<PAGE>
As filed with the Securities and Exchange Commission on April 1, 1998
Registration No. 333-
--------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------------------
INTERWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
WASHINGTON 6711 91-1691216
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
275 S.E. Pioneer Way, Oak Harbor, Washington 98277 (360) 679-4181
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
-----------------------------
STEPHEN M. WALDEN
President and Chief Executive Officer
275 S.E. Pioneer Way
Oak Harbor, Washington 98277
(360) 679-4181
(Name, address, including zip code and telephone number, including area code,
of agent for service)
-----------------------------
Copies of communications to:
<TABLE>
<CAPTION>
<S> <C> <C>
STEPHEN M. KLEIN, ESQ. BERNARD L. RUSSSELL, ESQ. GLEN P. GARRISON, ESQ.
WILLIAM E. BARTHOLDT, ESQ. Foster Pepper & Shefelman PLLC Keller Rohrback LLP
Graham & Dunn P.C. 1111 Third Avenue 1201 Third Avenue, Suite 3200
1420 Fifth Avenue, 33rd Floor Seattle, WA 98101 Seattle, WA 98101
Seattle, Washington 98101
(206) 624-8300
</TABLE>
-----------------------------
Approximate date of commencement of proposed sale of securities to the public:
The date of mailing of the enclosed Prospectus/Joint Proxy Statement to
stockholders of Pacific Northwest Bank and Pioneer Bancorp, Inc.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Title of Each Proposed Maximum Proposed Maximum Amount of
Class of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered(1) Per Share (2) Offering Price(3) Fee(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.20 Par Value 2,330,643 $11.86 $27,640,109 $8,153.83
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The estimated maximum number of shares of common stock of the Registrant
which may be issued in exchange for the 434,133 (including 38,170 shares
issuable upon exercise of options) outstanding shares of common stock of
Pacific Northwest Bank and for the 375,499 (including 30,800 shares
issuable upon exercise of options) outstanding shares of common stock of
Pioneer Bancorp, Inc. pursuant to formulas contained in the respective
Agreements and Plans of Merger described in this Registration Statement.
(2) Represents the maximum price per share of InterWest Common Stock issuable
in exchange for the common stock of Pacific Northwest Bank and Pioneer
Bancorp, Inc., based on the applicable Merger exchange ratios.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended
("1933 Act"), on the basis of the per share book value of the common
stock of Pacific Northwest Bank and Pioneer Bancorp, Inc. as at December
31, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant files
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the 1933
Act, or until this Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
[PACIFIC NORTHWEST BANK logo]
_______________, 1998
To the Shareholders of Pacific Northwest Bank:
You are cordially invited to attend a Special Meeting of Shareholders
of Pacific Northwest Bank ("Special Meeting"), at the Seattle Financial Center
of Pacific Northwest Bank, 1111 Third Avenue, Seattle, Washington, on ____day,
__________, 1998, at 6:30 p.m.
As described in the enclosed Prospectus/Joint Proxy Statement, at the
Special Meeting you will be asked to consider and vote upon a proposal to
approve and adopt the Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement") dated January 15, 1998, between Pacific Northwest Bank and
InterWest Bancorp, Inc. Under the Merger Agreement, Pacific Northwest Bank will
become a wholly-owned subsidiary of InterWest Bancorp, Inc., and each
outstanding share of Pacific Northwest Bank common stock will be converted into
the right to receive 3.95 shares of common stock of InterWest Bancorp, Inc.
Your Board of Directors has determined that the Merger Agreement is in
the best interest of Pacific Northwest Bank and its shareholders and has
unanimously approved the Merger Agreement. The Board unanimously recommends that
you vote "FOR" approval and adoption of the Merger Agreement.
Consummation of the merger is subject to certain conditions, including
approval and adoption of the Merger Agreement by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of Pacific Northwest Bank common
stock entitled to vote thereon, and receipt of certain approvals from regulatory
authorities.
You are urged to read the accompanying Prospectus/Joint Proxy
Statement, which provides you with a description of the terms of the proposed
merger. A copy of the Amended and Restated Agreement and Plan of Merger is
included as Appendix A to the enclosed Prospectus/Joint Proxy Statement.
If the merger is consummated, holders of Pacific Northwest Common Stock
who vote against approval of the Merger Agreement and who otherwise comply with
the requirements of RCW 30.49.090 will be entitled to statutory appraisal
rights.
It is very important that your shares be represented at the Special
Meeting. Whether or not you plan to attend the Special Meeting, you are
requested to complete, date, sign and return the enclosed Proxy in the
postage-paid envelope provided. Failure to return a properly executed Proxy or
vote at the Special Meeting, will have the same effect as a vote against
approval of the Merger Agreement. Executed proxies with no instructions
indicated thereon will be voted for approval and adoption of the Merger
Agreement. Please do not send any of your stock certificates at this time. In
the event the merger is consummated, you will be sent a letter of transmittal
for that purpose as soon as reasonably practicable thereafter.
Sincerely,
-------------------------------------
Patrick M. Fahey
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
PACIFIC NORTHWEST BANK
1111 Third Avenue
Seattle, WA 98101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ___________, 1998
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
Pacific Northwest Bank will be held at the Seattle Financial Center of Pacific
Northwest Bank, 1111 Third Avenue, Seattle, Washington, on ____day, __________,
1998, at 6:30 p.m. to consider and act upon the following matters:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger, dated January 15, 1998 (the "Merger
Agreement"), between Pacific Northwest Bank ("Pacific") and InterWest Bancorp,
Inc. ("InterWest"), a copy of which is attached as Appendix A to the
accompanying Prospectus/Joint Proxy Statement. Under the terms of the Merger
Agreement (i) Pacific will be acquired as a wholly-owned subsidiary of
InterWest, and (ii) each outstanding share of common stock of Pacific will be
converted into the right to receive 3.95 shares of InterWest common stock in
accordance with the terms of the Merger Agreement; and
2. To transact such other business as may be properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on
_____________, 1998, as the record date for the determination of shareholders
entitled to notice of and to vote at the Special Meeting. Only holders of common
stock of record at the close of business at that date will be entitled to notice
of and to vote at the Special Meeting or any adjournments or postponements
thereof. The affirmative vote of holders of two-thirds of the outstanding shares
of Pacific common stock is required for approval of the Merger Agreement.
Pacific shareholders have the right to vote against the merger and
obtain payment of the fair value of their shares of Pacific common stock under
the applicable provisions of Washington law. Further information regarding
voting rights and the business to be transacted at the Special Meeting is given
in the accompanying Prospectus/Joint Proxy Statement. A copy of the applicable
Washington statutory provisions regarding dissenters' rights is sent forth in
Appendix G to the accompanying Prospectus/Joint Proxy Statement and a summary of
such provisions is set forth under "THE MERGER(S) - Dissenters' Rights of
Appraisal - Pacific" beginning on page ___.
BY THE ORDER OF THE BOARD OF DIRECTORS
Kim Brace, Secretary
Seattle, Washington
, 1998
- ------------
Your vote is important regardless of the number of shares you own. Whether or
not you expect to attend the meeting, please sign, date, and promptly return the
accompanying proxy using the enclosed postage-prepaid envelope. If for any
reason you should desire to revoke your proxy, you may do so at any time before
it is voted at the meeting.
<PAGE>
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Pioneer Bancorp, Inc. ("Pioneer"), the holding company for Pioneer National
Bank ("Pioneer Bank"), to be held on the ______ day of May, 1998, at 7:00 p.m.,
local time, at .
-----------------------------------------------
The Notice of Special Meeting of Shareholders and Prospectus/Joint
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 February 4, 1998, between Pioneer and
Pioneer Bank, and InterWest Bancorp, Inc. ("InterWest") and its subsidiary,
InterWest Bank. The Merger Agreement provides that Pioneer will be merged with
and into InterWest, with InterWest being the surviving entity in the Merger.
Directors and officers of Pioneer, as well as representatives of Moss Adams,
LLP, Pioneer's independent auditors, Legal Counsel, and Financial Advisors 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 Pioneer will be converted into shares of
common stock of InterWest. You are urged to review carefully the
Prospectus/Joint Proxy Statement, which contains a more complete description of
the terms of the Merger.
The Board of Directors of Pioneer has unanimously approved the Merger
Agreement and recommends that the shareholders vote FOR the approval of the
Merger Agreement. Pioneer'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 Pioneer 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 Pioneer
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. Please do not send any of your stock
certificates in at this time. In the event the merger is consummated, you will
be sent a letter of transmittal for that purpose as soon as reasonably
practicable thereafter.
Holders of Pioneer Common Stock will have dissenters' rights in this
transaction. The enclosed Prospectus/Joint Proxy Statement contains an
explanation of these rights.
The Board of Directors believes that the merger is in the best interest
of Pioneer and its shareholders. On behalf of the Board of Directors, we
recommend that you vote FOR approval of the Merger Agreement.
Very truly yours,
Donald H. Ballew, M.D. Paul L. Campbell.
Chairman of the Board President and Chief Executive Officer
PIONEER BANCORP, INC. PIONEER BANCORP, INC.
Yakima, Washington Yakima, Washington
Date: , 1998
----------------
<PAGE>
PIONEER BANCORP, INC.
The Tower, P.O. Box 2949
Yakima, Washington 98907
NOTICE
OF
SPECIAL MEETING OF SHAREHOLDERS
to be held ______________, 1998
Notice is hereby given that pursuant to the call of its Board of
Directors, a Special Meeting of Shareholders of Pioneer Bancorp, Inc.
("Pioneer") will be held on _____________, 1998, at 7:00 p.m., local time, at
____________________, Yakima, Washington.
The purposes of the meeting are:
(1) A proposal to approve the Agreement and Plan of Merger, dated as of
February 4, 1998 (the "Merger Agreement"), between Pioneer and its wholly-owned
subsidiary, Pioneer National Bank ("Pioneer Bank"), and InterWest Bancorp, Inc.
("InterWest") and its subsidiary, InterWest Bank, a copy of which is attached as
Appendix B to the accompanying Prospectus/Joint Proxy Statement, under the terms
of which (i) Pioneer will merge with and into InterWest with InterWest as the
surviving corporation, and (ii) each outstanding share of common stock of
Pioneer ("Pioneer 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 ________, 1998, 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 Pioneer Common Stock is required for
approval of the Merger Agreement.
Holders of Pioneer Common Stock have dissenters' rights in this
transaction under applicable provisions of Washington law. A copy of the
applicable Washington statutory provisions regarding dissenters' rights is set
forth in Appendix H to the accompanying Prospectus/Joint Proxy Statement and a
summary of such provisions is set forth under "THE MERGER(S) - Dissenters'
Rights of Appraisal - Pioneer."
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
Paul L. Campbell
President and Chief Executive Officer
Yakima, Washington
, 1998
- ------------
<PAGE>
JOINT PROXY STATEMENT FOR SPECIAL
MEETINGS OF SHAREHOLDERS OF PACIFIC NORTHWEST BANK
AND PIONEER BANCORP, INC.
PROSPECTUS OF INTERWEST BANCORP, INC.
Shares of Common Stock, $.20 Par Value
This Prospectus/Joint Proxy Statement is being furnished in connection
with the solicitation of proxies by the management of Pacific Northwest Bank
("Pacific"), a Washington state-chartered bank and Pioneer Bancorp, Inc.
("Pioneer"), a Washington corporation, for the Special Meetings of Shareholders
of each of Pacific and Pioneer, to be held, in the case of Pacific on
________________________, 1998 at ________________________________________ and
in the case of Pioneer, on _________________, 1998 at
_______________________________, Yakima, Washington, and at any adjournments or
postponements thereof.
Pacific shareholders will vote upon a proposal to merge Pacific (the
"Pacific Merger") with New Pacific Northwest Bank ("New Bank"), a newly formed
Washington state-chartered bank and wholly-owned subsidiary of InterWest, with
Pacific being the surviving corporation, on the terms described in the Amended
and Restated Agreement and Plan of Merger (the "Pacific Merger Agreement") dated
as of January 15, 1998 among InterWest, New Bank and Pacific. The Pacific Merger
Agreement is incorporated herein by reference.
Pioneer shareholders will vote upon a proposal to approve the merger
(the "Pioneer Merger") of Pioneer with and into InterWest Bancorp, Inc.
("InterWest"), a Washington corporation, on the terms described in the Agreement
and Plan of Merger (the "Pioneer Merger Agreement") dated as of February 4,
1998, between Pioneer, its wholly owned subsidiary Pioneer National Bank, a
national banking association ("Pioneer Bank"), InterWest, and InterWest's wholly
owned subsidiary, InterWest Bank, a Washington state-chartered savings bank. The
Pioneer Merger Agreement is incorporated herein by reference.
Both transactions are referred to together as the "Merger(s)". The
Pacific Merger and the Pioneer Merger are separate transactions. Approval of one
merger is not in any way contingent on approval of the other merger. The closing
of the Pacific Merger is expected to occur in May, 1998, and the closing of the
Pioneer Merger is expected to occur in June, 1998.
When the Merger(s) become effective, all outstanding shares of common
stock, $1 par value per share of Pacific ("Pacific Common Stock") and shares of
common stock, no par value per share of Pioneer ("Pioneer Common Stock") will be
converted into the right to receive shares of common stock, $.20 par value, of
InterWest ("InterWest Common Stock"). Cash will be paid in lieu of fractional
shares. Upon consummation of the Pacific Merger, each Pacific shareholder will
receive 3.95 shares of InterWest Common Stock for each share of Pacific Common
Stock owned (the "Pacific Exchange Ratio"). Upon consummation of the Pioneer
Merger, each Pioneer shareholder will receive between 1.34 to 1.64 shares of
InterWest Common Stock for each share of Pioneer Common Stock owned (the
"Pioneer Exchange Ratio"), with the actual Pioneer Exchange Ratio to be
determined by the average trading price of InterWest common stock for the brief
period preceding consummation of the Pioneer Merger. See "THE MERGER(S) - Terms
of Merger(s)." For a description of certain significant considerations in
connection with the Merger(s), see "THE MERGER(S) - Conditions to the
Merger(s)"and "Interests of Certain Persons in the Merger(s)."
InterWest Common Stock trades on the NASDAQ National Market under the
symbol IWBK. The last reported sale price for the InterWest Common Stock on the
NASDAQ National Market was $______ per share on _________________, 1998. Neither
the shares of Pacific nor Pioneer are traded on any market, thus no current
market prices are available for the shares of either Pacific or Pioneer. See
"SUMMARY - Stock Price and Dividend Information."
The aggregate number of shares of InterWest Common Stock to be issued
in the Pacific Merger is 1,714,825 (which is valued at $___________ based on the
$______ closing price of InterWest Common Stock on
<PAGE>
_______________, 1998), assuming the outstanding options for 38,170 shares of
Pacific Common Stock are exercised prior to closing of the Pacific Merger. The
aggregate number of shares of InterWest Common Stock to be issued in the Pioneer
Merger is, depending on the Exchange Ratio, between 503,169 and 615,818 (which
is valued at $_________ based on the ________________, 1998 closing price of
InterWest Common Stock), assuming the outstanding options for 30,800 shares of
Pioneer Common Stock are exercised prior to closing of the Pioneer Merger.
Pioneer shareholders will not know the number of shares of InterWest Common
Stock they will receive on the date of the special meeting to vote on the
Pioneer Merger. Assuming 1,714,825 shares of InterWest Common Stock are issued
in the Pacific Merger, _________ shares of InterWest Common Stock are issued in
the Pioneer Merger and _________ shares of InterWest Common Stock are
outstanding after closing of the Merger(s), Pacific shareholders will hold
approximately _____% of InterWest Common Stock and Pioneer shareholders will
hold approximately ____% of InterWest Common Stock.
This Prospectus/Joint 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 (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act"), relating to the shares of InterWest Common Stock to
be issued in the Merger(s). This Prospectus/Joint Proxy Statement does not cover
any resale of the securities to be received by shareholders of Pacific and
Pioneer upon consummation of the Merger(s), and no person is authorized to make
any use of this Prospectus/Joint Proxy Statement in connection with any such
resale, although the InterWest Common Stock may be traded without use of this
Prospectus/Joint Proxy Statement by those shareholders of InterWest not deemed
to be "affiliates" of either InterWest, Pacific or Pioneer. See "THE MERGER(S) -
Resales of Stock Received in the Merger(s) by Pacific and Pioneer Affiliates".
All information concerning InterWest contained in this Prospectus/Joint
Proxy Statement has been provided by InterWest, and all information concerning
Pacific and Pioneer has been provided by Pacific and Pioneer, respectively.
This Prospectus/Joint Proxy Statement and the accompanying proxy cards
are first being mailed to shareholders of Pacific and Pioneer on or about
_________________, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/JOINT PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF INTERWEST COMMON STOCK ISSUABLE IN THE MERGER(S) ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Prospectus/Joint Proxy Statement is ________________, 1998
<PAGE>
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. Pacific is subject to the information and reporting requirements
of the 1934 Act, as modified by Federal Deposit Insurance Corporation ("FDIC")
rules and regulations. In accordance with the 1934 Act and FDIC, Pacific files
reports, proxy statements, and other information with the FDIC, which may be
inspected at the FDIC, 550 - 17th Street NW, Washington, D.C., and the Federal
Reserve Bank, 101 Market Street, San Francisco, California. Pioneer is not
subject to the information and reporting requirements of the 1934 Act or the
FDIC.
Under the rules and regulations of the SEC, the solicitation of
stockholders to approve the Merger(s) constitutes an offering of the InterWest
Common Stock to be issued in conjunction with the Merger(s). 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(s). 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 SEC'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/Joint Proxy Statement constitutes part of the
Registration Statement (File No. 333-________) filed by InterWest with the SEC
under the 1933 Act. This Prospectus/Joint 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. While statements contained in this
Prospectus/Joint Proxy Statement or in any document incorporated herein by
reference as to the contents of any contract or other document referred to
herein or therein disclose material terms of such contract or other document,
such statements 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 in this
Prospectus/Joint Proxy Statement by reference. Each such statement is qualified
in its entirety by such reference.
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed by InterWest with the SEC
(File Number 0-20288) pursuant to the 1934 Act are incorporated in this
Prospectus/Joint Proxy Statement by reference:
1. InterWest's Annual Report on Form 10-K for the year ended
September 30, 1997 (the "InterWest 1997 10-K");
2. InterWest's Proxy Statement for its 1998 Annual Meeting of
Shareholders (the "InterWest 1998 Proxy");
3. InterWest's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997; and
4. InterWest's Current Reports on Form 8-K dated January 26, 1998
and February 6, 1998.
<PAGE>
All documents filed by InterWest pursuant to Sections 13(a), 13(c), 14
and 15(d) of the 1934 Act after the date hereof and prior to the Pacific and
Pioneer Special Meetings of Shareholders shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
hereof to the extent that a statement contained herein or in any other
subsequently filed document that also is, or is deemed to be, incorporated by
reference herein modifies or supersedes such document. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part hereof.
This Prospectus/Joint Proxy Statement incorporates documents by
reference which are not presented herein or 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 to whom a copy of this Prospectus/Joint 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.
No person is authorized to give any information or to make any
representation not contained in this Prospectus/Joint Proxy Statement and, if
given or made, such information or representation should not be relied upon as
having been authorized by InterWest, Pacific or Pioneer. This Prospectus/Joint
Proxy Statement does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this Prospectus/Joint Proxy
Statement, in any jurisdiction in which it is unlawful to make such an offer, or
solicitation of an offer.
Neither the delivery of this Prospectus/Joint Proxy Statement nor any
distribution of the securities offered pursuant to this Prospectus/Joint 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
InterWest, Pacific or Pioneer and their subsidiaries since the date of this
Prospectus/Joint Proxy Statement or that the information herein is correct as of
any time subsequent to the date hereof.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY............................................................................ 1
Introduction................................................................. 1
Parties to the Merger........................................................ 1
Meetings and Votes Required.................................................. 2
The Merger(s)................................................................ 3
Effect of Merger(s)................................................. 3
Recommendation of the Pacific Board................................. 4
Recommendation of the Pioneer Board................................. 4
Opinions of Financial Advisor....................................... 4
Effective Time and Closing of Merger(s)............................. 5
Conditions; Regulatory Approvals.................................... 5
No Solicitation..................................................... 5
Stock Option Agreements............................................. 6
Director Non-Competition Agreements................................. 6
Termination or Amendment of the Merger Agreement(s)................. 6
Interests of Certain Persons in the Merger(s)....................... 6
Dissenters' Rights of Appraisal..................................... 7
Tax Treatment of the Merger(s)...................................... 7
Accounting Treatment of the Merger(s)............................... 8
Trading Market...................................................... 8
Comparison of Shareholders' Rights.................................. 8
Stock Price And Dividend Information......................................... 8
Comparative Per Common Share Data............................................ 11
Selected Historical Financial Data........................................... 14
SPECIAL MEETING OF PACIFIC SHAREHOLDERS............................................ 17
Date, Time, and Place........................................................ 17
Purpose of the Meeting....................................................... 17
Shares Outstanding and Entitled to Vote; Record Date......................... 17
Vote Required................................................................ 17
Voting, Solicitation, and Revocation of Proxies.............................. 17
SPECIAL MEETING OF PIONEER SHAREHOLDERS............................................ 18
Date, Time, and Place........................................................ 18
Purpose of the Meeting....................................................... 18
Shares Outstanding and Entitled to Vote; Record Date......................... 18
Vote Required................................................................ 18
Voting, Solicitation, and Revocation of Proxies.............................. 19
BACKGROUND OF AND REASONS FOR THE MERGER(S)........................................ 20
Pacific...................................................................... 20
Background of the Pacific Merger ...................................... 20
InterWest's Reasons for the Pacific Merger ............................ 20
Pacific's Reasons For The Pacific Merger .............................. 22
Opinion of Columbia Financial Advisors, Inc. .......................... 23
Recommendation of the Pacific Board.................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Pioneer ..................................................................... 25
Background of the Pioneer Merger ...................................... 25
InterWest's Reasons For The Pioneer Merger ............................ 26
Pioneer's Reasons For The Pioneer Merger .............................. 28
Opinion of Columbia Financial Advisors, Inc. .......................... 28
Recommendation of the Pioneer Board ................................... 30
THE MERGER(S) ..................................................................... 31
General ..................................................................... 31
Basic Terms of the Merger(s) ................................................ 31
Exchange of Stock Certificates .............................................. 33
Employee Benefit Plans ...................................................... 34
Mechanics of the Merger(s) .................................................. 34
Conduct Pending Consummation of the Merger(s) ............................... 34
Conditions to the Merger(s) ................................................. 34
Pacific and Pioneer Stock Option Agreements ................................. 35
Termination or Amendment of the Merger Agreement(s) ......................... 36
Interests of Certain Persons in the Merger(s) ............................... 36
Federal Income Tax Treatment of the Merger(s) ............................... 37
Accounting Treatment of the Merger(s) ....................................... 38
Dissenters' Rights of Appraisal ............................................. 38
Resales of Stock Received in the Merger(s) by Pacific and
Pioneer Affiliates .................................................... 40
No Solicitation ............................................................. 40
Expenses .................................................................... 40
PRO FORMA COMBINED UNAUDITED FINANCIAL STATEMENTS ................................. 41
INFORMATION CONCERNING INTERWEST .................................................. 49
Year 2000 Issues ............................................................ 49
INFORMATION CONCERNING PACIFIC .................................................... 51
Business ................................................................... 51
Competition ................................................................. 51
Facilities .................................................................. 52
Employees ................................................................... 52
Legal Proceedings ........................................................... 52
PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................... 52
INFORMATION CONCERNING PIONEER .................................................... 66
Business 68
Competition ................................................................. 66
Facilities .................................................................. 66
Employees ................................................................... 67
Year 2000 ................................................................... 67
Legal Proceedings ........................................................... 68
PIONEER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................................... 68
</TABLE>
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<TABLE>
<S> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF INTERWEST, PACIFIC AND PIONEER ............................................ 79
Executive Compensation ....................................................... 80
SUPERVISION AND REGULATION ........................................................ 82
DESCRIPTION OF INTERWEST CAPITAL STOCK ............................................ 89
COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST, PACIFIC AND
PIONEER COMMON STOCK ......................................................... 90
CERTAIN LEGAL MATTERS ............................................................. 97
EXPERTS ........................................................................... 97
OTHER MATTERS...................................................................... 98
GLOSSARY OF KEY TERMS.............................................................. 99
INDEX TO FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
APPENDIX A - Amended and Restated Agreement and of Plan of Merger between
InterWest and Pacific
APPENDIX B - Agreement and Plan of Merger between InterWest, Pioneer and Pioneer
Bank
APPENDIX C - Stock Option Agreement between InterWest and Pacific
APPENDIX D - Stock Option Agreement between InterWest and Pioneer
APPENDIX E - Opinion of Columbia Financial Advisors, Inc. to Pacific
APPENDIX F - Opinion of Columbia Financial Advisors, Inc. to Pioneer
APPENDIX G - Section 30.49 of the Revised Code of Washington (Dissenters' Rights
of Appraisal under Washington banking law)
APPENDIX H - Chapter 23B.13 of the Revised Code of Washington (Dissenters'
Rights of Appraisal under Washington corporate law)
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SUMMARY
The following material summarizes certain information contained
elsewhere in this Prospectus/Joint 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/Joint Proxy
Statement (including the appendices). Capitalized terms used in this
Prospectus/Joint Proxy Statement, unless the context otherwise requires, have
the meanings ascribed to them in the Glossary of Key Terms inside the back
cover of this Prospectus/Joint Proxy Statement or in the respective Merger
Agreement. Additional terms used principally in particular sections of this
Prospectus/Joint Proxy Statement are defined in the sections where they are
used.
Introduction
Shareholders of Pacific will be asked to vote on a proposed merger
of New Bank into Pacific pursuant to the Pacific Merger Agreement.
Shareholders of Pioneer will be asked to vote on a proposed merger of Pioneer
into InterWest pursuant to the Pioneer Merger Agreement. Under applicable
Washington law and NASDAQ requirements, InterWest shareholders are not
required to vote on the Merger(s). The Boards of Directors of InterWest, New
Bank and Pacific have unanimously adopted and approved the Pacific Merger
Agreement. The Boards of Directors of InterWest, InterWest Bank, Pioneer and
Pioneer Bank have unanimously adopted and approved the Pioneer Merger
Agreement.
Parties to the Merger
InterWest. 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 and of First National Bank of Port Orchard, a
national banking association ("FNBP"). At December 31, 1997, InterWest and
subsidiaries had total assets of approximately $2.0 billion, total loans and
loans held for sale of approximately $1.2 billion, total deposits of
approximately $1.2 billion and stockholders' equity of approximately $133.4
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 is currently in the process of
transforming from a traditional thrift to a financial institution with
business banking in its portfolio of products. InterWest Bank is a community
oriented bank which provides a wide range of financial services for
individual and business customers. As of December 31, 1997, InterWest Bank
conducted its business through 39 full-service branch offices located in the
western and central part of the State of Washington. See "INFORMATION
CONCERNING INTERWEST."
FNBP is a national bank under the laws of the United States and is
regulated by the Office of the Comptroller of the Currency ("OCC") and to a
lesser extent, by the FDIC and the Board of Governors of the Federal Reserve
System ("FRB"). FNBP's deposits are insured up to applicable limits under the
BIF of the FDIC. FNBP offers a full line of commercial banking services,
including checking and savings accounts; commercial, real estate, personal
and other installment and terms loans. FNBP operates a main office in Port
Orchard, a branch in Bremerton and a branch in Gig Harbor, all in the State
of Washington. See "INFORMATION CONCERNING INTERWEST."
Additional information concerning InterWest is included in the
InterWest documents incorporated by reference in this Prospectus/Joint Proxy
Statement. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"AVAILABLE INFORMATION."
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Pacific. Pacific Northwest Bank was organized in July 1988 as a
state-charted bank under Washington law and is regulated by the Division and
the FDIC. Pacific primarily serves the commercial banking needs of
individuals and small and medium-sized businesses located in western
Washington. As of December 31, 1997, Pacific had assets of approximately
$197.2 million, loans of $136.3 million, and deposits of $165.8 million. The
principal executive offices of Pacific are located at 1111 Third Avenue,
Seattle, Washington 98101 and its telephone number is (206) 624-0600. See
"INFORMATION CONCERNING PACIFIC."
Pioneer and Pioneer Bank. Pioneer is a bank holding company
incorporated under the laws of the State of Washington and is subject to the
BHCA, which places Pioneer under the supervision of the Board of Governors of
the FRB. The business of Pioneer consists primarily of holding 100% of the
capital stock of Pioneer Bank. At December 31, 1997, Pioneer had consolidated
total assets of approximately $105.9 million, total loans of approximately
$61 million, total deposits of approximately $85.6 million, and total
stockholders' equity of approximately $9 million. Pioneer maintains its
principal office at 402 East Yakima Avenue, Suite 110, Yakima, Washington
98901, and its telephone number is (509) 575-6300. See "INFORMATION
CONCERNING PIONEER."
Pioneer Bank is a national banking association organized under the
laws of the United States. Pioneer Bank conducts a commercial banking
business and provides personal and business financial services primarily to
individuals and small businesses in Yakima and Benton Counties, Washington.
Pioneer Bank conducts its business through its principal office located at
402 East Yakima Avenue, Suite 110, Yakima Washington, and four additional
branch offices. See "INFORMATION CONCERNING PIONEER."
Meetings and Votes Required
General. The affirmative vote of two-thirds (2/3) of the shares of
Pacific Common Stock and Pioneer Common Stock outstanding, respectively, on
the Pacific Record Date and Pioneer Record Date is required to approve the
respective Merger Agreement(s). In order to ensure that the requisite votes
are obtained, Pacific and Pioneer shareholders are urged to sign, date and
return the enclosed proxy. Shareholders may revoke proxies previously
submitted by completing a later-dated proxy, by written revocation delivered
to Pacific's or Pioneer's secretary, as appropriate, at or prior to the
special meeting of shareholders, or by appearing, withdrawing the proxy and
voting at the special meeting in person.
At the Pacific Record Date, Pacific's directors and executive
officers and their affiliates were entitled to vote 60,519 shares at the
Pacific Meeting, which represent approximately 15.28% of the total number of
outstanding shares on such date. At the Pioneer Record Date, Pioneer's
directors and executive officers and their affiliates were entitled to vote
94,589 shares at the Pioneer Meeting, which represent approximately 27.4% of
the total number of outstanding shares on such date. Each director of Pacific
and Pioneer have agreed to vote their shares in favor of the Pacific and
Pioneer Merger, respectively.
Pacific. A special meeting of Pacific shareholders (the "Pacific
Special Meeting") will be held at_________________________, on
________________, 1998, at _____ p.m. The purpose of the Pacific Special
Meeting is to vote to approve the Pacific Merger Agreement providing for the
merger of New Bank into Pacific, pursuant to which each share of Pacific
Common Stock will be exchanged for 3.95 shares of InterWest Common Stock.
Shares of Pacific Common Stock are the only shares entitled to vote at the
Pacific Special Meeting. ________________, 1998 is the record date for the
Pacific Special Meeting (the "Pacific Record Date"). On the Pacific Record
Date, there were 395,963 shares of Pacific Common Stock outstanding.
Pioneer. A special meeting of Pioneer shareholders (the "Pioneer
Special Meeting") will be held at ___________________________, on
_____________, 1998, at ____ p.m. The purpose of the Pioneer Special Meeting
is to vote to approve the Pioneer Merger Agreement providing for the merger
of Pioneer with and into InterWest, pursuant to which each share of Pioneer
Common Stock will be exchanged for between 1.34 to 1.64
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<PAGE>
shares of InterWest Common Stock, depending on the average price of InterWest
Common Stock for the brief period before the closing of the Pioneer Merger,
which is expected to occur on or around June 30, 1998. The precise number of
shares to be received will not be calculated until after the Pioneer Special
Meeting. Shares of Pioneer Common Stock are the only shares entitled to vote
at the Pioneer Special Meeting. April 30, 1998 is the record date for the
Pioneer Special Meeting (the "Pioneer Record Date"). On the Pioneer Record
Date, there were 344,699 shares of Pioneer Common Stock outstanding.
The Merger(s)
Effect of Merger(s)
Pacific. In accordance with the Pacific Merger Agreement, on the
Pacific Effective Date, New Bank will merge into Pacific, with Pacific as the
surviving corporation. Upon consummation of the Pacific Merger, each holder
of shares of Pacific Common Stock, other than any shares as to which
dissenters' rights are perfected under Washington law ("Dissenting Shares"),
will be entitled to receive 3.95 shares of InterWest Common Stock (the
"Pacific Exchange Ratio"), in exchange for each share of Pacific Common Stock
held of record as of the Pacific Effective Date. Cash will be paid in lieu of
issuing fractional shares of InterWest Common Stock. Upon completion of the
Pacific Merger, shareholders of Pacific will no longer own any stock in
Pacific, and InterWest, as the sole shareholder of New Bank, will be entitled
to receive for each share of New Bank common stock held as of the Pacific
Effective Date, one share of the surviving corporation (i.e., Pacific). As a
result, Pacific will be the wholly owned subsidiary of InterWest, InterWest
will no longer own any stock in New Bank, and New Bank will cease to exist.
The aggregate number of shares of InterWest Common Stock to be
issued in the Pacific Merger is 1,714,825 (which is valued at $________ based
on the $____ closing price of InterWest Common Stock on ___________),
assuming the outstanding options for 38,170 shares of Pacific Common Stock
are exercised prior to the closing of the Pacific Merger. As a result,
Pacific shareholders would hold approximately ____% of the _________ shares
of InterWest Common Stock expected to be outstanding after closing of the
Mergers. BECAUSE THE MARKET PRICE OF INTERWEST COMMON STOCK IS SUBJECT TO
FLUCTUATION, THE MARKET VALUE OF THE SHARES OF INTERWEST COMMON STOCK THAT
PACIFIC SHAREHOLDERS WILL RECEIVE IN THE PACIFIC MERGER MAY INCREASE OR
DECREASE PRIOR TO THE PACIFIC EFFECTIVE DATE. See "Stock Price and Dividend
Information."
If the Pacific Merger is not consummated before June 30, 1998, the
Pacific Exchange Ratio will be adjusted so that holders of Pacific Common
Stock (other than Dissenting Shares) will be entitled to receive additional
shares of InterWest Common Stock. The manner in which the number of such
additional shares would be calculated is described in "THE MERGER(S) - Basic
Terms of the Merger(s) - Pacific."
For more detailed information concerning the Pacific Merger
generally, see "THE MERGER(S) - Basic Terms of the Merger(s) - Pacific."
Pioneer. In accordance with the Pioneer Merger Agreement, on the
Pioneer Effective Date, Pioneer will merge into InterWest, with InterWest as
the surviving corporation, and Pioneer Bank will become a wholly owned
subsidiary of InterWest. Upon consummation of the Pioneer Merger, each holder
of shares of Pioneer Common Stock, other than Dissenting Shares, will be
entitled to receive shares of InterWest Common Stock in exchange for each
share of Pioneer Common Stock held of record as of the Pioneer Effective
Date. The precise number of shares of InterWest Common Stock to be received
in exchange for each share of Pioneer Common Stock will be calculated by
dividing $58.98 by the Valuation Price (the "Pioneer Exchange Ratio"). The
term "Valuation Price" is defined in the Pioneer Merger Agreement as the
Average Closing Price (rounded to four decimals) of InterWest Common Stock
during a 10 trading day period ending shortly before the Pioneer Effective
Date, except that if the Average Closing Price is less than $36.00, the
Valuation Price will be $36.00, and if the Average Closing Price is more than
$44.00, the Valuation Price will be $44.00. Accordingly, the Pioneer
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<PAGE>
Exchange Ratio will be between 1.34 and 1.64, depending on the Valuation
Price. The aggregate number of shares of InterWest Common Stock to be issued
in the Pioneer Merger, depending on the Exchange Ratio, will be between
503,169 and 615,818 (which, by way of example, would be _________ shares if
the Average Closing Price were to equal the $____ closing price of InterWest
Common Stock on ___________), assuming the outstanding options for 30,800
shares of Pioneer Common Stock are exercised prior to the closing of the
Pioneer Merger.
If the Pioneer Merger is not consummated before the date in June
that is established by InterWest for determining InterWest shareholders of
record who are entitled to receive InterWest's regular quarterly cash
dividend, the Pioneer Exchange Ratio will be adjusted. The manner in which
the Pioneer Exchange Ratio is adjusted is described in "THE MERGERS - Basic
Terms of the Merger(s) -Pioneer."
For more detailed information concerning the Pioneer Merger,
generally, see "THE MERGER(S) - Basic Terms of the Merger(s) - Pioneer."
Recommendation of the Pacific Board
The Board of Directors of Pacific (the "Pacific Board") has
unanimously determined that the Pacific Merger is fair to and in the best
interests of Pacific's shareholders. In making this determination, the
Pacific Board considered a variety of factors, including the value of the
InterWest Common Stock that the shareholders of Pacific will receive in
exchange for their shares of Pacific Common Stock, the ability of InterWest
to provide competitive and comprehensive services in the Pacific market area,
and the parties' shared community banking philosophies. The Pacific Board
believes that the Pacific Merger will allow Pacific shareholders to realize a
premium for their shares and will also allow InterWest to provide the
advantages of personal community banking to Pacific's current customers. THE
PACIFIC BOARD HAS UNANIMOUSLY APPROVED THE PACIFIC MERGER AGREEMENT AS
ADVISABLE AND IN THE BEST INTERESTS OF PACIFIC AND ITS SHAREHOLDERS AND
RECOMMENDS THAT PACIFIC'S SHAREHOLDERS APPROVE THE PACIFIC MERGER AGREEMENT.
See "BACKGROUND OF AND REASONS FOR THE MERGER(S) -Pacific."
Recommendation of the Pioneer Board
The Board of Directors of Pioneer (the "Pioneer Board") has
unanimously determined that the Pioneer Merger is fair to and in the best
interests of Pioneer's shareholders. In making this determination, the
Pioneer Board considered a variety of factors, including the value of the
InterWest Common Stock that the shareholders of Pioneer will receive in
exchange for their shares of Pioneer Common Stock, the ability of InterWest
to provide job opportunities for Pioneer employees, and deal fairly with
personnel issues, the ability of InterWest to provide competitive and
comprehensive services in the markets in which Pioneer operates, and the
parties' shared belief in community banking, which emphasizes responsiveness
to local markets and the delivery of personalized services to customers. The
Pioneer Board believes that the Pioneer Merger will allow Pioneer
shareholders to realize a premium for their shares and will also allow
InterWest to provide the advantages of personal community banking to
Pioneer's current customers. THE PIONEER BOARD HAS UNANIMOUSLY APPROVED THE
PIONEER MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF PIONEER
AND ITS SHAREHOLDERS AND RECOMMENDS THAT PIONEER'S SHAREHOLDERS APPROVE THE
PIONEER MERGER AGREEMENT. See "BACKGROUND OF AND REASONS FOR THE MERGER(S)
- -Pioneer."
Opinions of Financial Advisor
Columbia Financial Advisors, Inc. ("CFA"), the financial advisor to
both Pacific and Pioneer, has delivered to the Pacific Board a written
opinion dated January 15, 1998, and to the Pioneer Board a written opinion
dated February 4, 1998, to the effect that each Merger is fair, from a
financial perspective, to Pacific,
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<PAGE>
Pioneer, and their respective shareholders. Copies of CFA's opinions setting
forth the limits of its review, assumptions made, matters considered and
procedures followed, are attached to this Prospectus/Joint Proxy Statement as
Appendix E for Pacific and as Appendix F for Pioneer, and should be read in
their entirety by the shareholders of the respective entities. See
"BACKGROUND OF AND REASONS FOR THE MERGER(S) - Pacific - Opinion of Columbia
Financial Advisors, Inc.; - Pioneer - Opinion of Columbia Financial Advisors,
Inc."
Effective Time and Closing of Merger(s)
The parties presently expect to consummate the Merger(s) during the
second quarter of calendar year 1998, although the timing is subject to the
satisfaction of certain conditions. The Pacific Merger Agreement provides
that if the Pacific Merger has not been consummated by September 30, 1998
(except under certain conditions) at any time after such date, the Board of
either InterWest or Pacific may vote to abandon the Pacific Merger. The
Pioneer Merger Agreement provides that if the Pioneer Merger has not been
consummated by September 30, 1998 (except under certain conditions) at any
time after such date, the Board of either InterWest or Pioneer may vote to
abandon the Pioneer Merger. The Board of Pioneer may abandon the Pioneer
Merger without any conditions (other than Pioneer not being in material
breach of the Pioneer Merger Agreement) if it is not consummated before
December 31, 1998. See "THE MERGER(S) - Termination or Amendment of the
Merger Agreement(s)."
Conditions; Regulatory Approvals
Consummation of each Merger is conditioned on (a) approval of the
respective Merger Agreement by the holders of not less than a two-thirds
(2/3) of the outstanding shares of Pacific Common Stock or Pioneer Common
Stock, as applicable; (b) receipt of all necessary approvals of the Merger(s)
by governmental regulatory agencies, including the FRB for both the Pacific
and Pioneer Mergers, and the FDIC and the Director of the Washington State
Department of Financial Institutions (the "Washington Director") for the
Pacific Merger; (c) receipt by each party of a favorable tax opinion from
Graham & Dunn, P.C.; (d) InterWest's receipt of a letter from Ernst & Young
LLP to the effect that the Pacific Merger qualifies for pooling of interests
accounting treatment if consummated in accordance with the terms of the
Pacific Merger Agreement and InterWest's receipt of a letter from Moss Adams
LLP to the effect that neither Pioneer nor Pioneer Bank nor any of their
respective shareholders, directors or officers shall have taken any action
that would disqualify the Pioneer Merger from qualifying for pooling of
interests accounting treatment; (e) the continuing accuracy of the
representations and warranties of each party; (f) the performance of
specified obligations by each party; and (g) certain other conditions. THE
CLOSING OF NEITHER THE PACIFIC MERGER NOR THE PIONEER MERGER IS DEPENDENT
UPON CLOSING OF THE OTHER MERGER. EACH MERGER IS A SEPARATE AND INDEPENDENT
TRANSACTION.
No Solicitation
Pacific and Pioneer have agreed in the respective Merger
Agreement(s) that, except as required by law, neither Pacific nor any of its
officers or directors, nor Pioneer nor any of its officers or directors will
(i) solicit, encourage, entertain or facilitate any other proposals or
inquiries for an acquisition of the shares or assets of Pacific or Pioneer or
any subsidiaries (an "Acquisition Proposal"), (ii) enter into discussions
concerning any such acquisition, or (iii) furnish any nonpublic information
relating to InterWest's business or organization to any person that is not
affiliated with Pacific, Pioneer or InterWest.
If (i) there is an Acquisition Proposal prior to the Pacific
Shareholder vote on the Pacific Merger or the Pioneer Shareholder vote on the
Pioneer Merger, (ii) the Merger(s) are not approved by two-thirds of the
outstanding shares of Pacific or Pioneer Common Stock at the Special
Meeting(s); and (iii) prior to June 30, 1999 either Pacific or Pioneer is
acquired by a third party, then unless the representations and warranties of
InterWest in the Merger Agreement(s) were false as of the date of the Special
Meeting(s) or InterWest was in material
5
<PAGE>
default of its covenants in the Agreement(s), Pacific and/or Pioneer, as the
case may be, must pay InterWest $250,000 and $300,000 respectively.
No solicitation provisions generally increase the likelihood that a
merger transaction will lead to a completed transaction, thus justifying the
time and expense of the acquiror in pursuing the transaction, or, in the
alternative, will result in the acquiror being compensated for its time and
expense if the no solicitation agreement is breached and the transaction is
not completed.
Stock Option Agreements
As inducements to InterWest to enter into the Pacific Merger and the
Pioneer Merger, both Pacific and Pioneer have granted InterWest an option
("Options") to purchase authorized but unissued shares of Pacific or Pioneer,
as the case may be, on the occurrence of certain events. These Options, if
exercised, would allow InterWest to acquire 19.9% of the outstanding shares
of Pacific Common Stock and Pioneer Common Stock, respectively. See "THE
MERGER(S) - Pacific and Pioneer Stock Option Agreements."
Director Non-Competition Agreements
As a condition to the execution of the Merger Agreements, each
member of the Board of Pacific and Pioneer has executed a Director
Non-Competition Agreement with InterWest. The Director Non-Competition
Agreement prohibits the directors from competing with InterWest or any of its
subsidiaries for two years from the Pacific Effective Date within Washington
State in the case of Pacific Directors, and for a period of three years from
the Pioneer Effective Date within Yakima and/or Benton Counties in Washington
State in the case of Pioneer Directors. Director Non-Competition Agreements
generally provide acquiring companies with added assurance that the value of
the target company will be preserved after closing of the merger transaction.
Termination or Amendment of the Merger Agreement(s)
Either the Pacific Merger Agreement or the Pioneer Merger Agreement
may be terminated, and either Merger abandoned, before the Pacific or Pioneer
Effective Date, as the case may be, whether before or after its adoption by
the shareholders or by either the InterWest or the Pacific Board, or the
InterWest or the Pioneer Board, under certain specified circumstances,
including a failure to consummate the Merger by September 30, 1998 in the
case of Pacific. In the case of Pioneer, the Pioneer Merger may be terminated
by InterWest or Pioneer if not consummated by September 30, 1998, except
where such delay results from (i) amendments to the Registration Statement,
(ii) a change in the method of acquisition, or (iii) a resolicitation of
proxies as a consequence of an InterWest transaction. After any such delay,
Pioneer may still terminate the Pioneer Merger if not consummated by December
31, 1998. In addition, InterWest or Pacific may terminate the Pacific Merger
Agreement if the Average Closing Price of InterWest Common Stock is lower
than $35.00.
