<PAGE> 1
As filed with the Securities and Exchange Commission on November 26, 1996
Registration No. 333-15321
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
FIRST COMMUNITY FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 6711 91-1277503
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
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721 COLLEGE AVENUE, P.O. BOX 3800, LACEY, WASHINGTON 98509-3800 (360) 459-1100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------
KEN F. PARSONS
Chief Executive Officer
First Community Financial Group, Inc.
721 College Avenue, P.O. Box 3800
Lacey, Washington 98509-3800
(360) 459-1100
(Names, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies of communications to:
MARK C. LEWINGTON, Esq. WILLIAM P. JOHNSON, Esq.
CHRISTI MUONEKE, Esq. Rothgerber, Appel, Powers & Johnson LLP
Graham & Dunn P.C. 1200 - 17th Street, Suite 3000
1420 Fifth Avenue, 33rd Floor Denver, Colorado 80202-5839
Seattle, Washington 98101-2390
-----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC:
The date of mailing of the enclosed Prospectus/Proxy Statement to
shareholders of Prairie Security Bank.
-----------
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. [ ]
-----------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
FIRST COMMUNITY FINANCIAL GROUP, INC.
CROSS-REFERENCE SHEET
(SHOWING LOCATION OF INFORMATION REQUIRED BY FORM S-4)
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S-4 Item Prospectus Heading
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A. INFORMATION ABOUT THE TRANSACTION
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1. Forepart of Registration Statement and Cover Page; Cross Reference Sheet; Outside Front
Outside Front Cover Page of Prospectus. Cover Page of Prospectus/Proxy Statement
2. Inside Front and Outside Back Cover Pages of Available Information; Table of Contents
Prospectus
3. Risk Factors; Ratio of Earnings to Fixed Summary; Stock Price and Dividend Information;
Charges; and Other Information Selected Historical and Unaudited Pro Forma Financial
Data; Equivalent Per Common Share Data
4. Terms of the Transaction Summary; Equivalent Per Common Share Data; Special
Meeting of PSB Shareholders; Background of and
Reasons for the Merger; The Merger; Unaudited
Condensed Pro Forma Combined Financial Statements;
Comparison of Certain Shareholder Rights
5. Pro Forma Financial Information Selected Historical and Unaudited Pro Forma Financial
Data; Equivalent Per Common Share Data; Unaudited
Condensed Pro Forma Combined Financial Statement
6. Material Contracts with the Company Being Summary; The Merger
Acquired
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
be Underwriters
8. Interests of Named Experts and Counsel Background of and Reasons for the Merger; Certain
Legal Matters; Experts
9. Disclosure of SEC Position on Indemnification Not Applicable
for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information Not Applicable
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information with Respect to Registrants Other Summary; Stock Price and Dividend Information;
Than S-3 or S-2 Registrants Selected Historical and Unaudited Pro Forma Financial
Data; Equivalent Per Common Share Data; Background of
and Reasons for the Merger; The Merger; Unaudited
Condensed Pro Forma Combined Financial Statement;
Information Concerning FCFG; FCFG and Subsidiaries
Consolidated Average Balances/Interest Income and
Expense Rates; FCFG Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Management of FCFG; Bank Supervision and
Regulation; Description of FCFG Common Stock;
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Comparison of Certain Shareholder Rights; FCFG
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-3 or S-2 Not Applicable
Companies
17. Information with Respect to Companies Other Summary; Stock Price and Dividend Information;
Than S-3 or S-2 Companies Selected Historical and Unaudited Pro Forma Financial
Data; Equivalent Per Common Share Data; Background of
and Reasons for the Merger; The Merger; Unaudited
Condensed Pro Forma Combined Financial Statement;
Information Concerning PSB; PSB Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Management of PSB; Bank
Supervision and Regulation; Comparison of Certain
Shareholder Rights; PSB Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited Summary; Special Meeting of PSB Shareholders;
Background of and Reasons for the Merger; The Merger;
Information Concerning PSB; Description of FCFG Common
Stock; Comparison of Certain Shareholder Rights 1
19. Information if Proxies, Consents or Not Applicable
Authorizations are Not to be Solicited
or in an Exchange Offer
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[Prairie Security Bank Letterhead]
___________, 1996
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting ("Special
Meeting") of Shareholders of Prairie Security Bank, a Washington state-chartered
bank ("PSB"). The Special Meeting will be held on Wednesday, January 8, 1997, at
6:00 p.m. local time, at the Yelm High School Auditorium, 1315 Yelm Avenue West,
Yelm, Washington.
The attached Notice of Special Meeting and Prospectus/Proxy Statement
describe the formal business to be transacted at the Special Meeting. At the
Special Meeting, you will be asked to consider and vote upon a proposal to
approve the Plan and Agreement of Reorganization and Merger ("Merger
Agreement"), dated as of September 11, 1996, and as amended and restated on
October 18, 1996, between PSB, First Community Financial Group, Inc. ("FCFG"), a
Washington corporation and bank holding company, and First Community Bank (the
"Bank"), a Washington state-chartered bank and wholly-owned subsidiary of FCFG.
The Merger Agreement provides for the merger ("Merger") of PSB with and into the
Bank, with the Bank as the surviving corporation. As a result of the Merger,
PSB's shareholders would become shareholders of FCFG, and the Bank would remain
a wholly-owned subsidiary of FCFG.
The Merger is subject to various conditions which, with other terms of
the Merger, are contained in the Merger Agreement and described in the attached
Proxy Statement, which also serves as a Prospectus of FCFG for its common stock
("FCFG Common Stock") to be issued in the Merger. If the Merger is completed,
each PSB shareholder will receive for each share of PSB Common Stock ("PSB
Common Stock") owned, (i) shares of FCFG Common Stock based on an exchange
formula detailed in the Prospectus/Proxy Statement, (ii) cash, or (iii) a
combination of FCFG Common Stock and cash. The complete text of the Merger
Agreement appears as Appendix A to the Prospectus/Proxy Statement.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF PSB AND ITS SHAREHOLDERS, AND HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
MERGER PROPOSAL.
Approval of the Merger requires the affirmative vote of the holders of
two-thirds of the outstanding shares of PSB Common Stock. We urge you to review
the attached Prospectus/Proxy Statement and to consider your vote carefully. If
you have any questions regarding this material in advance of the Special
Meeting, please call Sharon Scholl, PSB's Executive Administrator, at (360)
458-2265.
IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING, REGARDLESS OF THE SIZE OF YOUR HOLDINGS, AND WHETHER YOU PLAN TO ATTEND
THE SPECIAL MEETING IN PERSON OR NOT. A FAILURE TO VOTE, EITHER BY NOT RETURNING
THE ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX ON THE PROXY, 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 FORM IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU DO ATTEND, YOU
MAY (IF YOU WISH), REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON AT THE
SPECIAL MEETING.
On behalf of your Board of Directors, we recommend that you vote FOR
approval of the Merger Agreement.
Very truly yours,
Lawrence J. Schorno Michael D. Edwards
Chairman of the Board President and
Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY FORM
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PRAIRIE SECURITY BANK
608 YELM AVENUE EAST
P.O. BOX 5060
YELM, WASHINGTON 98597
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 8, 1997
TO THE SHAREHOLDERS OF PRAIRIE SECURITY BANK:
NOTICE IS HEREBY GIVEN that pursuant to call of its directors, a
Special Meeting ("Special Meeting") of Shareholders of Prairie Security Bank
("PSB), a Washington state-chartered bank, will be held on Wednesday, January 8,
1997, at 6:00 p.m. local time, at the Yelm High School Auditorium, 1315 Yelm
Avenue West, Yelm, Washington. The Special Meeting is for the following
purposes:
1. MERGER AGREEMENT. To consider and vote upon a proposal to approve
the Plan and Agreement of Reorganization and Merger ("Merger Agreement"), dated
as of September 11, 1996, and as amended and restated on October 18, 1996,
between PSB, First Community Financial Group, Inc. ("FCFG"), a Washington
corporation and bank holding company, and First Community Bank (the "Bank"), a
Washington state-chartered bank and wholly-owned subsidiary of FCFG, under the
terms of which PSB will merge with and into the Bank, as more fully described in
the accompanying Prospectus/Proxy Statement. The Merger Agreement is attached as
Appendix A to the Prospectus/Proxy Statement.
2. OTHER MATTERS. To act upon such other matters as may properly come
before the Special Meeting or any adjournment thereof.
Only holders of record of the PSB Common Stock, $1.00 par value per
share, at 5:00 p.m. on __________, 1996 (the Record Date for the Special
Meeting), are entitled to notice of, and to vote at, the Special Meeting or any
adjournments or postponements thereof. The affirmative vote of the holders of
two-thirds or more of the outstanding shares of PSB Common Stock is required for
approval of the Merger Agreement. On the Record Date, there were ________ shares
of PSB Common Stock outstanding.
PSB shareholders desiring to do so may dissent from the Merger and
obtain payment for their shares in accordance with the provisions of the
Washington statute, RCW 30.49.090, a copy of which is included in the
Prospectus/Proxy Statement. See "THE MERGER -- Dissenters' Rights of Appraisal"
and Appendix B.
All shareholders are cordially invited to attend the Special Meeting
personally. Whether or not you are able to do so, it is important that you
complete, sign, date, and promptly return the accompanying proxy in the enclosed
postage-paid envelope in order to vote your shares of PSB Common Stock.
Shareholders may revoke proxies previously submitted by completing a later-dated
proxy, by written revocation delivered to PSB's Secretary at or prior to the
Special Meeting, or by appearing and voting at the Special Meeting in person.
Attendance at the Special Meeting will not of itself revoke a previously
submitted proxy.
By Order of the Board of Directors,
Judith C. Nettleton, Corporate Secretary
Yelm, Washington
December ___, 1996
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN, AND WHETHER
OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. APPROVAL OF THE MERGER REQUIRES
THE AFFIRMATIVE VOTE OF HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES OF PSB
COMMON STOCK. IN ORDER TO ENSURE THAT THE REQUISITE VOTES ARE OBTAINED AND A
QUORUM IS ATTAINED, WE URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY
FORM.
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PROXY STATEMENT OF PRAIRIE SECURITY BANK
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 8, 1997
PROSPECTUS OF FIRST COMMUNITY FINANCIAL GROUP, INC.
SHARES OF COMMON STOCK, $2.50 PAR VALUE
This Prospectus/Proxy Statement is being furnished to holders of shares
of common stock, $1.00 par value per share ("PSB Common Stock"), of Prairie
Security Bank ("PSB"), a Washington state-chartered bank, in connection with the
solicitation of proxies by PSB's Board of Directors (the "PSB Board") for use at
the Special Meeting of PSB shareholders to be held at the Yelm High School
Auditorium, 1315 Yelm Avenue West, Yelm, Washington, on January 8, 1997, at 6:00
p.m. local time, and at any adjournments or postponements thereof. At the
Special Meeting, PSB shareholders will vote upon a proposal to approve the
merger (the "Merger") of PSB with and into First Community Bank (the "Bank"), a
Washington state-chartered bank and a wholly-owned subsidiary of First Community
Financial Group, Inc. ("FCFG"), a Washington bank holding company ("FCFG"), on
the terms described in the Plan and Agreement of Merger dated as of September
11, 1996, as amended on October 18, 1996, (the "Merger Agreement") among PSB,
FCFG and the Bank. The Merger Agreement is hereby incorporated in this
Prospectus/Proxy Statement by reference.
This Prospectus/Proxy Statement also constitutes the Prospectus of FCFG
filed as part of a Registration Statement on Form S-4 with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933, as amended
("Securities Act"), relating to the shares of common stock, $2.50 par value per
share ("FCFG Common Stock"), of FCFG to be issued in the Merger. At such time as
the Merger becomes effective, all outstanding shares of PSB Common Stock will be
converted into the right to receive (i) shares of FCFG Common Stock, (ii) cash,
or (iii) a combination of shares of FCFG Common Stock and cash. PSB shareholders
who reside outside the State of Washington, or holders of fewer than 200 shares
of PSB common stock, will have their shares of PSB Common Stock converted into
the right to receive cash only. No fractional shares of FCFG Common Stock will
be issued, and all PSB shareholders who, as a result of the Merger, would be
entitled to receive fractional shares of FCFG Common Stock will receive cash in
lieu of such fractional shares. Using the September 30, 1996 per share Book
Values for FCFG and PSB Common Stock of $12.23 and $23.92, respectively, PSB
shareholders would receive approximately 1.996 shares of FCFG Common Stock for
each share of PSB Common Stock that is exchanged for FCFG Common Stock, and cash
for the remainder. THIS EXCHANGE RATIO IS NOT FIXED AND THE FINAL EXCHANGE RATIO
MAY BE DIFFERENT. See "THE MERGER -- Basic Terms of Merger." For a description
of certain significant considerations in connection with the Merger and the
related transactions described in this Prospectus/Proxy Statement, see "THE
MERGER -- Conditions to the Merger; Additional Conditions; Interests of Certain
Persons in the Merger."
All information contained in this Prospectus/Proxy Statement relating
to FCFG has been furnished by FCFG, and PSB is relying upon the accuracy of that
information. All information contained in this Prospectus/Proxy Statement
relating to PSB has been furnished by PSB, and FCFG is relying upon the accuracy
of that information.
This Prospectus/Proxy Statement and the accompanying proxy cards are
first being mailed to shareholders of PSB on or about December ____, 1996.
THE SHARES OF FCFG COMMON STOCK ISSUABLE IN THE MERGER ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY OR INSTRUMENTALITY.
THE SHARES OF FCFG COMMON STOCK ISSUABLE IN THE MERGER 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 date of this Prospectus/Proxy Statement is December ____, 1996.
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AVAILABLE INFORMATION
FCFG is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"). In accordance with the
Exchange Act, FCFG files reports, proxy statements, and other information with
the SEC. PSB is not subject to the information and reporting requirements of the
Exchange Act. Under the rules and regulations of the SEC, the solicitation of
PSB shareholders to approve the Merger constitutes an offering of the FCFG
Common Stock to be issued in conjunction with the Merger. FCFG has filed with
the SEC a registration statement on Form S-4 (the "Registration Statement")
under the Securities Act covering the FCFG Common Stock to be issued in
connection with the Merger. The Registration Statement and the exhibits thereto,
as well as the reports, proxy statements, and other information filed with the
SEC by FCFG under the Exchange Act may be inspected and copied at prescribed
rates at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at 7 World Trade Center, Thirteenth Floor,
New York, New York 10048, and The Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained at prescribed rates from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of the
Registration Statement and related documents may be obtained through the
Commission's Internet address at http://www.sec.gov. As permitted by the rules
and regulations of the SEC, this Prospectus/Proxy Statement omits certain
information, exhibits, and undertakings contained in the Registration Statement.
Reference is made to the Registration Statement and to the exhibits thereto for
further information.
This Prospectus/Proxy Statement constitutes part of the Registration
Statement (File No. 333-15321) filed by FCFG with the SEC under the
Securities Act. This Prospectus/Proxy Statement omits certain information
contained in the Registration Statement in accordance with the rules and
regulations of the SEC. Reference is made hereby to the Registration Statement
and related exhibits for further information with respect to FCFG and the FCFG
Common Stock. Statements contained herein or in any document incorporated herein
by reference as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or such other document incorporated herein by
reference. Each such statement is qualified in its entirety by such reference.
All information contained in this Prospectus/Proxy Statement relating
to FCFG has been furnished by FCFG, and PSB is relying upon the accuracy of that
information. All information contained in this Prospectus/Proxy Statement
relating to PSB has been furnished by PSB, and FCFG is relying upon the accuracy
of that information.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY EITHER FCFG OR PSB. THIS PROSPECTUS/PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER,
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS/PROXY
STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF PSB OR
FCFG AND ITS SUBSIDIARIES SINCE THE DATE OF THIS PROSPECTUS/PROXY STATEMENT OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
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TABLE OF CONTENTS
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GLOSSARY OF CERTAIN KEY TERMS.......................................................vi
SUMMARY ............. .............................................................. 1
Introduction............................................................... 1
Parties to the Merger...................................................... 1
Special PSB Shareholder Meeting............................................ 2
The Merger; Exchange Value................................................. 2
Effective Date of the Merger............................................... 3
Board Determinations....................................................... 3
Reasons for the Merger; Recommendation of the PSB Board.................... 3
Opinion of Financial Advisor............................................... 3
Conditions; Regulatory Approvals........................................... 4
Amendment or Termination of the Merger Agreement........................... 4
Directors and Officers of FCFG and the Bank................................ 4
Interests of Certain Persons in the Merger................................. 5
Conduct Pending Consummation of the Merger................................. 5
Federal Income Tax Treatment of the Merger................................. 5
Accounting Treatment of the Merger......................................... 5
Dissenters' Rights of Appraisal............................................ 6
Election Procedure and Exchange of Stock Certificates...................... 6
Comparison of Certain Shareholder Rights................................... 6
Absence of Active Trading Market........................................... 7
STOCK PRICE AND DIVIDEND INFORMATION................................................ 7
FCFG....................................................................... 7
PSB........................................................................ 8
SELECTED HISTORICAL PRO FORMA FINANCIAL DATA (Unaudited)............................ 9
FCFG....................................................................... 9
PSB........................................................................10
Pro forma FCFG and PSB Combined Alternative Nos. 1a, 1b, 2a & 2b ..........10
EQUIVALENT PER COMMON SHARE DATA (Unaudited)........................................11
SPECIAL MEETING OF PSB SHAREHOLDERS.................................................12
Date, Time, Place and Purpose..............................................12
Shares Outstanding and Entitled to Vote; Record Date.......................12
Vote Required..............................................................13
Voting, Solicitation and Revocation of Proxies.............................13
BACKGROUND OF AND REASONS FOR THE MERGER............................................13
Background of the Merger...................................................13
Reasons for the Merger - General...........................................14
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Reasons for the Merger - PSB..............................................15
Reasons for the Merger - FCFG.............................................16
Opinion of Financial Advisor .............................................16
Recommendation of the PSB Board...........................................21
THE MERGER.........................................................................21
General...................................................................21
Basic Terms of the Merger.................................................21
Cash for Certain Shareholders.............................................22
Election Procedure and Adjustment.........................................23
Exchange of Stock Certificates............................................24
Mechanics of the Merger...................................................24
Conduct Pending Consummation of the Merger................................24
Conditions to the Merger..................................................25
Amendment or Termination of Merger Agreement..............................26
Certain Federal Income Tax Matters........................................26
Accounting Treatment of the Merger........................................27
Dissenters' Rights of Appraisal...........................................27
Resales of Stock Received in the Merger by PSB Affiliates.................28
No Solicitation...........................................................28
Board of Directors and Management After the Merger........................28
Employee Benefit Plans....................................................29
Interests of Certain Persons in the Merger................................29
INFORMATION CONCERNING FCFG........................................................31
Business..................................................................31
Proposed Transactions.....................................................32
Competition...............................................................33
Facilities................................................................33
Employees.................................................................34
Legal Proceedings.........................................................34
FCFG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................................34
Nine Months Ended September 30, 1996......................................34
Financial Condition..................................................34
Results of Operations................................................36
Year Ended December 31, 1995..............................................37
Financial Condition..................................................37
Results of Operations................................................40
Consolidated Average Balances/Interest Income and Expense Rates...........41
Investment Portfolio......................................................42
Loan Portfolio............................................................43
Summary of Credit Loss Experience.........................................45
Deposits..................................................................46
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MANAGEMENT OF FCFG..................................................................48
Directors and Executive Officers...........................................48
Board Committees...........................................................49
Director Compensation......................................................49
Securities Ownership of Certain Beneficial Owners and Management ..........50
Executive Compensation.....................................................51
Employment Agreements......................................................52
Employee Supplemental Income Plan..........................................52
Employee Stock Option and Restricted Stock Award Plan......................53
Employee Stock Ownership Plan..............................................53
Certain Transactions and Relationships.....................................54
INFORMATION CONCERNING PSB..........................................................54
Business...................................................................54
Competition................................................................54
Facilities.................................................................55
Employees..................................................................55
Legal Proceedings..........................................................55
PSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................................55
Financial Condition........................................................55
Results of Operations......................................................57
Nine Months Ended September 30, 1996..................................57
Year Ended December 31, 1995..........................................57
Loan Portfolio.............................................................58
Summary of Credit Loss Experience..........................................59
MANAGEMENT OF PSB...................................................................60
Directors and Executive Officers...........................................60
Board Committees...........................................................62
Director Compensation......................................................62
Security Ownership of Certain Beneficial Owners and Management.............62
Executive Compensation.....................................................63
Executive Supplemental Income Plan.........................................64
Employee Stock Ownership Plan with 401(k) Provisions.......................64
Incentive Stock Option Plan and Nonstatutory Stock Option Plan.............65
Certain Transactions and Relationships.....................................65
UNAUDITED CONDENSED PRO FORMA FCFG AND PSB
COMBINED FINANCIAL STATEMENTS.......................................................66
Pro Forma Combined Balance Sheet -- Alternative No. 1a.....................67
Pro Forma Combined Statements of Income (9/30/96) -- Alternative No. 1a ...68
Pro Forma Combined Statements of Income (12/31/95) -- Alternative No. 1a ..69
Pro Forma Combined Balance Sheet -- Alternative No. 1b.....................70
Pro Forma Combined Statements of Income (9/30/96) -- Alternative No. 1b ...71
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Pro Forma Combined Statements of Income (12/31/95)-- Alternative No. 1b ........72
Pro Forma Combined Balance Sheet -- Alternative No. 2a..........................73
Pro Forma Combined Statements of Income (9/30/96) -- Alternative No. 2a ........74
Pro Forma Combined Statements of Income (12/31/95) -- Alternative No. 2a .......75
Pro Forma Combined Balance Sheet -- Alternative No. 2b..........................76
Pro Forma Combined Statements of Income (9/30/96) -- Alternative No. 2b ........77
Pro Forma Combined Statements of Income (12/31/95)-- Alternative No. 2b ........78
Notes to Unaudited Condensed Pro Forma Combined Financial Statements ...........79
PRO FORMA ANALYSIS OF PROJECTED AGGREGATED PURCHASE
ACCOUNTING ADJUSTMENTS...................................................................81
BANK SUPERVISION AND REGULATION..........................................................82
FCFG............................................................................82
General....................................................................82
Holding Company Structure..................................................82
Control Transactions.......................................................83
The Bank and PSB................................................................83
General....................................................................83
Regulation of State Banks..................................................84
Regulation of Management...................................................84
Control of Financial Institutions..........................................84
Recent Federal Legislation.................................................84
Capital Adequacy Requirement...............................................86
FDIC Insurance.............................................................87
DESCRIPTION OF FCFG COMMON STOCK.........................................................88
Voting Rights...................................................................88
Dividends.......................................................................89
Liquidation.....................................................................89
Other Characteristics...........................................................89
COMPARISON OF CERTAIN SHAREHOLDER RIGHTS.................................................89
General.........................................................................90
Common Stock....................................................................90
Preferred Stock.................................................................90
Dividend Rights.................................................................90
Voting Rights...................................................................91
Preemptive Rights...............................................................91
Liquidation Rights..............................................................91
Assessments.....................................................................91
Stock Repurchases...............................................................91
Amendment of Articles and Bylaws................................................91
Special Meetings; Actions Without a Meeting.....................................92
Board of Directors..............................................................93
</TABLE>
- iv -
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C>
Indemnification and Limitation of Liability.................................... 93
Sales of Assets, Merger and Share Exchanges; Voting............................ 94
Dissenters' Rights............................................................. 94
Potential "Anti-Takeover" Provisions........................................... 94
CERTAIN LEGAL MATTERS................................................................... 96
EXPERTS................................................................................. 96
OTHER MATTERS........................................................................... 96
INDEX TO THE FINANCIAL STATEMENTS ...................................................... F-1
APPENDIX A - Amended and Restated Merger Agreement...................................... A-1
APPENDIX B - Rights of Dissenting Shareholder - Appraisal - Amount Due as Debt ......... B-1
APPENDIX C - Opinion of Financial Advisor............................................... C-1
</TABLE>
- v -
<PAGE> 13
GLOSSARY OF CERTAIN KEY TERMS
<TABLE>
<CAPTION>
<S> <C>
BANK................................. First Community Bank, a wholly-owned subsidiary of FCFG.
BANK BOARD........................... The Board of Directors of First Community Bank.
BHCA................................. The Bank Holding Company Act of 1956, as amended.
BOARD................................ Board of Directors.
BOOK VALUE........................... Common stock, surplus and retained earnings.
CLOSING.............................. The closing of the Merger transaction contemplated in the Merger
Agreement.
CODE................................. The Internal Revenue Code of 1986, as amended.
COMBINED BANK ....................... First Community Bank as it exists after the Merger.
DIRECTOR............................. The Director of the Department of Financial Institutions of the State of
Washington.
DISSENTING SHARES.................... Those shares of PSB Common Stock with respect to which PSB
shareholders have perfected their dissenters' rights under Washington
law.
EFFECTIVE DATE....................... The date on which Closing of the Merger will occur.
EXCHANGE ACT......................... The Securities Exchange Act of 1934, as amended, and related rules and
regulations.
EXCHANGE AGENT....................... The individual designated by the parties to handle the exchange of PSB
Common Stock for FCFG Common Stock or cash (in the case of holders
who elect to receive cash in the Merger, or who would otherwise be
entitled to a fractional share of FCFG Common Stock).
FCFG................................. First Community Financial Group, Inc.
FCFG BOARD........................... The Board of Directors of FCFG.
FCFG COMMON STOCK.................... The Common Stock of FCFG, $2.50 par value per share.
KSOP................................. FCFG's Employee Stock Ownership Plan
FDIC................................. The Federal Deposit Insurance Corporation.
FRB.................................. The Board of Governors of the Federal Reserve System.
GAAP................................. Generally accepted accounting principles, consistently applied.
GRAHAM & DUNN ....................... Graham & Dunn P.C., legal counsel for FCFG.
HOEFER & ARNETT...................... Hoefer & Arnett, Incorporated, financial advisors for PSB and FCFG.
KNIGHT, VALE & GREGORY............... Knight, Vale & Gregory, Inc., P.S., accountants for FCFG and PSB.
MERGER............................... The merger of PSB with and into the Bank in accordance with the
Merger Agreement.
</TABLE>
- vi -
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
MERGER AGREEMENT..................... The Plan and Agreement of Merger, dated as of September 11, 1996,
between FCFG, the Bank and PSB, as amended and restated as of
October 18, 1996.
NCB.................................. Northwest Community Bank
PAR VALUE............................ Par value, as used with reference to the FCFG Common Stock and PSB
Common Stock is a value assigned for corporate law purposes only, and
has no relation to the market value of such stock.
PROSPECTUS/PROXY STATEMENT........... This Prospectus/Proxy Statement, filed with the SEC by FCFG as part of
the Registration Statement, together with any amendments and
supplements.
PSB.................................. Prairie Security Bank.
PSB BOARD............................ The Board of Directors of PSB.
PSB COMMON STOCK..................... The Common Stock of PSB, $1.00 par value per share.
PSB ESOP............................. PSB's Employee Stock Ownership Plan.
RCW.................................. The revised Code of Washington.
RECORD DATE.......................... ________________, 1996, the record date for the special PSB
Shareholder meeting held to consider the Merger.
REGISTRATION STATEMENT............... The Registration Statement on Form S-4, of which this Prospectus/Proxy
Statement forms a part, filed with the SEC under the Securities Act, for
the purpose of registering the shares of FCFG Common Stock to be
issued in the Merger.
REGULATORY APPROVALS................. The required regulatory approvals of the transaction by the FDIC.
ROTHGERBER, APPEL.................... Rothgerber, Appel, Powers & Johnson, LLP, legal counsel for PSB.
SEC.................................. The U.S. Securities and Exchange Commission.
SECURITIES ACT....................... The Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
SPECIAL MEETING...................... The special meeting of the shareholders of PSB to be held on January 8,
1997, for the purpose of considering the Merger Agreement and any
other purpose.
TERMINATION DATE..................... April 30, 1997, the date after which each party has the right to terminate
the Merger Agreement, if the Closing has not occurred by that date.
TOTAL AVAILABLE CASH................. The total aggregate cash to be paid by FCFG to the PSB shareholders, as
determined by the FCFG Board under the Merger Agreement.
WBCA................................. Washington Business Corporation Act, contained at Title 23B of the
RCW.
</TABLE>
- vii -
<PAGE> 15
SUMMARY
The following material summarizes certain information contained
elsewhere in this Prospectus/Proxy Statement. This summary is not intended to be
complete and is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Prospectus/Proxy Statement (including
the appendices hereto). Capitalized terms used in this Prospectus/Proxy
Statement, unless the context otherwise requires, have the meanings in the
Glossary of Key Terms. Additional terms used principally in particular sections
of this Prospectus/Proxy Statement are defined in the sections where they are
used.
INTRODUCTION
FCFG, the Bank and PSB propose to merge PSB and the Bank under the
terms of the Merger Agreement, which has been adopted by the respective Boards
of FCFG and PSB. The PSB Board has unanimously recommended that the shareholders
of PSB vote to approve the plan of merger contained in the Merger Agreement.
Subject to approval by the shareholders of PSB, receipt of required regulatory
approvals and satisfaction of certain other conditions, PSB will be merged with
and into the Bank. As a result, PSB shareholders will become shareholders of
FCFG, the Bank will remain a wholly-owned subsidiary of FCFG, and PSB will cease
to exist as a separate entity. PSB shareholders will receive a combination of
FCFG Common Stock and cash in exchange for their shares of PSB Common Stock. See
"THE MERGER -- Basic Terms of the Merger."
PARTIES TO THE MERGER
FCFG. FCFG is a Washington bank holding company incorporated in 1983
and headquartered in Lacey, Washington. FCFG has one banking subsidiary, First
Community Bank (the "Bank"), a Washington state-chartered full service bank
formed in 1979. FCFG also owns all the outstanding shares of two non-bank
subsidiaries -- (i) Premises, Inc., a Washington corporation formed for the
purpose of acquiring and holding properties used by FCFG's banking subsidiaries,
and (ii) Information Management Systems, Inc., a Washington corporation formed
in 1993 to provide data processing services to FCFG and its subsidiaries. FCFG
proposes to combine Premises, Inc. with the Bank prior to completion of the
Merger. The Bank maintains a mortgage production office and ten branches located
in Lacey, Olympia, Tumwater, Yelm, Tacoma, Fircrest, Centralia, Elma and
Hoquiam, Washington. The Bank also owns all the outstanding shares of FCB
Financial Services, Inc., a full-service brokerage firm.
As of September 30, 1996, the Bank had deposits of approximately $154
million and assets of approximately $177 million. The Bank's deposits are
insured by the FDIC. FCFG's executive offices are located at 721 College Street
SE, Lacey, Washington 98503, and its telephone number is (360) 459-1100. See
"INFORMATION CONCERNING FCFG."
PSB. PSB is a Washington state-chartered commercial bank incorporated
in 1987. PSB's headquarters are located in Yelm, Washington. PSB conducts
business through a mortgage production office and three branch locations, in
Yelm, Olympia and Eatonville, Washington.
As of September 30, 1996, PSB had deposits of approximately $42 million
and assets of approximately $50 million. PSB's deposits are insured by the FDIC.
PSB's executive offices are located at 608 Yelm Avenue East, Yelm, Washington
98597, and its telephone number is (360) 458-2265. See "INFORMATION CONCERNING
PSB."
- 1 -
<PAGE> 16
FCFG and PSB had no previous affiliation with one another prior to the
Merger negotiations. Certain principals of PSB may also be shareholders of FCFG,
but none, either individually or in the aggregate, own five percent or more of
FCFG Common Stock. See "BACKGROUND OF AND REASONS FOR THE MERGER -- Background
of the Merger."
SPECIAL PSB SHAREHOLDER MEETING
A special meeting of PSB shareholders ("Special Meeting") will be held
Yelm High School Auditorium, 1315 Yelm Avenue West, Yelm Washington, on January
8, 1997, at 6:00 p.m. local time. The purpose of the Special Meeting is to vote
to approve the Merger Agreement providing for the merger of PSB with and into
the Bank in exchange for FCFG Common Stock and cash. Only shares of PSB Common
Stock outstanding as of _______, 1996, the record date for the Special Meeting
("Record Date"), are entitled to vote at the Special Meeting. On the Record
Date, there were _______ shares of PSB Common Stock outstanding. The affirmative
vote of two-thirds (2/3) of the shares of PSB Common Stock outstanding on the
Record Date is required to approve the Merger Agreement. As of the Record Date,
PSB's directors and executive officers and their affiliates were entitled to
vote ______ shares at the Special Meeting, which represent approximately ____
percent of the total number of outstanding shares on such date. See "SPECIAL
MEETING OF PSB SHAREHOLDERS."
THE MERGER; EXCHANGE VALUE
Pursuant to the Merger Agreement, PSB will be merged with and into the
Bank on the Effective Date, with the Bank as the surviving corporation. Upon
consummation of the Merger, each holder of shares of PSB Common Stock (other
than dissenting shares) will be entitled to receive, in exchange for each share
of PSB Common Stock held of record by such shareholder on the Effective Date,
either cash, shares of FCFG Common Stock or a combination of cash and stock. The
consideration to be received for each share of PSB Common Stock ("PSB Exchange
Value") will be either (i) cash equal to 200 percent of the per-share Book Value
of PSB Common Stock determined on the Pricing Date (i.e., the last day of the
calendar month immediately preceding the Effective Date) or (ii) shares of FCFG
Common Stock equal to 200 percent of the per-share Book Value of PSB Common
Stock as of the Pricing Date divided by 196 percent of the per-share Book Value
of FCFG Common Stock as of the Pricing Date. See "THE MERGER -- Basic Terms of
the Merger."
The aggregate cash to be paid for all of the outstanding shares of PSB
Common Stock, including cash to be paid for dissenting shares, will be limited
to a percentage of the total value of the PSB Common Stock to be exchanged in
the Merger, such percentage to be between 20 percent and 45 percent. The actual
percentage of cash consideration will be set by the FCFG Board before closing
("Total Available Cash"). Certain shareholders -- including shareholders who are
not Washington residents, shareholders holding less than 200 shares of PSB
Common Stock, and all shareholders to the extent they are entitled to receive
fractional shares -- may be required to receive cash for their PSB Common Stock.
All other PSB shareholders will be given an opportunity to elect to receive
stock, cash or a combination of stock and cash, but such election will be
subject to the Total Available Cash limitation. See "THE MERGER -- Cash for
Certain Shares."
For information on how PSB shareholders must make their elections for
stock and/or cash consideration and the procedure for exchanging PSB stock
certificates, see "THE MERGER -- Election Procedures and Adjustments; and
Exchange of Stock Certificates."
- 2 -
<PAGE> 17
EFFECTIVE DATE OF THE MERGER
The Merger is presently expected to be consummated during the first
quarter of 1997, although the timing is subject to satisfaction of several
conditions. Specifically, the Merger will be consummated after approval of the
Merger Agreement by the shareholders of PSB, receipt of regulatory approvals and
satisfaction or waiver of all of the conditions set forth in the Merger
Agreement. The consummation of the Merger is referred to in this
Prospectus/Proxy Statement as the "Closing" and the date on which the Closing
occurs is referred to as the "Effective Date." The Merger Agreement provides
that if the Merger has not been consummated by April 30, 1997, then at any time
after such date, the Board of either FCFG or PSB may vote to abandon the Merger.
See "THE MERGER -- Basic Terms of the Merger."
BOARD DETERMINATIONS
The PSB Board has unanimously approved the Merger. The FCFG Board has
approved the Merger by a majority vote. One member of the FCFG Board voted
against the Merger Agreement on the basis that he believes FCFG and the Bank
should focus on profitability rather than growth. The remaining seven members of
the FCFG Board voted in favor of the Merger on the basis that the existing
expansion opportunities may not be available in the future and that the Bank
should pursue the growth opportunities while they are available. See "BACKGROUND
OF AND REASONS FOR THE MERGER."
REASONS FOR THE MERGER; RECOMMENDATION OF THE PSB BOARD
The PSB Board has unanimously determined that the Merger and the Merger
Agreement are in the best interest of PSB and its shareholders. In making this
determination, the PSB Board considered a variety of factors, including the
expansion opportunities and economies of scale available to the Combined Bank,
the enhanced shareholder value represented by the premium being paid by FCFG for
the PSB Common Stock, the continuity of management and the shared community
banking cultures of the two banks and the substantially greater resources and
enhanced employee opportunities of the Combined Bank. The PSB Board has also
obtained an opinion as to the fairness of the terms of the Merger to PSB and its
shareholders from Hoefer & Arnett, investment bankers experienced in banking
matters. THE PSB BOARD HAS UNANIMOUSLY RECOMMENDED THAT ITS SHAREHOLDERS APPROVE
THE MERGER AGREEMENT. See "BACKGROUND OF AND REASONS FOR THE MERGER; Reasons for
the Merger - PSB; Opinion of Financial Advisor."
OPINION OF FINANCIAL ADVISOR
Hoefer & Arnett, PSB's and FCFG's financial advisor, has delivered a
written opinion to the PSB Board, dated October 14, 1996, to the effect that the
Merger is fair, from a financial perspective, to PSB and its shareholders. A
copy of Hoefer & Arnett's opinion setting forth the limits of its review,
assumptions made, other matters considered and procedures followed, is attached
to this Prospectus/Proxy Statement as Appendix C and should be read in its
entirety by PSB shareholders. Hoefer & Arnett has delivered a similar opinion to
the FCFG Board. See "BACKGROUND OF AND REASONS FOR THE MERGER -- Opinion of
Financial Advisor."
- 3 -
<PAGE> 18
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is conditioned upon (i) approval of the
Merger Agreement by the holders of at least two-thirds of the outstanding shares
of PSB Common Stock; (ii) receipt of all necessary approvals of the Merger by
governmental regulatory agencies, including the FDIC and the Director; (iii) the
effectiveness with the SEC of this Registration Statement; (iv) receipt by each
party of a favorable tax opinion from Knight, Vale & Gregory; (v) the continuing
accuracy of the representations and warranties of each party; (vi) the
performance of specified obligations by each party; and (vii) certain other
conditions. FCFG will file with the FDIC and Director applications for approval
of the Merger. The tax opinion from Knight, Vale & Gregory to PSB and FCFG as
required by the Merger Agreement has been received and is filed as an exhibit to
this Registration Statement. Both PSB and FCFG have satisfied, or are in the
process of satisfying, all obligations under the Merger Agreement and neither
PSB nor FCFG is aware of any violation of or noncompliance with any condition or
representation under the Merger Agreement. See "THE MERGER -- Conditions to the
Merger" and "BANK SUPERVISION AND REGULATION."
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be amended or supplemented at any time prior
to the Effective Date, whether before or after its adoption by the PSB
shareholders, upon written approval by both the FCFG and PSB Boards. The Merger
Agreement has been amended once since it was initially executed. Amendment No.1,
dated October 18, 1996, was adopted by both the FCFG and PSB Boards, and is
incorporated into the amended and restated Merger Agreement attached as Appendix
A to this Prospectus/Proxy Statement. Subject to applicable law, any further
amendment of, or supplement to, the Merger Agreement may be made without further
approval of the PSB shareholders. The Merger Agreement may be terminated, and
the Merger abandoned prior to the Effective Date, whether before or after its
adoption by PSB's shareholders, (i) by the respective majority votes of the FCFG
and PSB Boards, or (ii) by either the FCFG or the PSB Board under certain
specified circumstances, including a failure to consummate the Merger by April
30, 1997. See "THE MERGER -- Amendment and Termination of Merger Agreement."
DIRECTORS AND OFFICERS OF FCFG AND THE BANK
Upon consummation of the Merger, the FCFG Board will consist of all of
the directors of FCFG immediately before the Effective Date with the addition of
Michael D. Edwards. The Bank Board will consist of all the directors of the Bank
immediately before the Effective Date, with the addition of Mr. Edwards,
Lawrence J. Schorno and Thomas P. Gorman, each of whom are currently directors
of PSB. The executive officers of FCFG and the Bank immediately prior to the
Effective Date will remain unchanged following consummation of the Merger,
except that Mr. Edwards, who is also currently the President and Chief Executive
Officer of PSB, will be appointed President of the Combined Bank. In addition,
certain executive officers of PSB will be appointed to positions at Combined
Bank substantially similar to the positions they currently hold at PSB. See "THE
MERGER -- Directors and Officers; and Interests of Certain Persons in the
Merger."
- 4 -
<PAGE> 19
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of PSB's management and the PSB Board may be deemed to
have interests in the Merger in addition to their interests as shareholders of
PSB generally, as a result of provisions in the Merger Agreement relating to
indemnification, employment agreements, and appointments to the FCFG and Bank
Boards.
Upon consummation of the Merger, Mr. Edwards will be appointed
President of the Combined Bank for a term of five years. He will receive an
annual compensation of $120,000 subject to a minimum ten percent increase on
September 1, 1997 and annual increases thereafter commensurate with raises
granted to other executive officers. In addition, Mr. Edwards will be granted
certain stock options and will be eligible for additional incentive stock
options and participate in the Bank's incentive bonus program. Executive
Supplemental Income Agreements in effect between PSB and each of Mr. Edwards,
Roger A. Johansen, D. James Arthur, and Colleen Dorian will remain in effect
after the Merger. See "THE MERGER -- Directors and Officers; and Interests of
Certain Persons in the Merger."
FCFG has entered into an agreement with certain holders of shares of
FCFG Common Stock (including certain directors of FCFG and the Bank) pursuant to
which FCFG will purchase the shares of such FCFG shareholders, conditioned upon
the Closing of the Merger. See "INFORMATION ABOUT FCFG -- Proposed
Transactions."
CONDUCT PENDING CONSUMMATION OF THE MERGER
PSB shareholders will retain their equity interest in PSB until the
Effective Date. The Merger Agreement provides that until the consummation of the
Merger and unless FCFG otherwise consents in writing, PSB will operate only in
the ordinary and usual course of business, and in addition will refrain from
engaging in certain specified activities. See "THE MERGER -- Conduct Pending
Consummation of the Merger."
FEDERAL INCOME TAX TREATMENT OF THE MERGER
Consummation of the Merger is conditioned upon receipt by FCFG, and
delivery to PSB, of opinions from Knight, Vale & Gregory to the effect that (i)
the Merger will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
(ii) FCFG, the Bank and PSB will each be a party to the reorganization pursuant
to Section 368(b) of the Code, (iii) pursuant to the provisions of Section
354(a)(1) of the Code, no gain or loss will be recognized with respect to each
shareholder of PSB who exchanges his or her shares of PSB Common Stock solely
for shares of FCFG Common Stock, and (iv) the payment of cash to a shareholder
of PSB in lieu of fractional shares of FCFG Common Stock will be treated as
received in exchange for said fractional shares, subject to the limitations of
Section 302 of the Code. See "THE MERGER -- Certain Federal Income Tax Matters."
ACCOUNTING TREATMENT OF THE MERGER
It is expected that the Merger will be treated as a purchase for
accounting and financial reporting purposes.
- 5 -
<PAGE> 20
DISSENTERS' RIGHTS OF APPRAISAL
Holders of PSB Common Stock have the right to dissent from the Merger
to obtain payment of the appraised value of their shares in accordance with
applicable provisions of Washington state banking law. To exercise these rights,
a PSB shareholder must (i) vote against the Merger; (ii) make written demand for
the exercise of dissenters' rights within thirty (30) days after the Effective
Date; and (iii) surrender his or her stock certificates representing shares of
the PSB Common Stock. See "THE MERGER -- Dissenters' Rights of Appraisal" and
Appendix B.
ELECTION PROCEDURE AND EXCHANGE OF STOCK CERTIFICATES
Accompanying this Prospectus/Proxy Statement, holders of shares of PSB
Common Stock should receive an election form relating to their exchange of PSB
Common Stock in connection with the Merger. PSB shareholders will need to submit
their elections to receive cash, shares of FCFG Common Stock or a combination of
cash and stock, on or before five business days after the Special Meeting of PSB
Shareholders at which the Merger Agreement is considered. The individual
elections will be subject to adjustment to achieve the proper cash-to-stock
ratio for the overall consideration to be exchanged for the outstanding shares
of PSB Common Stock. See "THE MERGER -- Election Procedure and Adjustments."
As of the Effective Date of the Merger, each stock certificate that
prior to the Effective Date represented shares of PSB Common Stock will evidence
only the right to receive cash and/or shares of FCFG Common Stock payable in
accordance with the terms of the Merger Agreement. After the Merger is
effective, PSB shareholders will receive written instructions for the procedure
for exchanging their stock certificates. PSB SHAREHOLDERS SHOULD NOT SEND IN
THEIR STOCK CERTIFICATES AT THIS TIME.
COMPARISON OF CERTAIN SHAREHOLDER RIGHTS
PSB's shareholders who receive FCFG Common Stock shares in the Merger
in exchange for their shares of PSB Common Stock shares will be governed, with
respect to their rights as shareholders, by FCFG's Articles of Incorporation and
Bylaws, and Washington State corporation law (contained in Title 23B of the
Revised Code of Washington). Presently, the rights of PSB's shareholders are
determined under PSB's Articles of Incorporation and Bylaws, and Washington
State banking law (contained in Title 30 of the Revised Code of Washington).
Both FCFG and PSB have provisions in their charter that could make more
difficult the acquisition of either party by means of a tender offer, a proxy
contest, merger or otherwise. Washington law applicable to FCFG includes a "fair
price" statute and also requires the prior approval of a majority of a target
corporation's board of directors for certain acquisitions. Washington State
banking law, to which PSB is subject, has no similar provisions. For a
discussion of certain material differences in the rights of shareholders of FCFG
and PSB, and an explanation of certain possible anti-takeover effects of certain
provisions in FCFG's Articles of Incorporation and Bylaws, see "COMPARISON OF
SHAREHOLDER RIGHTS."
- 6 -
<PAGE> 21
ABSENCE OF ACTIVE TRADING MARKET
Neither the PSB Common Stock nor the FCFG Common Stock is actively
traded or listed on any national exchange and thus, the FCFG Common Stock to be
received by the shareholders of PSB upon consummation of the Merger will have
restricted liquidity. The FCFG Common Stock is registered as a class with the
SEC under the Exchange Act. Accordingly, FCFG is required to file certain
periodic and annual reports with the SEC and make information about FCFG
available to its shareholders and the public. The PSB Common Stock is not
registered with the SEC under the Exchange Act.
STOCK PRICE AND DIVIDEND INFORMATION
FIRST COMMUNITY FINANCIAL GROUP
No broker makes a market in the FCFG Common Stock and trading has not
been extensive. The trades that have occurred cannot be characterized as
amounting to an established public trading market. The FCFG 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 price information may not accurately reflect the actual market value
of FCFG's shares. The following data includes trades between individual
investors and new issues of stock, as reported to the Bank as transfer agent,
and does not reflect dealer mark-ups or mark-downs. This data does not include
the exercise of stock options.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NUMBER OF SHARES FCFG COMMON STOCK PRICES CASH
PERIOD REPORTED AS TRADED* LOW HIGH DIVIDENDS PAID
------ ------------------- --- ---- --------------
<S> <C> <C> <C> <C>
1993 41,000 $11.92 $15.49 N/A
1994 254,501 15.75 18.55 N/A
1995 25,938 17.60 21.00 N/A
1996 (through 9/30) 138,096 19.96 22.00 N/A
- ----------------------------------------------------------------------------------------
</TABLE>
(*) Does not include stock dividend transactions, or shares traded
as a result of the merger of Bank with NCB in 1995.
No cash dividends have been declared to date in 1996, nor were any
declared in 1995, 1994, or 1993. In 1992, the FCFG Board adopted a policy to
declare a stock dividend each year over the next five years while FCFG is in a
pattern of growth. The amount of the dividend to be paid will be determined by
the FCFG Board and will depend on the growth experienced by FCFG and the profits
generated. Stock dividends of 3 percent, 10 percent, 5 percent and 3 percent
were issued on March 31, 1993, January 1, 1994, February 28, 1995, and March 20,
1996, respectively. Washington law limits the ability of the Bank to pay
dividends to FCFG. Under these restrictions, a bank may not declare or pay any
dividend in an amount greater than its retained earnings without approval of the
Director. All of the retained earnings of the Bank are available for the payment
of dividends to FCFG under these restrictions, subject to applicable federal
capital regulations.
- 7 -
<PAGE> 22
PRAIRIE SECURITY BANK
No broker makes a market in the PSB Common Stock, and the trades that
have occurred cannot be characterized as amounting to an established public
trading market. The PSB 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 price
information may not accurately reflect the actual market value of PSB's shares.
The following data includes trades between individual investors and new issues
of stock, as reported to PSB as its own transfer agent, and does not reflect
dealer mark-ups or mark-downs. This data does not include the exercise of stock
options.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
NUMBER OF SHARES PSB COMMON STOCK PRICES CASH
PERIOD REPORTED AS TRADED LOW HIGH DIVIDENDS PAID
------ ------------------ --- ---- --------------
<S> <C> <C> <C> <C>
1993 60,348* $25.00 $50.00 N/A
1994 6,439 33.00 45.00 N/A
1995 2,068 47.50 50.00 N/A
1996 (through 9/30) 4,861 39.75 50.00 $1 per share**
- ---------------------------------------------------------------------------------------------
</TABLE>
(*) The trade of $50.00 occurred prior to July, 1993 when PSB paid a
stock dividend of 20 percent on its common shares, followed by a
two-for-one stock split. In September 1993, PSB sold 60,000
newly-issued shares at $25.00 per share in a limited offering.
(**) The total cash dividend amount was $196,316.
- 8 -
<PAGE> 23
SELECTED HISTORICAL PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following table sets forth selected financial data for FCFG and PSB
and selected pro forma condensed financial data. The selected pro forma
condensed financial data gives effect to the Merger on a purchase basis for the
periods specified below, under alternative scenarios that vary the amount of
cash consideration paid to PSB Shareholders and whether or not the targeted FCFG
Common Stock purchase takes place. See "INFORMATION CONCERNING FCFG -- Proposed
Transactions" and "THE MERGER -- Basic Terms of the Merger."
The four alternatives covered in the selected pro forma financial data
are as follows:
Alternative No. 1a: The consideration paid to PSB shareholders
consists of 45% cash and 55% stock and the
targeted stock purchase does not occur.
Alternative No. 1b: The consideration paid to PSB shareholders
consists of 45% cash and 55% stock and the
targeted stock purchase occurs at the
beginning of the period presented.
Alternative No. 2a: The consideration paid to PSB shareholders
consists of 20% cash and 80% stock and the
targeted stock purchase does not occur.
Alternative No. 2b: The consideration paid to PSB shareholders
consists of 20% cash and 80% stock and the
targeted stock purchase occurs at the
beginning of the period presented.
The pro forma condensed financial data are not necessarily indicative of actual
or future operating results or the financial position that would have occurred
or will occur upon the consummation of the Merger. The data have been derived in
part from, and should be read in conjunction with, the financial statements and
notes thereto and other financial information with respect to FCFG and PSB set
forth elsewhere in this Prospectus/Proxy Statement, and such data are qualified
in their entirety by reference thereto. All adjustments that the respective
managements of FCFG and PSB believe to be necessary for a fair presentation of
the data for the nine months periods have been included. The data for the nine
month periods are not necessarily indicative of the data for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DOLLARS IN THOUSANDS SEPTEMBER 30 YEARS ENDED DECEMBER 31
1996 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
FIRST COMMUNITY FINANCIAL GROUP
- -------------------------------
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income $ 7,238 $ 7,193 $ 9,646 $ 9,381 $ 7,734
Net income 1,448 1,039 920 1,797 2,113
AVERAGE BALANCE SHEET DATA:
Total loans 131,043 118,755 122,237 105,431 85,672
Total assets 171,008 171,058 173,167 153,614 128,178
Total deposits 150,116 121,623 150,923 131,765 113,022
Shareholders' equity 19,736 18,970 19,540 16,344 11,764
- ---------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
</TABLE>
- 9 -
<PAGE> 24
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS SEPTEMBER 30 YEARS ENDED DECEMBER 31
1996 1995 1995 1994 1993
- --------------------------------------------------------------------------------------------
PRAIRIE SECURITY BANK
- ---------------------
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income 1,926 1,746 2,289 2,465 2,133
Net income 332 105 255 251 370
AVERAGE BALANCE SHEET DATA:
Total loans 37,455 30,117 30,600 24,713 21,278
Total assets 48,371 42,155 42,812 36,364 28,240
Total deposits 39,970 36,014 36,167 31,259 23,966
Shareholders' equity 4,635 4,020 4,157 4,260 2,765
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PRO FORMA FCFG AND PSB COMBINED -- ALTERNATIVE NO. 1A
- -------------------------------------------------------
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income 9,154 8,929 11,921 11,832 9,853
Net income 1,540 903 855 1,728 2,163
AVERAGE BALANCE SHEET DATA:
Total loans 168,590 148,964 152,929 130,236 107,042
Total assets 220,002 213,836 216,602 190,601 157,041
Total deposits 190,137 157,688 187,141 163,075 137,039
Shareholders' equity 24,861 23,480 24,187 21,094 15,019
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PRO FORMA FCFG AND PSB COMBINED -- ALTERNATIVE NO. 1B
- ------------------------------------------------------
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income 9,154 8,929 11,921 11,832 9,853
Net income 1,540 903 855 1,728 2,163
AVERAGE BALANCE SHEET DATA:
Total loans 168,590 148,964 152,929 130,236 107,042
Total assets 217,747 211,581 214,347 188,346 154,786
Total deposits 190,137 157,688 187,141 163,075 137,039
Shareholders' equity 21,479 20,098 20,805 17,712 11,637
- --------------------------------------------------------------------------------------------
</TABLE>
- 10 -
<PAGE> 25
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DOLLARS IN THOUSANDS SEPTEMBER 30 YEARS ENDED DECEMBER 31
1996 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA FCFG AND PSB COMBINED -- ALTERNATIVE NO. 2A
- -----------------------------------------------------
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income 9,154 8,929 11,921 11,832 9,853
Net income 1,540 903 855 1,728 2,163
AVERAGE BALANCE SHEET DATA:
Total loans 168,590 148,964 152,929 130,236 107,042
Total assets 222,350 216,184 218,950 192,949 159,389
Total deposits 190,137 157,688 187,141 163,075 137,039
Shareholders' equity 27,209 25,828 26,535 23,442 17,367
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PRO FORMA FCFG AND PSB COMBINED -- ALTERNATIVE NO. 2B
- -----------------------------------------------------
EARNINGS SUMMARY:
Net interest income 9,154 8,929 11,921 11,832 9,853
Net income 1,540 903 855 1,728 2,163
AVERAGE BALANCE SHEET DATA:
Total loans 168,590 148,964 152,929 130,236 107,042
Total assets 220,095 213,929 216,695 190,694 157,134
Total deposits 190,137 157,688 187,141 163,075 137,039
Shareholders' equity 23,827 22,446 23,153 20,060 13,985
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
EQUIVALENT PER COMMON SHARE DATA
(UNAUDITED)
The following two tables present selected per common share data for (i) FCFG,
(ii) pro forma combined FCFG and PSB, (iii) PSB, and (iv) equivalent per share
of PSB after giving effect to the Merger on the purchase method of accounting.
The pro forma combined data are not necessarily indicative of actual or future
operating results or the financial position that would have occurred or will
occur upon the consummation of the Merger. The comparative data are based on the
historical and pro forma combined financial statements appearing elsewhere in
this Prospectus/Proxy Statement and should be read in conjunction with those
financial statements and the related notes.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HISTORICAL PER COMMON SHARE DATA
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
--------------------------------------
FCFG(1)
- ----
<S> <C> <C>
Net Income(2) $ 0.80 $ 0.51
Cash Dividends N/A N/A
Book value (as of end of period)(3) $ 12.03 $ 11.37
PSB
- ---
Net Income(2) $ 1.48 $ 1.14
Cash Dividends $ 1.00 N/A
Book value (as of end of period)(3) $ 23.81 $ 23.22
- --------------------------------------------------------------------------------
</TABLE>
- 11 -
<PAGE> 26
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA PER COMMON SHARE DATA AFTER GIVING EFFECT TO THE MERGER (4)
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
Alternative Alternative
- ------------------------------------------------------------------------------------------------------------------------------------
1a 1b 2a 2b 1a 1b 2a 2b
- ------------------------------------------------------------------------------------------------------------------------------------
FCFG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income(2): FCFG & PSB, Combined $ 0.75 $ 0.79 $ 0.71 $ 0.75 $ 0.42 $ 0.44 $ 0.40 $ 0.42
- ------------------------------------------------------------------------------------------------------------------------------------
Book value(3): FCFG & PSB, Combined $13.38 $12.94 $13.89 $13.51 $12.71 $12.23 $13.23 $12.80
- ------------------------------------------------------------------------------------------------------------------------------------
PSB
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income(2): FCFG & PSB, Combined $ 1.50 $ 1.58 $ 1.42 $ 1.50 $ 0.84 $ 0.88 $ 0.80 $ 0.84
- ------------------------------------------------------------------------------------------------------------------------------------
Book value(3): FCFG & PSB, Combined $26.76 $25.88 $27.78 $27.02 $25.42 $24.46 $26.46 $25.60
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On March 20, 1996 FCFG declared a five percent stock dividend. Accordingly,
the number of shares outstanding at December 31, 1995, and the average
shares outstanding for the year then ended have been restated to give
effect to the 80,226 shares issued.
