<PAGE> 1
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Puget Sound Bancorp, Inc. ("Bancorp"), the holding company for First National
Bank of Port Orchard ("FNBP"), to be held on the 16th day of December, 1997, at
7:00 p.m., local time, at the principal offices of Bancorp at 1488 Olney Avenue
SE, Port Orchard, Washington.
The Notice of Special Meeting of Shareholders and Prospectus/Proxy
Statement that appear on the following pages describe the formal business to be
transacted at the meeting. The primary purpose of the meeting is to consider and
vote upon a proposal to approve the Agreement and Plan of Merger (the "Merger
Agreement") dated as of September 18, 1997, between Bancorp and FNBP, and
InterWest Bancorp, Inc. ("InterWest") and its subsidiary, InterWest Bank. The
Merger Agreement provides that Bancorp will be merged with and into InterWest,
with InterWest being the surviving entity in the Merger. Directors and officers
of Bancorp, as well as representatives of Knight, Vale & Gregory, Inc., P.S.,
Bancorp's independent auditors, will be present to respond to any appropriate
questions shareholders may have.
The Merger Agreement provides that upon consummation of the merger all
outstanding shares of common stock of Bancorp will be converted into shares of
common stock of InterWest. You are urged to review carefully the
Prospectus/Proxy Statement, which contains a more complete description of the
terms of the Merger.
The Board of Directors of Bancorp has unanimously approved the Merger
Agreement and recommends that the shareholders vote FOR the approval of the
Merger Agreement. Bancorp's financial advisor, Columbia Financial Advisors,
Inc., has issued its opinion to the effect that, as of the date hereof and based
on the factors and assumptions described therein, the consideration to be paid
by InterWest pursuant to the Merger Agreement is fair to Bancorp and its
shareholders from a financial point of view. Approval of the Merger Agreement
requires the affirmative vote of two-thirds of the outstanding shares of Bancorp
common stock.
It is very important that your shares be represented at the Special
Meeting, regardless of whether you plan to attend in person. A failure to vote,
either by not returning the enclosed proxy or by checking the "Abstain" box
thereon, will have the same effect as a vote against approval of the Merger
Agreement. To assure that your shares are represented in voting on this very
important matter, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD in the
postage-prepaid envelope provided, 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 meeting.
The Board of Directors believes that the merger is in the best interest
of Bancorp and its shareholders. On behalf of the Board of Directors, we
recommend that you vote FOR approval of the Merger Agreement.
Very truly yours,
Duane R. Guggenmos, President
PUGET SOUND BANCORP, INC.
Port Orchard, Washington
Date: November 14, 1997
<PAGE> 2
PUGET SOUND BANCORP, INC.
1488 Olney Avenue SE
Port Orchard, Washington 98366-4041
NOTICE
OF
SPECIAL MEETING OF SHAREHOLDERS
to be held December 16, 1997
Notice is hereby given that pursuant to the call of its Board of
Directors, a Special Meeting of Shareholders of Puget Sound Bancorp, Inc.
("Bancorp") will be held on December 16, 1997, at 7:00 p.m., local time, at the
principal offices of Bancorp at 1488 Olney Avenue SE, Port Orchard, Washington.
The purposes of the meeting are:
(1) A proposal to approve the Agreement and Plan of Merger, dated as of
September 18, 1997 (the "Merger Agreement"), between Bancorp and its
wholly-owned subsidiary, First National Bank of Port Orchard, and InterWest
Bancorp, Inc. ("InterWest") and its subsidiary, InterWest Bank, a copy of which
is attached as Appendix A to the accompanying Prospectus/Proxy Statement, under
the terms of which (i) Bancorp will merge with and into InterWest with InterWest
as the surviving corporation, and (ii) each outstanding share of common stock of
Bancorp ("Bancorp Common Stock") will be converted into shares of the common
stock of InterWest ("InterWest Common Stock") in accordance with the terms of
the Merger Agreement.
(2) Such other matters as may properly come before the meeting or any
adjournments or postponements thereof.
Any action may be taken on the foregoing proposal at the meeting on the
date specified above or on any date or dates to which, by original or later
adjournment, the meeting may be adjourned. Shareholders of record at the close
of business on November 7, 1997, are the shareholders entitled to vote at the
meeting and any adjournments thereof. The affirmative vote of the holders of
two-thirds of the outstanding shares of Bancorp Common Stock is required for
approval of the Merger Agreement.
You are requested to fill in and sign the enclosed form of proxy, which
is solicited by the Board of Directors, and to mail it promptly in the enclosed
envelope. If you attend the meeting, you may revoke your proxy and vote your
shares in person.
By Order of the Board of Directors
Duane R. Guggenmos, President
Port Orchard, Washington
November 14, 1997
<PAGE> 3
Filed Pursuant to Rule 424(b)(1)
Registration Statement No. 333-39329
PROXY STATEMENT
PUGET SOUND BANCORP, INC.
PROSPECTUS
INTERWEST BANCORP, INC. COMMON STOCK ($.20 PAR VALUE)
This Prospectus/Proxy Statement is being furnished to holders of common
stock, no par value per share ("Bancorp Common Stock") of Puget Sound Bancorp,
Inc. ("Bancorp"), a Washington corporation, in connection with the solicitation
of proxies by the Board of Directors of Bancorp (the "Bancorp Board") for use at
the Bancorp Special Stockholders Meeting to be held on December 16, 1997 at 7:00
p.m. local time, at the principal offices of Bancorp, 1488 Olney Ave SE, Port
Orchard, Washington, and at any adjournments or postponements of such meeting.
Bancorp stockholders will vote upon a proposal to approve the merger (the
"Merger") of Bancorp with and into InterWest Bancorp, Inc. ("InterWest"), a
Washington corporation, on the terms described in the Agreement and Plan of
Merger dated as of September 18, 1997 among Bancorp, InterWest, and their
respective subsidiary banks (the "Merger Agreement"). The Merger Agreement is
incorporated into this Prospectus/Proxy Statement by reference and attached as
Appendix A.
When the Merger becomes effective, all outstanding shares of Bancorp
Common Stock will be converted into the right to receive shares of the common
stock of InterWest ("InterWest Common Stock"). Cash will be paid in lieu of
fractional shares. Upon consummation of the Merger, each Bancorp stockholder
will receive a number of shares of InterWest Common Stock for each share of
Bancorp Common Stock, based upon the Exchange Ratio set forth in the Merger
Agreement. Subject to certain limits on the fluctuation in the Average Closing
Price of the InterWest Common Stock (see "THE MERGER -- Basic Terms of the
Merger") each share of Bancorp Common Stock will be converted into the right to
receive $64.05 in value of InterWest Common Stock. The precise number of shares
of InterWest Common Stock to be received for each share of Bancorp Common Stock
will likely be determined after the Bancorp Special Stockholders Meeting, based
upon the average price of InterWest Common Stock for a 10 trading-day period
ending shortly before the closing of the Merger (the "Average Closing Price").
See "THE MERGER -- Basic Terms of the Merger."
The aggregate number of shares of InterWest Common Stock to be issued in
the Merger cannot be determined until the Average Closing Price is established.
Assuming, for illustration purposes only, that the Average Closing Price is
$39.25 and that 230,433 shares of Bancorp Common Stock are outstanding and
subject to exchange on the Effective Date, the aggregate number of shares of
InterWest Common Stock issued would be 376,031, having an aggregate value of
$14,759,234. Assuming that 376,031 shares of InterWest Common Stock are issued
in the Merger and 8,426,297 shares of InterWest are outstanding after closing of
the Merger, Bancorp stockholders will hold approximately 4.46% of the
outstanding InterWest Common Stock.
InterWest Common Stock trades on the Nasdaq National Market under the
symbol "IWBK". The reported sales price for the InterWest Common Stock was
$37.63 per share on November 7, 1997, the most recent date for which it was
practicable to obtain information prior to the printing of this Prospectus/Proxy
Statement. Bancorp Common Stock does not trade on any market, thus no current
market price is available. See "STOCK PRICE AND DIVIDEND INFORMATION."
This Prospectus/Proxy Statement also constitutes the Prospectus of
InterWest 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 (the "1933 Act"), relating to shares of the InterWest Common Stock to be
issued in the Merger. When the Merger becomes effective, all outstanding shares
of Bancorp Common Stock will be converted into the right to receive shares of
InterWest Common Stock. Cash will be paid in lieu of fractional shares. See "THE
MERGER -- Basic Terms of the Merger." Stockholders 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 23B.13, a copy of which is included in
this Prospectus/Proxy Statement as Appendix B. For a description of certain
significant considerations in connection with the Merger, see "THE MERGER --
Basic Terms of the
<PAGE> 4
Merger; Dissenters' Rights of Appraisal"; "- Conditions to the Merger"; and "-
Interests of Certain Persons in the Merger."
THIS PROSPECTUS/PROXY STATEMENT DOES NOT COVER ANY RESALE OF THE
SECURITIES TO BE RECEIVED BY STOCKHOLDERS OF BANCORP UPON CONSUMMATION OF THE
MERGER, AND NO PERSON IS AUTHORIZED TO MAKE ANY USE OF THIS PROSPECTUS/PROXY IN
CONNECTION WITH ANY SUCH RESALE.
THE SHARES OF INTERWEST 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 INTERWEST 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 November 13, 1997.
<PAGE> 5
AVAILABLE INFORMATION
InterWest is subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended ("1934 Act"). In accordance with
the 1934 Act, InterWest files reports, proxy statements, and other information
with the SEC. Bancorp is not subject to the information and reporting
requirements of the 1934 Act.
Under the rules and regulations of the SEC, the solicitation of
stockholders to approve the Merger constitutes an offering of the InterWest
Common Stock to be issued in conjunction with the Merger. InterWest has filed a
Registration Statement with the SEC under the 1933 Act covering the InterWest
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 InterWest under the 1934 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 at The
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials 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. Copies of materials filed by InterWest with the SEC may also be obtained
through the Commission's Internet address at http://www.sec.gov. In addition,
materials filed by InterWest are available for inspection at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus/Proxy Statement constitutes part of the Registration
Statement (File No. 333-39329) filed by InterWest with the SEC under the 1933
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 InterWest and the InterWest 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by InterWest with the SEC under the 1934
Act are incorporated by reference herein:
1. InterWest's Annual Report on Form 10-K for the year ended
September 30, 1996 filed on December 30, 1996, File No. O-26632
("InterWest 1996 10-K");
2. InterWest's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1996, March 31 and June 30, 1997, File No. O-26632
("InterWest 10-Qs");
3. InterWest's Annual Meeting Proxy Statement for the 1997 Annual
Meeting of Shareholders ("InterWest 1997 Proxy Statement").
4. InterWest's 1996 Annual Report to Shareholders filed as an
exhibit to the InterWest 1996 10-K on December 30, 1996
("InterWest 1996 Annual Report").
All documents filed by InterWest under Sections 13(a), 13(c), 14 and
15(d) of the 1934 Act after the date of this Prospectus/Proxy Statement and
before the Bancorp Special Meeting are incorporated by reference and are a part
of this Prospectus/Proxy Statement from each document's date of filing. Any
statement contained in a document incorporated by reference as modified or
superseded for purposes hereof to the extent that a statement contained herein
or in any other subsequently filed document that also is incorporated by
reference herein
<PAGE> 6
modifies or supersedes that statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement incorporates by reference documents that
are not presented herein of delivered herewith. These documents (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents) are available, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus/Proxy
Statement is delivered. Requests for such copies should be directed to Margaret
Mordhorst, Corporate Secretary, InterWest Bancorp, Inc., 275 S.E. Pioneer Way,
Oak Harbor, Washington 98227, (360) 679-4181.
-------------------
All information contained in this Prospectus/Proxy Statement relating to
InterWest has been furnished by InterWest, and Bancorp is relying upon the
accuracy of that information. All information contained in this Prospectus/Proxy
Statement relating to Bancorp has been furnished by Bancorp, and InterWest 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 INTERWEST OR BANCORP. 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 UNDER THE TERMS OF 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 BANCORP,
INTERWEST OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS/PROXY STATEMENT.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
GLOSSARY OF CERTAIN KEY TERMS.................................................................G-1
SUMMARY.........................................................................................1
Introduction................................................................................1
Parties to the Merger.......................................................................1
Special Stockholder Meeting - Bancorp.......................................................2
The Merger; Exchange Ratio..................................................................2
Reasons for the Merger; Recommendation of the Bancorp Board.................................3
Opinion of Financial Advisor to Bancorp.....................................................4
Effective Date of the Merger................................................................4
Exchange of Stock Certificates..............................................................4
Conditions; Regulatory Approvals............................................................5
Amendment or Termination of the Merger Agreement............................................5
Directors and Executive Officers After the Merger...........................................5
Federal Income Tax Treatment of the Merger..................................................5
Accounting Treatment........................................................................6
Dissenters' Rights of Appraisal.............................................................6
Interests of Certain Persons in the Merger..................................................6
Comparison of Stockholders' Rights..........................................................7
Trading Markets.............................................................................7
STOCK PRICE AND DIVIDEND INFORMATION............................................................8
InterWest...................................................................................8
Bancorp8
Recent Stock Price Data.....................................................................9
EQUIVALENT PER COMMON SHARE DATA...............................................................10
BANCORP SPECIAL STOCKHOLDER MEETING............................................................11
Date, Time, Place and Purpose..............................................................11
Shares Outstanding and Entitled to Vote; Record Date.......................................11
Vote Required..............................................................................11
Voting, Solicitation, and Revocation of Proxies............................................11
BACKGROUND OF AND REASONS FOR THE MERGER.......................................................12
Background of the Merger...................................................................12
Reasons For The Merger - Bancorp...........................................................13
Recommendation of Bancorp Board............................................................13
Opinion of Bancorp Financial Advisor.......................................................13
Reasons For The Merger - InterWest.........................................................16
THE MERGER.....................................................................................17
Basic Terms of the Merger..................................................................17
Mechanics of the Merger....................................................................19
Effective Date of the Merger...............................................................19
Exchange of Bancorp Stock Certificates.....................................................19
Conditions to Consummation of the Merger; Regulatory Approvals.............................20
</TABLE>
i
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<TABLE>
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Amendment or Termination...................................................................21
Conduct of Business Pending the Merger.....................................................22
Directors and Executive Officers After the Merger..........................................22
Employee Benefit Plans.....................................................................23
Interests of Certain Persons in the Merger.................................................23
Federal Income Tax Treatment of the Merger.................................................24
Accounting Treatment of the Merger.........................................................25
Dissenters' Rights of Appraisal............................................................25
Resale of InterWest Common Stock...........................................................26
No Solicitation............................................................................27
Expenses...................................................................................27
BUSINESSES OF THE PARTIES TO THE MERGER........................................................27
Information Concerning InterWest and InterWest Bank........................................27
Information Concerning Bancorp.............................................................28
Business...................................................................................28
Competition................................................................................28
Facilities.................................................................................28
Employees..................................................................................29
Legal Proceedings..........................................................................29
BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................29
General....................................................................................29
Six months ended June 30, 1997 and 1996....................................................29
Financial Condition and Results of Operation for the Years ended
December 31, 1996 and 1995...............................................................30
Loan Quality, Liquidity, and Capital.......................................................30
Lending31
Summary of Loan Loss Experience............................................................32
Asset and Liability Management.............................................................33
Securities Activity........................................................................34
Deposits...................................................................................35
Short term Borrowings......................................................................36
Significant Financial Ratios...............................................................36
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential.................................................36
MANAGEMENT OF BANCORP..........................................................................39
Directors and Executive Officers...........................................................39
Security Ownership of Management and Certain Beneficial Owners.............................40
MANAGEMENT OF INTERWEST........................................................................42
SUPERVISION AND REGULATION.....................................................................42
Introduction...............................................................................42
The Holding Companies......................................................................42
General.............................................................................42
Bank Holding Company Structure......................................................42
Transactions with Affiliates........................................................43
Regulation of Management............................................................44
FIRREA..............................................................................44
Tie-In Arrangements.................................................................44
State Law Restrictions..............................................................44
</TABLE>
ii
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<TABLE>
<S> <C>
Securities Registration and Reporting...............................................44
The Subsidiaries...........................................................................45
General.............................................................................45
Loans-to-One Borrower...............................................................45
FDIC Insurance......................................................................45
Capital Requirements................................................................46
Liquidity Requirements..............................................................47
Restrictions on Capital Distributions...............................................47
Federal Reserve System..............................................................48
Recent Federal Legislation..........................................................48
Regulatory Enforcement Authority....................................................49
DESCRIPTION OF INTERWEST CAPITAL STOCK.........................................................49
Voting Rights..............................................................................49
Dividends..................................................................................49
Liquidation................................................................................50
Other Characteristics......................................................................50
COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST AND BANCORP
COMMON STOCK...............................................................................50
Payment of Dividends.......................................................................50
Voting Rights..............................................................................51
Preemptive Rights..........................................................................51
Liquidation Rights.........................................................................51
Assessments................................................................................51
Stock Repurchases..........................................................................51
Amendment of Articles of Incorporation and Bylaws..........................................51
Special Meetings of Stockholders and Action Without a Meeting..............................52
Approval of Mergers, Consolidations, Sale of Substantially All Assets and Dissolution......52
Rights of Stockholders to Dissent..........................................................53
Size of Board of Directors.................................................................53
Classified Board of Directors..............................................................54
Removal of Directors.......................................................................54
Vacancies on the Board of Directors........................................................54
Advance Notice Requirements; Stockholder Meetings..........................................54
Indemnification of Officers and Directors and Limitation of Liability......................55
Potential Antitakeover Provisions..........................................................55
CERTAIN LEGAL MATTERS..........................................................................56
EXPERTS........................................................................................56
OTHER MATTERS..................................................................................56
FINANCIAL STATEMENTS OF BANCORP...............................................................F-1
APPENDIX A - Agreement and Plan of Merger
APPENDIX B - RCW 23B.13 of the Revised Code of Washington
(Dissenters' Rights of Appraisal under Washington law)
APPENDIX C - Opinion of Columbia Financial Advisors, Inc.
</TABLE>
iii
<PAGE> 10
GLOSSARY OF CERTAIN KEY TERMS
<TABLE>
<S> <C>
1933 Act.................. The Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
1934 Act.................. The Securities Exchange Act of 1934, as amended,
and related rules and regulations.
Average Closing Price..... The average daily closing price of InterWest
Common Stock during the ten trading days beginning
on the thirtieth day immediately preceding the
Effective Date.
Bancorp................... Puget Sound Bancorp, Inc.
Bancorp Common Stock...... Bancorp's Common Stock, no par value per share.
Bancorp Financial
Statements................ Bancorp's (i) audited consolidated balance sheets
as of December 31, 1996 and 1995 and the related
audited consolidated statements of income, cash
flows and stockholders' equity for each of the
years ended December 31, 1996 and 1995, and (ii)
Bancorp's unaudited consolidated balance sheet as
of June 30, 1997, and the related unaudited
statements of income, cash flows and stockholders'
equity for the six-month period ended June 30,
1997.
Bancorp Record Date....... November 7, 1997.
Bancorp Special Meeting... Special meeting of Bancorp stockholders to be held
on December 16, 1997.
BHCA...................... The Bank Holding Company Act of 1956, as amended.
Board..................... Board of Directors.
Closing................... The closing of the Merger transaction contemplated
in the Merger Agreement.
Code...................... The Internal Revenue Code of 1986, as amended.
Columbia Financial........ Columbia Financial Advisors, Inc., Bancorp's
financial advisor.
Dissenting Shares......... Those shares of Bancorp Common Stock with respect
to which Bancorp's stockholders have perfected
their dissenters' rights under Washington law.
Effective Date............ The date Closing of the Merger will occur.
FDIC...................... The Federal Deposit Insurance Corporation.
FNBP...................... First National Bank of Port Orchard, a wholly
owned subsidiary of Puget Sound Bancorp, Inc.
FRB....................... The Board of Governors of the Federal Reserve
System.
GAAP...................... Generally accepted accounting principles,
consistently applied.
</TABLE>
G-1
<PAGE> 11
<TABLE>
<S> <C>
InterWest Bank............ InterWest Bank, a wholly owned subsidiary of
InterWest Bancorp, Inc.
InterWest Common Stock.... InterWest's Common Stock, $.20 par value per
share.
InterWest Financial
Statements................ InterWest's (i) audited consolidated statements of
financial condition as of September 30, 1996 and
1995, and the related audited consolidated
statements of operations, cash flows and
stockholders' equity for each of the years ended
September 30, 1996, 1995 and 1994, and (ii)
unaudited consolidated statement of financial
condition as of June 30, 1997, and the related
unaudited statements of operations, cash flows and
stockholders' equity for the period then ended.
InterWest................. InterWest Bancorp, Inc.
Merger.................... The merger of Bancorp with and into InterWest in
accordance with the Merger Agreement.
Merger Agreement.......... The Agreement and Plan of Merger, dated as of
September 18, 1997, between InterWest and Bancorp.
OCC....................... The Office of the Comptroller of the Currency.
Prospectus/Proxy
Statement................. This Prospectus/Proxy Statement, filed with the
SEC by InterWest and to be mailed to Bancorp's
stockholders, together with any amendments and
supplements.
Registration Statement.... The Registration Statement on Form S-4, of which
this Prospectus/Proxy Statement forms a part,
filed with the SEC by InterWest under the 1933
Act, for the purpose of registering the shares of
InterWest Common Stock to be issued in the Merger.
SEC....................... The Securities and Exchange Commission.
Termination Date.......... June 30, 1998, the date after which each party has
the right to terminate the Merger Agreement, if
the Closing has not occurred by that date.
Valuation Price........... The same amount as the Average Closing Price,
unless the Average Closing Price is (i) less than
$34.75, in which event the Valuation Price is
$34.75, or (ii) greater than $43.75, in which
event the Valuation Price is $43.75.
WBCA...................... Washington Business Corporation Act
</TABLE>
G-2
<PAGE> 12
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). Capitalized terms used in this Prospectus/Proxy Statement,
unless the context otherwise requires, have the meanings ascribed to them in the
Glossary of Certain Key Terms inside the front cover. Additionally, terms used
principally in particular sections of this Prospectus/Proxy Statement also may
be defined in the sections where they are initially used.
INTRODUCTION
InterWest and Bancorp propose to merge under the terms of the Merger
Agreement. If the Merger Agreement is approved by the stockholders of Bancorp
and other conditions to closing are satisfied, Bancorp will merge with and into
InterWest ("Merger"). Consequently, holders of Bancorp Common Stock would become
stockholders of InterWest, and First National Bank of Port Orchard ("FNBP"),
which is presently a subsidiary of Bancorp, would become a direct subsidiary of
InterWest. After the Merger is consummated, Bancorp stockholders will no longer
own any stock in Bancorp, and Bancorp will cease to exist.
The respective Boards of Directors of InterWest and Bancorp have
unanimously approved the Merger Agreement. The Bancorp Board recommends that the
stockholders of Bancorp vote to approve the Merger Agreement. Bancorp's
stockholders, other than those that have perfected their dissenters' rights or
would otherwise be entitled to fractional shares of InterWest Common Stock based
on the Merger exchange ratio, will receive shares of InterWest Common Stock in
exchange for their shares of Bancorp Common Stock. See "THE MERGER -- Basic
Terms of the Merger"; "-- Cash for Fractional Shares"; "-- Dissenters' Rights of
Appraisal."
PARTIES TO THE MERGER
InterWest and InterWest Bank. InterWest is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The business of InterWest consists primarily of holding 100% of the capital
stock of InterWest Bank. At June 30, 1997, InterWest had total assets of
approximately $1.8 billion, total loans and mortgage-backed securities of
approximately $1.4 billion, total deposits of approximately $1.2 billion and
stockholders' equity of approximately $124.2 million. The principal executive
offices of InterWest are located at 275 SE Pioneer Way, Oak Harbor, Washington
98277 and its telephone number is (360) 679-4181.
InterWest Bank is a Washington state-chartered savings bank and is
regulated by the Department of Financial Institutions Division of Banks of the
State of Washington (the "Division") and by the Federal Deposit Insurance
Corporation ("FDIC"), its primary federal regulator and the insurer of its
deposits. InterWest Bank's deposits are insured up to applicable limits under
the Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund
("BIF") of the FDIC. InterWest Bank's principal business consists of attracting
savings deposits from the general public and originating loans for the purchase
or construction of residential real estate. To a lesser extent, InterWest Bank
originates multi-family residential, commercial real estate, consumer and other
loans. At September 30, 1997, InterWest Bank conducted its business through 39
full-service branch offices in western and central Washington and one lending
office located in Lynnwood, Washington. See "BUSINESSES OF THE PARTIES TO THE
MERGER - Information Concerning InterWest and InterWest Bank." Additional
information concerning InterWest is included in the InterWest documents
incorporated by reference in this Prospectus/Proxy Statement. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
Bancorp and FNBP. Bancorp is a bank holding company incorporated under
the laws of the State of Washington and is subject to the BHCA, which places
Bancorp under the supervision of the Board of Governors
1
<PAGE> 13
of the Federal Reserve System ("FRB"). The business of Bancorp consists
primarily of holding 100% of the capital stock of FNBP. At June 30, 1997,
Bancorp had consolidated total assets of approximately $50.6 million, total
loans of approximately $34.7 million, total customer deposits of approximately
$43.9 million, and total stockholder equity of approximately $4.9 million.
Bancorp maintains its principal offices at 1488 Olney Avenue S.E., Port Orchard,
Washington 98336, and its telephone number is (360) 895-2265. See "BUSINESSES OF
THE PARTIES TO THE MERGER."
FNBP is a national banking association organized under the laws of the
United States. FNBP conducts a commercial banking business and provides personal
and business financial services primarily to individuals and small businesses in
Port Orchard, Washington. FNBP conducts its business through its principal
office located at 1488 Olney Avenue SE, Port Orchard, Washington, and two
additional branch offices. See "BUSINESSES OF THE PARTIES TO THE MERGER."
SPECIAL STOCKHOLDER MEETING - BANCORP
Place, Time and Date; Purpose. The Bancorp Special Meeting will be held
on December 16, 1997 at 7:00 p.m., local time at the principal offices of
Bancorp, 1488 Olney Ave SE, Port Orchard, Washington, for the purpose of
considering and voting upon a proposal to approve the Merger Agreement attached
as Appendix A. See "BANCORP SPECIAL STOCKHOLDER MEETING."
Record Date; Shares Entitled to Vote. The Bancorp Board has fixed the
close of business on November 7, 1997 as the record date (the "Bancorp Record
Date") for determining stockholders entitled to notice of and to vote at the
Bancorp Special Meeting. Only those holders of shares of Bancorp Common Stock of
record on the Bancorp Record Date will be entitled to notice of and to vote at
the Bancorp Special Meeting. Each share of Bancorp Common Stock will be entitled
to one vote. Stockholders who execute proxies retain the right to revoke them at
any time prior to being voted at the Bancorp Special Meeting. At the Bancorp
Record Date, there were 232,592 shares of Bancorp Common Stock outstanding
and entitled to be voted at the Bancorp Special Meeting. See "BANCORP SPECIAL
STOCKHOLDER MEETING."
Vote Required. Approval of the Merger Agreement requires the affirmative
vote of the holders of two-thirds of the outstanding shares of Bancorp Common
Stock. At the Bancorp Record Date, the directors and executive officers of
Bancorp beneficially owned 83,575 shares of Bancorp Common Stock, which
represents 35.93% of the shares entitled to be voted at the Bancorp Special
Meeting. All of the directors of Bancorp have entered into an agreement with
InterWest pursuant to which each director has agreed to vote his or her shares
for approval of the Merger Agreement. See "BANCORP SPECIAL STOCKHOLDER MEETING."
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
APPROVAL OF THE MERGER AGREEMENT.
THE MERGER; EXCHANGE RATIO
The Merger Agreement provides for the merger of Bancorp with and into
InterWest, with InterWest to be the surviving corporation in the Merger. As a
result of the Merger, Bancorp will cease to exist and InterWest will succeed to
all of the assets and liabilities of Bancorp. See "THE MERGER -- Basic Terms of
the Merger." After consummation of the Merger, FNBP will operate as a wholly
owned subsidiary of InterWest.
Upon consummation of the Merger, each outstanding share of Bancorp
Common Stock (excluding any Dissenting Shares) and any shares of stock held by
InterWest or Bancorp, other than in a fiduciary capacity or in satisfaction of a
debt previously contracted (together with the Dissenting Shares, "Excluded
Shares") will be automatically converted into the right to receive shares of
InterWest Common Stock.
2
<PAGE> 14
The number of shares of InterWest Common Stock to be received for each
share of Bancorp Common Stock will be based on the Exchange Ratio, which will
fluctuate between 1.84 to 1.46 shares of InterWest Common Stock for each share
of Bancorp Common Stock depending on the Average Closing Price, if the Average
Closing Price of the InterWest Common Stock for a period shortly before the
closing of the Merger is between $34.75 and $43.75. Subject to certain
conditions that would apply if the Average Closing Price is either greater than
$43.75 or less than $34.75, each share of Bancorp Common Stock will receive a
number of shares of InterWest Common Stock worth $64.05 (using the Average
Closing Price to determine such value). See "THE MERGER -- Basic Terms of the
Merger."
If the Average Closing Price is greater than $43.75, InterWest may
terminate the Merger Agreement unless Bancorp elects to adjust the Exchange
Ratio so that the Average Closing Price multiplied by the Exchange Ratio equals
$64.05. InterWest may elect not to terminate the Merger Agreement even if
Bancorp does not elect to adjust the Exchange Ratio, in which case the Valuation
Price (i.e., the effective Average Closing Price) would be fixed at $43.75, and
the Exchange Ratio will be 1.46, even though the Average Closing Price exceeds
$43.75. See "THE MERGER -- Amendment or Termination."
If the Valuation Price is less than $34.75, Bancorp may terminate the
Merger Agreement unless InterWest elects to adjust the Exchange Ratio so that
the Average Closing Price multiplied by the Exchange Ratio equals $64.05.
Bancorp may elect not to terminate the Merger Agreement even if InterWest does
not elect to adjust the Exchange Ratio, in which case the Valuation Price (i.e.,
the effective Average Closing Price) would be fixed at $34.75, and the Exchange
Ratio will be 1.84, even though the Average Closing Price is less than $34.75.
See "THE MERGER -- Amendment or Termination."
The Exchange Ratio, and thus, the precise number of shares of InterWest
Common Stock to be received for each share of Bancorp Common Stock, will not be
known at the time that Bancorp stockholders vote on the Merger at the Bancorp
Special Meeting. See "THE MERGER -- Basic Terms of the Merger."
Assuming for illustration purposes only that the Average Closing Price
is $39.25 (the midpoint between $43.75 and $34.75) and that 230,433 shares of
Bancorp Common Stock are outstanding and subject to exchange on the Effective
Date, the aggregate number of shares of InterWest Common Stock to be issued in
the Merger would be 376,031, having an aggregate value of $14,759,234. As a
result, in this illustration Bancorp stockholders would hold approximately 4.46%
of the 8,426,297 shares of InterWest outstanding after the closing of the
Merger.
Each holder of Bancorp Common Stock who would otherwise be entitled to a
fractional share of InterWest Common Stock will receive cash in lieu of such
fractional share, determined by multiplying such fraction by the Average Closing
Price. See "THE MERGER -- Basic Terms of the Merger." Upon completion of the
Merger, stockholders of Bancorp will no longer own any Bancorp Common Stock.
Bancorp stockholders should note that the market price of the InterWest
Common Stock they receive will continue to be subject to changes in market value
and may, therefore, have a market value as of the date they receive certificates
for their shares (or such shares are otherwise made available to them) that is
less than, or greater than, the value of such stock at the date of such
determination. For a more detailed discussion of the calculation of the number
of shares of InterWest Common Stock to be received in exchange for Bancorp
Common Stock, see "THE MERGER -- Basic Terms of the Merger."
REASONS FOR THE MERGER; RECOMMENDATION OF THE BANCORP BOARD
The Bancorp Board has unanimously determined that the Merger Agreement
is fair to and in the best interests of Bancorp and its stockholders. In making
this determination, the Bancorp Board considered a variety of factors, including
the value of the InterWest Common Stock that the stockholders of Bancorp will
receive in exchange for their shares of Bancorp Common Stock, the continued
ability of FNBP to provide competitive and
3
<PAGE> 15
comprehensive services in the market in which it operates, and the parties'
shared commitment to personalized community banking, which emphasizes
responsiveness to local markets and the delivery of personalized services to
customers.
The Bancorp Board believes that the Merger will allow FNBP to provide a
wider array of products and services, while continuing to offer the advantages
of personalized community banking to FNBP's current customers, and will also
allow Bancorp to realize a premium, thus enhancing stockholder value. The
Bancorp Board further anticipates that the Merger will provide FNBP with
substantially greater financial and technological resources, which will enable
FNBP to compete more effectively in its market and better serve its customers
and community. Additionally, Bancorp stockholders would be able to obtain a
premium over book value for their shares of Bancorp Common Stock on a
tax-deferred basis, while at the same time enjoying the benefits of a more
active trading market in the InterWest Common Stock.
THE BANCORP BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS BEING
IN THE BEST INTERESTS OF BANCORP AND THE BANCORP STOCKHOLDERS AND RECOMMENDS
THAT THE STOCKHOLDERS OF BANCORP VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
For a discussion of the circumstances surrounding the Merger and the
factors considered by the Bancorp Board in making its recommendation, see
"BACKGROUND OF AND REASONS FOR THE MERGER." Approval of the Merger Agreement by
Bancorp stockholders is required by law and is a condition to consummation of
the Merger. See "THE MERGER -- Conditions to Consummation of the Merger." For a
description of certain economic interests that directors of Bancorp may be
deemed to have in the Merger, see "THE MERGER -- Interests of Certain Persons in
the Merger."
OPINION OF FINANCIAL ADVISOR TO BANCORP
Columbia Financial Advisors, Inc. ("Columbia Financial"), Bancorp's
financial advisor, has delivered a written opinion to the Bancorp Board, dated
September 17, 1997, to the effect that the terms of the Merger are fair to
Bancorp stockholders from a financial point of view. A copy of Columbia
Financial's opinion, setting forth the assumptions made, matters considered,
procedures followed and limits of its review, is attached hereto as Appendix C
and should be read by stockholders in its entirety. See "THE MERGER -- Opinion
of Financial Advisor to Bancorp."
EFFECTIVE DATE OF THE MERGER
Unless the parties agree upon another date, the Effective Date of the
Merger will be the date ten business days after the fulfillment or waiver of
each of the conditions to the obligations of the parties to effect the Merger
and the granting of all regulatory approvals. The parties presently expect to
consummate the Merger in early January 1998, although the timing is subject to
the satisfaction of certain conditions (discussed below). Either InterWest or
Bancorp may terminate the Merger Agreement if the Effective Date does not occur
on or before June 30, 1998.
EXCHANGE OF STOCK CERTIFICATES
As promptly as practicable after the Effective Date, InterWest will send
to each record holder of Bancorp Common Stock, transmittal materials for use in
exchanging Bancorp Common Stock certificates for InterWest Common Stock
certificates. All shares of InterWest Common Stock issued to Bancorp
stockholders pursuant to the Merger will be deemed to have been issued as of the
Effective Date. BANCORP STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS. See "THE MERGER --
Exchange of Bancorp Stock Certificates."
4
<PAGE> 16
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things: (i)
approval of the Merger Agreement by the holders of not less than two-thirds of
the outstanding shares of Bancorp Common Stock; (ii) receipt of all applicable
regulatory approvals without any condition that, in the opinion of InterWest,
would deprive InterWest of the material economic or business benefits of the
Merger, (iii) receipt by InterWest and Bancorp of the opinion of Graham & Dunn,
P.C., dated as of the Effective Date, as to certain federal income tax
consequences of the Merger; (iv) the InterWest Common Stock to be issued to
Bancorp stockholders having been approved for listing on the Nasdaq National
Market; (v) certain persons having entered into employment agreements with FNBP;
(vi) receipt by InterWest of an agreement from each "affiliate" of Bancorp
restricting the resale of InterWest Common Stock received by such affiliate in
the Merger; (vii) the number of Dissenting Shares does not exceed 10% of the
outstanding shares of Bancorp Common Stock; and (viii) receipt by InterWest of a
letter from InterWest's certified public accountants to the effect that the
Merger will qualify for pooling of interests accounting treatment. See "THE
MERGER -- Conditions to Consummation of the Merger."