Either Merger Agreement may be amended at any time before the
Pacific or Pioneer Effective Date, as the case may be, if the amendment is
approved by both the InterWest and Pacific Boards or InterWest and Pioneer
Boards, but no amendment reducing the amount or changing the form of any
consideration which is to be received by Pacific or Pioneer shareholders can
be effected without the approval of Pacific or Pioneer shareholders after
shareholder approval of the Merger Agreements. See "THE MERGER(S) -
Termination or Amendment of the Merger Agreement(s)."
Interests of Certain Persons in the Merger(s)
Certain members of Pacific's management and the Pacific Board and
certain members of Pioneer's management may be deemed to have interests in
the Merger(s) in addition to their interests as shareholders of Pacific and
Pioneer generally. As discussed below, these include, among other things,
provisions in the Pacific and Pioneer Merger Agreements relating to
employment agreements and provisions in the Pacific Merger
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<PAGE>
Agreement relating to an appointment to the InterWest Board. See "THE
MERGER(S) - Interests of Certain Persons in the Merger(s)."
Employment/Severance Agreements. Pacific has entered into employment
agreements with Messrs. Fahey, Straus, Budd and Brace, and Ms. Brace,
officers of Pacific. The employment agreement with Mr. Fahey, to which
InterWest is also a party, provides that Mr. Fahey, who currently serves as
the President and Chief Executive Officer of Pacific, will continue in such
capacity, and that he will also be Vice Chairman/Commercial Banking of
InterWest and serve on the InterWest Executive Management Team. The agreement
has a term of three years, beginning on the Pacific Effective Date of the
Pacific Merger, and provides for an annual salary of $275,000. The employment
agreement between Pacific and Mr. Straus, the Senior Vice President and Chief
Credit Officer, has a three year term and provides for an annual salary of
$140,000. The employment agreements between Pacific and Messrs. Brace and
Budd and Ms. Brace, all of whom are Senior Vice Presidents and who also hold
the respective positions of Manager of the Bellevue Financial Center, Manager
of the Seattle Financial Center, and Manager of Administrative Services, have
three year terms and provide for an annual salary to each officer of
$125,000. All of the Pacific employment agreements provide for payment to the
officer of his or her respective W-2 income (before salary deferrals) for the
12-month period preceding termination of their respective employment if: (i)
InterWest terminates employment without cause or the officer terminates his
or her employment for good reason, (ii) employment terminates (for any
reason) in connection with a change in control of InterWest, or (iii) the
officer elects to terminate his or her employment during the period
commencing on the 25th month of the employment term and ending on the 30th
month of the term.
Pioneer Bank has entered into employment agreements with Messrs.
Campbell, Kiser, Losee, and Lindberg, officers of Pioneer Bank. Mr. Campbell,
who is the President and Chief Executive Officer of Pioneer Bank, will
continue in such capacity until March 31, 1999, after which time his position
may be modified by InterWest. Mr. Campbell's agreement terminates on March
31, 2000, and provides an annual salary of $125,000. If Mr. Campbell's
employment is terminated as a result of his death or disability prior to
March 31, 1999, he or his estate will receive payment in an amount equal to
Mr. Campbell's 1998 annual salary. If his employment is terminated for death
or disability after March 31, 1999, Mr. Campbell or his estate will receive
the balance of the salary he would have received for the remainder of the
agreement term. Mr. Kiser, the Chief Financial Officer of Pioneer Bank, has
entered into a two-year employment agreement providing an annual salary of
$74,000. In the event of a change in control of InterWest, Mr. Kiser will
receive a severance payment equal to his annual salary. Messrs. Losee and
Lindberg, each of whom are Senior Vice Presidents of Pioneer Bank, have
two-year employment agreements providing an annual salary of, respectively,
$85,000 and $73,820. If Mr. Losee's employment terminates in connection with
a change in control of InterWest, he will receive a severance payment equal
to one-half of his annual salary then in effect. See "THE MERGER(S) -
Interests of Certain Persons in the Merger(s)."
Appointment to the InterWest Board. In connection with the Pacific
Merger, InterWest has agreed to appoint Mr. Fahey to the InterWest Board; Mr.
Fahey will also be appointed to the InterWest Board's Executive Committee.
Dissenters' Rights of Appraisal
Holders of Pacific Common Stock and Pioneer Common Stock have the
right to dissent from the Pacific Merger and the Pioneer Merger,
respectively, and, subject to certain conditions, to receive payment of the
"value" of their shares of Pacific Common Stock or Pioneer Common Stock, as
provided in RCW 30.49, in the case of Pacific, and RCW 23B.13, in the case of
Pioneer. See "THE MERGER(S) - Dissenters' Rights of Appraisal."
Tax Treatment of the Merger(s)
Graham & Dunn, P.C. delivered its opinion dated _______________,
1998, to the effect that (i) each Merger will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Internal
7
<PAGE>
Revenue Code of 1986, (the "Code") as amended, (ii) pursuant to the
provisions of Section 354(a)(i) of the Code, no gain or loss will be
recognized with respect to each shareholder of Pacific and Pioneer who
exchanges his or her shares of Pacific Common Stock or Pioneer Common Stock
solely for shares of InterWest Common Stock, and (iii) the payment of cash to
a shareholder of Pacific or Pioneer in lieu of a fractional share of
InterWest Common Stock will be treated as a distribution in redemption of the
fractional share interest, subject to the limitations of Section 302 of the
Code. The receipt by InterWest, and delivery to Pacific and Pioneer, of such
opinion is a condition to consummation of each Merger. See "THE MERGER(S) -
Certain Federal Income Tax Matters."
Accounting Treatment of the Merger(s)
It is anticipated that the Merger(s) will be accounted for as a
pooling of interests by InterWest under generally accepted accounting
principles. The Pacific Merger Agreement provides that, as a condition to
InterWest's obligation to consummate the Pacific Merger, InterWest must
receive a letter from Ernst & Young LLP to the effect that the Pacific Merger
will qualify for pooling of interests accounting treatment if consummated in
accordance with the terms of the Pacific Merger Agreement. The Pioneer Merger
Agreement provides that as a condition to InterWest's Merger, InterWest must
receive a letter from Moss Adams, LLP to the effect that neither Pioneer nor
Pioneer Bank nor their respective shareholders, directors or officers shall
have taken any action that would disqualify the Pioneer Merger from
qualifying for pooling of interests accounting treatment. See "THE MERGER(S)
- - Accounting Treatment of the Merger(s)."
Trading Market
The InterWest Common Stock is quoted on the Nasdaq National Market
under the symbol IWBK and is registered as a class with the Commission under
the Exchange Act. Accordingly, InterWest is required to file certain periodic
and annual reports with the Commission and make information about InterWest
available to its shareholders and the public. Pacific is subject to the
information and reporting requirements of the 1934 Act, as modified by FDIC
rules and regulations and is required make certain information available to
its shareholders and public. Pioneer is not subject to the information and
reporting requirements of the 1934 Act or the FDIC, or required to make any
information available to the public. Neither the Pacific Common Stock nor the
Pioneer Common Stock is actively traded or listed on any market system.
Comparison of Shareholders' Rights
Shareholders of Pacific and Pioneer who receive shares of InterWest
Common Stock in exchange for their shares of Pacific Common Stock or Pioneer
Common Stock will be governed, with respect to their rights as shareholders,
by InterWest's Articles of Incorporation and Bylaws, and by Washington law.
Prior to the Pacific Merger, the rights of Pacific's shareholders are
determined under Pacific's Articles of Association and Bylaws, and under
Washington law. Prior to the Pioneer Merger, the rights of Pioneer's
shareholders are determined under Pioneer's Articles of Incorporation and
Bylaws, and under Washington law. For a discussion of certain material
differences in the rights of shareholders of InterWest, Pacific and Pioneer
and an explanation of certain possible anti-takeover effects of certain
provisions in InterWest's Articles of Incorporation and Bylaws, see
"COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST, PACIFIC AND PIONEER
COMMON STOCK."
Stock Price And Dividend Information
InterWest. InterWest Common Stock is quoted on the Nasdaq National
Market under the symbol IWBK. The following table sets forth for the periods
indicated the high and low sale prices for the InterWest Common Stock as
reported on the Nasdaq National Market:
8
<PAGE>
<TABLE>
<CAPTION>
High Low Dividends Declared
---- --- ------------------
<S> <C> <C> <C>
1996 *
First quarter............ $ 20.37 $ 15.25 $ .10
Second quarter............ 21.87 19.62 .12
Third quarter............. 25.12 21.37 .13
Fourth quarter............ 29.87 24.00 .13
1997 *
First quarter............. 33.00 29.12 .14
Second quarter............ 36.25 31.75 .14
Third quarter............. 39.50 27.62 .15
Fourth quarter............ 43.25 37.00 .16
1998 *
First quarter............. 40.75 37.00 .18
</TABLE>
* InterWest's Fiscal Year ends on September 30.
At _______________, 1998, there were approximately 6,000 holders of record of
the InterWest Common Stock.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as the InterWest Subsidiaries, including
dividends. Such restrictions are tied to the institution's capital levels
after giving effect to such distributions. For the foreseeable future, it is
InterWest's intent to retain earnings to support the growth of its business.
See "SUPERVISION AND REGULATION."
Pacific. No broker makes a market in Pacific Common Stock, and trading has
not otherwise been extensive. The trades that have occurred cannot be
characterized as amounting to an established public trading market. Pacific
Common Stock is traded by individuals on a personal basis and is not listed
on any exchange or traded on the over-the-counter market, and the prices
reported reflect only the transactions known to management. Due to the
limited information available, the following data may not accurately reflect
the actual market value of Pacific Common Stock. The following data include
trades between individual investors, as reported to Pacific as its own
transfer agent.
<TABLE>
<CAPTION>
Pacific Common
Stock Prices
Number of Shares ----------------
Reported as Traded High Low
------------------ ---- ---
<S> <C> <C> <C>
1996
First quarter................. 1,947 $53.00 $51.00
Second quarter................ 3,693 55.00 54.00
Third quarter................. 1,090 57.00 55.00
Fourth quarter................ 1,700 58.00 58.00
1997
First quarter................. 725 62.00 58.00
Second quarter................ 2,196 66.00 63.00
Third quarter................. 950 72.00 68.00
Fourth quarter................ 1,320 80.00 75.00
</TABLE>
As of March 19, 1998, there were approximately 500 shareholders of
record of Pacific Common Stock.
Dividends paid on Pacific Common Stock in 1998, 1997 and 1996,
respectively, were $0.80 per share, $0.60 per share and $0.40 per share.
9
<PAGE>
Pioneer. No broker makes a market in Pioneer Common Stock, and
trading has not otherwise been extensive. The trades that have occurred
cannot be characterized as amounting to an established public trading market.
Pioneer Common Stock is traded by individuals on a personal basis and is not
listed on any exchange or traded on the over-the-counter market, and the
prices reported reflect only the transactions known to management. Due to the
limited information available, the following data may not accurately reflect
the actual market value of Pioneer Common Stock. The following data include
trades between individual investors, as reported to Pioneer as its own
transfer agent.
<TABLE>
<CAPTION>
Pacific Common
Stock Prices
Number of Shares ----------------
Reported as Traded High Low
------------------ ---- ---
<S> <C> <C> <C>
1996
First quarter................... 633 $22.60 $22.43
Second quarter.................. 59 22.51 22.51
Third quarter................... 6,532 25.00 24.00
Fourth quarter.................. 2,741 29.15 25.65
1997
First quarter................... 2,096 29.80 29.60
Second quarter.................. 700 32.00 32.00
Third quarter................... 1,000 32.30 32.30
Fourth quarter.................. No Trades -- --
</TABLE>
Dividends paid on Pioneer Common Stock in 1997 and in 1996,
respectively, were $0.51 per share and $0.46 per share. The 1997 dividend was
declared on January 16, 1997, payable on March 21, 1997, to stockholders of
record as of December 31, 1996.
As of March 19, 1998, there were approximately 400 shareholders of
record of Pioneer Common Stock.
Equivalent Per Share Price. The following table sets forth the last
reported sale price of InterWest Common Stock on January 14, 1998 and
February 4, 1998, the last trading day preceding public announcement of the
Pacific and Pioneer Merger Agreements, respectively, and on ______________,
the last practicable date prior to the mailing of this Prospectus/Joint Proxy
Statement. The equivalent per share price of Pacific Common Stock was
determined by multiplying the last reported sale price of a share of
InterWest Common Stock at each specified date by the exchange ratio of 3.95
shares of InterWest Common Stock for each share of Pacific Common Stock. The
equivalent per share price of Pioneer Common Stock is $58.98 in accordance
with the terms of the Pioneer Merger Agreement. This price assumes the
InterWest Common Stock price is between $36.00 and $44.00 per share. These
assumptions are made solely for the purpose of calculating the pro forma data
and are not intended to be, nor should they be, interpreted as a
representation or approximation of the actual Pioneer Exchange Ratio. For a
discussion of the manner in which the actual Pioneer Exchange Ratio will be
calculated, see "THE MERGER(S) - Basic Terms of the Merger(s) - Pioneer."
<TABLE>
<CAPTION>
Equivalent
InterWest Pacific Price Per Pioneer Equivalent
Common Common Pacific Common Price Per
Stock Stock (1) Share Stock (1) Pioneer Share
--------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
January 14, 1998.......... $39.125 $80.00 $154.54 $32.30 $58.98
February 5, 1998.......... 41.00 80.00 161.95 32.30 58.98
__________, 1998..........
</TABLE>
- ----------
(1) There are no publicly available quotations of Pacific and Pioneer
Common Stock, and the market prices per share as of the respective
dates represent prices known to Pacific and Pioneer's management to
have been paid for the Pacific and Pioneer Common Stock in the last
transaction prior to such dates.
10
<PAGE>
The market price for InterWest Common Stock will fluctuate between
the date of this Prospectus/Joint Proxy Statement and the Pacific Effective
Date of the Merger(s). The market value per share of the InterWest Common
Stock that Pacific shareholders ultimately receive in the Merger(s) could be
more or less than its market value on the date of this Prospectus/Joint Proxy
Statement. No assurance can be given concerning the market price of InterWest
Common Stock before or after the Pacific or Pioneer Effective Dates.
Comparative 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
Pacific and Pioneer, in each case on a historical and pro forma equivalent
basis, after giving effect to the Merger(s) on a pooling of interests basis.
For a description of the pooling of interests method of accounting with
respect to the Merger(s) and related effects on the historical financial
statements of InterWest, see "THE MERGER(S) - Accounting Treatment of the
Merger(s)." 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(s) become effective prior to the
periods indicated or will occur upon the consummation of the Pacific Merger
or the Pioneer Merger. This data should be read in conjunction with the
financial statements and other financial and pro forma financial information
with respect to InterWest, Pacific and Pioneer included elsewhere in this
Prospectus/Joint Proxy Statement or incorporated herein by reference. The
data is not necessarily indicative of the results of the future operations of
the combined entity or the actual results that could have occurred had the
Merger(s) become effective prior to the periods indicated.
11
<PAGE>
<TABLE>
<CAPTION>
SHARE DATA
Pro Forma
Pro Forma Pro Forma Combined
Combined Combined InterWest, Pro Forma Pro Forma
InterWest InterWest Pacific and Equivalent Equivalent
InterWest(2) Pacific and Pacific(3) Pioneer and Pioneer(4) Pioneer Pacific Pioneer
------------ ------- -------------- ------- -------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value as of: (1)
December 31, 1997 $16.60 $40.98 $15.58 $26.23 $16.60 $15.69 $61.54 $24.48
Basic net income per share (5)
Three months ended December 31, 1997 0.64 1.72 0.61 1.03 0.64 0.61 2.41 0.95
Three months ended December 31, 1996 0.62 1.41 0.58 0.69 0.61 0.57 2.28 0.90
Year ended September 30, 1997 (6) 2.53 5.79 2.37 3.09 2.51 2.35 9.35 3.70
Year ended September 30, 1996 (6) 1.62 4.80 1.57 3.22 1.67 1.61 6.22 2.47
Year ended September 30, 1995 (6) 1.83 4.02 1.69 2.34 1.80 1.69 6.69 2.66
Diluted net income per share (5)
Three months ended December 31, 1997 0.63 1.64 0.59 0.99 0.63 0.60 2.35 0.93
Three months ended December 31, 1996 0.61 1.36 0.56 0.67 0.60 0.56 2.23 0.88
Year ended September 30, 1997 (6) 2.48 5.55 2.31 2.98 2.45 2.29 9.12 3.61
Year ended September 30, 1996 (6) 1.58 4.63 1.53 3.14 1.63 1.57 6.06 2.41
Year ended September 30, 1995 (6) 1.80 3.90 1.66 2.29 1.78 1.66 6.57 2.62
Cash dividends declared
Three months ended December 31, 1997 0.18 0.00 0.15 0.00 0.16 0.14 0.58 0.24
Three months ended December 31, 1996 0.14 0.00 0.11 0.00 0.13 0.11 0.45 0.19
Year ended September 30, 1997 (6) 0.59 0.60 0.51 0.51 0.56 0.50 2.01 0.83
Year ended September 30, 1996 (6) 0.51 0.40 0.44 0.46 0.49 0.43 1.73 0.72
Year ended September 30, 1995 (6) 0.37 0.30 0.29 0.42 0.32 0.29 1.13 0.48
</TABLE>
12
<PAGE>
FOOTNOTES
(1) Book value per share is calculated by dividing the total actual
historical and pro forma equity as of the date indicated by the actual
historical and pro forma number of shares outstanding as of the same
date.
(2) Puget Sound Bancorp was merged into InterWest on January 15, 1998.
Prior period financial statements for InterWest have not been restated
to reflect combined accounts of Puget Sound Bancorp as the merger was
not material to the financial position or results of operations of
InterWest. The pro formas included in this document include the
accounts of Puget Sound Bancorp.
(3) The pro forma combined book value per share of InterWest Common Stock
is based upon the historical total combined common shareholders' equity
for InterWest and Pacific divided by total pro forma common shares of
the combined entities assuming conversion of the outstanding Pacific
Common Stock at an Exchange Ratio of 3.95 shares of InterWest Common
Stock for one share of Pacific Common Stock. The data presented assumes
389,926 outstanding shares of Pacific Common Stock, which does not
include 38,170 shares subject to options. The aggregate number of
shares of InterWest Common Stock assumed to be issued in the Pacific
Merger is 1,540,208. See "THE MERGER(S) - Basic Terms of the
Merger(s)." The pro forma equivalent book value per share of Pacific
Common Stock represents the pro forma combined amount multiplied by the
Pacific Exchange Ratio of 3.95.
(4) The pro forma combined book value per share of InterWest Common Stock
is based upon the historical total combined stockholders' equity for
InterWest and Pioneer divided by the total pro forma common shares of
the combined entities assuming conversion of the outstanding Pioneer
Common Stock at an assumed exchange ratio (made for purpose of this
calculation only) of 1.4745. The assumed Pioneer Exchange Ratio is
based upon an assumed average closing price of InterWest Common Stock
of $40.00 per share, which is the midpoint valuation price in the range
of the Pioneer "Valuation Price". 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 Pioneer Exchange Ratio.
The data assumes 344,699 shares, not including shares subject to
options. The pro forma equivalent book value per share of Pioneer
Common Stock represents the pro forma combined amount multiplied by the
assumed Pioneer Exchange Ratio of 1.4745.
(5) Net income per share is calculated by dividing 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
Pacific and Pioneer Common Stock represents the pro forma combined net
income per share multiplied by the assumed Pacific and Pioneer Exchange
Ratios described in notes (3) and (4) above.
(6) The share data for the years ended September 30, 1997, 1996 and 1995
have been adjusted to conform Pacific's and Pioneer's December 31
fiscal year end with InterWest's September 30 fiscal year end in
accordance with generally acceptable accounting principles.
Selected Historical Financial Data
The following tables set forth selected historical financial data for
InterWest, Pacific and Pioneer. The data has been derived in part from, and
should be read in conjunction with, the financial statements and notes thereto
and other fiscal information with regard to InterWest, Pacific and Pioneer set
forth elsewhere in this Prospectus/Joint Proxy Statement or incorporated herein
by reference, and such data are qualified in their entirety by reference
thereto. All adjustments that the respective managements of InterWest, Pacific
and Pioneer believe to be necessary for a fair presentation of the data have
been included and are of a normal recurring nature.
13
<PAGE>
INTERWEST BANCORP, INC.
Selected Financial Data
<TABLE>
<CAPTION>
As of and for the
Three Months ended As of and for the years ended
December 31, September 30,
-------------------------- ----------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
----------- ----------- -------- ---------- ----------- ---------- ----------
Dollars in thousands, except share and per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 37,868 $ 33,112 $ 138,011 $ 120,913 $ 100,264 $ 82,270 $ 73,035
Interest Expense 23,290 19,069 80,903 68,808 57,926 40,685 35,427
Net Interest Income Before
Provision for Losses on Loans 14,578 14,043 57,108 52,105 42,338 41,585 37,608
Provision for Losses on Loans 200 300 1,000 1,960 720 900 1,399
Net Interest Income After
Provision for Losses on Loans 14,378 13,743 56,108 50,145 41,618 40,685 36,209
Noninterest Income 4,628 3,259 14,714 12,553 9,993 7,708 8,914
Noninterest Expense 11,069 9,528 39,765 43,819 29,902 27,646 26,278
Income Tax Expense 2,776 2,522 10,758 6,108 7,347 7,280 6,362
Net Income $ 5,161 $ 4,952 $ 20,299 $ 12,771 $ 14,362 $ 13,467 $ 12,483
Basic Net Income Per Share $ 0.64 $ 0.62 $ 2.53 $ 1.62 $ 1.83 $ 1.72 $ 1.61
Diluted Net Income Per Share 0.63 0.61 2.48 1.58 1.80 1.69 1.58
Cash Dividends Declared Per Share 0.18 0.14 0.59 0.51 0.37 0.35 0.28
Weighted Average Basic
Shares Outstanding 8,042,897 7,959,173 8,010,960 7,865,027 7,844,299 7,838,061 7,756,077
Weighted Average Diluted
Shares Outstanding 8,228,624 8,136,297 8,196,600 8,064,344 7,971,909 7,977,772 7,908,972
Statement of Condition
Total Assets $1,982,317 $1,703,244 $2,046,705 $1,712,151 $1,470,437 $1,262,352 $ 975,375
Loans Receivable and Loans
Held for Sale 1,150,680 985,225 1,114,711 975,971 878,090 762,991 671,609
Deposits 1,154,914 1,154,774 1,171,440 1,120,743 1,040,310 959,344 776,499
Borrowings 682,497 419,872 731,077 460,497 314,171 202,142 110,218
Stockholder's Equity 133,398 116,072 129,824 111,021 105,740 93,578 82,420
Book Value Per Share $ 16.60 $ 14.51 $ 16.13 $ 14.02 $ 13.51 $ 11.91 $ 10.59
Key Performance Ratios:
Return on Average Assets 1.02% 1.15% 1.12% 0.82% 1.08% 1.19% 1.31%
Return on Average
Stockholders' Equity 15.75% 17.45% 16.98% 11.48% 14.37% 15.26% 16.32%
Net Interest Margin 3.07% 3.49% 3.35% 3.53% 3.37% 3.88% 4.22%
Ratio of Non-performing Assets
to Total Assets 0.69% 0.68% 0.58% 0.54% 0.45% 0.61% 0.82%
</TABLE>
- ----------
(1) Unaudited.
14
<PAGE>
PACIFIC NORTHWEST BANK
Selected Financial Data
<TABLE>
<CAPTION>
As of and for the
Three Months ended As of and for the years ended
December 31, September 30,
-------------------------- ---------------------------------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
----------- ----------- -------- ---------- ----------- ---------- ----------
Dollars in thousands, except share and per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 3,797 $ 3,126 $ 14,113 $ 11,548 $ 10,082 $ 8,430 $ 6,985
Interest Expense 1,224 990 4,629 3,745 3,366 2,241 1,870
Net Interest Income Before
Provision for Losses on Loans 2,573 2,136 9,484 7,803 6,716 6,189 5,115
Provision for Losses on Loans 3 33 252 158 35 77 304
Net Interest Income After
Provision for Losses on Loans 2,570 2,103 9,232 7,645 6,681 6,112 4,811
Noninterest Income 480 289 1,531 1,167 1,083 1,125 1,295
Noninterest Expense 2,030 1,557 7,327 5,996 5,433 4,919 4,683
Income Tax Expense 350 290 1,182 970 792 788 (140)
Cumulative Effect of Change
in Accounting 380
Net Income $ 670 $ 545 $ 2,254 $ 1,846 $ 1,539 $ 1,530 $ 1,943
Basic Net Income Per Share $ 1.72 $ 1.41 $ 5.79 $ 4.80 $ 4.02 $ 4.04 $ 5.16
Diluted Net Income Per Share 1.64 1.36 5.55 4.63 3.90 3.93 5.05
Cash Dividends Declared Per Share 0.00 0.00 0.60 0.40 0.30 0.25 0.00
Weighted Average Basic
Shares Outstanding 389,926 385,190 389,074 384,696 382,411 378,720 376,634
Weighted Average Diluted
Shares Outstanding 408,527 400,515 405,862 398,991 394,552 389,426 385,003
Statement of Condition
Total Assets $ 197,243 $ 160,765 $ 197,243 $ 160,765 $ 135,627 $ 128,589 $ 118,161
Loans Receivable and Loans
Held for Sale 136,303 110,439 136,303 110,439 81,835 73,610 63,593
Deposits 165,817 146,325 165,817 146,325 123,098 117,966 108,797
Borrowings 13,500 13,500
Stockholder's Equity 15,978 13,599 15,978 13,599 11,761 9,909 8,698
Book Value Per Share $ 40.98 $ 35.29 $ 40.98 $ 35.29 $ 30.68 $ 26.07 $ 23.04
Key Performance Ratios:
Return on Average Assets 1.42% 1.37% 1.28% 1.23% 1.18% 1.26% 1.91%
Return on Average
Stockholders' Equity 17.09% 16.38% 15.43% 14.67% 14.13% 16.64% 25.20%
Net Interest Margin 5.98% 5.82% 5.89% 5.66% 5.64% 5.58% 5.57%
Ratio of Non-performing Assets
to Total Assets 0.02% 0.05% 0.02% 0.05% 0.05% 0.04% 0.06%
</TABLE>
- ----------
(1) Unaudited.
15
<PAGE>
PIONEER BANCORP, INC.
Selected Financial Data
<TABLE>
<CAPTION>
As of and for the
Three Months ended As of and for the years ended
December 31, September 30,
-------------------------- ----------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
----------- ----------- -------- ---------- ----------- ---------- ----------
Dollars in thousands, except share and per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 2,039 $ 1,895 $ 8,636 $ 7,658 $ 6,161 $ 4,434 $ 3,598
Interest Expense 974 855 3,877 3,129 2,490 1,365 1,113
Net Interest Income Before
Provision for Losses on Loans 1,065 1,040 4,759 4,529 3,671 3,069 2,485
Provision for Losses on Loans 53 52 188 272 152 23 122
Net Interest Income After
Provision for Losses on Loans 1,012 988 4,571 4,257 3,519 3,046 2,363
Noninterest Income 874 518 1,908 1,691 1,682 1,301 1,541
Noninterest Expense 1,322 1,136 4,979 4,315 3,967 3,124 2,601
Income Tax Expense 204 120 419 470 389 275 390
Net Income $ 360 $ 250 $ 1,081 $ 1,163 $ 845 $ 948 $ 913
Basic Net Income Per Share $ 1.03 $ 0.69 $ 3.09 $ 3.22 $ 2.34 $ 2.76 $ 3.57
Diluted Net Income Per Share 0.99 0.67 2.98 3.14 2.29 2.71 3.50
Cash Dividends Declared Per Share 0.00 0.00 0.51 0.46 0.42 .38 .26
Weighted Average Basic
Shares Outstanding 349,687 361,000 349,687 361,000 361,000 343,860 255,811
Weighted Average Diluted
Shares Outstanding 362,251 370,725 362,251 370,725 368,495 350,003 261,105
Statement of Condition
Total Assets $105,871 $ 98,143 $105,871 $ 98,143 $ 77,088 $ 59,972 $ 48,802
Loans Receivable and Loans
Held for Sale 60,311 54,494 60,311 54,494 49,321 34,690 29,722
Deposits 85,601 82,223 85,601 82,223 60,934 45,344 37,557
Borrowings 10,191 5,796 10,191 5,796 7,761 7,326 6,064
Stockholder's Equity 9,040 8,559 9,040 8,559 7,605 6,569 4,259
Book Value Per Share $ 26.23 $ 23.71 $ 26.23 $ 23.71 $ 21.07 $ 18.20 $ 16.65
Key Performance Ratios:
Return on Average Assets 1.23% 1.06% 1.06% 1.35% 1.21% 1.90% 2.00%
Return on Average
Stockholders' Equity 14.42% 11.57% 12.73% 14.47% 12.85% 15.60% 24.90%
Net Interest Margin 5.34% 5.42% 5.20% 5.80% 5.90% 5.90% 6.10%
Ratio of Non-performing Assets
to Total Assets .13% .61% .13% .61% .56% .09% .12%
</TABLE>
- ----------
(1) Unaudited.
16
<PAGE>
SPECIAL MEETING OF PACIFIC SHAREHOLDERS
Date, Time, and Place
The Pacific Northwest Bank Special Meeting will be held on ___________,
1998, at 6:30 p.m., local time at the Seattle Financial Center of Pacific
Northwest Bank, 1111 Third Avenue, Seattle, Washington. This Prospectus/Joint
Proxy Statement is being sent to holders of Pacific Common Stock and is
accompanied by a form of proxy which is being solicited by the Pacific Board of
Directors for use at the Special Meeting and any adjournments or postponements
thereof.
Purpose of the Meeting
The purpose of the Pacific Special Meeting is: (i) to consider and vote
upon a proposal to approve the Pacific Merger Agreement described herein,
providing for, among other things, the acquisition of Pacific which will become
a wholly-owned subsidiary of InterWest, and the conversion of shares of Pacific
Common Stock into shares of InterWest Common Stock, and (ii) act upon such other
matters, if any, as may properly come before the Pacific Special Meeting.
Shares Outstanding and Entitled to Vote; Record Date
The Pacific Board has fixed the close of business on ______________,
1998, as the Record Date for determining the shareholders entitled to notice of
and to vote at the Special Meeting. Only those holders of shares of Pacific
Common Stock of record on the Pacific Record Date will be entitled to notice of
and to vote at the Pacific Special Meeting. Each share of Pacific Common Stock
will be entitled to one vote. At the Pacific Record Date, there were 395,963
shares of Pacific Common Stock outstanding and entitled to vote at the Special
Meeting.
Vote Required
A majority of the shares entitled to vote, represented in person or
proxy, will constitute a quorum for the transaction of business at the Pacific
Special Meeting. Abstentions and broker non-votes will be considered present for
purposes of determining whether a quorum exists. Approval of the Pacific Merger
Agreement requires the affirmative vote of the holders who hold 66 2/3% of the
outstanding shares of Pacific Common Stock entitled to vote at the Pacific
Special Meeting. Abstentions and broker non-votes will have the same effect as
votes cast against approval of the Pacific Merger Agreement.
At the Pacific Record Date, the directors and executive officers of
Pacific and their affiliates beneficially owned an aggregate of 60,519 shares of
Pacific Common Stock, which represents 15.28% of the shares entitled to be voted
at the Pacific Special Meeting.
Voting, Solicitation, and Revocation of Proxies
Holders of Pacific Common Stock may vote either in person or by
properly executed proxy. Shares of Pacific Common Stock represented by a
properly executed proxy received prior to or at the Pacific Special Meeting
will, unless such proxy is revoked, be voted in accordance with the instructions
indicated on such proxy. If no instructions are indicated on a properly executed
proxy, the shares covered thereby will be voted FOR the proposal to approve the
Pacific Merger Agreement. Failure to return the proxy card or to vote in person
at the Pacific Special Meeting will have the effect of a vote cast against the
Pacific Merger Agreement. If any other matters are properly presented at the
Pacific Special Meeting for consideration, including, among other things, a
motion to adjourn the Pacific Special Meeting to another time and/or place,
(including, without limitation, for the purpose of soliciting additional
proxies), the persons named in the proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgement;
provided, however, that no
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proxy which is voted against the proposal to approve the Pacific Merger
Agreement will be voted in favor of any such adjournment or postponement. A
proxy marked ABSTAIN with respect to the proposal to approve the Pacific Merger
Agreement may be voted in favor of a proposal to adjourn or postpone the Pacific
Special Meeting in the discretion of the persons named in the proxy. As of the
date hereof, the Pacific Board knows of no such other matters.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it at any time before it is voted by delivering to
the Secretary of Pacific, on or before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the proxy or a
later dated proxy relating to the same shares of Pacific Common Stock, or by
attending the Special Meeting and voting in person. Attendance at the Pacific
Special Meeting will not in itself constitute revocation of a proxy.
The proxy for the Pacific Special Meeting is being solicited on behalf
of the Pacific Board. The expense of soliciting proxies for the Pacific Special
Meeting will be borne by Pacific. All costs and expenses incurred in connection
with the Pacific Merger Agreement and the transactions contemplated thereby are
to be paid by the party incurring such expenses. Proxies will be solicited
principally by mail, but may also be solicited by the directors, officers, and
other employees of Pacific in person or by telephone, facsimile or other means
of communication. Such directors, officers, and employees will receive no
compensation therefor in addition to their regular compensation, but may be
reimbursed for out-of-pocket expenses in connection with such solicitation.
Brokers and others who hold Pacific Common Stock on behalf of another will be
asked to forward proxy material and related documents to the beneficial owners
of such stock, and Pacific will reimburse them for their expenses in doing so.
SPECIAL MEETING OF PIONEER SHAREHOLDERS
Date, Time, and Place
The Pioneer Special Meeting will be held on __________________, 1998,
at _____ p.m., local time, at _________________________________.
Purpose of the Meeting
The purposes of the Pioneer Special Meeting are as follows: (i) to
consider and vote upon approval of the Pioneer Merger Agreement; and (ii) to act
upon such matters, if any, as may properly come before the Pioneer Special
Meeting.
Shares Outstanding and Entitled to Vote; Record Date
The Pioneer Board has fixed the close of business on April 30, 1998 as
the Pioneer Record Date for determining the holders of shares of Pioneer Common
Stock entitled to vote at the Pioneer Special Meeting. At the close of business
on the Pioneer Record Date, there were 344,699 shares of Pioneer Common Stock
issued and outstanding held by approximately 393 holders of record. See
"SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF INTERWEST,
PACIFIC AND PIONEER." Holders of record of Pioneer Common Stock on the Pioneer
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(S) - Dissenters' Rights of Appraisal - Pioneer" and Appendix H.
Vote Required
The affirmative vote of two-thirds (2/3) of all shares of Pioneer
Common Stock outstanding on the Pioneer Record Date is required to approve the
Pioneer Merger Agreement. Pioneer's shareholders are entitled to one vote for
each share of Pioneer Common Stock held. The presence of a majority of the
outstanding shares of
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Pioneer Common Stock in person or by proxy is necessary to constitute a quorum
of shareholders for the Pioneer 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 Pioneer Merger Agreement will be
counted as favorable votes in determining whether the Pioneer Merger Agreement
is approved by the holders of Pioneer Common Stock. Accordingly, abstentions and
broker nonvotes will have the same effect as votes against approval of the
Pioneer Merger Agreement.
As of the Pioneer Record Date, Pioneer's directors and executive
officers and their affiliates owned and were entitled to vote 94,589 shares at
the Meeting, representing approximately 27.4% of the outstanding shares of
Pioneer Common Stock. Each Pioneer director has agreed to vote all shares of
Pioneer Common Stock held or controlled by him or her in favor of the approval
of the Pioneer Merger Agreement.
Voting, Solicitation, and Revocation of Proxies
If the enclosed proxy is duly executed and
received in time for the Pioneer 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 SPECIAL MEETING, unless otherwise directed by the
proxy. Any proxy given by a shareholder may be revoked before its exercise by
written notice to the Secretary of Pioneer, or by a subsequently dated proxy, or
in open meeting before the shareholder vote is taken. The shares represented by
properly executed, unrevoked proxies will be voted in accordance with the
instructions in the proxy. Shareholders are entitled to one vote for each share
of Pioneer Common Stock held on the Pioneer Record Date.
The proxy for the Pioneer Special Meeting is being solicited on behalf
of the Pioneer Board. Pioneer will bear the cost of solicitation of proxies from
its shareholders. In addition to using the mails, proxies may be solicited by
personal interview, telephone, and wire. Banks, brokerage houses, other
institutions, nominees, and fiduciaries will be requested to forward their proxy
soliciting material to their principals and obtain authorization for the
execution of proxies. Officers and other employees of Pioneer may solicit
proxies personally. Pioneer 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.
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BACKGROUND OF AND REASONS FOR THE MERGER(S)
Pacific
Background of the Pacific Merger
InterWest has adopted a strategy to accomplish certain goals for
growth, capital and return on equity that has included growth through
acquisitions. This strategy has been approved by the InterWest Board of
Directors. The first acquisition was completed in August, 1996, through the
merger of Central Bancorporation, located in Wenatchee, Washington, into
InterWest. The second acquisition was completed in January, 1998 through the
merger of Puget Sound Bancorp located in Port Orchard, Washington, into
InterWest.
On April 29, 1997 Mr. Gary Bolyard, the Vice Chairman of InterWest, met
with Mr. Patrick Fahey, Chairman, President and Chief Executive Officer of
Pacific. The meeting took place in Seattle, Washington to discuss a potential
business combination of the two companies. On July 28, 1997 Mr. Stephen Walden,
President and Chief Executive Officer of InterWest and Mr. Bolyard from
InterWest met with Mr. Fahey to again discuss a potential business combination
of the two companies. These first two meetings included preliminary discussions
about the potential business combination of the two companies and did not result
in any type of agreement regarding the terms of a merger transaction.
Subsequently in October and November, 1997 there were several
discussions between executives of the two companies regarding preliminary
financial terms proposed as well as employee and benefit issues. In November,
1997 InterWest retained the services of Sandler O'Neill & Partners, L.P. as
independent financial advisor to assist the InterWest Board in analyzing,
structuring, and negotiating a proposed business combination between the two
companies.
On December 2, 1997 Mr. Walden, Mr. Bolyard, and Mr. Glenn Mouw from
InterWest, representatives from Sandler O'Neill & Partners, L.P. and Mr.
Fahey from Pacific met to have discussions about financial terms of a
potential merger as well as employee and benefit issues. At the December 15,
1997 InterWest Board meeting, executive management updated the Board on
merger and acquisition opportunities and discussed the possibility of a
merger transaction with Pacific. The benefits of a merger with Pacific and
proposed terms for a merger were discussed by the InterWest Board. The Board
authorized management to negotiate a merger agreement with Pacific consistent
with the terms discussed.
In late December, 1997 and early January, 1998 there were several
discussions between executives from the two companies to negotiate the specific
financial terms proposed as well as employee and benefit issues. On January 14,
1998 there was a special meeting of the InterWest Board to review and discuss
the proposed terms of a merger with Pacific. The terms of the merger were
incorporated into a definitive merger agreement which was approved by the
InterWest Board and executed on January 15, 1998.
InterWest's Reasons for the Pacific Merger
At a meeting on January 14, 1998, the InterWest Board determined that
the Pacific Merger and Pacific Merger Agreement are fair to and in the best
interests of InterWest and its stockholders. InterWest has also obtained an
opinion from Sandler O'Neill & Partners LP, an independent financial advisor, to
such effect. In considering the Pacific Merger, the InterWest Board determined
that the Pacific Merger would be consistent with InterWest's strategic intent in
expanding its community banking business. InterWest can potentially provide
customers and stockholders of Pacific with certain advantages of a community
banking organization as well as a larger banking organization.
InterWest determined that the Pacific Merger would advance InterWest's
strategic plan because of its belief that the Pacific Merger will combine two
financially sound institutions with complementary businesses
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and strategies, thereby creating a stronger combined organization with greater
size, flexibility and efficiency. The InterWest Board believes that (i) each
institution is currently well managed, (ii) the companies have compatible
management philosophies and strategic focuses, (iii) Pacific will contribute
strengths in business banking to InterWest, and (iv) the Pacific Merger would
benefit the localities currently served by Pacific by providing additional
lending capacity, and (v) the combined organization will continue to be well
capitalized. The InterWest Board also believes that the Pacific 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 Pacific 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:
- The InterWest Board's knowledge and review of the financial
condition, results of operation, and business operations and
prospects of Pacific;
- 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;
- The InterWest Board's belief that the acquisition of Pacific
will expand InterWest's franchise and would be a logical
extension for InterWest into the Seattle and Bellevue areas
where Pacific is located;
- InterWest believes that Pacific's strong management team will
strengthen InterWest's initiatives to expand business banking
activities into other parts of Washington State; provide a
platform for possible future acquisitions of community banks;
and provide expertise to develop business banking relationships
with professional services firms;
- The InterWest Board's evaluation of the financial terms of the
Pacific 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;
- InterWest believes that the Pacific Merger would allow InterWest
to expand its commercial, small business and consumer lending
activity in King and Snohomish counties through Pacific's
existing branch network faster and more efficiently than
InterWest could develop it on its own;
- The expectation that the Pacific Merger will be a tax-free
transaction to InterWest and will qualify for pooling-of-
interests accounting treatment (see "THE MERGER(S)--Federal
Income Tax Treatment of the Merger(s); "--Accounting Treating of
the Merger(s)"); and
- The InterWest Board's belief, after consultation with its legal
counsel, that the required regulatory approvals could be
obtained to consummate the Pacific 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
Pacific Merger are fair to and in the best interests of InterWest and its
stockholders.
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Pacific's Reasons For The Pacific Merger
In reaching its determination to approve and adopt the Pacific Merger
Agreement, the Pacific Board consulted with Pacific's management and its
financial and legal advisors, and considered a number of factors, including,
without limitation, the following material factors:
- The Pacific Board's thorough review of Pacific's business,
operations, financial condition and earnings on an historical
and a prospective basis;
- The Pacific Board's knowledge and review, based in part on
presentations by its financial advisors and Pacific's
Management, of: (i) the business, operations, financial
condition and earnings of InterWest on an historical and
prospective basis and of the combined company on a pro forma
basis; and (ii) the historical stock price performance of
InterWest's Common Stock, the potential for increased earnings
and dividends for Pacific Shareholders as shareholders of the
combined company, and InterWest's substantial market
capitalization; and
- The presentation of Columbia Financial Advisors, Inc., to the
Pacific Board on January 15, 1998, and the opinion of Columbia
Financial Advisors rendered on January 15, 1998, that, as of
such date, the Exchange Ratio pursuant to the Pacific Merger
Agreement was fair from a financial point of view to the holders
of Pacific Common Stock;
- The terms of the Pacific Merger Agreement, including: (i) a
provision for a fixed Exchange Ratio of 3.95 shares of InterWest
Common Stock for each share of Pacific Common Stock, enabling
Pacific shareholders to benefit from any increase in the trading
price of InterWest Common Stock prior to the Pacific Merger,
coupled with a provision permitting Pacific to terminate the
Pacific Merger if the Average Closing Price of InterWest Common
Stock is below $35, thereby limiting the risk to Pacific
shareholders of possible declines in InterWest Common Stock;
(ii) an attractive premium for the holders of Pacific Common
Stock based on price-to-1997-earnings and price-to-book-value
multiples of 27x and 3.8x, respectively;
- The current and prospective economic and competitive
environment facing the financial services industry generally,
and Pacific in particular, including the continued rapid
consolidation in the industry and the increasing importance of
operational scale and financial resources in maintaining
efficiency and remaining competitive over the long term, and in
being able to capitalize on technological developments which
significantly impact industry competition;
- The general impact that the Pacific Merger could be expected to
have on the constituencies served by Pacific, including its
customers, employees and communities. In this regard, Pacific
noted that the combined company could be expected to offer a
more extensive range of financial products and services to
Pacific's existing customers and could provide its customers
with the added convenience of access to InterWest's extensive
branch system;
- The expectation that the Pacific Merger will be tax-free for
federal income tax purposes to Pacific and Pacific shareholders;
and
- The common business philosophy and compatibility of the
managements and staffs of Pacific and InterWest, and the fact
that Mr. Fahey would become Vice Chairman of Commercial Banking
of InterWest and continue as Chairman, President and CEO of
Pacific, that each of Pacific's other top four executive officers
would enter into employment contracts with Pacific and that the
Board of Directors of Pacific would continue in that capacity.
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The foregoing discussion of the information and factors considered by the
Pacific Board is not intended to be exhaustive but is believed to include the
material factors considered by the Pacific Board. In reaching its determination
to approve and recommend the Pacific Merger Agreement, the Pacific Board did not
assign any relative or specific weights to the factors considered in reaching
such determination, and individual Directors may have given differing weights to
differing factors.
Opinion of Columbia Financial Advisors, Inc.
Columbia Financial Advisors, Inc. ("CFA") has delivered a written
opinion to the Pacific Board to the effect that, as of the date of this Proxy
Statement/Prospectus, the consideration to be received by Pacific common
stockholders pursuant to the terms of the Pacific Merger Agreement is fair to
such stockholders from a financial point of view. The Exchange Ratio has been
determined by Pacific and InterWest through negotiations. The CFA 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
Pacific stockholder as to how such shareholder should vote at the Pacific
Special Meeting. As of March 13, 1998, the price of InterWest's common stock is
$42.50, and the total purchase price is $167.88 per share for all of the
outstanding shares of Pacific.