(2) Net income per share is calculated by dividing total historical and pro
forma net income for the nine month period ended September 30, and for the
year ended December 31, by the historical and pro forma weighted average
number of shares of common stock and common stock equivalents outstanding
for the period indicated.
(3) Book value per share is calculated according to GAAP by dividing the total
historical and pro forma equity as of the date indicated by the historical
and pro forma number of shares outstanding as of the same date.
(4) Pro forma information is based on the PSB and FCFG Exchange Values being
applied against book values, to determine the exchange ratio for that
portion of PSB Common Stock that is exchanged for FCFG Common Stock under
each scenario.
SPECIAL MEETING OF PSB SHAREHOLDERS
DATE, TIME, PLACE AND PURPOSE
The PSB Special Meeting will be held on Wednesday, January 8, 1997, at
6:00 p.m. local time at the Yelm High School Auditorium, 1315 Yelm Avenue West,
Yelm, Washington. The purposes of the Special Meeting are as follows: (i) to
consider and vote upon approval of the Merger Agreement, and (ii) to act upon
other matters, if any, that may properly come before the Special Meeting.
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
The PSB Board has fixed _________, 1996 as the Record Date for
determining the holders of shares of PSB Common Stock entitled to notice of and
to vote at the Special Meeting. At the close of business on the Record Date,
there were ________ shares of PSB Common Stock issued and outstanding held by
approximately ___ holders of record. Holders of record of PSB Common Stock on
the Record Date are entitled to one vote per share, and are also entitled to
exercise dissenters' rights if certain procedures are followed. See "Dissenters'
Rights of Appraisal" and Appendix B.
- 12 -
<PAGE> 27
VOTE REQUIRED
The affirmative vote of two-thirds of all shares of PSB Common Stock
outstanding on the Record Date is required to approve the Merger Agreement. PSB
shareholders are entitled to one vote for each share of PSB Common Stock held.
The presence of a majority of the outstanding shares of PSB Common Stock in
person or by proxy is necessary to constitute a quorum of shareholders for the
Special Meeting. For this purpose, abstentions and broker nonvotes (i.e.,
proxies from brokers or nominees indicating that such person has not received
instructions from the beneficial owners or other persons entitled to vote shares
as to a matter with respect to which the broker or nominees do not have
discretionary power to vote) are counted in determining the shares present at a
meeting. For voting purposes, however, only shares affirmatively voted for the
approval of the Merger Agreement, and neither abstentions nor broker nonvotes,
will be counted as favorable votes in determining whether the Merger Agreement
is approved by the holders of PSB Common Stock. As a consequence, abstentions
and broker nonvotes will have the same effect as votes against approval of the
Merger Agreement.
As of the Record Date, directors and executive officers of PSB, owned
and were entitled to vote _____ shares at the Special Meeting, representing
approximately ______ percent of the outstanding shares of PSB Common Stock. See
"INFORMATION CONCERNING PSB -- Security Ownership of Certain Beneficial Owners
and Management." Each director of PSB has agreed to vote all shares of PSB
Common Stock held or controlled by him or her (a total of ______ shares, or
approximately ______ percent of the shares outstanding), in favor of approval of
the Merger.
VOTING, SOLICITATION, AND REVOCATION OF PROXIES
If the enclosed proxy is duly executed and received in time for the
Special Meeting, it will be voted in accordance with the instructions given. If
no instruction is given, it is the intention of the persons named in the proxy
to vote the shares represented by the proxy FOR THE APPROVAL OF THE MERGER
AGREEMENT AND IN THE PROXY'S DISCRETION ON ANY OTHER MATTER COMING BEFORE THE
MEETING, unless otherwise directed by the proxy. Any proxy given by a
shareholder may be revoked before its exercise by written notice to the
Secretary of PSB at the address for PSB given above, or by a subsequently dated
proxy, or in open meeting before the shareholder vote is taken. The shares
represented by properly executed, unrevoked proxies will be voted in accordance
with the instructions in the proxy. Shareholders are entitled to one vote for
each share of PSB Common Stock held on the Record Date.
The proxy for the Special Meeting is being solicited on behalf of the
PSB Board. PSB will bear the cost of solicitation of proxies from its
shareholders. In addition to using the mails, proxies may be solicited by
personal interview, telephone, and wire. Banks, brokerage houses, other
institutions, nominees, and fiduciaries will be requested to forward their proxy
soliciting material to their principals and obtain authorization for the
execution of proxies. Officers and other employees of PSB may solicit proxies
personally. PSB is not expected to pay any compensation for the solicitation of
proxies, but will, upon request, pay the standard charges and expenses of banks,
brokerage houses, other institutions, nominees, and fiduciaries for forwarding
proxy materials to and obtaining proxies from their principals.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
FCFG is headquartered in the City of Lacey, Thurston County, close to
the Washington State capitol city of Olympia. Thurston County has enjoyed strong
growth in recent years and FCFG's strategy
- 13 -
<PAGE> 28
has been to seek continued growth both within Thurston County and in adjoining
markets. In addition to de novo branching, FCFG management's strategy has also
been to pursue attractive alliance opportunities such as the proposed
transaction with PSB. In March 1993, FCFG acquired Citizens First Bank, in
adjoining Grays Harbor County, and in 1994, FCFG completed a successful offering
of FCFG Common Stock, which contributed over $3 million in additional capital to
help finance these expansion plans. In 1995, FCFG acquired Northwest Community
Bank, in adjoining Pierce County, and in early 1996, FCFG opened a branch in
neighboring Lewis County. During this period, FCFG has continued to invest
significantly in management, technology, and other resources to support its
expansion.
PSB is a state banking corporation headquartered in Yelm, Thurston
County, approximately 13 miles from the Washington State capitol city of
Olympia. PSB engages in general banking business, and has expanded its business
largely through de novo branching. It opened its Olympia and Eatonville branches
in 1993 and 1994, respectively. Although it actively competes with a multitude
of national and state banks, mutual savings banks, savings and loans, finance
companies, credit unions, and other financial institutions, PSB faces
significant obstacles to developing the technological and service capacities
needed to aggressively grow in a highly competitive market.
FCFG approached PSB concerning a possible business combination. From
February 1996 through August 1996, informal discussions were held between
executive officers of FCFG, the Bank and PSB on the basic terms of a prospective
acquisition in order to determine whether a merger would be beneficial for both
parties. During these discussions, FCFG and the Bank expressed their interest in
retaining PSB's President and CEO, Michael D. Edwards, as the Bank's President
following a merger. Thus, coincidentally with the discussions concerning a
possible merger, FCFG and the Bank pursued discussions with Mr. Edwards
concerning his possible employment as President of the Bank, contingent upon the
consummation of a merger between the Bank and PSB.
The PSB Board carefully considered the nature, value and prospects for
future appreciation and liquidity of the shares of FCFG Common Stock to be
received by PSB shareholders in the proposed Merger. For the reasons set forth
hereafter, the PSB Board determined that the proposed transaction was in the
best interest of PSB's shareholders and provides an ongoing opportunity for
appreciation of the FCFG Common Stock following the Merger, as well as the
potential for increased liquidity through a substantially larger shareholder
base. See "Reasons for the Merger -- PSB."
Based on these and other relevant considerations, the Merger Agreement
was approved by the PSB Board on September 10, 1996, approved by the FCFG and
Bank Boards on September 11, 1996, and executed by the parties on September 11,
1996. The Merger Agreement was subsequently amended and restated on October 18,
1996, as described further below under "Reasons for the Merger -- PSB" and
"Reasons for the Merger -- FCFG."
REASONS FOR THE MERGER -- GENERAL
Both FCFG and PSB share a community-directed banking philosophy and
strategy which emphasizes responsiveness to local markets and the delivery of
personalized services through a community-oriented bank. FCFG and PSB believe
that the Merger will enable the Combined Bank to provide enhanced services to
customers and to compete more effectively in the present banking environment,
which is dominated by larger institutions. It is expected that the parties'
complementary market areas, product mixes, and areas of expertise will provide
significant opportunities for growth, revenue enhancement, and increased quality
of customer services. Moreover, the parties believe that their different asset
mixes, and industry focuses may enhance the diversification of the Combined
Bank, increasing its overall stability.
- 14 -
<PAGE> 29
The Merger is also expected to provide benefits to the parties through
increased efficiencies and other cost savings, particularly in the area of
information systems, financial services, and mortgage processing. As a result of
the Merger a broader array of products and services will be provided to
customers of PSB.
REASONS FOR THE MERGER -- PSB
At a special meeting held on September 10, 1996, the PSB Board
unanimously determined that the Merger and the Merger Agreement are in the best
interest of PSB and its shareholders, and recommended the Merger Agreement be
submitted to the shareholders of PSB for approval. In reaching its
determination, the PSB Board relied mainly on the informed business judgment of
its members and an appraisal of the relative worths of the Common Stock of PSB
and FCFG from Hoefer & Arnett, a consulting and financial advisory firm
experienced in bank appraisals. That appraisal indicated that the per share fair
market value for the PSB Common Stock was 200 percent of Book Value, which is
the price being paid by FCFG in the Merger. Other considerations material to the
PSB Board's decision were as follows:
a) The difficulty and expense of growing as an independent,
community-based financial institution in the present
competitive climate. Were PSB to stay independent, substantial
investment in data processing facilities, branches and
personnel would be necessary to support an expansion strategy.
FCFG has invested in significant infrastructure improvements,
including computer and associated technologies and customer
product delivery systems, that will be available to support
expansion of the Combined Bank's services.
b) The economies of scale available to the Combined Bank from
branch consolidations, combined human resources, streamlined
management and the discontinued outsourcing of certain
internal bank functions, including data processing, and
customer services, such as investment services.
c) The enhancement to shareholder value represented by the
premium paid by FCFG, in cash and FCFG Common Stock, to PSB
shareholders. Although neither PSB nor FCFG stock is actively
traded, PSB shareholders receiving FCFG Common Stock in the
Merger will own stock in a company whose stock is more widely
held and will be registered under federal securities laws, and
that will be preparing, filing and distributing periodic
reports to shareholders and with the SEC under federal
securities laws.
d) The continuity of management and management philosophies in
the Combined Bank, including the continued participation of
certain directors of PSB on the Board of the Bank. Both the
Bank and PSB have similar community banking cultures and
lending philosophies, including a commitment to customer
service in their respective core communities, and similar
sales and marketing strategies. These synergies will be
enhanced by the relative strength of PSB in such areas as
mortgage lending, which will be offered throughout the
Combined Bank's service area.
e) The substantially greater resources of the Combined Bank and
FCFG and the advantages associated with ownership of the
Combined Bank through a bank holding company such as FCFG,
including the ability to offer larger loans to customers due
to higher legal lending limits.
- 15 -
<PAGE> 30
f) The ability of the Combined Bank to provide enhanced technology
and additional training programs to employees, allowing them to
better meet customer needs while providing increased career
opportunities and greater job satisfaction.
The PSB Board has obtained a written opinion from Hoefer & Arnett as to
the fairness to PSB and its shareholders, from a financial point of view, of the
terms of the proposed Merger of PSB with and into the Bank. See "Opinion of
Financial Advisor."
On October 18, 1996, the PSB Board considered and unanimously adopted
Amendment No. 1 to the Merger Agreement pursuant to which it was agreed that the
Total Available Cash payable by FCFG as cash consideration to PSB shareholders
under the Merger Agreement would be not less than 20 percent nor greater than 45
percent of the total consideration paid by FCFG for PSB Common Stock in the
Merger. The amendment has been incorporated into the amended and restated Merger
Agreement attached as Appendix A to this Prospectus/Proxy Statement.
REASONS FOR THE MERGER -- FCFG
At a meeting held on September 11, 1996, the FCFG Board determined to
proceed with the Merger and authorized execution of the Merger Agreement. One
member of the FCFG Board voted against the Merger Agreement on the basis that he
believes that FCFG and the Bank should focus on immediate profitability
enhancement rather than growth through merger. The remaining seven (7) members
of FCFG's Board voted in favor of the Merger based on their belief that
acquisition opportunities such as that presented by the proposed Merger may not
be available in the future.
The FCFG Board determined that the Merger would advance FCFG's
strategic plan by combining the Bank with a financially sound institution with a
complementary business strategy, thereby creating a stronger institution with
greater size, flexibility, efficiency, capital strength, and profitability. The
FCFG Board believes that the Merger will allow FCFG to more effectively compete
in the rapidly changing marketplace for banking, mortgage banking, financial
services and to take advantage of opportunities for growth and diversification.
On October 17, 1996, the FCFG Board considered and adopted Amendment
No. 1 to Merger Agreement pursuant to which it was agreed that the Total
Available Cash payable by FCFG as cash consideration to PSB shareholders under
the Merger Agreement would be not less than 20 percent nor less than 45 percent
of the total consideration paid by FCFG for PSB Common Stock in the Merger. The
amendment has been incorporated into the amended and restated Merger Agreement
attached as Appendix A to this Prospectus/Proxy Statement.
OPINION OF FINANCIAL ADVISOR
The respective Boards of PSB and the Bank retained Hoefer & Arnett,
Incorporated to render a written opinion (the "Fairness Opinion") as financial
analysts as to the fairness, from a financial point of view, to the Boards and
shareholders of PSB and FCFG of the terms of the proposed Merger of PSB with and
into the Bank, as defined in the Merger Agreement. No limitations were imposed
by the Boards of either PSB or FCFG upon Hoefer & Arnett with respect to the
investigations made or procedures followed in rendering the Fairness Opinion.
A copy of the Fairness Opinion of Hoefer & Arnett, dated October 14,
1996, which was delivered to the PSB Board and which sets forth certain
assumptions made, matters considered and limits
- 16 -
<PAGE> 31
on the review undertaken by Hoefer & Arnett, is attached as Appendix C to this
Prospectus/Proxy Statement. PSB shareholders are urged to read the Fairness
Opinion in its entirety. The following summary of the procedures and analysis
performed, and assumptions used by Hoefer & Arnett is qualified in its entirety
by reference to the text of such Fairness Opinion. The Fairness Opinion is
directed to the PSB Board and is directed only to the financial terms of the
transaction and does not constitute a recommendation to any PSB shareholder as
to how such shareholder should vote at the Shareholder's Meeting.
In arriving at its opinion, Hoefer & Arnett reviewed and analyzed,
among other things, the following: (i) the Merger Agreement; (ii) Annual Reports
to Shareholders of PSB and FCFG for the years ended December 31, 1994 and
December 31, 1995; (iii) Quarterly FDIC Call reports for the quarters ended
December 31, 1995, March 31, 1996 and June 30, 1996; (iv) certain other publicly
available information concerning other banks and holding companies, the trading
markets for their securities, and the nature and terms of certain other merger
transactions believed to be relevant to this inquiry. Hoefer & Arnett has held
discussions with senior management of PSB, FCFG and the Bank concerning their
past and current operations, financial condition and prospects, as well as the
results of regulatory examinations.
Hoefer & Arnett reviewed with senior management of PSB earnings
projections for 1996 through 2000 for PSB as a stand-alone entity, assuming the
Merger does not occur, prepared by PSB. Hoefer & Arnett reviewed with senior
management of FCFG and the Bank earnings projections for 1996 through 2000 as a
stand-alone entity, assuming the Merger does not occur, as well as projected
operating cost savings expected to be achieved in each such years resulting from
the Merger. Such projections were prepared by the Bank's senior management.
Certain pro forma financial projections for the years 1996 through 2000 for the
combined entity were derived by Hoefer & Arnett based partially upon the
projections discussed above, as well as Hoefer & Arnett's own assessment of
general economic, market and financial conditions. In certain cases, such
combined pro forma financial projections included projected operating cost
savings derived by Hoefer & Arnett partially based upon the projections
discussed above to be realizable in the Merger.
In conducting its review and arriving at its opinion, Hoefer & Arnett
relied upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available, and did not attempt to
independently verify the same. Hoefer & Arnett relied upon the management of
PSB, FCFG and the Bank as to the reasonableness of the financial and operating
forecasts, projections and possible operating cost savings (and the assumptions
and bases therefore) provided to it, and Hoefer & Arnett assumed that such
forecasts, projections and possible operating cost savings reflect the best
currently available estimates and judgments of the applicable management. Hoefer
& Arnett also assumed without independent verification, that the aggregate
allowances for loan losses for PSB and the Bank are adequate to cover such
losses. Hoefer & Arnett did not make or obtain any evaluations or appraisals of
the properties of PSB or the Bank, nor did it examine any individual loan credit
files. For purposes of its opinion, Hoefer & Arnett assumed that the Merger will
have the tax accounting and legal effects described in the Merger Agreement and
relied, as to legal matters, exclusively on counsel to PSB, FCFG and the Bank,
as to the accuracy of the disclosures set forth in the Merger Agreement. Hoefer
& Arnett's opinion is limited to the fairness, from a financial point of view,
to the holders of shares of PSB Common Stock of the terms of the proposed Merger
of PSB with and into the Bank and does not address PSB's underlying business
decision to proceed with the Merger.
As more fully discussed below, Hoefer & Arnett considered such
financial and other factors as it deemed appropriate under the circumstances,
including among others the following: (i) the historical and current financial
position and results of operations of PSB and the Bank, including interest
income,
- 17 -
<PAGE> 32
interest expense, net interest income, net interest margin, provision for loan
losses, non-interest income, non-interest expense, earnings, dividends, internal
capital generation, book value, intangible assets, return on assets, return on
shareholders' equity, capitalization, the amount and type of non-performing
assets, loan losses and the reserve for loan losses, all as set forth in the
financial statements for PSB, FCFG and the Bank; (ii) the assets and liabilities
of PSB and the Bank, including the loan, investment and mortgage portfolios,
deposits, other liabilities, historical and current liability sources and costs
and liquidity; and (iii) the nature and terms of certain other merger
transactions involving banks and bank holding companies.
Hoefer & Arnett also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and its
knowledge of the banking industry generally. The Fairness Opinion is necessarily
based upon conditions as they existed and can be evaluated on the date of its
opinion and the information made available to it through that date.
In connection with rendering its Fairness Opinion to the Boards of PSB
and FCFG, Hoefer & Arnett performed certain financial analyses, which are
summarized below. Hoefer & Arnett believes that its analysis must be considered
as a whole and that selecting portions of such analysis and the factors
considered therein, without considering all factors and analysis, could create
an incomplete view of the analysis and the processes underlying the Fairness
Opinion. The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. In its analyses, Hoefer & Arnett made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters, many of which are beyond the control of PSB, FCFG and the Bank.
Any estimates contained in Hoefer & Arnett's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates of values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold.
The financial forecasts and projections of PSB and the Bank prepared by
Hoefer & Arnett were based on projections provided by the respective companies
as well as Hoefer & Arnett's own assessment of general economic, market and
financial conditions. All such information was reviewed with the respective
management of PSB, FCFG and the Bank. Neither PSB nor the Bank publicly
discloses internal management financial forecasts and projections of the type
provided to Hoefer & Arnett in connection with its review of the proposed Merger
and such forecasts and projections were not prepared with a view towards public
disclosure. The forecasts, projections, and possible operating cost savings
prepared by Hoefer & Arnett were based on numerous variables and assumptions
which are inherently uncertain, including, without limitation, factors related
to general economic and market conditions. Accordingly, actual results could
vary significantly from those set forth in such forecasts and projections.
Set forth below is a brief summary of the analysis performed by Hoefer
& Arnett in reaching the Fairness Opinion. Hoefer & Arnett assumed for purposes
of its opinion that the Merger will be accounted for as a purchase transaction
under generally accepted accounting principles. Hoefer & Arnett used an exchange
ratio of two shares of FCFG Common Stock for each share of PSB Common Stock.
Exchange Ratio Determination Analysis. In order to determine a fair and
equitable exchange ratio, Hoefer & Arnett utilized the net asset value, market
value and investment value approaches, as explained below.
Net asset value is the value of the net equity of a bank, including
every kind of property and value. This approach normally assumes liquidation on
the date of appraisal with recognition of securities
- 18 -
<PAGE> 33
gains or losses, real estate appreciation or depreciation and any adjustments to
the loan loss reserve, discounts to the loan portfolio or changes in the net
value of other assets. As such, it is not the best approach to use 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
prices and yields (which is often of limited accuracy because readily available
data is often lacking), it still results in a liquidation value for the concern.
Furthermore, since this method does not take into account the values
attributable to the going concern such as the interrelationship among the
company's assets, liabilities, customer relations, market presence, image and
reputation, and staff expertise and depth, little weight is given to the net
asset value method of valuation.
Market value is defined as the price, established on an "arm's length"
basis, at which knowledgeable, unrelated buyers and sellers would agree. The
market value is frequently used to determine the price of a minority block of
stock when both the quantity and the quality of the "comparable" data are deemed
sufficient. However, the relative thinness of the specific market for the stock
of the banking company being appraised may result in the need to review
alternative markets of comparative pricing purposes. The "hypothetical" market
value for a small bank with a thin market for its stock is normally determined
by comparison to the average price to earnings, price to equity and dividend
yield of local or regional publicly-traded bank issues, adjusted for lack of
marketability or liquidity. Based on the low end of the trading range of PSB's
and FCFG's Common Stock, Hoefer & Arnett calculated an exchange of 2 to 1.
The market value in connection with the evaluation of control of a bank
is determined by the previous sales of banks in the state or region. In valuing
a business enterprise, when sufficient comparable trade data is available, the
market value deserves greater weighting than the net asset value and equal or
possible greater weighting than the investment value. In analyzing the fair
market value of both PSB and FCFG, Hoefer & Arnett has considered the market
approach and has evaluated price to equity and price to earnings multiples of
banking organizations that were sold during the first half of 1996. This data
was obtained from SNL Securities, L.P.
Hoefer & Arnett calculated an "Adjusted Book Value" exchange ratio,
based on PSB's and FCFG's June 30, 1996 equity, of 1.96 to 1. Hoefer & Arnett
calculated an "Adjusted Earnings Value" exchange ratio, based on PSB's and
FCFG's estimated 1996 earnings, of 2.36 to 1. The financial performance
characteristics of the banking organizations sold in the first half of 1996
vary, sometimes substantially from those of PSB and FCFG. When the variance is
significant for relevant performance factors, adjustment of the exchange ratio
computed using price multiples is appropriate when comparing them to the fair
market value conclusion. These "Adjusted Book Value" and "Adjusted Earnings
Value" approaches were also utilized in supporting the fairness of the cash
price to be offered for shares of PSB Common Stock as provided for in the Merger
Agreement.
Hoefer & Arnett analyzed the value of the aggregate consideration to be
received in the transactions that were announced in the first half of 1996 in
relationship to the stated Book Value and earnings as compared to the value of
the aggregate consideration to be received by holders of shares of PSB Common
Stock. However, Hoefer & Arnett has considered the proposed transaction as a
true bank merger, versus an acquisition or sale.
Investment value is sometimes referred to as the income value or
earnings value. The investment value is frequently defined as an estimate of the
present value of future benefits. Another popular investment value method is to
determine the level of current annual benefits and then capitalize one or more
of the benefit types using an appropriate capitalization rate such as an
earnings or dividend yield. Using a net present value discount rate of 12
percent, an acceptable discount rate considering the risk-
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<PAGE> 34
return relationship most investors would demand for an investment of this type
as of the valuation date, the exchange ratio based on the net present value of
future earnings equaled 2.36 to 1.
In order to analyze the reasonableness of the fair market value, the
return on investment was calculated to determine the return that would accrue to
a potential buyer at the fair market value. The return on investment equaled
10.35 percent for PSB and 10.21 percent for FCFG. Additionally, the fair market
value to assets was calculated and compared to the average purchase price to
assets for banking organizations sold in the first half of 1996. Based on the
proposed exchange ratio of 2 to 1, the price to assets equaled 19.22 percent for
PSB and 23.30 percent for FCFG. Lastly, Hoefer & Arnett calculated the net
present value to fair market value, as it has been recognized that there is a
relationship between the net present value of a community banking organization
and the fair market value of a majority block of the banking organization's
stock. The ratios of net present value to fair market value, based on the
proposed exchange ratio of 2 to 1, equaled 89.63 percent for PSB and 75.84
percent for FCFG. The return on investment and net present value approaches were
also utilized in supporting the fairness of the cash price to be offered for
shares of PSB Common Stock as provided for in the Merger Agreement.
When these investment value methods are combined and the values
determined using the net asset value, market value and investment value
approaches are subjectively weighed, using the appraiser's experience and
judgment, a fair exchange ratio of two-to-one is derived.
Pro Forma Merger and Contribution Analysis. Based upon input from
senior management of PSB and the Bank, as well as Hoefer & Arnett's own
assessment of general economic, market and financial conditions, and all
financial and other factors it deemed appropriate under the circumstances,
Hoefer & Arnett prepared financial projections for PSB and FCFG on a stand-alone
basis. The projections and possible operating cost savings prepared by Hoefer &
Arnett were based on numerous variables and assumptions which are inherently
uncertain, and accordingly, actual results could vary from those set forth in
such projections.
FCFG is projected to generate a return on average assets of 1.16
percent in 1996 and 1.40 percent in the years 1997 through 2000. FCFG's assets
are projected to increase by 6.62 percent in 1996, 12.00 percent in 1997, 11.00
percent in 1998 and 10.00 percent in 1999 and 2000. PSB is projected to generate
a return on average assets of 1.22 percent in 1996, 1.25 percent in 1997 and
1.30 percent in 1998 through 2000. PSB's assets are project to increase by 17.56
percent in 1996, 15.00 percent in 1997, 14.00 percent in 1998, 13.00 percent in
1999 and 12.00 percent in 2000.
Pro forma financial projections for the combined entity were derived by
Hoefer & Arnett based upon the projections discussed above and included
Merger-related savings of $250,000 in 1997 and $750,000 in 1998 through 2000, on
a pre-tax basis. Such estimates were based partially upon discussions with
senior management of the Bank and Hoefer & Arnett's own assessment of the cost
savings realizable in the Merger. Hoefer & Arnett analyzed the Book Value and
earnings per share impact of the proposed transaction on PSB and FCFG
shareholders over the next five years. At an exchange ratio of two shares of
FCFG Common Stock for each share of PSB Common stock, PSB shareholders are
projected to experience equity per share appreciation ranging from 13.36 percent
to 16.53 percent in the years 1996 through 2000. On an earnings per share basis,
PSB shareholders are projected to incur dilution of 7.05 percent in 1996,
appreciation ranging from 1.61 percent to 4.64 percent in 1997 through 1999 and
dilution of 0.21 percent in 2000.
Based upon and subject to the foregoing, Hoefer & Arnett is of the
opinion as financial advisors that, as of the date hereof, the terms of proposed
Merger of PSB with and into the Bank are fair, from a financial point of view,
to the holders of shares of PSB Common Stock.
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<PAGE> 35
For its services as an independent financial analyst for the Merger,
including the rendering of its opinion referred to above, the parties to the
Merger Agreement have agreed to pay Hoefer & Arnett aggregate fees of $19,000.
RECOMMENDATION OF THE PSB BOARD
THE PSB BOARD UNANIMOUSLY RECOMMENDS THAT THE PSB SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
THE MERGER
GENERAL
The following description of certain aspects of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement. All PSB shareholders are urged to read the Merger Agreement
carefully. PSB shareholders are being asked to approve the Merger that is to be
consummated in accordance with the terms of the Merger Agreement.
BASIC TERMS OF THE MERGER
Terms. Under the terms of the Merger Agreement, PSB will be merged with
and into the Bank. Upon consummation of the Merger, the outstanding shares of
PSB Common Stock, other than dissenting shares, will be converted into the right
to receive cash and/or shares of FCFG Common Stock. The holders of the
outstanding shares of PSB Common Stock will be entitled to receive, in the
aggregate, (i) cash equal to a percentage of the PSB Exchange Value to be
determined by the FCFG Board on or before Closing, but not to be less than 20
percent or to exceed 45 percent ("Total Available Cash"), and (ii) shares of
FCFG Common Stock having an aggregate Exchange Value equal the remaining
percentage of the PSB Exchange Value. Each holder of the outstanding shares of
PSB Common Stock will have an opportunity to elect to receive cash and/or
shares, but such elections will be subject to adjustment as specified in the
Merger Agreement to limit cash to the Total Available Cash.
Exchange Values. The shares of PSB Common Stock will be exchanged
according to the respective Exchange Values of PSB's and FCFG's Common Stock.
Based on analysis by the financial advisors Hoefer & Arnett, the Exchange Value
of FCFG Common Stock will be 196 percent of its Book Value and the Exchange
Value of PSB Common Stock will be 200 percent of its Book Value. The number of
shares of FCFG Common Stock that can be received for each share of PSB Common
Stock will be the number obtained by taking 200 percent of the per-share Book
Value of PSB Common Stock as of the Pricing Date (i.e., the last day of the
calendar month immediately preceding the Effective Date), and dividing such
number by 196 percent of the per-share Book Value of FCFG Common Stock as of the
Pricing Date.
Example: Suppose that the electing shareholder has 1,000 shares of PSB
Common Stock and that the per-share Book Values are $23.00 for PSB
Common Stock and $11.80 for FCFG Common Stock. The shareholder elects
to exchange PSB shares for 45% cash and 55% stock. Under the exchange
mechanism, the shareholder will receive $20,700 for 450 PSB shares,
calculated as follows: 450 x (200% x $23.00) = $20,700. The shareholder
will receive 1,093 FCFG shares (ignoring fractional shares) for the
remaining 550 PSB shares, calculated as follows: 550 x (200% x $23.00)
/ (196% x
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<PAGE> 36
$11.80) = 1,093 shares. The cash to be received may be limited by the
Total Available Cash.
PSB's and FCFG's management will each determine the Book Value of their
respective companies on the Pricing Date. If either PSB or FCFG experiences a
net loss between the Pricing Date and the Effective Date, resulting in a
reduction in the Book Value of that company, then the exchange values will be
recalculated to take into account the reduced Book Value. The Merger Agreement
provides that the minimum per-share Book Value for FCFG Common Stock will be
$11.38 and for PSB Common Stock will be $22.60. If either company's Book Value
drops below the minimum, then the other company will have the option to
terminate the Merger Agreement.
As of September 30, 1996, the per-share Book Value of PSB Common Stock
was $23.92 and FCFG Common Stock was $12.23.
The Book Values used to determine the Exchange Values of PSB and FCFG
Common Stock are likely to differ from the Book Values at the time of Closing
due to fluctuations that may occur between the Pricing Date and the Effective
Date. However, neither PSB nor FCFG has plans which would change its per-share
Book Value prior to the final determination except for normal earnings, and
neither PSB nor FCFG anticipates material fluctuations to earnings up to the
date of final determination.
Closing and Effective Date. The Merger will be effective upon Closing.
The date on which the Closing takes place will be the Effective Date. Unless the
parties agree otherwise, the Closing will occur five business days after the
fulfillment or waiver of each condition, and the granting of each approval (and
the expiration of any required waiting period), set forth in or required by the
Merger Agreement. In no event, however, will the Closing occur before January
22, 1997, or if the Closing is to occur after January, in no event will the
Closing occur before the fifth business day of the month. The purpose of
restrictions in the last sentence is to allow adequate time for year-end (for a
January closing) and month-end financial information to be compiled. If the
Closing does not occur prior to April 30, 1997, either PSB or FCFG may terminate
the Merger Agreement. See "THE MERGER -- Conditions to the Merger."
CASH FOR CERTAIN SHAREHOLDERS
Certain shareholders of PSB Common Stock will be required to receive
cash in exchange for their shares of PSB Common Stock, subject to the Total
Available Cash limitation on aggregate cash consideration ("Mandatory Cash
Recipients"). Mandatory Cash Recipients will be (i) holders of dissenting
shares, (ii) holders of PSB Common Stock who would be entitled to receive
fractional shares of FCFG Common Stock (to the extent of such fractional
shares), (iii) holders of PSB Common Stock whose principal residence (or
principal office, in the case of a corporation, partnership, trust or other
business organization) is not within the State of Washington as of the Record
Date; and (iv) holders of fewer than 200 shares of PSB Common Stock. FCFG will
not issue stock certificates to Mandatory Cash Recipients, unless they are
required to receive shares of FCFG Common Stock because of the ceiling on
aggregate cash consideration.
Dissenting Shares. Holders of dissenting shares of PSB Common Stock
will be subject to the rules summarized below. See "THE MERGER -- Dissenters
Rights."
Fractional Shares. Each PSB shareholder will receive, in lieu of any
fractional shares of FCFG Common Stock, payment in cash for such fractional
shares in an amount equal to the product determined by multiplying such
fractional shares by 1.96 times the per-share Book Value of FCFG Common Stock
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<PAGE> 37
as of the Pricing Date. Each such PSB shareholder will have no other rights with
respect to such fractional shares.
Certain Shareholders. Each PSB shareholder owning fewer than 200 shares
of PSB Common Stock and each PSB shareholder who is not a Washington resident
will receive payment in cash for their shares, in an amount equal to the product
determined by multiplying the number of PSB shares held by such shareholder by
200 percent of the per-share Book Value of PSB Common Stock. For example, a PSB
shareholder owning 100 shares of PSB Common Stock would receive the dollar
equivalent of 100 times 200 percent of the per-share Book Value of PSB Common
Stock. For these purposes, a Washington resident refers to an individual whose
principal residence is within the State of Washington and any corporation,
partnership, trust or other form of business organization whose principal office
is within the State of Washington, in each case determined as of the Record
Date.
ELECTION PROCEDURE AND ADJUSTMENTS
Election Procedure. PSB shareholders eligible to elect to receive cash
or FCFG common stock in exchange for their shares of PSB Common Stock will need
to make their election on or before five business days after the PSB shareholder
meeting at which the Merger Agreement is considered. Eligible shareholders are
those shareholders of record of PSB Common Stock as of the Effective Date other
than Mandatory Cash Recipients.
Each shareholder will be required to make his or her election in
writing on an election form, a copy of which has been provided with this
Prospectus/Proxy Statement. Any shareholder who does not receive an election
form may obtain one from PSB by contacting Sharon Scholl at (360) 458-2265. The
form must be hand delivered or mailed (and postmarked) to FCFG at its main
office on or before five business days after the PSB shareholder meeting at
which the Merger Agreement is considered. Any shareholder who fails to make a
timely election will be deemed to have made an election to receive cash, subject
to adjustment as described below.
An election may be revoked or changed by substituting the submitted
election with another properly executed election form before the deadline for
making the election. Otherwise, elections will be irrevocable unless changed in
writing with the consent of the Boards of PSB and FCFG.
Adjustments to Achieve Proper Cash-to-Stock Ratio. The consideration to
be paid in the aggregate to shareholders of PSB Common Stock will be subject to
an overall ratio of cash to shares of FCFG Common Stock, such ratio to be
determined by the FCFG Board at its discretion before Closing. In no event,
however, will the cash amount be less than 20 percent or exceed 45 percent of
the aggregate PSB Exchange Value. The total amount of cash to be paid (the Total
Available Cash) will be calculated by taking the percentage set by the FCFG
Board times the per-share PSB Exchange Value times the total number of shares of
PSB Common Stock issued and outstanding as of the Effective Date (e.g., 45% x
200% x per-share Book Value x outstanding PSB shares = Total Available Cash).
The Total Available Cash will include cash amounts due to Mandatory Cash
Recipients.
If the Total Available Cash is less than the amount due to Mandatory
Cash Recipients, then the cash will be allocated first to the dissenting shares,
second to the fractional shares, third to shares held by holders who are not
Washington residents, and fourth to shares held by holders who own fewer than
200 shares of PSB Common Stock.
After allocating cash to Mandatory Cash Recipients, if the remaining
Total Available Cash is less than the amount due to shareholders who elect (or
are deemed to have elected) to receive cash, then
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<PAGE> 38
the following adjustments will be made. PSB shareholders who failed to make a
timely election will be deemed to have elected to receive only FCFG Common Stock
for their PSB Common Stock. The cash payable to those PSB shareholders who made
timely elections will be reduced pro rata, based on the number of shares of PSB
Common Stock for which they elected to receive cash. PSB shares for which the
shareholder elected to, but will not, receive cash will be exchanged for shares
of FCFG Common Stock.
After allocating cash to Mandatory Cash Recipients, if the remaining
Total Available Cash exceeds the amount due to shareholders who elect (or are
deemed to have elected) to receive cash, then the following adjustments will be
made. The cash payable to those PSB shareholders who made timely elections will
be increased pro rata, based on the number of shares of PSB Common Stock for
which they elected to receive cash. The number of shares of FCFG Common Stock
received by these PSB shareholders will be reduced commensurately.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Date, each certificate that, prior to the Effective
Date, represented shares of PSB Common Stock will evidence only the right to
receive cash and/or the number of shares of FCFG Common Stock payable in
accordance with the terms of the Merger Agreement. Upon valid surrender to PSB
of certificates that, prior to the Effective Date, represented shares of PSB
Common Stock, together with a duly executed transmittal form and any other
required documents, the holder surrendering such certificates will be entitled
to receive cash and certificates representing the shares of FCFG Common Stock to
which he or she is entitled, in accordance with the terms of the Merger
Agreement. No holder of certificates that, prior to the Effective Date,
represented PSB Common Stock will be entitled to receive any payments or
securities in exchange for those shares until valid surrender of the holder's
certificates is made. After the Merger is consummated, PSB shareholders will
receive written instructions on the procedure for turning in their stock
certificate and the required letter of transmittal. PSB SHAREHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES AT THIS TIME.
In the case of lost, stolen or destroyed stock certificates, the
shareholder will need to provide satisfactory evidence of ownership of the PSB
Common Stock along with proper indemnification before any FCFG stock
certificates will be issued.
All FCFG Common Stock issued pursuant to the Merger Agreement will be
deemed issued as of the Effective Date. No distributions or dividends paid upon
shares of FCFG Common Stock after the consummation of the Merger will be paid to
holders of PSB Common Stock who are entitled under the Merger Agreement to
receive FCFG Common Stock until such holders have surrendered the certificates
formerly representing shares of PSB Common Stock, at which time any accumulated
dividends and distributions since the Effective Date, without interest, will be
paid.
MECHANICS OF THE MERGER
PSB will be merged with and into the Bank. At that time, all business,
assets and liabilities formerly carried on or owned by PSB will be transferred
to and vested in the Bank. PSB will cease to have a corporate existence separate
from the Bank.
CONDUCT PENDING CONSUMMATION OF THE MERGER
PSB's shareholders will retain their equity interest in PSB until the
Effective Date. The Merger Agreement provides that, until the consummation of
the Merger and unless FCFG otherwise consents in
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<PAGE> 39
writing, PSB will conduct its business only in the ordinary and usual course and
will use all reasonable efforts to preserve intact its present business
organization, keep available the services of its present management and
employees, and preserve the goodwill of all parties with whom it has business
dealings. The Merger Agreement also provides that, unless FCFG otherwise
consents in writing, PSB will refrain from engaging in certain activities during
the period prior to consummation of the Merger (such as, effecting any
recapitalization, declaring or paying dividends, disposing of assets or making
material commitments, acquiring real property without conducting an
environmental evaluation, and entering into transactions or incurring any
expenses that are not in the ordinary course of business).
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions. No
assurance can be provided as to whether such conditions will be satisfied or
waived by the appropriate party. Accordingly, there can be no assurance that the
Merger will be completed. In the event that conditions to the Merger remain
unsatisfied and the Merger has not been effected on or before April 30, 1997,
the Merger Agreement may be terminated by either party to the Merger Agreement.
Shareholder Vote and Regulatory Approval. The Merger will occur only if
the transaction is approved by the affirmative vote of holders of at least
two-thirds (2/3) of the shares of PSB Common Stock. In addition, the respective
obligations of PSB and FCFG to consummate the Merger are subject to the
condition that the transactions contemplated by the Merger Agreement shall have
been approved by all governmental agencies having jurisdiction with respect to
such transactions. The Merger requires the prior approval of the Director of the
Washington State Department of Financial Institutions ("Director") and the FDIC.
Applications are pending with the Director and the FDIC to obtain the required
approvals in connection with the Merger.
Joint Conditions. The obligations of all parties to the Merger
Agreement to proceed with the Merger are subject also to other conditions,
including the following: (i) the effectiveness with the SEC of the registration
of FCFG Common Stock to be issued in connection with the Merger; (ii) no action
or proceeding having been commenced or threatened by any governmental agency to
restrain or prohibit or invalidate the Merger contemplated by the Merger
Agreement; (iii) the continuing accuracy in all material respects of the
representations and warranties of each party; (iv) receipt by each party of all
necessary corporate and shareholder regulatory approvals of the Merger; and (v)
receipt of an opinion from Knight, Vale & Gregory to the effect that
consummation of the Merger as proposed in the Merger Agreement will not result
in a taxable event for either PSB or FCFG, and certain other tax matters
described below. See "THE MERGER -- Certain Federal Income Tax Matters."
Conditions to FCFG Obligations. The obligations of FCFG to proceed with
the Merger and the transactions contemplated by the Merger Agreement are also
subject to various other conditions, including (among other conditions) the
following: (i) PSB's performance and satisfaction in all material respects of
all terms, covenants and conditions required by the Merger Agreement to be
performed and satisfied by PSB; (ii) PSB's capital being not less than
$4,500,000 on the Effective Date; (iii) PSB's allowance for possible loan and
lease losses being adequate to absorb PSB's anticipated loan and lease losses
and in any case being not less than $400,000 or an amount determined by Knight,
Vale & Gregory by applying FCFG's standard reserve factors to each of PSB's
loans; (iv) the non-occurrence of any material adverse effect with respect to
PSB; (v) execution of certain director and key employee agreements; (vi) PSB's
termination of certain employee benefit arrangements; and (vii) delivery to FCFG
of various certificates and opinions of counsel.
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<PAGE> 40
Conditions to PSB Obligations. The obligations of PSB to proceed with
the Merger and the transactions contemplated by the Merger Agreement are also
subject to various other conditions, including (among other conditions) the
following: (i) FCFG's performance and satisfaction in all material respects of
all covenants and conditions required by the Merger Agreement to be performed
and satisfied by either or both of them; (ii) the non-occurrence of any material
adverse effect with respect to FCFG; and (iii) delivery to PSB of various
certificates.
Either PSB or FCFG may waive any condition to their respective
obligations to complete the Merger, except those that are required by law (such
as receipt of regulatory and shareholder approval).
AMENDMENT AND TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be amended or supplemented at any time by
written agreement of FCFG and PSB (with the authorization of their respective
Boards), whether before or after the Special Meeting. To the extent permitted
under applicable law, any such amendment or supplement may be made without
further approval of PSB's shareholders. As of October 18, 1996, both the PSB and
FCFG Boards adopted Amendment No.1 to the Merger Agreement, which amendment
provided that the Total Available Cash would be between twenty and forty-five
percent of the total consideration to be paid for PSB Common Stock, with the
actual percentage to be set by the FCFG Board prior to Closing. This Amendment
No.1 has been incorporated into the amended and restated Merger Agreement,
attached to this Prospectus/Proxy Statement as Appendix A.
If the Merger has not been consummated by April 30, 1997, then at any
time thereafter, any party may terminate the Merger Agreement, unless the Merger
Agreement has been extended by mutual consent. The Merger Agreement may also be
terminated at any time prior to the Closing, whether before or after approval by
PSB shareholders, by mutual consent of the parties to the Merger Agreement.
If the Merger Agreement is terminated for any reason other than the
fault of any party, then each of the parties will pay its own out-of-pocket
costs incurred in connection with the transaction and there will be no other
liability to any other party. In the event that the Merger Agreement is
terminated unilaterally due to the fault of one party, the party at fault will
be liable to the other unaffiliated party or parties to this Agreement for an
amount equal to $400,000. The term "fault" is defined in the Merger Agreement to
mean (i) in the case of PSB, any agreement by PSB to merge or consolidate with,
or sell, substantially all of its assets to, any entity other than FCFG or the
Bank, and (ii) for all parties, any intentional acts or omissions by, or lack of
good faith efforts of, any party that result in the failure to perform or
fulfill any covenant, representation or warranty in this Agreement. Good faith
unilateral termination of the Merger Agreement under a termination provision of
the Merger Agreement will not constitute "fault."
CERTAIN FEDERAL INCOME TAX MATTERS
The Merger is intended to qualify as a tax-free reorganization under
Sections 368(a)(1)(A) and 368(a)(1)(D) of the Code for Federal income tax
purposes. PSB and FCFG has received an opinion from Knight, Vale & Gregory that
the Merger will constitute a tax-free reorganization for Federal tax purposes.
Such opinion does not bind the Internal Revenue Service or preclude the Internal
Revenue Service from adopting a contrary position. The opinion is based upon
facts and assumptions and representations and assurances made by PSB and FCFG.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW MAY NOT APPLY TO
PARTICULAR CATEGORIES OF HOLDERS OF PSB COMMON STOCK SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, SUCH
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<PAGE> 41
AS FOREIGN HOLDERS OR HOLDERS WHOSE STOCK MAY HAVE BEEN ACQUIRED AS
COMPENSATION. IN ADDITION, THERE MAY BE RELEVANT STATE, LOCAL OR OTHER TAX
CONSEQUENCES, NONE OF WHICH ARE DESCRIBED BELOW. SHAREHOLDERS ARE URGED TO
CONSULT THEIR ADVISORS TO DETERMINE THE SPECIFIC PERSONAL TAX CONSEQUENCES OF
THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND
OTHER TAX LAWS.
The Knight, Vale & Gregory opinion states that:
1. The merger of PSB with and into the Bank will constitute a
tax-free reorganization.
2. Under Section 354(a)(1) of the Code, no gain or loss will be
recognized by holders of the PSB Common Stock who exchange
such shares solely for FCFG Common Stock pursuant to the
Merger.
3. The payment of cash to a PSB shareholder in lieu of fractional
shares will be treated as received in exchange for said
fractional shares, subject to the limitations of Section 302
of the Code. Any gain or loss recognized as a result of the
receipt of such cash for fractional shares will be a capital
gain or loss equal to the difference between the cash received
and the shareholder's basis in such fractional shares,
provided that the PSB Common Stock surrendered was a capital
asset in the hands of the shareholder at the time of
surrender.
4. The tax basis of the FCFG Common Stock received in the Merger
by each PSB shareholder receiving solely FCFG Common Stock
will equal the tax basis of such PSB shareholder's shares of
PSB Common Stock exchanged in the Merger (less any basis
allocated to fractional shares for which cash is received).
5. The holding period for shares of FCFG Common Stock received in
the Merger by each PSB shareholder receiving solely FCFG
Common Stock will include the holding period for the shares of
PSB Common Stock exchanged in the Merger.
6. The tax basis and holding period in the assets and liabilities
acquired by the Bank from PSB as a result of the Merger will
be the same as the tax basis and holding period of said assets
and liabilities to PSB immediately prior to the Merger.
7. PSB, FCFG and the Bank each will not recognize gain or loss as
a result of the Merger.
ACCOUNTING TREATMENT OF MERGER
It is expected that the Merger will be treated as a purchase for
accounting and financial reporting purposes.
DISSENTERS' RIGHTS OF APPRAISAL
Pursuant to the provisions of RCW 30.49.090, a shareholder of PSB may,
under certain circumstances, exercise "dissenter's rights." To exercise these
rights, an PSB shareholder must (1) vote against the Merger, (2) make written
demand for the exercise of dissenters' rights within 30 days after the Effective
Date of the Merger, and (3) surrender his or her stock certificates representing
shares of the PSB Common Stock. Upon such exercise, the dissenting shareholder
is entitled to receive the fair value of such shares in cash, less the
shareholder's pro rata share of one-half of the appraisal cost for determining
such value. Fair value would be determined by three appraisers, one of whom
would be
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<PAGE> 42
selected by the owners of two-thirds of the dissenting shares, a second would be
selected by the Board of the Combined Bank, and the third would be selected by
the two appraisers so chosen.
The dissenting shareholders will bear the cost of their appraisal and
one-half the cost of a third appraisal. The Combined Bank will bear the cost of
its appraisal and one-half the cost of the third appraisal. The value of the
shares will be established by agreement of any two of the three appraisers. The
sole right of each dissenting shareholder will be to receive payment of the
appraised value of the surrendered shares.
The failure of a shareholder of PSB to comply strictly with the
statutory requirements will result in a loss of dissenter's rights. A copy of
the relevant statutory provisions is attached for your reference as Appendix B.
PSB shareholders should refer to this Appendix for a complete statement
concerning dissenters' rights and the foregoing summary of such rights is
qualified in its entirety by reference to such Appendix. PSB SHAREHOLDERS WILL
NOT BE SENT A SEPARATE NOTICE OF THE EFFECTIVE DATE OF THE MERGER. All
correspondence concerning the exercise of dissenter's rights should be addressed
and mailed to Ken Parsons at the head office of FCFG.
RESALE OF STOCK RECEIVED IN THE MERGER BY PSB AFFILIATES
The FCFG Common Stock to be issued in the Merger will be transferable
free of restrictions under the Securities Act, except for shares received by
persons, including directors and executive officers of PSB, who may be deemed to
be "affiliates" of PSB, as that term is used in (i) paragraphs (c) and (d) of
Rule 145 under the Securities Act and/or (ii) Accounting Series Releases 130 and
135, as amended, of the SEC. Affiliates may not sell their shares of FCFG Common
Stock acquired pursuant to the Merger, except (a) pursuant to an effective
registration statement under the Securities Act covering those shares, (b) in
compliance with Rule 145, or (c) in the opinion of counsel reasonably
satisfactory to FCFG, pursuant to other applicable exemptions from the
registration requirements of the Securities Act. This Prospectus/Proxy Statement
does not cover any resales of the FCFG Common Stock received by affiliates of
PSB.
NO SOLICITATION
PSB has agreed in the Merger Agreement that, except as required by
fiduciary duties under applicable law, neither PSB nor any of its officers or
directors will (i) solicit, encourage, entertain or facilitate any other
proposals or inquiries for an acquisition of the shares or assets of PSB, (ii)
enter into discussions concerning any such acquisition, or (iii) furnish any
information not routinely made available to the public relating to PSB's
business or organization to any person that is not affiliated with PSB.
BOARD OF DIRECTORS AND MANAGEMENT AFTER THE MERGER
Effective upon Closing, Michael D. Edwards will be appointed as
president of the Bank. Mr. Edwards is currently the president and chief
executive officer of PSB. Mr. Edwards has entered into an Employment Agreement
with the Bank. See "THE MERGER -- Interests of Certain Persons in the Merger."
All other persons who are officers of the Bank immediately before the Merger
will remain officers immediately after the Merger. In addition, certain persons
who are officers of PSB immediately before the Merger will be retained by the
Bank in substantially the same position held by such persons at PSB and will be
paid salaries that are generally comparable to the salaries received by
employees in comparable positions. Such persons will be retained for at least
one year following the Closing date unless such persons are terminated, with or
without cause, by Mr. Edwards, or by the Bank if either Mr. Edwards
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<PAGE> 43
terminates his employment with the Bank without good reason or his employment is
terminated by the Bank for cause.
As of the Closing, the Bank Board will consist of all persons who are
directors of the Bank immediately before the Merger plus three of PSB's current
directors: Mr. Edwards, Lawrence J. Schorno and Thomas P. Gorman. Each of the
directors will serve on the Bank Board until the 1997 annual meeting of the
Bank's shareholder or until successors have been elected and qualified. As of
Closing, Mr. Edwards will also be appointed to the FCFG Board. As a condition to
FCFG's and the Bank's obligations under the Merger Agreement, Messrs. Edwards,
Schorno and Gorman will each enter into a Director Noncompetition Agreement with
FCFG, the Bank and PSB. The Director Noncompetition Agreement prohibits these
directors from competing with FCFG, the Bank or any of their affiliates within
Pierce, Lewis and Thurston Counties of Washington for a period of three years
after Closing.
EMPLOYEE BENEFIT PLANS
The Merger Agreement confirms FCFG's intention to allow PSB employees
who continue as employees of the Bank after the Merger to participate in certain
FCFG and Bank employee benefit plans. In connection with such participation, PSB
employees who continue as Bank employees will receive credit for prior service
with PSB for purpose of determining eligibility and vesting. The benefits
provided to PSB employees who continue as Bank employees will be, in the
aggregate, no less favorable to such employees than the benefits being provided
to FCFG employees. PSB's employee benefit plans will be terminated before
Closing, as a condition of FCFG's obligations under the Merger Agreement; the
employee interests in those plans will be transferred or merged into the Bank's
employee benefit plans at Closing.
At Closing, PSB's Employee Stock Ownership Plan ("PSB ESOP") will be
merged into FCFG's Employee Stock Ownership Plan ("KSOP"), unless prior to
Closing the participants of the PSB ESOP elect to terminate the PSB ESOP. Also
at Closing, all options issued and outstanding to PSB employees pursuant to
PSB's Incentive Stock Option and Nonstatutory Stock Option Plan shall terminate,
except that any such options held by an individual who will be an officer or
director of the Bank immediately after Closing will be entitled to receive, in
exchange for his or her such options, options pursuant to FCFG's Employee Stock
Option and Restricted Stock Award Plan, in a number equivalent to that number of
FCFG Common Stock shares to which such individual would have been entitled under
the Merger Agreement if the individual had exercised such PSB options
immediately prior to Closing and elected to receive FCFG Common Stock in
connection with the Merger. Options in FCFG Common Stock received by PSB
officers or directors who will be FCFG officers or directors immediately after
Closing will have the same expiration dates as the PSB options for which the
FCFG options were exchanged. All other employee benefit arrangements (whether in
written form or not) maintained by PSB solely for the benefit of its executive
employees will terminate at Closing, except for Executive Supplemental Income
Agreements with each of Mr. Edwards, Roger A. Johansen, D. James Arthur and
Colleen Dorian.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Effective upon Closing, Michael D. Edwards will be appointed president
of the Combined Bank for a term of five years. Mr. Edwards and the Bank have
signed an Employment Agreement, as a condition to FCFG's and the Bank's
obligations under the Merger Agreement. Mr. Edwards will receive a salary of
$120,000 per annum, subject to a minimum ten percent increase on September 1,
1997 and annual increases thereafter commensurate with raises granted to other
executive officers. In addition to his salary, Mr. Edwards will be granted
options to purchase shares of FCFG Common Stock, at the market price as of the
Effective Date. He will receive options for 20,000 shares of FCFG Common Stock,
which will vest over five years with the first 4,000 shares vested after twelve
full months of
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<PAGE> 44
employment, and an additional 4,000 shares to vest each full year
thereafter. The Employment Agreement also provides that Mr. Edwards will receive
options of up to 5,000 shares of FCFG common stock, dependent on the Combined
Bank's year-end return on assets, during each of the next four fiscal years. The
shares will vest over the four years according to the schedule set forth in the
Employment Agreement.
Executive Supplemental Income Agreements in effect between PSB and each
of Messrs. Edwards, Johansen, Arthur, and Ms. Dorian will remain in effect after
the Merger.
FCFG has entered into an agreement with certain holders of shares of
FCFG Common Stock (including certain directors of FCFG and the Bank) pursuant to
which FCFG will purchase the shares of such FCFG shareholders, conditioned upon
the Closing of the Merger. See "INFORMATION ABOUT FCFG -- Proposed
Transactions."
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<PAGE> 45
INFORMATION CONCERNING FCFG
BUSINESS
First Community Bank ("FCFG"), a Washington bank holding company, was
incorporated in November 1983 as First Community Bancorp, Inc. FCFG changed its
name to the present name in July 1992. In 1984, pursuant to a plan of
reorganization, FCFG acquired all of the stock of First Community Bank (the
"Bank"), a state banking corporation chartered under Washington law in 1979.
On March 1, 1993, FCFG acquired Citizens First Bank ("CFB"), a state
banking corporation chartered under Washington law in 1978. On December 8, 1995,
CFB's banking charter was merged into the Bank. The accompanying financial
information was prepared following the pooling-of-interests method of
accounting, and reflects the combined financial position and operating results
of the Bank and CFB for all periods presented.
On November 29, 1995, FCFG acquired Northwest Community Bank ("NCB"), a
state banking corporation chartered under Washington law in 1991, and merged NCB
into the Bank. The accompanying financial information was prepared following the
pooling-of-interests method of accounting, and reflects the combined financial
position and operating results of the Bank and NCB for all periods presented.
FCFG owns all outstanding shares of Premises, Inc., a non-bank
corporation formed for the purpose of acquiring and holding properties used by
FCFG's banking subsidiaries. During 1993, FCFG started Information Management
Systems, Inc., a non-bank corporation formed to provide data processing services
to FCFG and its subsidiaries. FCFG proposes to combine Premises, Inc. with the
Bank before the end of 1996. See "INFORMATION CONCERNING FCFG -- Proposed
Transactions."
