<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FRONTIER FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 6022 91-1223535
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
332 S.W. EVERETT MALL WAY
EVERETT, WASHINGTON 98204
(425) 514-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
GLEN P. GARRISON, ESQ.
LUCAS D. SCHENCK, ESQ.
KELLER ROHRBACK, L.L.P.
1201 THIRD AVENUE, SUITE 3200
SEATTLE, WASHINGTON 98101-3052
(206) 623-1900
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
STEPHEN M. KLEIN, ESQ.
WILLIAM E. BARTHOLDT, ESQ.
GRAHAM & DUNN, PC
1420 FIFTH AVENUE, 33RD FLOOR
SEATTLE, WASHINGTON 98101-2390
(206) 624-8300
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as Practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(2)
- ----------------------------------------------------------------------------------------------------------------------
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Common Stock, No par value........ 970,473 $10.40 $10,089,223 $2,976.32
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</TABLE>
(1) Represents the estimated maximum number of shares of common stock, no value
per share, issuable by Frontier Financial Corporation ("Frontier") upon
consummation of the acquisition of Valley Bancorporation ("Valley") by
Frontier. Pursuant to Rule 416, this Registration Statement also covers an
indeterminate number of shares of common stock as may become issuable as a
result of stock splits, stock dividends or similar transactions.
(2) Pursuant to Rule 457(f)(2), the registration fee for the Frontier common
stock is based on the book value of the Valley common stock, $1.00 par value
per share, on June 30, 1998 ($10,089,223) and computed based on the
estimated maximum number of such shares (978,398), including shares issuable
upon the exercise of employee and director stock options, that may be
exchanged for the securities being registered.
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
, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Valley Bancorporation ("Valley"), to be held at , Sumner, Washington,
on , 1998 at :00 .m., local time.
The Notice of Special Meeting of Shareholders and Prospectus/Proxy
Statement that appear on the following pages describe the formal business to be
transacted at the meeting. At the meeting, you will be asked to consider and
vote upon a proposal to approve the Agreement and Plan of Mergers dated as of
July 30, 1998 (the "Merger Agreement") by and among Frontier Financial
Corporation ("Frontier"), Frontier Bank, Valley and Bank of Sumner. The Merger
Agreement provides that Valley will be merged with Frontier and that,
thereafter, the Bank of Sumner will be merged with Frontier Bank, with Frontier
and Frontier Bank as the surviving entities.
Upon consummation of the merger, each share of Valley common stock will be
converted into the right to receive shares of Frontier common
stock. The last reported sale price of Frontier common stock on the Nasdaq
National Market (symbol: "FTBK") on , 1998 was $ per share. You
are urged to review carefully the enclosed Prospectus/Proxy Statement, which
contains a more complete description of the terms of the merger.
The Board of Directors of Valley has unanimously approved the Merger
Agreement and recommends that you vote FOR the approval of the Merger Agreement.
Approval of the Merger Agreement requires the affirmative vote of two-thirds of
the outstanding shares of Valley common stock.
It is very important that your shares be represented at the meeting,
regardless of whether you plan to attend in person. A failure to vote, either by
not returning the enclosed proxy or by checking the "Abstain" box thereon, will
have the same effect as a vote against approval of the Merger Agreement. To
assure that your shares are represented in voting on this very important matter,
please sign, date and return the enclosed proxy card in the enclosed
postage-prepaid envelope whether or not you plan to attend the meeting. If you
are a shareholder of record and do attend, you may, if you wish, revoke your
proxy and vote your shares in person at the meeting.
On behalf of the Board of Directors, I urge you to vote FOR approval of the
Merger Agreement.
Sincerely,
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Basil Anton Linda A. Dryden
Chairman of the Board President
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<PAGE> 3
VALLEY BANCORPORATION
801 ALDER AVENUE
SUMNER, WASHINGTON 98390
(253) 863-6301
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Valley
Bancorporation ("Valley") will be held at , Sumner, Washington,
on , , 1998, at :00 .m., for the following purposes:
1. Agreement and Plan of Mergers. To consider and vote upon a proposal
to approve the Agreement and Plan of Mergers dated as of July 30, 1998 (the
"Merger Agreement") by and among Valley Bancorporation ("Valley"), Bank of
Sumner, Frontier Financial Corporation ("Frontier") and Frontier Bank, a
copy of which is set forth in Appendix A to the accompanying
Prospectus/Proxy Statement, pursuant to which Valley would merge into
Frontier and each outstanding share of Valley common stock would be
converted into the right to receive shares of Frontier
common stock, all on and subject to the terms and conditions contained
therein.
2. To consider and act upon such other matters as may properly come
before the meeting or any adjournments thereof.
Only those shareholders of record at the close of business on ,
1998 shall be entitled to notice of, and to vote at, the meeting or any
adjournments thereof. The affirmative vote of the holders of two-thirds of the
outstanding shares of Valley common stock is required for approval of the Merger
Agreement.
Valley shareholders have the right to dissent from the merger and obtain
payment of the fair value of their shares of Valley common stock under the
applicable provisions of Washington law. In order to perfect dissenters' rights,
Valley shareholders must send a notice to Valley before the Special Meeting on
, 1998 and must not vote in favor of the merger by proxy or
otherwise. A copy of the applicable Washington statutory provisions regarding
dissenters' rights is set forth in Appendix B to the accompanying
Prospectus/Proxy Statement and a summary of such provisions is set forth under
"THE MERGER -- Dissenters' Rights" beginning on page . Further information
regarding voting rights and the business to be transacted at the meeting is
given in the accompanying Prospectus/Proxy Statement.
The Board of Directors of Valley unanimously recommends that shareholders
vote "FOR" approval of the Merger Agreement.
Sincerely,
Kinuyo Ota
Secretary
Your vote is important regardless of the number of shares you own. Whether
or not you expect to attend the meeting, please sign, date and promptly return
the accompanying proxy card using the enclosed postage-prepaid envelope. If for
any reason you should desire to revoke your proxy, you may do so at any time
before it is voted at the meeting.
<PAGE> 4
VALLEY BANCORPORATION
PROXY STATEMENT
FRONTIER FINANCIAL CORPORATION PROSPECTUS
UP TO 970,473 SHARES OF COMMON STOCK
This Prospectus/Proxy Statement is being furnished by Valley Bancorporation
("Valley") to the holders of Valley common stock, par value $1.00 per share
("Valley Common Stock"), in connection with the solicitation of proxies by the
Board of Directors of Valley (the "Valley Board") for use at a special meeting
of Valley shareholders to be held on , 1998, and at any adjournments
or postponements thereof (the "Special Meeting"). This Prospectus/Proxy
Statement is first being mailed to shareholders on or about , 1998.
At the Special Meeting, shareholders of Valley will consider and vote upon
a proposal to approve the Agreement and Plan of Mergers dated as of July 30,
1998 (the "Merger Agreement"), by and among Valley Bancorporation ("Valley"),
the Bank of Sumner, Frontier Financial Corporation ("Frontier") and Frontier
Bank pursuant to which Valley would be merged with and into Frontier (the
"Merger"). Upon consummation of the Merger, shareholders of Valley will receive
shares of Frontier common stock, no par value per share ("Frontier Common
Stock"), in exchange for their shares of Valley Common Stock. FOR A MORE
DETAILED DESCRIPTION OF THE TERMS OF THE MERGER, SEE "THE MERGER."
The last reported sale price of Frontier Common Stock on the Nasdaq
National Market (symbol: "FTBK") on , 1998 was $ per share.
Frontier has filed a registration statement on Form S-4 (the "Registration
Statement") pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), with respect to up to 970,473 shares of Frontier Common Stock to be
issued pursuant to the Merger Agreement. This Prospectus/Proxy Statement also
constitutes the prospectus of Frontier filed as part of the Registration
Statement.
------------------------
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
This Prospectus/Proxy Statement does not cover any resale of the securities
to be received by shareholders of Valley upon consummation of the proposed
transaction, and no person is authorized to make any use of this
Prospectus/Proxy Statement in connection with any such resale.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS , 1998.
<PAGE> 5
TABLE OF CONTENTS
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<S> <C>
TABLE OF CONTENTS........................................... i
WHERE YOU CAN FIND MORE INFORMATION......................... 1
SUMMARY..................................................... 2
The Companies............................................. 2
The Special Meeting....................................... 2
The Merger; Exchange Ratio................................ 3
Recommendation of the Valley Board........................ 3
Opinion of Financial Advisor.............................. 3
Interests of Certain Persons in the Merger................ 4
Effective Date of the Merger.............................. 4
Exchange Of Valley Certificates........................... 4
Conditions to Consummation of the Merger.................. 4
Accounting Treatment...................................... 4
Regulatory Requirements................................... 4
Certain Federal Income Tax Consequences................... 4
Dissenters' Rights........................................ 5
Comparison of Shareholders' Rights........................ 5
SELECTED HISTORICAL FINANCIAL DATA.......................... 5
COMPARATIVE PER SHARE DATA.................................. 10
COMPARATIVE MARKET PRICE DATA............................... 11
THE SPECIAL MEETING......................................... 13
Place, Time and Date...................................... 13
Purpose................................................... 13
Record Date; Shares Entitled to Vote...................... 13
Vote Required............................................. 13
Proxies................................................... 13
THE MERGER.................................................. 14
General................................................... 14
Merger Consideration...................................... 14
Effective Date of the Merger.............................. 15
Exchange of Valley Certificates........................... 15
Background and Reasons for the Merger..................... 16
Opinion of Financial Advisor.............................. 17
Interests of Certain Persons in the Merger................ 19
Certain Federal Income Tax Consequences................... 20
Conduct of Business Pending the Merger.................... 21
Conditions to Consummation of the Merger.................. 22
Regulatory Requirements................................... 22
Dissenters' Rights........................................ 23
Amendment; Waiver; Termination............................ 24
</TABLE>
i
<PAGE> 6
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Termination Fee........................................... 25
Resale of Frontier Common Stock........................... 26
Accounting Treatment...................................... 26
Expenses.................................................. 26
BUSINESS OF THE PARTIES TO THE MERGER....................... 26
Frontier.................................................. 26
Frontier Year 2000 Issues................................. 27
Valley.................................................... 28
Valley Year 2000 Issues................................... 30
SUPERVISION AND REGULATION.................................. 31
VOTING SECURITIES OF VALLEY AND PRINCIPAL HOLDERS THEREOF... 37
DESCRIPTION OF FRONTIER CAPITAL STOCK....................... 37
COMPARISON OF SHAREHOLDERS' RIGHTS.......................... 38
LEGAL OPINIONS.............................................. 42
EXPERTS..................................................... 42
CHANGE IN VALLEY'S ACCOUNTANTS.............................. 42
OTHER MATTERS............................................... 42
GLOSSARY OF KEY TERMS....................................... 43
</TABLE>
<TABLE>
<S> <C>
Appendix A -- Agreement and Plan of Mergers
Appendix B -- Chapter 13 of the Washington Business Corporations Act
Appendix C -- Fairness Opinion of Columbia Financial Advisors, Inc.
Appendix D -- Financial Information for Valley Bancorporation
</TABLE>
ii
<PAGE> 7
You should rely only on the information contained or incorporated by
reference in this Prospectus/Proxy Statement to vote your shares at the Special
Meeting. Frontier and Valley have not authorized anyone to provide you with
information that is different from what is contained in this Prospectus/Proxy
Statement. This Prospectus/Proxy Statement is dated , 1998.
You should not assume that the information contained in the Prospectus/Proxy
Statement is accurate as of any date other than that date, and neither the
mailing of this Prospectus/Proxy Statement to shareholders nor the issuance of
Frontier's securities in the Merger shall create any implication to the
contrary.
WHERE YOU CAN FIND MORE INFORMATION
Frontier files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC" or the
"Commission"). You may read and copy such reports, statements and information at
the SEC's public reference room in Washington, D.C. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. In addition, materials filed by Frontier are
available for inspection at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006. Reports, proxy statements and other
information filed by Frontier are also available on the Internet at the
Commission's World Wide Web site at http://www.sec.gov.
Frontier has filed a Registration Statement on Form S-4 (File No.
333- ) to register with the SEC the shares of Frontier to be issued to
Valley stockholders in the Merger. This Prospectus/Proxy Statement is part of
the Registration Statement and constitutes a prospectus of Frontier and a proxy
statement for Valley for the Special Meeting. As allowed by the SEC, this
Prospectus/Proxy Statement does not contain all the information that
shareholders can find in the Registration Statement or the exhibits to the
Registration Statement.
The SEC allows Frontier to "incorporate by reference" information into this
Prospectus/Proxy Statement, which means that Frontier can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be a part of
this Prospectus/Proxy Statement, except for any information superseded by
information contained directly in the Prospectus/Proxy Statement. This
Prospectus incorporates by reference the following documents that Frontier has
filed with the SEC:
1. Frontier's Annual Report on Form 10-K for the year ended December 31,
1997;
2. Frontier's Proxy Statement, dated March 20, 1998 for its Annual Meeting
of Shareholders held on April 16, 1998 that has been incorporated by reference
in the 1997 Frontier Form 10-K;
3. Frontier's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 and June 30, 1998; and
4. Frontier's Current Reports on Form 8-K dated February 25, 1998 and July
31, 1998.
Frontier incorporates by reference additional documents that it may file
with the SEC between the date of this Prospectus/Proxy Statement and the date of
the Special Meeting. These include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE IMPORTANT
BUSINESS AND FINANCIAL INFORMATION THAT IS NOT INCLUDED WITH THESE DOCUMENTS.
THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS UPON WRITTEN OR
ORAL REQUEST TO: CAROL FOX, ADMINISTRATIVE SECRETARY, FRONTIER FINANCIAL
CORPORATION, 332 SW EVERETT MALL WAY, EVERETT, WASHINGTON 98204 (TELEPHONE
NUMBER (425) 514-0700). TO OBTAIN TIMELY DELIVERY, SECURITY HOLDERS MUST REQUEST
THIS INFORMATION NO LATER THAN FIVE BUSINESS DAYS BEFORE THE DATE THEY MUST MAKE
THEIR INVESTMENT DECISION. THE DATE BY WHICH SECURITY HOLDERS MUST REQUEST THIS
INFORMATION IS , 1998.
Frontier has supplied all information contained or incorporated by
reference in this Prospectus/Proxy Statement relating to Frontier and Frontier
Bank. Valley has supplied all information contained or incorporated by reference
in this Prospectus/Proxy Statement relating to Valley and the Bank of Sumner.
1
<PAGE> 8
SUMMARY
The following summary explains the significant aspects of the Merger.
Capitalized terms have the meanings stated in the Glossary of this
Prospectus/Proxy Statement and as otherwise stated in this Prospectus/Proxy
Statement. For additional information about the Merger, please refer to the more
detailed information appearing elsewhere in this Prospectus/Proxy Statement,
including the Appendices and the documents incorporated by reference.
Shareholders of Valley will be asked to vote on a proposed merger of Valley
with and into Frontier, followed by the merger of the Bank of Sumner with and
into Frontier Bank. The Board of Directors of Valley has unanimously adopted and
approved the Merger Agreement.
THE COMPANIES
Frontier. Frontier is a bank holding company registered with the Board of
Governors of the Federal Reserve System ("Federal Reserve"). The business of
Frontier consists primarily of holding 100% of the capital stock of Frontier
Bank. At June 30, 1998, Frontier had total assets of $943.911 million, total
deposits of $773.527 million and stockholders' equity of $108.289 million. The
principal executive offices of Frontier are located at 332 SW Everett Mall Way,
Everett, Washington 98204 and its telephone number is (425) 514-0700.
Frontier Bank is a Washington-chartered commercial bank regulated by the
Washington Department of Financial Institutions ("DFI") and the Federal Deposit
Insurance Corporation ("FDIC"). Frontier Bank conducts its business from its
main office in Everett, Washington and its 18 branch offices located in
Snohomish, King and Skagit Counties. Frontier Bank is primarily engaged in
providing a full range of banking services to individual and corporate customers
in the area surrounding its offices. Frontier Bank also offers trust and
discount brokerage services and operates an Insurance and Investment Center that
markets annuities, life insurance products and mutual funds.
See "SELECTED HISTORICAL FINANCIAL DATA" and "BUSINESS OF THE PARTIES TO
THE MERGER -- Frontier." Additional information concerning Frontier is included
in the documents incorporated herein by reference. See "WHERE YOU CAN FIND MORE
INFORMATION."
Valley. Valley is a bank holding company registered with the Federal
Reserve. The business of Valley consists primarily of holding 100% of the
capital stock of the Bank of Sumner. At June 30, 1998, Valley had total assets
of $96.759 million, total deposits of $85.801 million, and total stockholders'
equity of $10.089 million. The principal executive offices of Valley are located
at 801 Alder Avenue, Sumner, Washington and its telephone number is (253)
863-6304.
The Bank of Sumner is a Washington-chartered commercial bank regulated by
DFI and the FDIC. The Bank of Sumner operates out of its main office in Sumner,
Washington, and its branch offices in the cities of Puyallup, Orting and
Buckley, all of which are located in Pierce County. The Bank of Sumner is
primarily engaged in providing banking services to individual and corporate
customers in the Pierce County area. The Bank of Sumner originates commercial,
real estate and consumer loans.
See "SELECTED HISTORICAL FINANCIAL DATA," "BUSINESS OF THE PARTIES TO THE
MERGER -- Valley" and Appendix D.
THE SPECIAL MEETING
Place, Time and Date; Purpose. The Special Meeting will be held on
, , 1998 at .m., local time, at
, Sumner, Washington, for the purpose of considering and voting
upon a proposal to approve the Merger Agreement attached hereto as Appendix A.
See "THE SPECIAL MEETING -- Place, Time and Date" and "-- Purpose."
Record Date; Shares Entitled to Vote. The Valley Board has fixed the close
of business on , 1998 as the record date (the "Record Date") for
determining shareholders entitled to notice of and to vote at the Special
Meeting. Only those holders of shares of Valley Common Stock of record on the
Record Date will
2
<PAGE> 9
be entitled to notice of and to vote at the Special Meeting. Each share of
Valley Common Stock will be entitled to one vote. Shareholders of record who
execute proxies retain the right to revoke them at any time prior to being voted
at the Special Meeting. At the Record Date, there were shares of
Valley Common Stock outstanding and entitled to be voted at the Special Meeting.
See "THE SPECIAL MEETING -- Record Date; Shares Entitled to Vote."
Vote Required. Approval of the Merger Agreement requires the affirmative
vote of the holders of two-thirds of the outstanding shares of Valley Common
Stock. At the Record Date, the directors and executive officers of Valley and
their affiliates beneficially owned 432,210 shares of Valley Common Stock, which
represents 46.95% of the shares entitled to be voted at the Special Meeting.
Simultaneous with the execution of the Merger Agreement, all of the executive
officers and directors of Valley entered into an agreement with Frontier
pursuant to which each individual agreed to vote his or her shares for the
approval of the Merger Agreement. See "THE SPECIAL MEETING -- Vote Required."
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
APPROVAL OF THE MERGER AGREEMENT.
THE MERGER; EXCHANGE RATIO
Upon consummation of the Merger, the number of shares of Frontier stock
that the shareholders of Valley will receive for each share of Valley Common
Stock depends upon the Frontier Average Closing Price. Depending on the Frontier
Average Closing Price, the exchange ratio could be from 0.8177 shares of
Frontier for one share of Valley (at an average price of $59.07 or greater), to
0.9046 shares of Frontier for one share of Valley (at an average price of $43.86
or less). The shareholders of Valley, other than Dissenting Shares, will receive
for each share of Valley Common Stock: (i) 0.8625 shares of Frontier Common
Stock if the Frontier Average Closing Price is equal to or greater than $46 and
less than $56; (ii) the result obtained by dividing 39.6750 by the Frontier
Average Closing Price if the Frontier Average Closing Price is equal to or
greater than $43.86 but less than $46; (iii) 0.9046 shares of Frontier Common
Stock if the Frontier Average Closing Price is equal to or less than $43.86;
(iv) the result obtained by dividing $48.30 by the Frontier Average Closing
Price if the Frontier Average Closing Price is equal to or greater than $56 and
less than $59.07; or (v) 0.8177 if the Frontier Average Closing Price is equal
to or greater than $59.07.
RECOMMENDATION OF THE VALLEY BOARD
THE VALLEY BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS ADVISABLE
AND IN THE BEST INTERESTS OF VALLEY AND VALLEY'S SHAREHOLDERS AND RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
For a discussion of the circumstances surrounding the Merger and the
factors considered by the Valley Board in making its recommendation, see "THE
MERGER -- Background and Reasons for the Merger." Approval of the Merger by
two-thirds of the Valley shareholders entitled to vote is required by law. See
"THE MERGER -- Conditions to Consummation of the Merger." For a description of
certain economic interests directors and officers of Valley may be deemed to
have in the Merger, see "THE MERGER -- Interests of Certain Persons in the
Merger."
OPINION OF FINANCIAL ADVISOR
Columbia Financial Advisors, Inc. ("CFAI"), Valley's financial advisor, has
delivered a written opinion to the Valley Board, dated July 30, 1998 and updated
as of the date of this Prospectus/Proxy Statement, to the effect that the Merger
consideration is fair to Valley shareholders from a financial point of view. A
copy of CFAI's opinion, dated the date of this Prospectus/Proxy Statement,
setting forth the assumptions made, matters considered, procedures followed and
limits of its review, is attached hereto as Appendix C and should be read by
shareholders in its entirety. See "THE MERGER -- Opinion of Financial Advisor."
3
<PAGE> 10
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Valley's management and the Valley Board may be deemed
to have interests in the Merger in addition to their interests as shareholders
of Valley generally. Following consummation of the Merger, the President and CEO
of Valley will enter into an employment agreement with Frontier and Frontier
Bank. All executive officers will be required to enter into covenant not to
compete agreements, for which they will receive consideration. Frontier has also
agreed to assume existing options to purchase shares of Valley Common Stock. See
"THE MERGER -- Interests of Certain Persons in the Merger."
EFFECTIVE DATE OF THE MERGER
Subject to the conditions to the obligations of the parties to complete the
Merger as set forth in the Merger Agreement, the "Effective Date" of the Merger
will occur as soon as practicable after such conditions have been satisfied or
waived. Either Frontier or Valley may terminate the Merger Agreement if the
closing of the Merger does not occur on or before April 30, 1999.
EXCHANGE OF VALLEY CERTIFICATES
After the Merger is consummated, Valley shareholders will surrender their
certificates representing shares of Valley Common Stock and will receive
certificates representing shares of Frontier Common Stock. VALLEY SHAREHOLDERS
SHOULD NOT SEND IN THEIR CERTIFICATES REPRESENTING SHARES OF VALLEY COMMON STOCK
UNTIL AFTER THOSE VALLEY SHAREHOLDERS RECEIVE TRANSMITTAL DOCUMENTS.
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to, among other things: (i) approval
of the Merger Agreement by the holders of not less than two-thirds of the
outstanding shares of Valley Common Stock; (ii) receipt of all applicable
regulatory approvals; (iii) receipt by Frontier and Valley of the opinion of
Keller Rohrback L.L.P., dated as of the Effective Date, as to certain federal
income tax consequences of the Merger; (iv) the President and CEO of Valley
having entered into an employment agreement with Frontier and Frontier Bank; (v)
the absence of any material adverse change in the financial condition or results
of operations of Valley; (vi) the number of shares for which dissenters' rights
are exercised not exceeding 10% of the outstanding shares of Valley Common
Stock; and (vii) Valley's Capital shall not be less than $10 million. See "THE
MERGER -- Conditions to Consummation of the Merger."
ACCOUNTING TREATMENT
Frontier anticipates that it will account for the Merger as a pooling of
interests under generally accepted accounting principles. See "THE
MERGER -- Accounting Treatment".
REGULATORY REQUIREMENTS
The Merger is subject to the receipt of certain prior approvals from the
Federal Reserve , the FDIC, and DFI. Frontier has filed applications for such
approvals. Frontier cannot guarantee that such approvals will be obtained. See
"THE MERGER -- Regulatory Requirements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned, among other things, on receipt
by Frontier and Valley of an opinion of Keller Rohrback L.L.P., special counsel
for Frontier, to the effect that the Merger will be treated as a reorganization
described in Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). In accordance with this opinion, holders of Valley Common Stock
who receive solely Frontier
4
<PAGE> 11
Common Stock in exchange for their shares will recognize no gain or loss on such
exchange. See "THE MERGER -- Certain Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH SHAREHOLDER, EACH VALLEY SHAREHOLDER IS URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE MERGER, INCLUDING THE SPECIFIC APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS TO SUCH SHAREHOLDER.
DISSENTERS' RIGHTS
Valley shareholders have the right to dissent from the Merger and obtain
payment of the fair value of their shares of Valley Common Stock under the
provisions of Chapter 13 of the Washington Business Corporation Act ("WBCA").
Your failure to follow exactly the procedures specified in Chapter 13 of the
WBCA will result in the loss of your dissenters' rights. Accordingly, Valley
shareholders wishing to dissent from the Merger are urged to read carefully "THE
MERGER -- Dissenters' Rights" and the copy of Chapter 13 of the WBCA set forth
in Appendix B to this Prospectus/Proxy Statement, and to consult with their own
legal advisors. If Valley shareholders perfect dissenters' rights with respect
to more than 10% of the outstanding shares of Valley Common Stock, Frontier may
elect not to consummate the Merger. See "THE MERGER -- Conditions to
Consummation of the Merger."
COMPARISON OF SHAREHOLDERS' RIGHTS
The rights of Valley shareholders are currently determined by the WBCA and
Valley's Articles of Incorporation and Bylaws. On the Effective Date,
shareholders of Valley will become shareholders of Frontier, and their rights as
shareholders of Frontier will be determined by the WBCA and Frontier's Articles
of Incorporation and Bylaws. For a discussion of certain material differences in
the rights of shareholders of Frontier and Valley and an explanation of certain
possible anti-takeover effects of certain provisions in Frontier's Articles of
Incorporation and Bylaws, see "COMPARISON OF SHAREHOLDERS' RIGHTS."
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical consolidated financial
data for Frontier and Valley. This information should be read in conjunction
with the historical financial statements of Frontier and Valley, including the
respective notes thereto, appearing elsewhere in this Prospectus/Proxy Statement
and in the other documents incorporated by reference herein. See "WHERE YOU CAN
FIND MORE INFORMATION" and Appendix D.
The Frontier historical consolidated unaudited financial data as of and for
the six months ended June 30, 1998 and 1997 have been prepared on the same basis
as the historical information derived from audited financial statements, and in
the opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of results of operations
for such periods. The Valley historical consolidated unaudited financial data as
of and for the six months ended June 30, 1998 and 1997 have been prepared on the
same basis as the historical information derived from audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of results of operations for such periods.
5
<PAGE> 12
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS AT OR FOR THE YEARS
ENDED JUNE 30, ENDED DECEMBER 31,
------------------- -----------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
--------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income.................... $ 40,808 $ 36,732 $ 76,311 $ 68,000 $ 63,086 $ 52,945 $ 44,324
Interest expense................... 16,978 15,641 32,160 30,100 29,347 20,639 17,782
-------- -------- -------- -------- -------- -------- --------
Net interest income.............. 23,830 21,091 44,151 37,900 33,739 32,306 26,542
Provision for loan losses.......... (350) (350) (1,850) (1,980) (1,525) (3,900) (3,012)
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................. 23,480 20,741 42,301 35,920 32,214 28,406 23,530
Noninterest income................. 2,260 1,958 3,875 3,708 3,417 2,910 4,383
Noninterest expense................ 11,254 9,964 20,893 17,931 17,164 16,651 16,776
-------- -------- -------- -------- -------- -------- --------
Income before provision for income
taxes............................ 14,486 12,735 25,283 21,697 18,467 14,665 11,137
Provision for income taxes......... (4,958) (4,359) (8,381) (7,080) (5,852) (4,305) (3,391)
-------- -------- -------- -------- -------- -------- --------
Net Income....................... $ 9,528 $ 8,376 $ 16,902 $ 14,617 $ 12,615 $ 10,360 $ 7,746
======== ======== ======== ======== ======== ======== ========
HISTORICAL PER SHARE DATA:
Earnings per share
Basic............................ $ 1.21 $ 1.07 $ 2.16 $ 1.88 $ 1.63 $ 1.35 $ 1.01
Diluted.......................... $ 1.20 $ 1.06 $ 2.14 $ 1.86 $ 1.61 $ 1.32 $ 0.98
Shareholder's equity............... 108,289 88,636 97,839 80,317 65,353 50,459 41,167
SELECTED RATIOS:
Return on average equity........... 18.44% 19.16% 18.84% 20.01% 21.59% 22.21% 20.59%
Return on average assets........... 2.11% 2.04% 2.02% 1.94% 1.82% 1.69% 1.50%
Net yield on interest earning
assets........................... 5.50% 5.43% 5.65% 5.40% 5.26% 5.80% 5.70%
Average equity as a percentage of
average assets................... 11.45% 10.65% 10.71% 9.70% 8.45% 7.63% 7.28%
Non-performing assets as a
percentage of total assets....... 0.47% 0.64% 0.62% 0.52% 0.70% 0.61% 0.44%
FINANCIAL CONDITION DATA:
Total assets....................... 943,911 834,852 882,880 803,619 735,183 642,568 558,043
Loans receivable, net.............. 715,570 628,084 650,485 587,126 493,091 460,102 362,238
Cash and due from banks, federal
funds sold and investments....... 201,824 180,951 206,946 191,285 220,614 159,527 174,949
Deposits........................... 773,527 693,901 730,931 670,516 641,218 539,603 506,538
Borrowings......................... 30,040 30,085 30,056 35,100 15,136 38,065 737
</TABLE>
6
<PAGE> 13
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest Income.................................... $17,853 $17,195 $16,657 $16,295
Interest Expense................................... 7,815 7,437 7,200 7,648
------- ------- ------- -------
Net Interest Income.............................. 10,038 9,758 9,457 8,647
Provision for loan losses.......................... (780) (700) (300) (200)
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 9,258 9,058 9,157 8,447
Noninterest income................................. 891 1,128 875 814
Noninterest expense................................ 5,399 4,108 4,646 3,778
------- ------- ------- -------
Income before income taxes......................... 4,750 6,078 5,386 5,483
Income tax......................................... (1,350) (2,097) (1,785) (1,848)
------- ------- ------- -------
Net Income......................................... $ 3,400 $ 3,981 $ 3,601 $ 3,635
======= ======= ======= =======
Basic earnings per common share.................... $ 0.44 $ 0.51 $ 0.46 $ 0.47
Diluted earnings per common share.................. $ 0.43 $ 0.51 $ 0.46 $ 0.46
Average basic common shares outstanding (in
thousands)....................................... 7,785 7,777 7,766 7,751
Average diluted common shares outstanding (in
thousands)....................................... 7,860 7,853 7,841 7,826
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest Income.................................... $20,091 $19,488 $18,837 $17,895
Interest Expense................................... 8,391 8,128 7,866 7,775
------- ------- ------- -------
Net Interest Income.............................. 11,700 11,360 10,971 10,120
Provision for loan losses.......................... (1,150) (350) (250) (100)
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 10,550 11,010 10,721 10,020
Noninterest income................................. 963 954 1,166 792
Noninterest expense................................ 6,136 4,793 5,528 4,436
------- ------- ------- -------
Income before income taxes......................... 5,377 7,171 6,359 6,376
Income tax......................................... (1,534) (2,488) (2,158) (2,201)
------- ------- ------- -------
Net income......................................... $ 3,843 $ 4,683 $ 4,201 $ 4,175
======= ======= ======= =======
Basic earnings per common share.................... $ 0.49 $ 0.60 $ 0.54 $ 0.53
Diluted earnings per common share.................. $ 0.49 $ 0.59 $ 0.53 $ 0.53
Average basic common shares outstanding (in
thousands)....................................... 7,840 7,835 7,830 7,827
Average diluted common shares outstanding (in
thousands)....................................... 7,911 7,906 7,908 7,904
</TABLE>
7
<PAGE> 14
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY
($ IN THOUSANDS, EXCEPT PER SHARE DATA -- CONTINUED)
<TABLE>
<CAPTION>
1998 QUARTER ENDED
-----------------------
JUNE 30 MARCH 31
-------- ---------
<S> <C> <C>
Interest Income............................................. $20,653 $20,154
Interest Expense............................................ 8,513 8,465
------- -------
Net Interest Income......................................... 12,140 11,689
Provision for loan losses................................... (100) (250)
------- -------
Net interest income after provision for loan losses......... 12,040 11,439
Noninterest income.......................................... 1,238 1,022
Noninterest expense......................................... 6,064 5,189
------- -------
Income before income taxes.................................. 7,214 7,272
Income tax.................................................. (2,359) (2,599)
------- -------
Net income.................................................. $ 4,855 $ 4,673
======= =======
Basic earnings per common share............................. $ 0.62 $ 0.59
Diluted earnings per common share........................... $ 0.61 $ 0.59
Average basic common shares outstanding (in thousands)...... 7,878 787
Average diluted common shares outstanding (in thousands).... 7,956 7,941
</TABLE>
8
<PAGE> 15
VALLEY BANCORPORATION
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS AT OR FOR THE YEARS
ENDED JUNE 30, ENDED DECEMBER 31,
------------------ --------------------
1998 1997 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING DATA:
Interest Income:
Interest income..................................... $ 4,072 $ 3,170 $ 7,013 $ 5,971
Interest expense.................................... 1,318 1,008 2,209 1,962
------- ------- ------- -------
Net interest income............................... 2,754 2,162 4,804 4,009
Provision for loan losses........................... (150) (120) (245) (153)
------- ------- ------- -------
Net interest income after provision for loan
losses............................................ 2,604 2,042 4,559 3,856
Noninterest income.................................. 255 215 491 454
Noninterest expense................................. 1,567 1,207 2,652 2,324
------- ------- ------- -------
Income before provision for income taxes............ 1,292 1,051 2,398 1,986
Provision for income taxes.......................... (407) (307) (705) (591)
------- ------- ------- -------
Net Income........................................ $ 885 $ 744 $ 1,692 $ 1,396
======= ======= ======= =======
HISTORICAL PER SHARE DATA:
Earnings per share..................................
Basic............................................. $ 0.96 $ 0.89 $ 1.92 $ 1.60
Diluted........................................... $ 0.92 $ 0.86 $ 1.86 $ 1.54
Shareholder's equity................................ 10,089 9,545 9,545 8,034
SELECTED RATIOS:
Return on average equity............................ 18.15% 17.57% 19.73% 18.98%
Return on average assets............................ 1.94% 2.01% 2.17% 2.13%
Net yield on interest earning assets................ 6.48% 6.59% 6.65% 6.58%
Average equity as a percentage of average assets.... 10.70% 11.43% 11.02% 11.22%
Non-performing assets as a percentage of total
assets............................................ 0.00% 0.42% 0.10% 0.19%
FINANCIAL CONDITION DATA:
Total asset......................................... $96,759 $75,053 $90,172 $71,327
Loans receivable, net............................... 79,077 63,569 70,637 56,517
Cash and due from banks, federal funds sold and
investments....................................... 12,967 8,268 14,642 11,948
Deposits............................................ 85,801 62,296 79,417 61,873
Borrowings.......................................... 227 3,687 639 959
</TABLE>
9
<PAGE> 16
COMPARATIVE PER SHARE DATA
The following table sets forth selected comparative per share data for
Frontier on both a historical and a pro forma combined basis and for Valley on
both a historical and a pro forma equivalent basis giving effect to the Merger
using the pooling of interests method of accounting. These tables should be read
in conjunction with the historical financial statements of Frontier and Valley,
including the respective notes thereto, appearing elsewhere in this
Prospectus/Proxy Statement, and the other documents incorporated by reference
herein. The pro forma information has been prepared based on an assumed Exchange
Ratio of .8625 shares of Frontier Common Stock for each share of Valley Common
Stock. There is no assurance that .8625 will be the actual Exchange Ratio; .8625
is used for purposes of the pro forma information only. See "THE MERGER --
Merger Consideration." The following information is not necessarily indicative
of the results of operations or combined financial position that would have
resulted had the Merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the results of operations of
future periods or future combined financial position.
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS AT OR FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
1998 1997
------------------------ ----------------------
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE:
Frontier Historical................................... $13.73 $12.44
Valley Historical..................................... $10.96 $10.37
Pro forma combined(1)................................. $13.44 $12.22
Pro forma equivalent.................................. $13.64 $12.40
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
AT OR FOR THE SIX MONTHS ENDED DECEMBER 31,
ENDED JUNE 30, 1998 1997 1996 1995
------------------------ ---- ---- ----
<S> <C> <C> <C> <C>
CASH DIVIDENDS DECLARED PER SHARE
Frontier Historical..................................... 0 0 0 0
Valley Historical....................................... .37 .33 .30 .60
Pro forma combined(2)................................... .04 .03 .03 .07
Pro forma equivalent.................................... .04 .03 .03 .07
BASIC EARNINGS PER SHARE
Frontier Historical..................................... 1.21 2.16 1.88 1.63
Valley Historical....................................... .96 1.92 1.60 1.42
Pro forma combined(3)................................... 1.18 2.13 1.85 1.61
Pro forma equivalent.................................... 1.20 2.16 1.87 1.63
DILUTED EARNINGS PER SHARE:
Frontier Historical..................................... 1.20 2.14 1.86 1.61
Valley Historical....................................... .92 1.86 1.54 1.39
Pro forma combined(4)................................... 1.17 2.11 1.82 1.59
Pro forma equivalent.................................... 1.19 2.14 1.85 1.61
</TABLE>
- ---------------
(1) The pro forma combined book value per share of Frontier Common Stock is
based upon the historical total common stockholders' equity for Frontier and
the additional stockholder's equity resulting from the Merger divided by
total pro forma common shares of the combined entities. The pro forma
equivalent book value per share of Valley Common Stock represents the pro
forma combined book value of Frontier Common Stock multiplied by an assumed
.8625 Exchange Ratio.
(2) Pro forma combined dividends assumes no cash dividends declared by Frontier.
The pro forma equivalent cash dividends declared per share of Valley Common
Stock represent the pro forma combined cash dividends declared per share of
Valley Common Stock multiplied by an assumed .8625 Exchange Ratio.
(3) The pro forma combined earnings per share of Frontier Common stock
(excluding dilution) is based upon the combined weighted average pro forma
common shares of the combined entities. The pro forma equivalent earnings
per share of Valley Common Stock represents the pro forma combined earnings
per share multiplied by an assumed .8625 Exchange Ratio.
(4) The pro forma combined earnings per share of Frontier Common Stock (based on
diluted earnings per share and weighted average shares outstanding) is based
upon the combined pro forma net income for Frontier and Valley divided by
the weighted average diluted pro forma common shares of the combined
entities. The pro forma equivalent earnings per share of Valley Common Stock
represents the pro forma combined earnings per share multiplied by an
assumed .8625 Exchange Ratio.
10
<PAGE> 17
COMPARATIVE MARKET PRICE DATA
Frontier. Frontier Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "FTBK." The table below sets forth, for the period
after April 15, 1998, the high and low sales prices of Frontier Common Stock as
reported on Nasdaq since Frontier began listing its shares on Nasdaq on April
16, 1998. Prior to that there was no established trading market for Frontier
Common Stock. Frontier Common Stock was traded by individuals on a personal
basis and was not listed on any exchange or traded on the over-the-counter
market, and the prices reported reflect only the transactions known to
management.
<TABLE>
<CAPTION>
FRONTIER
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter............................................... $35.00 $27.00
Second Quarter.............................................. $33.00 $20.00
Third Quarter............................................... $32.00 $24.16
Fourth Quarter.............................................. $35.00 $30.00
1997
First Quarter............................................... $34.00 $27.00
Second Quarter.............................................. $34.00 $29.00
Third Quarter............................................... $35.00 $25.00
Fourth Quarter.............................................. $37.00 $32.00
1998
First Quarter............................................... $42.50 $34.00
Second Quarter(1)........................................... $61.00 $35.00(2)
</TABLE>
- ---------------
(1) Frontier began listing its shares of Common Stock on Nasdaq on April 16,
1998.
(2) Excludes one transaction which Frontier was aware that was traded at $30.00
Frontier has not paid cash dividends, even though it has the ability to do
so. Frontier has no intention to pay cash dividends for the foreseeable future.
Frontier paid 7% stock dividends on March 18, 1996, March 17, 1997, and March
16, 1998.
As of June 30, 1998, the 7,885,541 outstanding shares of Frontier Common
Stock were held by approximately 3,384 holders of record.
Valley. There is no established trading market for Valley Common Stock. No
broker makes a market in Valley Common Stock and trading has not otherwise been
extensive. The trades that have occurred cannot be characterized as amounting to
an established public trading market. Valley Common Stock is traded by
individuals on a personal basis and is not listed on any exchange or traded on
the over-the-counter market, and the prices reported reflect only the
transactions known to management. Due to the limited information available, the
following data may not accurately reflect the actual market value of Valley
Common Stock. The
11
<PAGE> 18
following data includes trades between individual investors, as reported to
Valley by the Bank of Sumner, which acts as transfer agent.
<TABLE>
<CAPTION>
VALLEY COMMON STOCK
--------------------------------------
NUMBER OF SHARES
REPORTED AS TRADED HIGH LOW
------------------ ------ ------
<S> <C> <C> <C>
1996
First Quarter.................................... 5,470 $10.00 $ 9.00
Second Quarter................................... 12,100 9.50 9.50
Third Quarter.................................... 3,201 20.00 15.00
Fourth Quarter................................... 0 -- --
1997
First Quarter.................................... 215 23.50 23.50
Second Quarter................................... 3,385 25.00 23.00
Third Quarter.................................... 7,945 25.85 25.00
Fourth Quarter................................... 1,050 25.00 25.00
1998
First Quarter.................................... 995 27.00 26.00
Second Quarter................................... 2,520 $26.00 26.00
</TABLE>
As of June 30, 1998, the 920,648 outstanding shares of Valley Common Stock
were held by approximately 440 holders of record. Dividends paid on Valley
Common Stock in 1998, 1997 and 1996, respectively, were $0.37 per share, $0.33
per share and $0.30 per share.
Recent Stock Price Data. The following table sets forth the closing price
per share for Frontier Common Stock, as reported on Nasdaq , and the equivalent
pro forma per share price for Valley Common Stock on July 30, 1998, the last
full trading day prior to the public announcement of the execution of the Merger
Agreement, and on , 1998, which is the most recent date for which it
was practicable to obtain market price data prior to the printing of this
Prospectus/Proxy Statement. HOLDERS OF VALLEY COMMON STOCK ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR SHARES OF FRONTIER COMMON STOCK.
<TABLE>
<CAPTION>
JULY 30, 1998 1998
------------- ------------------
<S> <C> <C>
Closing price share:
Frontier............................................... 59
Valley(1).............................................. 27
Equivalent pro forma per share of Valley Common
Stock................................................ 48.30(2)
</TABLE>
- ---------------
(1) There is no publicly available quotations of Valley Common Stock, and the
market price per share as of the respective dates represent prices known to
Valley's management to have been paid for the Valley Common Stock in the
last transaction prior to such data.
(2) Computed by multiplying the Frontier Average Closing Price by an assumed
.8186 Exchange Ratio.
12
<PAGE> 19
THE SPECIAL MEETING
PLACE, TIME AND DATE
The Special Meeting will be held on , , 1998 at
:00 .m., local time, at , Sumner, Washington. This
Prospectus/Proxy Statement is being sent to holders of Valley Common Stock and
is accompanied by a form of proxy that is being solicited by the Valley Board
for use at the Special Meeting and any adjournments or postponements thereof.
PURPOSE
The purpose of the Special Meeting is: (i) to consider and vote upon a
proposal to approve the Merger Agreement described herein and (ii) to act upon
such other matters, if any, as may properly come before the Special Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE
The Valley Board has fixed the close of business on , 1998 as
the Record Date for determining shareholders entitled to notice of and to vote
at the Special Meeting. Only those holders of Valley Common Stock of record on
the Record Date will be entitled to notice of and to vote at the Special
Meeting. Each share of Valley Common Stock will be entitled to one vote. At the
Record Date, there were shares of Valley Common Stock outstanding
and entitled to be voted at the Special Meeting.
VOTE REQUIRED
A majority of the shares entitled to vote, represented in person or by
proxy, will constitute a quorum of Valley shareholders at the Special Meeting.
Valid proxies that are marked "Abstain," including proxies submitted by brokers
that are the record owners of shares (so-called "broker non-votes"), will be
considered present for purposes of determining whether a quorum exists. Approval
of the Merger Agreement requires the affirmative vote of the holders of
two-thirds of the outstanding shares of Valley Common Stock. Abstentions and
broker non-votes will have the same effect as votes cast against approval of the
Merger Agreement.