Pacific retained CFA as its exclusive financial advisor pursuant to an
engagement letter dated January 8, 1998 in connection with the Pacific Merger.
CFA 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 Pacific Board selected CFA to act as Pacific's exclusive
financial advisor based on CFA's experience in mergers and acquisitions and in
securities valuation generally.
On January 15, 1998, CFA issued its Opinion to the Pacific Board that,
in its opinion as investment bankers, the terms of the Pacific Merger as
provided in the Pacific Merger Agreement are fair, from a financial view point
to Pacific, the Bank and its shareholders. The full text or the CFA Opinion,
which sets forth the assumptions made, matters considered, and limits on its
review, is attached hereto as Appendix E. The summary of the CFA Opinion in this
Prospectus/Joint Proxy Statement Prospectus is qualified in its entirety by
reference to the full text of such opinion. PACIFIC SHAREHOLDERS ARE URGED TO
READ THE ENTIRE CFA OPINION.
In rendering its opinion to Pacific, CFA reviewed, among other things,
historical financial data of Pacific, certain internal financial data and
assumptions of Pacific prepared for financial planning and budgeting purposes
furnished by the management of Pacific and, to the extent publicly available,
the financial terms of certain change of control transactions involving
Northwest community banks. CFA discussed with Pacific's management the financial
condition, current operating results, and business outlook for Pacific. CFA also
reviewed certain publicly available information concerning InterWest and certain
financial and securities data InterWest and companies deemed similar to
InterWest. CFA discussed with InterWest's management the financial condition,
current operating results, and business outlook for InterWest and InterWest's
plans relating to Pacific. In rendering its opinion, CFA 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 Pacific or InterWest nor
was it furnished any such appraisals. Pacific did not impose any limitations on
the scope of the CFA investigation in arriving at its opinion.
CFA 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%.
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
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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 Pacific's assets and liabilities, customer relations,
market presence, image and reputation, staff expertise and depth, little weight
is given by CFA 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 thc average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In valuing a business enterprise, when sufficient
comparable trade data are available, the market value approach deserves greater
weighting than the net asset value approach and similar weight as the investment
value approach as discussed below.
CFA maintains a comprehensive data base concerning prices paid for
banking institutions in the Northwest, particularly Western Washington and
Western Oregon banking institutions, during 1988 through 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 Pacific, CFA 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 Washington and
Oregon banking organizations with total assets greater than $100 million that
sold for 100% common stock from January 1988 to December 1997.
Comparable Sales Multiples. CFA calculated a "Merger
Consideration-Adjusted Book Value" for Pacific's December 31, 1997 stockholders
equity and the estimated June 30, 1998 stockholders' equity adjusted for the
price to stockholders equity ratios for a sample of Northwest banking
institutions with assets of between $100 million and $250 million which sold
between January 1, 1993 through December 31, 1997 and a sample of Northwest
banking institutions with total assets of between $100 million and $250 million
which sold between January 1, 1996 and December 29, 1997. The calculations are
$80.75 and $97.31 per share, respectively, for the December 31, 1997
stockholders' equity for the two samples. For the estimated June 30, 1998
stockholders' equity, the calculations are $85.23 and $102.70, respectively. For
Pacific's 1997 net income and twelve months prior to June 30, 1998, the
calculations are $88.13 and $101.10, respectively.
Transaction Value as a Percentage of Total Assets. CFA 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 $157.01 per Pacific share results in a transaction value
as a percentage of total assets of 29.92%. The median price as a percentage of
total assets for a sample of Northwest banking institutions with assets of
between $100 million and $250 million which sold between January 1, 1993 through
December 31, 1997 and a sample of Northwest banking institutions with total
assets of between $100 million and $250 million which sold between January 1,
1996 and December 31, 1997 of 18.0% and 19.6%, respectively.
Investment Value is sometimes referred to as the income or earnings
value. One investment value method frequently used estimates the present value
of an institution's future earnings or cash flow which is discussed below.
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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 Pacific's estimates of
future growth and an appropriate capitalization or discount rate. CFA's
calculations were based on an analysis of the banking industry, Pacific's
earnings estimates for 1998-2002, historical levels of growth and earnings, and
the competitive situation in Pacific's market area. Using discount rates of 16%
and 18%, acceptable discount rates considering thc risk-return relationship most
investors would demand for an investment of this type as of the valuation date,
the "Net Present Value of Future Earnings" provided a range of $116.09 to
$107.66 per share.
When the net as value, market value and investment value approaches are
subjectively weighed, using the appraiser's experience and judgment, it is CFA's
opinion that the proposed transaction is fair, from a financial point of view to
the Pacific shareholders.
Pursuant to the terms of the Engagement Letter, Pacific has agreed to
pay CFA a fee of $30,000 for this fairness opinion. In addition, Pacific has
agreed to reimburse CFA for its reasonable out-of-pocket expenses, including the
fees and disbursements of its counsel, and to indemnify CFA against certain
liabilities.
Recommendation of the Pacific Board
THE PACIFIC BOARD UNANIMOUSLY RECOMMENDS THAT THE PACIFIC SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
Pioneer
Background of the Pioneer Merger
InterWest has adopted a strategy to accomplish certain goals for
growth, capital and return on equity that has included growth through
acquisitions. This strategy has been approved by the InterWest Board of
Directors. The first acquisition was completed in August, 1996, through the
merger of Central Bancorporation, located in Wenatchee, Washington, into
InterWest. The second acquisition was completed in January, 1998 through the
merger of Puget Sound Bancorp located in Port Orchard, Washington, into
InterWest.
On August 28, 1997 Mr. Gary Bolyard, the Vice Chairman of InterWest
initiated a meeting with Mr. Paul Campbell, President and Chief Executive
Officer of Pioneer. The meeting took place in Yakima, Washington to discuss a
potential business combination of the two companies. At that meeting, Mr.
Campbell indicated that the Board had adopted a strategy of independence, and
would prefer a non-binding letter, not requiring further response from the
Board, rather than meeting with the directors. On September 8, 1997, InterWest
provided a letter to the Pioneer Chairman of the Board with an outline of
proposed terms. On September 18, 1997, the Pioneer Board met to review the
InterWest letter and proposed term sheet. Following a discussion of InterWest
financial trends and stock liquidity, the conclusion of this meeting was that
the price discussed was inadequate. Accordingly, the Board's position was that
there was no interest in further discussions at that time of a transaction. The
Board authorized Morris G. Shore and Mr. Campbell to retain the services of
Foster Pepper & Shefelman PLLC. On September 23, 1997, Paul Campbell responded
to InterWest that the Board had met and discussed the offer but noted that the
Pioneer Board had decided not to pursue a merger at this time.
On October 23, 1997, the Pioneer Board met for the purpose of obtaining
more information about InterWest, and to determine what the value of Pioneer
would be in terms of a fair price to shareholders, should another offer be
forthcoming. The information regarding InterWest was presented by CFA and based
on interviews with InterWest executives and information from financial analysts
and others. A profile of InterWest based on publicly available information such
as earnings estimates, stock performance, dividend policy, ownership, and other
research indicated that InterWest was in the top ten percent of its peer group.
InterWest
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was compared to other publicly traded regional banks and thrifts. At
this meeting, CFA also presented a valuation of Pioneer and what it might expect
as a transaction price based on potential accretion.
It was decided to review the proposed transaction with Moss Adams LLP, to
retain a financial advisor, and to seek a visit with InterWest executives to
obtain more information on InterWest and its plans and to report back to the
Pioneer Board. In addition, CFA was requested to explore the possibility of
other institutions which might be interested in a transaction with Pioneer. On
October 31, 1997, Pioneer signed a contract to retain the services of CFA to
assist the Pioneer Board in evaluation and negotiating proposed merger
alternatives.
On November 12, 1997, Chairman Donald H. Ballew, Paul Campbell, Don
Kiser, and a representative of CFA visited the offices of InterWest for further
discussions with InterWest executives. Following the visit with InterWest, the
Pioneer Board met on November 14th to discuss the visit. A number of issues and
possible approaches were identified. After debate of pros and cons, it was
decided to move forward with an evaluation of a merger proposal. The Pioneer
Board authorized the Chairman and President to have CFA convey Pioneer's
preliminary interest in a proposal and discuss additional issues. Subsequently,
on November 14, 1997, executive management for Pioneer contacted InterWest and
presented additional issues related to the possibility of a merger.
At the November 20, 1997 InterWest Board meeting, executive management
updated the Board on merger and acquisition opportunities and discussed the
possibility of a merger transaction with Pioneer. The proposed terms for the
possibility of a merger were discussed by the InterWest Board. The Board
authorized management to negotiate a merger agreement with Pioneer consistent
with the terms proposed. In late November, 1997 and December, 1997 there were
several discussions between executives from the two companies regarding the
specific financial terms proposed as well as employee and benefit issues.
Additionally, in December, 1997 an independent review of Pioneer Bank's loan
portfolio was conducted by the Bank Consulting Group to assist in finalizing the
financial terms of the merger.
On December 3, 1997, and December 5, 1997, the Pioneer Board met to
discuss a proposed term sheet dated November 25, 1997, from InterWest and other
issues. Discussed were financial structure, management and employee issues, and
representations and warranties. Subject to final review of the definitive
agreement, the due diligence process, and consideration of fairness to
stockholders and employees, it was decided to move ahead with the InterWest
proposal.
At the January 20, 1998 InterWest Board meeting, executive management
updated the Board on merger and acquisitions opportunities and reviewed the
proposed terms for the possibility of the merger with Pioneer. The Board
resolved that it was in the best interest of InterWest to proceed with the
proposed transaction.
The Board of Pioneer met on February 4, 1998, and reviewed the proposed
terms of the merger agreement. After a thorough discussion of the issues, the
Board concluded the merger agreement to be fair and in the best interests of
Pioneer, its shareholders, customers and employees. The terms of the proposed
merger agreement were unanimously adopted and approved by the Pioneer Board. The
terms of the Pioneer Merger were incorporated into a definitive merger agreement
which was approved by the InterWest Board and executed on February 4, 1998.
InterWest's Reasons For The Pioneer Merger
At a meeting on January 20, 1998, the InterWest Board determined that
the Pioneer Merger and Pioneer Merger Agreement are fair to and in the best
interests of InterWest and its stockholders. In considering the Pioneer Merger,
the InterWest Board determined that the Pioneer Merger would be consistent with
InterWest's strategic intent in expanding its community banking business.
InterWest can potentially provide customers and stockholders of Pioneer with
certain advantages of a community banking organization as well as a larger
banking organization.
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InterWest determined that the Pioneer Merger would advance InterWest's
strategic plan because of its belief that the Pioneer 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) Pioneer will
contribute complementary business strengths to InterWest, (iv) the Pioneer
Merger would benefit the localities currently served by Pioneer by providing
additional lending capacity; and (v) the combined organization will continue to
be well capitalized. The InterWest Board also believes that the Pioneer 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 Pioneer 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:
- The InterWest Board's knowledge and review of the financial
condition, results of operation, and business operations and
prospects of Pioneer;
- 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;
- The InterWest Board's belief that the acquisition of Pioneer
will expand InterWest's franchise and would be a logical
extension for InterWest into other communities in Washington
State;
- The InterWest Board's evaluation of the financial terms of the
Pioneer 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;
- InterWest believes that Pioneer Bank's management team will
strengthen InterWest initiatives to develop business banking for
small businesses and professional service firms;
- Pioneer is not so large as to make the combination of the two
companies difficult and costly;
- InterWest believes that the Pioneer Merger would allow InterWest
to expand its commercial, agricultural, small business and
consumer lending activity in Yakima and Benton counties through
Pioneer's existing branch network faster and more efficiently
than InterWest could develop it on its own;
- The expectation that the Pioneer Merger will be a tax-free
transaction to InterWest and will qualify for
pooling-of-interests accounting treatment (see "THE MERGER(S) --
Federal Income Tax Treatment of the Merger(s); "-Accounting
Treating of the Merger(s)"); and
- The InterWest Board's belief, after consultation with its legal
counsel, that the required regulatory approvals could be
obtained to consummate the Pioneer 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
Pioneer Merger are fair to and in the best interests of InterWest and its
stockholders.
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Pioneer's Reasons For The Pioneer Merger
Pioneer's Board, at its meeting held on February 4, 1998, considered
the Pioneer Merger Agreement and determined it to be fair, and in the best
interests of, Pioneer and its shareholders, customers and employees. In reaching
its determination, Pioneer's Board consulted with Pioneer management, as well as
financial, legal and accounting advisors respectively, regarding the financial
fairness of the Pioneer Merger and the terms of the Pioneer Merger Agreement,
and considered a number of factors. Listed below are the material factors
Pioneer's Board considered in their decision. Pioneer's Board did not assign any
specific or relative weight to the factors listed below.
- The Board determined that a merger with InterWest would be a
better alternative plan than expanding independently through
internal growth or through acquisition.
- The ability to transition operations under the name of "Pioneer
National Bank" while accessing the financial, technological and
human resource strength of InterWest would greatly enhance
Pioneer's ability to compete in an ever changing market place.
- Pioneer's Board determined that combining with a larger,
publicly-traded company would result in greatly improved
liquidity for Pioneer shareholders.
- Combining the management resources of the two companies would
result in a greater depth of management, which would strengthen
both companies.
- Because of InterWest's relative size and resources, Pioneer's
employees would benefit from enhanced technology and training
which in turn would provide substantially improved career
opportunities for Pioneer's employees.
- Because InterWest does not have a substantial business presence
in Pioneer's market area, Pioneer's employees have better
continued employment opportunities than they would if Pioneer
did a transaction with a financial institution already doing a
substantial business in Pioneer's market area.
Opinion of Columbia Financial Advisors, Inc.
Columbia Financial Advisors, Inc. ("CFA") has delivered a written
opinion to the Pioneer Board and the Pioneer Bank Board to the effect that, as
of the date of this Prospectus/Joint Proxy Statement, the consideration to be
received by Pioneer common stockholders under the terms of the Pioneer Merger
Agreement is fair to such stockholders from a financial point of view. The
Exchange Ratio has been determined by Pioneer and InterWest through
negotiations. The CFA 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 Pioneer stockholder as to how such shareholder should vote
at the Pioneer Special Meeting. As of February 19, 1998, the price of
InterWest's common stock was $______, and the total purchase price is $58.98 per
share for all of the outstanding shares of Pioneer.
Pioneer retained CFA as its exclusive financial advisor under the terms
of an engagement letter dated October 31, 1997 ("Engagement Letter") in
connection with the Pioneer Merger. CFA 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 Pioneer Board
selected CFA to act as Pioneer's exclusive financial advisor based on CFA's
experience in mergers and acquisitions and in securities valuation generally.
On February 4, 1998, CFA issued its opinion to the Pioneer Board that,
in its opinion as investment bankers, the terms of the Pioneer Merger as
provided in the Pioneer Merger Agreement are fair, from a financial view point,
to Pioneer and its stockholders. The full text of the CFA Opinion, which sets
forth the
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assumptions made, matters considered, and limits on its review, is
attached as Appendix E. The summary of the CFA Opinion in this Prospectus/Joint
Proxy Statement is qualified in its entirety by reference to the full text of
such opinion. PIONEER STOCKHOLDERS ARE URGED TO READ THE ENTIRE CFA OPINION.
In rendering its opinion to Pioneer, CFA reviewed, among other things,
historical financial data of Pioneer, certain internal financial data and
assumptions of Pioneer prepared for financial planning and budgeting purposes
furnished by the management of Pioneer and, to the extent publicly available,
the financial terms of certain change of control transactions involving
Northwest community banks. CFA discussed with Pioneer's management the financial
condition, current operating results, and business outlook for Pioneer. CFA also
reviewed certain publicly available information concerning InterWest and certain
financial and securities data of InterWest and companies deemed similar to
InterWest. CFA discussed with InterWest's management the financial condition,
current operating results, and business outlook for InterWest and InterWest's
plans relating to Pioneer. In rendering its opinion, CFA 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 Pioneer or InterWest nor
was it furnished any such appraisals. Pioneer did not impose any limitations on
the scope of the CFA investigation in arriving at its opinion.
CFA 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 Pioneer's assets and liabilities,
customer relations, market presence, image and reputation, staff expertise and
depth, little weight is given by CFA to the net asset value approach to
valuation.
Market Value is generally defined as the price, established on an
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a thin market for
its common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In valuing a business enterprise, when sufficient
comparable trade data are available, the market value approach deserves greater
weighting than the net asset value approach and similar weight as the investment
value approach as discussed below.
CFA maintains a comprehensive data base concerning prices paid for
banking institutions in the Northwest, particularly Eastern Washington and
Eastern 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 Pioneer, CFA 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
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banking organizations with total assets greater than $100 million
that sold for 100% common stock from January 1988 to December 1997.
Comparable Sales Multiples. CFA calculated a "Merger
Consideration-Adjusted Book Value" for Pioneer's December 31, 1997 stockholders
equity and the estimated June 30, 1998 stockholders equity adjusted for the
price to stockholders equity ratios for a sample of Northwest banking
institutions with assets of less than $150 million which sold between January 1,
1993 through December 31, 1997 and a sample of Northwest banking institutions
with total assets of less than $150 million which sold between January 1,1996
and December 29, 1997. The calculations are $46.68 and $52.98 per share,
respectively, for the December 31, 1997 stockholders equity for the two samples.
For the estimated June 30, 1998 stockholders equity, the calculations are $47.55
and $53.96, respectively. For Pioneer's 1997 net income and twelve months prior
to June 30, 1998, the calculations are $39.79 and $45.33, for the first sample
and $43.24 and $49.26 for the second sample, respectively.
Transaction Value as a Percentage of Total Assets. CFA 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 $58.98 per Pioneer share results in a transaction value as
a percentage of total assets of 20.95%. The median price as a percentage of
total assets for a sample of Northwest banking institutions with assets of
between $100 million and $250 million which sold between January 1,1993 through
December 31, 1997 and a sample of Northwest banking institutions with total
assets of between $100 million and $250 million which sold between January 1,
1996 and December 31, 1997 was 18% and 19.6%, respectively
Investment Value is sometimes referred to as the income or earnings
value. One investment value method frequently 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 Pioneer's estimates of
future growth and an appropriate capitalization or discount rate. CFA's
calculations were based on an analysis of the banking industry, Pioneer's
earnings estimates for 1998-2002, historical levels of growth and earnings, and
the competitive situation in Pioneer's market area. Using discount rates of 16%,
and 18%, acceptable discount rates considering the risk-return relationship most
investors would demand for an investment of this type as of the valuation date,
the "Net Present Value of Future Earnings" provided a range of $43.72 to $40.68
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
CFA's opinion that the proposed transaction is fair, from a financial point of
view to the Pioneer shareholders.
According to the terms of the Engagement Letter, Pioneer has agreed to
pay CFA a fee for representing Pioneer as its exclusive financial advisor, and
for this fairness opinion. The amount of the fee is based on a percentage of the
purchase price up to $18,000,000, and a greater percentage applied to the price
above $18,000,000. In addition Pioneer has agreed to reimburse CFA for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel, and to indemnify CFA against certain liabilities.
Recommendation of the Pioneer Board
THE PIONEER BOARD UNANIMOUSLY RECOMMENDS THAT THE PIONEER SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE PIONEER MERGER AGREEMENT.
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THE MERGER(S)
General
The following description of the material terms of the Mergers is
qualified in its entirety by reference to the applicable Merger Agreement. All
Pacific and Pioneer shareholders are urged to read the Merger Agreement
applicable to them carefully. Pacific and Pioneer shareholders are being asked
to approve their respective Merger and Merger Agreement in accordance with the
terms of such Merger Agreement.
Basic Terms of the Merger(s)
Pacific. Under the terms of the Pacific Merger Agreement, New Bank will
merge into Pacific, with Pacific as the surviving wholly-owned subsidiary of
InterWest. New Bank would cease to exist. As a result, Pacific shareholders,
other than those who duly exercise dissenters' rights, would become shareholders
of InterWest. See " - Dissenters' Rights of Appraisal - Pacific."
In the Pacific Merger, each share of Pacific Common Stock outstanding
prior to the Pacific Effective Date (other than Dissenting Shares) will be
converted into the right to receive 3.95 shares of InterWest Common Stock (the
"Pacific Exchange Ratio"). Each share of New Bank Stock outstanding prior to the
Pacific Effective Date will be converted into one share of the surviving
corporation (i.e., Pacific). If the Pacific Merger has not closed by June 30,
1998, the Pacific Exchange Ratio will be adjusted so that holders of Pacific
Common Stock will receive additional shares of InterWest Common Stock for their
shares of Pacific Common Stock. The number of additional shares will be
calculated by adding to the Pacific Exchange Ratio the number obtained by (A)
dividing Pacific's undistributed GAAP net income for the period between June 30,
1998 and the Pacific Effective Date by the Average Closing Price of InterWest
Common Stock, and (B) dividing the quotient so obtained by 395,963. The "Average
Closing Price" is defined in the Pacific Merger Agreement as the average
(rounded to the nearest penny) of the closing bid and ask prices per share of
InterWest Common Stock for the ten consecutive trading days beginning on and
including the twentieth day immediately preceding the Pacific Effective Date.
For example, if Pacific's GAAP net income between June 30, 1998 and the
Pacific Effective Date is $70,000, then the number of shares of InterWest Common
Stock to be issued in exchange for each share of Pacific Common Stock, assuming
an Average Closing Price of $40.00, will be 3.954 (rather than the original
Exchange Ratio of 3.95), calculated as follows:
(A) Net Income: $70,000 = $1,750
---------------------------------
Average Closing Price: $40
(B) $1,750 = 0.004
---------
395,963
3.95 + 0.004 = 3.954
The Pacific Merger will close and become effective on the Pacific
Effective Date (as described in the Pacific Merger Agreement, within five
business days after the fulfillment or waiver of each condition set forth in the
Pacific Merger Agreement), unless extended by the parties. Closing is
anticipated by the end of May, 1998. If closing does not occur before September
30, 1998, either Pacific or InterWest may terminate the Pacific Merger
Agreement. If the Average Closing Price of InterWest Common Stock is below
$35.00, either Pacific or InterWest may terminate the Pacific Merger Agreement.
See " - Conditions to the Merger(s)."
InterWest will not issue certificates for fractional shares of
InterWest Common Stock. Each Pacific shareholder who is otherwise entitled to
receive a fractional share, will receive cash in lieu thereof in an amount
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equal to the product of such fraction multiplied by the Average Closing Price of
InterWest Common Stock, and such Pacific shareholder will have no other rights
with respect to such fractional shares or other shares.
Pioneer. Under the terms of the Pioneer Merger Agreement, Pioneer will
merge into InterWest, with InterWest being the surviving entity and Pioneer Bank
will become a wholly-owned subsidiary of InterWest. Pioneer would cease to
exist. As a result of the Pioneer Merger, Pioneer shareholders, other than those
who duly exercise dissenters' rights, will become shareholders of InterWest. See
"--Dissenters' Rights of Appraisal--Pioneer."
In the Pioneer Merger, each share of Pioneer outstanding prior to the
Pioneer Effective Date (other than Dissenting Shares) will be converted into
shares of InterWest Common Stock at the Pioneer Exchange Ratio, which is based
on the Average Closing Price of InterWest Common Stock. The precise number of
shares of InterWest Common Stock to be issued in exchange for each shares of
Pioneer Common Stock will be calculated by dividing $58.98 by the Valuation
Price (the quotient, as adjusted, if applicable, is the "Pioneer Exchange
Ratio").
The term "Valuation Price" is defined in the Pioneer Merger Agreement.
"Valuation Price" means the price equal to the average (rounded to four
decimals) of the closing bid and ask prices per share of InterWest Common Stock
for the ten consecutive trading days beginning on and including the twentieth
day immediately preceding the Pioneer Merger Effective Date, except that if such
average is less than or equal to $36.00, then the Valuation Price will be
$36.00, and if such average is equal to or more than $44.00, the Valuation Price
will be $44.00. Accordingly, the Pioneer Exchange Ratio will be between 1.34 and
1.64, depending on the Valuation Price.
If the Pioneer Merger does not close prior to the June date established
by InterWest for determining the InterWest shareholders of record who are
entitled to receive InterWest's quarterly cash dividend, the Pioneer Exchange
Ratio will be increased so that holders of Pioneer Common Stock will receive
additional shares of InterWest Common Stock for their shares of Pioneer Common
Stock. The number of additional shares will be calculated by adding to the
Pioneer Exchange Ratio the "Adjustment Factor". The Adjustment Factor is defined
in the Pioneer Merger Agreement and calculated as follows: The average of
Pioneer's monthly GAAP net income for the first six months of 1998 will be
multiplied by either one or a fraction (whichever is greater), the numerator of
which is the number of days elapsed during the period beginning on July 1, 1998
and ending on the Pioneer Effective Date, and the denominator of which is 30.
The product so obtained will be divided by the Average Closing Price. The
quotient thus obtained will be divided by 344,699.
For example, if Pioneer's net income for the first six months of 1998
is $500,000, and the Pioneer Effective Date is July 6, 1998, then the Adjustment
Factor will be 0.0362 based on an Average Closing Price of $40. Holders of
Pioneer Common Stock (other than Dissenting Shares) will accordingly receive
1.51 shares of InterWest Common Stock for each share of Pioneer Common Stock
held, as calculated below:
$500,000 x 1* = $12,500
----------------
$40
$12,500 = 0.0362 Adjustment Factor
-------
344,699
Based on $40 Average Closing Price, the Pioneer Exchange Ratio (unadjusted)
would be 1.47.**
1.47 + 0.0362 = 1.51 Exchange Ratio (as adjusted)
- ----------
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* Based on an Pioneer Effective Date of July 6, the number of days
elapsed between the Pioneer Effective Date and July 1, 1998 is 5. The
fraction to be calculated is thus 5/30 (i.e., 1/6), which is less than
1. Accordingly, the number 1 is used for this calculation.
** The Exchange Ratio is calculated by dividing $58.98 by the Average
Closing Price.
On ________________, 1998, the most recent date for which it was
practicable to obtain information prior to the printing of this Prospectus/Joint
Proxy Statement, the closing price per share of InterWest Common Stock, as
reported on the NASDAQ national market, was $___. By way of example only, if the
Average Closing Price was also $____, each share of Pioneer Common Stock would
be converted into ___ shares of InterWest Common Stock, which would have a
value, based on such Average Closing Price, of $58.98.
The Pioneer Merger will close and become effective on the Pioneer
Effective Date (as described in the Pioneer Merger Agreement. Closing is
anticipated to occur around June of 1998. If closing does not occur by September
30, 1998, and the delay is not attributable to certain factors specified in the
Pioneer Merger Agreement, Pioneer or InterWest, depending on the circumstances,
may terminate the Pioneer Merger Agreement. See " - Conditions to the
Merger(s)."
InterWest will not issue certificates for fractional shares of
InterWest Common Stock. Each Pioneer shareholder who is otherwise entitled to
receive a fractional share, will receive cash in lieu thereof in an amount
determined by multiplying such fraction by the Average Closing Price and will
have no other rights with respect to such fractional interest.
Exchange of Stock Certificates
On and after the Pacific Effective Date, certificates representing
Pacific Common Stock and Pioneer Common Stock will be deemed to represent only
the right to receive InterWest Common Stock or cash as provided in the Merger
Agreements. Upon surrender to the Exchange Agent designated by InterWest,
Pacific and Pioneer, of certificates that, before the Pioneer Effective Date,
represented shares of Pacific Common Stock or Pioneer Common Stock, together
with a properly executed transmittal letter form and any other required
documents, the holder surrendering the certificates will be entitled to receive
certificates representing the number of shares of InterWest Common Stock, and
cash, if any, to which he or she is entitled in accordance with the terms of the
Pacific or Pioneer Merger Agreement, as the case may be. DO NOT SEND IN YOUR
CERTIFICATES AT THIS TIME. Pacific and Pioneer shareholders will receive written
instructions and the required letter of transmittal after the respective Merger
is effective.
All InterWest Common Stock issued pursuant to the Merger Agreements
will be deemed issued as of the Pacific or Pioneer Effective Date, as the case
may be. No distributions or dividends paid upon shares of InterWest Common Stock
after the consummation of the Merger(s) will be paid to holders of Pacific
Common Stock or Pioneer Common Stock who are entitled under the respective
Merger Agreement to receive InterWest Common Stock until such holders have
surrendered the certificates formerly representing shares of Pacific Common
Stock or Pioneer Common Stock, at which time any accumulated dividends and
distributions since the Pacific or Pioneer Effective Date, without interest,
will be paid.
Employee Benefit Plans
The Merger Agreements confirm InterWest's intention to allow the
Pacific and Pioneer Bank employees who continue as employees of
InterWest/Pacific/Pioneer Bank, as applicable, after the Merger(s) to
participate in plans similar to certain InterWest and InterWest Bank employee
benefit plans. Pacific's and Pioneer's employee benefit plans will be terminated
as soon as practicable after the Merger(s), and the employee interests in those
plans will be transferred to or merged into InterWest's employee benefit plans.
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Mechanics of the Merger(s)
On the Pacific or Pioneer Effective Date, as the case may be, all
business, assets, and liabilities formerly carried on or owned by New Bank will
be transferred and vested in Pacific, and all business, assets, and liabilities
formerly carried on or owned by Pioneer will be transferred to and vested in
InterWest. At the consummation of the Pacific Merger, New Bank will cease to
have a corporate existence separate from Pacific and Pacific will become a
wholly-owned subsidiary of InterWest. At the consummation of the Pioneer Merger,
Pioneer will cease to have a corporate existence separate from InterWest and
Pioneer Bank will become a wholly-owned subsidiary of InterWest.
Conduct Pending Consummation of the Merger(s)
The Merger Agreements provide that, until the Merger(s) are effective,
Pacific will, and Pioneer will, and will cause Pioneer Bank to, conduct their
respective businesses only in the ordinary and usual course, and use all
reasonable efforts to preserve their respective present business organization,
retain the services of their present management, and preserve the goodwill of
all parties with whom they have business dealings. The Merger Agreements also
provide that, unless InterWest otherwise consents in writing, Pacific and
Pioneer will refrain from engaging in various activities such as effecting any
stock split or other recapitalization, disposing of assets or making material
commitments, acquiring real property without conducting an environmental
evaluation, and entering into transactions or incurring any expenses that are
not in the ordinary course of business.
Conditions to the Merger(s)
Consummation of each Merger is subject to various conditions. No
assurance can be provided as to whether these conditions will be satisfied or
waived by the appropriate party. Accordingly, there can be no assurance that
either Merger will be completed. In the event that conditions to the Pacific
Merger remain unsatisfied and the Pacific Merger has not been effected on or
before September 30, 1998, the Pacific Merger Agreement may be terminated by
either party to the Pacific Merger Agreement. In the event the conditions to the
Pioneer Merger remain unsatisfied and the Pioneer Merger has not been effected
on or before September 30, 1998, the Pioneer Merger Agreement may be terminated,
subject to certain limitations, by either party to the Pioneer Merger Agreement.
The Pacific and Pioneer Merger(s) can occur only if the holders of the
shares of Pacific Common Stock and Pioneer Common Stock approve the respective
transaction(s). The Pioneer Merger can occur only if the holders of the shares
of Pioneer Common Stock approve the transaction. In accordance with Pacific's
and Pioneer's Articles of Incorporation and Washington law, approval of the
Pacific Merger and the Pioneer Merger requires the affirmative vote by the
holders of a two-thirds (2/3) of all shares outstanding of Pacific Common Stock
and Pioneer Common Stock, respectively. In addition, approval of each Merger (or
confirmation that it will not exercise authority) is required from the FRB for
both Mergers and from the FDIC and the Washington Director for the Pacific
Merger.
Certain conditions must be satisfied or events must occur before the
parties will be obligated to complete the Merger(s). Each party's obligations
under each Merger Agreement are conditioned on satisfaction of certain
conditions. Some of these conditions are as follows: (a) each party's Board and
the shareholders of New Bank, Pacific and Pioneer have approved the respective
Merger(s); (b) all appropriate regulatory agencies have approved the Merger(s);
(c) no action or proceeding has been commenced or is threatened by any court or
agency of competent jurisdiction that enjoins or prohibits consummation of any
of the transactions required under the Merger(s) (d) the Commission has declared
the effectiveness of the Registration Statement for the shares of InterWest
Common Stock to be issued in the Merger(s); (e) InterWest shall have received
all state securities laws and "blue sky" permits necessary to consummate the
Merger(s); (f) the parties have provided one another with the counsel, tax,
accounting treatment, and fairness opinions required by the respective Merger
Agreements; (g) the shares of InterWest Common Stock to be issued pursuant to
the Merger Agreement(s) will have been
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approved for listing on the National Market; (h) the representations and
warranties of each party are true in all material respects (as of Closing), and
each party has complied with its covenants in the Merger Agreement; (i) no
Adverse Change has occurred with respect to any party; (j) not more than ten
percent (10%) of the Pacific Common Stock and the Pioneer Common Stock will be
Dissenting Shares at Closing (k) Pacific and Pioneer have met certain financial
condition and allowance for loan and lease loss requirements; and (l) in the
case of Pacific, certain employment agreements have been executed and the key
man life insurance policy for Patrick M. Fahey has been purchased by Mr. Fahey.
As a condition to the execution of the Merger Agreements, each member
of the Board of Pacific and Pioneer has executed a Director Non-Competition
Agreement with InterWest. The Director Non-Competition Agreement prohibits the
directors from competing with InterWest or any of its subsidiaries for two years
from the Pioneer Effective Date within Washington State in the case of Pacific
Directors, and for a period of three years from the Pacific Effective Date
within Yakima and/or Benton Counties in Washington State in the case of Pioneer
Directors. Director Non-Competition Agreements generally provide acquiring
companies with added assurance that the value of the target company will be
preserved after closing of the merger transaction.
Either InterWest or Pacific, or InterWest or Pioneer, may waive the
other party's conditions, except those that are required by law (such as receipt
of regulatory and shareholder approval). Either InterWest or Pacific, or
InterWest or Pioneer, may also grant extended time to the other party to perform
an obligation or satisfy a condition.
Pacific and Pioneer Stock Option Agreements
Pacific Stock Option Agreement. As an inducement to InterWest to enter
into the Pacific Merger Agreement, Pacific has granted an option (the "Pacific
Option") to InterWest, by agreement dated January 15, 1998, to purchase
authorized but unissued shares of Pacific Common Stock, which if issued, would
constitute 19.9% of the outstanding Pacific Common Stock, at a price equal to
$85 per share. InterWest may only exercise its option upon (i) the occurrence of
certain events set forth in the Pacific Option, and (ii) obtaining any
regulatory approvals necessary for the acquisition of the Pacific Common Stock
subject to the Pacific Option; additionally InterWest must have performed its
obligations under the Pacific Merger Agreement. InterWest may transfer the
Pacific Option only if an event occurs triggering InterWest's right to exercise
the option. The Pacific Option is attached to this Prospectus/Joint Proxy
Statement as Appendix C.
Pioneer Stock Option Agreement. As an inducement to InterWest to enter
into the Pioneer Merger Agreement, Pioneer has granted an option (the "Pioneer
Option") to InterWest, by agreement dated February 4, 1998, to purchase
authorized but unissued shares of Pioneer Common Stock, which if issued, would
constitute 19.9% of the outstanding Pioneer Common Stock, at a price equal to
$39.35 per share. InterWest may only exercise its option upon (i) the occurrence
of certain events set forth in the Pioneer Option, and (ii) obtaining any
regulatory approvals necessary for the acquisition of the Pioneer Common Stock
subject to the Pioneer Option; additionally InterWest must have performed its
obligations under the Pioneer Merger Agreement. InterWest may transfer the
Pioneer Option only if an event occurs triggering InterWest's right to exercise
the option. The Pioneer Option is attached to this Prospectus/Joint Proxy
Statement as Appendix D.
Termination or Amendment of the Merger Agreement(s)
The Merger Agreement(s) may be terminated, and the Merger(s) abandoned,
before the Pacific or Pioneer Effective Date, as the case may be, whether before
or after adoption by the shareholders of New Bank, Pacific or Pioneer, by the
respective majority votes of the InterWest, New Bank and Pacific Boards for the
Pacific Merger, or by the InterWest or Pioneer Boards for the Pioneer Merger,
under certain specified circumstances, including a failure to consummate the
Merger(s) by September 30, 1998. The Pioneer Board may abandon the Pioneer
Merger without any conditions if it is not consummated before December 31, 1998.
In
35
<PAGE>
addition, InterWest or Pacific may terminate the Pacific Merger Agreement if
the Average Closing Price of InterWest Common Stock is lower than $35.00.
The Merger Agreements may be amended or supplemented at any time by
written agreement of InterWest and Pacific for the Pacific Merger Agreement and
by InterWest and Pioneer for the Pioneer Merger Agreement, whether before or
after the shareholder approval. To the extent permitted under applicable law,
the parties may make any amendment or supplement without further approval of
Pacific's or Pioneer's shareholders, as the case may be, except amendments that
would reduce the amount of or change the form of consideration that the
shareholders of Pacific or Pioneer, as the case may be, will receive in the
respective Merger transactions. See "THE MERGER -- Amendment or Termination."
Interests of Certain Persons in the Merger(s)
Certain members of the Pacific and Pioneer Boards and management may be
deemed to have interests in the Merger, in addition to their interests as
shareholders of Pacific and Pioneer. The Pacific and Pioneer Boards were aware
of these factors and considered them, among other matters, in approving the
Merger Agreements and the transactions contemplated thereby.
Employment/Severance Agreements. Pacific has entered into employment
agreements with Messrs. Fahey, Straus, Budd and Brace, and Ms. Brace, officers
of Pacific. The employment agreement with Mr. Fahey, to which InterWest is also
a party, provides that Mr. Fahey, who currently serves as the President and
Chief Executive Officer of Pacific, will continue in such capacity, and that he
will also be Vice Chairman/Commercial Banking of InterWest and serve on the
InterWest Executive Management Team. The agreement has a term of three years,
beginning on the Pacific Effective Date of the Pacific Merger, and provides for
an annual salary of $275,000. The employment agreement between Pacific and Mr.
Straus, the Senior Vice President and Chief Credit Officer, has a three year
term and provides for an annual salary of $140,000. The employment agreements
between Pacific and Messrs. Brace and Budd and Ms. Brace, all of whom are Senior
Vice Presidents and who also hold the respective positions of Manager of the
Bellevue Financial Center, Manager of the Seattle Financial Center, and Manager
of Administrative Services, have three year terms and provide for an annual
salary to each officer of $125,000. All of the Pacific employment agreements
provide for payment to the officer of his or her respective W-2 income (before
salary deferrals) for the 12-month period preceding termination of their
respective employment if: (i) InterWest terminates employment without cause or
the officer terminates his or her employment for good reason, (ii) employment
terminates (for any reason) in connection with a change in control of InterWest,
or (iii) the officer elects to terminate his or her employment during the period
commencing on the 25th month of the employment term and ending on the 30th month
of the term.
Pioneer Bank has entered into employment agreements with Messrs.
Campbell, Kiser, Losee, and Lindberg, officers of Pioneer Bank. Mr. Campbell,
who is the President and Chief Executive Officer of Pioneer Bank, will continue
in such capacity until March 31, 1999, after which time his position may be
modified by InterWest. Mr. Campbell's agreement terminates on March 31, 2000,
and provides an annual salary of $125,000. If Mr. Campbell's employment is
terminated as a result of his death or disability prior to March 31, 1999, he or
his estate will receive payment in an amount equal to Mr. Campbell's 1998 annual
salary. If his employment is terminated for death or disability after March 31,
1999, Mr. Campbell or his estate will receive the balance of the salary he would
have received for the remainder of the agreement term. Mr. Kiser, the Chief
Financial Officer of Pioneer Bank, has entered into a two-year employment
agreement providing an annual salary of $74,000. In the event of a change in
control of InterWest, Mr. Kiser will receive a severance payment equal to his
annual salary. Messrs. Losee and Lindberg, each of whom are Senior Vice
Presidents of Pioneer Bank, have two-year employment agreements providing an
annual salary of, respectively, $85,000 and $73,820. If Mr. Losee's employment
terminates in connection with a change in control of InterWest, he will receive
a severance payment equal to one-half of his annual salary then in effect.
36
<PAGE>
Appointment to the InterWest Board. In connection with the Pacific
Merger, InterWest has agreed to appoint Mr. Fahey, currently the Chairman of the
Pacific Board, to the InterWest Board, where he will also serve on the Board's
Executive Committee. Directors of InterWest receive an annual retainer of
$8,000, or, at their election, options for InterWest Common Stock in an
equivalent amount under InterWest's director stock option plan.
Indemnification. For a period of four years from and after the Pacific
Effective Date of the Pacific Merger and for a period of six years from and
after the Pioneer Effective Date of the Pioneer Merger, InterWest will
indemnify, defend and hold harmless the present and former directors and
officers of Pacific, and the present and former directors, officers and
employees of Pioneer 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 Pacific or Pioneer Effective Date, as the case may
be, to the fullest extent that Pacific or Pioneer, respectively, would have been
permitted under Washington law and their respective Articles of Incorporation or
Bylaws in effect on the date of the Merger Agreement(s). In the case of the
Pioneer Merger, InterWest will also use reasonable efforts to provide directors'
and officers' liability insurance covering Indemnified Parties for a period of
three years after the Pioneer Merger Effective Date. The coverage will not be
materially less favorable to the Indemnified Parties than that provided to
similarly situated persons under InterWest's existing liability insurance
policies, but annual premium payments are not to exceed 150% of the annual
premiums presently paid by Pioneer for such insurance.
Federal Income Tax Treatment of the Merger(s)
The Merger(s) are intended to qualify as a tax-free reorganization
under Section 368(a) of the Code for federal income tax purposes. InterWest,
Pacific and Pioneer, as the case may be, will receive at Closing an opinion from
Graham & Dunn that the Merger(s) constitute tax-free reorganization(s) for
federal tax purposes. Such opinion will not bind the Internal Revenue Service or
preclude the Internal Revenue Service from adopting a contrary position. The
opinion is based upon facts and assumptions and representations and assurances
made by InterWest, Pacific and Pioneer, as the case may be. The Federal income
tax discussion set forth below may not apply to particular categories of holders
of Pacific or Pioneer Common Stock subject to special treatment under the
federal income tax laws, such as foreign holders or holders whose stock may have
been acquired as compensation. In addition, there may be relevant state, local
or other tax consequences, none of which are described below. Stockholders are
urged to consult their advisors to determine the specific personal tax
consequences of the Merger, including the applicability and effect of foreign,
state, local, and other tax laws.
The Graham & Dunn opinion will state that:
1. The merger of New Bank with and into Pacific and the merger of
Pioneer with and into InterWest will constitute tax-free
reorganizations.
2. No gain or loss will be recognized by InterWest, Pacific or
Pioneer as a result of the Merger(s).
3. The tax basis and holding period for the Pioneer assets that
are received by InterWest in the Merger(s) and the New Bank
assets received by Pacific will be the same as the tax basis
and holding period of the assets held immediately before the
exchange by Pacific and Pioneer, respectively.
4. No gain or loss will be recognized by holders of Pacific
Common Stock or Pioneer Common Stock upon the receipt of
InterWest Common Stock in exchange for Pacific Common Stock or
Pioneer Common Stock pursuant to the Merger(s).
37
<PAGE>
5. The tax basis of the InterWest Common Stock received in the
Merger(s)s by Pacific and Pioneer shareholders will be the
same as the tax basis of the shares of Pacific Common Stock or
Pioneer Common Stock surrendered in the exchange, reduced by
any basis allocable to a fractional share interest in the
InterWest Common Stock for which cash is received. The holding
period for the shares of InterWest Common Stock received in
the Merger(s) will include the holding period of Pacific and
Pioneer shares exchanged, provided that Pacific and Pioneer
shares were held as capital assets at the time of the
Merger(s).
6. Gain or loss will be recognized by Pacific or Pioneer
shareholders who receive cash in lieu of fractional shares of
InterWest Common Stock, or who exercise dissenters' rights and
receive cash for their shares. The amount of such gain or loss
will be the difference between the cash received and the basis
of the shares or fractional share interests surrendered in the
exchange. Such gain or loss will be a capital gain or loss
provided that the shares of Pacific or Pioneer Common Stock
surrendered were capital assets at the time of surrender, and
will be long-term capital gain or loss if such shares of
Pacific or Pioneer Common Stock have been held for more than
one year.
Accounting Treatment of the Merger(s)
Consummation of the Pacific Merger is conditioned upon receipt by
InterWest of a letter from Ernst & Young LLP to the effect that the Pacific
Merger will qualify for "pooling of interests" accounting treatment if
consummated in accordance with the terms of the Pacific Merger Agreement.
Consummation of the Pioneer Merger is conditioned upon receipt by InterWest of a
letter from Moss Adams, LLP to the effect that neither Pioneer nor Pioneer Bank
nor any of their respective shareholders, directors or officers shall have taken
any action that would disqualify the Pioneer Merger from qualifying for pooling
of interests accounting treatment. Under the pooling of interests method of
accounting, the historical basis of the assets and liabilities of InterWest,
Pacific and Pioneer will be combined at the Pacific or Pioneer Effective Date,
as the case may be, and carried forward at their previously recorded amounts,
and the stockholders' equity accounts of InterWest, Pacific and Pioneer will be
combined on InterWest's consolidated balance sheet. Income and other financial
statements of InterWest issued after consummation of the Merger(s) will be
restated retroactively to reflect the consolidated operations of InterWest,
Pacific and Pioneer as if the Merger(s) had taken place prior to the periods
covered by such financial statements. There is no recognition of goodwill from
the Merger(s) under the pooling of interests accounting method.