The principal offices of FCFG, the Bank, Premises, Inc. and Information
Management Systems, Inc. are located in Lacey, Washington.
FCFG's primary functions are strategic planning for FCFG and its
subsidiaries, capital planning and financing, overall financial management,
marketing support for subsidiaries, management of all facility related matters,
and implementation and coordination of employee benefits. FCFG also provides
analysis of business opportunities including additional bank services, financial
analysis and trends, analysis of potential acquisitions, and general delivery
systems support such as data processing, telecommunications, etc. to its
subsidiaries.
The Bank engages in general banking business through ten branches and a
mortgage production office in Thurston, Grays Harbor, Lewis and Pierce counties.
The Bank's banking business includes the acceptance of demand, time and savings
deposits and the making of loans. The Bank provides a full range of consumer
banking services including: savings accounts, checking accounts, installment and
commercial lending, safety deposit facilities, time deposits, Visa and other
consumer and business related financial services, including the sale of
non-deposit investment products.
The Bank presently maintains branches in Lacey, Olympia, Tumwater,
Yelm, Tacoma, Fircrest, Centralia, Elma and Hoquiam, Washington. The Bank has
been continuously located in its Lacey branch since inception. The Olympia
branch was opened in 1981. In 1987, the Bank opened a mortgage banking office
offering a broad range of home and construction financing. In 1990 the Bank
opened new branches in Tumwater and Yelm. In 1993, the Bank acquired branches in
Elma and Hoquiam through its merger with CFB. During 1994, the Bank opened a new
branch located in downtown Olympia. In 1995,
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<PAGE> 46
the Bank acquired branches in Fircrest and Tacoma through the acquisition of
NCB. In 1996, the Bank opened a branch in Centralia thus entering the Lewis
County market.
As a state bank, the Bank's ability to extend its existing branch
banking systems is subject to approval by the Director and by the FDIC. The
branching laws of the State of Washington allow banks to branch anywhere in the
State, and in other states with Director approval.
PROPOSED TRANSACTIONS
The FCFG Board has determined that it is in the best interests of FCFG
to cause FCFG to acquire the shares of FCFG Common Stock owned by certain
shareholders (the "Selling Shareholders"). The Selling Shareholders own FCFG
Common Stock as a result of the stock-for-stock merger of NCB with and into the
Bank in late 1995 ("NCB Merger"). Two of the Selling Shareholders (Michael A.
Price and William E. Hartman, Jr.) were previously directors of NCB and have
served as directors of the Bank since the NCB Merger. Additionally, Mr. Price
has served as a director of FCFG since the NCB Merger.
Since the NCB Merger, relations between FCFG and the Bank, on the one
hand, and the Selling Shareholders involved in management of those two entities,
on the other hand, have become strained, primarily as a result of differing
philosophies regarding the current conduct and future development of the
businesses of FCFG and the Bank. Management of FCFG believes that the situation
may have been exacerbated by certain disputes, since resolved, which occurred
subsequent to the NCB Merger. The FCFG Board believes that the existence of
disaffected shareholders, and in the cases of Messrs. Price and Hartman, of
disaffected directors of FCFG and/or the Bank, is having and would continue to
have a negative effect on the efficient business operations of FCFG and the
Bank. Additionally the FCFG Board believes that the acquisition of the Selling
Shareholders' shares and the concurrent resignations of those Selling
Shareholders involved in management will allow the Bank to better assimilate and
utilize the people and assets, now part of the Bank, which constituted NCB prior
to the NCB Merger.
The Selling Shareholders recently approached FCFG, indicating a desire
to sell the shares of FCFG Common Stock owned by them. For the reasons set forth
above, FCFG determined that such repurchase would be in FCFG's best interests.
FCFG is in the process of entering into a Stock Purchase and Sale Agreement (the
"Stock Purchase Agreement") pursuant to which FCFG or its assigns will acquire a
total of 178,233 shares of FCFG Common Stock owned by the Selling Shareholders,
for $20.50 per share in cash. Shares of FCFG Common Stock have recently traded
at $22.00 per share. The aggregate purchase price for the FCFG Common Stock
owned by the Selling Shareholders is $3,653,777. The purchase of the shares
is conditioned upon the consummation of the Merger contemplated in this
Prospectus/Proxy Statement.
FCFG will also acquire certain options to buy FCFG Common Stock
("Selling Shareholder Options") owned by Kevin M. Byrne and Robert J. Coleman,
both previously executive officers of NCB. The Selling Shareholder Options (or
the underlying shares of FCFG Common Stock, if such options are exercised prior
to the purchase by FCFG) will be acquired, by FCFG or its assigns, prior to
January 31, 1998, with the timing of the purchase otherwise in the discretion
of FCFG. The purchase price for the Selling Shareholder Options was determined
by using a price of $22.00 per share, less the exercise prices applicable to
the Selling Shareholder Options. If the Selling Shareholder Options have been
exercised in whole or in part prior to the purchase by FCFG, the purchase price
will be $22.00. The aggregate purchase price for the Selling Shareholder
Options will be $1,132,940, if none of the options have been exercised prior to
their purchase by FCFG. The purchase of the Selling Shareholder Options or the
underlying shares, as the case may be, is conditioned upon the consummation of
the Merger.
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<PAGE> 47
FCFG intends to fund all or a significant portion of the purchase price
for the Selling Shareholders' shares of FCFG Common Stock and for the Selling
Shareholder Options by means of a dividend to be declared and paid to it by the
Bank, as well as the repayment by the Bank of an advance previously made to it
by FCFG to fund improvements to the Bank's Lacey offices. In addition, FCFG's
KSOP might participate in the stock purchase for up to $1 million, but no
determination has yet been made by the trustees of the KSOP. See "UNAUDITED
CONDENSED PRO FORMA FCFG AND PSB COMBINED FINANCIAL STATEMENTS."
The Stock Purchase Agreement also provides that Messrs. Price and
Hartman will resign, effective immediately, from their respective positions as
directors of FCFG and/or the Bank, but further provides that they will be
reappointed if the contemplated purchase and sale does not occur prior to March
15, 1997.
FCFG also plans to dissolve its nonbank subsidiary Premises, Inc.
("Premises") and consolidate its operations with those of the Bank. FCFG formed
Premises on November 1, 1989, as a vehicle for efficiently managing the various
premises of FCFG's bank subsidiaries. At that time, FCFG was pursuing a
corporate strategy potentially involving multiple bank subsidiaries, and
Premises was formed as part of that corporate strategy. FCFG's management has
since determined that it is in FCFG's best interests to depart from this
corporate strategy and consolidate its banking operations into a single banking
subsidiary, the Bank, rather than operate several independent bank subsidiaries.
For this reason, FCFG no longer requires a separate premises-holding
corporation, and management believes Premises should be liquidated. The proposed
liquidation of Premises would occur in two steps: (i) FCFG will contribute the
capital stock of Premises to the Bank, and (ii) following the capital
contribution, Premises will dissolve and transfer all of its assets and
liabilities to the Bank. FCFG's management believes this liquidation would
further FCFG's goal of consolidating operations and reducing corporate expenses
in order to increase efficiency and better serve its customer base.
COMPETITION
The financial services industry is highly competitive. The Bank
competes actively with national and state banks, mutual savings banks, savings
and loans, finance companies, credit unions, brokerage houses and other
financial institutions operating in the service area. Many of these financial
institutions have merged or are in process of merging and many are larger in
size than the Bank.
FACILITIES
The Bank owns the property and building on which the Olympia East, Elma
and Hoquiam branches are situated. Premises, Inc. owns property and buildings of
the Lacey, Yelm, downtown Olympia, Fircrest and Centralia branches. The Tumwater
branch is operated out of a building owned by Premises, Inc. which is situated
on leased property. Premises, Inc. also purchased the building which may be the
site of a possible Aberdeen branch. FCFG's administrative offices are located in
the Lacey branch and the mortgage center is located in the downtown Olympia
branch. The Bank operates one other retail branch in South Tacoma in a leased
facility.
The Lacey branch is a two-story building with a drive-up facility,
which has approximately 18,000 square feet and is fully utilized. This facility
was recently renovated and expanded. The Olympia East branch is a 3,000 square
foot, one-story structure with a drive-up facility. The Tumwater branch is a
single-story structure constructed in 1991 and has a drive-up facility. The Yelm
branch is a single-story building with a driveup facility. The Elma branch,
formerly the CFB principal branch, is a two-story
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<PAGE> 48
structure with a drive-up facility. The Hoquiam, Centralia, Fircrest and South
Tacoma branches are retail branches with drive-up facilities.
EMPLOYEES
FCFG and its subsidiaries employ a total of 138 employees, consisting
of 100 full time and 38 part time employees as of September 30, 1996. Such
employees are not represented by a union organization or other collective
bargaining group, and FCFG's management considers its relations with the
employees to be very good.
LEGAL PROCEEDINGS
From time to time in the ordinary course of business, FCFG or its
subsidiaries may be involved in litigation. At the present time, neither FCFG
nor any of its subsidiaries are involved in any material litigation proceeding.
FCFG MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
FINANCIAL CONDITION
Overview. FCFG's consolidated total assets at September 30, 1996 of
$176,631,000 represent a 3.4 percent decrease over December 31, 1995 assets of
$182,897,000. This is the result of a 4.4 percent decline in deposits totaling
$7,129,000 during the year. During the first two quarters of 1996, deposits
declined as a result of two factors. The Bank typically experiences a deposit
increase at year-end which runs off during January and February. Additionally,
much of the deposit base gained in the acquisition of Northwest Community Bank
in November 1995 consisted of high cost time deposits from customers who had no
other relationship with the bank. Management has elected to not renew certain of
these high rate time deposits. This caused deposits to decline to a low of $145
million at June 30, 1996. By September 30, 1996, deposits have risen to $154
million, regaining approximately $9 million since June.
Loan demand in FCFG's market area was moderate during the period. Total
loans, including loans held for sale, increased 3.5 percent, or $4,401,000
during the period, over the December 31, 1995 balance of $127,632,000. The ratio
of loans to deposits increased from 79.16 percent at December 31, 1995 to 85.68
percent by the end of the second quarter as the Bank experienced a growth in
loans and a decline in deposits. The balances of cash and due from banks,
interest bearing deposits in banks, Federal funds sold and investment securities
decreased $11,547,000 from $44,161,000 to fund the loan growth and deposit
decline.
The allowance for possible credit losses reflects management's current
estimate of the amount required to absorb losses on existing loans and
commitments to extend credit. Determination of the appropriate level of the
allowance is based on an analysis of various factors including historical loss
experience based on volumes and types of loans; volumes and trends in
delinquencies and non-accrual loans; trends in portfolio volume; results of
internal and independent external credit reviews; and anticipated economic
conditions. An analysis of the adequacy of the allowance is subject to quarterly
review by the Board of Directors. Based on this analysis, management considers
the allowance for possible credit losses to be adequate.
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<PAGE> 49
The allowance for possible credit losses increased $26,000 during the
first three quarters to $1,402,000 at September 30, 1996 over the December 31,
1995 balance of $1,376,000. This increase consisted of provisions totaling
$221,000, which were net of charge offs of $195,000. The allowance for possible
credit losses represents a ratio of 1.06 percent and 1.08 percent of total loans
at September 30, 1996 and December 31, 1995, respectively. Non-accrual loans
decreased from $1,427,000 at December 31, 1995 to $387,000 at September 30,
1996. These loans represent loans that are well secured, and on which material
losses are not presently expected.
Liquidity and Rate Sensitivity. FCFG's assets and liabilities are
managed to maximize long-term shareholder returns by optimizing net interest
income within the constraints of maintaining high credit quality, conservative
interest rate risk disciplines and prudent levels of liquidity. The
Asset/Liability Committee meets regularly to monitor the composition of the
balance sheet, to assess current and projected interest rate trends, and to
formulate strategies consistent with established objectives for liquidity,
interest rate risk and capital adequacy.
Liquidity management involves the ability to meet cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Liquidity is generated from both internal and external
sources. Internal sources are those assets that can be converted to cash with
little or no risk of loss. These include overnight investments in federal funds
sold and investment securities, particularly those of shorter maturity, and are
the principal source of asset liquidity. At September 30, 1996, cash, Federal
funds sold and securities available for sale totaled $28,051,000. External
sources refer to the ability to attract new liabilities and capital. They
include increasing savings and demand deposits, federal funds purchased, and the
issuance of capital and debt securities. At September 30, 1996, federal funds
borrowing lines of credit totaled $2,000,000 and were unused during the first
quarter of 1996. The Bank also has preestablished borrowing lines available with
the Federal Home Loan Bank of approximately $9,300,000. This credit facility has
remained unused during 1996.
Management believes the Bank's liquidity position at September 30,
1996, was adequate to meet its short term funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. FCFG's net interest
margin is affected by changes in the level of market interest rates.
Management's objectives are to monitor and control interest rate risk and ensure
predictable and consistent growth in net interest income.
Management considers any asset or liability which matures, or is
subject to repricing within one year to be interest sensitive, although
continual monitoring is performed for other time intervals as well. The
difference between interest sensitive assets and liabilities for a defined
period of time is known as the interest sensitivity "gap", and may be either
positive or negative. If positive, more assets reprice before liabilities. If
negative, the reverse is true. Gap analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently the
Banks' interest sensitivity gap is negative within one year. Assuming that
general market interest rate changes affected the repricing of assets and
liabilities in equal magnitudes, this indicates that the effects of rising
interest rates on FCFG would be a decrease in the net interest margin, whereas
falling interest rates would cause a corresponding increase in the margin.
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<PAGE> 50
Capital. Capital serves two basic purposes. First, it provides a
reserve for unforeseen operating losses, and second, it provides a foundation
for future growth. Consolidated capital of FCFG increased $1,174,000 during the
first three quarters of 1996, primarily through retained earnings.
There are regulatory constraints placed upon capital adequacy, and it
is necessary to maintain an appropriate ratio between capital and assets.
Regulations require banks and holding companies to maintain a minimum "leverage"
ratio (primary capital ratio) of total assets. For the most highly rated holding
companies this ratio must be at least 3 percent, and for others it must be 4 to
5 percent. At September 30, 1996, FCFG's leverage ratio was 11.57 percent,
compared to 10.54 percent at year-end 1995. In addition, holding companies are
required to meet minimum risk-based capital guidelines under which risk
percentages are assigned to various categories of assets and off-balance-sheet
items to calculate a risk-adjusted capital ratio. Tier I capital generally
consists of common stockholders' equity, less goodwill, while Tier II capital
includes the allowance for possible loan losses, subject to 1.25 percent
limitation of risk-adjusted assets. The rules require Tier II capital of 4
percent of risk-adjusted assets and total capital (combined Tier I and Tier II)
of 8 percent. At September 30, 1996, the Tier I capital ratio was 14.70 percent
and total capital was 15.32 percent.
RESULTS OF OPERATIONS
General. Net income is largely dependent upon the difference between
the interest received on earning assets and the interest paid on interest
bearing liabilities and is defined as net interest income. Net income is also
affected by the provision for loan losses, other non-interest income and other
non-interest expense.
Net income for the three months ended September 30, 1996 was $450,000,
compared to $375,000 for the three months ended September 30, 1995. This 20
percent increase is due to a $171,000 reduction in non-interest expense, and a
$10,000 decrease in income tax expense. This was partially offset by a $5,000
decrease in net interest income, an increase in the provision for possible
credit losses of $44,000 and a $57,000 decline in non-interest income.
Net Income for the nine months ended September 30, 1996 increased 39
percent to $1,448,000 over the September 30, 1995 earnings of $1,039,000. This
was the result of a $45,000 increase in net interest income, a $278,000 increase
in the level of non-interest income, and a $247,000 decrease in non-interest
expense. These were only partially offset by an increase in the provision for
possible credit losses of $109,000 and an increase in income tax expense of
$52,000.
Net Interest Income. Net interest income for the nine months ended
September 30, 1996 increased $45,000 over the comparable period in 1995. The net
interest margin decreased slightly, moving 5 basis points from 6.37 percent to
6.32 percent.
Interest income for the nine months ended September 30, 1996 increased
$202,000 over the nine months ended September 30, 1995. Of this increase,
approximately $156,000 is attributed to an increase in the average volume of
earning assets, and approximately $46,000 is the result of a 4 basis point
increase in the aggregate yield on earning assets.
Total interest expense for the nine months ended September 30, 1996
increased over the comparable period of the prior year by $157,000. Of this
increase, approximately $86,000 was due to an increase in the average volume of
interest bearing liabilities, and $71,000 was due to a 7 basis point increase in
the aggregate cost of funds. Time deposits as a percent of total deposits
increased from 47 percent at September 30, 1995 to 52 percent at September 30,
1996.
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<PAGE> 51
Non-Interest Income. Total non-interest income for the quarter ended
September 30, 1996 decreased 12.6 percent or $57,000 from the comparable quarter
of 1995. Of this amount, $69,000 is due to a decrease in other income, which is
partially offset by a $16,000 increase in service charges on deposit accounts.
For the nine months ended September 30, 1996, non-interest income
increased $278,000 over the nine months ended September 30, 1995. Of this
increase, $77,000 is attributable to an increase in service charge income,
$160,000 is due to increased mortgage loan origination fees, and $41,000 is the
result of an increase in other non-interest income.
Non-interest Expense. Total non-interest expense for the quarter ended
September 30, 1996 decreased $171,000, or 7.5 percent over the third quarter of
1995. Of this net decrease in the level of non-interest expense, $243,000
represents a decrease in the level of salaries and employee benefits, as
staffing efficiencies are realized from the acquisition of Northwest Community
Bank which occurred in the fourth quarter of 1995. Occupancy and equipment
increased $9,000 as the result of two new branches that were opened after the
second quarter of 1995, and other expense increased $63,000.
Non-interest expense for the nine months ended September 30, 1996
decreased $247,000 or 3.7 percent over the nine months ended September 30, 1995.
Salaries and benefits were down $423,000 or 10.9 percent from the comparable
period of 1995 due to staffing efficiencies realized from the acquisition of
Northwest Community Bank in the fourth quarter of 1995. Occupancy and equipment
increased $100,000 as the result of two new branches that were opened after the
second quarter of 1995, and other expense increased $76,000.
YEAR ENDED DECEMBER 31, 1995
FINANCIAL CONDITION
Overview. In 1995 FCFG saw another year of consistent growth as
consolidated total assets grew 12.8 percent to $182,897,000. This increase is
due to the effect of a 13.9 percent increase in deposits totaling nearly $20
million. Continued growth is expected in the coming year as further market
penetration is achieved through the existing branch banking network, as well as
further geographic expansion.
Loan demand in FCFG's market area slowed somewhat in 1995 as loans grew
only 8 percent or $9.5 million during 1995, compared to a 24 percent growth rate
during 1994.
The aggregate maximum amount the Bank may lend to a single customer
increased from approximately $1.5 million at year-end 1994 to $3 million at
year-end 1995 primarily as the result of the acquisition of Northwest Community
Bank ("NCB") in November 1995. This gives the Bank the ability to serve a
broader spectrum of customers, specifically those with larger credit needs. The
average loan to deposit ratio was 81 percent in 1995, compared with 80 percent
in 1994.
The bulk of the increase in total assets for 1995 was invested in
investment securities, federal funds sold and interest bearing deposits with
banks which produce significantly lesser yields than loans. This increased
investment securities, federal funds sold and interest bearing deposits in other
banks to 18.58 percent of total earning assets at December 31, 1995, up from
13.54 percent at December 31, 1994. Loans decreased from 86.46 percent at
December 31, 1994 to 81.41 percent of earning assets at December 31, 1995.
- 37 -
<PAGE> 52
Premises and equipment increased $2,330,000 in 1995, net of
depreciation. This primarily represents the remodeling costs of FCFG's Lacey
branch facility. The building was remodeled and expanded during the year to
upgrade the banking facility as well as to provide facilities for FCFG's
headquarters and data processing operations. Additionally, branch facilities
were acquired in Centralia and Aberdeen, Washington during 1995. The branch in
Centralia was opened in March 1996. The potential Aberdeen branch is currently
under evaluation. FCFG also purchased the branch building in Yelm that had
previously been leased by the Bank.
Total deposits increased 13.91 percent during 1995, representing a
16.23 percent increase in non-interest bearing demand accounts, a 7.83 percent
increase in savings and NOW accounts and a 19.62 percent increase in time
deposit accounts.
The allowance for possible credit losses reflects management's current
estimate of the amount required to absorb losses on existing loans and
commitments to extend credit, as well as an additional amount to provide a
supplementary margin of safety. Determination of the appropriate level of the
allowance is based on an analysis of various factors including historical loss
experience based on volumes and types of loans; volumes and trends in
delinquencies and non-accrual loans; trends in portfolio volume; results of
internal and independent external credit reviews; and anticipated economic
conditions. The loss factors used in the analysis represent amounts
substantially in excess of the Bank's actual loss experience, and are used to
provide an additional margin of safety. An analysis of the adequacy of the
allowance is subject to quarterly review by the FCFG Board. Based on this
analysis, management considers the allowance for possible credit losses to be
adequate.
The allowance for possible credit losses increased $126,000 during 1995
to $1,376,000 at December 31, 1995 over the December 31, 1994 balance of
$1,250,000. The allowance for possible credit losses represents a ratio of 1.09
percent and 1.07 percent of total loans at December 31, 1995 and 1994,
respectively. The recorded investment in impaired loans at December 31, 1995
totaled $1,427,000. Non-accrual loans totaled $741,000 at December 31, 1994.
Loans over 90 days past due still accruing interest increased from $255,000 at
December 31, 1994 to $401,000 at December 31, 1995. These increases generally
represent loans that are well secured, and on which material losses are not
expected.
Liquidity and Rate Sensitivity. FCFG's assets and liabilities are
managed to maximize long-term shareholder returns by optimizing net interest
income within the constraints of maintaining high credit quality, conservative
interest rate risk disciplines and prudent levels of liquidity. The Asset and
Liability Committee meets regularly to monitor the composition of the balance
sheet, to assess current and projected interest rate trends, and to formulate
strategies consistent with established objectives for liquidity, interest rate
risk and capital adequacy.
Liquidity management involves the ability to meet cash flow
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. Liquidity is generated from both internal and external
sources. Internal sources are those assets that can be converted to cash with
little or no risk of loss. These include overnight investments in federal funds
sold and investment securities, particularly those of shorter maturity, and are
the principal source of asset liquidity. At December 31, 1995, cash, Federal
funds sold and investment securities maturing within one year totaled
$34,369,000. External sources refer to the ability to attract new liabilities
and capital. They include increasing deposits, federal funds purchased, and the
issuance of capital and debt securities. At December 31, 1995, federal funds
borrowing lines of credit totaled $2,000,000 and were not materially used during
1995. The Bank also has pre-established
- 38 -
<PAGE> 53
borrowing lines available with the Federal Home Loan Bank of Seattle of up to 5
percent of total assets (approximately $9 million at December 31, 1995).
Management believes the Bank's liquidity position at December 31, 1995,
was adequate to meet its short term funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. FCFG's net interest
margin is affected by changes in the level of market interest rates and the mix
of rate sensitive assets and liabilities. Management's objectives are to monitor
and control interest rate risk and ensure predictable and consistent growth in
net interest income.
Management considers any asset or liability which matures, or is
subject to repricing within one year to be interest sensitive, although
continual monitoring is performed for other time intervals as well. The
difference between interest sensitive assets and liabilities for a defined
period of time is known as the interest sensitivity "gap", and may be either
positive or negative. If positive, more assets reprice before liabilities. If
negative, the reverse is true. Gap analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently the
Bank's interest sensitive gap is negative within one year. Assuming that general
market interest rate changes affected the repricing of assets and liabilities in
equal magnitudes, this indicates that the effects of rising interest rates on
FCFG would be a decrease in the net interest margin, whereas falling interest
rates would cause a corresponding increase in the margin.
Capital Expenditures. During 1995, FCFG remodeled and expanded its
Lacey branch facility, which was the original branch of the Bank. The original
building contained 6,000 square feet and was used as a branch bank. The expanded
building is approximately 18,000 square feet, and in addition to upgrading and
expanding the banking facility, now accommodates FCFG's headquarters, including
loan processing, operations and data processing. Previously, these
administrative departments occupied leased space. The cost of the project was
approximately $1,725,000.
Additionally, FCFG acquired two branch banking facilities located in
Centralia and Aberdeen, Washington for a total of $530,000. The Bank opened a
branch in the Centralia facility in March 1996, and the Aberdeen facility is
anticipated to open later in the year. FCFG also purchased the facility used by
the bank as a branch in Yelm. The building, which had previously been leased,
was purchased for $325,000.
A new branch was opened in South Tacoma during 1995 in leased
facilities. Total expenditures during the year for leasehold improvements,
furniture and equipment amounted to $290,000.
Capital. Capital serves two basic purposes. First, it provides a
reserve for unforeseen operating losses, and second, it provides a foundation
for future growth. Consolidated capital of FCFG increased 6.97 percent or
$1,254,000 during 1995 primarily through retained earnings of $920,000 and newly
issued common stock through the exercise of stock options totaling $261,000.
There are regulatory constraints placed upon capital adequacy, and it
is necessary to maintain an appropriate ratio between capital and assets.
Regulations require banks and holding companies to maintain a minimum "leverage"
ratio (primary capital ratio) of total assets. For the most highly rated holding
companies this ratio must be at least 3 percent, and for others it must be 4 to
5 percent. At year end 1995, FCFG's leverage ratio was 10.98 percent, compared
to 11.77 percent at year end 1994. In addition, holding companies are required
to meet minimum risk-based capital guidelines under which risk
- 39 -
<PAGE> 54
percentages are assigned to various categories of assets and off-balance-sheet
items to calculate a risk-adjusted capital ratio. Tier I capital generally
consists of common stockholders' equity, less certain intangible assets, while
Tier II capital includes the allowance for possible loan losses, subject to 1.25
percent limitation of risk-adjusted assets. The rules require Tier II capital of
4 percent of risk-adjusted assets and total capital (combined Tier I and Tier
II) of 8 percent. The Tier I capital ratio decreased from 15.06 percent at
December 31, 1994, to 14.42 percent at December 31, 1995. Total capital
decreased from 16.10 percent at December 31, 1994, to 15.46 percent at December
31, 1995.
RESULTS OF OPERATIONS
General. Net income is largely dependent upon the difference between
the interest received on earning assets and the interest paid on interest
bearing liabilities, defined as net interest income. Net income is also affected
by the provision for possible credit losses, other non-interest income and other
non-interest expense.
Net income for 1995 was $920,000 compared to $1,797,000 for 1994. This
decrease is due primarily to costs associated with the acquisition of NCB.
Net Interest Income. Net interest income in 1995 increased 2.8 percent,
or $265,000 over 1994. Interest income increased by $2,060,000 over 1994 to
$15,231,000. This increase was due almost entirely to an increase in the volume
of interest earning assets, as the yield on earning assets remained constant
from 1994 to 1995. Interest expense increased $1,795,000 to $5,585,000. Of this
increase, approximately $795,000 results from an increase in the volume of
deposits, while the remaining $1 million is the result of a 100 basis point rise
in the cost of funds. This was due to a general increase in the level of
competition for funding in the financial services markets.
This caused the net interest margin to narrow by approximately 75 basis
points to 6.09 percent
Non-Interest Income. Total non-interest income decreased 14.41 percent
or $290,000 from 1994. The decrease is primarily due to a $221,000 decline in
the volume of mortgage loan origination fee income. 1994 and 1995 were years of
steadily increasing home mortgage interest rates following a period in 1992 and
1993 of historically low rates. During this period of low rates a record number
of homeowners refinanced their mortgages to take advantage of the low rates.
This refinancing activity effectively stopped as rates began to climb in 1994.
Coupled with this rate increase was a slowing of home sales as fewer first time
home buyers could afford to purchase at the higher rates. Late in the 4th
quarter of 1995 mortgage rates began to ease, which has stimulated mortgage loan
origination volume. With the current and anticipated interest rate environment,
coupled with an expanded sales force and a larger branch network, mortgage
volume is expected to increase substantially in 1996.
Non-Interest Expense. Non-interest expense increased $1,117,000 over
1994 to a total of $9,889,000. Salary expense contributed $791,000 to this
increase, with the balance coming from other expense. Prior to FCFG's
acquisition of NCB, NCB incurred costs of approximately $875,000 representing
satisfaction of its obligations to senior management. Additionally, other merger
related costs were incurred totaling approximately $300,000.
Excluding the costs associated with the acquisition of NCB, FCFG's
non-interest expense decreased by $58,000, and the ratio non-interest expense to
total assets declined from 5.41 percent in 1994 to 4.76 percent in 1995.
- 40 -
<PAGE> 55
CONSOLIDATED AVERAGE BALANCES/INTEREST INCOME AND EXPENSE RATES
The following table sets forth the average balance sheets of FCFG for the past
two years 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 in each category, and net yield on earning assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1994
---- ----
Average Interest Average Average Interest Average
(Dollars in Thousands) Balance Income Rates Balance Income Rates
(Expense) (Expense)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans (1) $122,237 $13,404 10.97% $105,431 $11,696 11.09%
Federal funds sold and interest 17,178 969 5.64% 16,083 696 4.33%
bearing deposits in banks
Investment securities 15,991 858 5.37% 15,981 779 4.87%
Total earning assets and interest income: 155,406 15,231 9.80% 137,495 13,171 9.58%
-------- ------- ----- -------- ------- -----
Other assets:
Cash and due from banks 8,126 6,841
Bank premises and equipment 6,998 5,233
Other assets 3,936 5,199
Allowance for possible credit losses (1,299) (1,154)
TOTAL ASSETS $173,167 $153,614
-------- --------
LIABILITY AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings, NOW and Money Market
Deposits $ 62,828 (2,000) 3.18% $ 61,514 (1,745) 2.84%
Time deposits 60,007 (3,459) 5.76% 45,849 (1,957) 4.27%
-------- ------- -------- -------
Total interest bearing deposits: $122,835 (5,459) 4.44% $107,363 (3,702) 3.45%
Other borrowing: 1,430 (126) 8.81% 2,133 (88) 4.13%
-------- ------- -------- -------
Total interest bearing liabilities and
interest expense 124,265 (5,585) 4.49% 109,496 (3,790) 3.46%
-------- ------- -------- -------
Non-interest bearing deposits 28,088 24,402
Other liabilities 1,274 3,375
Stockholders' equity 19,540 16,344
TOTAL LIABILITIES, STOCKHOLDERS' EQUITY
AND NET INTEREST INCOME $173,167 $ 9,646 $153,014 $ 9,381
-------- ------- -------- -------
Net interest income as a percentage of
average earning assets:
Interest Income 9.80% 9.58%
Interest Expense 3.59% 2.76%
Net Interest Income 6.21% 6.82%
----- -----
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding. Loan fees and late charges of $1,527,000
and $1,529,000 are included in interest income in 1995 and 1994.
- 41 -
<PAGE> 56
INVESTMENT PORTFOLIO
Analysis of Investment Securities at Year-End. Debt and equity
securities have been classified according to management's intent. The carrying
amount of securities and the approximate fair values at December 31 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
SEPTEMBER 30, 1996
Equity securities $ 2,219 $ -- $ -- $ 2,219
U.S. Government and agency securities 3,405 -- 48 3,357
Mortgage backed securities 969 -- 54 915
State and municipal securities 324 6 -- 330
$ 6,917 $ 6 $ (102) $ 6,821
DECEMBER 31, 1995
Equity securities $ 1,821 $ -- $ -- $ 1,821
U.S. Government and agency securities 3,753 4 18 3,739
Corporate securities 297 1 -- 298
Mortgage backed securities 1,012 -- 58 954
State and municipal securities 324 7 -- 331
$ 7,207 $ 12 $ 76 $ 7,143
DECEMBER 31, 1994
Equity securities $ 603 -- $ -- $ 603
U.S. Government and agency securities 2,950 -- 147 2,803
Corporate securities 454 -- 5 449
Other securities 761 -- -- 761
$ 4,768 -- $ 152 $ 4,616
- -----------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
SEPTEMBER 30, 1996
U.S. Government and agency securities $ 1,753 $ -- $ 1 $ 1,752
Corporate securities 805 -- -- 805
State and municipal securities 2,005 22 -- 2,027
$ 4,563 $ 22 $ 1 $ 4,584
DECEMBER 31, 1995
U.S. Government and agency securities $ 4,214 $ 6 $ -- $ 4,220
Corporate securities 822 21 -- 843
State and municipal securities 2,226 56 -- 2,282
$ 7,262 $ 83 $ -- $ 7,345
DECEMBER 31, 1994
U.S. Government and agency securities $ 7,089 $ 1 $ 208 $ 6,882
Corporate securities 1,237 -- 49 1,188
State and municipal securities 2,853 36 19 2,870
$10,940 $ 37 $ 276 $11,179
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- 42 -
<PAGE> 57
Maturity Distribution of Investment Securities. The scheduled
maturities of held-to-maturity and available-for-sale debt securities at
December 31, 1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------- --------------------------------------------
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
Estimated Weighted Estimated Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $2,877 $2,904 5.13% $1,759 $1,736 4.72%
Due after one year through five years 3,711 3,753 5.45% 3,627 3,586 5.61%
Due after five years through ten years 279 293 5.57% -- -- --
Due after ten years 395 395 6.15% -- -- --
$7,262 $7,345 $5,386 $5,322
- ------------------------------------------------------------------------------- --------------------------------------------
</TABLE>
Mortgage backed securities are allocated based on their anticipated
principal repayment.
LOAN PORTFOLIO
Types of Loans. The composition of loans at December 31 was (dollars in
thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
1995 % OF 1994 % OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
Commercial $ 28,259 22.40% $ 30,743 26.35%
Real estate construction 15,701 12.45% 15,119 12.96%
Real estate mortgage 75,128 59.55% 63,474 54.40%
Consumer 7,066 5.60% 7,336 6.29%
$126,154 100.00% $116,672 100.00%
------------------------------------------------------------------------------
</TABLE>
Loan Maturities & Sensitivities To Changes In Interest Rates. The
following table shows the maturity analysis of commercial and real estate
construction loans outstanding as of December 31, 1995. Also provided are the
amounts of all loans due after one year classified according to the sensitivity
to changes in interest rates (dollars in thousands):
- 43 -
<PAGE> 58
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial $12,713 $14,577 $ 969 $28,259
Real Estate Construction 14,758 943 -- 15,701
TOTAL $27,471 $15,520 $ 969 $43,960
Total loans maturing after one year with:
Predetermined interest rates (fixed) $49,690 $10,378
Floating or adjustable interest rates (variable) 16,934 3,032
TOTAL $66,624 $13,410
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Risk Elements. Non-accrual and past due loans were as follows at
September 30, 1996 and the end of the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994
<S> <C> <C> <C>
Non-accrual loans $ 387 $1,427 $741
Accruing loans past due
90 days or more 2,156 401 255
---------------------------------------------------------------------
</TABLE>
Interest income on non-accrual loans that would have been recorded in
the year ended December 31, 1995 and 1994 had those loans performed in
accordance with their original terms, was $146,000 and $145,000, respectively.
Interest income collected on such loans and included in income was not material.
At December 31, 1995 there were no commitments to lend additional funds
to borrowers whose loans were classified as non-accrual. FCFG is not aware of
any loans continuing to accrue interest at December 31, 1995 that represent or
result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources, or
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
Loan Administration. FCFG's lending officers have the ability to grant
loans to customers up to preestablished individual lending limits. Loans in
excess of these limits, but less than a preestablished in-house limit must be
approved by a committee consisting of senior lending officers, including the
President and Credit Administrator. Loans in excess of the in-house limit must
be approved by the Board of Directors' Loan Committee.
The Senior Vice President/Credit Administrator monitors the loan
portfolio with respect to pricing, composition and quality. Collection of
problem credits is performed under the direction of the Senior Vice
President/Special Credits Officer, who monitors and reports to other members of
senior management and the Directors Loan Committee.
The Bank has adopted comprehensive lending policies that provide
detailed underwriting guidelines, as well as procedures for the identification
and monitoring of potential problem loans. The Directors' Loan Committee meets
regularly and reviews various reports pertaining to the performance,
- 44 -
<PAGE> 59
quality and composition of the loan portfolio, as well as detailed credit
information regarding new loans extended during the period. The Committee in
turn provides regular reports on the loan portfolio to the FCFG Board.
The reviews, examinations and actions described above are in addition
to the regular examination procedures of FCFG's Internal Audit/Compliance
department and the periodic examination by federal and state regulatory
agencies, as well as FCFG's outside accounting firm. Based on evaluations of
this information and other conditions, management reviews the adequacy of the
allowance for possible credit losses quarterly. The allowance is maintained at a
level deemed sufficient to meet potential losses.
Non-Performing Loans. Loans are placed in a non-accrual status when, in
the opinion of management, the collection of additional interest is doubtful, or
when the loan becomes ninety (90) or more days past due in principal or interest
unless the loan is well secured and in the process of collection. When a loan is
placed on non-accrual status, all interest previously accrued but not collected
is reversed and charged against interest income. Income on non-accrual loans is
then recognized only to the extent cash is received. Accruals are resumed only
when the loan is brought current, and when, in the opinion of management, the
borrower has demonstrated the ability to resume payments of principal and
interest. If management determines that ultimate collectability of principal is
in doubt, cash receipts on non-accrual loans are applied to reduce the principal
balance.
SUMMARY OF CREDIT LOSS EXPERIENCE
Analysis. Transactions in the allowance for possible credit losses for
the nine months ended September 30, 1996 and the years ended December 31, 1995
and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED DECEMBER 31
SEPTEMBER 30, 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of period $1,376 $1,250 $1,149
Provision charged to non-interest expense 221 236 224
Losses charged to allowance
Commercial 30 138 62
Real Estate Mortgage 100 12 13
Real Estate Construction -- -- --
Consumer 73 26 68
(203) (176) (143)
Recoveries credited to allowance 8 66 20
NET CHARGE-OFFS (195) (110) (123)
BALANCE AT END OF PERIOD $1,402 $1,376 $1,250
Ratio of net charge-offs to Average Loans Outstanding .15% .09% .12%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The amount charged to operations and the related balance in the allowance for
possible credit losses is based upon periodic evaluations of the loan portfolio
by management. These evaluations consider
- 45 -
<PAGE> 60
several factors including but not limited to loan volume, growth and composition
of the loan portfolio, past loan loss experience, general economic conditions
and management's estimate of future potential losses.
Allocation of Allowance for Possible Credit Losses. It is the policy of
First Community Financial Group and its subsidiaries to charge-off any loan or
portion of a loan that is deemed uncollectible in the ordinary course of
business. The entire allowance for possible credit losses is available to absorb
such charge-offs. FCFG has history to draw from regarding loan losses and
therefore allocates its allowance for possible credit losses primarily on the
basis of historical occurrence. Based on certain characteristics of the
portfolio, losses can be anticipated for major loan categories. In the following
table, the allowance for possible credit losses at December 31, 1995 and 1994
has been allocated among major loan categories based on a number of factors
including quality, volume, economic outlook and other business considerations
(dollars in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1995 1994
% OF TOTAL % OF TOTAL
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
<S> <C> <C> <C> <C>
Commercial Loans $ 295 21.4% $ 380 30.4%
Real Estate Loans 953 69.3% 744 59.5%
Consumer Loans 128 9.3% 126 10.1%
TOTAL ALLOWANCE $1,376 100.0% $1,250 100.0%
- ---------------------------------------------------------------------------------------------
</TABLE>
Historical net charge-offs are not necessarily accurate predictors of
future losses since net charge-offs vary from period to period due to economic
conditions and other factors that cannot be accurately measured. Thus, an
evaluation based on historical loss experience of individual loan categories
will prove valuable in the future but will be only one of many factors
considered by management in evaluating the adequacy of the overall allocation
and in determining the amount of the provision for possible credit losses. At
December 31, 1995, the total of the allocation for possible credit losses was,
in management's opinion, adequate to provide for future losses.
DEPOSITS
Average Interest and Non Interest Bearing Deposit Balances
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1995 1994
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Demand Deposits $ 28,088 $ 24,402
Interest bearing demand 39,697 3.22% 33,292 2.91%
Savings Accounts 23,131 3.13% 28,222 2.75%
Other time deposits 60,007 5.76% 45,849 4.27%
TOTAL $150,923 $131,765
- ---------------------------------------------------------------------------------
</TABLE>
Certificates of deposit at December 31, 1995 are scheduled to mature as
follows (dollars in thousands):
- 46 -
<PAGE> 61
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
UNDER $100,000
$100,000 AND OVER TOTAL
<S> <C> <C> <C>
0-90 days $ 8,740 $ 5,797 $14,537
91-180 days 9,536 1,886 11,422
181-365 days 17,816 5,664 23,480
Over 1 year 10,802 1,851 12,653
$46,894 $15,198 $62,092
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Return on Equity and Assets. The following table sets forth
consolidated operating and capital ratios for the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
Return on average assets .53% 1.17%
Return on average equity 4.71% 10.99%
Cash dividend payout ratio 0.00% 0.00%
Average equity to average asset ratio 11.28% 10.74%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Short Term Borrowings. During the years ended December 31, 1995 and
1994, FCFG incurred no material short-term borrowings.
Summary of Interest Earned and Interest Paid. The following table sets
forth for the periods indicated a summary of the changes in interest earned and
interest paid resulting from changes in volume and changes in rates:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME RATE NET VOLUME RATE NET
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $1,841 ($ 133) $1,708 $2,149 ($ 72) $2,077
Federal funds sold and deposits in banks 50 223 273 (95) 344 249
Investment securities - - 79 79 1 (13) (12)
TOTAL INTEREST INCOME 1,891 169 2,060 2,055 259 2,314
Interest paid on:
Savings, NOW and MMA 38 217 255 322 10 332
Time deposits 704 798 1,502 256 79 335
Other borrowings (16) 54 38 - - - - - -
TOTAL INTEREST EXPENSE 726 1,069 1,795 578 89 667
NET INTEREST INCOME $1,165 ($ 900) $ 265 $1,477 $170 $1,647
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
-47-
<PAGE> 62
MANAGEMENT OF FCFG
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the name and certain information, as of
September 30, 1996, regarding the directors of FCFG, and executive officers of
FCFG and the Bank.
<TABLE>
<CAPTION>
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Tenure as FCFG
Director of Term
Name Age Principal Occupation Position(s) Held FCFG Expires
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Arneson, James F. 36 Executive Vice President and FCFG-Treasurer N/A N/A
Chief Financial Officer, FCFG Bank-Treasurer
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
DeTray, Paul F. 63 President, DeTray's Quality FCFG-Director 1979 1999
Homes Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Durney, John D. 48 V.P./Co-Owner, Durney Agency, FCFG-Director 1993 1999
Inc. Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Huber, John D. 52 Executive Vice President, Bank-Director N/A N/A
Grays Harbor Region, Bank
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Martin, Patrick 58 President, Patrick's FCFG-Director 1981 1997
Decorating Center Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Murphy, Michael 54 Deputy State Auditor, State FCFG-Director 1993 1999
Auditor's Office Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Panowicz, A. Richard 52 President, Archives NW FCFG-Director 1992 1998
Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Parsons, Ken F. 51 President and CEO, FCFG FCFG-Vice 1979 1997
Chairman
Bank-Chairman &
Acting President
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Price, Michael 51 President, T&W Financial FCFG-Director 1996 1998
Corporation Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
Wilcox, Kenneth 67 Retired Pharmacist FCFG-Director 1979 1998
Bank-Director
- -------------------------- ------ -------------------------------- -------------------- ------------------ ----------
</TABLE>
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<PAGE> 63
BOARD COMMITTEES
The FCFG Board meets on a bi-monthly basis. There were five meetings of
the FCFG Board through September 30, 1996. All directors attended more than 75
percent of such meetings and of all committee meetings of which they were
members.
The FCFG Board and the Bank have established certain standing
committees, including an Executive Committee and an Audit Committee. There is
presently no standing Nominating Committee.
Executive Committee. The Executive Committee is authorized, to the
extent permitted by law, to act on behalf of the FCFG Board on all matters that
may arise between regular board meetings upon which the FCFG Board would be
authorized to act. In 1996, members of the committee were Messrs. DeTray
(Chairman), Martin, Panowicz and Parsons. There were five (5) meetings of the
Executive Committee during 1996 through September 30th.
Audit Committee. The Audit Committee's function is to meet with
management, the internal auditors and the independent auditors to review and
evaluate FCFG's audited financial statements, internal accounting controls,
regulatory examinations and compliance with laws, regulations and corporate
policy. In 1996, members of the committee were Messrs. Panowicz (Chairman),
Durney, Hartman, Murphy, and Wilcox. There were three (3) meetings of the Audit
Committee during 1996 through September 30th.
DIRECTOR COMPENSATION
Director and Committee Fees. FCFG has an established program for
director compensation in which each director of FCFG receives an annual retainer
fee of $2,400, a Board meeting attendance fee of $350 per Board meeting, and a
committee meeting attendance fee of $175 per meeting. Directors of the Bank
Board also receive an annual retainer of $2,400 a Board meeting attendance fee
of $350 per Board meeting, and a committee meeting attendance fee of $175 per
meeting.
Deferred Compensation Agreements. In 1992, FCFG entered into deferred
compensation agreements with four (4) directors of the Bank. The agreements
allow each director, at his option, to defer regular monthly Board fees until
retirement or termination of the Agreement.
Performance Based Fees. A performance based fee schedule plan was
implemented in 1992 whereby, in addition to the base fees, director receive fee
adjustments based on FCFG's annual performance as measured by return on assets.
During the fiscal year 1995, there were no performance based fees for Directors.
Director Stock Option Plan. Shareholders approved a Non-Employee
Directors' Stock Option Plan at the annual shareholders meeting of April 19,
1989. They authorized stock options covering a total of 10,000 shares of FCFG's
Common Stock to nonemployee directors as inducement to acquire a further
proprietary interest in FCFG. Options for a total of 8,000 shares were issued in
1989 under this Plan and the remaining options for 2,000 shares were issued in
February 1992. Options were granted at an exercise price equal to the then fair
market value of the underlying shares of common stock.
On May 13, 1992, the shareholders approved the 1992 Stock Option Plan
for Non-employee Directors which authorized options for a total of 64,000 shares
of FCFG's Common Stock. Options for 64,000 shares were then granted at the then
fair market value of the underlying shares of common stock.
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<PAGE> 64
On April 19, 1994, the shareholders approved the 1994 Stock Option Plan
for Non-employee Directors ("1994 Plan") which authorized options for a total of
73,500 shares of FCFG's Common Stock to non-employee directors. The 1994 Plan
supplements the previously approved 1989 and 1992 Stock Option Plans. The
exercise price of the options granted under this Plan must be not less than the
greater of the Book Value or market value at the time of grant, and options have
a term of not more than ten years from the date of grant. In August 1994,
options covering a total of 33,600 shares were issued with an exercise price
equal to the then fair market value of the underlying shares. Options for 43,989
shares remain unissued under this plan at December 31, 1995.
Options under the above Plans covering a total of 75,728 shares remain
outstanding at December 31, 1995, of which 38,980 were exercisable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning
beneficial owners of FCFG Common Stock as of September 30, 1996, by (i) the only
persons known to FCFG to have beneficial ownership of more than five percent of
its outstanding Common Stock; (ii) each of the names directors and executive
officers of FCFG; and (iii) directors and certain executive officers of FCFG
and/or the Bank as a group.
<TABLE>
<CAPTION>
------------------------------------------- ------------------------------------ -----------------------------
Name and Address and Relationship with Number of Shares Percent of Class
FCFG(*) Beneficially Owned Beneficially Owned
------------------------------------------- ------------------------------------ -----------------------------
<S> <C> <C>
E. Paul DeTray 108,746 (1) 6.37
Director
------------------------------------------- ------------------------------------ -----------------------------
Ken F. Parsons 131,047 (2) 7.57
Director
------------------------------------------- ------------------------------------ -----------------------------
John D. Durney 7,491 (3) (**)
Director
------------------------------------------- ------------------------------------ -----------------------------
Patrick L. Martin 37,545 (4) 2.20
Director
------------------------------------------- ------------------------------------ -----------------------------
Michael N. Murphy 12,955 (5) (**)
Director
------------------------------------------- ------------------------------------ -----------------------------
A. Richard Panowicz 64,837 (6) 3.80
Director
------------------------------------------- ------------------------------------ -----------------------------
Michael A. Price 93,150 (7) 5.49
Director
------------------------------------------- ------------------------------------ -----------------------------
Kenneth M. Wilcox 48,775 (8) 2.86
Director
------------------------------------------- ------------------------------------ -----------------------------
FCFG Employee Stock Ownership Plan 265,037 (9) 15.62
("KSOP")
------------------------------------------- ------------------------------------ -----------------------------
Directors and Officers as a group 508,454 (10) 29.97
------------------------------------------- ------------------------------------ -----------------------------
</TABLE>
* The address for all individuals is the same address as FCFG.
** Indicates ownership of less than 1%.
1. Includes 45,335 shares held jointly with spouse; 15,789 shares held
by DeTray's Quality Homes; 7,150 held by a the DeTray Family
Partnership; 23,320 unallocated shares held by the KSOP, considered
beneficially owned by Mr. DeTray as Trustee for the KSOP; and 10,617
shares which could be acquired within 60 days by the exercise of
stock options.
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<PAGE> 65
2. Includes 50,424 shares held jointly with spouse; 13,740 and 1,429
held in IRA accounts for the benefit of Mr. Parsons; 633 shares
representing Mr. Parsons ownership in an investment partnership; 868
shares held in an IRA for the benefit of Mrs. Parsons; 5,301 shares
held in the KSOP for the benefit of Mr. Parsons; 23,320 unallocated
shares held by the KSOP, considered beneficially owned by Mr. Parsons
as trustee for the KSOP; and 35,332 shares which could be acquired
within 60 days by the exercise of stock options.
3. Includes 1,631 shares held in IRA accounts for the benefit of Mr.
Durney; 1,312 shares owned by spouse; 110 shares held in an IRA for
the benefit of Mrs. Durney; 220 shares owned by minor children; and
2,116 shares which could be acquired within 60 days by the exercise
of stock options.
4. Includes 13,752 shares held jointly with wife; 2,685 shares held in
an IRA account for the Benefit of Mr. Martin; 310 shares hold in IRA
account for the benefit of Mr. Martin's wife; 10,617 shares which
could be acquired within 60 days by the exercise of stock options.
5. Includes 2,116 shares which could be acquired within 60 days by the
exercise of stock options.
6. Includes 16,045 shares hold jointly with wife; 11,560 shares held in
an IRA account for the benefit of Mr. Panowicz; 23,320 unallocated
shares held by the KSOP of which Mr. Panowicz is a trustee; and
10,617 shares which could be acquired within 60 days by the exercise
of stock options.
7. Includes 1,110 shares owned by minor children.
8. Includes 2,683 shares held in an IRA account for the benefit of Mr.
Wilcox; and 10,617 shares which could be acquired within 60 days by
the exercise of stock options.
9. In addition to the 23,230 unallocated shares held by the KSOP,
includes 85,426, 107,727, 41,517 and 7,237 beneficially owned by
Messrs. DeTray, Parsons and Panowicz as well as another trustee,
respectively, solely as trustees of the KSOP, over which the KSOP
disclaims beneficial ownership.
10. Includes 23,320 unallocated shares held by the KSOP which are
considered beneficially owned by Messrs. DeTray, Parsons and
Panowicz, as well as another trustee of the KSOP. Also includes
99,141 shares owned by directors and management which could be
acquired within 60 days by the exercise of stock options.
EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information
concerning the compensation paid by FCFG and/or the Bank for services rendered
in all capacities during the last two fiscal years to its President and Chief
Executive Officer, the only executive officer who earned compensation during the
last fiscal year of $100,000 or higher.
<TABLE>
<CAPTION>
- ---------------------------- -------- ------------------------------------- -------------------------- ----------------------
Annual Compensation Long Term Compensation
------------ ----------- ------------ -------------- -----------
Other
Annual Awards Payouts
-------------- -----------
Name and Year Salary (1) Bonus Compen- Options LTIP All Other
Principal Position sation (2) Shares (3) Payouts Compensation (4)
- ---------------------------- -------- ------------ ----------- ------------ -------------- ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ken F. Parsons 1995 $108,933 $26,000 0 0 0 $8,844
FCFG--President, Vice 1994 99,865 23,816 0 28,000 0 9,756
Chairman & CEO
Bank, Premises & IMS--
Chairman & CEO
- ---------------------------- -------- ------------ ----------- ------------ -------------- ----------- ----------------------
</TABLE>
(1) Includes salary and fees received as a director for participation in FCFG
Board and committee meetings. Does not include deferred salary and
director fees totaling $4,525 for the year 1995 and $11,308 for the year
1994.
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<PAGE> 66
(2) The named executive did not receive any perquisites or other personal
benefits in an aggregate amount equal to or exceeding the lesser of (i)
$50,000 or (ii) 10 percent of the executive's total annual salary and
bonus for the year.
(3) Consists of awards granted pursuant to FCFG's Employee Stock Option and
Restricted Stock Award Plan.
(4) Includes amounts paid by FCFG pursuant to FCFG's Profit Sharing Plan and
matching contributions under FCFG's 401(k) Plan.
No stock options were granted to the named executive officer during
1995. The following table sets forth certain information concerning exercises of
stock options pursuant to the FCFG stock option plans by the named executive
officer during the year ended December 31, 1995, and stock options held at year
end.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------
- -------------------- ------------- ------------ ------------------------------------ -----------------------------------
Shares Acquired
on Exercise
Name Value Number of Unexercised Options Value of Unexercised Options
Realized at Year End at Year End (1)
--------------- -------------------- ----------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- ------------ --------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ken F. Parsons -- -- 25,866 33,037 $238,224 $203,150
- -------------------- ------------- ------------ --------------- -------------------- ----------------- -----------------
</TABLE>
(1) On December 31, 1995, the estimated market price of the Common Stock was
$20.00. For purposes of the foregoing table, stock options with an
estimated price less than that amount are considered to be "in the money"
and are considered to have a value equal to the difference between this
amount and the exercise price of the stock option multiplied by the
number of shares covered by the stock option.
EMPLOYMENT AGREEMENTS
FCFG entered into an employment agreement on September 1, 1996 with Mr.
Parsons, President, Chief Executive Officer and Director of FCFG, and Chief
Executive Officer and Chairman of the Bank. The agreement has an eight-year
term, subject to renewal. FCFG may terminate the agreement at any time for cause
without incurring any post-termination obligation to Mr. Parsons, or without
cause with severance benefits of between thirty-six months' and seventy-two
months' salary continuation. If Mr. Parsons terminates his employment for any
reason within twelve months of a change in majority control of FCFG, then the
agreement provides the same severance benefits. Mr. Parsons is generally
prohibited from competing with FCFG in its market area for at least twelve
months following termination for any reason. The non-compete period is increased
to thirty-six months following termination by FCFG without cause or by Mr.
Parsons with good reason. The agreement provides that upon retirement, Mr.
Parsons will receive a continuing service consulting fee based upon annual cash
compensation and years of serving FCFG.
Under a stock option agreement, Mr. Parsons will receive options for
8,000 shares of FCFG Common Stock for each of five years, with an exercise price
of the market value as of the grant date of such options. He will also receive
options for up to 15,000 shares of FCFG Common Stock for each of four years if
the Bank achieves certain performance goals.
EMPLOYEE SUPPLEMENTAL INCOME PLAN
In 1992, FCFG adopted an Executive Supplemental Income Plan ("ESIP")
covering a senior group of management personnel. The post-retirement benefit
provided by the ESIP is designed to supplement a participating officer's
retirement benefits from social security, in order to provide the
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<PAGE> 67
officer with a certain percentage of final average income at retirement age.
Additionally, the ESIP provides a pre-retirement death benefit. These benefits
are funded by life insurance policies owned by FCFG covering the participants.
The ESIP entitles Mr. Parsons to 15 annual payments of $125,000 upon
his retirement, or pre-retirement death benefits consisting of a payment of
$180,000 in the first year following his death, annual payments of $135,000 in
years 2 through 5, and $90,000 annually in years 6 through 15.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK AWARD PLAN
The shareholders approved an Employee Stock Option and Restricted Stock
Award Plan ("FCFG Plan") at a regular annual meeting of shareholders held on
April 19, 1989. The purpose of the FCFG Plan is to provide additional incentives
to selected eligible key officers of FCFG and its subsidiaries in order to (i)
attract and retain the best available personnel for positions of responsibility
with FCFG and its subscribers, (ii) promote the success of the business
activities of FCFG, and (iii) increase shareholder value. The incentives are in
the form of options to purchase shares of FCFG Common Stock and/or restricted
stock awards. FCFG has the first right of refusal to purchase any shares issued
under the FCFG Plan prior to being sold on the open market. As of December 31,
1995, options covering 233,785 shares were outstanding under the Plan, of which
126,172 were exercisable. Options for 120,884 shares remain unissued in the
Plan.