As of the Record Date, the directors and executive officers of Valley and
their affiliates beneficially owned an aggregate of 432,210 shares of Valley
Common Stock, which represents 46.95% of the shares entitled to be voted at the
Special Meeting. All of the directors and executive officers of Valley have
entered into agreements with Frontier pursuant to which each individual has
agreed to vote his or her shares for approval of the Merger Agreement.
PROXIES
Holders of Valley Common Stock may vote either in person or by properly
executed proxy. Shares of Valley Common Stock represented by a properly executed
proxy received prior to or at the Special Meeting will, unless such proxy is
revoked, be voted in accordance with the instructions indicated on such proxy.
If no instructions are indicated on a properly executed proxy, the shares
covered thereby will be voted FOR the proposal to approve the Merger Agreement.
Failure to return the proxy card or to vote in person at the Special Meeting
will have the effect of a vote cast against the Merger Agreement. If any other
matters are properly presented at the Special Meeting for consideration,
including, among other things, a motion to adjourn the Special Meeting to
another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment; provided, however, that no proxy which is voted against the
proposal to approve the Merger Agreement will be voted in favor of any such
adjournment or postponement. As of the date hereof, the Valley Board knows of no
such other matters.
Any proxy given pursuant to this solicitation or otherwise may be revoked
by the record holder of the shares at any time before it is voted by delivering
to the Secretary of Valley, on or before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the proxy or a
later dated proxy
13
<PAGE> 20
relating to the same shares of Valley Common Stock, or by attending the Special
Meeting and voting in person. Attendance at the Special Meeting will not in
itself constitute revocation of a proxy.
The proxy for the Special Meeting is being solicited on behalf of the
Valley Board. The expense of soliciting proxies for the Special Meeting will be
borne by Valley. All other costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby are to be paid by the
party incurring such expenses. Proxies will be solicited principally by mail,
but may also be solicited by the directors, officers and other employees of
Valley in person or by telephone, facsimile or other means of communication.
Such directors, officers and employees will receive no compensation therefor in
addition to their regular compensation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Brokers and others who hold
Valley Common Stock on behalf of another will be asked to forward proxy material
and related documents to the beneficial owners of such stock, and Valley will
reimburse them for their expenses in doing so.
THE MERGER
The descriptions in this Prospectus/Proxy Statement of the terms and
conditions of the Merger and related transactions are qualified in their
entirety by reference to the Merger Agreement, a copy of which is attached as
Appendix A to this Prospectus/Proxy Statement and is incorporated herein by
reference.
GENERAL
The Merger Agreement provides for the merger of Valley with and into
Frontier followed by the merger of the Bank of Sumner with and into Frontier
Bank. The separate existence of Valley and the Bank of Sumner will cease upon
completion of the mergers. After consummation of the transaction, the branches
of Bank of Sumner will operate and be known as branches of Frontier Bank. While
Frontier and Valley believe that they will receive the requisite regulatory
approvals for the Merger, there can be no assurance that such approvals will be
received or, if received, as to the timing of such approvals or as to the
ability to obtain such approvals on satisfactory terms. See "-- Conditions to
Consummation of the Merger" and "-- Regulatory Requirements."
MERGER CONSIDERATION
Upon consummation of the Merger, the shareholders of Valley, other than
Dissenting Shares, will receive for each share of Valley common stock the right
to receive the number of shares of Frontier stock equal to the Exchange Ratio,
if no Triggering Event (see below) has occurred. The Exchange Ratio will be
calculated as follows:
- Price Below $43.86. If the average price of Frontier stock from the date
of the Plan until ten days prior to closing (the "Average Stock Price")
is less than $43.86, Frontier must adjust the Exchange Ratio so that the
Average Stock Price multiplied by the Exchange Ratio equals $39.67. If
Frontier fails to so adjust the Exchange Ratio, Valley may terminate the
Plan.
- Price Between $43.86 and $46. If the Average Stock Price is equal to or
greater than $43.86 and less than $46, the Exchange Ratio will be the
result obtained by dividing $39.6751 by the Average Stock Price (i.e.,
each Valley share will be converted into the right to receive $39.68
worth of Frontier stock.)
- Price Between $46 and $56. If the Average Stock Price is equal to or
greater than $46 and less than $56, the Exchange Ratio will be 0.8625
(i.e., each Valley share will be converted into the right to receive
between $39.68 and $48.30 worth of Frontier stock, depending on the
actual Average Stock Price.)
- Price Between $56 and $59.07. If the Average Stock Price is equal to or
greater than $56 and less than $59.07, the Exchange Ratio will be the
result obtained by dividing $48.30 by the Average Stock Price (i.e., each
Valley share will be converted into the right to receive $48.30 worth of
Frontier stock.)
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- Price Greater Than $59.07. If the Average Stock Price is greater than
$59.07, the Exchange Ratio will be 0.8177 shares (i.e., each Valley share
will be converted into a minimum of $49.06 worth of Frontier stock, with
no upper limit).
If a Triggering Event has occurred, the Exchange Ratio will be 0.8625,
regardless of the Average Stock Price. For the purposes of these provisions, a
"Triggering Event" generally means that a deal has been announced for Frontier
to be acquired by any third party.
The "Frontier Average Closing Price" means the price equal to the average
(rounded to four decimals) of each Daily Sales Price of Frontier Common Stock
for the trading days beginning on and including the date of execution of the
Merger through and including the tenth day immediately preceding the Effective
Date. The "Daily Sales Price of Frontier Common Stock" shall be equal to the
average (rounded to four decimals) of the daily high and low trading prices per
share of Frontier Common Stock on Nasdaq, as reported in The Wall Street
Journal.
Accordingly, depending on the Frontier Average Closing Price, the exchange
ratio will be from 0.8177 shares of Frontier for one share of Valley (at an
average price of $59.07 or greater), to 0.9046 shares of Frontier for one share
of Valley (at an average price of $43.86 or less). By way of example, the
Exchange Ratio would be and the number of Frontier Common Stock issued
in the Merger would be if the Frontier Average Closing Price were to
equal the $ closing price of Frontier Common Stock on , 1998.
EFFECTIVE DATE OF THE MERGER
Subject to the conditions to the obligations of the parties to complete the
Merger as set forth in the Merger Agreement, the Effective Date of the Merger
will occur as soon as practicable after such conditions have been satisfied or
waived. Subject to the foregoing, it is currently anticipated that the Merger
will be consummated by the end of 1998. Either Frontier or Valley may terminate
the Merger Agreement if the Effective Date does not occur on or before April 30,
1999.
EXCHANGE OF VALLEY CERTIFICATES
As promptly as practicable after the Effective Date, Frontier will send to
each holder of record of Valley Common Stock transmittal materials for use in
exchanging all of such holder's certificates representing Valley Common Stock
for a certificate or certificates representing the Frontier Common Stock to
which such holder is entitled and a check or checks for such holder's fractional
share interests, as appropriate. The transmittal materials will contain
information and instructions with respect to the surrender and exchange of such
certificates.
Because the Effective Date of the Merger is not expected to occur for
several weeks after the Special Meeting, depending on the receipt of regulatory
approval, Valley shareholders will not be able to obtain their certificates
representing shares of Frontier Common Stock for several weeks after the Special
Meeting.
DO NOT SEND IN YOUR VALLEY CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for Valley Common Stock
registered in the name of a holder of such certificates (or indemnity
satisfactory to Frontier and the exchange agent selected by Frontier, if any of
such certificates are lost, stolen or destroyed), together with a properly
completed letter of transmittal, such exchange agent will mail to such holder a
certificate or certificates representing the number of shares of Frontier Common
Stock to which such holder is entitled, and, where applicable, a check for any
fractional share interest (without interest).
All shares of Frontier Common Stock issued to the holders of Valley Common
Stock pursuant to the Merger will be deemed issued as of the Effective Date.
Frontier dividends having a record date after the Effective Date will include
dividends on all shares of Frontier Common Stock issued in the Merger, but no
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dividend or other distribution payable to the holders of record of Frontier
Common Stock at or as of any time after the Effective Date will be distributed
to the holder of any Valley Common Stock certificates until such holder
physically surrenders all such certificates as described above. Promptly after
such surrender, all undelivered dividends and other distributions and, where
applicable, a check for any fractional share interest, will be delivered to such
holder, in each case without interest. After the Effective Date, the stock
transfer books of Valley will be closed, and there will be no transfers on the
transfer books of Valley of the shares of Valley Common Stock that were
outstanding immediately prior to the Effective Date.
BACKGROUND AND REASONS FOR THE MERGER
Valley. On April 29, 1998, the Valley Board retained Columbia Financial
Advisors, Inc. ("CFAI") to explore the various strategic options available to
Valley. Two options discussed by the Valley Board at an April 30, 1998 meeting
were a merger with a publicly traded bank holding company and a merger with a
publicly traded thrift holding company. The Valley Board authorized CFAI in May
to contact four publicly traded bank holding companies and four publicly traded
thrift holding companies to see if there was interest in a merger. After the
execution of a confidentiality agreement with each party, financial and other
information regarding Valley was disclosed to each party.
On June 15, 1998, six non-binding indications of interest were submitted to
CFAI. The Valley Board and CFAI met on June 18, 1998 to review the proposals.
The Valley Board decided to proceed with discussions with three parties, with
proposals for a fixed number of shares. Revised indications of interest were
provided by two parties, and these were reviewed in a June 19, 1998 meeting. On
June 23, 1998, meetings were conducted with two parties to clarify their
indications of interest. The Valley Board met on June 25, 1998 and decided to
negotiate with one party. After a meeting between the management of Valley and
this party on June 29, 1998, negotiations reached an impasse. The Valley Board
decided to authorize Valley management and CFAI to meet with the second party to
clarify and/or negotiate several points. On July 9, 1998, a meeting was
conducted; the results of this meeting were reviewed for the Valley Board on
July 10, 1998. On July 15, 1998, a director of the Valley Board, CFAI, and the
management of the interested party met to negotiate several unresolved issues.
On July 16, 1998, the Valley Board unanimously approved and directed Valley
management to retain Graham & Dunn, P.C., as Valley's legal counsel and to
construct a merger agreement with this interested party (the "Merger
Agreement").
On July 30, 1998, the Valley Board carefully considered the nature, value,
and prospects for future appreciation and liquidity of the shares of Frontier
Common Stock to be received by Valley shareholders in the proposed merger. A
report from a financial point of view regarding the fairness of the transaction
was presented by CFAI and a report of due diligence was presented by Valley
management regarding their findings. The Valley Board, along with its counsel,
Graham & Dunn, and its accountants, Dodd, Wing & Co., P.C., reviewed the Merger
Agreement and considered the potential benefit of the proposed merger to Valley
and its shareholders, taking into account the financial and valuation analyses
of the Merger, and the terms of the Merger Agreement. At this meeting, the
Valley Board unanimously determined that the proposed transaction was fair to
and in the best interest of Valley and its shareholders, and therefore
recommended the Merger Agreement be submitted to Valley's shareholders for
approval.
In reaching its determination to approve and adopt the Merger Agreement,
the Valley Board consulted with Valley's management and its financial and legal
advisors, and considered a number of factors, including, without limitation, the
following material factors:
- The Valley Board's review of Frontier's business, operations, financial
condition and earnings on an historical and a prospective basis;
- The Valley Board's knowledge and review, based in part on presentations
by its financial advisor and Valley's management, of: (i) the business,
operations, financial condition and earnings of Frontier on an historical
and prospective basis and of the combined company on a pro forma basis;
and (ii) the historical stock price performance of Frontier's Common
Stock, the potential for increased earnings and dividends for Valley
shareholders as shareholders of the combined company, and Frontier's
substantial market capitalization;
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- The presentation of CFAI, to the Valley Board on July 30, 1998 and the
opinion of CFAI rendered on July 30, 1998, that, as of such date, the
exchange ratio pursuant to the Merger Agreement was fair from a financial
point of view to the holders of Valley Common Stock;
- The terms of the Merger Agreement, including: (i) a provision permitting
Valley to terminate the Merger Agreement if the Frontier Average Closing
Price of Common Stock is below $43.86, thereby limiting the risk to
Valley shareholders of possible declines in Frontier Common Stock; and
(ii) an attractive premium for the holders of Valley Common Stock based
on price to 1997 earnings and price to book value multiples of
approximately 25x and 4.7x, respectively, at the time of the execution of
the Merger Agreement;
- The current and prospective economic and competitive environment facing
the financial services industry generally, and Valley in particular,
including the continued rapid consolidation in the industry and the
increasing importance of operational scale and financial resources in
maintaining efficiency and remaining competitive over the long term, and
in being able to capitalize on technological developments which
significantly impact industry competition;
- The general impact that the Merger could be expected to have on the
constituencies served by Valley, including its customers, employees and
communities. In this regard, Valley noted that the combined company could
be expected to offer a more extensive range of financial products and
services to Valley's existing customers and could provide its customers
with the added convenience of access to Frontier Bank's branch system;
- The expectation that the Merger will be tax-free for federal income tax
purposes to Valley and Valley shareholders; and
- The common business philosophy and compatibility of the management and
staff of Valley and Frontier.
The foregoing discussion of the information and factors considered by the
Valley Board is not intended to be exhaustive but is believed to include the
material factors considered by the Valley Board. In reaching its determination
to approve and recommend the Merger Agreement, the Valley Board did not assign
any relative or specific weights to the factors considered in reaching such
determination, and individual Directors may have given differing weights to
differing factors.
FOR THE REASONS SET FORTH ABOVE, THE VALLEY BOARD HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF VALLEY AND ITS
SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS OF VALLEY VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
CFAI has delivered a written opinion to the Valley Board to the effect
that, as of the date of this Prospectus/Proxy Statement, the consideration to be
received by Valley common stockholders pursuant to the terms of the Merger
Agreement is fair to such stockholders from a financial point of view. The
Exchange Ratio of . shares based upon the price calculation described
below of Frontier Common Stock for each share of Valley has been determined by
Valley and Frontier through negotiations. The CFAI Opinion is directed only to
the fairness, from a financial point of view, of the consideration to be
received and does not constitute a recommendation to any Valley stockholder as
to how such shareholder should vote at the Special Meeting. As of
, 1998, the price of Frontier's Common Stock was $
based upon the daily average of the high and low stock prices as reported in The
Wall Street Journal for the period of July 31, 1998 through ,
1998, and the total purchase price is approximately $ per share for all
of the outstanding shares of Valley.
Valley retained CFAI as its exclusive financial advisor pursuant to an
engagement letter dated April 29, 1998 in connection with the Merger. CFAI is a
regionally recognized investment banking firm that is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions. The Valley
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Board selected CFAI to act as Valley's exclusive financial advisor based on
CFAI's experience in mergers and acquisitions and in securities valuation
generally.
On July 30, 1998, CFAI issued its Opinion to the Valley Board that, in its
opinion as investment bankers, the terms of the Merger as provided in the Merger
Agreement are fair, from a financial view point, to Valley and its shareholders.
THE FULL TEXT OF THE CFAI OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED, AND LIMITS ON ITS REVIEW, IS ATTACHED HERETO AS APPENDIX C.
THE SUMMARY OF THE CFAI OPINION IN THIS PROSPECTUS/PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. VALLEY
SHAREHOLDERS ARE URGED TO READ THE ENTIRE CFAI OPINION.
In rendering its opinion to Valley, CFAI reviewed, among other things,
historical financial data of Valley, certain internal financial data and
assumptions of Valley prepared for financial planning and budgeting purposes
furnished by the management of Valley and, to the extent publicly available, the
financial terms of certain change of control transactions involving Northwest
community banks. CFAI discussed with Valley's management the financial
condition, current operating results, and business outlook for Valley. CFAI also
reviewed certain publicly available information concerning Frontier and certain
financial and securities data of Frontier and companies deemed similar to
Frontier. CFAI discussed with Frontier's management the financial condition,
current operating results, and business outlook for Frontier and Frontier's
plans relating to Valley. In rendering its opinion, CFAI relied, without
independent verification, on the accuracy and completeness of all financial and
other information reviewed by it and did not attempt to verify or to make any
independent evaluation or appraisal of the assets of Valley or Frontier nor was
it furnished any such appraisals. Valley did not impose any limitations on the
scope of the CFAI investigation in arriving at its opinion. CFAI analyzed the
total Purchase Price on a cash equivalent fair market value basis using standard
evaluation techniques (as discussed below) including comparable sales multiples,
net present value analysis, and net asset value based on certain assumption of
projected growth, earnings and dividends and a range of discount rates from 16%
to 18%.
Net Asset Value is the value of the net equity of a bank, including every
kind of property and value. This approach normally assumes the liquidation on
the date of appraisal with the recognition of the investment securities gains or
losses, real estate appreciation or depreciation, adjustments to the loan loss
reserve, discounts to the loan portfolio and changes in the net value of other
assets. As such, it is not the best evaluation approach when valuing a going
concern because it is based on historical costs and varying accounting methods.
Even if the assets and liabilities are adjusted to reflect prevailing market
prices and yields (which is often of limited accuracy due to the lack of readily
available data), it still results in a liquidation value. In addition, since
this approach fails to account for the values attributable to the going concern
such as the interrelationship among Valley's assets and liabilities, customer
relations, market presence, image and reputation, staff expertise and depth,
little weight is given by CFAI to the net asset value approach to valuation.
Market Value is generally defined as the price, established on an
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a thin market for
its common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In valuing a business enterprise, when sufficient
comparable trade data are available, the market value approach deserves greater
weighting than the net asset value approach and similar weight as the investment
value approach as discussed below.
CFAI maintains a comprehensive data base concerning prices paid for banking
institutions in the Northwest, particularly Western Washington and Western
Oregon banking institutions, during 1988 through 1998. This data base provides
comparable pricing and financial performance data for banking institutions sold
or acquired. Organized by different peer groups, these data present medians of
financial performance and purchase price levels, thereby facilitating a valid
comparative purchase price analysis. In analyzing the transaction value of
Valley, CFAI has considered the market approach and has evaluated price to
stockholders
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equity and price to earnings multiples and the price to total assets percentage
for transactions involving Washington and Oregon banking organizations with
total assets greater than $100 million that sold for 100% common stock from
January 1988 to June 1998.
Comparable Sales Multiples. CFAI calculated a "Merger
Consideration-Adjusted Book Value" for Valley's June 30, 1998 stockholders
equity and the estimated December 31, 1998 stockholders' equity adjusted for the
price to stockholders equity ratios for a sample of Northwest banking
institutions with assets of below $150 million which sold between January 1,
1992 through June 1, 1998 and a sample of Northwest banking institutions with
total assets of below $150 million which sold between January 1, 1996 and June
1, 1998. The calculations are $20.62 and $23.82 per share, respectively, for the
June 30, 1998 stockholders' equity for the two samples. For the estimated
December 31, 1998 stockholders' equity, the calculations are $19.74 and $22.80,
respectively. For Valley's 1997 net income for the twelve months prior to June
30, 1998, the calculations are $26.04 and $34.02, respectively.
Transaction Value as a Percentage of Total Assets. CFAI calculated the
percentage of total assets which the transaction represents as a price level
indicator. The transaction value as a percentage of total assets facilitates a
truer price level comparison with comparable banking organizations, regardless
of the differing levels of stockholders equity and earnings. In this instance, a
transaction value of $ per Valley share results in a transaction value as a
percentage of total assets of %. The median prices as a percentage of total
assets for a sample of Northwest banking institutions with assets of below $150
million which sold between January 1, 1992 through June 1, 1998 and a sample of
Northwest banking institutions with total assets of below $150 million which
sold between January 1, 1996 and June 1, 1998 are 19.97% and 20.11%,
respectively.
Investment Value is sometimes referred to as the income or earnings value.
One investment value method frequented used estimates the present value of an
institution's future earnings or cash flow which is discussed below.
Net Present Value Analysis. The investment or earnings value of any banking
organization's stock is an estimate of the present value of future benefits,
usually earnings, dividends, or cash flow, which will accrue to the stock. An
earnings value is calculated using an annual future earning stream over a period
of time of not less than five years and the residual or terminal value of the
earnings stream after five years, using Valley's estimates of future growth and
an appropriate capitalization or discount rate. CFAI's calculations were based
on an analysis of the banking industry, Valley's earnings estimates for
1998-2002, historical levels of growth and earnings, and the competitive
situation in Valley's market area. Using discount rates of 16% and 18%,
acceptable discount rates considering the risk-return relationship most
investors would demand for an investment of this type as of the valuation date,
the "Net Present Value of Future Earnings" provided a range of $34.49 to $40.45
per share.
When the net asset value, market value and investment value approaches are
subjectively weighed, using the appraiser's experience and judgment, it is
CFAI's opinion that the proposed transaction is fair, from a financial point of
view to the Valley shareholders.
Pursuant to the terms of the Engagement Letter, Valley has agreed to pay
CFAI a fee of $180,000 for its services as financial advisor, including this
fairness opinion. In addition, Valley has agreed to reimburse CFAI for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel, and to indemnify CFAI against certain liabilities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of Valley, together with their
affiliates, beneficially owned a total of 432,210 shares of Valley Common Stock
(representing 46.95% of all outstanding shares of Valley Common Stock) as of the
Record Date. The directors and executive officers will receive the same
consideration in the Merger for their shares as the other shareholders of
Valley. Certain members of Valley's management and the Valley Board have certain
interests in the Merger as described below that are in addition to their
interests as shareholders of Valley generally. The Valley Board was aware of
these interests and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated thereby.
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Employment Agreement. Frontier and Frontier Bank have entered into an
employment agreement with Linda A. Dryden, the President and CEO of Valley, to
take effect upon consummation of the Merger. Ms. Dryden will serve as Senior
Vice President, Manager of the Pierce County Division of Frontier Bank. The
employment agreement has a one-year term and provides for an annual salary equal
to her current compensation. Ms. Dryden will receive an incentive bonus not to
exceed 50 percent of her annual salary upon meeting certain earnings
requirements. Additionally, Ms. Dryden will receive 1,000 shares of Frontier
Common Stock if she remains employed by Frontier or if her employment is
terminated without cause within two years following the Merger.
Conversion of Stock Options. At the Effective Date of the Merger, Frontier
will assume each outstanding option to purchase shares of Valley Common Stock so
that such option is converted into an option to purchase shares of Frontier
Common Stock, except that each option will be exercisable for that number of
shares of Frontier Common Stock equal to the number of shares of Valley Common
Stock for which such option was exercisable multiplied by the Exchange Ratio,
and the exercise price of such Valley option will be equal to the exercise price
of such option divided by the Exchange Ratio. As of the date of this Prospectus/
Proxy Statement, the officers and directors of Valley held options to acquire an
aggregate of 57,750 shares of Valley Common Stock.
Covenant Not To Compete Agreements. Linda Dryden, Vera Telling, Executive
Vice President and Loan Administrator of Valley, and David Lawson, Senior Vice
President and CFO of Valley, entered into agreements with Frontier and Frontier
Bank not to become involved with a business that competes with Frontier or
Frontier Bank within a thirty mile radius of the current main office of the Bank
of Sumner. These agreements are conditioned upon the consummation of the Merger.
The covenants of Ms. Dryden, Ms. Telling and Mr. Lawson expire two years,
eighteen months and one year, respectively, from the date employment ceases with
Frontier. Under the terms of these agreements, Ms. Dryden, Ms. Telling and Mr.
Lawson will not directly or indirectly encourage, solicit or attempt to solicit
(i) any employees of Frontier or any of its subsidiaries employed in Pierce
County, to leave their employment or (ii) any customers of any Pierce County
office of Frontier or any of its subsidiaries to remove their business from
Frontier or any of its subsidiaries. As consideration for the covenants, Ms.
Dryden, Ms. Telling and Mr. Lawson will, upon consummation of the Merger,
receive an immediate payment of $340,000, $140,000 and $90,000, respectively.
Appointment of Director to the Frontier Board. Frontier has agreed to
appoint Michael Corliss, a member of the Valley Board and a member of the Board
of the Bank of Sumner, to serve on the Frontier and Frontier Bank Boards of
Directors following the Effective Date. Mr. Corliss is and has been the Chief
Executive Officer of Investco Financial and Management Corporation ("Investco")
for more than five years. Investco is a diversified real estate company.
Directors of Frontier currently receive an annual retainer of $20,000, and the
directors of Frontier Bank receive $2,000 per director meeting attended.
Appointment of Advisory Board. Immediately after the Effective Date, the
Board of Directors of Frontier will appoint all of the members of the Board of
Directors of Valley to an Advisory Board. Frontier will pay each member of the
Advisory Board a fee of $100 for each Advisory Board meeting attended.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Merger that are generally applicable to Valley shareholders.
This discussion is based on currently existing provisions of the Code, existing
regulations thereunder (including final, temporary or proposed) and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences described herein. The following discussion is intended only as a
general summary of the material federal income tax consequences of the Merger
and is not a complete analysis or listing of all potential tax effects relevant
to a decision on whether to vote in favor of approval of the Merger Agreement.
Consummation of the Merger is conditioned upon the receipt by Frontier and
Valley of an opinion of Keller Rohrback, L.L.P., special counsel to Frontier, to
the effect that if the Merger is consummated in accordance with the terms set
forth in the Merger Agreement: (i) the Merger will constitute a reorganization
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within the meaning of Section 368(a) of the Code; and (ii) no gain or loss will
be recognized by Valley shareholders as a result of receiving shares of Frontier
Common Stock in exchange for their shares of Valley Common Stock. The opinion
will not bind the Internal Revenue Service (the "IRS") or preclude the IRS from
adopting a contrary position. Frontier and Valley may waive receipt of such tax
opinion as a condition to consummating the Merger; provided, however, that if
the anticipated material federal income tax consequences of the Merger are
significantly different than those described herein, Valley will resolicit the
approval of its shareholders. Neither Frontier nor Valley has requested or will
request a ruling from the IRS with regard to the federal income tax consequences
of the Merger.
Receipt of Frontier Common Stock in Exchange for Valley Common Stock. No
gain or loss will be recognized by a holder who receives solely shares of
Frontier Common Stock (except for cash received in lieu of fractional shares, as
discussed below) in exchange for all of his or her shares of Valley Common
Stock. The tax basis of the shares of Frontier Common Stock received by a holder
in such exchange will be equal (except for the basis attributable to any
fractional shares of Frontier Common Stock, as discussed below) to the basis of
the Valley Common Stock surrendered in exchange therefor. The holding period of
the Frontier Common Stock received will include the holding period of shares of
Valley Common Stock surrendered in exchange therefor, provided that such shares
were held as capital assets of the holder at the Effective Date of the Merger.
Cash in Lieu of Fractional Shares. A holder who holds Valley Common Stock
as a capital asset and who receives in the Merger, in exchange for such stock,
solely Frontier Common Stock and cash in lieu of a fractional share interest in
Frontier Common Stock will be treated as having received such cash in full
payment for such fractional share of stock, and will incur capital gain or loss
to the extent the cash payment exceeds or is less than the holder's basis in
such fractional share.
THE FOREGOING IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO VALLEY SHAREHOLDERS, WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S TAX SITUATION AND
STATUS. BECAUSE TAX CONSEQUENCES OF THE MERGER VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH SHAREHOLDER, EACH VALLEY SHAREHOLDER SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING SUCH SHAREHOLDER'S SPECIFIC TAX
SITUATION AND STATUS, INCLUDING THE SPECIFIC APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN LAWS TO SUCH SHAREHOLDER AND THE POSSIBLE EFFECT OF CHANGES IN
FEDERAL AND OTHER TAX LAWS.
CONDUCT OF BUSINESS PENDING THE MERGER
Valley has agreed in the Merger Agreement not to take certain actions
relating to its operations without the prior approval of Frontier pending
consummation of the Merger. The Merger Agreement provides that, except with the
written consent of Frontier, each of Valley and the Bank of Sumner,
respectively, may not, among other things: (i) amend its articles of
incorporation or bylaws; (ii) impose any lien on any share of stock held by it;
(iii) repurchase any of its capital stock, split or otherwise subdivide its
capital stock, recapitalize in any way or declare a cash or stock dividend on
Valley Common Stock; however, in the event the Merger has not been consummated
by December 31, 1998, Valley may declare and pay cash dividends after such date
in an aggregate amount up to Valley's net income (determined in accordance with
GAAP) after December 31, 1998, to the extent that such dividends would not
preclude the Merger from being accounted for on a pooling-of-interests basis,
consistent with prior practice, and in no event shall the dividend paid in 1999
exceed the dividend paid in 1998; (iv) incur any additional debt except in the
ordinary course of business; (v) with certain specified exceptions, increase
compensation, pay bonuses or enter into severance arrangements; (vi) amend any
existing employment contract with any person or enter into any new employment
contract; (vii) adopt any new employee benefit plan or make any material change
to an existing employee benefit plan; (viii) enter into any new material service
contract, purchase or sale agreement or lease agreement; (ix) make any capital
expenditures exceeding $10,000 individually or $20,000 in the aggregate; (x)
enter into, renew or terminate any material contract or agreement or make any
changes in any material lease or contract; (xi) settle any claim for money
damages, (xii) enter into any new activities or lines of business, cease any
material activities or lines of business or conduct any material business
activity not consistent with past practice; (xiii) make, alter or purchase any
extension of credit except in the ordinary
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course of business and make, alter or purchase any extension of credit above
$500,000 for an existing customer or $250,000 for a new customer subject to
limited exceptions; (xiv) incur transaction expenses in excess of $375,000; (xv)
enter into any transactions other than in the ordinary course of business.
Moreover, Valley is required, among other things, to operate its businesses in
the usual, regular and ordinary course and to use its best efforts to preserve
its business relationships and to retain key employees.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of Valley and Frontier to consummate the Merger are subject
to, among other things, the satisfaction of the following conditions: (i)
approval of the Merger Agreement by the holders of not less than two-thirds of
the outstanding shares of Valley Common Stock; (ii) receipt of all applicable
regulatory approvals and the expiration of all required waiting periods; (iii)
no proceeding pending or threatened before any court or governmental agency
which presents a substantial risk of restraint or prohibition of the Merger;
(iv) receipt by Frontier and Valley of the opinion of Keller Rohrback, LLP,
dated as of the Effective Date, as to certain federal income tax consequences of
the Merger; (v) Frontier's receiving a letter from Moss Adams, L.L.P., dated the
Effective Date, and Valley's receiving a letter from Dodd, Wing & Co., P.C.,
dated the Effective Date, to the effect that the Mergers will qualify for
pooling of interests accounting treatment; (vi) the shares of Frontier Common
Stock to be issued pursuant to the Merger Agreement being approved for listing
on the National Market; and (vii) the Commission declaring the effectiveness of
the Registration Statement for the shares of Frontier Common Stock to be issued
in the merger.
The obligations of Frontier are subject to the satisfaction of certain
additional conditions, including: (i) the delivery by Valley of opinions of its
legal counsel and certificates executed by certain of its executive officers as
to compliance with the Merger Agreement; (ii) the accuracy of the
representations and warranties, and compliance with the agreements and covenants
of Valley; (iii) Linda Dryden having entered into an employment agreement with
Frontier Bank and Frontier; (iv) the absence of any material adverse change in
the financial position or results of operations of Valley; (v) the number of
Dissenting Shares not exceeding 10% of the outstanding shares of Valley Common
Stock; and (vi) Valley's Capital shall not be less than $10 million (not
including capital contributions upon exercise of outstanding Valley Options) at
October 1, 1998, and not less than $10 million (not including capital
contributions upon exercise of outstanding Valley Options) on the Effective
Date.
The obligations of Valley are also subject to the satisfaction of certain
additional conditions, including: (i) the delivery by Frontier of opinions of
its legal counsel and certificates executed by certain of its executive officers
as to compliance with the Merger Agreement; (ii) the accuracy of the
representations and warranties, and compliance with the agreements and covenants
of Frontier; and (iii) the receipt of an opinion from CFAI prior to the mailing
of this proxy statement to the effect that the financial terms of the merger are
fair to Valley shareholders.
Frontier and Valley may waive certain of the conditions to their respective
obligations to consummate the Merger, other than conditions required by law.
REGULATORY REQUIREMENTS
The merger of Frontier and Valley is subject to prior approval by the
Federal Reserve and DFI. An application for approval of the merger of Frontier
and Valley was filed with the Federal Reserve on September 1, 1998 and DFI on
September 8, 1998. The merger of Frontier Bank and the Bank of Sumner is subject
to the receipt of certain prior approvals from the FDIC and DFI. An application
for such merger was filed with the FDIC and DFI on September 8, 1998.
The approval of any application merely implies satisfaction of regulatory
criteria for approval, which do not include review of the transaction from the
standpoint of the adequacy of the consideration to be received by, or fairness
to, shareholders. Regulatory approvals do not constitute an endorsement or
recommendation of the proposed transaction.
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Frontier and Valley are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for consummation
of the transactions contemplated by the Merger Agreement other than as described
above. Should any other approval or action be required, it is presently
contemplated that such approval or action would be sought. There can be no
assurance that any such approval or action, if needed, could be obtained and, if
such approvals or actions are obtained, there can be no assurance as to the
timing thereof. The Merger cannot proceed in the absence of all requisite
regulatory approvals. See "-- Effective Date of the Merger," "-- Conditions to
Consummation of the Merger," and "-- Amendment; Waiver; Termination."
The Merger Agreement provides that if the Merger has not been consummated
on or before April 30, 1999, the Merger Agreement may be terminated by Frontier
or Valley. Since there is the possibility that regulatory approval may not be
obtained for a substantial period of time after approval of the Merger Agreement
by Valley's shareholders, there can be no assurance that the Merger will be
consummated by April 30, 1999. In addition, should regulatory approval require
any material change, a resolicitation of shareholders may be required if
regulatory approval is obtained after shareholder approval of the Merger
Agreement.
DISSENTERS' RIGHTS
In accordance with Chapter 13 of the WBCA (Chapter 23B.13 of the Revised
Code of Washington), Valley's shareholders have the right to dissent from the
Merger and to receive payment in cash for the "fair value" of their Valley
Common Stock.
If Valley shareholders perfect dissenters' rights with respect to more than
10% of the outstanding shares of Valley Common Stock, Frontier may elect not to
consummate the Merger. Valley shareholders electing to exercise dissenters'
rights must comply with the provisions of Chapter 13 in order to perfect their
rights. Valley and Frontier will require strict compliance with the statutory
procedures. The following is intended as a brief summary of the material
provisions of the Washington statutory procedures required to be followed by a
Valley shareholder in order to dissent from the Merger and perfect the
shareholder's dissenters' rights. THIS SUMMARY, HOWEVER, IS NOT A COMPLETE
STATEMENT OF ALL APPLICABLE REQUIREMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO CHAPTER 13 OF THE WBCA, THE FULL TEXT OF WHICH IS SET FORTH IN
APPENDIX B.
A shareholder who wishes to assert dissenters' rights must (a) deliver to
Valley before the vote is taken by Valley shareholders written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
Merger is effected, and (b) not vote such shares in favor of the Merger. A
shareholder wishing to deliver such notice should hand deliver or mail such
notice to Valley at the following address within the requisite time period:
Valley Bancorporation
801 Alder Avenue
Sumner, Washington 98390
Attn: Linda A. Dryden, President
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the shares the shareholder owns or over which the
shareholder has power to direct the vote. However, if a record shareholder is a
nominee for several beneficial shareholders some of whom wish to dissent and
some of whom do not, then the record holder may dissent with respect to all the
shares beneficially owned by any one person by notifying Valley in writing of
the name and address of each person on whose behalf the record shareholder
asserts dissenters' rights. A beneficial shareholder may assert dissenters'
rights directly by submitting to Valley the record shareholder's written consent
and by dissenting with respect to all the shares of which such shareholder is
the beneficial shareholder or over which such shareholder has power to direct
the vote.
A SHAREHOLDER WHO DOES NOT DELIVER TO VALLEY PRIOR TO THE VOTE BEING TAKEN
BY VALLEY SHAREHOLDERS A WRITTEN NOTICE OF THE SHAREHOLDER'S INTENT TO DEMAND
PAYMENT FOR THE "FAIR VALUE" OF THE SHARES WILL LOSE THE RIGHT TO EXERCISE
DISSENTERS' RIGHTS. IN ADDITION, ANY SHAREHOLDER ELECTING TO EXERCISE
DISSENTERS' RIGHTS MUST EITHER VOTE AGAINST THE MERGER OR ABSTAIN FROM VOTING.
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If the Merger is effected, Frontier as the surviving corporation shall,
within ten days after the Effective Date of the Merger, deliver a written notice
to all shareholders who properly perfected their dissenters' rights in
accordance with Chapter 13 of the WBCA. Such notice will, among other things:
(a) state where the payment demand must be sent and where and when certificates
for certificated shares must be deposited; (b) inform holders of uncertificated
shares to what extent transfer of the shares will be restricted after the
payment demand is received; (c) supply a form for demanding payment; and (d) set
a date by which Frontier must receive the payment demand, which date will be
between 30 and 60 days after notice is delivered.
A shareholder wishing to exercise dissenters' rights must timely file the
payment demand and deliver share certificates as required in the notice. Failure
to do so will cause such person to lose his or her dissenters' rights.
Within 30 days after the Merger occurs or receipt of the payment demand,
whichever is later, Frontier shall pay each dissenter with properly perfected
dissenters' rights Frontier's estimate of the "fair value" of the shareholder's
interest, plus accrued interest from the Effective Date of the Merger. With
respect to a dissenter who did not beneficially own Valley shares prior to the
public announcement of the Merger, Frontier is required to make the payment only
after the dissenter has agreed to accept the payment in full satisfaction of the
dissenter's demands. "Fair value" means the value of the shares immediately
before the Effective Date of the Merger, excluding any appreciation or
depreciation in anticipation of the Merger. The rate of interest is generally
required to be the rate at which Frontier can borrow money from other banks. It
is the current intention of Frontier to estimate the fair value of Valley Common
Stock to be $27.00 per share, which represents the price paid for Valley Common
Stock on July 17, 1998, the last transaction for which a price is known to
Valley management prior to the date on which the Merger Agreement was signed.
A dissenter who is dissatisfied with Frontier's estimate of the fair value
or believes that interest due is incorrectly calculated may notify Frontier of
the dissenter's estimate of the fair value and amount of interest due. If
Frontier does not accept the dissenter's estimate and the parties do not
otherwise settle on a fair value then Frontier must within 60 days petition a
court to determine the fair value.
In view of the complexity of Chapter 13 of the WBCA and the requirement
that shareholders must strictly comply with the provisions of Chapter 13 of the
WBCA, shareholders of Valley who may wish to dissent from the Merger and pursue
appraisal rights should consult their legal advisors.
AMENDMENT; WAIVER; TERMINATION
Frontier may elect to modify the structure of the Merger; provided,
however, that Frontier shall not have the right to make any revision to the
structure of the Merger which changes the amount or kind of the consideration
which the Valley shareholders are entitled to receive, or adversely affects the
intended tax-free treatment to Valley shareholders as a result of receiving such
consideration or terminate the Merger Agreement because of a delay caused by
such a revision in structure. Prior to the Effective Date of the Merger, any
condition of the Merger Agreement may (to the extent allowed by law) be waived
in writing by the party benefited by the provision or may be amended or modified
by an agreement in writing approved by the Boards of Directors of Frontier and
Valley. After approval of the Merger Agreement by the shareholders of Valley,
the Merger Agreement will not, without further approval of such shareholders, be
amended in any manner that would decrease the consideration to be received by
Valley shareholders in exchange for their Valley Common Stock or that would
adversely affect the intended tax-free treatment to Valley shareholders. For a
discussion of this intended tax-free treatment see "THE MERGER -- Certain
Federal Income Tax Consequences."
The Merger Agreement may be terminated at any time prior to the Effective
Date of the Merger, either before or after approval by the Valley shareholders,
as follows: (i) by the mutual consent of the parties; (ii) by either party if
the Merger is not consummated on or before April 30, 1999; (iii) by either party
if the other party has committed a material breach that has not been cured
within 30 days after the giving of written notice of such breach; (iv) by
Frontier if Valley enters any agreement with a view toward being acquired or
effecting a business combination with any other person; (v) by either party in
the event the requisite shareholder approval by Valley shareholders is not
obtained; or (vi) by Valley if the Frontier Average Closing Price is less
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than $43.86 and Frontier does not elect to adjust the Exchange Ratio so that the
Frontier Average Closing price multiplied by the Exchange Ratio equals $39.675.
Valley has certain rights, tied to a reduction in value of Frontier Common
Stock, to terminate the Merger Agreement. In determining whether to elect to
terminate the Merger Agreement in these circumstances, the Valley Board will
take into account, consistent with its fiduciary duties, all relevant facts and
circumstances existing at that time, including without limitation the market for
financial institution stocks in general, the relative value of Frontier Common
Stock in the market, and the advice of its financial advisers and legal counsel.
By approving the Merger Agreement, Valley shareholders would be permitting the
Valley Board to determine, in the exercise of its fiduciary duties, to proceed
with the Merger even though the Average Closing Price is less than $43.86. The
termination right of Valley under the Merger Agreement is subject in certain
circumstances to Frontier's right to avoid termination by increasing the number
of shares of Frontier Common Stock that Valley shareholders would receive.
In the event of the valid termination of the Merger Agreement by either
Frontier or Valley, the obligations of the parties to the Merger Agreement shall
terminate, and there will be no liability on the part of either party or their
officers or directors, except for the potential of a termination fee as
described in the next section.
TERMINATION FEE
As a condition and inducement to Frontier's entering into the Merger
Agreement and in consideration thereof, Valley has agreed to pay to Frontier a
termination fee under certain circumstances. Valley has agreed to pay to
Frontier a termination fee of $500,000 in the event that: (i) the Merger
Agreement is terminated because Valley and the Bank of Sumner do not use their
best efforts to consummate the Merger in accordance with the terms of the Merger
Agreement; or (ii) Valley terminates the Merger Agreement for any reason other
than the grounds for termination for Mutual Consent, Breach, Delay or the
Frontier Average Closing Price below $43.86. Frontier has agreed to pay to
Valley a termination fee of $500,000 in the event that: (i) the Merger Agreement
is terminated because Frontier does not use its best efforts to consummate the
Merger in accordance with the terms of the Merger Agreement; or (ii) Frontier
terminates the Merger Agreement for any reason other than the grounds for
termination for Mutual Consent, Breach, Delay or the Frontier Average Closing
Price below $43.86.
In addition, Valley has agreed to pay to Frontier a acquirer fee of
$750,000 under certain circumstances. Such fee may be demanded by Frontier in
the event that the Merger is not completed by January 30, 2000 and any of the
following occurs: (i) a third party acquires beneficial ownership of 25% or more
of the then outstanding Valley Common Stock; (ii) Valley, without the written
consent of Frontier, enters into or recommends to Valley shareholders an
agreement with a third party providing for certain actions (each an "Acquisition
Transaction"), including a merger or similar transaction involving Valley, the
purchase, acquisition or lease of substantially all of the assets of Valley or
the purchase or other acquisition of securities representing 10% or more of the
voting power of Valley; or (iii) a bona fide proposal to engage in an
Acquisition Transaction is made to Valley by a third party, and after such
proposal is made either Valley willfully breaches the Merger Agreement and such
breach entitles Frontier to terminate the Merger Agreement, Valley shareholders
fail to approve the Merger Agreement at the Special Meeting, the Special Meeting
is canceled without the fault of Frontier, or the Valley Board withdraws or
modifies in a manner adverse to Frontier its recommendation to shareholders to
approve the Merger Agreement.
Valley will not be required to pay the acquiror fee if, prior to the
occurrence of any of the events described above, Frontier terminates the Merger
Agreement other than because of a material breach by Valley or Valley validly
terminates the Merger Agreement (i) with the mutual consent of Frontier, or (ii)
because of a material breach by Frontier that cannot be or has not been cured
within 30 days after written notice of such breach (but only if at such time as
Valley exercises its right to terminate the Merger Agreement Frontier is not
entitled to terminate the Merger Agreement either because of a material breach
by Valley, or because the Merger has not been consummated by April 30, 1999).
The acquiror fee is intended to increase the likelihood that the Merger will be
consummated according to the terms set forth in the Merger Agreement and may be
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expected to discourage competing offers to acquire Valley from potential third
party acquirors because the acquiror fee could increase the cost of such
acquisition. Under no circumstances shall Valley pay an aggregate termination
fee and acquiror fee of more than $1,000,000. To the best of Valley's knowledge,
no event that would permit Frontier to demand payment of the acquiror fee has
occurred as of the date of this Prospectus/ Proxy Statement.
RESALE OF FRONTIER COMMON STOCK
The shares of Frontier Common Stock to be issued to shareholders of Valley
upon consummation of the Merger have been registered under the Securities Act.