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated, and the Merger abandoned, before
the Effective Date, whether before or after its adoption by the stockholders of
Bancorp, by the respective majority votes of both the InterWest and Bancorp
Boards, or by either the InterWest Board or the Bancorp Board under certain
specified circumstances, including a failure to consummate the Merger by June
30, 1998. In addition, InterWest may terminate the Merger Agreement under
certain circumstances if the Average Closing Price of the InterWest Common Stock
is greater than $43.75, and Bancorp may terminate the Merger Agreement under
certain circumstances if the Average Closing Price is less than $34.75. The
Merger Agreement may be amended at any time before the Effective Date if both
InterWest and Bancorp Boards approve, and InterWest has the right, without the
approval of Bancorp, to change the method of its acquisition of Bancorp.
However, no amendment may under any circumstances change the consideration to be
received by Bancorp stockholders for their Bancorp Common Stock. See "THE MERGER
- -- Amendment or Termination."
DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
Upon consummation of the Merger, the InterWest Board will consist of
InterWest's current directors. The executive officers of InterWest and InterWest
Bank in office immediately before the Effective Date will remain unchanged
following the Merger.
Following the Merger, InterWest anticipates that certain representatives
of InterWest may be elected to the FNBP Board, although the number and identity
of such persons has not been determined. The executive officers of FNBP will
remain unchanged immediately following the Merger, except that Mr. David Burgett
will retire as an officer of Bancorp and FNBP. Certain officers of Bancorp
and/or FNBP have executed employment agreements with Bancorp in anticipation of
the Merger. These employment agreements will be assumed by InterWest following
the Merger. See "THE MERGER -- Interests of Certain Persons in the Merger" and
"- Directors and Executive Officers After the Merger."
FEDERAL INCOME TAX TREATMENT OF THE MERGER
Consummation of the Merger is conditioned, among other things, on
receipt by InterWest and Bancorp of an opinion of Graham & Dunn, P.C., special
counsel for InterWest to the effect that no gain or loss will be recognized for
federal income tax purposes by stockholders of Bancorp who receive InterWest
Common Stock in exchange for their shares of Bancorp Common Stock, other than
with respect to cash received in lieu of fractional share interests. See "THE
MERGER -- Federal Income Tax Treatment of the Merger."
5
<PAGE> 17
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, EACH BANCORP STOCKHOLDER IS URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE MERGER, INCLUDING THE SPECIFIC APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS TO SUCH STOCKHOLDER.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a pooling of
interests by InterWest under generally accepted accounting principles. The
Merger Agreement provides that a condition to InterWest's obligation to
consummate the Merger is the receipt by InterWest of a letter from InterWest's
certified public accountants, independent auditors, to the effect that such firm
concurs with management's conclusions as to the appropriateness of pooling of
interests accounting for the Merger. See "THE MERGER -- Conditions to
Consummation of the Merger" and "-- Accounting Treatment."
The Merger is subject to the receipt of certain prior approvals from the
Board of Governors of the FRB. A Notice/Application for approval of the Merger
will be filed with the FRB. There can be no assurance that such approval will be
obtained, and, if obtained, that it will not impose conditions that, in the
opinion of InterWest, would deprive InterWest of the economic and business
benefits of the Merger so as to render it inadvisable in the judgment of
InterWest to proceed with the Merger. See "THE MERGER -- Regulatory
Requirements."
DISSENTERS' RIGHTS OF APPRAISAL
Bancorp stockholders have the right to dissent from the Merger and
obtain payment of the fair value of their shares of Bancorp Common Stock under
the provisions of Chapter 23B.13 of the Revised Code of Washington (the
"Appraisal Laws"). A STOCKHOLDER'S FAILURE TO FOLLOW EXACTLY THE PROCEDURES
SPECIFIED IN THE APPRAISAL LAWS WILL RESULT IN LOSS OF SUCH STOCKHOLDER'S
DISSENTERS' RIGHTS. Accordingly Bancorp stockholders wishing to dissent from the
Merger are urged to read carefully "THE MERGER -- Dissenters' Rights of
Appraisal" and the copy of the Appraisal Laws set forth in Appendix B to this
Prospectus/Proxy Statement, and to consult with their own legal advisors. If
Bancorp stockholders perfect dissenters' rights with respect to more than 10% of
the outstanding shares of Bancorp Common Stock, InterWest may elect not to
consummate the Merger. See "THE MERGER -- Conditions to Consummation of the
Merger." Additionally, if stockholders perfect dissenters' rights with respect
to more than 10% of the outstanding shares of Bancorp Common Stock and InterWest
elects to consummate the Merger, the Merger will not qualify for pooling of
interests accounting treatment. See "THE MERGER -- Accounting Treatment of the
Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Bancorp's management and the Bancorp Board may be
deemed to have interests in the Merger in addition to their interests as
stockholders of Bancorp generally. These include, among other things, provisions
in the Merger Agreement relating to indemnification and employment agreements.
The Merger Agreement provides that for the four-year period following
the Effective Date, InterWest will indemnify the directors, officers and
employees of Bancorp against certain liabilities to the extent that such persons
were entitled to indemnification under Washington law and the Articles of
Incorporation and Bylaws of Bancorp. See "THE MERGER -- Interests of Certain
Persons in the Merger."
Certain current members of management of Bancorp and/or FNBP will enter
into employment agreements with FNBP, to be assumed by InterWest upon
consummation of the Merger. See "THE MERGER -- Interests of Certain Persons in
the Merger."
Duane Guggenmos, the President and Chief Executive of Bancorp, and Linda
A. Smith, Vice President of FNBP, have entered into employment agreements with
FNBP which will become effective upon consummation
6
<PAGE> 18
of the Merger. Pursuant to Mr. Guggenmos's agreement, he will serve as President
of FNBP for a period of twelve (12) months commencing upon the consummation of
the Merger. Mr. Guggenmos's base salary under the Agreement will be $102,500.
Pursuant to Ms. Smith's agreement, she will serve as Vice President of FNBP for
a period of twenty-four (24) months commencing upon the consummation of the
Merger. Ms. Smith's base salary under the agreement will be $67,500. Both Mr.
Guggenmos and Ms. Smith are entitled to severance payments under certain
conditions. See "THE MERGER - Interests of Certain Persons in the Merger."
COMPARISON OF STOCKHOLDERS' RIGHTS
Stockholders of Bancorp who receive shares of InterWest Common Stock in
exchange for their shares of Bancorp Common Stock will be governed, with respect
to their rights as such stockholders, by InterWest's Articles of Incorporation
and Bylaws. For a discussion of certain material differences in the rights of
stockholders of InterWest and Bancorp and an explanation of certain possible
antitakeover effects of certain provisions in InterWest's Articles of
Incorporation and Bylaws, see "COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF
INTERWEST AND BANCORP COMMON STOCK."
TRADING MARKETS
InterWest Common Stock trades on the Nasdaq Stock Market under the
symbol "IWBK". Bancorp Common Stock does not trade on any exchange or market
system. See "STOCK PRICE AND DIVIDEND INFORMATION."
7
<PAGE> 19
STOCK PRICE AND DIVIDEND INFORMATION
INTERWEST
The InterWest Common Stock trades on The Nasdaq Stock Market under the
symbol "IWBK." The respective high and low sale prices of the InterWest Common
Stock for the periods indicated are shown below. The prices below do not include
retail mark-ups, mark-downs or commissions, and may not represent actual
transactions. The per share information has been adjusted retroactively for all
stock dividends and splits previously issued. As of October 29, 1997, there were
approximately 5,500 holders of record of the InterWest Common Stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1995
- ------------------------------------------------------------------------------------------------------
Cash Cash Cash
Dividends Dividends Dividends
Period Market Price Declared Market Price Declared Market Price Declared
- ------------------------------------------------------------------------------------------------------
High Low High Low High Low
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $33.00 $29.12 $0.14 $20.37 $15.25 $0.10 $14.50 $12.38 $0.075
- ------------------------------------------------------------------------------------------------------
2nd Quarter 36.25 31.75 0.14 21.87 19.62 0.12 14.75 12.00 0.075
- ------------------------------------------------------------------------------------------------------
3rd Quarter 39.50 27.62 0.15 25.12 21.37 0.13 14.37 12.75 0.080
- ------------------------------------------------------------------------------------------------------
4th Quarter 43.25 37.00 0.16 29.87 24.00 0.13 16.00 15.19 0.090
- ------------------------------------------------------------------------------------------------------
</TABLE>
Between September 30, 1997 and November 7, 1997 the most recent date for
which it was practicable to obtain information prior to the printing of this
Prospectus/Proxy Statement, the high for InterWest Common Stock was $40.75 and
the low was $37.38.
BANCORP
There is no established trading market for Bancorp Common Stock. Trades
are generally undertaken in private transactions. Thus, Bancorp management does
not have knowledge of the prices paid in all transactions involving its shares.
The following table sets forth management's best estimates of the high and low
trade prices for Bancorp Stock at the end of each quarter since the second
quarter of 1996. The most recent trade of Bancorp Common Stock occurred on June
10, 1997, when 31 shares of Bancorp Common Stock were traded at a price of
$31.00 per share.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock Prices
------------
CALENDAR YEAR QUARTER HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
Second 1996 $28.00 $25.00
- --------------------------------------------------------------------------------
Third 1996 28.00 28.00
- --------------------------------------------------------------------------------
Fourth 1996 28.00 28.00
- --------------------------------------------------------------------------------
First 1997 31.00 28.00
- --------------------------------------------------------------------------------
Second 1997 31.00 31.00
- --------------------------------------------------------------------------------
Third 1997 31.00 31.00
- --------------------------------------------------------------------------------
Fourth 1997 through November 7, 1997 No trades
- --------------------------------------------------------------------------------
</TABLE>
Dividends paid on Company Stock in 1997 and in 1996, respectively, were
$0.28 per share and $0.00 per share. The 1997 dividend was declared on February
19, 1997, payable on July 3, 1997, to stockholders of record as of April 17,
1997.
8
<PAGE> 20
RECENT STOCK PRICE DATA
The following table sets forth the closing price per share of InterWest
Common Stock, as reported on The Nasdaq Stock Market, and of Bancorp Common
Stock, in addition to the equivalent per share price for Bancorp Common Stock,
on September 17, 1997 (the last full trading day prior to the public
announcement of the execution of the Merger Agreement) and on November 7, 1997,
the most recent date for which it is practicable to obtain market price data
prior to the printing of this Prospectus/Proxy Statement. Holders of Bancorp
Common Stock are urged to obtain current market quotations for shares of
InterWest Common Stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLOSING PRICE PER SHARE: September 17, 1997 November 7, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
InterWest Common Stock $41.00 $37.63
- ------------------------------------------------------------------------------------------
Bancorp Common Stock(1) $31.00 $31.00
- ------------------------------------------------------------------------------------------
Bancorp Equivalent Pro Forma(2) $64.05 $64.05
- ------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) There are no publicly available quotations of Bancorp Common Stock, and the
market prices per share as of September 17, and November 7, 1997,
respectively (quoted above), represent the purchase prices known to
Bancorp's management to have been paid for the Bancorp Common Stock in the
last transaction prior to such dates.
(2) Giving effect for the Merger and computed by multiplying the closing price
per share of InterWest Common Stock by the Exchange Ratio.
9
<PAGE> 21
EQUIVALENT PER COMMON SHARE DATA
The following table presents unaudited selected per common share data
for InterWest on a historical and pro forma combined basis and for Bancorp, on a
historical and pro forma equivalent basis, after giving effect to the Merger on
a pooling of interests basis. For a description of the pooling of interests
method of accounting with respect to the Merger see "THE MERGER -- Accounting
Treatment of the Merger." The pro forma combined financial data are not
necessarily indicative of actual or future operating results or the financial
position that would have occurred had the Merger become effective prior to the
period indicated or will occur upon consummation of the Merger. This data should
be read in conjunction with the financial statements and other financial data
with respect to InterWest and Bancorp included elsewhere in this
Prospectus/Proxy Statement or incorporated herein by reference. The data is not
necessarily indicative of the results of future operations of the combined
entity or the actual results that could have occurred had the Merger become
effective prior to the periods indicated. The table assumes an Exchange Ratio of
1.46 shares of InterWest Common Stock for one share of Bancorp Common Stock; the
actual Exchange Ratio cannot be determined at this time and will not be
calculable until shortly before the Merger. See "THE MERGER -- Basic Terms of
the Merger."
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
INTERWEST BANCORP COMBINED(3) EQUIVALENT(3)
--------- ------- ----------- -------------
<S> <C> <C> <C> <C>
BOOK VALUE (1) AS OF:
June 30, 1997 $15.46 $23.54 $15.48 $22.60
September 30, 1996 14.02 21.32 14.04 20.50
EARNINGS PER SHARE (2)
Nine months ended June 30, 1997 1.84 3.13 1.85 2.70
Nine months ended June 30, 1996 1.64 2.30 1.63 2.39
Year Ended September 30, 1996 1.58 3.39 1.61 2.35
Year Ended September 30, 1995 1.80 2.53 1.80 2.63
Year Ended September 30, 1994 1.69 2.66 1.69 2.47
CASH DIVIDENDS DECLARED
Nine months ended June 30, 1997 0.43 0.28 0.42 0.62
Nine months ended June 30, 1996 0.35 0 0.34 0.49
Year Ended September 30, 1996 0.51 0 0.49 0.72
Year Ended September 30, 1995 0.37 0 0.36 0.52
Year Ended September 30, 1994 0.35 0 0.34 0.49
</TABLE>
- ---------------
(1) Book value per share is calculated by dividing the total actual historical
and pro forma equity as the date indicated by the actual historical and pro
forma number of shares outstanding as of the same date.
(2) Earnings per share is calculated by dividing the total actual historical and
pro forma net income for the periods ended by the actual historical and pro
forma weighted average number of shares of common stock for the period
indicated. The pro forma equivalent net income per share of Bancorp Common
Stock represents the pro forma combined net income per share multiplied by
the assured Exchange Ratio described in note (3) below. Prior year Bancorp
financial statements have been restated to conform Bancorp's December 31
fiscal year end and InterWest's September 30 fiscal year end for purposes of
determining earnings per share.
(3) The pro forma combined book value per share of InterWest Common Stock is
based upon the historical total combined shareholders' equity for InterWest
and Bancorp divided by the total pro forma common shares of the combined
entities assuming conversion of the outstanding Bancorp Common Stock at an
assumed ratio (made for purpose of this calculation only) of 1.46. The
assumed Exchange Ratio is based upon an assumed price for InterWest Common
Stock of $43.75 per share, which is the highest price in the range of the
Exchange Ratio. This assumption is made solely for the purpose of
calculating the pro forma data and is not intended to be a representation or
approximation of the actual Exchange Ratio. The data assumes 209,576,
shares, not including shares subject to options.
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BANCORP SPECIAL STOCKHOLDER MEETING
DATE, TIME, PLACE AND PURPOSE
The Bancorp Special Meeting will be held on December 16, 1997, at 7:00
p.m. local time, at the principal offices of Bancorp, 1488 Olney Avenue SE, Port
Orchard, Washington. The purposes of the Bancorp 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 Bancorp Special
Meeting. At the time of the Bancorp Special Meeting, the precise number of
shares of InterWest Common Stock to be received for each share of Bancorp Common
Stock will not be known, as it will be determined by the Average Closing Price
of InterWest Common Stock for a brief period before the closing of the Merger,
which is expected to occur in early January, 1998. See "THE MERGER -- Basic
Terms of the Merger."
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
The Bancorp Board has fixed 5:00 p.m. on November 8, 1997 as the Bancorp
Record Date for determining the holders of shares of Bancorp Common Stock
entitled to notice of and to vote at the Bancorp Special Meeting. At the close
of business on the Bancorp Record Date, there were 232,592 shares of Bancorp
Common Stock issued and outstanding held by approximately 390 holders of record.
Holders of record of Bancorp Common Stock on the Bancorp Record Date are
entitled to one vote per share, and are also entitled to exercise dissenters'
rights if certain procedures are followed. See "THE MERGER -- Dissenters' Rights
of Appraisal" and Appendix B.
VOTE REQUIRED
The affirmative vote of two-thirds of all shares of Bancorp Common Stock
outstanding on the Bancorp Record Date is required to approve the Merger
Agreement. Bancorp's stockholders are entitled to one vote for each share of
Bancorp Common Stock held. The presence of a majority of the outstanding shares
of Bancorp Common Stock in person or by proxy is necessary to constitute a
quorum of stockholders for the Bancorp 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 Bancorp 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 Bancorp Record Date, directors and executive officers of
Bancorp, and their affiliates, owned and were entitled to vote 83,575 shares at
the Bancorp Special Meeting, representing approximately 35.93 percent of the
outstanding shares of Bancorp Common Stock. See "MANAGEMENT OF BANCORP --
Security Ownership of Management and Certain Beneficial Owners." Each director
of Bancorp has agreed to vote all shares of Bancorp Common Stock held or
controlled by him or her (a total of 83,575 shares, or approximately 35.93
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
Bancorp 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
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MEETING, unless otherwise directed by the proxy. Any proxy given by a
stockholder may be revoked before its exercise by written notice to the
Secretary of Bancorp, or by a subsequently dated proxy, or in open meeting
before the stockholder vote is taken. The shares represented by properly
executed, unrevoked proxies will be voted in accordance with the instructions in
the proxy. Stockholders are entitled to one vote for each share of Bancorp
Common Stock held on the Bancorp Record Date.
The proxy for the Bancorp Special Meeting is being solicited on behalf
of the Bancorp Board. Bancorp will bear the cost of solicitation of proxies from
its stockholders. 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 Bancorp may solicit
proxies personally. Bancorp 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
InterWest has adopted a strategy to accomplish certain goals for growth,
capital and return on equity that has included growth through acquisitions. The
first acquisition was completed in August, 1996, through the merger of Central
Bancorporation, located in Wenatchee, Washington, into InterWest. This strategy
has been approved by the InterWest Board of Directors.
On May 22, 1997 Mr. Gary Bolyard, the Vice Chairman of InterWest,
initiated a meeting with Mr. Duane Guggenmos, President and Chief Executive
Officer of Bancorp. The meeting took place on May 27, 1997 in Port Orchard,
Washington to discuss a potential business combination of the two companies. At
the June 11, 1997 InterWest Board of Directors meeting executive management
provided an update on mergers and acquisitions opportunities including the fact
that there was a meeting scheduled with the Board of Directors of Bancorp on
June 12, 1997 to discuss the possibility of pursuing a merger.
On June 12, 1997 Mr. Stephen Walden, President and Chief Executive
Officer of InterWest and Mr. Bolyard met with the Board of Directors of Bancorp
in Port Orchard, Washington to discuss a potential business combination of the
two companies. In June, 1997 the Bancorp Board of Directors held a retreat for
the purpose of addressing the succession of management, consistent with the
recommendation of bank regulators. At that time the possible merger with
InterWest was also discussed. Subsequent to this meeting there were several
other discussions between executives of the two companies in late June 1997, and
early July 1997, involving the possibility of a merger. These discussions were
preliminary in nature and did not result in agreement regarding the terms of a
merger transaction.
At the July 15, 1997 InterWest Board meeting executive management
updated the Board on merger and acquisitions opportunities and discussed the
possibility of a merger transaction with Bancorp. Bancorp has three offices in
locations that would be a logical extension of the markets that InterWest is
currently located in. The proposed terms for the possibility of the merger were
reviewed and discussed with the Board. The Board resolved that it was in the
best interest of InterWest to proceed with the proposed transaction. The Board
authorized management to negotiate a merger agreement with Bancorp consistent
with the terms proposed.
In July and August 1997 negotiations continued regarding the specific
financial terms of the proposed transaction as well as employee and benefit
issues. In August 1997 the Bancorp Board of Directors retained the services of
Columbia Financial Advisors, Inc. to assist the Board in considering InterWest's
merger proposal. At the September 9, 1997 InterWest Board meeting management
updated the Board on the status of the proposed
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transaction with Bancorp. There was a discussion about Bancorp being a natural
extension of InterWest's market area and the historical operating results that
Bancorp has had.
The terms of the merger were incorporated into a definitive merger
agreement which was approved by the Bancorp Board on September 17, 1997.
REASONS FOR THE MERGER - BANCORP
Bancorp's Board, at its meeting held on September 17, 1997, considered
the Merger Agreement and determined it to be fair, and in the best interests of,
Bancorp and its shareholders, customers and employees. In reaching its
determination, Bancorp's Board consulted with Bancorp management, as well as
financial and legal advisors respectively, regarding the financial fairness of
the merger and the terms of the Merger Agreement, and considered a number of
factors. Listed below are the material factors Bancorp's Board considered in
their decision. Bancorp's Board did not assign any specific or relative weight
to the factors listed below.
o The Board determined that a merger with InterWest would be a better
alternative plan than expanding independently through internal growth
or through acquisition.
o The ability to continue operations under the name of "First National
Bank of Port Orchard" while accessing the financial, technological
and human resource strength of InterWest would greatly enhance
Bancorp's ability to compete in an ever changing market place.
o Confronted with changing shareholder demographics and desires,
Bancorp's Board determined that combining with a larger,
publicly-traded company would result in greatly improved liquidity
for Company shareholders.
o Combining the management resources of the two companies would result
in a greater depth of management, which would strengthen both
companies.
o Because of InterWest's relative size and resources, Bancorp's
employees would benefit from enhanced technology and training which
in turn would provide substantially improved career opportunities for
Bancorp's employees.
RECOMMENDATION OF BANCORP BOARD
FOR THE REASONS SET FORTH ABOVE, BANCORP'S BOARD HAS APPROVED THE MERGER
AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF BANCORP AND BANCORP
SHAREHOLDERS AND RECOMMENDS THAT BANCORP SHAREHOLDER VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
OPINION OF BANCORP FINANCIAL ADVISOR
Columbia Financial has delivered a written opinion (the "Columbia
Financial Opinion") to the Bancorp Board to the effect that, as of the date of
this Prospectus/Proxy Statement, the consideration to be received by Bancorp
stockholders under the terms of the Merger Agreement is fair to such
stockholders from a financial point of view. The Exchange Ratio has been
determined by Bancorp and InterWest through negotiations. The Columbia Financial
Opinion is directed only to the fairness, from a financial point of view, of the
consideration to be received and does not constitute a recommendation to any
Bancorp stockholder as to how such stockholder should vote at the Bancorp
Special Meeting.
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Bancorp retained Columbia Financial as its exclusive financial advisor
under the terms of an engagement letter dated August 20, 1997 ("Engagement
Letter") in connection with the Merger. Columbia Financial is a regionally
recognized investment banking firm that is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions. The
Bancorp Board selected Columbia Financial to act as Bancorp's exclusive
financial advisor based on Columbia Financial's experience in mergers and
acquisitions and in securities valuation generally.
On September 18, 1997, Columbia Financial issued its opinion to the
Bancorp Board that, in its opinion as investment bankers, the terms of the
Merger as provided in the Merger Agreement are fair, from a financial view
point, to Bancorp and its stockholders. THE FULL TEXT OF THE COLUMBIA FINANCIAL
OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITS
ON ITS REVIEW, IS ATTACHED AS APPENDIX C. THE SUMMARY OF THE COLUMBIA FINANCIAL
OPINION IN THIS PROSPECTUS/PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. BANCORP STOCKHOLDERS ARE URGED TO
READ THE ENTIRE COLUMBIA FINANCIAL OPINION.
In rendering its opinion to Bancorp, Columbia Financial reviewed, among
other things, historical financial data of Bancorp, certain internal financial
data and assumptions of Bancorp prepared for financial planning and budgeting
purposes furnished by the management of Bancorp and, to the extent publicly
available, the financial terms of certain change of control transactions
involving Northwest community banks. Columbia Financial discussed with Bancorp's
management the financial condition, current operating results, and business
outlook for Bancorp. Columbia Financial also reviewed certain publicly available
information concerning InterWest and certain financial and securities data of
InterWest and companies deemed similar to InterWest. Columbia Financial
discussed with InterWest's management the financial condition, current operating
results, and business outlook for InterWest and InterWest's plans relating to
Bancorp. In rendering its opinion, Columbia Financial relied, without
independent verification, on the accuracy and completeness of all financial and
other information reviewed by it and did not attempt to verify or to make any
independent evaluation or appraisal of the assets of Bancorp or InterWest nor
was it furnished any such appraisals. Bancorp did not impose any limitations on
the scope of the Columbia Financial investigation in arriving at its opinion.
Columbia Financial analyzed the total purchase price on a cash
equivalent fair market value basis using standard evaluation techniques (as
discussed below) including comparable sales multiples, net present value
analysis, and net asset value based on certain assumptions of projected growth,
earnings and dividends and a range of discount rates from 16% to 18% percent.
NET ASSET VALUE is the value of the net equity of a bank, including
every kind of property and value. This approach normally assumes the liquidation
on the date of appraisal with the recognition of the investment securities gains
or losses, real estate appreciation or depreciation, adjustments to the loan
loss reserve, discounts to the loan portfolio and changes in the net value of
other assets. As such, it is not the best evaluation approach when valuing a
going concern because it is based on historical costs and varying accounting
methods. Even if the assets and liabilities are adjusted to reflect prevailing
market prices and yields (which is often of limited accuracy due to the lack of
readily available data), it still results in a liquidation value. In addition,
since this approach fails to account for the values attributable to the going
concern such as the interrelationship among Bancorp's assets and liabilities,
customer relations, market presence, image and reputation, staff expertise and
depth, little weight is given by Columbia Financial to the net asset value
approach to valuation.
MARKET VALUE is generally defined as the price, established on an
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a thin market for
its common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In
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valuing a business enterprise, when sufficient comparable trade data are
available, the market value approach deserves greater weighting than the net
asset value approach and similar weight as the investment value approach as
discussed below.
Columbia Financial maintains a substantial proprietary data base
concerning prices paid for banking institutions in the Northwest, particularly
Washington and Oregon banking institutions, during 1988 through 1997. This data
base provides comparable pricing and financial performance data for banking
institutions sold or acquired. Organized by different peer groups, these data
present medians of financial performance and purchase price levels, thereby
facilitating a valid comparative purchase price analysis. In analyzing the
transaction value of Bancorp, Columbia Financial has considered the market
approach and has evaluated price to stockholders equity and price to earnings
multiples and the price to total assets percentage for transactions involving
Oregon and Washington banking organizations with total assets less than $100
million that sold for 100% common stock from January 1988 to September 1997.
COMPARABLE SALES MULTIPLES. Columbia Financial calculated a "Merger
Consideration-Adjusted Book Value" for Bancorp's June 30, 1997 stockholders
equity and the estimated January 15, 1998 stockholders equity adjusted for the
price to stockholders equity ratios for a sample of Northwest banking
institutions with assets below $100 million which sold between January 1988
through September 1997 and a sample of Northwest banking institutions with total
assets below $100 million which sold between January 1994 and September 1997.
The calculations are $46.72 and $47.19 per share, respectively, for the June 30,
1997 stockholders equity for the two samples. For the estimated January 15, 1998
stockholders equity, the calculations are $47.60 and $48.08, respectively. For
Bancorp's 1996 net income and twelve months prior to June 30, 1997, the
calculations are $42.36 and $50.47, respectively. This summary of the material
results of these analyses indicates that the proposed transaction has a total
purchase price whose ratios exceed those derived from Comparable Sales Multiples
analyses and supports the Columbia Financial conclusion that the proposed
transaction is fair, from a financial point of view.
TRANSACTION VALUE AS A PERCENTAGE OF TOTAL ASSETS. Columbia Financial
calculated the percentage of total assets which the transaction represents as a
price level indicator. The transaction value as a percentage of total assets
facilitates a truer price level comparison with comparable banking
organizations, regardless of the differing levels of stockholders equity and
earnings. In this instance, a transaction value of $64.05 per share results in a
transaction value as a percentage of total assets of 29.22%. The median price as
a percentage of total assets for a sample of Northwest banking institutions with
assets below $100 million which sold between January 1988 through September 1997
and a sample of Northwest banking institutions with total assets below $100
million which sold between 1994 and 1997 was 18% and 18%, respectively. This
summary of the material results of these analyses indicates that the proposed
transaction has a total purchase price whose ratios exceed those derived from
Transaction Value as a Percentage of Total Assets analyses and supports the
Columbia Financial conclusion that the proposed transaction is fair, from a
financial point of view.
INVESTMENT VALUE is sometimes referred to as the income or earnings
value. One investment value method frequented used estimates the present value
of an institution's future earnings or cash flow which is discussed below.
NET PRESENT VALUE ANALYSIS. The investment or earnings value of any
banking organization's stock is an estimate of the present value of future
benefits, usually earnings, dividends, or cash flow, which will accrue to the
stock. An earnings value is calculated using an annual future earning stream
over a period of time of not less than five years and the residual or terminal
value of the earnings stream after five years, using Bancorp's estimates of
future growth and an appropriate capitalization or discount rate. Columbia
Financial's calculations were based on an analysis of the banking industry,
Bancorp's earnings estimates for 1997-2001, historical levels of growth and
earnings, and the competitive situation in Bancorp's market area. Using discount
rates of 16%, 18% and 20%, acceptable discount rates considering the risk-return
relationship most investors would demand
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for an investment of this type as of the valuation date, the "Net Present Value
of Future Earnings" provided a range of $50.42 to $59.33 per share.
When the net asset value, market value and investment value approaches
are subjectively weighed, using the appraiser's experience and judgment, it is
Columbia Financial's opinion that the proposed transaction is fair, from a
financial point of view.
Pursuant to the terms of the Engagement Letter, Bancorp has agreed to
pay Columbia Financial a fee of $20,000 for this fairness opinion and a fee to
be determined by the amount of the Purchase Price above the first $13,100,000,
to be paid at closing. In addition, Bancorp has agreed to reimburse Columbia
Financial for its reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel, and to indemnify Columbia Financial against
certain liabilities.
REASONS FOR THE MERGER - INTERWEST
At a meeting on September 9, 1997, the InterWest Board determined that
the Merger and Merger Agreement are fair to and in the best interests of
InterWest and its stockholders. In considering the Merger, the InterWest Board
determined that the Merger would be consistent with InterWest's strategic intent
in expanding its community banking business. InterWest can potentially provide
customers and stockholders of Bancorp with certain advantages of a community
banking organization as well as a larger banking organization.
InterWest determined that the Merger would advance InterWest's strategic
plan because of its belief that the Merger will combine two financially sound
institutions with complementary businesses and strategies, thereby creating a
stronger combined organization with greater size, flexibility, efficiency, and
profitability. The InterWest Board believes that (i) each institution is
currently well managed, (ii) the companies have compatible management
philosophies and strategic focuses, (iii) Bancorp will contribute complementary
business strengths to InterWest, and (iv) the combined organization will
continue to be well capitalized. The InterWest Board also believes that the
Merger will allow the combined organization to compete effectively in the
rapidly changing marketplace of banking and financial services and to take
advantage of opportunities for growth and diversification in Washington State.
In reaching its determination to adopt the Merger Agreement, the
InterWest Board considered a variety of factors, although it did not assign any
relative or specific weights to the factors considered. The factors considered
included the following:
o The InterWest Board's knowledge and review of the financial
condition, results of operation, and business operations and
prospects of Bancorp;
o The InterWest Board's analysis of the banking industry environment,
including the rapid consolidation and increasing regional competition
in the banking and financial services industries and the need to
respond proactively to industry trends;
o The InterWest Board's belief that the acquisition of Bancorp will
expand InterWest's franchise and would be a logical extension for
InterWest into the locations where Bancorp is located;
o The InterWest Board's evaluation of the financial terms of the Merger
and their effect on the stockholders of InterWest and the InterWest
Board's belief that such terms are fair to InterWest and its
stockholders;
o Bancorp is not so large as to make the combination of the two
companies difficult and costly;
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o The Merger would allow InterWest to expand its commercial, small
business and consumer lending activity on the Kitsap Peninsula
through Bancorp's existing branch network faster and more efficiently
than InterWest could develop it on its own;
o The expectation that the Merger will be a tax-free transaction to
InterWest and will qualify for pooling-of-interests accounting
treatment (see "THE MERGER -- Federal Income Tax Treatment of the
Merger; "-- Accounting Treating of the Merger"); and
o The InterWest Board's belief, after consultation with its legal
counsel, that the required regulatory approvals could be obtained to
consummate the Merger.
The foregoing discussion of the information and factors considered by
the InterWest Board is not intended to be exhaustive but is believed to
encompass all material factors considered by the InterWest Board. On the basis
of the foregoing factors, the InterWest Board concluded that the terms of the
Merger are fair to and in the best interests of InterWest and its stockholders.
THE MERGER
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. Bancorp stockholders are being asked to approve the Merger in
accordance with the terms of the Merger Agreement, and are urged to read the
Merger Agreement, which is attached at Appendix A, carefully.
BASIC TERMS OF THE MERGER
The Merger Agreement provides for the merger of Bancorp with and into
InterWest, with InterWest surviving the Merger. The separate existence of
Bancorp will cease upon completion of the Merger. While InterWest and Bancorp
believe that they will receive the requisite regulatory approvals for the
Merger, there can be no assurance that such approvals will be received or, if
received, as to the timing of such approvals or as to the ability to obtain such
approvals on satisfactory terms. See "-- Conditions to Consummation of the
Merger" and "-- Regulatory Requirements." After consummation of the Merger, FNBP
will operate as a wholly owned subsidiary of InterWest.
Upon consummation of the Merger, each outstanding share of Bancorp
Common Stock (except Excluded Shares) will be automatically converted into the
right to receive InterWest Common Stock. The exact number of shares of InterWest
Common Stock that a holder will receive for each share of Bancorp Common Stock
will be equal to the Exchange Ratio, as determined in the manner described
below. The Exchange Ratio will not be calculable at the date of the Bancorp
Special Meeting, and thus holders of Bancorp Common Stock will not know at the
time they vote on the Merger Agreement exactly how many shares of InterWest
Common Stock they will receive for each share of Bancorp Common Stock.
The number of shares of InterWest Common Stock to be received for each
share of Bancorp Common Stock will be equal to the Exchange Ratio, which will
fluctuate between 1.84 to 1.46 shares of InterWest Common Stock for each share
of Bancorp Common Stock if the Average Closing Price of the InterWest Common
Stock for a 10 trading-day period commencing 30 days prior to the Effective Date
is between $34.75 and $43.75. Subject to the conditions described below that
would apply if the Average Closing Price is greater than $43.75 or less than
$34.75, each share of Bancorp Common Stock will be converted into a right to
receive InterWest Common Stock worth $64.05, based on the Average Closing Price.
If the Average Closing Price is less than $34.75, Bancorp may terminate
the Merger Agreement unless InterWest elects to adjust the Exchange Ratio so
that the Average Closing Price multiplied by the Exchange Ratio
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equals $64.05. Bancorp may elect not to terminate the Merger Agreement even if
InterWest does not elect to adjust the Exchange Ratio, in which case the
Valuation Price (i.e., the effective Average Closing Price) would be fixed at
$34.75, and the Exchange Ratio will be 1.84, even though the Average Closing
Price is less than $34.75.
As an example of the above, if the Average Closing Price is $25.00,
Bancorp may terminate the Merger Agreement unless InterWest elects to adjust the
Exchange Ratio so that the Average Closing Price (in the example given, $25.00)
multiplied by the Exchange Ratio equals $64.05. In the example given, the
Exchange Ratio would be 2.562, and each share of Bancorp Common Stock would be
converted into the right to receive 2.562 shares of InterWest Common Stock.
Under the Merger Agreement, if the Average Closing Price is less than $34.75 and
InterWest does not elect to adjust the Exchange Ratio, Bancorp has the option to
either terminate the Merger Agreement, or accept $34.75 as the Valuation Price
(resulting in a 1.84 Exchange Ratio) even though the Average Closing Price is
below that figure. See "-- Amendment and Termination."
If the Average Closing Price is greater than $43.75, InterWest may
terminate the Merger Agreement unless Bancorp elects to adjust the Exchange
Ratio so that the Average Closing Price multiplied by the Exchange Ratio equals
$64.05. InterWest may elect not to terminate the Merger Agreement even if
Bancorp does not elect to adjust the Exchange Ratio, in which case the Valuation
Price (i.e., the effective Average Closing Price) would be fixed at $43.75, and
the Exchange Ratio will be 1.46, even though the Average Closing Price exceeds
that figure.