Under the terms of the FCFG Plan, the exercise price of option shares
will be fair market value of the shares on the date the option is granted. All
options are incentive stock options under Section 422 of the Code, and are
exercisable over a ten (10) year period from the date of the grant.
EMPLOYEE STOCK OWNERSHIP PLAN
FCFG provides retirement benefits to eligible employees through an
Employee Stock Ownership Plan that includes Code Section 401(k) provisions (the
"KSOP"). The KSOP was adopted as a 401(k) plan in 1987, and restated in 1992 to
add employee stock ownership plan provisions. Eligible employees may elect to
contribute to the KSOP up to 12 percent of their compensation (subject to
Internal Revenue Service limitations), and these contributions are matched by
FCFG at a rate of 50 percent of up to 6 percent of an employee's contribution.
The FCFG Board may make additional contributions to the KSOP, based on
performance of FCFG.
All funds in the KSOP are held in trust. The KSOP is administered by a
Board of Trustees that consists of Messrs. Arneson, DeTray, Panowicz and
Parsons. Employer contributions to the KSOP are generally invested in shares of
FCFG's Common Stock, although the Trustees have the discretion to invest in such
other prudent investments as deemed appropriate. Participants may direct the
investment of his or her Salary Reduction Account into any combination of (i)
FCFG Common Stock, (ii) mutual funds, or (iii) money market investments.
Upon retirement or termination of employment, a participant is entitled
to receive all Employer Basic Contributions, Employee Salary Reductions and
Rollover Contributions. The participant will also be eligible to withdraw
Employer Optional and Matching Contributions contributed by FCFG from profits,
subject to a vesting schedule. A participant becomes fully vested in five years,
with vesting of 20 percent each year after the first year of participation.
Contributions to the KSOP for the years ended December 31 were $165,114
in 1995 and $164,000 in 1994.
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<PAGE> 68
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1995, many directors and executive officers of FCFG and the Bank
and their associates were also customers of the Bank. It is anticipated that
directors, executive officers, and their associates will continue to be
customers of the Bank in the future. The Bank has had, and expects to have in
the future, banking transactions in the ordinary course of their business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with others and which do
not involve more than the normal risk of collectability or present other
unfavorable features.
In April, 1993, Mr. Kenneth Wilcox, a director of FCFG and the Bank,
loaned $450,000 to IMS, a wholly-owned subsidiary of FCFG, for the purpose of
acquiring data processing equipment to be used by IMS in its business. The term
of the loan is five years, and interest is paid at a rate of .75 percent over
prime rate (9.5 percent at December 31, 1995). Management of FCFG believes that
the terms of the loan are at least as favorable as those that would have been
received from an unaffiliated party. As of September 30, 1996, the principal
outstanding under this obligation was $230,963.
INFORMATION CONCERNING PSB
BUSINESS
PSB is a Washington state-chartered commercial banking corporation
incorporated on July 8, 1987. PSB was founded in May, 1988 through the
acquisition of substantially all of the assets and liabilities of the Yelm
branch of Central Evergreen Federal Savings & Loan Association.
PSB engages in a general commercial banking business through branches
in Yelm, Olympia and Eatonville, Washington, serving the greater Thurston County
area and eastern Pierce County. PSB provides a full range of consumer banking
services, including savings accounts, checking accounts, safe deposit
facilities, time deposits, VISA(TM) debit cards and other consumer and related
financial services including the sale of non-deposit investment products through
a third party vendor. PSB lends to consumers via installment loans and mortgage
creation and to the commercial market via real estate and construction loans and
general business lines of credit. As of September 30, 1996, PSB had
approximately $42.1 million in deposits, $37.7 million in loans and total assets
of $50.1 million.
PSB has one subsidiary, PSB Capital, Inc., which is not currently
engaged in any active business and does not own any property.
COMPETITION
PSB competes principally with other commercial banks, mutual savings
banks, savings and loan associations, finance companies, credit unions,
brokerage firms and other financial institutions in its service area with
respect to the scope and type of services it offers, the interest rates it pays
for deposits and the pricing of loans, among other areas. PSB's community
banking philosophy allows it to compete based on its flexibility in offering
loan products to its local customers based on their particular needs. PSB also
competes in the residential real estate financing market through its access to
the national secondary market for mortgage originations through the Independent
Bankers Association of America Mortgage Corporation and its secondary market
outlet.
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<PAGE> 69
Commercial banking in Washington and in PSB's service area is highly
competitive, and many of PSB's competitors have substantially greater resources,
better deposit gathering capabilities through more locations, and substantially
greater lending limits due to their greater size. These competitors also have
the ability to offer more product and service lines, such as investments and
trust services, and to conduct wider-ranging advertising campaigns. They may
also allocate their investment assets to geographic regions in which they face
greater loan demand and can obtain higher yields.
PSB's competitive strategy is based on its determination to be a
community-based lender within its service area of Thurston County. Management
believes that its community involvement, understanding of the region and
localized focus and decision-making allow it the flexibility to compete in the
local market.
FACILITIES
PSB's main branch and corporate offices are located in Yelm,
Washington, in a 6,000 square foot building owned and substantially occupied by
PSB. PSB operates its branch in Olympia in leased space, with a night drop and
ATM, and the Eatonville branch out of premises for which PSB owns the building
and leases the land. PSB conducts its real estate lending and mortgage
origination operations out of leased space located in an office complex adjacent
to the main branch.
EMPLOYEES
As of September 30, 1996, PSB had approximately 39 full-time and 8
part-time employees. Such employees are not represented by a union organization
or other collective bargaining group, and PSB's management considers its
relations with the employees to be very good.
LEGAL PROCEEDINGS
PSB is not a party to any pending legal proceedings, other than
ordinary routine litigation incidental to its business, before any court,
administrative agency or other tribunal, nor is management aware of any such
proceedings either pending or threatened against PSB which would have a material
effect on its business or financial condition if determined adversely to it.
PSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Overview. Total assets of $50.1 million at September 30, 1996 represent
a 10.6 percent increase over total assets at December 31, 1995. That represents
an annualized growth rate of 14.3 percent. Loans also increased $6.2 million, or
approximately 28.6 percent, during the first nine months of 1996, representing
an annualized growth rate of 38 percent. Total loans increased 25.5 percent in
1995. The ratio of loans to deposits was 95.7 percent at September 30, 1996
compared to 82.8 percent at December 31, 1995.
The allowance for credit losses represents management's current
estimate of amounts required to absorb losses on existing loans. The $408,000
allowance for credit losses at September 30, 1996 included a provision to the
allowance of $56,000 during the nine months then ended. The allowance represents
approximately 1.1 percent of total loans at September 30, 1996 and December 31,
1995.
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<PAGE> 70
Determination of the appropriate allowance level is based on, among other
things, an analysis of various factors including historical loss experience
based on volumes and types of loans, volumes and trends in delinquencies and
impaired loans, trends in portfolio volume, results of internal and independent
external credit reviews, and anticipated economic conditions in PSB's economic
area. Based on this analysis, management considers the allowance for possible
credit losses to be adequate.
Liquidity and Rate Sensitivity. PSB's assets and liabilities are
managed to maximize long-term shareholder returns by optimizing net interest
income within the constraints of maintaining high credit quality, conservative
interest rate risk disciplines and prudent levels of liquidity. Liquidity
management involves the ability to meet cash-flow requirements of customers who
may be either depositors wanting to withdraw funds or borrowers needing
assurance that sufficient funds will be available to meet their credit needs.
Liquidity is generated from both internal and external sources. Internal sources
are those assets that can be converted to cash with little or no risk of loss.
These include overnight investments in federal funds sold and certain investment
securities, particularly those of shorter maturity, and are the principal source
of asset liquidity. At September 30, 1996, cash and due from banks,
interest-bearing deposits with banks, federal funds sold and "Available for
Sale" investment securities, together approximated $4.5 million. External
sources refer to the ability to attract new liabilities and capital. They
include increasing savings and demand deposits, federal funds purchased, and the
issuance of capital and debt securities. PSB has $2 million of unsecured federal
funds credit lines with other banks. PSB also has access to a Federal Home Loan
Bank credit line of approximately $5 million on a secured basis. These lines
were used extensively during 1996 to meet heavy demand for short-term loans
generated primarily through PSB's Mortgage Department. PSB management believes
the liquidity position at September 30, 1996 is adequate to meet its short-term
funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. Net interest income
is affected by changes in the level of interest rates. PSB management's
objectives are to monitor and control interest rate risk and ensure predictable
and consistent growth in net interest income. PSB management considers any asset
or liability which matures, or is subject to repricing within one year, to be
interest sensitive, although continual monitoring is performed for other time
intervals as well. The difference between interest sensitive assets and
liabilities for a defined period of time is known as the interest sensitivity
"gap," and may be either positive or negative. If positive, more assets reprice
before liabilities. If negative, the reverse is true. Gap analysis provides a
general measure of interest rate risk, but does not address complexities such as
prepayment risk, interest rate floors and ceilings imposed on financial
instruments, interest rate dynamics and customers' response to interest rate
changes. PSB management's objective is to sustain a relatively "neutral" gap
position. At September 30, 1996, PSB had $6.6 million (or 13 percent of total
assets) more in liabilities than assets repricing during the next year. However,
because PSB's deposit rates tend to change less than loan and investment rates,
PSB's interest income will change more than cost of funds when rates change. Its
net interest margin should therefore increase somewhat when rates increase and
shrink somewhat when rates fall. The current estimate is a $67,000 change to the
net interest margin for the one percent change in the Fed Funds rate.
This modest interest rate risk is created by the concentration of
variable rate and short term commercial loans -- one of PSB's major business
lines.
Capital. The primary capital-to-asset leverage ratio was approximately
9.2 percent at September 30, 1996 as compared to 10.2 percent and 10.9 percent
at December 31, 1995 and 1994, respectively. In 1989, the banking regulators
adopted risk-based capital guidelines under which one of four risk weights is
applied to balance sheet assets, each with different capital requirements based
on the credit risk of the asset. Risk-adjusted capital-to-asset ratios were 8.8
percent at September 30, 1996 and
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<PAGE> 71
9.5 percent and 10.4 percent at December 31, 1995 and 1994, respectively, all of
which substantially exceeded regulatory guidelines.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996. Interest income for the nine
months ended September 30, 1996 increased approximately $370,000, or 13.3
percent, over the comparable prior year period. The increase was due primarily
to an increase in average loans to approximately $35.0 million as compared to
$30.6 million in the prior year period. Most of the increase was due to growth
in commercial real estate lending, particularly in the Olympia branch.
Interest expense for the nine months ended September 30, 1996 increased
approximately $190,000, or 18.4 percent, over the comparable prior year period.
The increase was due to an increase in PSB's cost of funds, as average rates
paid on deposits increased to 5.0 percent during the 1996 period as compared to
4.8 percent for the 1995 period, as well as a $3.6 million increase in the
average balance of certificates of deposit. This trend in interest expense was
mitigated somewhat by the rollover of previously higher-yielding time deposits
into lower-yielding time deposits, and the repayment of $1.0 million in Fed
Funds borrowings.
Net interest income for the nine months ended September 30, 1996
increased approximately $180,000 over the comparative prior year period. The net
interest spread decreased to an annualized rate of approximately 5.3 percent for
the 1996 period as compared to approximately 5.7 percent for the 1995 period.
Non-interest income for the nine months ended September 30, 1996
increased approximately $311,000, or 34.4 percent, compared to the corresponding
prior year period, due primarily to an increase in brokered loan fees and an
increase in fee income on sales of annuities. Non-interest income as a percent
of average total assets increased to 3.3 percent in 1996 compared to 2.9 percent
in 1995.
Non-interest expense for the nine months ended September 30, 1996
increased by $136,000, or 5.5 percent, compared to the corresponding prior year
period. As a percent of average total assets, non-interest expense approximated
7.2 percent for 1996 compared to 7.8 percent for the 1995 period.
As a result of the above, income before income taxes for the nine
months ended September 30, 1996 increased by $344,000, or 251 percent, as
compared to the corresponding prior year period.
Year Ended December 31, 1995. Interest income for the year ended
December 31, 1995 increased approximately $920,000, representing a 32.9 percent
increase over the prior year. The increase was due primarily to increases in
average loans to $30.6 million, as compared to $24.7 million for the prior year,
and an increase in the average yield on loans to 10.6 percent as compared to 9.6
percent.
Interest expense for the year ended December 31, 1995 increased
approximately $581,000, or 68.8 percent over the prior year. The increase was
due to increases in average deposits to $30.7 million in 1995, as compared to
$25.9 million in 1994, as well as an increase in the average cost of funds for
those deposits to 4.2 percent during 1995 as compared to 3.2 percent in 1994.
Net interest income for the year ended December 31, 1995 increased
approximately $339,000 compared to the prior year, an increase of approximately
17.4 percent. The net interest spread for 1995 was relatively constant compared
to 1994. 5.7 percent in 1995 versus 5.6 percent in 1994.
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<PAGE> 72
Non-interest income for the year ended December 31, 1995 increased
approximately $393,000, or 35.8 percent, over the prior year, due primarily to
an increase in mortgage origination fees.
Non-interest expenses for the year ended December 31, 1995 increased
approximately $691,000 compared to the prior year, or 26.6 percent, due
primarily to increased personnel and other costs associated with PSB's continued
growth. Non-interest expense, as a percent of average total assets, increased
slightly to 7.5 percent in 1995 as compared to 7.2 percent in 1994.
As a result of the above, income before income taxes for the year ended
December 31, 1995 increased $26,000 as compared to the prior year.
LOAN PORTFOLIO
Types of Loans. The composition of loans at December 31, 1995 was as
follows (dollars in thousands).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
% OF
PORTFOLIO PORTFOLIO
<S> <C> <C>
Commercial $ 3,812 12.13%
Real estate:
Construction 11,138 35.46
Commercial 8,030 25.56
Residential 7,615 24.24
Consumer 819 2.61
$31,414 100.00%
- ------------------------------------------------------------------------------
</TABLE>
Loan Maturities and Repricing. The following table shows the maturity
and repricing analysis for loans outstanding as of December 31, 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FIXED FLOATING
RATE RATE TOTAL
<S> <C> <C> <C>
0-90 days $ 4,645 $11,026 $15,671
91-365 days 3,500 20 3,520
1 year or more 8,911 2,668 11,579
$17,056 $13,714 30,770
Loans on which the accrual
of interest has been discontinued 646
$31,416
- -----------------------------------------------------------------------------------------
</TABLE>
Risk elements. The following table states as of December 31, 1995
non-accrual and past due loans (dollars in thousands):
<TABLE>
<CAPTION>
------------------------------------------ -------------
<S> <C>
Non-accrual loans $646
Loans 90 days or more past
due still accruing interest 148
------------------------------------------ -------------
</TABLE>
-58-
<PAGE> 73
Non-Performing Loans. Accrual of interest on impaired loans is
discontinued when reasonable doubt exists as to the collectibility of the loan
or the unpaid interest or when payment of principal and interest is
contractually ninety (90) days past due, unless the loan is well secured and in
the process of collection. Upon such discontinuance, the loan is placed on
non-accrual status and any accrued but unpaid interest is charged against
current income, unless the loan and accrued interest balances are adequately
collateralized and in the process of collection. Interest income is subsequently
recognized only to the extent cash payments are received. Accrual of interest is
resumed only when the borrower demonstrates an ability to make scheduled
payments of both principal and interest.
At December 31, 1995, there were no commitments to lend additional
funds to borrowers whose loans were classified as impaired. PSB is not aware of
any loans that continue to accrue interest at December 31, 1995 that management
reasonably expects will have a materially negative impact on future operating
results.
SUMMARY OF CREDIT LOSS EXPERIENCE
Analysis of the Allowance for Credit Losses. The following is an
analysis of the activity in the allowance for possible credit losses for the
year ended December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
<S> <C>
Balance at beginning of year $263
Provision for possible credit losses 90
Balance at end of year $353
Allowance for possible loan losses to total loans 1.12%
Impaired loans to total loans 2.06%
Allowance for possible loan losses to impaired loans 54.64%
---------------------------------------------------------------------------------
</TABLE>
PSB maintains the allowance for possible credit losses at a level
sufficient to provide for estimated credit losses based on evaluating known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Allocation of the Allowance for Credit Losses. The following is a
breakdown of the allowance for credit losses for the year ended December 31,
1995 (dollars in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
% OF TOTAL
AMOUNT ALLOWANCE
<S> <C> <C>
Impaired loans $ 5 1.42%
Classified loans 161 45.61%
Non-classified loans:
Commercial 24 6.80%
Real estate 157 44.47%
Consumer 6 1.70%
Total allowance $ 353 100.00%
------------------------------------------------------------------------------------
</TABLE>
-59-
<PAGE> 74
Management has adopted a credit classification process whereby loans
are categorized into risk categories. Classified loans referred to above
encompasses all individual loans which have been identified as having higher
risk than the non-classified loans. Factors that affect classifying a loan as
higher risk are based on conditions that may affect the ability of the borrower
to service the debt, such as current financial information, historical payment
experience, and current economic or market conditions. The relative percentage
of the allowance allocated to specific loan types is based on management's
judgment and are not materially different from prior periods. At December 31,
1995, the total of the allocation of the possible credit losses was, in
management's opinion, adequate to provide for future losses.
MANAGEMENT OF PSB
DIRECTORS AND EXECUTIVE OFFICERS
The name and age of the directors and executive officers of PSB, and
their positions with PSB and the Subsidiary Banks, if any, are set forth in the
following table:
<TABLE>
<CAPTION>
------------------------------------------- ---------- ------------------------------------ --------------------
Term of
Name Age Position with PSB Directorship
------------------------------------------- ---------- ------------------------------------ --------------------
<S> <C> <C> <C>
Michael D. Edwards (1)(2)(3) 52 President and Director 1998
------------------------------------------- ---------- ------------------------------------ --------------------
Roger A. Johansen 46 Vice President/Sr. Credit N/A
Administrator
------------------------------------------- ---------- ------------------------------------ --------------------
D. James Arthur 56 Vice President N/A
------------------------------------------- ---------- ------------------------------------ --------------------
Lawrence J. Schorno (1)(3)(4)(5) 53 Chairman and Director 1998
------------------------------------------- ---------- ------------------------------------ --------------------
Judith C. Nettleton (2)(3)(4)(5)(6) 52 Secretary and Director 1997
------------------------------------------- ---------- ------------------------------------ --------------------
Neil Amondson (3) 42 Director 1997
------------------------------------------- ---------- ------------------------------------ --------------------
Lyman Fleetwood (6) 69 Director 1997
------------------------------------------- ---------- ------------------------------------ --------------------
Thomas P. Gorman (1)(2)(3)(4)(5)(6) 51 Director 1999
------------------------------------------- ---------- ------------------------------------ --------------------
Dan Longmire 52 Director 1997
------------------------------------------- ---------- ------------------------------------ --------------------
Donald Miller (1)(3)(5) 71 Director 1998
------------------------------------------- ---------- ------------------------------------ --------------------
Dr. Glen Nutter (2)(3) 64 Director 1999
------------------------------------------- ---------- ------------------------------------ --------------------
Terrance Van Eaton (3)(6) 52 Director 1997
------------------------------------------- ---------- ------------------------------------ --------------------
</TABLE>
(1) Member of Loan Committee
(2) Member of Investment-Asset/Liability Committee
(3) Member of Marketing and CRA Committee
(4) Member of Executive Committee
(5) Member of Personnel and Benefits Committee
(6) Member of Audit Committee
The following is a description of the business experience of each of
the above for at least the last five years:
Michael D. Edwards has been the President and a director of PSB since
its founding in 1988. Mr. Edwards has been in the banking industry for 28 years,
from 1992 to 1994 serving by appointment of Chairman Greenspan to the Consumer
Advisory Council of the Federal Reserve Board. From 1977 to
-60-
<PAGE> 75
1983, Mr. Edwards was Supervisor of Banking for the State of Washington, the
state's chief banking regulator.
Roger A. Johansen is a Vice President and the Senior Credit
Administrator for PSB, and has over 16 years experience in the banking industry.
Prior to joining PSB in that capacity in 1993, Mr. Johansen was a Vice President
and Commercial Loan Officer with Key Bank of Washington in Lacey, Washington.
D. James Arthur is a Vice President of PSB in charge of its mortgage
lending operations, and has over 20 years experience in the mortgage banking
industry. Prior to joining PSB in 1994, Mr. Arthur was an independent mortgage
broker.
Lawrence J. Schorno was a founding director of PSB and is the Chairman
of the Board of Directors. Mr. Schorno is the President of Schorno
Agri-Business, a livestock export company, and Schorno Auction Co., a livestock
auctioneer. Mr. Schorno also serves on the Board of Trustees of the Washington
State University Foundation.
Judith C. Nettleton was a founding director and is currently Corporate
Secretary of PSB. Ms. Nettleton, now retired, was formerly co-owner and operator
of Western Sales and Imports, and was previously an operations officer for First
Interstate Bank in Tacoma, Washington.
Neil Amondson has been a director of PSB since 1989. Mr. Amondson is
currently a self-employed heavy equipment salesman and consultant. Prior to
that, Mr. Amondson was a Washington State Senator.
Lyman Fleetwood was an organizing director of PSB and is retired from
the practice of dentistry in Yelm. Mr. Fleetwood is a real estate owner and
developer.
Thomas P. Gorman has been a director of PSB since 1989. Mr. Gorman is
President of the Yelm Telephone Company, and was previously a Commander (Ret.)
in the United States Navy Reserve. Mr. Gorman is also the Chairman of the Yelm
Planning Commission and a past President of the Yelm Chamber of Commerce.
Dan Longmire was an organizing director of PSB and was previously owner
and operator of Yelm Realty, a real estate brokerage concern. Mr. Longmire is
currently a computer programmer and consultant.
Donald Miller was an organizing director of PSB and is the retired
owner of the Nisqually Valley News. Mr. Miller is a member of the Yelm City
Council and the Intercity Transit Authority.
Dr. Glen Nutter was an organizing director of PSB, and is the retired
Superintendent of Schools for the Yelm School District in which capacity he
served for 18 years. Dr. Nutter is currently on a one-year teaching assignment
in Africa.
Terrance Van Eaton has been a director of PSB since 1994, and is the
owner of Van Eaton Chevrolet in Eatonville. Mr. Van Eaton is a member of the
founding family of Eatonville.
-61-
<PAGE> 76
BOARD COMMITTEES
The PSB Board maintains an Executive Committee, an Audit Committee, a
Personnel and Benefits Committee, a Marketing and CRA Committee, an
Investment-Asset/Liability Committee and a Loan Committee. The Executive
Committee is authorized to exercise the authority of the PSB Board in all
matters except amendments to the Articles of Incorporation and/or consideration
and approval of a merger, consolidation or sale of all or substantially all of
the assets of PSB. The Audit Committee reviews and oversees internal auditing
procedures, internal financial and accounting controls, external and internal
audits and management responses to audits and recommendations of auditors. The
Personnel and Benefits Committee reviews and recommends compensation levels and
benefits. The Marketing and CRA Committee oversees the bank's marketing efforts
within the community and compliance with the Community Reinvestment Act
requirements. The Investment-Asset/Liability Committee reviews and controls
overall risk levels with respect to the assets and investments of PSB. The Loan
Committee reviews all loans over a pre-set amount that have been recommended by
management.
DIRECTOR COMPENSATION
Directors accrue $100 per month in directors' fees which are cumulated
and paid annually into the Directors' Deferred Income Plan, which is
administered by Banking Consultants of America.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the PSB Common Stock as of October 1, 1996, by (i) each person
known by PSB to own beneficially more than five percent of PSB's Common Stock,
(ii) each of PSB's directors, (iii) the executive officer named in the Summary
Compensation Table, and (iv) all directors and the executive officer of PSB as a
group. Each such holder has sole voting and investment power with respect to the
shares beneficially owned, except where indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ------------------------- --------------------------
Name and Address of Number of Shares
Beneficial Owner(*) Beneficially Owned Percentage Owned(1)
- ---------------------------------------------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Michael D. Edwards(2) 8,387 4.19
- ---------------------------------------------------------------- ------------------------- --------------------------
Neil Amondson(3) 4,454 2.26
- ---------------------------------------------------------------- ------------------------- --------------------------
Lyman Fleetwood(4) 1,574 (**)
- ---------------------------------------------------------------- ------------------------- --------------------------
Thomas Gorman(5) 3,312 1.68
- ---------------------------------------------------------------- ------------------------- --------------------------
Dan Longmire(6) 3,132 1.59
- ---------------------------------------------------------------- ------------------------- --------------------------
Donald Miller(7) 3,034 1.54
- ---------------------------------------------------------------- ------------------------- --------------------------
Terrance Van Eaton(8) 1,000 (**)
- ---------------------------------------------------------------- ------------------------- --------------------------
Lawrence J. Schorno(9) 5,848 2.97
- ---------------------------------------------------------------- ------------------------- --------------------------
Dr. Glen Nutter(10) 2,282 1.16
- ---------------------------------------------------------------- ------------------------- --------------------------
Judith C. Nettleton(11) 3,427 1.74
- ---------------------------------------------------------------- ------------------------- --------------------------
Directors and Officer as a group (ten persons) 31,242 15.29
- ---------------------------------------------------------------- ------------------------- --------------------------
</TABLE>
* The address for all individuals is the same address as PSB.
** Indicates ownership of less than 1%.
-62-
<PAGE> 77
1. Shares not outstanding but which are subject to options exercisable by
the named person within 60 days are deemed to be outstanding for
computing the percentage of outstanding shares owned by such person,
but shall not be deemed to be outstanding for the purpose of computing
the percentage of the class owned by any other person.
2. Includes: (i) 2,434 shares as trustee, with Messrs. Gorman and Schorno,
of the PSB ESOP; (ii) 3,836 shares which may be acquired within 60 days
through exercise of stock options, and (iii) 180 shares held of record
by Cede & Co. as trustee.
3. Includes: (i) 4,000 shares owned jointly and/or pursuant to a durable
power of attorney with members of Mr. Amondson's immediate family; and
(ii) 454 shares which may be acquired within 60 days through exercise
of stock options.
4. Includes: (i) 300 shares held of record by Mr. Fleetwood's spouse for
which beneficial ownership is disclaimed; and (ii) 454 shares which may
be acquired within 60 days through exercise of stock options.
5. Includes: (i) 264 shares held jointly with spouse; (ii) 2,434 shares as
trustee, with Messrs. Edwards and Schorno, of the PSB ESOP; (iii) 454
shares which may be acquired within 60 days through exercise of stock
options; and (iv) 160 shares held of record by Cede & Co. as trustee
for Mr. Gorman's spouse, for which beneficial ownership is disclosed.
6. Includes 454 shares which may be acquired within 60 days through
exercise of stock options.
7. Includes: (i) 2,580 shares held jointly with spouse; and (ii) 454
shares which may be acquired within 60 days through exercise of stock
options.
8. Owned jointly with spouse.
9. Includes: (i) 2,960 shares held jointly with spouse; (ii) 2,434 shares
as trustee, with Messrs. Edwards and Gorman, of the PSB ESOP; and (iii)
454 shares which may be acquired within 60 days through exercise of
stock options.
10. Includes: (i ) 448 shares held of record by Dr. Nutter's spouse, for
which beneficial ownership is disclaimed; and (ii) 454 shares which may
be acquired within 60 days through exercise of stock options.
11. Includes: (i) 2,618 shares held jointly with spouse; (ii) 355 shares
held of record by Cede & Co., as trustee; and (iii) 454 shares which
may be acquired within 60 days through exercise of stock options.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation paid by PSB during the 1995 fiscal year to its Chief Executive
Officer.
<TABLE>
<CAPTION>
- ------------------------- ------- ------------------------------------- ------------------------ ---------------------
Annual Compensation Long Term Compensation
------------- --------- ------------- ----------- ------------
Other Awards Payouts
Annual ----------- ------------
Name and Principal Year Salary (1) Bonus Compen- Options LTIP All Other
Position sation (2) Shares Payouts Compensation (3)
- ------------------------- ------- ------------- --------- ------------- ----------- ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael D. Edwards, 1995 $91,336 --- $2,000 N/A --- $8,479
President and C.E.O.
- ------------------------- ------- ------------- --------- ------------- ----------- ------------ ---------------------
</TABLE>
(1) Includes salary and fees received as a director for participation in
PSB Board and Committee meetings.
(2) Mr. Edwards did not receive any perquisites or other personal benefits
in an aggregate amount equal to or exceeding the lesser of (i) $50,000
or (ii) 10 percent of his total annual salary and bonus for the year.
(3) Includes (i) discretionary and matching contributions paid by PSB under
the PSB ESOP in the amount of $2,130 and (ii) $6,349 accrued in Mr.
Edwards' name under the Executive Supplemental Income Plan.
-63-
<PAGE> 78
Options Granted in Last Fiscal Year. No stock options were granted
during the 1995 fiscal year to the Chief Executive Officer.
Aggregate Option Exercises and Fiscal Year-End Value Table. No options
to acquire PSB Common Stock were exercised by the Chief Executive Officer during
fiscal year 1995. The following table sets forth the number of shares that may
be acquired in the future under currently exercisable and unexercisable stock
options held by the Chief Executive Officer as of December 31, 1995, and
includes the value of any such options that are "in-the-money" options, that is,
that have an exercise price that is less than the currently estimated fair
market value of the underlying shares.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Number of Unexercised Options Value of Unexercised Options at
Exercise Value at Year End Year End (1)
Name Realized
------------------------------------------------------------------------
Exercisable(1) Unexercisable Exercisable(1) Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Edwards N/A N/A 3,836 7,684 $127,853 $256,108
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to the Merger Agreement, Mr. Edwards has agreed to refrain
from exercising such options before consummation of the Merger. As a
result of the Merger, these options will be converted to options to
acquire that number of shares of FCFG Common Stock as Mr. Edwards would
have been entitled to receive if he had exercised his options to
acquire PSB Common Stock immediately prior to the Closing and elected
to receive FCFG Common Stock in connection with the Merger.
(2) On December 31, 1995, the estimated market price of the Common Stock
was $50.00. For purposes of the foregoing, stock options with an
exercise price less than that amount are considered to be
"in-the-money" and are considered to have a value equal to the
difference between this amount and the exercise price of the stock
option multiplied by the number of shares covered by the stock option.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
PSB maintains an Executive Supplemental Income Plan pursuant to which
PSB annually credits an amount set at the sole discretion of the PSB Board to a
Deferred Compensation Account in the participating executive's name. The plan
pays death and retirement benefits out of such Deferred Compensation Account on
certain terms and conditions, including a vesting schedule according to
continued service by the executive to PSB. PSB has entered into Executive
Supplemental Income Agreements under the plan with Messrs. Edwards, Johansen and
Arthur and Ms. Colleen Dorian, which will remain in effect after the Merger.
EMPLOYEE STOCK OWNERSHIP PLAN WITH 401(K) PROVISIONS
PSB maintains an Employee Stock Ownership Plan (the "PSB ESOP") which
includes certain section 401(k) salary reduction and matching contribution
provisions. Under the PSB ESOP, employees may make deferred salary contributions
of up to 15 percent of their gross salary, 25 percent of which is matched by PSB
up to a maximum of 4 percent of the employee' s salary, subject to certain
dollar amount restrictions. In addition, PSB may make annual discretionary
contributions to the PSB ESOP.
-64-
<PAGE> 79
INCENTIVE STOCK OPTION PLAN AND NONSTATUTORY STOCK OPTION PLAN
PSB maintains an Incentive Stock Option Plan and Nonstatutory Stock
Option Plan (the "Option Plan") which was adopted by the PSB Board on November
3, 1992 and approved by shareholders on May 12, 1994. The Purpose of the Option
Plan is to strengthen the bank's ability to attract and retain officers, key
employees and directors by offering such persons the opportunity to acquire PSB
Common Stock thereby giving such persons a personal and proprietary interest in
PSB's continued growth and success. Under the Option Plan, tax-qualified options
are granted to eligible employees and non tax-qualified options are granted to
directors by the Stock Option Plan Committee of the PSB Board. Each option
granted has an exercise price of not less than fair market value for the
underlying shares at the time such option is granted.
As of September 30, 1996, there were options granted to acquire 51,672
shares of PSB Common Stock under the Option Plan, of which 14,500 were
exercisable. It is anticipated that options to acquire up to 8,166 shares of PSB
Common Stock at a price of $16.67 per share may be exercised in connection with
the Merger prior to the Effective Date.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Certain of the officers and directors of PSB and their immediate
families and/or affiliated companies are also customers and depositors of PSB.
It is anticipated that such persons and/or companies will continue to be
customers of PSB and the Combined Bank after the Merger. It is the policy of PSB
to submit all loan applications submitted to the bank by such officers,
directors and/or their affiliates to the full PSB Board for its approval. All
customer and deposit transactions, including loans, between PSB and its
officers, directors or their affiliates were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons not affiliated with the bank, and in the opinion of management, do
not involve more than the normal risk of collectibility or present other
unfavorable features.
-65-
<PAGE> 80
UNAUDITED CONDENSED PRO FORMA
FCFG AND PSB COMBINED FINANCIAL STATEMENT
The following unaudited condensed pro forma combined financial
statements give effect to the Merger of FCFG and PSB on a purchase accounting
basis. The unaudited pro forma combined balance sheet is presented on the basis
that the merger took place on the balance sheet date. The unaudited condensed
pro forma combined statements of income are presented on the basis that the
Merger was consummated as of the beginning of the first period presented.
These unaudited condensed pro forma combined financial statements
should be read in conjunction with the historical financial statements and the
related notes thereto for FCFG and PSB included in this Prospectus/Proxy
Statement and the information is qualified in its entirety by reference to more
detailed financial information and consolidated financial statements presented
elsewhere in this Prospectus/Proxy Statement.
The unaudited condensed pro forma statements of income are not
necessarily indicative of operating results which would have been achieved had
the Merger been consummated as of the beginning of the first period presented
and should not be construed as representative of future results.
As more fully described in Notes to Unaudited Condensed Pro Forma
Combined Financial Statements, these financial statements present pro forma
effects of the Merger, assuming that the percentage of the total consideration
that consists of cash is either at the minimum of 20 percent or at the maximum
of 45 percent. For that portion of PSB Common Stock that is treated as exchanged
for FCFG Common Stock, rather than cash, the pro forma per share data is based
on an exchange ratio calculated by applying the FCFG and PSB Exchange Values
applied against the relevant Book Values. Additionally, the pro forma effects of
the targeted stock purchase are shown under the minimum and maximum scenarios.
See "INFORMATION CONCERNING FCFG -- Proposed Transactions."
The four alternative scenarios represented in the pro forma financial
statements are as follows:
Alternative No. 1a: The consideration paid to PSB shareholders
consists of 45% cash and 55% stock and the
targeted stock purchase does not occur.
Alternative No. 1b: The consideration paid to PSB shareholders
consists of 45% cash and 55% stock and the
targeted stock purchase occurs at the
beginning of the period presented.
Alternative No. 2a: The consideration paid to PSB shareholders
consists of 20% cash and 80% stock and the
targeted stock purchase does not occur.
Alternative No. 2b: The consideration paid to PSB shareholders
consists of 20% cash and 80% stock and the
targeted stock purchase occurs at the
beginning of the period presented.
-66-
<PAGE> 81
PRO FORMA ALTERNATIVE NO. 1A
BALANCE SHEET (UNAUDITED)
September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 9,777 $ 1,953 ($ 4,226)(a) $ 7,504
Interest bearing deposits in banks 6,836 29 6,865
Federal funds sold 4,617 1 4,618
Investment securities 11,384 4,661 (36)(b) 16,009
Loans 132,033 40,398 92 (c) 172,523
Less allowance for possible credit losses 1,402 408 1,810
NET LOANS 130,631 39,990 92 170,713
Premises and equipment 7,696 2,074 200 (d) 9,970
Other Assets 5,690 1,434 4,593 (e) 11,717
TOTAL ASSETS $ 176,631 $ 50,142 $ 623 $ 227,396
Liabilities
Deposits $ 154,107 $ 42,123 51 (f) $ 196,281
Federal funds purchased -- 1,901 1,901
Long term debt 1,337 1,000 2,337
Other liabilities 773 444 82 (g) 1,299
TOTAL LIABILITIES 156,217 45,468 133 201,818
Stockholders' Equity
Common stock 4,241 196 342 (h) 4,779
Surplus 13,719 3,782 844 (h) 18,345
Retained Earnings 2,783 717 (717)(h) 2,783
Unrealized loss on securities available for sale (64) (21) 21 (h) (64)
Guaranteed KSOP obligation (265) -- (265)
TOTAL STOCKHOLDERS' EQUITY 20,414 4,674 490 25,578
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 176,631 $ 50,142 $ 623 $ 227,396
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-67-
<PAGE> 82
PRO FORMA ALTERNATIVE NO. 1A
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Nine Months ended September 30, 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 10,560 $ 2,884 ($ 23)(c) $ 13,421
Federal funds sold and deposits in banks 337 22 359
Investment securities 550 245 9 (b) 804
TOTAL INTEREST INCOME 11,447 3,151 (14) 14,584
Interest Expense
Deposits 4,124 1,099 (4)(f) 5,219
Other 85 126 211
TOTAL INTEREST EXPENSE 4,209 1,225 (4) 5,430
NET INTEREST INCOME 7,238 1,926 (10) 9,154
Provision for Possible Credit Losses 221 56 277
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 7,017 1,870 (10) 8,877
Non-Interest Income
Service charges on deposit accounts 823 281 1,104
Origination fees on mortgage loans sold 351 606 957
Other income 296 327 623
TOTAL NON-INTEREST INCOME 1,470 1,214 2,684
Non-Interest Expense
Salaries and employee benefits 3,464 1,440 4,904
Occupancy and equipment 1,045 365 6 (d) 1,416
Other expense 1,995 798 230 (e) 3,023
TOTAL NON-INTEREST EXPENSE 6,504 2,603 236 9,343
OPERATING INCOME BEFORE INCOME TAXES 1,983 481 (246) 2,218
Income Taxes 535 149 (6) 678
NET INCOME $ 1,448 $ 332 ($ 240) $ 1,540
Weighted Average Common
Shares Outstanding 1,817,491 224,584 2,062,159
EARNINGS PER COMMON SHARE $ .80 $ 1.48 $ .75
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-68-
<PAGE> 83
PRO FORMA ALTERNATIVE NO. 1A
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Year ended December 31, 1995
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 13,404 $ 3,257 ($ 31) (c) $ 16,630
Federal funds sold and deposits in banks 969 20 989
Investment securities 858 438 12 (b) 1,308
TOTAL INTEREST INCOME 15,231 3,715 (19) 18,927
Interest Expense
Deposits 5,459 1,283 (5)(f) 6,737
Other 126 143 269
TOTAL INTEREST EXPENSE 5,585 1,426 (5) 7,006
NET INTEREST INCOME 9,646 2,289 (14) 11,921
Provision for Possible Credit Losses 236 90 326
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 9,410 2,199 (14) 11,595
Non-Interest Income
Service charges on deposit accounts 988 435 1,423
Origination fees on mortgage loans sold 310 780 1,090
Other income 425 276 701
TOTAL NON-INTEREST INCOME 1,723 1,491 3,214
Non-Interest Expense
Salaries and employee benefits 5,504 1,637 7,141
Occupancy and equipment 1,280 463 8 (d) 1,751
Other expense 3,105 1,193 306 (e) 4,604
TOTAL NON-INTEREST EXPENSE 9,889 3,293 314 13,496
OPERATING INCOME BEFORE INCOME TAXES 1,244 397 (328) 1,313
Income Taxes 324 142 (8) 458
NET INCOME $ 920 $ 255 ($ 320) $ 855
Weighted Average Common
Shares Outstanding 1,805,837 224,584 2,049,435
EARNINGS PER COMMON SHARE
$ .51 $ 1.14 $ .42
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-69-
<PAGE> 84
PRO FORMA ALTERNATIVE NO. 1B
COMBINED BALANCE SHEET (UNAUDITED)
September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $9,777 $1,953 ($6,481) (a) $5,249
Interest bearing deposits in banks 6,836 29 6,865
Federal funds sold 4,617 1 4,618
Investment securities 11,384 4,661 (36) (b) 16,009
Loans 132,033 40,398 92 (c) 172,523
Less allowance for possible credit losses 1,402 408 1,810
NET LOANS 130,631 39,990 92 170,713
Premises and equipment 7,696 2,074 200 (d) 9,970
Other Assets 5,690 1,434 4,593 (e) 11,717
TOTAL ASSETS $176,631 $50,142 ($1,632) $225,141
Liabilities
Deposits $154,107 $42,123 51 (f) $196,281
Federal funds purchased - - 1,901 1,901
Long term debt 1,337 1,000 1,127 (i) 3,464
Other liabilities 773 444 82 (g) 1,299
TOTAL LIABILITIES 156,217 45,468 1,260 202,945
Stockholders' Equity
Common stock 4,241 196 67 (h) 4,504
Surplus 13,719 3,782 (1,136) (h) 16,365
Retained Earnings 2,783 717 (717) (h) 2,783
Unrealized loss on securities available for sale (64) (21) 21 (h) (64)
Guaranteed KSOP obligation (265) - - (1,127) (i) (1,392)
TOTAL STOCKHOLDERS' EQUITY 20,414 4,674 (2,892) 22,196
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,631 $50,142 ($1,632) $225,141
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-70-
<PAGE> 85
PRO FORMA ALTERNATIVE NO. 1B
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Nine Months ended September 30, 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $10,560 $2,884 ($23) (c) $13,421
Federal funds sold and deposits in banks 337 22 359
Investment securities 550 245 9 (b) 804
TOTAL INTEREST INCOME 11,447 3,151 (14) 14,584
Interest Expense
Deposits 4,124 1,099 (4) (f) 5,219
Other 85 126 211
TOTAL INTEREST EXPENSE 4,209 1,225 (4) 5,430
NET INTEREST INCOME 7,238 1,926 (10) 9,154
Provision for Possible Credit Losses 221 56 277
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 7,017 1,870 (10) 8,877
Non-Interest Income
Service charges on deposit accounts 823 281 1,104
Origination fees on mortgage loans sold 351 606 957
Other income 296 327 623
TOTAL NON-INTEREST INCOME 1,470 1,214 2,684
Non-Interest Expense
Salaries and employee benefits 3,464 1,440 4,904
Occupancy and equipment 1,045 365 6 (d) 1,416
Other expense 1,995 798 230 (e) 3,023
TOTAL NON-INTEREST EXPENSE 6,504 2,603 236 9,343
OPERATING INCOME BEFORE INCOME TAXES 1,983 481 (246) 2,218
Income Taxes 535 149 (6) 678
NET INCOME $ 1,448 $ 332 ($240) $ 1,540
Weighted Average Common
Shares Outstanding 1,817,491 224,584 1,952,159
EARNINGS PER COMMON SHARE $ .80 $ 1.48 $ .79
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-71-
<PAGE> 86
PRO FORMA ALTERNATIVE NO. 1B
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Year ended December 31, 1995
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $13,404 $ 3,257 ($ 31) (c) $16,630
Federal funds sold and deposits in banks 969 20 989
Investment securities 858 438 12 (b) 1,308
TOTAL INTEREST INCOME 15,231 3,715 (19) 18,927
Interest Expense
Deposits 5,459 1,283 (5) (f) 6,737
Other 126 143 269
TOTAL INTEREST EXPENSE 5,585 1,426 (5) 7,006
NET INTEREST INCOME 9,646 2,289 (14) 11,921
Provision for Possible Credit Losses 236 90 326
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 9,410 2,199 (14) 11,595
Non-Interest Income
Service charges on deposit accounts 988 435 1,423
Origination fees on mortgage loans sold 310 780 1,090
Other income 425 276 701
TOTAL NON-INTEREST INCOME 1,723 1,491 3,214
Non-Interest Expense
Salaries and employee benefits 5,504 1,637 7,141
Occupancy and equipment 1,280 463 8 (d) 1,751
Other expense 3,105 1,193 306 (e) 4,604
TOTAL NON-INTEREST EXPENSE 9,889 3,293 314 13,496
OPERATING INCOME BEFORE INCOME TAXES 1,244 397 (328) 1,313
Income Taxes 324 142 (8) 458
NET INCOME $ 920 $ 255 ($320) $ 855
Weighted Average Common
Shares Outstanding 1,805,837 224,584 1,939,435
EARNINGS PER COMMON SHARE $ .51 $1.14 $ .44
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-72-
<PAGE> 87
PRO FORMA ALTERNATIVE NO. 2A
COMBINED BALANCE SHEET (UNAUDITED)
September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $9,777 $1,953 ($1,878) (a) $ 9,852
Interest bearing deposits in banks 6,836 29 6,865
Federal funds sold 4,617 1 4,618
Investment securities 11,384 4,661 (36) (b) 16,009
Loans 132,033 40,398 92 (c) 172,523
Less allowance for possible credit losses 1,402 408 1,810
NET LOANS 130,631 39,990 92 170,713
Premises and equipment 7,696 2,074 200 (d) 9,970
Other Assets 5,690 1,434 4,593 (e) 11,717
TOTAL ASSETS $176,631 $50,142 $2,971 $229,744
Liabilities
Deposits $154,107 $42,123 51 (f) $196,281
Federal funds purchased - - 1,901 1,901
Long term debt 1,337 1,000 2,337
Other liabilities 773 444 82 (g) 1,299
TOTAL LIABILITIES 156,217 45,468 133 201,818
Stockholders' Equity
Common stock 4,241 196 587 (h) 5,024
Surplus 13,719 3,782 2,947 (h) 20,448
Retained Earnings 2,783 717 (717) (h) 2,783
Unrealized loss on securities available for sale (64) (21) 21 (h) (64)
Guaranteed KSOP obligation (265) - - (265)
TOTAL STOCKHOLDERS' EQUITY 20,414 4,674 2,838 27,926
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,631 $50,142 $2,971 $229,744
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-73-
<PAGE> 88
PRO FORMA ALTERNATIVE NO. 2A
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Nine Months ended September 30, 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $10,560 $2,884 ($23) (c) $13,421
Federal funds sold and deposits in banks 337 22 359
Investment securities 550 245 9 (b) 804
TOTAL INTEREST INCOME 11,447 3,151 (14) 14,584
Interest Expense
Deposits 4,124 1,099 (4) (f) 5,219
Other 85 126 211
TOTAL INTEREST EXPENSE 4,209 1,225 (4) 5,430
NET INTEREST INCOME 7,238 1,926 (10) 9,154
Provision for Possible Credit Losses 221 56 277
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 7,017 1,870 (10) 8,877
Non-Interest Income
Service charges on deposit accounts 823 281 1,104
Origination fees on mortgage loans sold 351 606 957
Other income 296 327 623
TOTAL NON-INTEREST INCOME 1,470 1,214 2,684
Non-Interest Expense
Salaries and employee benefits 3,464 1,440 4,904
Occupancy and equipment 1,045 365 6 (d) 1,416
Other expense 1,995 798 230 (e) 3,023
TOTAL NON-INTEREST EXPENSE 6,504 2,603 236 9,343
OPERATING INCOME BEFORE INCOME TAXES 1,983 481 (246) 2,218
Income Taxes 535 149 (6) 678
NET INCOME $ 1,448 $ 332 ($240) $ 1,540
Weighted Average Common
Shares Outstanding 1,817,491 224,584 2,147,935
EARNINGS PER COMMON SHARE $ .80 $ 1.48 $ .71
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-74-
<PAGE> 89
PRO FORMA ALTERNATIVE NO. 2A
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Year ended December 31, 1995
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $13,404 $ 3,257 ($ 31) (c) $16,630
Federal funds sold and deposits in banks 969 20 989
Investment securities 858 438 12 (b) 1,308
TOTAL INTEREST INCOME 15,231 3,715 (19) 18,927
Interest Expense
Deposits 5,459 1,283 (5) (f) 6,737
Other 126 143 269
TOTAL INTEREST EXPENSE 5,585 1,426 (5) 7,006
NET INTEREST INCOME 9,646 2,289 (14) 11,921
Provision for Possible Credit Losses 236 90 326
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 9,410 2,199 (14) 11,595
Non-Interest Income
Service charges on deposit accounts 988 435 1,423
Origination fees on mortgage loans sold 310 780 1,090
Other income 425 276 701
TOTAL NON-INTEREST INCOME 1,723 1,491 3,214
Non-Interest Expense
Salaries and employee benefits 5,504 1,637 7,141
Occupancy and equipment 1,280 463 8 (d) 1,751
Other expense 3,105 1,193 306 (e) 4,604
TOTAL NON-INTEREST EXPENSE 9,889 3,293 314 13,496
OPERATING INCOME BEFORE INCOME TAXES 1,244 397 (328) 1,313
Income Taxes 324 142 (8) 458
NET INCOME $ 920 $ 255 ($320) $ 855
Weighted Average Common
Shares Outstanding 1,805,837 224,584 2,119,308
EARNINGS PER COMMON SHARE $ .51 $1.14 $ .40
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-75-
<PAGE> 90
PRO FORMA ALTERNATIVE NO. 2B
COMBINED BALANCE SHEET (UNAUDITED)
September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $9,777 $1,953 ($4,133) (a) $ 7,597
Interest bearing deposits in banks 6,836 29 6,865
Federal funds sold 4,617 1 4,618
Investment securities 11,384 4,661 (36) (b) 16,009
Loans 132,033 40,398 92 (c) 172,523
Less allowance for possible credit losses 1,402 408 1,810
NET LOANS 130,631 39,990 92 170,713
Premises and equipment 7,696 2,074 200 (d) 9,970
Other Assets 5,690 1,434 4,593 (e) 11,717
TOTAL ASSETS $176,631 $50,142 $ 716 $227,489
Liabilities
Deposits $154,107 $42,123 51 (f) $196,281
Federal funds purchased - - 1,901 1,901
Long term debt 1,337 1,000 1,127 (i) 3,464
Other liabilities 773 444 82 (g) 1,299
TOTAL LIABILITIES 156,217 45,468 1,260 202,945
Stockholders' Equity
Common stock 4,241 196 312 (h) 4,749
Surplus 13,719 3,782 967 (h) 18,468
Retained Earnings 2,783 717 (717) (h) 2,783
Unrealized loss on securities available for sale (64) (21) 21 (h) (64)
Guaranteed KSOP obligation (265) - - (1,127) (i) (1,392)
TOTAL STOCKHOLDERS' EQUITY 20,414 4,674 (544) 24,544
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,631 $50,142 $ 716 $227,489
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-76-
<PAGE> 91
PRO FORMA ALTERNATIVE NO. 2B
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Nine Months ended September 30, 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $10,560 $2,884 ($23) (c) $13,421
Federal funds sold and deposits in banks 337 22 359
Investment securities 550 245 9 (b) 804
TOTAL INTEREST INCOME 11,447 3,151 (14) 14,584
Interest Expense
Deposits 4,124 1,099 (4) (f) 5,219
Other 85 126 211
TOTAL INTEREST EXPENSE 4,209 1,225 (4) 5,430
NET INTEREST INCOME 7,238 1,926 (10) 9,154
Provision for Possible Credit Losses 221 56 277
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 7,017 1,870 (10) 8,877
Non-Interest Income
Service charges on deposit accounts 823 281 1,104
Origination fees on mortgage loans sold 351 606 957
Other income 296 327 623
TOTAL NON-INTEREST INCOME 1,470 1,214 2,684
Non-Interest Expense
Salaries and employee benefits 3,464 1,440 4,904
Occupancy and equipment 1,045 365 6 (d) 1,416
Other expense 1,995 798 230 (e) 3,023
TOTAL NON-INTEREST EXPENSE 6,504 2,603 236 9,343
OPERATING INCOME BEFORE INCOME TAXES 1,983 481 (246) 2,218
Income Taxes 535 149 (6) 678
NET INCOME $ 1,448 $ 332 ($240) $ 1,540
Weighted Average Common
Shares Outstanding 1,817,491 224,584 2,050,119
EARNINGS PER COMMON SHARE $ .80 $ 1.48 $ .75
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-77-
<PAGE> 92
PRO FORMA ALTERNATIVE NO. 2B
COMBINED STATEMENTS OF INCOME (UNAUDITED)
Year ended December 31, 1995
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA
FCFG PSB ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $13,404 $ 3,257 ($ 31) (c) $16,630
Federal funds sold and deposits in banks 969 20 989
Investment securities 858 438 12 (b) 1,308
TOTAL INTEREST INCOME 15,231 3,715 (19) 18,927
Interest Expense
Deposits 5,459 1,283 (5) (f) 6,737
Other 126 143 269
TOTAL INTEREST EXPENSE 5,585 1,426 (5) 7,006
NET INTEREST INCOME 9,646 2,289 (14) 11,921
Provision for Possible Credit Losses 236 90 326
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 9,410 2,199 (14) 11,595
Non-Interest Income
Service charges on deposit accounts 988 435 1,423
Origination fees on mortgage loans sold 310 780 1,090
Other income 425 276 701
TOTAL NON-INTEREST INCOME 1,723 1,491 3,214
Non-Interest Expense
Salaries and employee benefits 5,504 1,637 7,141
Occupancy and equipment 1,280 463 8 (d) 1,751
Other expense 3,105 1,193 306 (e) 4,604
TOTAL NON-INTEREST EXPENSE 9,889 3,293 314 13,496
OPERATING INCOME BEFORE INCOME TAXES 1,244 397 (328) 1,313
Income Taxes 324 142 (8) 458
NET INCOME $ 920 $ 255 ($320) $ 855
Weighted Average Common
Shares Outstanding 1,805,837 224,584 2,037,395
EARNINGS PER COMMON SHARE $ .53 $1.14 $ .42
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-78-
<PAGE> 93
NOTES TO UNAUDITED CONDENSED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION OF PRO FORMA FINANCIAL INFORMATION
The estimated fair value adjustments have been determined by FCFG based upon
information provided by PSB and various assumptions deemed appropriate by FCFG.
Certain fair value estimates may change as refinements are made and final
appraisals are obtained. The fair values ultimately determined may be different
from those values used in the pro forma adjustments included herein. For
illustrative purposes in developing the pro forma financial information., FCFG
has assumed that consideration will consist of 45 percent cash and 55 percent
FCFG stock in Alternative No. 1, and that consideration will consist of 20
percent cash and 80 percent stock in Alternative No. 2. However, pursuant to the
terms of the Merger Agreement, the percentage of consideration that may be paid
in cash may fall anywhere between 20 percent and 45 percent.
2A. ALTERNATIVE NO. 1A AND 1B - PRO FORMA ADJUSTMENT OF THE FINANCIAL
STATEMENTS ARE AS FOLLOWS:
(a) Cash has been adjusted for 45 percent of the total transaction price
that will be paid to PSB shareholders as provided in the Merger
Agreement.
(b) The held-to-maturity investment portfolio of PSB has been adjusted to
the estimated fair value as of the balance sheet date. The adjustment
is accreted over a period of three years, the estimated maturity of the
securities.
(c) The loan portfolio of PSB has been adjusted to the estimated fair value
as of the balance sheet date. The adjustment is accreted over a period
of 3 years, the estimated average maturity of the portfolio.
(d) Premises and equipment has been adjusted to its estimated fair market
value as of the balance sheet date. The increased value is amortized
over a period of 25 years, its estimated remaining useful life.
(e) Goodwill represents the excess of the transaction price over the sum of
the amounts assigned to identifiable assets acquired less liabilities
assumed. Goodwill is amortized over an estimated life of 15 years.
(f) The deposits of PSB have been adjusted to the estimated fair value as
of the balance sheet date. The adjustment is amortized over an
estimated life of 10 years.
(g) Deferred income taxes represent the tax effect of differences between
the estimated fair values of PSB's assets and liabilities and their tax
bases, and are recognized as the temporary differences reverse.
(h) Adjustments of the Common Stock, Surplus and Retained Earnings result
from the issuance of 215,511 shares of FCFG Common Stock in exchange
for 196,316 shares of PSB Common Stock.
(i) Long term debt is increased and capital is decreased to reflect FCFG's
guarantee of debt incurred by FCFG's KSOP to acquire FCFG shares.
-79-
<PAGE> 94
2B. ALTERNATIVE NO. 2A AND 2B - PRO FORMA ADJUSTMENT OF THE FINANCIAL
STATEMENTS ARE AS FOLLOWS:
(a) Cash has been adjusted for 20 percent of the total transaction price
that will be paid to PSB shareholders as provided in the Merger
Agreement.
(b) The held-to-maturity investment portfolio of PSB has been adjusted to
the estimated fair value as of the balance sheet date. The adjustment
is accreted over a period of three years, the estimated maturity of the
securities.
(c) The loan portfolio of PSB has been adjusted to the estimated fair value
as of the balance sheet date. The adjustment is accreted over a period
of three years, the estimated average maturity of the portfolio.
(d) Premises and equipment has been adjusted to its estimated fair market
value as of the balance sheet date. The increased value is amortized
over a period of 25 years, its estimated remaining life.
(e) Goodwill represents the excess of the transaction price over the sum of
the amounts assigned to identifiable assets acquired less liabilities
assumed. Goodwill is amortized over an estimated life of 15 years.