The pro forma combined financial information contained in this
Prospectus/Joint Proxy Statement has been prepared using the pooling of
interests accounting method to account for the Merger(s). See "PRO FORMA
COMBINED FINANCIAL STATEMENTS," including the related Notes.
Dissenters' Rights of Appraisal
Pacific. Under Washington banking law, shareholders of Pacific have the
right to dissent from the Pacific Merger, and, assuming the proper approval of
the Pacific Merger Agreement, to receive the "value" of their shares in cash by
complying with the provisions of RCW 30.49.090, a copy of which is attached as
Appendix G hereto. The following summary of dissenter's rights, and the
procedure for exercising such rights, is qualified in its entirety by reference
to these statutes set forth in Appendix G.
Any Pacific shareholder desiring to dissent and receive payment for the
"value" of his or her shares must vote against the Pacific Merger. The
dissenting shareholder must also make written demand to Pacific as the resulting
bank within thirty (30) days after the Pacific Effective Date. The shareholder's
demand must be accompanied by the surrender of his or her stock certificates.
Pacific shareholders will not receive further notification of the last date by
which such written demand must be made. Merely voting against the Pacific Merger
is not sufficient statutory notice of a shareholder's desire to dissent, and,
furthermore, the failure of a shareholder to vote against the resolution will
constitute a waiver of dissenters' rights.
38
<PAGE>
Any dissenting shareholder who complies with the statutory requirements
will have the right to be paid the appraised value of his or her Pacific Common
Stock, ascertained as of the date of the Pacific Special Meeting. The appraised
value will be determined by three appraisers, as follows: One appraiser will be
selected by the owners of two-thirds of the dissenting shares, one by the Board
of Directors of Pacific as the resulting bank, and the third by the two so
chosen. The valuation agreed upon by any two appraisers will govern. The
dissenting shareholders will bear, on a pro rata basis based on the number or
dissenting shares owned, the cost of the appraisal performed by their appraiser
and one-half of the cost of the third appraisal. Pacific will bear the cost of
the appraisal performed by its appraiser and one-half of the cost of the third
appraisal. If the appraisal is not completed within ninety (90) days after the
Pacific Effective Date, the Washington Director will cause an appraisal to be
made which shall be final and binding on all parties. In such case, the cost of
the Washington Director's appraisal will be borne equally by dissenting
shareholders and Pacific, with the dissenting shareholders to share their half
of the cost on a pro rata basis based on the number of dissenting shares owned.
Pioneer. Under Washington corporate law (RCW 23B.13), a shareholder of
Pioneer may exercise "dissenters' rights" and receive the fair value of his or
her shares in cash, if certain procedures are followed. To exercise these
rights, a Pioneer shareholder must (i) deliver to Pioneer, before the vote on
approval of the Pioneer Merger is taken, written notice of intent to demand
payment for his or her shares if the Pioneer Merger is effected, and (ii) not
vote in favor of the Pioneer Merger. Following consummation of the Pioneer
Merger, InterWest will send a Dissenters' Notice to each Pioneer shareholder who
has properly perfected his or her dissenters' rights. A dissenting shareholder
must also follow the procedures set forth in the Dissenters' Notice. The
Dissenters' Notice will include instructions to completing the exercise of
dissenters' rights, including that the dissenting shareholder must (1) make
written demand for payment of the fair value of his or her shares in the form
sent to the shareholder by Pioneer along with the Dissenters' Notice (this
notice will prescribe a time period within which the demand must be made), (2)
certify that beneficial ownership of his or her Pioneer Common Stock shares was
acquired before the date set forth in the Dissenters' Notice, and (3) surrender
his or her stock certificates representing shares of the Pioneer Common Stock in
accordance with the Dissenters' Notice. A shareholder who exercises and perfects
dissenters' rights is entitled to receive the fair value of his or her shares in
cash. Such value may be higher or lower than the value of InterWest Common Stock
issuable pursuant to the Pioneer Merger Agreement.
A vote against the Pioneer Merger will not in and of itself satisfy the
requirements of the Washington statute; a shareholder who does not deliver to
Pioneer prior to the Pioneer Special Meeting a written notice of the
shareholder's intent to demand payment for the fair value of the shares of
Pioneer Common Stock held will lose the right to exercise dissenters' rights. In
addition, any shareholder electing to exercise dissenters' right must either
vote against the Pioneer Merger or abstain from voting. The failure of a
shareholder of Pioneer to comply strictly with the statutory requirements will
result in a loss of dissenters' rights. A copy of the relevant statutory
provisions is attached as Appendix H and Pioneer shareholders are urged to refer
to this Appendix for a complete statement concerning dissenters' rights. The
foregoing summary of such rights is qualified in its entirety by reference to
such Appendix H.
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the shares the shareholder owns or over which the
shareholder has power to direct the vote. However, if a record shareholder is a
nominee for several beneficial shareholders some of whom wish to dissent and
some of whom do not, then the record holder may dissent with respect to all the
shares beneficially owned by any one person by notifying InterWest in writing of
the name and address of each person on whose behalf the record shareholder
asserts dissenters' rights. A beneficial shareholder may assert dissenters'
rights directly by submitting to InterWest the record shareholder's written
consent and by dissenting with respect to all the shares of which such
shareholder is the beneficial shareholder or over which such shareholder has
power to direct the vote. Any record or beneficial shareholder to whom the
foregoing discussion may apply should carefully review the provisions of RCW
23B.13.030.
39
<PAGE>
Resales of Stock Received in the Merger(s) by Pacific and Pioneer Affiliates
The InterWest Common Stock to be issued in the Merger(s) will be
transferable free of restrictions under the Securities Act, except for shares
received by persons, including directors and executive officers of Pacific and
Pioneer, who may be deemed to be "affiliates" of Pacific or Pioneer, as that
term is used in (i) paragraphs (c) and (d) of Rule 145 under the Securities Act
and/or (ii) Accounting Series Releases 130 and 135, as amended, of the
Commission. Affiliates may not sell their shares of InterWest Common Stock
acquired pursuant to the Merger(s), except (a) pursuant to an effective
registration statement under the Securities Act covering those shares, (b) in
compliance with Rule 145, or (c) in the opinion of counsel reasonably
satisfactory to InterWest, pursuant to other applicable exemptions from the
registration requirements of the Securities Act. Commission 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 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 merger and ending when financial results
covering at least 30 days of post-merger operations of the combined organization
have been published. InterWest has obtained customary agreements with all
directors, officers, and affiliates of Pacific and Pioneer, under the terms of
which such persons have represented that they will not dispose of their shares
of InterWest received in the Merger or the shares of capital stock of Pacific,
Pioneer or InterWest held by them before the Merger, except (i) in compliance
with the Securities 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(s) as a pooling of interests for financial reporting purposes.
This Prospectus/Joint Proxy Statement does not cover any resales of the
InterWest Common Stock received by affiliates of Pacific or Pioneer.
No Solicitation
Pacific and Pioneer have agreed in the respective Merger Agreement(s)
that, except as required by law, neither Pacific nor any of its officers or
directors, nor Pioneer nor any of its officers or directors will (i) solicit,
encourage, entertain or facilitate any other proposals or inquiries for an
acquisition of the shares or assets of Pacific or Pioneer or any subsidiaries
(an "Acquisition Proposal"), (ii) enter into discussions concerning any such
acquisition, or (iii) furnish any nonpublic information relating to InterWest's
business or organization to any person that is not affiliated with Pacific,
Pioneer or InterWest.
If (i) there is an Acquisition Proposal prior to the Pacific
Shareholder vote on the Pacific Merger or the Pioneer Shareholder vote on the
Pioneer Merger, (ii) the Merger(s) are not approved by two-thirds of the
outstanding shares of Pacific and Pioneer Common Stock at the Special
Meeting(s); and (iii) prior to June 30, 1999 either Pacific or Pioneer is
acquired by a third party, then unless the representations and warranties of
InterWest in the Merger Agreement(s) were false in any material respect as of
the date of the Special Meeting(s) or InterWest was in material default of its
covenants in the Agreement(s) as of such date, Pacific and/or Pioneer, as the
case may be, must promptly pay InterWest $250,000 and $300,000, respectively.
Expenses
InterWest, Pacific and Pioneer will each pay their own expenses in
connection with the Merger Agreements and the transactions contemplated thereby,
except that printing expenses for this Prospectus/Joint Proxy Statement will be
shared by all parties.
40
<PAGE>
PRO FORMA COMBINED UNAUDITED FINANCIAL STATEMENTS
The following pro forma combined unaudited financial statements give
effect to the Merger(s) of InterWest and Pacific and Pioneer on a pooling of
interests basis. The unaudited pro forma combined balance sheets are presented
on the basis that the Merger(s) took place on December 31, 1997. The unaudited
condensed pro forma combined statements of income are presented on the basis
that the Merger(s) were consummated as of the beginning of the first period
presented.
Puget Sound Bancorp was merged into InterWest on January 15, 1998.
Prior period financial statements for InterWest have not been restated to
reflect combined accounts of Puget Sound Bancorp, as the merger was not material
to the financial position or results of operations of InterWest. The pro formas,
unaudited financial statements included in this document include the accounts of
Puget Sound Bancorp.
These pro forma combined unaudited financial statements should be read
in conjunction with the historical financial statements and the related notes
thereto for InterWest, Pacific and Pioneer included or incorporated into this
Prospectus/Joint Proxy Statement by reference. See "AVAILABLE INFORMATION,"
"INFORMATION INCORPORATED BY REFERENCE" and the InterWest 1997 10-K, the
InterWest December 31, 1997 10-Q and the InterWest 1998 Proxy.
The pro forma unaudited statements of operations are not necessarily
indicative of operating results which would have been achieved had the Merger(s)
been consummated as of the beginning of the first period presented and should
not be construed as representative of future results.
41
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF FINANCIAL CONDITION
December 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands) Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents
Non-interest bearing ................... $ 46,191 $ 2,127 $ 14,783 $ 63,101
Interest-bearing deposits in banks ..... 400 5,135 5,535 1,792
Federal funds sold ....................... 11,425 11,425 11,425
Securities available for sale ............ 582,469 5,426 17,063 604,958
Securities held to maturity .............. 96,515 4,775 6,172 107,462
Loans receivable, net .................... 1,136,710 38,731 133,028 1,308,469
Loans held for sale ...................... 13,970 1,900 15,870 2,369
Accrued interest receivable .............. 15,618 350 1,003 16,971
Real estate held for sale and
for development ........................ 12,830 12,830
Federal Home Loan Bank
(FHLB) stock ........................... 28,848 1,463 30,311 2,020
Premises and equipment, net .............. 42,478 1,109 3,529 47,116
Intangible assets ........................ 3,320 122 3,442 1,255
Other assets ............................. 3,368 192 1,620 5,180
----------- ----------- ----------- -----------
Total assets ............................. $ 1,982,317 $ 53,110 $ 197,243 $ 2,232,670
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Liabilities
Non-interest bearing deposits ............ $ 67,217 $ 9,044 $ 58,516 $ 134,777
Interest-bearing deposits ................ 1,087,697 36,559 107,301 1,231,557
----------- ----------- ----------- -----------
Total deposits ........................... 1,154,914 45,603 165,817 1,366,334
FHLB advances ............................ 516,571 1,200 13,500 531,271
Securities sold under agreements
to repurchase .......................... 163,290 163,290
Accrued expenses and other liabilities ... 11,508 379 1,948 13,835
Other borrowings ......................... 2,636 2,636
----------- ----------- ----------- -----------
Total liabilities ........................ 1,848,919 47,182 181,265 2,077,366
Stockholders' Equity
Common stock ............................. 1,615 78 390 2,001
Paid-in-capital .......................... 20,362 3,074 8,059 31,577
Retained earnings ........................ 113,220 2,772 7,495 123,487
Treasury stock ........................... (289) (289)
Debt related to ESOP ..................... (652) (652)
Net unrealized gain (loss) on
securities available for sale, net of tax (858) 4 34 (820)
----------- ----------- ----------- -----------
Total stockholders' equity ............... 133,398 5,928 15,978 155,304
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity ................... $ 1,982,317 $ 53,110 $ 197,243 $ 2,232,670
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Pro Forma Pro Forma
Combined Combined
InterWest InterWest,
and Pacific and
Pioneer Pioneer Pioneer
----------- ----------- ------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents
Non-interest bearing ................... $ 6,254 $ 69,355 $ 54,572
Interest-bearing deposits in banks ..... 2,192 7,327
Federal funds sold .......................
Securities available for sale ............ 30,286 618,181 635,244
Securities held to maturity .............. 1,355 102,645 108,817
Loans receivable, net .................... 57,942 1,233,383 1,366,411
Loans held for sale ...................... 16,339 18,239
Accrued interest receivable .............. 786 16,754 17,757
Real estate held for sale and
for development ........................ 12,830 12,830
Federal Home Loan Bank
(FHLB) stock ........................... 30,868 32,331
Premises and equipment, net .............. 1,403 44,990 48,519
Intangible assets ........................ 4,575 4,697
Other assets ............................. 409 3,969 5,589
----------- ----------- -----------
Total assets ............................. $ 105,871 $ 2,141,298 $ 2,338,541
----------- ----------- -----------
----------- ----------- -----------
Liabilities
Non-interest bearing deposits ............ $ 16,663 $ 92,924 $ 151,440
Interest-bearing deposits ................ 68,938 1,193,194 1,300,495
----------- ----------- -----------
Total deposits ........................... 85,601 1,286,118 1,451,935
FHLB advances ............................ 9,776 527,547 541,047
Securities sold under agreements
to repurchase ..........................
Accrued expenses and other liabilities ... 1,039 12,926 14,874
Other borrowings ......................... 415 3,051 3,051
----------- ----------- -----------
Total liabilities ........................ 96,831 1,992,932 2,174,197
Stockholders' Equity
Common stock ............................. 2,263 1,795 2,103
Paid-in-capital .......................... 320 25,917 34,058
Retained earnings ........................ 6,285 122,277 129,772
Treasury stock ........................... (289) (289)
Debt related to ESOP ..................... (652) (652)
Net unrealized gain (loss) on
securities available for sale, net of tax 172 (682) (648)
----------- ----------- -----------
Total stockholders' equity ............... 9,040 148,366 164,344
----------- ----------- -----------
Total liabilities and
stockholders' equity ................... $ 105,871 $ 2,141,298 $ 2,338,541
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to pro forma combined unaudited financial statements
42
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF OPERATIONS
Quarter ended December 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands) Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $25,173 $ 1,011 $ 3,226 $29,410
Securities available for sale .......... 10,625 71 232 10,928
Securities held to maturity ............ 1,626 64 143 1,833
Other .................................. 444 33 196 673
-------- ------ ------- -------
37,868 1,179 3,797 42,844
Interest expense
Deposits ............................... 13,073 419 1,082 14,574
FHLB advances and other borrowings ..... 7,024 20 142 7,186
Securities sold under agreements
to repurchase ........................ 3,193 3,193
-------- ------ ------- -------
23,290 439 1,224 24,953
Net interest income before provision
for losses on loans .................... 14,578 740 2,573 17,891
Provision for losses on loans .......... 200 19 3 222
-------- ------ ------- -------
Net interest income after provision
for losses on loans .................... 14,378 721 2,570 17,669
Noninterest income
Gain on sale of loans .................. 1,585 9 157 1,751
Service fees ........................... 2,083 97 248 2,428
Insurance commissions .................. 374 374 374 374
Gain on sale of securities available
for sale ............................. 136 136
Gain on sale of real estate held for
sale and for development ............. 102 102
Other .................................. 348 9 75 432
-------- ------ ------- -------
4,628 115 480 5,223
Noninterest expense
Compensation and employee benefits ..... 5,694 300 1,046 7,040
General and administrative ............. 2,701 100 490 3,291
Occupancy .............................. 1,461 69 353 1,883
Data processing ........................ 734 33 136 903
FDIC premium assessment ................ 161 1 5 167
Loss for real estate write-downs
and operations ....................... 318 318
-------- ------ ------- -------
11,069 503 2,030 13,602
Income before income taxes ............... 7,937 333 1,020 9,290
Income tax expense ....................... 2,776 87 350 3,213
-------- ------ ------- -------
Net income ............................... $ 5,161 $ 246 $ 670 $ 6,077
-------- ------ ------- -------
-------- ------ ------- -------
Basic net income per share ............... $ 0.64 $ 1.06 $ 1.72 $ 0.61
Diluted net income per share ............. 0.63 1.04 1.64 0.59
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Pro Forma
Pro Forma Combined
Combined InterWest,
InterWest Pacific
and and
Pioneer Pioneer Pioneer
-------- ------- -------
<S> <C> <C> <C>
Interest Income
Loans receivable and loans held for sale $ 1,503 $27,687 $30,913
Securities available for sale .......... 487 11,183 11,415
Securities held to maturity ............ 17 1,707 1,850
Other .................................. 32 509 705
-------- ------- -------
2,039 41,086 44,883
Interest expense
Deposits ............................... 834 14,326 15,408
FHLB advances and other borrowings ..... 140 7,184 7,326
Securities sold under agreements
to repurchase ........................ 3,193 3,193
-------- ------- -------
974 24,703 25,927
Net interest income before provision
for losses on loans .................... 1,065 16,383 18,956
Provision for losses on loans .......... 53 272 275
-------- ------- -------
Net interest income after provision
for losses on loans .................... 1,012 16,111 18,681
Noninterest income
Gain on sale of loans .................. 456 2,050 2,207
Service fees ........................... 273 2,453 2,701
Insurance commissions .................. 374 374
Gain on sale of securities available
for sale ............................. 54 190 190
Gain on sale of real estate held for
sale and for development .............
Other .................................. 91 448 523
-------- ------- -------
874 5,617 6,097
Noninterest expense
Compensation and employee benefits ..... 764 6,758 7,804
General and administrative ............. 303 3,104 3,594
Occupancy .............................. 252 1,782 2,135
Data processing ........................ 767 903
FDIC premium assessment ................ 3 165 170
Loss for real estate write-downs
and operations ....................... 318 318
-------- ------- -------
1,322 12,894 14,924
Income before income taxes ............... 564 8,834 9,854
Income tax expense ....................... 204 3,067 3,417
-------- ------- -------
Net income ............................... $ 360 $ 5,767 $ 6,437
-------- ------- -------
-------- ------- -------
Basic net income per share ............... $ 1.03 $ 0.64 $ 0.61
Diluted net income per share ............. 0.99 0.63 0.60
</TABLE>
See notes to pro forma combined unaudited financial statements
43
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF OPERATIONS
Quarter ended December 31, 1996
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 22,181 $ 770 $ 2,591 $ 25,542
Securities available for sale .......... 6,206 102 245 6,553
Securities held to maturity ............ 4,252 64 162 4,478
Other .................................. 473 24 128 625
-------- -------- -------- ---------
33,112 960 3,126 37,198
Interest expense
Deposits ............................... 12,517 372 989 13,878
FHLB advances and other borrowings ..... 4,600 2 1 4,603
Securities sold under agreements
to repurchase ........................ 1,952 1,952
-------- -------- -------- ---------
19,069 374 990 20,433
Net interest income before provision
for losses on loans .................... 14,043 586 2,136 16,765
Provision for losses on loans .......... 300 16 33 349
-------- -------- -------- ---------
Net interest income after provision
for losses on loans .................... 13,743 570 2,103 16,416
Noninterest income
Gain on sale of loans .................. 270 61 331
Service fees ........................... 1,764 80 189 2,033
Insurance commissions .................. 553 553
Gain on sale of securities available
for sale ............................. 322 322
Gain on sale of real estate held for
sale and for development ............. 34 34
Other .................................. 316 10 39 365
-------- -------- -------- ---------
3,259 90 289 3,638
Noninterest expense
Compensation and employee benefits ..... 5,136 228 806 6,170
General and administrative ............. 2,337 99 334 2,770
Occupancy .............................. 1,262 57 283 1,602
Data processing ........................ 729 33 133 895
FDIC premium assessment ................ (67) 1 1 (65)
Loss for real estate write-downs
and operations ....................... 131 131
-------- -------- -------- ---------
9,528 418 1,557 11,503
Income before income taxes ............... 7,474 242 835 8,551
Income tax expense ....................... 2,522 60 290 2,872
-------- -------- -------- ---------
Net income ............................... $ 4,952 $ 182 $ 545 $ 5,679
-------- -------- -------- ---------
-------- -------- -------- ---------
Basic net income per share ............... $ 0.62 $ 0.87 $ 1.41 $ 0.58
Diluted net income per share ............. 0.61 0.87 1.36 0.56
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Pro Forma
Pro Forma Combined
Combined InterWest,
InterWest Pacific
and and
Pioneer Pioneer Pioneer
-------- -------- --------
<S> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 1,446 $ 24,397 $ 26,988
Securities available for sale .......... 390 6,698 6,943
Securities held to maturity ............ 8 4,324 4,486
Other .................................. 51 548 676
-------- -------- --------
1,895 35,967 39,093
Interest expense
Deposits ............................... 767 13,656 14,645
FHLB advances and other borrowings ..... 88 4,690 4,691
Securities sold under agreements
to repurchase ........................ 1,592 1,952
-------- -------- --------
855 20,298 21,288
Net interest income before provision
for losses on loans .................... 1,040 15,669 17,805
Provision for losses on loans .......... 52 368 401
-------- -------- --------
Net interest income after provision
for losses on loans .................... 988 15,301 17,404
Noninterest income
Gain on sale of loans .................. 179 449 510
Service fees ........................... 284 2,128 2,317
Insurance commissions ..................
Gain on sale of securities available
for sale ............................. 32 354 354
Gain on sale of real estate held for
sale and for development ............. 34 34
Other .................................. 23 349 388
-------- -------- --------
518 3,867 4,156
Noninterest expense
Compensation and employee benefits ..... 600 5,964 6,770
General and administrative ............. 328 2,764 3,098
Occupancy .............................. 206 1,525 1,808
Data processing ........................ 762 895
FDIC premium assessment ................ 2 (64) (63)
Loss for real estate write-downs
and operations ....................... 131 131
-------- -------- --------
1,136 11,082 12,639
Income before income taxes ............... 370 8,086 8,921
Income tax expense ....................... 120 2,702 2,992
-------- -------- --------
Net income ............................... $ 250 $ 5,384 $ 5,929
-------- -------- --------
-------- -------- --------
Basic net income per share ............... $ 0.69 $ 0.61 $ 0.57
Diluted net income per share ............. 0.67 0.60 0.56
</TABLE>
See notes to pro forma combined unaudited financial statements
44
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF OPERATIONS
Year ended September 30, 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 92,899 $ 3,724 $ 11,940 $108,563
Securities available for sale .......... 31,904 374 938 33,216
Securities held to maturity ............ 11,430 260 622 12,312
Other .................................. 1,778 88 613 2,479
-------- ------- ------- --------
138,011 4,446 14,113 156,570
Interest expense
Deposits ............................... 51,706 1,614 4,234 57,554
FHLB advances and other borrowings ..... 18,831 58 395 19,284
Securities sold under agreements
to repurchase ........................ 10,366 10,366
-------- ------- ------- --------
80,903 1,672 4,629 87,204
Net interest income before provision
for losses on loans .................... 57,108 2,774 9,484 69,366
Provision for losses on loans .......... 1,000 68 252 1,320
-------- ------- ------- --------
Net interest income after provision
for losses on loans .................... 56,108 2,706 9,232 68,046
Noninterest income
Gain on sale of loans .................. 2,805 86 438 3,329
Service fees ........................... 7,667 363 883 8,913
Insurance commissions .................. 2,172 2,172 2,172 2,172
Gain on sale of securities available
for sale ............................. 516 516
Gain on sale of real estate held for
sale and for development ............. 337 9 346
Other .................................. 1,217 34 210 1,461
-------- ------- ------- --------
14,714 492 1,531 16,737
Noninterest expense
Compensation and employee benefits ..... 20,632 1,170 3,701 25,503
General and administrative ............. 10,088 381 1,800 12,269
Occupancy .............................. 5,199 274 1,271 6,744
Data processing ........................ 2,866 132 537 3,535
FDIC premium assessment ................ 395 4 18 417
Loss for real estate write-downs
and operations ....................... 585 585
-------- ------- ------- --------
39,765 1,961 7,327 49,053
Income before income taxes ............... 31,057 1,237 3,436 35,730
Income tax expense ....................... 10,758 322 1,182 12,262
-------- ------- ------- --------
Net income ............................... $ 20,299 $ 915 $ 2,254 $ 23,468
-------- ------- ------- --------
-------- ------- ------- --------
Basic net income per share ............... $ 2.53 $ 4.21 $ 5.79 $ 2.37
Diluted net income per share ............. 2.48 4.15 5.55 2.31
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Pro Forma
Pro Forma Combined
Combined InterWest,
InterWest Pacific
and and
Pioneer Pioneer Pioneer
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Loans receivable and loans held for sale $ 6,490 $103,113 $115,053
Securities available for sale .......... 1,985 34,263 35,201
Securities held to maturity ............ 50 11,740 12,362
Other .................................. 111 1,977 2,590
-------- -------- --------
8,636 151,093 165,206
Interest expense
Deposits ............................... 3,453 56,773 61,007
FHLB advances and other borrowings ..... 424 19,313 19,708
Securities sold under agreements
to repurchase ........................ 10,366 10,366
-------- -------- --------
3,877 86,452 91,081
Net interest income before provision
for losses on loans .................... 4,759 64,641 74,125
Provision for losses on loans .......... 188 1,256 1,508
-------- -------- --------
Net interest income after provision
for losses on loans .................... 4,571 63,385 72,617
Noninterest income
Gain on sale of loans .................. 880 3,771 4,209
Service fees ........................... 539 8,569 9,452
Insurance commissions .................. 2,172 2,172
Gain on sale of securities available
for sale ............................. 71 587 587
Gain on sale of real estate held for
sale and for development ............. 346 346
Other .................................. 418 1,669 1,879
-------- -------- --------
1,908 17,114 18,645
Noninterest expense
Compensation and employee benefits ..... 2,609 24,411 28,112
General and administrative ............. 1,438 11,907 13,707
Occupancy .............................. 921 6,394 7,665
Data processing ........................ 2,998 3,535
FDIC premium assessment ................ 11 410 428
Loss for real estate write-downs
and operations ....................... 585 585
-------- -------- --------
4,979 46,705 54,032
Income before income taxes ............... 1,500 33,794 37,230
Income tax expense ....................... 419 11,499 12,681
-------- -------- --------
Net income ............................... $ 1,081 $ 22,295 $ 24,549
-------- -------- --------
-------- -------- --------
Basic net income per share ............... $ 3.09 $ 2.51 $ 2.35
Diluted net income per share ............. 2.98 2.45 2.29
</TABLE>
See notes to pro forma combined unaudited financial statements
45
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF OPERATIONS
Year ended September 30, 1996
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 82,925 $ 3,038 $ 9,195 $ 95,158
Securities available for sale .......... 20,758 346 1,028 22,132
Securities held to maturity ............ 14,428 233 728 15,389
Other .................................. 2,802 91 597 3,490
--------- --------- --------- ---------
120,913 3,708 11,548 136,169
Interest expense
Deposits ............................... 48,166 1,443 3,743 53,352
FHLB advances and other borrowings ..... 17,449 2 2 17,453
Securities sold under agreements
to repurchase ........................ 3,193 3,193
--------- --------- --------- ---------
68,808 1,445 3,745 73,998
Net interest income before provision
for losses on loans .................... 52,105 2,263 7,803 62,171
Provision for losses on loans .......... 1,960 62 158 2,180
--------- --------- --------- ---------
Net interest income after provision
for losses on loans .................... 50,145 2,201 7,645 59,991
Noninterest income
Gain on sale of loans .................. 1,191 225 1,416
Service fees ........................... 6,832 293 789 7,914
Insurance commissions .................. 2,302 2,302
Gain on sale of securities available
for sale ............................. 531 531
Gain on sale of real estate held for
sale and for development ............. 806 806
Other .................................. 891 40 153 1,084
--------- --------- --------- ---------
12,553 333 1,167 14,053
Noninterest expense
Compensation and employee benefits ..... 19,496 866 2,928 23,290
General and administrative ............. 7,928 378 1,494 9,800
Occupancy .............................. 4,571 213 1,083 5,867
Data processing ........................ 2,021 125 489 2,635
FDIC premium assessment ................ 1,988 4 2 1,994
Loss for real estate write-downs
and operations ....................... (813) (813)
SAIF assessment ........................ 5,523 5,523 5,523 5,523
Special charges ........................ 3,105 3,105 3,105 3,105
--------- --------- --------- ---------
43,819 1,586 5,996 51,401
Income before income taxes ............... 18,879 948 2,816 22,643
Income tax expense ....................... 6,108 237 970 7,315
--------- --------- --------- ---------
Net income ............................... $ 12,771 $ 711 $ 1,846 $ 15,328
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share ............... $ 1.62 $ 3.39 $ 4.80 $ 1.57
Diluted net income per share ............. 1.58 3.39 4.63 1.53
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Pro Forma
Pro Forma Combined
Combined InterWest,
InterWest Pacific
and and
Pioneer Pioneer Pioneer
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Loans receivable and loans held for sale $ 6,134 $ 92,097 $ 101,292
Securities available for sale .......... 1,320 22,424 23,452
Securities held to maturity ............ 38 14,699 15,427
Other .................................. 166 3,059 3,656
-------- -------- --------
7,658 132,279 143,827
Interest expense
Deposits ............................... 2,731 52,340 56,083
FHLB advances and other borrowings ..... 398 17,849 17,851
Securities sold under agreements
to repurchase ........................ 3,193 3,193
-------- -------- --------
3,129 73,382 77,127
Net interest income before provision
for losses on loans .................... 4,529 58,897 66,700
Provision for losses on loans .......... 272 2,294 2,452
-------- -------- --------
Net interest income after provision
for losses on loans .................... 4,257 56,603 64,248
Noninterest income
Gain on sale of loans .................. 573 1,764 1,989
Service fees ........................... 761 7,886 8,675
Insurance commissions ..................
Gain on sale of securities available
for sale ............................. 53 584 584
Gain on sale of real estate held for
sale and for development .............
Other .................................. 304 1,235 1,388
-------- -------- --------
1,691 14,577 15,744
Noninterest expense
Compensation and employee benefits ..... 2,282 22,644 25,572
General and administrative ............. 1,246 9,552 11,046
Occupancy .............................. 783 5,567 6,650
Data processing ........................ 2,146 2,635
FDIC premium assessment ................ 4 1,996 1,998
Loss for real estate write-downs
and operations ....................... (813) (813)
SAIF assessment ........................ 5,523 5,523
Special charges ........................ 3,105 3,105
-------- -------- --------
4,315 49,720 55,716
Income before income taxes ............... 1,633 21,460 24,276
Income tax expense ....................... 470 6,815 7,785
-------- -------- --------
Net income ............................... $ 1,163 $ 14,645 $ 16,491
-------- -------- --------
-------- -------- --------
Basic net income per share ............... $ 3.22 $ 1.67 $ 1.61
Diluted net income per share ............. 3.14 1.63 1.57
</TABLE>
See notes to pro forma combined unaudited financial statements
46
<PAGE>
INTERWEST BANCORP, INC. AND PACIFIC NORTHWEST BANK AND PIONEER BANCORP, INC.
PRO FORMA COMBINED UNAUDITED STATEMENT OF OPERATIONS
Year ended September 30, 1995
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Pro Forma
Combined
InterWest
Recent and
InterWest Merger Pacific Pacific
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 70,803 $ 2,723 $ 7,711 $ 81,237
Securities available for sale .......... 5,740 249 769 6,758
Securities held to maturity ............ 22,426 177 1,136 23,739
Other .................................. 1,295 75 466 1,836
-------- -------- -------- ---------
100,264 3,224 10,082 113,570
Interest expense
Deposits ............................... 45,952 1,328 3,361 50,641
FHLB advances and other borrowings ..... 10,402 9 5 10,416
Securities sold under agreements
to repurchase ........................ 1,572 1,572
-------- -------- -------- ---------
57,926 1,337 3,366 62,629
Net interest income before provision
for losses on loans .................... 42,338 1,887 6,716 50,941
Provision for losses on loans .......... 720 22 35 777
-------- -------- -------- ---------
Net interest income after provision
for losses on loans .................... 41,618 1,865 6,681 50,164
Noninterest income
Gain on sale of loans .................. 917 250 1,167
Gain on sale of loan servicing ......... 1,831 1,831
Service fees ........................... 3,965 247 720 4,932
Insurance commissions .................. 2,221 2,221
Gain on sale of securities available
for sale ............................. 287 287
Gain on sale of real estate held for
sale and for development ............. 16 16
Other .................................. 756 25 113 894
-------- -------- -------- ---------
9,993 272 1,083 11,348
Noninterest expense
Compensation and employee benefits ..... 15,139 775 2,607 18,521
General and administrative ............. 6,931 352 1,447 8,730
Occupancy .............................. 3,743 170 976 4,889
Data processing ........................ 1,657 115 401 2,173
FDIC premium assessment ................ 2,006 4 2 2,012
Loss for real estate write-downs
and operations ....................... 426 426
-------- -------- -------- ---------
29,902 1,416 5,433 36,751
Income before income taxes ............... 21,709 721 2,331 24,761
Income tax expense ....................... 7,347 193 792 8,332
-------- -------- -------- ---------
Net income ............................... $ 14,362 $ 528 $ 1,539 $ 16,429
-------- -------- -------- ---------
-------- -------- -------- ---------
Basic net income per share ............... $ 1.83 $ 2.53 $ 4.02 $ 1.69
Diluted net income per share ............. 1.80 2.53 3.90 1.66
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Pro Forma
Pro Forma Combined
Combined InterWest,
InterWest Pacific
and and
Pioneer Pioneer Pioneer
-------- -------- --------
<S> <C> <C> <C>
Interest income
Loans receivable and loans held for sale $ 4,969 $ 78,495 $ 86,206
Securities available for sale .......... 896 6,885 7,654
Securities held to maturity ............ 162 22,765 23,901
Other .................................. 134 1,504 1,970
-------- -------- --------
6,161 109,649 119,731
Interest expense
Deposits ............................... 1,974 49,254 52,615
FHLB advances and other borrowings ..... 516 10,927 10,932
Securities sold under agreements
to repurchase ........................ 1,572 1,572
-------- -------- --------
2,490 61,753 65,119
Net interest income before provision
for losses on loans .................... 3,671 47,896 54,612
Provision for losses on loans .......... 152 894 929
-------- -------- --------
Net interest income after provision
for losses on loans .................... 3,519 47,002 53,683
Noninterest income
Gain on sale of loans .................. 875 1,792 2,042
Gain on sale of loan servicing ......... 1,831 1,831
Service fees ........................... 681 4,893 5,613
Insurance commissions .................. 2,221 2,221
Gain on sale of securities available
for sale ............................. 48 335 335
Gain on sale of real estate held for
sale and for development ............. 16 16
Other .................................. 78 859 972
-------- -------- --------
1,682 11,947 13,030
Noninterest expense
Compensation and employee benefits ..... 1,958 17,872 20,479
General and administrative ............. 1,201 8,484 9,931
Occupancy .............................. 757 4,670 5,646
Data processing ........................ 1,772 2,173
FDIC premium assessment ................ 51 2,061 2,063
Loss for real estate write-downs
and operations ....................... 426 426
-------- -------- --------
3,967 35,285 40,718
Income before income taxes ............... 1,234 23,664 25,995
Income tax expense ....................... 389 7,929 8,721
-------- -------- --------
Net income ............................... $ 845 $ 15,735 $ 17,274
-------- -------- --------
-------- -------- --------
Basic net income per share ............... $ 2.34 $ 1.80 $ 1.69
Diluted net income per share ............. 2.29 1.78 1.66
See notes to pro forma combined unaudited financial statements
</TABLE>
47
<PAGE>
Notes to Pro Forma Combined Unaudited Financial Statements
1. Adjustments
The pro forma combined unaudited statement of financial condition
reflects the issuance of 1,540,208 shares of InterWest Common Stock, $0.20 par
value, to Pacific stockholders using the exchange ratio of 3.95, and the
issuance of 508,259 shares of InterWest Common Stock to Pioneer stockholders
using the exchange ratio of 1.4745. These shares were derived using the
respective outstanding shares of Pacific and Pioneer at December 31, 1997, not
including shares subject to exercise of stock options.
The issuance of shares for the Pacific Merger was based on the fixed
exchange ratio of 3.95 shares of InterWest Common Stock for each share of
Pacific Common Stock.
The issuance of shares for the Pioneer Merger is based upon an exchange
ratio of 1.4745 resulting from an assumed average closing price for InterWest
Common Stock of $40.00 per share, which is the midpoint valuation price in the
range of the Pioneer "Valuation Price". 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 Pioneer Exchange Ratio.
2. Fiscal Year Ends
The pro forma combined statements of operations for the years ended
September 30, 1997, 1996 and 1995 have been adjusted to conform Pacific and
Pioneer's December 31 fiscal year end with InterWest's September 30 fiscal year
end in accordance with generally accepted accounting principles.
3. Recent Merger
Puget Sound Bancorp was merged into InterWest on January 15, 1998.
Prior period financial statements for InterWest have not been restated to
reflect the combined accounts of InterWest and Puget Sound Bancorp as this
merger was not material to the financial condition or results of operations of
InterWest. The pro forma combined statement of condition and pro forma combined
statements of operations include the accounts of Puget Sound Bancorp.
4. Net Income Per Share
Basic and diluted net income per share is computed based on the weighed
average number of basic and diluted common shares outstanding during the periods
presented. Diluted common shares outstanding include common stock equivalents
computed using the treasury stock method. Common stock equivalents include
shares issuable upon exercise of common stock options. Pro forma basic and
diluted net income per share for the periods presented is computed based on the
respective exchange ratios for Pacific and Pioneer described in Note 1. Pro
forma basic and diluted net income per share amounts may vary due to potential
changes in the Pioneer Exchange Ratio.
5. Merger(s) Expenses
Costs directly associated with the Merger(s) are expected to be
approximately $1.3 million. These costs represent professional fees for
attorneys, accountants and investment advisors; registration fees; and printing
costs. The amounts of these costs will be expensed in the period the Merger(s)
are completed.
48
<PAGE>
INFORMATION CONCERNING INTERWEST
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 and FNBP. As of December 31, 1997, InterWest and subsidiaries had
total assets of approximately $2.0 billion, total loans and loans held for sale
of approximately $1.2 billion, total deposits of approximately $1.2 billion and
stockholders' equity of approximately $133.4 million.
InterWest 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 currently in the process of
transforming from a traditional thrift to a financial institution with business
banking in its portfolio of products. InterWest Bank is a community oriented
bank which provides a wide range of financial services for individual and
business customers. The principal lending activity of InterWest Bank is the
origination of single-family residential mortgage loans and, to a lesser extent,
loans secured by commercial properties, consumer loans, commercial loans and
agricultural loans. InterWest Bank offers various types of deposit accounts,
including savings, checking accounts, money market accounts and a variety of
certificate accounts. As of December 31, 1997, InterWest Bank conducted its
business through 39 full-service branch offices located in the western and
central parts of the State of Washington. These offices are located primarily in
towns, small cities, suburbs and to a lesser extent, metropolitan markets.
FNBP is a national banking association and is regulated primarily by
the OCC. FNBP's deposits are insured up to applicable limits by the BIF.
InterWest acquired FNBP in a merger with FNBP's former bank holding company on
January 15, 1998. FNBP offers a full line of commercial banking services to its
customers and the community, providing personal and business financial services
to individuals and small businesses. FNBP operates a main office in Port
Orchard, a branch in Bremerton and a branch in Gig Harbor, all in the State of
Washington. Its primary service area is Kitsap County.
A source of future growth for InterWest will be through acquisitions.
InterWest believes that many stockholders of other financial institutions are
seeking to sell their institutions for a variety of reasons, including lack of
stockholder liquidity, management succession plans and increasing competition.
InterWest actively reviews proposals for various acquisition opportunities.
InterWest has established a due diligence review process to evaluate potential
acquisitions and has established parameters for potential acquisitions relating
to market factors, financial performance and certain nonfinancial factors.
Successful completion of acquisitions by InterWest depends on several factors
such as the availability of suitable acquisition candidates, necessary
regulatory and stockholder approval and compliance with applicable capital
requirements.
Financial and other information relating to InterWest, including
information relating to InterWest's directors and executive officers, is set
forth in InterWest's 1997 10-K, InterWest's December 31, 1997 10-Q, and
InterWest's 1998 Proxy Statement, copies of which may be obtained from InterWest
as indicated under "INFORMATION INCORPORATED BY REFERENCE."
Year 2000 Issues
The century date change for the Year 2000 is a serious issue that may
impact virtually every organization, including InterWest. The challenge is
especially important to financial institutions since many processes, such as
interest accruals and payments, are date sensitive and InterWest has interaction
with numerous customers, vendors and third party service providers whom must
also address the century date change issue.
InterWest has developed a plan, is developing contingency plans and has
performed assessments on its systems. As part of InterWest's process to address
the Year 2000 issue, InterWest has implemented a program to monitor the Year
2000 efforts of its suppliers, service providers and large customers. Testing on
systems
49
<PAGE>
identified as critical to validate upgrades, vendor certification and
other changes necessary is expected to begin in 1998. Current estimates indicate
that renovation costs will not be material to InterWest results of operations.
Costs incurred related to renovating and testing will be expensed in the period
incurred. InterWest could possibly be impacted by the century change to the
extent other entities not affiliated with InterWest are unsuccessful in
addressing this issue.
The discussion above with regards to the century date change for the
year 2000 includes certain "forward looking statements" concerning the future
operations of InterWest. It is InterWest's desire to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing InterWest of the protections of
such safe harbor with respect to all "forward looking statements". Management's
ability to predict results of the effect of future plans is inherently
uncertain, and is subject to factors that may cause actual results to differ
materially from those projected. Factors that could affect the actual results
include the possibility that systems modifications will not operate as intended,
unexpected costs, and the uncertainty associated with the impact of the century
change on InterWest's customers, vendors and third party service providers.
50
<PAGE>
INFORMATION CONCERNING PACIFIC
Business
Pacific Northwest Bank was organized in July 1988 as a state-charted
bank under Washington law and commenced operations in October 1988. Primarily
engaging in commercial banking activities, Pacific serves individuals and small
and medium-sized businesses located in western Washington. Pacific has four
locations: downtown Seattle, downtown Bellevue, Lynwood, and Kent, which opened
in June 1997.
Pacific offers its customers a full range of deposit services including
checking accounts, savings accounts and other time-deposit services. Pacific's
lending activity consists of short to medium-term commercial and consumer loans,
including operating loans and lines, equipment loans, commercial real estate and
construction loans, automobile loans, recreational vehicle and truck loans,
personal loans or lines of credit, home improvement and rehabilitation loans and
Visa national credit and debit cards. Pacific also offers merchant credit card
processing, safe deposit boxes, investment services, wire transfers, direct
deposit of payroll and social security checks, automated teller machine access,
and automatic drafts for various accounts. Pacific is an insured bank under the
Federal Deposit Insurance Act, but, like most state-chartered banks of its size
in Washington, has chosen not to become a member of the Federal Reserve System.
Pacific's deposits are attracted primarily from individuals, merchants,
small and medium-sized businesses, and professionals. The principal sources of
Pacific's revenues are (i) interest and fees on loans, (ii) interest on
securities, (iii) deposit service charges, (iv) interest on federal funds sold,
and (v) gains on the sales of loans.
As of December 31, 1997, Pacific had assets of approximately $197.2
million, loans of $136.3 million, and deposits of $165.8 million.
Competition
The banking business in Seattle and western Washington generally, and
in Pacific's primary service area specifically, is highly competitive with
respect to both loans and deposits and is dominated by a relatively small number
of major banks with many offices operating over a wide geographic area. Among
the advantages such major banks have over Pacific are their ability to finance
wide-ranging advertising campaigns and to allocate their investment assets to
geographical regions of higher yield and demand. Such banks offer certain
services such as trust services and international banking which are not offered
directly by Pacific (but are offered indirectly through correspondent
institutions); and, by virtue of their greater total capitalization (legal
lending limits to an individual customer are based upon a percentage of a bank's
total stockholder equity accounts), such banks have substantially higher lending
limits that Pacific. All of the major local commercial banks are owned and
controlled by out-of-state bank holding companies, which provides a strong
market advantage for locally owned and controlled banks.
In addition, the opening of the new independent banks in Washington has
intensified, and will continue to intensify competition. Banks also compete with
the financial markets for funds. For instance, yields on corporate and
government debt securities and other commercial paper affect the ability of
commercial banks to attract and hold deposits. Further, commercial banks compete
for available funds with money market instruments and similar investment
vehicles offered by institutions such as brokerage firms, credit card companies,
and retailers. In periods of high interest rates, such money market funds have
provided substantial competition to banks for deposits, and it is anticipated
that they may continue to do so in the future.