Such shares may be traded freely and without restriction by those shareholders
not deemed to be "affiliates" of Valley or Frontier as that term is defined in
the rules under the Securities Act. Frontier Common Stock received by those
shareholders of Valley who are deemed to be "affiliates" of Valley on the date
of the Special Meeting may be resold without registration only to the extent
provided for by Rule 145, or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Valley generally include
individuals or entities that control, are controlled by or are under common
control with, Valley, and may include the executive officers and directors of
Valley and certain of their affiliates as well as certain principal shareholders
of Valley. In the Merger Agreement, Valley has agreed to use its best efforts to
cause each person who may be deemed to be an affiliate of Valley to enter into
an agreement with Frontier providing that such affiliate will not sell,
transfer, or otherwise dispose of the shares of Frontier Common Stock to be
received by such person in the Merger except in compliance with the applicable
provisions of the Securities Act and the rules and regulations promulgated
thereunder. This Prospectus/Proxy Statement does not cover any resales of
Frontier Common Stock received by affiliates of Valley.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by Frontier of a
letter from Moss Adams, LLP, and Valley's receipt of a letter from Dodd, Wing &
Co., P.C., to the effect that the Merger will qualify for "pooling of interests"
accounting treatment if consummated in accordance with the terms of the Merger
Agreement. Under the pooling of interests method of accounting, the historical
basis of assets and liabilities of Frontier and Valley will be combined at the
Effective Date and carried forward at their previously recorded amounts, and the
stockholders' equity accounts of Frontier and Valley will be combined on
Frontier's consolidated balance sheet. Income and other financial statements of
Frontier issued after consummation of the Merger will be restated retroactively
to reflect the consolidated operations of Frontier and Valley as if the Merger
had taken place prior to the periods covered by such financial statements. There
is no recognition of goodwill from the Merger under the pooling of interests
account method.
EXPENSES
The Merger Agreement provides that Frontier and Valley each will pay their
own expenses in connection with the Merger Agreement and the transactions
contemplated thereby. Valley may not incur expenses in connection with the
transaction that exceed $375,000.
BUSINESS OF THE PARTIES TO THE MERGER
FRONTIER
Frontier is a Washington corporation registered as a bank holding company
under the Bank Holding Company Act of 1956. Frontier is primarily engaged in the
business of planning, directing, and coordinating the business activities of its
wholly owned subsidiaries, Frontier Bank, which is engaged in a general banking
business and businesses related to banking, and FFP, Inc., a nonbank corporation
which leases property to Frontier Bank. Frontier Bank conducts business from its
main office in Everett, Washington and its eighteen branch offices located in
Snohomish, King and Skagit counties.
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Frontier Bank, incorporated in 1978, is a Washington state-chartered
commercial bank that serves individuals and businesses throughout Washington.
Frontier Bank provides a full range of consumer banking services including
savings accounts, checking accounts, installment and commercial lending, safe
deposit facilities, time deposits and other consumer and business related
financial services. In addition to consumer oriented activities, Frontier Bank
maintains a strong commercial lending program, servicing businesses
headquartered throughout Snohomish, King and Skagit counties. Frontier Bank
offers discount brokerage services and operates a Real Estate Division that
provides a broad range of home, construction and commercial long-term financing.
Frontier Bank's Trust Department offers a full array of trust services and its
Private Banking Office gives personal service to select customers. Frontier Bank
also has an Insurance and Investment Center that markets annuities, life
insurance products, and mutual funds to Frontier Bank customers and the general
public.
Frontier Bank's 19 locations include four offices in Everett, one office
each in Arlington, Snohomish, Smokey Point, Lake Stevens, Marysville, Lynnwood,
Mill Creek, Edmonds, Stanwood, Bothell, Woodinville, Monroe, Lake City
(Seattle), Redmond and Burlington.
Financial and other information relating to Frontier is set forth in
Frontier's Annual Report on Form 10-K for the year ended December 31, 1997, and
Quarterly Reports on Form 10-Q for the quarters ended March 31, and June 30,
1998. Information regarding the names, ages, positions and business backgrounds
of the executive officers and directors of Frontier, as well as additional
information, including executive compensation, security ownership of certain
beneficial owners and management and certain relationships and related
transactions, is set forth in or incorporated by reference in Frontier's Annual
Report on Form 10-K for the year ended December 31, 1997 and Frontier's Proxy
Statement dated March 20, 1998 for its Annual Meeting of Shareholders. Copies of
this information may be obtained from Frontier as indicated under "WHERE YOU CAN
FIND MORE INFORMATION."
FRONTIER YEAR 2000 ISSUES
The Year 2000 Problem. The century date change creates a problem because
computer programs and systems were designed to store calendar years with only
two numbers, rather than four numbers. Because of this faulty design, computer
programs and systems may recognize a date using "00" as 1900 rather than the
Year 2000. The extent of the potential impact of this Year 2000 problem is not
yet known and could affect the global economy and every organization.
Only one thing is certain about the impact of the Year 2000 -- it is
difficult to predict with any degree of certainty what will happen after
December 31, 1999. Frontier is committed to address and is addressing these Year
2000 issues and the uncertainty that is presented by these Year 2000 issues. The
total financial effect that the Year 2000 problem will have on Frontier is
uncertain and will not be known until the year 2000 arrives. In spite of
Frontier's efforts to mitigate the Year 2000 problem, the success of Frontier's
efforts will not be known until the year 2000 arrives.
The Challenges faced by Frontier. The Year 2000 problem is of particular
concern to Frontier and other financial institutions because most financial
transactions, such as interest accruals and payments, are date sensitive. The
Year 2000 problem will impact both information technology ("IT") systems, such
as computers, and non-IT systems. Non-IT systems typically include embedded
technology such as microcontrollers, and include automated teller machines,
elevators, alarm systems, and vaults. Non-IT systems are more difficult to
assess and repair than IT systems.
Frontier's State of Readiness. Frontier established a Year 2000 Committee
in February 1997 with representatives from all significant functional areas
which report to the Frontier Board of Directors. Detailed inventories for all IT
systems and all identified non-IT systems have been conducted to catalog
potential hardware and software problems. Frontier has identified certain
systems as business-critical systems and testing of those business-critical
systems has commenced. Frontier has identified the end of this year as the
projected deadline to complete the Year 2000 testing on business-critical
systems. Testing will continue into the year 1999 for those business-critical
systems that are not tested in 1998 and for those systems that have not been
identified as critical. Frontier has determined that modifications to certain
systems are required and that
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such modifications will be conducted to mitigate, but not eliminate, the risks
associated with the Year 2000 problem.
Third Party Concerns. Frontier interacts with numerous customers, vendors
and third party service providers whose failure to address the Year 2000 problem
may create significant business disruption and costs to Frontier. Due to the
interdependence of computer systems today, it is simply impossible for any one
party to eliminate the risks related to the Year 2000 problem. It is even
possible that the Year 2000 problem could disrupt Frontier's business through
the loss of electric power or phone service, or for other reasons outside of
Frontier's control. Frontier has initiated formal communications with certain
significant suppliers and large customers to attempt to determine the extent to
which Frontier is vulnerable to those third parties' failure to remediate their
own Year 2000 issues. Systems of other companies on which Frontier's systems
rely may not be timely converted, which might well result in significant costs
to Frontier.
Frontier is in the process of assessing the incremental credit risk in loan
portfolio relating to individual customers' ability to successfully address Year
2000 IT and non-IT issues. For those over an established dollar threshold,
credit risk assessments are being or will be performed on each borrower. This
process will be ongoing until the Year 2000.
Estimated Costs. It is impossible to predict with any degree of certainty
the costs that Frontier will incur as a result of the Year 2000 problem.
Frontier's current estimate for the total year 2000 testing and remediation is
roughly $550,000, which will be funded through cash flows of operations.
Frontier has incurred and expensed approximately $200,000 addressing the Year
2000 problem. These future financial estimates are just rough estimates, as
these are "forward-looking" statements subject to risks and uncertainties that
may cause future results to differ materially. It is uncertain to what extent
the actual costs of the Year 2000 problem will have on Frontier's results of
operations, liquidity, and financial condition. Actual lost revenue resulting
from the Year 2000 problem is impossible to predict because of the inherent
uncertainty of the Year 2000 problem. Frontier, through its Year 2000 Committee,
is analyzing and determining how to best handle and mitigate this uncertainty.
Frontier presently believes that costs associated with compliance efforts will
not have a significant impact on Frontier's ongoing operations, although there
can be no assurance in this regard.
Frontier's Contingency Plans. The Year 2000 Committee is in the process of
developing and implementing contingency plans to handle the most reasonably
likely worst case scenarios. Since these worst case scenarios are difficult or
even impossible to predict at this time, these contingency plans are
particularly challenging. Frontier intends to develop contingency plans that are
reasonably necessary to address the Year 2000 problem and to revise those
contingency plans on an ongoing basis until the problem is confronted and
resolved.
VALLEY
Valley is a Washington corporation that, effective December 3, 1984, became
the sole shareholder of the Bank of Sumner. Valley engages in no significant
activity other than holding the stock of Bank of Sumner.
Bank of Sumner was founded as a Washington State Bank in December of 1975.
Bank of Sumner conducts a commercial banking business that offers a full line of
banking services to its customers and the community and that provides personal
and business financial services to individuals and small businesses. Bank of
Sumner offers those services traditionally offered by commercial banks,
including loans, deposits, travelers checks, safe deposit boxes, wire transfers
and notary services. Bank of Sumner's main office and administrative office are
in Sumner, Washington. Bank of Sumner has branch facilities in Puyallup, Orting
and Buckley, Washington. Bank of Sumner employs 41 full time and 9 part time
employees.
As of June 30, 1998, on a consolidated basis, Bank of Sumner had a total of
$80,180,680 in loans outstanding, an allowance for loan losses of $1,103,374,
total deposits of $85,801,409 and total stockholders' equity of $10,089,223.
Competition. The primary service area of Bank of Sumner is the western
portion of Pierce County Washington plus the area surrounding Enumclaw, which is
located in King County. The bank's service area covers approximately 200 square
miles and includes the cities of Sumner, Puyallup, Buckley, Bonney Lake,
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Orting, Graham, Milton and Enumclaw. The area served has a population of
approximately 155,000 and total deposits in banks in those cities were $890
million at June 30, 1997 based on the Data Book published jointly by FDIC and
OTS. Bank of Sumner's deposits make up 7.6% of the total in its service area.
With 45 financial institution branches serving this population, competition in
Bank of Sumner's primary service area is relatively high. Bank of Sumner has
competition within its area from many well-established financial institutions
including seven commercial banks, two savings banks, and five credit unions.
Many of Bank of Sumner's competitors are larger and more substantially
capitalized than Bank of Sumner. They have established positions in Pierce
County and have greater resources than Bank of Sumner for lending and to pay for
advertising, physical facilities, personnel and interest on deposited funds.
The primary factors affecting competition for deposits are interest rates,
the quality and range of financial services offered and the convenience of
office locations and office hours. The primary factors in competing for loans
are interest rates, loan origination fees and the quality and range of lending
services offered. Other factors, which affect competition, include the general
availability of lendable funds and credit, general and local economic conditions
and the quality of service provided to customers.
Bank of Sumner relies substantially on local promotional activity, personal
contacts by its officers, directors, employees and shareholders, extended hours,
personalized service, a flexible product mix and its reputation in the community
to compete effectively.
At December 31, 1997, Bank of Sumner was the sixth largest of seven
commercial banks in its primary service area based on total asset size.
Facilities. Bank of Sumner operates out of 5 offices. Following are
descriptions of Bank of Sumner's facilities at each location.
Main Office. Located at 801 Alder Street, Sumner, Washington has six teller
windows, one drive up window with 3 lanes, and one ATM. Bank of Sumner owns this
two-story building with 7500 square feet.
Meridian Place Office is located in the Meridian Place shopping center at
4417 South Meridian, Puyallup, Washington. This branch has seven teller windows
and one drive up window with two lanes, and one ATM. The building has
approximately 4000 square feet on two floors. Bank of Sumner owns this building,
but is leasing the property on which it is situated. The lease on this property
expires in September of 1999. The lease provides an option to renew the lease
for an additional ten years.
Buckley Branch is located at 112 River Street, Buckley, Washington. The
4000 square foot building has six teller windows and one ATM, all on one floor.
The bank owns this facility and has been negotiating with the city to acquire
adjoining property to add a drive up window.
Orting Branch, located at 104B South Washington in Orting, Washington, has
four teller windows and one drive up window with two lanes. There is also an
ATM. Part of the facility, which is owned by Bank of Sumner, is rented out to a
retail establishment on a month-to-month basis. Total square footage of this one
story building is approximately 2500.
Administrative Office is located at 802 Alder Street, Sumner, Washington.
This two story facility houses the data processing center and administrative
offices on the ground floor, with meeting rooms, storage and lunchroom on the
upper level. The Bank of Sumner owns this building which has approximately 5000
square feet.
Employees. As of August 1, 1998, Bank of Sumner employed 41 full-time and 9
part-time employees. Bank of Sumner provides a variety of benefits to its
employees and believes employee relations are good. Bank of Sumner's employees
are not parties to any collective bargaining agreement. Valley Bancorporation
does not directly employ anyone.
Legal Proceedings. Valley Bancorporation is not presently involved in any
legal proceedings which management believes to be material to its financial
condition or results of operations. As the nature of Bank of Sumner's business
involves providing certain financial services, the collection of loans and the
enforcement
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and validity of mortgages and other liens, Bank of Sumner is a party in various
legal proceedings (such as garnishment proceedings) which may be considered as
arising in the ordinary course of its business.
Financial and other detailed information relating to Bank of Sumner is set
forth in Appendix D.
VALLEY YEAR 2000 ISSUES
The century date change for the Year 2000 is a serious issue that may
impact virtually every organization, including Valley. Many software programs
are not able to recognize the Year 2000, since most programs and systems were
designed to store calendar years in the 1900s by assuming the "19" and storing
only the last two digits of the year. The problem is especially important to
financial institutions since many transactions, such as interest accruals and
payments, are date sensitive, and because the Bank of Sumner interacts with
numerous customers, vendors and third party service providers who must also
address the Year 2000 issue. The problem is not limited to computer systems.
Year 2000 issues will potentially affect every system that has an embedded
microchip, such as automated teller machines, elevators and vaults.
Valley is committed to addressing these Year 2000 issues in a prompt and
responsible manner, and it has dedicated the resources to do so. Management has
completed an assessment of Valley's and the Bank of Sumner's automated systems
and has implemented a program consistent with applicable regulatory guidelines,
to complete all steps necessary to resolve identified issues. Valley's
compliance program has several phases, including (1) project management; (2)
assessment; (3) testing; and (4) remediation and implementation. Valley has
formed a Year 2000 compliance committee consisting of senior management and the
data processing manager and senior operations officer. A Year 2000 compliance
plan has been developed and regular committee meetings have been held to discuss
the process, assign tasks, determine priorities and monitor progress. The
committee reports to Valley's Board monthly.
All of Valley's and the Bank of Sumner's computer equipment,
mission-critical software programs, and primary software providers have been
identified and assessed. Third party providers of mission-critical software have
been contacted as necessary. Valley will continue to monitor and work with these
vendors. The Bank of Sumner has also identified, and begun working with, its
significant borrowers to assess the extent to which they may be affected by Year
2000 issues.
Updating and testing of Valley's and the Bank of Sumner's automated systems
is currently underway, and Valley anticipates that all testing will be complete
by December 31, 1998. Upon completion, Valley will be able to identify any
internal computer systems that remain non-compliant.
The total financial effect that Year 2000 issues will have on Valley cannot
be predicted with any certainty at this time. In fact, in spite of all efforts
being made to rectify these problems, the success of Valley's efforts will not
be known until the Year 2000 actually arrives. However, based on its assessment
to date, Valley does not believe that expenses related to meeting Year 2000
challenges will have a material effect on the operations or financial condition
of Valley or the Bank of Sumner. Year 2000 challenges facing vendors of mission-
critical software and systems, and facing bank customers, could have a material
effect on the operations or financial condition of Valley, to the extent such
parties are materially affected by such challenges.
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SUPERVISION AND REGULATION
INTRODUCTION
The following generally refers to certain statutes and regulations
affecting the banking industry. These references are only intended to provide
brief summaries and therefore, are not complete and are qualified by the
statutes and regulations referenced. In addition, due to the numerous statutes
and regulations which apply to and regulate the operation of the banking
industry, many are not referenced below.
THE HOLDING COMPANIES
GENERAL
Frontier and Valley are bank holding companies by virtue of their
respective ownership of Frontier Bank and Bank of Sumner, and are registered as
such with the Federal Reserve. As bank holding companies, Frontier and Valley
are subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"),
which governs and subjects each of them and their respective subsidiaries to
supervision and examination by the Federal Reserve. Under the BHCA, Frontier and
Valley file with the Federal Reserve annual reports of their operations and such
additional information as the Federal Reserve may require.
BANK HOLDING COMPANY STRUCTURE
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Certain
recent legislation designed to expand interstate branching and relax federal
restrictions on interstate banking may expand opportunities for bank holding
companies (see below under "Regulation of Banking Subsidiaries -- Recent Federal
Legislation -- Interstate Banking and Branching").
Federal Reserve Regulation. Bank holding companies must obtain the Federal
Reserve's approval before they: (1) acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, they would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank; (2) merge or consolidate with another bank holding company; and (3)
acquire substantially all of the assets of any additional banks. Until September
1995, the BHCA also prohibited bank holding companies from acquiring any such
interest in any bank or bank holding company located in a state other than the
state in which the bank holding company was located, unless the laws of both
states expressly authorized the acquisition. Now, subject to certain state
restrictions, such as age and contingency laws, a bank holding company that is
adequately capitalized and adequately managed may acquire the assets of an
out-of-state bank.
Control of Nonbanks. With certain exceptions, the BHCA also prohibits bank
holding company from acquiring direct or indirect ownership or control of voting
shares in any company other than a bank or a bank holding company unless the
Federal Reserve finds the company's business to be incidental to the business of
banking. When making this determination, the Federal Reserve in part considers
whether allowing a bank holding company to engage in those activities would
offer advantages to the public that would outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek Federal Reserve approval before engaging de novo in
permissible nonbanking activities, if the holding company is well capitalized
and meets certain other criteria specified in the same statute. A bank holding
company meeting the specifications is now required only to notify the Federal
Reserve within 10 business days after the activity has begun.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' prior written notice of the
proposed acquisition. Following receipt of this notice, the Federal Reserve has
60 days to
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issue a notice disapproving the proposed acquisition, but the Federal Reserve
may extend this time period for up to another 30 days. An acquisition may be
completed before the disapproval period expires if the Federal Reserve issues
written notice of its intent not to disapprove the action. Under a rebuttable
presumption established by the Federal Reserve, the acquisition of 10% or more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
("Exchange Act") would, under the circumstances set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the Federal Reserve under the BHCA before
acquiring 25% (5% if the "company" is a bank holding company) or more of the
outstanding shares of Frontier, or otherwise obtain control over Frontier.
TRANSACTIONS WITH AFFILIATES
Frontier and its subsidiaries, and likewise Valley and Bank of Sumner, are
deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions. Generally,
Sections 23A and 23B of the Federal Reserve Act: (1) limit the extent to which
the financial institution or its subsidiaries may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar type of transactions.
REGULATIONS OF MANAGEMENT
Federal law: (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel 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.
FIRREA
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (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
and the other insure savings association deposits; (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 penalities for
violating statutes and regulations.
TIE-IN ARRANGEMENTS
Frontier, Valley and their subsidiaries, 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, neither Frontier, Valley nor their subsidiaries may condition an
extension of credit 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. Effective April 1997,
the Federal Reserve has adopted significant amendments to its anti-tying rules
that: (1) remove Federal Reserve-imposed anti-tying restrictions on bank holding
companies and their non-bank subsidiaries; (2) create exemptions from the
statutory restriction on bank tying arrangements to allow banks greater
flexibility to package products with their affiliates; and (3) establish a safe
harbor from the tying restrictions for certain foreign transactions. These
amendments are designed to enhance competition in banking and nonbanking
products and allow banks
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and their affiliates to provide more efficient a lower-cost service to
customers. However, the impact of the amendments on Frontier, Valley and their
subsidiaries is unclear at this time.
STATE LAW RESTRICTIONS
As corporations chartered under the laws of the State of Washington,
Frontier and Valley may be subject to certain limitations and restrictions as
provided under applicable Washington corporate laws.
SECURITIES REGISTRATION AND REPORTING
The Frontier Common Stock is registered as a class with the SEC under the
Securities Act and thus is subject to the periodic reporting and proxy
solicitation requirements and the insider-trading restrictions of that Act. The
periodic reports, proxy statements, and other information filed by Frontier
under that Act can be inspected and copied at or obtained from the Washington,
D.C., office of the SEC. In addition, the securities issued by Frontier are
subject to the registration requirements of the Securities Act and applicable
state securities laws unless exemptions are available.
THE BANKS
GENERAL
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, certain
interest rates payable, mergers and consolidations, borrowings, issuance 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 an unsafe and
unsound practice in conducting their business.
Frontier Bank and the Bank of Sumner are state-chartered commercial banks
subject to extensive regulation and supervision by the Washington Department of
Financial Institutions Division of Banks ("DFI"). Frontier Bank and the Bank of
Sumner (the "Banks") are also subject to regulation and examination by the FDIC,
which insures their respective deposits to the maximum extent permitted by law.
The federal laws that apply to the Banks regulate, among other things, the scope
of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for loans. The laws and regulations governing the Banks generally
have been promulgated to protect depositors and not to protect stockholders of
such institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of areas to ensure bank safety and soundness, including:
internal controls; credit underwriting; asset growth; management compensation;
ratios of classified assets to capital; and earnings. FDICIA also contains
provisions which are intended to change independent auditing requirements;
restrict the activities of state-chartered insured banks; amend various consumer
banking laws; limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve's discount window; and require regulators to perform periodic
on-site bank examinations and set standards for real estate lending.
LOANS-TO-ONE BORROWER
Each of the Banks is subject to limitations on the aggregate amount of
loans that it can make to any one borrower, including related entities.
Applicable regulations generally limit loans-to-one borrower to 20% of
unimpaired capital. Each of the Banks is in compliance with applicable
loans-to-one borrower requirements.
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FDIC INSURANCE
Generally, customer deposit accounts in banks 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 which depository institutions contribute funds to the
BIF and/or the SAIF, as applicable, based on their risk classification.
In September of 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted. The Funds Act provided, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment was
designed to place the SAIF at its 1.25 reserve ratio goal.
The Funds Act, for the three-year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis points)
imposed on SAIF insured deposits (approximately 6.5 basis points). Beginning in
the year 2000, BIF insured institutions will be required to pay the FICO
obligations on a pro-rata basis with all thrift institutions; annual assessments
are expected to equal approximately 2.4 basis points until 2017, to be phased
out completely by 2019.
Until further action by the FDIC, BIF premiums will be maintained at their
current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on a
range of rates, with those in the highest risk category paying 27 cents for
every $100 of BIF insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 basis points, have been adjusted by 4 basis
points to a range of 0 to 27 basis points.
The Funds Act provides for the merger of the BIF and SAIF on January 1,
1999, only if no thrift institutions exist on that date. It is expected that
Congress will continue to address comprehensive legislation on the merger of the
funds and elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL REQUIREMENTS
Capital Adequacy Requirements. The Federal Reserve and the FDIC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.
The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
the allowance for loan and lease losses. Tier 2 capital includes the excess of
any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, 20% of unrealized gain of equity securities, and general
reserves for loan and lease losses up to 1.25% of risk-weighted assets. Neither
of the Banks have received any notice indicating that it will be subject to
higher capital requirements.
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Under these guidelines, banks' assets are given risk-weights of 0%, 20%,
50% or 100%. Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier
1 capital as a percentage of average total assets less intangibles, to be used
as a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected 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.
Prompt Corrective Action. Regulations adopted by the Agencies as required
by FDICIA impose even more stringent capital requirements. The FDIC and other
Agencies must take certain "prompt corrective action" when a bank fails to meet
capital requirements. The regulations establish and define five capital levels:
(1) "well-capitalized," (2) "adequately capitalized," (3) "undercapitalized,"
(4) "significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10% total
risk-based capital, 6% Tier 1 risk-based capital, and a leverage ratio of no
less than 5%. 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 being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital, and a leverage ratio of at least 4%). 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/Proxy statement, neither Frontier, Valley, nor
their respective subsidiaries were subject to any regulatory order, agreement,
or directive to meet and maintain a specific capital level for any capital
measure.
LIQUIDITY REQUIREMENTS
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
Dividends paid to Frontier by its subsidiaries are the material source of
Frontier's cash flow. Likewise, dividends paid to Valley by Bank of Sumner are
the material source of Valley's cash flow. Various federal and state statutory
provisions limit the amount of dividends Frontier's and Valley's banking
subsidiaries are permitted to pay to Frontier and Valley, respectively, without
regulatory approval. Federal Reserve policy further limits the circumstances
under which bank holding companies may declare dividends. For example, a bank
holding company should not continue its existing rate of cash dividends on its
common stock unless its net income is sufficient to fully fund each dividend and
its prospective rate of earnings retention appears consistent with its capital
needs, asset qualify, and overall financial condition.
If, in the opinion of the applicable federal banking agency, 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 agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the Federal Reserve and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
Under Washington law, the Banks may not declare or pay a cash dividend on
their capital stock if it would cause its net worth to be reduced below (1) the
amounts required for liquidation accounts or (2) the net worth requirements, if
any, imposed by the Director of DFI. Dividends on Frontier Bank's capital stock
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may not be paid in an aggregate amount greater than the aggregate retained
earnings of Frontier Bank, without the approval of DFI.
FEDERAL RESERVE SYSTEM
The Federal Reserve requires all depository institutions to maintain
reserves against their transaction accounts (primarily checking accounts) and
non-personal time deposits. Currently, reserves of 3% must be maintained against
total transaction accounts of $49.8 million or less (after a $4.2 million
exemption), and an initial reserve of 10% (subject to adjustment by the Federal
Reserve to a level between 8% and 14%) must be maintained against that portion
of total transaction accounts in excess of such amount. Both of the Banks are in
compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of Frontier and Valley's
banking subsidiaries.
RECENT FEDERAL LEGISLATION
Interstate Banking and Branching: The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") generally permits nationwide
interstate banking and branching by relaxing federal law restrictions on
interstate banking and providing general authorization for interstate branching.
Subject to certain state laws, such as age and contingency laws, the Interstate
Act allows adequately capitalized and adequately managed bank holding companies
to purchase the assets of out-of-state banks). Additionally, since June 1, 1997,
the Interstate Act permits interstate bank mergers, subject to these state laws,
unless the home state of either merging bank has "opted-out" of these provisions
by enacting "opt-out" legislation. The Interstate Act does allow states to
impose certain conditions on interstate bank mergers within their borders; for
example, states may require that the in-state merging bank exist for up to five
years before the interstate merger. Under the Interstate Act, states may also
"opt-in" to de novo branching, allowing out-of-state banks to establish de novo
branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing interstate
mergers pursuant to the Interstate Act. Accordingly, as of June 6, 1996, an
out-of-state bank holding company may now acquire more than 5% of the voting
shares of a Washington-based bank, regardless of reciprocity, provided such bank
or its predecessor has been doing business for at least five years prior to the
acquisition. Further, an out-of-state bank may engage in banking in Washington
if the requirements of Washington's interstate banking statute are met, and the
bank either (1) was lawfully engaged in banking in Washington on June 6, 1996,
(2) resulted from an interstate combination pursuant to Washington law, (3)
resulted from a relocation of a head office of a state bank or a main office of
a national bank pursuant to federal law, or (4) resulted from the establishment
of a savings bank branch in compliance with applicable Washington law.
Additionally, the Director of the Division may approve interstate combinations
if the basis for such approval does not discriminate against out-of-state banks,
out-of-state holding companies, or their subsidiaries.
The Agencies recently adopted regulations, under which banks are prohibited
from using their interstate branches primarily for deposit production. The
Agencies have accordingly implemented a loan-to-deposit ratio screen to ensure
compliance with this prohibition.
Regulatory Improvement. In 1994, Congress enacted the Community Development
and Regulatory Improvement Act ("Regulatory Improvement Act"), with the intent
of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax certain regulatory compliance requirements. In addition, the
Regulatory Improvement Act specifically directs each federal banking agency to
review and streamline its regulations and written supervisory policies.
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REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
VOTING SECURITIES OF VALLEY AND PRINCIPAL HOLDERS THEREOF
The following table sets forth, as of the Record Date, information as to
the shares of Valley Common Stock beneficially owned by each person who, to the
knowledge of Valley, is the owner of more than 5% of the outstanding shares of
Valley Common Stock, by each director of Valley, by the Chief Executive Officer
of Valley, and by all executive officers and directors of Valley as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME BENEFICIALLY OWNED(1) OUTSTANDING
---- --------------------- -----------------
<S> <C> <C>
Basil Anton....................................... 48,741 5.29%
Joe. E. Corliss................................... 25,979 2.82%
Michael Corliss................................... 164,754 17.90%
Judd. T. Dockery.................................. 8,788 *
Linda A. Dryden................................... 36,414 3.96%
Patrick Duffy, Jr................................. 16,004 1.74%
Edward Hansen..................................... 19,994 2.17%
Dale H. Nicholson................................. 37,558 4.08%
Kinuyo Ota........................................ 43,471 4.72%
Richard D. Thomson................................ 12,106 1.31%
Directors and Executive Officers, as a
group(12)....................................... 432,210 46.95%
</TABLE>
- ---------------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any share of Valley
Common Stock if he or she has voting and/or investment power with respect to
such security. The table includes shares owned by spouses, other immediate
family members in trust, shares held in retirement accounts or funds for the
benefit of the named individuals, and other forms or ownership, over which
shares the persons named in the table possess voting and/or investment
power. The amounts shown also include 5,250 shares of Valley Common Stock
which each indicated individual has the right to acquire within 60 days of
the Valley Record Date through the exercise of stock options granted
pursuant to Valley's stock option plans.
DESCRIPTION OF FRONTIER CAPITAL STOCK
Frontier is authorized to issue 50,000,000 shares of Common Stock and
10,000,000 shares of preferred stock, no par value per share. Frontier Common
Stock is listed for trading on the Nasdaq National Market under the symbol
"FTBK." Each share of Frontier Common Stock has the same relative rights and is
identical in all respects with every other share of Frontier Common Stock. The
following summary is not a complete description of the applicable provisions of
the Frontier Articles of Incorporation and Bylaws or of applicable statutory or
other law, and is qualified in its entirety by reference thereto. See "WHERE YOU
CAN FIND MORE INFORMATION."
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COMMON STOCK
Voting Rights. The holders of Frontier Common Stock possess exclusive
voting rights in Frontier. Each holder of Frontier Common Stock is entitled to
one vote for each share held of record on all matters submitted to a vote of
holders of Frontier Common Stock. Holders of shares of Frontier Common Stock are
not entitled to cumulate votes for the election of directors.
Dividends. The holders of Frontier Common Stock are entitled to such
dividends as the Frontier Board may declare from time to time out of funds
legally available therefor. Dividends from Frontier depend upon the receipt by
Frontier of dividends from its subsidiaries because Frontier has no source of
income other than dividends from its subsidiaries.
Liquidation. In the event of liquidation, dissolution or winding up of
Frontier, the holders of shares of Frontier Common Stock are entitled to share
ratably in all assets remaining after payment of all debts and other liabilities
of Frontier.
Other Characteristics. Holders of Frontier Common Stock do not have any
preemptive, conversion or other subscription rights with respect to any
additional shares of Frontier Common Stock which may be issued. Therefore, the
Board of Directors of Frontier may authorize the issuance and sale of shares of
common stock of Frontier without first offering them to existing shareholders of
Frontier. Frontier Common Stock is not subject to any redemption or sinking fund
provisions. The outstanding shares of Frontier Common Stock are, and the shares
to be issued in the Merger will be, fully paid and non-assessable.
PREFERRED STOCK
Frontier's Articles of Incorporation authorize the Board of Directors of
Frontier to issue from time to time one or more series of preferred stock with
such designations and preferences, relative, participating, optional and other
special rights and qualifications, limitations and restrictions thereon, as
permitted by law and as fixed from time to time by resolution of the Board of
Directors. Because of its broad discretion with respect to the creation and
issuance of any series of preferred stock without shareholder approval, the
Board of Directors could adversely affect the voting power of the holders of
common stock, and by issuing shares of preferred stock with certain voting,
conversion and/or redemption rights, could discourage any attempt to obtain
control of Frontier in any transaction not approved by the Board of Directors of
Frontier. As of the Record Date, there are no outstanding shares of preferred
stock of Frontier.
COMPARISON OF SHAREHOLDERS' RIGHTS
Frontier is incorporated under the laws of the State of Washington and,
accordingly, the rights of Frontier's shareholders are governed by Frontier's
Articles of Incorporation, Bylaws and the WBCA. Valley is incorporated under the
laws of the State of Washington and, accordingly, the rights of Valley's
shareholders are governed by Valley's Articles of Incorporation, Bylaws and the
WBCA.
Upon consummation of the Merger, shareholders of Valley will become
shareholders of Frontier and, as such, their rights will be governed by
Frontier's Articles of Incorporation, Bylaws and the WBCA. The following is a
summary of material differences between the rights of a Frontier shareholder
under Frontier's Articles of Incorporation and Bylaws, and the rights of a
Valley shareholder under Valley's Articles of Incorporation and Bylaws. This
discussion is not intended to be a complete statement of the differences
affecting the rights of shareholders and is qualified in its entirety by
reference to governing law and the articles of incorporation and bylaws of each
corporation. See "WHERE YOU CAN FIND MORE INFORMATION."
SIZE OF BOARD OF DIRECTORS
Frontier. Frontier's Articles of Incorporation provide that its Board of
Directors shall consist of not less than five nor more than 25 directors. The
Bylaws of Frontier provide that the Board of Directors may change the authorized
number of directors within the stated range. Changes in the size of the range
may be made by
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an amendment to Frontier's Articles of Incorporation, which must be approved by
at least a majority of the outstanding shares entitled to vote. The current
number of directors is set at fourteen.
Valley. Valley's Articles of Incorporation provide that its Board of
Directors shall consist of not less than five nor more than 11 directors. The
Bylaws of Valley provide that the Board of Directors may change the authorized
number of directors within the stated range. Changes in the size of the range
may be made by amendment to Valley's Articles of Incorporation, which must be
approved by at least a majority of the outstanding shares entitled to vote. The
current number of directors is set at ten.
CLASSIFIED BOARD OF DIRECTORS
Frontier. Frontier's Articles of Incorporation provide for a Board of
Directors divided into three classes, with members of each class of directors
being elected for a term of three years. A classified board is one in which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes a change in the composition
of the Board of Directors, and a potential change in control of a corporation, a
lengthier and more difficult process. Since the terms of only one-third of the
incumbent directors expire each year, there must be at least two annual
elections for the shareholders to change a majority of the directors.
Valley. Valley's Articles of Incorporation also provide for a Board of
Directors divided into three classes, with members of each class of directors
being elected for a term of three years.
CUMULATIVE VOTING
Frontier. Frontier's Articles of Incorporation eliminate cumulative voting.
Cumulative voting entitles each shareholder to cast a number of votes in the
election of directors equal to the number of such shareholder's shares of common
stock multiplied by the number of directors to be elected and to distribute such
votes among one or more of the nominees to be elected. The absence of cumulative
voting rights limits the ability of minority shareholders to obtain
representation on the Frontier Board.
Valley. Valley's Articles of Incorporation also eliminate cumulative
voting.
REMOVAL OF DIRECTORS
Frontier. Frontier's Articles of Incorporation provide that any director or
the entire Board of Directors may be removed by the shareholders only for cause
and only by a vote of the holders of at least two-thirds of the shares then
entitled to vote at such meeting. The requirement that directors may be removed
only for cause and only upon an two-thirds vote makes it difficult for a person
or entity immediately to acquire control of the Frontier Board through the
removal of existing directors and the election of such person's or entity's
nominees to fill the newly created vacancies.
Valley. Valley's Articles of Incorporation provide that directors may be
removed from office without cause by the affirmative vote of the holders of
two-thirds or more of the shares entitled to vote. Valley directors may be
removed for cause by a vote of a majority of the shareholders entitled to vote.
VACANCIES ON THE BOARD OF DIRECTORS
Frontier. The Articles of Incorporation of Frontier provide that any
vacancy on the Board of Directors may be filled by the affirmative vote of a
majority of the remaining directors, and any director so appointed is to hold
office for a term expiring at the annual meeting of shareholders at which the
term of the class to which the director has been chosen expires.
Valley. Valley's Bylaws provide that any vacancy on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors.
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<PAGE> 46
SPECIAL MEETINGS OF SHAREHOLDERS AND ACTION WITHOUT A MEETING
Frontier. The Bylaws of Frontier provide that special meetings of
shareholders may be called by the President, the Board of Directors or at the
request of shareholders holding 10% of all the outstanding shares of Frontier.
This restriction on the calling of special shareholders' meetings may deter
hostile takeovers of Frontier by making it more difficult for a person or entity
to obtain immediate control of Frontier between one annual meeting and the next.
Valley. The Bylaws of Valley provide that special meetings of shareholders
may be called by the President, the Chairman of the Board, a majority of the
Board of Directors or shareholders holding 10% of the shares entitled to vote at
the meeting.
APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS AND
DISSOLUTION
Frontier. Pursuant to the WBCA, a plan of merger or share exchange must be
recommended for approval by the board of directors and approved by holders of
each voting group entitled to vote separately on the plan by two-thirds of all
the votes entitled to be cast on the plan by that voting group. Action by the
shareholders of the surviving corporation on a plan of merger is not required if
certain conditions are met.
Valley. The requirements of Valley to approve a merger or share exchange
are the same as those applicable to Frontier. In addition, Valley's Articles of
Incorporation require the Valley Board to consider all relevant factors in
addition to the amount of consideration to be paid when evaluating certain
business combinations or a tender or exchange offer, including the social and
economic effects of the transaction on the community and on Valley's depositors,
borrowers, employees, suppliers and other constituents.
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND LIMITATION OF LIABILITY
Frontier. Pursuant to Frontier's Bylaws, Frontier will, to the fullest
extent permitted by the WBCA, indemnify the directors and officers of Frontier
for expenses, judgments, fines and amounts paid in settlement incurred by such
person in connection with any action, suit or proceeding by reason of the fact
that such person is or was a director or officer of Frontier. The Board of
Directors of Frontier may approve indemnification of any other person which
Frontier has the power to indemnify under the WBCA. Frontier's Articles of
Incorporation provide that the directors of Frontier shall not be personally
liable for monetary damages to Frontier for conduct as directors, except for
liabilities that involve intentional misconduct by the director, a knowing
violation of law by the director, conduct violating provisions of the WBCA
relating to unlawful distributions by Frontier, or any transaction from which
the director will personally receive a benefit in money, property or services to
which the director is not legally entitled. This provision might, in certain
instances, discourage or deter shareholders or management from bringing a
lawsuit against directors for a breach of their duties even though such an
action, if successful, might have benefited Frontier.
Valley. Valley's Articles of Incorporation provide that no director or
director who is simultaneously both an officer and director ("officer-director")
shall be personally liable to Valley for monetary damages for conduct as a
director or officer-director, unless the conduct is finally adjudged to be
egregious conduct. "Finally adjudged" means stated in a judgement based upon
clear and convincing evidence by a court having jurisdiction, from which there
is no further right to appeal. "Egregious conduct" means an act or omission that
involves intentional misconduct or a knowing violation of law, conduct violating
section 23B.08.310 of the WBCA, or participation in a transaction in which the
director or officer-director personally received a benefit in money, property or
services to which he or she was not legally entitled. Valley shall indemnify any
director and officer-director who is, or is threatened to be made, a party to
any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative by reason of the fact that such person is or was a director or
officer-director of Valley or a subsidiary of Valley against judgements,
penalties or penalty taxes, fines, settlements (even if paid or payable to
Valley or its shareholders) and reasonable expenses, including attorneys' fees
unless the liability and expenses were on account of conduct finally adjudged to
be egregious conduct, as defined herein.
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<PAGE> 47
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Frontier. Frontier's Articles of Incorporation may be amended by the vote
of the holders of a majority of the outstanding shares of Frontier Common Stock.
Frontier's Bylaws may be amended by a majority vote of the Board of Directors or
by the holders of a majority of the outstanding shares of Frontier.
Valley. Valley's Articles of Incorporation may be amended by a majority
vote of the outstanding shares of Valley Common Stock. Valley's Bylaws may be
amended, altered or repealed by a majority vote of the Valley Board or by the
affirmative vote of a majority of shareholders.
POTENTIAL ANTI-TAKEOVER PROVISIONS
Frontier. Frontier's Articles of Incorporation contain provisions that may
have the effect of discouraging persons from acquiring large blocks of Frontier
Common Stock or delaying or preventing a change of control in Frontier. One
provision is the classification of the Frontier Board into three classes with
the term on only one class expiring each year. (See "Classified Board of
Directors.") Another provision in Frontier's Articles of Incorporation
authorizes Frontier's Board to issue up to 10,000,000 shares of Frontier
Preferred Stock in one or more series and to fix the powers and rights thereto,
including dividend rights, conversion rights, redemption terms, liquidation
rights and voting rights without any further vote of Frontier's shareholders.
See "DESCRIPTION OF FRONTIER CAPITAL STOCK -- Preferred Stock."
The WBCA imposes restrictions on certain transactions between a corporation
and certain significant shareholders. Subject to certain exceptions, pursuant to
the Fair Price Provision, a merger, share exchange, sale of assets other than in
the regular course of business, or dissolution of a corporation involving an
Interested Shareholder owning beneficially 20% or more of the corporation's
voting securities must be approved by the holders of two-thirds of the
corporation's outstanding voting securities, other than those shares held by an
Interested Shareholder. This restriction does not apply if a majority of the
Board of Directors, excluding Interest Directors, determine that the fair market
value of the consideration received as a result of the transaction by
shareholders who are not Interested Shareholders is not less than the highest
consideration paid by the Interested Shareholder for the corporation's shares
during the preceding two years or if the transaction is approved by a majority
of directors who are not affiliated with the Interested Shareholder.
The WBCA also prohibits a "target corporation," with certain exceptions,
from engaging in certain "significant business transactions" with a person or
group of persons who beneficially owns 10% or more of the voting securities of a
target corporation (an "Acquiring Person") for a period of five years after the
acquisition of such securities, unless the transaction or acquisition of shares
is approved by a majority of the members of the target corporation's Board of
Directors prior to the date of the acquisition. The significant business
transactions include, among others, a merger or consolidation with, disposition
of assets to or with, or issuance or redemption of stock to or from, the
Acquiring Person, termination of 5% or more of the employees of the target
corporation employed in the State of Washington as a result of the Acquiring
Person's acquisition of 10% or more of the shares or allowing the Acquiring
Person to receive any disproportionate benefit as a shareholder. Target
corporations include domestic corporations with either their principal executive
offices in Washington or a majority of their employees resident in Washington.
Frontier currently meets these standards and is subject to these limitations.
Valley. Valley's Articles of Incorporation contain provisions that may have
the effect of discouraging persons from acquiring large blocks of Valley Common
Stock or delaying or preventing a change of control of Valley. These provisions
include the classification of the Valley Board into three classes with terms of
only one class expiring each year (see "-- Classified Board of Directors") and
requirements for the approval of certain business combinations (see "-- Approval
of Mergers, Consolidations, Sale of Substantially All Assets and Dissolution").
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<PAGE> 48
LEGAL OPINIONS
The validity of the Frontier Common Stock to be issued in the Merger is
being passed upon for Frontier by Keller Rohrback L.L.P., Seattle, Washington.
Keller Rohrback L.L.P. will deliver an opinion concerning certain federal income
tax consequences of the Merger.
EXPERTS
The consolidated financial statements incorporated in this Prospectus/Proxy
Statement by reference from Frontier's Annual Report on Form 10-K for the year
ended December 31, 1997 have been audited by Moss Adams, LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of Valley as of December 31, 1997, and for the
year then ended, have been included in this Prospectus/Proxy Statement, in
reliance upon the report of Dodd, Wing & Co., P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Valley as of December 31, 1996,
and for the year then ended, have been included in this Prospectus/Proxy
Statement, in reliance upon the report of Knight, Vale & Gregory, Inc., P.S.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
CHANGE IN VALLEY'S ACCOUNTANTS
On September 18, 1997, Valley's Board of Directors, on the recommendation
of the audit committee, determined to change Valley's independent public
accountants. This decision was made in large part due to the change of employer
of Valley's lead accountant and tax accountant, and Valley's desire to continue
its relationship with such persons.