(f) The deposits of PSB have been adjusted to the estimated fair value as
of the balance sheet date. The adjustment is amortized over an
estimated life of 10 years.
(g) Deferred income taxes represent the tax effect of differences between
the estimated fair values of PSB's assets and liabilities and their tax
bases, and are recognized as the temporary differences reverse.
(h) Adjustments of the Common Stock, Surplus and Retained Earnings result
from the issuance of 313,471 shares of FCFG Common Stock in exchange
for 196,316 shares of PSB Common Stock.
(i) Long term debt is increased and capital is decreased to reflect FCFG's
guarantee of debt incurred by FCFG's KSOP to acquire FCFG shares.
No other pro forma adjustment to the historical balance sheets or statements of
income were made to arrive at the unaudited pro forma combined balance sheets
and statements of income. Total costs to be incurred by FCFG and PSB in
connection with the Merger are estimated to be $200,000. These costs, relating
to legal, accounting, printing and other expenses, will be charged to expenses
of the respective banks in the periods incurred.
3. Pro forma weighted average shares outstanding for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 reflect the shares
issued in exchange for PSB stock as though they were issued at the beginning of
the respective periods, and are adjusted for the dilutive effect of PSB options.
-80-
<PAGE> 95
PRO FORMA ANALYSIS OF PROJECTED AGGREGATE
PURCHASE ACCOUNTING ADJUSTMENTS
The following analysis is provided to show the expected effects on future
income of the projected accounting adjustments in the accompanying unaudited pro
forma combined statements of FCFG and PSB assuming the acquisition will take
place on January 1, 1997 under the assumptions set forth in the "Notes to
Unaudited Condensed Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
(DOLLARS IN THOUSANDS)
FAIR VALUE TOTAL
ADJUSTMENT 2002 ACCRETION
Accretion (Amortization) (PREMIUM) 1997 1998 1999 2000 2001 -2022 (AMORTIZATION)
of: DISCOUNT
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
discount accreted into
income over 3 years ($ 36) $ 12 $ 12 $ 12 $ 36
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Loans, premium amortized
into income over 3 92 (31) (31) (30) (92)
years
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Bank premises to be
amortized over 25 years 200 (8) (8) (8) (8) (8) (160) (200)
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Goodwill to be amortized
over 15 years. 4,593 (306) (306) (306) (306) (306) (3,063) (4,593)
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Deposits, premium accreted
into income over 10 (51) 5 5 5 5 5 26 51
years
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Deferred income tax
effect of
purchase accounting (70) 8 8 8 1 1 44 70
adjustments
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
Net impact of purchase
accounting adjustments
on future net income
(loss) without regard
to potential
recognition of
prospective events $ 4,728 ($ 320) ($ 320) ($ 319) ($ 308) ($ 308) ($ 3,153) ($ 4,728)
- --------------------------- ------------- --------- --------- --------- --------- -------- ----------- ----------------
</TABLE>
-81-
<PAGE> 96
BANK SUPERVISION AND REGULATION
FCFG
GENERAL
As a bank holding company, FCFG is subject to the Bank Holding Company
Act of 1956 ("BHCA"), as amended, which places FCFG under the supervision of the
Board of Governors of the Federal Reserve System ("FRB"). In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and
engaging in other activities related to banking. Certain recent legislation
designed to expand interstate branching and relax federal restrictions on
interstate banking has been phased in and may expand opportunities for bank
holding companies. For additional information, see below, "The Bank - Recent
Federal Legislation - Interstate Banking and Branching". The impact of this
legislation on FCFG is unclear at this time.
HOLDING COMPANY STRUCTURE
FRB Regulation. FCFG must obtain the approval of the FRB: (1) prior to
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than five percent of the voting shares of such bank; (2) before
merging or consolidating with another bank holding company; and (3) before
acquiring substantially all of the assets of any additional banks. Until
September, 1995, the BHCA also prohibited the acquisition by FCFG of any such
interest in any bank or bank holding company located in a state other than
Washington unless the laws of the state in which such bank was located expressly
authorized such acquisition. Now, subject to certain state laws, 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 without regard
to whether such transaction is prohibited by the laws of any state.
FCFG is required by the BHCA to file annual and quarterly reports and
such other reports as may be required from time to time by the FRB. In addition,
the FRB performs periodic examinations of FCFG and its subsidiary Bank.
Holding Company Control of Nonbanks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company which is not a bank or a bank holding
company unless the FRB determines that the activities of such company are so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making such determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public that would outweigh possible adverse effects. For example, the FRB
has by regulation determined activities such as, among others, operating an
industrial loan company, industrial bank, savings association, mortgage company,
finance company, trust company, credit card company or factoring company,
performing certain data processing operations, and providing investment and
financial advice, are so closely related to banking as to be a proper incident
thereto within the meaning of the BHCA. On the other hand, activities such as,
among others, real estate brokerage and syndication, land development, property
management, underwriting of life insurance not related to credit transactions,
and with certain exceptions, securities underwriting and equity funding, are not
so closely related to banking as to be a proper incident thereto within the
meaning of the BHCA. In the future, the FRB may from time to time add to or
delete from the list of activities permissible for bank holding companies.
Transactions With Affiliates. FCFG and its subsidiary Bank will be
deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions.
-82-
<PAGE> 97
Covered transactions include, subject to specific exceptions, loans by bank
subsidiaries to affiliates, investments by bank subsidiaries in securities
issued by an affiliate, the taking of such securities as collateral, and the
purchase of assets by a bank subsidiary from an affiliate. FCFG and its
subsidiary Bank are also subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
Tie-In Arrangements. FCFG and its subsidiary Bank are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, FCFG or its subsidiary Bank may not 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.
State Law Restrictions. As a corporation chartered under the laws of
the State of Washington, FCFG is also be subject to certain limitations and
restrictions as provided under applicable Washington corporate law.
Securities Registration and Reporting. The common stock of FCFG is
registered as a class with the SEC under the Exchange Act and thus is subject to
the periodic reporting and proxy solicitation requirements and the
insider-trading restrictions of the Exchange Act. The periodic reports, proxy
statements, and other information filed by FCFG under the Exchange Act can be
inspected and copied at or obtained from the Washington, D.C., office of the
SEC. In addition, the securities issued by FCFG are subject to the registration
requirements of the Securities Act and applicable state securities laws unless
exemptions are available.
CONTROL TRANSACTIONS
The Change in Bank Control Act of 1978, as amended, prohibits a person
or group of persons from acquiring "control" of a bank holding company unless
the FRB has been given 60 days' prior written notice of the proposed
acquisition, and within that time period, the FRB has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued. An acquisition may be made
prior to the expiration of the disapproval period if the FRB issues written
notice of its intent not to disapprove the action. Under a rebuttable
presumption established by the FRB, the acquisition of 10 percent or more of a
class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the 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 FRB under the BHCA before acquiring 25 percent (5 percent if the company is
a bank holding company) or more of the outstanding shares of FCFG, or otherwise
obtain control over FCFG.
THE BANK AND PSB
GENERAL
Despite some recent legislative initiatives to reduce regulatory
burdens, banking remains a highly regulated industry. Legislation enacted from
time to time may increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other financial and nonfinancial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks and other financial
institutions are frequently made in Congress, in the Washington State
Legislature, and before various bank regulatory agencies. In addition, there
continue to be proposals in Congress to restructure the banking system.
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Some of the significant areas of bank regulation, including significant
federal legislation affecting state-chartered banks, are generally discussed
below.
REGULATION OF STATE BANKS
Washington State banks such as the Bank and PSB are subject to primary
regulation and examination by the Director and by the FDIC. Applicable federal
and state statutes and regulations governing a bank's operations relate, among
other matters, to capital requirements, required reserves against deposits,
investments, loans, legal lending limits (see below), certain interest rates
payable, mergers and consolidations, borrowings, issuance of securities, payment
of dividends, establishment of branches, and dealings with affiliated persons.
The FDIC also 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. State banks are permitted by state law to invest, up
to a specified amount of assets or net worth (as defined), in the equity
securities of any business entity except an insurance or travel agency. This and
certain other powers of state banks have been limited by federal legislation
(for additional information see below, "Recent Federal Legislation - Interstate
Banking and Branching").
State banking law provides that the amount of funds which a bank may
lend to a single borrower is generally limited to 20 percent of capital and
surplus. For this purpose, capital includes (1) the amount of common stock
outstanding and unimpaired, (2) the amount of preferred stock outstanding and
unimpaired, and (3) capital notes or debentures issued pursuant to RCW 30.36.
Surplus includes capital surplus, reflecting the amounts paid in excess of the
par or stated value of capital stock, or amounts contributed to the bank other
than for capital stock, and undivided profits. As of September 30, 1996, the
Bank's lending limit was approximately $3,200,000.
REGULATION OF MANAGEMENT
Federal law provides for the circumstances under which officers or
directors of a bank may be removed by the institution's federal supervisory
agency, places restraints on lending by a bank to its executive officers,
directors, or principal shareholders, and prohibits management personnel of a
bank from serving as a director or in other management positions of another
financial institution whose assets exceed a specified amount or which has an
office within a specified geographic area.
CONTROL OF FINANCIAL INSTITUTIONS
No person may acquire "control" of a bank unless the appropriate
federal agency has been given 60 days prior written notice and within that time
the agency has not disapproved the acquisition. Substantial monetary penalties
may be imposed for violation of the change in control or other provisions of
banking laws. State banking laws further require that 30 days prior to the
acquisition of control, defined as direct or indirect ownership, control or
power to vote 25 percent or more of the outstanding stock of a bank, the
acquiring party must file with the Director an application containing certain
specified information. Acquisitions of control in violation of the statute are
deemed void.
RECENT FEDERAL LEGISLATION
Interstate Banking and Branching. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching. This legislation generally authorizes
interstate branching and relaxes federal law restrictions on interstate banking.
Individual states have the authority to "opt out" of certain of these
provisions. The Interstate Act
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currently allows states to enact "opting-in" legislation that (1) permits
interstate mergers within their own borders before June 1, 1997, and (2) permits
out-of-state banks to establish de novo branches within the state. As of
September 29, 1995, subject to certain state restrictions such as age and
contingency laws, bank holding companies may purchase banks in any state.
Additionally, subject to such state restrictions, beginning June 1, 1997, banks
will be permitted to merge with banks in other states as long as the home state
of neither merging bank has opted out. The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area.
Since July of 1987, the State of Washington has generally permitted
out-of-state bank holding companies to purchase more than five percent of the
voting shares of a Washington-based bank, provided (1) such bank has been doing
business for at least three years prior to the acquisition by the out-of-state
bank holding company of such voting shares, and (2) the state in which the
out-of-state bank holding company is based has reciprocal laws (i.e. permits
Washington bank holding companies to purchase more than five percent of the
voting shares of banks chartered under that state's laws). The Interstate Act
broadened interstate banking authority by eliminating the reciprocity
requirement for adequately capitalized bank holding companies, and Washington
has amended its banking laws to accommodate the provisions of the Interstate
Act.
In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, an out-of-state
bank holding company may now acquire more than five percent 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 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. The Director
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.
Under its new interstate banking statute, the State of Washington
permits out-of-state banks meeting the above requirements to maintain and
operate the Washington branches of a Washington bank with which the out-of-state
bank engaged in an interstate combination. The out-of state bank may also
establish, acquire and operate additional branches in Washington to the same
extent as any Washington bank may under applicable federal and state law. Unless
prohibited by the out-of-state bank's home state law, the out-of-state bank may
exercise any powers that are authorized under Washington law for Washington
banks. If additional powers are authorized under the laws of its home state, the
out-of-state bank may seek written authorization from the Director to exercise
such powers, if the exercise of the additional powers (1) will not threaten the
safety and soundness of banks in Washington, and (2) will serve the convenience
and needs of Washington consumers.
Washington laws applicable to Washington state banks regarding
community reinvestment, consumer protection, fair lending, and the establishment
of intrastate branches apply to any Washington branch of an out-of-state bank to
the same extent as such laws apply to a Washington state bank.
Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"). FDICIA requires federal banking regulators to adopt regulations in a
number of areas to ensure bank safety and soundness. As such, numerous
regulations have been adopted by federal bank regulatory agencies, including the
following: (1) federal bank regulatory authorities have established five
different capital
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levels for banks and, as a general matter, enable banks with higher capital
levels to engage in a broader range of activities; (2) the FRB has issued
regulations requiring standardized disclosures with respect to interest paid on
deposits; (3) the FDIC has imposed restrictions on the acceptance of brokered
deposits by weaker banks; (4) the FDIC has implemented risk-based deposit
insurance premiums; and (5) the FDIC has issued regulations requiring
state-chartered banks to comply with certain restrictions with respect to equity
investments and activities in which the banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the
FDIC to maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25
percent of insured deposits by increasing deposit insurance premiums as
necessary to maintain such ratio. FDICIA also required federal bank regulatory
authorities to prescribe, by December 1, 1993, (1) non-capital standards of
safety and soundness; (2) operational and managerial standards for banks; (3)
asset and earnings standards for banks and bank holding companies addressing
such areas as classified assets, capital, and stock price; and (4) standards for
compensation of executive officers and directors of banks. However, this
provision was modified by recent legislation to allow federal regulatory
agencies to implement these standards through either guidelines or regulations.
The full effect FDICIA will have on financial institutions is not known
at this time and cannot be predicted with certainty. However, FDICIA and similar
legislation and regulatory requirements have historically increased the cost of
doing business, and it is clear that this legislation places a premium on the
maintenance of a strong capital position.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). 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 to 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 penalties for
violating statutes and regulations.
CAPITAL ADEQUACY REQUIREMENTS
The FRB, the FDIC, and the OCC (collectively, the "Federal Banking
Agencies") have established uniform capital requirements for all commercial
banks. A bank that does not achieve and maintain required capital levels may be
subject to supervisory action through the issuance of a capital directive to
ensure the maintenance of adequate capital levels. In addition, banks are
required to meet certain guidelines concerning the maintenance of an adequate
allowance for loan and lease losses.
The Federal Banking Agencies' "risk-based" capital guidelines establish
a systematic, analytical framework that makes regulatory capital requirements
more sensitive to differences in risk profiles among banking organizations,
takes off-balance sheet exposures into explicit account in assessing capital
adequacy, and minimizes disincentives to holding liquid, low-risk assets. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into several categories, with high levels of capital being
required for the categories perceived as representing greater risk. The risk
weights assigned to assets and credit equivalent amounts of off-balance sheet
items are based primarily on credit risk. Other types of exposure, such as
interest rate, liquidity and funding risks, as well as asset quality problems,
are not factored into the risk-based ratio. Such risks, however, will be taken
into account in determining a final assessment of an organization's capital
adequacy. Under these
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new regulations, banks were required to achieve a minimum total risk-based
capital ratio of eight percent. On August 16, 1996, the Federal Banking Agencies
published a joint notice of proposed rulemaking to amend their respective
risk-based capital standards to make uniform their treatments for transactions
supported by qualifying collateral. The effect of the proposal would be to allow
banks, bank holding companies and savings associations to hold less capital for
certain transactions collateralized by cash or qualifying securities.
The Federal Banking Agencies also have adopted leverage ratio standards
that require commercial banks to maintain a minimum ratio of core capital to
total assets (the "Leverage Ratio") of 3 percent. Any institution operating at
or near this level is expected to have well-diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity and good
earnings, and in general, to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels (e.g., an additional cushion of at least 100 to 200 basis points,
depending upon the particular circumstances and risk profile).
Regulations adopted by the Federal Banking Agencies as required by
FDICIA impose even more stringent capital requirements. The regulators require
the FRB and other Federal Banking Agencies to take certain "prompt corrective
action" when a bank fails to meet certain capital requirements. The regulations
establish and define five capital levels at which an institution is deemed to be
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In order to be
"well-capitalized," an institution must maintain, among other things, at least
ten percent total risk-based capital and a five percent Leverage Ratio.
Increasingly severe restrictions are imposed on the payment of dividends and
management fees, asset growth and other aspects of the operations of
institutions that fall below the category of "adequately capitalized" (which
requires at least eight percent risk-based capital and a four percent Leverage
Ratio). Undercapitalized institutions are required to develop and implement
capital plans acceptable to the appropriate federal regulatory agency. Such
plans must require that any company that controls the undercapitalized
institution must provide certain guarantees that the institution will comply
with the plan until it is adequately capitalized. As of December 31, 1995, the
Bank was not subject to any regulatory order, agreement, or directive to meet
and maintain a specific capital level for any capital measure.
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-related
insurance assessment system. The risk classification is based on an assignment
of the institution by the FDIC to one of three capital groups and to one of
three supervisory subgroups. The capital groups are "well capitalized,"
"adequately capitalized," and "undercapitalized." The three supervisory
subgroups are Group "A" (for financially sound institutions with only a few
minor weaknesses), Group "B" (for those institutions with weaknesses which, if
uncorrected, could cause substantial deterioration of the institution and
increase risk to the deposit insurance fund), and Group "C" (for those
institutions with a substantial probability of loss to the fund absent effective
corrective action).
In August, 1995, the FDIC published a rule that revised the then
current range to a new range of $.04 to $.31, thereby reducing premiums that
some banks would pay for deposit insurance. The actual rate paid by each bank
continued to depend on how much risk that bank posed to the Bank Insurance Fund
("BIF"). The new range did not apply to savings associations whose deposits are
insured by the Savings Association Insurance Fund ("SAIF"). Although this rule
was effective on September 15, 1995,
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the new rates took effect retroactive to June 1, 1995, the first day of the
month following the month in which BIF's mandated reserve ratio of 1.25 percent
was reached. The rule included a mechanism for refunding to banks any excess
premiums that were paid after May 31, 1995.
On November 14, 1995, the FDIC voted to reduce the assessment range
even further to $.00 to $.27 for the semiannual assessment period that began on
January 1, 1996. The reduction represents a downward adjustment of four basis
points from the BIF assessment rate promulgated in August of 1995. One
implication of the zero marginal assessment is that the largest institutions in
the best capital group will pay the same dollar amount for deposit insurance as
the smallest institutions. Another implication is that the best-rated new
institutions will receive insurance protection essentially premium-free. In May
of 1996, the FDIC resolved to continue this downward adjustment to the
semiannual assessment period that began on July 1, 1996. Accordingly, the BIF
assessment rates will continue to range from 0 to 27 basis points, resulting in
an estimated average annual assessment rate of 0.29 basis points.
On September 30, 1996, President Clinton signed into law a budget bill
that, among other things, significantly impacts the BIF and SAIF. In this
regard, a one-time assessment will be imposed on institutions holding SAIF
deposits on March 31, 1995, in an amount necessary for SAIF to reach its 1.25
designated reserve ratio. This special assessment is expected to be
approximately 66 basis points, to be paid before year end.
In addition to the one-time SAIF assessment, for the three year period
beginning in 1997, BIF-insured deposits will be subject 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). In the year 2000, BIF-insured institutions
will be required to share in the payment of the FICO obligations on a pro-rata
basis with all thrift institutions, with annual assessments expected to equal
approximately 2.4 basis points until the year 2017, and to be phased out
completely by 2019.
Banking regulators are now empowered, under the new bill, to prohibit
insured institutions and their holding companies from facilitating or
encouraging the shifting of deposits from the SAIF to the BIF for the purpose of
evading thrift assessment rates under FICO and the risk-based premium structure.
The new budget bill also 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 address comprehensive legislation on the merger of the funds and
elimination of the thrift charter during its next session.
DESCRIPTION OF FCFG CAPITAL STOCK
FCFG is authorized to issue 10,000,000 shares of Common Stock, $2.50
par value per share, and 200,000 shares of Preferred Stock, with no par value
per share. As of September 30, 1996, 1,696,507 shares of FCFG Common Stock were
issued and outstanding. Each share of FCFG Common Stock has the same relative
rights and is identical in all respects with every other share of FCFG Common
Stock. The following summary does not purport to be a complete description of
the applicable provisions of the FCFG Articles of Incorporation and Bylaws or of
applicable statutory or other law, and is qualified in its entirety by reference
thereto.
VOTING RIGHTS
The holders of FCFG Common Stock possess exclusive voting rights in
FCFG. Each holder of FCFG Common Stock is entitled to one vote for each share
held of record on all matters submitted to a
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vote of holders of FCFG Common Stock. Holders of shares of FCFG Common Stock are
not entitled to cumulate votes for the election of directors.
DIVIDENDS
Holders of shares of FCFG Common Stock are entitled to dividends as and
when declared by the FCFG Board out of funds legally available for the payment
of dividends. The FCFG Board may issue preferred stock that is entitled to such
dividend rights as the FCFG Board may determine, including priority over the
common stock in the payment of dividends. The ability of FCFG to pay dividends
depends on the amount of dividends paid to it by its subsidiaries. Accordingly,
the dividend restrictions imposed on the subsidiaries by statute or regulation
effectively may limit the amount of dividends FCFG can pay. Under the WBCA, the
FCFG Board is barred from making any dividend payment if, after giving effect to
such payment, either FCFG is unable to pay its debts as they become due in the
usual course of business or FCFG's total assets is less than the sum of its
total liabilities, as more fully provided in RCW 23B.06.400.
LIQUIDATION
In the event of a liquidation of FCFG, the holders of FCFG Common Stock
are entitled to share, on a pro rata basis, the assets of FCFG remaining after
provision for liabilities. The FCFG Board is authorized to determine the
liquidation rights of any preferred stock that may be issued, including priority
over the liquidation rights of holders of FCFG Common Stock.
OTHER CHARACTERISTICS
Holders of FCFG Common Stock do not have preemptive, conversion or
other subscription rights with respect to any additional shares of FCFG Common
Stock which may be issued. Therefore, the FCFG Board may authorize the issuance
and sale of shares of capital stock of FCFG without first offering them to
existing shareholders of FCFG. FCFG Common Stock is not subject to any
redemption or sinking fund provisions. The outstanding shares of FCFG Common
Stock are, and the shares to be issued in the Merger will be, fully paid and
non-assessable.
The FCFG Articles of Incorporation and Bylaws contain provisions that
may have the effect of discouraging persons from acquiring large blocks of FCFG
Common Stock or delaying or preventing a change in control of FCFG. See
"COMPARISON OF CERTAIN SHAREHOLDER RIGHTS."
COMPARISON OF CERTAIN SHAREHOLDER RIGHTS
OF PSB AND FCFG COMMON STOCK
On the Effective Date, those shareholders of PSB who become
shareholders of FCFG will have their rights as shareholders determined by the
Washington Business Corporation Act ("WBCA") and by FCFG's Articles of
Incorporation, as amended (the "FCFG Articles"), and Bylaws (the "FCFG Bylaws").
Shareholders of PSB presently have their rights as shareholders determined by
Washington State banking law and by PSB's Articles of Incorporation (the "PSB
Articles") and Bylaws (the "PSB Bylaws"). The following is a brief summary of
certain differences in the respective rights of FCFG and PSB's shareholders.
This summary does not purport to be complete and is qualified by reference to
those documents cited above and by applicable law.
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GENERAL
The FCFG Articles authorize capital stock consisting of 10,000,000
shares of common stock with a par value of $2.50 per share and 200,000 shares of
preferred stock with no par value.
PSB's authorized capital stock consists of 500,000 shares of common
stock with a par value of $1.00 per share and 10,000 shares of preferred stock
with no par value.
A more detailed description of the capital stock of each of FCFG and
PSB follows.
COMMON STOCK
As of September 30, 1996, there were outstanding 1,696,507 shares of
FCFG Common Stock, in addition to options for the purchase of 373,100 shares of
the FCFG Common Stock pursuant to FCFG's employee and director stock option
plans.
As of September 30, 1996, there were 196,316 shares of PSB Common Stock
outstanding and 51,672 shares subject to stock options.
PREFERRED STOCK
As of September 30, 1996, neither FCFG nor PSB had any shares of
preferred stock issued. The FCFG Board is authorized, without further
shareholder action, to issue preferred stock with such designations, preferences
and rights as the FCFG Board may determine.
The PSB Board is authorized, with the approval of the Director and
without further shareholder action, to issue preferred stock with such
designations, preferences and rights as the PSB Board may determine.
DIVIDEND RIGHTS
Dividends may be paid on FCFG Common Stock as and when declared by the
FCFG Board out of funds legally available for the payment of dividends. The FCFG
Board may issue preferred stock that is entitled to such dividend rights as the
FCFG Board may determine, including priority over the common stock in the
payment of dividends. The ability of FCFG to pay dividends depends on the amount
of dividends paid to it by its subsidiaries. Accordingly, the dividend
restrictions imposed on the subsidiaries by statute or regulation effectively
may limit the amount of dividends FCFG can pay. Under the WBCA, the FCFG Board
is barred from making any dividend payment if, after giving effect to such
payment, either FCFG is unable to pay its debts as they become due in the usual
course of business or FCFG's total assets is less than the sum of its total
liabilities, as more fully provided in RCW 23B.06.400.
PSB's shareholders are entitled to such dividends, if any, as may be
declared by the PSB Board out of funds legally available for the payment of
dividends. The PSB Board may issue preferred stock that is entitled to such
dividend rights as the PSB Board may determine, including priority over the
common stock in the payment of dividends. The provisions of RCW 30.04.180 limit
the right of a state bank to declare or pay dividends in an amount greater than
the bank's retained earnings. The statute also grants to the Director the
discretion to require any bank to suspend the payment of any and all dividends
until all requirements that may have been made by the Director shall have been
complied with. The statute provides that dividends may be payable in cash,
property or capital stock.
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VOTING RIGHTS
All voting rights are presently vested in the holders of FCFG Common
Stock and PSB Common Stock, respectively, each share being entitled to one vote.
The FCFG Articles provide that shareholders do not have cumulative
voting rights in the election of directors. The FCFG Board is authorized to
determine the voting rights of any preferred stock that may be issued.
The PSB Articles provide that shareholders do not have cumulative
voting rights in the election of directors. The PSB Board is authorized to
determine the voting rights of any preferred stock that may be issued, subject
to the approval of the Director.
PREEMPTIVE RIGHTS
Neither the holders of FCFG nor PSB Common Stock have preemptive rights
to subscribe to any additional securities that may be issued.
LIQUIDATION RIGHTS
In the event of a liquidation of FCFG, the holders of FCFG Common Stock
are entitled to share, on a pro rata basis, the assets of FCFG remaining after
provision for liabilities. The FCFG Board is authorized to determine the
liquidation rights of any preferred stock that may be issued, including priority
over the liquidation rights of holders of FCFG Common Stock.
Similarly, the holders of PSB Common Stock are entitled to share, pro
rata, the assets of PSB remaining after provision for liabilities, upon a
liquidation of PSB. The PSB Board is authorized, with the approval of the
Director, to determine the liquidation rights of any preferred stock that may be
issued, including priority over the liquidation rights of holders of PSB Common
Stock.
ASSESSMENTS
All outstanding shares of FCFG Common Stock are fully paid and
nonassessable.
Pursuant to RCW 30.44.020, the Director may notify PSB to levy an
assessment on its stock to make good on any impairment or otherwise. In such
event, PSB's shareholders will share the levy obligation, pro rata, and may
forfeit their stock if they fail to pay.
STOCK REPURCHASES
Both the FCFG Articles and the WBCA permit FCFG to repurchase shares of
its own capital stock.
Under applicable Washington banking law, PSB may only repurchase shares
with the prior approval of the Director, as well as the FDIC.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Under the WBCA, the FCFG Board is authorized to amend the FCFG
Articles, without additional shareholder action, in order to make certain
ministerial deletions that do not substantively effect shareholders' rights, to
change the par value of outstanding stock or to effectuate a stock split or
stock
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dividend (if only one class of stock is outstanding), and to change FCFG's
corporate name. Generally, however, Washington law requires that the FCFG
Articles may be amended upon an additional affirmative vote of the holders of a
majority of FCFG's outstanding voting stock. The FCFG Bylaws may be amended upon
the affirmative vote of the holders of a majority of FCFG's outstanding voting
stock or by a majority of the FCFG Board.
Under Washington banking law, the PSB Board is authorized to amend the
PSB Articles, without additional shareholder action, in order to make certain
ministerial deletions that do not substantively effect shareholders' rights, to
change the par value of outstanding stock or to effectuate a stock split or
stock dividend (if only one class of stock is outstanding), and to change PSB's
corporate name. Generally, however, Washington law requires that the PSB
Articles may be amended or repealed upon an additional affirmative vote of the
holders of two-thirds of the shares entitled to vote on the matter. The PSB
Bylaws may be amended either upon the affirmative vote of the holders of a
majority of PSB's outstanding voting stock, or by a majority of the PSB Board.
SPECIAL MEETINGS; ACTIONS WITHOUT A MEETING
The FCFG Bylaws provide that special meetings of FCFG's shareholders
may be called at any time by FCFG's President, a majority of the FCFG Board, or
by shareholders owning in the aggregate not less than fifty percent (50%) of the
shares entitled to vote at the special meeting. Shareholders may also hold a
special meeting at any time and place without notice or call upon receipt of
waivers signed by all shareholders who are entitled to vote a shareholders'
meeting. Written notice of the place, day and hour of the special shareholders'
meeting must be delivered not less than ten (10) nor more than fifty (50) days
before the date of the meeting.
The FCFG Bylaws provide that special meetings of the FCFG Board may be
called by the Chairman, or at the request of three (3) or more directors. Notice
of a special FCFG Board meeting must be mailed at least two (2) days before the
meeting, or by telephoning, telegraphing or personally advising each director at
least one (1) day before the meeting. In accordance with Washington law, action
may be taken without a special Board meeting if a written consent setting forth
the action taken is signed by all members of FCFG's Board.
The PSB Bylaws provide that special meetings of PSB's shareholders may
be called at any time by either the PSB Board or by one or more shareholders
holding one-third of the voting power of all shareholders. The PSB Bylaws
prescribe a procedure under which one or more shareholders must submit a written
request for a special meeting to PSB's Secretary, who is then obligated to
arrange for the meeting to be held not less then ten (10) days nor more than
thirty-five (35) days following receipt of the request. Written notice of the
time, place and purpose of the special meeting must be delivered to PSB's
shareholders at least ten (10) days prior to the date of the meeting. Action may
be taken without a special shareholder meeting if a written consent setting
forth the action taken is signed by all of PSB's shareholders.
The PSB Bylaws also provide that special meetings of the PSB Board may
be called at any time by PSB's President, Secretary, or any five (5) or more
directors, or may be held at any time without notice by unanimous consent of the
full Board. Otherwise, notice of a special PSB Board meeting must be delivered
at least three (3) days prior to the date of the meeting. In accordance with
Washington law, action may be taken without a special Board meeting if a written
consent setting forth the action taken is signed by all members of the PSB
Board.
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<PAGE> 107
BOARD OF DIRECTORS
The FCFG Bylaws establish a Board consisting of not less than five (5)
nor more than fifteen (15) members, the exact number to be set by resolution of
the FCFG Board. The FCFG Articles divide the FCFG Board into three classes. FCFG
directors are elected annually to serve for three-year terms, and a director may
be removed before the expiration of his or her term with or without cause by the
affirmative vote of the owners of a majority of FCFG Common Stock entitled to
vote on the matter at a special meeting called expressly for that purpose.
Currently, the FCFG Board is comprised of eight (8) directors.
The PSB Articles divide the PSB Board into three classes, consisting of
not less than five (5) nor more than fifteen (15) members. The exact number is
set by resolution of the PSB Board. The current number of directors is ten (10).
Directors of PSB are elected annually to serve for three-year terms, and until
their successors have been elected and are qualified. A director or the entire
PSB Board may be removed from office before the expiration of his or her term
only for cause and by the affirmative vote of the outstanding shares entitled to
vote. A vacancy created by removal of a director shall be filled by a vote of
two-thirds (2/3) of the directors then in office, whether a quorum or not. If
the entire PSB Board is removed, vacancies shall be filled by the shareholders
at the next special meeting. The PSB Articles further require that the terms of
the directors be staggered such that approximately one-third of the directors
are elected each year.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The FCFG Articles provide for the indemnification, including advances
of expenses, of any person made a party to any proceeding, including a
proceeding by or in the right of FCFG, by reason of the fact that such person is
or was a director, officer, trustee, employee, agent or partner of another
corporation, partnership, joint venture, trust, employee benefit plan (including
a voluntary employee's beneficiary association) or other enterprise, against
judgments, penalties, fines, settlements and reasonable expenses, including
attorney's fees, actually incurred by such person in connection with such
proceeding to the extent permitted by and in accordance with the WBCA. However,
FCFG may not indemnify a person who is adjudged to be liable to FCFG, or such
other enterprise, on the basis that the person seeking indemnification
improperly received a personal benefit, unless a court of competent jurisdiction
determines that it would be unfair, under the circumstances, to deny
indemnification to such person.
PSB's Articles provide for the indemnification, including advances of
expenses, to any present or former director, officer, trustee, employee or agent
of PSB, or any business entity acting on behalf of PSB, against judgments,
penalties, fines, settlements and reasonable expenses, including attorney's
fees, actually incurred by such person in connection with a legal proceeding,
including proceedings by or in the right of PSB. Such indemnification will not
be provided, however, if the person claiming indemnification is adjudged liable
to PSB, or a business entity of PSB, on the basis that personal benefit was
improperly received by the person seeking indemnification, or acts or omissions
of the person involved intentional misconduct or a knowing violation of law,
unless a court of competent jurisdiction determines that it would be unfair to
deny indemnification to the person. PSB's additionally require that PSB will
indemnify a person who has brought an action against PSB if the indemnification
is authorized by the PSB Board. A director or officer claiming indemnification
will only be advanced expenses if he or she undertakes, in writing, to repay all
advanced funds in the event that the action results in a final judgment that he
or she was not entitled to indemnification.
The PSB Articles additionally provide that PSB's directors shall not be
personally liable to PSB or its shareholders for monetary damages for conduct as
a director, except for liability arising from (i) a director's acts or omissions
that involve intentional misconduct or a knowing violation of law, (ii) a
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<PAGE> 108
director's approval of, or assent to, certain distributions that violate
Washington law, (iii) any transaction from which the director personally
received a benefit to which he or she is not legally entitled, or (iv) any
transaction or violation of Washington banking law pertaining to knowing
violations of law, regulation or directive from the Supervisor of Banking of the
State of Washington.
SALES OF ASSETS, MERGER AND SHARE EXCHANGES; VOTING
Under the WBCA, unless a corporation's articles of incorporation
provide for a lesser vote (but not less than a majority), approval by at least
two-thirds of the outstanding shares entitled to vote or two-thirds of each
voting group is required for mergers, asset sales, and dissolutions. Separate
voting by voting groups is required on (i) a plan of share exchange and (ii) a
plan of merger if it contains provisions that would require separate voting if
contained in an amendment to the articles of incorporation. The FCFG Articles
contain certain anti-takeover provisions, however, as detailed below.
Under RCW 30.49.050, pertaining to mergers, consolidations and
conversions of banking corporations, to be effective, a merger which is to
result in a state bank must be approved by the stockholders of each merging
state bank by a vote of two-thirds of the outstanding voting stock of each class
at a meeting called consider such action. In addition, the PSB Articles contain
certain anti-takeover provisions, as detailed below.
DISSENTERS' RIGHTS
The rights of FCFG's shareholders to dissent from various corporate
transactions, including mergers, shares exchanges, sales of all or substantially
all of FCFG's assets, and other transactions, are prescribed under Chapter
23B.13 of the Washington Business Corporation Act. Under those provisions, a
shareholder is entitled to dissent from, and upon completion of various notice
and demand requirements prescribed in RCW 23B.13.210 and 23B.13.230, to obtain
the fair value of his or her shares in the event of certain corporate actions,
including certain mergers, share exchanges, sales of substantially all assets of
the corporation, and certain amendments to the corporation's articles of
incorporation.
The rights of PSB's shareholders to dissent from various corporate
transactions, including mergers and conversions, are prescribed under RCW
30.49.090. Under that section, a shareholder of a state bank is entitled to
receive the shares' value if the owner voted against the state bank's merger or
conversion, and if the owner made written demand upon the resulting bank at any
time within thirty days after the effective date of the merger or conversion.
The value of the dissenting shareholder's shares is to be determined by an
appraisal of three appraisers. Other restrictions are set forth in RCW
30.49.090.
POTENTIAL ANTI-TAKEOVER PROVISIONS
FCFG. The FCFG Articles include certain provisions that could make more
difficult the acquisition of FCFG by means of a tender offer, a proxy contest,
merger or otherwise. Such provisions include (i) limitations on changes in the
composition, and classification, of the FCFG Board (discussed above under the
heading "Board of Directors"), (ii) certain nonmonetary factors that the FCFG
Board is required to consider in evaluating any takeover offer, and (iii) a
requirement that all shareholders receive a "fair price" for their stock in any
uninvited takeover transaction (which provisions are discussed in more detail
below). Also, the authorization of preferred stock, which is intended primarily
as a financing tool and not as a defense against takeovers, has the potential to
be used by management to make more difficult uninvited attempts to acquire
control of FCFG (for example, by diluting the ownership interest of a
substantial shareholder, increasing the amount of consideration necessary for a
shareholder to obtain control, or selling authorized but unissued shares to
friendly third parties).
-94-
<PAGE> 109
The FCFG Articles require the FCFG Board to consider nonmonetary
factors in evaluating any takeover offer. More specifically, the FCFG Articles
provide that, when evaluating any third party offers to make a tender or
exchange offer of, purchase all or substantially all the assets of, or merge or
consolidate with, FCFG, the FCFG Board must consider all relevant factors,
including social and economic effects on its community, customers, employees,
suppliers and other constituents.
The FCFG Articles also seek to ensure that a "fair price" is paid to
all shareholders for shares sold as a result of certain business combinations
(as defined therein), by requiring that such combinations be approved by the
holders of ninety percent (90%) of the shares entitled to be voted in an
election of directors. This requirement does not apply if (i) the business
combination is approved by at least two-thirds of the FCFG Board, or (ii) the
consideration to be received per share by the shareholders is not less than the
highest price per share paid by the offeror in acquiring any of its holdings of
FCFG Common Stock and a proxy statement responsive to the requirements of the
Exchange Act is mailed to all shareholders to solicit their approval of the
business combination. Any amendment or repeal of this provision including a
merger or consolidation, must be approved by ninety percent (90%) of the shares
entitled to be voted in an election of directors, unless the acquiring company's
articles of incorporation contain an article to the same effect as FCFG's fair
price provision.
The Articles of Incorporation of the Bank have been amended to adopt a
"fair price" provision identical to the provision contained in the FCFG
Articles.
PSB. The PSB Articles include certain provisions that could make more
difficult the acquisition of PSB by means of a tender offer, a proxy contest,
merger or otherwise. Such provisions include (i) limitations on changes in the
composition, and classification, of the PSB Board (discussed above under the
heading "Board of Directors"), (ii) certain nonmonetary factors that the PSB
Board is required to consider in evaluating any takeover offer, and (iii) a
requirement that all shareholders receive a "fair price" for their stock in any
uninvited takeover transaction (which provisions are discussed in more detail
below). Also, the authorization of preferred stock, which is intended primarily
as a financing tool and not as a defense against takeovers, has the potential to
be used by management to make more difficult uninvited attempts to acquire
control of PSB (for example, by diluting the ownership interest of a substantial
shareholder, increasing the amount of consideration necessary for a shareholder
to obtain control, or selling authorized but unissued shares to friendly third
parties).
The PSB Articles require the PSB Board to consider nonmonetary factors
in evaluating any takeover offer. More specifically, the PSB Articles provide
that, when evaluating any third party offers to make a tender or exchange offer
of, purchase all or substantially all the assets of, or merge or consolidate
with, PSB, the PSB Board must consider all relevant factors, including social
and economic effects on its community, customers, employees, and other
constituents.
The PSB Articles also seek to ensure that a "fair price" is paid to all
shareholders for shares sold as a result of certain business combinations (as
defined therein), by requiring that such combinations be approved by the holders
of ninety percent (90%) of the shares entitled to be voted in an election of
directors. This requirement does not apply if (i) the business combination is
approved by at least two-thirds of the PSB Board, or (ii) the consideration to
be received per share by the shareholders is not less than the highest price per
share paid by the offeror in acquiring any of its holdings of PSB Common Stock
and a proxy statement responsive to the requirements of the Exchange Act is
mailed to all shareholders to solicit their approval of the business
combination. Any amendment or repeal of this provision including a merger or
consolidation, must be approved by ninety percent (90%) of the shares entitled
to be voted in an election of directors, unless the acquiring company's articles
of incorporation contain an article to the same effect as PSB's fair price
provision.
-95-
<PAGE> 110
Washington Law. RCW 23B.19 contains the WBCA's anti-takeover
provisions. In general, "target corporations" (Washington corporations, and
foreign corporations which are qualified to do business in Washington which have
a class of securities registered with the SEC pursuant to sections 12 or 15 of
the Exchange Act) are subject, without any additional corporate action, to the
anti-takeover provisions under the WBCA. Otherwise, a target corporation must
amend its articles of incorporation with a provision which affirmatively
subjects the corporation to RCW 23B.19. Neither FCFG's Articles nor PSB's
Articles contain such a provision.
In general, RCW 23B.19 prevents a target corporation from engaging in a
merger, share exchange, consolidation, or a significant sale, lease, exchange,
mortgage, or similar "significant business transaction" (as more fully described
in RCW 23B.19.020) for a period of five years following an "acquiring person's"
acquisition of ten percent or more of the target corporation's outstanding
voting stock. A target corporation may engage in a significant business
transaction at any time, however, if either the proposed significant business
transaction or the acquiring person's acquisition of ten percent or more of the
target corporation's outstanding voting stock is approved by the majority of the
target corporation's board of directors prior to the date on which the acquiring
person acquired ten percent or more of the stock. Additional provisions detailed
in RCW 23B.19.040 establish the minimum consideration paid to the target
corporation's shareholders by the acquiring person.
CERTAIN LEGAL MATTERS
The validity of the FCFG Common Stock to be issued in the Merger will
be passed upon for FCFG by its counsel, Graham & Dunn, a professional
corporation, Seattle/Tacoma, Washington.
EXPERTS
The audited consolidated financial statements of FCFG as of December
31, 1994 and 1995, and for the years ended December 31, 1995 and 1994, included
in this Prospectus/Proxy Statement and Registration Statement, have been audited
by Knight, Vale & Gregory, independent public accountants, as indicated in their
report appearing elsewhere in this Prospectus/Proxy Statement, and are included
herein in reliance upon the authority of such firm as experts in accounting and
auditing. Knight, Vale & Gregory also will give an opinion upon certain tax
matters related to the Merger.
The audited consolidated financial statements of PSB as of December 31,
1995, and for the year ended December 31, 1995, included in this
Prospectus/Proxy Statement and Registration Statement, have been audited by
Knight, Vale & Gregory, independent public accountants, as indicated in their
report appearing elsewhere in this Prospectus/Proxy Statement, and are included
herein in reliance upon the authority of such firm as experts in auditing and
accounting.
OTHER MATTERS
The PSB Board is not aware of any business to come before the PSB
shareholder meeting other than those matters described above in this
Prospectus/Proxy Statement. However, if any other matters should properly come
before the shareholder meeting, it is intended that proxies in the accompanying
form will be voted in respect thereof in accordance with the judgment of the
persons voting the proxies.
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<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRST COMMUNITY FINANCIAL GROUP, INC............................................ F-2
1996 Interim Financial Statements (Unaudited)
---------------------------------------------
Condensed Consolidated Balance Sheets.................................. F-2
Condensed Consolidated Statements of Income............................ F-3
Condensed Consolidated Statements of Changes in Shareholders' Equity... F-4
Condensed Consolidated Statements of Cash Flows........................ F-5
Notes to Condensed Consolidated Financial Statements................... F-6
1995 and 1994 Year-End Financial Statements
-------------------------------------------
Report of Independent Public Accountants............................... F-7
Consolidated Balance Sheets............................................ F-8
Consolidated Statements of Income...................................... F-9
Consolidated Statements of Changes in Shareholders' Equity............. F-10
Consolidated Statements of Cash Flows.................................. F-11
Notes to Consolidated Financial Statements............................. F-12
PRAIRIE SECURITY BANK........................................................... F-31
1996 Interim (Unaudited) and 1995 Year-End Financial Statements
---------------------------------------------------------------
Report of Independent Public Accountants............................... F-31
Consolidated Balance Sheets............................................ F-32
Consolidated Statements of Income...................................... F-33
Consolidated Statements of Changes in Shareholders' Equity............. F-34
Consolidated Statements of Cash Flows.................................. F-35
Notes to Consolidated Financial Statements............................. F-37
</TABLE>
F-1
<PAGE> 112
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,777 $ 15,024
Interest bearing deposits in banks 6,836 11,982
Federal funds sold 4,617 2,750
Securities available for sale 6,821 7,143
Securities held to maturity 4,563 7,262
Loans held for sale 852 1,478
Loans 131,181 126,154
Less allowance for possible credit losses 1,402 1,376
NET LOANS 129,779 124,778
Premises and equipment 7,696 7,840
Other assets 5,690 4,640
TOTAL ASSETS $ 176,631 $ 182,897
LIABILITIES
Deposits:
Non-interest bearing $ 25,567 $ 34,440
Interest bearing 128,540 126,796
TOTAL DEPOSITS 154,107 161,236
Long term debt 1,337 1,237
Other liabilities 773 1,184
TOTAL LIABILITIES 156,217 163,657
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 per share; 4,241 4,031
10,000,000 shares authorized, 1,696,507 shares issued
in 1996, and 1,612,472 shares issued in 1995
Surplus 13,729 12,311
Retained earnings 2,773 2,940
Unrealized loss on securities available for sale (64) (42)
Guaranteed KSOP Obligation (265) --
TOTAL SHAREHOLDERS' EQUITY 20,414 19,240
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,631 $ 182,897
</TABLE>
See notes to condensed consolidated financial statements
F-2
<PAGE> 113
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,525 $ 3,400 $ 10,560 $ 9,917
Federal funds sold and deposits in banks 170 317 337 686
Investments 173 234 550 642
TOTAL INTEREST INCOME 3,868 3,951 11,447 11,245
INTEREST EXPENSE
Deposits 1,418 1,492 4,124 3,959
Other 25 29 85 93
TOTAL INTEREST EXPENSE 1,443 1,521 4,209 4,052
NET INTEREST INCOME 2,425 2,430 7,238 7,193
PROVISION FOR POSSIBLE CREDIT LOSSES 85 41 221 112
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 2,340 2,389 7,017 7,081
NON-INTEREST INCOME
Service charges on deposit accounts 277 261 823 746
Origination fees on mortgage loans sold 73 77 351 191
Other income 47 116 296 255
TOTAL NON-INTEREST INCOME 397 454 1,470 1,192
NON-INTEREST EXPENSE
Salaries and employee benefits 1,129 1,372 3,464 3,887
Occupancy and equipment 323 314 1,045 945
Other expense 666 603 1,995 1,919
TOTAL NON-INTEREST EXPENSE 2,118 2,289 6,504 6,751
OPERATING INCOME BEFORE INCOME TAXES 619 554 1,983 1,522
Income Taxes 169 179 535 483
NET INCOME $ 450 $ 375 $ 1,448 $ 1,039
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE $ .24 $ .21 $ .80 $ .58
Average number of common
and equivalent shares outstanding 1,837,230 1,815,758 1,817,491 1,814,597
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION $ .24 $ .21 $ .79 $ .57
Average number of common and equivalent
shares outstanding - assuming full dilution 1,837,757 1,821,637 1,836,904 1,816,270
</TABLE>
See notes to condensed consolidated financial statements
F-3
<PAGE> 114
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on Guaranteed
Common Retained Available-for- KSOP
Stock Surplus Earnings Sale Securities Obligation Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $3,823 $10,170 $ 4,093 ($100) -- $ 17,986
Net income -- -- 920 -- -- 920
Common stock issued 5 15 -- -- -- 20
Stock options exercised 80 181 -- -- -- 261
5% stock dividend 123 763 (891) -- -- (5)
Transfer from retained earnings -- 1,182 (1,182) -- -- --
Change in unrealized
depreciation on available-
for-sale securities, net of tax -- -- -- 58 -- 58
BALANCE, DECEMBER 31, 1995 $4,031 $12,311 $ 2,940 ($ 42) -- $ 19,240
Net income -- -- 1,448 -- -- 1,448
Stock options exercised 9 15 -- -- -- 24
5% stock dividend 201 1,393 (1,605) -- -- (11)
Guarantee of KSOP obligation -- -- -- -- (265) (265)
Change in unrealized
depreciation on available-
for-sale securities, net of tax -- -- -- (22) -- (22)
BALANCE, SEPTEMBER 30, 1996 $4,241 $13,719 $ 2,783 ($ 64) ($265) $ 20,414
</TABLE>
See notes to condensed consolidated financial statements
F-4
<PAGE> 115
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,448 $ 1,039
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for possible credit losses 221 112
Depreciation and amortization 584 409
Gain on sale of loans -- 50
Other - net (1,524) 470
Originations of loans held for sale (16,478) (7,256)
Proceeds from sales of loans held for sale 17,104 6,451
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,355 1,275
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 5,146 (9,635)
Net (increase) decrease in Federal funds sold (1,867) 1,725
Proceeds from sales of available-for-sale securities 1,765 800
Purchase of available-for-sale securities (1,317) (500)
Proceeds from maturities of held-to-maturity securities 2,670 1,200
Purchase of held-to-maturity securities (18) (2,517)
Net increase in loans (5,262) (5,914)
Additions to premises and equipment (440) (2,765)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 677 (17,606)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (7,129) 16,997
Net (increase) decrease in short-term borrowings -- (500)
Sale of common stock 24 203
Long term borrowing -- 200
Repayment of long-term borrowings (165) (62)
Payment for fractional shares (9) (5)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (7,279) 16,833
NET CHANGE IN CASH AND DUE FROM BANKS (5,247) 502
CASH AND DUE FROM BANKS:
Beginning of period 15,024 7,059
END OF PERIOD $ 9,777 $ 7,561
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAYMENTS FOR:
Interest $ 4,328 $ 4,042
Taxes 665 474
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans 1,625 919
Increase (decrease) in depreciation of available for sale securities (18) (111)
Increase (decrease) in guarantee of KSOP obligation 265 --
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 116
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information and with instructions to Form 10-KSB and Rule 10-01 of
Regulation S-X. 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 considered
necessary for a fair presentation have been included. Operating results for the
three months and nine months ended September 30, 1996 are not necessarily
indicative of the results anticipated for the year ended December 31, 1996.
2. EARNINGS PER COMMON AND EQUIVALENT SHARE
Earnings per common and equivalent share is calculated by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding during the periods presented. Fully diluted earnings per share
assumes that all dilutive stock options outstanding are issued such their
dilutive effect is maximized.
F-6
<PAGE> 117
INDEPENDENT AUDITORS' REPORT
Board of Directors
FIRST COMMUNITY FINANCIAL GROUP, INC.
Lacey, Washington
We have audited the accompanying consolidated balance sheets of FIRST COMMUNITY
FINANCIAL GROUP, INC. AND SUBSIDIARIES as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1994 financial
statements of Northwest Community Bank, a bank which was pooled with First
Community Financial Group, Inc. in 1995, as explained in Note 3 to the
consolidated financial statements, which statements are included in the restated
1994 financial statements and reflect total assets and net interest income
constituting 32% and 34%, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion for 1994, insofar as it relates to amounts included for
Northwest Community Bank, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FIRST COMMUNITY
FINANCIAL GROUP, INC. AND SUBSIDIARIES as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, FIRST COMMUNITY
FINANCIAL GROUP, INC. AND SUBSIDIARIES changed their method of accounting for
impaired loans effective January 1, 1995, to conform with Statement of Financial
Accounting Standards Nos. 114 and 118.
KNIGHT, VALE & GREGORY, INC., P.S.
February 6, 1996
Tacoma, Washington
F-7
<PAGE> 118
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4) $ 15,024 $ 7,059
Interest bearing deposits in other banks 11,982 5,467
Federal funds sold 2,750 8,655
Securities available for sale (Note 5) 7,143 4,616
Securities held to maturity (fair value
1995 - $7,345, 1994 - 10,940) (Note 5) 7,262 11,179
Loans held for sale 1,478 172
Loans (Notes 6, 12 and 13) 126,154 116,672
Allowance for possible credit losses (Note 6) (1,376) (1,250)
LOANS - NET 124,778 115,422
Premises and equipment (Note 7) 7,840 5,510
Foreclosed real estate 385 408
Accrued interest receivable 985 921
Other assets 3,270 2,764
TOTAL ASSETS $ 182,897 $ 162,173
LIABILITIES
Deposits:
Non-interest bearing demand $ 34,440 $ 29,630
Savings and NOW 64,704 60,005
Time deposits (Note 8) 62,092 51,908
TOTAL DEPOSITS 161,236 141,543
Short term borrowings (Note 9) -- 500
Long term debt (Note 10) 1,237 1,113
Accrued interest payable 341 296
Other liabilities 843 735
TOTAL LIABILITIES 163,657 144,187
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 12 and 13) -- --
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 200,000 shares authorized, none issued -- --
Common stock, par value $2.50 per share; 2,000,000 shares
authorized, 1,612,472 shares issued in 1995 and 1,529,250 shares
issued in 1994 (Notes 14, 15, and 16) 4,031 3,823
Surplus 12,311 10,170
Retained earnings 2,940 4,093
Net unrealized depreciation on available for sale securities,
net of tax of $22 in 1995 and $52 in 1994 (Note 5) (42) (100)
TOTAL SHAREHOLDERS' EQUITY 19,240 17,986
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 182,897 $ 162,173
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE> 119
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31, 1995 and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Loans $ 13,404 $ 11,696
Federal funds sold and deposits in banks 969 696
Investment securities:
Taxable 694 672
Non-taxable 164 107
TOTAL INTEREST INCOME 15,231 13,171
INTEREST EXPENSE
Deposits 5,459 3,702
Other 126 88
TOTAL INTEREST EXPENSE 5,585 3,790
NET INTEREST INCOME 9,646 9,381
PROVISION FOR POSSIBLE CREDIT LOSSES (Note 6) 236 224
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 9,410 9,157
NON-INTEREST INCOME
Service charges on deposit accounts 988 978
Origination fees on mortgage loans sold 310 531
Origination fees and gains on sales of loans 78 159
Loss on sale of securities available for sale -- (54)
Other operating income 347 399
TOTAL NON-INTEREST INCOME 1,723 2,013
NON-INTEREST EXPENSES
Salaries 4,634 3,843
Employee benefits (Note 14) 870 972
Occupancy 548 467
Equipment 732 778
Other (Note 20) 3,105 2,712
TOTAL NON-INTEREST EXPENSES 9,889 8,772
OPERATING INCOME BEFORE INCOME TAXES 1,244 2,398
INCOME TAXES (Note 11) 324 601
NET INCOME $ 920 $ 1,797
EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE (Notes 1 and 15) $ .51 $ 1.08
Average number of common and equivalent shares outstanding 1,805,837 1,666,754
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION (Notes 1 and 15) $ .51 $ 1.07
Average number of common and equivalent
shares outstanding - assuming full dilution 1,810,443 1,685,511
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE> 120
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CHANGES IN SHAREHOLDERS' EQUITY
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on Guaranteed
Common Retained Available-for- KSOP
Stock Surplus Earnings Sale Securities Obligation Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $3,361 $ 6,689 $ 3,131 $ 7 ($159) $ 13,029
Net income -- -- 1,797 -- -- 1,797
Common stock issued 461 2,648 -- -- -- 3,109
Stock options exercised 1 2 -- -- -- 3
Stock dividend - fractional
shares (Note 15) -- -- (4) -- -- (4)
Transfer from retained earnings -- 831 (831) -- -- --
Change in unrealized
depreciation on available
for sale securities, net of tax -- -- -- (107) -- (107)
Decrease in Guaranteed
KSOP obligation (Note 14) -- -- -- -- 159 159
BALANCE, DECEMBER 31, 1994 $3,823 $10,170 $ 4,093 ($100) -- $ 17,986
Net income -- -- 920 -- -- 920
Common stock issued 5 15 -- -- -- 20
Stock options exercised 80 181 -- -- -- 261
5% Stock dividend (Note 15) 123 763 (891) -- -- (5)
Transfer from retained earnings -- 1,182 (1,182) -- -- --
Change in unrealized
depreciation on available
for sale securities, net of tax -- -- -- 58 -- 58
BALANCE, DECEMBER 31, 1995 $4,031 $12,311 $ 2,940 ($ 42) -- $ 19,240
</TABLE>
See notes to consolidated financial statements
F-10
<PAGE> 121
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 920 $ 1,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses 236 224
Depreciation and amortization 703 656
Deferred income taxes 62 112
Loss on sale of securities available for sale -- 54
Gain on sale of loans (78) (159)
Origination of loans held for sale (12,590) (19,167)
Proceeds from sales of loans held for sale 11,366 21,129
Other - net (106) (1,595)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 513 3,051
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in other banks (6,515) 4,419
Net decrease in Federal funds sold 5,905 1,930
Purchases of securities held to maturity (2,133) (3,250)
Purchases of securities available for sale (2,472) (1,615)
Proceeds from maturities of securities held to maturity 3,944 2,023
Proceeds from sales and maturities of securities available for sale 2,028 2,064
Net increase in loans (10,886) (21,782)
Proceeds from sales of foreclosed assets 1,034 --
Additions to premises and equipment (3,075) (1,768)
Other - net 29 15
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (12,141) (17,964)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and savings accounts 9,509 3,343
Net increase in time deposit accounts 10,184 10,338
Net decrease in short-term borrowings (500) (2,500)
Sale of common stock 281 3,074
Proceeds from issuance of long-term debt 200 750
Repayment of long-term debt (76) (70)
Payment for fractional shares (5) (4)
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,593 14,931
------- -------
NET CHANGE IN CASH AND DUE FROM BANKS 7,965 18
CASH AND DUE FROM BANKS
Beginning of year 7,059 7,041
END OF YEAR $ 15,024 $ 7,059
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 5,540 $ 3,503
Income taxes 439 966
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ 1,062 $ 176
Change in depreciation of available for sale securities, net 58 (107)
Decrease in guarantee of KSOP obligation -- (159)
Reclassification of securities held to maturity to
securities available for sale (Note 5) 2,059 --
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE> 122
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company provides commercial banking services in Washington State through
nine branches concentrated in and around Thurston, Grays Harbor and Pierce
Counties. Additionally, the Company provides real estate mortgage lending
services and the sale of non-deposit investment products through its branch
network. The Company's primary source of revenue is providing loans to customers
who are predominately small and middle-market businesses and middle-income
individuals.