As an example, if the Average Closing Price is $48.00, and if no
Triggering Event (as defined below) has occurred, InterWest may terminate the
Merger Agreement unless Bancorp elects to adjust the Exchange Ratio so that the
Average Closing Price (in the example given, $48.00) multiplied by the Exchange
Ratio equals $64.05. In the example given, the Exchange Ratio would be 1.334,
and each share of Bancorp Common Stock would be converted into the right to
receive 1.334 shares of InterWest Common Stock. Under the Merger Agreement, if
the Average Closing Price is higher than $43.75, no Triggering Event has
occurred, and Bancorp does not elect to adjust the Exchange Ratio, then
InterWest has the option to either terminate the Merger Agreement, or accept
$43.75 as the Valuation Price (resulting in a 1.46 Exchange Ratio) even though
the Average Closing Price is above $43.75. See "-- Amendment and Termination."
For purposes of the foregoing, a "Triggering Event" means any one or
more of the following events: (i) InterWest shall have authorized, recommended,
publicly proposed or publicly announced an intention to authorize, recommend or
propose, or entered into an agreement with, any third party to effect (a) a
merger, consolidation or similar transaction involving InterWest or any of its
significant subsidiaries, (b) the disposition of assets or deposits of InterWest
representing 25% or more of the consolidated assets or deposits of InterWest and
it subsidiaries, or (c) the issuance, sale or other disposition of securities
representing 25% or more of the voting power of InterWest or any of its
significant subsidiaries other than the issuance of InterWest Common Stock upon
the exercise of outstanding options or the conversion of outstanding convertible
securities of InterWest (an "InterWest Transaction"); (ii) a third party shall
have made a proposal to InterWest or its stockholders to engage in an InterWest
Transaction; (iii) a third party, other than in connection with a transaction to
which Bancorp has given its prior written consent, shall have filed an
application or notice with any regulatory authority for approval to engage in an
InterWest Transaction; and (iv) a third party shall have commenced, or filed a
registration statement with respect to, a tender offer or exchange offer that
would result in such third party owning or controlling 20% or more of the then
outstanding shares of InterWest Common Stock.
By way of example only, if the Average Closing Price is $39.25, and
assuming that 230,433 shares of Bancorp Common Stock are outstanding and subject
to exchange on the Effective Date, each share of Bancorp Common Stock would be
converted into a right to receive 1.632 shares of InterWest Common Stock, which
would have a value, determined on the basis of the Valuation Price, equal to
$64.05. Bancorp stockholders should note, however, that the market price of
InterWest Common Stock they receive will continue to be subject to market
fluctuations, as well as the future results of operations and financial
condition of InterWest, among
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other factors, and therefore may be worth less than, or more than, the Average
Closing Price as of the date they receive their InterWest Common Stock
certificates.
On November 7, 1997, the most recent date for which it is practicable
to obtain information prior to the printing of this Prospectus/Proxy Statement,
the closing price per share of InterWest Common Stock, as reported on the Nasdaq
National Market, was $37.63.
MECHANICS OF THE MERGER
On the Effective Date, Bancorp will be merged with and into InterWest.
At that time, all business, assets, and liabilities formerly carried on or owned
by Bancorp will be transferred to and owned by InterWest. Bancorp will cease to
have a corporate existence separate from InterWest, and FNBP will be a directly
owned subsidiary of InterWest.
EFFECTIVE DATE OF THE MERGER
Unless the parties agree upon another date, the Effective Date of the
Merger will be the date ten business days after the fulfillment or waiver of
each of the conditions to the obligations of the parties to effect the Merger
and the granting of all regulatory approvals. Subject to the foregoing, it is
currently anticipated that the Merger will be consummated in early January,
1998. Either InterWest or Bancorp may terminate the Merger Agreement if the
Effective Date does not occur on or before June 30, 1998.
EXCHANGE OF BANCORP STOCK CERTIFICATES
As promptly as practicable after the Effective Date, InterWest will send
or cause to be sent to each holder of record of Bancorp Common Stock transmittal
materials for use in exchanging all of such holder's certificates representing
Bancorp Common Stock for a certificate or certificates representing the
InterWest Common Stock to which such holder is entitled and a check or checks
for such holder's fractional share interests, as appropriate. The transmittal
materials will contain information and instructions with respect to the
surrender and exchange of such certificates.
BANCORP STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for Bancorp Common Stock
registered in the name of a holder of such certificates (or indemnity
satisfactory to InterWest and the exchange agent selected by InterWest, if any
of such certificates are lost, stolen or destroyed), together with a properly
completed letter of transmittal, such exchange agent will mail to such holder a
certificate or certificates representing the number of shares of InterWest
Common Stock to which such holder is entitled, together with all undelivered
dividends or distributions in respect of such shares and, where applicable, a
check for any fractional share interest (in each case, without interest).
All shares of InterWest Common Stock issued to the holders of Bancorp
Common Stock pursuant to the Merger will be deemed issued as of the Effective
Date. InterWest dividends having a record date after the Effective Date will
include dividends on all shares of InterWest Common Stock issued in the Merger,
but no dividend or other distribution payable to the holders of record of
InterWest Common Stock at or as of any time after the Effective Date will be
distributed to the holder of any Bancorp Common Stock certificates until such
holder physically surrenders all such certificates as described above. Promptly
after such surrender, all undelivered dividends and other distributions and,
where applicable, a check for any fractional share interest, will be delivered
to such holder, in each case, without interest. After the Effective Date, the
stock transfer books of
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Bancorp will be closed, and there will be no transfers on the transfer books of
Bancorp of the shares of Bancorp Common Stock that were outstanding immediately
prior to the Effective Date.
CONDITIONS TO CONSUMMATION OF THE MERGER; REGULATORY APPROVALS
The obligations of Bancorp and InterWest to consummate the Merger are
subject to, among other things, the satisfaction of the following conditions:
(i) approval of the Merger Agreement by the holders of at least two-thirds of
the outstanding shares of Bancorp Common Stock; (ii) receipt of all applicable
regulatory approvals without any condition that, in the opinion of InterWest,
would deprive InterWest of the material economic or business benefits of the
Merger; (iii) no court or government or regulatory authority having taken any
action which enjoins or prohibits the Merger; (iv) receipt by InterWest and
Bancorp of the opinion of Graham & Dunn, P.C., dated as of the Effective Date,
as to certain federal income tax consequences of the Merger; (v) the InterWest
Common Stock to be issued to Bancorp stockholders having been approved for
listing on the Nasdaq National Market; and (vi) Mr. Duane R. Guggenmos and Ms.
Linda A. Smith having entered into employment agreements with FNBP.
The obligations of InterWest are subject to the satisfaction or waiver
of certain additional conditions, including: (i) the delivery by Bancorp of
opinions of its legal counsel and certificates executed by certain of its
executive officers as to compliance with the Merger Agreement; (ii) the accuracy
of the representations and warranties, and compliance in all material respects
with the agreements and covenants of Bancorp; (iii) receipt by InterWest of an
agreement from each "affiliate" of Bancorp restricting the sale of InterWest
Common Stock received by such affiliate in the Merger; (iv) the absence of any
material adverse change in the financial position or results of operations of
Bancorp; (v) the number of Dissenting Shares does not exceed 10% of the
outstanding shares of Bancorp Common Stock; (vi) receipt by InterWest of a
letters from its certified public accountants to the effect that the Merger will
qualify for pooling of interests accounting treatment, assuming the Merger is
consummated in accordance with the Merger Agreement; (vii) Bancorp's capital is
not less than $5,425,000 unless the Merger is consummated after March 31, 1998,
in which case Bancorp's capital is not less than $5,500,000; and (viii) FNBP's
allowance for possible loan and lease losses is not less than 0.95% of FNBP's
adjusted loans and is adequate to absorb anticipated losses.
The obligations of Bancorp are also subject to the satisfaction or
waiver of certain additional conditions, including: (i) the delivery by
InterWest of opinions of its legal counsel and certificates executed by certain
of its executive officers as to compliance with the Merger Agreement; (ii) the
accuracy of the representations and warranties, and compliance in all material
respects with the agreements and covenants of InterWest; (iii) the absence of
any material adverse change in the financial position or results of operations
of InterWest.
Additionally, the Merger Agreement may be terminated by Bancorp in
certain circumstances if the Average Closing Price is less than $34.75, or by
InterWest in certain circumstances if the Average Closing Price is greater than
$43.75. See "-- Basic Terms of the Merger" and "-- Amendment or Termination."
The Merger is subject to prior approval by the FRB under the BHCA. A
Notice/Application for approval of the Merger will be filed with the FRB.
The approval of any application merely implies satisfaction of
regulatory criteria for approval, which do not include review of the Merger from
the standpoint of the adequacy of the consideration to be received by, or
fairness to, stockholders. Regulatory approvals do not constitute an endorsement
or recommendation of the proposed Merger.
InterWest and Bancorp are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for consummation
of the Merger other than those described above. Should any other approval or
action be required, it is presently contemplated that such approval or action
would be sought.
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There can be no assurance that any such approval or action, if needed, could be
obtained and, if such approvals or actions are obtained, there can be no
assurance as to the timing thereof. The Merger cannot proceed in the absence of
all requisite regulatory approvals. See "-- Effective Date of the Merger," "--
Conditions to Consummation of the Merger," and "--Amendment or Termination."
The Merger Agreement provides that if the Merger has not been
consummated by June 30, 1998, the Merger Agreement may be terminated by
InterWest or Bancorp. Since there is the possibility that regulatory approval
may not be obtained for a substantial period of time after approval of the
Merger Agreement by Bancorp's stockholders, there can be no assurance that the
Merger will be consummated by June 30, 1998. In addition, should regulatory
approval require any material change, a resolicitation of stockholders may be
required if regulatory approval is obtained after stockholder approval of the
Merger Agreement.
AMENDMENT OR TERMINATION
InterWest may elect to modify the structure of the Merger, but InterWest
will not have the right to make any revision to the structure of the Merger
which (i) changes the amount or kind of the consideration which the Bancorp
stockholders are entitled to receive or (ii) adversely affects the tax treatment
to Bancorp stockholders of receiving such consideration. Prior to the Effective
Date of the Merger, any condition of the Merger Agreement may (to the extent
allowed by law) be waived in writing by the party benefited by the provision or
may be amended or modified by an agreement in writing approved by the Boards of
Directors of InterWest and Bancorp. After approval of the Merger Agreement by
the stockholders of Bancorp, the Merger Agreement may not, without further
approval of such stockholders, be amended in any manner that would alter the
consideration to be received by Bancorp stockholders in exchange for their
Bancorp Common Stock.
The Merger Agreement may be terminated prior to the Effective Date of
the Merger, either before or after approval by the Bancorp stockholders, as
follows: (i) by the mutual consent of the parties; (ii) by either party if the
other party has committed a material breach that cannot be or has not been cured
within 30 days after the giving of written notice of such breach; (iii) by
either party if the Closing Date shall not have occurred by June 30, 1998; (iv)
by either party if the stockholders of Bancorp fail to approve the Merger
Agreement; (v) by Bancorp if the Average Closing Price is less than $34.75 and
InterWest, in its sole discretion, does not elect to adjust the Exchange Ratio
so that the Average Closing Price multiplied by the Exchange Ratio equals
$64.05; or (vi) by InterWest if the Average Closing Price is greater than
$43.75, if no Triggering Event has occurred and Bancorp, in its sole discretion,
does not elect to adjust the Exchange Ratio so that the Average Closing Price
multiplied by the Exchange Ratio equals $64.05. The ability of Bancorp or
InterWest to terminate the Merger Agreement as described in clauses (v) and (vi)
are governed (with respect to notice deadlines and the like) by Sections 7.5 and
7.6 of the Merger Agreement.
If the Average Closing Price of the InterWest Common Stock is less than
$34.75, Bancorp may terminate the Merger Agreement unless InterWest elects to
adjust the Exchange Ratio so that the Average Closing Price multiplied by the
Exchange Ratio equals $64.05. See "-- Basic Terms of the Merger." Alternatively,
Bancorp may elect to go forward with the Merger, in which case the Valuation
Price (i.e., the effective Average Closing Price) will be fixed at $34.75, even
though the Average Closing Price is less than that figure. In determining
whether to elect to terminate the Merger Agreement in these circumstances, the
Bancorp Board will take into account, consistent with its fiduciary duties, all
relevant facts and circumstances existing at the time, including, without
limitation, the market for financial institution stocks in general, the relative
value of InterWest Common Stock in the market, and the advice of its financial
advisors and legal counsel. By approving the Merger Agreement, stockholders of
Bancorp would be permitting the Bancorp Board to determine, in the exercise of
its fiduciary duties, to proceed with the Merger even though the Average Closing
Price is less than $34.75
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Similarly, if the Average Closing Price of the InterWest Common Stock is
greater than $43.75, and if no Triggering Event has occurred, InterWest may
terminate the Merger Agreement unless Bancorp elects to adjust the Exchange
Ratio so that the Average Closing Price multiplied by the Exchange Ratio equals
$64.05. Alternatively, InterWest may elect to go forward with the Merger, in
which case the Valuation Price (i.e., the effective Average Closing Price) will
be fixed at $43.75. In determining whether to elect to terminate the Merger
Agreement in these circumstances, the InterWest Board will take into account,
consistent with its fiduciary duties, all relevant facts and circumstances
existing at the time, including, without limitation, the market for financial
institution stocks in general, the relative value of InterWest Common Stock and
Bancorp Common Stock in the market, and the advice of its financial advisors and
legal counsel.
In the event of the valid termination of the Merger Agreement by either
InterWest or Bancorp, the obligations of the parties to the Merger Agreement
will terminate and there will be no liability on the part of either party or
their officers or directors except for liability for breach of the Merger
Agreement or for any misstatement or misrepresentation made prior to such
termination.
CONDUCT OF BUSINESS PENDING THE MERGER
Bancorp and FNBP have agreed in the Merger Agreement not to take certain
actions without the prior approval of InterWest relating to their operations
pending consummation of the Merger. These actions include among other things,
(i) issuing or selling any Bancorp Common Stock; (ii) Bancorp paying any
dividends, other than a $0.37 per share dividend that may be declared and paid
after March 31, 1998 if the Merger has not been completed by that date, to the
extent that such dividend does not result in the failure of Bancorp to maintain
"Capital" (as defined in the Merger Agreement) of at least $5.5 million; (iii)
incurring any indebtedness for borrowed money or becoming liable for the
obligations of any other entity other than in the ordinary course of business;
(iv) changing its lending, investment, liability management or other material
banking policies in any respect; (v) imposing any lien on any share of stock
held by Bancorp; (vi) entering into or amending any employment agreements or any
employee benefit plans or granting any increases (other than in the ordinary
course of business); (vii) disposing of any material portion of its assets or
acquiring any material portion of the business or property of any other entity;
(viii) amending its articles of incorporation or bylaws; (ix) settling any
claims involving any liability for material money damages; (x) entering into,
terminating or changing any material agreements, except for those agreements
that may be terminated by Bancorp without penalty upon not more than 60 days'
prior written notice; and (xi) extending credit other than in accordance with
existing lending policies, with specific exceptions granted to FNBP. Moreover,
Bancorp and FNBP are required, among other things, to operate their businesses
in the usual, regular and ordinary course and to use their best efforts to
preserve their business relationships and to retain key employees.
DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
The persons serving as directors and executive officers of InterWest
immediately prior to the Merger will continue to serve in such capacities
following the Merger.
Following the Merger, InterWest anticipates that certain representatives
of InterWest may be elected to the FNBP Board, although the number and identity
of such persons has not been determined. The executive officers of FNBP will
remain unchanged immediately following the Merger, except that Mr. David Burgett
will retire as an officer of Bancorp and FNBP.
As a condition to the consummation of the Merger, each of the directors
of Bancorp will enter into a Director's Agreement with InterWest. The Director's
Agreements prohibit these directors from competing with InterWest or any of its
subsidiaries in Kitsap County for a period of three years after the Effective
Date.
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EMPLOYEE BENEFIT PLANS
The Merger Agreement confirms InterWest's intention to allow the
employees of Bancorp and FNBP who continue as employees after the Merger to
participate in certain InterWest employee benefit plans, on substantially the
same terms as employees of InterWest and its other subsidiaries. For the
purposes of determining eligibility to participate in such plans, and the
vesting of benefits under such plans (but not the accrual of benefits under such
plans) InterWest will give effect to years of service with Bancorp or FNBP as
though such service was with InterWest. On the Effective Date, all outstanding
and unexercised options to purchase Bancorp Common Stock will be converted into
options to purchase InterWest Common Stock, adjusted as to both number of shares
and price using the Exchange Ratio.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of Bancorp, together with their
affiliates, beneficially owned a total of [86,806] shares of Bancorp Common
Stock (representing [36.73%] of all outstanding shares of Bancorp Common Stock)
as of the Record Date. The directors and executive officers will receive the
same consideration in the Merger for their shares, including any shares which
they may acquire prior to the Effective Date pursuant to the exercise of stock
options, as the other shareholders of Bancorp. Certain members of Bancorp's
management and Bancorp's Board have certain interests in the Merger as described
below that are in addition to their interest as shareholders of Bancorp
generally. Bancorp's Board was aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
Directors' and Officers' Liability. The Merger Agreement provides that
for the four-year period following the Effective Date, InterWest will indemnify
the directors, officers and employees of Bancorp and FNBP against certain
liabilities to the extent that such persons were entitled to indemnification
under Washington law and the Articles of Incorporation and Bylaws of Bancorp and
FNBP.
Employment Agreements. InterWest will adopt and ratify employment
agreements previously entered into between FNBP and Mr. Duane R. Guggenmos,
President, CEO and a director of FNBP and Ms. Linda A. Smith, currently Vice
President of FNBP. Mr. Guggenmos's agreement is for a term of 12 months
commencing on the Effective Date. Mr. Guggenmos's initial base salary under the
agreement will be $102,500. The agreement further provides that Mr. Guggenmos
will receive all benefits that are generally provided to similarly situated full
time employees of InterWest. Mr. Guggenmos will also receive certain fringe
benefits, including the use of a company automobile. If Mr. Guggenmos is
terminated without cause (including termination due to the expiration of the
term of employment) under the agreement, he is entitled to receive his base
salary for the remaining term of the agreement, if applicable, plus an amount
equal to one year's base salary. At the end of Mr. Guggenmos's term of
employment, or his voluntary termination, or his termination for cause, Mr.
Guggenmos will not compete with InterWest in Kitsap County for a period of 24
months following termination.
Ms. Smith's agreement is for a term of 24 months commencing on the
Effective Date. Ms. Smith's initial annual base salary under the Agreement will
be $67,500. The agreement further provides that Ms. Smith will receive all
benefits that are generally provided to similarly situated full time employees
of InterWest. If Ms. Smith is terminated without cause or voluntarily terminates
her employment for "good reason" as defined in the Agreement, she is entitled to
receive her base salary for the remaining term of the agreement. Ms. Smith's
employment agreement also contains a two-year noncompetition provision, similar
to the provisions described above with respect to Mr. Guggenmos.
Bancorp and FNBP have entered into an Executive Severance Agreement with
Mr. David C. Burgett, Vice President and Treasurer of Bancorp, dated September
17, 1997. The Executive Severance Agreement provides that upon a proposed change
of control of Bancorp (such as the Merger), Mr. Burgett will not resign his
position and will assist the Bancorp Board in evaluating the proposal. The
Agreement also provides that at the
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end of Mr. Burgett's term of employment, or his voluntary termination, or if his
employment is terminated for cause, he will not compete with Bancorp in Kitsap
and portions of Pierce Counties for two years following such termination. The
Executive Severance Agreement provides for the payment of severance benefits to
Mr. Burgett upon his termination of employment. The severance benefits consist
of (i) cash in an amount equal to two times Mr. Burgett's highest annual
compensation in the three years preceding the termination, and (ii) a payment in
an amount equal to the cost required to maintain Mr. Burgett's present medical
coverage (or equivalent) to age 65, or until such coverage is available to Mr.
Burgett at no cost through future employment. InterWest has entered into an
agreement with Mr. Burgett, pursuant to which InterWest agrees to pay a portion
of the severance benefits due to Mr. Burgett under the Executive Severance
Agreement, conditioned upon his discharge of his duties to Bancorp and FNBP
through the Effective Date. InterWest will pay Mr. Burgett the sum of $104,000
on the Effective Date, and provide him with payments not exceeding $25,000 in
the aggregate for pre-funded medical expenses. The pre-funded medical payment to
Mr. Burgett will completely satisfy all medical coverage payments due to him
under the Executive Severance Agreement; Bancorp will pay, immediately prior to
the Effective Date, that portion of the cash severance benefit that is not to be
paid by InterWest.
FEDERAL INCOME TAX TREATMENT OF THE MERGER
The following is a discussion of the material federal income tax
consequences of the Merger that are generally applicable to Bancorp
stockholders. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended ("Code"), existing regulations
thereunder (including final, temporary or proposed), and current administrative
rulings and court decisions, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the tax consequences
described herein. The following discussion is intended only as a summary of the
material federal income tax consequences of the Merger and does not purport to
be a complete analysis or listing of all of the potential tax effects relevant
to a decision on whether to vote in favor of approval of the Merger Agreement.
The Merger is expected to qualify as a reorganization under Section
368(a) of the Code. As parties to reorganization, neither InterWest nor Bancorp
will recognize gain or loss as a result of the Merger. Except for cash received
in lieu of a fractional share interest in InterWest Common Stock, holders of
shares of Bancorp Common Stock will recognize no gain or loss on the receipt of
InterWest Common Stock.
Consummation of the Merger is conditioned upon the receipt by InterWest
and Bancorp of an opinion of Graham & Dunn, P.C., special counsel to InterWest,
to the effect that if the Merger is consummated in accordance with the term set
forth in the Merger Agreement, the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, no gain or loss will be
recognized by Bancorp stockholders who exchange all of their Bancorp Common
Stock solely for shares of InterWest Common Stock (except for cash received in
lieu of fractional shares).
The opinion of counsel, which will be delivered on the Closing Date, is
filed as an exhibit to the Registration Statement, and the foregoing is only a
summary of such tax consequences as described in the opinion. An opinion of
counsel only represents counsel's best legal judgment, and has no binding effect
or official status of any kind, and no assurance can be given that contrary
positions may not be taken by the Internal Revenue Service (the "IRS") or a
court considering the issues. Neither Bancorp nor InterWest has requested or
will request a ruling from the IRS with regard to the federal income tax
consequences of the Merger.
THE FOREGOING IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO BANCORP STOCKHOLDERS, WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH STOCKHOLDER'S TAX SITUATION AND
STATUS. IN ADDITION, THERE MAY BE RELEVANT STATE, LOCAL OR OTHER TAX
CONSEQUENCES, NONE OF WHICH IS DESCRIBED ABOVE. BECAUSE CERTAIN TAX CONSEQUENCES
OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH
STOCKHOLDER, EACH BANCORP STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING SUCH STOCKHOLDER'S SPECIFIC TAX SITUATION AND STATUS, INCLUDING THE
SPECIFIED APPLICATION
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AND EFFECT OF STATE, LOCAL AND FOREIGN LAWS TO SUCH STOCKHOLDER AND THE POSSIBLE
EFFECT OF CHANGE IN FEDERAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT OF THE MERGER
It is expected that the pooling of interests method of accounting will
be used to reflect the Merger. As required by generally accepted accounting
principles, under pooling of interests accounting, as of the Effective Date of
the Merger, the assets and liabilities of Bancorp would be added to those of
InterWest at their recorded book values and the stockholders' equity accounts of
InterWest and Bancorp would be combined on InterWest's consolidated balance
sheet. On a pooling of interests accounting basis, income and other financial
statements of InterWest issued after consummation of the Merger would be
restated retroactively to reflect the consolidated combined financial position
and results of operations of InterWest and Bancorp as if the Merger had taken
place prior to the periods covered by such financial statements. In order for
the Merger to qualify for pooling of interests accounting treatment, among other
things, substantially all (90% or more) of the outstanding Bancorp Common Stock
must be exchanged for InterWest Common Stock.
DISSENTERS' RIGHTS OF APPRAISAL
In accordance with the Appraisal Laws, Bancorp's stockholders have the
right to dissent from the Merger and to receive payment in cash for the "fair
value" of their Bancorp Common Stock. Under applicable Washington law, InterWest
stockholders will not have any dissenters' rights.
If Bancorp stockholders perfect dissenters' rights with respect to more
than 10% of the outstanding shares of Bancorp Common Stock, InterWest has a
right under the Merger Agreement to elect not to consummate the Merger.
Additionally, if Bancorp stockholders perfect dissenters' rights with respect to
more than 10% of the outstanding shares of Bancorp Common Stock and InterWest
elects to consummate the Merger, the Merger will not qualify for pooling of
interests accounting treatment. Bancorp stockholders electing to exercise
dissenters' rights must comply with the provisions of the Appraisal Laws in
order to perfect their rights. Bancorp and InterWest will require strict
compliance with the statutory procedures. The following is intended as a brief
summary of the material provisions of the procedures required to be followed by
a Bancorp stockholder in order to dissent from the Merger and perfect the
stockholder's dissenters' rights. THIS SUMMARY, HOWEVER, IS NOT A COMPLETE
STATEMENT OF ALL APPLICABLE REQUIREMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE APPRAISAL LAWS, THE FULL TEXT OF WHICH IS SET FORTH IN APPENDIX
B.
A stockholder who wishes to assert dissenters' rights must (a) deliver
to Bancorp before the Bancorp Special Meeting written notice of the
stockholder's intent to demand payment for the stockholder's shares if the
Merger is effected, and (b) not vote such shares in favor of the Merger. A
stockholder wishing to deliver such notice should hand deliver or mail such
notice to Bancorp at the following address:
Puget Sound Bancorp, Inc.
1488 Olney Avenue S.E.
P.O. Box 2029
Port Orchard, Washington 98366
Attn: Corporate Secretary
A stockholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the shares the stockholder owns or over which the
stockholder has power to direct the vote. However, if a record stockholder is a
nominee for several beneficial stockholders some of whom wish to dissent and
some of whom do not, then the record holder may dissent with respect to all the
shares beneficially owned by any one person by notifying Bancorp in writing of
the name and address of each person on whose behalf the record stockholder
asserts dissenters' rights. A beneficial stockholder may assert dissenters'
rights directly by submitting to Bancorp
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the record stockholder's written consent and by dissenting with respect to all
the shares of which such stockholder is the beneficial stockholder or over which
such stockholder has power to direct the vote.
A STOCKHOLDER WHO DOES NOT DELIVER TO BANCORP PRIOR TO THE BANCORP
SPECIAL MEETING A WRITTEN NOTICE OF THE STOCKHOLDER'S INTENT TO DEMAND PAYMENT
FOR THE "FAIR VALUE" OF THE SHARES WILL LOSE THE RIGHT TO EXERCISE DISSENTERS'
RIGHTS. IN ADDITION, ANY STOCKHOLDER ELECTING TO EXERCISE DISSENTERS' RIGHTS
MUST EITHER VOTE AGAINST THE MERGER OR ABSTAIN FROM VOTING.
If the Merger is effected, InterWest shall, within ten days after the
Effective Date of the Merger, deliver a written notice to all stockholders who
properly perfected their dissenters' rights. Such notice will, among other
things, (a) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited; (b) inform holders of
uncertificated shares to what extent transfer of the shares will be restricted
after the payment demand is received; (c) supply a form for demanding payment;
and (d) set a date by which InterWest must receive the payment demand, which
date will be between 30 and 60 days after notice is delivered.
A stockholder wishing to exercise dissenters' rights must at that time
file the payment demand and deliver share certificates as required in the
notice. Failure to do so will cause such person to lose his or her dissenters
rights.
Within 30 days after the Merger occurs or receipt of the payment demand,
whichever is later, InterWest will pay each dissenter with properly perfected
dissenters' rights InterWest's estimate of the "fair value" of the stockholder's
interest, plus accrued interest from the Effective Date of the Merger. With
respect to a dissenter who did not beneficially own Bancorp shares prior to the
public announcement of the Merger, InterWest is required to make the payment
only after the dissenter has agreed to accept the payment in full satisfaction
of the dissenter's demands. "Fair value" means the value of the shares
immediately before the Effective Date of the Merger, excluding any appreciation
in anticipation of the Merger. The rate of interest is generally required to be
the rate at which InterWest can borrow money from other banks. It is the current
intention of InterWest to estimate the fair value of Bancorp Common Stock to be
$31.00 per share, which represents the price paid for Bancorp common stock in
the last transaction for which a price is known to Bancorp management prior to
the date on which the Merger Agreement was signed.
A dissenter dissatisfied with InterWest's estimate of the fair value may
notify InterWest of the dissenter's estimate of the fair value. If InterWest
does not accept the dissenter's estimate and the parties do not otherwise settle
on a fair value then InterWest must within 60 days petition a court to determine
the fair value.
In view of the complexity of the Appraisal Laws, stockholders of Bancorp
who may wish to dissent from the Merger and pursue appraisal rights should
consult their legal advisors.
RESALE OF INTERWEST COMMON STOCK
The InterWest Common Stock to be issued in the Merger will be
transferable free of restrictions under the 1933 Act, except for shares received
by persons, including directors and executive officers of Bancorp, who may be
deemed to be "affiliates" of Bancorp, as that term is used in (i) paragraphs (c)
and (d) of Rule 145 under the 1933 Act and/or (ii) Accounting Series Releases
130 and 135, as amended, of the SEC. Affiliates may not sell their shares of
InterWest Common Stock acquired in the Merger, except (a) pursuant to an
effective registration statement under the 1933 Act covering those shares, (b)
in compliance with Rule 145, or (c) in accordance with an opinion of counsel
reasonably satisfactory to InterWest, under other applicable exemptions from the
registration requirements of the 1933 Act. SEC guidelines further indicate that
the pooling of interests method of accounting will generally not be challenged
on the basis of sales by affiliates of the acquiring or acquired company if such
affiliates do not dispose of any of the shares of the acquiring or acquired
company they
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owned before the consummation of a merger or shares of the acquiring corporation
they receive in connection with the merger during the period beginning 30 days
before the Effective Date and ending when financial results covering at least 30
days of post-merger operations of the combined organization have been published.
InterWest will obtain customary agreements with all Bancorp directors, officers,
and affiliates of Bancorp and InterWest, under which such persons have
represented that they will not dispose of their shares of InterWest Common Stock
received in the Merger or the shares of Bancorp Common Stock or InterWest Common
Stock held by them before the Merger, except (i) in compliance with the 1933 Act
and the rules and regulations promulgated thereunder, and (ii) in a manner that
would not adversely affect the ability of InterWest to treat the Merger as a
pooling of interests for financial reporting purposes. This Prospectus/Proxy
Statement does not cover any resales of the InterWest Common Stock received by
affiliates of Bancorp.
NO SOLICITATION
Bancorp has agreed in the Merger Agreement that neither it nor any of
its subsidiaries will solicit, initiate or encourage inquiries or proposals with
respect to or, except as required by the fiduciary duties of the Bancorp Board,
furnish any nonpublic information relating to or participate in any negotiations
concerning, any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, Bancorp or any of its
subsidiaries or any merger or other business combination with Bancorp or any of
its subsidiaries.
EXPENSES
The Merger Agreement provides that InterWest and Bancorp will each pay
their own expenses in connection with the Merger Agreement and the transactions
contemplated thereby, except that printing expenses for this Prospectus/Proxy
Statement will be shared equally.
BUSINESSES OF THE PARTIES TO THE MERGER
INFORMATION CONCERNING INTERWEST AND INTERWEST BANK
InterWest is a bank holding company registered under the BHCA. The
business of InterWest consists primarily of holding 100% of the capital stock of
InterWest Bank. At June 30, 1997, InterWest had total assets of approximately
$1.8 billion, total loans and mortgage-backed securities of approximately $1.4
billion, total deposits of approximately $1.2 billion and stockholders' equity
of approximately $124.2 million.
InterWest Bank is a state-chartered savings bank and is regulated by the
Division and by the FDIC, its primary federal regulator and the insurer of its
deposits. InterWest Bank's deposits are insured up to applicable limits under
the SAIF and BIF of the FDIC. InterWest Bank is a community oriented savings
bank which has traditionally offered a variety of savings products to its retail
customers while concentrating its lending activities on loans for the purchase
or construction of residential real estate. Lending activities have also
included the origination of multifamily residential, commercial real estate and
consumer loans. In addition, InterWest Bank has maintained a significant portion
of its assets in mortgage-backed and related securities. As of September 30,
1997, InterWest Bank conducted its business through 39 full-service branch
offices located in small cities and towns in the western and central parts of
the State of Washington and one lending office located in Lynnwood, Washington.
These smaller cities and towns are generally outside Washington's most densely
populated cities, such as Seattle and Spokane. InterWest believes it is easier
to develop long-term customer relationships in outlying areas and that such
relationships lead to increased repeat business and greater customer loyalty.
Financial and other information relating to InterWest, including
information relating to InterWest's directors and executive officers, is set
forth in InterWest's 1996 10-K, InterWest's 10-Qs, InterWest's 1997 Proxy
Statement and InterWest's 1996 Annual Report, copies of which may be obtained
from InterWest as indicated under "AVAILABLE INFORMATION."
27
<PAGE> 39
INFORMATION CONCERNING BANCORP
BUSINESS
Bancorp was incorporated on February 5, 1996 in the State of Washington
and became a registered bank holding company through the acquisition of FNBP on
May 31, 1996. Bancorp's principal business is to hold 100% of the capital stock
of its bank subsidiary, FNBP.
FNBP was chartered as a national bank under the laws of the United States
on April 18, 1989 and conducts a commercial banking business in Port Orchard,
Washington. FNBP offers a full line of commercial banking services to its
customers and the community, providing personal and business financial services
to individual and small businesses. Services include those traditionally offered
by commercial banks, such as checking and savings accounts; commercial, real
estate, agricultural, personal and other installment and term loans; travelers
checks; safe deposit boxes; escrow services; collection services; wire transfers
and notary services. FNBP operates a main office in Port Orchard, one branch
office in Bremerton and one branch office in Gig Harbor, Washington. See "-
Facilities."
COMPETITION
The primary service area of Bancorp is Kitsap County in Washington.
Kitsap County covers 392.7 square miles and includes the cities of Port Orchard,
Bremerton and Poulsbo. This area has a population of approximately 224,700. With
17 financial institutions serving this population, competition in Bancorp's
primary service area is relatively high. Bancorp has competition within its
service area from many well-established financial institutions. In addition to
competition from ten other commercial banking institutions, there is competition
from three savings and loan companies and four credit unions. Many of Bancorp's
competitors are larger and more substantially capitalized than Bancorp. They
have established positions in Kitsap County and have greater resources than
Bancorp for lending and to pay for advertising, physical facilities, personnel
and interest on deposited funds. FNBP also has a branch in Gig Harbor, a city in
Pierce County with a population of 3,890.
The primary factors affecting competition for deposits are interest
rates, the quality and range of financial services offered and the convenience
of office locations and office hours. The primary factors in competing for loans
are interest rates, loan origination fees and the quality and range of lending
services offered. Other factors which affect competition include the general
availability of lendable funds and credit, general and local economic conditions
and the quality of service provided to customers.
Bancorp relies substantially on local promotional activity, personal
contacts by its officers, directors, employees and shareholders, extended hours,
personalized service, a flexible product mix and its reputation in the community
to compete effectively.
At June 30, 1997, Bancorp was the seventh largest of ten commercial
banks in its primary service area based on assets.
FACILITIES
Bancorp operates out of three offices. Following are descriptions of
Bancorp's facilities at each location.
Main Office located at 1488 Olney Avenue SE, Port Orchard, Washington,
has four teller windows, one drive up windows and one ATM. Bancorp owns this
two-story building with 7,000 square feet.
28
<PAGE> 40
Gig Harbor Branch located at 7109 Pioneer, Gig Harbor, Washington has
four teller windows, one drive up windows and one ATM. FNBP leases this property
from MGM Property Management pursuant to a lease expiring on April 12, 1998,
with four additional three-year options to renew.
Fairgrounds Branch located at 1554 Fairgrounds Road, Bremerton,
Washington has four teller windows, one drive up windows and one ATM. FNBP
leases this property from North Stream LLC pursuant to a lease expiring on
August 20, 2006, with two additional five-year options to renew.
EMPLOYEES
As of October 1, 1997, Bancorp employed 30 employees, with 25 persons
working full time and five working part time. Bancorp provides a variety of
benefits to its employees and believes employee relations are good. Bancorp's
employees are not parties to any collective bargaining agreement.