The former accountants report on the financial statements of Valley for the
past two years did not contain an adverse opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with the audits of the two most recent fiscal years preceding the engagement of
Dodd, Wing & Co., P.C., there were no disagreements with the former accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or such procedure which, if not resolved to the
satisfaction of the former accountants, would have caused it to make reference
to the subject matter of the disagreement in connection with its report.
OTHER MATTERS
The Valley Board is not aware of any business to come before the Valley
Special Meeting other than those matters described above in this
Prospectus/Proxy Statement. However, if any other matters should properly come
before the Valley Special Meeting, it is intended that proxies in the
accompanying form will be voted in respect thereof in accordance with the
judgment of the person or persons voting the proxies.
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<PAGE> 49
GLOSSARY OF KEY TERMS
<TABLE>
<S> <C>
CEO....................................... Chief Executive Officer.
CFAI...................................... Columbia Financial Advisors, Inc.
CFO....................................... Chief Financial Officer.
Code...................................... Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder.
Commission................................ The Securities and Exchange Commission.
Daily Sales Price of Frontier Common
Stock................................... The average (rounded to 4 decimals) of the daily high and
low trading prices per share of Frontier Common Stock on
the Nasdaq recording system, as reported in The Wall Street
Journal.
DFI....................................... Department of Financial Institutions of the State of
Washington.
Dissenting Shareholder.................... A Valley shareholder who properly perfects dissenter's
rights in accordance with Chapter 13 of the WBCA.
Effective Date............................ The time the closing of the Merger will be effective
pursuant to the Merger Agreement.
Exchange Ratio............................ The number of shares of Frontier Common Stock that the
shareholders of Valley, other than the Dissenting
Shareholders, will receive for each share of Valley Common
Stock upon consummation of the Merger.
FDIC...................................... Federal Deposit Insurance Corporation.
Federal Reserve........................... The Board of Governors of the Federal Reserve System.
Frontier Average Closing Price............ The price equal to the average (rounded to 4 decimals) of
each Daily Sales Price of Frontier Common Stock for the
trading days beginning on and including the date of
execution of the Merger, through and including the 10th day
immediately preceding the Effective Date.
Frontier Board............................ Board of Directors of Frontier.
Frontier Common Stock..................... Frontier's common stock, no par value.
Frontier.................................. Frontier Financial Corporation, a Washington Bank Holding
Company.
Interested Shareholder.................... Shareholders with conflicting interests who may not be
counted in certain shareholder votes as described in the
WBCA 8.730(2).
Merger Agreement.......................... The Agreement and Plan of Mergers, dated as of July 30,
1998, between Frontier, Valley, Frontier Bank, and Bank of
Sumner.
Merger.................................... The merger of Valley with and into Frontier and the
subsequent merger of the Bank of Sumner with and into
Frontier Bank in accordance with the Merger Agreement.
Nasdaq.................................... The Nasdaq national market.
Prospectus/Proxy Statement................ The statement which is to be mailed to Valley and Bank of
Sumner's shareholders, together with any amendments and
supplements.
RCW....................................... Revised Code of Washington.
</TABLE>
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<PAGE> 50
<TABLE>
<S> <C>
Record Date............................... , 1998.
SEC....................................... The Securities and Exchange Commission.
Securities Act............................ The Securities Act of 1933, as amended.
Special Meeting........................... The special meetings of shareholders of Valley to be held
at the time and at the place specified in the Notice of
Special Meeting of Shareholders attached to the
Prospectus/Proxy Statement.
Valley.................................... Valley Bancorporation, a Washington Bank Holding Company.
Valley Board.............................. Board of Directors of Valley.
Valley Common Stock....................... Valley's common stock, par value of $1.00 per share.
WBCA...................................... The Washington Business Corporations Act.
</TABLE>
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGERS
BETWEEN
FRONTIER FINANCIAL CORPORATION
AND
FRONTIER BANK
AND
VALLEY BANCORPORATION
AND
BANK OF SUMNER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DATED AS OF JULY 30, 1998
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
I. MERGERS................................................................ A-6
1.1 The Corporate Merger........................................ A-6
1.2 The Bank Merger............................................. A-6
1.3 Dissenting Shares........................................... A-7
1.4 Effective Date.............................................. A-7
II. CONSIDERATION......................................................... A-7
2.1 Exchange Consideration...................................... A-7
2.2 Shareholder Rights; Stock Transfers......................... A-8
2.3 Fractional Shares........................................... A-8
2.4 Exchange Procedures......................................... A-8
2.5 Exchange Ratio/Frontier Average Daily Closing Price A-8
Adjustments.................................................
2.6 Exception Shares............................................ A-8
2.7 Reservation of Right to Revise Transaction.................. A-8
2.8 Options..................................................... A-9
III. ACTIONS PENDING CONSUMMATION......................................... A-9
3.1 Capital Stock............................................... A-9
3.2 Dividends, etc.............................................. A-9
3.3 Indebtedness; Liabilities; etc.............................. A-9
3.4 Line of Business; Operating Procedures; etc................. A-9
3.5 Liens and Encumbrances...................................... A-10
3.6 Compensation; Employment Agreements; etc.................... A-10
3.7 Benefit Plans............................................... A-10
3.8 Continuance of Business..................................... A-10
3.9 Amendments.................................................. A-10
3.10 Claims...................................................... A-10
3.11 Contracts................................................... A-10
3.12 Loans....................................................... A-10
3.13 Transaction Expenses........................................ A-10
IV. REPRESENTATIONS AND WARRANTIES........................................ A-11
4.1 Valley and Bank of Sumner Representations and Warranties.... A-11
4.2 Frontier and Frontier Bank Representations and Warranties... A-18
V. COVENANTS.............................................................. A-20
5.1 Best Efforts................................................ A-20
5.2 The Proxy................................................... A-20
5.3 Registration Statement Compliance with Securities Laws...... A-20
5.4 Registration Statement Effectiveness........................ A-20
5.5 Press Releases.............................................. A-20
5.6 Access; Information......................................... A-20
5.7 Registration Statement Preparation; Regulatory Applications A-21
Preparation.................................................
5.8 Blue-Sky Filings............................................ A-21
5.9 Affiliate Agreements........................................ A-21
5.10 Certain Policies of Valley and Bank of Sumner............... A-21
5.11 State Takeover Law.......................................... A-21
5.12 No Rights Triggered......................................... A-22
5.13 Shares Listed............................................... A-22
5.14 Regulatory Applications..................................... A-22
</TABLE>
i
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
5.15 Regulatory Divestitures..................................... A-22
5.16 Current Information......................................... A-22
5.17 401(k) Plans................................................ A-22
5.18 Insurance................................................... A-22
5.19 Appointment of Director and Advisory Board.................. A-22
5.20 Post-Merger Actions......................................... A-23
VI. CONDITIONS TO CONSUMMATION OF THE MERGERS............................. A-23
6.1 Conditions to Each Party's Obligations...................... A-23
6.2 Conditions to Obligations of Frontier....................... A-24
6.3 Conditions to Obligations of Company and Bank of Sumner..... A-24
VII. TERMINATION.......................................................... A-25
7.1 Events of Termination....................................... A-25
7.2 Consequences of Termination................................. A-26
7.3 Termination Fee............................................. A-26
7.4 ACQUIROR FEE................................................ A-26
VIII. OTHER MATTERS....................................................... A-27
8.1 Survival.................................................... A-27
8.2 Waiver; Amendment........................................... A-27
8.3 Counterparts................................................ A-27
8.4 Governing Law............................................... A-27
8.5 Expenses.................................................... A-27
8.6 Confidentiality............................................. A-27
8.7 Notices..................................................... A-27
8.8 Entire Understanding; No Third Party Beneficiaries.......... A-28
8.9 Benefit Plans............................................... A-28
8.10 Headings.................................................... A-28
</TABLE>
ii
<PAGE> 54
AGREEMENT AND PLAN OF MERGERS
AGREEMENT AND PLAN OF MERGERS, dated as of the 30th day of July, 1998 (this
"Plan"), is between VALLEY BANCORPORATION ("Valley"), BANK OF SUMNER, FRONTIER
FINANCIAL CORPORATION ("Frontier"), and FRONTIER BANK.
RECITALS
(A) Valley. Valley is a corporation duly organized and existing in good
standing under the laws of the State of Washington, with its principal executive
offices located in Sumner, Washington. Valley is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended. As of the date
of this Plan, Valley has 3,000,000 authorized shares of common stock, $1.00 par
value ("Valley Common Stock"), of which 920,648 shares of Valley Common Stock
are issued and outstanding, no other class of capital stock being authorized. As
of the date of this Plan, Valley had 160,000 shares of Valley Common Stock
reserved for issuance under director and employee stock option plans pursuant to
which options covering 57,750 shares of Valley Common Stock are outstanding as
of the date of this Plan.
(B) Bank of Sumner. Bank of Sumner is a banking corporation duly organized
and existing in good standing under the laws of the State of Washington. As of
the date of this Plan, Bank of Sumner has 122,850 authorized shares of common
stock, $10.00 par value per share ("Bank of Sumner Common Stock") (no other
class of capital stock being authorized), of which 82,350 shares of Bank of
Sumner Common Stock are issued and outstanding. All of the issued and
outstanding shares of Bank of Sumner Common Stock are owned by Valley, the sole
shareholder of Bank of Sumner. As of December 31, 1997, Bank of Sumner had
capital of $9,544,645, divided into common stock of $920,648, surplus of
$69,569, and undivided profits of $8,554,428.
(C) Frontier. Frontier is a corporation duly organized and existing in good
standing under the laws of the State of Washington, with its principal executive
offices located in Everett, Washington. Frontier is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended. As of the date
of this Plan, Frontier has 50,000,000 authorized shares of common stock, no par
value per share ("Frontier Common Stock") (no other class of capital stock being
authorized), of which 7,885,541 shares of Frontier Common Stock are issued and
outstanding, and has 10,000,000 authorized shares of preferred stock, no par
value per share ("Frontier Preferred Stock") (no other class of preferred stock
being authorized), of which no shares of Frontier Preferred Stock are issued and
outstanding.
(D) Frontier Bank. Frontier Bank is a banking corporation duly organized
and existing in good standing under the laws of the State of Washington. As of
the date of this Plan, Frontier Bank has 83,029 authorized shares of common
stock, $37.50 par value per share ("Frontier Bank Common Stock") (no other class
of capital stock being authorized), of which 72,600 shares are issued and
outstanding and owned by Frontier, the sole shareholder of Frontier Bank. As of
December 31, 1997, Frontier Bank had capital of $103,347,000, divided into
common stock of $2,723,000, surplus of $31,290,000 and undivided profits of
$68,817,000 (including comprehensive income of $517,000).
(E) Voting Agreement. As a condition and an inducement to Frontier's and
Frontier Bank's willingness to enter into this Plan, the directors and officers
of Bank of Sumner and Valley have entered into agreements in the forms attached
to this Plan as Exhibit A and Exhibit B, pursuant to which, among other things,
each such individual has agreed to vote his or her shares of Valley Common Stock
in favor of approval of the actions contemplated by this Plan at the Meeting (as
defined below) and to refrain from competing with Frontier and Frontier Bank.
(F) Rights, Etc. Except as Previously Disclosed (as defined below) in
Schedule 4.l(C), or paragraph (A) of the Recitals to this Plan, or as authorized
by this Plan: there are no shares of capital stock of Valley or Bank of Sumner
authorized and reserved for issuance; neither Valley nor Bank of Sumner has any
Rights (as defined below) issued or outstanding; and neither Valley nor Bank of
Sumner has any commitment to authorize, issue or sell any such shares or any
Rights. The term "Rights" means securities or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire, or
any options,
A-1
<PAGE> 55
calls or commitments relating to, shares of capital stock. There are no
preemptive rights with respect to Valley Common Stock.
(G) Approvals. At meetings of the respective Boards of Directors of Valley,
Bank of Sumner, Frontier and Frontier Bank, each such Board has approved and
authorized the execution of this Plan in counterparts.
In consideration of their mutual promises and obligations, the Parties
further agree as follows:
DEFINITIONS
(A) Definitions. Capitalized terms used in this Plan have the following
meanings:
"Acquiror Fee" has the meaning assigned to such term in Section 7.4.
"Acquisition Proposal" has the meaning assigned to such term in Section
7.4(B).
"Adjusted Loans" means all loans and other extensions of credit by Bank of
Sumner other than (1) that portion of Small Business Administration loans or the
guaranteed portions of other loans guaranteed by the U.S. Government or any of
its agencies, and (2) single-family residential loans in the process of being
sold.
"Advisory Board" has the meaning assigned to such term in Section 5.19(B).
"Appraisal Laws" has the meaning assigned to such term in Section 1.3.
"Asset Classification" has the meaning assigned to such term in Section
4.1(T).
"Bank Financial Reports" has the meaning assigned to such term in Section
4.1(H).
"Bank Merger" has the meaning assigned to such term in Section 1.2.
"Bank of Sumner" has the meaning assigned to such term in the first
paragraph of this Plan.
"Bank of Sumner Common Stock" has the meaning assigned to such term in
paragraph (B) of the Recitals.
"Business Day" means any day other than a Saturday, Sunday, or legal
holiday in the State of Washington.
"Capital" means capital stock, surplus and retained earnings determined in
accordance with GAAP.
"Code" has the meaning assigned to such term in Section 0.
"Company" has the meaning assigned to such term in the first paragraph to
this Plan.
"Compensation and Benefit Plans" has the meaning assigned to such term in
Section 0.
"Continuing Corporation" has the meaning assigned to such term in Section
1.1(A).
"Control" with respect to any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting interests, by
contract, or otherwise.
"Corporate Merger" has the meaning assigned to such term in Section 1.1.
"Daily Sales Price" for any trading day shall be equal to the average
(rounded to four decimals) of the daily high and low trading prices per share of
Frontier Common Stock on the NASDAQ Stock Market reporting system, as reported
in The Wall Street Journal..
"Department" means the Department of Financial Institutions of the State of
Washington.
"Derivatives Contract" means an exchange-traded or over-the-counter swap,
forward, future, option, cap, floor or collar financial contract or any other
contract that (1) is not included on the balance sheet of the Holding Company
Financial Reports or the Frontier Financial Reports, as the case may be, and (2)
is a derivative contract (including various combinations thereof).
A-2
<PAGE> 56
"Dissenting Shares" means the shares of Valley Common Stock held by those
shareholders of Valley who have timely and properly exercised their dissenters'
rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.4.
"Eligible Valley Common Stock" means shares of Valley Common Stock other
than Exception Shares and Dissenting Shares.
"Employment Agreement" shall mean Exhibit C.
"Environmental Law" means (1) any federal, state, and/or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection, preservation or restoration of the environment (including air, water
vapor, surface water, groundwater, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource) or to
human health or safety, or (b) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Material, in each case as amended
and as now in effect, including the Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, and the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970, and (2) any common
law or equitable doctrine (including injunctive relief and tort doctrines such
as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 0.
"ERISA Affiliate" has the meaning assigned to such term in Section 0.
"ERISA Plans" has the meaning assigned to such term in Section 0.
"Exception Shares" means shares held by any of Valley's Subsidiaries or by
Frontier or any of its Subsidiaries, in each case other than in a fiduciary
capacity or as a result of debts previously contracted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under such statute.
"Exchange Agent" has the meaning assigned to such term in Section 2.4.
"Exchange Ratio" has the meaning assigned to such term in Section 2.1(B).
"FDIC" means the Federal Deposit Insurance Corporation.
"Final Capital Requirement" means a dollar amount equal to the sum of
$10-million.
"Financial Reports" has the meaning assigned to such term in Section
4.1(H).
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"Frontier" has the meaning assigned to such term in the first paragraph of
this Plan.
"Frontier Average Closing Price" means the price equal to the average
(rounded to four decimals) of each Daily Sales Price of Frontier Common Stock
for the trading days beginning on and including the date of execution of the
Plan through and including the tenth day immediately preceding the Effective
Date.
"Frontier Bank Common Stock" has the meaning assigned to such term in
paragraph (D) of the Recitals.
"Frontier Common Stock" has the meaning assigned to such term in paragraph
(C) of the Recitals.
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"Frontier Transaction" means: (1) a merger, consolidation or similar
transaction involving Frontier, where Frontier is not the corporation surviving
such transaction or where a change of control of Frontier is otherwise effected,
(2) the disposition, by sale, lease, exchange or otherwise, of assets or
deposits of Frontier or any of its significant subsidiaries representing in
either case 25% or more of the consolidated assets or deposits of Frontier and
its subsidiaries, or (3) the issuance, sale or other disposition (including by
way of merger, consolidation, share exchange or any similar transaction) of
securities representing 25% or more of the voting power of Frontier or any of
its significant subsidiaries other than the issuance of Frontier Common Stock
upon the exercise of outstanding options or the conversion of outstanding
convertible securities of Frontier.
"GAAP" means generally accepted accounting principles consistently applied.
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
including any oil or other petroleum product, toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste or petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos, asbestos containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"Holding Company Financial Reports" has the meaning assigned to such term
in Section 4.1(H).
"Indemnified Party" has the meaning assigned to such term in Section Error!
Reference source not found.
"Loan/Fiduciary Property" means any property owned or controlled by Valley
or any of its Subsidiaries or in which Valley or any of its Subsidiaries holds a
security or other interest, and, where required by the context, includes any
such property where Valley or any of its Subsidiaries constitutes the owner or
operator of such property, but only with respect to such property.
"Material Adverse Effect" means, with respect to any Party, an event,
occurrence or circumstance (including (i) the making of any provisions for
possible loan and lease losses, write-downs of other real estate owned and
taxes, and (ii) any breach of a representation or warranty contained in this
Plan by such Party) that (a) has or is reasonably likely to have a material
adverse effect on the financial condition, results of operations, business or
prospects of such Party and its Subsidiaries, taken as a whole, or (b) would
materially impair such Party's ability to perform its obligations under this
Plan or the consummation of any of the transactions contemplated by this Plan.
"Meeting" has the meaning assigned to such term in Section 5.2.
"Mergers" means the merger of Valley with and into Frontier, and Bank of
Sumner with and into Frontier Bank.
"Multiemployer Plans" has the meaning assigned to such term in Section 0.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotations system.
"Participation Facility" means any facility in which Valley or any of its
Subsidiaries participates in the management and, where required by the context,
includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section 0.
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, governmental
body, or other entity.
"Plan" means this Agreement and Plan of Mergers, together with all Exhibits
and Schedules annexed to, and incorporated by specific reference, as a part of
this Plan.
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"Previously Disclosed" means information provided by a Party in a Schedule
that is delivered by that Party to the other Party contemporaneously with the
execution of this Plan.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Registration Statement" has the meaning assigned to such term in Section
5.2.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"Rights" has the meaning assigned to such term in paragraph (G) of the
Recitals to this Plan.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under such statute.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any entity, each partnership, limited
liability company, or corporation the majority of the outstanding partnership
interests, membership interests, capital stock or voting power of which is (or
upon the exercise of all outstanding warrants, options and other rights would
be) owned, directly or indirectly, at the time in question by such entity.
"Tax Returns" has the meaning assigned to such term in Section 4.1(AA).
"Taxes" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, withholding or similar taxes imposed on the income,
properties or operations of the respective Party or its Subsidiaries, together
with any interest, additions, or penalties with respect thereto and any interest
in respect of such additions or penalties.
"Termination Date" has the meaning assigned to such term in Section 1.4.
"Third Party" means a person within the meaning of Sections 3(a)(9) and
13(d)(3) of the Exchange Act, excluding (1) Valley or any Subsidiary of Valley,
and (2) Frontier or any Subsidiary of Frontier.
"Triggering Event" means any one or more of the following events:
(1) Frontier shall have authorized, recommended, publicly proposed or
publicly announced an intention to authorize, recommend or propose, or
entered into an agreement with any Third Party to effect a Frontier
Transaction.
(2) Any Third Party shall have acquired beneficial ownership (as such
term is defined in
Rule 13d-3 promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act) shall have been formed that beneficially owns or has the
right to acquire beneficial ownership of, 15% or more (or if such Third
Party or group is the beneficial owner of 15% or more on the date hereof
such Third Party or group acquires an additional 5% or more) of the voting
power of Frontier or any of its significant subsidiaries.
(3) Any Third Party shall have commenced (as such term is defined in
Rule 14d-2 under the Exchange Act) or shall have filed a registration
statement under the Securities Act with respect to, a tender offer or
exchange offer to purchase any shares of Frontier Common Stock such that,
upon consummation of such offer, such Third Party would own or control 20%
or more of the then outstanding shares of Frontier Common Stock (such an
offer being referred to herein as a "Tender Offer" or an "Exchange Offer,"
respectively).
(4) Any Third Party shall have made a bona fide proposal to Frontier
or its stockholders by public announcement, or by written communication
that is or becomes the subject of public disclosure, to engage in an
Frontier Transaction.
(5) Any Third Party, other than in connection with a transaction to
which Valley has given its prior written consent, shall have filed an
application or notice with the Board of Governors of the Federal
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Reserve Board, or other federal or state bank regulatory authority, for
approval to engage in an Frontier Transaction.
"Valley Common Stock" has the meaning assigned to such term in paragraph
(A) of the Recitals.
"Valley Option" has the meaning assigned to such term in Section 2.8.
(B) General Interpretation. Except as otherwise expressly provided in this
Plan or unless the context clearly requires otherwise, the terms defined in this
Plan include the plural as well as the singular; the words "hereof," "herein,"
"hereunder," "in this Plan" and other words of similar import refer to this Plan
as a whole and not to any particular Article, Section or other subdivision; and
references in this Plan to Articles, Sections, Schedules, and Exhibits refer to
Articles and Sections of and Schedules and Exhibits to this Plan. Unless
otherwise stated, references to Subsections refer to the Subsections of the
Section in which the reference appears. All pronouns used in this Plan include
the masculine, feminine and neuter gender, as the context requires. All
accounting terms used in this Plan that are not expressly defined in this Plan
have the respective meanings given to them in accordance with GAAP.
I. MERGERS
1.1 The Corporate Merger. Subject to the provisions of this Plan, on the
Effective Date:
(A) Continuing Corporation. Valley shall be merged with and into Frontier
pursuant to the terms and conditions set forth herein. Upon consummation of the
Corporate Merger, the separate existence of Valley shall cease and Frontier
shall continue as the Continuing Corporation.
(B) Certificate of Incorporation and Bylaws. The certificate of
incorporation and bylaws of Frontier, in effect immediately prior to the
Effective Date, shall become the certificate of incorporation and bylaws of the
Continuing Corporation. The directors and officers of Frontier in office
immediately prior to the Corporate Merger becoming effective shall be the
directors and officers of the Continuing Corporation, together with such
additional directors and officers as may thereafter be elected, who shall hold
office until such time as their successors are elected and qualified; provided,
however, that one director of Valley shall be appointed to the Board of
Directors of the Continuing Corporation pursuant to Section 5.19.
(C) Effects of the Corporate Merger. The separate existence of Valley shall
cease, and Valley shall be merged with and into Frontier which, as the
Continuing Corporation, shall thereupon and thereafter possess all of the
assets, rights, privileges, appointments, powers, licenses, permits and
franchises of the two merged corporations, whether of a public or a private
nature, and shall be subject to all of the liabilities, restrictions,
disabilities and duties of both Frontier and Valley.
(D) Transfer of Assets. All rights, assets, licenses, permits, franchises
and interests of Frontier and Valley in and to every type of property, whether
real, personal, or mixed, whether tangible or intangible, shall be deemed to be
vested in Frontier as the Continuing Corporation by virtue of the Corporate
Merger becoming effective and without any deed or other instrument or act of
transfer whatsoever.
(E) Assumption of Liabilities. The Continuing Corporation shall become and
be liable for all debts, liabilities, obligations and contracts of Frontier as
well as those of Valley, whether the same shall be matured or unmatured; whether
accrued, absolute, contingent or otherwise; and whether or not reflected or
reserved against in the balance sheets, other financial statements, books of
account or records of Frontier or Valley.
1.2 The Bank Merger. As soon as practicable following the Effective Date:
(A) The Continuing Bank. The Bank of Sumner shall be merged into Frontier
Bank. Upon consummation of the Bank Merger, the separate existence of the Bank
of Sumner shall cease and Frontier Bank shall survive as the Continuing Bank.
(B) Rights, Etc. The Continuing Bank shall thereupon and thereafter possess
all of the rights, privileges, immunities and franchises, of a public as well as
of a private nature, of each of the institutions so merged; and all property,
real, personal and mixed, and all debts due on whatever account, and all and
every
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other interest, of or belonging to or due to each of the institutions so merged,
shall be deemed to be vested in the Continuing Bank without further act or deed;
and the title to any real estate or any interest therein, vested in each of such
institutions, shall not revert or be in any way impaired by reason of the Bank
Merger.
(C) Liabilities. The Continuing Bank shall thenceforth be responsible and
liable for all the liabilities, obligations and penalties of each of the
institutions so merged, in accordance with applicable law.
(D) Articles, Bylaws, Directors, Officers. The Articles and Bylaws of the
Continuing Bank shall be those of Frontier Bank, as in effect immediately prior
to the Bank Merger becoming effective. The directors and officers of Frontier
Bank in office immediately prior to the Bank Merger becoming effective shall be
the directors and officers of the Continuing Bank, together with such additional
directors and officers as may thereafter be elected, who shall hold office until
such time as their successors are elected and qualified; provided, however, that
one director of Valley shall be appointed to the Board of Directors of the
Continuing Bank pursuant to Section 5.19.
1.3 Dissenting Shares. Notwithstanding anything to the contrary in this
Plan, each Dissenting Share whose holder, as of the Effective Date of the
Corporate Merger, has not effectively withdrawn or lost his dissenters' rights
under RCW 23B.13 (the "Appraisal Laws") shall not be converted into or represent
a right to receive Frontier Common Stock, but the holder of such Dissenting
Share shall be entitled only to such rights as are granted by the Appraisal
Laws, unless and until such holder shall have failed to perfect or shall have
effectively withdrawn or lost the right to payment under the Appraisal Laws, in
which case each such share shall be deemed to have been converted at the
Effective Date into the right to receive Frontier Common Stock without any
interest thereon. Each holder of Dissenting Shares who becomes entitled to
payment for his Valley Common Stock pursuant to the provisions of the Appraisal
Laws shall receive payment for such Dissenting Shares from Frontier (but only
after the amount thereof shall have been agreed upon or finally determined
pursuant to the Appraisal Laws).
1.4 Effective Date. Unless the Parties agree upon another date, the
"Effective Date" will be the tenth Business Day after the fulfillment or waiver
of each condition precedent set forth in, and the granting of each approval (and
expiration of any waiting period) required by, Article VI. If the Corporate
Merger is not consummated in accordance with this Plan on or prior to April 30,
1999 (the "Termination Date"), Valley or Frontier may terminate this Plan in
accordance with Article VII. On the Effective Date, Frontier and Valley shall
execute and deliver to the Secretary of State of the State of Washington
articles of merger in accordance with applicable law.
II. CONSIDERATION
2.1 Exchange Consideration. Subject to the provisions of this Plan, on the
Effective Date:
(A) Outstanding Frontier Common Stock. The shares of Frontier Common Stock
issued and outstanding immediately prior to the Effective Date shall, on and
after the Effective Date, remain as issued and outstanding shares of Frontier
Common Stock.
(B) Outstanding Valley Common Stock. Each share of Eligible Company Stock
issued and outstanding immediately prior to the Effective Date shall, by virtue
of the Corporate Merger, automatically and without any action on the part of the
holder of such share, be exchanged for the right to receive a number of shares
of Frontier Common Stock equal to the Exchange Ratio. The "Exchange Ratio" shall
be equal (rounded to four decimals) to:
(i) 0.8625 if the Frontier Average Closing Price is equal to or
greater than $46 and less than $56;
(ii) the result obtained by dividing 39.6750 by the Frontier Average
Closing Price if the Frontier Average Closing Price is equal to or greater
than $43.86 but less than $46;
(iii) 0.9046 if the Frontier Average Closing Price is equal to or less
than $43.86;
(iv) the result obtained by dividing $48.30 by the Frontier Average
Closing Price if the Frontier Average Closing Price is equal to or greater
than $56 and less than $59.07; or
(v) 0.8177 if the Frontier Average Closing Price is equal to or
greater than $59.07.
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Notwithstanding the foregoing, if a Triggering Event has occurred, each
share of Eligible Valley Common Stock issued and outstanding immediately prior
to the Effective Date shall be converted into the right to receive 0.8625 shares
of Frontier Common Stock.
2.2 Shareholder Rights; Stock Transfers. On the Effective Date, holders of
Valley Common Stock shall cease to be, and shall have no rights as, shareholders
of Valley, other than to receive the consideration provided under this Article
II. After the Effective Date, there shall be no transfers on the stock transfer
books of Valley or the Continuing Corporation of the shares of Valley Common
Stock that were issued and outstanding immediately prior to the Effective Date.
2.3 Fractional Shares. Notwithstanding any other provision of this Plan,
no fractional shares of Frontier Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Corporate Merger. Frontier shall pay to each holder of Valley Common Stock who
would otherwise be entitled to a fractional share an amount in cash determined
by multiplying such fraction by the Average Closing Price.
2.4 Exchange Procedures. As promptly as practicable after the Effective
Date, Frontier shall send or cause to be sent to each former shareholder of
Valley of record immediately prior to the Effective Date transmittal materials
for use in exchanging such shareholder's certificates for Valley Common Stock
for the consideration set forth in this Article II. The certificates
representing the shares of Frontier Common Stock into which shares of such
shareholder's Valley Common Stock are converted on the Effective Date, any
fractional share checks that such shareholder shall be entitled to receive, and
any dividends paid on such shares of Frontier Common Stock for which the record
date for determination of shareholders entitled to such dividends is on or after
the Effective Date, will be delivered to such shareholder only upon delivery to
Frontier's exchange agent (the "Exchange Agent") of the certificates
representing all of such shares of Valley Common Stock (or indemnity
satisfactory to Frontier and the Exchange Agent, in their judgment, if any of
such certificates are lost, stolen or destroyed). No interest will be paid on
any such fractional share checks or dividends to which the holder of such shares
shall be entitled to receive upon such delivery. Certificates surrendered for
exchange by any person constituting an "affiliate" of Valley for purposes of
Rule 145 of the Securities Act shall not be exchanged for certificates
representing Frontier Common Stock until Frontier has received a written
agreement from such person as specified in Section 5.10.
2.5 Exchange Ratio/Frontier Average Daily Closing Price Adjustments. In
the event Frontier changes the number of shares of Frontier Common Stock issued
and outstanding prior to the Effective Date as a result of a stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding Frontier Common Stock and the record date therefor shall be prior to
the Effective Date, the Frontier Average Daily Closing Price set forth in
Section 2.1(B) and the Exchange Ratio in Sections 2.1(B)(i), 2.1(B)2.1(B)(iii)
and 2.1(B)(v) shall be adjusted proportionately.
2.6 Exception Shares. Each of the Exception Shares of Valley Common Stock
shall be canceled and retired upon consummation of the Corporate Merger, and no
consideration shall be issued in exchange therefor.
2.7 Reservation of Right to Revise Transaction. In its sole discretion,
and notwithstanding any other provision in this Plan to the contrary, Frontier
may at any time change the method of effecting its acquisition of Valley and
Bank of Sumner; provided, however, that (A) no such change shall alter or change
the amount or kind of consideration to be issued to holders of Valley Common
Stock as provided for in this Plan, (B) no such change shall adversely affect
the tax treatment to Valley shareholders as a result of receiving such
consideration, and (C) no delay caused by such a change shall be the basis upon
which Frontier terminates this Plan pursuant to Section 7.1(C). If Frontier
elects to change the method of acquisition pursuant to this section, and as a
result the Corporate Merger will not be accounted for on a pooling-of-interests
basis, Frontier and Valley must each first waive their pooling condition in
Sections 6.2(F) and 6.3(E), respectively. If Frontier elects to change the
method of acquisition and both Frontier and Valley have waived their pooling
condition, if required, Valley and Bank of Sumner will cooperate with and assist
Frontier and Frontier Bank with any necessary amendment to this Plan, and with
the preparation and filing of such applications, documents, instruments and
notices as may be necessary or desirable, in the opinion of counsel for
Frontier, to
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obtain all necessary shareholder approvals and approvals of any regulatory
agency, administrative body or other governmental entity.
2.8 Options. On the Effective Date, by virtue of the Corporate Merger, and
without any action on the part of any holder of an option, each option granted
by Valley to purchase shares of Valley Common Stock ("Valley Option") that is
then outstanding and unexercised shall be converted into and become an option to
purchase Frontier Common Stock ("Frontier Option") on the same terms and
conditions as are in effect with respect to Valley Option immediately prior to
the Effective Date, except that (A) each such Frontier Option may be exercised
solely for shares of Frontier Common Stock, (B) the number of shares of Frontier
Common Stock subject to such Frontier Option shall be equal to the number of
shares of Valley Common Stock subject to such Option immediately prior to the
Effective Date multiplied by the Exchange Ratio, the product being rounded, if
necessary, up or down to the nearest whole share, and (C) the per share exercise
price under each such Frontier Option shall be adjusted by dividing the per
share exercise price of Valley Option by the Exchange Ratio, and rounding up or
down to the nearest cent. The number of shares of Valley Common Stock that are
issuable upon exercise of Options as of the date of this Plan are Previously
Disclosed in Schedule 2.8. Following the Effective Date, Frontier shall use its
best efforts to promptly prepare and file with the SEC a registration statement
on Form S-8 covering shares of Frontier Common Stock to be issued upon the
exercise of stock options assumed by Frontier pursuant to this Section 2.8.
III. ACTIONS PENDING CONSUMMATION
Unless otherwise agreed to in writing by Frontier, each of Valley and Bank
of Sumner shall conduct its and each of its Subsidiaries' business in the
ordinary and usual course consistent with past practice and shall use its best
efforts to maintain and preserve its and each of its Subsidiaries' business
organization, employees and advantageous business relationships and retain the
services of its and each of its Subsidiaries' officers and key employees
identified by Frontier Bank, and neither Valley nor Bank of Sumner, without the
prior written consent of Frontier, will (or cause or allow any of it
Subsidiaries to):
3.1 Capital Stock. Except for or as otherwise expressly permitted by this
Plan, or Valley Options, or as Previously Disclosed in Schedule 4.1(C), issue,
sell or otherwise permit to become outstanding any additional shares of capital
stock of Valley, Bank of Sumner or any of their Subsidiaries, or any Rights with
respect thereto, or enter into any agreement with respect to the foregoing, or
permit any additional shares of Valley Common Stock to become subject to grants
of employee stock options, stock appreciation rights or similar stock-based
employee compensation rights.
3.2 Dividends, Etc. Except for payment of a dividend(s) from Bank of
Sumner to Valley necessary to facilitate payment under terms of the Executive
Deferred Compensation Agreement between Linda A. Dryden and Valley
Bancorporation and the Covenants Not to Compete (Dryden, Telling and Lawson),
make, declare or pay any dividend on or in respect of, or declare or make any
distribution on, or directly or indirectly combine, redeem, reclassify, purchase
or otherwise acquire, any shares of its capital stock or, other than as
permitted in or contemplated by this Plan, authorize the creation or issuance
of, or issue, any additional shares of its capital stock or any Rights with
respect thereto; provided, however, that in the event the transactions
contemplated by this Plan have not been consummated on or before December 31,
1998, Valley may declare and pay cash dividends after such date in an aggregate
amount up to Valley's net income (determined in accordance with GAAP) after
December 31, 1998, to the extent that such dividends would not preclude the
Corporate Merger from being accounted for on a pooling-of-interests basis, and
are consistent with prior practice. In no event shall the dividend paid in 1999
exceed the dividend paid in 1998.
3.3 Indebtedness; Liabilities; Etc. Other than in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual, corporation
or other entity.
3.4 Line of Business; Operating Procedures; Etc. Except as may be directed
by any regulatory agency, (A) change its lending, investment, liability
management or other material banking policies in any material
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respect, except such changes as are in accordance and in an effort to comply
with Section 5.11, or (B) commit to incur any further capital expenditures
beyond those Previously Disclosed in Schedule 3.4 other than in the ordinary
course of business and not exceeding $10,000 individually or $20,000 in the
aggregate.
3.5 Liens and Encumbrances. Impose, or suffer the imposition, on any
shares of stock of any of its Subsidiaries, any lien, charge or encumbrance, or
permit any such lien, charge or encumbrance to exist.
3.6 Compensation; Employment Agreements; Etc. Except as Previously
Disclosed in Schedule 3.6, enter into or amend any employment, severance or
similar agreement or arrangement with any of its directors, officers or
employees, or grant any salary or wage increase, amend the terms of any Valley
Option or increase any employee benefit (including incentive or bonus payments),
except normal individual increases in regular compensation to employees in the
ordinary course of business consistent with past practice.
3.7 Benefit Plans. Except as Previously Disclosed in Schedule 3.7, enter
into or modify (except as may be required by applicable law) any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees, including taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
3.8 Continuance of Business. Dispose of or discontinue any portion of its
assets, business or properties, that is material to Valley and its Subsidiaries
taken as a whole, or merge or consolidate with, or acquire all or any portion
of, the business or property of any other entity that is material to Valley and
its Subsidiaries taken as a whole (except foreclosures or acquisitions by Bank
of Sumner in its fiduciary capacity, in each case in the ordinary course of
business consistent with past practice).
3.9 Amendments. Amend its articles of incorporation or bylaws.
3.10 Claims. Settle any claim, litigation, action or proceeding involving
any liability for material money damages or restrictions upon the operations of
Valley or any of its Subsidiaries.
3.11 Contracts. Except as previously disclosed on Schedule 3.11, enter
into, renew, terminate or make any change in any material contract, agreement or
lease (excluding agreements and loans permitted under Section 3.12), except in
the ordinary course of business consistent with past practice with respect to
contracts, agreements and leases that are terminable by it without penalty on no
more than 60 days prior written notice.
3.12 Loans. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except that
Valley shall not, without the prior consent of Frontier's Chief Executive
Officer or Chief Credit Administrator: (a) modify, restructure or renew any
existing nonperforming loan (defined as on non-accrual status, or 90 days or
more past due) or make any new loan to any Person if the amount of the resulting
loan, when aggregated with all other loans or extensions of credit to such
Person whose loan is non-performing (or which would be required to be aggregated
for loans-to-one-borrower limitations), would be in excess of $100,000; (b) make
any loan to an existing customer as of the date of this Plan in excess of
$500,000; or (c) make any loan to a new customer in excess of $250,000, except
that (i) single-family residential loans may be made in amounts that would not
exceed applicable FHLMC and FNMA limits, and (ii) such limits shall not apply to
SBA or other governmental or governmental agency guaranteed amounts.
3.13 Transaction Expenses. Incur expenses in connection with the
transactions contemplated by this Plan that exceed $375,000 in the aggregate.
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IV. REPRESENTATIONS AND WARRANTIES
4.1 Valley and Bank of Sumner Representations and Warranties. Each of
Valley and Bank of Sumner hereby represents and warrants to Frontier and
Frontier Bank as follows:
(A) Recitals. The facts set forth in the Recitals of this Plan with respect
to Valley and its Subsidiaries are true and correct.
(B) Organization, Standing and Authority. Each of Valley and its
Subsidiaries is duly qualified to do business and is in good standing in the
States of the United States and foreign jurisdictions where the failure to be
duly qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it. Each of Valley and its Subsidiaries has in effect
all federal state, local and foreign governmental authorizations necessary for
it to own or lease its properties and assets and to carry on its business as it
is now conducted, the absence of which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on it. Bank of Sumner is an
"insured depository institution" as defined in the Federal Deposit Insurance
Act, as amended, and applicable regulations under such statute, and its deposits
are insured by the Bank Insurance Fund of the FDIC.
(C) Shares. The outstanding shares of Valley and its Subsidiaries' capital
stock are validly issued and outstanding, fully paid and nonassessable, and
subject to no preemptive rights. Except as Previously Disclosed in Schedule
4.1(C) and paragraph (A) of the Recitals, there are no shares of capital stock
or other equity securities of Valley or its Subsidiaries outstanding and no
outstanding Rights with respect thereto.
(D) Valley Subsidiaries. Valley has Previously Disclosed in Schedule
4.1(D)a list of all of its Subsidiaries. Each of its Subsidiaries that is a bank
is an "insured depository institution" as defined in the Federal Deposit
Insurance Act, as amended, and applicable regulations under such statute. No
equity securities of any of its Subsidiaries are or may become required to be
issued (other than to Valley or one of its Subsidiaries) by reason of any Rights
with respect thereto. There are no contracts, commitments, understandings or
arrangements by which any of its Subsidiaries is or may be bound to sell or
otherwise issue any shares of such Subsidiary's capital stock, and there are no
contracts, commitments, understandings or arrangements relating to the rights of
Valley or its Subsidiaries, as applicable, to vote or to dispose of such shares.
All of the shares of capital stock of each of its Subsidiaries held by Valley or
one of its Subsidiaries are fully paid and nonassessable and are owned by Valley
or one of its Subsidiaries free and clear of any charge, mortgage, pledge,
security interest, restriction, claim, lien or encumbrance. Each of its
Subsidiaries is in good standing under the laws of the jurisdiction in which it
is incorporated or organized, and is duly qualified to do business and in good
standing in the jurisdictions where the failure to be duly qualified is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it. Except as Previously Disclosed in Schedule 4.1(D), it does not own
beneficially, directly or indirectly, any shares of any equity securities or
similar interests of any corporation, bank, partnership, joint venture, business
trust, association or other organization. In the case of representations by
Valley, the deposits of its Subsidiaries that are banks are insured by the Bank
Insurance Fund of the FDIC.
(E) Corporate Power. Each of Valley and its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its material properties and assets.
(F) Corporate Authority. Subject to any necessary receipt of approval by
its shareholders referred to in Section 6.1, this Plan has been authorized by
all necessary corporate action of Valley and each of its Subsidiaries that is a
Party, and each such agreement is a valid and binding agreement of Valley and
such Subsidiaries, enforceable against Valley and such Subsidiaries in
accordance with its terms, subject to bankruptcy, insolvency and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(G) No Defaults. Subject to the approval by its shareholders referred to in
Section 6.1, the required regulatory approvals referred to in Section 6.1, and
the required filings under federal and state securities laws, and except as
Previously Disclosed in Schedule 4.1(G), the execution, delivery and performance
of this Plan and the consummation by Valley and each of its Subsidiaries that is
a Party to the transactions contemplated by this Plan do not and will not (1)
constitute a breach or violation of, or a default under, any law, rule or
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regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Valley or of any of its Subsidiaries or to
which Valley or any of its Subsidiaries or its or their properties is subject or
bound, which breach, violation or default is reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect on it, (2) constitute a
breach or violation of, or a default under, the articles of incorporation,
charter or bylaws of it or any of its Subsidiaries, or (3) require any consent
or approval under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the consent or approval of any other party to
any such agreement, indenture or instrument, other than any such consent or
approval that, if not obtained, would not be reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect on it.
(H) Financial Reports. Except as Previously Disclosed in Schedule
4.1(H),(1) as to Valley, its audited consolidated balance sheet as of December
31, 1997 and the related statements of income, changes in shareholders' equity
and cash flows for the fiscal year ended December 31, 1997 (collectively, the
"Holding Company Financial Reports"), and (2) as to each of Valley's
Subsidiaries that is a bank, its call report for the fiscal year ended December
31, 1997, and all other financial reports filed or to be filed subsequent to
December 31, 1997, in the form filed with the FDIC and the Department (in each
case, the "Bank Financial Reports" and together with the Holding Company
Financial Reports, the "Financial Reports") did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Financial Reports
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date, and each of the statements of income and changes in
shareholders' equity and cash flows or equivalent statements in the Bank
Financial Reports (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
shareholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein, in each case in
accordance with GAAP during the periods involved, except in each case as may be
noted therein, subject to normal and recurring year-end audit adjustments in the
case of unaudited statements.
(I) Absence of Undisclosed Liabilities. Except as Previously Disclosed on
Schedule 4.1(I), neither Valley nor any of its Subsidiaries has any obligation
or liability (contingent or otherwise) that, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on it, except (1) as
reflected in its Holding Company Financial Reports prior to the date of this
Plan, and (2) for commitments and obligations made, or liabilities incurred, in
the ordinary course of business consistent with past practice since December 31,
1997. Except as Previously Disclosed on Schedule 4.1(I), since December 31,
1997, neither Valley nor any of its Subsidiaries has incurred or paid any
obligation or liability (including any obligation or liability incurred in
connection with any acquisitions in which any form of direct financial
assistance of the federal government or any agency thereof has been provided to
any Subsidiary) that, individually or in the aggregate, is reasonably likely to
have a Material Adverse Effect on it.
(J) No Events. Except as Previously Disclosed on Schedule 4.1(J), since
December 31, 1997, no event has occurred that, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on it.