In order to compete with the major financial institutions in its
primary service area, Pacific uses to the fullest extent possible the
flexibility, which is accorded by its independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by Pacific's officers, director and
51
<PAGE>
employees. These added services are provided to both commercial and individual
customers. Pacific also seeks to provide special services and programs for
individuals in it primary area who are employed in the business and professional
fields. Pacific uses a data processing servicer, which allows Pacific to provide
sophisticated and highly automated products and services. In the event there are
customers whose loan demands exceed Pacific's lending limits, Pacific arranges
for such loans on a participation basis with other financial institutions.
Pacific also assists those customers requiring services not offered by Pacific
to obtain such services from its correspondent banks and serves as the
intermediary between Pacific's customers and the correspondent banks. These
services include investments and letters of credit provided to Pacific's
customers by correspondent banks.
Facilities
Pacific's main office is located in downtown Seattle at 1111 Third
Avenue. Its other three offices are located in downtown Bellevue at 1110 NE 8th
Street, Lynwood at 6400 196th Street SE and Kent at 1140 West Meeker. Pacific
owns the properties on which the Lynwood and Kent offices are located. The lease
for the downtown Seattle office expires in December 2005 and the lease for the
downtown Bellevue office expires August 2001.
Employees
At December 31, 1997, Pacific had 79 full-time employees. The employees
are not represented by a union organization or other collective bargaining
group, and management considers its relations with the employees to be very
good.
Legal Proceedings
Pacific is from time to time a party to various legal proceedings
arising in the ordinary course of its business. Management believes that there
is no threatened or pending proceedings against Pacific which, if determined
adversely, would have a material effect on its business or financial position.
PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Pacific operates four branches in the Greater Seattle area. Branches
are located in Seattle, Bellevue, Lynnwood and Kent. Pacific's primary source of
revenue is derived from providing loans to customers, who are predominately
small and middle-market businesses and middle income individuals.
Three months ended December 31, 1997 and 1996
Overview. Total assets increased 23% from $160,765,098 at December 31,
1996 to $197,243,246 at December 31, 1997. Most of the growth is the result of
an increase in the growth of Pacific's loan portfolio. The growth was funded by
increased deposits, term borrowings and maturities of securities.
Net Income. Pacific recorded net income of $669,912 for the fourth
quarter of 1997 compared with $545,207 for the fourth quarter of 1996, an
increase of 23%. The increase in earnings is due to increased net interest
income and increased noninterest income partially offset by an increase in
noninterest expense.
Net Interest Income. Net interest income increased $437,530 from
$2,136,007 for the fourth quarter of 1996 to $2,573,537 for the same period in
1997. The increase in net interest income was primarily due to the increase in
the commercial loan portfolio outstanding balances. Pacific's net interest
margin was 5.98% and 5.82% for the three months ended December 31, 1997 and
1996, respectively.
52
<PAGE>
Noninterest Income. Noninterest income was $479,653 for the three
months ended December 31, 1997 compared with $288,774 for the three months ended
December 31, 1996, an increase of $190,879. This increase was primarily due to
increased gains recorded from the sales of loans and increased loan volumes
resulting in higher loan fees.
Noninterest Expense. Noninterest expense was $2,030,124 for the fourth
quarter of 1997 compared with $1,556,600 for the fourth quarter of 1996, an
increase of $473,524. In addition, Pacific opened a new branch in Kent in June
1997. The increased operating expenses of the new branch contributed to the
increased noninterest expense. Also, the significant growth in loans and
deposits during the last year has required additional operations staff and
increased expenditures for supplies, postage, furniture and fixtures.
Years ended December 31, 1997, 1996 and 1995
Overview
Pacific achieved significant growth during 1997. Net income in 1997 was
$2,254,121, up 22% from $1,846,312 in 1996. Average earning assets grew 17% from
1996 to 1997 and average deposits increased 12%. This growth resulted in a 22%
increase in net interest income from $7,803,623 in 1996 to $9,483,450 in 1997.
In June 1997, Pacific opened a new financial center in Kent. As anticipated, the
startup, salary and other operating expenses for the new financial center had a
negative impact on Pacific's performance in the last six months of 1997.
Return on Equity and Assets
The following table shows consolidated after-tax operating and capital
ratios for Pacific for the last three years:
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------- ------- -------
For the year ended December 31 1997 1996 1995
- -------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Return on average assets ............................... 1.28% 1.23% 1.18%
Return on average equity ............................... 15.43% 14.67% 14.13%
Dividend payout ratio .................................. 11.03% 8.81% 7.81%
Average equity to average assets ratio ................. 8.30% 8.41% 8.37%
- -------------------------------------------------------- ------- ------- -------
</TABLE>
Net Interest Income
In 1997, Pacific recorded net interest income of $9,483,450. This was
an increase of $1,679,827 compared to $7,803,623 in 1996. The increase was
primarily due to the growth of the commercial loan portfolio and corresponding
increase in earning assets. The cost of higher rates paid on interest-bearing
liabilities was largely offset by higher yields on earning assets. Pacific
continues to benefit from a favorable deposit mix with a high proportion of
noninterest-bearing deposits.
Interest Income
Interest income increased 22% from $11,549,028 in 1996 to $14,112,283
in 1997. This increase reflects the significant growth of Pacific's loan
portfolio aided by a small increase in loan yields. The investment portfolio has
declined slightly as Pacific used proceeds from maturing investments to fund
loan growth.
Interest Expense
Interest expense increased 24% from $3,745,405 in 1996 to $4,628,833 in
1997. This was due to the growth in interest-bearing deposits and other
borrowings combined with slightly higher rates.
53
<PAGE>
Net Interest Margin
Pacific continues to have a strong net interest margin of 5.89% for
1997 compared to 5.66% in 1996. The increase in the net interest margin was
primarily due to a higher proportion of noninterest-bearing deposits in relation
to total deposits.
Analysis of Average Balances, Net Interest Income, and Net Interest Margin
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ----------------------
For the year ended December 31
- ------------------------------------------------------------------- ----------------------
Average Yield
Assets Balance Interest Rate
- ----------------------------------------- ------------- ------------- ------
<S> <C> <C> <C>
Commercial loans ......................... $ 94,732,595 $ 9,388,456 9.91%
Real estate construction loans ........... 7,263,588 686,720 9.45%
Real estate mortgage loans ............... 15,256,798 1,322,646 8.67%
Consumer loans ........................... 5,615,373 540,784 9.63%
------------- ------------- ----
Total loans .............................. 122,868,354 11,938,606 9.72%
Federal funds sold ....................... 7,126,589 389,223 5.46%
Interest-bearing deposits in banks ....... 4,127,371 223,863 5.42%
Securities ............................... 26,730,396 1,560,591 5.84%
------------- ------------- ----
Total earning assets ..................... 160,852,710 14,112,283 8.77%
Cash and due from banks .................. 11,316,381
Premises and equipment ................... 3,160,286
Deferred tax assets ...................... 422,809
Accrued interest and other assets ........ 1,549,771
Allowance for possible credit losses ..... (1,288,371)
-------------
Total assets ............................. $ 176,013,586
-------------
-------------
Liabilities
------------- ------------- ----
Interest-bearing deposits:
Demand deposits ....................... $ 17,578,978 $ 237,994 1.35%
Savings deposits ...................... 45,756,845 1,412,472 3.09%
Time deposits ......................... 46,372,477 2,583,064 5.57%
------------- ------------- ----
Total interest-bearing deposits .......... 109,708,300 4,233,530 3.86%
Term borrowings .......................... 7,383,315 395,303 5.35%
------------- ------------- ----
Total interest-bearing liabilities ....... 117,091,615 4,628,833 3.95%
Noninterest-bearing deposits ............. 42,803,036
Accrued interest and other liabilities ... 1,505,859
-------------
Total liabilities ........................ 161,400,510
Shareholders' equity ..................... 14,613,076
-------------
Total liabilities and shareholders' equity $ 176,013,586
-------------
-------------
Interest revenue as a percentage of
average earning assets 8.77%
Interest expense as a percentage of
average earnings assets 2.88%
------------- ----
Net interest income
and net interest margin ............... $ 9,483,450 5.89%
------------- ----
------------- ----
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------
1996 1997 over 1996
---------------------------------------- -------------------------------
Change in income due to
Average Yield
Balance Interest Rate Volume Rate
---------- --------- ---- --------- ------
<S> <C> <C> <C> <C> <C>
Commercial loans ......................... $ 69,282,374 $ 6,781,502 9.79% $ 2,521,216 $ 85,738
Real estate construction loans ........... 6,451,885 613,198 9.50% 76,757 (3,235)
Real estate mortgage loans ............... 15,094,848 1,320,917 8.75% 14,101 (12,372)
Consumer loans ........................... 4,932,485 480,918 9.75% 65,831 (5,965)
------------- ------------- ---- ------------- -------------
Total loans .............................. 95,761,592 9,196,535 9.60% 2,677,905 64,166
Federal funds sold ....................... 9,311,516 491,878 5.28% (118,837) 16,182
Interest-bearing deposits in banks ....... 1,988,842 104,912 5.28% 115,910 3,041
Securities ............................... 30,766,171 1,755,703 5.71% (234,824) 39,712
------------- ------------- ---- ------------- -------------
Total earning assets ..................... 137,828,121 11,549,028 8.38% $ 2,440,154 $ 123,101
------------- -------------
------------- -------------
Cash and due from banks .................. 9,204,091
Premises and equipment ................... 1,939,733
Deferred tax assets ...................... 361,130
Accrued interest and other assets ........ 1,429,220
Allowance for possible credit losses ..... (1,025,278)
-------------
$ 149,737,017
Total assets ............................. -------------
-------------
Liabilities
- ------------------------------------------ ------------- ------------- ---- ------------- -------------
Interest-bearing deposits:
Demand deposits ....................... $ 15,434,755 $ 212,426 1.38% $ 29,081 ($ 3,513)
Savings deposits ...................... 43,851,803 1,299,262 2.96% 57,647 55,563
Time deposits ......................... 41,727,200 2,231,979 5.35% 255,969 95,116
------------- ------------- ---- ------------- -------------
Total interest-bearing deposits .......... 101,013,758 3,743,667 3.71% 342,697 147,166
Term borrowings .......................... 28,702 1,738 6.06% 393,789 (224)
------------- ------------- ---- ------------- -------------
Total interest-bearing liabilities ....... 101,042,460 3,745,405 3.71% $ 736,486 $ 146,942
------------- -------------
------------- -------------
Noninterest-bearing deposits ............. 35,250,458
Accrued interest and other liabilities ... 856,075
-------------
137,148,993
Total liabilities ........................
12,588,024
Shareholders' equity .....................
-------------
Total liabilities and shareholders' equity $ 149,737,017
-------------
-------------
Interest revenue as a percentage of
average earning assets
8.38%
----
Interest expense as a percentage of
average earnings assets
2.72%
----
Net interest income
and net interest margin ............... $ 7,803,623 5.66%
------------- ----
------------- ----
</TABLE>
Changes in income and expense which are not due solely to rate or volume have
been allocated proportionately. Average loan balances include nonaccrual loans.
54
<PAGE>
Analysis of Average Balances, Net Interest Income, and Net Interest Margin
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------------------------
For the year ended December 31 1996
- ------------------------------------------ ------------------------------------------
Average Yield
Assets Balance Interest Rate
- ------------------------------------------ ------------- ------------- -----
<S> <C> <C> <C>
Commercial loans ......................... $ 69,282,374 $ 6,781,502 9.79%
Real estate construction loans ........... 6,451,885 613,198 9.50%
Real estate mortgage loans ............... 15,094,848 1,320,917 8.75%
Consumer loans ........................... 4,932,485 480,918 9.75%
------------- ------------- ----
Total loans .............................. 95,761,592 9,196,535 9.60%
Federal funds sold ....................... 9,311,516 491,878 5.28%
Interest-bearing deposits in banks ....... 1,988,842 104,912 5.28%
Securities ............................... 30,766,171 1,755,703 5.71%
------------- ------------- ----
Total earning assets ..................... 137,828,121 11,549,028 8.38%
Cash and due from banks .................. 9,204,091
Premises and equipment ................... 1,939,733
Deferred tax assets ...................... 361,130
Accrued interest and other assets ........ 1,429,220
Allowance for possible credit losses ..... (1,025,278)
-------------
Total assets ............................. $ 149,737,017
-------------
-------------
Liabilities
Interest-bearing deposits:
Demand deposits ....................... $ 15,434,755 $ 212,426 1.38%
Savings deposits ...................... 43,851,803 1,299,262 2.96%
Time deposits ......................... 41,727,200 2,231,979 5.35%
------------- ------------- ----
Total interest-bearing deposits .......... 101,013,758 3,743,667 3.71%
Term borrowings .......................... 28,702 1,738 6.06%
------------- ------------- ----
Total interest-bearing liabilities ....... 101,042,460 3,745,405 3.71%
Noninterest-bearing deposits ............. 35,250,458
Accrued interest and other liabilities ... 856,075
-------------
Total liabilities ........................ 137,148,993
Shareholders' equity ..................... 12,588,024
-------------
Total liabilities and shareholders' equity $ 149,737,017
-------------
-------------
Interest revenue as a percentage of
average earning assets ................ 8.38%
Interest expense as a percentage of
average earnings assets ............... 2.72%
------------- ----
Net interest income
and net interest margin ............... $ 7,803,623 5.66%
------------- ----
------------- ----
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------ ----------------------------------------- -----------------------------
For the year ended December 31 1995 1996 over 1995
- ------------------------------------------ ----------------------------------------- -----------------------------
Change in income due to
Average Yield
Assets Balance Interest Rate Volume Rate
- ------------------------------------------ ------------- ------------- ----- ------------- ------------
<S> <C> <C> <C> <C> <C>
Commercial loans ......................... $ 51,897,745 $ 5,343,671 10.30% $ 1,712,994 $ 275,163)
Real estate construction loans ........... 5,809,222 566,482 9.75% 61,376 (14,660)
Real estate mortgage loans ............... 14,555,361 1,320,462 9.07% 48,056 (47,601)
Consumer loans ........................... 4,922,925 480,015 9.75% 932 (29)
------------- ------------- ---- ------------- ------------
Total loans .............................. 77,185,253 7,710,630 9.99% 1,823,358 (337,453)
Federal funds sold ....................... 8,097,781 466,152 5.76% 66,155 (40,429)
Interest-bearing deposits in banks ....... 104,912 0
Securities ............................... 33,712,713 1,905,561 5.65% (167,989) 18,131
------------- ------------- ---- ------------- ------------
Total earning assets ..................... 118,995,747 10,082,343 8.47% $ 1,826,436 ($ 359,751)
------------- ------------
------------- ------------
Cash and due from banks .................. 8,447,314
Premises and equipment ................... 1,541,084
Deferred tax assets ...................... 265,511
Accrued interest and other assets ........ 1,757,980
Allowance for possible credit losses ..... (948,102)
------------
Total assets ............................. $130,059,534
------------
------------
Liabilities
Interest-bearing deposits:
Demand deposits ....................... $ 12,656,647 $ 202,292 1.60% $ 40,626 ($ 30,492)
Savings deposits ...................... 39,801,250 1,272,452 3.20% 123,982 (97,172)
Time deposits ......................... 34,466,929 1,886,563 5.47% 389,232 (43,816)
------------- ------------- ---- ---------- ----------
Total interest-bearing deposits .......... 86,924,826 3,361,307 3.87% 553,840 (171,480)
Term borrowings .......................... 76,877 4,981 6.48% (2,936) (307)
------------- ------------- ---- ---------- ----------
Total interest-bearing liabilities ....... 87,001,703 3,366,288 3.87% $ 550,904 ($ 171,787)
---------- ----------
---------- ----------
Noninterest-bearing deposits ............. 31,372,449
Accrued interest and other liabilities ... 794,057
-------------
Total liabilities ........................ 119,168,209
-------------
Shareholders' equity ..................... 10,891,325
-------------
Total liabilities and shareholders' equity $ 130,059,534
-------------
-------------
Interest revenue as a percentage of
average earning assets ................ 8.47%
Interest expense as a percentage of
average earnings assets ............... 2.83%
------------------------
Net interest income
and net interest margin ............... $ 6,716,055 5.64%
------------------------
------------------------
</TABLE>
Changes in income and expense which are not due solely to rate or volume have
been allocated proportionately. Average loan balances include nonaccrual loans.
55
<PAGE>
Analysis of Average Balances, Net Interest Income, and Net Interest Margin
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------------------
For the year ended December 31 1995
- ------------------------------------------ ---------------------------------------------
Average Yield
Assets Balance Interest Rate
- ------------------------------------------ ------------- ------------- ------
<S> <C> <C> <C>
Commercial loans ......................... $ 51,897,745 $ 5,343,671 10.30%
Real estate construction loans ........... 5,809,222 566,482 9.75%
Real estate mortgage loans ............... 14,555,361 1,320,462 9.07%
Consumer loans ........................... 4,922,925 480,015 9.75%
------------- ------------- -----
Total loans .............................. 77,185,253 7,710,630 9.99%
Federal funds sold ....................... 8,097,781 466,152 5.76%
Securities ............................... 33,712,713 1,905,561 5.65%
------------- ------------- -----
Total earning assets ..................... 118,995,747 10,082,343 8.47%
Cash and due from banks .................. 8,447,314
Premises and equipment ................... 1,541,084
Deferred tax assets ...................... 265,511
Accrued interest and other assets ........ 1,757,980
Allowance for possible credit losses ..... (948,102)
-------------
Total assets ............................. $ 130,059,534
-------------
-------------
Liabilities
- ------------------------------------------ ------------- -------------
Interest-bearing deposits:
Demand deposits ....................... $ 12,656,647 $ 202,292 1.60%
Savings deposits ...................... 39,801,250 1,272,452 3.20%
Time deposits ......................... 34,466,929 1,886,563 5.47%
------------- ------------- -----
Total interest-bearing deposits .......... 86,924,826 3,361,307 3.87%
Term borrowings .......................... 76,877 4,981 6.48%
------------- ------------- -----
Total interest-bearing liabilities ....... 87,001,703 3,366,288 3.87%
Noninterest-bearing deposits ............. 31,372,449
Accrued interest and other liabilities ... 794,057
-------------
Total liabilities ........................ 119,168,209
Shareholders' equity ..................... 10,891,325
-------------
Total liabilities and shareholders' equity $ 130,059,534
-------------
-------------
Interest revenue as a percentage of 8.47%
average earning assets ...............
Interest expense as a percentage of
average earnings assets .............. 2.83%
------------- -----
Net interest income
and net interest margin ............... $ 6,716,055 5.64%
------------- -----
------------- -----
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------------------------ -------------------------------
For the year ended December 31 1994 1995 over 1994
- ------------------------------------------ ------------------------------------------ -------------------------------
Change in income due to
Average Yield
Assets Balance Interest Rate Volume Rate
- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans ......................... $ 46,094,327 $ 4,093,387 8.88% $ 551,628 $ 698,656
Real estate construction loans ........... 5,571,805 513,579 9.22% 22,421 30,482
Real estate mortgage loans ............... 12,767,857 1,139,978 8.93% 161,898 18,586
Consumer loans ........................... 6,229,299 646,192 10.37% (129,190) (36,987)
------------- ------------- ----- ---------- -------------
Total loans .............................. 70,663,288 6,393,136 9.05% 606,757 710,737
Federal funds sold ....................... 7,573,137 323,868 4.28% 23,732 118,552
Securities ............................... 32,642,737 1,713,495 5.25% 57,456 134,610
------------- ------------- ----- ---------- -------------
Total earning assets ..................... 110,879,162 8,430,499 7.60% $ 687,945 $ 963,899
---------- -------------
---------- -------------
Cash and due from banks .................. 9,693,762
Premises and equipment ................... 755,809
Deferred tax assets ...................... 272,221
Accrued interest and other assets ........ 1,036,994
Allowance for possible credit losses ..... (914,641)
-------------
$ 121,723,307
-------------
Total assets ............................. -------------
Liabilities
- ------------------------------------------ ------------- ------------- ----- ---------- -------------
Interest-bearing deposits:
Demand deposits ....................... $ 12,180,153 $ 170,182 1.40% $ 6,863 $ 26,247
Savings deposits ...................... 41,438,875 1,036,078 2.50% (42,362) 278,736
Time deposits ......................... 25,621,663 1,028,875 4.02% 418,049 439,639
------------- ------------- ----- ---------- -------------
Total interest-bearing deposits .......... 79,240,691 2,235,135 2.82% 382,550 743,622
Term borrowings .......................... 145,000 6,410 4.42% (3,716) 2,287
------------- ------------- ----- ---------- -------------
Total interest-bearing liabilities ....... 79,385,691 2,241,545 2.82% $ 378,834 $ 745,909
---------- -------------
---------- -------------
Noninterest-bearing deposits ............. 32,648,536
Accrued interest and other liabilities ... 492,390
-------------
Total liabilities ........................ 112,526,617
Shareholders' equity ..................... 9,196,690
-------------
Total liabilities and shareholders' equity $ 121,723,307
-------------
-------------
Interest revenue as a percentage of
average earning assets
7.60%
Interest expense as a percentage of
average earnings assets
2.02%
------------- -----
Net interest income
and net interest margin ............... $ 6,188,954 5.58%
------------- -----
------------- -----
</TABLE>
Changes in income and expense which are not due solely to rate or volume have
been allocated proportionately. Average loan balances include nonaccrual loans.
Noninterest Income
Noninterest income was $1,530,513 in 1997, an increase of $363,479 when
compared to $1,167,034 in 1996. The largest component of this increase was
increased gains on the sales of loans. Pacific continues to aggressively
originate and sell Small Business Administration loans, but the amount of loans
sold can vary significantly between periods. Increases in service charges on
deposit accounts have been limited to a reduction in corporate account
overdrafts and by higher compensating balances maintained by corporate
customers. The increase in credit card fees was due to increased debit and
credit card transaction volumes. The increase in other loan processing fees was
primarily due to increased loan volumes and increased commitment fees.
56
<PAGE>
The following table provides an analysis of noninterest income for 1997
and 1996:
<TABLE>
<CAPTION>
Change from 1996 to 1997
------------------------
1997 1996 Amount %
- --------------------------------------- ---------- ---------- -------------- ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts.... $ 493,793 $ 486,101 $ 7,692 2%
Credit card fees ...................... 218,027 165,711 52,316 32%
Other loan processing fees ............ 189,344 134,336 55,008 41%
Merchant credit card processing fee.... s 45,419 40,230 5,189 13%
Gains on sales of loans ............... 437,883 225,289 212,594 94%
Gains on sales of securities .......... 1,196 14,423 (13,227) (92%)
Other miscellaneous income ............ 144,851 100,944 43,907 43%
---------- ---------- ---------- ------
Total noninterest income .............. $1,530,513 $1,167,034 $ 363,479 31%
---------- ---------- ---------- ------
---------- ---------- ---------- ------
</TABLE>
Noninterest Expense
Noninterest expense increased $1,328,982 from $5,996,678 in 1996 to
$7,325,660 in 1997.
In December 1996, Pacific purchased an empty banking facility in Kent
with the goal of opening a new financial center serving South King County in
June 1997. During the first six months of 1997, Pacific began to incur expenses,
primarily professional fees, associated with the opening of the new financial
center. The new financial center opened on June 30, 1997. The expenses
associated with the start-up of the new financial center resulted in increased
operations expenses during the last six months of 1997. Also, the significant
growth in loans and deposits during the last year has required additional
operations staff and increased expenditures for supplies, postage, furniture and
fixtures. Salaries and employee benefits increased significantly due to the
increased number of employees required to staff the new financial center and to
support the loan and deposit growth. Recent bank mergers in the Greater Seattle
area market have provided additional opportunities for acquiring new customers.
Pacific increased its promotional expenses to reach businesses in targeted
markets and to promote the opening of the new financial center.
The following table provides an analysis of noninterest expense for 1997
and Change from 1996 to 1997 1996:
<TABLE>
<CAPTION>
Change from 1996 to 1997
------------------------
1997 1996 Amount %
- -------------------------------------------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Salaries ................................... $3,007,385 $2,350,401 $ 656,984 28%
Employee benefits .......................... 693,545 577,599 115,946 20%
Data processing and other services ......... 536,573 489,248 47,325 10%
Advertising and business promotion ......... 274,406 262,207 12,199 5%
Professional fees .......................... 211,312 151,926 59,386 39%
Occupancy, net ............................. 749,316 676,593 72,723 11%
Furniture and equipment .................... 521,293 406,878 114,415 28%
Supplies and postage ....................... 446,661 356,563 90,098 25%
State and local business taxes ............. 266,838 212,742 54,096 25%
Other ...................................... 618,331 512,521 105,810 21%
---------- ---------- ---------- --
Total noninterest expense .................. $7,325,660 $5,996,678 $1,328,982 22%
---------- ---------- ---------- --
---------- ---------- ---------- --
</TABLE>
57
<PAGE>
Securities
Pacific maintains a securities portfolio which is used to secure public
funds and other deposit accounts,
as required by law, and to provide liquidity. Securities that are classified as
held-to-maturity are carried at amortized cost. Securities that are classified
as available-for-sale are carried at estimated fair value. The unrecognized
gains and losses on the securities classified as available-for-sale are not
recorded as income or loss but as a separate component, net of taxes, of
shareholders' equity. A significant portion of Pacific's investment portfolio
consists of mortgage-backed securities which provide liquidity through returns
of principal from the underlying mortgages.
The following table shows Pacific's securities distribution at December
31:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
------------------------- -------------------------
(Dollars in thousands) 1997 1996 1995 1997 1996 1995
- ------------------------------------------------ ------- ------- ------- ------- ------- --------
(Amortized costs) (Estimated fair value)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury and agency obligations ........... $ 3,023 $ 3,050 $ 5,545 $ 5,502 $12,001
Obligations of states and political subdivisions $ 1,005 1,008 1,011
Mortgage-backed securities ..................... 5,167 8,549 10,077 11,518 9,803 7,848
Other securities ............................... 1,463 433
------- ------- ------- ------- ------- -------
$ 6,172 $12,580 $14,138 $18,526 $15,738 $19,849
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The following table sets forth the maturities and yields of securities
at December 31, 1997, and the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security):
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
---------------------------- ------------------------------
Weighted Amortized Weighted Estimated
(Dollars in thousands) average yield Cost average yield fair value
- ---------------------------------------------------- --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
U.S. treasury and agency obligations:
Due after one year but within five years .... 6.17% $5,545
Obligations of states and political subdivisions:
Due after five years but within ten years ... 5.27% $1,005
Mortgage-backed securities ...................... 5.52% 5,167 6.21% 11,518
------- --------
5.48% 6,172 6.20% 17,063
Other ........................................... 1,463
------- --------
$6,172 $18,526
------- --------
------- --------
</TABLE>
Loan Portfolio
During 1997, loan growth continued to be strong. Average loan balances
increased 28% from $95,762,000 in 1996 to $122,868,000 in 1997. Ending balances
at year-end increased 35% over the period year-end.
58
<PAGE>
The following table shows Pacific's loan distribution at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------------------
Ending Ending Ending
(Dollars in thousands) balance % of total balance % of total balance % of total
- ------------------------ ----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and financial $108,112 79% $ 83,152 75% $ 54,614 67%
Real estate construction 6,521 5% 6,578 6% 6,337 8%
Real estate mortgage ... 15,616 11% 15,511 14% 16,202 20%
Consumer ............... 6,054 5% 5,198 5% 4,682 5%
-------- -------- -------- -------- -------- --------
Total loans ............ $136,303 100% $110,439 100% $ 81,835 100%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The average balances on loans, and yields on such loans, are summarized
in the following table:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- ------------------------------------
Average Average
(Dollars in thousands) balance % of total Yield balance % of total Yield
- ------------------------ ---------- ---------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Commercial and financial $ 94,733 77% 9.91% $ 69,282 72% 9.79%
Real estate construction 7,264 6% 9.45% 6,452 7% 9.50%
Real estate mortgage ... 15,257 12% 8.67% 15,095 16% 8.75%
Consumer ............... 5,614 5% 9.63% 4,933 5% 9.75%
-------- ----- -------- -----
Total loans ............ $122,868 100% 9.72% $ 95,762 100% 9.60%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
Loan Maturities
The following table shows the maturities of loans (excluding mortgages
and consumer loans) as of December 31, 1997. Also reflected are loan amounts
after one year, classified according to interest rate sensitivity:
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------
After one year
Within but within five After five
(Dollars in thousands) one year years years Total
- ----------------------------------- --------- --------------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial and financial .......... $54,205 $ 21,930 $ 31,977 $108,112
Real estate construction .......... 1,257 2,095 3,169 6,521
------- -------- -------- --------
Total ............................. $55,462 $ 24,025 $ 35,146 $114,633
------- -------- -------- --------
------- -------- -------- --------
Loans maturing after one year with:
Fixed interest rates ......... $ 13,774 $ 4,888
Variable interest rates ...... 10,251 30,258
-------- --------
Total ............................. $ 24,025 $ 35,146
-------- --------
-------- --------
</TABLE>
Allowance for Possible Credit Losses and Loan Quality Review
The allowance for possible credit losses is established through a
provision charged to expense. Loans are charged against the allowance for
possible credit losses when management believes the collectibility of the
principal is unlikely. The allowance is maintained at an amount management
believes will be adequate to absorb losses inherent in the loan portfolio.
Determination of the adequacy of the allowance is based on an evaluation of the
portfolio and other relevant factors. Management's analysis emphasizes review of
the loan portfolio
59
<PAGE>
(concentrations, collateral, and risk) and monitoring past due loans, economic
conditions, and other relevant factors.
Credit Loss Experience
The following table summarizes Pacific's credit loss experience during
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Allowance at beginning of year: ........................................ $ 1,106,000 $ 965,000 $ 920,000
Charge-offs:
Commercial and financial .......................................... (6,464) 0 (50,776)
Consumer .......................................................... (24,667) (25,531)
----------- ----------- -----------
Total charge-offs .................................................... (6,464) (24,667) (76,307)
Recoveries:
Commercial and financial .......................................... 0 0 4,336
Consumer .......................................................... 23,582 7,500 81,980
----------- ----------- -----------
Total recoveries ..................................................... 23,582 7,500 86,316
----------- ----------- -----------
Net (charge-offs) recoveries ......................................... 17,118 (17,167) 10,009
Provision charged to expense ......................................... 251,882 158,167 34,991
----------- ----------- -----------
Allowance at end of year: .............................................. $ 1,375,000 $ 1,106,000 $ 965,000
----------- ----------- -----------
----------- ----------- -----------
Allowance as percentage of total loans ................................. 1.01% 1.00% 1.18%
Net charge-offs (recoveries) as a percentage of average loans .......... (0.01%) 0.02% (0.01%)
- ------------------------------------------------------------------------ ----------- ----------- -----------
</TABLE>
Nonperforming and Past Due Loans
When management believes the borrower's financial condition is such
that the condition of interest is uncertain, accrual of interest is discontinued
and interest previously accrued but not collected is reversed. Management may
elect to continue the accrual of interest when the estimated net realizable
value of collateral is sufficient to cover the principal balance and accrued
interest. Management's classification of a loan as nonperforming does not
necessarily indicate that the principal of the loan is uncollectible in whole or
part. The following table summarizes Pacific's nonaccrual and past due loans at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial and financial ................ $ 18,363 $ 49,348 $ 34,089
Consumer ................................ 5,804 7,338 4,097
-------- -------- --------
Total nonperforming assets ................. $ 24,167 $ 56,686 $ 38,186
-------- -------- --------
-------- -------- --------
Loans contractually past due 90 days or more
and accruing interest ................... $321,212 $ 490 $ 759
-------- -------- --------
-------- -------- --------
Nonaccrual loans as a percent of total loans 0.02% 0.05% 0.05%
-------- -------- --------
-------- -------- --------
Commitments to lend additional funds ....... $ 0 $ 0 $ 0
-------- -------- --------
-------- -------- --------
</TABLE>
60
<PAGE>
Loan Concentrations
In general, Pacific is permitted by law to make loans to single
borrowers in aggregate amounts up to 20% of Pacific's capital and surplus.
Pacific occasionally sells participations in loans to other banks to stay within
lending limits or to otherwise limit Pacific's exposure.
Pacific's goal is to reduce the risk of undue concentrations of loans
to multiple borrowers engaged in similar activities that would cause them to be
similarly affected by economic or other conditions. At December 31, 1997, no
concentration of loans to such multiple borrowers exceeded 10% of Pacific's loan
portfolio.
Pacific has generally restricted its lending activity to customers
located in Washington State, primarily in the Greater Seattle area. Deposits
The following table shows Pacific's deposit distribution at December
31:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Ending Ending
(Dollars in thousands) balance % of total balance % of total
- ------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Noninterest-bearing deposits .. $ 58,517 35% $ 43,668 30%
Interest-bearing deposits:
Demand ..................... 21,231 13% 17,140 12%
Savings .................... 47,760 29% 45,934 31%
Time deposits .............. 38,309 23% 39,583 27%
-------- -------- -------- --------
Total interest-bearing deposits 107,300 65% 102,657 70%
-------- -------- -------- --------
Total deposits ................ $165,817 100% $146,325 100%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Average deposits increased 12% from $136,264,000 in 1996 to
$152,511,000 in 1997. Average balances and rates paid on such deposits are
summarized in the following table:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ------------------------------------------
Average Rates Average Rates
(Dollars in thousands) balance % of total paid balance % of total paid
- --------------------------------- --------- ------------ -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits . $ 42,803 28% $ 35,250 26%
Interest-bearing deposits
Demand ..................... 17,579 12% 1.35% 15,435 11% 1.38%
Savings .................... 45,757 30% 3.09% 43,852 32% 2.96%
Time deposits .............. 46,372 30% 5.57% 41,727 31% 5.35%
-------- ----- ------- -----
Total interest-bearing deposits 109,708 72% 3.86% 101,014 74% 3.71%
-------- ----- ------- -----
Total deposits ................ $152,511 100% $136,264 100%
-------- ----- ------- -----
-------- ----- ------- -----
</TABLE>
61
<PAGE>
Maturities of time deposits of $100,000 or more outstanding at December
31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------------------- --------------
<S> <C>
Three months or less $19,097
Over three months through six months 5,613
Over six months through twelve months 2,779
Over twelve months 255
Total time deposits of $100,000 or more $27,744
--------
--------
</TABLE>
Liquidity Management
Pacific's primary funding sources are customer deposits, loan principal
repayments and maturing securities. Pacific offers a full range of deposit
accounts, including noninterest-bearing and interest-bearing demand deposits,
money market and savings accounts, and time deposits. Pacific attempts to
control the flow of deposits by pricing its accounts to remain generally
competitive with other financial institutions in its market but does not
necessarily always match the highest rates paid by competing institutions.
Pacific maintains additional liquidity capacity through its securities
portfolio, federal funds borrowing lines, borrowing lines with the Federal
Reserve Bank and Federal Home Loan Bank, and participation agreements
established with other financial institutions.
The following comparison of average balances shows Pacific's uses and
sources of funds during the past two years:
<TABLE>
<CAPTION>
- ----------------------------- ------------------------ -----------------------
Average balances for the year 1997 1996
- ----------------------------- ------------------------ -----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Uses of Funds
Loans ...................... $122,868 70% $ 95,762 64%
Other earnings assets ...... 37,985 21% 42,066 28%
-------- -------- -------- --------
Total earning assets ....... 160,853 91% 137,828 92%
Cash and due from banks .... 11,316 7% 9,204 6%
Other nonearning assets .... 3,845 2% 2,705 2%
-------- -------- -------- --------
Total assets ............... $176,014 100% $149,737 100%
-------- -------- -------- --------
-------- -------- -------- --------
Sources of Funds
Interest-bearing deposits .. $109,708 63% $101,014 67%
Other borrowings ........... 7,384 4% 28 0%
-------- -------- -------- --------
Total interest-bearing ..... 117,092 67% 101,042 67%
Noninterest-bearing deposits 42,803 24% 35,250 24%
Other noninterest-bearing .. 1,506 1% 857 1%
-------- -------- -------- --------
Total noninterest-bearing .. 44,309 25% 36,107 25%
Shareholders' equity ....... 14,613 8% 12,588 8%
-------- -------- -------- --------
Total liabilities and
shareholders' equity ..... $176,014 100% $149,737 100%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
62
<PAGE>
Market Risk
Pacific's results of operations are subject to the market risk of
changing interest rates. Pacific manages this risk through an emphasis on
variable rate loans and short maturities combined with shorter term deposits.
Pacific does not use derivatives to manage market risk. The table on the
following page sets forth the balances of Pacific's financial instruments at the
expected maturity dates as well as the fair value of those financial instruments
as of December 31, 1997.
The expected maturities take into consideration historical and
estimated principal prepayments for loans and securities. Principal prepayments
are the amounts of principal reduction over and above normal amortization. The
table assumes that fixed rate loans have annual prepayment rates between 10% to
20% and variable rate loans to have annual prepayment rates between 20% and 25%.
Estimated prepayment rates for mortgage backed securities were obtained from
published sources.
The expected maturities of deposits with no stated maturities reflect
assumptions based on historical and estimated future roll-off rates for deposit
products. The average roll-off rates used for noninterest-bearing,
interest-bearing checking accounts and savings accounts were 5%, 4% and 14%,
respectively.
In most cases, market prices are not available for these financial
instruments and fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the estimates presented in the following table are not
necessarily indicative of the amounts Pacific could realize in a current market
exchange. The carrying value of cash and cash equivalents, interest-bearing
deposits in banks, Federal funds sold, and accrued interest receivable is a
reasonable estimate of fair value for these short-term instruments. For
securities held-to-maturity, available-for-sale, or for trading purposes, fair
value equals quoted market price or dealer quotes. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments. For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The fair value of lending commitments at
year-end is estimated to approximate the remaining unamortized fees. The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
savings, and certain types of money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts for variable-rate, fixed-term money market
accounts approximate their fair values at the reporting date. The fair values
for certificates of deposit are estimated using discounted cash flow analyses,
using interest rates currently being offered for certificates of deposit with
similar terms. The fair value of accrued interest payable approximates the
carrying amount. The fair values of term borrowings are estimated using
discounted cash flow analyses, using interest rates currently being charged for
term borrowings with similar terms.
63
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Expected maturity
--------------------------------------------------------------
There- Fair
(Dollars in thousands) 1998 1999 2000 2001 2002 after Total Value
- ----------------------------------------- --------- --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents ............... 14,783 14,783 14,783
Federal funds sold ...................... 11,425 11,425 11,425
Weighted average interest rate ........ 6.67% 6.67%
Interest-bearing deposits in banks ...... 5,135 5,135 5,135
Weighted average interest rate ........ 6.30% 6.30%
Securities held-to-maturity
Fixed rate ............................ 3,108 78 72 212 830 1,007 5,307 5,340
Weighted average interest rate ........ 5.30% 6.14% 6.10% 6.07% 5.27% 5.55% 5.40%
Variable rate ......................... 64 59 55 51 47 589 865 842
Weighted average interest rate ........ 5.94% 5.94% 5.94% 5.94% 5.94% 5.94% 5.94%
Securities available-for-sale
Fixed rate ............................ 5,142 4,204 542 2,590 3,404 1,180 17,062 17,062
Weighted average interest rate ........ 5.75% 6.30% 6.49% 6.36% 6.46% 6.58% 6.20%
Securities - stock ...................... 1,463 1,463 1,463
Net loans
Fixed rate ............................ 14,816 7,460 5,539 1,531 875 2,297 32,518 32,047
Weighted average interest rate ........ 8.97% 9.43% 9.25% 9.40% 9.17% 9.12% 9.16%
Variable rate ......................... 88,146 5,314 2,738 3,410 2,802 102,410 102,410
Weighted average interest rate ........ 9.73% 8.79% 9.08% 9.01% 9.17% 9.63%
Accrued interest receivable ............. 1,003 1,003 1,003
Financial Liabilities
Non-interest bearing deposits ........... 5,852 4,096 2,341 1,756 1,170 43,302 58,517 58,517
Interest-bearing checking accounts ...... 1,274 1,168 849 637 425 16,878 21,231 21,231
Weighted average interest rate .......... 1.36% 1.36% 1.36% 1.36% 1.36% 1.36% 1.36%
Savings accounts ........................ 13,373 14,328 2,388 1,910 1,433 14,328 47,760 47,760
Weighted average interest rate .......... 3.17% 3.17% 3.17% 3.17% 3.17% 3.17% 3.17%
Certificates of deposit - fixed ......... 36,928 486 229 209 440 17 38,309 38,717
Weighted average interest rate .......... 5.55% 5.66% 5.88% 7.75% 5.74% 5.71% 5.57%
Term borrowings - fixed ................. 3,500 10,000 13,500 13,634
Weighted average interest rate .......... 5.97% 5.39% 5.82%
Accrued interest payable ................ 446 446 446
</TABLE>
Year 2000 Issue
The Year 2000 issue is the result of representing dates with a
two-digit year instead of a four-digit year (i.e., "98" versus "1998".) Today's
computerized systems perform many calculations and comparisons on dates which,
if based on a two-digit year, could produce erroneous results if the systems
read "00" as "1900" instead of "2000" when processed. The issue is not limited
to computer software programs, but potentially includes many electro-mechanical
systems such as elevators, facsimile machines, copiers, etc.
Pacific uses a data processing servicer, M&I Data Services, Inc.
("M&I"). M&I provides Pacific with most of its core processing systems including
loans, deposits, ATM and financial accounting. M&I began addressing the Year
2000 issues in 1995. Pacific has been closely monitoring M&I's progress on its
Year 2000 project. M&I has completed the programming of its software to address
the Year 2000 issue and is in the process of testing the modified software.
Pacific is currently scheduled to be converted to M&I's Year 2000 compliant
software in October 1998.
In addition, Pacific began its own Year 2000 project in late 1996 to
address internal systems. Pacific uses a number of microcomputer based third
party software programs to perform tasks such as accounts payable and loan
documentation. Pacific has completed a detailed inventory of these software
programs and has
64
<PAGE>
reviewed all programs for Year 2000 compliance. With only a few exceptions, most
of Pacific's microcomputer software applications are Year 2000 compliant,
according to the software vendors. Pacific is in the process of testing
compliant software packages to confirm compliance and anticipates completing
this testing phase by year-end 1998. Non-compliant software is scheduled to be
updated or replaced by August 1998 with testing of the updated software to be
completed by year-end 1998.
As a result, Pacific anticipates having all its products and services
Year 2000 compliant by December 1998.
The third part of Pacific's Year 2000 project consists of inventorying
Pacific's infrastructure systems such as facsimile machines, copiers, heating
and air conditioning systems, phone systems, elevators, and security systems.
This inventory has been completed and Pacific is in the process of reviewing and
testing these systems for compliance.
Forward Looking Statements
Pacific has included certain "forward looking statements" concerning
the future operations of Pacific. It is management's desire to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. This statement is for the express purpose of availing Pacific of the
protections of such safe harbor with respect to all "forward looking statements"
contained in the information provided in this Prospectus/Joint Proxy Statement.
Pacific has used "forward looking statements" to describe the future plans and
strategies including expectations of Pacific's future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could effect results include
interest rate trends, the general economic climate in Washington State and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the "forward
looking statements" and undue reliance should not be placed on such statements.
65
<PAGE>
INFORMATION CONCERNING PIONEER
Business
Pioneer was incorporated on January 31, 1985 in the State of
Washington and became a registered bank holding company through the
acquisition of Pioneer Bank on October 25, 1985. Pioneer's principal business
is to hold 100% of the capital stock of its bank subsidiary, Pioneer Bank.
Pioneer Bank was chartered as a national bank under the laws of the
United States in July 1977 and is a full-service commercial bank which
conducts general banking business. Pioneer Bank offers its customers a broad
range of banking services including checking, deposits, commercial loans,
including SBA loans, real estate loans, personal and other installment and
term loans, travelers cheques, safe deposit boxes, electronic banking, wire
transfers and notary services. Pioneer Bank operates a main office in Yakima,
three branch offices in Yakima, and one branch office in Kennewick,
Washington. See "-Facilities."
Competition
The primary service area of Pioneer Bank is the City of Yakima in
Yakima County which is located in South Central Washington. In addition
Pioneer Bank has a branch in Benton County which is located in South-eastern
Washington. Yakima, the largest city in Yakima County, is the location of
Pioneer Bank's home office along with 3 other branches. Pioneer Bank is also
represented in Benton County with one branch in Kennewick. Kennewick is the
largest of the three major cities within the Tri-Cities area. The Tri-Cities
population which is within Benton and Franklin Counties is projected to have
a year 2000 population of approximately 190,000. With 11 other financial
institutions serving the population, competition in Pioneer Bank's primary
service area is relatively high. There are a number of well established
commercial banks and savings banks within this service area. Many of Pioneer
Bank's competitors are larger and more substantially capitalized than Pioneer
Bank. These established larger financial institutions have greater resources
than Pioneer Bank for lending activities and to pay for advertising, physical
facilities, and personnel.
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.
Pioneer Bank relies substantially on local promotional activity,
personal contacts by its officers, directors, employees and shareholders,
extended hours, personalized service, a flexible product mix and its
reputation in the community to compete effectively.
At December 31, 1997, Pioneer Bank was the sixth largest of 12
financial institutions in its primary service area based on deposits.
Facilities
Pioneer Bank operates out of five offices. Following are
descriptions of Pioneer's facilities at each location.
Main Office located at 402 East Yakima Avenue, Yakima, Washington
has four teller windows, two drive up windows and one walk up window. Pioneer
Bank leases this office from Yakima Mall Shopping Center Corporation under
four separate lease agreements. Two leases expire in April 2002. Two leases
expire on July 30, 1998, with additional options to renew until April 2002.