LEGAL PROCEEDINGS
Bancorp is not presently involved in any legal proceedings which
management believes to be material to its financial condition or results of
operations. As the nature of Bancorp's business involves providing certain
financial services, the collection of loans and the enforcement and validity of
mortgages and other liens, Bancorp is a party in various legal proceedings (such
as garnishment proceedings) which may be considered as arising in the ordinary
course of its business.
BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For purposes of the following management discussion and analysis, the
information primarily reflects the activities of Bancorp's subsidiary, FNBP, as
Bancorp has no operations other than owning FNBP. FNBP operates three offices in
communities in and around Port Orchard, Gig Harbor, and Bremerton. FNBP's
primary source of revenue is derived from providing loans to customers, who are
predominately small and middle-market businesses and middle income individuals.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
OVERVIEW. Total assets of $50.6 million at June 30, 1997 represents a
14.5% increase over total assets of $44.2 million at June 30, 1996. Most of the
growth is a result of increases in loans and securities. The growth was funded
primarily by increases in deposits, short term borrowings and retained earnings.
NET INCOME. For the six months ended June 30, 1997 and 1996, net income
was $464,000 and $318,000, respectively, an increase of $146,000 or 45.9% in
1997 compared with 1996. The increase in earnings is due in part to increased
net interest income and non-interest income, partially offset by an increase in
non-interest expense. Earnings per share for the two periods ended June 30, 1997
and 1996 were $2.21 and $1.52, respectively.
NET INTEREST INCOME. Net interest income for the six month period ended
June 30, 1997 increased $280,000, or 27.2%. compared to the six months ended
June 30, 1996. The increase in net interest income was primarily the result of
an $6.5 million increase in average earning assets (primarily loans) during the
period. Average earning assets were $45.2 million and $38.7 million for the two
periods ended June 30, 1997 and 1996, respectively. FNBP's net yield on earning
assets totaled 6.1% and 5.6% during the same periods, respectively.
29
<PAGE> 41
NON-INTEREST EXPENSES. Non-interest expenses for the six month period
ended June 30, 1997 increased $147,000, or 19.4% from the six month period ended
June 30, 1996. The increase in expenses was primarily associated with costs
incurred with the opening of FNBP's third office in East Bremerton.
FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE YEARS ENDED DECEMBER 31,
1996 AND 1995
OVERVIEW. Total assets of $45.3 million at December 31, 1996, represents
a 11.6% increase over total assets of $40.6 million at December 31, 1995. Most
of the growth is a result of increases in loans and securities. The growth was
funded primarily by increases in deposits, short term borrowings and retained
earnings.
NET INCOME. For the years ended December 31, 1996 and 1995, net income
was $711,000 and $528,000, respectively an increase of $183,000 or 34.7% from
1996 compared with 1995. The increase in earnings is due in part to increased
net interest income and non-interest income, partially offset by an increase in
non-interest expense. Earnings per share for the two year periods ended December
31, 1996 and 1995 were $3.39 and $2.53, respectively.
NET INTEREST INCOME. Net interest income for the years ended December
31, 1996 increased $376,000, or 19.9% compared to the year ended December 31,
1995. The increase in net interest income was primarily the result of an $5.3
million increase in average earning assets (primarily loans) during the period.
Average earning assets were $40.5 million and $35.2 million for the years ended
December 31, 1996 and 1995, respectively. FNBP's net yield on earning assets
totaled 5.9% and 5.6% during the same periods, respectively.
NON-INTEREST EXPENSES. Non-interest expenses for the year ended December
31, 1996 increased $170,000, or 12.0% from the year ended December 31, 1995. The
increase in expenses was primarily associated with increased personnel and other
expenses incurred in connection with opening the East Bremerton office.
LOAN QUALITY, LIQUIDITY, AND CAPITAL
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses represents
management's current estimate of amounts required to absorb losses on existing
loans. The allowance of $329,000 at June 30, 1997 is an increase of $22,000 or
7.2% from the December 31, 1996 allowance of $307,000. The allowance represents
.95% of total loans at June 30, 1997. The $307,000 allowance at December 31,
1996 is an increase of $42,000 or 15.8% from the 1995 allowance of $265,000. The
allowance represents 1.01% of loans at December 31, 1996, as compared to .98% at
December 31, 1995.
The allowance for credit losses is increased by provisions charged to
operations and reduced by loans charged off, net of recoveries. The allowance is
based on management's periodic evaluation of potential losses in the loan
portfolio after consideration of historical loss, experience, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
collateral, economic conditions and other risks inherent in the portfolio.
LIQUIDITY AND SOURCES OF FUNDS. FNBP's primary sources of funds are
through borrowing lines arranged through the Federal Home Loan Bank of Seattle
(FHLB) as well as other correspondent lines, sales of securities "available for
sale", customer deposits, loan repayments, maturities of securities, and net
income. Scheduled loan repayments are a relatively stable source of funds while
deposit inflows and unscheduled loan prepayments are not. Deposit inflows and
unscheduled loan prepayments are influenced by general interest rate levels,
interest rates on other investments, competition, economic conditions and other
factors.
Total deposits were $43.9 million at June 30, 1997, up 9.4% from $40.1
million at December 31, 1996, which were up 9.6% from $36.6 million at December
31, 1995. FNBP does not accept brokered deposits. A
30
<PAGE> 42
concerted effort has been made to attract deposits in the market area FNBP
serves through competitive pricing and delivery of quality products.
Management anticipates that FNBP will continue relying on advances from
the FHLB and other correspondent credit lines, sales of securities "available
for sale", customer deposits, loan repayments, maturities of investment
securities and net income to provide liquidity. Although deposit balances have
shown historical growth, such balances may be influenced by changes in the
banking industry, interest rates available on other investments, general
economic conditions, competition and other factors. Borrowings may be used on a
short-term basis to compensate for reductions in other sources of funds.
Borrowings may also be used on a long-term basis to support expanded lending
activities and to match maturities or re-pricing intervals on assets. The
sources of such funds will most likely be borrowings from the FHLB.
CAPITAL. The Tier 1 capital-to-asset ratio for FNBP was 9.6% at June 30,
1997, as compared to 9.7% at December 31, 1996, and 9.7% at December 31, 1995.
In 1989, the federal banking regulators adopted risk based capital guidelines
under which one of four risk weights is applied to balance sheet assets, each
with different capital requirements based on the perceived credit risk of the
asset. Risk-adjusted capital-to-asset ratios were 14.8% 14.8% and 14.2% at June
30, 1997, December 31, 1996 and 1995, respectively. At June 30, 1997, FNBP met
all regulatory capital requirements and was considered "well capitalized" under
regulatory risk based capital guidelines.
Bancorp declared a cash dividend on February 19, 1997, payable on July
3, 1997, to stockholders of record as of April 17, 1997. The dividend was $0.28
per share, which represents 8.3% of 1996 earnings.
LENDING
FNBP's policy is to originate loans primarily in its local market area.
FNBP's loan underwriting policies focus on assessment of each borrower's ability
to service and repay the debt, and the availability of collateral that can be
used to secure the loan. Depending on the nature of the borrower and the purpose
and the amount of the loan, FNBP's loans may be secured by a variety of
collateral, including business assets, real estate, and personal assets. Many
business loans may also be dependent upon the personal guarantee of owners
business. FNBP's loans are generally classified by the ability of the borrowers
to repay and the principal asset pledged as collateral to secure the loan.
FNBP's commercial and industrial loans consist primarily of secured
revolving operating lines of credit and business term loans. Commercial real
estate loans include loans for various purposes where the primary collateral is
commercial real estate. Real estate construction loans include loans made in
connection with custom and "spec" (build to sell) construction of residential
and commercial buildings and loans made to borrowers who build residential and
commercial buildings for resale. The majority of loans within FNBP's portfolio
have terms of five years or less or have adjustable interest rates. Such rates
are principally tied to the prime rate, or to a similar extent, a treasury-base
index.
Consumer installment loans and other loans, while representing a smaller
percentage of total outstanding loans, include home equity loans, auto loans,
and VISA credit cards.
TYPES OF LOANS. The following table sets forth the composition of FNBP's
loan portfolio by type of loan at June 30, 1997 and at December 31, 1996 and
1995.
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<PAGE> 43
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
June 30, 1997 1996 1995
----------------------- ----------------------- -----------------------
Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 4,354 12.53% $ 4,149 13.70% $ 3,170 11.70%
Real estate
Construction 5,798 16.69 5,118 16.90 4,760 17.58
1-4 residential 10,319 29.71 9,132 30.16 7,429 27.43
Commercial 11,805 33.98 9,261 30.59 8,675 32.03
Consumer 2,462 7.09 2,620 8.65 3,049 11.26
------- ------ ------- ------ ------- ------
TOTAL $34,738 100.00% $30,280 100.00% $27,083 100.00%
</TABLE>
LOAN MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES. The
following table shows an analysis of FNBP's loan maturities and sensitivities to
changes in interest rates at June 30, 1997.
<TABLE>
<CAPTION>
Within 1 year Over 1 to 5 years Over 5 years Total
------------- ----------------- ------------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate 1-4 residential $ 2,612 $ 4,229 $ 715 $ 7,556
All other loans 11,217 13,894 2,071 27,182
------- ------- ------ -------
TOTAL $13,829 $18,123 $2,786 $34,738
</TABLE>
RISK ELEMENTS. Risk elements include accruing loans past due ninety days
or more, non-accrual loans, and loans that have been restructured to provide a
reduction or deferral of interest or principal for reasons related to the
borrowers financial difficulties, potential problem loans and loan
concentrations. The following table states FNBP's non-accrual loans as of June
30, 1997, December 31, 1996 and 1995. There were no loans accruing past due 90
days or more and no restructured loans on these dates.
<TABLE>
<CAPTION>
December 31,
June 30, 1997 1996 1995
------------- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $0 $43 $0
</TABLE>
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. Interest income is subsequently recognized only to the
extent payments are received.
At June 30, 1997, FNBP was not aware of any loans that continued to
accrue interest or that management reasonably expects will have a materially
negative impact on future operating results. FNBP's management is not aware of
any information concerning any material loans, other than those discussed as
risk elements above, that cause it to have doubts as to the ability of the
borrowers to comply with the term of the loans.
At June 30, 1997, FNBP had no non-accrual loans compared to $43,000 or
13.91% of the allowance at December 31, 1996, and no non-accrual loans at
December, 31, 1995.
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES. FNBP maintains the
allowance for credit losses at a level sufficient to provide for estimated loan
losses based on evaluation of known and inherent risks in the loan portfolio.
The allowance is based on management's periodic evaluation of potential losses
in the loan portfolio after consideration of historical loss experience, adverse
situations that may effect the borrower's ability to repay,
32
<PAGE> 44
the estimated value of any underlying collateral, economic conditions, the
result of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. Credits deemed uncollectible are
charged to the allowance. Provisions for credit losses and recoveries on loans
previously charged off are added to Bancorp's allowance.
The following table summarizes FNBP's loan loss experience for the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
June 30, 1997 1996 1995
------------- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 307 $ 265 $ 247
Charge-offs
Commercial and industrial -- -- 3
Consumer 8 40 13
------- ------- -------
8 40 16
Recoveries
Commercial and industrial -- -- 3
Consumer -- 20 9
------- ------- -------
-- 20 12
Net charge-offs 8 20 4
Provision for credit losses 30 62 22
------- ------- -------
Balance at end of period $ 329 $ 307 $ 265
Ratio of net charge-offs to average
outstanding loans during the period .025% .069% .015%
Average outstanding loans $32,377 $28,797 $26,291
</TABLE>
ASSET AND LIABILITY MANAGEMENT
FNBP's results of operation depends substantially on net interest
income. Interest income and interest expense are affected by general economic
conditions, competition in the market place, market interest rates and
re-pricing and maturity characteristics of FNBP's assets and liabilities.
Exposure to interest rate risk is primarily a function of differences between
the maturity and re-pricing schedules of assets ( principally loans and
securities) and liabilities (principally deposits). Assets and liabilities are
described as interest sensitive for a given period of time when they mature or
can re-price within that period. The difference between the amount of interest
sensitive assets and interest sensitive liabilities are referred to as the
interest sensitivity "GAP" for any given period.
There are shortcomings inherent in the interest sensitivity GAP method
of analysis presented in the following table. For example, although certain
assets and liabilities may have similar re-pricing characteristics, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates.
The following table sets forth the dollar amount of interest sensitive
assets and interest sensitive liabilities at June 30, 1997 and the difference
between them for the maturity or re-pricing periods indicated.
33
<PAGE> 45
<TABLE>
<CAPTION>
Estimated Maturity or Re-pricing
Within 1 year Over 1 to 5 years Over 5 years Total
------------- ----------------- ------------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 13,829 $18,123 $2,786 $34,738
Investment securities 1,591 7,279 3,011 11,881
Federal funds and
interest-bearing
balance with banks 625 -- -- 625
-------- ------- ------ -------
Total interest-earnings assets $ 16,045 $25,402 $5,797 $47,244
Interest-Bearing Liabilities:
Interest bearing demand deposits $ 3,286 -- -- $ 3,286
Savings deposits 13,958 -- -- 13,958
Time deposits 13,821 5,711 -- 19,532
Other borrowings 1,500 -- -- 1,500
-------- ------- ------ -------
Total interest-bearing liabilities $ 32,565 $ 5,711 -- $38,276
Net interest rate sensitivity GAP $(16,520) $19,691 $5,797 $ 8,968
</TABLE>
SECURITIES ACTIVITY
Debt securities for which FNBP 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 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 net amount in
a separate component of shareholders' equity. Realized gains and losses on
securities available for sale, determined using the specific identification
method, are included in earnings. Amortization of premiums and accretion of
discounts are recognized in interest income over the period to maturity.
FNBP's investment policy is approved by its Board. It has been the
policy of FNBP to maintain relatively high levels of liquidity to meet loan
funding and deposit outflow requirements. The following table sets forth the
securities portfolio of FNBP.
ANALYSIS OF SECURITIES. The amortized cost and estimated market values
of investments in debt securities are as follows as of June 30, 1997.
34
<PAGE> 46
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
---- ----- ------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
US Treasury and other
US government agencies
and corporations $5,824 $12 $ 27 $5,809
Other debt securities 456 3 -- 459
------ --- ------ ------
$6,280 $15 $ 27 $6,268
Held to Maturity:
States of the US and
political subdivisions $5,383 $73 $ 4 $5,452
</TABLE>
MATURITY DISTRIBUTION OF DEBT SECURITIES. The following table sets forth
the stated maturities of debt securities at June 30, 1997, and the weighted
average yields of such securities. Mortgage backed securities and callable bonds
are reported at their stated maturity. Yields on tax exempt obligations have
been computed on a tax equivalent basis using a 34% tax rate.
<TABLE>
<CAPTION>
Less than One to Five to Over Ten
One Year Five Years Ten Years Years
-------- ---------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
US Treasury and other
US government agencies
and corporations $630 5.57% $3,918 6.55% $1,181 7.26% $80 6.98%
Other debt securities 100 6.95% 258 6.30% 101 7.02% -- --
---- ------ ------ ---
$730 5.76% $4,176 6.53% $1,282 7.24% $80 6.98%
Held to Maturity:
States of the US and
political subdivisions $861 6.79% $3,103 7.60% $1,349 8.15% $70 7.86%
</TABLE>
The balance of states and political subdivisions at June 30, 1997 were
issued by the State of Washington and its political subdivisions. These
securities were purchased to enhance Bancorp's yield on earning assets and
reduce Bancorp's effective marginal tax rate.
DEPOSITS
The average daily amount of deposits and rates paid on interest bearing
deposits is summarized for the periods indicated in the following table:
35
<PAGE> 47
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
1997 1996 1996 1995
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits:
Demand deposits $ 7,492 -- $ 6,113 -- $ 6,327 -- $ 5,205 --
Savings, NOW, and
money market 18,221 3.48% 16,880 3.63% 17,543 3.59% 14,744 3.73%
Time deposits 16,907 5.45% 14,204 5.71% 14,538 5.60% 13,993 5.56%
------- ------- ------- -------
Total $42,620 $37,197 $38,408 $33,942
</TABLE>
Maturities of time certificates of deposit of $100,000 or more
outstanding as of June 30, 1997, are summarized as follows (dollars in
thousands):
<TABLE>
<S> <C>
Three months or less $2,412
Over three through twelve months 2,945
Over one year through three years 1,708
------
Total $7,065
</TABLE>
SHORT TERM BORROWINGS
For the six month period ended June 30, 1997 and the years ended
December 31, 1996 and 1995 short term borrowings consisted of primarily advances
from the FHLB.
SIGNIFICANT FINANCIAL RATIOS
The following table sets forth consolidated operating ratios for Bancorp
for the periods presented.
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets 1.92% 1.53% 1.64% 1.40%
Return on average equity 18.91% 15.54% 17.31% 14.96%
Average equity to average assets 10.17% 9.84% 9.46% 9.34%
Dividend pay out ratio to net income 12.67% -- -- --
</TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following two tables set forth the average consolidated balance
sheets of Bancorp for the periods indicated along with an analysis of net
interest earnings for each major category of interest-earning assets and
interest-bearing liabilities, the average yield or rate paid on each category,
and the net yield on interest-earning assets.
36
<PAGE> 48
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
------------------------------- -------------------------------
Interest Interest
Average Income/ Average Income/
Balance(1) Expense(2) Rate Balance(1) Expense(2) Rate
---------- ---------- ---- ---------- ---------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING
Loans $32,377 $1,724 10.74% $27,553 $1,426 10.41%
Securities
Taxable 6,459 208 6.49% 4,998 154 6.20%
Nontaxable(3) 5,044 194 7.75% 4,204 161 7.68%
Federal funds sold 635 17 5.40% 825 22 5.36%
Interest bearing deposits 704 20 5.73% 1,101 30 5.48%
------- ------ ------ ------- ------ ------
Interest earning $45,219 $2,163 9.65% $38,681 $1,793 9.32%
NON-INTEREST EARNING
Cash and due from banks 1,878 1,793
Bank premise and equipment 1,142 1,051
Other assets 347 312
Less: allow. for credit losses (314) (270)
------- -------
Total $48,272 $41,567
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING
Savings, NOW and
money market $18,221 $ 314 3.48% $16,880 $ 305 3.63%
Time deposits 16,907 457 5.45% 14,204 403 5.71%
Short-term borrowings 524 16 6.16% -- -- --
------- ------ ------ ------- ------ ------
Interest bearing $35,652 $ 787 4.45% $31,084 $ 708 4.58%
NON-INTEREST BEARING
Demand deposits 7,492 6,113
Other 220 278
Stockholders' equity 4,908 4,092
------- -------
Total $48,272 $41,567
Net interest income $1,376 $1,085
Net yield on earning assets 6.14% 5.64%
Tax equivalent adjustment $ 66 $ 55
</TABLE>
- ----------------------
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) Included in interest on loans are amortized loan fees and late charges.
(3) Taxable equivalent adjustment is computed using a 34% tax rate.
37
<PAGE> 49
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1995
Interest Interest
Average Income/ Average Income/
Balance(1) Expense(2) Rate Balance(1) Expense(2) Rate
---------- ---------- ---- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING
Loans $28,797 $3,038 10.55% $26,291 $2,723 10.36%
Securities
Taxable 5,561 346 6.22% 4,060 247 6.08%
Nontaxable(3) 4,535 353 7.78% 3,486 268 7.69%
Federal funds sold 894 39 4.36% 836 47 5.62%
Interest bearing deposits 718 52 7.24% 488 28 5.74%
------- ------ ------ ------- ------ ------
Interest earning $40,505 $3,828 9.45% $35,161 $3,313 9.42%
NON-INTEREST EARNING
Cash and due from banks 1,800 1,608
Bank premise and equipment 1,042 1,011
Other assets 325 249
Less: allow. for credit losses (274) (258)
------- -------
Total
$43,398 $37,771
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING
Savings, NOW and
money market $17,543 $ 629 3.59% $14,744 $ 550 3.73%
Time deposits 14,538 814 5.60% 13,993 778 5.56%
Short-term borrowings 500 2 2.50% 147 9 6.12%
Interest bearing 32,581 1,445 4.49% 28,884 1,337 4.63%
NON-INTEREST BEARING
Demand deposits 6,327 5,205
Other 383 153
Stockholders' equity 4,107 3,529
------- -------
Total $43,398 $37,771
Net interest income $2,383 $1,976
Net yield on earning assets 5.88% 5.62%
Tax equivalent adjustment $ 126 $ 91
</TABLE>
- ----------------------
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) Included in interest on loans are amortized loan fees and late charges.
(3) Taxable equivalent adjustment is computed using a 34% tax rate.
38
<PAGE> 50
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. The change in interest due to volume and rate has
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the changes in each.
<TABLE>
<CAPTION>
For the six months ended June 30, For the year ended December 31,
1997 compared to 1996 1996 compared to 1995
Volume Rate Net Volume Rate Net
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans $252 $ 46 $298 $262 $ 53 $315
Securities
Taxable 46 8 54 95 4 99
Nontaxable 32 1 33 82 3 85
Federal funds sold (5) -- (5) 3 (11) (8)
Interest bearing deposits (11) 1 (10) 16 8 24
---- ---- ---- ---- ---- ----
Interest earning $314 $ 56 $370 $458 $ 57 $515
INTEREST PAID ON:
Savings, NOW and
money market $ 23 $(14) $ 9 $102 $(23) $ 79
Time deposits 73 (19) 54 31 5 36
Short-term borrowings 16 -- 16 3 (10) (7)
---- ---- ---- ---- ---- ----
Interest bearing $112 $(33) $ 79 $136 $(28) $108
Net Interest income $202 $ 89 $291 $322 $ 85 $407
</TABLE>
MANAGEMENT OF BANCORP
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of Bancorp, including their age and current
positions held with Bancorp.
<TABLE>
<CAPTION>
Name Age Positions with Bancorp
---- --- ----------------------
<S> <C> <C>
William D. Bloomquist 56 Chairman
David C. Burgett 56 Director; Vice President and Treasurer
Donald F. Cox, Jr. 45 Director
Richard L. Granquist 47 Director
Duane R. Guggenmos 60 Director; President and Chief Executive Officer
Charles P. Henson 56 Director
Donald L. Morrison 59 Director
Thomas O. Myers 63 Director
Kenneth F. Paskett 57 Director and Secretary
Jeffrey L. Swan 49 Director
D. Alson VanderStaay 63 Director
</TABLE>
During the past five years, the business experience of each director and
executive officer is as follows:
39
<PAGE> 51
William D. Bloomquist has owned and operated the Woodridge Dental Clinic
since 1985. He has been a director and Chairman of FNBP since 1989 and has been
a director and Chairman of Bancorp since its formation.
David C. Burgett has served as Vice President and Treasurer of Bancorp
since its formation, a director of Bancorp since May, 1997 and as Senior Vice
President of FNBP since 1989.
Donald F. Cox, Jr. has been a partner of Cox & Lucy, an accounting firm,
since 1978. He has served as a director of FNBP since 1989 and a director of
Bancorp since its formation.
Richard L. Granquist has been the owner and president of RLG
Construction Co., Inc. since 1977. He is also the owner of Parr Custom Blinds
Manufacturing with his wife. He has served as a director of FNBP since 1989 and
a director of Bancorp since its formation.
Duane R. Guggenmos has served as a director and President/CEO of FNBP
since 1989 and as a director and President/CEO of Bancorp since its formation.
Charles P. Henson served as Detachment Director of the Naval Surface
Warfare Center since 1984 until his retirement. He has served as a director of
FNBP since 1989 and a director of Bancorp since its formation.
Donald L. Morrison has owned and operated Dockside Sales and Service
since 1983. He has served as a director of FNBP since 1989 and a director of
Bancorp since its formation.
Thomas O. Myers is the owner of Allstar Ministorage in Belfair,
Washington and High-Joy Bowl in Port Orchard, Washington. He has served as a
director of FNBP since 1989 and a director of Bancorp since its formation.
Kenneth F. Paskett is a pharmacist and owner of South Park Pharmacy in
Port Orchard since 1968. He has served as a director of FNBP since 1989 and a
director of Bancorp since its formation.
Jeffrey L. Swan has owned and operated Evergreen Lumber, Inc. since
1966. He has served as a director of FNBP since 1989 and a director of Bancorp
since its formation.
D. Alson VanderStaay is a realtor and owner of Kitsap Property
Management since 1985. He has served as a director of FNBP since 1989 and a
director of Bancorp since its formation.
There are no arrangements or understandings among any of the directors,
officers or any other persons pursuant to which any of the above directors or
officers have been selected as directors or officers.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the
beneficial ownership of Bancorp Common Stock as of October 24, 1997, by (i) each
person known by Bancorp to own beneficially more than 5 percent of Bancorp
Common Stock, (ii) each current director of Bancorp, and (iii) all executive
officers and directors of Bancorp as a group. Except as otherwise indicated,
each of the persons named below has sole voting and investment power with
respect to Bancorp Common Stock owned by them.
40
<PAGE> 52
<TABLE>
<CAPTION>
Amount and Nature Percentage of Shares
Name of Shareholder of Beneficial Ownership Outstanding
-------------------------------------------------------------------------------
<S> <C> <C>
William D. Bloomquist 10,968(1) 4.64%
David C. Burgett 3,284(2) 1.39%
Donald F. Cox, Jr. 7,668(3) 3.24%
Richard L. Granquist 3,246(4) 1.37%
Duane R. Guggenmos 8,047(5) 3.40%
Charles P. Henson 6,158(6) 2.61%
Donald L. Morrison 6,589(7) 2.79%
Thomas O. Myers 15,393(8) 6.51%
Kenneth F. Paskett 8,332(9) 3.53%
Jeffry L. Swan 9,782(10) 4.14%
D. Alson VanderStaay 7,339(11) 3.11%
Executive officers and
directors as a group
(11 persons) 86,806(1)-(11) 36.73%
</TABLE>
- ---------------------------
(1) Includes 8,343 shares held jointly with his spouse; 1,050 shares held
jointly with his mother; and 1,365 shares held in IRAs for the benefit of
Mr. Bloomquist and his spouse.
(2) Includes 210 shares held in an IRA for the benefit of Mr. Burgett and 2,051
shares which could be acquired within 60 days by the exercise of stock
options.
(3) Includes 5,640 shares held jointly with his spouse and 1,818 shares held in
trust of which Mr. Cox is a trustee.
(4) Includes 1,026 shares held jointly with his spouse.
(5) Includes 3,173 shares held jointly with his spouse; 780 shares held in an
IRA for the benefit of Mr. Guggenmos; and 3,859 shares which could be
acquired within 60 days by the exercise of stock options.
(6) Includes 5,948 held in trust of which Mr. Henson is a trustee.
(7) Includes 4,430 shares held jointly with his spouse and 1,949 shares held in
an IRA for the benefit of Mr. Morrison.
(8) Includes 13,525 shares held by the Thomas and Patricia Myers Family Limited
Partnership and 1,658 shares held jointly with his spouse.
(9) Includes 8,750 shares held jointly with his spouse.
(10) Includes 9,572 shares held jointly with his spouse.
(11) Includes 4,120 shares held jointly with his spouse and 3,009 shares held in
IRAs for the benefit of Mr. VanderStaay and his spouse.
41
<PAGE> 53
MANAGEMENT OF INTERWEST
Information regarding the names, ages, positions and business
backgrounds of the executive officers and directors of InterWest, as well as
additional information, including executive compensation, security ownership of
certain beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to InterWest's 10-K (which
incorporates portions of InterWest's 1997 Proxy Statement dated December 17,
1996). See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Stockholders
desiring copies of such documents may contact InterWest at the addresses or
phone numbers indicated under "AVAILABLE INFORMATION."
SUPERVISION AND REGULATION
INTRODUCTION
The following generally refers to certain statutes and regulations
affecting the banking industry. These references are only intended to provide
brief summaries and therefore, are not complete and are qualified by the
statutes and regulations referenced. In addition, due to the numerous statutes
and regulations which apply to and regulate the operation of the banking
industry, many are not referenced below.
THE HOLDING COMPANIES
GENERAL
InterWest and Bancorp are bank holding companies by virtue of their
respective ownership of InterWest Bank and FNBP, and are registered as such with
the FRB. As bank holding companies, InterWest and Bancorp are subject to the
BHCA, which governs and subjects each of them and their respective subsidiaries
to supervision and examination by the FRB. Under the BHCA, InterWest and Bancorp
file with the FRB annual reports of their operations and such additional
information as the FRB may require.
BANK HOLDING COMPANY STRUCTURE
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Certain
recent legislation designed to expand interstate branching and relax federal
restrictions on interstate banking may expand opportunities for bank holding
companies (see below under "Regulation of Banking Subsidiaries - Recent Federal
Legislation - Interstate Banking and Branching"). However, the impact that this
legislation may have on InterWest, Bancorp and their subsidiaries is unclear at
this time.
FRB Regulation. Bank holding companies must obtain the FRB's approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5% of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; and (3) acquire
substantially all of the assets of any additional banks. Until September of
1995, the BHCA also prohibited bank holding companies from acquiring any such
interest in any bank or bank holding company located in a state other than the
state in which the bank holding company was located, unless the laws of both
states expressly authorized the acquisition. Now, subject to certain state 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.
Control of Nonbanks. With certain exceptions, the BHCA also prohibits
bank holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds Bancorp's business to be incidental to the business of banking.
When
42
<PAGE> 54
making this determination, the FRB in part considers whether allowing a bank
holding company to engage in those activities would offer advantages to the
public that would outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek FRB approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the statute. A bank holding company meeting
the specifications is now required only to notify the FRB within 10 business
days after the activity has begun. The FRB has issued a final rule incorporating
the changes enacted by the Economic Growth Act, and as of April 21, 1997, a
well-run bank holding company, without any prior notice or FRB approval, may
commence immediately any activity that is currently or at the time of
commencement included in the FRB's list of acceptable nonbanking activities.
Acceptable nonbanking activities include: (1) operating an industrial
loan company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate brokerage and syndication, land development, property
management, and the underwriting of life insurance not related to credit
transactions. From time to time, the FRB may add to or delete from the list of
activities permissible for bank holding companies.
Control Transactions. The Change in Bank Control Act of 1978, as
amended, requires a person or group of persons acquiring "control" of a bank
holding company to provide the FRB with at least 60 days' prior written notice
of the proposed acquisition. Following receipt of this notice, the FRB has 60
days to issue a notice disapproving the proposed acquisition, but the FRB may
extend this time period for up to another 30 days. An acquisition may be
completed before the disapproval period expires 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% 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% (5% if the "company" is a bank holding company) or more of the
outstanding shares of Bancorp, or otherwise obtain control over Bancorp.
TRANSACTIONS WITH AFFILIATES
InterWest and its subsidiaries, and likewise Bancorp and FNBP, are
deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions. These
restrictions apply to InterWest and Bancorp and their respective subsidiaries
through the BHCA, which provide that transactions between an insured subsidiary
of a holding company and its affiliates are subject to the restrictions
applicable to transactions between banks that are members of the Federal Reserve
System and their affiliates in accordance with Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B: (1) limit the extent to
which the financial institution or its subsidiaries may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
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<PAGE> 55
REGULATION OF MANAGEMENT
Federal law: (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions of another financial institution whose assets
exceed a specified amount or which has an office within a specified geographic
area.
FIRREA
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other 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.
TIE-IN ARRANGEMENTS
InterWest, Bancorp and their subsidiaries, are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, neither InterWest, Bancorp, nor their subsidiaries may condition an
extension of credit on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. Effective April, 1997,
the FRB has adopted significant amendments to its anti-tying rules that: (1)
remove FRB-imposed anti-tying restrictions on bank holding companies and their
non-bank subsidiaries; (2) create exemptions from the statutory restriction on
bank tying arrangements to allow banks greater flexibility to package products
with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions. These amendments are designed to
enhance competition in banking and nonbanking products and allow banks and their
affiliates to provide more efficient a lower-cost service to customers. However,
the impact of the amendments on InterWest, Bancorp and their subsidiaries is
unclear at this time.
STATE LAW RESTRICTIONS
As corporations chartered under the laws of the State of Washington,
InterWest and Bancorp may be subject to certain limitations and restrictions as
provided under applicable Washington corporate laws.
SECURITIES REGISTRATION AND REPORTING
The InterWest Common Stock is registered as a class with the SEC under
the Securities Exchange Act of 1934 and thus is subject to the periodic
reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by InterWest under that Act can be inspected and copied at or
obtained from the Washington, D.C., office of the SEC. In addition, the
securities issued by InterWest are subject to the registration requirements of
the Securities Act of 1933 and applicable state securities laws unless
exemptions are available.
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<PAGE> 56
THE SUBSIDIARIES
GENERAL
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
FNBP is a national banking association which is subject to extensive
regulation and supervision by the OCC. InterWest Bank is a state-chartered
savings bank subject to extensive regulation and supervision by the Washington
Department of Financial Institutions Division of Banks (the "Division"), and
under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations. Each of InterWest's and Bancorp's banking subsidiaries are also
subject to regulation and examination by the FDIC, which insures the deposits of
InterWest Bank and FNBP to the maximum extent permitted by law and by
requirements established by the FRB. The federal laws that apply to InterWest's
and Bancorp's banking subsidiaries regulate, among other things, the scope of
their business, their investments, their reserves against deposits, the timing
of the availability of deposited funds and the nature and amount of and
collateral for loans. The laws and regulations governing InterWest's and
Bancorp's banking subsidiaries generally have been promulgated to protect
depositors and not to protect stockholders of such institutions or their holding
companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of areas to ensure bank safety and soundness, including:
internal controls; credit underwriting; asset growth; management compensation;
ratios of classified assets to capital; and earnings. FDICIA also contains
provisions which are intended to change independent auditing requirements;
restrict the activities of state-chartered insured banks; amend various consumer
banking laws; limit the ability of "undercapitalized banks" to borrow from the
FRB's discount window; and require regulators to perform annual on-site bank
examinations and set standards for real estate lending.
LOANS-TO-ONE BORROWER
Each of InterWest's and Bancorp's banking subsidiaries is subject to
limitations on the aggregate amount of loans that it can make to any one
borrower, including related entities. Applicable regulations generally limit
loans-to-one borrower to 15 to 20% of unimpaired capital and surplus. As of
August 31, 1997, each of InterWest's and Bancorp's banking subsidiaries was in
compliance with applicable loans-to-one borrower requirements.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the FDIC
for up to a maximum amount of $100,000. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute funds
to the Bank Insurance Fund ("BIF") and/or the Savings Association Insurance Fund
("SAIF"), as applicable, based on their risk classification.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment is
designed to place the SAIF at its 1.25 reserve ratio goal.
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<PAGE> 57
The Funds Act, for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis points)
imposed on SAIF insured deposits (approximately 6.5 basis points). Beginning in
the year 2000, BIF insured institutions will be required to pay the FICO
obligations on a pro-rata basis with all thrift institutions; annual assessments
are expected to equal approximately 2.4 basis points until 2017, to be phased
out completely by 2019.
For the remainder of 1997 and until further action by the FDIC, BIF
premiums will be maintained at their current level. Accordingly, institutions in
the lowest risk category will continue to pay no premiums, and other
institutions will be assessed based on a range of rates, with those in the
highest risk category paying 27 cents for every $100 of BIF insured deposits.
Rates in the SAIF assessment schedule, previously ranging from 4 to 31 basis
points, have been adjusted by 4 basis points to a range of 0 to 27 basis points.
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. The Funds Act 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 continue to address comprehensive legislation on the
merger of the funds and elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL REQUIREMENTS
Capital Adequacy Requirements. The FRB, the FDIC, and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.
The current guidelines require all federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to 1.25%
of risk-weighted assets. FNBP has not received any notice indicating that it
will be subject to higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0%,
20%, 50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans (both carry a 50% rating).
Most investment
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<PAGE> 58
securities are assigned to the 20% category, except for municipal or state
revenue bonds (which have a 50% rating) and direct obligations of or obligations
guaranteed by the United States Treasury or United States Government Agencies
(which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to limit the maximum degree to which a bank may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected to 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.