(K) Properties. Except as reserved against in its Holding Company Financial
Reports, Valley and each of its Subsidiaries have good and marketable title,
free and clear of all liens, encumbrances, charges, defaults, or equities of any
character, to all of the properties and assets, tangible and intangible,
reflected in its Holding Company Financial Reports as being owned by Valley or
its Subsidiaries as of the dates thereof other than those that, individually or
in the aggregate, are not reasonably likely to have a Material Adverse Effect on
it, except those sold or otherwise disposed of in the ordinary course of
business. All buildings and all material fixtures, equipment, and other property
and assets that are held under leases or subleases by Valley or any of its
Subsidiaries are held under valid leases or subleases enforceable in accordance
with their respective terms, other than any such exceptions to validity or
enforceability that, individually or in the aggregate, are not reasonably likely
to have a Material Adverse Effect on it.
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(L) Litigation; Regulatory Action. Except as Previously Disclosed in
Schedule 4.l(L), no litigation, proceeding or controversy before any court or
governmental agency is pending that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on Valley or any of its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and, to the best of its knowledge, no such litigation, proceeding or
controversy has been threatened; and except as Previously Disclosed in Schedule
4.1(L), neither Valley nor any of its Subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authority, and neither Valley nor any of its
Subsidiaries has been advised by any of such Regulatory Authorities that such
authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum or understanding, commitment letter or similar submission.
(M) Compliance With Laws. Except as Previously Disclosed in Schedule
4.1(M), each of Valley and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to own its
businesses presently conducted and that are material to the business of it
and its Subsidiaries taken as a whole; all such permits, licenses,
certificates of authority, orders and approvals are in full force and
effect and, to its best knowledge, no suspension or cancellation of any of
them is threatened; and all such filings, applications and registrations
are current;
(2) has received no notification or communication from any Regulatory
Authority or the staff thereof (a) asserting that Valley or any of its
Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances which such Regulatory Authority enforces, which, as a result of
such noncompliance in any such instance, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on Valley or its
Subsidiaries, (b) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Valley
or its Subsidiaries, or (c) requiring any of Valley or its Subsidiaries (or
any of its or their officers, directors or controlling persons) to enter
into a cease and desist order, agreement or memorandum of understanding (or
requiring the board of directors thereof to adopt any resolution or
policy);
(3) is not required to give prior notice to any federal banking or
thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive; and
(4) is in compliance in all material respects with all fair lending
laws or other laws relating to discrimination, including the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and
the Home Mortgage Disclosure Act.
(N) Material Contracts. Except as Previously Disclosed in Schedule 4.1(N),
none of Valley or its Subsidiaries, nor any of their respective assets,
businesses or operations, is a party to, or is bound or affected by, or receives
benefits under, any material contract or agreement or amendment thereto
(excluding extensions of credit made in the ordinary course of business).
Neither Valley nor any of its Subsidiaries is in default under any contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument
to which it is a party, by which its respective assets, business or operations
may be bound or affected or under which it or any of its respective assets,
business or operations receives benefits, which default, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Valley or
its Subsidiaries, and there has not occurred any event that, with the lapse of
time or the giving of notice or both, would constitute such a default. Except as
Previously Disclosed in Schedule 4.1(N), neither Valley nor any of its
Subsidiaries is subject to or bound by any contract containing covenants that
limit the ability of Valley or any of its Subsidiaries to compete in any line of
business or with any Person or that involve any restriction of
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geographical area in which, or method by which, Valley or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any applicable Regulatory Authority).
(O) Reports. Since January 1, 1993, each of Valley and its Subsidiaries has
filed all reports and statements, together with any amendments required to be
made with respect thereto, that it was required to file with (1) the Department,
(2) the FDIC, (3) the Federal Reserve Board, and (4) any other Regulatory
Authorities having jurisdiction with respect to Valley and its Subsidiaries. As
of their respective dates (and without giving effect to any amendments or
modifications filed after the date of this Plan with respect to reports and
documents filed before the date of this Plan), each of such reports and
documents, including the financial statements, exhibits and schedules thereto,
complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Regulatory Authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(P) No Brokers. Except as previously disclosed in Schedule 4.1(P), all
negotiations relative to this Plan and the transactions contemplated by this
Plan have been carried on by it directly with the other Parties and no action
has been taken by it that would give rise to any valid claim against any Party
for a brokerage commission, finder's fee or other like payment.
(Q) Employee Benefit Plans.
(1) Schedule 4.1(Q)(1) contains a complete list of all bonus, deferred
compensation, pension, retirement, profit-sharing, thrift savings, employee
stock ownership, stock bonus, stock purchase restricted stock and stock
option plans, all employment or severance contracts, all medical, dental,
health and life insurance plans, all other employee benefit plans,
contracts or arrangements and any applicable "change of control" or similar
provisions in any plan, contract or arrangement maintained or contributed
to by Valley or any of its Subsidiaries for the benefit of employees,
former employees, directors, former directors or their beneficiaries (the
"Compensation and Benefit Plans"). True and complete copies of all
Compensation and Benefit Plans of Valley and its Subsidiaries, including
any trust instruments and/or insurance contracts, if any, forming a part
thereof, and all amendments thereto, have been supplied to the other
Parties.
(2) All "employee benefit plans" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than "multiemployer plans" within the meaning of Section 3(37) of
ERISA ("Multiemployer Plans"), covering employees or former employees of
Valley and its Subsidiaries (the "ERISA Plans"), to the extent subject to
ERISA, are in substantial compliance with ERISA. Except as Previously
Disclosed in Schedule 4.1(Q)(2) each ERISA Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension
Plan") and which is intended to be qualified under Section 401(a) of the
Internal Revenue Code of 1986 (as amended, the "Code") has received a
favorable determination letter from the Internal Revenue Service, and it is
not aware of any circumstances reasonably likely to result in the
revocation or denial of any such favorable determination letter or the
inability to receive such a favorable determination letter. There is no
material pending or, to its knowledge, threatened litigation relating to
the ERISA Plans. Neither Valley nor any of its Subsidiaries has engaged in
a transaction with respect to any ERISA Plan that could subject Valley or
any of its Subsidiaries to a tax or penalty imposed by either Section 4975
of the Code or Section 502(i) of ERISA in an amount which would be
material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by Valley or any of its Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan," within
the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which
is considered one employer with Valley under Section 4001(a)(15) of ERISA
or Section 414 of the Code (an "ERISA Affiliate"). Neither Valley nor any
of its Subsidiaries presently contributes to a Multiemployer Plan, nor have
they contributed to such a plan within the past five calendar years. No
notice of a "reportable event," within the meaning of Section 4043 of ERISA
for which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plan or by any ERISA Affiliate within
the past 12-month period.
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(4) All contributions required to be made under the terms of any ERISA
Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA. Neither Valley nor any of its
Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year, the actuarially determined present
value of all "benefit liabilities," within the meaning of Section
4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan's most recent actuarial valuation) did
not exceed the then current value of the assets of such plan, and there has
been no material change in the financial condition of such plan since the
last day of the most recent plan year.
(6) Neither Valley nor any of its Subsidiaries has any obligations for
retiree health and life benefits under any plan, except as set forth in
Schedule 4.1(Q)(6). There are no restrictions on the rights of Valley or
any of its Subsidiaries to amend or terminate any such plan without
incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.l(Q)(7), neither the
execution and delivery of this Plan nor the consummation of the
transactions contemplated by this Plan will (a) result in any payment
(including severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of Valley or any of
its Subsidiaries under any Compensation and Benefit Plan or otherwise from
Valley or any of its Subsidiaries, (b) increase any benefits otherwise
payable under any Compensation and Benefit Plan, or (c) result in any
acceleration of the time of payment or vesting of any such benefit.
(R) No Knowledge. Valley and its Subsidiaries know of no reason why the
regulatory approvals referred to in Section 6.1 should not be obtained.
(S) Labor Agreements. Neither Valley nor any of its Subsidiaries is a party
to or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is
Valley or any of its Subsidiaries the subject of a proceeding asserting that it
or any such Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel it or such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it or any
of its Subsidiaries pending or, to the best of its knowledge, threatened, nor is
it aware of any activity involving its or any of the Subsidiaries' employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
(T) Asset Classification. Valley and its Subsidiaries have Previously
Disclosed in Schedule 4.1(T) a list, accurate and complete in all material
respects, of the aggregate amounts of loans, extensions of credit or other
assets of Valley and its Subsidiaries that have been classified by it as of
December 31, 1997 (the "Asset Classification"); and no amounts of loans,
extensions of credit or other assets that have been classified as of December
31, 1997 by any regulatory examiner as "Other Loans Specially Mentioned,"
"Substandard," "Doubtful" "Loss," or words of similar import are excluded from
the amounts disclosed in the Asset Classification, other than amounts of loans,
extensions of credit or other assets that were charged off by Valley or any
Subsidiary prior to December 31, 1997.
(U) Allowance for Possible Loan Losses. The allowance for possible loan
losses shown on the consolidated balance sheets in the December 31, 1997 Holding
Company Financial Reports of Valley and the June 30, 1998, Bank Regulatory
Reports was, and the allowance for possible loan losses to be shown on
subsequent Holding Company Financial Reports of Valley was and will be, adequate
in the opinion of the Board of Directors of Valley to provide for possible
losses, net of recoveries relating to loans previously charged off, on loans
outstanding (including accrued interest receivable) as of the date thereof.
(V) Insurance. Each of Valley and its Subsidiaries has taken all requisite
action (including the making of claims and the giving of notices) pursuant to
its directors' and officers' liability insurance policy or policies
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in order to preserve all rights thereunder with respect to all matters that are
known to Valley, except for such matters that, individually or in the aggregate,
are not reasonably likely to have a Material Adverse Effect on Valley or its
Subsidiaries. Set forth in Schedule 4.l(V) is a list of all insurance policies
maintained by or for the benefit of Valley or its Subsidiaries or their
respective directors, officers, employees or agents.
(W) Affiliates. Except as Previously Disclosed in Schedule 4.1(W), to the
best of Valley's knowledge, there is no person who, as of the date of this Plan,
may be deemed to be an "affiliate" of Valley as that term is used in Rule 145
under the Securities Act.
(X) State Takeover Laws, Articles of Incorporation. Valley and its
Subsidiaries have taken all necessary action to exempt this Plan and the
transactions contemplated by this Plan from (1) any applicable state takeover
laws, including, but not limited to, RCW Ch. 23B.19, as amended, and (2) any
takeover-related provisions of Valley's and its Subsidiaries' articles of
incorporation.
(Y) No Further Action. Valley and its Subsidiaries have taken all action so
that the entering into of this Plan and the consummation of the transactions
contemplated by this Plan, or any other action or combination of actions, or any
other transactions, contemplated by this Plan do not and will not (1) require a
vote of shareholders (other than as set forth in Section 6.1), or (2) result in
the grant of any rights to any Person under the articles of incorporation,
charter or bylaws of Valley or any of its Subsidiaries or under any agreement to
which Valley or any such Subsidiaries is a party, or (iii) restrict or impair in
any way the ability of the other Parties to exercise the rights granted under
this Plan.
(Z) Environmental Matters.
(1) To Valley's knowledge, it and each of its Subsidiaries, the
Participation Facilities and the Loan/Fiduciary Properties are, and have
been, in compliance with all Environmental Laws, except for instances of
noncompliance that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Valley or its Subsidiaries.
(2) There is no proceeding pending or, to Valley's knowledge,
threatened before any court, governmental agency or board or other forum in
which Valley or any of its Subsidiaries or any Participation Facility has
been, or with respect to threatened proceedings, reasonably would be
expected to be, named as a defendant or potentially responsible party (a)
for alleged noncompliance (including by any predecessor) with any
Environmental Law, or (b) relating to the release or threatened release
into the environment of any Hazardous Material, whether or not occurring at
or on a site owned, leased or operated by Valley or any of its Subsidiaries
or any Participation Facility, except for such proceedings pending or
threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Valley or its Subsidiaries
or have been Previously Disclosed in Schedule 4.1(Z)(2).
(3) There is no proceeding pending or, to Valley's knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or Valley or any of its Subsidiaries in
respect of any Loan/Fiduciary Property) has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a
defendant or potentially responsible party (a) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (b) relating
to the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property,
except for such proceedings pending or threatened that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on Valley or have been Previously Disclosed in Schedule 4.1(Z)(3).
(4) To Valley's knowledge, there is no reasonable basis for any
proceeding of a type described in subparagraph (2) or (3) of this paragraph
(Z), except as has been Previously Disclosed in Schedule 4.1(Z)(4).
(5) To Valley's knowledge, during the period of (a) ownership or
operation by Valley or any of its Subsidiaries of any of their respective
current properties, (b) participation in the management of any
Participation Facility by Valley or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by Valley or
any of its Subsidiaries, there have been no releases of Hazardous
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Material in, on, under or affecting any such property, Participation
Facility or Loan/Fiduciary Property, except for such releases that are not
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Valley or its Subsidiaries or have been Previously
Disclosed in Schedule 4.1(Z)(5).
(6) To Valley's knowledge, prior to the period of (a) ownership or
operation by Valley or any of its Subsidiaries of any of their respective
current properties, (b) participation in the management of any
Participation Facility by Valley or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by Valley or
any of its Subsidiaries, there were no releases of Hazardous Material in,
on, under or affecting any such property, Participation Facility or Loan)
Fiduciary Property, except for such releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on Valley or its Subsidiaries or have been Previously Disclosed in Schedule
4.1(Z)(6).
(AA) Tax Reports. Except as Previously Disclosed in Schedule 4.1(AA), (1)
all reports and returns with respect to Taxes that are required to be filed by
or with respect to Valley or its Subsidiaries, including consolidated federal
income tax returns of Valley and its Subsidiaries (collectively, the "Tax
Returns"), have been duly filed, or requests for extensions have been timely
filed and have not expired, for periods ended on or prior to the most recent
fiscal year-end, except to the extent all such failures to file, taken together,
are not reasonably likely to have a Material Adverse Effect on Valley or its
Subsidiaries, and such Tax Returns were true, complete and accurate in all
material respects, (2) all Taxes shown to be due on the Tax Returns have been
paid in full, (3) the Tax Returns have been examined by the Internal Revenue
Service or the appropriate state, local or foreign taxing authority, or the
period for assessment of the Taxes in respect of which such Tax Returns were
required to be filed has expired, (4) all Taxes due with respect to completed
and settled examinations have been paid in full, (5) no issues have been raised
by the relevant taxing authority in connection with the examination of any of
the Tax Returns which are reasonably likely, individually or in the aggregate,
to result in a determination that would have a Material Adverse Effect on Valley
or its Subsidiaries, except as reserved against in the Holding Company Financial
Reports of Valley, and (6) no waivers of statutes of limitations (excluding such
statutes that relate to years under examination by the Internal Revenue Service)
have been given by or requested with respect to any Taxes of Valley or its
Subsidiaries.
(BB) Accuracy of Information. The statements with respect to Valley and its
Subsidiaries contained in this Plan, the Schedules and any other written
documents executed and delivered by or on behalf of Valley or any other Party
pursuant to the terms of or relating to this Plan are true and correct in all
material respects, and such statements and documents do not omit any material
fact necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(CC) Derivatives Contracts. None of Valley or its Subsidiaries is a party
to or has agreed to enter into a Derivatives Contract or owns securities that
are referred to as "structured notes" except for those Derivatives Contracts and
structured notes Previously Disclosed in Schedule 4.1(CC). Schedule
4.1(CC)includes a list of any assets of Valley or its Subsidiaries that are
pledged as security for each such Derivatives Contract.
(DD) Accounting Controls. Each of Valley and its Subsidiaries has devised
and maintained systems of internal accounting controls sufficient to provide
reasonable assurances that (1) all material transactions are executed in
accordance with management's general or specific authorization, (2) all material
transactions are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP, and to maintain proper accountability for
items, (3) access to the material property and assets of Valley and its
Subsidiaries is permitted only in accordance with management's general or
specific authorization, and (4) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
(EE) Commitments and Contracts. Neither Valley nor any of its Subsidiaries
is a party or subject to any of the following (whether written or oral, express
or implied):
(1) except as Previously Disclosed in Schedule 4.1(EE)(1), any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or
fringe benefits) with any present or former officer, director or employee
(other than those
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which are terminable at will by Valley or any such Subsidiary without any
obligation on the part of Valley or any such Subsidiary to make any payment
in connection with such termination);
(2) except as Previously Disclosed in Schedule 4.1(EE)(2), any real or
personal property lease with annual rental payments aggregating $10,000 or
more; or
(3) except as Previously Disclosed in Schedule 4.1(EE)(3), any
material contract with any affiliate.
4.2 Frontier and Frontier Bank Representations and Warranties. Each of
Frontier and Frontier Bank hereby represents and warrants to Valley and Bank of
Sumner as follows:
(A) Recitals. The facts set forth in the Recitals of this Plan with respect
to Frontier and Frontier Bank are true and correct.
(B) Organization, Standing and Authority. Each of Frontier and Frontier
Bank is duly qualified to do business and is in good standing in the States of
the United States and foreign jurisdictions where the failure to be duly
qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it. Each of Frontier and its Subsidiaries has in
effect all federal state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Frontier.
(C) Shares. The outstanding shares of Frontier's capital stock are validly
issued and outstanding, fully paid and nonassessable, and subject to no
preemptive rights. Except as Previously Disclosed in Schedule 4.2(C), there are
no shares of capital stock or other equity securities of it or its Subsidiaries
outstanding and no outstanding Rights with respect thereto.
(D) Corporate Power. Each of Frontier and Frontier Bank has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its material properties and assets.
(E) Corporate Authority. This Plan has been authorized by all necessary
corporate action of Frontier and such agreement is a valid and binding agreement
of Frontier, enforceable against Frontier in accordance with its terms, subject
to bankruptcy, insolvency and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles. As of the Date of
this Plan, no approval by Frontier's shareholders of the Plan is required.
(F) No Defaults. Subject to receipt of the required regulatory approvals
referred to in Section 6.1, and the required filings under federal and state
securities laws, and except as Previously Disclosed in Schedule 4.2(F), the
execution, delivery and performance of this Plan and the Employment Agreement
and the consummation by Frontier and each of its Subsidiaries that is a Party of
the transactions contemplated by this Plan does not and will not (1) constitute
a breach or violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement, indenture
or instrument of Frontier or of any of its Subsidiaries or to which Frontier or
any of its Subsidiaries or its or their properties is subject or bound, which
breach, violation or default is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Frontier, (2) constitute a
breach or violation of, or a default under, the articles of incorporation,
charter or bylaws of its or any of its Subsidiaries, or (3) require any consent
or approval under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the consent or approval of any other party to
any such agreement, indenture or instrument, other than any such consent or
approval that, if not obtained, would not be reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect on Frontier.
(G) Financial Reports. Except as Previously Disclosed in Schedule 4.2(G),
in the case of Frontier, its Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, and all other documents filed or to be filed subsequent
to December 31, 1997 under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, in the form filed with the SEC (in each such case, the "Frontier Financial
Reports"), did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets in or incorporated by
reference into the Frontier Financial
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Reports (including the related notes and schedules thereto) fairly presents and
will fairly present the financial position of the entity or entities to which it
relates as of its date, and each of the statements of income and changes in
shareholders' equity and cash flows or equivalent statements in the Frontier
Financial Reports (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
shareholders, equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with GAAP, except as may be noted therein, subject to
normal and recurring year-end audit adjustments in the case of unaudited
statements.
(H) No Events. Except as Previously Disclosed on Schedule 4.2(H), since
December 31, 1997, no event has occurred which is reasonably likely to have a
Material Adverse Effect on it.
(I) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.2(I) no litigation, proceeding or controversy before any court or
governmental agency is pending that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on Frontier or its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and, to the best of its knowledge, no such litigation, proceeding or
controversy has been threatened; and except as Previously Disclosed in Schedule
4.2(I), neither Frontier nor any of its Subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authority, and neither Frontier nor any of its
Subsidiaries has been advised by any of such Regulatory Authorities that such
authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum or understanding, commitment letter or similar submission.
(J) Reports. Since January 1, 1996, each of Frontier and its Subsidiaries
has filed all reports and statements, together with any amendments required to
be made with respect thereto, that it was required to file with (1) the FDIC,
(2) the Department, (3) the Federal Reserve Board, and (4) any other Regulatory
Authorities having jurisdiction with respect to Frontier and its Subsidiaries.
As of their respective dates (and without giving effect to any amendments or
modifications filed after the date of this Plan with respect to reports and
documents filed before the date of this Plan), each of such reports and
documents, including the financial statements, exhibits and schedules thereto,
complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Regulatory Authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(K) Accuracy of Information. The statements with respect to Frontier and
its Subsidiaries contained in this Plan, the Schedules and any other written
documents executed and delivered by or on behalf of Frontier or any other Party
pursuant to the terms of this Plan are true and correct in all material
respects, and such statements and documents do not omit any material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(L) Derivatives Contracts. None of Frontier or its Subsidiaries is a party
to or has agreed to enter into a Derivatives Contract or owns securities that
are referred to as "structured notes" except for those Derivatives Contracts and
structured notes Previously Disclosed in Schedule 4.2(L). Schedule 4.2(L)
includes a list of any assets of Frontier or its Subsidiaries that are pledged
as security for each such Derivatives Contract.
(M) Absence of Undisclosed Liabilities. Neither Frontier nor any of its
Subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it, except (1) as reflected the Frontier Financial Reports
prior to the date of this Plan, and (2) for commitments and obligations made, or
liabilities incurred, in the ordinary course of business consistent with past
practice since December 31, 1997. Since December 31, 1997, neither Frontier nor
any of its Subsidiaries has incurred or paid any obligation or liability
(including any obligation or liability incurred in connection with any
acquisitions in which any form of direct financial assistance of the federal
government or
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any agency thereof has been provided to any Subsidiary) that, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect on it.
V. COVENANTS
Each of Valley and Bank of Sumner hereby covenants to Frontier and Frontier
Bank, and each of Frontier and Frontier Bank hereby covenants to Valley and Bank
of Sumner, that:
5.1 Best Efforts. Subject to the terms and conditions of this Plan and, in
the case of Valley and Bank of Sumner, to the exercise by their respective
Boards of Directors of such Boards' fiduciary duties, each party shall use its
best efforts in good faith to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or desirable, or advisable
under applicable laws, so as to permit consummation of the Corporate Merger by
December 31, 1998, and to otherwise enable consummation of the transactions
contemplated by this Plan, and shall cooperate fully with the other Parties to
that end (it being understood that any amendments to the Registration Statement
or a resolicitation of proxies as a consequence of a Frontier Transaction shall
not violate this covenant).
5.2 The Proxy. In the case of Valley: it shall promptly assist Frontier in
the preparation of a proxy statement (the "Proxy Statement") to be mailed to the
holders of Valley Common Stock in connection with the transactions contemplated
by this Plan and to be filed by Frontier in a registration statement (the
"Registration Statement") with the SEC as provided in Section 5.8, which shall
conform to all applicable legal requirements, and it shall call a special
meeting (the "Meeting") of the holders of Valley Common Stock to be held as soon
as practicable for purposes of voting upon the transactions contemplated by this
Plan and Valley shall use its best efforts to solicit and obtain votes of the
holders of Valley Common Stock in favor of the transactions contemplated by this
Plan and, subject to the exercise of its fiduciary duties, the Board of
Directors of Valley shall recommend approval of such transactions by such
holders.
5.3 Registration Statement Compliance With Securities Laws. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the date of the Meeting, such Registration Statement, and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by or on behalf of Valley relating to
Valley or its Subsidiaries and by or on behalf of Frontier relating to Frontier
or its Subsidiaries, (A) will comply in all material respects with the
provisions of the Securities Act and any other applicable statutory or
regulatory requirements, and (B) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading; provided,
however, in no event shall any Party be liable for any untrue statement of a
material fact or omission to state a material fact in the Registration Statement
made in reliance upon, and in conformity with, written information concerning
another Party furnished by or on behalf of such other Party specifically for use
in the Registration Statement.
5.4 Registration Statement Effectiveness. Frontier will advise Valley,
promptly after Frontier receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment has
been filed, of the issuance of any stop order or the suspension of the
qualification of the Frontier Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.5 Press Releases. Valley and Bank of Sumner will not, without the prior
approval of Frontier, and Frontier and Frontier Bank will not, without the prior
approval of Valley, issue any press release or written statement for general
circulation relating to the transactions contemplated by this Plan, except as
otherwise required by law.
5.6 Access; Information.
(A) Upon reasonable notice, Valley and Bank of Sumner shall afford Frontier
and its officers, employees, counsel, accountants and other authorized
representatives, access, during normal business hours throughout
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the period up to the Effective Date, to all of the properties, books, contracts,
commitments and records of Valley and its Subsidiaries and, during such period,
Valley and Bank of Sumner shall furnish promptly (and cause its accountants and
other agents to furnish promptly) to Frontier (1) a copy of each material
report, schedule and other document filed by Valley and its Subsidiaries with
any Regulatory Authority, (2) such representations and certifications as are
necessary for purposes of the pooling letter described in Section 6.2(F), and
(3) all other information concerning the business, properties and personnel of
Valley and its Subsidiaries as Frontier may reasonably request, provided that no
investigation pursuant to this Section 5.6 shall affect or be deemed to modify
or waive any representation or warranty made by Valley or Bank of Sumner in this
Plan or the conditions to the obligations of Valley and Bank of Sumner to
consummate the transactions contemplated by this Plan; and
(B) Frontier will not use any information obtained pursuant to this Section
5.6 for any purpose unrelated to the consummation of the transactions
contemplated by this Plan and, if this Plan is terminated, will hold all
confidential information and documents obtained pursuant to this paragraph in
confidence (as provided in Section 8.6) unless and until such time as such
information or documents become publicly available other than by reason of any
action or failure to act by Frontier or as it is advised by counsel that any
such information or document is required by law or applicable stock exchange
rule to be disclosed, and in the event of the termination of this Plan, Frontier
will, upon request by Valley, deliver to Valley all documents so obtained by
Frontier or destroy such documents and, in the case of destruction, will certify
such fact to Valley.
5.7 Registration Statement Preparation; Regulatory Applications
Preparation. Frontier shall, as promptly as practicable following the date of
this Plan, prepare and file the Registration Statement with the SEC with respect
to the shares of Frontier Common Stock to be issued to the holders of Valley
Common Stock pursuant to this Plan, and Frontier shall use its best efforts to
cause the Registration Statement to be declared effective as soon as practicable
after the filing thereof. Frontier shall, as promptly as practicable following
the date of this Plan, prepare and file all necessary notices or applications
with Regulatory Authorities having jurisdiction with respect to the transactions
contemplated by this Plan.
5.8 Blue-Sky Filings. Frontier shall use its best efforts to obtain, prior
to the effective date of the Registration Statement, any necessary state
securities laws or "blue sky" permits and approvals, provided that Frontier
shall not be required by virtue thereof to submit to general jurisdiction in any
state.
5.9 Affiliate Agreements. Valley will use its best efforts to induce each
person who may be deemed to be an "affiliate" of Valley for purposes of Rule 145
under the Securities Act, to execute and deliver to Frontier on or before the
mailing of the Proxy Statement for the Meeting, an agreement in the form
attached hereto as Exhibit D restricting the disposition of such affiliate's
shares of Valley Common Stock, and, in the case of "affiliates" of Valley, the
shares of Frontier Common Stock to be received by such person in exchange for
such person's shares of Valley Common Stock. Frontier agrees to use its best
efforts to maintain the availability of Rule 145 for use by such "affiliates".
5.10 Certain Policies of Valley and Bank of Sumner. Valley and Bank of
Sumner, each shall, at Frontier's request, modify and change its loan,
litigation and other reserve and real estate valuation policies and practices
(including loan classifications and levels of reserves), and generally conform
its operating, lending and compliance policies and procedures, immediately prior
to the Effective Date so as to be consistent on a mutually satisfactory basis
with those of Frontier and GAAP; provided, however, that prior to any such
modification or change, Frontier shall certify that the conditions to the
obligation of Frontier under Section 6.1 and 6.2 to consummate the transactions
contemplated by this Plan, other than the condition set forth in Section 6.1(G),
have been satisfied or waived. Valley's and Bank of Sumner's representations,
warranties, covenants and conditions contained in this Plan shall not be deemed
to be untrue, breached or unsatisfied in any respect for any purpose as a
consequence of any modifications or changes undertaken pursuant to this Section
5.11.
5.11 State Takeover Law. Valley shall not take any action that would cause
the transactions contemplated by this Plan to be subject to any applicable state
takeover statute, and Valley shall take all necessary steps to exempt (or ensure
the continued exemption of) the transactions contemplated by this Plan from, or,
if necessary, challenge the validity or applicability of, any applicable state
takeover law.
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5.12 No Rights Triggered. Except for those consents of Third Parties
Previously Disclosed on Schedule 4.1(G), Valley shall take all necessary steps
to ensure that the entering into of this Plan and the consummation of the
transactions contemplated by this Plan (including the Mergers) and any other
action or combination of actions, or any other transactions contemplated by this
Plan, do not and will not (A) result in the grant of any rights to any Person
under the articles of incorporation or bylaws of Valley or under any agreement
to which Valley or any of its Subsidiaries is a party, or (B) restrict or impair
in any way the ability of Frontier or Frontier Bank to exercise the rights
granted under this Plan.
5.13 Shares Listed. Frontier shall use its best efforts to cause to be
listed, prior to the Effective Date, on the NASDAQ National Market upon official
notice of issuance the shares of Frontier Common Stock to be issued to the
holders of Valley Common Stock.
5.14 Regulatory Applications. Frontier and Frontier Bank, each shall (A)
promptly prepare and submit applications to the appropriate Regulatory
Authorities for approval of the Mergers, and (B) promptly make all other
appropriate filings to secure all other approvals, consents and rulings that are
necessary for the consummation of the Mergers by Frontier.
5.15 Regulatory Divestitures. In the case of Valley: No later than the
Effective Date, Valley shall cease engaging in such activities as Frontier shall
advise Valley in writing are not permitted to be engaged in by Frontier under
applicable law following the Effective Date and, to the extent required by any
Regulatory Authority as a condition of approval of the transactions contemplated
by this Plan, Valley shall divest any Subsidiary engaged in activities or
holding assets that are impermissible for Frontier or Frontier Bank, on terms
and conditions agreed to by Frontier; provided, however, that prior to taking
such action, Frontier shall certify that the conditions to the obligations of
Frontier under Sections 6.1 and 6.2 to consummate the transactions contemplated
by this Plan, other than the condition set forth in Section 6.2(G) (which shall
be adjusted to the extent that assets are divested at less than book value),
have been satisfied or waived.
5.16 Current Information.
(A) During the period from the date of this Plan to the Effective Date,
each of Valley and Frontier shall, and shall cause its representatives to,
confer on a regular and frequent basis with representatives of the other.
(B) Each of Valley and Frontier shall promptly notify the other of (1) any
material change in the business or operations of it or its Subsidiaries, (2) any
material complaints, investigations or hearings (or communications indicating
that the same may be contemplated) of any Regulatory Authority relating to it or
its Subsidiaries, (3) the initiation or threat of material litigation involving
or relating to it or its Subsidiaries, or (4) any event or condition that might
reasonably be expected to cause any of its representations or warranties set
forth in this Plan not to be true and correct in all material respects as of the
Effective Date or prevent it or its Subsidiaries from fulfilling its or their
obligations under this Plan.
5.17 401(k) Plans. Prior to execution of this Plan, Valley shall take
necessary steps to restrict its contributions to its 401(k) plan to cash
contributions.
5.18 Insurance. Frontier will cause the persons serving as officers and
directors of Valley and the Bank of Sumner immediately prior to the Effective
Date to be covered for a period of six (6) years after the Effective Date by the
current policies of directors and officers liability insurance maintained by
Valley with respect to acts or omissions of officers and directors, in their
capacity as such, occurring on or prior to the Effective Date, with policy
limits of $10-million. The provisions of this Section 5.17 are intended to be
for the benefit of, and shall be enforceable by, each of the present and former
officers and directors of Valley and the Bank of Sumner and each such person's
respective heirs and representatives.
5.19 Appointment of Director and Advisory Board.
(A) Frontier shall exercise its best efforts prior to the Effective Date to
make such amendments to its Bylaws as may be necessary to facilitate the
appointment of one member of the Board of Directors of Valley, selected by the
Board of Valley and approved by the Board of Frontier, to serve on the Frontier
and Frontier Bank Boards of Directors following the Effective Date; and
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(B) Immediately after the Effective Date, the Board of Directors of
Frontier shall appoint all of the members of the Board of Directors of Valley to
an Advisory Board, which shall meet three times a year during the initial
12-month period following the Effective Date. Frontier will pay each member a
fee of $100 for each Advisory Board meeting attended. Thereafter, the Advisory
Board will meet only if Frontier and the Advisory Board members both consider it
beneficial to continue the meetings. The purpose of the Advisory Board will be
to consider and make recommendations on an advisory basis regarding matters
affecting Frontier's business following the Mergers. Meeting times and dates
will be set by Frontier's Board of Directors.
5.20 Post-Merger Actions. Following the Merger, neither Frontier nor any
of its affiliates shall take any action that will adversely affect the federal
income tax treatment of the Merger to the shareholders of Valley, including
failing to continue at least one historic business line of Valley or to use at
least a significant portion of Valley's historic assets in a business, in each
case within the meaning of Treas. Reg. sec.1.368-1(d).
VI. CONDITIONS TO CONSUMMATION OF THE MERGERS
6.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the transactions contemplated by this Plan are subject
to the written waiver by such Party or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) Shareholder Vote. This Plan shall have been duly approved by the
requisite vote of Valley's shareholders under applicable law and the articles of
incorporation and bylaws of Valley.
(B) Regulatory Approvals. The Parties shall have procured all necessary
regulatory consents and approvals by the appropriate Regulatory Authorities, and
any waiting periods relating thereto shall have expired; provided, however,that
no such approval or consent shall have imposed any condition or requirement not
normally imposed in such transactions that, in the opinion of Frontier, would
deprive Frontier of the material economic or business benefits of the
transactions contemplated by this Plan.
(C) No Injunction. There shall not be in effect any order, decree or
injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated by this Plan.
(D) Effective Registration Statement. The Registration Statement shall have
become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
(E) Blue-Sky Permits. Frontier shall have received all state securities
laws and "blue sky" permits necessary to consummate the Mergers.
(F) Tax Opinion. Frontier and Valley shall have received an opinion from
Keller Rohrback L.L.P. to the effect that (1) the Corporate Merger constitutes a
reorganization under Section 368 of the Code, and (2) no gain or loss will be
recognized by shareholders of Valley who receive shares of Frontier Common Stock
in exchange for their shares of Valley Common Stock, except that gain or loss
may be recognized as to cash received in lieu of fractional share interests,
and, in rendering their opinion, Keller Rohrback may require and rely upon
representations contained in certificates of officers of Frontier, Valley and
others.
(G) NASDAQ Listing. The shares of Frontier Common Stock to be issued
pursuant to this Plan shall have been approved for listing on the NASDAQ
National Market subject only to official notice of issuance.
(H) Pooling Letter. Frontier shall have received a letter from Moss Adams,
LLP, dated as of the date of this Agreement and as of the Effective Date, in
form and substance acceptable to Frontier, to the effect that the Mergers will
qualify for pooling of interests accounting treatment. Valley shall have
received a letter from Dodd & Wing, PC, dated as of the date of this Agreement
and as of the Effective Date, in form and substance acceptable to Valley, from
Dodd & Wing, PC, to the effect that the Mergers will qualify for pooling of
interests accounting treatment.
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6.2 Conditions to Obligations of Frontier. The obligations of Frontier and
Frontier Bank to consummate the transactions contemplated by this Plan also are
subject to the written waiver by Frontier or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) Legal Opinion. Frontier shall have received an opinion, dated the
Effective Date, of Graham & Dunn, P.C., counsel for Valley and Bank of Sumner,
in the form of Exhibit E.
(B) Officers' Certificate. (1) Each of the representations and warranties
contained in this Plan of Valley and Bank of Sumner shall be true and correct in
all material respects as of the date of this Plan and upon the Effective Date
with the same effect as though all such representations and warranties had been
made on the Effective Date, except for any such representations and warranties
that specifically relate to an earlier date, which shall be true and correct as
of such earlier date and except as otherwise provided in Section 5.11, and (2)
each and all of the agreements and covenants of Valley and Bank of Sumner to be
performed and complied with pursuant to this Plan on or prior to the Effective
Date shall have been duly performed and complied with in all material respects,
and Frontier shall have received a certificate signed by the chief executive
officers, chief financial officers, and chief lending officers of Valley and
Bank of Sumner dated the Effective Date, to such effect.
(C) Receipt of Affiliate Agreements. Frontier shall have received from each
affiliate of Valley the agreement referred to in Section 5.10.
(D) Adverse Change. During the period from December 31, 1997 to the
Effective Date, there shall not have been any material adverse change in the
financial position or results of operations of Valley or Bank of Sumner, nor
shall Valley or Bank of Sumner have sustained any loss or damage to its
properties, whether or not insured, nor shall there have been any other event,
occurrence or circumstance which would have a Material Adverse Effect upon its
ability to conduct its business; and Frontier shall have received a certificate
dated the Effective Date signed by the Chief Executive Officers of Valley and
Bank of Sumner to such effect.
(E) Dissenters' Rights. The number of shares of Valley Common Stock for
which cash is to be paid because dissenters' rights of appraisal under the
Appraisal Laws shall have been effectively preserved as of the Effective Date or
because of the payment of cash in lieu of fractional shares of Frontier Common
Stock shall not exceed in the aggregate 10% of the outstanding shares of Valley
Common Stock.
(F) Capital. Valley's Capital shall not be less than $10-million (not
including capital contributions upon exercise of outstanding Valley Options) at
October 1, 1998, and not less than the Final Capital Requirement (not including
capital contributions upon exercise of outstanding Valley Options) on the
Effective Date.
(G) Allowance for Loan and Lease Losses. Bank of Sumner's allowance for
possible loan and lease losses shall not be less than 1.25% of Bank of Sumner's
total outstanding loans and leases and will be adequate to absorb Bank of
Sumner's anticipated loan and lease losses.
(H) Employment Contract. The Employment Agreement attached as Exhibit C
shall have been duly executed and delivered by all parties to such Employment
Agreement.
6.3 Conditions to Obligations of Company and Bank of Sumner. The
obligations of Valley and Bank of Sumner to consummate the transactions
contemplated by this Plan also are subject to the written waiver by Valley and
Bank of Sumner or the fulfillment on or prior to the Effective Date of each of
the following conditions:
(A) Legal Opinion. Valley and Bank of Sumner shall have received an
opinion, dated the Effective Date, of Keller Rohrback, L.L.C., counsel for
Frontier, in the form of Exhibit F.
(B) Officer's Certificate. (1) Each of the representations and warranties
of Frontier and Frontier Bank contained in this Plan shall be true and correct
in all material respects as of the date of this Plan and upon the Effective Date
with the same effect as though all such representations and warranties had been
made on the Effective Date, except for any such representations and warranties
that specifically relate to an earlier date, which shall be true and correct as
of such earlier date, and (2) each and all of the agreements and covenants
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of Frontier and Frontier Bank to be performed and complied with pursuant to this
Plan on or prior to the Effective Date shall have been duly performed and
complied with in all material respects, and Valley shall have received a
certificate signed by an executive officer of Frontier and Frontier Bank dated
the Effective Date, to such effect.
(C) Adverse Change. During the period from December 31, 1997 to the
Effective Date, there shall not have been any material adverse change in the
financial position or results of operations of Frontier and Frontier Bank nor
shall Frontier or Frontier Bank have sustained any loss or damage to its
properties, whether or not insured, that materially affects its ability to
conduct its business; and Valley shall have received a certificate dated the
Effective Date signed by the Chief Executive Officers of Frontier and Frontier
Bank to such effect.
(D) Fairness Opinion. Valley shall have received, immediately prior to the
mailing of the Proxy Statement to Valley's shareholders, an opinion of Columbia
Financial Advisors, Inc., to the effect that the financial terms of the
Corporate Merger are fair from a financial point of view to Valley's
shareholders.
VII. TERMINATION
7.1 Events of Termination. This Plan may be terminated prior to the
Effective Date, either before or after receipt of required shareholder
approvals:
(A) Mutual Consent. By the mutual consent of Frontier and Valley, if the
Board of Directors of each so determines by vote of a majority of the members of
its entire board.
(B) Breach. By Frontier or Valley, if its Board of Directors so determines
by vote of a majority of the members of its entire Board, in the event of (A) a
material breach by the other Party of any representation or warranty contained
herein, which breach cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach, or (B) a breach
by the other party of any of the material covenants or agreements contained,
which breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching Party of such breach.
(C) Delay. By Frontier or Valley in the event the Corporate Merger is not
consummated by April 30, 1999, unless the failure of the consummation of the
transactions to occur shall be due to the failure of the Party seeking to
terminate this Merger Agreement to perform its obligations hereunder in a timely
manner; provided, however, that Frontier may not terminate the Merger Agreement
pursuant to this Section 7.1(C), if such delay results from (a) amendments to
the Registration Statement or a resolicitation of proxies as a consequence of a
Frontier Transaction, or any other acquisition or sale transaction, or any
offering of securities, in which Frontier is involved, or (b) a change in the
method of acquisition pursuant to Section 2.7; and provided, further, that a
party may not terminate the Merger Agreement pursuant to this Section 7.1(C) if
it is in material breach of any of the provisions of the Merger Agreement.
(D) No Shareholder Approval. By Frontier or Valley, if its Board of
Directors so determines by a vote of a majority of the members of its entire
Board, in the event that the shareholder approval contemplated by Section 6.1 is
not obtained at the Meeting, including any adjournment or adjournments the
meeting.
(E) Average Closing Price Below $43.86. By Valley, within five days after
the end of the trading period used to determine the Frontier Average Closing
Price, if the Frontier Average Closing Price, subject to adjustment as provided
in Section 2.5 hereof, is less than $43.86 and Frontier, in its sole discretion,
does not elect by written notice to Valley to adjust the Exchange Ratio so that
the Frontier Average Closing Price multiplied by the Exchange Ratio equals
$39.6750.
(F) Fiduciary Duties. By Valley, if its Board of Directors, after receiving
advice of counsel, determines in its good faith that it is required to do so in
order to discharge its fiduciary duties, shall withdraw or modify or resolve to
withdraw or modify its recommendation that the shareholders vote in favor of the
Merger.
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7.2 Consequences of Termination.
(A) General Consequences. Subject to Section 7.3 and Section 7.4, in the
event of the termination or abandonment of this Plan pursuant to the provisions
of Section 7.1, this Plan shall become void and have no force or effect, without
any liability on the part of the Parties or any of their respective directors or
officers or shareholders with respect to this Plan.
(B) Enforcement Proceedings. In any action or proceeding in connection with
the enforcement of this Plan, the prevailing party will be entitled to
reasonable attorneys' fees and expenses.
7.3 Termination Fee. The parties hereby acknowledge that, in negotiating
and executing this Plan and in taking the steps necessary or appropriate to
effect the transaction contemplated hereby, Frontier and Valley have each
incurred and will incur direct and indirect monetary and other costs (including
without limitation attorneys' fees and costs of their respective employee and
management time) and will forego discussions with respect to other potential
transactions.
(A) To compensate Frontier for such costs and to induce it to forego
initiating discussions regarding other transactions, if (i) this Plan terminates
because Valley does not use its best efforts to consummate the transactions
contemplated by this Plan in accordance with the terms of this Plan (unless a
condition set forth in Section 7.1 is not satisfied and such nonsatisfaction has
not been the result of the failure of Valley to use its best efforts to
consummate this Plan in accordance with the terms of this Plan); (ii) Valley
terminates this Plan for any reason other than the grounds for termination set
out in Section 7.1(A), 7.1(B), 7.1(C), or 7.17.1(E); then Valley shall be
obligated to pay Frontier on demand (and in no event more than three days after
such demand) in immediately available funds Five Hundred Thousand and No/100
Dollars ($500,000.00). It is further understood and agreed that the fee payable
under this Section shall be due and owing even though the event or condition
which caused the fee to be payable was the result (in part or in whole) of the
directors of Valley complying with their fiduciary duties.
(B) To compensate Valley for such costs and to induce it to forego
initiating discussions regarding other transactions, if (i) this Plan terminates
because Frontier does not use its best efforts to consummate the transactions
contemplated by this Plan in accordance with the terms of this Plan (unless a
condition set forth in Section 7.1 is not satisfied and such nonsatisfaction has
not been the result of the failure of Frontier to use its best efforts to
consummate this Plan in accordance to the terms of this Plan); or (ii) Frontier
terminates this Plan for any reason other than the grounds for termination set
out in Section 7.1(A), 7.1(B), 7.1(C), 7.1(D) or 7.17.1(E), then Frontier shall
be obligated to pay Valley on demand (and in no event more than three days after
such demand) in immediately available funds Five Hundred Thousand and No/100
Dollars ($500,000.00).