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the 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 from those
estimates.
Certain prior year amounts have been reclassified to conform to 1995
presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Community
Financial Group, Inc. (the Company) and its wholly owned subsidiaries, First
Community Bank of Washington (FCB), Information Management Systems, Inc. (IMS),
and Premises, Inc. FCB is referred to as "the Bank". Citizens First Bank, which
was acquired by the Company in 1993 was merged into First Community Bank during
1995. The accounts of Citizens First Bank are also included in the consolidated
financial statements. All significant intercompany transactions and balances
have been eliminated.
As more fully described in Note 3, the Company acquired Northwest Community Bank
(NCB) during 1995. The transaction was accounted for as a pooling-of-interests.
As a result, prior year financial statements have been restated to reflect the
transaction.
SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those debt securities the Company
has the positive intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs, or changes in general economic conditions.
These securities are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income over the period to
maturity.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale consist of debt and certain equity
securities the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Securities available for sale are reported at fair
value. Unrealized gains and losses, net of the related deferred tax effect, are
reported as a net amount in a separate component of shareholders' equity.
Realized gains and losses on available-for-sale securities, determined using the
specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write downs
of the individual securities to their fair value. Such write downs are included
in earnings as realized losses.
(continued)
F-12
<PAGE> 123
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS HELD FOR SALE
Mortgage and government guaranteed loans originated for sale in the secondary
market are carried at the lower of cost or estimated market value. Net
unrealized losses are recognized through a valuation allowance established by
charges to income.
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance for
possible credit losses. Interest on loans is accrued daily based upon the
principal amount outstanding.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. Interest income is subsequently recognized only to the
extent cash payments are received.
It is the Company's policy to defer loan origination and commitment fees and
certain direct loan origination costs to amortize the net amount as an
adjustment of the related loan's yield over the contractual life of the loan.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses is maintained at a level considered
adequate to absorb any losses which may exist in the loan portfolio. The
allowance is increased by provisions charged to operating expense and by
recoveries on loans previously charged off, and is reduced by charge-offs.
Management performs periodic credit reviews of the loan portfolio and considers
past loan loss experience, current economic conditions, review of specific
problem loans, and other factors in determining the adequacy of the allowance
balance.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as a integral part of
their examination process, periodically review the Bank's allowance for possible
credit losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related 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 dispositions are reflected
in earnings.
FORECLOSED REAL ESTATE
Real estate properties acquired through foreclosure or other proceedings are
held for sale and are recorded at the lower of the recorded amount of the loan,
or the fair value of the properties less estimated costs of disposal. Any write
down to fair value at the time of transfer to foreclosed real estate is charged
to the allowance for possible credit losses. Properties are evaluated regularly
to ensure the recorded amount is supported by their current fair value, and
valuation allowances to reduce the carrying amount to fair value less estimated
costs to dispose are recorded as necessary. Additions to or reductions from
valuation allowances are recorded in income.
(continued)
F-13
<PAGE> 124
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Subsidiaries provide for tax on a separate company basis and remit to the
Company amounts currently due.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS HELD FOR SALE
Fair values of loans held for sale are based on their estimated market
prices.
LOANS
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed-rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate
certificate of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted
cash flow analyses based on the Company's current incremental borrowing
rates for similar types of borrowing arrangements.
(continued)
F-14
<PAGE> 125
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
LONG-TERM DEBT
The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
FAIR VALUES OF FINANCIAL INSTRUMENTS ACCRUED INTEREST
The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values of off-balance-sheet financial instruments are immaterial.
CASH AND CASH EQUIVALENTS
The Company considers all cash and due from depository institutions to be cash
equivalents. The Company maintains 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 COMMON SHARE
Earnings per common and equivalent share is calculated by dividing net income by
the weighted average number of common shares and common share equivalents
outstanding during the years presented. Fully diluted earnings per share assumes
that all dilutive stock options outstanding are issued such that their dilutive
effect is maximized.
NOTE 2 - ACCOUNTING CHANGES
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118. Under these
standards, impairment occurs when it is probable a creditor will not be able to
collect all amounts due under a loan agreement. Impaired loans are to be
measured based on the present value of expected future cash flows, discounted at
the loan's effective interest rate, or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Changes in these values will be reflected as adjustments
to the allowance for possible credit losses. The effect of adoption on the
Company's 1995 financial position and results of operations was insignificant.
In March 1995, the Financial Accounting Standards Board issued Statement No 121
("SFAS No. 121") on accounting for the impairment of long lived assets, certain
identifiable intangibles, and goodwill related to assets to be held and used.
SFAS No. 121 also establishes accounting standards for long-lived assets and
certain identifiable intangibles to be disposed of. The Company is required to
adopt SFAS No. 121 no later than fiscal 1996. The Company has not yet determined
what the impact of adoption will be on the carrying value of its long-lived
assets.
In November 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which established
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 specifies a fair value based method of
accounting for stock-based compensation plans and encourages (but does not
require) entities to adopt that method in place of the provisions of APB Opinion
25, Accounting for Stock Issued to Employees. The Company has not yet determined
which method of accounting will be used or what impact the adoption of the
accounting requirements of SFAS No. 123 might have on the Company's results of
operations.
(continued)
F-15
<PAGE> 126
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 3 - ACQUISITION OF NORTHWEST COMMUNITY BANK
On November 30, 1995 the Company acquired all of the outstanding shares of
Northwest Community Bank in exchange for 550,762 shares of the Company's stock.
The accompanying consolidated financial statements have been prepared following
the pooling-of-interests method of accounting and reflect the combined financial
position and operating results of the Company and Northwest Community Bank for
all periods presented.
Separate results of operations of the combined entities for the year ended
December 31, 1994 and the eleven months ended November 30, 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, 1995 DECEMBER 31, 1994
<S> <C> <C>
NET INTEREST INCOME:
FCFG $5,721 $6,177
NCB 3,084 3,204
NET INCOME:
FCFG $922 $914
NCB 56 883
</TABLE>
Prior to the merger, Northwest Community Bank incurred costs approximating
$875,000, representing satisfaction of NCB's prior obligations to their senior
management. Additionally, other merger related costs were incurred by NCB and
the Company totaling approximately $300,000.
NOTE 4 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The average amounts
of such balances for the year ended December 31, 1995 and 1994 were
approximately $1,150,000 and $800,000, respectively.
NOTE 5 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and the approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
DECEMBER 31, 1995
Equity securities $1,821 $ -- $ -- $1,821
U.S. Government and agency securities 3,753 4 18 3,739
Corporate securities 297 1 -- 298
Mortgage backed securities 1,012 -- 58 954
State and municipal securities 324 7 -- 331
$7,207 $ 12 $76 $7,143
</TABLE>
(continued)
F-16
<PAGE> 127
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 5 - DEBT AND EQUITY SECURITIES (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
DECEMBER 31, 1994
Equity securities $ 603 -- $ -- $ 603
U.S. Government and agency securities 2,950 -- 147 2,803
Corporate securities 454 -- 5 449
Other securities 761 -- -- 761
$ 4,768 -- $ 152 $ 4,616
HELD-TO-MATURITY SECURITIES
DECEMBER 31, 1995
U.S. Government and agency securities $ 4,214 $ 6 $ -- $ 4,220
Corporate securities 822 21 -- 843
State and municipal securities 2,226 56 -- 2,282
$ 7,262 $ 83 $ -- $ 7,345
DECEMBER 31, 1994
U.S. Government and agency securities $ 7,089 $ 1 $ 208 $ 6,882
Corporate securities 1,237 -- 49 1,188
State and municipal securities 2,853 36 19 2,870
$11,179 $ 37 $ 276 $10,940
</TABLE>
Gross realized losses on sales of available-for-sale securities were $54,000 in
1994. There were no realized losses on sales of available-for-sale securities in
1995. There were no gains or losses realized on held-to-maturity securities in
1995 or 1994.
Coincident with the merger of Northwest Community Bank into FCB, securities with
an amortized cost of $2,056,000 and market value of $2,009,000 were reclassified
from held-to-maturity on the books of NCB to available-for-sale on the books of
FCB to conform to the Company's accounting for such securities. Unrealized
depreciation on these securities totaled $47,000 at December 31, 1995.
(continued)
F-17
<PAGE> 128
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 5 - DEBT AND EQUITY SECURITIES (concluded)
The scheduled maturities of held-to-maturity and available-for-sale debt
securities at December 31, 1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
Estimated Weighted Estimated Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $2,877 $2,904 5.13% $1,759 $1,736 4.72%
Due after one year through five years 3,711 3,753 5.45% 3,627 3,586 5.61%
Due after five years through ten years 279 293 5.57% -- -- --
Due after ten years 395 395 6.15% -- -- --
$7,262 $7,345 $5,386 $5,322
</TABLE>
Mortgage backed securities are allocated based on their anticipated principal
repayment.
Securities with a carrying value of $2,059,000 and $2,171,000 at December 31,
1995 and 1994, respectively, were pledged to secure public deposits and certain
short-term borrowings, and for other purposes as required by law.
NOTE 6 - LOANS
The composition of loans at December 31 was (dollars in thousands):
<TABLE>
<CAPTION>
1995 % OF 1994 % OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
Commercial $ 28,259 22.40% $ 30,743 26.35%
Real estate construction 15,701 12.45% 15,119 12.96%
Real estate mortgage 75,128 59.55% 63,474 54.40%
Consumer 7,066 5.60% 7,336 6.29%
$126,154 100.00% $116,672 100.00%
</TABLE>
(continued)
F-18
<PAGE> 129
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 6 - LOANS (concluded)
Transactions in the allowance for possible credit losses for the years ended
December 31, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of year $ 1,250 $ 1,149
Provision charged to non-interest expense 236 224
Losses charged to allowance (176) (143)
Recoveries credited to allowance 66 20
NET CHARGE-OFFS (110) (123)
BALANCE AT END OF YEAR $ 1,376 $ 1,250
Ratio of net charge-offs to Average Loans Outstanding .09% .12%
</TABLE>
The recorded investments in impaired loans was $1,427,000 at December 31, 1995.
A specific allocation of $164,000 of the allowance for possible credit losses
was made for $814,000 of these impaired loans. For the remaining $734,000 of
impaired loans, no allocation of the allowance for possible credit losses was
considered necessary. The average recorded investment in impaired loans during
the year ended December 31, 1995 was $1,541,000. Interest income recognized on
impaired loans, which was collected in cash, totaled $11,000.
Loans on which the accrual of interest had been discontinued totaled $741,000 at
December 31, 1994. The difference between the interest income which would have
been accrued if such loans had performed in accordance with original terms and
the interest income recognized on those loans was $145,000.
At December 31, 1995, there were no commitments to lend additional funds to
borrowers whose loans were impaired. Loans over 90 days past due still accruing
interest were $401,000 and $255,000 at December 31, 1995 and 1994, respectively.
Maturity and repricing information for the Company's loan portfolio at December
31, 1995 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Floating Rate
Maturing in Repricing in Total
<S> <C> <C> <C>
0 - 90 days $13,972 $23,806 $ 37,778
91 - 365 days 20,139 3,558 23,697
1 year - 5 years 59,874 3,378 63,252
$93,985 $30,742 $124,727
Loans on which the accrual of interest has been discontinued 1,427
$126,154
</TABLE>
At December 31, 1995 and 1994, certain officers and directors, and companies in
which they have 10% or more beneficial interest, were indebted to the Bank in
the aggregate amount of $4,972,000 and $5,685,000, respectively. All such loans
were made in the ordinary course of business. During 1995 $6,415,000 of new
loans were made, and repayments totaled $4,338,000. During 1994, $5,970,000 of
new loans were made, and repayments totaled $5,119,000.
(continued)
F-19
<PAGE> 130
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 were (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,010 $ 803
Bank premises 6,052 3,656
Equipment, furniture and fixtures 4,194 3,966
TOTAL COST 11,256 8,425
Accumulated depreciation 3,416 2,915
$ 7,840 $5,510
</TABLE>
At December 31, 1995, the Company had various noncancellable lease agreements
for office space and branch facilities requiring the following minimum payments
for the years ending December 31: 1996 - $69,000; 1997 - $68,000; 1998 -
$52,000. The leases contain renewal options for between one and four additional
terms of between five and ten years each. Because of possible future lease
renewals, these payments are not necessarily a forecast of future rental
expense.
Total rental expense aggregated $113,000 in 1995 and $114,000 in 1994.
NOTE 8 - INTEREST BEARING DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $15,198,000 and $13,971,000
at December 31, 1995 and 1994, respectively. At December 31, 1995 scheduled to
maturities of certificates of deposit are as follows (dollars in thousands):
<TABLE>
<S> <C>
1996 $49,439
1997 10,904
1998 1,131
1999 264
Thereafter 354
TOTAL $62,092
</TABLE>
NOTE 9 - SHORT TERM BORROWINGS
At December 31, 1995 the Bank had available various short-term credit
facilities, which include Federal funds purchased lines of $2,000,000. The Bank
also has a short-term borrowing line with the Federal Home Loan Bank which
allows it to borrow up to 5% of the Bank's assets (approximately $9,000,000 at
December 31, 1995) In 1995 and 1994 Federal funds purchased lines were unused.
At December 31, 1994 $500,000 was outstanding under the Federal Home Loan Bank
of Seattle borrowing line. No material borrowing occurred in 1995 under the
Federal Home Loan Bank borrowing line.
(continued)
F-20
<PAGE> 131
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 10 - LONG-TERM DEBT
Long-term debt at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a director of the Company
due in monthly installments of $8,000, including interest
at 0.75% over the Wall Street prime rate (9.5% at
December 31, 1995), collateralized by equipment. Interest
paid in 1995 totaled $32,000 $ 291 $ 363
Note payable due in monthly installments of $6,000 beginning June 1995,
including interest at 2.5% over the 5 year constant maturity treasury index,
adjusted every 5 years (9.375% at
December 31, 1995), collateralized by premises 746 750
Note payable due in annual installments of $100,000, including
interest at 6%, collateralized by premises 200 --
$1,237 $1,113
</TABLE>
Principal reductions due on the above indebtedness for the years ending December
31 are as follows: 1996 - $189,000; 1997 - $197,000; 1998 - $106,000; 1999 -
$37,000; 2000 - $37,000; thereafter - $671,000.
NOTE 11 - INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Income taxes are comprised of the following for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current $262 $489
Deferred (benefit) 62 112
TOTAL INCOME TAXES $324 $601
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expense which are reported in different periods for financial
reporting and income tax purposes. The sources of the differences and the
resulting deferred income tax provision are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Provision for possible credit losses $ (54) $( 34)
Depreciation (10) 42
Use of cash basis reporting for tax purposes (30) 22
Deferred income (59) 372
Low income housing tax credits (275) (616)
Increase in valuation reserve 507 384
Other (17) (58)
DEFERRED INCOME TAXES $ 62 $ 112
</TABLE>
(continued)
F-21
<PAGE> 132
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 11 - INCOME TAXES (concluded)
Net deferred tax assets (liabilities) consist of the following components at
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for possible credit losses, in excess of tax reserves $ 311 $ 257
Low income housing tax credits 1007 732
Valuation reserve (1007) (500)
Unrealized depreciation on available-for-sale securities 22 52
Other deferred tax assets 116 114
TOTAL DEFERRED TAX ASSETS 449 655
DEFERRED TAX LIABILITIES
Tax depreciation taken in excess of book depreciation 216 226
Deferred income 412 471
Other deferred tax liabilities 34 79
TOTAL DEFERRED TAX LIABILITIES 662 776
NET DEFERRED TAX LIABILITY $ 213 $ 121
</TABLE>
A reconciliation of the Company's effective income tax rate with the Federal
statutory tax rate for the years ended December 31, follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Income tax based on statutory rate $423 34.0% $815 34.0%
Adjustments resulting from:
Tax-exempt income (52) (4.2) (36) (1.5)
Tax credits (107) (8.6) (232) (9.7)
Other 60 4.8 54 2.3
INCOME TAXES $324 26.0% $601 25.1%
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets.
(continued)
F-22
<PAGE> 133
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (concluded)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
<S> <C> <C>
Commitments to extend credit:
Real estate secured $ 7,369 $ 8,058
Credit card lines 2,102 1,769
Other 8,489 5,518
TOTAL COMMITMENTS TO EXTENDED CREDIT $17,960 $15,345
Standby letters of credit $ 452 $ 547
</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 70% 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 extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
CONTINGENCIES
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
The Company has entered into contracts with certain of its executives and others
which provide for contingent payments subject to future events.
(continued)
F-23
<PAGE> 134
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 13 - CONCENTRATION OF CREDIT RISK
The Bank has credit risk exposure including off-balance-sheet credit risk
exposure related to real estate loans as disclosed in Notes 6 and 12. The
ultimate collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the region. The bank
generally requires collateral on all real estate exposures and typically
maintains loan-to-value ratios of no greater than 85%.
Investments in state and municipal securities generally involve governmental
entities within Washington State. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of practice, generally
does not extend credit to any single borrower or group of related borrowers in
excess of $3,000,000.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
NOTE 14 - BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a combined employee stock ownership and profit sharing plan with
401(k) provisions (KSOP) which covers substantially all employees who have
completed one year or more of service. Contributions by the Company to the Plan
are based on one-half the employees' contributions with a maximum of 3% of the
employees' compensation. Profit sharing contributions to the Plan are made at
the discretion of the Board of Directors. Contributions for the combined 401(k)
and Profit Sharing Plan made for the years ended December 31, 1995 and 1994 were
$165,000 and $164,000, respectively.
In 1993 the Plan obtained a loan of $175,500, the proceeds of which were used to
purchase previously issued Company stock. The note was collateralized by 13,000
shares of the Company's common stock. The debt was retired in 1994.
Total shares held by the KSOP at December 31, 1995 and 1994, were 63,742 and
60,090, respectively, which include unallocated shares of 9,705 and 1,013.
Cash payments to the Plan consisted of the following for the years ended
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Contributions $165 $158
Interest -- 6
$165 $164
</TABLE>
When a participant terminates from the Plan, receiving a distribution of Company
stock, the Company is required to issue put options to the terminated
participant. This permits the terminated participant to sell the stock to the
Company at fair value any time during the option periods, which can be as long
as 18 months. At December 31, 1995, outstanding put options were not material.
(continued)
F-24
<PAGE> 135
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 14 - BENEFIT PLANS (concluded)
401(k) / PROFIT SHARING PLAN
Northwest Community Bank maintained a 401(k) profit sharing plan ("Plan") for
the benefit of its employees prior to the NCB's acquisition by the Company.
NCB's obligations under the Plan consisted of matching eligible employee
contributions, as well as additional contributions made at the discretion of
NCB's Board of Directors. NCB matched 100% of the contributions of eligible
employees, up to 5% of the employees compensation. Total matching and
discretionary contributions made to the Plan for the eleven months ended
November 30, 1995 and the year ended December 31, 1994 were $58,000 and $81,000,
respectively. This plan was discontinued upon the Company's acquisition of NCB.
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the financial performance of the Company. Awards are payable if the Company and
its subsidiaries meet earnings and other performance objectives and are
determined as a percentage of their base salary. Fees paid to directors are also
adjusted annually based on the financial performance of the Company. No awards
were made under the plan in 1995. Awards under the plan for 1994 were $123,000.
Northwest Community Bank maintained an incentive compensation plan for certain
officers. Awards under this plan totaled $300,000 in 1995 and $364,000 in 1994.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
The Company provides an Employee Supplemental Income (ESI) plan covering a
select group of management personnel. The post-retirement benefit provided by
the ESI plan is designed to supplement a participating officer's retirement
benefits from social security, in order to provide the officer with a certain
percentage of final average income at retirement age. Expenses related to this
plan totaled $70,000 and $48,000 in 1995 and 1994, respectively.
Benefits to employees may be funded by life insurance policies purchased by the
Company, which had a cash surrender value of $1,545,000 at December 31, 1995.
Liabilities to employees, which will be accrued over their expected time to
retirement, were $64,000 and $21,000 at December 31, 1995 and 1994,
respectively.
DIRECTOR DEFERRED INCOME PLAN
In 1992, the Board of Directors approved a plan similar to the ESI plan under
which a director may elect to defer director fees until retirement and to
provide a death benefit.
Benefits to directors may be funded by life insurance policies purchased by the
Company, which had a cash surrender value of $105,000 at December 31, 1995.
Accrued liabilities to directors at December 31, 1995 and 1994 totaled $70,000
and $48,000, respectively. Expenses associated with this plan were $22,000 and
$24,000 in 1995 and 1994, respectively.
(continued)
F-25
<PAGE> 136
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 15 - STOCK DIVIDENDS
In February 1995 the Board of Directors declared a 5% stock dividend to
shareholders of record on February 28, 1995. The effect of the dividend was to
increase the number of shares outstanding by 49,234. In January 1994 the Board
of Directors declared a 10% stock dividend to shareholders of record on January
1, 1994, which was reflected in the consolidated financial statements as of
December 31, 1993. The effect of the dividend was to increase the number of
shares outstanding by 73,426. Accordingly, all references to number of common
shares and per share data have been restated to reflect the stock dividends.
In March 1996, the Board of Directors declared a 5% stock dividend. The effect
of the dividend was to increase the number of shares outstanding by 80,226. All
reference to per share data have been restated to reflect the stock dividend.
(Unaudited).
NOTE 16 - STOCK OPTION PLANS
The Company maintains stock option plans for non-employee members of the Board
of Directors and incentive stock option plans for key employees. The exercise
price of the stock options may not be less than the fair market value of the
stock at the date of grant.
Stock option and per shares amounts for current and prior periods have been
adjusted to reflect the effect of stock dividends, and are as follows:
<TABLE>
<CAPTION>
Employee Director Total Range of Exercise
Options Options Options Price Per Share
<S> <C> <C> <C> <C>
Under option at December 31, 1993 137,511 70,784 208,295 $ 4.77 - $11.35
Granted 113,400 35,280 148,680 $16.19
Exercised -- (594) (594) $11.35
Under option at December 31, 1994 250,911 105,470 356,381 $ 4.77 - $16.19
Granted -- -- --
Exercised (6,643) (14,918) (21,561) $ 5.72 - $11.35
Expired (10,483) (14,824) (25,307) $ 4.77 - $ 5.72
UNDER OPTION AT DECEMBER 31, 1995 233,785 75,728 309,513 $ 4.77 - $16.19
OPTIONS EXERCISABLE AT DECEMBER 31, 1995 126,172 39,890 166,062
</TABLE>
Options becoming exercisable under both stock option plans in future years
ending December 31 are as follows: 1996 - 47,703; 1997 - 33,426; 1998 - 31,161
and 1999 - 31,161.
Options for 120,884 shares remain available to be granted at December 31, 1995.
(continued)
F-26
<PAGE> 137
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash $ 461 $ 2,090
Investment in subsidiaries 16,110 14,991
Buildings and equipment 28 51
Due from subsidiaries 2,477 754
Other assets 182 186
TOTAL ASSETS $ 19,258 $ 18,072
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES $ 18 $ 86
SHAREHOLDERS' EQUITY 19,240 17,986
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,258 $ 18,072
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
(dollars in thousands)
OPERATING INCOME
Dividends received from subsidiaries $ 69 $ 235
Rental and other income 61 504
TOTAL OPERATING INCOME 130 739
OPERATING EXPENSES 277 795
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES (147) (56)
INCOME TAX BENEFIT (76) (101)
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (71) 45
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 991 1,752
NET INCOME $ 920 $ 1,797
</TABLE>
(continued)
F-27
<PAGE> 138
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (concluded)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 920 $ 1,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (991) (1,752)
Increase in due from subsidiaries (1,723) (539)
Depreciation 19 23
Other - net (64) (108)
NET CASH USED BY OPERATING ACTIVITIES (1,839) (579)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment -- (33)
Investment in subsidiaries (66) (625)
NET CASH USED IN INVESTING ACTIVITIES (66) (658)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock 281 3,071
Payment for fractional shares (5) (4)
NET CASH PROVIDED BY FINANCING ACTIVITIES 276 3,067
NET CHANGE IN CASH (1,629) 1,830
CASH
Beginning of year 2,090 260
END OF YEAR $ 461 $ 2,090
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Stock issued in acquisition of NCB $ 1,377 $ --
Property invested in subsidiary -- 436
Property dividends received -- 436
Net decrease in guaranteed KSOP obligation -- (159)
Equipment transferred to Bank 4 --
</TABLE>
NOTE 18 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional discretionary --
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines on the
regulatory framework for prompt corrective action, the Company must meet
specific capital adequacy guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital classification is
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
(continued)
F-28
<PAGE> 139
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 18 - REGULATORY MATTERS (concluded)
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Tier 1 capital (as defined in the regulations) to total average
assets (as defined), and minimum ratios of Tier 1 and total capital (as defined)
to risk-weighted assets (as defined). Under the regulatory framework for prompt
corrective action, the Company 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, 1995, the most recent notification from the Bank's regulator
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized, the
Bank must maintain minimum total risk-based, Tier 1 risk-based, 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.
The Company's actual capital amounts and ratios are also presented in the table
(dollars in thousands).
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Tier 1 capital
(to average assets) $19,271 10.98% $ 6,927 4.00% $ 8,658 5.00%
Tier 1 capital
(to risk-weighted assets) 19,271 14.42% 5,345 4.00% 8,017 6.00%
Total capital
(to risk-weighted assets) 20,658 15.46% 10,690 8.00% 13,362 10.00%
DECEMBER 31, 1994
Tier 1 capital
(to average assets) $18,086 11.77% $ 6,145 4.00% $ 7,681 5.00%
Tier 1 capital
(to risk-weighted assets) 18,086 15.06% 4,085 4.00% 7,208 6.00%
Total capital
(to risk-weighted assets) 19,336 16.10% 9,610 8.00% 12,013 10.00%
</TABLE>
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1995, all of the
Bank's retained earnings were available for dividend declaration to its parent
company without prior regulatory approval.
Management believes, as of December 31, 1995, that the Bank meets all capital
requirements to which it is subject.
(continued)
F-29
<PAGE> 140
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits with
banks, and federal funds sold $ 29,756 $ 29,756
Securities available for sale 7,143 7,143
Securities held to maturity 7,262 7,345
Loans held for sale 1,478 1,502
Loans receivable 124,778 124,145
Accrued interest receivable 985 985
FINANCIAL LIABILITIES
Deposits $161,236 $161,383
Long-term debt 1,237 1,220
Accrued interest payable 341 341
</TABLE>
NOTE 20 - OTHER OPERATING EXPENSES
Other operating expenses include the following amounts which are in excess of 1%
of the total of interest income and non-interest income for the years ended
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Data processing $204 $131
Office supplies and expense 188 175
State taxes 244 219
Directors' fees 148 176
Regulatory expenses (FDIC/Washington State) 155 285
Legal 283 119
Accounting and Auditing 187 87
</TABLE>
F-30
<PAGE> 141
INDEPENDENT AUDITORS' REPORT
Board of Directors
PRAIRIE SECURITY BANK
Tacoma, Washington
We have audited the accompanying consolidated balance sheet of PRAIRIE SECURITY
BANK AND SUBSIDIARY as of December 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 PRAIRIE SECURITY
BANK AND SUBSIDIARY as of December 31, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the method of
accounting for impaired loans was changed effective January 1, 1995, to conform
with Statements of Financial Accounting Standards Nos. 114 and 118.
KNIGHT, VALE & GREGORY, INC., P.S.
March 1, 1996
Tacoma, Washington
F-31
<PAGE> 142
PRAIRIE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3) $ 1,953 $ 2,284
Interest bearing deposits in banks 29 651
Federal funds sold 1 --
Securities available for sale (Notes 4 and 8) 2,288 2,056
Securities held to maturity (Notes 4 and 8) 2,373 2,764
Loans held for sale 2,688 2,220
Loans (Note 5) 37,710 31,414
Allowance for possible credit losses (Notes 5 and 8) (408) (353)
NET LOANS 37,302 31,061
Premises and equipment (Note 6) 2,074 2,247
Foreclosed real estate (Note 9) 190 230
Accrued interest receivable 255 267
Cash surrender value of life insurance 782 894
Other assets 207 651
TOTAL ASSETS $ 50,142 $ 45,325
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 12,983 $ 11,061
Savings, NOW and money market 11,548 11,949
Time (Note 7) 17,592 14,904
TOTAL DEPOSITS 42,123 37,914
Accrued interest payable 100 92
Federal funds purchased and treasury, tax and loan account 1,901 268
Short-term borrowings (Note 8) 1,000 2,000
Other debt (Note 9) -- 62
Other liabilities 344 430
TOTAL LIABILITIES 45,468 40,766
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12) -- --
SHAREHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock (no par value), 10,000 shares authorized, none issued -- --
Common stock (par value: $1), 500,000 shares authorized,
196,316 shares issued and outstanding 196 196
Surplus 3,782 3,782
Retained earnings 717 581
Unrealized loss on securities available for sale - net of tax (21) --
TOTAL SHAREHOLDERS' EQUITY 4,674 4,559
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,142 $ 45,325
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE> 143
PRAIRIE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,884 $ 2,436 $ 3,257
Federal funds sold and deposits in banks 22 15 20
Securities available for sale 38 46 127
Securities held to maturity 207 234 311
TOTAL INTEREST INCOME 3,151 2,781 3,715
INTEREST EXPENSE
Deposits 1,099 939 1,283
Federal funds purchased and treasury, tax and loan account 67 38 47
Short-term borrowings 52 58 88
Other debt 7 -- 8
TOTAL INTEREST EXPENSE 1,225 1,035 1,426
NET INTEREST INCOME 1,926 1,946 2,289
PROVISION FOR POSSIBLE CREDIT LOSSES (Note 5) 56 45 90
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 1,870 1,701 2,199
NON-INTEREST INCOME
Service charges on deposit accounts 281 297 435
Loan fees on loans held for sale and gains on sale of loans 606 521 780
Gain on sale of securities available for sale -- -- 12
Other operating income 327 35 264
TOTAL NON-INTEREST INCOME 1,214 903 1,491
NON-INTEREST EXPENSE
Salaries 1,111 938 1,362
Employee benefits 329 297 275
Occupancy 103 80 184
Furniture and equipment 262 251 279
Other non-interest expense 798 901 1,193
TOTAL NON-INTEREST EXPENSE 2,603 2,467 3,293
INCOME BEFORE INCOME TAXES 481 137 397
INCOME TAXES (Note 11) 149 32 142
NET INCOME $ 332 $ 105 $ 255
EARNINGS PER SHARE DATA
Average number common shares and
equivalents outstanding $224,584 $224,584 $224,584
NET INCOME PER SHARE $ 1.48 $ .47 $ 1.14
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 144
PRAIRIE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
UNREALIZED GAIN
COMMON RETAINED (LOSS) ON SECURITIES
STOCK SURPLUS EARNINGS AVAILABLE FOR SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (unaudited) $ 196 $3,782 $ 326 ($36) $ 4,268
Net income -- -- 255 -- 255
Change in unrealized gain (loss)
on securities available for sale -- -- -- 36 36
BALANCE AT DECEMBER 31, 1995 196 3,782 581 -- 4,559
(UNAUDITED)
Net income -- -- 332 -- 332
Dividend ($1.00 per share) (196) -- (196)
Change in unrealized loss on
securities available for sale -- -- -- (21) (21)
BALANCE AT SEPTEMBER 30, 1996 $ 196 $3,782 $ 717 ($21) $ 4,674
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE> 145
PRAIRIE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 332 $ 105 $ 255
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for possible credit losses 56 45 90
Depreciation and amortization 194 183 264
Investment amortization - net of accretion -- 13 18
Deferred income taxes (benefit) -- -- (4)
Gain on securities available for sale -- -- (12)
Loss on sale of fixed assets -- 4 (4)
Gain on sale of foreclosed real estate (32) -- (51)
Stock dividends received -- (9) (14)
Increase in interest receivable 12 (41) (39)
Increase in interest payable 8 109 31
Decrease in other assets 455 (84) 38
Increase in other liabilities (86) 13 357
NET CASH USED IN OPERATING ACTIVITIES 939 338 929
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of and payments received
from securities held to maturity 127 246 818
Proceeds from sale of securities available for sale -- 500 1,944
Purchases of securities available for sale -- (321) (381)
Purchases of securities held to maturity -- (500) (500)
Net increase in interest bearing deposits in banks 621 96 (565)
Increase in loans (6,693) (4,920) (7,147)
Purchases of premises and equipment (21) (95) (117)
Proceeds from sale of premises and equipment -- 3 32
Cash surrender value of life insurance 112 108 (281)
Additions to foreclosed real estate -- (36) (37)
NET CASH USED IN INVESTING ACTIVITIES (5,854) (4,919) (6,234)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposit accounts 4,209 2,495 2,964
Net increase (decrease) in federal funds purchased and
treasury, tax and loan account 1,633 121 138
Net increase (decrease) in short-time borrowings (1,000) 2,000 2,000
Payment of Debt (62) -- --
Dividends on common stock (196) -- --
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,584 4,616 5,102
NET INCREASE/DECREASE IN CASH AND DUE FROM BANKS (331) 35 (203)
CASH AND DUE FROM BANKS
Beginning of year 2,284 2,487 2,487
END OF YEAR $ 1,953 $ 2,522 $ 2,284
</TABLE>
(continued)
See notes to consolidated financial statements.
F-35
<PAGE> 146
PRAIRIE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(concluded)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,217 $ 1,022 $ 1,395
Income taxes 95 10 10
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES
Transfer from loans to foreclosed real estate $ 510 $ 457 $ 457
Transfer from securities held to maturity to available for sale -- -- 1,936
Fair value adjustment to securities available for sale (32) (55) (55)
Income tax effect related to fair value adjustment 11 19 19
Assumption of mortgage on foreclosed real estate,
including accrued interest -- -- 81
Loans made on sales of foreclosed real estate 582 71 71
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE> 147
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Prairie Security
Bank (the Bank) and its wholly owned subsidiary, PSB Capital, Inc. (PSB). All
significant intercompany transactions and balances have been eliminated.
The Bank operates three branches in suburban communities in the greater Puget
Sound area. The Bank's primary source of revenue is providing loans to
customers, who are predominately small and middle-market businesses and
middle-income individuals. The Bank operates a mortgage lending center that
offers both speculative construction and permanent financing of residential real
estate.
PSB initiates and brokers construction and permanent first mortgage commercial
real estate loans throughout Washington, Oregon and Idaho.
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. 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 possible credit losses, and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans.
SECURITIES HELD TO MATURITY
Debt securities for which the Bank 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.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt and certain equity securities not
classified as trading or as securities held to maturity. Securities available
for sale are reported at fair value. Unrealized gains and losses, net of the
related deferred tax effect, are reported as a separate component of
shareholders' equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
Declines in the fair value of individual securities held to maturity and
available for sale below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. Such write-downs
are included in earnings as realized losses.
LOANS HELD FOR SALE
Mortgage loans originated for sale in the secondary market are carried at the
lower of cost or estimated market value. Net unrealized losses, if any, are
recognized through a valuation allowance established by charges to income.
(continued)
F-37
<PAGE> 148
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance for
possible credit losses. Interest on loans is accrued daily based on the
principal amount outstanding.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income, unless the loan and accrued interest balances are
adequately collateralized and in the process of collection. Interest income is
subsequently recognized only to the extent cash payments are received.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses charged to operations is an amount
sufficient to bring the allowance for possible credit losses to an estimated
balance considered adequate to absorb losses inherent in the portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, current economic conditions, historical loan loss
experience and other risk factors. While management uses the best information
available to make evaluations, future adjustments may be necessary if economic
and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible
credit losses and valuation of foreclosed real estate. Such agencies may require
the Bank to recognize additions to the allowance or to write down foreclosed
real estate based on the examiners' judgments about information available to
them at the time of their examinations.
PREMISES AND EQUIPMENT
Bank 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.
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 other real estate owned 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.
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.
(continued)
F-38
<PAGE> 149
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for fixed rate loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Fair
values of loans held for sale are based on their estimated market
prices. Fair values for impaired loans are estimated using discounted
cash flow analyses or underlying collateral values, where applicable.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
FEDERAL FUNDS PURCHASED
The carrying amounts of federal funds purchased approximate their fair
values.
SHORT-TERM BORROWINGS
Short-term borrowings reprice frequently and, therefore, the carrying
amount is a reasonable estimate of fair value.
OTHER DEBT
The fair values of the Bank's other debt are estimated using
discounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values of off-balance-sheet lending commitments approximate the
recorded amounts of the related fees charged for similar agreements.
NET INCOME PER SHARE
Net income per share of common stock is based on the weighted average number of
shares of common and common equivalent shares outstanding.
(continued)
F-39
<PAGE> 150
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
RECENT ACCOUNTING PRONOUNCEMENTS
In November 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), which established
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 specifies a fair value based method of
accounting for stock-based compensation plans and encourages (but does not
require) entities to adopt that method in place of the provisions of APB Opinion
25, Accounting for Stock Issued to Employees. The Bank has not yet determined
which method of accounting will be used or what impact the adoption of the
accounting requirements of SFAS No. 123 might have on the Bank's results of
operations.
CASH AND CASH EQUIVALENTS
The Bank considers all amounts included in the balance sheets caption "Cash and
due from banks" to be cash equivalents.
INTERIM FINANCIAL STATEMENTS
The interim financial data as of and for the nine months ended September 30,
1996 and 1995 is unaudited; however, in the opinion of Bank management, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of results for the interim periods.
The 1996 interim period results of operations are not necessarily indicative of
results for the entire year.
NOTE 2 - ACCOUNTING CHANGES
Effective January 1, 1995, the Bank adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118. Under these
standards, impairment occurs when it is probable a creditor will not be able to
collect all amounts due under a loan agreement. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate, or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Changes in these values are reflected in income and as
adjustments to the allowance for possible credit losses. The effect of adoption
on the Bank's 1995 financial position and results of operations was
insignificant.
NOTE 3 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amount of this
balance for the year ended December 31, 1995 was approximately $233,000.
F-40
<PAGE> 151
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - DEBT AND EQUITY SECURITIES
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 (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government and agency securities $1,750 $ -- $ -- $1,750
Equity securities 306 -- -- 306
TOTAL $2,056 $ -- $ -- $2,056
SECURITIES HELD TO MATURITY
Mortgaged--backed securities $1,615 $ 8 $ 6 $1,617
Pooled real--estate participation certificates 1,149 -- -- 1,149
TOTAL $2,764 $ 8 $ 6 $2,766
</TABLE>
In December 1995, the Bank transferred securities with an amortized cost of
$1,936,000 from the "held to maturity" category to the "available for sale"
category under one-time reassessment guidelines issued by the FASB. The related
unrealized loss associated with this transfer was $10,000, which is included in
the "unrealized gain (loss) on securities available for sale" component of
shareholders' equity.
Gross realized gains and losses on sales of securities available for sale were
(dollars in thousands):
<TABLE>
<S> <C>
GROSS REALIZED GAINS
U.S. Government and agency securities $11
State and municipal securities 4
$15
GROSS REALIZED LOSSES
State and municipal securities $ 3
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 250 $ 252
Due from one year to five years 1,181 1,179 1,500 1,498
Due from five to ten years 434 438 -- --
Due after ten years -- -- -- --
TOTAL $1,615 $1,617 $1,750 $1,750
</TABLE>
(continued)
F-41
<PAGE> 152
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - DEBT AND EQUITY SECURITIES (concluded)
For purposes of the maturity table, mortgage backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted average contractual maturities of underlying collateral. The
mortgage backed securities may mature earlier than their weighted average
contractual maturities because of principal prepayments.
Securities carried at approximately $3,365,000 at December 31, 1995 were pledged
to secure public deposits and for other purposes required or permitted by law.
NOTE 5 - LOANS
Loans at December 31, 1995 consist of the following (dollars in thousands):
<TABLE>
<S> <C>
Commercial $ 3,812
Real estate:
Construction 11,138
Commercial 8,030
Residential 7,615
Consumer 821
31,416
Less unearned income and deferred fees 2
TOTAL LOANS $31,414
</TABLE>
Changes in the allowance for possible credit losses for the year ended December
31, 1995 are as follows (dollars in thousands):
<TABLE>
<S> <C>
Balance at beginning of year $263
Provision for possible credit losses 90
BALANCE AT END OF YEAR $353
</TABLE>
The recorded investment in impaired loans was $646,000 at December 31, 1995. A
specific allocation of $5,000 of the allowance for possible credit losses was
made for $26,000 of these impaired loans. For the remaining $620,000 of impaired
loans, no allocation of the allowance for possible credit losses was considered
necessary. The average recorded investment in impaired loans during the year
ended December 31, 1995 was $395,000. No interest income was recognized on
impaired loans.
At December 31, 1995, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due still
accruing interest were $148,000 at December 31, 1995.
(continued)
F-42
<PAGE> 153
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS (concluded)
Maturity and repricing for the Bank's portfolio at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
FIXED FLOATING
RATE RATE TOTAL
<S> <C> <C> <C>
0 - 90 days $ 4,645 $11,026 $15,671
91 - 365 days 3,500 20 3,520
1 year or more 8,911 2,668 11,579
$17,056 $13,714 30,770
Loans on which the accrual of interest has been discontinued 646
$31,416
</TABLE>
Certain related parties of the Bank, principally Directors of the Bank and their
associates, were loan customers of the Bank in the ordinary course of business
during 1995 and 1994. Total loans outstanding at December 31, 1995 to key
officers and directors were $569,000. New loans and draws in 1995 totaled
$220,000, and principal payments totaled $265,000.
NOTE 6 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 1995 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
Land $ 504
Buildings 820
Leasehold improvements 357
Furniture and equipment 1,237
2,918
Less accumulated depreciation and amortization (671)
TOTAL PREMISES AND EQUIPMENT $2,247
</TABLE>
The Bank leases certain land and buildings for branch locations under
noncancellable operating lease agreements expiring through 1999. Certain
agreements contain renewal options, and one land lease contains a purchase
option at the fair market value of the property at the date of purchase. Rent
expense totaled $67,000 in 1995.
The Bank's future minimum rental payments required under these agreements are as
follows: 1996 - $58,000; 1997 - $37,000; 1998 - $17,000; and 1999 - $6,000.
(continued)
F-43
<PAGE> 154
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $2,285,000 at December 31,
1995.
At December 31, 1995, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1996 $10,795
1997 3,920
1998 180
1999 9
$14,904
</TABLE>
NOTE 8 - SHORT-TERM BORROWINGS
At December 31, 1995 advances from the Federal Home Loan Bank were $2,000,000,
with interest tied to the three-month LIBOR ($1,000,000 matures February 28,
1996, and $1,000,000 matures May 20, 1996). These advances are collateralized by
certain securities and certain loans totaling $3,624,000 as of December 31,
1995.
NOTE 9 - OTHER DEBT
Other debt consists of a mortgage requiring monthly interest payments at prime
plus 6.54% (15.29% at December 31, 1995), due December 2006, collateralized by
foreclosed assets. Provisions of the mortgage agreement require a prepayment
penalty of $6,000 if the mortgage is prepaid before December 1996.
NOTE 10 - BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank sponsors an Employee Stock Ownership Plan containing Internal Revenue
Code Section 401(k) provisions (KSOP). The purpose of the KSOP is to enable
full-time employees who have been employed for at least six months to invest
their retirement funds in stock of the Bank. Contributions to the KSOP include:
1) salary deferral of the employee's own wages; 2) discretionary match of the
employee's contribution from the Bank based on 25% of the employee's
contribution, up to a maximum of 4% of employee's compensation; 3) a basic
contribution from the Bank for all non-highly compensated employees to satisfy
nondiscrimination requirements; and 4) an optional contribution from the Bank.
For the year ended December 31, 1995 the Bank made a cash contribution of $8,000
to the KSOP.
In the event a terminated KSOP participant desires to sell his or her shares of
the Bank's stock, or for certain employees who elect to diversify their account
balance, the Bank may be required to purchase the shares from the participant at
their fair market value. At December 31, 1995 the KSOP held 2,434 shares, all of
which have been allocated to KSOP participants. The fair market value of those
shares totaled approximately $79,000 as of December 31, 1995.
(continued)
F-44
<PAGE> 155
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - BENEFIT PLANS (concluded)
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the Bank's return on assets and individual performance standards. Cash bonuses
are awarded pursuant to a prescribed formula based on the Bank's achievement of
at least a 1.0% return on assets before bonus and KSOP contributions. No
incentive compensation was paid in 1995.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
In 1992, the Bank adopted an Employee Supplemental Income (ESI) plan covering a
select group of management personnel. The post-retirement benefit provided by
the ESI plan is designed to supplement a participating officer's retirement
benefits from social security, in order to provide the officer with a certain
percentage of final average income at retirement age. Expenses, including life
insurance expenses, related to this plan totaled $47,000 in 1995.
Benefits to employees may be funded by life insurance policies purchased by the
Bank, which had a cash surrender value of $662,000 at December 31, 1995.
Liabilities to employees, which will be accrued over their expected time to
retirement, were $46,000 at December 31, 1995.
DIRECTOR DEFERRED INCOME PLAN
In 1992, the Board of Directors approved a deferred income plan whereby
Directors can elect to receive their Director fees in cash, or defer them for a
specified period. In 1995 Plan expenses, including life insurance expense,
totaled $26,000.
Benefits to Directors may be funded by life insurance policies purchased by the
Bank, which had a cash surrender value of $233,000 at December 31, 1995.
Liabilities to Directors, which will be accrued over their expected time to
retirement, were $67,000 at December 31, 1995.
NOTE 11 - INCOME TAXES
Income taxes are comprised of the following for the year ended December 31, 1995
(dollars in thousands):
<TABLE>
<S> <C>
Current $146
Deferred (4)
TOTAL INCOME TAXES $142
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rates for the year ended December 31, 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENT
OF PRE-TAX
AMOUNT INCOME
<S> <C> <C>
Income tax at statutory rates $135 34.0%
Increase (decrease) resulting from:
Tax-exempt income (5) (1.3)
Life insurance 12 3.0
TOTAL INCOME TAX EXPENSE $142 35.7%
</TABLE>
(continued)
F-45
<PAGE> 156
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (concluded)
The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31, 1995 are presented below
(dollars in thousands):
<TABLE>
<S> <C>
DEFERRED TAX ASSETS
Allowance for possible credit losses $110
Deferred compensation 38
Other 6
TOTAL DEFERRED TAX ASSETS 154
DEFERRED TAX LIABILITIES
Accumulated depreciation 93
Other 18
Cash basis accounting 53
Deferred income 63
TOTAL DEFERRED TAX LIABILITIES 227
NET DEFERRED TAX LIABILITIES $ 73
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the 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 (dollars in thousands):
<TABLE>
<S> <C>
Commitments to extend credit:
Real estate $5,897
Commercial 3,014
TOTAL COMMITMENTS TO EXTENDED CREDIT $8,911
Standby letters of credit $ 105
</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 88% 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.
(continued)
F-46
<PAGE> 157
PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS AND CONTINGENCIES (concluded)
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
The Bank has agreements with commercial banks for Federal funds lines and lines
of credit totaling $2,250,000, of which $225,000 was used at December 31, 1995.
NOTE 13 - CONCENTRATION OF CREDIT RISK
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, related to loans as disclosed in Notes 5 and 12. The ultimate
collectibility of a substantial portion of the loan portfolio is susceptible to
changes in economic and market conditions in the region. The Bank generally
requires collateral on all real estate exposures and typically maintains
loan-to-value ratios of no greater than 90%.
Investments in state and municipal securities involve governmental entities
within the Bank's market area. Standby letters of credit were granted primarily
to commercial borrowers. The Bank, as a matter of practice, generally does not
extend credit to any single borrower or group of related borrowers in excess of
$750,000.
NOTE 14 - STOCK OPTIONS
The Bank adopted a stock option plan which provides incentive and non-qualified
stock options to certain key employees and nonemployee directors for up to
60,000 shares of common stock. At December 31, 1995 shares available for future
grant under the plan were 8,328. Options are not exercisable for at least three
years, then one-third of the options are exercisable each year thereafter. All
options expire 10 years after date of grant. The Bank makes no recognition in
the balance sheet of the options until such options are exercised and no amounts
applicable thereto are reflected in net income. All options were granted at 100%
of fair market.
As of December 31, 1995 options outstanding and the total exercisable were
51,672 and 14,500, respectively. No options were issued or exercised during
1995. Exercise price per share is: 43,527 options at $16.67; 5,645 options at
$25.00; and 2,500 options at $27.78.
Outstanding stock options have been considered as common stock equivalents in
the computation of earnings per share.
NOTE 15 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines of
the regulatory framework for prompt corrective action, the Bank must meet
specific capital adequacy guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
(continued)
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PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - REGULATORY MATTERS (concluded)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (as defined in the regulations) to total average assets
(as defined), and minimum ratios of Tier 1 and total capital (as defined) to
risk-weighted assets (as defined). Under the regulatory framework for prompt
corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1
risk-based, and total risk-based ratios as set forth in the table.
The Bank's actual and minimum capital amounts and ratios are presented in the
table (dollars in thousands):
<TABLE>
<CAPTION>
CAPITAL ADEQUACY
ACTUAL PURPOSES
AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Tier 1 capital (to average assets) $4,558 10.16% $1,794 4.00%
Tier 1 capital (to risk-weighted assets) 4,558 8.87 2,055 4.00
Total capital (to risk-weighted assets) 4,572 9.48 4,111 8.00
</TABLE>
Management believes, as of December 31, 1995, that the Bank meets all capital
requirements to which it is subject.
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1995, there were
no restrictions on retained earnings for dividend declaration.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments at December 31,
1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
FINANCIAL ASSETS
Cash and due from banks, and interest
bearing deposits with banks $ 2,935 $ 2,935
Securities available for sale 2,056 2,056
Securities held to maturity 2,764 2,766
Loans held for sale 2,220 2,237
Loans receivable 31,061 31,113
Accrued interest receivable 267 267
FINANCIAL LIABILITIES
Deposits $37,978 $38,025
Federal funds sold 225 225
Short-term borrowings 2,000 2,000
Other debt 62 30
Accrued interest payable 92 92
</TABLE>
(continued)
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PRAIRIE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANT'S
REPORT
The Board of Directors of the Bank adopted a Plan of Merger and Merger Agreement
dated September 11, 1996, pursuant to which, subject to shareholder approval,
the Bank would be merged with and into First Community Bank, a subsidiary of
First Community Financial Group, Inc. (FCFG), and the Bank shareholders would be
entitled to receive, in exchange for each share of Bank common stock either
cash, shares of FCFG common stock or a combination of cash and stock.
F-49
<PAGE> 160
APPENDIX A
TO REGISTRATION STATEMENT ON FORM S-4
================================================================================
AMENDED AND RESTATED
PLAN AND AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST COMMUNITY FINANCIAL GROUP, INC.,
FIRST COMMUNITY BANK,
AND
PRAIRIE SECURITY BANK
================================================================================
DATED AS OF SEPTEMBER 11, 1996
AMENDED AND RESTATED AS OF OCTOBER 18, 1996
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TABLE OF CONTENTS
Page
----
SECTION 1. DEFINITIONS 4
1.1. Defined Terms....................................................... 4
1.2. General Interpretation.............................................. 10
SECTION 2. TERMS OF TRANSACTION........................................... 10
2.1. Transaction......................................................... 10
2.2. Merger.............................................................. 10
2.3. Consideration....................................................... 12
2.4. Alternative Structures.............................................. 16
2.5. Letter of Transmittal............................................... 16
2.6. Undelivered Certificates............................................ 16
SECTION 3. CLOSING OF THE TRANSACTION..................................... 17
3.1. Closing............................................................. 17
3.2. Events of Closing................................................... 17
3.3. Place of Closing.................................................... 17
SECTION 4. REPRESENTATIONS AND WARRANTIES................................. 17
4.1. Representations and Warranties of PSB and FCFG...................... 17
4.2. Exceptions to Representations and Warranties........................ 27
SECTION 5. CONDUCT AND TRANSACTIONS PRIOR TO CLOSING...................... 28
5.1. Conduct of PSB's Business Prior to Closing.......................... 28
5.2. Registration Statement.............................................. 32
5.3. Submission to Regulatory Authorities................................ 32
5.4. Announcements....................................................... 33
5.5. Consents............................................................ 33
5.6. Further Actions..................................................... 33
5.7. Notice.............................................................. 33
5.8. Confidentiality..................................................... 33
5.9. Affiliate Letters................................................... 33
5.10. Update of Financial Statements..................................... 34
5.11. Availability of FCFG's Books, Records and Properties............... 34
5.12. Conduct Regarding Representations and Warranties................... 34
SECTION 6. APPROVALS AND CONDITIONS....................................... 34
6.1. Required Approvals.................................................. 34
6.2. Conditions to Obligations of FCFG and the Bank...................... 34
6.3. Conditions to Obligations of PSB.................................... 37
SECTION 7. DIRECTORS, OFFICERS AND EMPLOYEES.............................. 38
7.1. Directors........................................................... 38
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7.2. Key Employees....................................................... 38
7.3. Employee Benefit Issues............................................. 38
SECTION 8. TERMINATION OF AGREEMENT AND ABANDONMENT OF TRANSACTION........ 39
8.1. Termination......................................................... 39
8.2. Cost Allocation Upon Termination.................................... 39
SECTION 9. MISCELLANEOUS.................................................. 40
9.1. Notices............................................................. 40
9.2. Waivers and Extensions.............................................. 40
9.3. Construction and Execution in Counterparts.......................... 41
9.4. Survival of Representations, Warranties, and Covenants.............. 41
9.5. Attorneys' Fees and Costs........................................... 41
9.6. Governing Law....................................................... 41
SECTION 10. AMENDMENTS.................................................... 42
SCHEDULES:
SCHEDULE 1 Offices of Bank and PSB
SCHEDULE 2 Names and Addresses of Initial Directors and Officers
SCHEDULE 3 General Exceptions to Representations and Warranties
SCHEDULE 4 Subsidiaries
SCHEDULE 5 Stock Option Plans of FCFG and PSB
SCHEDULE 6 Third Party Consents
SCHEDULE 7 Classified Assets
SCHEDULE 8 Encumbrances
SCHEDULE 9 Compliance With Laws and Litigation
SCHEDULE 10 Insurance
SCHEDULE 11 Employee Benefit Plans
SCHEDULE 12 Material Contracts
SCHEDULE 13 Key Employees
EXHIBITS:
EXHIBIT A Form of Opinion of Counsel for PSB
EXHIBIT B Form of Non-Competition Agreement for PSB Directors
EXHIBIT C Form of Employment Agreement for Michael D. Edwards
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AMENDED AND RESTATED
PLAN AND AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST COMMUNITY FINANCIAL GROUP, INC.,
FIRST COMMUNITY BANK,
AND
PRAIRIE SECURITY BANK
This Plan and Agreement of Reorganization and Merger (the "Agreement")
was first made and entered into as of September 11, 1996, between FIRST
COMMUNITY FINANCIAL GROUP, INC., a Washington corporation ("FCFG"), FIRST
COMMUNITY BANK, a banking corporation chartered under the laws of the State of
Washington (the "Bank"), and PRAIRIE SECURITY BANK, a banking corporation
chartered under the laws of the State of Washington ("PSB"), and then amended
and restated by the parties as of October 18, 1996.
PREAMBLE
The management of FCFG and PSB believe that the merger of PSB with and
into the Bank, on the terms and conditions set forth in this Agreement, is in
the best interests of the stockholders of FCFG and PSB.