Prompt Corrective Action. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The
regulators require the FDIC, the OCC 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: (1)
"well-capitalized," (2) "adequately capitalized," (3) "undercapitalized," (4)
"significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10% total
risk-based capital, 6% Tier 1 risk-based capital, and a leverage ratio of no
less than 5%. Increasingly severe restrictions are imposed on the payment of
dividends and management fees, asset growth and other aspects of the operations
of institutions that fall below the category of being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital, and a leverage ratio of at least 4%). Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of the date of this Prospectus/Proxy Statement, neither InterWest, Bancorp, nor
their respective subsidiaries were subject to any regulatory order, agreement,
or directive to meet and maintain a specific capital level for any capital
measure.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process.
LIQUIDITY REQUIREMENTS
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
Dividends paid to InterWest by its banking subsidiaries are a material
source of InterWest's cash flow. Likewise, dividends paid to Bancorp by FNBP are
a material source of Bancorp's cash flow. Various federal and state statutory
provisions limit the amount of dividends InterWest's and Bancorp's banking
subsidiaries are permitted to pay to InterWest and Bancorp, respectively,
without regulatory approval. FRB policy further limits the circumstances under
which bank holding companies may declare dividends. For example, a bank holding
company should not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset qualify, and overall financial condition.
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If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the FRB and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
According to Washington law, InterWest Bank may not declare or pay a
cash dividend on its capital stock if it would cause its net worth to be reduced
below (1) the amounts required for liquidation accounts or (2) the net worth
requirements, if any, imposed by the Director of the Division. Dividends on
InterWest Bank's capital stock may not be paid in an aggregate amount greater
than the aggregate retained earnings of FNBP, without the approval of the
Director of the Division.
Under the National Bank Act, FNBP may not pay dividends without advance
approval of the OCC if the total of all dividends declared by any such bank in
any calendar year will exceed the sum of its net profits (as defined by statute)
for that year plus its retained profits for the preceding two calendar years,
less any required transfers to surplus. The National Bank Act also prohibits
national banks from paying dividends that would be in an amount greater than net
profits then on hand (as defined by statute) after deducting losses and bad
debts (as defined by statute). The amount available for dividend distribution by
FNBP as of June 30, 1997, was approximately $1.8 million.
FEDERAL RESERVE SYSTEM
The FRB requires all depository institutions to maintain reserves
against their transaction accounts (primarily checking accounts) and
non-personal time deposits. Currently, reserves of 3% must be maintained against
total transaction accounts of $49.8 million or less (after a $4.2 million
exemption), and an initial reserve of 10% (subject to adjustment by the FRB to a
level between 8% and 14%) must be maintained against that portion of total
transaction accounts in excess of such amount. On August 31, 1997, each of
InterWest's and Bancorp's banking subsidiaries was in compliance with applicable
requirements.
The balances maintained to meet the reserve requirements imposed by the
FRB may be used to satisfy applicable liquidity requirements. Because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the earning assets of InterWest's and Bancorp's banking subsidiaries.
RECENT FEDERAL LEGISLATION
Interstate Banking and Branching. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act") generally permits
nationwide interstate banking and branching by relaxing federal law restrictions
on interstate banking and providing general authorization for interstate
branching. Subject to certain state laws, such as age and contingency laws, the
Interstate Act allows adequately capitalized and adequately managed bank holding
companies to purchase the assets of out-of-state banks. Additionally, since June
1, 1997, the Interstate Act permits interstate bank mergers, subject to these
state laws, unless the home state of either merging bank has "opted-out" of
these provisions by enacting "opt-out" legislation. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, as of June 6,
1996, an out-of-state bank holding company may now acquire more than 5% of the
voting shares of a Washington-based bank, regardless of reciprocity, provided
such bank or its
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predecessor has been doing business for at least five years prior to the
acquisition. Further, an out-of-state bank may engage in banking in Washington
if the requirements of Washington's interstate banking statute are met, and the
bank either (1) was lawfully engaged in banking in Washington on June 6, 1996,
(2) resulted from an interstate combination pursuant to Washington law, (3)
resulted from a relocation of a head office of a state bank or a main office of
a national bank pursuant to federal law, or (4) resulted from the establishment
of a savings bank branch in compliance with applicable Washington law.
Additionally, the Director of the Division may approve interstate combinations
if the basis for such approval does not discriminate against out-of-state banks,
out-of-state holding companies, or their subsidiaries.
Regulatory Improvement. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act"), with
the intent of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax certain regulatory compliance requirements. In addition, the
Regulatory Improvement Act specifically directs each federal banking agency to
review and streamline its regulations and written supervisory policies.
At this time, the full impact that the Interstate Act and the Regulatory
Improvement Act might have on InterWest, Bancorp and their subsidiaries is
impossible to predict.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
DESCRIPTION OF INTERWEST CAPITAL STOCK
InterWest is authorized to issue 20,000,000 shares of Common Stock,
$0.20 par value per share. At September 18, 1997, the date the Merger Agreement
was executed, 8,068,173 shares of InterWest Common Stock were issued and
outstanding. A total of 331,211 shares are subject to options under InterWest
stock option plans; 241,023 of such options are fully vested and exercisable.
InterWest Common Stock is listed for trading on the Nasdaq National Market under
the symbol "IWBK." Each share of InterWest Common Stock has the same relative
rights and is identical in all respects with every other share of InterWest
Common Stock. The following summary describes the material aspects of the
InterWest Common Stock, but does not purport to be a complete description of the
applicable provisions of the InterWest Articles of Incorporation and Bylaws or
of applicable statutory or other law, and is qualified in its entirety by
reference thereto. See "AVAILABLE INFORMATION."
VOTING RIGHTS
The holders of InterWest Common Stock possess exclusive voting rights in
InterWest. Each holder of InterWest Common Stock is entitled to one vote for
each share held of record on all matters submitted to a vote of holders of
InterWest Common Stock. Holders of shares of InterWest Common Stock are not
entitled to cumulate votes for the election of directors.
DIVIDENDS
The holders of InterWest Common Stock are entitled to such dividends as
the InterWest Board may declare from time to time out of funds legally available
therefor. Dividends from InterWest depend upon the
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receipt to InterWest of dividends from InterWest Bank because InterWest has no
source of income other than dividends from InterWest Bank. Accordingly, the
dividend restrictions imposed on InterWest's subsidiary bank by statute or
regulation may effectively limit the amount of dividends InterWest can pay. See
"SUPERVISION AND REGULATION -- Dividend Restrictions."
LIQUIDATION
In the event of liquidation, dissolution or winding up of InterWest, the
holders of shares of InterWest Common Stock are entitled to share ratably in all
assets remaining after payment of all debts and other liabilities of InterWest.
OTHER CHARACTERISTICS
Holders of InterWest Common Stock do not have any preemptive, conversion
or other subscription rights with respect to any additional shares of InterWest
Common Stock which may be issued. Therefore, the InterWest Board may authorize
the issuance and sale of shares of capital stock of InterWest without first
offering them to existing stockholders of InterWest. InterWest Common Stock is
not subject to any redemption or sinking fund provisions. The outstanding shares
of InterWest Common Stock are, and the shares to be issued in the Merger will
be, fully paid and non-assessable.
The InterWest Articles of Incorporation and Bylaws contain provisions
that may have the effect of discouraging persons from acquiring large blocks of
InterWest Common Stock or delaying or preventing a change in control of
InterWest. These provisions include the classification of the InterWest Board
into three classes with the term of only one class expiring each year and
requirements for the approval of certain business combinations. See "COMPARISON
OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST AND BANCORP COMMON STOCK."
COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST
AND BANCORP COMMON STOCK
InterWest is incorporated under the laws of the State of Washington and,
accordingly, the rights of InterWest's stockholders are governed by InterWest's
Articles of Incorporation, Bylaws and the WBCA. Bancorp is also incorporated
under the laws of the State of Washington and, accordingly, the rights of
Bancorp's stockholders are also governed by Bancorp Articles of Incorporation,
Bylaws and the WBCA.
Upon consummation of the Merger, stockholders of Bancorp will become
stockholders of InterWest, and as such, their rights will be governed by
InterWest's Articles of Incorporation, Bylaws and the WBCA. The following is a
summary of material differences between the Articles of Incorporation and Bylaws
of InterWest and the Articles of Incorporation and Bylaws of Bancorp. This
discussion is not intended to be a complete statement of the differences
affecting the rights of stockholders and is qualified in its entirety by
reference to the governing laws and the articles of incorporation and bylaws of
each corporation.
PAYMENT OF DIVIDENDS
InterWest. Under Washington law, dividends may be paid only if, after
giving effect to the dividend, InterWest will be able to pay its debts as they
become due in the ordinary course of business and InterWest's total assets will
not be less than the sum of its total liabilities plus the amount that would be
needed, if InterWest were to be dissolved at the time of the dividend, to
satisfy the preferential rights of persons whose right to payment is superior to
those receiving the dividend.
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Bancorp. Bancorp's ability to pay dividends, and the limits imposed by
Washington law, are the same as those applicable to InterWest.
VOTING RIGHTS
InterWest. InterWest's Articles of Incorporation eliminate cumulative
voting. Cumulative voting entitles each stockholder to cast a number of votes in
the election of directors equal to the number of such stockholders' shares of
common stock multiplied by the number of directors to be elected, and to
distribute such votes among one or more of the nominees to be elected. The
absence of cumulative voting rights limits the ability of minority stockholders
to obtain representation on the InterWest Board. All voting rights are vested in
the holders of InterWest Common Stock, with each share being entitled to one
vote.
Bancorp. All voting rights are vested in the holders of Bancorp Common
Stock, with each share being entitled to one vote. Bancorp's Articles of
Incorporation eliminate cumulative voting.
PREEMPTIVE RIGHTS
Neither InterWest's stockholders nor Bancorp's stockholders have
preemptive rights to subscribe to any additional securities that may be issued.
LIQUIDATION RIGHTS
InterWest. If InterWest is liquidated, the holders of InterWest Common
Stock are entitled to share, on a pro rata basis, InterWest's remaining assets
after payment of or provision for all debts and other liabilities of InterWest.
Bancorp. Similarly, if Bancorp is liquidated, holders of Bancorp Common
Stock are entitled to share, on a pro rata basis, Bancorp's remaining assets
after payment of or provision for all debts and other liabilities of Bancorp.
ASSESSMENTS
All outstanding shares of InterWest Common Stock and of Bancorp Common
Stock are fully paid and nonassessable.
STOCK REPURCHASES
Under Washington law, a corporation may acquire shares of its own stock.
Therefore, both InterWest and Bancorp may repurchase shares of their own capital
stock.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
InterWest. InterWest's Articles of Incorporation may be amended by the
vote of the holders of a majority of the outstanding shares of InterWest Common
Stock, except that the provisions of the Articles of Incorporation governing
approval of business combinations with "Related Persons" may not be amended
altered, changed or repealed except by the vote of the holders of at least 80%
of the outstanding shares of InterWest, unless any such amendment has been
approved by a majority of the members of the InterWest Board who were directors
prior to the time any Related Person (as defined below) became a Related Person.
The Bylaws of InterWest may be amended by a majority vote of the Board of
Directors or by the holders of at least a majority of the outstanding shares of
InterWest.
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Bancorp. Bancorp's Articles of Incorporation may be amended by the vote
of the holders of a majority of the outstanding shares of Bancorp Common Stock,
except that the provisions of the Articles of Incorporation requiring a
"super-majority" vote in certain circumstances involving a proposed merger,
consolidation, share exchange, liquidation or dissolution may not be amended
unless first approved by the holders of at least 80% of the outstanding Bancorp
Common Stock. Bancorp's Bylaws may be amended, altered or repealed at any
meeting of the Bancorp Board called for that purpose or by consent of the Board.
SPECIAL MEETINGS OF STOCKHOLDERS AND ACTION WITHOUT A MEETING
InterWest. The Articles of Incorporation of InterWest provide that
special meetings of stockholders may be called by the president, the board of
directors or holders of not less than a majority of the outstanding shares. This
restriction on the calling of special stockholders' meetings may deter hostile
takeovers of InterWest making it more difficult for a person or entity to obtain
immediate control of InterWest between one annual meeting and the next. Pursuant
to InterWest's Bylaws, any action required or permitted to be taken at a meeting
of stockholders may be taken without a meeting if a consent in writing is signed
by all of the stockholders entitled to vote on the matter.
Bancorp. The Bylaws of Bancorp provide that special meetings of
stockholders may be called at any time by the Chairman, the President, a
Vice-President, a majority of the Bancorp Board or any stockholder or
stockholders holding in the aggregate not less than 25% of all shares entitled
to vote at the special meeting. Pursuant to the WBCA, an action required or
permitted to be taken at a stockholders' meeting may be taken without a meeting
if a consent signed in writing by all of the stockholders entitled to vote on
the action.
APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS AND
DISSOLUTION
InterWest. Article X of InterWest's Articles of Incorporation requires
the approval of the holders of (i) at least 80% of InterWest's outstanding
shares of voting stock, and (ii) at least a majority of InterWest's outstanding
shares of voting stock, not including shares held by a "Related Person," to
approve certain "Business Combinations," except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
InterWest Board who were directors prior to the time when the Related Person
became a Related Person. In the event the requisite approval of the Board were
given, the normal vote requirement of applicable Washington law would apply, or,
for certain transactions, no stockholder vote would be necessary. The term
"Related Person" is defined to include any individual, corporation, partnership
or other entity which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of InterWest. The provisions
of Article X apply to any "Business Combination" which is defined to include
among other things: (i) any merger or consolidation of InterWest or any of its
affiliates with or into any Related Person; (ii) any sale, lease, exchange,
mortgage, transfer, or other disposition of all or a substantial part of the
assets of InterWest or any of its affiliates to any Related Person (the term
"substantial part" is defined to include more than 25% of InterWest's total
assets); (iii) any sale, lease, exchange, or other transfer by any Related
Person to InterWest of all or a substantial part of the assets of Related
Person; (iv) the acquisition by InterWest of any securities of the Related
Person; (v) any reclassification of InterWest Common Stock; and (vi) any
agreement, contract or other arrangement providing for any of the transactions
described above. The increased stockholder vote required to approve a Business
Combination may have the effect of foreclosing mergers and other business
combinations which a majority of stockholders deem desirable and place the power
to prevent such a merger or combination in the hands of a minority of
stockholders.
InterWest's Articles of Incorporation require InterWest's Board of
Directors to consider certain factors in addition to the amount of consideration
to be paid when evaluating certain business combinations or a tender or exchange
offer. These additional factors include: (i) the social and economic effects of
the transaction; (ii) the business and financial condition and earnings
prospects of the acquiring person or entity; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its management.
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Bancorp. Pursuant to Article IX of Bancorp's Articles of Incorporation,
no merger, consolidation, share exchange, liquidation or dissolution of Bancorp,
nor any action that would result in the sale or disposition of substantially all
of the assets of Bancorp, shall be valid unless first approved by the holders of
at least 80% of Bancorp's outstanding shares of voting stock, unless a lesser
vote (which may not be less than 2/3 of the outstanding shares of voting stock)
is provided by the Bancorp Board in accordance with applicable provisions of the
WCBA.
Bancorp's Articles of Incorporation permit, but do not require,
Bancorp's Board of Directors to consider certain factors in determining whether
or not to oppose a tender offer or other offer for Bancorp Common Stock. Such
factors include (i) whether the offer price is acceptable based on historical
and present operating results or financial condition of Bancorp; (ii) whether a
more favorable price could be obtained in the future; (iii) the impact of an
acquisition of Bancorp on employees, depositors, customers and the served
communities; and (iv) the reputation and business practices of the offeror.
RIGHTS OF STOCKHOLDERS TO DISSENT
InterWest. Under the WBCA, stockholders of InterWest will generally have
dissenter's appraisal rights in connection with (i) a plan of merger to which
InterWest is a party; (ii) a plan of share exchange to which InterWest is a
party as the corporation whose shares will be acquired; (iii) certain sales or
exchanges of all, or substantially all, of InterWest's property other than in
the regular course of business; and (iv) amendments to InterWest's Articles of
Incorporation effecting a material reverse stock split. However, stockholders
generally will not have such dissenters' rights if stockholder approval is not
required by the WBCA for the corporate action. Approval of the Merger by the
holders of InterWest Common Stock is not required under the WBCA; therefore
stockholders of InterWest do not have dissenters' rights in connection with the
Merger.
Bancorp. Under the WBCA, stockholders of Bancorp generally have
dissenter's appraisal rights in connection with (i) a plan of merger to which
Bancorp is a party; (ii) a plan of share exchange to which Bancorp is a party as
the corporation whose shares will be acquired; (iii) certain sales or exchanges
of all, or substantially all, of Bancorp's property other than in the regular
course of business; and (iv) amendments to Bancorp's Articles of Incorporation
effecting a material reverse stock split. However, stockholders generally will
not have such dissenters' rights if stockholder approval is not required for the
corporate action. Stockholders of Bancorp have dissenters' rights in connection
with the Merger. See "THE MERGER -- Dissenters' Rights of Appraisal."
SIZE OF BOARD OF DIRECTORS
InterWest. InterWest's Articles of Incorporation provide that its Board
of Directors shall consist of not less than five nor more than 15 members, with
the current number set at nine by the Bylaws of InterWest. The Bylaws of
InterWest provide that the Board of Directors or the stockholders may change the
authorized number of directors within the stated range by amending the Bylaws,
which must be approved by a majority of the outstanding shares entitled to vote
or by a majority of the directors. Changes in the size of the range may be made
by an amendment to InterWest's Articles of Incorporation, which must be approved
by a majority of the outstanding shares entitled to vote. The effect of such
provisions may be to make it difficult for a person or entity immediately to
acquire control of InterWest through an increase in the number of InterWest's
directors and election of such person's or entity's nominees to fill the newly
created vacancies.
Bancorp. Bancorp's Articles of Incorporation provide that its Board of
Directors shall consist of not less than 3 members, and establishes the initial
number of members at 11. Bancorp's Bylaws provide that the number of directors
to serve until the next annual meeting shall be set at each annual meeting of
stockholders.
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CLASSIFIED BOARD OF DIRECTORS
InterWest. A classified board is one in which a certain number, but not
all, of the directors are elected on a rotating basis each year. InterWest's
Articles of Incorporation provide for a Board of Directors divided into three
classes, with members of each class of directors being elected for a term of
three years. This method of electing directors makes a change in the composition
of the Board of Directors, and a potential change in control of a corporation, a
lengthier and more difficult process. Since the terms of only one-third of the
incumbent directors expire each year, it requires at least two annual elections
for the stockholders to change a majority of the directors. In the absence of
the provisions of the Articles of Incorporation classifying the Board, all of
the directors would be elected each year.
Bancorp. Bancorp's Articles of Incorporation do not provide for a
classified Board. All of the directors are elected each year.
REMOVAL OF DIRECTORS
InterWest. InterWest's Articles of Incorporation provide that at a
meeting of stockholders called expressly for that purpose, any director or the
entire Board of Directors may be removed for cause by a vote of the holder of a
majority of the shares then entitled to vote at such meeting. The requirement
that directors may be removed only upon a majority vote and only for cause makes
it difficult for a person or entity immediately to acquire control of
InterWest's Board through the removal of existing directors and the election of
such person's or entity's nominated to fill the newly created vacancies.
Bancorp. Bancorp's Bylaws provide that directors may be removed in the
manner prescribed by the WBCA. Under the WBCA, directors may be removed with or
without cause by the stockholders only at a special meeting called for that
purpose, and only if the number of votes cast to remove the director exceeds the
number of votes cast not to remove the director.
VACANCIES ON THE BOARD OF DIRECTORS
InterWest. The Bylaws of InterWest provide that any vacancy on the Board
of Directors may be filled by the affirmative vote of a majority of the
remaining directors, and any director so appointed is to serve for an unexpired
term of his or her predecessor. A director appointed by reason of an increase in
the number of directors may serve only until the next election of directors.
Bancorp. Bancorp's Articles of Incorporation provide that vacancies on
the Board of Directors may be filled by a vote of the remaining directors or by
the stockholders at a special meeting called for that purpose.
ADVANCE NOTICE REQUIREMENTS; STOCKHOLDER MEETINGS
InterWest. The Bylaws of InterWest generally provide that any
stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to InterWest at least 30 days and not more than 60 days in advance of the
meeting, together with certain information relating to the nomination or new
business. Failure to comply with these advance notice requirements will preclude
such nominations or new business from being considered at the meeting.
Management believes that it is in the best interests of InterWest and its
stockholders to provide sufficient time to enable management to disclose to
stockholder's information about a dissident slate of nominations for directors.
This advance notice requirement may also give management time to solicit its own
proxies in an attempt to defeat any dissident slate of nominations, should
management determine that doing so is in the best interest of stockholders
generally. Similarly, adequate advance notice of stockholder proposals will give
management time to study such proposals and to determine whether to recommend to
the stockholders that such proposals be
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adopted. In certain instances, such provisions could make it more difficult to
oppose management's nominees or proposals, even if stockholders believe such
nominees or proposals are in their best interests.
Bancorp. The Bylaws of Bancorp do not contain provisions relating to
stockholders' nominations for the election of directors or proposals for new
business at a meeting of stockholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND LIMITATION OF LIABILITY
InterWest. Pursuant to InterWest's Articles of Incorporation, InterWest
will, to the fullest extent permitted by the WBCA, indemnify the officers,
directors, agents and employees of InterWest with respect to expenses,
settlements, judgments and fines in suits in which such person was made a party
by reason of the fact that he or she is or was an agent of InterWest. No such
indemnification may be given if the acts or omissions of the person are adjudged
to be in violation of law, if such person is liable to the corporation for an
unlawful distribution, or if such person personally received a benefit to which
he or she was not entitled. In addition, InterWest's Articles of Incorporation
provide that the directors of InterWest shall not be personally liable for
monetary damages to InterWest for certain breaches of their fiduciary duty as
directors, except for liabilities that involve intentional misconduct by the
director, the authorization or illegal distributions or receipt of an improper
personal benefit from their actions as directors. This provision might, in
certain instances, discourage or deter stockholders or management from bringing
a lawsuit against directors for a breach of their duties even though such an
action, if successful, might have benefited InterWest.
In addition to the indemnification provisions set forth in InterWest's
Articles, InterWest has entered into separate Indemnity Agreements with the
directors of InterWest and InterWest Bank which provide for the indemnification
of such directors by InterWest to the fullest extent allowed by the WBCA. The
Indemnity Agreements indemnify each director and hold such director harmless
against any loss arising from a claim or action relating to his or her services
as a director. The Indemnity Agreements further provides that InterWest will
advance sufficient funds as may be necessary to investigate or defend claims
against a director, and to reimburse funds that may be incurred by the director,
with the proviso that the director will reimburse InterWest any expenses paid to
such director in the event it is later determined that the payment of such sums
were not allowable under Washington law.
Bancorp. Pursuant to Bancorp's Articles of Incorporation, Bancorp will,
to the fullest extent permitted by the WBCA, indemnify the officers and
directors of Bancorp for judgments, penalties, fines, settlements and reasonable
expenses in suits in which such person has made a party by reason of the fact
that such person is or was a director or officer of Bancorp. Pursuant to
Bancorp's Bylaws, no such indemnification may be given in connection with a
proceeding by or in the right of Bancorp in which the director was adjudged
liable to Bancorp, or in connection with any proceeding involving a transaction
from which the director personally received a benefit to which the director was
not legally entitled. In addition, Bancorp's Articles of Incorporation provide
that the directors and officers of Bancorp shall not be personally liable for
monetary damages to Bancorp for conduct as directors or officers, except for
liabilities that involve intentional misconduct or a knowing violation of law by
the director, conduct violating Section 23B.08.310 of the WBCA or participation
in any transaction from which the director personally received a benefit to,
which the director was not legally entitled.
POTENTIAL ANTITAKEOVER PROVISIONS
InterWest. The InterWest Articles of Incorporation contain provisions
that may have the effect of discouraging persons from acquiring large blocks of
InterWest Common Stock or delaying or preventing a change of control of
InterWest. These provisions include the classification of the InterWest Board
into three classes with the term of only one class expiring each year (see
"--Classified Board of Directors") and requirements for the approval of certain
business combinations (see "--Approval of Mergers, Consolidations, Sale of
Substantially All Assets and Dissolution.")
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Bancorp. Provisions in the Bancorp Articles of Incorporation requiring
an 80% stockholder approval in certain circumstances involving proposed mergers,
consolidations, or sales of substantially all asset of Bancorp may have the
effect of discouraging persons from acquiring large blocks of Bancorp Common
Stock or delaying or preventing a change of control of Bancorp. See "--Approvals
of Mergers, Consolidations, Sale of Substantially All Assets and Dissolution."
CERTAIN LEGAL MATTERS
The validity of the InterWest Common Stock to be issued in the Merger is
being passed upon for InterWest by Graham & Dunn, P.C., Seattle, Washington.
Graham & Dunn, P.C. will also deliver an opinion concerning certain federal
income tax consequences of the Merger.
EXPERTS
The consolidated statements of financial condition of InterWest as of
September 30, 1996 and September 30, 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended, incorporated by reference in InterWest's Annual Report on Form 10-K for
the year ended September 30, 1996 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon incorporated by
reference therein and incorporated herein by reference. Such consolidated
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated statements of income, stockholders' equity and cash
flows for the year ended September 30, 1994 of InterWest Savings Bank and
subsidiaries (the Bank) as existed prior to restatement for the Bank's pooling
combination with Central Bancorporation (and not presented separately or
incorporated separately by reference herein), have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report (which report
expressed an unqualified opinion and included an explanatory paragraph
referring to Bank's adoption of Statement of Financial Accounting Standards No.
115), which is incorporated herein by reference from the InterWest Bancorp,
Inc. Annual Report on Form 10-K for the year ended September 30, 1996. The
consolidated financial statements of InterWest Bancorp, Inc., as restated for
the Bank's pooling combination with Central Bancorporation have also been
incorporated in this prospectus by reference from the InterWest Bancorp, Inc.
annual report on Form 10-K for the year ended September 30, 1996, in reliance
(with respect to the pre-pooling consolidated statements of income,
stockholders' equity and cash flows for the Bank for the year ended September
30, 1994) upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated balance sheet of Central Bancorporation and
subsidiaries (Central) as of December 31, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended as existed prior to restatement for Central's pooling combination with
InterWest Bancorp, Inc. (and not presented separately or incorporated
separately by reference herein), have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein
by reference from the InterWest Bancorp, Inc. Annual Report on Form 10-K for
the year ended September 30, 1996. The consolidated financial statements of
InterWest Bancorp, Inc., as restated for InterWest's pooling combination with
Central have also been incorporated in this prospectus by reference from the
InterWest Bancorp, Inc. Annual Report on Form 10-K for the year ended September
30, 1996 in reliance (with respect to the pre-pooling consolidated financial
statements of Central at and for the year ended December 31, 1995) upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated statement of operations for the year ended
December 31, 1994 of Central Bancorporation and subsidiaries incorporated by
reference in InterWest's Annual Report on Form 10-K for the year ended
September 30, 1996 and incorporated by reference herein, have been audited by
KPMG Peat Marwick LLP, independent auditors, as set forth in their report there
on included therein and incorporated herein by reference. Such consolidated
statement is incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
OTHER MATTERS
The Bancorp Board is not aware of any business to come before the
Bancorp Special Meeting other than those matters described above in this
Prospectus/Proxy Statement. However, if any other matters should properly come
before the Bancorp Special Meeting, it is intended that proxies in the
accompanying form will be voted in respect thereof in accordance with the
judgment of the person or persons voting the proxies.
56
<PAGE> 68
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT........................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.........................................F-4
Consolidated Statements of Income...................................F-5
Consolidated Statements of Shareholders' Equity.....................F-6
Consolidated Statements of Cash Flows...............................F-7
Notes to Consolidated Financial Statements.....................F-8-F-28
</TABLE>
F-1
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
Board of Directors
PUGET SOUND BANCORP, INC.
Port Orchard, Washington
We have audited the accompanying consolidated balance sheets of PUGET SOUND
BANCORP, INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 PUGET SOUND BANCORP,
INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. The supplementary
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
KNIGHT, VALE & GREGORY, INC., P.S.
January 17, 1997
Tacoma, Washington
F-2
<PAGE> 70
CONSOLIDATED
FINANCIAL
STATEMENTS
F-3
<PAGE> 71
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4) $ 1,901 $ 2,119
Interest bearing deposits in banks 541 1,049
Federal funds sold 325 1,100
Securities available for sale (Note 5) 5,724 4,311
Securities held to maturity (Note 5) 4,940 3,887
Loans available for sale 500 --
Loans (Notes 6, 11 and 12) 30,280 27,083
Less allowance for credit losses (Note 6) 307 265
NET LOANS 29,973 26,818
Premises and equipment (Note 7) 1,063 1,061
Accrued interest receivable 306 224
Foreclosed real estate -- 24
Other assets 53 35
TOTAL ASSETS $ 45,326 $40,628
LIABILITIES
Deposits:
Demand $ 5,842 $ 5,696
Savings and NOW 19,189 16,574
Time (Note 8) 15,080 14,334
TOTAL DEPOSITS 40,111 36,604
Short term borrowings 400 --
Accrued interest payable 106 103
Other liabilities 241 144
TOTAL LIABILITIES 40,858 36,851
COMMITMENTS AND CONTINGENCIES (Note 11) -- --
SHAREHOLDERS' EQUITY (Notes 3, 13, 14 and 15)
Preferred stock, no par value, non-voting,
non-cumulative, non-convertible; authorized
500,000 shares, no shares issued -- --
Common stock, par value $5; authorized
1,000,000 shares; issued and outstanding
209,576 shares 1,048 1,048
Surplus 1,514 1,514
Retained earnings 1,915 1,204
Net unrealized gains (losses) on securities
available for sale, net of tax of ($5) and
$6 and, respectively (9) 11
TOTAL SHAREHOLDERS' EQUITY 4,468 3,777
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,326 $40,628
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 72
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Puget Sound Bancorp, Inc. and Subsidiary
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Loans $ 3,038 $ 2,723
Deposits in banks 52 28
Federal funds sold 39 47
Securities available for sale - taxable 346 249
Securities held to maturity - tax-exempt 233 177
TOTAL INTEREST INCOME 3,708 3,224
INTEREST EXPENSE
Deposits 1,443 1,328
Other short-term borrowings 2 9
TOTAL INTEREST EXPENSE 1,445 1,337
NET INTEREST INCOME 2,263 1,887
PROVISION FOR CREDIT LOSSES (Note 6) 62 22
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 2,201 1,865
NON-INTEREST INCOME
Service charges on deposit accounts 211 186
Origination fees on brokered mortgage loans 82 61
Other operating income 40 25
TOTAL NON-INTEREST INCOME 333 272
NON-INTEREST EXPENSES
Salaries 714 648
Employee benefits (Note 9) 152 127
Occupancy 109 80
Furniture and equipment 104 90
Other 507 471
TOTAL NON-INTEREST EXPENSES 1,586 1,416
INCOME BEFORE INCOME TAXES 948 721
INCOME TAXES (Note 10) 237 193
NET INCOME $ 711 $ 528
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 209,576 208,984
NET INCOME PER SHARE $ 3.39 $ 2.53
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 73
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES
COMMON RETAINED AVAILABLE FOR
STOCK SURPLUS EARNINGS SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 976 $1,272 $ 923 $(16) $ 3,155
Net income -- -- 528 -- 528
Shares issued under stock option
plan (Note 13) 22 47 -- -- 69
Stock dividend (5%) (Note 14) 50 195 (247) -- (2)
Change in net unrealized gains on
securities available for sale, net -- -- -- 27 27
BALANCE, DECEMBER 31, 1995 1,048 1,514 1,204 11 3,777
Net income -- -- 711 -- 711
Change in net unrealized losses on
securities available for sale, net -- -- -- (20) (20)
BALANCE, DECEMBER 31, 1996 $1,048 $1,514 $ 1,915 $( 9) $ 4,468
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 74
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 711 $ 528
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 62 22
Depreciation 90 78
Deferred Federal income taxes 28 37
Increase in accrued interest receivable (82) (28)
Increase in accrued interest payable 3 32
Other - net 40 (179)
NET CASH PROVIDED BY OPERATING ACTIVITIES 852 490
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 508 (749)
Net (increase) decrease in Federal funds sold 775 (850)
Purchases of securities held to maturity (1,501) (1,055)
Purchases of securities available for sale (5,267) (4,308)
Proceeds from maturities of securities held to maturity
and available for sale 4,303 4,475
Net increase in loans (3,769) (2,089)
Additions to premises and equipment (92) (176)
Proceeds from sales of foreclosed real estate 46 --
Other 20 12
NET CASH USED IN INVESTING ACTIVITIES (4,977) (4,740)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,507 4,927
Issuance of common stock -- 69
Dividends paid -- (2)
Net increase in short-term borrowings 400 --
Proceeds from borrowings 160 --
Repayment of borrowings (160) --
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,907 4,994
NET CHANGE IN CASH AND DUE FROM BANKS (218) 744
CASH AND DUE FROM BANKS
Beginning of year 2,119 1,375
END OF YEAR $ 1,901 $ 2,119
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 1,442 $ 1,305
Cash payments for income taxes 145 187
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Net of tax change in net unrealized gains (losses) on securities
available for sale $ (20) $ 27
Foreclosed real estate acquired in settlement of loans -- 24
Stock dividend -- (2)
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Puget Sound
Bancorp, Inc. (the Company) and its wholly owned subsidiary, First National Bank
of Port Orchard (the Bank). All significant intercompany transactions and
balances have been eliminated in consolidation.
The Bank operates two branches in Port Orchard and Gig Harbor. The Bank's
primary source of revenue is providing loans to customers, who are predominately
small and middle-market businesses, and individuals.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet, and revenues and
expenses for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for credit losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
credit losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties.
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
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 net amount in a separate
component of shareholders' equity. Realized gains and losses on securities
available for sale, determined using the specific identification method, are
included in earnings. Amortization of premiums and accretion of discounts are
recognized in interest income over the period to maturity.
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
Declines in the fair value of individual held to maturity and available for sale
securities that are other than temporary result in write-downs of the individual
securities to fair value. Any such write-downs are included in earnings as
realized loans.
F-8
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS HELD FOR SALE
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
credit losses. Interest on loans is accrued daily based on the principal amount
outstanding.
The accrual of interest on loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed against current
income. Interest income is subsequently recognized only to the extent cash
payments are received.
The Company's policy is to defer loan origination and commitment fees and
certain direct loan origination costs and to amortize the net amount as an
adjustment of the yield of the related loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is increased by provisions charged to operations
and reduced by loans charged off, net of recoveries. The allowance is based on
management's periodic evaluation of potential losses in the loan portfolio after
consideration of historical loss experience, adverse situations that may affect
the borrowers' ability to repay, the estimated value of any underlying
collateral, economic conditions, the results of examination of individual loans,
the evaluation of the overall portfolio by senior credit personnel and federal
and state regulatory agencies, and other risks inherent in the portfolio.
When management determines that it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Gains or losses on
dispositions are reflected in earnings.
(continued)
F-9
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
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 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.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheets caption "Cash
and Due from Banks" to be cash equivalents.
NET INCOME PER SHARE
Net income per share of common stock has been computed on the basis of the
weighted average number of shares of common stock outstanding.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS No. 125), which establishes accounting and reporting
standards based on consistent application of a financial components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when satisfied. The Statement
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The Statement
is effective for the year beginning after December 15, 1996, and may not be
applied retroactively. In December 1996, the effective date of certain
provisions of SFAS No. 125 was postponed until 1998. The Company has not
assessed the impact of SFAS No. 125 on its future operations.
F-10
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 2 - ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under
SFAS No. 123, stock-based compensation is measured either using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB Opinion No. 25), or the fair value
method described in SFAS No. 123. Companies choosing the intrinsic value method
are required to disclose the pro forma impact of the fair value method on net
income and earnings per share. The Company implemented SFAS No. 123 using the
intrinsic value method, which had no effect on its financial position or results
of operations. Required pro forma disclosures are included in Note 13.
NOTE 3 - ACQUISITION
On May 31, 1996, the Company acquired all of the outstanding common stock
(209,576 shares) of the Bank by exchanging one share of its common stock for
each one share of the Bank's common stock. The acquisition was accounted for as
a pooling of interests. The only effect of this transaction on the 1995
financial statements previously reported by the Bank was to restate the common
stock and capital surplus amounts to conform to amounts reported by the Company.