7.4 Acquiror Fee. Valley hereby agrees to pay Frontier on demand (and in
no event more than three days after such demand) in immediately available funds
$750,000 (the "Acquiror Fee") if within 18 months after the date hereof the
Corporate Merger has not been completed and there occurs any of the events set
forth in subparagraphs (A), (B) or (C), below.
(A) Any person other than Frontier or an affiliate of Frontier or a person
who is a shareholder of Valley as of the date of this Plan acquires beneficial
ownership of 25% or more of the then-outstanding Valley Common Stock;
(B) Valley, without having received Frontier's prior written consent,
enters into an agreement to engage in an Acquisition Proposal (as defined below)
with any person (the term "person" for purposes of this section having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the 1934 Act and
the rules and regulations thereunder) other than Frontier or any of its
respective Subsidiaries, or Valley's Board of Directors recommends that Valley
Shareholders approve or accept any Acquisition Proposal with any person other
than Frontier or any of its respective Subsidiaries. For purposes of this
section, "Acquisition Proposal" shall mean (a) a merger or consolidation, or any
similar transaction, involving Valley, (b) a purchase, lease or other
acquisition of all or substantially all of the assets of Valley, or (c) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20% or more of the voting
power of Valley; or
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(C) A bona fide proposal is made by a third party to Valley to engage in an
Acquisition Proposal and after such proposal is made any of the following events
occurs: Valley willfully breaches this Plan and such breach entitles Frontier to
terminate this Plan; Valley Shareholders do not approve this Plan at the
Shareholders Meeting; the Shareholders Meeting is not held or is canceled prior
to termination of this Plan for reasons other than the fault of Frontier; or
Valley's Board of Directors modifies in a manner adverse to Frontier its
recommendation with respect to this Plan.
Notwithstanding the foregoing, Valley shall not be obligated to pay to
Frontier the Acquiror Fee if, prior to the occurrence of any of the events
specified in Sections 7.4(A), (B) or (C), either (i) Frontier terminates the
Plan in accordance with the terms hereof other than pursuant to Section 7.1(B)
hereof or (ii) Valley terminates this Plan pursuant to Section 7.1(B). Under no
circumstances shall Valley be required under Sections 7.3 and 7.4 to pay in the
aggregate more than $1-million.
VIII. OTHER MATTERS
8.1 Survival. Only those agreements and covenants in this Plan that by
their express terms apply in whole or in part after the Effective Date shall
survive the Effective Date. All other representations, warranties, and covenants
shall be deemed only to be conditions of the Mergers and shall not survive the
Effective Date. If the Mergers are abandoned and this Plan is terminated, the
provisions of Article VII shall apply and the agreements of the Parties in
Sections 7.3, 7.4, 8.5 and 8.6 shall survive such abandonment and termination.
8.2 Waiver; Amendment. Prior to the Effective Date, any provision of this
Plan may be (A) waived in writing by the Party benefited by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated by this Plan) by an agreement in writing among the Parties approved
by their respective Boards of Directors and executed in the same manner as this
Plan, except that, after the vote by the shareholders of Valley, the
consideration to be received by the shareholders of Valley for each share of
Valley Common Stock shall not thereby be altered. Nothing contained in this
Section 8.2 is intended to modify Frontier's rights pursuant to Section 2.7.
8.3 Counterparts. This Plan may be executed in one or more facsimile
counterparts, each of which shall be deemed to constitute an original. This Plan
shall become effective when one counterpart has been signed by each Party.
8.4 Governing Law. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law may
be applicable.
8.5 Expenses. Each Party will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated by this Plan, except
printing expenses which shall be shared equally between Valley and Frontier.
8.6 Confidentiality. Except as otherwise provided in Section 5.6(B), each
of the Parties and their respective agents, attorneys and accountants will
maintain the confidentiality of all information provided in connection herewith
which has not been publicly disclosed.
8.7 Notices. All notices, requests and other communications hereunder to a
"Party" shall be in writing and shall be deemed to have been duly given when
delivered by hand, telegram, certified or registered mail, overnight courier,
telecopy or telex (confirmed in writing) to such Party at its address set forth
below or such other address as such Party may specify by notice to the Parties.
If to Frontier or Frontier Bank to:
FRONTIER FINANCIAL CORPORATION
332 SW Everett Mall Way
Everett, WA 98204
Attn: Robert J. Dickson, President
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Copies to:
Glen P. Garrison
Keller Rohrback, L.L.P.
Suite 3200
1201 Third Avenue
Seattle, WA 98101-3052
If to Valley or Bank of Sumner, to:
VALLEY BANCORPORATION
801 Alder Avenue
Sumner, WA 98390
Attn: Linda A. Dryden
Copies to:
Stephen M. Klein
Graham & Dunn, P.C.
1420 Fifth Avenue, 33rd Floor
Seattle, WA 98101
8.8 Entire Understanding; No Third Party Beneficiaries. This Plan
represents the entire understanding of the Parties with reference to
transactions contemplated by this Plan and supersedes any and all other oral or
written agreements previously made, except for Sections 5.9, 5.17, 5.20, and
8.9. Nothing in this Plan, expressed or implied, is intended to confer upon any
Person, other than the Parties or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Plan.
8.9 Benefit Plans. Upon consummation of the Mergers, all employees of
Valley and its Subsidiaries shall be deemed to be at-will employees of Frontier
and its subsidiaries, except for Linda A. Dryden, who is party to the Employment
Agreement. From and after the Effective Date, employees of Valley and its
Subsidiaries shall be entitled to participate in the pension, employee benefit
and similar plans (including stock option, bonus or other incentive plans) on
substantially the same terms and conditions as similarly situated employees of
Frontier and its Subsidiaries. With the exception of stock option plans, for the
purpose of determining eligibility to participate in such plans and the vesting
of benefits under such plans (but not for the accrual of benefits), Frontier
shall give effect to years of service with Valley or Valley's Subsidiaries, as
the case may be, as if such service were with Frontier or its Subsidiaries.
Employees of Valley and its Subsidiaries will be entitled to carry over unused
vacation days and sick leave accrued as of the Effective Date. Frontier shall
use its best efforts to facilitate the rollover of the 401(k) plan maintained by
Valley into the 401(k) plan maintained by Frontier Bank.
8.10 Headings. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
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IN WITNESS WHEREOF, the Parties have caused this instrument to be executed
in counterparts by their duly authorized officers, all as of the day and year
first above written.
FRONTIER FINANCIAL CORPORATION
By: /s/ ROBERT J. DICKSON
------------------------------------
Robert J. Dickson,
President and Chief Executive
Officer
FRONTIER BANK
By: /s/ ROBERT J. DICKSON
------------------------------------
Robert J. Dickson,
President and Chief Executive
Officer
VALLEY BANCORPORATION
By: /s/ LINDA A. DRYDEN
------------------------------------
Title: President & Chief Executive
Officer
BANK OF SUMNER
By: /s/ LINDA A. DRYDEN
------------------------------------
Title: President & Chief Executive
Officer
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EXHIBITS
<TABLE>
<S> <C>
Exhibit A Voting Agreement
Exhibit B Director's Agreement
Exhibit C Employment Agreement
Exhibit D Affiliate Agreement
Exhibit E Legal Opinion of Graham & Dunn, P.C.
Exhibit F Legal Opinion of Keller Rohrback L.L.P.
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
COMPANY DISCLOSURES
Schedule 2.8 Outstanding Options
Schedule 3.4 Changes to Line of Business, Operating Procedures, etc.
Schedule 3.6 New or Changes to Compensation, Employment Agreements, etc.
Schedule 3.7 New or Modifications to Benefit Plans
Schedule 3.11 New or Changes to Material Contracts
Schedule 4.1(C) Shares Outstanding
Schedule 4.1(D) Subsidiaries
Schedule 4.1(G) No Defaults -- Agreements Requiring Third Party Consent
Schedule 4.1(H) Financial Reports
Schedule 4.1(I) Undisclosed Liabilities
Schedule 4.1(J) No Events Causing Material Adverse Effect
Schedule 4.1(L) Litigation, Regulatory Action
Schedule 4.1(M) Compliance with Laws
Schedule 4.1(N) Material Contracts
Schedule 4.1(P) Brokers
Schedule 4.1(Q)(1) List of Employee Benefit Plans
Schedule 4.1(Q)(2) Employee Benefit Plans Not Qualified Under ERISA
Schedule 4.1(Q)(6) Obligations for Retiree Health and Life Benefits
Schedule 4.1(Q)(7) Agreements Resulting in Payments to Employees Under Any
Compensation and Benefit Plan with Respect to Proposed
Transaction
Schedule 4.1(T) Asset Classification
Schedule 4.1(V) Insurance
Schedule 4.1(W) Affiliates
Schedule 4.1(Z)(2) Pending Proceedings with Respect to Environmental Matters
Schedule 4.1(Z)(3) Pending Proceedings with Respect to Environmental Matters
Involving Loan/Fiduciary Property
Schedule 4.1(Z)(4) Pending Proceedings with Respect to Environmental Matters
Listed in Sections 4.1(Z)(2) or (3)
Schedule 4.1(Z)(5) Actions During Ownership Which could Have Material Adverse
Effect with Respect to Environmental Matters
Schedule 4.1(Z)(6) Actions Prior to Ownership Which could Have Material Adverse
Effect with Respect to Environmental Matters
Schedule 4.1(AA) Tax Reports Matters
</TABLE>
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<TABLE>
<S> <C>
Schedule 4.1(CC) Derivative Contracts, including a list of any assets pledged
as security for such Derivative Contracts
Schedule 4.1(EE)(1) Employment Contracts Requiring Payment In Connection with
Termination
Schedule 4.1(EE)(2) Leases with Aggregate Annual Rent Exceeding $10,000
Schedule 4.1(EE)(3) Material Contracts with Affiliates
FRONTIER
DISCLOSURES
Schedule 4.2(C) Shares
Schedule 4.2(F) No Defaults
Schedule 4.2(G) Financial Reports
Schedule 4.2(H) No Events Causing Material Adverse Effect
Schedule 4.2(I) Litigation, Regulatory Action
Schedule 4.2(L) Derivative Contracts, including a list of any assets pledged
as security for such Derivative Contracts
</TABLE>
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APPENDIX B
CHAPTER 13 OF THE WASHINGTON BUSINESS CORPORATIONS ACT
RCW 23B.13.010 DEFINITIONS. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
RCW 23B.13.020 RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the corporation
is a subsidiary that is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply
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with the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
RCW 23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
RCW 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.
RCW 23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.
RCW 23B.13.220 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
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(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered;
and
(e) Be accompanied by a copy of this chapter.
RCW 23B.13.230 DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
RCW 23B.13.240 SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
RCW 23B.13.250 PAYMENT.
(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
(c) An explanation of how the interest was calculated;
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(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
RCW 23B.13.260 FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
RCW 23B.13.270 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
RCW 23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250
or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
RCW 23B.13.300 COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a
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foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.
RCW 23B.13.310 COURT COSTS AND COUNSEL FEES.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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APPENDIX C
FAIRNESS OPINION OF COLUMBIA FINANCIAL ADVISORS, INC.
, 1998
Board of Directors
Valley Bancorporation
801 Alder
Sumner, WA 98390
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Valley Bancorporation ("VB") of the
consideration to be received by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated July 30, 1998, (the "Agreement")
between VB and Frontier Financial Corporation ("FTBK").
In connection with the proposed merger transaction (the "Merger") whereby
VB will merge into FTBK, each issued and outstanding share and option of VB
common stock (along with its associated rights) at the effective time of the
Merger (other than (i) shares of holders of which are exercising appraisal
rights pursuant to applicable law and (ii) shares held directly by or indirectly
by the Bank, its parent company or any subsidiary thereof other than shares held
in a fiduciary capacity or in satisfaction of a debt previously contracted)
shall be converted into the right to receive .8625 FTBK shares, except for
fractional shares which will receive a proportional amount of cash (the Merger
"Consideration").
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and advises
the directors, officers and shareholders of both public and private banks and
thrift institutions with respect to the fairness, from a financial point of
view, of the consideration to be received in transactions such as that proposed
by the Agreement. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, of the Consideration
to be received by holders of the shares from FTBK pursuant to the Merger, CFAI
has advised Washington and Oregon community banks regarding fairness of capital
transactions. VB has agreed to pay CFAI a fee for this opinion letter.
In connection with rendering this opinion, we have, among other things: (i)
reviewed the Agreement; (ii) reviewed VB's financial information for the twelve
months ended December 31, 1997 and for the six months ended June 30, 1998; (iii)
reviewed certain internal financial analyses and certain other forecasts for VB
prepared by and reviewed with the management of VB; (iv) conducted interviews
with senior management of VB regarding the past and current business operations,
results thereof, financial condition and future prospects of VB; (v) reviewed
the current market environment generally and the banking environment in
particular; (vi) reviewed the prices paid in certain recent mergers and
acquisitions in the banking industry on a regional basis; (vii) reviewed FTBK's
audited financial information for the fiscal year ended December 31, 1997 and
three months ended March 31, 1998 including the Form 10-KSB and 10-QSB filed
with the U.S. Securities and Exchange Commission; (ix) reviewed the price ranges
and dividend history for FTBK common stock; (x) and reviewed such other
information, studies and analyses and performed such other investigations and
took into account such other matters as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of the
VB or FTBK. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of VB. This
opinion is necessarily based upon circumstances and conditions as they exist and
can be evaluated as
C-1
<PAGE> 91
of the date of this letter. We have not been authorized to solicit and did not
solicit other entities for purposes of a business combination with VB.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof. We
are not expressing any opinion herein as to the prices at which shares of FTBK
Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a recommendation
to any stockholder as to how such stockholder should vote with respect to the
merger.
In reliance upon and subject to the foregoing, it is our opinion that, as
of the date hereof, the Merger Consideration to be received by the shareholders
of VB pursuant to the Agreement is fair, from a financial point of view, to the
shareholders of VB.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By:
------------------------------------
Robert J. Rogowski
Principal
C-2
<PAGE> 92
APPENDIX D
VALLEY BANCORPORATION FINANCIAL INFORMATION
AND MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets (unaudited)................... D-2
Consolidated Statements of Income (unaudited)............. D-3
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)............................................ D-4
Consolidated Statements of Cash Flows (unaudited)......... D-5
Notes to Consolidated Financial Statements (unaudited).... D-6
INDEPENDENT AUDITOR'S REPORT................................ D-8
FINANCIAL STATEMENTS (audited)
Consolidated Balance Sheets............................... D-10
Consolidated Statements of Income......................... D-11
Consolidated Statements of Stockholders' Equity........... D-12
Consolidated Statements of Cash Flows..................... D-13
Notes to Consolidated Financial Statements................ D-14
VALLEY BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis...................... D-26
Tables to Management's Discussion and Analysis............ D-29
</TABLE>
D-1
<PAGE> 93
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks................................... $ 4,400,894 $ 3,208,146
Interest bearing deposits in banks........................ 7,666,700 10,535,102
Securities held to maturity............................... 899,334 898,669
Federal Home Loan Bank stock.............................. 490,000 466,900
Loans..................................................... 80,180,680 71,615,949
Allowance for loan losses................................. (1,103,374) (979,196)
----------- -----------
NET LOANS................................................. 79,077,306 70,636,753
Premises and equipment.................................... 1,922,043 1,970,283
Foreclosed real estate.................................... 245,722 199,792
Interest receivable....................................... 562,368 488,187
Intangible assets......................................... 1,185,215 1,229,946
Other assets.............................................. 309,193 538,311
----------- -----------
TOTAL ASSETS...................................... $96,758,775 $90,172,089
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand................................................. $17,079,238 $18,530,286
Savings and interest-bearing demand.................... 35,196,544 32,595,974
Time................................................... 33,525,627 28,290,933
----------- -----------
TOTAL DEPOSITS.................................... 85,801,409 79,417,193
Interest payable.......................................... 208,169 172,528
Long-term borrowings...................................... 227,429 638,889
Other liabilities......................................... 432,545 398,834
----------- -----------
TOTAL LIABILITIES................................. 86,669,552 80,627,444
----------- -----------
SHAREHOLDERS' EQUITY
Common stock (par value: $1); authorized 3,000,000 shares;
issued: 920,648 shares in 1998 and 1997................ 920,648 920,648
Surplus................................................... 69,569 69,569
Retained earnings......................................... 9,099,006 8,554,428
----------- -----------
Total shareholders' equity................................ 10,089,223 9,544,645
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $96,758,775 $90,172,089
=========== ===========
</TABLE>
See notes to consolidated financial statements.
D-2
<PAGE> 94
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME
Loans..................................................... $3,830,384 $2,975,682
Deposits in banks and federal funds sold.................. 194,306 148,220
Federal Home Loan Bank dividends.......................... 22,274 8,891
Securities held to maturity............................... 25,118 38,076
---------- ----------
TOTAL INTEREST INCOME..................................... 4,072,082 3,170,869
---------- ----------
INTEREST EXPENSE
Deposits.................................................. 1,309,779 995,452
Borrowings................................................ 7,920 12,788
---------- ----------
TOTAL INTEREST EXPENSE.................................... 1,317,699 1,008,240
---------- ----------
NET INTEREST INCOME....................................... 2,754,383 2,162,629
PROVISION FOR CREDIT LOSSES................................. 150,000 120,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES..... 2,604,383 2,042,629
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts....................... 144,348 138,475
Real estate loan brokerage fees........................... 60,905 33,812
Other..................................................... 50,035 43,057
---------- ----------
TOTAL NONINTEREST INCOME.................................. 255,288 215,344
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits............................ 866,813 660,055
Occupancy................................................. 156,336 144,079
Other..................................................... 544,046 402,854
---------- ----------
TOTAL NONINTEREST EXPENSE................................. 1,567,195 1,206,988
---------- ----------
INCOME BEFORE INCOME TAXES................................ 1,292,476 1,050,985
INCOME TAXES................................................ 407,259 306,547
---------- ----------
NET INCOME.................................................. $ 885,217 $ 744,438
========== ==========
NET INCOME PER SHARE DATA
Basic earnings per common share........................... $ .96 $ .89
Diluted earnings per common share......................... .92 .86
</TABLE>
See notes to consolidated financial statements.
D-3
<PAGE> 95
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK SURPLUS EARNINGS TOTAL
-------- ------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997................... $920,648 $69,569 $8,554,428 $ 9,544,645
Net income................................. -- -- 885,217 885,217
Cash dividends............................. -- -- (340,639) (340,639)
-------- ------- ---------- -----------
BALANCE, JUNE 30, 1998....................... $920,648 $69,569 $9,099,006 $10,089,223
======== ======= ========== ===========
</TABLE>
See notes to consolidated financial statements.
D-4
<PAGE> 96
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 885,217 $ 744,438
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 150,000 120,000
Depreciation and amortization.......................... 133,353 79,711
Investment amortization -- net......................... (665) (1,363)
Stock dividends received............................... (23,100) (9,300)
(Increase) decrease in interest receivable and other
assets................................................ 154,937 (140,912)
Increase in interest payable and other liabilities..... 69,352 94,946
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 1,369,094 887,520
----------- -----------
INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks and
federal funds sold..................................... 2,868,402 3,443,999
Maturities of investments held to maturity................ -- 100,000
Purchase of Federal Home Loan Bank stock.................. -- (190,800)
Increase in loans made to customers, net of principal
collections............................................ (8,636,033) (7,171,434)
Purchases of equipment.................................... (40,382) (94,055)
Proceeds from sale of premises and equipment.............. 675,000 --
Additions to other real estate owned...................... (450) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES..................... (5,808,463) (3,912,290)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposit accounts.......................... 6,384,216 423,635
Proceeds from borrowings.................................. -- 2,730,365
Payment on borrowings..................................... (411,460) (2,158)
Dividends................................................. (340,639) (275,375)
Issuance of common stock.................................. -- 10,380
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 5,632,117 2,886,847
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.......... 1,192,748 (137,923)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD................ 3,208,146 2,933,745
----------- -----------
CASH AND DUE FROM BANKS, END OF PERIOD...................... $ 4,400,894 $ 2,795,822
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid............................................. $ 1,282,058 $ 1,044,649
Income taxes paid......................................... 414,000 255,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES
Transfer of loans to foreclosed real estate............... $ 45,480 --
</TABLE>
See notes to consolidated financial statements.
D-5
<PAGE> 97
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
practices for interim financial information within the banking industry.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
additional information refer to the consolidated financial statements and
footnotes thereto included in Valley Bancorporation's annual report for the year
ended December 31, 1997.
2. FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Valley
Bancorporatoin (the Company) and Bank of Sumner (the Bank). All significant
inter-company balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128),
which the Company adopted in the fourth quarter of 1997. SFAS No. 128 replaces
current earnings per share requirements and requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per share reflect the potential dilution
that could occur if common shares were issued pursuant to the exercise of
options under the Company's stock option plans.
Following is information regarding the calculation of basic and diluted
earnings per share for the six months ended as indicated:
<TABLE>
<CAPTION>
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Basic earnings per share:
Net income............................................ $885,217 $920,648 $.96
Effect of dilutive securities:
Options............................................... -- $ 39,538
-------- --------
Diluted earnings per share:
Net income............................................ $885,217 $960,186 $.92
======== ========
SIX MONTHS ENDED JUNE 30, 1997
Basic earnings per share:
Net loss.............................................. $744,438 $837,487 $.89
Effect of dilutive securities:
Options............................................... -- $ 29,797
-------- --------
Diluted earnings per share:
Net loss.............................................. $744,438 $867,284 $.86
======== ========
</TABLE>
D-6
<PAGE> 98
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1997
4. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective for fiscal years
beginning after June 15, 1999. The new standard requires that all companies
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivatives and
whether it qualifies for hedge accounting. Management .is currently assessing
the impact of SFAS No. 133 on the financial statements of the Company.
5. PENDING MERGER
On July 30, 1998, the Company and its subsidiary bank entered into an
agreement and plan of merger with Frontier Financial Corporation, Everett,
Washington, and its subsidiary, Frontier Bank, pursuant to which the Company
will be merged into Frontier Financial Corporation. The merger agreement
provides that the Company's common stock will be exchanged for shares of
Frontier Financial Corporation common stock pursuant to a specified exchange
ratio. Consummation of the acquisition is subject to several conditions,
including receipt of applicable regulatory and stockholder approval.
D-7
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Valley Bancorporation
Sumner, Washington
We have audited the accompanying consolidated balance sheet of Valley
Bancorporation and Subsidiary as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
Bancorporation 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.
/s/ DODD WING & CO., P.C.
Kirkland, Washington
January 14, 1998
D-8
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
Board of Directors
Valley Bancorporation
Sumner, Washington
We have audited the accompanying consolidated balance sheet of Valley
Bancorporation and Subsidiary as of December 31, 1996 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
Bancorporation and Subsidiary as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KNIGHT, VALE & GREGORY, INC.,
P.S.
Tacoma, Washington
January 24, 1997
D-9
<PAGE> 101
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash and due from banks..................................... $ 3,208,146 $ 2,933,745
Interest bearing deposits in banks.......................... 10,535,102 7,552,618
Federal funds sold.......................................... -- 500,000
Securities held to maturity................................. 898,669 961,725
Loans....................................................... 71,615,949 57,282,559
Allowance for credit losses................................. (979,196) (765,480)
----------- -----------
NET LOANS................................................... 70,636,753 56,517,079
Federal Home Loan Bank stock, at cost....................... 466,900 248,400
Premises and equipment...................................... 1,970,283 1,745,021
Foreclosed assets........................................... 199,792 62,000
Accrued interest receivable................................. 488,187 413,558
Intangible assets........................................... 1,229,946 --
Other assets................................................ 538,311 392,877
----------- -----------
TOTAL ASSETS...................................... $90,172,089 $71,327,023
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand.................................................... $18,530,286 $11,951,835
Savings and interest-bearing demand....................... 32,595,974 24,542,739
Time...................................................... 28,290,933 25,378,181
----------- -----------
TOTAL DEPOSITS.................................... 79,417,193 61,872,755
Accrued interest payable.................................. 172,528 187,396
Long-term borrowings...................................... 638,889 958,729
Other liabilities......................................... 398,834 274,086
----------- -----------
TOTAL LIABILITIES................................. 80,627,444 63,292,966
----------- -----------
SHAREHOLDERS' EQUITY
Common stock (par value $1); authorized 3,000,000 shares;
issued and outstanding: 1997 -- 920,648 shares;
1996 -- 836,570 shares................................. 920,648 836,570
Paid-in capital........................................... 69,569 16,360
Retained earnings......................................... 8,554,428 7,181,127
----------- -----------
Total shareholders' equity................................ 9,544,645 8,034,057
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $90,172,089 $71,327,023
=========== ===========
</TABLE>
See accompanying notes and auditors' report.
D-10
<PAGE> 102
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans..................................................... $6,523,295 $5,541,343
Federal funds sold and deposits in banks.................. 412,863 344,705
Federal Home Loan Bank stock.............................. 23,846 18,465
Securities held to maturity............................... 52,933 66,153
---------- ----------
TOTAL INTEREST INCOME..................................... 7,012,937 5,970,666
---------- ----------
INTEREST EXPENSE
Deposits.................................................. 2,146,933 1,884,820
Long-term borrowings...................................... 62,440 76,996
---------- ----------
TOTAL INTEREST EXPENSE.................................... 2,209,373 1,961,816
---------- ----------
NET INTEREST INCOME....................................... 4,803,564 4,008,850
PROVISION FOR CREDIT LOSSES................................. 245,000 153,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES..... 4,558,564 3,855,850
---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts....................... 311,310 284,088
Real estate loan brokerage fees........................... 79,800 95,736
Other operating income.................................... 99,830 74,378
---------- ----------
TOTAL NON-INTEREST INCOME................................. 490,940 454,202
---------- ----------
NON-INTEREST EXPENSES
Salaries and employee benefits (net of deferred salary
costs of $240,000 in 1997 and $226,000 in 1996)........ 1,518,443 1,295,181
Occupancy................................................. 294,505 202,908
Data processing........................................... 160,106 166,249
Other..................................................... 678,787 659,230
---------- ----------
TOTAL NON-INTEREST EXPENSES............................... 2,651,841 2,323,568
---------- ----------
INCOME BEFORE INCOME TAXES................................ 2,397,663 1,986,484
INCOME TAXES................................................ 705,197 590,537
---------- ----------
NET INCOME.................................................. $1,692,466 $1,395,947
========== ==========
EARNINGS PER SHARE DATA
Basic earnings per share.................................. $ 1.92 $ 1.60
Diluted earnings per share................................ $ 1.86 $ 1.54
</TABLE>
See accompanying notes and auditors' report.
D-11
<PAGE> 103
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 1995............................ $ 83,077 $ 373,189 $6,405,384 $6,861,650
Net income........................................ -- -- 1,395,947 1,395,947
Cash dividends declared ($0.30 per share)......... -- -- (249,490) (249,490)
Stock split (ten for one)......................... 747,693 (376,979) (370,714) --
Stock options exercised........................... 5,800 20,150 -- 25,950
-------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996........................ 836,570 16,360 7,181,127 8,034,057
Net income........................................ -- -- 1,692,466 1,692,466
Cash dividends declared ($0.33 per share)......... -- -- (275,375) (275,375)
Stock options exercised........................... 42,220 53,209 -- 95,429
5% stock dividend................................. 41,858 -- (43,790) (1,932)
-------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997........................ $920,648 $ 69,569 $8,554,428 $9,544,645
======== ========== ========== ==========
</TABLE>
See accompanying notes and auditors' report.
D-12
<PAGE> 104
VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 1,692,466 $ 1,395,947
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses............................ 245,000 153,000
Depreciation and amortization.......................... 213,909 163,385
Deferred income tax benefit............................ (121,792) (27,726)
Stock dividend from Federal Home Loan Bank............. (27,700) (18,300)
Net amortization of premiums on investments............ (1,885) 801
(Gain) loss on sale of foreclosed real estate.......... 8,637 (8,874)
Deferral of loan origination costs and fees, less
amortization......................................... 145,099 17,700
Increase in accrued interest receivable and other
assets............................................... (77,092) (169,867)
Increase in accrued interest payable and other
liabilities.......................................... 109,878 94,303
Writedown of foreclosed assets......................... -- 28,395
------------ ------------
Net cash provided by operating activities......... $ 2,186,520 $ 1,628,764
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing deposits in banks........ (2,982,484) (451,841)
Net increase in Federal funds sold........................ 500,000 500,000
Purchases of securities held to maturity.................. (350,059) (196,660)
Purchase of Federal Home Loan Bank stock.................. (190,800) --
Proceeds from maturities of securities held to maturity... 415,000 673,611
Net increase in loans..................................... (14,686,842) (10,395,091)
Additions to premises and equipment....................... (444,908) (44,699)
Proceeds from sale of foreclosed assets................... 53,363 52,286
Net cash provided from acquisition of branch.............. 13,136,416 --
------------ ------------
Net cash used in investing activities............. (4,550,314) (9,862,394)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................................. 3,139,913 8,812,532
Payments on long-term debt................................ (319,840) (299,707)
Issuance of common stock and payment of fractional
shares................................................. 93,497 25,950
Payment of dividends...................................... (275,375) (249,490)
------------ ------------
Net cash provided by financing activities......... $ 2,638,195 $ 8,289,285
------------ ------------
Net change in cash and due from banks............. 274,401 55,655
CASH AND DUE FROM BANKs
Beginning of year......................................... 2,933,745 2,878,090
End of year............................................... $ 3,208,146 $ 2,933,745
============ ============
SUPPLEMENTAL DISCLOSURES
Cash Payments for :
Interest............................................... $ 2,182,003 $ 1,934,720
Income taxes........................................... 680,000 675,000
Non-cash investing activities:
Transfer from loans to foreclosed real estate.......... 177,069 133,807
</TABLE>
See accompanying notes and auditors' report.
D-13
<PAGE> 105
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation and operations. The consolidated financial
statements include the accounts of Valley Bancorporation (the Company) and its
wholly owned subsidiary, Bank of Sumner (the Bank). All significant intercompany
transactions and balances have been eliminated.
The Company is a one-bank holding company which operates primarily through
its subsidiary, the Bank. The Bank operates three branches in suburban
communities in the greater Pierce County area. The Bank's primary source of
revenue is providing loans to customers, who are predominately individuals and
small to middle-market businesses.
Consolidated financial statement presentation. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and practices within the banking industry. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet, and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change relate to the determination
of the allowance for credit losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for credit losses and the valuation of foreclosed
real estate, management obtains independent appraisals for significant
properties.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
Securities held to maturity. Debt securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts, which are recognized in
interest income over the period to maturity.
Loans. Loans are stated at the amount of unpaid principal, reduced by
deferred loan fees and an allowance for credit losses. Interest on loans is
accrued daily based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due or when they are past due 90 days as to either principal or interest. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the yield of the related
loan.
Allowance for credit losses. The allowance for credit losses is increased
by provisions charged to operations and reduced by loans charged off, net of
recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. This evaluation requires the use of
current estimates, which may vary from the ultimate collectibility experienced
in the future. The estimates used are reviewed periodically, and, as adjustments
become necessary, they are charged to operations in the period in which they
become known.
When management determines that it is possible that a borrower will be
unable to repay all amounts due according to the terms of the loan agreement,
including scheduled interest payments, the loan is considered impaired. The
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or when the primary
source of repayment is provided by real
D-14
<PAGE> 106
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
estate collateral, at the fair value of the collateral less estimated selling
costs. The amount of impairment and any subsequent charges are recorded through
the provision for credit losses as an adjustment to the allowance for credit
losses.
Premises and equipment. Premises and equipment are stated at cost less
accumulated depreciation, which is computed on a straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the terms of the respective leases or the estimated useful lives of the
improvements, whichever is less. Gains or losses on disposition are reflected in
earnings.
Foreclosed real estate. Real estate properties acquired through or in lieu
of, foreclosure are to be sold and recorded at the lower of the recorded amount
of the loan, or the fair value of the properties less estimated costs of
disposal. Any write-down to fair value at the time of transfer to foreclosed
real estate is charged to the allowance for possible credit losses. Properties
are evaluated regularly to ensure that the recorded amounts are supported by
their current fair values, and that valuation allowances to reduce the carrying
amounts to fair value less estimated costs to dispose are recorded as necessary.
Additions to or reductions from valuation allowances are recorded in income.
Intangible assets. Intangible assets represent the excess of cost over net
assets of an acquired branch, and are being amortized on a straight-line basis
over 14 years.
Income taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
The Bank provides for income taxes on a separate return basis and remits to
the Company amounts determined to be currently payable.
Cash and cash equivalents. The Company considers all amounts due from
depository institutions to be cash equivalents.
The Company maintains its cash in depository institution accounts, which at
times may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Earnings per share. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS No. 128), which the Bank adopted in the fourth quarter of 1997. SFAS
No. 128 replaces current earnings per share requirements and requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share reflects the
potential dilution that could occur if common shares were issued pursuant to the
exercise of options under the Bank's stock option plans. Earnings per share for
1997 and 1996 have been restated to conform to the presentation required by SFAS
No. 128.
Recent accounting pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statements of Accounting Standards Nos. 130 and 131, both
of which are effective for years beginning after December 31, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items that
are required to be recognized under accounting standards as components of
comprehensive income will have to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Also, the
accumulated balance of other comprehensive income will have to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS No. 131 requires that public enterprises
report financial and descriptive information about its reportable operating
segments. Both of
D-15
<PAGE> 107
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
these pronouncements provide additional disclosures about the Bank's operations
and are not anticipated to affect its financial position or results of
operations.
2. RESTRICTED ASSETS
Federal Reserve Board regulations require the maintenance of minimum
reserve balances in the form of cash and balances with Federal Reserve Bank. The
amounts of such balances for the years ended December 31, 1997 and 1996 were
approximately $1,606,148 and $610,000.
3. DEBT SECURITIES
Debt securities have been classified according to management's intent. The
carrying amount of securities and their approximate fair values at December 31
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities held to maturity
December 31, 1997
U.S. Government agency securities............. $548,681 $ -- $ 243 $548,438
State and municipal securities................ 349,988 1,807 -- 351,795
-------- ------- ------ --------
$898,669 $ 1,807 $ 243 $900,233
======== ======= ====== ========
December 31,1996
U.S. Government agency securities............. $197,578 $ -- 1,516 196,062
State and municipal securities................ 764,147 12,714 -- 776,861
-------- ------- ------ --------
$961,725 $12,714 $1,516 $972,923
======== ======= ====== ========
</TABLE>
The scheduled maturities of debt securities held to maturity at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $200,000 $201,132
Due from one year to five years........................ 698,669 699,101
-------- --------
Total........................................ $898,669 $900,233
======== ========
</TABLE>
Securities carried at $748,777 at December 31, 1997 and $497,578 at
December 31, 1996, with market values of $749,570 and $499,200, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.
D-16
<PAGE> 108
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial...................................... $34,490,213 $12,228,690
Real estate:
Construction.................................. 5,537,692 12,913,101
Residential................................... 4,907,213 5,243,190
Commercial.................................... 23,078,770 25,529,947
Consumer........................................ 3,891,159 1,511,631
----------- -----------
71,905,047 57,426,559
Less unearned income and deferred fees.......... (289,098) (144,000)
----------- -----------
Total loans........................... $71,615,949 $57,282,559
=========== ===========
</TABLE>
Changes in the allowance for credit losses for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning of year........................... $765,480 $704,108
Provision for credit losses............................ 245,000 153,000
Charge-offs............................................ (59,000) (97,878)
Recoveries............................................. 27,716 6,250
-------- --------
Net charge-offs........................................ (31,284) (91,628)
-------- --------
Balance at end of year....................... $979,196 $765,480
======== ========
</TABLE>
The recorded investment in impaired loans was $86,022 and $136,340 at
December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996,
specific allocations of $103,228 and $31,500, respectively, of the allowance for
credit losses were made for these impaired loans. The average recorded
investment in impaired loans during the years ended December 31, 1997 and 1996
was $210,757 and $73,924, respectively. Interest income, which was collected in
cash, recognized on impaired loans was $12,686 in 1996. No interest income was
recognized in 1997.
At December 31, 1997 there were no commitments to lend additional funds to
borrowers whose loans are not performing. There were no loans 90 days and over
past due still accruing interest at December 31, 1996.
Maturity and repricing for the Bank's portfolio at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
FIXED RATE FLOATING RATE TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
0 - 90 days......................... $ 5,467,131 $14,765,895 $20,233,026
91 - 365 days....................... 14,887,724 -- 14,887,724
1 - 5 years......................... 35,968,982 -- 35,968,982
5 years or more..................... 526,217 -- 526,217
----------- ----------- -----------
$56,850,054 $14,765,895 $71,615,949
=========== =========== ===========
</TABLE>
Certain related parties of the Company, principally directors of the
Company and their associates, were loan customers of the Bank in the ordinary
course of business during 1997 and 1996. Total loans outstanding at December 31,
1997 and 1996 to the key officers and directors were $3,018,665 and $2,867,920,
respectively. During 1997, loan advances totaled $4,360,962 and loan repayments
totaled $4,210,217 on these loans.
D-17
<PAGE> 109
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land, buildings and leasehold improvements........ $ 2,157,162 $ 1,896,610
Equipment, furniture and fixtures................. 1,112,923 986,845
----------- -----------
3,270,085 2,883,455
Less accumulated depreciation and amortization.... (1,299,802) (1,138,434)
----------- -----------
Total premises and equipment.................... $ 1,970,283 $ 1,745,021
=========== ===========
</TABLE>
The Bank is obligated under a noncancellable lease agreement expiring in
September 1999 for the land and building where its South Hill branch is
situated. An option to renew the lease for an additional ten years is provided
in the agreement. Expected minimum monthly payments required under the lease
terms are $2,250 through September 30, 1999, totaling $47,250. Total rental
expense related to the lease was $27,000 and $27,000 for the years ended
December 31, 1997 and 1996, which is included in occupancy expense.
6. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit (each with
a minimum denomination of $100,000), was approximately $8,877,000 and $7,151,000
at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998........................................................ $26,413,202
1999........................................................ 1,350,435
2000........................................................ 371,614
2001 and thereafter......................................... 155,682
-----------
$28,290,933
===========
</TABLE>
7. LONG-TERM DEBT
The Bank has three installment notes with the Federal Home Loan Bank of
Seattle under the "Community Investment Fund" program. The balance of the notes
at December 31, 1997 and 1996 was $240,379 and $266,279, respectively, requiring
monthly principal payments totaling $3,378, plus interest at rates varying
between 5.67% and 7.32%. The Bank has entered into a blanket pledge agreement as
collateral for these borrowings.
The Company is obligated under a five-year term loan with a balance of
$398,510 and $692,450 at December 31, 1997 and 1996, respectively, maturing on
March 5, 1999, collateralized by 26,103 shares of the Bank's common stock and
requiring monthly payments of $27,821, including interest at 7%.
Future minimum principal payments for all long-term debt are as follows:
1998 -- $341,746; 1999 -- $109,868; 2000 -- $29,000; 2001 -- $20,000;
2002 -- $19,000; and thereafter $119,489.
8. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan. The Bank sponsors a profit sharing plan which allows
qualified employees, at their option, to make contributions of up to certain
percentages of pre-tax base salary through salary deductions under Section
401(k) of the Internal Revenue Code. A portion of these contributions may be
matched by the Bank. The Bank's contributions for the years ended December 31,
1997 and 1996 were $46,352 and $39,000, respectively.
D-18
<PAGE> 110
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Deferred Compensation Plan. In 1993 the Bank approved a deferred
compensation plan for the Bank's President. The plan requires annual
contributions of $35,000 until the President retires, earning interest at a rate
equal to 70% of the Bank's return on equity (13.62% at December 31, 1997). Total
employee benefit expense under this plan was $64,056 and $50,340 for the years
ended December 31, 1997 and 1996, respectively.
Incentive Compensation Plan. The Bank has an incentive compensation plan
for officers and other employees. Incentive compensation is computed according
to a formula based on pre-tax income. Costs incurred for 1997 and 1996 were
$215,735 and $153,000, respectively, which are included in salary expense.
Stock Option Plans. The Company has two stock-based option plans, which are
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recognized for these plans. Had compensation cost for the Bank's stock
option plans been determined based on the fair value at the grant dates for
awards granted in 1997 under these plans, consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
these pro forma amounts:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net income:
As reported.................................... $1,692,466
Pro forma...................................... 1,666,166
Earnings per share:
Basic:
As reported.................................... $ 1.92
Pro Forma...................................... $ 1.89
Diluted:
As reported.................................... $ 1.86
Pro forma...................................... $ 1.83
</TABLE>
The fair value of the option grants is estimated on the date of grant,
based on the Black-Scholes option-pricing model and using the following
weighted-average assumptions: dividend yield of .1% for all years; risk-free
interest rates of 5.8% for 1997; and expected lives of ten years. The weighted
average fair value of options granted during 1997 was $7.59.
Stock Option Plan. Effective April 18, 1991, the Company adopted an
Employee Incentive Stock Option Plan. Total shares reserved under this plan were
127,050. The options are not transferable and expire upon termination if the
option is not exercised within 90 days. The exercise price for the stock options
may not be less than the fair value of the optioned stock at the date of grant.
Options granted under the plan expire at various times in 2007. At December 31,
1997, total shares reserved for future options are 27,783.
In 1994, the Company adopted a director stock option plan which reserved a
total of 63,000 shares of common stock for issuance under this plan. All options
are exercisable five years from the date of grant, except if the director
terminates, then options vest one-fifth each of the first five anniversary dates
from date of grant. All outstanding options expire December 31, 1999. At
December 31, 1997, the total shares reserved for future options is 10,500.
D-19
<PAGE> 111
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
A summary of the status of the Company's stock option plans as of December
31, 1997 and 1996, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................. 94,830 $5.24 100,920 $5.18
Exercised......................................... (42,330) 2.25 (6,090) 4.26
Granted........................................... 5,250 17.46 -- --
------- -------
Outstanding at end of year...................... 57,750 $8.51 94,830 $5.24
======= =======
Options exercisable at year end................... 5,250 40,020
</TABLE>
The following information summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------- ----------- ---------------- -----------
<S> <C> <C> <C>
7.62$...... 52,500 2 years --
17.4$6..... 5,250 9 years 5,250
</TABLE>
9. INCOME TAXES
Income taxes are comprised of the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current............................................... $ 826,989 $618,263
Deferred benefit...................................... (121,792) (27,726)
--------- --------
Total income taxes.......................... $ 705,197 $590,537
========= ========
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Income tax at statutory rates............ $815,205 34.0% $675,405 34.0%
Increase (decrease) resulting from
Tax-exempt income...................... (99,676) (4.2) (83,985) (4.2)
Other.................................. (10,332) (.4) (883) (.1)
-------- ---- -------- ----
TOTAL INCOME EXPENSE................... $705,197 29.4% $590,537 29.7%
======== ==== ======== ====
</TABLE>
D-20
<PAGE> 112
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Net deferred tax assets consist of the following components at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses.......................... $287,335 $214,671
Deferred fees in excess of loan origination costs.... 98,293 48,960
Deferred compensation................................ 78,742 56,962
Valuation allowance on foreclosed assets............. -- 8,840
-------- --------
TOTAL DEFERRED TAX ASSETS............................ 464,370 329,433
-------- --------
DEFERRED TAX LIABILITIES
Accumulated depreciation............................. 75,350 79,802
Stock dividends...................................... 40,052 30,634
Deferred income...................................... 65,690 57,511
-------- --------
TOTAL DEFERRED TAX LIABILITIES....................... 181,092 167,947
-------- --------
NET DEFERRED TAX ASSETS................................ $283,278 $161,486
======== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk. The Bank is party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of the Bank's commitments is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit:
Commercial...................................... $ 8,055,000 $ 5,209,000
Real Estate..................................... 12,522,000 6,630,000
Consumer........................................ -- 2,000
Standby letters of credit......................... 190,000 260,000
----------- -----------
$20,767,000 $12,101,000
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Bank's experience has been that approximately 80% of loan commitments are
drawn upon by customers. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in
D-21
<PAGE> 113
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
extending loan facilities to customers. Collateral held varies as specified
above, and is required in instances where the Bank deems necessary.
The Bank has agreements with commercial banks and other institutions for
the lines of credit totaling $7,700,000.
11. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in
Washington. Investments in State and municipal securities involve governmental
entities primarily within the State of Washington. As of December 31, 1997, the
Bank's loans to companies in the real estate development industry totaled
$19,224,542, or 27% of total loans. The Bank, as a matter of policy, generally
does not extend credit in excess of $1,500,000 to any single borrower or group
of borrowers. Standby letters of credit were granted primarily to commercial
borrowers.
12. CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS -- DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Cash..................................................... $ 99,507 $ 7,495
Investment in subsidiary................................. 9,672,202 8,582,643
Due from subsidiary...................................... 249,217 58,166
Federal income taxes receivable.......................... -- 82,243
----------- ----------
Total assets............................................. $10,020,926 $8,730,547
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Federal income taxes payable............................. $ 75,447 $ --
Long-term debt........................................... 398,510 692,450
Accrued interest payable................................. 2,324 4,040
Shareholders' equity..................................... 9,544,645 8,034,057
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $10,020,926 $8,730,547
=========== ==========
CONDENSED STATEMENTS OF INCOME -- YEARS ENDED DECEMBER 31
OPERATING INCOME
Income form subsidiary -- dividends...................... $ 665,000 $ 591,000
----------- ----------
OPERATING EXPENSES
Professional fees........................................ 36,847 21,410
Interest expense......................................... 42,237 58,449
Director fees............................................ 5,400 5,610
Other.................................................... 10,970 4,869
----------- ----------
TOTAL OPERATING EXPENSES................................. 95,454 90,338
----------- ----------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY.................................. 569,546 500,662
INCOME TAX BENEFIT......................................... 33,361 26,003
----------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY............................................ 602,907 526,665
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY............... 1,089,559 869,282
----------- ----------
NET INCOME............................................... $ 1,692,466 $1,395,947
=========== ==========
</TABLE>
D-22
<PAGE> 114
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
CONDENSED STATEMENTS OF CASH FLOWS -- YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 1,692,466 $1,395,947
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiary.......... (1,089,559) (869,282)
(Increase) decrease Federal income taxes receivable... 157,690 (52,816)
(Increase) decrease in receivable from subsidiary..... (191,051) 26,813
Decrease in accrued interest payable.................. (1,716) (1,597)
------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 567,830 499,065
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid...................................... (275,375) (249,490)
Cash received on exercised stock options................. 95,429 25,950
Cash paid for fractional shares.......................... (1,932) --
Principal payments on long-term debt..................... (293,940) (273,807)
------------ ----------
NET CASH USED IN FINANCING ACTIVITIES.................... (475,818) (497,347)
------------ ----------
NET CHANGE IN CASH....................................... 92,012 1,718
CASH, BEGINNING OF YEAR.................................... 7,495 5,777
------------ ----------
CASH, END OF YEAR........................................ $ 99,507 $ 7,495
============ ==========
</TABLE>
13. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines of the regulatory framework for
prompt corrective action, the Bank must meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table.
As of December 31, 1997, the most recent notification from the Company's
and the Bank's regulator categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category.
D-23
<PAGE> 115
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE
PURPOSES ACTION PROVISIONS
ACTUAL ------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ---------- ----- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Tier 1 capital (to average assets)
Consolidated...................... $8,314,700 9.77% $2,552,100 3.00% N/A N/A
Bank.............................. 8,442,202 9.92% 2,552,100 3.00% $4,253,500 5.00%
Tier 1 capital (to risk-weighted
assets)
Consolidated...................... 8,314,700 11.32% 2,937,048 4.00% N/A N/A
Bank.............................. 8,442,202 11.50% 2,937,048 4.00% 4,405,472 6.00%
Total capital (to risk-weighted
assets)
Consolidated...................... 9,230,152 12.57% 5,874,096 8.00% N/A N/A
Bank.............................. 9,357,622 12.74% 5,874,096 8.00% 7,342,621 10.00%
DECEMBER 31, 1996
Tier 1 capital (to average assets)
Consolidated...................... $8,034,057 11.25% $2,142,893 3.00% N/A N/A
Bank.............................. 8,582,643 12.02% 2,141,490 3.00% $3,569,150 5.00%
Tier 1 capital (to risk-weighted
assets)
Consolidated...................... 8,034,057 13.45% 2,388,693 4.00% N/A N/A
Bank.............................. 8,582,643 14.23% 2,412,040 4.00% 3,618,060 6.00%
Total capital (to risk-weighted
assets)
Consolidated...................... 8,780,524 14.70% 4,777,387 8.00% N/A N/A
Bank.............................. 9,336,406 15.48% 4,824,080 8.00% 6,030,100 10.00%
</TABLE>
Management believes, as of December 31, 1997, that the Company and the Bank
meet all capital requirements to which they are subject.
Restrictions on Retained Earning. The Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. At December 31, 1997, all of the retained earnings were
available for dividend declaration without prior regulatory approval.
D-24
<PAGE> 116
VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
14. EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated.
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income................................... $1,692,466 880,268 $1.92
Effect of dilutive securities:
Options...................................... -- 29,603
-------
Diluted earnings per share
Net Income................................... $1,692,466 909,871 $1.86
========== =======
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share:
Net income................................... $1,395,947 874,885 $1.60
Effect of dilutive securities:
Options...................................... -- 33,634
---------- -------
Diluted earnings per share
Net Income................................... $1,395,947 908,519 $1.54
========== =======
</TABLE>
The number of shares shown above for "options" is the number of incremental
shares that would result from exercise of options and use of the proceeds to
repurchase shares at the average market price during the year.
15. STOCK DIVIDEND AND EARNINGS PER SHARE
In July 1997, the Company's Board of Directors declared a 5% stock
dividend. All references in the financial statements to number of shares, price
per share amounts, and stock option data, have been retroactively restated to
reflect the increased number of shares outstanding.
D-25
<PAGE> 117
VALLEY BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis highlights the significant factors
affecting the financial statements of Valley Bancorporation and its wholly owned
subsidiary, Bank of Sumner. For a more complete understanding of the following
discussion, reference should be made to Valley Bancorporation's consolidated
financial statements and related notes thereto presented elsewhere in this proxy
statement.
For purposes of the following management discussion and analysis, the
information primarily reflects the activities of Valley Bancorporation's
subsidiary, Bank of Sumner, as Valley Bancorporation has no operations other
than owning Bank of Sumner. Bank of Sumner operates four branches in Pierce
County and its primary source of revenue is derived from providing loans to
customers who are predominately small and middle-market businesses and middle
income individuals.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Overview. At June 30, 1998, total assets of $96.759 million represented a
29% increase over total assets of $75.053 million at June 30, 1997. Most of the
growth is a result of increases in loans. The growth was funded primarily by
increases in deposits, short-term borrowings and retained earnings.
Net Income. For the six months ended June 30, 1998 and 1997, net income was
$885,217 and $744,438 respectively, an increase of $140,779 or 19% in 1998
compared with 1997. The increase in earnings is due mostly to increased net
interest income, partially offset by an increase in non-interest expense.
Earnings per share for the two periods ended June 30, 1998 and 1997 were $0.96
and $0.89 respectively.
Net Interest Income. Net interest income for the six-month period ended
June 30, 1998 increased $591,754 or 27% compared to the six months ended June
30, 1997. The increase in net interest income was primarily the result of a
$18.6 Million increase in average earning assets during the period. Average
earning assets were $84 million and $67 million for the two periods ended June
30, 1998 and 1997, respectively. Bank of Sumner's net yield on earning assets
was 6.48% and 6.59% during the same periods, respectively.
Non-Interest Expenses. Non-interest expenses for the six-month period ended
June 30, 1998 increased $360,207 or 30%. The increase in expenses was primarily
due to the acquisition of the Buckley branch from Wells Fargo Bank in late June
1997. The expenses of that branch are included in 1998 period, but not in the
1997 period.
FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE YEARS ENDED DECEMBER 31,
1997 AND 1996
Overview. Total assets of $90.2 million at December 31, 1997 represent a
26% increase over total assets of $71 million at December 31, 1996. Most of the
growth is a result of increases in loans. The growth was funded primarily by
increases in deposits, short-term borrowings and retained earnings.
Net Income. For the years ended December 31, 1997 and 1996, net income was
$1.69 million and $1.4 million respectively, an increase of $290 thousand or 21%
from 1996 to 1997. The increase in earnings is due in part to increased net
interest income, partially offset by increased overhead expense. Earnings per
share for the two-year periods ended December 31, 1997 and 1996 were $1.92 and
$1.60 respectively.
Net Interest Income. Net interest income for the year ended December 31,
1997 increased 20% or $795 thousand, from the year ended December 31, 1996. The
increase in earnings is principally due to a $11 million increase in earning
assets, principally loans. Average earning assets were $72 million and $61
million for the years ended December 31, 1997 and 1996, respectively. Bank of
Sumner's net yield on earning assets totaled 6.74% and 6.67% during the same
periods, respectively.
Non-Interest Expenses. Non-interest expenses for the year ended December
31, 1997 increased $328 thousand or 14% from the year ended December 31, 1996.
The increase in expenses was primarily associated with increased personnel and
other expenses costs, with 36% of the increase attributed to costs associated
with the Buckley branch which was acquired in mid year 1997.
D-26
<PAGE> 118
LOAN QUALITY, LIQUIDITY, AND CAPITAL
Allowance for Credit Losses. The allowance for credit losses represents
management's current estimate of amounts required to absorb losses on existing
loans and commitments. The allowance of $979,196 at December 31, 1997 is an
increase of $213,716 from the December 31, 1996 allowance of $765,480. The
allowance represents 1.36% of total loans at December 31, 1997 compared with
1.33% at December 31, 1996.
The allowance for credit losses is increased by provisions charged to
operations and reduced by loans charged off, net of recoveries. The allowance is
based on management's periodic evaluation of potential losses in the loan
portfolio after consideration of historical loss, experience, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
collateral, economic conditions and other risks inherent in the portfolio.
Liquidity and Sources of Funds. Valley Bancorporation's primary sources of
funds are customer deposits, loan repayments, net income, and deposits and/or
loans from Federal Home Loan Bank of Seattle (FHLB) as well as other
correspondent bank lines. Scheduled loan repayments are a relatively stable
source of funds while deposit inflows and unscheduled loan prepayments are
influenced by general interest rate levels, interest rates on other investments,
competition, economic conditions and other factors.
Total deposits were $79.4 million at December 31, 1997, up $17.5 million or
28% from December 31, 1996 balance of $61.9 million. Bank of Sumner does not
accept brokered deposits. A concerted effort has been made to attract deposits
in the market area Bank of Sumner serves through competitive pricing and
delivery of quality products.
Capital. The Tier 1 capital-to-asset ratio for Valley Bancorporation was
9.77% at December 31, 1997 compared to 11.25% at December 31, 1996. This ratio
was impacted both by good growth in assets, and by a $1.2 million premium paid
for the acquisition of the Buckley office from Wells Fargo Bank in 1997. Tier 1
capital to risk-weighted assets ratio was 11.32% at December 31, 1997 and 13.45%
at December 31, 1996.
Valley Bancorporation declared cash dividends of $275,375 in 1997 and
$249,490 in 1996. The dividends were $0.334 cents per share and $0.30 cents per
share respectively and represented approximately 20% of the prior year's
earnings.
LENDING
Bank of Sumner's policy is to originate loans primarily in its local market
area. Bank of Sumner's loan underwriting policies focus on assessment of each
borrower's ability to service and repay the debt, and the availability of
collateral that can be used to secure the loan. Depending on the nature of the
borrower and the purpose and the amount of the loan, Bank of Sumner's loans may
be secured by a variety of collateral, including real estate, business assets
and personal assets. Most business loans are also guaranteed by the owner of the
business. Bank of Sumner's loans are generally classified by the ability of the
borrowers to repay and the principal asset pledged as collateral to secure the
loan.
Bank of Sumner's commercial and industrial loans consist primarily of
secured revolving operating lines of credit and business term loans. Commercial
real estate loans include loans for various purposes where the primary
collateral is commercial real estate. Real estate construction loans include
loans made in connection with custom and "spec" (build to sell) construction of
residential and commercial buildings and loans made to borrowers who build
residential and commercial buildings for resale. The majority of loans within
Bank of Sumner's portfolio have terms of five years or less or have adjustable
interest rates. Such rates are principally tied to the bank's base rate which is
reviewed monthly and adjusted if necessary to respond to market trends.
Consumer installment loans and other loans, while representing a smaller
percentage of total outstanding loans, represent loans for various personal uses
and are secured by home equity, personal vehicles, and other personal assets.
Types of Loans. Table 1 sets forth the composition of Bank of Sumner' loan
portfolio by type of loan at June 30, 1998, and at December 31, 1997 and 1996.
D-27
<PAGE> 119
Loan Maturities and Sensitivities to Changes in Interest Rates. Table 2
shows an analysis of Bank of Sumner's loan maturities and sensitivities to
changes in interest rates at June 30, 1998, and at December 31, 1997.
Risk Elements. Risk elements include accruing loans past due ninety days or
more, non-accrual loans, and loans that have been restructured to provide a
reduction or deferral of interest or principal for reasons related to the
borrowers financial difficulties, potential problem loans and loan
concentrations. Table 3 lists total non-accrual loans as of June 30, 1998 and
December 31, 1997 and 1996, and shows the amount of interest which would have
accrued for each year had the loans not been classified as non-performing. There
were no restructured loans and no loans accruing past due 90 days or more for
either year-end.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against the current income. Interest income is subsequently recognized only to
the extent payments are received.
At June 30, 1998 Bank of Sumner was not aware of any loans that continued
to accrue interest or that management reasonably expects will have a materially
negative impact on future operating results. Bank of Sumner's management is not
aware of any information concerning any material loans, other than those
discussed as risk elements above that cause it to have doubts as to the ability
of the borrowers to comply with the terms of the loans.
SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of the Allowance for Credit Losses. Bank of Sumner maintains the
allowance for credit losses at a level sufficient to provide for estimated loan
losses based on evaluation of known and inherent risks in the loan portfolio.
The allowance is based on management's periodic evaluation of potential losses
in the loan portfolio after consideration of historical loss experience, adverse
situations that may effect the borrower's ability to repay, the estimated value
of any underlying collateral, economic conditions, the result of examination of
individual loans, the evaluation of the overall portfolio by senior credit
personnel and federal and state regulatory agencies, and other risks inherent in
the portfolio. Credits deemed uncollectable are charged to the allowance.
Provisions for credit losses and recoveries on loans previously charged off are
added to Bank of Sumner's allowance.
Table 4 summarizes Bank of Sumner's loan loss experience for the six months
ended June 30, 1998 and the years ended December 31, 1997 and December 31, 1996.
ASSET AND LIABILITY MANAGEMENT
Bank of Sumner's results of operation depends substantially on net interest
income. Interest income and interest expense are affected by general economic
conditions, competition in the market place, market interest rates and
re-pricing and maturity characteristics of Bank of Sumner's assets and
liabilities. Exposure to interest rate risk is primarily a function of
differences between the maturity and re-pricing schedules of assets (principally
loans and securities) and liabilities (principally deposits). Assets and
liabilities are described as interest sensitive for a given period of time when
they mature or can re-price within that period. The difference between the
amount of interest sensitive assets and interest sensitive liabilities are
referred to as the interest sensitivity "Gap" for any given period.
There are shortcomings inherent in the interest sensitivity gap method of
analysis presented in Table 5. For example, although certain assets and
liabilities may have similar re-pricing characteristics, they may react in
different degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates.
Table 5 sets forth the dollar amount of interest sensitive assets and
interest sensitive liabilities at December 31, 1997 and the difference between
them for the maturity or re-pricing periods indicated.
D-28
<PAGE> 120
SECURITIES ACTIVITY
Securities make up a very small portion of the assets of Bank of Sumner,
and therefore a complex analysis is not warranted.
Debt securities for which Bank of Sumner has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized in the interest income
over the period to maturity.
Bank of Sumner did not hold any securities available for sale in the years
1996, 1997 or 1998 (though June 30).
Bank of Sumner's investment policy is approved by its board and stipulates
the type of securities which may be purchased by the bank, and what authority is
needed to purchase securities. In recent years as securities have matured, they
have only been replaced as needed to provide collateral for public deposits and
for government deposits (Treasury Tax and Loan Account) at Federal Reserve Bank.
DEPOSITS
The average daily amount of deposits and weighted rates paid on interest
bearing deposits is summarized for the six months ended June 30, 1998, and for
the years ended December 31, 1997 and 1996 in Table 6.
Maturities of time certificates of deposit of $100,000 or more outstanding
at June 30, 1998, and on December 31, 1997 are summarized in Table 7.
SHORT TERM BORROWINGS
For the years ended December 31, 1997 and 1996 short-term borrowings
consisted primarily of advances from the FHLB.
SIGNIFICANT FINANCIAL RATIOS
Table 8 sets forth consolidated operating ratios and compares the capital
ratios with applicable regulatory requirements for Valley Bancorporation for the
periods presented.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
Table 9 sets forth the average consolidated balance sheets of Valley
Bancorporation for the periods indicated along with an analysis of net interest
earnings for each major category of interest-earning assets and interest-bearing
liabilities, the average yield or rate paid on each category, and that net yield
on interest-earning assets.
The table also summarizes the changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The change in interest
due to volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the changes in
each.
TABLE 1
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Commercial.......................................... $39,165,243 $34,490,213 $12,228,690
Real Estate -- Construction......................... 5,391,055 5,537,692 12,913,101
Real Estate -- Residential.......................... 5,129,483 4,907,213 5,243,190
Real Estate -- Commercial........................... 26,523,654 23,078,770 25,529,947
Consumer Loans...................................... 4,217,651 3,891,159 1,511,631
80,427,086 71,905,047 57,426,559
Unearned Fees....................................... (246,406) (289,098) (144,000)
Total Loans............................... $80,180,680 $71,615,949 $57,282,559
</TABLE>
D-29
<PAGE> 121
TABLE 2
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------------------------------------------
MATURING
-----------------------------------------------------------
WITHIN ONE OVER ONE YEAR
YEAR THROUGH 5 YEARS AFTER 5 YEARS TOTAL
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Commercial................................. $ 2,124,105 $ 4,504,158 $ 52,768 $ 6,681,031
Real Estate -- Construction................ 12,494,465 2,816,922 15,311,387
Real Estate -- Residential................. 2,409,306 5,377,604 237,638 8,024,548
Real Estate -- Commercial.................. 8,319,431 19,442,486 873,333 28,635,250
Consumer Loans............................. 365,010 1,638,754 79,720 2,083,484
Fixed Rate Loans........................... 25,712,317 33,779,924 1,243,459 60,735,700
Variable Rate Loans........................ 19,444,980 -- -- 19,444,980
Total Loans...................... $45,157,297 $33,779,924 $1,243,459 $80,180,680
</TABLE>
<TABLE>
<CAPTION>
REPRICING FOR VARIABLE RATE LOANS
-----------------------------------------------------------
WITHIN ONE OVER ONE YEAR
YEAR THROUGH 5 YEARS AFTER 5 YEARS TOTAL
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Variable Rate Loans........................ $19,444,980 -- -- $19,444,980
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------
MATURING
-----------------------------------------------------------
WITHIN ONE OVER ONE YEAR
YEAR THROUGH 5 YEARS AFTER 5 YEARS TOTAL
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Commercial................................. $ 1,753,442 $ 5,572,129 $ 40,848 $ 7,366,419
Real Estate -- Construction................ 10,409,415 3,093,877 -- 13,503,292
Real Estate -- Residential................. 2,085,027 5,772,077 319,771 8,176,875
Real Estate -- Commercial.................. 5,768,516 20,102,775 109,019 25,980,310
Consumer Loans............................. 338,455 1,428,124 56,579 1,823,158
Fixed Rate Loans........................... 20,354,855 35,968,982 526,217 56,850,054
Variable Rate Loans........................ 14,765,895 -- -- 14,765,895
Total Loans...................... $35,120,750 $35,968,982 $ 526,217 $71,615,949
</TABLE>
<TABLE>
<CAPTION>
REPRICING FOR VARIABLE RATE LOANS
-----------------------------------------------------------
WITHIN ONE OVER ONE YEAR
YEAR THROUGH 5 YEARS AFTER 5 YEARS TOTAL
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Variable Rate Loans........................ $14,765,895 -- -- $14,765,895
</TABLE>
TABLE 3
NONPERFORMING LOANS AND PAST DUE LOANS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------- ------------ ------------
<S> <C> <C> <C>
Nonaccrual Loans......................................... $ -- $86,022 $136,340
Interest that would have accrued in that year had loans
remained on accrual basis.............................. -- $ 9,462 $ 14,384
</TABLE>
D-30
<PAGE> 122
TABLE 4
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Amount of loan loss reserve at beginning of period.... $ 979,196 $765,480 $704,108
Loans charged off Commercial.......................... 33,496 55,000 95,006
Real Estate -- Construction........................... -- -- --
Real Estate -- Mortgage............................... -- -- 2,549
Installment loans to individuals...................... 5,696 4,000 323
Lease Financing Recoveries Commercial................. 13,370 27,568 6,250
Real Estate -- Construction
Real Estate -- Mortgage
Installment loans to individuals...................... -- 148 --
Lease Financing Net Charge-offs....................... 25,822 31,284 91,628
---------- -------- --------
Additions charged to operations....................... 150,000 245,000 153,000
---------- -------- --------
Balance at end of period.............................. $1,103,374 $979,196 $765,480
========== ======== ========
Ratio of net charge-offs during the period to average
loans outstanding during the period................. 0.034% 0.050% 0.173%
</TABLE>
The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's reviews of individual loans.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
% LOANS IN DECEMBER 31, % LOANS IN DECEMBER 31, % LOANS IN
JUNE 30, 1998 EACH CATEGORY 1997 EACH CATEGORY 1996 EACH CATEGORY
------------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
agriculture........... -- -- --
Real Estate --
Construction.......... $ 470,270 6.72% $364,379 7.73% $364,379 22.54%
Real
Estate -- Mortgage.... -- -- --
Consumer................ -- -- --
Classified loans
(total)............... 72,600 1.39% 103,228 2.23% 103,228 4.15%
Unallocated............. 560,504 65.96% 511,589 70.41% 297,873 68.97%
Total......... $1,110,374 $979,196 $765,480
</TABLE>
TABLE 5
INTEREST SENSITIVE ASSETS AND INTEREST SENSITIVE LIABILITIES AT DECEMBER 31,
1997
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING
------------------------------------------------------
WITHIN ONE OVER ONE TO 5
YEAR YEARS OVER 5 YEARS TOTAL
---------- ------------- ------------ -------
<S> <C> <C> <C> <C>
Loans........................................ $32,602 $34,389 $487 $67,478
Investment securities........................ 565 198 458 1,221
Federal funds and interest bearing balances
with banks................................. 9,954 -- -- 9,954
------- ------- ---- -------
Total interest-earning assets...... 43,121 34,587 945 78,563
------- ------- ---- -------
Interest-Bearing Liabilities
Interest-bearing demand deposits............. 6,618 -- -- 6,618
Savings deposits............................. 27,505 -- -- 27,505
Time deposits................................ 22,618 1,880 -- 24,498
Other borrowings............................. -- 247 -- 247
------- ------- ---- -------
Total interest-bearing
liabilities...................... 56,741 2,127 0 58,868
------- ------- ---- -------
Net interest rate sensitivity gap............ $13,620 $32,460 $945 $19,785
======= ======= ==== =======
</TABLE>
D-31
<PAGE> 123
TABLE 6
AVERAGE DEPOSIT BALANCES AND WEIGHTED RATES
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING YEAR ENDING
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- ----------------------- -----------------------
AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
BALANCE RATE BALANCE RATE BALANCE RATE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits...... $17,536,135 N/A $14,361,560 N/A $11,242,202 N/A
Savings, NOW and
Money Market
accounts........... 32,751,979 2.84% 28,797,771 2.83% 21,790,130 2.70%
Time Deposits........ 30,777,286 5.49% 24,355,902 5.46% 23,494,203 5.52%
</TABLE>
TABLE 7
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
<S> <C> <C> <C>
Three months or less......................... $ 9,208,297 $6,148,374 $3,650,674
Three months through 12 months............... 3,519,784 2,523,170 3,184,839
Over 12 months............................... 101,795 205,456 315,970
----------- ---------- ----------
$12,829,876 $8,877,000 $7,151,483
</TABLE>
TABLE 8
OPERATING AND CAPITAL RATIONS
RETURN ON EQUITY AN ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING YEAR ENDING
JUNE 30, 1998 DECEMBER 31,1997 DECEMBER 31, 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Return on average assets................... 1.94% 2.17% 2.13%
Return on average equity................... 18.15% 19.73% 18.98%
Dividend Payout ratio...................... 20.13% 20.02% 20.42%
Equity to assets ratio..................... 10.70% 11.02% 11.22%
</TABLE>
COMPARISON OF CAPITAL RATIOS WITH REGULATORY REQUIREMENTS
<TABLE>
<CAPTION>
REGULATORY
REQUIREMENTS FOR
BANK OF SUMNER BANK OF SUMNER CAPITAL ADEQUACY
JUNE 30, 1998 DECEMBER 31, 1997 PURPOSES
-------------- ----------------- ----------------
<S> <C> <C> <C>
Total Capital/Risk Weighted Assets........... 11.97% 12.74% 8.00%
Tier 1 Capital/Risk Weighted Assets.......... 10.72% 11.50% 4.00%
Tier 1 Capital/Average Assets................ 9.47% 9.92% 4.00%
</TABLE>
D-32
<PAGE> 124
TABLE 9
COMPARATIVE AVERAGE BALANCES -- YIELDS AND RATES
The table below shows the average balances of the assets and liabilities of
Bank of Sumner, the interest income or expense associated with those assets and
liabilities, and the computed yield or rate based upon the interest income or
expense for each of the last two years. The table also shows the change from
year to year for each component of the net interest margin separated into the
amount generated by volume changes in the yield or rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
-------------------------------- --------------------------------
AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST RATE BALANCES INTEREST RATE
----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets
Securities Taxable..... 198,759 11,650 5.86% 196,019 11,028 5.63%
Tax Exempt............. 687,512 41,283 6.00% 931,083 55,081 5.92%
Interest-bearing DFB... 7,932,642 436,710 5.51% 6,732,921 363,214 5.39%
Total Securities....... 8,818,913 489,643 5.55% 7,860,023 429,323 5.46%
Loans.................. 63,360,933 6,523,295 10.30% 53,084,654 5,541,323 10.44%
Total interest-earning
assets............... 72,179,846 7,012,938 9.72% 60,944,677 5,970,646 9.80%
Other non-earning
Assets............... 6,549,339 5,351,678
Allowance for Loan
Loss................. (873,283) (742,609)
Total Assets....... 77,855,902 7,012,938 65,553,746 5,970,646
LIABILITIES & CAPITAL
Interest-bearing
Liabilities
Demand deposits........ 5,770,136 108,801 1.89% 4,527,256 84,610 1.87%
Savings deposits....... 23,027,635 707,598 3.07% 17,262,874 504,240 2.92%
Time deposits.......... 24,355,903 1,330,534 5.46% 23,494,203 1,295,970 5.52%
Borrowings............. 858,330 62,440 7.27% 1,109,504 76,996 6.94%
Total Interest-bearing
Liabilities.......... 54,012,004 2,209,373 4.09% 46,393,837 1,961,816 4.23%
Non-interest-bearing
Demand deposits...... 14,361,560 11,242,202
Other Liabilities...... 902,299 563,665
Total.................. 15,263,859 11,805,867
Total
Liabilities...... 69,275,863 2,209,373 58,199,704 1,961,816
Shareholders' Equity... 8,580,039 7,354,042
Total Liabilities &
Capital.......... 77,855,902 65,553,746
Net Interest
Earnings............. 4,803,565 4,008,830
Net Yield on Interest-
earning Assets....... 6.65% 6.58%
<CAPTION>
INTEREST CHANGE
--------------------------------------
AMOUNT AMOUNT
ATTRIB. TO ATTRIB. TO NET INTEREST
BALANCE BALANCE YIELD CHANGE
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
ASSETS
Interest-earning Assets
Securities Taxable..... 2,740 161 461 622
Tax Exempt............. (243,571) (14,626) 828 (13,798)
Interest-bearing DFB... 1,199,721 66,047 7,449 73,496
Total Securities....... 958,890 53,239 7,081 60,320
Loans.................. 10,276,279 1,057,989 (76,017) 981,972
Total interest-earning
assets............... 11,235,169 1,111,229 (68,937) 1,042,292
Other non-earning
Assets...............
Allowance for Loan
Loss.................
Total Assets.......
LIABILITIES & CAPITAL
Interest-bearing
Liabilities
Demand deposits........ 1,242,880 23,436 755 24,191
Savings deposits....... 5,764,761 177,141 26,217 203,358
Time deposits.......... 861,700 47,074 (12,510) 34,564
Borrowings............. (251,174) (18,272) 3,716 (14,556)
Total Interest-bearing
Liabilities.......... 7,618,167 311,623 (64,066) 247,557
Non-interest-bearing
Demand deposits......
Other Liabilities......
Total..................
Total
Liabilities......
Shareholders' Equity...
Total Liabilities &
Capital..........
Net Interest
Earnings.............
Net Yield on Interest-
earning Assets.......
</TABLE>
Nonaccruing loans have been included in the average loan balances and
interest collected prior to these loans having been placed on nonaccrual has
been included in interest income. Loan fees included in interest income were
approximately $457,382 in 1996 and $546,470 in 1997. Tax exempt investments have
not been reported on a tax-equivalent basis.
D-33
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 28B.08.600 RCW contain specific provisions
relating to indemnification of directors and officers of Washington
corporations. In general, the statute provides that (i) a corporation must
indemnify a director or officer who is wholly successful in his defense of a
proceeding to which he is a party because of his status as such, unless limited
by the articles of incorporation, and (ii) a corporation may indemnify a
director or officer if he is not wholly successful in such defense, if it is
determined as provided in the statute that the director meets a certain standard
of conduct, provided when a director is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification or advance of expenses, unless the articles of incorporation
provide otherwise, and the court may order indemnification or advance of
expenses under certain circumstances set forth in the statute. The statute
further provides that a corporation may in its articles of incorporation or
bylaws or by resolution provide indemnification in addition to that provided by
the statute, subject to certain conditions set forth in the statute.
Pursuant to Frontier's Bylaws, Frontier will indemnify the directors and
officers of Frontier for expenses, judgments, fines and amounts paid in
settlement incurred by such person in connection with any action, suit or
proceeding by reason of the fact that such person is or was a director or
officer of Frontier. No such indemnification may be given in the acts or
omissions of the person are adjudged to be in violation of law, if such person
is liable to the corporation for an unlawful distribution, or if such person
personally received a benefit to which he or she is not entitled. The Board of
Directors of Frontier may approve indemnification of any other person which
Frontier has the power to indemnify under the WBCA.
Frontier's Articles of Incorporation provide that the directors of Frontier
shall not be personally liable for monetary damages to Frontier for certain
breaches of their fiduciary duty as directors, except for liabilities that
involve intentional misconduct or a knowing violation of law by the director,
the authorization or illegal distributions or receipt of an improper personal
benefit from their actions as directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2 Agreement and Plan of Merger dated July 30, 1998, by and
between Frontier Financial Corporation, Frontier Bank,
Valley Bancorporation and Bank of Sumner (incorporated by
reference in Appendix A to the Prospectus Proxy Statement in
this Registration Statement).
5 Opinion of Keller Rohrback LLP regarding legality of
securities.
8 Form of opinion of Keller Rohrback LLP regarding federal
income tax consequences.
10.1 Employment Agreement Between Frontier Financial Corporation
Frontier Bank and
Linda A. Dryden.
10.2 Noncompetition Agreement between Frontier Financial
Corporation and Linda A. Dryde.
10.3 Noncompetition Agreement between Frontier Financial
Corporation and Vera Telling.
10.4 Noncompetition Agreement between Frontier Financial
Corporation and David Lawson.
10.5 Director's Agreement of Valley Bancorporation Directors.
10.6 Voting Agreement of Valley Bancorporation Directors.
23.1 Consent of Keller Rohrback LLP (contained in its opinion
filed as Exhibit 5).
23.2 Consent of Keller Rohrback LLP as to its tax opinion.
</TABLE>
II-1
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
23.3 Consent of Moss Adams, LLP, Frontier Financial Corporation's
independent auditors.
23.4 Consent of Dodd, Wing & Co., PC, Valley Bancorporation's
independent auditors.
23.5 Consent of Knight, Vale & Gregory, Valley Bancorporation's
independent auditors until September 18, 1997.
23.6 Consent of Columbia Financial Advisors, Inc.
24 Power of Attorney (contained in the signature page of the
Registration Statement).
99.1 Form of proxy to be mailed to shareholders of Valley
Bancorporation.
99.2 Rule 438 Consent of Michael Corliss.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(c) REPORTS, OPINIONS OR APPRAISALS
Opinion of Columbia Financial Advisors, Inc. (incorporated by reference in
Appendix C to the Prospectus/Proxy Statement.
ITEM 22. UNDERTAKINGS
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) 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 provisions referred to in Item 20
of this registration statement, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted
II-2
<PAGE> 127
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 Act and
will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of, and
included in the registration statement when it became effective.
II-3
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized in the City of Everett, State
of Washington on September 21, 1998.
FRONTIER FINANCIAL CORPORATION
By: /s/ ROBERT J. DICKSON
------------------------------------
Robert J. Dickson
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and officers of Frontier Financial
Corporation, do hereby severally constitute and appoint Robert J. Dickson our
true and lawful attorney and agent to do any and all things and acts in our
names in the capacities indicated below and to execute all instruments for us on
our names in the capacities indicated below which said Robert J. Dickson may
deem necessary or advisable to enable Frontier Financial Corporation, to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
Registration Statement on Form S-4 relating to the issuance of Frontier
Financial Corporation's Common Stock, including specifically but not limited to,
power and authority to sign for us or any of us in our names in the capacities
indicated below the Registration Statement and any and all amendments (including
post-effective amendments) thereto; and we hereby ratify and confirm all that
Robert J. Dickson shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
- --------------------------------------------------- --------------------------------- ---------------
<C> <S> <C>
/s/ JAMES F. FELICETTY Secretary and Treasurer August 19, 1998
- --------------------------------------------------- (Principal Financial and
James F. Felicetty Accounting Officer)
/s/ GEORGE E. BARBER Director August 19, 1998
- ---------------------------------------------------
George E. Barber
/s/ LUCY DE YOUNG Director August 19, 1998
- ---------------------------------------------------
Lucy DeYoung
/s/ DAVID A. DUJARDIN Director August 19, 1998
- ---------------------------------------------------
David A. Dujardin
/s/ EDWARD D. HANSEN Director August 19, 1998
- ---------------------------------------------------
Edward D. Hansen
/s/ WILLIAM H. LUCAS Director August 19, 1998
- ---------------------------------------------------
William H. Lucas
/s/ JAMES H. MULLIGAN Director August 19, 1998
- ---------------------------------------------------
James H. Mulligan
</TABLE>
II-4
<PAGE> 129
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. DON REGAN Director August 19, 1998
- ---------------------------------------------------
J. Don Regan
/s/ ROGER L. RICE, D.D.S Director August 19, 1998
- ---------------------------------------------------
Roger L. Rice, D.D.S
/s/ ROY A. ROBINSON Director August 19, 1998
- ---------------------------------------------------
Roy A. Robinson
/s/ WILLIAM J. ROBINSON Director August 19, 1998
- ---------------------------------------------------
William J. Robinson
/s/ EDWARD C. RUBATINO Director August 19, 1998
- ---------------------------------------------------
Edward C. Rubatino
/s/ DARRELL J. STORKSON Director August 19, 1998
- ---------------------------------------------------
Darrell J. Storkson
</TABLE>
II-5
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2 Agreement and Plan of Merger dated July 30, 1998, by and
between Frontier Financial Corporation, Frontier Bank,
Valley Bancorporation and Bank of Sumner (incorporated by
reference in Appendix A to the Prospectus Proxy Statement in
this Registration Statement).
5 Opinion of Keller Rohrback LLP regarding legality of
securities.
8 Form of opinion of Keller Rohrback LLP regarding federal
income tax consequences.
10.1 Employment Agreement Between Frontier Financial Corporation
Frontier Bank and Linda A. Dryden.
10.2 Noncompetition Agreement between Frontier Financial
Corporation and Linda A. Dryde.
10.3 Noncompetition Agreement between Frontier Financial
Corporation and Vera Telling.
10.4 Noncompetition Agreement between Frontier Financial
Corporation and David Lawson.
10.5 Director's Agreement of Valley Bancorporation Directors.
10.6 Voting Agreement of Valley Bancorporation Directors.
23.1 Consent of Keller Rohrback LLP (contained in its opinion
filed as Exhibit 5).
23.2 Consent of Keller Rohrback LLP as to its tax opinion.
23.3 Consent of Moss Adams, LLP, Frontier Financial Corporation's
independent auditors.
23.4 Consent of Dodd, Wing & Co., PC, Valley Bancorporation's
independent auditors.
23.5 Consent of Knight, Vale & Gregory, Valley Bancorporation's
independent auditors until September 18, 1997.
23.6 Consent of Columbia Financial Advisors, Inc.
24 Power of Attorney (contained in the signature page of the
Registration Statement).
99.1 Form of proxy to be mailed to shareholders of Valley
Bancorporation.
99.2 Rule 438 Consent of Michael Corliss.
</TABLE>
<PAGE> 1
EXHIBIT 5
[LAW OFFICES OF KELLER ROHRBACK L.L.P. LETTERHEAD]
- --------------------------------------------------------------------------------
__________________, 1998
To the Board of Directors
Frontier Financial Corporation
332 S.W. Everett Mall Way
Everett, Washington 98204
Re: Frontier Financial Corporation Registration Statement of Form S-4
Ladies and Gentlemen:
We are acting as counsel for Frontier Financial Corporation, a
Washington bank holding company ("Frontier"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of up to
970,473 shares of common stock of Frontier, no par value per share (the
"Shares"), to be issued in accordance with the Agreement and Plan of Mergers
dated June 30, 1998, between Frontier, Frontier Bank, Valley Bancorporation,
Inc., and the Bank of Sumner (the "Merger Agreement"). A registraton statement
on Form S-4 (the "Registration Statement") is being filed under the Act with
respect to the offering of the Shares pursuant to the Merger Agreement.
In connection with the offering of the Shares, we have again examined:
(i) the Merger Agreement; (ii) the Registration Statement; and (iii) such other
documents as we have deemed necessary to form the opinion expressed below. As to
various questions of fact material to such opinion, where relevant facts were
not independently established, we have relied upon statements of officers of
Frontier, or representations and warranties of Frontier contained in the Merger
Agreement.
Based and relying solely upon the foregoing, it is our opinion that the
Shares, upon issuance pursuant to the Merger Agreement after the Registration
Statement has become effective under the Act, will be validly issued under the
laws of the State of Washington and will be fully paid and not assessable.
Consent is hereby given to the filing of this opinion as an exhibit to
the Registration Statement and to the legal reference to this firm under the
caption "Certain Legal Matters" as having passed upon the validity of the
Shares. In giving this consent, we do not admit that we are experts within the
meaning of the Act.
Very truly yours,
KELLER ROHRBACK L.L.P.
<PAGE> 1
EXHIBIT 8
[LAW OFFICES OF KELLER ROHRBACK L.L.P. LETTERHEAD]
- --------------------------------------------------------------------------------
____________, 1998
Frontier Financial Corporation Valley Bancorporation
332 SW Everett Mall Way 801 Alder Avenue
Everett, WA 98204 Sumner, WA 98390
Re: HOLDING COMPANY MERGER/TAX CONSEQUENCES
Ladies and Gentlemen:
This letter responds to your request for our opinion as to certain of
the federal income tax consequences of the proposed merger (the "Merger") of
Valley Bancorporation ("Valley") into Frontier Financial Corporation
("Frontier").
We have acted as legal counsel to Frontier in connection with the
Merger. For the purpose of rendering this opinion, we have examined and relied
upon originals, certified copies, or copies otherwise identified to our
satisfaction as being true copies of the originals of the following documents,
including all exhibits and schedules attached to them:
(a) The Agreement and Plan of Mergers, dated as of July 30, 1998,
between Frontier, Frontier Bank, Valley and Bank of Sumner (the
"Merger Agreement").
(b) Form S-4 Registration Statement of Frontier filed with the
Securities and Exchange Commission on September ___, 1998.
(c) The Proxy Statement of Valley (included as part of the
Registration Statement); and
(d) Such other documents, instruments, records and information
pertaining to the Merger as we have deemed necessary for rendering
our opinion.
We have assumed, without independent investigation or review, the
accuracy and completeness of the facts and representations and warranties
contained in those documents or otherwise made known to us, and that the Merger
will be effected in accordance with the terms of the Merger Agreement.
In connection with the Merger and pursuant to the Merger Agreement, each
share of Valley voting common stock will be exchanged for that number of shares
of Frontier voting common stock based on the exchange rate established in the
Merger Agreement. No fractional shares will be involved. Valley shareholders who
perfect their dissenter's rights under state law will be paid the cash value for
their Valley shares. Such payments will be made by Valley without reimbursement
by Frontier. Upon the consummation of the Merger, Frontier will continue the
historic business of Valley.
<PAGE> 2
_______________, 1998 KELLER ROHRBACK L.L.P.
Page 2
Based upon our review of the facts described above and our analysis of
the law, and subject to the qualifications and limitations set forth herein, and
the completion of the transactions described in the matter contemplated, it is
our opinion that:
1. The merger of Valley into Frontier solely for Frontier voting common
stock, as described above, will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal Revenue Code, as
amended (the "Code"). Valley and Frontier will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Valley shareholders upon the
receipt of Frontier voting common stock solely in exchange for their
shares of Valley stock, pursuant to Section 354(a)(1) of the Code.
3. The basis of the shares of Frontier voting common stock received by
Valley shareholders will be the same as the basis of the Valley
stock surrendered in exchange therefor, pursuant to Section
358(a)(1) of the Code.
4. The holding period of the shares of Frontier voting common stock
received by Valley shareholders will include the holding period
during which the Valley stock surrendered in exchange therefor was
held, provided that the shares of Valley stock were held as a
capital asset in the hands of the exchanging shareholders on the
date of the exchange, pursuant to Section 1223(1) of the Code.
5. Where cash is received by any dissenting shareholder of Valley in
exchange for the surrender of all of such shareholder's Valley
stock, the cash will be treated as received by the shareholder as a
distribution in redemption of his or her Valley stock, subject to
the provisions and limitations of Section 302 of the Code.
6. A Valley shareholder who receives cash in lieu of a fractional share
of Frontier voting common stock will recognize gain or loss equal to
the difference between the cash received and the shareholder's basis
in that fractional share, and the gain or loss will be capital gain
or loss if the fractional share would have been a capital asset in
the hands of the shareholder.
7. No gain or loss will be recognized by Valley upon the transfer of
its assets to Frontier, pursuant to Sections 361 and 357(a) of the
Code.
8. The basis of the assets of Valley acquired by Frontier will be the
same as the basis of Valley in the assets immediately before the
Merger, pursuant to Section 362(b) of the Code.
9. The holding period of the assets acquired by Frontier will include
the period such assets were held by Valley, pursuant to Section
1223(2) of the Code.
<PAGE> 3
_______________, 1998 KELLER ROHRBACK L.L.P.
Page 3
10. No gain or loss will be recognized by Frontier upon the receipt by
Frontier of the assets of Valley, as described above.
We have assumed, with your consent, that the Merger will be completed in
the manner set forth in the Merger Agreement and Registration Statement without
waiver or breach of any material provision thereof, and all of the
representations, warranties, statements and assumptions upon which we relied are
true and accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
Our opinion represents only our best legal judgment as to the probable
federal income tax consequences of the transaction described, based upon
existing law. Our opinion is not intended to be a conclusive statement as to all
of the tax consequences of the transaction and is expressly limited to the
matters addressed. Further, our opinion is not binding upon the Internal Revenue
Service (the "IRS") or any court and has no official status of any kind, and no
private ruling regarding the matters discussed has been or will be requested
from the IRS. The IRS has ruled in a number of private rulings that transactions
substantially identical to the Merger result in tax consequences consistent with
those described in this opinion. Although such rulings do not constitute
authority on which we can rely in expressing our opinion, such rulings generally
do reflect the position of the IRS. Each shareholder, however, is urged to
consult with his or her own tax advisor with respect to their individual tax
situation. Our opinion is intended solely for the benefit of Frontier, the
shareholders of Frontier and the shareholders of Valley, and may not be relied
upon for any other purpose or by any other person or entity or made available to
any other person or entity without our prior written consent.
Very truly yours,
KELLER ROHRBACK, LLP
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), signed this 31ST day of July,
1998, between FRONTIER FINANCIAL CORPORATION ("FFC"), FRONTIER BANK ("Frontier")
and LINDA A. DRYDEN ("Executive") takes effect on the consummation of the
Mergers ("Effective Date").