66
<PAGE>
Medical Center Office located at 301 South 11th Avenue, Yakima,
Washington has four teller windows and one drive up window. Pioneer Bank owns
this building.
Gateway Office located at 120 N. Fair Avenue, Yakima, Washington, in
the Food Pavilion at Gateway Center, has three teller windows, and an ATM.
Pioneer Bank leases this office from Thrifty Foods of Eastern WA, Inc.,
pursuant to a lease expiring on December 31, 2001, with two additional five
year options to renew.
Chalet Office located at 5605 Summitview Avenue, Yakima, Washington,
in Wray's Thriftway, has two teller windows and an ATM. Pioneer Bank leases
this office from Wray's Inc., pursuant to a lease expiring on December 31,
2002, with two additional five year options to renew.
Tri-Cities Office located at 401 North Kellogg, Kennewick,
Washington has three teller windows, two drive up windows and an ATM. Pioneer
Bank leases this office from J.P. and Nicole LaLiberte pursuant to a lease
expiring on October 4, 2009, with one additional ten year option to renew.
In addition, Pioneer Bank has an ATM located in the lobby of the
Yakima airport, located at 2300 West Washington Avenue, Yakima, Washington,
and an ATM located at Shields Bag & Printing, located at 1009 Rock Avenue,
Yakima, Washington.
Employees
At December 31, 1997, Pioneer Bank had 80 employees, with 59 persons
working full-time and 21 working part-time. Pioneer has no employees separate
from those of Pioneer Bank. The employees are not represented by a union
organization or other collective bargaining group, and management considers
its relations with the employees to be very good.
Year 2000
Pioneer Bank has been working on becoming year 2000 compliant since
September 1997. Preparations and accomplishments to date include the
following:
The first step was to make the Pioneer Bank Board of Directors and
senior management aware of the issue, its risks and complexities. A senior
executive was assigned responsibility for overseeing the project and a year
2000 committee was formed with representatives from each department of the
Pioneer Bank. Regular meetings have been held to discuss the process, assign
tasks, determine priorities, and monitor progress toward becoming year 2000
compliant. Updates have been provided to the Board of Directors on a monthly
basis.
All of Pioneer Bank's computer controlled equipment has been
identified and approximately 90% has been tested for compliance. All software
programs have been identified and Pioneer Bank is in the process of setting
up testing routines for those programs which have been identified by the
vendors as year 2000 compliant. Some vendors have identified certain programs
that they must change or existing software upgrades that Pioneer Bank must
make to process into the year 2000. Pioneer Bank plans to complete testing on
all programs by the fourth quarter of 1998. Management of Pioneer Bank is
monitoring the progress that its vendors are making towards a solution.
Pioneer Bank does not write any of its own software as it uses
standard programs available to the general banking community. The primary
vendor for the main processing system used by Pioneer Bank is Information
Technology Inc. ("ITI") of Lincoln, Nebraska. ITI has stated that its systems
are year 2000 ready and is providing Pioneer Bank with special instructions
and assistance with testing and confirming that its banking software is ready
for the century date change.
67
<PAGE>
Key vendors have been identified and letters requesting their
progress toward implementing year 2000 solutions have been mailed.
Alternative or backup vendors will be identified where necessary.
Questionnaires have been sent to appropriate corporate borrowing customers to
determine the customer's ability to meet its obligations to Pioneer Bank.
Follow up will be made where necessary.
Pioneer Bank management considers that it is making progress
identifying and remedying problems with processing into the next century, and
that it will meet the necessary deadlines to successfully accomplish the
change to the new century.
Legal Proceedings
Pioneer Bank is from time to time a party to various legal
proceedings arising in the ordinary course of it's business. Management
believes that there is no threatened or pending proceedings against Pioneer
or Pioneer Bank which, if determined adversely, would have a material effect
on the business or financial position of either, respectively.
PIONEER 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 Pioneer's subsidiary,
Pioneer Bank, as Pioneer's primary operation is owning Pioneer Bank. Pioneer
Bank operates four offices in Yakima and one office in Kennewick. Pioneer
Bank concentrates its lending on term loans to small to medium sized
businesses and professionals, and on residential real estate loans to home
buyers. Many of its term loans are commercial real estate loans, and many of
its business loans are guaranteed by the Small Business Administration
("SBA").
Three months ended December 31, 1997 and 1996
Overview. Total assets of $105.9 million at December 31, 1997
represents an 8% increase over total assets of $98.1 million at December 31,
1996. Most of the growth is a result of increases in balances of loans and
securities. The growth in assets was funded primarily by increases in
deposits, and borrowings.
Net Income. For the three months ended December 31, 1997 and 1996,
net income was $360,000 and $250,000, respectively, an increase of $110,000
or 44% in 1997 compared to 1996. The increase in earnings is due in part to
increased net interest income and non-interest income during 1997.
Net Interest Income. Net interest income for the three month period
ended December 31, 1997 was $1,065,000 compared to $1,040,000 for the three
months ended December 31, 1996. This was an increase of $25,000 or 2%
compared to the three months ended December 31, 1996. The increase in net
interest income was primarily the result of a $9 million increase in average
earning assets. Average earning assets were $96 million and $87 million for
the two quarters ended December 31, 1997 and 1996, respectively. Net interest
income was reduced by an increase of $119,000, or 14%, in interest expense
during the three months ending December 31, 1997 compared to the three months
ending December 31, 1996, primarily as a result of increased interest-bearing
deposit accounts. For the three months ended December 31, 1997 and 1996,
interest expense was $974,000 and $855,000, respectively. Pioneer Bank's net
interest margin on earning assets totaled 5.34% and 5.42% during the same
periods, respectively.
Non-Interest Income. Non interest income for the three month period
ended December 31, 1997 and 1996 was $874,000 and $518,000, respectively, an
increase of $356,000 or 69% in 1997 compared to 1996.
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<PAGE>
Fourth quarter of 1997 increase in fee income was primarily due to
income generated from lending activities, resulting in increased gain on sale
of loans.
Non-Interest Expenses. Non-interest expenses for the three month
period ended December 31, 1997 and 1996 was $1,322,000 and $1,136,000,
respectively, an increase of $186,000, or 16.4% from the three month period
ended December 31, 1996. The increase in expenses was primarily associated
with costs incurred with the opening of two new branches in Yakima.
Financial Condition and Results of Operation for the Years ended December 31,
1997 and 1996
Overview. Total assets of $105.9 million at December 31, 1997
represents an 8% increase over total assets of $98.1 million at December 31,
1996. Most of the growth in assets is the result of increases in balances of
loans and securities. The growth in assets was funded primarily by increases
in deposits and borrowings.
Net Income. For the years ended December 31, 1997 and 1996, net
income was $1,081,000 and $1,163,000, or a decrease of $82,000 or 7% from
1997 compared with 1996. The decrease in net income is due in part to lower
fee income from loan sales during the first half of 1997, an increase in
operating expenses associated with the opening of two new branches, and the
expense associated with the repurchase of $103,000 of employee stock option
rights.
Net Interest Income. Net interest income for the years ended
December 31, 1997 increased $230,000, or 5% compared to the year ended
December 31, 1996. The increase in net interest income was primarily the
result of a $15 million increase in average earning assets. Average earning
assets were $95 million and $80 million for the years ended December 31, 1997
and 1996, respectively. Interest income increased by 12.8% for the year
ending December 31, 1997 over the same period for 1996. This increase was
partially offset by the increase in interest expense for the same time
period. Interest expense increased by 23.9% for the year ending December 31,
1997 over the same period for 1996. Interest expense increased due to
increases in interest bearing money market accounts and time deposits in
relationship to non-interest bearing demand deposits. Pioneer Bank's net
interest margin on earning assets totaled 5.20% and 5.80% during the same
periods, respectively.
Non-Interest Income. For the years ended December 31, 1997 and 1996,
non-interest income was $1,908,000 and $1,691,000 respectively, an increase
of $217,000 or 12.8% from 1997 compared with 1996. The increase was primarily
due to growth in deposits resulting in increased service charges on deposit
accounts, and an increase in fee income generated from discounts on purchased
receivables. The increase in non-interest income for the year 1997 was
reduced by a decrease in loan servicing income due to higher SBA loan payoffs
during the year ending 1997.
Non-Interest Expenses. Non-interest expenses for the year ended
December 31, 1997 increased $664,000, or 15.4% from the year ended December
31, 1996. Non-interest expense was $4,979,000 and $4,315,000 for the years
ending December 31, 1997 and 1996 respectively. The increase in expenses was
primarily associated with increased personnel and other expenses incurred in
connection with opening two new Yakima branches, and the repurchase of
$103,000 of employee stock option rights.
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 $696,000 allowance at December 31, 1997 is a decrease
of $52,000 or 6.9% from the 1996 allowance of $748,000. The allowance
represents 1.14% of loans at December 31, 1997, as compared to 1.35% at
December 31, 1996.
The allowance for credit losses is increased by provisions charged
to operations and reduced by loans charged off, net of recoveries. The
allowance is based on management's periodic evaluation of potential losses
69
<PAGE>
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. Pioneer Bank's primary sources of
funds are deposits, borrowing lines arranged through the Federal Home Loan
Bank of Seattle (FHLB) as well as other correspondent lines, sales of
securities available for sale, repurchase agreements, 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 at December 31, 1997 were $85.6 million, an increase
of 4.1% from $82.2 million at December 31, 1996. Pioneer Bank does not accept
brokered deposits. A concerted effort has been made to attract deposits in
the market area Pioneer Bank serves, through competitive pricing and delivery
of quality products.
Capital. 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 16.0%
and 16.9% at 1997, December 31, 1997 and 1996, respectively. At December 31,
1997, Pioneer Bank met all regulatory capital requirements and was considered
"well capitalized" under regulatory risk based capital guidelines.
Pioneer declared a cash dividend on January 16, 1997, payable on
March 21, 1997, to stockholders of record as of December 31, 1996. The
dividend was $0.51 per share, which represents 17% of 1997 earnings.
A voluntary stock repurchase program was initiated on March 24, 1997
and concluded on May 23, 1997. The buyback was at a price of $32.00 per
share. Pioneer also offered employees who held stock options to buy them back
under the same terms. The employees were paid the difference between their
option exercise price and $32.00. The number of shares repurchased were
17,801, and the number of employees options repurchased were 10,250. Shares
repurchased represented less than 4.5% of total outstanding shares.
Lending
Pioneer Bank's policy is to originate loans primarily in its local
market areas. Pioneer Bank'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,
Pioneer Bank'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 the owners. Many business
loans are also guaranteed by the Small Business Administration. Pioneer
Bank's loans are generally classified by the loan purpose and the principal
asset pledged as collateral to secure the loan.
Pioneer Bank'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 Pioneer Bank'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.
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<PAGE>
Types of Loans. The following table sets forth the composition of
Pioneer Bank's loan portfolio by type of loan at December 31, 1997, 1996, and
1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- -------------------------- ------------------------
(Dollars in thousands) Ending Ending Ending
balance % of total balance % of total balance % of total
------------ ------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $13,220 22% $12,528 23% $10,652 21%
Real Estate:
Construction 3,706 6% 5,191 9% 3,876 8%
1-4 Residential 8,362 14% 7,208 13% 10,103 20%
Commercial 31,840 54% 29,253 53% 24,534 48%
Consumer 2,068 4% 1,313 2% 1,572 3%
- -------------------------------------------------------------------------------------------------------
TOTAL $59,196 100% $55,493 100% $50,737 100%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
Loan Maturities and Sensitivities to Changes in Interest Rates. The
following table shows an analysis of Pioneer Bank's loan maturities and
sensitivities to changes in interest rates at December 31, 1997.
<TABLE>
<CAPTION>
After 1 But
Within 1 Year Within 5 After 5 Total
------------- -------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans-Fixed Rate
Commercial and industrial $ 2,356 $ 1,206 $ 83 $ 3,645
Real estate
Construction 2,209 258 0 2,467
1-4 residential 572 2,123 2,900 5,595
Commercial 851 11,474 6,717 19,042
Consumer 151 672 404 1,227
----------------------------------------------------------
Total loans with
interest rates (fixed) $ 6,139 $15,733 $10,104 $31,976
Loans-Variable
Commercial and industrial $ 9,528 $ 48 $ 0 $ 9,576
Real estate
Construction 1,238 0 1,238
1-4 residential 1,568 1,199 2,767
Commercial 11,313 1,306 179 12,798
Consumer 841 0 0 841
----------------------------------------------------------
Total loans with floating or
adjusted interest rates 24,488 2,553 179 27,220
----------------------------------------------------------
Total Loans $30,627 $18,286 $10,283 $59,196
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
71
<PAGE>
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, loan
concentrations and classified loans. The following table states Pioneer
Bank's non-accrual loans as of December 31, 1997, 1996 and 1995. There was
one restructured loan in the amount of $455,000 as of December 31, 1997. This
loan was performing under a Chapter 11 bankruptcy plan.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------
Non-Accrual Loans Accruing Loans Past Due 90 Days
----------------- -------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial and industrial $139 $26 $402
Real estate:
Construction
1-4 residential
Commercial 532
Consumer 17 19
------------------------------------------------------------------------
Total $139 $575 $421 $0 $0 $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 income. Interest income is subsequently
recognized only to the extent payments are received.
At December 31, 1997, Pioneer Bank 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. Pioneer Bank'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.
Summary of Loan Loss Experience
Analysis of the Allowance for Credit Losses. Pioneer Bank maintains
the allowance for credit losses at a level sufficient to provide for
estimated loan losses based on evaluation of known and inherent risks in the
loan portfolio. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may effect the borrower's ability to
repay, the estimated value of any underlying collateral, economic conditions,
the result of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory
agencies, and other risks inherent in the portfolio. Credits deemed
uncollectible are charged to the allowance. Provisions for credit losses and
recoveries on loans previously charged off are added to Pioneer Bank's
allowance.
The following table summarizes Pioneer Bank's loan loss experience
for the years ended December 31, 1997, 1996 and 1995.
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<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------
1997 1996 1995
---------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of year: $748 $533 403
Charge-offs:
Commercial and industrial (93) (29) (23)
Commercial real estate (154) (18)
Consumer (15) (11) --
---------------------------------------------
Total charge-offs (262) (58) (23)
Recoveries:
Commercial and industrial 1 1
Commercial real estate 21
Consumer 0 0 1
---------------------------------------------
Total recoveries 22 1 1
---------------------------------------------
Net (charge-offs) recoveries (240) (57) (22)
Provision charged to expense 188 272 152
---------------------------------------------
Allowance at end of year: $696 $748 $533
---------------------------------------------
---------------------------------------------
Ratio of net charge-offs to average
outstanding loans during the period .405% .105% .05%
Allowance as percentage of total loans
at end of period 1.14% 1.35% 1.07%
Average outstanding loans $59,257 $54,096 $44,220
</TABLE>
Market Risk
Pioneer Bank's business strategies are to maximize long term
profitability and to provide stable net interest income insofar as possible,
but even more importantly, to protect the bank's net earnings during various
rate scenarios.
This includes managing the risk/return relationships between
liquidity, capital adequacy and the potential for income fluctuations due to
the mismatching of asset and liability maturities. Pioneer Bank considers
liquidity the greatest risk to the bank followed by capital adequacy and then
interest rate risk. Pioneer Bank expects to generate earnings from
appropriate loan volume ( fees), correct loan pricing (interest), and expense
control, and not from trying to accurately forecast interest rates.
Pioneer Bank's loan portfolio historically has had very little
interest rate risk compared to its' liabilities due to the fact that
approximately 83% of it's loans are variable rate or mature in less than 5
years. Pioneer Bank's liability side also is weighted to a short maturity
schedule. Most commercial loans are priced off of a prime rate index. Over
45% of the loans at year end December 31, 1997 were variable rate, the
majority of which reprice immediately or within 30 days of a change in the
prime rate. Over 90% of the banks certificates of deposit mature within 12
months.
Pioneer Bank does make some longer term residential real estate
loans. In most cases these loans are written to secondary market standards
and sold within 30 days.
The table on the following page sets forth the balance of Pioneer
Bank's financial instruments at the expected maturity dates as well as the
fair value of those financial instruments as of December 31, 1997.
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<PAGE>
The expected maturities for financial liabilities with no stated
maturity reflect assumptions based on historical and estimated future
roll-off rates. The roll-off rates for non-interest bearing deposits,
interest bearing checking accounts, money market accounts and savings
accounts are 8 percent, 14 percent, 10 percent, and 15 percent, respectively.
The weighted average interest rates for financial instruments presented are
actual as of December 31, 1997.
The estimated fair value amounts have been determined by Pioneer
Bank using available market information and appropriate valuation
methodologies. Amounts that could actually be realized may be different than
those presented herein. The carrying value of cash and cash equivalents and
accrued interest receivable is a reasonable estimate of the fair value for
such financial assets. The fair values of securities available for sale,
securities held to maturity and loans held for sale are based on quoted
market rates and dealer quotes. The fair value of fixed-rate and adjustable
rate loans is based on discounted cash flows using estimated market rates for
loans with similar characteristics. FHLB stock does not have a market and the
fair value is considered to be its carrying value. The fair value deposits
with no stated maturity, such as checking accounts, money market accounts and
savings accounts, is considered to be the amount payable on demand as of
December 31, 1997. The fair value of certificates of deposit is based on the
discounted value of cash flows using a discount rate based on the current
average rate for deposits with similar maturities as of December 31, 1997.
The fair value of FHLB advances and securities sold under agreements to
repurchase are estimated based on the present value of future cash flows
using a discount rate equal to the rate offered on similar borrowings with
similar maturities as of December 31, 1997.
74
<PAGE>
<TABLE>
<CAPTION>
There- Fair
1998 1999 2000 2001 2002 after Total Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents
Non-Interest bearing $6,254 $6,254 $6,254
Weighted average interest rate
Interest-bearing deposits in banks 1,792 1,792 1,792
Weighted average interest rate 5.50% 5.50%
Securities available for sale
Fixed rate 623 5,634 5,101 5,305 3,507 8,289 28,459 28,459
Weighted average interest rate 6.90% 5.96% 6.25% 6.35% 6.45% 6.67% 6.37%
Adjustable rate --- 497 --- --- --- 1,330 1,827 1,827
Weighted average interest rate --- 5.55% --- --- --- 6.76% 6.43%
Securities held to maturity
Fixed rate 259 63 45 107 55 826 1,355 1,388
Weighted average interest rate 7.16% 8.07% 9.70% 8.06% 10.00% 7.06% 7.46%
Adjustable rate --- --- --- --- --- --- ---
Weighted average interest rate --- --- --- --- --- --- ---
Loans receivable, net
Fixed rate 6,211 1,306 8,134 2,375 3,265 10,685 31,976 31,820
Weighted average interest rate 8.79% 9.86% 9.47% 9.65% 9.97% 9.29% 9.36%
Adjustable rate 5,937 1,425 1,781 1,603 1,722 14,752 27,220 27,563
Weighted average interest rate 10.22% 10.31% 10.76% 10.90% 10.60% 10.60% 10.53%
Loans held for sale 2,369 2,369 2,394
Weighted average interest rate 7.25 7.25%
Accrued interest receivable 786 786 786
Weighted average interest rate
Federal Home Loan Bank (FHLB) stock 2,020 2,020 2,020
Weighted average interest rate 8.00% 8.00%
Financial Liabilities
Non-interest bearing deposits 1,333 1,227 1,128 1,038 954 10,983 16,663
Weighted average interest rate --- --- --- --- --- --- --- ---
Interest-bearing checking accounts 856 736 633 545 468 2,879 6,117
Weighted average interest rate 1.45% 1.45% 1.45% 1.45% 1.45% 1.45% 1.45%
Money market accounts 1,178 1,060 954 859 773 6,954 11,778
Weighted average interest rate 4.57% 4.57% 4.57% 4.57% 4.57% 4.57% 4.57%
Savings accounts 1,081 919 781 664 564 3,198 7,207
Weighted average interest rate 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35%
Certificates of deposit
Fixed rate 39,705 3,290 356 198 161 --- 43,710 43,766
Weighted average interest rate 5.47% 5.75% 5.81% 5.35% 5.40% --- 5.49%
Adjustable average interest rate 126 126 126
Weighted average interest rate 5.17% 5.17%
FHLB advances and other borrowings
Fixed rate 2,700 1,893 1,680 --- 400 --- 6,673 6,673
Weighted average interest rate 6.06% 6.88% 6.32% --- 7.70% --- 6.46%
Adjustable average interest rate 3,518 --- --- --- --- --- 3,518 3,520
Weighted average interest rate 6.03% 6.03%
Securities sold under agreements
to repurchase --- --- --- --- --- --- ---
Weighted average interest rate
</TABLE>
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<PAGE>
Securities Activity
Securities for which Pioneer Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized in interest
income.
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 stockholders' 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.
Pioneer Bank's investment policy is approved by its Board. It has
been the policy of Pioneer Bank to maintain relatively high levels of
liquidity to meet loan funding and deposit outflow requirements. The
following table sets forth the securities portfolio of Pioneer Bank.
Analysis of Securities. The estimated fair values of securities
available for sale and the amortized cost of securities held to maturity are
as follows at December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
As of December 31,
(dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Available for Sale:
US Treasury and other
US government agencies
and corporations $25,216 $20,743 $12,469
States of the US and 4,733 6,343 1,781
political subdivisions
Other securities 2,357 2,465 3,523
-------------------------------------
$32,306 $29,551 $17,773
Held to Maturity:
States of the US and
political subdivisions $ 1,355 $ 551 $ 770
</TABLE>
Maturity Distribution of Securities. The following table sets forth
the stated maturities of securities as of December 31, 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 --- --- $21,004 6.28% $2,000 6.39% $2,204 6.72%
States of the US and
political subdivisions 623 6.90% 2,128 6.41% 1,990 7.20% --- ---
Other securities 2,108 7.54% 249 5.74% ---- ---- --- ---
------ ---- ------- ---- ------ ---- ------ ----
$2,731 7.39% $23,381 6.29% $3,990 6.79% $2,204 6.72%
</TABLE>
76
<PAGE>
<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>
Held to Maturity:
States of the US and
political subdivisions $ 259 7.16% $ 270 8.73% $ 826 7.21% --- ---
</TABLE>
The balance of states and political subdivisions at December 31,
1997 were issued by the State of Washington and its political subdivisions.
These securities were purchased to enhance Pioneer Bank's yield on earning
assets and reduce Pioneer Bank'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:
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits:
Demand deposits $14,580 --- $13,530 --- $11,647 ---
Savings, NOW and
money market 25,115 3.25% 19,400 2.86% 16,336 2.9%
Time deposits 46,263 5.70% 37,791 5.76% 25,801 5.8%
------- ----- ------- ----- ------- ----
Total $85,958 $70,721 $53,784
------- ----- ------- ----- ------- ----
------- ----- ------- ----- ------- ----
</TABLE>
Maturities of time certificates of deposit of $100,000 or more
outstanding as of December 31, 1997, are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Three months or less $3,260
Over three through twelve months 5,927
Over one year through three years 1,033
-------
Total $10,220
-------
-------
</TABLE>
Significant Financial Ratios
The following table sets forth consolidated operating ratios for
Pioneer Bancorp for the periods presented.
<TABLE>
<CAPTION>
Three months ended
December 31, Year ended December 31,
------------------- -----------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 1.23% 1.06% 1.06% 1.35% 1.21%
Return on average equity 14.42% 11.57% 12.73% 14.47% 12.85%
Average equity to average assets 8.55% 9.15% 8.37% 9.24% 9.83%
Dividend pay out ratio to net income --- --- 17.02% 14.27% 17.99%
</TABLE>
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<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
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 year ended December 31, 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 $ 568 $ (212) $ 356 $ 1,116 $ 49 $ 1,165
Securities
Taxable 458 34 492 302 (21) 281
Nontaxable 185 0 185 70 (51) 19
Federal funds sold (63) 8 (55) 37 (5) 32
Interest bearing deposits -- -- -- -- -- --
-------------------------------------------------------------------
Interest earning $ 1,148 $ (170) $ 978 $ 1,525 $ (28) $ 1,497
INTEREST PAID ON:
Savings, NOW and
money market $ 189 $ 72 $ 261 $ 89 $ (8) $ 81
Time deposits 483 (22) 461 695 (19) 676
Short-term borrowings 19 7 26 (95) (23) (118)
-------------------------------------------------------------------
Interest bearing $ 691 $ 57 $ 748 $ 689 $ (50) $ 639
-------------------------------------------------------------------
Net Interest income $ 457 $ (227) $ 230 $ 836 $ 22 $ 858
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
78
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF INTERWEST, PACIFIC AND PIONEER
Information regarding beneficial ownership of the InterWest Common Stock
is set forth in the InterWest 1998 Proxy, which is incorporated herein by
reference. See "INFORMATION INCORPORATED BY REFERENCE," "AVAILABLE
INFORMATION" and the InterWest 1998 Proxy.
PACIFIC
The following table sets forth certain information regarding beneficial
ownership of the Pacific Common Stock at March 19, 1998 by (i) each director
and executive officer, (ii) all directors and executive officers as a group,
and (iii) each person known by Pacific to be the beneficial owner of more
than 5% of the outstanding shares of Pacific Common Stock:
<TABLE>
<CAPTION>
Shares Beneficially
Owned Before Percent of Class
Name and Address(1) the Merger Before the Merger(2)William
- ------------------- ------------------- ---------------------------
<S> <C> <C>
William Bain, Jr. 3,712 *
George Brace 13,788 (3) 3.42%
Kim Brace 13,788 (4) 3.42%
Roderick Budd 5,224 (5) 2.31%
James P. Crutcher 2,953 *
Patrick Fahey 39,337 (6) 9.53%
Robert E. Hartley 1,513 *
William G. Lucks 4,214 1.06%
Samuel Rubenstein 25,586 6.46%
David Straus 5,917 (7) 1.48%
Douglas A. Swerland 4,341 1.10%
Betty Woods 2,383 *
Executive officers and directors
as a group(11 persons) 92,029 (8) 21.53%
</TABLE>
- ----------
* Less than one percent.
(1) Unless otherwise noted, the address for all of the named persons is 1111
Third Avenue, Seattle, Washington.
(2) In accordance with Rules 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Pacific Common Stock if he or she has voting and/or investment
power with respect to such security. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of ownership, over which shares the persons named in the
table possess voting and/or investment power.
(3) Includes 5,548 shares held by Kim Brace, Mr. Brace's spouse, and 2,000
shares held jointly by Mr. Brace and Ms. Brace, and 3,724 shares subject
to stock options currently exercisable.
(4) Includes 6,240 shares held by George Brace, Ms. Brace's spouse, and
2,000 shares held jointly by Ms. Brace and Mr. Brace, and 3,724 shares
subject to stock options currently exercisable.
(5) Includes 3,724 shares subject to stock options currently exercisable.
(6) Includes 100 shares held as custodian for the benefit of his minor
child, 4,507 shares held in various individual retirement accounts, 119
shares held in an Individual Retirement Account in the name of Barbara
S. Fahey, 30 shares held in the name of Barbara S. Fahey, and 16,614
shares subject to stock options currently exercisable.
(7) Includes 3,724 shares subject to stock options currently exercisable,
and 200 shares held by Mr. Straus' spouse for the benefit of minor
children.
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<PAGE>
(8) Includes 8,647 shares as of March 19, 1998, held in the Pacific
Northwest Bank Retirement Plan for which Kim Brace and David Straus
serve as trustees. Does not include shares held by Samuel Rubenstein
who is neither an Executive Officer nor Director.
Executive Compensation
Mr. Patrick Fahey currently serves as the President and Chief Executive
Officer of Pacific, will continue to serve in that capacity after the Pacific
Merger and will also be Vice Chairman/Commercial Banking of InterWest and
will serve on the InterWest Executive Management Team. In 1997, 1996 and
1995, Mr. Fahey received annual compensation (salary and bonus) of $288,000,
$251,500 and $245,000, respectively. Mr. Fahey was awarded long-term
compensation of $25,521, $22,485 and $21,199 in 1997, 1996 and 1995,
respectively, and granted an option to purchase 500 shares of Pacific Common
Stock. The long-term compensation awards include contributions made by
Pacific under its Retirement Plan with a "401(k)" feature, which provides for
broad-based employee participation, and Pacific's "make whole" benefit plan,
the purpose of which is to provide benefits to employees whose benefits under
Pacific's qualified retirement plan(s) are limited by the application of Code
sections 415 and/or 401(a)(7).
PIONEER
The following table sets forth certain information regarding beneficial
ownership of the Pioneer Common Stock at March 19, 1998 by (i) each director
and executive officer, (ii) all directors and executive officers as a group,
and (iii) each person known by Pioneer to be the beneficial owner of more
than 5% of the outstanding shares of Pioneer Common Stock:
<TABLE>
<CAPTION>
Shares Beneficially
Owned Before Percent of Class
Name and Address(1) the Merger Before the Merger(2)William
- ------------------- ------------------- ---------------------------
<S> <C> <C>
Joanne Almon 600 (3) *
Donald H. Ballew M.D. 17,459 (4) 4.65%
Paul L. Campbell 16,017 (5) 4.27%
Ardell Curtis 2,763 (6) *
Laura Haddix 4,000 (7) 1.07%
W. S. Doyle, Jr. 6,998 (8) 1.86%
Robert D. Hall 5,677 1.51%
Edward R. Kershaw 5,030 (9) 1.34%
Donald P. Kiser 5,100 (10) 1.36%
Jeff Lindberg 3,000 (11) .80%
Sherm Losee 4,000 (12) 1.07%
Robert P. Lewis 15,834 (13) 4.22%
Robert R. Lynch 12,091 (14) 3.22%
Sandra Matheson 1,058 *
Eugene L. Shields 16,799 (15) 4.47%
Melvin G. Wagner 6,163 (16) 1.64%
Max Webb -0- -0-
Executive officers and
directors as a group
(17 persons) 122,589 (3)-(16) 32.65%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise noted, the address for all named persons is 402 East
Yakima Avenue, Suite 110, Yakima, Washington 98901.
80
<PAGE>
(2) In accordance with Rules 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Pacific Common Stock if he or she has voting and/or investment
power with respect to such security. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of ownership, over which shares the persons named in the
table possess voting and/or investment power.
(3) Includes 600 shares owned jointly by Mrs. Almon and her spouse.
(4) Includes 15,439 owned jointly by Dr. Ballew and his spouse.
(5) Includes 3,017 shares owned jointly by Mr. Campbell and his spouse, and
13,000 shares which could be acquired by exercise of stock options.
(6) Includes 2,763 shares owned jointly by Mr. Curtis and his spouse.
(7) Includes 4,000 shares which could be acquired by Mrs. Haddix by exercise
of stock options.
(8) Includes 6,998 shares owned by Doyle Family Living Trust, of which Mr.
Doyle is a trustee.
(9) Includes 4,032 shares held for Mr. Kershaw in an individual retirement
account. Also 266 shares owned by Mr. Kershaw's spouse and 732 shares
owned jointly by Mr. Kershaw and his brother.
(10) Includes 1,100 shares owned jointly by Mr. Kiser and his mother, and
4,000 shares which Mr. Kiser could acquire by exercise of stock options.
(11) Includes 3,000 shares which could be acquired by Mr. Lindberg by
exercise of stock options.
(12) Includes 4,000 shares which could be acquired by Mr. Losee by exercise
of stock options.
(13) Includes 11,559 shares owned jointly by Mr. Lewis and his spouse. Also
2,680 shares held in an individual retirement account for Mr. Lewis and
1,170 shares held in an individual retirement account for Mr. Lewis's
spouse.
(14) Includes 12,091 shares owned jointly by Mr. Lynch and his spouse.
(15) Includes 7,561 shares owned jointly by Mr. Shields and his spouse. Also
Shields is trustee.
(16) Includes 1,589 shares held in an individual retirement account for Mr.
Wagner.
81
<PAGE>
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 Pioneer are bank holding companies by virtue of their
respective ownership of InterWest Bank and FNBP, and Pioneer Bank, and are
registered as such with the FRB. As bank holding companies, InterWest and
Pioneer 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 Pioneer 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, Pioneer 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 restrictions, such as age and contingency laws, a
bank holding company that is adequately capitalized and adequately managed
may acquire the assets of an out-of-state bank.
Control of Nonbanks. With certain exceptions, the BHCA also prohibits
bank holding 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 the company's business to be incidental to the business
of banking. When 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.
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
82
<PAGE>
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 Pioneer and Pioneer Bank,
are deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions.
Generally, Sections 23A and 23B of the Federal Reserve Act: (1) limit the
extent to which the financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, to an amount equal to
10% of such institution's capital and surplus and an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such
capital and surplus, and (2) require all transactions with an affiliate,
whether or not "covered transactions," to be on terms substantially the same,
or at least as favorable to the institution or subsidiary, as those provided
to 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.
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, Pioneer 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, Pioneer, 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
83
<PAGE>
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, Pioneer and their subsidiaries is unclear at this
time.
State Law Restrictions
As corporations chartered under the laws of the State of Washington,
InterWest and Pioneer 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.
The Banks
General
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks
under their supervision from engaging in what they consider to be an unsafe
and unsound practice in conducting their business.
Pacific is a state-chartered commercial bank subject to extensive
regulation and supervision by the Washington Department of Financial
Institutions Division of Banks (the "Division"). FNBP and Pioneer Bank are
national banking associations which are subject to extensive regulation and
supervision by the OCC. InterWest Bank is a state-chartered savings bank
subject to regulation and supervision by 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 Pacific, Pioneer Bank, InterWest Bank and FNBP (the "Banks") are also
subject to regulation and examination by the FDIC, which insures their
respective deposits to the maximum extent permitted by law. The federal laws
that apply to the Banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of
the availability of deposited funds and the nature and amount of and
collateral for loans. The laws and regulations governing the Banks generally
have been promulgated to protect depositors and not to protect stockholders
of such institutions or their holding companies.
FNBP and Pioneer Bank are national banks, primarily regulated by the
OCC. The OCC charges each national bank under its supervision a semi-annual
assessment that is based on a predetermined regulatory formula. Effective in
1998, the OCC has amended its assessment regulations so that a national bank
that receives a CAMELS rating of 3,4 or 5 will be required to pay a surcharge
equal to 25% of the amount of the assessment that the bank would otherwise
pay. This increase is intended to offset the higher costs incurred by the OCC
in supervising banks with these ratings. Neither Pioneer Bank nor FNBP
expect to be subject to the surcharge.
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,
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<PAGE>
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
periodic on-site bank examinations and set standards for real estate lending.
Loans-to-One Borrower
Each of the Banks is subject to limitations on the aggregate amount of
loans that it can make to any one borrower, including related entities.
Applicable regulations generally limit loans-to-one borrower to 15 to 20% of
unimpaired capital and surplus. Each of the Banks is 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 BIF and/or the SAIF, as applicable, based on their risk
classification.
In September of 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provided, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment was
designed to place the SAIF at its 1.25 reserve ratio goal.
The Funds Act, for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis
points) imposed on SAIF insured deposits (approximately 6.5 basis points).
Beginning in the year 2000, BIF insured institutions will be required to pay
the FICO obligations on a pro-rata basis with all thrift institutions; annual
assessments are expected to equal approximately 2.4 basis points until 2017,
to be phased out completely by 2019.
Until further action by the FDIC, BIF premiums will be maintained at
their current level. Accordingly, institutions in the lowest risk category
will continue to pay no premiums, and other institutions will be assessed
based on a range of rates, with those in the highest risk category paying 27
cents for every $100 of BIF insured deposits. Rates in the SAIF assessment
schedule, previously ranging from 4 to 31 basis points, have been adjusted by
4 basis points to a range of 0 to 27 basis points.
The Funds Act provides for the merger of the BIF and SAIF on January 1,
1999, only if no thrift institutions exist on that date. It is expected that
Congress will continue to address comprehensive legislation on the merger of
the funds and elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law. The
insurance may be terminated permanently, if the institution has no tangible
capital. If deposit insurance is terminated, the accounts at the institution
at the time of the termination, less subsequent withdrawals, will continue to
be insured for a period of six months to two years, as determined by the
FDIC.
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<PAGE>
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. None of InterWest, FNBP,
Pacific or Pioneer Bank have 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%. Most loans are assigned to the 100% risk category, except for
first mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating).
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or
United States Government Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to
be used as a supplement to the risk-based guidelines. The principal
objective of the leverage ratio is to limit the maximum degree to which a
bank may leverage its equity capital base. The minimum required leverage
ratio for top-rated institutions is 3%, but most institutions are required to
maintain an additional cushion of at least 100 to 200 basis points. Any
institution operating at or near the 3% level is expected to be a strong
banking organization without any supervisory, financial or operational
weaknesses or deficiencies. Any institutions experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
Prompt Corrective Action. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The
FDIC, the OCC and other Agencies must take certain "prompt corrective action"
when a bank fails to meet capital requirements. The regulations establish
and define five capital levels: (1) "well-capitalized," (2) "adequately
capitalized," (3) "undercapitalized," (4) "significantly undercapitalized"
and (5) "critically undercapitalized." To qualify as "well-capitalized," an
institution must maintain at least 10% total risk-based capital, 6% Tier 1
risk-based capital, and a leverage ratio of no less than 5%. Increasingly
severe restrictions are imposed on the payment of dividends and management
fees, asset growth and other aspects of the operations of institutions that
fall below the category of being "adequately capitalized" (which requires at
least 8% total risk-based capital, 4% Tier 1 risk-based capital, and a
leverage ratio of at least 4%). Undercapitalized institutions are required to
develop and implement capital plans acceptable to the appropriate federal
regulatory agency. Such plans must require that any company that controls
the undercapitalized institution must provide certain guarantees that the
institution will comply with the plan until it is adequately capitalized. As
of the date of this Prospectus/Joint Proxy Statement, neither InterWest,
Pioneer, nor their respective subsidiaries or Pacific were subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
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<PAGE>
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 Pioneer by
Pioneer Bank are a material source of Pioneer's cash flow. Various federal
and state statutory provisions limit the amount of dividends InterWest's and
Pioneer's banking subsidiaries are permitted to pay to InterWest and Pioneer,
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.
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.
Under 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 InterWest Bank, without the approval
of the Director of the Division.
Pacific may not declare or pay any dividends in an amount greater than
its retained earnings without the approval of the Washington Director. The
Banking Act also grants to the Washington Director discretion to require any
bank to suspend the payment of dividends until the bank complies with all the
conditions imposed by the Washington Director. Restriction of the payment of
dividends do not apply to dividends payable in Pacific capital stock, unless
the Washington Director suspends the payment of any or all dividends.
Pacific's ability to pay dividends may also be limited by the FDIC's safety
and soundness regulations.
Under the National Bank Act, Pioneer Bank may not pay dividends without
advance approval of the OCC if the total of all dividends declared by them in
any calendar year will exceed the sum of their respective net profits (as
defined by statute) for that year plus 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 Pioneer Bank as of December 31, 1997, was
approximately $2,600,000.
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. Each of the
Banks 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
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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 predecessor has been doing business for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking
in Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to Washington
law, (3) resulted from a relocation of a head office of a state bank or a main
office of a national bank pursuant to federal law, or (4) resulted from the
establishment of a savings bank branch in compliance with applicable Washington
law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
The Agencies recently adopted regulations, under which banks are
prohibited from using their interstate branches primarily for deposit
production. The Agencies have accordingly implemented a loan-to-deposit
ratio screen to ensure compliance with this prohibition.
Regulatory Improvement. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act"),
with the intent of, among other things, reducing the regulatory burden on
financial institutions. This Act is intended to streamline certain
regulatory procedures and relax certain regulatory compliance requirements.
In addition, the Regulatory Improvement Act specifically directs each federal
banking agency to review and streamline its regulations and written
supervisory policies.
At this time, the full impact that the Interstate Act and the Regulatory
Improvement Act might have on InterWest, Pacific, Pioneer 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.
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DESCRIPTION OF INTERWEST CAPITAL STOCK
InterWest is authorized to issue 20,000,000 shares of Common Stock,
$0.20 par value per share. At March 26, 1998, 8,415,372 shares of InterWest
Common Stock were issued and outstanding. A total of 435,833 shares are
subject to options under InterWest stock option plans; 273,209 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" and "INFORMATION INCORPORATED
BY REFERENCE."
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 receipt to
InterWest of dividends from InterWest Subsidiaries because InterWest has no
source of income other than dividends from InterWest Subsidiaries.
Accordingly, the dividend restrictions imposed on InterWest's Subsidiaries 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(s) 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, PACIFIC AND PIONEER
COMMON STOCK."
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COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST,
PACIFIC AND PIONEER 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. Pioneer is also
incorporated under the laws of the State of Washington and, accordingly, the
rights of Pioneer's stockholders are governed by Pioneer Articles of
Incorporation, Bylaws and the WBCA. The rights of Pacific Shareholders are
currently governed by Title 30 of the Revised Code of Washington, as amended
(the "Banking Act"), and Pacific's Articles of Incorporation and Bylaws.
Upon consummation of the Merger(s), stockholders of Pacific and
Pioneer 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
Association/Incorporation and Bylaws of Pacific and Pioneer. 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.
Pacific. The Banking Act restricts the ability of Pacific to pay
dividends. Without the approval of the Washington Director, Pacific may not
declare or pay any dividends in an amount greater than its retained earnings.
The Banking Act also grants to the Washington Director discretion to require
any bank to suspend the payment of dividends until the bank complies with all
the conditions imposed by the Washington Director. Pacific's ability to pay
dividends may also be limited by the FDIC's safety and soundness regulations.
(See "SUPERVISION AND REGULATION - Pacific - Dividends".)
Pioneer. Pioneer'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.
Pacific. All voting rights are currently vested in the holders of
Pacific Common Stock, each share being entitled to one vote. Pacific's
Articles provide that shareholders do not have cumulative voting rights in
the election of directors.
Pioneer. All voting rights are vested in the holders of Pioneer
Common Stock, with each share being entitled to one vote. Pioneer's Articles
of Incorporation eliminate cumulative voting.
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Preemptive Rights
Neither InterWest's stockholders nor Pacific's or Pioneer'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.
Pacific. If Pacific is liquidated, the holders of Pacific Common
Stock are entitled to share, on a pro-rata basis, Pacific's remaining assets,
after provision for all debts and liabilities.
Pioneer. If Pioneer is liquidated, holders of Pioneer Common Stock
are entitled to share, on a pro rata basis, Pioneer's remaining assets after
payment of or provision for all debts and other liabilities of Pioneer.
Assessments
All outstanding shares of InterWest Common Stock and of Pioneer
Common Stock are fully paid and nonassessable.
Pacific. The Banking Act authorizes the Washington Director to levy
an assessment on Pacific's common stock to make good on any offense or
delinquency. The amount of the assessment shall be pro rata and shareholders
are subject to forfeiture of their common stock if they fail to pay.
Stock Repurchases
Under Washington law, a corporation may acquire shares of its own
stock. Therefore, both InterWest and Pioneer may repurchase shares of their
own capital stock.
Pacific. Pacific, with the prior approval of the Washington
Director, may purchase shares of its 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.
Pacific. Pacific's Articles of Incorporation may be amended upon
the affirmative vote of the holders of two-thirds of Pacific's outstanding
voting stock. Certain amendments to Pacific's Articles of Incorporation, as
listed in the Banking Act, may be made by Pacific's Board of Directors
without shareholder approval. The Bylaws of Pacific may be amended by a
majority vote of the Board of Directors or by holders of a majority of the
outstanding shares of Pacific.
Pioneer. Pioneer's Articles of Incorporation may be amended in
accordance with the provisions of the WBCA. Generally, under the WBCA, with
certain exceptions, amendments to a corporation's articles of
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incorporation must be recommended to the shareholders by the board of
directors (unless the board of directors determines that, because of a
conflict of interest or other special circumstances, it should make no
recommendation), and approved by two-thirds of all votes entitled to be cast
by each voting group which has a right to vote on such amendment, unless a
higher percentage is specified by the board of directors or in the Pioneer
Articles or the WBCA. Pioneer Articles of Incorporation do not specify a
higher percentage.
Pioneer's Bylaws may be amended by a majority vote of the board of
directors, provided that any such amendment to the Bylaws may be subsequently
changed or repealed by the affirmative vote of the holders of a majority of
the outstanding shares of Pioneer.
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.
Pacific. The Bylaws of Pacific provide that special meetings of
shareholders may be called at any time by the Chairman, the President, the
Board or holders or not less than 1/10 of all the shares of Pacific entitled
to vote at the meeting. Pursuant to the Banking Act, an action required or
permitted to be taken at the shareholders meeting may be taken without a
meeting if a consent, in writing, setting forth the action so taken, is
signed by all the shareholders entitled to vote with respect to the subject
matter thereof.
Pioneer. Pioneer's Bylaws provide that special meetings of
shareholders may be called at any time upon the request of any two directors,
or of any shareholder or shareholders holding in the aggregate one-tenth of
all the shares entitled to vote at the meeting. Under the WBCA, any action
required or permitted to be taken at a meeting of shareholders may be taken
without a meeting if the action is taken by all the shareholders 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
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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.
Pacific. The Banking Act requires the approval by the Washington
Director and the holders of 66 2/3% of Pacific's outstanding voting stock for
merger(s) and consolidations. Upon receipt of written permission from the
Washington Director, a state bank may go into voluntary liquidation by a vote
of shareholders owning two-thirds of its capital stock. For the purpose of
voluntary liquidation, a state bank may transfer its assets or liabilities to
another bank or trust company, by a vote of shareholders owning two-thirds of
its capital stock, but only with the written consent of the Washington
Director.