NOTE 4 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Company maintain certain
minimum reserve balances on deposit with the Federal Reserve Bank. The average
amounts of such balances for the years ended December 31, 1996 and 1995 were
approximately $132,000 and $82,000, respectively. The Company must also maintain
a compensating balance for its credit cards. The balances required at December
31, 1996 and 1995 were approximately $23,000 and $21,000, 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 their approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1996
U.S. Government and agency securities $5,035 $11 $ 27 $5,019
Corporate bonds 497 2 -- 499
Federal Reserve Bank and Federal Home
Loan Bank stock 206 -- -- 206
$5,738 $13 $ 27 $5,724
</TABLE>
(continued)
F-11
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 5 - DEBT AND EQUITY SECURITIES (concluded)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1995
U.S. Government and agency securities $3,720 $15 $ 4 $3,731
Corporate bonds 396 6 -- 402
Federal Reserve Bank and Federal Home
Loan Bank stock 178 -- -- 178
$4,294 $21 $ 4 $4,311
SECURITIES HELD TO MATURITY
DECEMBER 31, 1996
State and municipal securities $4,940 $66 $ 5 $5,001
DECEMBER 31, 1995
State and municipal securities $3,887 $64 $ 6 $3,945
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1996 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 $ 756 $ 759 $ 963 $ 965
Due from one year to five years 2,927 2,962 3,636 3,618
Due from five to ten years 1,202 1,226 851 853
Due after ten years 55 54 -- --
Collateralized mortgage obligation -- -- 82 82
TOTAL $4,940 $5,001 $5,532 $5,518
</TABLE>
Securities, carried at approximately $458,000 at December 31, 1996 and $446,000
at December 31, 1995, were pledged to secure public deposits and for other
purposes required or permitted by law.
F-12
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 6 - LOANS
Loans at December 31 consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Real estate:
Construction $ 5,118 $ 4,760
1-4 family residential 9,132 7,429
Commercial 9,261 8,675
Commercial and industrial 4,149 3,170
Consumer 2,620 3,049
TOTAL LOANS $30,280 $27,083
</TABLE>
Changes in the allowance for credit losses for the years ended December 31 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of year $265 $247
Provision for credit losses 62 22
Charge-offs (40) (16)
Recoveries 20 12
NET CHARGE-OFFS (20) (4)
BALANCE AT END OF YEAR $307 $265
</TABLE>
The recorded investment in impaired loans was $43,000 at December 31, 1996. The
Company did not have any impaired loans at December 31, 1995. No allocation of
the allowance for credit losses was considered necessary for the impaired loans
at December 31, 1996. The average recorded investment in impaired loans during
the year ended December 31, 1996 was $4,000. No interest income was recognized
or collected on impaired loans during 1996. No loans at December 31, 1996 or
1995 were 90 days or more past due and still accruing interest.
Maturity and repricing for the Bank's loan portfolio at December 31, 1996 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
FIXED FLOATING
RATE RATE TOTAL
<S> <C> <C> <C>
0 - 90 days $ 1,308 $ 7,698 $ 9,006
91 - 365 days 1,531 1,175 2,706
1 year or more 18,568 -- 18,568
$21,407 $ 8,873 $30,280
</TABLE>
Certain related parties of the Company, principally Directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1996 and 1995. Total loans outstanding at December 31, 1996 and 1995 to
key officers and Directors were $1,270,000 and $1,279,000, respectively. During
1996, loan advances totaled $242,000, and loan repayments totaled $251,000.
F-13
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 7 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 277 $ 277
Building 596 596
Furniture and equipment 542 450
1,415 1,323
Less accumulated depreciation and amortization 352 262
TOTAL PREMISES AND EQUIPMENT $1,063 $1,061
</TABLE>
The Bank leases its Gig Harbor branch facility under an operating lease expiring
in 1998. The lease contains renewal options for twelve years and escalation
clauses based on increases in property taxes and other costs. Rental expense
under this lease was $35,000 in 1996 and $23,000 in 1995, which is included in
occupancy expense.
The Bank also leases its East Bremerton branch (opening in 1997) facility under
an operating lease expiring in 2006. The lease contains two five-year renewal
options. No rental expense was recorded under this lease in 1996.
Minimum future rental commitments under the branch leases were as follows at
December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Gig Harbor East
<S> <C> <C>
Bremerton
1997 $35 $ 20
1998 12 32
1999 -- 34
2000 -- 34
2001 -- 34
2002 and thereafter -- 170
TOTAL MINIMUM PAYMENTS REQUIRED $47 $324
</TABLE>
F-14
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 8 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $4,160,000 and $4,304,000 at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1997 $12,783
1998 2,214
1999 83
$15,080
</TABLE>
NOTE 9 - EMPLOYEE BENEFITS
The Company has a combined 401(k) and profit sharing plan which covers
substantially all employees who have completed one year or more of service.
Contributions to the profit sharing 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, 1996 and 1995 were $49,000 and $29,000,
respectively.
NOTE 10 - INCOME TAXES
Income taxes are comprised of the following for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current $209 $156
Deferred 28 37
TOTAL INCOME TAXES $237 $193
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
PERCENT PERCENT
OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rates $322 34.0% $245 34.0%
Decrease resulting from:
Tax-exempt income (85) (9.0) (52) (7.2)
TOTAL INCOME TAX EXPENSE $237 25.0% $193 26.8%
</TABLE>
(continued)
F-15
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 10 - INCOME TAXES (concluded)
The temporary differences that give rise to significant portions of deferred tax
assets and liabilities at December 31 are (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
DEFERRED TAX ASSETS
Allowances for credit losses $ 75 $ 55
Unrealized loss on securities available for sale 5 --
TOTAL DEFERRED TAX ASSETS 80 55
DEFERRED TAX LIABILITIES
Accumulated depreciation 33 23
Deferred income 124 85
Unrealized gain on securities available for sale -- 6
TOTAL DEFERRED TAX LIABILITIES 157 114
NET DEFERRED TAX LIABILITIES $ 77 $ 59
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commitments to extend credit $5,980 $5,935
</TABLE>
(continued)
F-16
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 11 - COMMITMENTS AND CONTINGENCIES (concluded)
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 all 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.
The Bank has agreements with commercial banks for lines of credit totaling
$1,250,000, none of which was used at December 31, 1996, and for a credit line
with the Federal Home Loan Bank totaling 5% of assets, $400,000 of which was
used at December 31, 1996.
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.
NOTE 12 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, related to loans as disclosed in Notes 6 and 11. 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, as a matter
of practice, generally does not extend credit to any single borrower or group of
related borrowers in excess of $550,000.
Investments in state and municipal securities involve governmental entities
within Washington State.
F-17
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 13 - STOCK OPTIONS
At December 31, 1996, the Company has a nonqualified stock-based option plan,
which is described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan. Accordingly, no compensation cost
has been recognized for this plan. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates for
awards granted in 1996 and 1995, consistent with the method described by SFAS
No. 123 (see Note 2), the Company's net income and earnings per share would have
been reduced to these pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income:
As reported $ 711 $ 528
Pro forma 641 461
Earnings per share:
As reported $3.39 $2.53
Pro forma 3.06 2.21
</TABLE>
The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option-pricing model and using the following weighted-average
assumption: zero dividend yield; risk-free interest rates of 6.53%; and expected
lives of ten years for the options.
The stock option plan provides for granting options to purchase Company common
stock at its market price at the time of grant to directors, officers and
employees; 52,500 common shares have been reserved for option under this plan.
Options granted must be exercised within ten years from the date of grant. Ten
options are granted to each non-officer director for each board and committee
meeting attended. The chief executive officer receives options for 100 shares
per year. Options may be granted to other employees when certain performance
goals established in the plan are reached.
Existing options granted under the plan expire at various times between 1997 and
2005. At December 31, 1996, options for 12,476 shares are still available for
granting under this plan.
(continued)
F-18
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 13 - STOCK OPTIONS (concluded)
A summary of the status of the Company's stock option plan as of December 31,
1996 and 1995, and changes during the years ending on those dates, is presented
below:
<TABLE>
<CAPTION>
1996 1995
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 21,035 $20.15 18,259 $17.95
Granted 5,926 27.66 7,441 22.15
Exercised -- -- (4,665) 14.76
OUTSTANDING AT END OF YEAR 26,961 21.80 21,035 20.15
Options exercisable at year-end 26,961 21.80 21,035 20.15
Weighted average fair value of
options granted during the year 13.11 9.88
</TABLE>
The following summarizes information about stock options outstanding and
exercisable at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL
PRICES OUTSTANDING LIFE
<S> <C> <C>
$19.05 16,125 8
23.75 4,910 9
27.00 2,000 10
28.00 3,926 10
26,961
</TABLE>
F-19
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 14 - STOCK DIVIDENDS AND EARNINGS PER SHARE
On August 31, 1995, the Board of Directors declared a 5% stock dividend, with
fractional shares paid in cash.
Per share stock option information at December 31, 1994 has been adjusted to
reflect the effect of the stock dividend.
NOTE 15 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's 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 its assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table.
As of December 31, 1996, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
(continued)
F-20
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 15 - REGULATORY MATTERS (concluded)
The Bank'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, 1996
Tier 1 capital (to average assets)
Consolidated $4,451 9.7% $1,833 4.0% N/A N/A
Bank 4,437 9.7 1,833 4.0 $2,291 5.0%
Tier 1 capital (to risk-weighted assets)
Consolidated 4,451 13.9 1,282 4.0 N/A N/A
Bank 4,437 13.8 1,282 4.0 1,923 6.0
Total capital (to risk-weighted assets)
Consolidated 4,758 14.8 2,564 8.0 N/A N/A
Bank 4,744 14.8 2,564 8.0 3,204 10.0
DECEMBER 31, 1995
Tier 1 capital
(to average assets) - Bank $3,766 9.7% $1,559 4.0% $1,949 5.0%
Tier 1 capital
(to risk-weighted assets) - Bank 3,766 13.3 1,137 4.0 1,705 6.0
Total capital
(to risk-weighted assets) - Bank 4,031 14.2 2,280 8.0 2,850 10.0
</TABLE>
The Parent Company was formed in 1996, thus capital amounts and ratios have not
been shown for 1995.
Management believes that the Company and the Bank meet all capital requirements
to which they are subject at December 31, 1996.
The Bank, as a national bank, is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller, declare dividends in excess of
the sum of the current year's earnings (as defined) plus the retained earnings
(as defined) from the prior two years. None of the Bank's retained earnings were
restricted under Comptroller regulations at December 31, 1996.
F-21
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
December 31, 1996 and 1995
NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEET - DECEMBER 31, 1996 (Dollars in Thousands)
<TABLE>
<S> <C>
ASSETS
Cash $ 14
Investment in subsidiary 4,428
Organization costs, net 26
TOTAL ASSETS $ 4,468
STOCKHOLDERS' EQUITY $ 4,468
CONDENSED STATEMENT OF INCOME - YEAR ENDED DECEMBER 31, 1996
(Dollars in Thousands)
DIVIDEND FROM SUBSIDIARY $ 50
OPERATING EXPENSES (10)
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 40
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 671
NET INCOME $ 711
CONDENSED STATEMENT OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1996
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 711
Adjustments to reconcile net income to net cash provided:
Amortization of organizational costs 3
Equity in undistributed income of subsidiary (721)
Increase in organization costs (29)
NET CASH USED IN OPERATING ACTIVITIES (36)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 160
Repayment of borrowings (160)
Dividend from subsidiary 50
NET CASH PROVIDED BY FINANCING ACTIVITIES 50
INCREASE IN CASH $ 14
</TABLE>
F-22
<PAGE> 90
Puget
Sound
Bancorp
Inc.
and
Subsidiary
CONSOLIDATED
FINANCIAL
REPORT
June 30
1997
F-23
<PAGE> 91
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,171 $ 1,901
Interest bearing deposits in banks 300 541
Federal funds sold 325 325
Securities available for sale 6,498 5,724
Securities held to maturity 5,383 4,940
Loans available for sale -- 500
Loans 34,738 30,280
Less allowance for credit losses 329 307
NET LOANS 34,409 29,973
Premises and equipment 1,158 1,063
Accrued interest receivable 340 306
Other assets 40 53
TOTAL ASSETS $ 50,624 $ 45,326
LIABILITIES
Deposits:
Demand $ 7,095 $ 5,842
Savings and NOW 17,244 19,189
Time 19,532 15,080
TOTAL DEPOSITS 43,871 40,111
Short term borrowings 1,500 400
Accrued interest payable 137 106
Other liabilities 242 241
TOTAL LIABILITIES 45,750 40,858
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock, no par value, non-voting, non-cumulative,
non-convertible; authorized 500,000 shares, no shares issued -- --
Common stock, par value $5; authorized 1,000,000 shares;
issued and outstanding 209,576 shares 1,048 1,048
Surplus 1,514 1,514
Retained earnings 2,320 1,915
Net unrealized gains (losses) on securities available for sale,
net of tax of ($4) and ($5) and, respectively (8) (9)
TOTAL SHAREHOLDERS' EQUITY 4,874 4,468
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,624 $ 45,326
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 92
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Puget Sound Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Loans $ 1,724 $ 1,426
Deposits in banks 20 30
Federal funds sold 17 22
Securities available for sale - taxable 208 154
Securities held to maturity - tax-exempt 128 106
TOTAL INTEREST INCOME 2,097 1,738
INTEREST EXPENSE
Deposits 771 708
Other short-term borrowings 16 --
TOTAL INTEREST EXPENSE 787 708
NET INTEREST INCOME 1,310 1,030
PROVISION FOR CREDIT LOSSES 30 23
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,280 1,007
NON-INTEREST INCOME
Service charges on deposit accounts 115 102
Other operating income 151 73
TOTAL NON-INTEREST INCOME 266 175
NON-INTEREST EXPENSES
Salaries 426 332
Employee benefits 47 44
Occupancy 81 73
Furniture and equipment 51 34
Other 299 274
TOTAL NON-INTEREST EXPENSES 904 757
INCOME BEFORE INCOME TAXES 642 425
INCOME TAXES 178 107
NET INCOME $ 464 $ 318
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 209,576 209,576
NET INCOME PER SHARE $ 2.21 $ 1.52
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 93
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES
COMMON RETAINED AVAILABLE FOR
STOCK SURPLUS EARNINGS SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $1,048 $1,514 $1,915 $( 9) $4,468
Net income -- -- 464 -- 464
Cash dividend payable ($.28 per share) -- -- (59) -- (59)
Change in net unrealized gains on
securities available for sale, net -- -- -- 1 1
BALANCE, JUNE 30, 1997 $1,048 $1,514 $2,320 $( 8) 4,874
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 94
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Puget Sound Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 464 $ 318
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 30 23
Depreciation 53 47
Increase in accrued interest receivable (34) (68)
Increase (decrease) in accrued interest payable 31 (2)
Other - net (71) 39
NET CASH PROVIDED BY OPERATING ACTIVITIES 473 357
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 241 234
Net increase in Federal funds sold -- (300)
Purchases of securities held to maturity (794) (716)
Purchases of securities available for sale (1,882) (3,229)
Proceeds from maturities of securities held to maturity
and available for sale 1,462 1,455
Net increase in loans (3,966) (1,078)
Additions to premises and equipment (148) (19)
Proceeds from sales of foreclosed real estate 24 --
NET CASH USED IN INVESTING ACTIVITIES (5,063) (3,653)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,760 3,295
Net increase in short-term borrowings 1,100 40
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,860 3,335
NET CHANGE IN CASH AND DUE FROM BANKS 270 39
CASH AND DUE FROM BANKS
Beginning of year 1,901 2,119
END OF YEAR $ 2,171 $ 2,158
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 756 $ 710
Cash payments for income taxes 130 35
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Net of tax change in net unrealized gains (losses) on securities
available for sale $ 1 $ 55
Cash dividend payable 59 --
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Puget Sound Bancorp, Inc. and Subsidiary
June 30, 1997 and 1996
1. BASIS OF PRESENSATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
practices for interim financial information within the banking industry.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results anticipated for the year ending December 31, 1997. For
additional information refer to the consolidated financial statements and
footnotes thereto included in Puget Sound Bancorp's ("Bancorp") annual report
for the year ended December 31, 1996.
2. CONSOLIDATION
The consolidated financial statements include the accounts of Puget
Sound Bancorp, Inc. and First National Bank of Port Orchard. All significant
inter-company balances and transactions have been eliminated in consolidation.
3. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common stock outstanding, including shares issuable under stock option plans,
when dilutive, during the periods presented.
The weighted average number of shares outstanding used to compute net
income per share was 209,676 during the six month periods in 1997 and 1996.
4. STATEMENT OF CASH FLOWS
The purposes of reporting cash flows, Bancorp considers all amounts
included in the balance sheet caption "Cash and Due from Banks" to be cash
equivalents.
5. DIVIDEND PAYABLE
On February 19, 1997, the directors of Bancorp declared a $.28 cash
dividend payable on July 3, 1997, to those stockholders' of record on April 17,
1997. The amount of the dividend was recorded as a reduction in retained
earnings and an increase in other liabilities.
6. PENDING MERGER
On September 18, 1997, Bancorp and its subsidiary bank entered into an
agreement and plan of merger with InterWest Bancorp, Inc., Oak Harbor,
Washington and InterWest's subsidiary, InterWest Bank, pursuant to which Bancorp
will be merged into InterWest Bancorp, Inc.. The merger agreement provides that
Bancorp's common stock will be exchanged for shares of InterWest common stock
pursuant to a specified exchange ratio. Consummation of the acquisition is
subject to several conditions, including receipt of applicable regulatory and
stockholder approval.
F-28
<PAGE> 96
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BETWEEN
PUGET SOUND BANCORP, INC.,
FIRST NATIONAL BANK OF PORT ORCHARD
AND
INTERWEST BANCORP, INC.
AND
INTERWEST BANK
================================================================================
DATED AS OF SEPTEMBER 18, 1997
<PAGE> 97
TABLE OF CONTENTS
ARTICLE I. MERGER.............................................................7
1.1 THE MERGER........................................................7
1.2 EFFECTIVE DATE....................................................7
ARTICLE II. CONSIDERATION.....................................................8
2.1 CONSIDERATION.....................................................8
2.2 SHAREHOLDER RIGHTS; STOCK TRANSFERS...............................8
2.3 FRACTIONAL SHARES.................................................8
2.4 EXCHANGE PROCEDURES...............................................8
2.5 ANTI-DILUTION PROVISIONS..........................................8
2.6 EXCEPTION SHARES..................................................9
2.7 RESERVATION OF RIGHT TO REVISE TRANSACTION........................9
2.8 OPTIONS...........................................................9
ARTICLE III. ACTIONS PENDING CONSUMMATION.....................................9
3.1 CAPITAL STOCK.....................................................9
3.2 DIVIDENDS, ETC...................................................10
3.3 INDEBTEDNESS; LIABILITIES; ETC...................................10
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC......................10
3.5 LIENS AND ENCUMBRANCES...........................................10
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC.........................10
3.7 BENEFIT PLANS....................................................10
3.8 CONTINUANCE OF BUSINESS..........................................10
3.9 AMENDMENTS.......................................................10
3.10 CLAIMS...........................................................10
3.11 CONTRACTS........................................................11
3.12 LOANS............................................................11
3.13 TRANSACTION EXPENSES.............................................11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES...................................11
4.1 THE COMPANY AND PORT ORCHARD BANK REPRESENTATIONS
AND WARRANTIES................................................11
4.2 INTERWEST AND INTERWEST BANK REPRESENTATIONS
AND WARRANTIES.................................................19
ARTICLE V. COVENANTS.........................................................22
5.1 BEST EFFORTS.....................................................22
5.2 THE PROXY........................................................22
5.3 REGISTRATION STATEMENT COMPLIANCE WITH
SECURITIES LAWS..................................................22
5.4 REGISTRATION STATEMENT EFFECTIVENESS.............................22
5.5 PRESS RELEASES...................................................23
i
<PAGE> 98
5.6 ACCESS; INFORMATION..............................................23
5.7 ACQUISITION PROPOSALS............................................23
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY
APPLICATIONS PREPARATION.........................................24
5.9 BLUE-SKY FILINGS.................................................24
5.10 AFFILIATE AGREEMENTS.............................................24
5.11 CERTAIN POLICIES OF THE COMPANY AND PORT ORCHARD
BANK.............................................................24
5.12 STATE TAKEOVER LAW...............................................24
5.13 NO RIGHTS TRIGGERED..............................................24
5.14 SHARES LISTED....................................................25
5.15 REGULATORY APPLICATIONS..........................................25
5.16 REGULATORY DIVESTITURES..........................................25
5.17 CURRENT INFORMATION..............................................25
5.18 INDEMNIFICATION..................................................25
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER.........................26
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS...........................26
6.2 CONDITIONS TO OBLIGATIONS OF INTERWEST...........................27
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND
PORT ORCHARD BANK................................................28
ARTICLE VII. TERMINATION.....................................................29
7.1 MUTUAL CONSENT...................................................29
7.2 BREACH...........................................................29
7.3 DELAY............................................................29
7.4 NO SHAREHOLDER APPROVAL..........................................29
7.5 AVERAGE CLOSING PRICE LESS THAN $34.75...........................29
7.6 AVERAGE CLOSING PRICE GREATER THAN $43.75........................29
7.7 CONSEQUENCES OF TERMINATION......................................29
ARTICLE VIII. OTHER MATTERS..................................................30
8.1 SURVIVAL.........................................................30
8.2 WAIVER; AMENDMENT................................................30
8.3 COUNTERPARTS.....................................................30
8.4 GOVERNING LAW....................................................30
8.5 EXPENSES.........................................................30
8.6 CONFIDENTIALITY..................................................30
8.7 NOTICES..........................................................30
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES...............31
8.9 BENEFIT PLANS....................................................31
8.10 HEADINGS.........................................................31
EXHIBITS
Exhibit A Approval by Directors of Puget Sound Bancorp, Inc.
Exhibit B Director's Agreement
Exhibit C Affiliate Undertakings and Agreements
Exhibit D Employment Agreement of Duane Guggenmos
ii
<PAGE> 99
Exhibit E Employment Agreement of Linda A. Smith
Exhibit F Employment Agreements for Certain Other Employees
Exhibit G Legal Opinion of Rothgerber, Appel, Powers & Johnson
Exhibit H Legal Opinion of special Washington counsel
Exhibit I Legal Opinion of Graham & Dunn
SCHEDULES
Company Disclosures
Schedule 2.8 Outstanding Options
Schedule 3.4 Changes to Line of Business, Operating Procedures, etc.
Schedule 3.6 New or Changes to Compensation, Employment Agreements,
etc.
Schedule 3.7 New or Modifications to Benefit Plans
Schedule 3.11 New or Changes to Material Contracts
Schedule 4.1(C) Shares Outstanding
Schedule 4.1(D) Subsidiaries
Schedule 4.1(G) No Defaults - Agreements Requiring Third Party Consent
Schedule 4.1(H) Financial Reports
Schedule 4.1(J) No Events Causing Material Adverse Effect
Schedule 4.1(L) Litigation, Regulatory Action
Schedule 4.1(M) Compliance with Laws
Schedule 4.1(N) Material Contracts
Schedule 4.1(Q)(1) List of Employee Benefit Plans
Schedule 4.1(Q)(2) Employee Benefit Plans Not Qualified Under ERISA
Schedule 4.1(Q)(6) Obligations for Retiree Health and Life Benefits
Schedule 4.1(Q)(7) Agreements Resulting in Payments to Employees Under Any
Compensation and Benefit Plan with Respect to Proposed
Transaction
Schedule 4.1(T) Asset Classification
Schedule 4.1(V) Insurance
Schedule 4.1(W) Affiliates
Schedule 4.1(Z)(2) Pending Proceedings with Respect to Environmental
Matters
Schedule 4.1(Z)(3) Pending Proceedings with Respect to Environmental
Matters Involving Loan/Fiduciary Property
Schedule 4.1(Z)(4) Pending Proceedings with Respect to Environmental
Matters Listed in Sections 4.1(Z)(2) or (3)
Schedule 4.1(Z)(5) Actions During Ownership Which could Have Material
Adverse Effect with Respect to Environmental Matters
Schedule 4.1(Z)(6) Actions Prior to Ownership Which could Have Material
Adverse Effect with Respect to Environmental Matters
Schedule 4.1(AA) Tax Reports Matters
Schedule 4.1(CC) Derivative Contracts
Schedule 4.1(EE) Commitments and Contracts
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InterWest Disclosures
Schedule 4.2(C) Shares
Schedule 4.2(F) No Defaults
Schedule 4.2(G) Financial Reports
Schedule 4.2(H) No Events Causing Material Adverse Effect
Schedule 4.2(I) Litigation, Regulatory Action
Schedule 4.2(L) Derivative Contracts
General Schedules
Schedule 6.1(H) Employees of Company Entering Into Employment
Agreements
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 18th day of September 1997
(this "Plan"), is between PUGET SOUND BANCORP, INC. (the "Company"), FIRST
NATIONAL BANK OF PORT ORCHARD ("Port Orchard Bank"), INTERWEST BANCORP, INC.
("InterWest"), and INTERWEST BANK.
RECITALS
(A) THE COMPANY. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Washington, with its
principal executive offices located in Port Orchard, Washington. The Company is
a registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). As of the date of this Plan, the Company has 1,000,000
authorized shares of common stock, no par value ("Company Common Stock"), of
which 209,576 shares of Company Common Stock are issued and outstanding, and
500,000 shares of preferred stock, no par value, none of which preferred stock
is issued and outstanding. As of the date of this Plan, the Company had 52,500
shares of Company Common Stock reserved for issuance under employee and director
stock option plans pursuant to which options covering 29,714 shares of Company
Common Stock are outstanding as of the date of this Plan.
(B) PORT ORCHARD BANK. Port Orchard Bank is a national banking
association duly organized and existing in good standing under the laws of the
United States, with its principal executive offices located in Port Orchard,
Washington. As of the date of this Plan, Port Orchard Bank has 475,000
authorized shares of common stock, $5.00 par value per share ("POB Common
Stock") (no other class of capital stock being authorized), of 209,576 shares of
POB Common Stock are issued and outstanding. All of the issued and outstanding
shares of POB Common Stock are owned by the Company. As of June 30, 1997, Port
Orchard Bank had capital of $4,765,301, divided into common stock of $1,047,880,
surplus of $1,514,324, and undivided profits of $2,203,097.
(C) INTERWEST. InterWest is a corporation duly organized and existing in
good standing under the laws of the State of Washington, with its principal
executive offices located in Oak Harbor, Washington. InterWest is a registered
bank holding company under the BHC Act. As of the date of this Plan, InterWest
has 20,000,000 authorized shares of common stock, $.20 par value per share
("InterWest Common Stock") (no other class of capital stock being authorized),
of which 8,050,088 shares of InterWest Common Stock are issued and outstanding.
(D) INTERWEST BANK. InterWest Bank is a savings bank duly organized and
existing in good standing under the laws of the State of Washington, with its
principal executive offices located in Oak Harbor, Washington. As of the date of
this Plan, InterWest Bank has 6,000,000 authorized shares of common stock, $.20
par value per share ("InterWest Bank Common Stock") (no other class of capital
stock being authorized), of which 200 shares are issued and outstanding and
owned by InterWest, the sole shareholder of InterWest Bank. As of June 30, 1997,
InterWest Bank had capital of $123,654,584, divided into common stock of $200,
surplus of $25,357,938 and undivided profits, including capital reserves, of
$98,296,446.
(E) VOTING AGREEMENT. As a condition and an inducement to InterWest's
and InterWest Bank's willingness to enter into this Plan, the directors and
officers of Port Orchard Bank and the Company have entered into agreements in
the forms attached to this Plan as Exhibit A and Exhibit B, pursuant to which,
among other things, each such individual has agreed to vote his or her shares of
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Company Common Stock in favor of approval of the actions contemplated by this
Plan at the Meeting (as defined below) and to refrain from competing with
InterWest and InterWest Bank.
(F) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
Schedule 4. l(C) or as authorized by this Plan: there are no shares of capital
stock of the Company or Port Orchard Bank authorized and reserved for issuance;
neither the Company nor Port Orchard Bank has any Rights (as defined below)
issued or outstanding; and neither the Company nor Port Orchard Bank has any
commitment to authorize, issue or sell any such shares or any Rights. The term
"Rights" means securities or obligations convertible into or exchangeable for,
or giving any person any right to subscribe for or acquire, or any options,
calls or commitments relating to, shares of capital stock. There are no
preemptive rights with respect to the Company Common Stock.
(G) APPROVALS. At meetings of the respective Boards of Directors of the
Company, Port Orchard Bank, InterWest and InterWest Bank, each such Board has
approved and authorized the execution of this Plan in counterparts.
In consideration of their mutual promises and obligations, the Parties
further agree as follows:
DEFINITIONS
(A) DEFINITIONS. Capitalized terms used in this Plan have the following
meanings:
"Acquisition Proposal" has the meaning assigned to such term in Section
5.7.
"Adjusted Loans" means all loans and other extensions of credit by Port
Orchard Bank other than (1) loans fully secured by cash, and (2) that portion of
loans fully guaranteed by the U.S. Government or any of its agencies.
"Appraisal Laws" has the meaning assigned to such term in Section
1.1(E).
"Asset Classification" has the meaning assigned to such term in Section
4.l(T).
"Average Closing Price" means the price equal to the average (rounded to
the nearest penny) of each Daily Sales Price of InterWest Common Stock for the
ten consecutive trading days beginning on and including the thirtieth day
immediately preceding the Effective Date, subject to any adjustment that may be
required in connection with the adjustment of the Exchange Ratio pursuant to
Section 2.5.
"Bank Financial Reports" has the meaning assigned to such term in
Section 4.1(H).
"Business Day" means any day other than a Saturday, Sunday, or legal
holiday in the State of Washington.
"Capital" means capital stock, surplus and retained earnings determined
in accordance with GAAP.
"Code" has the meaning assigned to such term in Section 4.1(Q)(2).
"Company Option" has the meaning assigned to such term in Section 2.8.
"Compensation and Benefit Plans" has the meaning assigned to such term
in Section 4.1(Q)(1).
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"Continuing Corporation" has the meaning assigned to such term in
Section 1.1(A).
"Control" with respect to any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting interests, by
contract, or otherwise.
"Daily Sales Price" for any trading day shall be equal to the average of
the bid and ask prices per share of all market makers, as reported on Bloomberg
Financial Markets, of InterWest Common Stock on the NASDAQ Stock Market
reporting system.
"Department" means the Department of Financial Institutions of the State
of Washington.
"Derivatives Contract" means an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial contract or any
other contract that (1) is not included on the balance sheet of the Holding
Company Financial Reports or the InterWest Financial Reports, as the case may
be, and (2) is a derivative contract (including various combinations thereof).
"Director" means the Director of the Department.
"Dissenting Shares" means the shares of Company Common Stock held by
those shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.2.
"Eligible Company Common Stock" means shares of Company Common Stock
other than Exception Shares and Dissenting Shares.
"Employment Agreement" shall mean any of Exhibits D, E and F.
"Environmental Law" means (1) any federal, state, and local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection, preservation or restoration of the environment (including air, water
vapor, surface water, groundwater, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource) or to
human health or safety, or (b) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Material, in each case as amended
and as now in effect, including the Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, and the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970, and (2) any common
law or equitable doctrine (including injunctive relief and tort doctrines such
as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 4.1(Q)(2).
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"ERISA Affiliate" has the meaning assigned to such term in Section
4.1(Q)(3).
"ERISA Plans" has the meaning assigned to such term in Section
4.1(Q)(2).
"Exception Shares" means shares held by any of the Company's
Subsidiaries or by InterWest or any of its Subsidiaries, in each case other than
in a fiduciary capacity or as a result of debts previously contracted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under such statute.
"Exchange Agent" has the meaning assigned to such term in Section 2.4.
"Exchange Ratio" has the meaning assigned to such term in Section
2.1(B).
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Reports" has the meaning assigned to such term in Section
4.1(H).
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"GAAP" means generally accepted accounting principles consistently
applied.
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
including any oil or other petroleum product, toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste or petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos, asbestos containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"Holding Company Financial Reports" has the meaning assigned to such
term in Section 4.1(H).
"Indemnified Party" has the meaning assigned to such term in Section
5.18(A).
"Insider" means any employee, officer or director of the Company or Port
Orchard Bank, and any entity with which any such individual is directly or
indirectly affiliated or associated.
"InterWest Option" has the meaning assigned to such term in Section 2.8.
"InterWest Transaction" means (1) a merger, consolidation or similar
transaction involving InterWest or any of its significant subsidiaries, (2) the
disposition, by sale, lease, exchange or otherwise, of assets or deposits of
InterWest or any of its significant subsidiaries representing in either case 25%
or more of the consolidated assets or deposits of InterWest and its
subsidiaries, or (3) the issuance, sale or other disposition (including by way
of merger, consolidation, share exchange or any similar transaction) of
securities representing 25% or more of the voting power of InterWest or any of
its significant subsidiaries other than the issuance of InterWest Common Stock
upon the exercise of outstanding options or the conversion of outstanding
convertible securities of InterWest.
"Loan/Fiduciary Property" means any property owned or controlled by the
Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries holds a security or other interest, and,
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where required by the context, includes any such property where the Company or
any of its Subsidiaries constitutes the owner or operator of such property, but
only with respect to such property.
"Material Adverse Effect" means, with respect to any Party, an event,
occurrence or circumstance (including (i) the making of any provisions for
possible loan and lease losses, write-downs of other real estate owned and
taxes, and (ii) any breach of a representation or warranty contained in this
Plan by such Party) that (a) has or is reasonably likely to have a material
adverse effect on the financial condition, results of operations, business or
prospects of such Party and its subsidiaries, taken as a whole, or (b) would
materially impair such Party's ability to perform its obligations under this
Plan or the consummation of any of the transactions contemplated by this Plan.
"Meeting" has the meaning assigned to such term in Section 5.2.
"Merger" has the meaning assigned to such term in Section 1.1(A).
"Multiemployer Plans" has the meaning assigned to such term in Section
4.l(Q)(2).
"NASDAQ" means the National Association of Securities Dealers Automated
Quotations system.
"Notice Date" means the fourth Business Day after the end of the ten
trading day period used to determine the Average Closing Price.
"Participation Facility" means any facility in which the Company or any
of its Subsidiaries participates in the management and, where required by the
context, includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section
4.l(Q)(2).
"Previously Disclosed" means information provided by a Party in a
Schedule that is delivered by that Party to the other Party contemporaneously
with the execution of this Plan.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Registration Statement" has the meaning assigned to such term in
Section 5.2.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"Rights" has the meaning assigned to such term in paragraph (F) of the
Recitals to this Plan.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under such statute.
"SEC" means the Securities and Exchange Commission.
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"Subsidiary" means, with respect to any entity, each partnership,
limited liability company, or corporation the majority of the outstanding
partnership interests, membership interests, capital stock or voting power of
which is (or upon the exercise of all outstanding warrants, options and other
rights would be) owned, directly or indirectly, at the time in question by such
entity.
"Tax Returns" has the meaning assigned to such term in Section 4.1(AA).
"Taxes" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, withholding or similar taxes imposed on the income,
properties or operations of the respective Party or its Subsidiaries, together
with any interest, additions, or penalties with respect thereto and any interest
in respect of such additions or penalties.
"Termination Date" has the meaning assigned to such term in Section 1.2.
"Third Party" means a person within the meaning of Sections 3(a)(9) and
13(d)(3) of the Exchange Act, excluding (1) the Company or any Subsidiary of the
Company, and (2) InterWest or any Subsidiary of InterWest.
"Triggering Event" means any one or more of the following events:
(1) InterWest shall have authorized, recommended, publicly
proposed or publicly announced an intention to authorize, recommend or
propose, or entered into an agreement with any Third Party to effect an
InterWest Transaction.
(2) Any Third Party shall have made a bona fide proposal to
InterWest or its shareholders by public announcement, or by written
communication that is or becomes the subject of public disclosure, to
engage in an InterWest Transaction.
(3) Any Third Party, other than in connection with a transaction
to which the Company has given its prior written consent, shall have
filed an application or notice with the Federal Reserve Board, or other
federal or state bank regulatory authority, for approval to engage in an
InterWest Transaction.
(4) Any Third Party shall have commenced (as such term is defined
in Rule 14d-2 under the Exchange Act) or shall have filed a registration
statement under the Securities Act with respect to, a tender offer or
exchange offer to purchase any shares of InterWest Common Stock such
that, upon consummation of such offer, such Third Party would own or
control 20% or more of the then outstanding shares of InterWest Common
Stock.