AGREEMENT
In consideration of the mutual agreements set forth in this Agreement,
FCFG, the Bank, and PSB agree as follows:
SECTION 1.
DEFINITIONS
1.1. DEFINED TERMS. Capitalized terms used in this Agreement have the
following meanings:
"AGREEMENT" means this Plan and Agreement of Reorganization and Merger.
"ASSET CLASSIFICATION" has the meaning assigned to such term in Section
4.1.7.
"BANK" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"BANK STOCK" means the capital stock of the Bank.
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<PAGE> 164
"BOOK VALUE" means stockholder common stock, surplus and retained
earnings, computed according to GAAP.
"BUSINESS DAY" means any day other than a Saturday, Sunday, or a legal
holiday in the State of Washington.
"CAPITAL" means capital stock, surplus and retained earnings (undivided
profits) determined in accordance with GAAP, applied on a consistent basis.
"CLOSING" means the closing of the transactions contemplated by this
Agreement, as specified in Section 3.1.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMBINED BANK" has the meaning assigned to such term in Section 2.2.
"COMPENSATION PLANS" has the meaning assigned to such term in Section
4.1.15(a).
"CONTINUING EMPLOYEES" has the meaning assigned to such term in Section
7.3.1.
"CONTRACTS" has the meaning assigned to such term in Section 4.1.5(b).
"DIRECTOR" means the Director of the Department of Financial
Institutions of the State of Washington.
"DISSENTING SHARES" means those shares of PSB Common Stock as to which
shareholders have perfected their dissenters' rights pursuant to RCW 30.49.090.
"EFFECTIVE DATE" means the date on which all conditions to Closing have
occurred and on which the Merger takes place, as more fully specified in Section
3.1.
"ELIGIBLE HOLDERS" means holders of shares of PSB Common Stock other
than Mandatory Cash Recipients.
"EMPLOYEES" has the meaning assigned to such term in Section 4.1.15(a).
"ENVIRONMENTAL LAW" means any federal, state, local or foreign law,
regulation, agency policy, order, decree, judgment, judicial opinion, or any
agreement with any Governmental Entity, presently in effect or subsequently
adopted relating to (a) the manufacture, generation, transport, use, treatment,
storage, recycling, disposal, release, threatened release or presence of
Hazardous Substances, or (b) the preservation, restoration or protection of the
environment, natural resources or human health.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" has the meaning assigned to such term in Section
4.1.15(c).
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<PAGE> 165
"ESOP" means the Employee Stock Ownership Plan (with 401(k) provisions)
for employees of PSB, effective as of January 1, 1992, as amended.
"EXCESS AMOUNT" has the meaning assigned to such term in Section
2.3.6(b).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and related rules and regulations.
"EXCHANGE AGENT" means the agent described in Section 2.3.9.
"EXECUTIVE OFFICERS" means the Chief Executive Officer and Chief
Financial Officer.
"FCFG" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"FCFG COMMON STOCK" has the meaning assigned to such term in Section
4.1.3(a).
"FCFG EMPLOYEE STOCK OPTION PLAN" means the Employee Stock Option and
Restricted Stock Award Plan dated April 19, 1989, as amended.
"FCFG-KSOP" means the Employee Stock Ownership Plan effective as of
January 1, 1992, as amended.
"FCFG FINANCIAL STATEMENTS" means FCFG's audited consolidated
statements of financial condition as of December 31,1995, 1994, and 1993, and
the related audited statements of income, changes in cash flows and
stockholders' equity for each of the years ended December 31, 1995 and 1994.
"FCFG OPTIONS" means options issued to employees of FCFG and its
subsidiaries pursuant to the FCFG Employee Stock Option Plan.
"FCFG PREFERRED STOCK" has the meaning assigned to such term in Section
4.1.3(a).
"FCFG STOCK PLANS" has the meaning assigned to such term in Section
4.1.3(a).
"FDIA" has the meaning assigned to such term in Section 4.1.2.
"FDIC" means the Federal Deposit Insurance Corporation.
"FAULT" means (i) in the case of PSB, any agreement by PSB to merge or
consolidate with, or sell substantially all of its assets to, any entity other
than FCFG or the Bank, and (ii) intentional acts or omissions by, or lack of
good faith efforts of, PSB, FCFG or the Bank that result in the failure to
perform or fulfill any covenant, representation or warranty in this Agreement.
Good faith unilateral termination of the Agreement in accordance with Section
8.1 will not constitute Fault on the part of the party terminating.
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<PAGE> 166
"FEDERAL RESERVE" means the Board of Governors of the Federal Reserve
System, or the Federal Reserve Bank of San Francisco acting under authority
delegated to it by the Board of Governors of the Federal Reserve System.
"FINANCIAL STATEMENTS" means (a) in the case of FCFG, the FCFG
Financial Statements or, for periods following December 31, 1995, the Subsequent
FCFG Financial Statements, and (b) in the case of PSB, the PSB Financial
Statements or, for periods following December 31, 1995, the Subsequent PSB
Financial Statements.
"GAAP" means generally accepted accounting principles, consistently
applied.
"GOVERNMENTAL ENTITY" has the meaning assigned to such term in Section
4.1.5(a).
"HAZARDOUS SUBSTANCES" means any hazardous or toxic substance, material
or waste that is regulated by any local governmental authority, any state
government or the United States Government, including any material or substance
that is (a) defined as a "hazardous substance" in 42 USC Section 9601(14), (b)
defined as a "pollutant or contaminant" in 42 USC Section 9604(a)(2), or (c)
defined as a "hazardous waste" in 42 USC Section 6903(5).
"INITIAL DIRECTORS" has the meaning assigned to such term in Section
2.2.3.
"INITIAL OFFICERS" has the meaning assigned to such term in Section
2.2.3.
"LIENS" has the meaning assigned to such term in Section 4.1.3(a).
"LIQUIDATED DAMAGES" means liquidated damages in the amount of
$400,000.
"MANDATORY CASH RECIPIENTS" means (a) Non-Residents, (b) holders of
fewer than 200 shares of PSB Common Stock, (c) holders of Dissenting Shares, and
(d) holders of PSB Common Stock who would be entitled to receive fractional
shares of FCFG Common Stock but for the provisions of Section 2.3.7.
"MATERIAL ADVERSE EFFECT" with respect to any corporation means an
effect that (a) is materially adverse to the business, financial condition,
results of operations or prospects of the corporation and its subsidiaries taken
as a whole, (b) significantly and adversely affects the ability of the
corporation to consummate the transactions contemplated by this Agreement by the
Termination Date or to perform its material obligations under this Agreement, or
(c) enables any person to prevent the consummation by the Termination Date of
the transactions contemplated by this Agreement; provided, however, that no
Material Adverse Effect shall be deemed to have occurred on the basis of any
effect resulting from (1) actions or omissions of the corporation taken with the
prior consent of the other parties to this Agreement or in contemplation of the
transactions provided for in this Agreement, or (2) circumstances affecting the
banking industry in the State of Washington generally.
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<PAGE> 167
"MERGER" has the meaning assigned to such term in Section 2.1.
"NET CASH AMOUNT" means the absolute amount by which the aggregate
amount of cash payable to all Mandatory Cash Recipients pursuant to Section 2.3
is less than the Total Available Cash.
"NON-RESIDENTS" means (a) an individual whose principal residence is
not within the State of Washington, and (b) a corporation, partnership, trust,
or other form of business organization whose principal office is not within the
State of Washington; in each case determined on the record date for the PSB
shareholder meeting held to consider the Merger; provided, however, that when
shares are held by a nominee (e.g., in "street name"), the beneficial owner
shall be deemed to be the shareholder for the purpose of determining residency
if the beneficial owner has power to control the investment or, otherwise, the
entity having such power shall be deemed to be the shareholder for such purpose.
"PSB" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"PSB BOARD DUTY" means exercise of the fiduciary duty of the PSB board
of directors to PSB shareholders, exercised in good faith with reasonable care,
in a manner believed to be in the best interest of PSB, in accordance with
written advice from Rothgerber, Appel, Powers & Johnson LLP, or other counsel
acceptable to FCFG.
"PSB COMMON STOCK" has the meaning assigned to such term in Section
4.1.3(b).
"PSB FINAL CAPITAL" means PSB's Capital as of the Effective Date.
"PSB FINANCIAL STATEMENTS" means PSB's audited statements of financial
condition as of December 31, 1995 (and 1994 and 1993 if required by Section
5.1.9), and the related audited statements of income, changes in cash flows and
stockholders' equity.
"PSB OPTIONS" means options issued to employees of PSB pursuant to the
PSB Stock Option Plan.
"PSB STOCK OPTION PLAN" means PSB's Incentive Stock Option and
Nonstatutory Stock Option Plan , effective as of November 3, 1992.
"PSB STOCK PLANS" means the ESOP and the PSB Stock Option Plan.
"PSB TARGET CAPITAL" means $4,500,000.
"PENSION PLAN" has the meaning assigned to such term in Section
4.1.15(b).
"PLAN" or "PLANS" individually or collectively, means any "employee
benefit plan," as defined in Section 3(3) of ERISA, maintained by FCFG or PSB,
as the case may be.
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<PAGE> 168
"PRICING DATE" has the meaning assigned to such term in Section 2.3.1.
"PROPERTY" means any real or personal property owned or leased by PSB,
or in which PSB holds any security interest, mortgage, other lien or interest.
"PROSPECTUS/PROXY STATEMENT" has the meaning assigned to such term in
Section 5.2.1.
"REGISTRATION STATEMENT" has the meaning assigned to such term in
Section 5.2.1.
"REGULATORY APPROVALS" means the required regulatory approvals of the
Transaction by the Director, FDIC, and Federal Reserve.
"REPORTS" has the meaning assigned to such term in Section 4.1.6(b).
"RESIDENTIAL MORTGAGE LOAN" means a loan up to $240,000 in principal
amount, originated by PSB for sale into the secondary market, secured by a first
deed of trust on owner occupied single family residential property, and in a
principal amount not exceeding 90% of the appraised value of the residence.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
related rules and regulations.
"SECURITIES LAWS" has the meaning assigned to such term in Section
4.1.6(b).
"SHORTFALL AMOUNT" has the meaning assigned to such term in Section
2.3.6(c).
"SUBJECT PROPERTY" with respect to any corporation means (a) all real
property at which the businesses of the corporation or any of its subsidiaries
have been conducted, all property in which it or any of its subsidiaries holds a
security or other interest (including a fiduciary interest), and any such
property where under any Environmental Law it or any of its subsidiaries is
deemed to be the owner or operator of such property, (b) any facility in which
the corporation or any of its subsidiaries participates in the management,
including participating in the management of the owner or operator of such
property, and (c) all other real property that, for purposes of any
Environmental Law, the corporation or any of its subsidiaries otherwise could be
deemed to be an owner or operator or otherwise control.
"SUBSEQUENT FCFG FINANCIAL STATEMENTS" means a consolidated balance
sheet and related statements of income and stockholders' equity for each of
FCFG's fiscal quarters ending after December 31, 1995 and prior to Closing.
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<PAGE> 169
"SUBSEQUENT PSB FINANCIAL STATEMENTS" means a balance sheet and related
statements of income and stockholders' equity for each of PSB's fiscal quarters
ending after December 31, 1995 and prior to Closing.
"TAX" includes any tax or similar governmental charge, impost or levy
(including income taxes, franchise taxes, transfer taxes or fees, stamp taxes,
sales taxes, use taxes, excise taxes, ad valorem taxes, withholding taxes,
employee withholding taxes, worker's compensation, payroll taxes, unemployment
insurance, social security, minimum taxes or windfall profits taxes), together
with any related liabilities, penalties, fines, additions to tax or interest,
imposed by the United States or any state, county, provincial, local or foreign
government or subdivision or agency of the United States.
"TERMINATION DATE" has the meaning assigned to such term in Section
3.1.
"TOTAL AVAILABLE CASH" has the meaning assigned to such term in Section
2.3.4.
"TRANSACTION" means the Merger, subject to any modification effected
pursuant to Section 2.4.
1.2. GENERAL INTERPRETATION. Except as otherwise expressly provided in
this Agreement or unless the context clearly requires otherwise, the terms
defined in this Section include the plural as well as the singular; the words
"hereof," "herein", "hereunder", "in this Agreement" and other words of similar
import refer to this Agreement as a whole and not to any particular Section or
other subdivision; and references in this Agreement to Sections, Schedules, and
Exhibits refer to Sections of and Schedules and Exhibits to this Agreement.
Whenever the words "include", "includes", or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". Unless otherwise stated, references to Subsections refer to the
Subsections of the Section in which the reference appears. All pronouns used in
this Agreement include the masculine, feminine and neuter gender, as the context
requires. All accounting terms used in this Agreement that are not expressly
defined in this Agreement have the respective meanings given to them in
accordance with GAAP.
SECTION 2.
TERMS OF TRANSACTION
2.1. TRANSACTION. Subject to the terms and conditions set forth in this
Agreement, PSB will merge with and into the Bank (the "Merger").
2.2. MERGER. Upon Closing of the Merger, pursuant to RCW 30.49 and 12
USC Section 1828(c) and the related rules and regulations, all shares of PSB
Common Stock issued and outstanding immediately prior to Closing, except for
Dissenting Shares, will, by virtue of the Merger and without any action on the
part of the holder, be converted into the right to receive the consideration
described in Section 2.3. In the Merger, PSB will be merged into the Bank, and
the Bank will be the surviving banking corporation (the "Combined Bank"). The
shares of Bank Stock issued and outstanding
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<PAGE> 170
on the Effective Date will continue to be issued and outstanding shares of the
Combined Bank. The name of the Combined Bank will be "First Community Bank of
Washington", and the Merger will not effect any change in the articles of
incorporation or bylaws of the Bank. The principal office of the Bank before the
Merger will be the principal office of the Combined Bank, and all other offices
of the Bank and PSB that are set forth in Schedule 1 will become offices of the
Combined Bank.
2.2.1. TRANSFER OF INTERESTS. Upon consummation of the Merger, the
Combined Bank will be deemed to be the same corporation as PSB and the
Bank. All rights, franchises and interests of PSB and the Bank in and to
every type of property (real, personal and mixed) and choses in action will
be transferred to and vested in the Combined Bank by virtue of such Merger
without any deed or other transfer, and the Combined Bank, without any
order or other action on the part of any court or otherwise, will hold and
enjoy all rights of property, franchises and interests, including
appointments, designations and nominations, and all other rights and
interests as trustee, executor, administrator, registrar or transfer agent
of stocks and bonds, guardian of estates, assignee, receiver and committee
of estates of incompetents, and in every other fiduciary capacity, in the
same manner and to the same extent as such rights, franchises and interests
were held or enjoyed by PSB and the Bank immediately before consummation of
the Merger.
2.2.2. LIABILITIES. Upon consummation of the Merger, the Combined Bank
will be liable for all liabilities of PSB and the Bank; all deposits,
debts, liabilities, obligations and contracts of PSB and the Bank, matured
or unmatured, whether accrued, absolute, contingent or otherwise, and
whether or not reflected or reserved against on balance sheets, books of
account or records of PSB or the Bank, as the case may be, will be those of
the Combined Bank, and will not be released or impaired by the Merger; and
all rights of creditors and other obligees and all liens on property of
either PSB or the Bank will be preserved unimpaired.
2.2.3. DIRECTORS AND OFFICERS OF COMBINED BANK. Upon consummation of
the Merger, (i) the board of directors of the Combined Bank will consist of
all persons who are directors of the Bank immediately before the Effective
Date plus three additional PSB directors designated by PSB and considered
satisfactory by FCFG, including Michael D. Edwards, the President and Chief
Executive Officer of PSB (collectively, the "Initial Directors"), and (ii)
the officers of the Combined Bank will consist of all persons who are
officers of the Bank immediately prior to the Effective Date, except that
PSB's President and Chief Executive Officer will serve as President of the
Bank and the PSB employees identified in Schedule 2 will hold the offices
indicated opposite their name (the "Initial Officers"); provided, however,
that nothing in this Agreement will be deemed to restrict in any way the
rights of the shareholders and directors of the Combined Bank at any time
after the Effective Date to nominate, elect, select or remove, as the case
may be, such directors and officers of the Combined Bank as they shall see
fit, subject (i) to the rights of any employees pursuant to employment
agreements, if any, between such employees and the Combined Bank, and (ii)
as provided by Section 7.2. The Initial Directors will serve on the board
of directors of the Combined Bank until the next annual meeting of the
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<PAGE> 171
stockholders of the Combined Bank or until such time as their successors
have been elected and qualified. The names and mailing addresses of the
Initial Directors and Initial Officers are set forth in Schedule 2.
2.3. CONSIDERATION. The aggregate consideration payable by FCFG to
PSB's stockholders in connection with the Merger shall be calculated and paid
pursuant to this Section 2.3.
2.3.1. EXCHANGE VALUE OF PSB COMMON STOCK. For all purposes of
this Agreement, each share of PSB Common Stock outstanding as of the
Effective Date shall have an exchange value equal to 200% of the Book
Value of such share as of the end of the calendar month immediately
preceding the Effective Date (the "Pricing Date"), determined in
accordance with GAAP.
2.3.2. EXCHANGE VALUE OF FCFG COMMON STOCK. For all purposes of
this Agreement, each share of FCFG Common Stock outstanding as of the
Effective Date shall have an exchange value equal to 196% of the Book
Value of such share as of the Pricing Date, determined in accordance
with GAAP.
2.3.3. ADJUSTMENT OF BOOK VALUE OF COMMON STOCK. If either PSB or
FCFG experiences a net loss (as determined in accordance with GAAP)
during the period commencing on the Pricing Date and ending on the
Effective Date, the Book Value of PSB or FCFG Common Stock, as
applicable, used to calculate the exchange value pursuant to Section
2.3.1 or 2.3.2 shall be reduced by the amount of such net loss and the
exchange value shall be recalculated after giving effect to such Book
Value reduction.
2.3.4. CONSIDERATION TO BE PAID. Subject to the terms and
conditions set forth in this Agreement, upon consummation of the Merger
and the surrender of his or her certificate or certificates in
accordance with Section 2.3.9(a), each holder of shares of PSB Common
Stock outstanding as of the Effective Date shall receive, in accordance
with the election procedures set forth in Section 2.3.5 and the
allocation procedures set forth in Section 2.3.6, (a) cash equal to the
exchange value of such shares, (b) shares of FCFG Common Stock with an
exchange value equal to the exchange value of such holder's shares of
PSB Common Stock, or (c) a combination of cash and shares of FCFG
Common Stock; provided, however, that (i) holders of fewer than 200
shares of PSB Common Stock and holders of PSB Common Stock who are
Non-Residents shall receive only cash equal to the exchange value of
their shares of PSB Common Stock, and (ii) the aggregate cash
consideration paid to all holders shall be limited to the percentage of
the aggregate exchange value of all such holders' shares of PSB Common
Stock that FCFG, at its discretion, determines at or before Closing to
be appropriate, which amount will be at least twenty percent (20%) but
no greater than forty five percent (45%) of the aggregate exchange
value of all such holders' shares of PSB Common Stock ("Total Available
Cash"). For illustrative purposes only (and disregarding the treatment
of fractional shares of FCFG Common Stock), a holder of 1,000 shares of
PSB Common Stock who has elected to receive 45% of the exchange value
of such shares in the form of cash and 55% of the exchange value of
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such shares in the form of FCFG Common Stock would receive $20,700 plus
1,100 shares of FCFG Common Stock, assuming for purposes of this
illustration only that (1) PSB's per share Book Value determined in
accordance with Section 2.3.1 is $23.00, (2) FCFG's per share Book
Value determined in accordance with Section 2.3.2 is $11.74, and (3)
neither PSB nor FCFG experiences a net loss as specified in Section
2.3.3 [i.e., cash of $20,700 because 450 times 200% of $23.00 equals
$20,700; and 1,100 shares of FCFG Common Stock because 550 times 200%
of $23.00 results in an aggregate exchange value of $25,300, and such
aggregate exchange value divided by 196% of $11.74 equals 1,100
shares]. The amount of cash to be received in this illustration may be
subject to adjustment, however, depending on the Total Available Cash.
2.3.5. ELECTION PROCEDURES. Each holder of shares of PSB Common
Stock as of the record dated fixed for the meeting of shareholders to
consider and vote upon this Agreement (except Mandatory Cash
Recipients) will be entitled to make an election to receive (a) cash,
(b) FCFG Common Stock, or (c) a combination of cash and FCFG Common
Stock. Such election will be made in writing on an election form
provided by PSB and satisfactory to FCFG, will be hand delivered or
promptly addressed and mailed to FCFG at its main office, U.S. mail,
postage prepaid, will bear a postmark on or before five Business Days
after the PSB shareholder meeting called for the purpose of approving
this Agreement. In the event that a holder of PSB Common Stock fails to
make a timely election, such holder will be deemed to have made an
election to receive cash except as otherwise provided in Section
2.3.6(b)(i). An election form may be revoked or changed by the person
submitting such form by substitution with another properly executed
election form before the deadline for making an election; provided,
however, that the board of directors of PSB, or its designee, will have
reasonable discretion to determine when any election, modification or
revocation has been properly made. In all other cases, an election will
be irrevocable unless changed in writing with the consent of the board
of directors of PSB and with the concurrence of the board of directors
of FCFG.
2.3.6. ALLOCATION OF CONSIDERATION TO BE PAID. Cash payable to
holders of shares of Common Stock will be allocated as follows:
(a) Insufficient Cash for Mandatory Cash Recipients. In the
event that the total amount of cash payable to all Mandatory Cash
Recipients pursuant to this Section 2.3 exceeds the Total Available
Cash, the Total Available Cash will be allocated among the Mandatory
Cash Recipients in the following order of priority: first, to holders
who vote against the Merger (but only with respect to shares so voted);
second, to pay for fractional shares of FCFG Common Stock to which
holders of PSB Common Stock would otherwise be entitled; third, to
holders who are Non-Residents; and fourth, to each other holder who
owns fewer than 200 shares of PSB Common Stock.
(b) Insufficient Cash for Eligible Holders. If Eligible Holders
elect (or are deemed to have elected in accordance with Section 2.3.5)
to receive cash in an aggregate amount that exceeds the Net Cash Amount
(such excess to be referred to as the "Excess Amount"), then the
following will occur:
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(i) Those holders of shares of PSB Common Stock who failed
to make an election in a timely manner in accordance with Section
2.3.5 will be deemed to have elected only to receive FCFG Common
Stock for their shares of PSB Common Stock;
(ii) The cash payable to Eligible Holders (other than those
holders referenced in Section 2.3.6(b)(i)) will be reduced by the
Excess Amount, and the reduction will be effected pro rata among
such Eligible Holders based upon the respective number of shares
of PSB Common Stock with respect to which such Eligible Holders
elected to receive cash; and
(iii) The number of shares of FCFG Common Stock to be
received by Eligible Holders (other than those holders referenced
in Section 2.3.6 (b)(i)) will be increased until the aggregate
exchange value of such shares is increased by the Excess Amount,
and the increase will be effected pro rata among such Eligible
Holders based upon the respective number of shares of PSB Common
Stock with respect to which such Eligible Holders elected to
receive cash.
(c) Excess Cash for Eligible Holders. If Eligible Holders elect
(or are deemed to have elected in accordance with Section 2.3.5) to
receive cash in an aggregate amount that is less than the Net Cash
Amount (the difference between such amounts to be referred to as the
"Shortfall Amount"), then the following will occur:
(i) The cash payable to such Eligible Holders will be
increased by the Shortfall Amount, and the increase will be
effected pro rata among such Eligible Holders based upon the
respective number of shares of PSB Common Stock with respect to
which such Eligible Holders elected to receive cash; and
(ii) The number of shares to be received by such Eligible
Holders will be reduced until the aggregate exchange value of such
shares is reduced by the Shortfall Amount, and the reduction will
be effected pro rata among such Eligible Holders based upon the
respective number of shares of PSB Common Stock with respect to
which such Eligible Holders elected to receive cash.
2.3.7. FRACTIONAL SHARES. No fractional shares of FCFG Common
Stock will be issued to any holder of PSB Common Stock, but any holder
of PSB Common Stock otherwise entitled to receive such a fractional
share will receive payment in cash for such fractional share in an
amount equal to the product determined by multiplying such fraction by
the per share exchange value of FCFG Common Stock determined in
accordance with Section 2.3.2.
2.3.8. OPTIONS. All PSB Options outstanding as of the Effective
Date shall terminate at Closing, except that all PSB Options held by an
individual who will be an Initial Officer or Initial Director will vest
at Closing, and each such individual shall be
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entitled to receive, in exchange for all of his or her PSB Options,
FCFG Options to purchase that number of FCFG Common Stock shares to
which such individual would have been entitled pursuant to this Section
2 if such individual had exercised such PSB Options immediately prior
to Closing and elected to receive FCFG Common Stock in connection with
the Merger. All such FCFG Options received by Initial Officers or
Initial Directors shall have expiration dates that are the same as the
expiration dates of the PSB Options exchanged pursuant to this Section.
2.3.9. CERTIFICATES.
(a) Surrender of Certificates. Until surrendered to an agent
designated by FCFG and PSB to effect the exchange of PSB Common Stock
for FCFG Common Stock or cash (the "Exchange Agent"), together with a
properly completed and executed form of transmittal letter, each
certificate evidencing PSB Common Stock (other than Dissenting Shares)
will, on and after the Effective Date, be deemed for all corporate
purposes to represent and evidence only the right to receive FCFG
Common Stock or cash in accordance with the provisions of this Section
2.3. Until any such certificate evidencing PSB Common Stock is so
surrendered, the holder of such PSB Common Stock will not have any
right to receive any certificates evidencing FCFG Common Stock or cash
in lieu of fractional shares.
(b) Issuance of Certificates in Other Names. If any certificate
evidencing FCFG Common Stock is to be issued in a name other than that
in which the certificate(s) for PSB Common Stock surrendered in
exchange is registered, it will be a condition of such exchange that
the person requesting the exchange will establish the right to receive
such certificate evidencing FCFG Common Stock and pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
such certificate in a name other than registered holder of the
certificate surrendered, or will establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable.
(c) Lost, Stolen, and Destroyed Certificates. The Exchange Agent
will be authorized to issue FCFG Common Stock for any PSB Common Stock
certificate that has been lost, stolen or destroyed, upon the Exchange
Agent's receipt of satisfactory evidence of ownership of the PSB Common
Stock represented by the missing certificate, and after appropriate
indemnification.
(d) Rights to Dividends and Distributions. After the Effective
Date, no holder of a certificate evidencing shares of PSB Common Stock
will be entitled to receive any dividends or other distributions
otherwise payable to holders of record of FCFG Common Stock on any date
subsequent to the Effective Date unless such holder is entitled to
receive FCFG Common Stock and unless such holder has surrendered such
holder's certificates evidencing shares of PSB Common Stock in exchange
for FCFG Common Stock; provided, however, that such surrender will not
deprive such holder of any dividends or distributions to which such
holder is entitled as a record holder of PSB Common Stock as of a date
prior to such surrender. Upon surrender of such certificates,
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there will be paid to the holder so surrendering such certificates the
amount, without interest, of any cash dividends and any other
distributions that have been distributed subsequent to the Effective
Date on the whole number of shares of FCFG Common Stock into which such
PSB Common Stock was converted at the Effective Date.
(e) Checks in Other Names. If any check for cash in lieu of
fractional shares is to be issued in a name other than that in which
the certificate(s) for PSB Common Stock surrendered in exchange is
registered, it will be a condition of such exchange that the person
requesting the exchange will establish the right to receive such cash
and pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of such check in a name other than registered
holder of the certificate surrendered, or will establish to the
satisfaction of the Exchange Agent that such tax has been paid or is
not applicable.
2.3.10. PAYMENT TO DISSENTING SHAREHOLDERS. Each outstanding
Dissenting Share shall be converted into the rights provided by RCW
30.49.090.
2.4. ALTERNATIVE STRUCTURES. In its sole discretion, within 30 days of
the execution of this Agreement and subject to the conditions set forth below,
FCFG may elect to consummate the transactions contemplated by this Agreement by
means other than the Merger and the related provisions of Section 2.3; provided,
however, that the type and aggregate amount of consideration set forth in
Section 2.3 will not be modified, and the tax consequences to PSB and its
shareholders will not be adversely affected, except by amendment of this
Agreement consistent with Section 10. If FCFG elects a structural alternative
pursuant to this Section, PSB will cooperate with and assist FCFG with any
necessary amendment to this Agreement, 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 FCFG, to obtain the necessary
shareholder approvals and approvals of any regulatory agency, administrative
body or other governmental entity.
2.5. LETTER OF TRANSMITTAL. FCFG will prepare a form of transmittal
letter reasonably acceptable to PSB for use by shareholders holding PSB Common
Stock. Certificates representing shares of PSB Common Stock must be delivered
for payment in the manner provided in the form of transmittal letter. The form
of transmittal letter will be mailed to shareholders on or about the Effective
Date.
2.6. UNDELIVERED CERTIFICATES. If outstanding certificates for PSB
Common stock are not surrendered or the payment for them is not claimed prior to
a date when such payments would otherwise escheat or become the property of any
governmental unit or agency, the unclaimed items will, to the extent permitted
by abandoned property or any other applicable law, become the property of FCFG
(and to the extent not in its possession shall be paid over to FCFG), free and
clear of all claims or interests of any person previously entitled to such
items. Notwithstanding the foregoing, neither FCFG nor any party to this
Agreement will be liable to any holder of PSB Common Stock for any amount paid
to any governmental unit or agency having jurisdiction over any such unclaimed
items pursuant to the abandoned property or other
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applicable law of such jurisdiction, and no interest will be borne on amounts
owed to shareholders for shares of PSB Common Stock.
SECTION 3.
CLOSING OF THE TRANSACTION
3.1. CLOSING. The Closing will occur on the Effective Date. Unless FCFG
and PSB agree upon another date, the Effective Date will be the date five
Business Days 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, Section 6 of this Agreement; provided, however, that in no
event shall the Effective Date occur earlier than (a) January 22, 1997, or (b)
five Business Days following the end of any calendar month after January 22,
1997. If Closing does not occur on or prior to April 30, 1997 (the "Termination
Date"), FCFG or PSB may terminate this Agreement in accordance with Section 8.
3.2. EVENTS OF CLOSING. On the Effective Date, all properly executed
documents required by this Agreement will be delivered to the proper party, in
form consistent with this Agreement. If any party fails to deliver a required
document on the Effective Date or otherwise defaults under this Agreement on or
prior to the Effective Date, then no Transaction will occur unless the adversely
affected party (i) waives the default, or (ii) elects to proceed while reserving
rights arising due to the default.
3.3. PLACE OF CLOSING. Unless FCFG and PSB agree otherwise, the Closing
will occur at the Lacey offices of FCFG at 10:00 a.m. on the Effective Date, or
such other time during normal business hours as FCFG and PSB may fix.
SECTION 4.
REPRESENTATIONS AND WARRANTIES
4.1. REPRESENTATIONS AND WARRANTIES OF PSB AND FCFG. Subject to Section
4.2 and except as expressly set forth in Schedule 3, FCFG and the Bank each
represent and warrant to PSB, and PSB represents and warrants to FCFG and the
Bank, that:
4.1.1. CORPORATE ORGANIZATION AND QUALIFICATION. It is a
corporation (or, in the case of the Bank and PSB, a banking
corporation) duly organized and validly existing under the laws of the
State of Washington, and its activities do not require it to be
qualified in any foreign jurisdiction; it has the requisite corporate
power and authority to own or lease its properties and assets and to
carry on its businesses as they are now being conducted; the locations
of each of its offices are set forth in Schedule 1; and it has made
available to the other parties to this Agreement a complete and correct
copy of its articles of incorporation and bylaws, each as amended to
date and currently in full force and effect.
4.1.2. SUBSIDIARIES. Schedule 4 lists all of its subsidiaries as
of the date of this Agreement and the percent of its stock-ownership of
such subsidiaries; each of its
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subsidiaries that is a depository institution is an "insured depository
institution" as defined in the Federal Deposit Insurance Act ("FDIA"),
and applicable regulations under the FDIA, having its deposits insured
by the FDIC, subject to applicable FDIC coverage limitations; each of
its subsidiaries is either a commercial bank or a corporation duly
organized and validly existing under the laws of the State of
Washington, and is duly qualified to do business and in good standing
in each jurisdiction where the property owned, leased or operated, or
the business conducted, by such subsidiary requires such qualification;
and each of its subsidiaries has the requisite corporate power and
authority to own or lease its properties and assets and to carry on its
business as it is now being conducted.
4.1.3. CAPITAL STOCK.
(a) FCFG. In the case of the representations and warranties
made by FCFG: The authorized capital stock of FCFG consists of ten
million two hundred thousand (10,200,000) shares divided into two
classes: ten million (10,000,000) shares of common stock, par value
$2.50 per share (the "FCFG Common Stock"), 1,696,507 shares of which
are issued and outstanding; and two hundred thousand (200,000) shares
of blank-check preferred stock, no par value, none of which is
outstanding (the "FCFG Preferred Stock"); there are outstanding under
the stock option plans identified in Schedule 5 (the "FCFG Stock
Plans") options or rights to acquire not more than an aggregate of
374,159 shares of FCFG Common Stock (subject to adjustment on the terms
set forth in the FCFG Stock Plans); FCFG has no shares of FCFG Common
Stock reserved for issuance other than the shares reserved for issuance
under the FCFG Stock Plans, and has no shares of FCFG Preferred Stock
reserved for issuance; all of the outstanding shares of FCFG Common
Stock have been duly authorized and validly issued and are fully paid
and nonassessable; all of the outstanding shares of capital stock of
each of FCFG's subsidiaries owned by FCFG or a subsidiary of FCFG have
been duly authorized and validly issued and are fully paid and
nonassessable except to the extent provided by RCW 30.12.180, and are
owned by FCFG or a subsidiary of FCFG free and clear of all liens,
pledges, security interests, claims, proxies, preemptive or
subscriptive rights or other encumbrances or restrictions of any kind
(collectively, "Liens"); and except as set forth in this Agreement or
in the FCFG Stock Plans, there are no shares of capital stock of FCFG
authorized, issued or outstanding, and there are no preemptive rights
or any outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of FCFG or
any of its subsidiaries of any character relating to the issued or
unissued capital stock or other equity securities of FCFG or any of its
subsidiaries (including those relating to the issuance, sale, purchase,
redemption, conversion, exchange, voting or transfer of such stock or
securities).
(b) PSB. In the case of the representations and warranties made
by PSB: The authorized capital stock of PSB consists of Five Hundred
Thousand (500,000) shares of common stock, par value $1.00 per share
(the "PSB Common Stock"), [196,316] shares of which are issued and
outstanding; there were outstanding under the PSB Stock Plans; options
or rights to acquire not more than an aggregate of 51,672 shares of PSB
Common
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Stock (subject to adjustment on the terms set forth in the PSB Stock
Plans); PSB has no shares of PSB Common Stock reserved for issuance
other than the shares reserved for issuance under the PSB Stock Plans;
all of the outstanding shares of PSB Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable
except to the extent provided by RCW 30.12.180; all of the outstanding
shares of capital stock of each of PSB's subsidiaries owned by PSB or a
subsidiary of PSB have been duly authorized and validly issued and are
fully paid and nonassessable, and are owned by PSB or a subsidiary of
PSB free and clear of all Liens; and except as set forth in this
Agreement or in the PSB Stock Plans, there are no shares of capital
stock of PSB authorized, issued or outstanding, and there are no
preemptive rights or any outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of
PSB or any of its subsidiaries of any character relating to the issued
or unissued capital stock or other equity securities of PSB or any of
its subsidiaries (including those relating to the issuance, sale,
purchase, redemption, conversion, exchange, registration, voting or
transfer of such stock or securities).
4.1.4. CORPORATE AUTHORITY. It has the requisite corporate power
and authority and has taken all corporate action necessary in order to
execute and deliver this Agreement and, in the case of PSB and the
Bank, subject only to the approval by its shareholders of the plan of
merger contained in this Agreement to the extent required by RCW 30.49
to consummate the transactions contemplated by this Agreement; and this
Agreement is a valid and legally binding agreement of it, enforceable
in accordance with the terms of this Agreement.
4.1.5. GOVERNMENTAL FILINGS; NO VIOLATIONS.
(a) Filings. Other than the Regulatory Approvals, and other
than as required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, the Exchange Act, the Securities Act, state
securities and "Blue Sky" laws, no notices, reports or other filings
are required to be made by it with, nor are any consents,
registrations, approvals, permits or authorizations required to be
obtained by it from, any governmental or regulatory authority, agency,
court, commission or other entity, domestic or foreign ("Governmental
Entity"), in connection with the execution, delivery or performance of
this Agreement by it and the consummation by it of the transactions
contemplated by this Agreement.
(b) Violations. The execution, delivery and performance of this
Agreement does not and will not, and the consummation by it of any of
the transactions contemplated by this Agreement will not, constitute or
result in (i) a material breach or violation of, or a default under,
its articles of incorporation or bylaws, or the comparable governing
instruments of any of its subsidiaries, or (ii) a material breach or
violation of, or a default under, or the acceleration of or the
creation of a Lien (with or without the giving of notice, the lapse of
time or both) pursuant to, any provision of any agreement, lease,
contract, note, mortgage, indenture, arrangement or other obligation
("Contracts") of it or any of its subsidiaries or any law, rule,
ordinance or regulation or judgment, decree, order,
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award or governmental or non-governmental permit or license to which it
or any of its subsidiaries is subject, or any change in the rights or
obligations of any party under any of the Contracts. Schedule 6
contains a list of all consents of third parties required under any
Contracts to be obtained by it or its subsidiaries prior to
consummation of the Merger.
4.1.6 REPORTS AND FINANCIAL STATEMENTS.
(a) Filing of Reports. With respect to periods since January 1,
1992, each of it and its subsidiaries has filed all reports and
statements, together with any amendments required to be made with
respect to such reports and statements, that it was required to file
with (i) the SEC, (ii) the Federal Reserve, (iii) the FDIC, (iv) the
Department, and (v) any other applicable federal or state banking,
insurance, securities, or other regulatory authorities, and, as of
their respective dates (and, in the case of reports or statements filed
prior to the date of this Agreement, without giving effect to any
amendments or modifications filed after the date of this Agreement),
each such report or statement, including the related financial
statements and exhibits, complied (or will comply, in the case of
reports or statements filed after the date of this Agreement) as to
form in all material respects with all applicable statutes, rules and
regulations.
(b) Delivery to Other Parties of Reports. It has delivered to
the other parties to this Agreement, a copy of each registration
statement, offering circular, report, definitive proxy statement or
information statement under the Securities Act, the Exchange Act, and
state securities and "Blue Sky" laws (collectively, the "Securities
Laws") filed, used or circulated by it with respect to periods since
January 1, 1992 through the date of this Agreement, and will promptly
deliver to such other parties each such registration statement,
offering circular, report, definitive proxy statement or information
statement filed, used or circulated after the date of this Agreement
(collectively, its "Reports"), each in the form (including related
exhibits and amendments) filed with the SEC (or if not so filed, in the
form used or circulated).
(c) Compliance with Securities Laws. As of their respective
dates (and without giving effect to any amendments or modifications
filed after the date of this Agreement), each of the Reports, including
the related financial statements, exhibits and schedules, filed, used
or circulated prior to the date of this Agreement complied (and each of
the Reports filed after the date of this Agreement will comply) in all
material respects with applicable Securities Laws, and did not (or in
the case of reports, statements, or circulars filed after the date of
this Agreement, 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 the light of the
circumstances under which they were made, not misleading.
(d) Financial Statements. Each of its balance sheets included in
the Financial Statements fairly presents (or, in the case of Financial
Statements for periods ending on a date following the date of this
Agreement, will fairly present) the consolidated financial
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position of it and its subsidiaries as of the date of such balance
sheet, and each of the consolidated statements of income, cash flows
and stockholders' equity included in the Financial Statements fairly
presents (or, in the case of Financial Statements for periods ending on
a date following the date of this Agreement, will fairly present) the
consolidated results of operations, retained earnings and cash flows,
as the case may be, of it and its subsidiaries for the periods set
forth in such statements (subject, in the case of unaudited statements,
to normal year-end audit adjustments), in each case in accordance with
GAAP, except as may be noted in such statements.
(e) Loan and Lease Losses. Its Executive Officers know of no
reason why the provision for loan and lease losses shown in the
consolidated balance sheet included in the Subsequent PSB Financial
Statements for the quarter ended June 30, 1996 was not adequate as of
such date to provide for estimable and probable losses, net of
recoveries relating to loans previously charged off, inherent in its
loan portfolio.
4.1.7. ASSET CLASSIFICATION. Schedule 7 sets forth a list,
accurate and complete in all material respects except as otherwise
expressly noted in such Schedule, of the aggregate amounts of loans,
extensions of credit and other assets of it and its subsidiaries that
have been criticized or classified as of the Pricing Date by it,
separated by category of classification or criticism (the "Asset
Classification"); and, except as shown on Schedule 7, no amounts of
loans, extensions of credit or other assets that have been classified
or criticized as of such date by any representative of any Governmental
Entity as "Other Loans Especially Mentioned," "Substandard,"
"Doubtful," "Loss" or words of similar effect are excluded from the
amounts disclosed in the Asset Classification, other than amounts of
loans, extensions of credit or other assets that were paid off or
charged off by it or its subsidiaries prior to the date of this
Agreement.
4.1.8. ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed
in its Financial Statements, since December 31, 1995, it and its
subsidiaries have conducted their respective businesses only in the
ordinary and usual course of such businesses, and there has not been
any change or development or combination of changes or developments
that, individually or in the aggregate, is reasonably likely to result
in a Material Adverse Effect with respect to it.
4.1.9. PROPERTIES. Except as disclosed or reserved against in its
Financial Statements or in Schedule 8, it and its subsidiaries have
good and marketable title, free and clear of all Liens (other than
Liens for current taxes not yet delinquent or pledges to secure
deposits) to all of the material properties and assets, tangible or
intangible, reflected in its Reports as being owned by it or its
subsidiaries as of the date of this Agreement; to the knowledge of its
Executive Officers, all buildings and all fixtures, equipment and other
property and assets that are material to its business on a consolidated
basis and are held under leases or subleases by it or its subsidiaries
are held under valid leases or subleases, enforceable in accordance
with their respective terms (except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally or by general equity principles);
and Schedule 1
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lists all existing branches and offices of the respective parties to
this Agreement, and all new branches or offices for which application
has been made.
4.1.10. COMPLIANCE WITH LAWS. Except as disclosed in Schedule 9,
it and each of its subsidiaries:
(a) is in compliance, in the conduct of its business, with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees, including
the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage
Disclosure Act and all other applicable fair lending laws or other laws
relating to discrimination;
(b) has all permits, licenses, certificates of authority,
orders, and approvals of, and has made all filings, applications, and
registrations with, federal, state, local, and foreign governmental or
regulatory bodies (including the Federal Reserve) that are required in
order to permit it or such subsidiary to carry on its business as it is
presently conducted;
(c) has received since January 1, 1992 no notification or
communication from any Governmental Entity (including any bank,
insurance and securities regulatory authorities) or its staff (i)
asserting that it or any of its subsidiaries is not in compliance with
any of the statutes, regulations or ordinances that such Governmental
Entity enforces, (ii) threatening to revoke any license, franchise,
permit or governmental authorization, or (iii) threatening or
contemplating revocation or limitation of, or that would have the
effect of revoking or limiting, FDIC deposit insurance (nor, to the
knowledge of its Executive Officers, do any grounds for any of the
foregoing exist); and
(d) is not required to give prior notice to any federal
banking agency of the proposed addition of an individual to its board
of directors or the employment of an individual as a senior executive.
4.1.11. LITIGATION. Except as disclosed in its Financial
Statements or in Schedule 9, there are no criminal or administrative
investigations or hearings of, before or by any Governmental Entity, or
civil, criminal or administrative actions, suits, claims or proceedings
of, before or by any person (including any Governmental Entity) pending
or, to the knowledge of its Executive Officers, threatened, against it
or any of its subsidiaries (including under the Truth in Lending Act,
the Equal Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act, the Home Mortgage Disclosure Act or any other fair
lending law or other law relating to discrimination); and neither it
nor any of its subsidiaries (nor any officer, director, controlling
person or property of it or any of its subsidiaries) 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 Governmental Entity charged with the supervision or
regulation of depository institutions or engaged in the insurance of
deposits (including the FDIC) or the supervision or regulation of it or
of its subsidiaries, and neither it nor any of its
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subsidiaries has been advised by any such Governmental Entity that such
Governmental Entity is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, commitment
letter or similar submission.
4.1.12. TAXES. All federal, state and local Tax returns, including
all information returns, required to be filed by or on behalf of it or
any of its subsidiaries have been timely filed or requests for
extensions have been timely filed, and any such extension shall have
been granted and not have expired, and all such filed returns are
complete and accurate in all material respects. Except as disclosed in
its Financial Statements, all taxes attributable to it or any of its
subsidiaries that are or were due or payable (without regard to whether
such taxes have been assessed) have been paid in full or have been
adequately provided for in its Financial Statements in accordance with
GAAP; adequate provision in accordance with GAAP has been made in its
Financial Statements relating to all Taxes for the periods covered by
such Financial Statements that were not yet due and payable as of the
dates of this Agreement, regardless of whether the liability for such
Taxes is disputed; as of the date of this Agreement and except as
disclosed in its Financial Statements, there is no outstanding audit
examination, deficiency, refund litigation or outstanding waiver or
agreement extending the applicable statute of limitations for the
assessment or collection of any Taxes for any period with respect to
any Taxes of it or its subsidiaries; all Taxes with respect to
completed and settled examinations or concluded litigation relating to
it or any of its subsidiaries have been paid in full or have been
recorded on its Financial Statements (in accordance with GAAP); neither
it nor any of its subsidiaries is a party to a Tax sharing or similar
agreement or any agreement pursuant to which it or any of its
subsidiaries has indemnified any party (other than it or one of its
subsidiaries) with respect to Taxes; and the proper and accurate
amounts have been withheld from all employees (and timely paid to the
appropriate Governmental Entity or set aside in an account for such
purposes) for all periods through the Closing Date in compliance with
all Tax withholding provisions of applicable federal, state, local and
foreign laws (including income, social security and employment tax
withholding for all types of compensation).
4.1.13. INSURANCE. Each of it and its subsidiaries has taken all
requisite action (including the making of claims and the giving of
notices) pursuant to its directors' and officers' liability insurance
policy or policies in order to preserve all rights under such policies
with respect to all matters (other than matters arising in connection
with, and the transactions contemplated by, this Agreement) that are
known to it. Schedule 10 to this Agreement contains a list of all
directors' and officers' liability insurance policies and other
material insurance policies maintained by it or its subsidiaries.
4.1.14. LABOR MATTERS. Neither it nor any of its subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract
or other agreement or understanding with a labor union or labor
organization, nor is it or any of its subsidiaries the subject of any
material proceeding asserting that it or any such subsidiary has
committed an unfair labor practice or seeking to compel it or such
subsidiary to bargain
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with any labor organization as to wages or conditions of employment,
nor is there any strike involving it or any of its subsidiaries pending
or, to the knowledge of its Executive Officers, threatened, nor are its
Executive Officers aware of any activity involving its or any of its
subsidiaries' employees seeking to certify a collective bargaining unit
or engaging in any other organizational activity.
4.1.15. EMPLOYEE BENEFITS.
(a) Schedule 11 sets forth a list, as of the date of this
Agreement, 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 material
employment or severance contracts and all other material employee
benefit plans that cover employees or former employees of it and its
subsidiaries (its "Compensation Plans"); and true and complete copies
of the Compensation Plans (and, as applicable, copies of summary plan
descriptions, governmental filings (on Form 5500 series or otherwise),
actuarial reports and reports under Financial Accounting Standards
Board Statement No. 106 relating to such Compensation Plans) covering
current or former employees or directors of it or its subsidiaries (its
"Employees"), including Plans and related amendments, have been made
available to the other parties to this Agreement.
(b) All of its Plans covering Employees (other than
"multi-employer plans" within the meaning of Section 3(37) or
4001(a)(3) of ERISA), to the extent subject to ERISA, are in
substantial compliance with ERISA; each of its Plans that is an
"employee pension benefit plan" within the meaning of Section 3(2) of
ERISA ("Pension Plan") and that is intended to be qualified under
Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service, and it is not aware of any
circumstances likely to result in revocation of any such favorable
determination letter; there is no pending or, to the knowledge of its
Executive Officers, threatened litigation relating to its Plans; and
neither it nor any of its subsidiaries has engaged in a transaction
with respect to any Plan that, assuming the taxable period of such
transaction expired as of the date of this Agreement, could subject it
or any of its subsidiaries to a Tax or penalty imposed by either
Section 4975 of the Code or Section 502(i) of ERISA.
(c) No liability under Subtitle C or D of Title IV of ERISA
(other than payment of applicable premiums) has been or is expected to
be incurred by it 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
that is considered one employer with it under Section 4001 of ERISA or
Section 414 of the Code (an "ERISA Affiliate"); it and its subsidiaries
and ERISA Affiliates have not incurred and do not expect to incur any
material withdrawal liability with respect to a multi-employer plan
under Subtitle I of Title IV of ERISA (regardless of whether based on
contributions of ERISA Affiliates), nor has it or any of its
subsidiaries or ERISA Affiliates been notified by any multi-employer
plan to which it or any of its subsidiaries or ERISA Affiliates is
contributing, or may be obligated to contribute, that such
multi-employer plan is currently
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in reorganization or insolvency under and within the meaning of Section
4241 or 4245 of ERISA or that such multi-employer plan intends to
terminate or has been terminated under Section 401(k) of ERISA; 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 of its Pension Plans or by any of
its ERISA Affiliates within the 12-month period ending on the date of
this Agreement; and neither it, its subsidiaries nor any of their
respective ERISA Affiliates has incurred or is aware of any facts that
are reasonably likely to result in any liability pursuant to Sections
4069 or 4204 of ERISA.
(d) All material contributions required to be made by it and its
subsidiaries under the terms of any of its Plans have been timely made
or have been reflected in its Financial Statements; neither any of its
Pension Plans nor any single-employer plan of any of its ERISA
Affiliates has an "accumulated funding deficiency" (whether or not
waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA; and none of it, its subsidiaries or its ERISA Affiliates has
provided, or is required to provide, security to any Pension Plan or to
any single- employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code, Section 412(f)(3) of the Code or Sections 306,
307 or 4204 of ERISA.
(e) Under each of its and its ERISA Affiliates' Pension Plans that
is a single-employer plan, as of the last day of the most recent plan
year ended prior to the date of this Agreement, 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 Pension Plan's most recent
actuarial valuation), did not exceed the then-current value of the
assets of such Pension Plan, and to the knowledge of its Executive
Officers, there has been no change in the financial condition of such
Pension Plan since the last day of the most recent plan year that
reasonably could be expected to change such conclusion; and there would
be no withdrawal liability of it and its subsidiaries under each Plan
that is a multi-employer plan to which it, its subsidiaries or it ERISA
Affiliates has contributed during the preceding 12 months, if such
withdrawal liability were determined as if a "complete withdrawal,"
within the meaning of Section 4203 of ERISA, had occurred as of the
date of this Agreement.
(f) Except as disclosed in its Financial Statements, neither it
nor any of its subsidiaries has any obligations for retiree health and
life benefits.
(g) There are no restrictions on the rights of it or its
subsidiaries to amend or terminate any Plan without incurring any
liability under such Plan in addition to normal liabilities for
benefits.
(h) Except as disclosed in its Financial Statements or as provided
in this Agreement, the transactions contemplated by this Agreement and
the Stock Plans will not result in the vesting or acceleration of any
amounts under any Compensation Plan, any
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material increase in benefits under any Compensation Plan or payment of
any severance or similar compensation under any Compensation Plan.
4.1.16. ENVIRONMENTAL MATTERS.
(a) To the knowledge of its Executive Officers, it and each of
its subsidiaries and the Subject Property are, and have been, in
compliance with all Environmental Laws and there are no circumstances
that with the passage of time or the giving of notice would be
reasonably likely to result in noncompliance with such Environmental
Laws.
(b) To the knowledge of its Executive Officers, there are no
pending or threatened claims, actions, investigations, notices of
non-compliance, information requests or notices of potential
responsibility or proceedings involving it or any of its subsidiaries
or any Subject Property relating to:
(i) an asserted liability of it or any of its
subsidiaries or any prior owner, occupier or user of Subject
Property under any Environmental Law or the terms and conditions
of any permit, license, authority, settlement, agreement, decree
or other obligation arising under any Environmental Law;
(ii) the handling, storage, use, transportation, removal
or disposal of Hazardous Substances;
(iii) the actual or threatened discharge, release or
emission of Hazardous Substances from, on or under or within
Subject Property into the air, water, surface water, ground water,
land surface or subsurface strata; or
(iv) personal injuries or damage to property related to
or arising out of exposure to Hazardous Substances;
and, to the knowledge of its Executive Officers, there is no reasonable
basis for any of the foregoing.
(c) To the knowledge of its Executive Officers: there are no
storage tanks underground or otherwise present on the Subject Property
or, if present, none of such tanks are leaking and each of them is in
full compliance with all Environmental Laws; with respect to any
Subject Property, it and its subsidiaries do not own, possess or
control any PCBs, PCB-contaminated fluids, wastes or equipment, or any
asbestos or asbestos-containing material; and no Hazardous Substances
have been used, handled, stored, discharged, released or emitted, or
are threatened to be discharged, released or emitted, at or on any
Subject Property, except for those types and quantities of Hazardous
Substances typically used in an office environment and that have not
created conditions requiring remediation under any Environmental Law.
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(d) To the knowledge of its Executive Officers and except for
the investigation or monitoring by the Environmental Protection Agency
or similar state agencies in the ordinary course, no part of the
Subject Property has been or is scheduled for investigation or
monitoring pursuant to any Environmental Law.
4.1.17. MATERIAL AGREEMENTS.
(a) Without giving effect to the second proviso of Section
4.2.1 and to Section 4.2.2, except for the Stock Plans and arrangements
made after the date and in accordance with the terms of this Agreement,
it and its subsidiaries are not bound by any material contract (as
defined in Item 601(b)(10) of Regulation S-K under the Securities Act)
that is to be performed after the date of this Agreement and has not
been filed with or incorporated by reference in its Reports or set
forth in Schedule 12.
(b) Neither it nor any of its subsidiaries is in default under
any contract, agreement, commitment, arrangement, lease, insurance
policy or other instrument.
4.1.18. KNOWLEDGE AS TO CONDITIONS. Its Executive Officers know of
no reason why the Regulatory Approvals and, to the extent necessary,
any other approvals, authorizations, filings, registrations, and
notices should not be obtained without the imposition of any condition
or restriction that is reasonably likely to have a Material Adverse
Effect with respect to it or the Combined Bank, or the opinion of the
tax experts referred to in Section 6.2.10.
4.1.19. BROKERS AND FINDERS. Neither it, its subsidiaries, nor any
of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with the transactions
contemplated in this Agreement.
4.2. EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES.
4.2.1. DISCLOSURE OF EXCEPTIONS. Each exception set forth in a
Schedule shall only be deemed disclosed for purposes of the
representations and warranties referenced in such exception; provided,
however, that (a) no such exception is required to be set forth in a
Schedule if its absence would not result in the related representation
or warranty being deemed untrue or incorrect under the standard
established by Section 6.2.1, and (b) the mere inclusion of an
exception in a Schedule shall not be deemed an admission by a party
that such exception represents a material fact, event or circumstance
or would result in a Material Adverse Effect with respect to that
party.
4.2.2. NATURE OF EXCEPTIONS. No representation or warranty
contained in Section 4.1 shall be deemed untrue or incorrect, and no
party to this Agreement shall be deemed to have breached a
representation or warranty, as a consequence of the existence of any
fact, circumstance or event if such fact, circumstance or event,
individually or taken together with all similar facts, circumstances or
events, would not, or, in the case of
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Section 4.1.11, is not reasonably likely to, have a Material Adverse
Effect with respect to such party.
SECTION 5.
CONDUCT AND TRANSACTIONS
PRIOR TO CLOSING
5.1. CONDUCT OF PSB'S BUSINESS PRIOR TO CLOSING. PSB covenants that,
prior to Closing:
5.1.1. AVAILABILITY OF PSB'S BOOKS, RECORDS AND PROPERTIES.
(a) The books, records, properties, contracts and documents of
PSB will be available at all reasonable times to FCFG and its counsel,
accountants and other representatives; such items will be open for
inspection, audit and direct verification of loan or deposit balances,
collateral receipts and such other transactions or documentation as
FCFG deems reasonably relevant to the Transaction; and PSB will
cooperate fully in such inspection and audit, and will make available
all information required by or on behalf of FCFG.
(b) Upon request by FCFG, PSB will request that any third
parties involved in the preparation or review of the PSB Financial
Statements or Subsequent PSB Financial Statements disclose to FCFG the
work papers or any similar materials related to such financial
statements.