RECITALS
A. FFC and Frontier Bank have entered into a Plan and Agreement of Mergers
("Plan") with Valley Bancorporation ("Valley") and the Bank of Sumner
("Sumner"), under which Valley Bancorporation will be merged into FFC,
and Sumner will be merged into Frontier (collectively "Mergers").
B. FFC/Frontier wishes to retain Executive, who is presently the President
and Chief Executive Officer of Sumner, to serve as Senior Vice President
and Manager of the Pierce County Division of Frontier Bank. Executive
wishes to accept employment in that capacity with Frontier.
C. This Agreement sets forth the terms and conditions of Executive's
employment with Frontier.
AGREEMENT
The parties agree as follows.
1. Employment. Upon the Effective Date, Frontier shall employ Executive,
and Executive agrees to be employed, as Senior Vice President and
Manager of the Pierce County Division of Frontier Bank. Executive will
also serve as a member of the Executive Management Team of Frontier.
2. Term. Executive's employment shall continue for a period of one year,
beginning on the Effective Date and ending one years thereafter (the
"Term"). If the Plan terminates before closing of the Mergers, this
Agreement will not become effective and will be void. Section 6 hereof
entitled "Special Bonus" shall survive the termination of this
Agreement.
3. Duties. Executive will faithfully and diligently perform the duties
assigned to Executive from time to time by Frontier's Board of Directors
or by the President or Chief Executive Officer of Frontier. Executive
will use her best efforts to perform her duties and will devote full
time and attention to these duties during working hours. These duties
will include, without limitation, the following:
(a) Pierce County Office Performance. Executive will be responsible for
all aspects of the performance of the Pierce County Offices of
Frontier Bank, including, but not limited to, directing that daily
operational and managerial matters are performed in a manner
consistent with Frontier's policies. These duties will also
-1-
<PAGE> 2
include formulating and implementing Frontier's expansion
strategies in the Pierce County area and performing all other tasks
in connection with Frontier's management and affairs that are
normal and customary to Executive's position.
(b) Development and Preservation of Business. Executive will be
responsible for the development and preservation of banking
relationships and other business development efforts (including
appropriate civic and community activities) in the Sumner/Pierce
County market area.
(c) Report to President. Executive will report directly to the
President of Frontier. Frontier's Board of Directors may, from time
to time, modify Executive's title or add to, delete from, or modify
Executive's performance responsibilities to accommodate management
succession, as well as any other management objectives of Frontier.
Executive will assume any additional positions, duties and
responsibilities as may reasonably be requested of her with or
without additional compensation, as appropriate and consistent with
Sections 3(a) and (b) of this Agreement.
4. Salary. Executive will receive an annual salary of $100,000, to be paid
in accordance with Frontier's regular payroll schedule.
5. Incentive Compensation. As additional incentive to Executive, Executive
shall receive an incentive bonus at the expiration of the term, if the
1999 earnings of the current branches of the Bank of Sumner ("Sumner
Earnings"), after adjustment for costs of the Merger, are: (i) 100 to
115 percent of the 1998 Sumner Earnings, then Executive will receive 3
percent of the pretax earnings of said branches; (ii) 115.1 to 120
percent of the 1998 Sumner Earnings, then the Executive will receive 5
percent of the pretax earnings for said branches; and (iii) 120.1
percent or greater of the 1998 Sumner Earnings, then Executive will
receive 10 percent of the pretax earnings for said branches. The
foregoing notwithstanding, the incentive bonus shall not exceed 50
percent of Executive's annual salary. In calculating the 1999 Sumner
Earnings, overhead for Sumner shall be calculated by dividing the
average Sumner assets for 1999 by the average Frontier Bank assets for
1999, multiplied by Frontier Bank's 1999 overhead.
6. Special Bonus. In the event Executive remains in the employ of FFC or
any of its subsidiaries for two years from the Effective Date, or if
Executive is terminated without Cause (by FFC/Frontier) or for Good
Reason (by Executive) during such two-year period, Executive shall
receive a special bonus of 1,000 shares of common stock of FFC. The
1,000 shares shall be as of the Effective Date and shall be adjusted
during such two-year period to reflect any change in the outstanding
shares through merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, split-up, splitoff, spinoff, combination of
shares, exchange of shares, or other like change in the capital
structure of FFC.
7. Income Deferral and Benefits. Subject to eligibility requirements and in
accordance with and subject to any policies adopted by Frontier's Board
of Directors with respect to any benefit plans or programs, Executive
will be entitled to receive benefits (including stock options and
deferred compensation, if applicable) similar to those offered to other
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<PAGE> 3
executive officers of Frontier and its subsidiaries with positions and
duties comparable to those of Executive.
8 Business Expenses. Frontier will reimburse Executive for ordinary and
necessary expenses (including, but not limited to, travel, entertainment
and similar expenses) incurred in performing and promoting Frontier's
business. Executive will present from time to time itemized accounts of
these expenses, subject to any limitations of Frontier's policies or the
rules and regulations of the Internal Revenue Service.
9. Termination.
(a) Termination by Frontier for Cause. If, before the end of the Term,
Frontier terminates Executive's employment for Cause or Executive
terminates her employment without Good Reason (defined below),
Frontier will pay Executive the salary earned and expenses
reimbursable under this Agreement incurred through the date of
Executive's termination. Executive will have no right to receive
compensation or other benefits (including the Special Bonus) for
any period after termination under this Section 9(a).
(b) Other Termination by Frontier. If, before the end of the Term,
Frontier terminates Executive's employment without cause or
Executive terminates her employment for Good Reason, Frontier will
pay Executive for the remainder of the Term the salary and other
compensation and benefits to which Executive would have been
entitled to under this Agreement if her employment had not
terminated.
(c) Death or Disability. This Agreement terminates (i) if Executive
dies or (ii) if Executive is unable to perform her duties and
obligations under this Agreement for a period of 90 days as a
result of a physical or mental disability arising at any time
during the term of this Agreement, unless with reasonable
accommodation Executive could continue to perform her duties under
this Agreement and making these accommodations would not impose any
undue hardship on Frontier to expend any funds. If termination
occurs under this Section 9(c), Executive or her estate will be
entitled to receive only the compensation and benefits earned and
expenses reimbursable through the date this Agreement terminated.
(d) Return of Frontier Property. If and when Executive ceases, for any
reason, to be employed by Frontier, Executive must return to
Frontier all keys, pass cards, identification cards and any other
property of Frontier. At the same time, Executive also must return
to Frontier all originals and copies (whether in hard copy,
electronic or other form) of any documents, drawings, notes,
memoranda, designs, devices, diskettes, tapes, manuals, and
specifications which constitute proprietary information or material
of Frontier. The obligations in this paragraph include the return
of documents and other materials which may be in Executive's desk
at work, in Executive's car or place of residence, or in any other
location under Executive's control.
10. Definition of "Cause". "Cause" means any one or more of the following:
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<PAGE> 4
(a) Willful misfeasance or gross negligence in the performance of
Executive's duties;
(b) Conviction of a crime in connection with her duties;
(c) Conduct demonstrably and significantly harmful to Frontier, as
reasonably determined by Frontier's Board of Directors on the
advice of legal counsel; or
(d) Death or Disability as provided in Section 9(c) hereof.
11. Definition of "Good Reason". "Good Reason" means any one or more of the
following:
(a) Reduction, without Executive's consent, of Executive's salary or
elimination of any compensation or benefit plan benefiting
Executive, unless the reduction or elimination is generally
applicable to substantially all similarly situated Frontier
employees (or employees of a successor or controlling entity of
Frontier) formerly benefited;
(b) The assignment to Executive without her consent of any authority or
duties materially inconsistent with Executive's position as of the
date of this Agreement; or
(c) A relocation or transfer of Executive's principal place of
employment that would require Executive to commute on a regular
basis more than 30 miles each way from her current business office
at Frontier on the date of this Agreement, unless Executive
consents to the relocation or transfer.
12. Confidentiality. Executive will not, after signing this Agreement,
including during and after its Term, use for her own purposes or
disclose to any other person or entity any confidential information
concerning Frontier or its business operations or customers, unless (i)
Frontier consents to the use or disclosure of their respective
confidential information, (ii) the use or disclosure is consistent with
Executive's duties under this Agreement or (iii) disclosure is required
by law or court order.
13. Enforcement.
(a) Frontier and Executive stipulate that, in light of all of the facts
and circumstances of the relationship between Executive and
FFC/Frontier, the agreements referred to in Section 12 are fair and
reasonably necessary for the protection of Frontier's confidential
information, goodwill and other protectable interests. If a court
of competent jurisdiction should decline to enforce any of those
covenants and agreements, Executive and FFC/Frontier request the
court to reform these provisions to restrict Executive's use of
confidential information and Executive's ability to compete with
FFC or its subsidiaries to the maximum extent, in time, scope of
activities and geography, the court finds enforceable.
(b) Executive acknowledges that FFC/Frontier will suffer immediate and
irreparable harm that will not be compensable by damages alone, if
Executive repudiates or breaches any of the provisions of Section
12 or threatens or attempts to do so. For
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<PAGE> 5
this reason, under these circumstances, FFC/Frontier, in addition
to and without limitation of any other rights, remedies or damages
available to it at law or in equity, will be entitled to obtain
temporary, preliminary, and permanent injunctions in order to
prevent or restrain the breach, and FFC/Frontier will not be
required to post a bond as a condition for the granting of this
relief.
14. Adequate Consideration. Executive specifically acknowledges the receipt
of adequate consideration for the covenants contained in Section 12 and
that Frontier is entitled to require her to comply with this Section,
which shall survive termination of this Agreement.
15. Arbitration.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with,
or relating to, this Agreement or any breach or alleged breach of
this Agreement, to arbitration under the American Arbitration
Association's rules then in effect (or under any other form of
arbitration mutually acceptable to the parties). A single
arbitrator agreed on by the parties will conduct the arbitration.
If the parties cannot agree on a single arbitrator, each party must
select one arbitrator and those two arbitrators will select a third
arbitrator. This third arbitrator will hear the dispute. The
arbitrator's decision is final (except as otherwise specifically
provided by law) and binds the parties, and either party may
request any court having jurisdiction to enter a judgment and to
enforce the arbitrator's decision. The arbitrator will provide the
parties with a written decision naming the substantially prevailing
party in the action. This prevailing party is entitled to
reimbursement from the other party for its costs and expenses,
including reasonable attorneys' fees.
(b) Governing Law. All proceedings will be held at a place designated
by the arbitrator in Snohomish County, Washington. The arbitrator,
in rendering a decision as to any state law claims, will apply
Washington law.
(c) Exception to Arbitration. Notwithstanding the above, if Executive
violates Section 12, FFC/Frontier will have the right to initiate
the court proceedings described in Section 13(b), in lieu of an
arbitration proceeding under this Section 15. Frontier may initiate
these proceedings wherever appropriate within the state of
Washington; but Executive will consent to venue and jurisdiction in
Snohomish County, Washington.
16. Miscellaneous Provisions.
(a) Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those
terms in the Plan.
(b) Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to its subject matter and merges
with and supersedes all prior discussion, agreements, commitments,
or understandings of every kind and nature relating thereto,
whether oral or written, between Executive and FFC/Frontier.
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<PAGE> 6
Neither party shall be bound by any term or condition other than as
is expressly set forth herein. Executive specifically waives the
terms of and all of her rights under all employment,
change-in-control, severance, salary continuation, or similar
agreements, whether written or oral, she has previously entered
into with Valley Bancorporation or any of its subsidiaries or
affiliates.
(c) Binding Effect. This Agreement will bind and inure to the benefit
of Frontier's and Executive's heirs, legal representatives,
successors and assigns.
(d) Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to
be due under it, this party will be entitled to reimbursement from
the other party for any and all of its reasonable out-of-pocket
expenses and costs including, without limitation, reasonable
attorneys' fees and costs incurred in connection with the
enforcement or collection.
(e) Waiver. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A
party's waiver of the other party's breach of any provision of this
Agreement will not operate as a waiver of any other breach by the
breaching party.
(f) Counsel Review. Executive represents and agrees that she fully
understands her right to discuss all aspects of this Agreement with
her private attorney, that to the extent she desired, she availed
herself of this right, that she has carefully read and fully
understands all of the provisions of the Agreement, that she is
competent to execute this Agreement that her decision to execute
this Agreement has not been obtained by any duress and that she
freely and voluntarily enters into this Agreement, and that she has
read this document in its entirety and fully understands the
meaning, intent, and consequences of this Agreement.
(g) Assignment. The services to be rendered by Executive under this
Agreement are unique and personal. Accordingly, Executive may not
assign any of her rights or duties under this Agreement.
(h) Amendment. This Agreement may be modified only through a written
instrument signed by both parties.
(i) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(j) Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent
that certain matters may be governed by federal law. Except as
otherwise provided in Section 15(c), the parties must bring any
legal proceeding arising out of this Agreement in Snohomish County,
Washington, and the parties will submit to jurisdiction in that
county.
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<PAGE> 7
(k) Parachute Payment. In the event the aggregate payments or benefits
to be made or afforded to Executive under this Agreement, together
with any other payments or benefits received or to be received by
Executive in connection with the Mergers (including the Deferred
Compensation Agreement) would be deemed to include an "excess
parachute payment" under Section 280G of the Internal Revenue Code
of 1986, as amended, then the payments or benefits to be provided
under this Agreement, or any other applicable agreements, shall be
reduced to the extent necessary to avoid treatment as an excess
parachute payment.
(l) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of
which taken together will constitute one and the same document.
Signed: ____________________, 1998:
FRONTIER FINANCIAL CORPORATION
and FRONTIER BANK
By: /s/ Robert J. Dickson
-------------------------------------
Robert J. Dickson, President and CEO
/s/ Linda A. Dryden
----------------------------------------
LINDA A. DRYDEN
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<PAGE> 1
EXHIBIT 10.2
COVENANT NOT TO COMPETE
LINDA A. DRYDEN
THIS AGREEMENT is made by and between FRONTIER FINANCIAL CORPORATION and
FRONTIER BANK (hereinafter referred to jointly as "Frontier") and LINDA A.
DRYDEN (hereinafter referred to as "Executive"), and takes effect on the
consummation of the Mergers ("Effective Date").
WHEREAS, Frontier has entered into a Plan and Agreement of Mergers
("Plan") with Valley Bancorporation and the Bank of Sumner (hereinafter referred
to jointly as "Valley"); and
WHEREAS, Executive is the President and Chief Executive Officer of
Valley, and Frontier would not be willing to enter into the Plan with Valley if
it were not that Executive has agreed to enter into this Covenant Not to
Compete; NOW, THEREFORE,
IT IS HEREBY AGREED AS FOLLOWS:
1. Non-Competition. In consideration of immediate payment to Executive
of $340,000 ($365,000 if Mergers are consummated after December 31, 1998),
Executive agrees that for a two-year period from the date she ceases employment
with Frontier, or two years from the Effective Date, whichever last occurs (the
"Covenant Period"):
a. She will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including, without
limitation, as a shareholder, member, partner, director, officer, manager,
investor, organizer, "founder," employee, consultant, or agent, within a
thirty-mile radius of the current Main Office of the Bank of Sumner (the
"Restricted Area"). The parties specifically agree that the time and distance of
the non-compete provision are reasonable and that this non-compete provision
covers this radius for the reason that Valley has drawn customers from that wide
an area. "Competing Business" means any financial services corporation or trust
company that competes with Frontier or any of its subsidiaries. The term
"Competing Business" includes, without limitation, any start-up or other
financial institution or trust company in formation.
b. She will not directly or indirectly encourage, solicit or attempt
to solicit (i) any employees of Frontier or any of its subsidiaries employed in
Pierce County, to leave their employment or (ii) any customers of any Pierce
County office of Frontier or any of its subsidiaries to remove their business
from Frontier or any of its subsidiaries, or to participate in any manner in a
Competing Business. Solicitation prohibited under this Section includes
solicitation by any means, including, without limitation, meetings, letters or
other mailings, electronic communications of any kind, and internet
communications.
2. Investment in Competing Business. During the Covenant Period,
Executive will not acquire an interest exceeding two percent of the total equity
interest in any Competing Business.
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<PAGE> 2
3. Employment Outside Restricted Area. Nothing in this Agreement
prevents Executive from accepting employment outside the Restricted Area.
4. Enforcement.
a. Frontier and Executive stipulate that, in light of all of the
facts and circumstances of the relationship between Executive and Frontier, the
agreements referred to in Sections 1 and 2 (including without limitation their
scope, duration and geographic extent) are fair and reasonably necessary for the
protection of Frontier's confidential information, goodwill and other
protectable interests. If a court of competent jurisdiction should decline to
enforce any of those covenants and agreements, Executive and Frontier request
the court to reform these provisions to restrict Executive's use of confidential
information and Executive's ability to compete with Frontier or its subsidiaries
to the maximum extent, in time, scope of activities and geography, the court
finds enforceable.
b. Executive acknowledges that Frontier will suffer immediate and
irreparable harm that will not be compensable by damages alone, if Executive
repudiates or breaches any of the provisions of Sections 1 and 2 or threatens or
attempts to do so. For this reason, under these circumstances, Frontier, in
addition to and without limitation of any other rights, remedies or damages
available to it at law or in equity, will be entitled to obtain temporary,
preliminary, and permanent injunctions in order to prevent or restrain the
breach, and Frontier will not be required to post a bond as a condition for the
granting of this relief.
5. Adequate Consideration. Executive specifically acknowledges the
receipt of adequate consideration for the covenants contained in Sections 1 and
2 and that Frontier is entitled to require her to comply with these Sections.
These Sections will survive termination of this Agreement. Executive represents
that if her employment is terminated, whether voluntarily or involuntarily,
Executive has experience and capabilities sufficient to enable Executive to
obtain employment in areas which do not violate this Agreement and that
Frontier's enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood.
6. Arbitration.
a. Arbitration. At either party's request, the parties must submit
any dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this Agreement,
to arbitration under the American Arbitration Association's rules then in effect
(or under any other form of arbitration mutually acceptable to the parties). A
single arbitrator agreed on by the parties will conduct the arbitration. If the
parties cannot agree on a single arbitrator, each party must select one
arbitrator and those two arbitrators will select a third arbitrator. This third
arbitrator will hear the dispute. The arbitrator's decision is final (except as
otherwise specifically provided by law) and binds the parties, and either party
may request any court having jurisdiction to enter a judgment and to enforce the
arbitrator's decision. The arbitrator will provide the parties with a written
decision naming the substantially prevailing party in the action. This
prevailing party is entitled to reimbursement from the other party for its costs
and expenses, including reasonable attorneys' fees.
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<PAGE> 3
b. Governing Law. All proceedings will be held at a place designated
by the arbitrator in Snohomish County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
c. Exception to Arbitration. Notwithstanding the above, if Executive
violates Section 1 or 2, Frontier will have the right to initiate the court
proceedings described in Section 4.b, in lieu of an arbitration proceeding under
this Section 6. Frontier may initiate these proceedings wherever appropriate
within the state of Washington; but Executive will consent to venue and
jurisdiction in Snohomish County, Washington.
7. Miscellaneous Provisions.
a. Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms in the
Plan.
b. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to its subject matter and merges with and
supersedes all prior discussion, agreements, commitments, or understandings of
every kind and nature relating thereto, whether oral or written, between
Executive and Frontier. Neither party shall be bound by any term or condition
other than as is expressly set forth herein. Executive specifically waives the
terms of and all of her rights under all employment, change-in-control,
severance, salary continuation, or similar agreements, whether written or oral,
she has previously entered into with Valley Bancorporation or any of its
subsidiaries or affiliates.
c. Binding Effect. This Agreement will bind and inure to the benefit
of Frontier's and Executive's heirs, legal representatives, successors and
assigns.
d. Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due under
it, this party will be entitled to reimbursement from the other party for any
and all of its reasonable out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection with the
enforcement or collection.
e. Waiver. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not operate as
a waiver of any other breach by the breaching party.
f. Counsel Review. Executive represents and agrees that she fully
understands her right to discuss all aspects of this Agreement with her private
attorney, that to the extent she desired, she availed herself of this right,
that she has carefully read and fully understands all of the provisions of the
Agreement, that she is competent to execute this Agreement that her decision to
execute this Agreement has not been obtained by any duress and that she freely
and voluntarily enters into this Agreement, and that she has read this document
in its entirety and fully understands the meaning, intent, and consequences of
this Agreement.
g. Amendment. This Agreement may be modified only through a written
instrument signed by both parties.
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<PAGE> 4
h. Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other provisions of
this Agreement.
i. Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that certain
matters may be governed by federal law. Except as otherwise provided in Section
6.c, the parties must bring any legal proceeding arising out of this Agreement
in Snohomish County, Washington, and the parties will submit to jurisdiction in
that county.
j. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which taken
together will constitute one and the same document.
Signed: ____________________, 1998:
FRONTIER FINANCIAL CORPORATION
and FRONTIER BANK
By: /s/ Robert J. Dickson
--------------------------------------
Robert J. Dickson, President and CEO
/s/ LINDA A. DRYDEN
-----------------------------------------
LINDA A. DRYDEN
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<PAGE> 1
EXHIBIT 10.3
COVENANT NOT TO COMPETE
VERA TELLING
THIS AGREEMENT is made by and between FRONTIER FINANCIAL CORPORATION and
FRONTIER BANK (hereinafter referred to jointly as "Frontier") and VERA TELLING
(hereinafter referred to as "Executive"), and takes effect on the consummation
of the Mergers ("Effective Date").
WHEREAS, Frontier has entered into a Plan and Agreement of Mergers
("Plan") with Valley Bancorporation and the Bank of Sumner (hereinafter referred
to jointly as "Valley", unless otherwise specified); and
WHEREAS, Executive is the Executive Vice President and Chief Loan
Officer of Bank of Sumner, and Frontier would not be willing to enter into the
Plan with Valley if it were not that Executive has agreed to enter into this
Covenant Not to Compete; NOW, THEREFORE,
IT IS HEREBY AGREED AS FOLLOWS:
1. Non-Competition. In consideration of immediate payment to Executive
of $140,000 ($150,000 if the Mergers are consummated after December 31, 1998),
Executive agrees that for a 18-month period from the date she ceases employment
with Frontier, or 18 months from the Effective Date, whichever last occurs (the
"Covenant Period"):
a. She will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including, without
limitation, as a shareholder, member, partner, director, officer, manager,
investor, organizer, "founder," employee, consultant, or agent, within a
thirty-mile radius of the current Main Office of the Bank of Sumner (the
"Restricted Area"). The parties specifically agree that the time and distance of
the non-compete provision are reasonable and that this non-compete provision
covers this radius for the reason that Valley has drawn customers from that wide
an area. "Competing Business" means any financial services corporation or trust
company that competes with Frontier or any of its subsidiaries. The term
"Competing Business" includes, without limitation, any start-up or other
financial institution or trust company in formation.
b. She will not directly or indirectly encourage, solicit or attempt
to solicit (i) any employees of Frontier or any of its subsidiaries employed in
Pierce County, to leave their employment or (ii) any customers of any Pierce
County office of Frontier or any of its subsidiaries to remove their business
from Frontier or any of its subsidiaries, or to participate in any manner in a
Competing Business. Solicitation prohibited under this Section includes
solicitation by any means, including, without limitation, meetings, letters or
other mailings, electronic communications of any kind, and internet
communications.
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<PAGE> 2
2. Investment in Competing Business. During the Covenant Period,
Executive will not acquire an interest exceeding two percent of the total equity
interest in any Competing Business.
3. Employment Outside Restricted Area. Nothing in this Agreement
prevents Executive from accepting employment outside the Restricted Area.
4. Enforcement.
a. Frontier and Executive stipulate that, in light of all of the
facts and circumstances of the relationship between Executive and Frontier, the
agreements referred to in Sections 1 and 2 (including without limitation their
scope, duration and geographic extent) are fair and reasonably necessary for the
protection of Frontier's confidential information, goodwill and other
protectable interests. If a court of competent jurisdiction should decline to
enforce any of those covenants and agreements, Executive and Frontier request
the court to reform these provisions to restrict Executive's use of confidential
information and Executive's ability to compete with Frontier or its subsidiaries
to the maximum extent, in time, scope of activities and geography, the court
finds enforceable.
b. Executive acknowledges that Frontier will suffer immediate and
irreparable harm that will not be compensable by damages alone, if Executive
repudiates or breaches any of the provisions of Sections 1 and 2 or threatens or
attempts to do so. For this reason, under these circumstances, Frontier, in
addition to and without limitation of any other rights, remedies or damages
available to it at law or in equity, will be entitled to obtain temporary,
preliminary, and permanent injunctions in order to prevent or restrain the
breach, and Frontier will not be required to post a bond as a condition for the
granting of this relief.
5. Adequate Consideration. Executive specifically acknowledges the
receipt of adequate consideration for the covenants contained in Sections 1 and
2 and that Frontier is entitled to require her to comply with these Sections.
These Sections will survive termination of this Agreement. Executive represents
that if her employment is terminated, whether voluntarily or involuntarily,
Executive has experience and capabilities sufficient to enable Executive to
obtain employment in areas which do not violate this Agreement and that
Frontier's enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood.
6. Arbitration.
a. Arbitration. At either party's request, the parties must submit
any dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this Agreement,
to arbitration under the American Arbitration Association's rules then in effect
(or under any other form of arbitration mutually acceptable to the parties). A
single arbitrator agreed on by the parties will conduct the arbitration. If the
parties cannot agree on a single arbitrator, each party must select one
arbitrator and those two arbitrators will select a third arbitrator. This third
arbitrator will hear the dispute. The arbitrator's decision is final (except as
otherwise specifically provided by law) and binds the parties, and either party
may request any court having jurisdiction to enter a judgment and to enforce the
arbitrator's decision. The arbitrator will provide the parties with a written
decision naming the substantially prevailing party in the action. This
prevailing party is entitled to reimbursement from the other party for its costs
and expenses, including reasonable attorneys' fees.
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<PAGE> 3
b. Governing Law. All proceedings will be held at a place designated
by the arbitrator in Snohomish County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
c. Exception to Arbitration. Notwithstanding the above, if Executive
violates Section 1 or 2, Frontier will have the right to initiate the court
proceedings described in Section 4.b, in lieu of an arbitration proceeding under
this Section 6. Frontier may initiate these proceedings wherever appropriate
within the state of Washington; but Executive will consent to venue and
jurisdiction in Snohomish County, Washington.
7. Miscellaneous Provisions.
a. Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms in the
Plan.
b. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to its subject matter and merges with and
supersedes all prior discussion, agreements, commitments, or understandings of
every kind and nature relating thereto, whether oral or written, between
Executive and Frontier. Neither party shall be bound by any term or condition
other than as is expressly set forth herein. Executive specifically waives the
terms of and all of her rights under all employment, change-in-control,
severance, salary continuation, or similar agreements, whether written or oral,
she has previously entered into with Valley Bancorporation or any of its
subsidiaries or affiliates.
c. Binding Effect. This Agreement will bind and inure to the benefit
of Frontier's and Executive's heirs, legal representatives, successors and
assigns.
d. Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due under
it, this party will be entitled to reimbursement from the other party for any
and all of its reasonable out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection with the
enforcement or collection.
e. Waiver. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not operate as
a waiver of any other breach by the breaching party.
f. Counsel Review. Executive represents and agrees that she fully
understands her right to discuss all aspects of this Agreement with her private
attorney, that to the extent she desired, she availed herself of this right,
that she has carefully read and fully understands all of the provisions of the
Agreement, that she is competent to execute this Agreement that her decision to
execute this Agreement has not been obtained by any duress and that she freely
and voluntarily enters into this Agreement, and that she has read this document
in its entirety and fully understands the meaning, intent, and consequences of
this Agreement.
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<PAGE> 4
g. Amendment. This Agreement may be modified only through a written
instrument signed by both parties.
h. Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other provisions of
this Agreement.
i. Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that certain
matters may be governed by federal law. Except as otherwise provided in Section
6.c, the parties must bring any legal proceeding arising out of this Agreement
in Snohomish County, Washington, and the parties will submit to jurisdiction in
that county.
j. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which taken
together will constitute one and the same document.
Signed: July 30, 1998:
FRONTIER FINANCIAL CORPORATION
and FRONTIER BANK
By: /s/ Robert J. Dickson
--------------------------------------
Robert J. Dickson, President and CEO
/s/ Elvera Telling
-----------------------------------------
VERA TELLING
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<PAGE> 1
EXHIBIT 10.4
COVENANT NOT TO COMPETE
DAVID LAWSON
THIS AGREEMENT is made by and between FRONTIER FINANCIAL CORPORATION and
FRONTIER BANK (hereinafter referred to jointly as "Frontier") and DAVID LAWSON
(hereinafter referred to as "Executive"), and takes effect on the consummation
of the Mergers ("Effective Date").
WHEREAS, Frontier has entered into a Plan and Agreement of Mergers
("Plan") with Valley Bancorporation and the Bank of Sumner (hereinafter referred
to jointly as "Valley"); and
WHEREAS, Executive is the Chief Financial Officer of the Bank of Sumner,
and Frontier would not be willing to enter into the Plan with Valley if it were
not that Executive has agreed to enter into this Covenant Not to Compete; NOW,
THEREFORE,
IT IS HEREBY AGREED AS FOLLOWS:
1. Non-Competition. In consideration of immediate payment to Executive
of $90,000 ($95,000 if Mergers are consummated after December 31, 1998),
Executive agrees that for a one-year period from the date he ceases employment
with Frontier, or one years from the Effective Date, whichever last occurs (the
"Covenant Period"):
a. He will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including, without
limitation, as a shareholder, member, partner, director, officer, manager,
investor, organizer, "founder," employee, consultant, or agent, within a
thirty-mile radius of the current Main Office of the Bank of Sumner (the
"Restricted Area"). The parties specifically agree that the time and distance of
the non-compete provision are reasonable and that this non-compete provision
covers this radius for the reason that Valley has drawn customers from that wide
an area. "Competing Business" means any financial services corporation or trust
company that competes with Frontier or any of its subsidiaries. The term
"Competing Business" includes, without limitation, any start-up or other
financial institution or trust company in formation.
b. He will not directly or indirectly encourage, solicit or attempt
to solicit (i) any employees of Frontier or any of its subsidiaries employed in
Pierce County, to leave their employment or (ii) any customers of any Pierce
County office of Frontier or any of its subsidiaries to remove their business
from Frontier or any of its subsidiaries, or to participate in any manner in a
Competing Business. Solicitation prohibited under this Section includes
solicitation by any means, including, without limitation, meetings, letters or
other mailings, electronic communications of any kind, and internet
communications.
2. Investment in Competing Business. During the Covenant Period,
Executive will not acquire an interest exceeding two percent of the total equity
interest in any Competing Business.
-1-
<PAGE> 2
3. Employment Outside Restricted Area. Nothing in this Agreement
prevents Executive from accepting employment outside the Restricted Area.
4. Enforcement.
a. Frontier and Executive stipulate that, in light of all of the
facts and circumstances of the relationship between Executive and Frontier, the
agreements referred to in Sections 1 and 2 (including without limitation their
scope, duration and geographic extent) are fair and reasonably necessary for the
protection of Frontier's confidential information, goodwill and other
protectable interests. If a court of competent jurisdiction should decline to
enforce any of those covenants and agreements, Executive and Frontier request
the court to reform these provisions to restrict Executive's use of confidential
information and Executive's ability to compete with Frontier or its subsidiaries
to the maximum extent, in time, scope of activities and geography, the court
finds enforceable.
b. Executive acknowledges that Frontier will suffer immediate and
irreparable harm that will not be compensable by damages alone, if Executive
repudiates or breaches any of the provisions of Sections 1 and 2 or threatens or
attempts to do so. For this reason, under these circumstances, Frontier, in
addition to and without limitation of any other rights, remedies or damages
available to it at law or in equity, will be entitled to obtain temporary,
preliminary, and permanent injunctions in order to prevent or restrain the
breach, and Frontier will not be required to post a bond as a condition for the
granting of this relief.
5. Adequate Consideration. Executive specifically acknowledges the
receipt of adequate consideration for the covenants contained in Sections 1 and
2 and that Frontier is entitled to require him to comply with these Sections.
These Sections will survive termination of this Agreement. Executive represents
that if his employment is terminated, whether voluntarily or involuntarily,
Executive has experience and capabilities sufficient to enable Executive to
obtain employment in areas which do not violate this Agreement and that
Frontier's enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood.
6. Arbitration.
a. Arbitration. At either party's request, the parties must submit
any dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this Agreement,
to arbitration under the American Arbitration Association's rules then in effect
(or under any other form of arbitration mutually acceptable to the parties). A
single arbitrator agreed on by the parties will conduct the arbitration. If the
parties cannot agree on a single arbitrator, each party must select one
arbitrator and those two arbitrators will select a third arbitrator. This third
arbitrator will hear the dispute. The arbitrator's decision is final (except as
otherwise specifically provided by law) and binds the parties, and either party
may request any court having jurisdiction to enter a judgment and to enforce the
arbitrator's decision. The arbitrator will provide the parties with a written
decision naming the substantially prevailing party in the action. This
prevailing party is entitled to reimbursement from the other party for its costs
and expenses, including reasonable attorneys' fees.
-2-
<PAGE> 3
b. Governing Law. All proceedings will be held at a place designated
by the arbitrator in Snohomish County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
c. Exception to Arbitration. Notwithstanding the above, if Executive
violates Section 1 or 2, Frontier will have the right to initiate the court
proceedings described in Section 4.b, in lieu of an arbitration proceeding under
this Section 6. Frontier may initiate these proceedings wherever appropriate
within the state of Washington; but Executive will consent to venue and
jurisdiction in Snohomish County, Washington.
7. Miscellaneous Provisions.
a. Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms in the
Plan.
b. Entire Agreement. This Agreement embodies the entire agreement of
the parties hereto with respect to its subject matter and merges with and
supersedes all prior discussion, agreements, commitments, or understandings of
every kind and nature relating thereto, whether oral or written, between
Executive and Frontier. Neither party shall be bound by any term or condition
other than as is expressly set forth herein. Executive specifically waives the
terms of and all of his rights under all employment, change-in-control,
severance, salary continuation, or similar agreements, whether written or oral,
he has previously entered into with Valley Bancorporation or any of its
subsidiaries or affiliates.
c. Binding Effect. This Agreement will bind and inure to the benefit
of Frontier's and Executive's heirs, legal representatives, successors and
assigns.
d. Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due under
it, this party will be entitled to reimbursement from the other party for any
and all of its reasonable out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection with the
enforcement or collection.
e. Waiver. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not operate as
a waiver of any other breach by the breaching party.
f. Counsel Review. Executive represents and agrees that he fully
understands his right to discuss all aspects of this Agreement with his private
attorney, that to the extent he desired, he availed himself of this right, that
he has carefully read and fully understands all of the provisions of the
Agreement, that he is competent to execute this Agreement, that his decision to
execute this Agreement has not been obtained by any duress and that he freely
and voluntarily enters into this Agreement, and that he has read this document
in its entirety and fully understands the meaning, intent, and consequences of
this Agreement.
g. Amendment. This Agreement may be modified only through a written
instrument signed by both parties.
-3-
<PAGE> 4
h. Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other provisions of
this Agreement.
i. Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that certain
matters may be governed by federal law. Except as otherwise provided in Section
6.c, the parties must bring any legal proceeding arising out of this Agreement
in Snohomish County, Washington, and the parties will submit to jurisdiction in
that county.
j. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which taken
together will constitute one and the same document.
Signed: July 30, 1998:
FRONTIER FINANCIAL CORPORATION
and FRONTIER BANK
By: /s/ Robert J. Dickson
--------------------------------------
Robert J. Dickson, President and CEO
/s/ David Lawson
-----------------------------------------
DAVID LAWSON
-4-
<PAGE> 1
EXHIBIT 10.5
DIRECTOR'S AGREEMENT
This Agreement, dated as of July__, 1998, is between FRONTIER FINANCIAL
CORPORATION, a Washington corporation ("Frontier") and (FirstName) (LastName)
("Director"), a director of Valley Bancorporation and Bank of Sumner
(hereinafter referred to jointly as "Valley").
Recitals
1. Pursuant to the terms of the Plan and Agreement of Mergers, dated as
of July 28, 1998 ("Plan") between Frontier and Valley, Valley will become merged
with Frontier, with Frontier as the surviving corporation.
2. Frontier's obligation to consummate the transactions contemplated by
the Plan is conditioned upon their receipt of non-competition agreements from
all directors of Valley.
3. Director is both a director and a shareholder of Valley.
Agreement
In consideration of Frontier's performance under the Plan, Director
agrees that for a period of two years after the Effective Date, as defined in
the Plan, he or she will not, directly or indirectly, become involved in, as a
principal shareholder, director or officer, "founder," employee, or other agent
of, any financial institution or trust company that competes or will compete
with Valley, Frontier, or any of their subsidiaries or affiliates, within a
thirty-mile radius of the Main Office of the Bank of Sumner.
Director also agrees that during this two-year period, Director will not
directly or indirectly solicit or attempt to solicit (1) any employees of
Valley, Frontier, or any of their subsidiaries or affiliates, to leave their
employment or (2) any customers of Valley, Frontier, or any of their
subsidiaries or affiliates to remove their business from Valley, Frontier, or
any of their subsidiaries or affiliates, or to participate in any manner in any
financial institution or trust company that competes or will compete with
Valley, Frontier, or any of their subsidiaries or affiliates, within Washington
State. Solicitation prohibited under this section includes solicitation by any
means, including, without limitation, meetings, telephone calls, letters or
other mailings, electronic communication of any kind, and internet
communications.
For purposes of this Agreement, the term "principal shareholder" means
any person who owns, directly or indirectly, five percent (5%) or more of the
outstanding shares of any class of equity security of a company.
Director recognizes and agrees that any breach of this Agreement by
Director will entitle Frontier and any of its successors or assigns to
injunctive relief and/or specific performance, as well as any other legal or
equitable remedies to which such entities may otherwise be entitled.
FRONTIER FINANCIAL CORPORATION DIRECTOR
By: ______________________________ ____________________________________
Its: _____________________________ (FirstName) (LastName)
<PAGE> 1
EXHIBIT 10.6
VOTING AGREEMENT
Frontier Financial Corporation
332 SW Everett Mall Way
Everett, Washington 98204
Gentlemen:
In order to induce you to enter into an Agreement and Plan of Mergers
(the "Merger Agreement") dated of even date herewith by and among Frontier
Financial Corporation ("Frontier") and Valley Bancorporation. ("Valley"), the
undersigned, for himself, his heirs and legal representatives, hereby agrees,
represents, warrants and covenants with and to Frontier as follows:
1. The undersigned beneficially owns the shares of common stock of
Valley ("Valley Common Stock") set forth beneath the undersigned's name below
and no other shares of Valley Common Stock. Such shares are so owned free and
clear of any lien, right or encumbrance whatsoever, except for any pledge of
such shares to secure a loan to the undersigned, and no proxy has been granted
with respect thereto and the undersigned has full capacity, power and authority
to vote such shares without the consent or approval of any other party in the
absence of a default under any such loan secured by such shares. If any of such
shares are currently pledged to secure a loan to the undersigned, the
undersigned (i) represents and warrants that such loan is not in default and no
event or condition exists that with notice, lapse of time or both would
constitute such a default, and (ii) agrees to take all such action as may be
necessary to prevent any such default, event or condition to exist in order to
prevent the lender from taking title to such shares and to continue to enable
the undersigned to vote such shares as hereinafter set forth.
2. The undersigned hereby agrees to vote such shares in favor of
approval of the Merger Agreement and, as a shareholder, agrees to take all
necessary action to consummate the Mergers (as defined in the Merger Agreement)
as expeditiously as possible.
3. The undersigned covenants that until the earlier of the consummation
of the Mergers or the termination of the Merger Agreement, the undersigned will
not sell, permit a lien or other encumbrance to exist with respect to (except as
hereinabove provided), or grant any proxy in respect of (except as hereinabove
provided and for proxies solicited by the Board of Directors of Valley in
connection with the special meeting to vote on the approval of the Merger
Agreement or in connection with any annual meeting of shareholders), the shares
of Valley Common Stock set forth below, unless all the other parties to any such
sale or other transaction enter into an agreement in form and substance
satisfactory to Frontier embodying the benefits and rights contained herein.
4. The undersigned covenants that the undersigned will not, without the
prior written consent of Frontier and Valley: (i) make any public announcement
with respect to the Mergers; (ii) submit or seek any other person or entity to
submit a proposal for a tender offer, merger or similar transaction with Valley;
or (iii) vote the shares owned or controlled by the undersigned in favor of,
solicit proxies or seek another person or entity to solicit proxies on behalf
of, a proposal, the purpose of which is to oppose or nullify the Mergers.
Very truly yours,
___________________________________
(First Name) (Last Name)
NUMBER OF SHARES:_________ Dated: July ____, 1998
<PAGE> 1
EXHIBIT 23.2
Gentlemen:
We hereby consent to the filing of the form of our federal tax opinion
as an exhibit to the Registration Statement and to the reference to us in the
Prospectus/Proxy Statement included therein under the headings "THE
REORGANIZATION -- Certain Federal Income Tax Consequences" and "LEGAL OPINIONS."
Respectfully,
KELLER ROHRBACK, L.L.P.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants and auditors, we consent to the reference to
our firm under the caption "Experts" and to the incorporation by reference in
this registration statement on Form S-4 of our report dated January 20, 1998
included in Frontier Financial Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997.
/s/ Moss Adams LLP
Everett, Washington
September 18, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Frontier Financial
Corporation on Form S-4 of our report on the consolidated balance sheet of
Valley Bancorporation and Subsidiary as of December 31, 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended, dated January 14, 1998, appearing in the
Prospectus/Proxy Statement which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/
DODD WING & CO., P.S.
Kirkland, Washington
September 17, 1998
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Joint Proxy Statement/Prospectus of our
report, dated January 24, 1997, relating to the consolidated financial
statements of Valley Bancorporation and Subsidiary, and to the reference to our
firm under the caption "EXPERTS" in the Joint Proxy Statement/Prospectus.
Knight, Vale & Gregory, Inc., P.S.
September 21, 1998
<PAGE> 1
EXHIBIT 23.6
Board of Directors
Valley Bancorporation
July 30, 1998
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/
---------------------------------------
Robert J. Rogowski
Principal
<PAGE> 1
EXHIBIT 99.1
REVOCABLE PROXY
VALLEY BANCORPORATION
REVOCABLE PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
ON _________, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints __________________________________ (with
full power to act alone and to designate substitutes) as attorney and proxy of
the undersigned with authority to vote and act with respect to all shares of
stock of Valley Bancorporation ("Valley"), which the undersigned would be
entitled to vote at the Special Meeting of Shareholders to be held on
_______________, 1998, at _:00 _.m., local time, at ____________________ Sumner,
Washington, and any adjournments or postponements thereof, with all the powers
the undersigned would possess if personally present, upon matters noted below
and upon such other matters as may properly come before the meeting.
(When properly executed, this Proxy will be voted in accordance with
your instructions. If you give no instructions, this Proxy will be voted FOR
Proposal 1).
The shares represented by this Proxy shall be voted as follows:
1. A proposal to approve the Agreement and Plan of Merger, dated as of July
30, 1998 (the "Merger Agreement"), between Valley and Frontier Financial
Corporation ("FFC"), under the terms of which: (i) Valley will merge
into FFC, and (ii) each outstanding share of common stock of Valley will
be converted into shares of FFC common stock in accordance with the
terms of the Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxy is authorized to vote upon such other
business as may properly come before the Special Meeting of
Shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ABOVE PROPOSAL.
Should the undersigned be present and elect to vote at the Special
Meeting or at any adjournment thereof and after notification to the Secretary of
Valley at the Special Meeting of the shareholder's decision to terminate this
proxy, then the power of said attorney and proxy shall be deemed terminated and
of no further force and effect.
The undersigned acknowledges receipt from Valley prior to the execution
of this proxy of notice of the Meeting, the Prospectus/Proxy Statement dated
_______________, 1998.
DATED: ___________________, 1998
____________________________________ ____________________________________
Print Name of Shareholder Print Name of Shareholder
____________________________________ ____________________________________
Signature Signature
Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGEMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOW OF
KNOW OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
(PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING
THE ENCLOSED ENVELOPE.)
<PAGE> 1
EXHIBIT 99.2
RULE 438 CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as
amended, the undersigned hereby consents to being named as a prospective
director of Frontier Financial Corporation ("Frontier") and Frontier Bank in the
Registration Statement on Form S-4 filed by Frontier with the Securities and
Exchange Commission on September 22, 1998.
/s/
_____________________________________
Michael Corliss
September 15, 1998
_____________________________________
Date Signed