"Valuation Price" means the Average Closing Price; provided, however,
that (1) if the Average Closing Price is less than or equal to $34.75, then the
Valuation Price shall be $34.75, and (2) if the Average Closing Price is equal
to or greater than $43.75, then the Valuation Price shall be $43.75.
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in
this Plan or unless the context clearly requires otherwise, the terms defined in
this Plan include the plural as well as the singular; the words "hereof,"
"herein," "hereunder," "in this Plan" and other words of similar import refer to
this Plan as a whole and not to any particular Article, Section or other
subdivision; and references in this Plan to Articles, Sections, Schedules, and
Exhibits refer to Articles and Sections of and Schedules and Exhibits to this
Plan. Whenever the words "include," "includes," or "including" are used in this
Plan, they shall be deemed to be followed by the words "without limitation."
Unless otherwise
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stated, references to Subsections refer to the Subsections of the Section in
which the reference appears. All pronouns used in this Plan include the
masculine, feminine and neuter gender, as the context requires. All accounting
terms used in this Plan that are not expressly defined in this Plan have the
respective meanings given to them in accordance with GAAP.
ARTICLE I. MERGER
1.1 THE MERGER. Subject to the provisions of this Plan, on the Effective
Date:
(A) THE CONTINUING CORPORATION. In accordance with the terms of RCW Ch.
23B.11, the Company shall merge into InterWest (the "Merger"), the separate
existence of the Company shall cease and InterWest (the "Continuing
Corporation") shall survive, and the name of the Continuing Corporation shall be
"InterWest Bancorp, Inc."
(B) RIGHTS, ETC. Upon consummation of the Merger, the Continuing
Corporation shall possess all of the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of the merging
corporations; and all property, real, personal and mixed, and all debts due on
whatever account, and all other choses in action, and all and every other
interest, of or belonging to or due to each of the corporations so merged, shall
be deemed to be vested in the Continuing Corporation without further act or
deed; and the title to any real estate or any interest therein, vested in each
of such corporations, shall not revert or be in any way impaired by reason of
the Merger.
(C) LIABILITIES. The Continuing Corporation shall be responsible and
liable for all the liabilities, obligations and penalties of each of the
corporations so merged.
(D) ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. The Articles
of Incorporation and Bylaws of the Continuing Corporation shall be those of
InterWest, as in effect immediately prior to the Merger becoming effective. The
directors and officers of InterWest in office immediately prior to the Merger
becoming effective shall be the directors and officers of the Continuing
Corporation, who shall hold office until such time as their successors are
elected and qualified.
(E) DISSENTING SHARES. Notwithstanding anything to the contrary in this
Plan, each Dissenting Share whose holder, as of the Effective Date of the
Merger, has not effectively withdrawn or lost his dissenters' rights under RCW
23B.13 (the "Appraisal Laws") shall not be converted into or represent a right
to receive InterWest Common Stock, but the holder of such Dissenting Share shall
be entitled only to such rights as are granted by the Appraisal Laws. Each
holder of Dissenting Shares who becomes entitled to payment for his Company
Common Stock pursuant to the provisions of the Appraisal Laws shall receive
payment for such Dissenting Shares from InterWest (but only after the amount
thereof shall have been agreed upon or finally determined pursuant to the
Appraisal Laws).
1.2 EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" will be the later of (A) January 15, 1998, and (B) the tenth
Business Day after the fulfillment or waiver of each condition precedent set
forth in, and the granting of each approval (and expiration of any waiting
period) required by, Article VI. If the Merger is not consummated in accordance
with this Plan on or prior to June 30, 1998 (the "Termination Date"), the
Company or InterWest may terminate this Plan in accordance with Article VII. On
the Effective Date, InterWest and the Company shall execute and deliver to the
Secretary of State of the State of Washington articles of merger in accordance
with applicable law.
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ARTICLE II. CONSIDERATION
2.1 CONSIDERATION. Subject to the provisions of this Plan, on the Effective
Date:
(A) OUTSTANDING INTERWEST COMMON STOCK. The shares of InterWest Common
Stock issued and outstanding immediately prior to the Effective Date shall, on
and after the Effective Date, remain as issued and outstanding shares of
InterWest Common Stock.
(B) OUTSTANDING COMPANY COMMON STOCK. Each share of Eligible Company
Common Stock issued and outstanding immediately prior to the Effective Date
shall, by virtue of the Merger, automatically and without any action on the part
of the holder of such share, become and be converted into the right to receive
the number of shares of InterWest Common Stock equal to the quotient of $64.05
divided by the Valuation Price (the quotient, as adjusted, if applicable,
pursuant to Section 2.5, being referred to as the "Exchange Ratio").
2.2 SHAREHOLDER RIGHTS; STOCK TRANSFERS. On the Effective Date, holders of
Company Common Stock shall cease to be, and shall have no rights as,
shareholders of the Company, other than to receive the consideration provided
under this Article II. After the Effective Date, there shall be no transfers on
the stock transfer books of the Company or the Continuing Corporation of the
shares of Company Common Stock that were issued and outstanding immediately
prior to the Effective Date.
2.3 FRACTIONAL SHARES. Notwithstanding any other provision of this Plan, no
fractional shares of InterWest Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger.
InterWest shall pay to each holder of Company Common Stock who would otherwise
be entitled to a fractional share an amount in cash determined by multiplying
such fraction by the Average Closing Price.
2.4 EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, InterWest shall send or cause to be sent to each former shareholder of the
Company of record immediately prior to the Effective Date transmittal materials
for use in exchanging such shareholder's certificates for Company Common Stock
for the consideration set forth in this Article II. The certificates
representing the shares of InterWest Common Stock into which shares of such
shareholder's Company Common Stock are converted on the Effective Date, any
fractional share checks that such shareholder shall be entitled to receive, and
any dividends paid on such shares of InterWest Common Stock for which the record
date for determination of shareholders entitled to such dividends is on or after
the Effective Date, will be delivered to such shareholder only upon delivery to
InterWest Bank (the "Exchange Agent") of the certificates representing all of
such shares of Company Common Stock (or indemnity satisfactory to InterWest and
the Exchange Agent, in their judgment, if any of such certificates are lost,
stolen or destroyed). No interest will be paid on any such fractional share
checks or dividends to which the holder of such shares shall be entitled to
receive upon such delivery. Certificates surrendered for exchange by any person
constituting an "affiliate" of the Company for purposes of Rule 145 of the
Securities Act shall not be exchanged for certificates representing InterWest
Common Stock until InterWest has received a written agreement from such person
as specified in Section 5.10.
2.5 ANTI-DILUTION PROVISIONS. In the event InterWest changes the number of
shares of InterWest Common Stock issued and outstanding prior to the Effective
Date as a result of a stock split, stock dividend, recapitalization or similar
transaction with respect to the outstanding InterWest Common Stock and the
record date therefor shall be prior to the Effective Date, the Exchange Ratio
shall be proportionately adjusted.
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2.6 EXCEPTION SHARES. Each of the Exception Shares of Company Common Stock
shall be canceled and retired upon consummation of the Merger, and no
consideration shall be issued in exchange therefor.
2.7 RESERVATION OF RIGHT TO REVISE TRANSACTION. In its sole discretion, and
notwithstanding any other provision in this Plan to the contrary, InterWest may
at any time change the method of effecting its acquisition of the Company and
Port Orchard Bank; provided, however, that no such change shall (A) alter or
change the amount or kind of consideration to be issued to holders of Company
Common Stock as provided for in this Plan, or (B) adversely affect the tax
treatment to the Company shareholders as a result of receiving such
consideration. If InterWest so elects to change the method of acquisition, the
Company and Port Orchard Bank will cooperate with and assist InterWest and
InterWest Bank with any necessary amendment to this Plan, and with the
preparation and filing of such applications, documents, instruments and notices
as may be necessary or desirable, in the opinion of counsel for InterWest, to
obtain all necessary shareholder approvals and approvals of any regulatory
agency, administrative body or other governmental entity. InterWest's authority
under this Section includes the right of InterWest, if it so elects, to merge
Port Orchard Bank into InterWest Bank on the Effective Date.
2.8 OPTIONS. On the Effective Date, by virtue of the Merger, and without any
action on the part of any holder of an option, each option granted by the
Company to purchase shares of Company Common Stock ("Company Option") that is
then outstanding and unexercised shall be converted into and become an option to
purchase InterWest Common Stock ("InterWest Option") on the same terms and
conditions as are in effect with respect to the Company Option immediately prior
to the Effective Date, except that (A) each such InterWest Option may be
exercised solely for shares of InterWest Common Stock, (B) the number of shares
of InterWest Common Stock subject to such InterWest Option shall be equal to the
number of shares of Company Common Stock subject to such Option immediately
prior to the Effective Date multiplied by the Exchange Ratio, the product being
rounded, if necessary, up or down to the nearest whole share, and (C) the per
share exercise price under each such InterWest Option shall be adjusted by
dividing the per share exercise price of the Company Option by the Exchange
Ratio, and rounding up to the nearest cent. The number of shares of Company
Common Stock that are issuable upon exercise of Options as of the date of this
Plan are Previously Disclosed in Schedule 2.8. Following the Effective Date,
InterWest shall use its best efforts to prepare and file with the SEC a
registration statement on Form S-8 covering shares of InterWest Common Stock to
be issued upon the exercise of stock options assumed by InterWest pursuant to
this Section 2.8.
ARTICLE III. ACTIONS PENDING CONSUMMATION
Each of the Company and Port Orchard Bank shall conduct its and each of its
Subsidiaries' business in the ordinary and usual course consistent with past
practice and shall use its best efforts to maintain and preserve its and each of
its Subsidiaries' business organization, employees and advantageous business
relationships and retain the services of its and each of its Subsidiaries'
officers and key employees identified by InterWest Bank, and neither the Company
nor Port Orchard Bank will (or cause or allow any of it Subsidiaries to):
3.1 CAPITAL STOCK. Except for or as otherwise permitted in or expressly
contemplated by this Plan or as Previously Disclosed in Schedule 4.1(C), issue,
sell or otherwise permit to become outstanding any additional shares of capital
stock of the Company, Port Orchard Bank or any of their Subsidiaries, or any
Rights with respect thereto, or enter into any agreement with respect to the
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foregoing, or permit any additional shares of Company Common Stock to become
subject to grants of employee stock options, stock appreciation rights or
similar stock-based employee compensation rights.
3.2 DIVIDENDS, ETC. Make, declare or pay any dividend on or in respect of,
or declare or make any distribution on, or directly or indirectly combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock or, other than as permitted in or contemplated by this Plan, authorize the
creation or issuance of, or issue, any additional shares of its capital stock or
any Rights with respect thereto; provided, however, that the Company may declare
and pay a cash dividend of $0.37 per share after March 31, 1998, only to the
extent that such dividend does not result in the failure of the Company to
maintain Capital of at least $5,500,000.
3.3 INDEBTEDNESS; LIABILITIES; ETC. Other than in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual corporation or
other entity.
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC. Except as may be directed
by any regulatory agency, (A) change its lending, investment, liability
management or other material banking policies in any material respect, except
such changes as are in accordance and in an effort to comply with Section 5.11,
or (B) commit to incur any further capital expenditures beyond those Previously
Disclosed in Schedule 3.4 other than in the ordinary course of business and not
exceeding $10,000 individually or $35,000 in the aggregate.
3.5 LIENS AND ENCUMBRANCES. Impose, or suffer the imposition, on any shares
of stock of any of its Subsidiaries, any lien, charge or encumbrance, or permit
any such lien, charge or encumbrance to exist.
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously Disclosed
in Schedule 3.6, enter into or amend any employment, severance or similar
agreement or arrangement with any of its directors, officers or employees, or
grant any salary or wage increase, amend the terms of any Company Option or
increase any employee benefit (including incentive or bonus payments), except
normal individual increases in regular compensation to employees in the ordinary
course of business consistent with past practice.
3.7 BENEFIT PLANS. Except as Previously Disclosed in Schedule 3.7, enter
into or modify (except as may be required by applicable law) any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees, including taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
3.8 CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion of its
assets, business or properties, that is material to the Company and its
Subsidiaries taken as a whole, or merge or consolidate with, or acquire all or
any portion of, the business or property of any other entity that is material to
the Company and its Subsidiaries taken as a whole (except foreclosures or
acquisitions by Port Orchard Bank in its fiduciary capacity, in each case in the
ordinary course of business consistent with past practice).
3.9 AMENDMENTS. Amend its articles of incorporation or bylaws.
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3.10 CLAIMS. Settle any claim, litigation, action or proceeding involving
any liability for material money damages or restrictions upon the operations of
the Company or any of its Subsidiaries.
3.11 CONTRACTS. Except as previously disclosed on Schedule 3.11, enter into,
renew, terminate or make any change in any material contract, agreement or
lease, except in the ordinary course of business consistent with past practice
with respect to contracts, agreements and leases that are terminable by it
without penalty on no more than 60 days prior written notice.
3.12 LOANS. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except that
Port Orchard Bank shall not, without the prior consent of InterWest, make any
new loan or modify, restructure or renew any existing nonperforming loan to any
borrower if the amount of the resulting loan, when aggregated with all other
loans or extensions of credit to such person or entity (or which would be
required to be aggregated for loans-to-one-borrower limitations), would be in
excess of $175,000 for any new customer (other than an Insider) or $400,000 to
any customer as of the date of this Plan (other than an Insider), except that
single-family residential loans may be made in amounts that would not exceed
applicable FHLMC and FNMA limits.
3.13 TRANSACTION EXPENSES. Incur expenses in connection with the
transactions contemplated by this Plan that exceed $175,000 in the aggregate.
ARTICLE IV. REPRESENTATIONS AND WARRANTS
4.1 THE COMPANY AND PORT ORCHARD BANK REPRESENTATIONS AND WARRANTIES. Each
of the Company and Port Orchard Bank hereby represents and warrants to InterWest
and InterWest Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with
respect to the Company and its Subsidiaries are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of the Company and its
Subsidiaries is duly qualified to do business and is in good standing in the
States of the United States and foreign jurisdictions where the failure to be
duly qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it. Each of the Company and its Subsidiaries has in
effect all federal state, local and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(C) SHARES. The outstanding shares of the Company and its Subsidiaries'
capital stock are validly issued and outstanding, fully paid and nonassessable,
and subject to no preemptive rights. Except as Previously Disclosed in Schedule
4.1(C), there are no shares of capital stock or other equity securities of the
Company or its Subsidiaries outstanding and no outstanding Rights with respect
thereto.
(D) THE COMPANY SUBSIDIARIES. The Company has Previously Disclosed in
Schedule 4.1(D) a list of all of its Subsidiaries. Each of its Subsidiaries that
is a bank is an "insured depository institution" as defined in the Federal
Deposit Insurance Act, as amended, and applicable regulations under such
statute. No equity securities of any of its Subsidiaries are or may become
required to be issued (other than to the Company or one of its Subsidiaries) by
reason of any Rights with respect thereto. There are no contracts, commitments,
understandings or arrangements by which any of its Subsidiaries is or may be
bound to sell or otherwise issue any shares of such Subsidiary's capital
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stock, and there are no contracts, commitments, understandings or arrangements
relating to the rights of the Company or its Subsidiaries, as applicable, to
vote or to dispose of such shares. All of the shares of capital stock of each of
its Subsidiaries held by the Company or one of its Subsidiaries are fully paid
and nonassessable and are owned by the Company or one of its Subsidiaries free
and clear of any charge, mortgage, pledge, security interest, restriction,
claim, lien or encumbrance. Each of its Subsidiaries is in good standing under
the laws of the jurisdiction in which it is incorporated or organized, and is
duly qualified to do business and in good standing in the jurisdictions where
the failure to be duly qualified is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it. Except as Previously
Disclosed in Schedule 4.1(D), it does not own beneficially, directly or
indirectly, any shares of any equity securities or similar interests of any
corporation, bank, partnership, joint venture, business trust, association or
other organization. In the case of representations by the Company, the deposits
of its Subsidiaries that are banks are insured by the Bank Insurance Fund of the
FDIC.
(E) CORPORATE POWER. Each of the Company and its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by
its shareholders referred to in Section 6.1, this Plan have been authorized by
all necessary corporate action of the Company and each of its Subsidiaries that
is a Party, and each such agreement is a valid and binding agreement of the
Company and such Subsidiaries, enforceable against the Company and such
Subsidiaries in accordance with its terms, subject to bankruptcy, insolvency and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(G) NO DEFAULTS. Subject to the approval by its shareholders referred to
in Section 6.1, the required regulatory approvals referred to in Section 6.1,
and the required filings under federal and state securities laws, and except as
Previously Disclosed in Schedule 4.1(G), the execution, delivery and performance
of this Plan and the consummation by the Company and each of its Subsidiaries
that is a Party to the transactions contemplated by this Plan does not and will
not (1) constitute a breach or violation of, or a default under, any law, rule
or regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of the Company or of any of its Subsidiaries
or to which the Company or any of its Subsidiaries or its or their properties is
subject or bound, which breach, violation or default is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it, (2)
constitute a breach or violation of, or a default under, the articles of
incorporation, charter or bylaws of it or any of its Subsidiaries, or (3)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the consent or approval of any
other party to any such agreement, indenture or instrument, other than any such
consent or approval that, if not obtained, would not be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it.
(H) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule
4.1(H), (1) as to the Company, its audited consolidated balance sheet as of
December 31, 1996 and the related statements of income, changes in shareholders'
equity and cash flows for the fiscal year ended December 31, 1996 (collectively,
the "Holding Company Financial Reports"), and (2) as to each of the Company's
Subsidiaries that is a bank, its call report for the fiscal year ended December
31, 1996, and all other financial reports filed or to be filed subsequent to
December 31, 1996, in the form filed with the FDIC and the Office of the
Comptroller of the Currency (in each case, the "Bank Financial Reports" and
together with the Holding Company Financial Reports, the "Financial Reports")
did not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
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were made, not misleading; and each of the balance sheets in or incorporated by
reference into the Financial Reports (including the related notes and schedules
thereto) fairly presents and will fairly present the financial position of the
entity or entities to which it relates as of its date, and each of the
statements of income and changes in shareholders' equity and cash flows or
equivalent statements in the Bank Financial Reports (including any related notes
and schedules thereto) fairly presents and will fairly present the results of
operations, changes in shareholders' equity and cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth therein,
in each case in accordance with GAAP during the periods involved, except in each
case as may be noted therein, subject to normal and recurring year-end audit
adjustments in the case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any of
its Subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it, except (1) as reflected in its Holding Company Financial
Reports prior to the date of this Plan, and (2) for commitments and obligations
made, or liabilities incurred, in the ordinary course of business consistent
with past practice since December 31, 1996. Since December 31, 1996, neither the
Company nor any of its Subsidiaries has incurred or paid any obligation or
liability (including any obligation or liability incurred in connection with any
acquisitions in which any form of direct financial assistance of the federal
government or any agency thereof has been provided to any Subsidiary) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.1(J), since
December 31, 1996, no event has occurred that, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on it.
(K) PROPERTIES. Except as reserved against in its Holding Company
Financial Reports, the Company and each of its Subsidiaries have good and
marketable title, free and clear of all liens, encumbrances, charges, defaults,
or equities of any character, to all of the properties and assets, tangible and
intangible, reflected in its Holding Company Financial Reports as being owned by
the Company or its Subsidiaries as of the dates thereof other than those that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on it, except those sold or otherwise disposed of in the ordinary
course of business. All buildings and all material fixtures, equipment, and
other property and assets that are held under leases or subleases by the Company
or any of its Subsidiaries are held under valid leases or subleases enforceable
in accordance with their respective terms, other than any such exceptions to
validity or enforceability that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect on it.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.l(L), no litigation, proceeding or controversy before any court or
governmental agency is pending that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or any of its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and, to the best of its knowledge, no such litigation, proceeding or
controversy has been threatened; and except as Previously Disclosed in Schedule
4.1(L), neither the Company nor any of its Subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authority, and neither the Company nor any of its
Subsidiaries has been advised by any of such Regulatory Authorities that such
authority is contemplating issuing or
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requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum or understanding, commitment letter or
similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in Schedule
4.1(M), each of the Company and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to own its
businesses presently conducted and that are material to the business of it and
its Subsidiaries taken as a whole; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to its best
knowledge, no suspension or cancellation of any of them is threatened; and all
such filings, applications and registrations are current;
(2) has received no notification or communication from any
Regulatory Authority or the staff thereof (a) asserting that the Company or any
of its Subsidiaries is not in compliance with any of the statutes, regulations
or ordinances which such Regulatory Authority enforces, which, as a result of
such noncompliance in any such instance, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or its
Subsidiaries, (b) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on the Company or its
Subsidiaries, or (c) requiring any of the Company or its Subsidiaries (or any of
its or their officers, directors or controlling persons) to enter into a cease
and desist order, agreement or memorandum of understanding (or requiring the
board of directors thereof to adopt any resolution or policy);
(3) is not required to give prior notice to any federal banking or
thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive; and
(4) is in compliance in all material respects with all fair lending
laws or other laws relating to discrimination, including the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the
Home Mortgage Disclosure Act.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in Schedule
4.1(N), none of the Company or its Subsidiaries, nor any of their respective
assets, businesses or operations, is a party to, or is bound or affected by, or
receives benefits under, any material contract or agreement or amendment
thereto. Neither the Company nor any of its Subsidiaries is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its respective assets, business or
operations may be bound or affected or under which it or any of its respective
assets, business or operations receives benefits, which default, individually or
in the aggregate, is reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries, and there has not occurred any event that, with the
lapse of time or the giving of notice or both, would constitute such a default.
Except as Previously Disclosed in Schedule 4.1(N), neither the Company nor any
of its Subsidiaries is subject to or bound by any contract containing covenants
that limit the ability of the Company or any of its Subsidiaries to compete in
any line of business or with any person or that involve any restriction of
geographical area in which, or method by which, the Company or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1993, each of the Company and its
Subsidiaries has filed all reports and statements, together with any amendments
required to be made with respect thereto, that it was required to file with (1)
the Office of the Comptroller of the Currency, (2) the FDIC,
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(3) the Federal Reserve Board, and (4) any other Regulatory Authorities having
jurisdiction with respect to the Company and its Subsidiaries. As of their
respective dates (and without giving effect to any amendments or modifications
filed after the date of this Plan with respect to reports and documents filed
before the date of this Plan), each of such reports and documents, including the
financial statements, exhibits and schedules thereto, complied in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Regulatory Authority with which they were filed and did not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
(P) NO BROKERS. All negotiations relative to this Plan and the
transactions contemplated by this Plan have been carried on by it directly with
the other Parties and no action has been taken by it that would give rise to any
valid claim against any Party for a brokerage commission, finder's fee or other
like payment (except for a fee to be paid by the Company to Columbia Financial
Advisors, Inc.).
(Q) EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.1(Q)(1) contains a complete list of all bonus,
deferred compensation, pension, retirement, profit-sharing, thrift savings,
employee stock ownership, stock bonus, stock purchase restricted stock and stock
option plans, all employment or severance contracts, all medical, dental, health
and life insurance plans, all other employee benefit plans, contracts or
arrangements and any applicable "change of control" or similar provisions in any
plan, contract or arrangement maintained or contributed to by the Company or any
of its Subsidiaries for the benefit of employees, former employees, directors,
former directors or their beneficiaries (the "Compensation and Benefit Plans").
True and complete copies of all Compensation and Benefit Plans of the Company
and its Subsidiaries, including any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto, have been
supplied to the other Parties.
(2) All "employee benefit plans" within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than "multiemployer plans" within the meaning of Section 3(37) of ERISA
("Multiemployer Plans"), covering employees or former employees of the Company
and its Subsidiaries (the "ERISA Plans"), to the extent subject to ERISA, are in
substantial compliance with ERISA. Except as Previously Disclosed in Schedule
4.1(Q)(2) each ERISA Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986 (as amended,
the "Code") has received a favorable determination letter from the Internal
Revenue Service, and it is not aware of any circumstances reasonably likely to
result in the revocation or denial of any such favorable determination letter or
the inability to receive such a favorable determination letter. There is no
material pending or, to its knowledge, threatened litigation relating to the
ERISA Plans. Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any ERISA Plan that could subject the Company or any
of its Subsidiaries to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA in an amount which would be material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of its Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any
of them, or the single-employer plan of any entity which is considered one
employer with the Company under Section 4001(a)(15) of ERISA or Section 414 of
the Code (an
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"ERISA Affiliate"). Neither the Company nor any of its Subsidiaries presently
contributes to a Multiemployer Plan, nor have they contributed to such a plan
within the past five calendar years. No notice of a "reportable event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any Pension Plan or by
any ERISA Affiliate within the past 12-month period.
(4) All contributions required to be made under the terms of any
ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency"(whether or not waived) within the meaning of Section 412 of the Code
or Section 302 of ERISA. Neither the Company nor any of its Subsidiaries has
provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Code.
(5) Under each Pension Plan which is a single-employer plan, as of
the last day of the most recent plan year, the actuarially determined present
value of all "benefit liabilities," within the meaning of Section 4001(a)(16) of
ERISA (as determined on the basis of the actuarial assumptions contained in the
plan's most recent actuarial valuation) did not exceed the then current value of
the assets of such plan, and there has been no material change in the financial
condition of such plan since the last day of the most recent plan year.
(6) Neither the Company nor any of its Subsidiaries has any
obligations for retiree health and life benefits under any plan, except as set
forth in Schedule 4.1(Q)(6). There are no restrictions on the rights of the
Company or any of its Subsidiaries to amend or terminate any such plan without
incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.l(Q)(7), neither
the execution and delivery of this Plan nor the consummation of the transactions
contemplated by this Plan will (a) result in any payment (including severance,
unemployment compensation, golden parachute or otherwise) becoming due to any
director or any employee of the Company or any of its Subsidiaries under any
Compensation and Benefit Plan or otherwise from the Company or any of its
Subsidiaries, (b) increase any benefits otherwise payable under any Compensation
and Benefit Plan, or (c) result in any acceleration of the time of payment or
vesting of any such benefit.
(R) NO KNOWLEDGE. The Company and its Subsidiaries know of no reason why
the regulatory approvals referred to in Section 6.1 should not be obtained.
(S) LABOR AGREEMENTS. Neither the Company nor any of its Subsidiaries is
a party to or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is the
Company or any of its Subsidiaries the subject of a proceeding asserting that it
or any such Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel it or such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it or any
of its Subsidiaries pending or, to the best of its knowledge, threatened, nor is
it aware of any activity involving its or any of the Subsidiaries' employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
(T) ASSET CLASSIFICATION. The Company and its Subsidiaries have
Previously Disclosed in Schedule 4.1(T) a list, accurate and complete in all
material respects, of the aggregate amounts of loans, extensions of credit or
other assets of the Company and its Subsidiaries that have been classified by it
as of June 30, 1997 (the "Asset Classification"); and no amounts of loans,
extensions of credit or other assets that have been classified as of June 30,
1997 by any regulatory examiner as "Other
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Loans Specially Mentioned," "Substandard," "Doubtful" "Loss," or words of
similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by the Company or any Subsidiary prior to June 30,
1997.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses shown on the consolidated balance sheets in the December 31, 1996 Holding
Company Financial Reports of the Company was, and the allowance for possible
loan losses to be shown on subsequent Holding Company Financial Reports of the
Company was and will be, adequate in the opinion of the Board of Directors of
the Company to provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding (including accrued interest
receivable) as of the date thereof.
(V) INSURANCE. Each of the Company and its Subsidiaries has taken all
requisite action (including the making of claims and the giving of notices)
pursuant to its directors' and officers' liability insurance policy or policies
in order to preserve all rights thereunder with respect to all matters that are
known to the Company, except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries. Set forth in Schedule 4.l(V) is a list of all
insurance policies maintained by or for the benefit of the Company or its
Subsidiaries or their respective directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in Schedule 4.1(W), to
the best of the Company's knowledge, there is no person who, as of the date of
this Plan, may be deemed to be an "affiliate" of the Company as that term is
used in Rule 145 under the Securities Act.
(X) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. The Company and its
Subsidiaries have taken all necessary action to exempt this Plan and the
transactions contemplated by this Plan from, and this Plan and such transactions
are exempt from (1) any applicable state takeover laws, including, but not
limited to, RCW Ch. 23B.19, as amended, and (2) any takeover-related provisions
of the Company's and its Subsidiaries' articles of incorporation.
(Y) NO FURTHER ACTION. The Company and its Subsidiaries have taken all
action so that the entering into of this Plan and the consummation of the
transactions contemplated by this Plan (including the Merger) or any other
action or combination of actions, or any other transactions, contemplated by
this Plan do not and will not (1) require a vote of shareholders (other than as
set forth in Section 6.1), or (2) result in the grant of any rights to any
person under the articles of incorporation, charter or bylaws of the Company or
any of its Subsidiaries or under any agreement to which the Company or any such
Subsidiaries is a party, or (iii) restrict or impair in any way the ability of
the other Parties to exercise the rights granted under this Plan.
(Z) ENVIRONMENTAL MATTERS.
(1) To the Company's knowledge, it and each of its Subsidiaries, the
Participation Facilities and the Loan/Fiduciary Properties are, and have been,
in compliance with all Environmental Laws, except for instances of noncompliance
that are not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on the Company or its Subsidiaries.
(2) There is no proceeding pending or, to the Company's knowledge,
threatened before any court, governmental agency or board or other forum in
which the Company or any of its Subsidiaries or any Participation Facility has
been, or with respect to threatened proceedings, reasonably would be expected to
be, named as a defendant or potentially responsible party (a) for alleged
noncompliance (including by any predecessor) with any Environmental Law, or (b)
relating to the release
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or threatened release into the environment of any Hazardous Material, whether or
not occurring at or on a site owned, leased or operated by the Company or any of
its Subsidiaries or any Participation Facility, except for such proceedings
pending or threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries
or have been Previously Disclosed in Schedule 4.1(Z)(2).
(3) There is no proceeding pending or, to the Company's knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or the Company or any of its Subsidiaries in
respect of any Loan/Fiduciary Property) has been, or with respect to threatened
proceedings, reasonably would be expected to be, named as a defendant or
potentially responsible party (a) for alleged noncompliance (including by any
predecessor) with any Environmental Law, or (b) relating to the release or
threatened release into the environment of any Hazardous Material, whether or
not occurring at or on a Loan/Fiduciary Property, except for such proceedings
pending or threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or have been
Previously Disclosed in Schedule 4.1(Z)(3).
(4) To the Company's knowledge, there is no reasonable basis for any
proceeding of a type described in subparagraph (2) or (3) of this paragraph (Z),
except as has been Previously Disclosed in Schedule 4.1(Z)(4).
(5) To the Company's knowledge, during the period of (a) ownership
or operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Company or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Company or
any of its Subsidiaries, there have been no releases of Hazardous Material in,
on, under or affecting any such property, Participation Facility or
Loan/Fiduciary Property, except for such releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
the Company or its Subsidiaries or have been Previously Disclosed in Schedule
4.1(Z)(5).
(6) To the Company's knowledge, prior to the period of (a) ownership
or operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Company or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Company or
any of its Subsidiaries, there were no releases of Hazardous Material in, on,
under or affecting any such property, Participation Facility or Loan) Fiduciary
Property, except for such releases that are not reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on the Company or its
Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(6).
(AA) TAX REPORTS. Except as Previously Disclosed in Schedule 4.1(AA),
(1) all reports and returns with respect to Taxes that are required to be filed
by or with respect to the Company or its Subsidiaries, including consolidated
federal income tax returns of the Company and its Subsidiaries (collectively,
the "Tax Returns"), have been duly filed, or requests for extensions have been
timely filed and have not expired, for periods ended on or prior to the most
recent fiscal year-end, except to the extent all such failures to file, taken
together, are not reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries, and such Tax Returns were true, complete and
accurate in all material respects, (2) all Taxes shown to be due on the Tax
Returns have been paid in full, (3) the Tax Returns have been examined by the
Internal Revenue Service or the appropriate state, local or foreign taxing
authority, or the period for assessment of the Taxes in respect of which such
Tax Returns were required to be filed has expired, (4) all Taxes due with
respect to completed and settled examinations have been paid in full, (5) no
issues have been raised by the relevant taxing authority in connection with
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the examination of any of the Tax Returns which are reasonably likely,
individually or in the aggregate, to result in a determination that would have a
Material Adverse Effect on the Company or its Subsidiaries, except as reserved
against in the Holding Company Financial Reports of the Company, and (6) no
waivers of statutes of limitations (excluding such statutes that relate to years
under examination by the Internal Revenue Service) have been given by or
requested with respect to any Taxes of the Company or its Subsidiaries.
(BB) ACCURACY OF INFORMATION. The statements with respect to the Company
and its Subsidiaries contained in this Plan, the Schedules and any other written
documents executed and delivered by or on behalf of the Company or any other
Party pursuant to the terms of or relating to this Plan are true and correct in
all material respects, and such statements and documents do not omit any
material fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.
(CC) DERIVATIVES CONTRACTS. None of the Company or its Subsidiaries is a
party to or has agreed to enter into a Derivatives Contract or owns securities
that are referred to as "structured notes" except for those Derivatives
Contracts and structured notes Previously Disclosed in Schedule 4.1(CC).
Schedule 4.1(CC) includes a list of any assets of the Company or its
Subsidiaries that are pledged as security for each such Derivatives Contract.
(DD) ACCOUNTING CONTROLS. Each of the Company and its Subsidiaries has
devised and maintained systems of internal accounting controls sufficient to
provide reasonable assurances that (1) all material transactions are executed in
accordance with management's general or specific authorization, (2) all material
transactions are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP, and to maintain proper accountability for
items, (3) access to the material property and assets of the Company and its
Subsidiaries is permitted only in accordance with management's general or
specific authorization, and (4) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
(EE) COMMITMENTS AND CONTRACTS. Neither the Company nor any of its
Subsidiaries is a party or subject to any of the following (whether written or
oral, express or implied):
(1) except as Previously Disclosed in Schedule 4.1(EE), any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or fringe
benefits) with any present or former officer, director or employee (other than
those which are terminable at will by the Company or any such Subsidiary without
any obligation on the part of the Company or any such Subsidiary to make any
payment in connection with such termination);
(2) except as Previously Disclosed in Schedule 4.1(EE), any real or
personal property lease with annual rental payments aggregating $10,000 or more;
or
(3) except as Previously Disclosed in Schedule 4.1(EE), any material
contract with any affiliate.
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4.2 INTERWEST AND INTERWEST BANK REPRESENTATIONS AND WARRANTIES. Each of
InterWest and InterWest Bank hereby represents and warrants to the Company and
Port Orchard Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with
respect to InterWest and InterWest Bank are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of InterWest and
InterWest Bank is duly qualified to do business and is in good standing in the
States of the United States and foreign jurisdictions where the failure to be
duly qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it. Each of InterWest and its Subsidiaries has in
effect all federal state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on InterWest.
(C) SHARES. The outstanding shares of InterWest's capital stock are
validly issued and outstanding, fully paid and nonassessable, and subject to no
preemptive rights. Except as Previously Disclosed in Schedule 4.2(C), there are
no shares of capital stock or other equity securities of it or its Subsidiaries
outstanding and no outstanding Rights with respect thereto.
(D) CORPORATE POWER. Each of InterWest and InterWest Bank has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(E) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by
its shareholders referred to in Section 6.1, this Plan and each of the
Employment Agreements have been authorized by all necessary corporate action of
InterWest and InterWest Bank and each such agreement is a valid and binding
agreement of InterWest and InterWest Bank, enforceable against InterWest and
InterWest Bank in accordance with its terms, subject to bankruptcy, insolvency
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles.
(F) NO DEFAULTS. Subject to receipt of the required regulatory approvals
referred to in Section 6.1, and the required filings under federal and state
securities laws, and except as Previously Disclosed in Schedule 4.2(F), the
execution, delivery and performance of this Plan and each of the Employment
Agreements and the consummation by InterWest and each of its Subsidiaries that
is a Party of the transactions contemplated by this Plan does not and will not
(1) constitute a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of InterWest or of any of its Subsidiaries or
to which InterWest or any of its Subsidiaries or its or their properties is
subject or bound, which breach, violation or default is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on
InterWest, (2) constitute a breach or violation of, or a default under, the
articles of incorporation, charter or bylaws of its or any of its Subsidiaries,
or (3) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the consent or
approval of any other party to any such agreement, indenture or instrument,
other than any such consent or approval that, if not obtained, would not be
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on InterWest.