Pioneer. Under the WBCA, a merger, share exchange, dissolution or
sale of all or substantially all the assets of a corporation must be adopted
by the corporation's board of directors and approved by each voting group
entitled to vote separately by two-thirds of all the votes entitled to be
cast, except for certain transactions where no shareholder vote is required.
The articles of incorporation may specify a lower percentage for the
requisite shareholder vote, so long as the vote provided is not less than a
majority of the votes entitled to be cast. Pioneer's Articles of
Incorporation do not specify a lower percentage.
Pioneer's Articles of Incorporation require the Pioneer Board of
Directors to consider "all relevant factors" when evaluating whether a
proposed business combination, or tender or exchange offer, is in the best
interests of the Pioneer shareholders. These factors include, but are not
limited to, the social and economic effects on Pioneer's employees,
customers, suppliers and other constituents of Pioneer, and on the
communities in which Pioneer conducts its business.
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(s) 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(s).
Pacific. The Banking Act provides that any shareholder of Pacific
who votes against the Pacific Merger will be entitled to receive the
appraised value of his or her shares as of the date of the meeting of
shareholders to approve the Pacific Merger, provided that the Pacific Merger
is consummated and that the shareholder, within 30 days after the Pacific
Effective Date, makes written demand for payment accompanied by the surrender
of stock certificates. See "THE MERGER(S) - Dissenters' Rights of Appraisal
- - Pacific."
Pioneer. Under the WBCA, stockholders of Pioneer generally have
dissenter's appraisal rights in connection with (i) a plan of merger to which
Pioneer is a party; (ii) a plan of share exchange to which Pioneer is a party
as the corporation whose shares will be acquired; (iii) certain sales or
exchanges of all, or substantially all, of Pioneer's property other than in
the regular course of business; and (iv) amendments to Pioneer'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 Pioneer
have
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dissenters' rights in connection with the Pioneer Merger. See "THE MERGER(S)
- --Dissenters' Rights of Appraisal - Pioneer."
Size of Board of Directors
InterWest. InterWest's Articles of Incorporation provide that its
Board of Directors will 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.
Pacific. Pacific's Articles provide that the number of directors of
Pacific shall not be less than five (5), nor more than twenty-five (25); with
the current number set at six (6). Changes in the size of the Board may be
made by resolution by the Pacific Board, which must be approved by 75 percent
of the directors then in office. 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.
Pioneer. Pioneer's Articles of Incorporation provide that its Board
of Directors shall consist of not fewer than nine nor more than 15 members,
with the current number set by resolution approved by at least a two-thirds
vote of the total number of directors. The Board of Directors may increase
by the number of directors to be elected by the shareholders by not more than
three directors between annual meetings of the shareholders. The Pioneer
Board of Directors currently consists of 12 directors.
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.
Pacific. Pacific's Articles provide that the Board of Directors
shall be divided into three classes, each consisting of one-third of the
whole number of directors (or as nearly as may be possible). Each member of
Pacific's Board serves for a three-year term or until their respective
successors are elected and qualified.
Pioneer. Pioneer's Articles of Incorporation provide for the
Pioneer Board of Directors to be divided into three classes to be as nearly
equal in number as possible. Members of each class of directors serve for a
term of three years.
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
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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.
Pacific. Pacific's Articles provide that at a meeting of
shareholders, by an affirmative vote of a majority of the outstanding shares,
any director or the entire Board of Directors may be removed from office, but
only for cause.
Pioneer. The WBCA provides that, at a meeting called expressly for
the purpose of removing one or more directors, the shareholders of a
corporation may remove one or more directors with or without cause unless the
corporation's articles of incorporation provide that directors may be removed
only for cause. Pioneer's Articles of Incorporation contain no such
provision. The WBCA provides that, in a corporation without cumulative
voting, removal requires only a plurality vote. Pioneer's Articles of
Incorporation provide that shareholders shall not have the right to cumulate
their votes; therefore, removal of one or more directors of Pioneer requires
a plurality vote.
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.
Pacific. The Articles of Pacific 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 the
unexpired term of his or her predecessor. Any directorship to be filled by
reason of an increase in the number of directors may be filled by the Board
of Directors for a term of office continuing only until the next election of
directors by the shareholders.
Pioneer. Pioneer's Articles of Incorporation provide that the Board
of Directors may appoint qualified persons to fill vacancies on the board
provided that such appointment shall not increase the total number of
directors to more than 15. Any vacancy not filled by the Pioneer Board of
Directors will be filled by election at an annual meeting or special meeting
of shareholders called expressly 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
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.
Pacific. The Articles of Incorporation of Pacific provide that any
shareholder desiring to make a nomination for the election of directors at a
meeting of shareholders must submit written notice, together with
95
<PAGE>
certain information relating to the nomination, to Pacific at least sixty
(60) days prior to the anniversary of the date of the last meeting of
shareholders. Pacific's Bylaws provide that written notice stating the place,
day and hour of a meeting of shareholders and, in the case of a special
meeting, the purpose for which such meeting is called must be delivered to
each shareholder entitled to vote at such meeting not less than ten days and
not more than sixty days before the meeting.
Pioneer. Pioneer's Bylaws provide that any shareholder who desires
to make a nomination for the election of directors must submit written notice
to the company's Chairman not less than 14 nor more than 50 days prior to any
meeting of shareholders called for the election of directors; provided, that
if notice of the meeting was given to shareholders less than 21 days prior to
the meeting, such written notice of the nomination shall be delivered to the
company's Chairman not later than the close of the seventh business day
following the day on which the notice of meeting was mailed. Nominations
which do not comply with these requirements may, in the Chairman's
discretion, be precluded from consideration at the meeting. Neither
Pioneer's Articles of Incorporation nor its Bylaws contain any advance notice
requirements for shareholder proposals other than nominations for election of
directors.
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.
Pacific. Pacific's Articles of Incorporation provide for the
exculpation of Pacific directors to the fullest extent permissible under the
WBCA. A director of Pacific shall not be personally liable to Pacific or its
shareholders for monetary damages for conduct as a director, unless the
director's actions or omissions that involve intentional misconduct or a
knowing violation of law, or for any transaction from which the director will
personally receive a benefit in money, property or services to which the
director is not legally entitled.
Pacific's Articles of Incorporation provide for the indemnification
of directors, and authorize the Board to pay reasonable expenses incurred by,
or to satisfy a judgment or fine against, a current or former director with
any personal legal liability incurred by the individual while acting for
Pacific within the scope of his or her employment and which were not in the
result of conduct finally adjudged to be intentional misconduct, a
96
<PAGE>
knowing violation of law, or on account of any transaction with respect to
which it is finally adjudged that such person personally received a benefit
in money, property or services to which such person was not legally entitled.
Pioneer. Pursuant to its Articles of Incorporation, Pioneer will
indemnify any person acting in the capacity of director against judgments,
penalties or fines and reasonable expenses, including attorneys' fees,
incurred as a result of any action, suit, or proceeding, whether civil,
criminal, administrative or investigative, and whether actual or threatened,
by reason of the fact that the person is or was a director of Pioneer.
Indemnification will not be available, however, for actions finally adjudged
to be egregious conduct. "Egregious conduct" is defined in the articles to
include, among other things, acts or omissions involving intentional
misconduct or participation in any transaction from which the person
personally received benefit in money, property or services to which the
person is not legally entitled.
Pioneer's Articles of Incorporation also provide that directors of
Pioneer shall not be personally liable to Pioneer or its shareholders for
monetary damages for conduct as a director, unless the conduct is finally
adjudged to have been egregious conduct (as defined above).
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.")
Pacific. The classification of the Pacific Board of Directors into
three classes with the term of only one class expiring each year (see
"--Classified Board of Directors") may have the effect of delaying or
preventing a change of control of Pacific.
Pioneer. Pioneer's Articles of Incorporation also contain
provisions that may have the effect of discouraging persons from acquiring
large blocks of Pioneer Common Stock or delaying or preventing a change of
control of Pioneer. These provisions include the classification of Pioneer's
Board of Directors into three classes and the requirements for the approval
of certain business combinations. See "--Classified Board of Directors."
CERTAIN LEGAL MATTERS
The validity of the InterWest Common Stock to be issued in the
Merger(s) will be passed upon for InterWest by its counsel, Graham & Dunn,
Seattle/Tacoma, Washington. Graham & Dunn also will opine concerning certain
tax matters related to the Merger(s).
EXPERTS
The consolidated statements of financial condition of InterWest as
of September 30, 1997 and September 30, 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1997, incorporated by reference
in InterWest's Annual Report on Form 10-K for the year ended September 30,
1997, 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.
97
<PAGE>
The consolidated statements of operations, stockholders' equity and
cash flows of Central Bancorporation ("Central") for the year ended December
31, 1995 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, 1997. 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, 1997 in reliance (with respect to the pre-pooling consolidated
financial statements of Central for the year ended December 31, 1995) upon
the report of such firm given upon their authority as experts in accounting
and auditing.
The statements of financial condition of Pacific as of December 31,
1997 and December 31, 1996 and the related statements income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997, appearing in Pacific's Annual Report on Form 10-K for the
year ended December 31, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are included
herein, in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Pioneer included in this
Prospectus/Joint Proxy Statement and in the Registration Statement have been
audited by Moss Adams LLP, independent certified public accountants, to the
extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
OTHER MATTERS
The Pacific and Pioneer Boards are not aware of any business to come
before the Pacific or Pioneer Special Meetings other than those matters
described above in this Prospectus/Joint Proxy Statement. However, if any
other matters should properly come before the Pacific or Pioneer Special
Meetings, it is intended that proxies in the accompanying form will be voted
in respect thereof in accordance with the judgment of the persons voting the
proxies.
98
<PAGE>
GLOSSARY OF KEY TERMS
<TABLE>
<S> <C>
1933 Act................ Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
1934 Act................ Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
BHCA.................... Bank Holding Company Act of 1956, as amended.
CFA..................... Columbia Financial Advisors, Inc., Pacific's and
Pioneer's financial advisors.
Closing................. Closing of the Merger(s) contemplated in the Merger
Agreement(s).
Code.................... Internal Revenue Code of 1986, as amended.
Dissenting Shares....... Those shares of Pacific Common Stock or Pioneer
Common Stock as to which shareholders have perfected
their dissenters' rights pursuant to RCW 30.49, in
the case of Pacific, or RCW 23B.13, in the case of
Pioneer.
Exchange Agent.......... Company designated by InterWest, Pacific and Pioneer
to handle the exchange of Pacific Common Stock and
Pioneer Common Stock for InterWest Common Stock or
cash (in the case of holders that would otherwise be
entitled to a fractional share of InterWest Common
Stock).
FDIC.................... Federal Deposit Insurance Corporation.
FRB..................... Board of Governors of the Federal Reserve System.
GAAP.................... Generally accepted accounting principles.
InterWest............... InterWest Bancorp, Inc., a Washington bank holding
company and its subsidiaries.
InterWest Common Stock.. InterWest's Common Stock, $.20 par value.
InterWest Subsidiaries.. InterWest Bank and First National Bank of Port
Orchard.
New Bank................ New Pacific Northwest Bank, a state-chartered bank
newly formed by InterWest for the purpose of the
Pacific Merger.
Pacific................. Pacific Northwest Bank, a Washington state chartered
commercial bank.
Pacific Common Stock.... Pacific's Common Stock, $1 par value per share.
Pacific Effective Date.. The date the closing of the Pacific Merger will
occur.
</TABLE>
99
<PAGE>
<TABLE>
<S> <C>
Pacific Financial
Statements............. Pacific's audited statements of condition as of
December 31, 1997 and 1996 and the related statements
of income, cash flows and changes in Shareholders'
equity for the years ended December 31, 1997, 1996 and
1995.
Pacific Merger.......... The merger of New Bank with and into Pacific in
accordance with the Pacific Merger Agreement.
Pacific Merger Agreement The Amended and Restated Agreement and Plan of Merger,
dated as of January 15, 1998, among InterWest, New
Bank, and Pacific.
Pacific Record Date..... ________________, 1998.
Pacific Special Meeting The Special Meeting of Pacific shareholders to be held
on ______________, 1998.
Pacific Special Meeting
Date.................. ______________, 1998.
Pioneer................. Pioneer Bancorp, Inc., a Washington bank holding
company, and Pioneer National Bank, its subsidiary.
Pioneer Bank............ Pioneer National Bank, a national banking association
and wholly owned subsidiary of Pioneer
Pioneer Common Stock.... Pioneer's Common Stock, no par value per share.
Pioneer Effective Date.. The date the closing of the Pioneer Merger will occur.
Pioneer Financial
Statements............. Pioneer's audited consolidated balance sheet as of
December 31, 1997 and 1996 and the related
consolidated statement of income, consolidated
statement of Stockholders' equity, and consolidated
statement of cash flows for the years ended
December 31, 1997, 1996 and 1995.
Pioneer Merger.......... The merger of Pioneer with and into InterWest in
accordance with the Pioneer Merger Agreement.
Pioneer Merger
Agreement.............. The Agreement and Plan of Merger, dated as of February
4, 1998, between InterWest, InterWest Bank, Pioneer,
and Pioneer Bank.
Pioneer Record Date..... April 30, 1998.
Pioneer Special Meeting The Special Meeting of Pioneer shareholders to be held
on ______________, 1998.
Pioneer Special Meeting
Date.................. ______________, 1998.
Prospectus/Joint Proxy
Statement.............. Prospectus/Joint Proxy Statement which is to be mailed
to Pacific's and Pioneer's shareholders, together with
any amendments and supplements.
RCW..................... Revised Code of Washington.
</TABLE>
100
<PAGE>
<TABLE>
<S> <C>
Registration Statement.. Registration Statement on Form S-4, of which this
Prospectus/Joint Proxy Statement forms a part, filed
by InterWest with the SEC for the purpose of
registering shares of InterWest Common Stock to be
issued in the Merger(s).
Regulatory Approvals.... The required regulatory approvals of the Merger(s) by
the FRB, the FDIC, the OCC and the Washington
Director.
SEC..................... Securities and Exchange Commission.
Washington Director..... The Director of the Washington State Department of
Financial Institutions.
WBCA.................... The Washington Business Corporations Act.
</TABLE>
101
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Pacific Northwest Bank:
Report of Independent Auditors....................................
Statements of Condition ..........................................
Statements of Income .............................................
Statements of Cash Flows .........................................
Statements of Changes in Shareholders' Equity.....................
Notes to Financial Statements ....................................
Pioneer Bancorp, Inc.:
Independent Auditor's Report ......................................
Consolidated Balance Sheet .........................................
Consolidated Statement of Income ...................................
Consolidated Statement of Shareholders' Equity .....................
Consolidated Statement of Cash Flows ...............................
Notes to Financial Statements ......................................
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pacific Northwest Bank
We have audited the accompanying statements of condition of Pacific
Northwest Bank as of December 31, 1997 and 1996, and the related statements
of income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Northwest
Bank at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
Seattle, Washington /s/ Ernst & Young LLP
January 30, 1998 ---------------------
1
<PAGE>
STATEMENTS OF CONDITION
PACIFIC NORTHWEST BANK
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1997 1996
- ------------------------------------------- -------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks.................... $ 14,783,372 $ 14,100,555
Interest-bearing deposits in banks......... 5,134,514 4,522,235
Federal funds sold......................... 11,425,000
Securities:
Held-to-maturity, at amortized cost (fair
value: $6,181,586 and $12,502,684,
respectively).......................... 6,171,563 12,580,488
Available-for-sale, at fair value
(amortized cost: $18,474,494 and
$15,772,961, respectively)............. 18,525,850 15,738,405
-------------- --------------
Total securities......................... 24,697,413 28,318,893
Loans...................................... 136,302,562 110,438,729
Allowance for possible credit losses....... (1,375,000) (1,106,000)
-------------- --------------
Net loans.................................. 134,927,562 109,332,729
Bank premises and equipment, net........... 3,528,733 2,661,375
Deferred tax assets........................ 450,783 369,785
Accrued interest receivable................ 1,002,695 791,812
Other assets............................... 1,293,174 667,714
-------------- --------------
Total assets............................... $ 197,243,246 $ 160,765,098
-------------- --------------
-------------- --------------
LIABILITIES
Deposits:
Noninterest-bearing....................... $ 58,516,727 $ 43,668,037
Interest-bearing.......................... 107,300,601 102,657,238
-------------- --------------
Total deposits............................ 165,817,328 146,325,275
Term borrowings............................ 13,500,000
Accrued interest payable................... 445,957 298,819
Other liabilities.......................... 1,502,332 541,977
-------------- --------------
Total liabilities.......................... 181,265,617 147,166,071
-------------- --------------
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock (par value: $1.00)--
authorized: 800,000 shares; issued and
outstanding: 389,926 and 385,326 shares,
respectively............................. 389,926 385,326
Surplus.................................... 8,059,158 7,763,197
Unrealized gains (losses) on securities
available-for-sale, net of tax........... 33,895 (22,807)
Retained earnings.......................... 7,494,650 5,473,311
-------------- -------------
Total shareholders' equity................. 15,977,629 13,599,027
-------------- --------------
-------------- --------------
Total liabilities and shareholders'
equity'.................................. $ 197,243,246 $ 160,765,098
-------------- -------------
-------------- -------------
</TABLE>
See notes to financial statements.
2
<PAGE>
STATEMENTS OF INCOME
PACIFIC NORTHWEST BANK
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees................................................. $ 11,938,606 $ 9,196,535 $ 7,710,630
Interest-bearing deposits in banks.................................... 223,863 104,912
Federal funds sold.................................................... 389,223 491,878 466,152
Securities held-to-maturity........................................... 622,497 728,009 1,136,065
Securities available-for-sale......................................... 938,094 1,027,694 769,496
------------- ------------ ------------
Total interest income................................................. 14,112,283 11,549,028 10,082,343
------------- ------------ ------------
------------- ------------ ------------
INTEREST EXPENSE
Deposits.............................................................. 4,233,530 3,743,667 3,361,307
Term borrowings....................................................... 395,303 1,738 4,981
------------- ------------ ------------
Total interest expense................................................ 4,628,833 3,745,405 3,366,288
------------- ------------ ------------
------------- ------------ ------------
NET INTEREST INCOME................................................... 9,483,450 7,803,623 6,716,055
Less provision for possible credit losses............................. 251,882 158,167 34,991
Net interest income after provision for possible credit losses........ 9,231,568 7,645,456 6,681,064
------------- ------------ ------------
------------- ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts................................... 493,793 486,101 437,099
Other service charges and fees........................................ 598,837 455,644 395,759
Gains on sales of loans............................................... 437,883 225,289 249,778
------------- ------------ ------------
Total noninterest income.............................................. 1,530,513 1,167,034 1,082,636
------------- ------------ ------------
------------- ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits........................................ 3,700,930 2,928,000 2,607,067
Occupancy, furniture, and equipment................................... 1,270,609 1,083,471 976,347
Other................................................................. 2,354,121 1,985,207 1,848,862
------------- ------------ ------------
Total noninterest expense............................................. 7,325,660 5,996,678 5,432,276
------------- ------------ ------------
------------- ------------ ------------
Income before federal income taxes.................................... 3,436,421 2,815,812 2,331,424
Federal income tax expense............................................ (1,182,300) (969,500) (792,900)
------------- ------------ ------------
Net income............................................................ $ 2,254,121 $ 1,846,312 $ 1,538,524
------------- ------------ ------------
------------- ------------ ------------
Basic earnings per share.............................................. $ 5.79 $ 4.80 $ 4.02
------------- ------------ ------------
------------- ------------ ------------
Diluted earnings per share............................................ $ 5.55 $ 4.63 $ 3.90
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF CASH FLOWS
PACIFIC NORTHWEST BANK
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 2,254,121 $ 1,846,312 $ 1,538,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible credit losses............................... 251,882 158,167 34,991
Provision for depreciation......................................... 323,167 263,540 220,837
Amortization of securities premiums................................ 32,366 117,551 182,123
Gains on sales of loans............................................ (437,883) (225,289) (249,778)
Benefit of deferred income taxes................................... (110,209) (67,017) (76,920)
Decrease (increase) in interest receivable......................... (210,883) 90,686 (205,589)
Decrease (increase) in other assets................................ (625,460) 610,957 (656,985)
Increase (decrease) in interest payable............................ 147,138 (65,875) 194,448
Increase (decrease) in other liabilities........................... 960,355 137,520 (139,199)
------------- ------------- -------------
Net cash provided by operating activities........................ 2,584,594 2,866,552 842,452
------------- ------------- -------------
------------- ------------- -------------
INVESTING ACTIVITIES
Net increase in interest-bearing deposits in banks................... (612,279) (4,522,235)
Net decrease (increase) in federal funds sold........................ (11,425,000) 6,630,000 4,990,000
Purchases of securities available-for-sale........................... (7,878,367) (7,740,605) (6,918,083)
Maturities of securities held-to-maturity............................ 6,369,802 1,508,303 2,154,614
Maturities of securities available-for-sale.......................... 3,688,303 6,716,730 1,792,824
Sales of securities available-for-sale............................... 1,495,288 5,035,107
Sales of loans....................................................... 5,703,205 3,132,499 3,482,133
Loan originations, net of principal repayments....................... (31,112,037) (31,527,776) (11,447,610)
Purchase of bank premises and equipment.............................. (1,190,524) (904,129) (1,584,236)
------------- ------------- -------------
Net cash used for investing activities........................... (34,961,609) (21,672,106) (7,530,358)
------------- ------------- -------------
------------- ------------- -------------
FINANCING ACTIVITIES
Stock options granted................................................ 105,667 84,825 49,250
Stock options exercised.............................................. 1,429 480 3,701
Proceeds from issuance of common stock............................... 193,465 80,797 51,433
Net increase (decrease) in shorter-term deposits..................... 20,765,497 20,888,217 (2,815,402)
Time deposit originations, net of withdrawals........................ (1,273,444) 2,339,454 7,947,272
Net increase in term borrowings...................................... 13,500,000
Cash dividends paid.................................................. (232,782) (153,829) (114,592)
------------- ------------- -------------
Net cash provided by financing activities........................ 33,059,832 23,239,944 5,121,662
------------- ------------- -------------
------------- ------------- -------------
Net increase (decrease) in cash and due from banks................... 682,817 4,434,390 (1,566,244)
Cash and due from banks at beginning of period....................... 14,100,555 9,666,165 11,232,409
------------- ------------- -------------
Cash and due from banks at end of period............................. $ 14,783,372 $ 14,100,555 $ 9,666,165
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES
Interest paid on deposits and borrowings............................. $ 4,481,695 $ 3,811,280 $ 3,715,496
Federal income tax deposits.......................................... $ 1,278,176 $ 975,000 $ 1,005,000
NONCASH INVESTING ACTIVITIES
Transfer of securities from held-to-maturity to available-for-sale... $ 5,839,990
Fair value adjustment to securities available-for-sale............... $ 85,912 $ (30,713) $ 489,825
Income tax effect related to fair value adjustment................... $ (29,210) $ 10,442 $ (166,541)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
PACIFIC NORTHWEST BANK
<TABLE>
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK (LOSSES) ON
---------------------- CAPITAL SECURITIES RETAINED
SHARES AMOUNT SURPLUS AVAILABLE-FOR-SALE EARNINGS TOTAL
---------- ---------- ------------ ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... 380,081 $ 380,081 $ 7,497,956 $ (325,821) $ 2,356,896 $ 9,909,112
Adjustment for unrealized gains
on securities available-for-
sale, net of taxes............ 323,284 323,284
Net income...................... 1,538,524 1,538,524
Stock options granted........... 49,250 49,250
Exercise of stock options....... 2,141 2,141 1,560 3,701
Common stock issued for cash.... 1,083 1,083 50,350 51,433
Cash dividends paid ............ (114,592) (114,592)
-------- ---------- ------------ ------------ ----------- ------------
Balance at December 31, 1995.... 383,305 383,305 7,599,116 (2,537) 3,780,828 11,760,712
Adjustment for unrealized losses
on securities available-for-
sale, net of taxes............ (20,270) (20,270)
Net income...................... 1,846,312 1,846,312
Stock options granted........... 84,825 84,825
Exercise of stock options....... 480 480 480
Common stock issued for cash.... 1,541 1,541 79,256 80,797
Cash dividends paid ............ (153,829) (153,829)
-------- ---------- ------------ ------------ ----------- ------------
Balance at December 31, 1996.... 385,326 385,326 7,763,197 (22,807) 5,473,311 13,599,027
Adjustment for unrealized gains
on securities available-for-
sale, net of taxes............ 56,702 56,702
Net income...................... 2,254,121 2,254,121
Stock options granted........... 105,667 105,667
Exercise of stock options....... 1,429 1,429 1,429
Common stock issued for cash.... 3,171 3,171 190,294 193,465
Cash dividends paid ............ (232,782) (232,782)
-------- ---------- ------------ ------------ ----------- ------------
Balance at December 31, 1997.... 389,926 $ 389,926 $ 8,059,158 $ 33,895 $ 7,494,650 $ 15,977,629
-------- ---------- ------------ ------------ ----------- ------------
-------- ---------- ------------ ------------ ----------- ------------
</TABLE>
See notes to financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PACIFIC NORTHWEST BANK
DECEMBER 31, 1997
NOTE 1 - ORGANIZATION AND STOCK OFFERING
Pacific Northwest Bank (the Bank) was organized under the laws of the
State of Washington during 1988. The Bank completed its initial stock
offering in September 1988 and commenced operation on October 6, 1988. As
allowed by state banking regulations, the Bank allocated $1,978,922 of the
proceeds of its initial stock offering to retained earnings. The Bank
provides a full complement of banking services to individuals and small- and
medium-sized businesses in the Greater Seattle area.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Bank follows generally accepted accounting principles and reporting
practices applicable to the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period, as well as the
amounts reported in the footnotes. Actual results could differ from those
estimates. A description of significant accounting policies follows:
SECURITIES
The Bank classifies securities at acquisition into one of three
categories: held-to-maturity, available-for-sale, or trading. Debt securities
that the Bank has both the positive intent and ability to hold to maturity
are classified as held-to-maturity and carried at amortized cost, adjusted
for amortization of premiums and accretion of discounts. Such amortization
and accretion is included in interest income. Debt securities bought and held
principally for the purpose of sale in the near term are classified as
trading and are carried at fair value. Investments not classified as
held-to-maturity securities or trading securities are classified as
available-for-sale and carried at fair value, adjusted for amortization of
premiums and accretion of discounts. Such amortization and accretion is
included in interest income. Unrealized holding gains and losses on
securities classified as available-for-sale, net of the related tax effect,
are reported as a separate component of shareholders' equity. Realized gains
and losses on securities available-for-sale are included in earnings. The
cost of securities sold is based on the specific-identification method.
6
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Loan origination fees and direct costs related
to loan origination are deferred and amortized into interest income over
contractual or actual loan lives as an adjustment to the loan yield. When
management believes that a borrower's financial condition is such that the
collection of interest is uncertain, accrual of interest is discontinued.
Interest accrued in the current year but not collected is reversed, and
interest accrued in prior years is charged against the allowance for possible
credit losses. Management may elect to continue the accrual of interest when
the estimated net realizable value of collateral is sufficient to cover the
principal balance and accrued interest. Interest payments received on
nonaccrual loans are recorded as reductions of principal if principal payment
is doubtful.
Other personal property held for resale, acquired principally through
repossession, is carried at the lower of cost or fair value and is included
in other assets.
Effective January 1, 1997, the Bank adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (Statement No. 125),
which requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred and to derecognize financial
assets when control has been surrendered. The application of the new rules
did not have a material impact on the Bank's financial condition or results
of operations.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses is established through a
provision charged to expense. Loans are charged against the allowance for
possible credit losses when management believes that the collectibility of
the principal is unlikely. The allowance is maintained at an amount that
management believes will be adequate to absorb potential losses inherent in
the loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio; economic conditions;
volume, growth, and composition of the loan portfolio; and other relevant
factors.
Although management has used currently available information to recognize
and record losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for possible credit losses. Such
agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examinations.
7
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Provisions for depreciation and amortization
are computed on a straight-line basis over the shorter of the estimated
useful lives of the assets or the remaining terms of associated operating
leases. Expenditures for maintenance and repairs are charged to operations as
incurred.
DIVIDENDS
The Bank paid dividends of $.60, $.40 and $.30 per share in 1997, 1996 and
1995, respectively.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (Statement No.
128). Statement No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to Statement No. 128 requirements.
ADVERTISING
The Bank expenses advertising costs as incurred.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Bank considers cash and
due from banks as cash and cash equivalents.
STOCK-BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement No. 123), the Bank
uses the intrinsic-value method of accounting for stock-based compensation as
prescribed by Accounting Principles Board Opinion No. 25. Companies using the
intrinsic-value method are required to disclose the pro-forma impact of the
fair-value method on net income and earnings per share, if material.
8
<PAGE>
NOTE 3 - SECURITIES
The following tables reflect the amortized cost and estimated fair values
of held-to-maturity and available-for-sale securities at December 31:
<TABLE>
<CAPTION>
Held-to-maturity securities
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
1997 cost gains losses value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions......... $ 1,004,933 $ 47,360 $ 0 $ 1,052,293
Mortgage-backed securities....... 5,166,630 3,094 40,431 5,129,293
----------- -------- --------- -----------
Total securities................. $ 6,171,563 $ 50,454 $ 40,431 $ 6,181,586
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale securities
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
1997 cost gains losses value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury and agency
securities..................... $ 5,511,132 $ 33,555 $ 0 $ 5,544,687
Mortgage-backed securities....... 11,500,162 42,235 24,434 11,517,963
Other securities................. 1,463,200 0 0 1,463,200
----------- -------- --------- -----------
Total securities................. $18,474,494 $ 75,790 $ 24,434 $18,525,850
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity securities
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
1996 cost gains losses value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury and agency
securities..................... $ 3,023,382 $ 0 $ 25,570 $ 2,997,812
Obligations of states and
political subdivisions......... 1,008,004 33,923 0 1,041,927
Mortgage-backed securities....... 8,549,102 4,192 90,349 8,462,945
----------- -------- --------- -----------
Total securities................. $12,580,488 $ 38,115 $ 115,919 $12,502,684
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale securities
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
1996 cost gains losses value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury and agency
securities..................... $ 5,503,107 $ 2,073 $ 2,681 $ 5,502,499
Mortgage-backed securities....... 9,837,254 30,946 64,894 9,803,306
Other securities................. 432,600 0 0 432,600
----------- -------- --------- -----------
Total securities................. $15,772,961 $ 33,019 $ 67,575 $15,738,405
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
9
<PAGE>
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at December 31,
1997 by contractual maturity, are shown in the following table:
<TABLE>
<CAPTION>
Held-to-maturity securities
- -----------------------------------------------------------------------------
Amortized Estimated
cost fair value
- -----------------------------------------------------------------------------
<S> <C> <C>
Due after one year but within five years... $ 885,496 $ 925,045
Due after five years but within ten years.. 119,437 127,248
------------ -----------
1,004,933 1,052,293
Mortgage-backed securities................. 5,166,630 5,129,293
------------ -----------
Total securities........................... $ 6,171,563 $ 6,181,586
------------ -----------
------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale securities
- -----------------------------------------------------------------------------
Amortized Estimated
cost fair value
- -----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................... $ 2,000,608 $ 2,005,000
Due after one year but within five years... 3,510,524 3,539,687
------------ -----------
5,511,132 5,544,687
Mortgage-backed securities and stock....... 12,963,362 12,981,163
------------ -----------
Total securities........................... $ 18,474,494 $18,525,850
------------ -----------
------------ -----------
</TABLE>
During 1997, available-for-sale securities were sold for $1,495,288,
resulting in realized gains of $789, net of tax. During 1996,
available-for-sale securities were sold for $5,035,107, resulting in realized
gains of $9,519 and realized losses of $8,510, net of tax. There were no
sales of securities in 1995.
Securities with a carrying value of $23,689,409 and $17,619,861 at
December 31, 1997 and 1996, respectively, were pledged to secure lines of
credit, public funds and other deposit accounts as required by law.
On November 15, 1995, the Financial Accounting Standards Board staff
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In
accordance with provisions in that Special Report, the Bank chose in 1995 to
reclassify certain securities from held-to-maturity to available-for-sale. At
the date of transfer, the amortized cost of those securities was $5,839,990,
and the unrealized loss on those securities was $31,203.
10
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Major classifications of loans at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Commercial and financial............. $ 108,112,408 $ 83,151,785
Real estate construction............. 6,521,409 6,578,344
Real estate mortgage................. 15,615,854 15,510,764
Consumer............................. 6,052,871 5,197,836
------------- -------------
Total loans.......................... $ 136,302,562 $ 110,438,729
------------- -------------
------------- -------------
</TABLE>
In general, the Bank is permitted by law to make loans to single borrowers
in aggregate amounts of up to 20% of the Bank's capital and surplus. The Bank
occasionally sells participations in loans to other banks to stay within
lending limits or to otherwise limit the Bank's exposure. The Bank's goal is
to reduce the risk of undue concentrations of loans to multiple borrowers
engaged in similar activities that would cause them to be similarly affected
by economic or other conditions. The Bank evaluates customers'
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 these
evaluations. Collateral varies, but may include securities, accounts
receivable, inventory, equipment and real estate. The Bank has generally
restricted its lending activity to customers located in the Greater Seattle
area.
Changes in the allowance for possible credit losses for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Balance at beginning of year.......... $ 1,106,000 $ 965,000 $ 920,000
Provision charged to expense.......... 251,882 158,167 34,991
Charge-offs........................... (6,464) (24,667) (76,307)
Recoveries............................ 23,582 7,500 86,316
----------- ----------- ---------
Balance at end of year................ $ 1,375,000 $ 1,106,000 $ 965,000
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The following table presents a summary of nonperforming loans and related
interest foregone at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Nonaccrual loans...................... $ 24,167 $ 56,686 $ 38,186
----------- ----------- ---------
----------- ----------- ---------
Loans contractually past due 90 days
or more and accruing interest....... $ 321,212 $ 490 $ 759
----------- ----------- ---------
----------- ----------- ---------
Net interest foregone on nonaccrual
loans............................... $ 10,106 $ 8,250 $ 47
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
11
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES (Continued)
At December 31, 1997, the Bank had approximately $1,900,000 in loans
guaranteed by the Small Business Administration, which were in various stages
of disbursement. These loans were carried at cost, which, in the aggregate,
is lower than market value. At December 31, 1997, 1996,and 1995, the Bank
was providing servicing for approximately $15,000,000, $13,400,000, and
$12,900,000, respectively, of SBA loans that had been previously sold.
Certain related parties of the Bank, principally executive officers and
directors of the Bank and their associates, were loan customers of the Bank
in the ordinary course of business during 1997 and 1996. Related-party loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
Accumulated
depreciation and
1997 Cost amortization Net
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Land................................. $ 1,214,461 $ 0 $ 1,214,461
Buildings and leasehold improvements. 1,944,461 753,225 1,191,236
Furniture and equipment.............. 2,409,525 1,286,489 1,123,036
----------- ----------- -----------
Total................................ $ 5,568,447 $ 2,039,714 $ 3,528,733
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
depreciation and
1996 Cost amortization Net
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Land................................. $ 1,214,461 $ 0 $ 1,214,461
Buildings and leasehold improvements. 1,405,222 673,964 731,258
Furniture and equipment.............. 1,788,662 1,073,006 715,656
----------- ----------- -----------
Total................................ $ 4,408,345 $ 1,746,970 $ 2,661,375
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Bank leases premises under operating leases. Rental expense for leased
premises was $713,697, $660,334 and $623,993 in 1997, 1996 and 1995,
respectively. Certain leases contain renewal options from five to ten years
and escalation clauses based on increases in property taxes and other costs.
Sublease rental income was $103,959, $86,425 and $60,282 in 1997, 1996 and
1995, respectively.
12
<PAGE>
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Minimum net rental commitments under noncancelable operating leases having
an original or remaining term of more than one year were as follows at
December 31, 1997:
<TABLE>
<S> <C>
1998............................ $ 735,431
1999............................ 710,004
2000............................ 716,004
2001............................ 696,940
2002............................ 547,012
Thereafter...................... 1,641,036
-----------
Total minimum commitments....... $ 5,046,427
-----------
-----------
</TABLE>
NOTE 6 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances on deposit with the Federal Reserve Bank. The
average amount of such balances for 1997 and 1996 was $1,186,000 and
$911,000, respectively.
NOTE 7 - DEPOSITS
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Noninterest-bearing deposits................ $ 58,516,727 $ 43,668,037
Interest-bearing deposits:
Demand.................................... 21,231,489 17,140,010
Savings................................... 47,759,791 45,934,463
Time deposits:
Due within one year..................... 36,928,839 38,594,720
After one year but within two years..... 485,581 357,161
After two years but within three years.. 228,582 96,466
After three years but within four years. 209,148 159,277
After four years but within five years.. 440,390 335,193
After five years........................ 16,781 39,948
------------- -------------
Total time deposits....................... 38,309,321 39,582,765
------------- -------------
Total Deposits.............................. $ 165,817,328 $ 146,325,275
------------- -------------
------------- -------------
</TABLE>
Included in time deposits at December 31, 1997 and 1996 was $27,744,077
and $30,937,595, respectively, for time certificates of $100,000 and over.
Included in interest expense on time deposits during 1997, 1996 and 1995 was
interest of $2,068,713, $1,667,402 and $1,400,975, respectively, for time
certificates of $100,000 and over.
13
<PAGE>
NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income......................... $ 2,254,121 $ 1,846,312 $ 1,538,524
----------- ----------- -----------
----------- ----------- -----------
Denominator:
Weighted average number of shares.. 389,074 384,696 382,411
Potential dilution of stock
options.......................... 16,788 14,295 12,141
----------- ----------- -----------
Shares adjusted for potential
dilution......................... 405,862 398,991 394,552
----------- ----------- -----------
----------- ----------- -----------
Basic earnings per share............. $ 5.79 $ 4.80 $ 4.02
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per share........... $ 5.55 $ 4.63 $ 3.90
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 9 - STOCK OPTIONS
The Bank has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options, rather than the
alternative fair value accounting allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(Statement No. 123). APB 25 provides that if the price of the Bank's employee
stock options equals the market price of the stock on the date of grant, no
compensation expense is recognized. Statement No. 123 requires companies that
continue to follow APB 25 to make pro forma disclosure of Statement No. 123
fair value results.
The Bank had two stock option plans in effect at December 31, 1997: the
1988 Director Stock Option Plan and the 1988 Employee Stock Option Plan.
As an alternative to receiving cash compensation for Directors' fees, the
Board of Directors adopted the 1988 Director Stock Option Plan, under which
each Director may elect to receive options to purchase shares of common stock
at a price of $1.00 in lieu of fees. Under this plan, 20,000 shares of common
stock were reserved for future issuance, of which 14,547 shares remain
available for issuance. All options granted vest immediately and expire in
fifteen years.
14
<PAGE>
NOTE 9 - STOCK OPTIONS (Continued)
A summary of the 1988 Director Stock Option Plan and related stock option
activity for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year..................... 5,376 $1 4,126 $1 5,107 $1
Granted....................... 1,853 $1 1,730 $1 1,120 $1
Exercised..................... (1,429) $1 (480) $1 (2,101) $1
------ ----- ------
Outstanding at end of year.... 5,800 $1 5,376 $1 4,126 $1
------ ----- ------
------ ----- ------
Exercisable at end of year.... 5,800 $1 5,376 $1 4,126 $1
------ ----- ------
------ ----- ------
</TABLE>
The weighted average remaining contractual life of outstanding options as
of December 31, 1997 was 12 years.
Under provisions of the 1988 Employee Stock Option Plan, the Bank has
granted to certain key employees options to purchase shares of common stock.
Under this plan, 40,000 shares of common stock were reserved for future
issuance, of which 39,640 shares remain available for issuance. The options
become exercisable over one to five years and expire ten years from the date
granted. A summary of the 1988 Employee Stock Option Plan and related stock
option activity for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................... 36,870 $28.14 36,270 $27.76 32,810 $25.88
Granted...................... 1,300 $63.31 600 $51.33 3,500 $45.46
Exercised.................... (40) $40.00
------ ------ ------
Outstanding at end of year... 38,170 $29.34 36,870 $28.14 36,270 $27.76
------ ------ ------
------ ------ ------
Exercisable at end of year... 35,410 $27.50 34,710 $27.09 34,270 $26.90
------ ------ ------
------ ------ ------
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995,
using the Black-Scholes option valuation method, was $22.35, $18.68 and
$19.26, respectively.
15
<PAGE>
NOTE 9 - STOCK OPTIONS (Continued)
The following table summarizes information about stock options outstanding
and exercisable under the 1988 Employee Stock Option Plan at December 31,
1997:
<TABLE>
<CAPTION>
Currently exercisable
----------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
exercise prices Outstanding contractual life exercise price Outstanding exercise price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$25.00 - 39.99 31,410 1 years $25.26 31,330 $25.23
$40.00 - 59.99 6,060 7 years $46.06 3,980 $44.15
$60.00 - 75.00 700 9 years $67.86 100 $75.00
</TABLE>
The exercise prices of all options are below current market value.
Pro forma information regarding net income and earnings per share has been
determined as if the Bank had accounted for its employee stock options under
the fair value method of Statement No. 123. The fair value for these options
was estimated at the date of each grant using a Black-Scholes option pricing
model. The Black-Scholes option valuation method was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Bank's employee options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's option, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Consequently, the pro forma results shown below only reflect the impact of
options granted in 1997, 1996 and 1995. Since option vesting generally occurs
over five years, the pro forma impact is expected to increase for the next
two to four years and then remain relatively constant thereafter, absent
significant changes to valuation assumptions or option grant patterns. The
Bank's pro forma information for the years ending December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income
As reported........................ $ 2,254,121 $ 1,846,312 $ 1,538,524
Pro forma.......................... 2,235,121 1,842,312 1,503,524
Basic earnings per share
As reported........................ $ 5.79 $ 4.80 $ 4.02
Pro forma.......................... 5.74 4.79 3.93
Diluted earnings per share
As reported........................ 5.55 4.63 3.90
Pro forma.......................... 5.51 4.62 3.81
</TABLE>
16
<PAGE>
NOTE 9 - STOCK OPTIONS (Continued)
The following weighted average assumptions were used in the computation of
the fair value of stock options for each year:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected volatility................. 8.1% 7.4% 7.4%
Expected dividend yield............. 1.2% 1.0% 1.0%
Risk-free interest rate............. 6.4% 6.0% 7.5%
Expected life (in years)............ 10.0 10.0 10.0
</TABLE>
NOTE 10 - FEDERAL INCOME TAXES
The Bank uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. The differences are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The
deferred tax expense (benefit) recorded represents the net change in the
deferred tax asset or liability balance during the year.
The differences between the federal income tax expense computed using the
federal statutory income tax rate and the total income tax expense for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense at
statutory rates (34%)................. $ 1,168,383 $ 957,376 $ 792,684
Net miscellaneous differences........... 13,917 12,124 216
----------- --------- ---------
Total federal income tax expense........ $ 1,182,300 $ 969,500 $ 792,900
----------- --------- ---------
----------- --------- ---------
</TABLE>
The Bank's provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Current................................ $ 1,292,300 $ 1,036,500 $ 869,800
Deferred............................... (110,000) (67,000) (76,900)
----------- ----------- ---------
$ 1,182,300 $ 969,500 $ 792,900
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
17
<PAGE>
NOTE 10 - FEDERAL INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Bank's net deferred tax assets at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities..................... $ 89,000 $ 38,000
Deferred tax assets:
Provision for possible credit losses....... 322,000 237,000
Accumulated depreciation................... 83,000 50,000
Other...................................... 135,000 121,000
--------- ---------
Total deferred tax assets.................... 540,000 408,000
--------- ---------
Net deferred tax assets....................... $ 451,000 $ 370,000
--------- ---------
--------- ---------
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Bank has a retirement plan that covers substantially all employees.
The plan consists of a combined 401(k) and defined contribution plan.
Contributions by the Bank to the 401(k) plan are based on one-half of the
employee's contribution, with a maximum of 3% of the employee's salary.
Contributions to the defined contribution plan are based upon each employee's
salary and integrated with Social Security. Contributions to the combined
plan were $227,674, $186,512 and $148,311 in 1997, 1996 and 1995,
respectively. The Bank does not provide other postretirement benefits.
18
<PAGE>
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, loan commitments are made to accommodate
the financial needs of the Bank's customers. Standby letters of credit commit
the Bank to make payments on behalf of customers when certain specified
future events occur. Both arrangements have credit risk essentially the same
as that involved in extending loans to customers and are subject to the
Bank's normal credit policies. Collateral (e.g., securities, receivables,
inventory, equipment, real estate) is obtained based upon management's credit
assessment of the customer. In addition, the Bank has entered into agreements
with other banks to participate in certain of the Bank's loan commitments to
customers. Management does not anticipate any material losses as a result of
these commitments.
The following table summarizes the Bank's maximum exposure to credit loss
for loan commitments (unfunded loans and unused lines of credit), standby
letters of credit, and commercial letters of credit used to facilitate
customer trade transactions. Maximum exposure to credit loss assumes that all
parties completely fail to perform according to the terms of the commitments,
that all other banks fail to meet their obligations to participate in the
Bank's commitments, and that the related collateral or other security, if
any, proves to be of no value.