5.1.2. ORDINARY AND USUAL COURSE. Without the prior written
consent of FCFG, PSB will conduct its business only in the ordinary and
usual course and will not do any of the following:
(a) Effect any stock split or other recapitalization with
respect to PSB Common Stock; issue, pledge or encumber in any way any
shares of such capital stock; or grant any option or other right to
shares of such capital stock.
(b) Declare or pay any dividend, or make any other
distribution, either directly or indirectly, with respect to PSB Common
Stock.
(c) Encumber or dispose of assets or make any commitment with
respect to assets other than in the ordinary and usual course of
business.
(d) Solicit or accept deposit accounts of a different type from
accounts previously accepted by PSB or at rates materially in excess of
rates previously paid by PSB, except to reflect changes in prevailing
interest rates, or incur any indebtedness greater than $5,000.
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(e) Acquire an ownership interest or a leasehold interest in
any real property, whether by foreclosure or otherwise, without making
an appropriate environmental evaluation in advance of obtaining such
interest and without providing to FCFG such evaluation and at least 30
days' advance written notice of the acquisition.
(f) Except as otherwise required by the PSB Board Duty, enter
into or recommend the adoption by PSB's shareholders of any agreement
involving a possible merger or other business combination or asset sale
by PSB not involving the Transaction.
(h) Enter into or terminate any contracts (including real
property leases) with a term of one-year or more, except for PSB's
contracts of deposit and agreements to lend money not otherwise
restricted under this Agreement and (i) entered into in the ordinary
and usual course of business, (ii) consistent with past practices, and
(iii) providing for not less (in the case of loans) or more (in the
case of deposits) than prevailing market rates of interest.
(i) Enter into or amend any contract (other than contracts for
deposits at the Bank or agreements to lend money not otherwise
restricted by this Agreement) calling for a payment by it of more than
$25,000, unless the contract may be terminated without cause or penalty
upon 30 days notice or less.
(j) Sell any securities, whether held for investment or sale,
other than in the ordinary course of business, or sell any securities,
whether held for investment or sale, even in the ordinary course of
business, if the aggregate gain realized from all sales after the date
of this Agreement would be more than $50,000, or transfer any
investment securities between portfolios of securities available for
sale and portfolios of securities to be held to maturity.
(k) Amend its articles or bylaws or convert its charter or form
of entity.
(l) Implement or adopt any material changes in its operations
policies and procedures, unless the changes are necessary or advisable,
on the advice of legal counsel, to comply with applicable laws,
regulations, and regulatory policies.
(m) Implement or adopt any change in its accounting principles,
practices or methods, other than as may be required (i) by GAAP, or
(ii) to take advantage of any beneficial tax or accounting methods.
(n) Enter into any other transaction or make any expenditure
other than in the ordinary and usual course of its business, except for
expenses reasonably related to completion of the Transaction
contemplated by this Agreement, which expenses shall not exceed
$50,000.
5.1.3. CONDUCT REGARDING REPRESENTATIONS AND WARRANTIES. PSB will
not do or cause to be done anything that would cause any representation
or warranty in Section
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4.1 to be untrue or inaccurate if made at Closing, except as otherwise
contemplated or required by this Agreement or consented to in writing
by FCFG.
5.1.4. MAINTENANCE OF PROPERTIES. PSB will maintain its properties
and equipment (and related insurance or its equivalent) in accordance
with good business practice.
5.1.5. PRESERVATION OF BUSINESS ORGANIZATION. PSB will use all
reasonable effort to:
(a) Preserve its business organization.
(b) Retain the services of present management.
(c) Preserve the goodwill of suppliers, customers and others
with whom PSB has business relationships.
(d) Obtain for FCFG, within 30 days after execution of this
Agreement, the agreements required by Section 7.
5.1.6. SENIOR MANAGEMENT. Without the prior written consent of
FCFG, PSB will not make any change with respect to present management
personnel having the rank of vice-president or higher.
5.1.7. COMPENSATION. PSB will not permit any increase in the
current or deferred compensation payable or to become payable by PSB to
any of its directors, officers, employees, agents or consultants other
than normal increments in compensation in accordance with PSB's
established policies with respect to the timing and amounts of such
increments. Without the prior written approval of FCFG, PSB will not
execute or deliver (or commit to execute or deliver) any employment
agreement with any party not terminable upon two weeks' notice and
without expense.
5.1.8. UPDATE OF FINANCIAL STATEMENTS. PSB will deliver Subsequent
PSB Financial Statements to FCFG, as soon as possible and not later
than thirty (30) days following the end of each relevant period. The
Subsequent PSB Financial Statements:
(a) will be prepared from the books and records of PSB.
(b) will present fairly the financial position and operating
results of PSB at the times indicated and for the periods covered.
(c) will be prepared in accordance with GAAP (except for the
absence of notes) and with the regulations promulgated by applicable
regulatory authorities, to the extent then applicable, subject to
normal year-end adjustments.
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(d) will reflect all liabilities, contingent or otherwise, of
PSB on the respective dates and for the respective periods covered,
except for liabilities not required to be so reflected in accordance
with GAAP or not significant in amount.
5.1.9. AUDIT OF FINANCIAL STATEMENTS. To the extent necessary to
satisfy regulatory requirements in connection with the solicitation of
proxies from its stockholders, PSB will furnish audited statements of
financial condition and related statements of income changes in cash
flows and stockholder equity for the years ended December 31, 1993 and
1994.
5.1.10. NO SOLICITATION. Neither PSB nor any of its officers or
directors, directly or indirectly, will solicit, encourage, entertain,
or facilitate any other proposals or inquiries for an acquisition of
the shares or assets of PSB or enter into discussions concerning any
such acquisition, except as otherwise required by the PSB Board Duty.
No such party will make available to any person not affiliated with PSB
any information about its business or organization that is not either
routinely made available to the public generally or required by the PSB
Board Duty.
5.1.11. STATUS OF TITLE/LEASEHOLD INTERESTS. PSB will provide FCFG
with title reports issued by a title insurance company reasonably
satisfactory to FCFG, showing unencumbered fee simple title or vendee's
interest to all real Property owned by PSB, other than other real
estate owned, and unencumbered leasehold interests in all real Property
leased by PSB, and containing only such exceptions, reservations and
encumbrances as may be consented to in writing by FCFG or may be
consistent with Section 4.1.9 (without reference to any exceptions that
may be set forth in Schedule 8). PSB will also provide to FCFG copies
of existing title policies held in its files, unless PSB has reason to
know of subsequent changes affecting such policies or unless FCFG
expressly requests an updated policy for any specific piece of
property.
5.1.12. REVIEW OF LOANS. Immediately after the signing of this
Agreement, PSB will permit FCFG to update its examination of PSB's
loans to determine credit quality and the adequacy of PSB's allowance
for loan losses. A designated representative of FCFG will review
proposed investments or sale of investments and proposed loans or loan
renewals, other than loans less than $50,000 and Residential Mortgage
Loans. Loans made by PSB following disapproval by the review
representative of FCFG will be, if requested by FCFG, purchased from
PSB by the directors of PSB at or prior to Closing. Investments made
after disapproval by the representative of FCFG will at FCFG's request
be purchased from PSB by the directors of PSB at or prior to Closing.
Disapprovals by FCFG's designated representative will be in writing
within 48 hours of presentation of proposed loans, loan renewals, sale
or purchase of investments. Purchase of loans and investments by the
directors of PSB at or prior to Closing will be at par with appropriate
accruals, collateral and other elements of the loans or investments.
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5.2. REGISTRATION STATEMENT.
5.2.1. PREPARATION OF REGISTRATION STATEMENT. FCFG and PSB
contemplate that a Registration Statement on Form S-4 (the
"Registration Statement") will be filed by FCFG with the SEC under the
Securities Act for registration of the FCFG Common Stock to be issued
in connection with the Transaction and that the parties will prepare a
related prospectus/proxy statement to be mailed to the shareholders of
PSB (together with any amendments and supplements to such
prospectus/proxy statement, the "Prospectus/Proxy Statement"). The
parties will cooperate with each other in preparing the Registration
Statement and Prospectus/Proxy Statement, and will use their best
efforts to (a) file the Registration Statement with the SEC within 45
days following the date on which this Agreement is executed, and (b)
obtain the clearance of the SEC, any appropriate state securities
regulators, and any other required regulatory approvals, to issue such
Prospectus/Proxy Statement. Without limiting the generality of the
foregoing, nothing will be contained in the Registration Statement or
the Prospectus/Proxy Statement or any proxy solicitation materials with
respect to any party to this Agreement unless approved by such party,
which approval will not be unreasonably withheld.
5.2.2. SUBMISSION TO SHAREHOLDERS.
(a) PSB will submit the Prospectus/Proxy Statement to, and will
use its best efforts in good faith to obtain the prompt approval of the
Prospectus/Proxy Statement by, all applicable regulatory authorities.
PSB will provide copies of such submissions for review by FCFG.
(b) PSB will promptly take the action necessary in accordance
with applicable law and its articles of incorporation and bylaws to
convene a shareholders meeting to consider the approval of this
Agreement and to authorize the transactions contemplated by this
Agreement, such date to be the earliest practical date after the date
the Prospectus/Proxy Statement may first be sent to PSB shareholders
without objection by the SEC or other Governmental Entities having
jurisdiction with respect to proxy solicitation or other aspects of the
Transaction, provided that PSB will have at least 30 days to solicit
proxies. Except as otherwise required by law, the board of directors
and officers of PSB will recommend to the shareholders of PSB that such
shareholders approve the Transaction.
5.3. SUBMISSION TO REGULATORY AUTHORITIES. Representatives of FCFG and
the Bank will prepare and file with applicable regulatory agencies, applications
for approvals, waivers or other actions deemed necessary or desirable, in the
opinion of their counsel, in order to consummate the Transaction. FCFG will
provide copies of such applications for review by PSB. These are expected to
include:
(a) An application to or request for waiver from the Federal
Reserve.
(b) An application to the FDIC and related filings regarding
the Merger.
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(c) An application to the Director and related filings regarding
the Merger.
5.4. ANNOUNCEMENTS. Without prior consultation with the other parties
to this Agreement, neither PSB, FCFG nor the Bank will hold any press interview
or conference or make any written announcements or statements to the public or
to PSB's employees concerning the Transaction.
5.5. CONSENTS. PSB, FCFG and the Bank each will use their best efforts
to obtain the consent or approval of any person, organization or other entity
whose consent or approval is required in order to permit FCFG, the Bank, and PSB
to consummate the Transaction.
5.6. FURTHER ACTIONS. The proper officers of FCFG, the Bank, and PSB,
in the name and on behalf of those respective parties, will use their best
efforts in good faith to make all such arrangements (including requesting
accounting waivers), do or cause to be done all such acts and things, and
execute and deliver all such certificates and other instruments and documents as
may be reasonably necessary or appropriate in order to consummate the
Transaction promptly.
5.7. NOTICE. PSB will provide FCFG and the Bank with prompt written
notice of:
(a) Any events, individually or in the aggregate, that could have
a Material Adverse Effect with respect to PSB.
(b) The commencement of any proceeding against PSB by or before
any court or governmental agency, individually or in the aggregate,
that might have a Material Adverse Effect with respect to PSB.
(c) Acquisition of an ownership or leasehold interest in any real
property or, if other than in the ordinary and usual course of its
business, any personal property.
5.8. CONFIDENTIALITY. FCFG, the Bank, and PSB each will hold in
confidence all nonpublic information obtained from the other in connection with
the Transaction, other than information that is required by law to be disclosed,
otherwise is available on a nonconfidential basis, or has become public without
fault of the receiving party. If the Transaction is not completed, FCFG, the
Bank and PSB each will return to the others all confidential documents obtained
from them, and each agrees that it will not use any nonpublic information
obtained pursuant to this Agreement or in connection with the Transaction.
5.9. AFFILIATE LETTERS. No later than thirty (30) days following the
execution and delivery of this Agreement, PSB will deliver to FCFG, after
consultation with legal counsel, a list of names and addresses of those persons
deemed to be "affiliates" of PSB with respect to the Merger within the meaning
of SEC Rule 145. PSB will deliver, or cause to be delivered, to FCFG not later
than the Effective Date, from each of the "affiliates" of PSB so identified, a
letter dated as of the date of its delivery, in form satisfactory to FCFG.
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5.10. UPDATE OF FINANCIAL STATEMENTS. FCFG will deliver Subsequent FCFG
Financial Statements to PSB, as soon as possible and not later than thirty (30)
days following the end of each relevant period. The Subsequent FCFG Financial
Statements:
(a) will be prepared from the books and records of FCFG.
(b) will present fairly the financial position and operating
results of FCFG at the times indicated and for the periods covered.
(c) will be prepared in accordance with GAAP (except for the
absence of notes) and with the regulations promulgated by applicable
regulatory authorities, to the extent then applicable, subject to
normal year-end adjustments.
(d) will reflect all liabilities, contingent or otherwise, of
FCFG on the respective dates and for the respective periods covered,
except for liabilities not required to be so reflected in accordance
with GAAP or not significant in amount.
5.11. AVAILABILITY OF FCFG'S BOOKS, RECORDS AND PROPERTIES. FCFG will
provide PSB with access to board and committee minutes and regulatory reports
and correspondence of FCFG and the Bank.
5.12. CONDUCT REGARDING REPRESENTATIONS AND WARRANTIES. FCFG will not
do or cause to be done anything that would cause any representation or warranty
in Section 4.1 to be untrue or inaccurate if made at Closing, except as
otherwise contemplated or required by this Agreement or consented to in writing
by PSB.
SECTION 6.
APPROVALS AND CONDITIONS
6.1. REQUIRED APPROVALS. The obligations of the parties to this
Agreement are subject to the approval of the Agreement and Transaction by all
appropriate regulatory agencies having jurisdiction with respect to the
Transaction.
6.2. CONDITIONS TO OBLIGATIONS OF FCFG AND THE BANK. All obligations
of FCFG and the Bank pursuant to this Agreement are subject to satisfaction of
the following conditions at or before Closing:
6.2.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of PSB contained in this Agreement or in any certificate or
other instrument delivered in connection with this Agreement will be
true and correct in all material respects at Closing, with the same
force and effect as though such representations and warranties had been
made on and as of Closing (except to the extent that such
representations and warranties expressly relate to an earlier date, in
which case such representations and warranties shall be true in all
material respects as of such earlier date). PSB will have
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delivered to FCFG and the Bank its certificate to that effect, executed
by an Executive Officer of PSB and dated as of Closing.
6.2.2. COMPLIANCE. PSB will have performed and complied with all
terms, covenants and conditions of this Agreement on or before Closing.
PSB will have delivered to FCFG and the Bank its certificate to that
effect, executed by an Executive Officer of PSB and dated as of
Closing.
6.2.3. NO MATERIAL ADVERSE EFFECT. There will have been no
material damage, destruction or loss (whether or not covered by
insurance) and no other event, individually or in the aggregate, having
or potentially having a Material Adverse effect with respect to PSB,
and the certificate of PSB referred to in Section 6.2.2 will so state.
6.2.4. FINANCIAL CONDITION. The following will be true as of
Closing, and the certificate of PSB referred to in Section 6.2.2 will
so state:
(a) PSB Final Capital will not be less than the PSB Target
Capital.
(b) PSB's allowance for possible loan and lease losses will be
adequate to absorb PSB's anticipated loan and lease losses and, in any
case, will not be less than the greater of (i) $400,000 or (ii) an
amount determined by Knight, Vale & Gregory by applying to each of
PSB's loans FCFG's standard reserve factors.
(c) The reserves set aside for the contingent liabilities
reflected in the Subsequent PSB Financial Statements will be adequate
to absorb all reasonably anticipated losses.
6.2.5. NO GOVERNMENTAL PROCEEDINGS. No action or proceeding will
have been commenced or threatened by any governmental agency to
restrain or prohibit or invalidate the Transaction.
6.2.6. EXECUTION OF ADDITIONAL AGREEMENTS. The agreements
described in Section 7 will have been executed and delivered to FCFG
and the Bank.
6.2.7. APPROVAL BY COUNSEL. All actions, proceedings, instruments
and documents required in connection with this Agreement, the
Transaction, and all other related legal matters will have been
approved by counsel for FCFG and the Bank.
6.2.8. SCHEDULES AND EXHIBITS. The contracts, proceedings and
other information that are set forth in summary form in the Schedules
and the Exhibits will have been reviewed in detail and expressly
accepted or otherwise acted upon by FCFG within 45 days after the date
of this Agreement.
6.2.9. CORPORATE AND SHAREHOLDER ACTION. The board of directors
and shareholders of PSB will each have approved the Transaction.
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6.2.10. TAX OPINION. FCFG and the Bank will have obtained from
Knight, Vale & Gregory, and delivered to PSB, an opinion addressed to
PSB and in form and substance reasonably satisfactory to PSB and its
counsel, to the effect that consummation of the Transaction in
accordance with this Agreement will not result in a taxable event for
PSB or FCFG, and otherwise will have each of the effects specified
below:
(a) The Merger will qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
(b) Pursuant to the provisions of Section 354(a)(1) of the
Code, no gain or loss will be recognized with respect to each
stockholder of PSB who, pursuant to the provisions of Section 2,
exchanges his or her shares of PSB Common Stock solely for shares of
FCFG Common Stock.
(c) The payment of cash to a PSB shareholder in lieu of a
fractional share of FCFG Common Stock will be treated as a distribution
in redemption of the fractional share interest, subject to the
limitations of Section 302 of the Code.
6.2.11. LEGAL OPINION. FCFG and the Bank will have obtained from
Rothgerber, Appel, Powers & Johnson LLP, counsel for PSB, a legal
opinion in the form of Exhibit A.
6.2.12. AFFILIATE LETTERS. FCFG and the Bank will have received
the affiliate list and letters specified in Section 5.9.
6.2.13. REGISTRATION STATEMENT. The Registration Statement, as it
may have been amended, required in connection with the shares of FCFG
Common Stock to be issued to PSB shareholders pursuant to Section 2
will have become effective, and no stop order suspending the
effectiveness of such Registration Statement shall have been issued and
shall remain in effect, and no proceedings for that purpose shall have
been initiated or threatened by the SEC the basis for which shall and
remain in effect.
6.2.14. CONSENTS. PSB will have obtained the consents listed in
Schedule 6.
6.2.15. PSB DIRECTORS TO SERVE ON COMBINED BANK BOARD. PSB will
have identified two PSB directors who are satisfactory to FCFG and
willing to serve on the Combined Bank's board of directors.
6.2.16. SOLICITATION OF EMPLOYEES. Neither any member of the
board of directors of PSB nor any entity with which any such director
is affiliated will have solicited any employee of PSB, FCFG or the Bank
with the intention of causing such employee to terminate his or her
employment with PSB, FCFG or the Bank, as the case may be.
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6.2.17. PSB OPTIONS. The board of directors of PSB or any
committee administering the PSB Stock Option Plan will have caused each
PSB Option that is not exercised prior to the Effective Date or held by
an individual who is entitled to receive FCFG Options pursuant to
Section 2.3.8 to terminate as of the Effective Date.
6.2.18. TERMINATION OF BENEFIT PLANS. The board of directors of
PSB shall have taken all necessary action to terminate, as of the
Effective Date, all Plans and other employee benefit arrangements
(whether in written form or not) maintained by PSB solely for the
benefit of its executive employees, except the Executive Supplemental
Income Agreements with Messrs. Edwards, Johansen, Arthur, and Ms.
Colleen Dorian.
6.2.19. OTHER MATTERS. FCFG will have received such other
opinions, certificates, and documents as FCFG may reasonably request in
connection with this Agreement and the Transaction.
6.3. CONDITIONS TO OBLIGATIONS OF PSB. All obligations of PSB pursuant
to this Agreement are subject to satisfaction of the following conditions at or
before Closing:
6.3.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of FCFG and the Bank contained in this Agreement or in any
certificate or other instrument delivered in connection with this
Agreement will be true and correct in all material respects at Closing,
with the same force and effect as though such representations and
warranties had been made on and as of Closing (except to the extent
that such representations and warranties expressly relate to an earlier
date, in which case such representations and warranties shall be true
in all material respects as of such earlier date). FCFG and the Bank
will have delivered to PSB their respective certificates to that
effect, executed by duly authorized officers of FCFG and the Bank and
dated as of Closing.
6.3.2. COMPLIANCE. FCFG and the Bank each will have performed and
complied with all terms, covenants and conditions of this Agreement on
or before Closing. FCFG and the Bank will have delivered to PSB their
respective certificates to that effect, executed by duly authorized
officers of FCFG and the Bank and dated as of Closing.
6.3.3. NO GOVERNMENTAL PROCEEDINGS. No action or proceeding will
have been commenced or threatened by any governmental agency to
restrain or prohibit or invalidate the Transaction.
6.3.4. CORPORATE AND SHAREHOLDER ACTION. The board of directors of
FCFG and the Bank, and the shareholder of the Bank, will each have
approved the Transaction.
6.3.5. TAX OPINION. The tax opinion specified in Section 6.2.10
will have been delivered to PSB.
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6.3.6. MATERIAL ADVERSE CHANGE. There will have been no material
damage, destruction or loss (whether or not covered by insurance) and
no other event, individually or in the aggregate, having or potentially
having a Material Adverse effect with respect to FCFG, and the
certificate of FCFG referred to in Section 6.3.2 will so state.
6.3.7. REGISTRATION STATEMENT. The Registration Statement, as it
may have been amended, required in connection with the shares of FCFG
Common Stock to be issued to Shareholders pursuant to Section 2.2 and
as described in Section 2.3 will have become effective, and no stop
order suspending the effectiveness of such Registration Statement shall
have been issued and shall remain in effect, and no proceedings for
that purpose shall have been initiated or threatened by the SEC the
basis for which shall remain in effect.
SECTION 7.
DIRECTORS, OFFICERS AND EMPLOYEES
7.1. DIRECTORS. Each of the directors of PSB who are appointed to the
board of directors of the Combined Bank pursuant to Section 2.2.3 will enter
into written agreements, in the form attached as Exhibit B, providing that for a
period of three years after Closing, no such person will become involved,
directly or indirectly, as a principal shareholder, director or officer of any
financial institution that competes with FCFG, the Bank, PSB or any of their
affiliates.
7.2. KEY EMPLOYEES. Michael D. Edwards and the Bank will enter into an
employment agreement in the form of Exhibit C. Each of the other PSB employees
who are listed in Schedule 13 will be retained by the Bank in substantially the
same position held at PSB prior to closing for one year following the Closing
and shall be paid salaries that are generally comparable to the salaries
received by such employees in connection with their employment by PSB, except
that any such employee may be terminated at any time, with or without cause, by
Michael D. Edwards or, if Edwards terminates his employment with the Bank
without good reason or his employment is terminated by the Bank for cause, by
the Bank.
7.3. EMPLOYEE BENEFIT ISSUES.
7.3.1 BENEFITS. FCFG and the Bank presently intend to allow
current employees of PSB who are employed with the Combined Bank
following consummation of the Transaction ("Continuing Employees") to
participate in certain employee benefit plans and stock purchase plans
in which employees of FCFG and the Bank currently participate. In
connection with such participation, Continuing Employees will receive
credit for prior service with PSB for purposes of determining
eligibility and vesting. Subject to the foregoing, FCFG confirms to PSB
its present intention to provide Continuing Employees with employee
benefit programs in the aggregate generally not less favorable to such
employees than those being provided to employees of FCFG.
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7.3.2. TRANSFER OR MERGER OF GROUP PLAN. Unless prior to Closing
participants in the ESOP have elected to terminate the ESOP, the ESOP
shall be merged into the FCFG-KSOP at Closing.
7.3.3. NO CONTRACT CREATED. Nothing in this Agreement will give
any employee of PSB a right to continuing employment, except as
provided in Exhibit C.
SECTION 8.
TERMINATION OF AGREEMENT AND ABANDONMENT OF TRANSACTION
8.1. TERMINATION. This Agreement and the Transaction may be terminated
at any time before Closing, whether before or after applicable approval of this
Agreement by the shareholders of PSB, as follows:
8.1.1. MUTUAL CONSENT. By mutual consent of the parties to this
Agreement, provided that the board of directors of each such party so
determines by a vote of a majority of the members of the entire Board.
8.1.2. CONDITIONS TO OBLIGATIONS OF FCFG/BANK NOT MET. By the
board of directors of FCFG and the Bank if, by April 30, 1997, any of
the conditions set forth in Sections 6.1 and 6.2 has not been
satisfied.
8.1.3. CONDITIONS TO OBLIGATIONS OF PSB NOT MET. By the board of
directors of PSB, if, by April 30, 1997, any of the conditions set
forth in Sections 6.1 and 6.3 has not been satisfied.
8.1.4. BOOK VALUE OF FCFG COMMON STOCK. By the board of directors
of PSB if the per share Book Value of FCFG Common Stock as of the
Pricing Date, determined in accordance with GAAP, is less than $11.38.
8.1.5. BOOK VALUE OF PSB COMMON STOCK. By the board of directors
of FCFG if the per-share Book Value of PSB Common Stock as of the
Pricing Date, determined in accordance with GAAP, is less than $22.60.
8.1.6. ADJUSTMENTS TO ALLOWANCE. By the board of directors of PSB
if (i) the amount computed in accordance with Section 6.2.4(b)(ii) is
greater than the amount that Knight, Vale & Gregory have determined
(based upon the application of PSB's standard reserve factor) to be
adequate to absorb PSB's anticipated loan and lease losses and (ii)
FCFG has not waived compliance with Section 6.2.4(b)(ii).
8.2. COST ALLOCATION UPON TERMINATION. In connection with the
termination of this Agreement pursuant to Section 8.1, PSB, FCFG and the Bank
each will pay their own out-of-pocket costs incurred in connection with this
Agreement, and will have no other liability to any other party; provided,
however, that upon unilateral termination of this Agreement as a result of
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the Fault of any party to this Agreement, the party at fault will be liable to
the other unaffiliated party or parties to this Agreement for Liquidated
Damages.
SECTION 9.
MISCELLANEOUS
9.1. NOTICES. Any notice, request, instruction or other document to be
given under this Agreement will be in writing and will be delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
PRAIRIE SECURITY BANK
608 Yelm Avenue East
P.O. Box 5060
Yelm, WA 98597-5060
Attn: Michael D. Edwards
with a copy to: William P. Johnson
Rothgerber, Appel, Powers & Johnson LLP
1200 17th Street, Suite 3000
Denver, Colorado 80202
FCFG AND THE BANK
721 College Avenue
P.O. Box 3800 (98509-3800)
Lacey, Washington (98503)
Attn: Ken F. Parsons
with a copy to: Mark C. Lewington
Graham & Dunn
1420 Fifth Avenue, 33rd Floor
Seattle, WA 98101-2390
or to such other address or person as any party may designate by written notice
to the other.
9.2. WAIVERS AND EXTENSIONS. PSB, FCFG or the Bank may, by written
instrument, extend the time for the performance of any of the obligations or
other acts of any other party, and may waive:
(a) any inaccuracies of any other party in the representations and
warranties contained in this Agreement or in any document delivered in
connection with this Agreement;
(b) compliance with any of the covenants of any other party; and
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<PAGE> 200
(c) any other party's performance of any obligations pursuant to
this Agreement and any other condition precedent set out in Section 6.
Any waiver or extension pursuant to this Agreement will be executed by the Chief
Executive Officer of the party granting such waiver or extension.
9.3. CONSTRUCTION AND EXECUTION IN COUNTERPARTS. Except as otherwise
expressly provided in this Agreement, this Agreement: (a) contains the entire
understanding of the parties, and no modification or amendment of its terms or
conditions will be effective unless in writing and signed by the parties, or
their respective duly authorized agents; (b) will not be interpreted by
reference to any of the titles or headings to the Sections or Subsections, which
have been inserted for convenience only and are not deemed a substantive part of
this Agreement; (c) is deemed to include all amendments to this Agreement, each
of which is made a part of this Agreement by this reference; and (d) may be
executed in one or more counterparts, each of which will be deemed an original,
but all of which taken together will constitute one and the same document.
9.4. SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. Except for
the covenants set forth in Section 5.8 (as to confidentiality), the
representations, warranties and covenants set forth in this Agreement will not
survive Closing or the termination of this Agreement.
9.5. ATTORNEYS' FEES AND COSTS. In the event of any dispute or
litigation with respect to the terms and conditions or enforcement of rights or
obligations arising by reason of this Agreement or the Transaction, the
prevailing party in any such litigation will be entitled to receipt of its costs
and expenses, including reasonable attorneys' fees.
9.6. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Washington, except to the extent that
certain matters may be governed by federal law.
[Continued on next page]
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<PAGE> 201
SECTION 10.
AMENDMENTS
Subject to applicable law, this Agreement and the form of any attached
Exhibit or Schedule may be amended upon authorization of the Boards of Directors
of PSB, FCFG and the Bank, whether before or after the meeting of shareholders
referred to in Section 5.2.2.
TO WITNESS THE FOREGOING, the parties have executed this Agreement as
of the dates first above written.
FIRST COMMUNITY FINANCIAL
GROUP, INC.
By /s/ Ken F. Parsons
---------------------------------
Name: Ken F. Parsons
Title: President and CEO
FIRST COMMUNITY BANK
By /s/ Ken F. Parsons
---------------------------------
Name: Ken F. Parsons
Title: Chairman and CEO
PRAIRIE SECURITY BANK
By /s/ Michael D. Edwards
---------------------------------
Name: Michael D. Edwards
Title: CEO
A-42
<PAGE> 202
STATE OF WASHINGTON )
) ss.
COUNTY OF THURSTON )
On this 11th day of September, 1996, before me personally appeared Ken
F. Parsons, to me known to be the President and Chief Executive Officer of FIRST
COMMUNITY FINANCIAL GROUP, INC., the corporation that executed the foregoing
instrument, who acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes mentioned there, and who
stated on oath that he or she was authorized to execute said instrument, and
that the seal affixed (if any) was the official seal of said corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF THURSTON )
On this 11th day of September, 1996, before me personally appeared Ken
F. Parsons to me known to be the Chief Executive Officer of FIRST COMMUNITY
BANK, the banking corporation that executed the foregoing instrument, who
acknowledged said instrument to be the free and voluntary act and deed of said
banking corporation, for the uses and purposes mentioned there, and who stated
on oath that he or she was authorized to execute said instrument, and that the
seal affixed (if any) was the official seal of said banking corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
A-43
<PAGE> 203
STATE OF WASHINGTON )
) ss.
COUNTY OF PIERCE )
On this 11th day of September, 1996, before me personally appeared
Michael D. Edwards, to me known to be the Chief Executive Officer of PRAIRIE
SECURITY BANK, the banking corporation that executed the foregoing instrument,
who acknowledged said instrument to be the free and voluntary act and deed of
said banking corporation, for the uses and purposes mentioned there, and who
stated on oath that he or she was authorized to execute said instrument, and
that the seal affixed (if any) was the official seal of said banking
corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
------------------------------------------------
AMENDMENT NO. 1 executed as of October 18, 1996 as follows:
FIRST COMMUNITY FINANCIAL
GROUP, INC.
By /s/ Ken F. Parsons
--------------------------------
Name: Ken F. Parsons
Title: President and CEO
FIRST COMMUNITY BANK
By /s/ Ken F. Parsons
--------------------------------
Name: Ken F. Parsons
Title: Chairman and CEO
PRAIRIE SECURITY BANK
By /s/ Michael D. Edwards
--------------------------------
Name: Michael D. Edwards
Title: CEO
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<PAGE> 204
STATE OF WASHINGTON )
) ss.
COUNTY OF THURSTON )
On this 18th day of October, 1996, before me personally appeared Ken F.
Parsons, to me known to be the President and Chief Executive Officer of FIRST
COMMUNITY FINANCIAL GROUP, INC., the corporation that executed the foregoing
instrument, who acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes mentioned there, and who
stated on oath that he or she was authorized to execute said instrument, and
that the seal affixed (if any) was the official seal of said corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF THURSTON )
On this 18th day of October, 1996, before me personally appeared Ken F.
Parsons to me known to be the Chief Executive Officer of FIRST COMMUNITY BANK,
the banking corporation that executed the foregoing instrument, who acknowledged
said instrument to be the free and voluntary act and deed of said banking
corporation, for the uses and purposes mentioned there, and who stated on oath
that he or she was authorized to execute said instrument, and that the seal
affixed (if any) was the official seal of said banking corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
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<PAGE> 205
STATE OF WASHINGTON )
) ss.
COUNTY OF PIERCE )
On this 18th day of October, 1996, before me personally appeared
Michael D. Edwards, to me known to be the Chief Executive Officer of PRAIRIE
SECURITY BANK, the banking corporation that executed the foregoing instrument,
who acknowledged said instrument to be the free and voluntary act and deed of
said banking corporation, for the uses and purposes mentioned there, and who
stated on oath that he or she was authorized to execute said instrument, and
that the seal affixed (if any) was the official seal of said banking
corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to
this document as of the day and year first written above.
/s/ Lori L. Fobes
----------------------------------------
Print Name Lori L. Fobes
-----------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Puyallup .
------------
My commission expires .
-----------------
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<PAGE> 206
APPENDIX B
TO REGISTRATION STATEMENT ON FORM S-4
RCW 30.49.090
RIGHTS OF DISSENTING SHAREHOLDER - APPRAISAL - AMOUNT DUE AS DEBT
The owner of shares of a state bank which were voted against a merger
to result in a state bank, or against the conversion of a state bank into a
national bank, shall be entitled to receive their value in cash, if and when the
merger or conversion becomes effective, upon written demand made to the
resulting state or national bank at any time within thirty days after the
effective date of the merger or conversion, accompanied by the surrender of the
stock certificates. The value of such shares shall be determined, as of the date
of the shareholders' meeting approving the merger or conversion, by three
appraisers, one to be selected by the owners of two-thirds of the dissenting
shares, one by the board of directors of the resulting state or national bank,
and the third by the two so chosen. The valuation agreed upon by any two
appraisers shall govern. If the appraisal is not completed within ninety days
after the merger or conversion becomes effective, the director shall cause an
appraisal to be made.
The dissenting shareholders shall bear, on a pro rata basis based on
the number of dissenting shares owned, the cost of their appraisal and one-half
of the cost of a third appraisal, and the resulting bank shall bear the cost of
its appraisal and one-half of the cost of the third appraisal. If the director
causes an appraisal to be made, the cost of that appraisal shall be borne
equally by the dissenting shareholders and the resulting bank, with the
dissenting shareholders sharing their half of the cost on a pro rata basis based
on the number of dissenting shares owned.
The resulting state or national bank may fix an amount which it
considers to be not more than the fair market value of the shares of a merging
or the converting bank at the time of the stockholders' meeting approving the
merger or conversion, which it will pay dissenting shareholders of the bank
entitled to payment in cash. The amount due under such accepted offer or under
the appraisal shall constitute debt of the resulting state or national bank.
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<PAGE> 207
APPENDIX C
TO REGISTRATION STATEMENT ON FORM S-4
Hoefer & Arnett, Incorporated
Investment Bankers
101 W. Sixth Street, Suite 416
Austin, Texas 78701
(612) 495-9890
October 14, 1996
Members of the Board of Directors
Prairie Security Bank
608 Yelm Avenue East
Yelm, Washington 98597
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Prairie Security Bank, Yelm,
Washington ("PSB") of the terms of the proposed merger of PSB with and into
First Community Bank, Lacey, Washington ("Bank"), a wholly-owned subsidiary of
First Community Financial Group ("FCFG"). Pursuant to the Plan and Agreement of
Reorganization and Merger (the "Agreement"), dated September 11, 1996, and
subject to the terms and conditions therein, each holder of shares of PSB Common
Stock outstanding as of the Effective Date shall receive (a) cash equal to the
exchange value of such shares, (b) shares of FCFG Common Stock with an exchange
value equal to the exchange value of such holder's shares of PSB Common Stock,
or (c) a combination of cash and shares of FCFG Common Stock; provided, however,
that (i) holders of fewer than 200 shares of PSB Common Stock, entitled to
receive holders of fractional shares of FCFG Common Stock, and holders of PSB
Common Stock who are Non-Residents shall receive only cash equal to the exchange
value of their shares of PSB Common Stock, and (ii) in no event shall the
aggregate consideration paid to all holders consist of cash equal to more than
forty-five percent (45%) or less than twenty percent (20%) of the aggregate
exchange value of all such holders' shares of PSB Common Stock ("Total Available
Cash"). For all purposes of the Agreement, each share of PSB Common Stock
outstanding as of the Effective Date shall have an exchange value equal to 200
percent of the Book Value of such share as of the end of the calendar month
immediately preceding the Effective Date, as determined in the Agreement. For
all purposes of the Agreement, each share of FCFG Common Stock outstanding as of
the Effective Date shall have an exchange value equal to 196 percent of the Book
Value of such share as of the Effective Date, as determined in the Agreement.
As part of its investment banking business, Hoefer & Arnett, Incorporated is
continually engaged in the valuation of bank, bank holding company and thrift
securities in connection with mergers and acquisitions nationwide. PSB and FCFG
each executed an identical engagement letter retaining Hoefer & Arnett,
Incorporated to act as an independent financial analyst in connection with the
Merger. Both parties agreed to utilize the services of Hoefer & Arnett,
Incorporated as their financial analyst based upon its reputation in the
industry, certain cost savings to be attained, and the desire to have a single
arbiter for the exchange ratio. The fees for our services are insignificant when
compared to the firm's total gross revenues.
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<PAGE> 208
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) Annual Reports to Shareholders of PSB and
FCFG for the years ended December 31, 1994 and December 31, 1995; (iii)
Quarterly FDIC Call reports for the quarters ended December 31, 1995, March 31,
1996 and June 30, 1996; (iv) certain other publicly available financial and
other information concerning PSB, FCFG and Bank; and (v) publicly available
information concerning other banks and holding companies, the trading markets
for their securities and the nature and terms of certain other merger
transactions we believe relevant to our inquiry. We have held discussions with
senior management of PSB, FCFG, and Bank concerning their past and current
operations, financial condition and prospects, as well as the results of
regulatory examinations.
We have reviewed with senior management of PSB earnings projections for 1996
through 2000 for PSB as a stand-alone entity, assuming the merger does not
occur, prepared by PSB. We reviewed with senior management of Bank earnings
projections for 1996 through 2000 as a stand-alone entity, assuming the merger
does not occur, as well as projected operating cost savings expected to be
achieved in each such years resulting from the merger. Such projections were
prepared by Bank senior management. Certain pro forma financial projections for
the years 1996 through 2000 for the combined entity were derived by us based
partially upon the projections discussed above, as well as our own assessment of
general economic, market and financial conditions. In certain cases, such
combined pro forma financial projections included projected operating cost
savings derived by us partially based upon the projections discussed above to be
realizable in the merger.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
PSB, FCFG, and Bank as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts,
projections and projected operating cost savings reflect the best currently
available estimates and judgments of the applicable management. We have also
assumed, without assuming any responsibility for the independent verification of
the same, that the aggregate allowances for loan losses for PSB and Bank are
adequate to cover such losses. We have not made or obtained any evaluations or
appraisals of the property of PSB or Bank, nor have we examined any individual
loan credit files. For purposes of this opinion, we have assumed that the merger
will have the tax, accounting and legal effects described in the Agreement and
assumed the accuracy of the disclosures set forth in the Agreement. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the holders of the Common Shares of PSB of the terms of the proposed merger
of PSB with and into Bank and does not address PSB's underlying business
decision to proceed with the merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of PSB
and Bank, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
PSB, FCFG, and Bank; (ii) the assets and liabilities of PSB and Bank, including
the loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger transactions involving banks and bank
holding companies. We have also taken into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of
C-2
<PAGE> 209
the banking industry generally. Our opinion is necessarily based upon conditions
as they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of proposed merger of PSB with
and into Bank are fair, from a financial point of view, to the holders of the
Common Shares of PSB.
It is understood that this letter is for the information of the Board of
Directors of PSB and does not constitute a recommendation to the Board of
Directors or to any shareholder of PSB with respect to any approval of the
merger. 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,
/s/ Hoefer & Arnett
Hoefer & Arnett, Incorporated
C-3
<PAGE> 210
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
FCFG's Articles of Incorporation provide for indemnification, including
advances of expenses, to any person made a party to any proceeding, including a
proceeding by or in the right of FCFG, by reason of the fact that such person is
or was a director, officer, trustee, employee, agent or partner of another
corporation, partnership, joint venture, trust, employee benefit plan (including
a voluntary employee's beneficiary association) or other enterprise, against
judgments, penalties, fines, settlements and reasonable expenses, including
attorney's fees, actually incurred by such person in connection with such
proceeding to the extent permitted by and in accordance with the WBCA; provided,
that FCFG shall not indemnify such person if the person shall have been adjudged
to be liable to FCFG, or such other enterprise, on the basis that personal
benefit was improperly received by the person seeking indemnification, unless a
court of competent jurisdiction shall determine that it would be unfair, under
the circumstances, to deny indemnification to such person.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The exhibits are listed on the accompanying "Exhibit Index."
(b) Financial Statement Schedules. None.
(c) The opinions of the financial advisor is set forth as Appendix C to
this Prospectus/Proxy Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information 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 end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than a
20 percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed information on the
plan of distribution;
(2) For determining liability under the Securities Act, to treat
each such post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering.
II-1
<PAGE> 211
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) To advise all directors and officers that insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
(c) 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.
(d) 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-2
<PAGE> 212
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this pre-effective Amendment No.1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lacey, State of Washington on November 25, 1996.
FIRST COMMUNITY FINANCIAL GROUP, INC.
By: /s/ Ken F. Parsons
---------------------------
Ken F. Parsons
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No.1
to the Registration Statement has been signed by the following persons in the
capacities indicated below on November 25, 1996.
SIGNATURE CAPACITIES
- --------- ----------
/s/ Ken F. Parsons President and Chief Executive Officer and
- ---------------------- Director (Principal Executive Officer)
Ken F. Parsons
/s/ James F. Arneson Executive Vice President, Treasurer and Chief
- ---------------------- Financial Officer
James F. Arneson (Principal Accounting Officer)
A MAJORITY OF THE BOARD OF DIRECTORS:
E. Paul DeTray*
John D. Durney*
Patrick L. Martin*
Michael N. Murphy*
A. Richard Panowicz*
Kenneth M. Wilcox*
By /s/ Ken F. Parsons
----------------------------------
Ken F. Parsons
Attorney-in-fact
II-3
<PAGE> 213
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
<S> <C>
2.1* Amended and Restated Plan and Agreement of
Reorganization and Merger, by and between FCFG, the
Bank and PSB, dated as of September 11, 1996, and
as amended by Amendment No. 1, dated October 18,
1996. (Contained in Appendix A to the
Prospectus/Proxy Statement, included in this
Registration Statement, and incorporated herein by
reference.)
3.1* Amended and Restated Articles of Incorporation of
Registrant.
3.2 Bylaws of Registrant.(1)
5.1* Opinion of Graham & Dunn as to the legality of the
securities to be issued.
8.1* Opinion of Knight, Vale & Gregory, tax counsel
to FCFG and PSB, as to Federal income tax matters.
10.1 Employment Agreement between FCFG and Ken F.
Parsons, effective as of September 1, 1996.(2)
10.2 Option Agreement between FCFG and Ken F. Parsons,
pertaining to grant of option to acquire 60,000
shares of FCFG common stock, effective March 1,
1996.(2)
10.3 Option Agreement between FCFG and Ken F. Parsons,
pertaining to grant of option to acquire 40,000
shares of FCFG common stock, effective March 1,
1996.(2)
10.4* Employment Agreement between the Bank and Michael
D. Edwards, dated September 11, 1996.
10.5 Form of Stock Purchase and Sale Agreement, by and
among Registrant and certain selling shareholders.
10.6 Form of Noncompetition Agreement by and between the
Bank and Michael D. Edwards, Lawrence J. Schorno,
and Thomas P. Gorman. (Included as Exhibit A to the
Merger Agreement which is contained as Appendix A
to the Prospectus/Proxy Statement, included in this
Registration Statement, and incorporated herein by
reference.)
10.7 Registrant's 1992 Stock Option Plan for
Non-employee Directors.(4)
10.8 Registrant's Second Amended Non-employee Directors
Stock Option Plan.(4)
10.9 Registrant's Employee Stock Option and Restricted
Stock Award Plan.(4)
10.10 Registrant's Executive Supplemental Income Plan.(4)
10.11 Registrant's 1994 Stock Option Plan for
Non-employee Directors.(3)
21.1* Subsidiaries of Registrant.
23.1* Consent of Graham & Dunn (contained in its opinion
filed as Exhibit 5.1).
</TABLE>
<PAGE> 214
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
<S> <C>
23.2* Consent of Knight, Vale & Gregory, FCFG's tax
counsel.
23.3* Consent of Knight, Vale & Gregory, PSB's
independent auditor.
23.4* Consent of Knight, Vale & Gregory, FCFG's
independent auditor.
23.5 Consent of Hoefer & Arnett, financial advisors
(included in Fairness Opinion of Hoefer & Arnett,
Appendix C to the Prospectus/Proxy Statement,
included in this Registration Statement, and
incorporated herein by reference).
24.1 Power of attorney (included in signature page to
Registration Statement) and certified resolutions
of the Board of Directors of Registrant.
99.1 Opinion of Hoefer & Arnett (included as Appendix C
to the Prospectus/Proxy Statement.)
99.2* Form of proxy to be mailed to shareholders of PSB.
99.3* Form of election to be mailed to shareholders of
PSB.
99.4* Rule 438 Consent of Michael D. Edwards.
</TABLE>
- -----------------------
* Previously filed.
(1) Incorporated by reference to Exhibit 3(b) of Registrant's
Registration Statement on Form S-4 declared effective November 20,
1992, File No. 33-52556.
(2) Incorporated by reference to Exhibits 10(a), 10(b) and 10(c) of
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(3) Incorporated by reference to Exhibit 10 of the Registrant's Form
10-KSB for the year ending December 31, 1994, as filed March 30, 1995
under Commission File Number 0-24024.
(4) Incorporated by reference to Exhibits 10(e), 10(f), 10(g), 10(h) and
22, respectively, of Registrant's Annual Report on Form 10-KSB for
the year ending December 31, 1992.
<PAGE> 1
EXHIBIT 10.5
<PAGE> 2
STOCK PURCHASE AND SALE AGREEMENT
This Stock Purchase and Sale Agreement ("Agreement") is made and
entered into this __ day of October, 1996, by and among First Community
Financial Group, a Washington corporation and bank holding company ("FCFG"), and
the persons whose names appear on the signature lines below (collectively
referred to as the "Sellers").
RECITALS
A. Sellers are the record and/or beneficial owners of a total of
178,233 shares of the Common Stock of FCFG (the "Subject Shares"). The
respective ownership of the Subject Shares by each of the Sellers is set forth
on Exhibit A attached hereto.
B. Two of the Sellers, Michael Price ("Price") and William Hartman
("Hartman") are directors of First Community Bank ("First Community") and Price
is also a director of FCFG.
C. Sellers desire to sell, and FCFG desires to purchase, the Subject
Shares, on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, the parties hereby agree as follows:
1. Purchase and Sale. Subject only to the conditions set forth in
Paragraph 6 below, the Sellers hereby agree to sell, assign, transfer and convey
all of their respective right, title and interest in and to the Subject Shares
to FCFG. Upon satisfaction of the conditions set forth in Paragraph 6, FCFG
shall tender the Purchase Price set forth in Paragraph 2 below, and Sellers
shall deliver certificates representing all of the Subject Shares, duly endorsed
for transfer to FCFG on the stock transfer records of FCFG. Closing of the
purchase and sale shall occur as soon as practicable following the satisfaction
of the conditions set forth in Paragraph 6 below, but in no event later than
thirty (30) days following the satisfaction of such conditions.
2. Purchase Price. The Purchase Price (herein so called) to be paid for
the Subject Shares shall be $20.50 per share, payable in cash, cashier's check,
or by wire transfer at closing.
3. Assignability. The rights and obligations of FCFG under this
Agreement shall be assignable by FCFG, in whole or in part, to any other person
or entity in its sole discretion. It is the intention of FCFG to assign the
purchase of 70,000 shares to other purchasers; provided, however, that no such
assignment, whether made or not, shall affect the obligations of FCFG to
consummate the transactions contemplated by this Agreement, whether itself or
together with its assignees, as the case may be.
4. Representations of FCFG. FCFG hereby represents and warrants to the
Sellers as follows:
(i) The purchase of the Subject Shares by FCFG has been duly approved
by all requisite action of the Board of Directors of FCFG.
<PAGE> 3
(ii) FCFG has full corporate authority and power to enter into this
Agreement and perform its obligations hereunder.
(iii) The purchase and sale contemplated by this Agreement is not
prohibited by or subject to the filing requirements of the Securities Exchange
Act of 1934, 15 U.S.C. 78a et seq., as amended by the Williams Act (P.L. No.
94-29, as amended).
5. Representations of Sellers. Each of the Sellers hereby jointly and
severally represents and warrants to FCFG as follows:
(i) The Sellers own the Subject Shares free and clear of any
encumbrance, interest, option, security interest, lien, or other right, claim or
interest of any person or entity, except as shall be fully discharged at the
closing from the proceeds of the sale of such Subject Shares, and have the full
right, power and authority to convey full and complete record and beneficial
ownership in the Subject Shares to FCFG.
(ii) The Sellers are aware of the availability of public filings and
disclosures made by FCFG, including without limitation filings made pursuant to
the Securities Exchange Act of 1934.
(iii) The Sellers have relied solely upon their own respective analyses
and publicly available information regarding FCFG, and the purchase price being
offered by FCFG for the Subject Shares, and have made independent evaluation of
same in determining to sell the Subject Shares owned by them.
(iv) The Sellers each agree that they will not, during the five (5)
year period commencing on the date(s) of their respective executions of this
Agreement, acquire record or beneficial ownership of any shares of FCFG. The
agreement of the Selling Shareholders set forth in the preceding sentence shall
be conditioned only upon (a) the consummation of the purchase and sale of the
Subject Shares contemplated by this Agreement, and (b) that during said five (5)
years period, FCFG shall not have defaulted and failed to perform with respect
to its obligation to repurchase Options or Option Stock pursuant to Paragraph 9
hereof.
6. Condition to Closing. The consummation of the purchase and sale of
the Subject Shares and the Options and/or Option Stock described in Paragraph 9
is subject to the following condition:
FCFG has entered into an Agreement of Merger (the
"Transaction") whereby its wholly-owned subsidiary, First Community
Bank ("First Community") will merge with Prairie Security Bank. The
Transaction is conditioned upon, among other things, the approval
thereof by the shareholders of Prairie Security Bank. The closing of
the purchase and sale of the Subject Shares shall not occur until and
unless the Transaction is consummated. If for any reason whatsoever the
Transaction is not consummated, the obligations of FCFG to acquire the
Subject Shares, and of the Sellers to sell such Subject Shares, shall
be void and of no further effect.
<PAGE> 4
7. Resignation. Concurrently with the effectiveness of this Agreement,
William Hartman and Michael Price shall tender to FCFG their respective
unconditional resignations as directors of First Community, and in the case of
Michael Price his resignation as a director of FCFG, effective immediately. The
vacancies created by the foregoing resignations shall not be filled by FCFG and
First Community unless and until the consummation of the purchase and sale
contemplated by this Agreement. If for any reason the purchase and sale
contemplated by this Agreement shall not have occurred by March 15, 1997, FCFG
and/or First Community, as the case may be, shall reappoint Messrs. Hartman and
Price to the directors' positions described above.
8. Confidentiality. FCFG and each of the Sellers hereby covenants and
agrees not to disclose the terms or provisions of this Agreement to any other
person, without the express written consent of the other party; provided,
however, that the forgoing shall not prohibit or restrict FCFG from satisfying
all applicable legal disclosure obligations, including without limitation those
arising under state or federal securities laws.
9. Purchase and Sale of Options. Subject only to the conditions set
forth in Paragraph 6 above, Kevin Byrne ("Byrne") and Robert Coleman ("Coleman")
hereby unconditionally and irrevocably agree to sell to FCFG or its assigns, and
FCFG and/or its assigns hereby unconditionally and irrevocably agrees to
purchase from Byrne and Coleman those certain options to acquire FCFG stock
previously granted to Byrne and Coleman (the "Options"), or, if the Options
shall have been exercised prior to the purchase and sale date, the Stock
obtained by Byrne and/or Coleman by the exercise of the Options (the "Option
Stock"), all pursuant to the terms of this Paragraph 9. Byrne and Coleman each
own Options representing the right to acquire 33,021 shares, respectively. Byrne
and Coleman will sell, and FCFG and/or assigns will acquire, the Options and/or
the Option Stock, as the case may be, no later than January 31, 1998. The exact
purchase and sale date shall be determined by FCFG, in its sole discretion. The
purchase price to be paid in cash at closing shall be $22.00 per share. In the
case of Options, the per-share exercise price shall be deducted from the
per-share purchase price. In the case of Option Stock, the full purchase price
shall be paid at closing. Nothing in this Agreement shall prohibit Byrne or
Coleman from assigning for security purposes or encumbering either the Options
or the Option Stock, so long as the obligation secured by such encumbrance(s)
shall not exceed the net purchase price to be paid by FCFG on the purchase and
sale date. Bryne and Coleman hereby unconditionally agree that in the event
either or both of them obtain any Option Stock through exercise of an Option,
they shall enter into an agreement in form and substance satisfactory to FCFG,
agreeing not to vote such Option Shares.
10. Miscellaneous Provisions.
(i) Nothing in this Agreement shall be deemed to affect in any way the
existing obligations of Messrs. Byrne, Coleman, Hartman or Price, including
without limitation their respective obligations under existing Performance
Agreements, Director's Agreements, or noncompetition agreements with FCFG or
affiliates thereof.
<PAGE> 5
(ii) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument. Each such counterpart shall become
effective when one counterpart has been signed by each party hereto.
(iii) This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law may
be applicable. The headings of the several articles and sections herein are
inserted for the convenience of reference only and are not intended to be a part
of or to affect the meaning of or interpretation of this Agreement.
(iv) All exhibits referred to in this Agreement are integral parts
hereof, and this Agreement, together with such exhibits, contains the entire
agreement among the parties with respect to the transactions contemplated hereby
and contains all of the terms, conditions and provisions of such transactions.
(v) This Agreement shall not be effective against or binding upon any
signatory until executed by (a) FCFG, (b) each of Price, Hartman, Kevin Byrne,
and Robert Coleman, and (c) each other person whose execution is necessary to
convey the subject shares shown on Exhibit A as subject to the control of Price,
Hartman, Byrne and Coleman. Once so executed, this Agreement shall become
effective against and binding upon such parties, and effective as to other
signatory Sellers upon their execution hereof.
EXECUTED as of the date and year first above written.
FCFG
- ----
FIRST COMMUNITY FINANCIAL GROUP
By /s/ Ken Parsons
------------------------------
Ken Parsons
Its President
SELLERS
- -------
/s/ Michael Price /s/ Kevin Byrne
- ------------------------- -------------------------
Michael Price Kevin Byrne
/s/ Robert Coleman /s/ William Hartman
- ------------------------- -------------------------
Robert Coleman William Hartman
/s/ Katherine Price /s/ Darren Callaway
- ------------------------- -------------------------
Katherine Price Darren Callaway
/s/ Tom Price /s/ Linda Coleman
- ------------------------- -------------------------
Tom Price Linda Coleman
/s/ Mary Byrne /s/ Helen Zelenka
- ------------------------- -------------------------
Mary Byrne Helen Zelenka
<PAGE> 6
SELLERS
- -------
/s/ Daniel L. Draughon /s/ Luzane Draughon
- ------------------------- -------------------------
Daniel L. Draughon Luzane Draughon
/s/ Ken McCarthy /s/ Carol McCarthy
- ------------------------- -------------------------
Ken McCarthy Carol McCarthy
/s/ Aaron Callaway /s/ Kevin M. Byrne
- ------------------------- -------------------------
Aaron Callaway James Peter Byrne
By Kevin M. Byrne
DESIGNATED ESCROW
By /s/ Marie Barth
- -------------------------
Marie Barth, President
KEVIN BYRNE, IRA MARY BYRNE, IRA
By /s/ Michael T. Donohue By /s/ Michael T. Donohue
---------------------------------- -----------------------------
Michael T. Donohue Michael T. Donohue
Vice President/Manager for Vice President/Manager for
Smith Barney, Custodian Smith Barney, Custodian
WILLIAM HARTMAN, IRA MAID OF CLOVER
By /s/ Michael T. Donohue By
------------------------- ----------------------------
Michael T. Donohue
Vice President/Manager for
Smith Barney, Custodian -------------------------------
Mike Campbell
NWCB PROFIT SHARING TRUST FOR -------------------------------
ROBERT COLEMAN Gary Grendahl
By /s/ Michael A. Price
----------------------------
Michael A. Price
By /s/ Kevin M. Byrne
----------------------------
Kevin M. Byrne, Trustee
By /s/ Robert J. Coleman
----------------------------
Robert J. Coleman, Trustee