(G) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule
4.2(G), in the case of InterWest, its Annual Report on Form 10-K for the fiscal
year ended September 30, 1996, and all other documents filed or to be filed
subsequent to September 30, 1996 under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act, in the form filed with the SEC (in each such case, the "InterWest
Financial
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Reports"), did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets in or incorporated by
reference into the InterWest Financial Reports (including the related notes and
schedules thereto) fairly presents and will fairly present the financial
position of the entity or entities to which it relates as of its date, and each
of the statements of income and changes in shareholders' equity and cash flows
or equivalent statements in the InterWest Financial Reports (including any
related notes and schedules thereto) fairly presents and will fairly present the
results of operations, changes in shareholders, equity and changes in cash
flows, as the case may be, of the entity or entities to which it relates for the
periods set forth therein, in each case in accordance with GAAP, except as may
be noted therein, subject to normal and recurring year-end audit adjustments in
the case of unaudited statements.
(H) NO EVENTS. Except as Previously Disclosed on Schedule 4.2(H), since
September 30, 1996, no event has occurred which is reasonably likely to have a
Material Adverse Effect on it.
(I) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.2(I) no litigation, proceeding or controversy before any court or
governmental agency is pending that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on InterWest or its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and, to the best of its knowledge, no such litigation, proceeding or
controversy has been threatened; and except as Previously Disclosed in Schedule
4.2(I), neither InterWest nor any of its Subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authority, and neither InterWest nor any of its
Subsidiaries has been advised by any of such Regulatory Authorities that such
authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum or understanding, commitment letter or similar submission.
(J) REPORTS. Since September 30, 1996, each of InterWest and its
Subsidiaries has filed all reports and statements, together with any amendments
required to be made with respect thereto, that it was required to file with (1)
the FDIC, (2) the Department, (3) the Federal Reserve Board, and (4) any other
Regulatory Authorities having jurisdiction with respect to InterWest and its
Subsidiaries. As of their respective dates (and without giving effect to any
amendments or modifications filed after the date of this Plan with respect to
reports and documents filed before the date of this Plan), each of such reports
and documents, including the financial statements, exhibits and schedules
thereto, complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Regulatory Authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(K) ACCURACY OF INFORMATION. The statements with respect to InterWest
and its Subsidiaries contained in this Plan, the Schedules and any other written
documents executed and delivered by or on behalf of InterWest or any other Party
pursuant to the terms of this Plan are true and correct in all material
respects, and such statements and documents do not omit any material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
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(L) DERIVATIVES CONTRACTS. None of InterWest or its Subsidiaries is a
party to or has agreed to enter into a Derivatives Contract or owns securities
that are referred to as "structured notes" except for those Derivatives
Contracts and structured notes Previously Disclosed in Schedule 4.2(L). Schedule
4.2(L) includes a list of any assets of InterWest or its Subsidiaries that are
pledged as security for each such Derivatives Contract.
(M) ABSENCE OF UNDISCLOSED LIABILITIES. Neither InterWest nor any of its
Subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it, except (1) as reflected the InterWest Financial Reports
prior to the date of this Plan, and (2) for commitments and obligations made, or
liabilities incurred, in the ordinary course of business consistent with past
practice since September 30, 1996. Since September 30, 1996, neither InterWest
nor any of its Subsidiaries has incurred or paid any obligation or liability
(including any obligation or liability incurred in connection with any
acquisitions in which any form of direct financial assistance of the federal
government or any agency thereof has been provided to any Subsidiary) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it.
ARTICLE V. COVENANTS
Each of the Company and Port Orchard Bank hereby covenants to InterWest and
InterWest Bank, and each of InterWest and InterWest Bank hereby covenants to the
Company and Port Orchard Bank, that:
5.1 BEST EFFORTS. Subject to the terms and conditions of this Plan and to
the exercise by its Board of Directors of such Board's fiduciary duties, it
shall use its best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the Merger by February 28, 1998 and to otherwise enable consummation of the
transactions contemplated by this Plan, and shall cooperate fully with the other
Parties to that end (it being understood that any amendments to the Registration
Statement or a resolicitation of proxies as a consequence of an InterWest
Transaction shall not violate this covenant).
5.2 THE PROXY. In the case of the Company: it shall promptly assist
InterWest in the preparation of a proxy statement (the "Proxy Statement") to be
mailed to the holders of the Company Common Stock in connection with the
transactions contemplated by this Plan and to be filed by InterWest in a
registration statement (the "Registration Statement") with the SEC as provided
in Section 5.8, which shall conform to all applicable legal requirements, and it
shall call a special meeting (the "Meeting") of the holders of Company Common
Stock to be held as soon as practicable for purposes of voting upon the
transactions contemplated by this Plan and the Company shall use its best
efforts to solicit and obtain votes of the holders of Company Common Stock in
favor of the transactions contemplated by this Plan and, subject to the exercise
of its fiduciary duties, the Board of Directors of the Company shall recommend
approval of such transactions by such holders.
5.3 REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the date of the Meeting, such Registration Statement, and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by or on behalf of the Company relating to
the Company or its Subsidiaries and by or on behalf of InterWest relating to
InterWest or its Subsidiaries, (A) will comply in all material respects with the
provisions of the Securities Act and any other applicable
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statutory or regulatory requirements, and (B) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; provided, however, in no event shall any Party be liable for any
untrue statement of a material fact or omission to state a material fact in the
Registration Statement made in reliance upon, and in conformity with, written
information concerning another Party furnished by or on behalf of such other
Party specifically for use in the Registration Statement.
5.4 REGISTRATION STATEMENT EFFECTIVENESS. In the case of InterWest: it will
advise the Company, promptly after InterWest receives notice thereof, of the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension of
the qualification of the InterWest Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.5 PRESS RELEASES. The Company and Port Orchard Bank will not, without the
prior approval of InterWest, and InterWest and InterWest Bank will not, without
the prior approval of the Company, issue any press release or written statement
for general circulation relating to the transactions contemplated by this Plan,
except as otherwise required by law.
5.6 ACCESS; INFORMATION.
(A) Upon reasonable notice, the Company and Port Orchard Bank shall
afford InterWest and its officers, employees, counsel, accountants and other
authorized representatives, access, during normal business hours throughout the
period up to the Effective Date, to all of the properties, books, contracts,
commitments and records of the Company and its Subsidiaries and, during such
period, the Company and Port Orchard Bank shall furnish promptly to InterWest
(1) a copy of each material report, schedule and other document filed by the
Company and its Subsidiaries with any Regulatory Authority, and (2) all other
information concerning the business, properties and personnel of the Company and
its Subsidiaries as InterWest may reasonably request, provided that no
investigation pursuant to this Section 5.6 shall affect or be deemed to modify
or waive any representation or warranty made by the Company or Port Orchard Bank
in this Plan or the conditions to the obligations of the Company and Port
Orchard Bank to consummate the transactions contemplated by this Plan; and
(B) InterWest will not use any information obtained pursuant to this
Section 5.6 for any purpose unrelated to the consummation of the transactions
contemplated by this Plan and, if this Plan is terminated, will hold all
confidential information and documents obtained pursuant to this paragraph in
confidence (as provided in Section 8.6) unless and until such time as such
information or documents become publicly available other than by reason of any
action or failure to act by InterWest or as it is advised by counsel that any
such information or document is required by law or applicable stock exchange
rule to be disclosed, and in the event of the termination of this Plan,
InterWest will, upon request by the Company, deliver to the Company all
documents so obtained by InterWest or destroy such documents and, in the case of
destruction, will certify such fact to the Company.
5.7 ACQUISITION PROPOSALS. In the case of the Company:
(A) Without the prior written consent of InterWest, the Company shall
not, and it shall cause its Subsidiaries not to, solicit, initiate or encourage
inquiries or proposals with respect to, or, except as required by the fiduciary
duties of the Board of Directors of the Company (as advised in writing by its
outside counsel), furnish any nonpublic information relating to or participate
in any negotiations or discussions concerning, any acquisition or purchase of
all or a substantial portion of the
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assets of, or a substantial equity interest in, the Company or any of its
Subsidiaries or any merger or other business combination with the Company or any
of its Subsidiaries other than as contemplated by this Plan ("Acquisition
Proposal"); it shall instruct its and its Subsidiaries' officers, directors,
agents, advisors and affiliates to refrain from doing any of the foregoing; and
it shall notify InterWest immediately if any such inquiries or proposals are
received by, or any such negotiations or discussions are sought to be initiated
with, the Company or any of its Subsidiaries.
(B) If (1) an Acquisition Proposal occurs prior to the Meeting, (2) the
shareholder approval contemplated by Section 6.1 is not obtained at the Meeting,
and (3) prior to August 1, 1998, Control of the Company is acquired by a third
party, by merger, purchase of assets, acquisition of stock or otherwise, then
unless the representations and warranties of InterWest in this Plan were false
in any material respect as of the date of such shareholder meeting or InterWest
was in material default of its covenants in this Plan as of such date, the
Company will promptly pay to InterWest the amount of $300,000.
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS PREPARATION.
In the case of InterWest: InterWest shall, as promptly as practicable following
the date of this Plan, prepare and file the Registration Statement with the SEC
and InterWest shall use its best efforts to cause the Registration Statement to
be declared effective as soon as practicable after the filing thereof. InterWest
shall, as promptly as practicable following the date of this Plan, prepare and
file all necessary notices or applications with Regulatory Authorities having
jurisdiction with respect to the transactions contemplated by this Plan.
5.9 BLUE-SKY FILINGS. In the case of InterWest: InterWest shall use its best
efforts to obtain, prior to the effective date of the Registration Statement,
any necessary state securities laws or "blue sky" permits and approvals,
provided that InterWest shall not be required by virtue thereof to submit to
general jurisdiction in any state.
5.10 AFFILIATE AGREEMENTS. In the case of the Company: The Company will use
its best efforts to induce each person who may be deemed to be an "affiliate" of
the Company for purposes of Rule 145 under the Securities Act to execute and
deliver to InterWest on or before the mailing of the Proxy Statement for the
Meeting an agreement in the form attached hereto as Exhibit C restricting the
disposition of such affiliate's shares of the Company Common Stock and the
shares of InterWest Common Stock to be received by such person in exchange for
such person's shares of Company Common Stock. In the case of InterWest:
InterWest agrees to use its best efforts to maintain the availability of Rule
145 for use by such "affiliates".
5.11 CERTAIN POLICIES OF THE COMPANY AND PORT ORCHARD BANK. In the case of
each of the Company and Port Orchard Bank: Each shall, at InterWest's request,
modify and change its loan, litigation and other reserve and real estate
valuation policies and practices (including loan classifications and levels of
reserves), and generally conform its operating, lending and compliance policies
and procedures, immediately prior to the Effective Date so as to be consistent
on a mutually satisfactory basis with those of InterWest and GAAP; provided,
however, that prior to any such modification or change, InterWest shall certify
that the conditions to the obligation of InterWest under Section 6.1 and 6.2 to
consummate the transactions contemplated by this Plan, other than the condition
set forth in Section 6.1(G), have been satisfied or waived. The Company's and
Port Orchard Bank's representations, warranties and covenants contained in this
Plan shall not be deemed to be untrue or breached in any respect for any purpose
as a consequence of any modifications or changes undertaken pursuant to this
Section 5.11.
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5.12 STATE TAKEOVER LAW. In the case of the Company: The Company shall not
take any action that would cause the transactions contemplated by this Plan to
be subject to any applicable state takeover statute, and the Company shall take
all necessary steps to exempt (or ensure the continued exemption of) the
transactions contemplated by this Plan from, or, if necessary, challenge the
validity or applicability of, any applicable state takeover law.
5.13 NO RIGHTS TRIGGERED. In the case of the Company: Except for those
consents of third parties Previously Disclosed on Schedule 4.1(G), the Company
shall take all necessary steps to ensure that the entering into of this Plan and
the consummation of the transactions contemplated by this Plan (including the
Merger) and any other action or combination of actions, or any other
transactions contemplated by this Plan, do not and will not (A) result in the
grant of any rights to any person under the articles of incorporation or bylaws
of the Company or under any agreement to which the Company or any of its
Subsidiaries is a party, or (B) restrict or impair in any way the ability of
InterWest or InterWest Bank to exercise the rights granted under this Plan.
5.14 SHARES LISTED. In the case of InterWest: InterWest shall use its best
efforts to cause to be listed, prior to the Effective Date, on the Nasdaq
National Market upon official notice of issuance the shares of InterWest Common
Stock to be issued to the holders of Company Common Stock.
5.15 REGULATORY APPLICATIONS. In the case of each of InterWest and InterWest
Bank, each shall (A) promptly prepare and submit applications to the appropriate
Regulatory Authorities for approval of the Merger, and (B) promptly make all
other appropriate filings to secure all other approvals, consents and rulings
that are necessary for the consummation of the Merger by InterWest.
5.16 REGULATORY DIVESTITURES. In the case of the Company: Effective on or
before the Effective Date, the Company shall cease engaging in such activities
as InterWest shall advise the Company in writing are not permitted to be engaged
in by InterWest under applicable law following the Effective Date and, to the
extent required by any Regulatory Authority as a condition of approval of the
transactions contemplated by this Plan, the Company shall divest any Subsidiary
engaged in activities or holding assets that are impermissible for InterWest or
InterWest Bank, on terms and conditions agreed to by InterWest; provided,
however, that prior to taking such action, InterWest shall certify that the
conditions to the obligations of InterWest under Sections 6.1 and 6.2 to
consummate the transactions contemplated by this Plan, other than the condition
set forth in Section 6.1(G), have been satisfied or waived.
5.17 CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective Date,
each of the Company and InterWest shall, and shall cause its representatives to,
confer on a regular and frequent basis with representatives of the other.
(B) Each of the Company and InterWest shall promptly notify the other of
(1) any material change in the business or operations of it or its Subsidiaries,
(2) any material complaints, investigations or hearings (or communications
indicating that the same may be contemplated) of any Regulatory Authority
relating to it or its Subsidiaries, (3) the initiation or threat of material
litigation involving or relating to it or its Subsidiaries, or (4) any event or
condition that might reasonably be expected to cause any of its representations
or warranties set forth in this Plan not to be true and correct in all material
respects as of the Effective Date or prevent it or its Subsidiaries from
fulfilling its or their obligations under this Plan.
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5.18 INDEMNIFICATION.
(A) For a period of four years from and after the Effective Date,
InterWest shall indemnify, defend and hold harmless the present and former
directors, officers and employees of the Company and its Subsidiaries (each, an
"Indemnified Party") against all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, and
arising out of matters existing or occurring at or prior to the Effective Date
(including the transactions contemplated by this Plan), whether asserted or
claimed prior to, at or after the Effective Date, to the fullest extent that the
Company would have been permitted under Washington law and its articles of
incorporation or bylaws in effect on the date of this Plan to indemnify such
person (and InterWest will also advance expenses as incurred to the fullest
extent permitted under applicable law so long as the person to whom expenses are
advanced provides an undertaking to repay such advances within a reasonable
period of time if it is ultimately determined that applicable law does not allow
for such indemnification).
(B) Any Indemnified Party wishing to claim indemnification under
paragraph (A) of this Section 5.18, upon learning of such claim, action, suit,
proceeding or investigation, shall promptly notify InterWest thereof, provided,
however, that the failure so to notify shall not affect the obligations of
InterWest under paragraph (A) of this Section 5.18 (unless such failure
materially and adversely increases InterWest's liability under such paragraph
(A)). In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Date), (1) InterWest shall have
the right to assume the defense thereof and InterWest shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; provided, however, that InterWest shall be
obligated pursuant to this paragraph (B) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction for any single action, suit or
proceeding, (2) the Indemnified Parties will cooperate in the defense of any
such matter, and (3) InterWest shall not be liable for any settlement effected
without its prior written consent.
(C) If InterWest or any of its successors or assigns shall consolidate
with or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of InterWest shall assume the
obligations set forth in this Section 5.18.
(D) InterWest shall pay all expenses, including attorneys' fees, that
may be incurred by any Indemnified Party in enforcing the indemnity and other
obligations provided for in this Section 5.18. The rights of each Indemnified
Party under this Section 5.18 shall be in addition to any other rights such
Indemnified Party may have under the articles of incorporation or bylaws of the
Company or under applicable Washington law.
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the transactions contemplated by this Plan are subject
to the written waiver by such Party or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) SHAREHOLDER VOTE. This Plan shall have been duly approved by the
requisite vote of the Company's shareholders under applicable law and the
articles of incorporation and bylaws of the Company.
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(B) REGULATORY APPROVALS. The Parties shall have procured all necessary
regulatory consents and approvals by the appropriate Regulatory Authorities, and
any waiting periods relating thereto shall have expired; provided, however, that
no such approval or consent shall have imposed any condition or requirement
that, in the opinion of InterWest, would deprive InterWest of the material
economic or business benefits of the transactions contemplated by this Plan.
(C) NO INJUNCTION. There shall not be in effect any order, decree or
injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated by this Plan.
(D) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
(E) BLUE-SKY PERMITS. InterWest shall have received all state securities
laws and "blue sky" permits necessary to consummate the Merger.
(F) TAX OPINION. InterWest and the Company shall have received an
opinion from Graham & Dunn, P.C. to the effect that (1) the Merger constitutes a
reorganization under Section 368 of the Code, and (2) no gain or loss will be
recognized by shareholders of the Company who receive shares of InterWest Common
Stock in exchange for their shares of the Company Common Stock, except that gain
or loss may be recognized as to cash received in lieu of fractional share
interests, and, in rendering their opinion, Graham & Dunn may require and rely
upon representations contained in certificates of officers of InterWest, the
Company and others.
(G) NASDAQ LISTING. The shares of InterWest Common Stock to be issued
pursuant to this Plan shall have been approved for listing on the Nasdaq
National Market subject only to official notice of issuance.
(H) EMPLOYMENT CONTRACTS. The Employment Agreements attached as Exhibits
D and E shall have been duly executed and delivered by all parties to such
Employment Agreements, and Employment Agreements in the form of Exhibit F shall
have been duly executed and delivered by the employees listed on Schedule 6.1(H)
and Port Orchard Bank.
6.2 CONDITIONS TO OBLIGATIONS OF INTERWEST. The obligations of InterWest and
InterWest Bank to consummate the transactions contemplated by this Plan also are
subject to the written waiver by InterWest or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) LEGAL OPINION. InterWest shall have received an opinion, dated the
Effective Date, of Rothgerber, Appel, Powers & Johnson LLP, special counsel for
the Company and Port Orchard Bank, in the form of Exhibit G, and of special
Washington counsel for the Company and Port Orchard Bank, in the form of Exhibit
H.
(B) OFFICERS' CERTIFICATE. (1) Each of the representations and
warranties contained in this Plan of the Company and Port Orchard Bank shall be
true and correct as of the date of this Plan and upon the Effective Date with
the same effect as though all such representations and warranties had been made
on the Effective Date, except for any such representations and warranties that
specifically relate to an earlier date, which shall be true and correct as of
such earlier date and except as otherwise provided in Section 5.11, and (2) each
and all of the agreements and covenants of the
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Company and Port Orchard Bank to be performed and complied with pursuant to this
Plan on or prior to the Effective Date shall have been duly performed and
complied with in all material respects, and InterWest and InterWest Bank shall
have received a certificate signed by the chief executive officers, chief
financial officers, and chief lending officers of the Company and Port Orchard
Bank dated the Effective Date, to such effect.
(C) ERNST & YOUNG, LLP. InterWest shall have received from Ernst &
Young, LLP a letter, dated the date of or shortly prior to (1) the mailing of
the Proxy Statement, and (2) the Effective Date, in form and substance
satisfactory to InterWest, with respect to the Company's consolidated financial
position and results of operations, which letters shall be based upon "agreed
upon procedures" undertaken by such firm.
(D) RECEIPT OF AFFILIATE AGREEMENTS. InterWest shall have received from
each affiliate of the Company the agreement referred to in Section 5.10.
(E) ADVERSE CHANGE. During the period from December 31, 1996 to the
Effective Date, there shall not have been any material adverse change in the
financial position or results of operations of the Company or Port Orchard Bank
nor shall the Company or Port Orchard Bank have sustained any loss or damage to
its properties, whether or not insured, that materially affects its ability to
conduct its business; and InterWest shall have received a certificate dated the
Effective Date signed by the Chief Executive Officers of the Company and Port
Orchard Bank to such effect.
(F) DISSENTERS' RIGHTS. The number of shares of Company Common Stock for
which cash is to be paid because dissenters' rights of appraisal under the
Appraisal Laws shall have been effectively preserved as of the Effective Date or
because of the payment of cash in lieu of fractional shares of InterWest Common
Stock shall not exceed in the aggregate 10% of the outstanding shares of Company
Common Stock.
(G) POOLING LETTERS. InterWest shall have received a letter dated as of
the Effective Date, in form and substance acceptable to InterWest, from Ernst &
Young LLP to the effect that the Merger will qualify for pooling-of-interests
accounting treatment.
(H) CAPITAL. The Company's Capital shall not be less than $5,425,000
unless the Merger is consummated after March 31, 1998, in which case the
Company's Capital shall not be less than $5,500,000.
(I) ALLOWANCE FOR LOAN AND LEASE LOSSES. Port Orchard Bank's allowance
for possible loan and lease losses shall not be less than 0.95% of Port Orchard
Bank's Adjusted Loans and will be adequate to absorb Port Orchard's anticipated
loan and lease losses.
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND PORT ORCHARD BANK. The
obligations of the Company and Port Orchard Bank to consummate the transactions
contemplated by this Plan also are subject to the written waiver by the Company
and Port Orchard Bank or the fulfillment on or prior to the Effective Date of
each of the following conditions:
(A) LEGAL OPINION. The Company and Port Orchard Bank shall have received
an opinion, dated the Effective Date, of Graham & Dunn, special counsel for
InterWest, in the form of Exhibit I.
(B) OFFICER'S CERTIFICATE. (1) Each of the representations and
warranties of InterWest and InterWest Bank contained in this Plan shall be true
and correct as of the date of this Plan
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and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except for
any such representations and warranties that specifically relate to an earlier
date, which shall be true and correct as of such earlier date, and (2) each and
all of the agreements and covenants of InterWest and InterWest Bank to be
performed and complied with pursuant to this Plan on or prior to the Effective
Date shall have been duly performed and complied with in all material respects,
and the Company and Port Orchard Bank shall have received a certificate signed
by an executive officer of each of InterWest and InterWest Bank dated the
Effective Date, to such effect.
(C) ADVERSE CHANGE. During the period from September 30, 1996 to the
Effective Date, there shall not have been any material adverse change in the
financial position or results of operations of InterWest and InterWest Bank nor
shall InterWest or InterWest Bank have sustained any loss or damage to its
properties, whether or not insured, that materially affects its ability to
conduct its business; and the Company shall have received a certificate dated
the Effective Date signed by the Chief Executive Officers of InterWest and
InterWest Bank to such effect.
ARTICLE VII. TERMINATION
This Plan may be terminated prior to the Effective Date, either before or
after receipt of required shareholder approvals:
7.1 MUTUAL CONSENT. By the mutual consent of InterWest and the Company, if
the Board of Directors of each so determines by vote of a majority of the
members of its entire board.
7.2 BREACH. By InterWest or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of (A) a material breach by the other party of any representation or
warranty contained herein, which breach cannot be or has not been cured within
30 days after the giving of written notice to the breaching party of such
breach, or (B) a breach by the other party of any of the material covenants or
agreements contained herein, which breach cannot be or has not been cured within
30 days after the giving of written notice to the breaching party of such
breach.
7.3 DELAY. By InterWest or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event that the Merger is not consummated by June 30, 1998.
7.4 NO SHAREHOLDER APPROVAL. By InterWest or the Company, if its Board of
Directors so determines by a vote of a majority of the members of its entire
Board, in the event that the shareholder approval contemplated by Section 6.1 is
not obtained at the Meeting, including any adjournment or adjournments thereof.
7.5 AVERAGE CLOSING PRICE LESS THAN $34.75. By the Company, within five
Business Days after the end of the ten trading day period used to determine the
Average Closing Price, if (A) the Average Closing Price is less than $34.75, and
(B) InterWest, in its sole discretion, does not elect by written notice
delivered to the Company prior to the Notice Date to adjust the Exchange Ratio
so that the Average Closing Price multiplied by the Exchange Ratio equals
$64.05.
7.6 AVERAGE CLOSING PRICE GREATER THAN $43.75. By InterWest, within five
Business Days after the end of the ten trading day period used to determine the
Average Closing Price, if (A) the Average Closing Price is greater than $43.75,
(B) no Triggering Event has occurred, and (C) the Company, in its sole
discretion, does not elect by written notice delivered to InterWest prior to the
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Notice Date to adjust the Exchange Ratio so that the Average Closing Price
multiplied by the Exchange Ratio equals $64.05.
7.7 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to subsection (B) of this Section 7.7
and to Section 5.7(B), in the event of the termination or abandonment of this
Plan pursuant to the provisions of Sections 7.1 through 7.6, this Plan shall
become void and have no force or effect, without any liability on the part of
the Parties or any of their respective directors or officers or shareholders
with respect to this Plan.
(B) OTHER CONSEQUENCES. Notwithstanding anything in this Plan to the
contrary, no termination of this Plan will relieve any Party of any liability
for breach of this Plan or for any misrepresentation under this Plan or be
deemed to constitute a waiver of any remedy available for such breach or
misrepresentation. In any action or proceeding in connection with such breach or
misrepresentation, the prevailing party will be entitled to reasonable
attorneys' fees and expenses.
ARTICLE VIII. OTHER MATTERS
8.1 SURVIVAL. Only those agreements and covenants in this Plan that by their
express terms apply in whole or in part after the Effective Date shall survive
the Effective Date. All other representations, warranties, and covenants shall
be deemed only to be conditions of the Merger and shall not survive the
Effective Date. If the Merger is abandoned and this Plan is terminated, the
provisions of Article VII shall apply and the agreements of the Parties in
Sections 5.6(B), 8.5 and 8.6 shall survive such abandonment and termination.
8.2 WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this
Plan may be (A) waived in writing by the Party benefited by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated by this Plan) by an agreement in writing among the Parties approved
by their respective Boards of Directors and executed in the same manner as this
Plan, except that, after the vote by the shareholders of the Company, the
consideration to be received by the shareholders of the Company for each share
of Company Common Stock shall not thereby be altered. Nothing contained in this
Section 8.2 is intended to modify InterWest's rights pursuant to Section 2.7.
8.3 COUNTERPARTS. This Plan may be executed in one or more counterparts,
each of which shall be deemed to constitute an original. This Plan shall become
effective when one counterpart has been signed by each Party.
8.4 GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law may
be applicable.
8.5 EXPENSES. Each Party will bear all expenses incurred by it in connection
with this Plan and the transactions contemplated by this Plan, except printing
expenses which shall be shared equally between the Company and InterWest.
8.6 CONFIDENTIALITY. Except as otherwise provided in Section 5.6(B), each of
the Parties and their respective agents, attorneys and accountants will maintain
the confidentiality of all information provided in connection herewith which has
not been publicly disclosed.
8.7 NOTICES. All notices, requests and other communications hereunder to a
"Party" shall be in writing and shall be deemed to have been duly given when
delivered by hand, telegram or telex
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(confirmed in writing) to such Party at its address set forth below or such
other address as such Party may specify by notice to the Parties.
If to InterWest or InterWest Bank to:
InterWest Bancorp, Inc.
1259 West Pioneer Way
Oak Harbor, Washington 98277
Attn: Stephen Walden, President
Copies to:
Edward C. Beeksma
Zylstra, Beeksma, Waller and Skinner
3101-300 Avenue West
Oak Harbor, Washington 98277
Stephen M. Klein
Graham & Dunn, P.C.
1420 Fifth Avenue, Suite 3300
Seattle, Washington 98101
If to the Company or Port Orchard Bank, to:
Puget Sound Bancorp, Inc.
1488 Olney Ave SE
PO Box 2629
Port Orchard, WA 98366
Attn: Duane R. Guggenmos,
President and CEO
Copies to: William P. Johnson
Rothgerber, Appel, Powers & Johnson LLP
Suite 3000, One Tabor Center
1200 - 17th Street
Denver, CO 80202-5839
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan represents
the entire understanding of the Parties with reference to transactions
contemplated by this Plan and supersedes any and all other oral or written
agreements previously made. Nothing in this Plan, expressed or implied, is
intended to confer upon any person, other than the Parties or their respective
successors, any rights, remedies, obligations or liabilities under or by reason
of this Plan.
8.9 BENEFIT PLANS. Upon consummation of the Merger, all employees of the
Company and its Subsidiaries shall be deemed to be at-will employees of
InterWest and its Subsidiaries except for those employees who are parties to the
Employment Agreements. From and after the Effective Date, employees of the
Company and its Subsidiaries shall be generally entitled to participate in the
pension, benefit and similar plans on substantially the same terms and
conditions as employees of InterWest and its Subsidiaries. For the purpose of
determining eligibility to participate in such plans and the vesting of benefits
under such plans (but not for the accrual of benefits under such plans),
InterWest shall give
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effect to years of service with the Company or the Company's Subsidiaries, as
the case may be, as if such service were with InterWest or its Subsidiaries.
InterWest shall use its best efforts to facilitate the rollover of the 401(k)
plan maintained by the Company into the 401(k) plan maintained by InterWest
Bank.
8.10 HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
IN WITNESS WHEREOF, the Parties have caused this instrument to be executed
in counterparts by their duly authorized officers, all as of the day and year
first above written.
INTERWEST BANCORP, INC.
By: /s/
- ---------------------------------------
NAME: H. GLENN MOUW
TITLE: EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INTERWEST BANK
By: /s/
- ---------------------------------------
NAME: H. GLENN MOUW
TITLE: EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PUGET SOUND BANCORP, INC.
By: /s/
- ---------------------------------------
NAME:
----------------------------------
TITLE:
----------------------------------
FIRST NATIONAL BANK OF PORT ORCHARD
By: /s/
- ---------------------------------------
NAME:
----------------------------------
TITLE:
----------------------------------
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APPENDIX B
TITLE 23B. WASHINGTON BUSINESS CORPORATION ACT
CHAPTER 23B.13. DISSENTERS' RIGHTS
SECTION 23B.13.010 DEFINITIONS. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 23B.13.020 RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the shareholder is
entitled to vote on the merger, or (ii) if the corporation is a subsidiary that
is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that
materially reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
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(e) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are entitled
to dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the
fair value of the shareholder's shares shall terminate upon the occurrence of
any one of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets
aside the corporate action; or
(c) The shareholder's demand for payment is withdrawn with the
written consent of the corporation. 1991 c 269 Section 37; 1989 c 165 Section
141.
SECTION 23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
dissenter dissents and the dissenter's other shares were registered in the names
of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all
shares of which such shareholder is the beneficial shareholder or over which
such shareholder has power to direct the vote. 1989 c 165 Section 142.
SECTION 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under
RCW 23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW
23B.13.020 it taken without a vote of shareholders, the corporation, within ten
days after [the] effective date of such corporate action, shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in RCW 23B.13.220. 1989
c 165 Section 143.
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SECTION 23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under
RCW 23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights must (a) deliver to the corporation
before the vote is taken written notice of the shareholder's intent to demand
payment for the shareholder's shares if the proposed action is effected, and (b)
not vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section is not entitled to payment for the shareholder's
shares under this chapter. 1989 c 165 Section 144.
SECTION 23B.13.220 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under
RCW 23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:
(a) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
SECTION 23B.13.230 DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW
23B.13.220 must demand payment, certify whether the shareholder acquired
beneficial ownership of the shares before the date required to be set forth in
the dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the
shareholder's share certificates under subsection (1) of this section retains
all other rights of a shareholder until the proposed corporate action is
effected.
(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
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SECTION 23B.13.240 SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received until the proposed
corporate action is effected or the restriction is released under RCW
23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
SECTION 23B.13.250 PAYMENT.
(1) Except as provided in RCW 23B.13.270, within thirty days of the
later of the effective date of the proposed corporate action, or the date the
payment demand is received, the corporation shall pay each dissenter who
complied with RCW 23B.13.230 the amount the corporation estimates to be the fair
value of the shareholders' shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment
under RCW 23B.13.280; and
(e) A copy of this chapter.
SECTION 23B.13.260 FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within
sixty days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release any transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
SECTION 23B.13.270 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW
23B.13.250 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of
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how it estimated the fair value of the shares, an explanation of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under RCW 23B.13.280.
SECTION 23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and amount
of interest due, and demand payment of the dissenter's estimate, less any
payment under RCW 23B.13.250, or reject the corporation's offer under RCW
23B.13.270 and demand payment of the dissenter's estimate of the fair value of
the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under RCW
23B.13.250 or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250
within sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and
does not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
SECTION 23B.13.300 COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the superior
court of the county where a corporation's principal office, or, if none in this
state, its registered office, is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled, parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The
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appraisers have the powers described in the order appointing them, or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to
judgment (a) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to withhold
payment under RCW 23B.13.270.
SECTION 23B.13.310 COURT COSTS AND COUNSEL FEES.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially comply with
the requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be paid out
of the amounts awarded the dissenters who were benefited.
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APPENDIX C
[LOGO]
September 18, 1997
Board of Directors
Puget Sound Bancorp, Inc.
1488 Olney Avenue S.E.
Port Orchard, Washington 98366
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Puget Sound Bancorp, Inc. and its wholly
owned subsidiary, First National Bank of Port Orchard ("PSB"), of the
consideration to be received by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated September 17, 1997, (the "Agreement")
between PSB and InterWest Bancorp, Inc. ("IWBK").
In connection with the proposed merger transaction (the "Merger")
whereby PSB will be merged into IWBK, each issued and outstanding share and
option of the Company common stock (along with its associated rights) at the
effective time of the Merger (other than (i) shares of holders of which are
exercising appraisal rights pursuant to applicable law and (ii) shares held
directly by or indirectly by PSB, its parent company or any subsidiary thereof
other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) shall be converted into the right to receive a varying
amount of IWBK common stock when IWBK trades between $34.75 and $43.75 per share
to equal $64.05 per PSB share (the Merger "Consideration"), except for
fractional shares which will receive a proportional amount of cash.
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and advises
the directors, officers and shareholders of both public and private banks and
thrift institutions with respect to the fairness, from a financial point of
view, of the consideration to be received in transactions such as that proposed
by the Agreement. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, of the Consideration
to be received by holders of the shares from IWBK pursuant to the Merger, CFAI
has advised Washington and Oregon community banks regarding fairness of capital
transactions. PSB has agreed to pay CFAI a fee for this opinion letter.
<PAGE> 140
Board of Directors
Puget Sound Bancorp, Inc.
September 18, 1997
In connection with rendering this opinion, we have, among other things:
(I) reviewed the Agreement; (ii) reviewed PSB's financial information for the
twelve months ended December 31, 1996 and the six months ended June 30, 1997;
(iii) reviewed certain internal financial analyses and certain other forecasts
for PSB prepared by and reviewed with the management of PSB; (iv) conducted
interviews with senior management of PSB regarding the past and current business
operations, results thereof, financial condition and future prospects of PSB;
(v) reviewed the current market environment generally and the banking and thrift
environment in particular; (vi) reviewed the prices paid in certain recent
mergers and acquisitions in the banking and thrift industries on a regional
basis; (vii) reviewed IWBK's audited financial information for the fiscal year
ended December 31, 1996 and financial information for the 3 months ended June
30, 1997 including the Form 10-KSB and the Form 10-QSB filed with the U.S.
Securities and Exchange Commission; (ix) reviewed the price ranges and dividend
history for IWBK common stock; (x) and reviewed such other information, studies
and analyses and performed such other investigations and took into account such
other matters as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied on
the accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of PSB
or IWBK. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of PSB. This
opinion is necessarily based upon circumstances and conditions as they exist and
can be evaluated as of the date of this letter. We have not been authorized to
solicit and did not solicit other entities for purposes of a business
combination with PSB.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof. We
are not expressing any opinion herein as to the prices at which shares of IWBK
Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the merger.
In reliance upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Merger Consideration to be received by the
shareholders of PSB pursuant to the Agreement is fair, from a financial point of
view, to the shareholders of PSB.
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Board of Directors
Puget Sound Bancorp, Inc.
September 18, 1997
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/ ROBERT J. ROGOWSKI
------------------------------------
Robert J. Rogowski
Principal