<TABLE>
<CAPTION>
December 31 1997 1996
- ----------- ------------ ------------
<S> <C> <C>
Loan commitments............................. $ 61,422,794 $ 41,294,511
Standby letters of credit.................... $ 2,627,739 $ 881,920
Commercial letters of credit................. $ 968,886 $ 416,681
</TABLE>
NOTE 13 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (Statement No. 107), which requires the
disclosure of fair value information about certain financial instruments for
which it is practicable to estimate that value. Fair value is defined as the
amount at which an instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. In most
cases, market prices are not available for these financial instruments, and
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the estimates presented in the following table are not
necessarily indicative of the amounts the Bank could realize in a current
market exchange. Statement No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying
value of the Bank.
19
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used in estimating the fair
value of each class of financial instruments for which it is practicable to
estimate that value. Potential tax ramifications related to the realization
of unrealized gains and losses that would be incurred in an actual sale
and/or settlement have not been taken into consideration:
Cash and cash equivalents, interest-bearing deposits in banks and Federal
funds sold. For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities (including mortgage-backed securities). For securities
held-to-maturity, available-for-sale, or for trading purposes, fair value
equals quoted market price or dealer quotes. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans. For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The fair value of lending
commitments at year-end is estimated to approximate the remaining unamortized
fees. The fair value of accrued interest receivable approximates the carrying
amount.
Deposit Liabilities. The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts approximate their fair values
at the reporting date. The fair values for certificates of deposit are
estimated using discounted cash flow analyses, using interest rates currently
being offered for certificates of deposit with similar terms. The fair value
of accrued interest payable approximates the carrying amount.
Term Borrowings. The fair values for term borrowings are estimated using
discounted cash flow analyses, using interest rates currently being charged
for term borrowings with similar terms.
20
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS (Continued)
The following table sets forth the disclosures about the fair value of the
Bank's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Estimated Estimated
December 31 Carrying amount fair value Carrying amount fair value
- ----------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ 14,783,000 $ 14,783,000 $ 14,101,000 $ 14,101,000
Federal funds sold.......... $ 11,425,000 $ 11,425,000 $ 0 $ 0
Interest-bearing deposits
in banks.................. $ 5,135,000 $ 5,135,000 $ 4,522,000 $ 4,522,000
Securities.................. $ 24,697,000 $ 24,707,000 $ 28,319,000 $ 28,241,000
Net loans................... $ 134,928,000 $ 134,457,000 $ 109,333,000 $ 109,100,000
Accrued interest receivable. $ 1,003,000 $ 1,003,000 $ 792,000 $ 792,000
LIABILITIES
Deposits.................... $ 165,817,000 $ 166,224,000 $ 146,325,000 $ 146,671,000
Term borrowings............. $ 13,500,000 $ 13,634,000 $ 0 $ 0
Accrued interest payable.... $ 446,000 $ 446,000 $ 299,000 $ 299,000
</TABLE>
The estimated fair value of financial instruments with off-balance-sheet
risk (discussed in Note 12) is not material.
NOTE 14 - NONINTEREST EXPENSE
The following table provides an analysis of noninterest expense for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Salaries............................ $ 3,007,385 $ 2,350,401 $ 2,121,175
Employee benefits................... 693,545 577,599 485,892
----------- ------------ -----------
Salaries and employee benefits...... 3,700,930 2,928,000 2,607,067
Occupancy, net...................... 749,316 676,593 634,088
Furniture and equipment............. 521,293 406,878 342,259
----------- ------------ -----------
Occupancy, furniture, and equipment. 1,270,609 1,083,471 976,347
Data processing..................... 536,573 489,248 400,835
Advertising and business promotion.. 274,406 262,207 231,959
Professional fees................... 211,312 151,926 179,674
Supplies and postage................ 446,661 356,563 338,828
State and local business taxes...... 266,838 212,742 192,562
Other............................... 618,331 512,521 505,004
----------- ------------ -----------
Total............................... 2,354,121 1,985,207 1,848,862
----------- ------------ -----------
Total noninterest expense........... $ 7,325,660 $ 5,996,678 $ 5,432,276
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
21
<PAGE>
NOTE 15 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
classification is 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 Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to total average
assets. The Bank's Tier 1 capital is comprised of shareholders' equity
excluding the equity impact of adjusting securities available-for-sale
securities to fair value. Total capital consists of Tier 1 capital and the
allowance for possible credit losses. Risk-weighted assets are computed using
rules[nb]defined by the Federal Deposit Insurance Corporation Improvement Act
of 1991. Under the regulatory framework for prompt corrective actions, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based ratios as set forth in the table.
As of December 31, 1997, the most recent notification from the 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 the notification that management believes have
changed the Bank's category.
The Bank's actual regulatory capital amounts and ratios at December 31 are
as follows:
<TABLE>
<CAPTION>
To be well
capitalized under
Capital prompt corrective
The Bank's actual adequacy purposes action provisions
----------------- ----------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------- ------ ----- ------ ----- ------ -----
1997
- ----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (to average assets)... $ 15,944 8.50% $ 7,507 4.00% $ 9,383 5.00%
Tier 1 capital (to risk-weighted
assets)............................ $ 15,944 10.27% $ 6,209 4.00% $ 9,314 6.00%
Total capital (to risk-weighted
assets)............................ $ 17,319 11.16% $ 12,419 8.00% $ 15,523 10.00%
1996
- ----
Tier 1 capital (to average assets)... $ 13,551 9.05% $ 5,989 4.00% $ 7,487 5.00%
Tier 1 capital (to risk-weighted
assets)............................ $ 13,551 11.20% $ 4,838 4.00% $ 7,256 6.00%
Total capital (to risk-weighted
assets)............................ $ 14,657 12.12% $ 9,675 8.00% $ 12,094 10.00%
</TABLE>
22
<PAGE>
NOTE 16 - TERM BORROWINGS
Term borrowings at December 31, 1997, consisted of Federal Home Loan Bank
(FHLB) advances of $3,500,000 due within 30 days and $10,000,000 due in four
and one-half years, but callable at three-month intervals. As provided for in
the Advances, Security, and Deposit Agreement with the FHLB, advances are
collateralized by FHLB stock owned by the Bank, various securities, certain
residential mortgages or deeds of trust securing such properties, and the
guaranteed portion of the SBA loan portfolio. As a member of the FHLB of
Seattle, the Bank currently has a credit line of 12% of the total assets of
the Bank, subject to collateralization requirements. As of December 31, 1997,
the collateral value of eligible collateral pledged for these borrowings was
$14,150,000.
The maximum and average outstanding and weighted average interest rates on
advances from FHLB were as follows during the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------
<S> <C> <C>
Maximum outstanding at any monthend............. $ 13,500,000 $ 0
Average outstanding............................. $ 7,241,096 $ 9,275
Weighted average interest rates:
Annual........................................ 0.00% 5.76%
End of year................................... 0.00% 0.00%
</TABLE>
NOTE 17 - SUBSEQUENT EVENTS
On January 15, 1998, the Bank's Board of Directors approved the payment of
a cash dividend of $.80 per share to shareholders of record at March 2, 1998.
The cash dividend of approximately $317,000 will be paid on approximately
March 15, 1998. On January 15, 1998, the Bank entered into an Agreement and
Plan of Reorganization ("Agreement") with InterWest Bancorp, Inc.
("InterWest") under the terms of which the Bank will become a wholly-owned
subsidiary of InterWest. The transaction is structured as a tax-free
reorganization. If the transaction is approved by the regulatory authorities
and the shareholders of the Bank, each share of common stock of the Bank, by
virtue of the reorganization, will automatically, and without any action on
the part of the holder of each share, be exchanged for the right to receive
3.95 shares of InterWest common stock. The exchange ratio is fixed unless the
average closing price per share of InterWest common stock, for the ten
consecutive trading days beginning on and including the twentieth day
immediately preceding the closing, is less than $35 per share. If the average
closing price is less than $35 per share, either party may terminate the
transaction. The reorganization will be accounted for as a pooling of
interests.
23
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
<PAGE>
CONTENTS
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT.................................. 1
FINANCIAL STATEMENTS
Consolidated balance sheet............................... 2
Consolidated statement of income......................... 3
Consolidated statement of stockholders' equity........... 4
Consolidated statement of cash flows..................... 5-6
Notes to consolidated financial statements............... 7-28
SUPPLEMENTAL INFORMATION
Independent auditor's report on supplemental information.. 29
Average balance sheet and net interest income............. 30
</TABLE>
Note: These financial statements have not been reviewed or confirmed for
accuracy or relevance by the Federal Deposit Insurance Corporation.
<PAGE>
[LOGO]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pioneer Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Pioneer
Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for the years ended December 31, 1997, 1996, and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Pioneer
Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996, and 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 5 to the financial statements, the Company changed
its method of accounting for loan servicing rights. The change was made to
conform with newly established accounting principles.
MOSS-ADAMS LLP
Yakima, Washington
January 26, 1998
[LOGO]
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
ASSETS
Cash and due from banks
Noninterest bearing................................... $ 6,254 $ 7,093
Interest bearing...................................... 1,792 1,990
Federal funds sold..................................... - 1,000
------ --------
Total cash and cash equivalents...................... 8,046 10,083
------ --------
Investment securities
Available-for-sale, at fair value..................... 32,306 29,551
Held-to-maturity (fair value: 1997 - $1,388;
1996 - $562)..................................... 1,355 551
------ --------
33,661 30,102
------ --------
Loans held for sale (fair value: 1997 - $2,394;
1996 - $668)..................................... 2,369 672
Loans.................................................. 58,638 54,570
Less allowance for loan losses......................... (696) (748)
------ --------
Loans - net.......................................... 60,311 54,494
------ --------
Bank premises and equipment, net....................... 1,403 1,009
Accrued interest receivable............................ 786 646
Excess servicing rights................................ 1,255 1,423
Other assets........................................... 409 386
------ --------
3,853 3,464
------ --------
TOTAL ASSETS......................................... $105,871 $ 98,143
------- --------
------- --------
LIABILITIES
Deposits
Non-interest bearing..................................$ 16,663 $ 15,928
Interest bearing...................................... 68,938 66,295
------- --------
85,601 82,223
Notes payable.......................................... 10,191 5,796
Accrued interest payable............................... 380 372
Other liabilities...................................... 659 1,193
------- --------
Total liabilities.................................... 96,831 89,584
------- --------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares authorized,
344,699 and 361,000 shares issued and outstanding,
respectively.......................................... 2,263 2,363
Surplus................................................ 320 773
Retained earnings...................................... 6,285 5,388
Net unrealized gain on available-for-sale securities,
net of tax......................................... 172 35
------- --------
Total stockholders' equity........................... 9,040 8,559
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...........$ 105,871 $ 98,143
------- --------
------- --------
</TABLE>
See Accompanying Notes
2
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ------------ ---------
(Dollars in Thousands Except
Per Share Amounts)
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans.......................... $ 6,490 $ 6,134 $ 4,969
Federal funds sold.................................. 111 166 134
Investments
Taxable........................................... 1,669 1,177 896
Nontaxable........................................ 366 181 162
-------- -------- --------
8,636 7,658 6,161
-------- -------- --------
INTEREST EXPENSE
Deposits........................................... 3,453 2,731 1,974
Federal funds purchased............................ 4 1 9
Federal Home Loan Bank borrowings.................. 407 397 500
Other borrowings................................... 13 - 7
-------- -------- --------
3,877 3,129 2,490
-------- -------- --------
NET INTEREST INCOME................................. 4,759 4,529 3,671
LESS PROVISION FOR LOAN LOSSES...................... 188 272 152
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. 4,571 4,257 3,519
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts................ 349 269 208
Gain on sale of loans.............................. 880 573 875
Loan servicing income.............................. 190 492 473
Net gain on sales of investment securities......... 71 53 48
Discounts on purchased receivables................. 325 209 31
Other.............................................. 93 95 47
-------- -------- --------
1,908 1,691 1,682
-------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits..................... 2,609 2,282 1,958
Occupancy and equipment expense.................... 921 783 757
Other taxes and assessments........................ 145 127 163
Office supplies and postage........................ 191 187 160
Advertising and marketing.......................... 107 102 135
Other.............................................. 1,006 834 794
-------- -------- --------
4,979 4,315 3,967
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAX.................... 1,500 1,633 1,234
PROVISION FOR FEDERAL INCOME TAX.................... 419 470 389
-------- -------- --------
NET INCOME.......................................... $ 1,081 $ 1,163 $ 845
-------- -------- --------
-------- -------- --------
BASIC EARNINGS PER SHARE OF COMMON STOCK............ $ 3.09 $ 3.22 $ 2.34
-------- -------- --------
-------- -------- --------
DILUTED EARNINGS PER SHARE OF COMMON STOCK.......... $ 2.98 $ 3.14 $ 2.29
-------- -------- --------
-------- -------- --------
</TABLE>
3
See accompanying notes
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Common Retained Available-for-Sale
Stock Surplus Earnings Securities Total
--------- ------ -------- ------------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994......................... $ 2,363 $ 773 $ 3,698 $ (265) $ 6,569
NET INCOME......................................... - - 845 - 845
NET CHANGE IN UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES, net of tax........................... - - - 343 343
CASH DIVIDEND ($.42 per share)..................... - - (152) - (152)
-------- ------ ------- ------- --------
BALANCE, December 31, 1995......................... 2,363 773 4,391 78 7,605
NET INCOME......................................... - - 1,163 - 1,163
NET CHANGE IN UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES, net of tax........................... - - - (43) (43)
CASH DIVIDEND ($.46 per share)..................... - - (166) - (166)
-------- ------ ------- ------- --------
BALANCE, December 31, 1996......................... 2,363 773 5,388 35 8,559
NET INCOME......................................... - - 1,081 - 1,081
NET CHANGE IN UNREALIZED GAIN
(LOSS) ON AVAILABLE-FOR-SALE
SECURITIES, net of tax........................... - - - 137 137
STOCK OPTIONS EXERCISED............................ 17 - - - 17
STOCK REPURCHASED.................................. (117) (453) - - (570)
CASH DIVIDEND ($.51 per share)..................... - - (184) - (184)
-------- ------ ------- ------- --------
BALANCE, December 31, 1997......................... $ 2,263 $ 320 $ 6,285 $ 172 $ 9,040
-------- ------ ------- ------- --------
-------- ------ ------- ------- --------
</TABLE>
See accompanying notes
4
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 1,081 $ 1,163 $ 845
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization..................... 422 406 332
Provision for loan losses......................... 188 272 152
Federal Home Loan Bank stock dividends............ (148) (139) (384)
Gain on sale of investments....................... (71) (53) (48)
Proceeds from sale of loans held for sale......... 6,200 8,600 10,940
Origination of loans held for sale................ (7,080) (9,173) (11,815)
(Gain) loss on fixed assets disposition.......... (1) 23 -
Deferred federal income tax....................... 96 32 (71)
Deferral of loan origination costs and fees,
less amortization................................ (27) 2 173
Increase in interest receivable................... (140) (62) (147)
Increase in interest payable...................... 8 10 131
Other - net....................................... (817) 738 (21)
--------- -------- -------
Net cash from operating activities............... (289) 1,819 87
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available
for sale..................................... 14,985 10,299 3,724
Purchases of securities available for sale......... (18,254) (24,507) (6,733)
Proceeds from maturing securities available
for sale..................................... 835 1,230 635
Proceeds from sale of securities held to maturity.. - - 120
Purchases of securities held to maturity........... (2,836) - (200)
Proceeds from maturing securities held to
maturity..................................... 119 218 865
Principal repayments on securities available
for sale..................................... 2,006 1,310 694
Principal repayments on securities held
to maturity.................................. - - 40
Net increase in loans.............................. (4,971) (5,083) (14,413)
Purchases of bank premises and equipment........... (660) (418) (375)
Other - net........................................ (8) (18) (14)
--------- -------- -------
Net cash from investing activities............... (8,784) (16,969) (15,657)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits........................... 3,378 21,289 15,590
Payment of dividends............................... (184) (166) (152)
Principal payments on notes payable................ (9,622) (2,265) (2,365)
Additions to notes payable......................... 14,017 300 2,800
Stock options exercised............................ 17 - -
Stock repurchased.................................. (570) - -
--------- -------- -------
Net cash from financing activities............... 7,036 19,158 15,873
--------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (2,037) 4,008 303
CASH AND CASH EQUIVALENTS, beginning of year........ 10,083 6,075 5,772
--------- -------- -------
CASH AND CASH EQUIVALENTS, end of year.............. $ 8,046 $ 10,083 $ 6,075
--------- -------- -------
--------- -------- -------
</TABLE>
5
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
------ ----- -----
(Dollars in Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<S> <S> <C> <C>
Cash payments for
Interest........................................ $ 3,869 $ 3,119 $ 2,402
Income taxes.................................... 376 642 360
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS:
Investing activities
(Increase) decrease in fair value of
securities available for sale, net of
federal income tax............................ $ (137) $ 43 $ (343)
Excess servicing rights retained................ (211) (268) (398)
Valuation allowance of retained portion of
sold SBA loans................................ - 98 208
</TABLE>
As of December 31, 1997, the Bank owed $111,620 for leasehold improvements
which is included in other liabilities.
See accompanying notes.
6
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Pioneer Bancorp, Inc. (the Company) operates as a holding company for
Pioneer Bank (the Bank). The Bank's main office is located in Yakima,
Washington. The Bank also maintains a full-service branch in Kennewick,
Washington and three other branches in Yakima, Washington. The fourth Yakima
branch opened in December 1997. The Bank's activities are generally centered
around those geographic areas.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Pioneer Bancorp, Inc. conform to
generally accepted accounting principles and prevailing practices within the
banking industry.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Pioneer Bancorp Inc. and its wholly-owned subsidiary,
Pioneer Bank. All significant intercompany transactions and balances have
been eliminated.
INVESTMENT SECURITIES - The Bank accounts for its debt and equity
securities as follows:
TRADING SECURITIES - Any securities held principally for sale in the
near term are classified as trading-account securities and recorded at
their fair values. Unrealized gains and losses on trading-account
securities are included immediately in other income. During 1997 and
1996, the Bank held no securities which were classified as trading.
SECURITIES HELD TO MATURITY - Securities other than equities for which
the Bank has the positive intent and ability to hold to maturity are
reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the
period to maturity.
SECURITIES AVAILABLE FOR SALE - Available-for-sale securities
consist of bonds, notes, debentures, and certain equity securities not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Gain or loss on
disposition of securities is based on the net proceeds and the
carrying value of the specific security sold.
ACCOUNTING FOR LOAN ORIGINATION FEES - The Bank defers certain loan
origination and commitment fees and certain loan origination costs and
amortizes the net amount as an adjustment of the yield of the related loan
over its contractual life.
7
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR SBA LOAN SALES - The Bank originates loans to customers
under a Small Business Administration (SBA) program that generally provides
for SBA guarantees of 75% to 80% of each loan. The Bank generally sells the
guaranteed portion of certain SBA loans to a third party and retains the
unguaranteed portion in its own portfolio. A gain is recognized on these
loans through collection on sale of a premium over the adjusted carrying
value, and through retention of an ongoing rate differential less a normal
service fee (excess servicing fee) between the rate paid by the borrower to
the Bank and the rate paid by the Bank to the purchaser.
In the case of sales for an ongoing rate differential, the Bank allocates
its investment in an SBA loan among the retained portion of the loan, excess
servicing retained, and the sold portion of the loan based on the relative
fair value of each portion. A valuation allowance is recorded for
adjustments to fair value, if necessary.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at the
amount of unpaid principal, reduced by an allowance for loan losses and
unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. Various regulatory agencies,
as a regular part of their examination process, periodically review the
Bank's reserve for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgment of information
available to them at the time of their examinations.
The Bank accounts for impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or at the loan's market price or the fair value of the collateral if the loan
is collateral dependent. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest is subsequently recognized only
to the extent cash payments are received.
8
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD-FOR-SALE - Loans held-for-sale are carried at the lower of cost
or estimated market value. Market value is determined on an aggregate loan
basis. At December 31, 1997 and 1996, mortgage loans held-for-sale were
carried at cost which approximated market.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed using both
straight-line and declining-balance methods over the estimated useful lives
of the related assets. The lives range from 3 to 10 years.
OTHER REAL ESTATE OWNED - Real estate acquired by foreclosure or by
accepting a deed in lieu of foreclosure is carried at the lower of the
recorded investment in the property or its net realizable value. Following
foreclosure, the value of the underlying loan is written down to the fair
market value of the real estate to be acquired by a charge to the allowance
for loan losses, if necessary. Any subsequent write-downs are charged to
non-interest expense. Operating expenses of such properties, related income,
and gains and losses on their disposition are included in non-interest income
and expense. At December 31, 1997 and 1996, the balance in the other real
estate owned account was zero.
FEDERAL INCOME TAX - The Company provides for federal income tax based on
the asset/liability method. This method recognizes the amount of tax payable
or receivable at the date of the financial statement as a result of all
events that have been recognized in the financial statements as measured by
the provisions of currently enacted tax law and rates.
EMPLOYEE BENEFIT PLAN - The Company has a 401(k) plan covering
substantially all employees. The plan provides for a basic employer matching
contribution of 5% of employee salary deferrals. In addition, the employer
can contribute an increased matching contribution and/or a discretionary
profit-sharing contribution. The maximum total contribution, including
salary deferrals, matching and profit-sharing, is 15% of eligible
compensation. The employer matching contribution was 50% of salary deferrals
with no additional profit-sharing contribution. For 1997, 1996, and 1995,
the total employer contribution was $47,501, $45,884, and $31,017,
respectively.
PRESENTATION OF CASH FLOWS - For purposes of reporting cash flows, cash
and cash equivalents include cash and cash due from banks and federal funds
sold.
EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of common stock and common stock equivalents outstanding. The
dilutive effect of shares issuable upon the assumed exercise of all stock
options granted is computed using the treasury stock method.
9
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS - In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock-Based Compensation." This new standard defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If the former
standard for measurement were elected, SFAS No. 123 requires supplemental
disclosure to show any significant effects of using the new measurement
criteria. The Bank has elected to continue using the measurement prescribed
by APB Opinion No. 25 and, accordingly, this pronouncement has had no effect
on the Bank's financial position or results of operations.
INTEREST RATE SWAP AGREEMENTS - At times, the Bank hedges its interest
rate risk on certain debt obligations using interest rate swaps. The
interest differential to be received or paid is adjusted as interest rates
change and is recognized over the life of the swap agreements as a component
of interest expense.
RECLASSIFICATION - Certain amounts on the December 31, 1996 and 1995
financial statements have been reclassified to conform to the December 31,
1997 financial statement presentation.
FINANCIAL STATEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 3 - CASH AND DUE FROM BANKS
Based on the types and amounts of deposits received, the Bank must
maintain an appropriate amount of currency and non-interest bearing cash
deposits in accordance with reserve requirements of the Federal Reserve Bank.
Such reserve requirements totaled $907,000 and $883,000 at December 31, 1997
and 1996, respectively.
As of December 31, 1997 and 1996, approximately $5,816,000 and $5,688,000,
respectively, of cash and due from banks represented cash balances held by
the Federal Reserve Bank.
10
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES
The carrying value and estimated market value of investment securities at
December 31 is as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in Thousands)
1997
<S> <C> <C> <C> <C>
Available-for-sale securities
U.S. Treasury securities............................. $ 5,850 $ 37 $ - $ 5,887
Obligations of U.S. Government agencies.............. 19,203 140 14 19,329
Obligations of states and political subdivisions..... 4,635 98 - 4,733
Other securities..................................... 250 - 1 249
Federal Reserve Bank stock........................... 88 - - 88
Federal Home Loan Bank stock......................... 2,020 - - 2,020
--------- ------ ----- ---------
$ 32,046 $ 275 $ 15 $ 32,306
--------- ------ ----- ---------
--------- ------ ----- ---------
Held-to-maturity securities
Obligations of states and political subdivisions..... $ 1,355 $ 33 $ - $ 1,388
--------- ------ ----- ---------
--------- ------ ----- ---------
1996
Available-for-sale securities
U.S. Treasury securities............................ $ 6,497 $ 18 $ 12 $ 6,503
Obligations of U.S. Government agencies............. 14,211 71 42 14,240
Obligations of states and political subdivisions.... 6,324 30 11 6,343
Other securities.................................... 505 1 1 505
Federal Reserve Bank stock.......................... 88 - - 88
Federal Home Loan Bank stock........................ 1,872 - - 1,872
--------- ------ ----- ---------
$ 29,497 $ 120 $ 66 $ 29,551
--------- ------ ----- ---------
--------- ------ ----- ---------
Held-to-maturity securities
Obligations of states and political subdivisions.... $ 551 $ 12 $ 1 $ 562
--------- ------ ----- ---------
--------- ------ ----- ---------
</TABLE>
11
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities by
contractual maturity are shown below at December 31, 1997. Expected
maturities will differ from contractual maturities because debt issuers may
have the right to call or prepay obligations, with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
--------- ------------
(Dollars in Thousands)
<S> <C> <C>
Available-for-sale securities
Due in one year or less............................. $ 622 $ 623
Due after one year through five years............... 23,257 23,381
Due after five years through ten years.............. 3,909 3,990
Due after ten years................................. 2,150 2,204
Federal Reserve Bank stock.......................... 88 88
Federal Home Loan Bank stock........................ 2,020 2,020
--------- ---------
$ 32,046 $ 32,306
--------- ---------
--------- ---------
Held-to-maturity securities
Due in one year or less............................. $ 259 $ 260
Due after one year through five years............... 270 282
Due after five years through ten years.............. 826 846
--------- ---------
$ 1,355 $ 1,388
--------- ---------
--------- ---------
</TABLE>
The Bank's holdings of obligations of states and political subdivisions
are concentrated in Washington State, particularly in the Bank's lending area.
Proceeds from the sales and calls of investment securities were
approximately $14,985,000, $10,299,000, and $3,852,000 in 1997, 1996, and
1995, respectively. Gross gains of $86,376 and gross losses of $15,372 were
realized on sales in 1997, gross gains of $69,911 and gross losses of $17,133
were realized on sales in 1996, and gross gains of $98,852 and gross losses
of $50,573 were realized on sales in 1995.
Investment securities with carrying values of approximately $2,815,000 and
$1,170,000 and market values of approximately $2,855,000 and $1,172,000 at
December 31, 1997 and 1996, respectively, were pledged to secure U.S.
Government and public deposits and repurchase agreements as required by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in capital stock of the Federal Home Loan
Bank in an amount equal to at least 5% of the Bank's advances from FHLB. The
required investment amount is determined at December 31 of each year.
12
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 5 - LOANS
The composition of loans is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Commercial and agricultural........................ $ 13,220 $ 12,528
Real estate
One-four family residential...................... 8,362 7,208
Multi-family and commercial...................... 31,840 29,253
Construction..................................... 3,706 5,191
Consumer and other................................. 2,068 1,313
--------- ---------
59,196 55,493
Net deferred loan fees............................. (222) (249)
Valuation allowance on retained portion of sold
SBA loans....................................... (336) (674)
--------- ---------
Total loans..................................... $ 58,638 $ 54,570
--------- ---------
--------- ---------
</TABLE>
The Bank had loans or leases to borrowers engaged in similar activities
which exceeded 10% of total loans at December 31, 1997 and 1996 totaling
$11,941,555 and $11,125,634, respectively, consisting of loans to physicians
and other professionals providing personal services.
Impairment of loans having a recorded investment of approximately
$139,000, $575,000, and $421,000 at December 31, 1997, 1996, and 1995,
respectively, has been recognized in conformity with FASB Statement No. 114
as amended by FASB Statement No. 118. The average investment in impaired
loans during 1997, 1996, and 1995 was approximately $539,000, $491,000, and
$349,000, respectively. The total allowance for loan losses related to these
loans was $56,000, $103,400, and $75,600 at December 31, 1997, 1996, and
1995, respectively. Had the impaired loans performed according to their
original terms, additional interest income of approximately $17,800, $81,600,
and $42,500 would have been recognized in 1997, 1996, and 1995, respectively.
In addition, at December 31, 1997, the Bank had restructured loans of
approximately $455,000 with a related writedown of $101,000.
There were no commitments to lend additional funds to borrowers whose
loans were classified as nonaccrual. There were no loans over 90 days past
due still accruing interest at December 31, 1997 and 1996.
Loans serviced for others at December 31, 1997 and 1996 were approximately
$48,956,747 and $49,112,570, respectively.
13
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 5 - LOANS (CONTINUED)
Maturity and repricing information for the Bank's loan portfolio at
December 31 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Floating Rate
Maturing in Repricing in Total
----------- ---------------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
1997
0 - 90 days........................................ $ 1,591 $ 23,547 $ 25,138
91 - 365 days...................................... 4,548 802 5,350
1 year - 5 years................................... 15,733 2,553 18,286
Over 5 years....................................... 10,104 179 10,283
-------- --------- ---------
$ 31,976 $ 27,081 59,057
-------- ---------
-------- ---------
Loans on which the accrual of interest had
been discontinued................................. 139
---------
$ 59,196
---------
---------
1996
0 - 90 days....................................... $ 1,504 $ 25,423 $ 26,927
91 - 365 days..................................... 4,868 1,460 6,328
1 year - 5 years.................................. 15,687 7 15,694
Over 5 years...................................... 5,950 - 5,950
-------- --------- ---------
$ 28,009 $ 26,890 54,899
-------- ---------
-------- ---------
Loans on which the accrual of interest had
been discontinued............................... 594
---------
$ 55,493
---------
---------
</TABLE>
During 1997, the Company adopted the requirements of FASB Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The impact of adoption on net income in
1997 was immaterial. The changes in the Company's servicing assets for the
years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Balance at January 1................................. $ 1,423 $ 1,313
Additions............................................ 211 268
Less amortization.................................... (379) (158)
-------- --------
Balance at December 31............................... $ 1,255 $ 1,423
-------- --------
-------- --------
</TABLE>
14
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 5 - LOANS (CONTINUED)
The estimated fair value of the servicing assets approximated the book
value at December 31, 1997 and 1996. Fair value is estimated by discounting
estimated future cash flows from the servicing assets using discount rates
that approximate current market rates and using current expected future
prepayment rates.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year........................... $ 748 $ 533 $ 403
------ ------ ------
Provision charged to non-interest expense.............. 188 272 152
------ ------ ------
Losses charged to allowance............................ (262) (58) (23)
Recoveries credited to allowance....................... 22 1 1
Net charge-offs..................................... (240) (57) (22)
------ ------ ------
Balance at end of year................................. $ 696 $ 748 $ 533
------ ------ ------
------ ------ ------
</TABLE>
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Land............................................... $ 35 $ 35
Premises........................................... 132 116
Leasehold improvements............................. 922 337
Equipment, furniture, and fixtures................. 2,019 1,765
Construction in progress........................... 53 203
------- -------
3,161 2,456
Less accumulated depreciation...................... (1,758) (1,447)
------- -------
$ 1,403 $ 1,009
-------- -------
-------- -------
</TABLE>
15
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 7 - BANK PREMISES AND EQUIPMENT (CONTINUED)
The Bank is obligated under various noncancelable lease agreements for
certain offices. The leases provide that the Bank pay annual rent of
approximately $365,500. The annual lease amount is adjustable for changes in
the Consumer Price Index. The agreements expire between 2002 and 2010 with
options to renew. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998................................................ $ 344,000
1999................................................ 313,000
2000................................................ 313,000
2001................................................ 313,000
2002................................................ 160,000
</TABLE>
Total rent expense was $347,000, $308,000, and $299,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.
NOTE 8 - DEPOSITS
Interest bearing deposits as of December 31, 1997, 1996, and 1995 and
interest paid on those deposits for the years then ended were:
<TABLE>
<CAPTION>
Deposits Interest
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
--------- ---------- --------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW and money
market accounts................................ $ 17,895 $ 16,290 $ 12,152 $ 644 $ 374 $ 283
Savings accounts................................ 7,207 6,782 6,417 173 181 191
Certificates of deposit
over $100,000.................................. 10,220 8,934 8,128 621 415 268
Other certificates of deposit................... 33,616 34,289 21,293 2,015 1,761 1,232
--------- --------- --------- -------- --------- --------
$ 68,938 $ 66,295 $ 47,990 $ 3,453 $ 2,731 $ 1,974
--------- --------- --------- -------- --------- --------
--------- --------- --------- -------- --------- --------
</TABLE>
At December 31, 1997, the scheduled maturities for all time certificates
of deposit are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $ 39,831
1999.............................................. 3,290
2000.............................................. 356
2001.............................................. 198
2002 and thereafter............................... 161
---------
$ 43,836
---------
---------
</TABLE>
16
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
------------ -------------
(Dollars in Thousands)
<S> <C> <C>
Various notes payable to the Federal Home Loan Bank
(FHLB), due in monthly payments with interest
at rates ranging from 5.45% to 7.703% and terms
from April 1997 to August 2002. The notes are
collateralized under a blanket pledge agreement.... $ 9,776 $ 5,796
Note payable to stockholder, with quarterly interest
payments at prime (8.5% as of December 31, 1997)
beginning October 1, 1997 and quarterly principal
payments of $12,500 beginning October 1, 1998...... 200 -
Note payable to stockholder, with quarterly interest
payments at 9.25% beginning October 1, 1997 and
quarterly principal payments of $12,500 beginning
October 1, 1998................................... 200 -
Other............................................... 15 -
-------- --------
$ 10,191 $ 5,796
-------- --------
-------- --------
</TABLE>
Principal payments required for future years are summarized as follows
(dollars in thousands):
<TABLE>
<S> <C>
1998................................................ $ 3,264
1999................................................ 3,895
2000................................................ 1,657
2001................................................ 100
2002................................................ 1,275
--------
$ 10,191
--------
--------
</TABLE>
To hedge against its fixed interest rate risk on certain FHLB advances,
the Bank has entered into an interest rate swap agreement with the FHLB as
the counterparty. The interest rate swap has a notional amount of $750,000
and requires the Bank to make quarterly payments to the FHLB calculated at a
floating 3-month LIBOR annual interest rate. In return, the Bank receives
semi-annual payments from the FHLB calculated at a fixed interest rate of
6.2% per annum. The interest rate swap matures on January 20, 2000.
Management considers the counterparty credit risk of this agreement to be
negligible.
17
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 10 - FEDERAL INCOME TAX
Federal income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Current................................................. $ 323 $ 438 $ 460
Deferred................................................ 96 32 (71)
------ ------ ------
$ 419 $ 470 $ 389
------ ------ ------
------ ------ ------
</TABLE>
Items causing deferred federal income tax in the recognition of income and
expenses for financial reporting and fe deral income tax purposes include
cash versus accrual reporting, provision for loan losses, deferred loan fees,
deferred compensation, and depreciation. As of December 31, 1997 and 1996,
the total deferred tax assets were $375,568 and $390,364, and the total
deferred tax liabilities were $453,912 and $373,128, respectively. The Bank
believes, based upon the available information, that all deferred tax assets
will be realized in the normal course of operations. Accordingly, these
assets have not been reduced by a valuation allowance.
A reconciliation of the Company's effective income tax rate with the
Federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income tax based on statutory rates.................... $ 510 34.0 $ 555 34.0 $ 420 34.0
Adjustment resulting from
Tax-exempt income.................................... (124) (8.3) (62) (3.8) (55) (4.4)
Other................................................ 33 2.2 (23) (1.4) 24 1.9
------ ---- ------ ---- ------ ----
Federal income tax..................................... $ 419 27.9 $ 470 28.8 $ 389 31.5
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
</TABLE>
18
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank has various outstanding
commitments and contingent liabilities, such as letters of credit,
guarantees, and commitments to extend credit, which are not reflected in the
accompanying financial statements. Loan commitments totaled $11,073,000 and
$11,739,000 at December 31, 1997 and 1996, respectively. Outstanding
commitments under standby letters of credit aggregated $368,000 and $345,500
for December 31, 1997 and 1996, respectively. The Bank requires collateral
to support financial instruments when deemed necessary. Each customer's
credit-worthiness is evaluated on a case-by-case basis. For secured loans,
the Bank generally requires a loan-to-collateral value ratio of no more than
80%, but this may be higher in some circumstances. In the opinion of
management, there are no firm commitments to extend credit which represent
unusual risks.
NOTE 12 - RETAINED EARNINGS
When the Bank was initially capitalized, $500,000 of the $1,500,000
capitalization was credited to retained earnings at the direction of the
Comptroller of the Currency. In 1984, $50,000 of the initial allocation was
transferred to surplus. Accordingly, retained earnings at December 31, 1997
and 1996 include $450,000 of the initial capital allocation.
NOTE 13 - RELATED-PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain officers and directors, or
companies in which they have 10% or more beneficial interest, were indebted
to the Company and the Bank. All loans and commitments to lend were made in
compliance with applicable laws on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. The loans do not involve more than the
normal risk of collectibility or present any other unfavorable features.
The activities for insider loans for the year ended December 31, 1997 are
as follows:
<TABLE>
<S> <C>
Beginning balance................................ $ 200,761
Loans made....................................... -
Loans repaid..................................... (39,001)
-----------
Ending balance................................... $ 161,760
-----------
-----------
</TABLE>
19
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 14 - BENEFIT PLANS
The Bank has a deferred compensation plan for the benefit of two key
officers. The benefits commence upon retirement of the covered officers. One
of the officers has retired and is receiving payments. The Bank has
purchased life insurance to fund the cost of the plan. An amount equal to
the present value of the expected future payments is included as a liability
on the balance sheet.
NOTE 15 - EMPLOYEE STOCK OPTION PLAN
The Bank's stock option plans provide for the granting of incentive stock
options to its officers and employees. Generally, options outstanding under
the Bank's stock option plan are: (1) granted at prices which equate to or
are above the market value of the stock on the date of the grant, (2) vest
ratably over a three-year service vesting period beginning one year after the
grant date, (3) become fully vested if the Company is sold or merged into any
other corporation, and (4) expire ten years subsequent to the award.
A summary of the status of the Bank's stock options and changes for years
ended December 31, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Weighted Weighted
Average Average
Option Exercise Exercise
Shares Price Shares Price
------ --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year................... 36,050 $ 16.13 27,050 $ 14.15
Granted.............................................. 9,000 29.64 10,500 21.79
Exercised............................................ (1,500) 11.14 - -
Expired.............................................. (2,500) 24.15 (1,500) 20.05
Sold................................................. (10,250) 21.94 - -
------- -------
Outstanding at end of the year......................... 30,800 36,050
------- -------
------- -------
Options exercisable at year end........................ 19,667 17,833
------- -------
------- -------
Options available for future grant..................... 19,200 13,950
------- -------
------- -------
Weighted average fair value of
options granted during the year....................... $ 5.87
-------
-------
</TABLE>
The fair value of each option granted during 1997 is estimated on the date
of the grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 2.05%, (2) expected volatility of 9.6% (3)
risk-free interest rate of 5.7%, and (4) expected life of 6 years.
20
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 15 - EMPLOYEE STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------- ---------------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise at Remaining Exercise at Exercise
Price 12/31/97 Life Price 12/31/97 Price
- -------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$8 9,000 4.00 $ 8.00 9,000 $ 8.00
$17-$20 10,800 7.55 17.71 8,833 17.58
$20-$30 11,000 9.50 25.72 1,834 21.78
----------- -----------
30,800 7.21 17.73 19,667 13.59
----------- -----------
----------- -----------
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1997, and additional awards in future years are anticipated. The disclosure
requirements of SFAS No. 123 were not material to the 1996 consolidated
financial statements.
<TABLE>
<CAPTION>
1997
----------------------
As Pro
Reported Forma
-------- --------
<S> <C> <C>
Net income $ 1,081 $ 1,061
-------- --------
-------- --------
Basic earnings per common share $ 3.09 $ 3.03
-------- --------
-------- --------
Diluted earnings per common share $ 2.98 $ 2.94
-------- --------
-------- --------
</TABLE>
21
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
1997 1996
------- -------
(Dollars in Thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Assets
Cash.............................................. $ 97 $ 37
Investment in bank subsidiary..................... 9,174 8,463
Due from bank subsidiary.......................... 169 49
Federal income tax receivable..................... - 10
------ ------
Total assets.................................... $9,440 $8,559
------ ------
------ ------
Liabilities
Notes payable..................................... $ 400 $ -
------ ------
Total liabilities............................... 400 -
Stockholders' equity................................ 9,040 8,559
------ ------
Total liabilities and stockholders' equity...... $9,440 $8,559
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -----
(Dollars in Thousands)
CONDENSED STATEMENT OF INCOME
<S> <C> <C> <C>
Operating income
Dividends from subsidiary.................. $ 584 $ 145 $ 212
Operating expenses, net...................... (116) (43) (24)
------ ------ ----
Income before income taxes and equity in
undistributed income of subsidiary.......... 468 102 188
Income tax benefit........................... 39 10 9
------ ------ ----
Income before equity in undistributed income
of subsidiary............................... 507 112 197
Equity in undistributed income of subsidiary. 574 1,051 648
------ ------ ----
Net income................................... $1,081 $1,163 $845
------ ------ ----
------ ------ ----
</TABLE>
22
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -----
(Dollars in Thousands)
CONDENSED STATEMENT OF CASH FLOWS
<S> <C> <C> <C>
Cash flows from operating activities
Net income.................................... $ 1,081 $ 1,163 $ 845
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed income of
subsidiary................................ (574) (1,051) (648)
Net (increase) decrease in due from bank
subsidiary................................ (120) 71 (183)
Income taxes payable (receivable)........... 10 (80) 174
------- ------- ------
Net cash from operating activities........ 397 103 188
------- ------- ------
Cash flows from financing activities
Long-term borrowing on notes payable.......... 400 - -
Principal repayments of notes payable......... - (105) (65)
Payment of dividends.......................... (184) (166) (152)
Stock options exercised....................... 17 - -
Stock repurchased............................. (570) - -
------- ------- ------
Net cash from financing activities........ (337) (271) (217)
------- ------- ------
Net change in cash.............................. 60 (168) (29)
Cash, beginning of year......................... 37 205 234
------- ------- ------
Cash, end of year............................... $ 97 $ 37 $ 205
------- ------- ------
------- ------- ------
</TABLE>
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal regulatory agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Banks' assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
23
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 17 - REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ----------------- -----------------
Dollars in Thousands Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
- -----------------------
Total capital (to risk weighted assets)... $9,697 15.95% $4,865 8.0% $6,081 10.0%
Tier I capital (to risk weighted assets).. 9,001 14.80% 2,432 4.0% 3,649 6.0%
Tier I capital (to average assets)........ 9,001 8.71% 4,133 4.0% 5,166 5.0%
As of December 31, 1996
- -----------------------
Total capital (to risk weighted assets)... $8,610 16.88% $4,082 8.0% $5,102 10.0%
Tier I capital (to risk weighted assets).. 7,971 15.59% 2,045 4.0% 3,068 6.0%
Tier I capital (to average assets)........ 7,971 8.64% 3,691 4.0% 4,613 5.0%
</TABLE>
Banking regulations limit the transfer of assets in the form of dividends
from the Bank to the Company. At Decemb er 31, 1997, the aggregate amount of
dividends which could be paid to the Company by the Bank under these
regulations without prior approval of the Office of the Comptroller of the
Currency approximated $2,610,000.
24
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
DISCLOSURES RELATED TO FAIR VALUE OF FINANCIAL INSTRUMENTS - The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
CASH AND EQUIVALENTS AND FEDERAL FUNDS SOLD - For these short-term
instruments, the carrying amount is a reasonable estimate of fair
value.
INVESTMENT SECURITIES AND LOANS HELD FOR SALE - For securities and
loans held for sale, fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities. The Federal Home Loan Bank stock and Federal
Reserve Bank stock are not actively traded so there is not a readily
determinable market value for these investments.
LOANS RECEIVABLE - The fair value of loans generally is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit rating
and for the same remaining maturities.
DEPOSIT LIABILITIES AND FEDERAL FUNDS PURCHASED - The fair value of
demand deposits, savings accounts, and certain money market deposits
is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
LONG-TERM DEBT - Rates currently available to the Bank for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
INTEREST RATE SWAP - The fair value of the interest rate swap, which
is used for hedging purposes, is the estimated amount the Bank would
expect to receive to terminate the swap agreement at the reporting
date. This estimate takes into consideration current interest rates,
which determine the estimated future interest receipts and payments on
the agreement and the creditworthiness of the counterparty, which
helps determine an appropriate risk-based discount factor.
25
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table includes the carrying amounts and estimated fair
values of the Bank's financial instruments at December 31, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
(Dollars in Thousands)
<S> <C> <C>
Financial assets
Cash and due from banks......................... $ 8,046 $ 8,046
Federal funds sold.............................. - -
Investment securities........................... 33,661 33,694
Loans, net of allowance for loan losses......... 60,311 60,461
Accrued interest receivable..................... 786 786
Excess servicing rights......................... 1,255 1,255
Financial liabilities
Non-interest bearing deposits................... 16,663 16,663
Interest bearing deposits....................... 68,938 68,970
Accrued interest payable........................ 380 380
Notes payable................................... 10,191 10,191
Derivative instruments
Interest rate swap.............................. - -
</TABLE>
While estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assu rance that were the Bank to have
disposed of such items at December 31, 1997, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1997 should not necessarily be considered to apply at subsequent dates.
The fair values of loan commitments and standby letters of credits at
December 31, 1997 have not been determined a s it was not practicable to do
so. The details of such financial instruments are included in Note 11.
In addition, other assets and liabilities of the Bank that are not defined
as financial instruments are not includ ed in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in the financial statements nevertheless may have value but are
not included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the trained work force, customer goodwill, and similar
items.
26
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 19 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which is
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 replaced standards for computing and presenting
earnings per share and requires a dual presentation of basic and diluted
earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the year. Diluted earnings
per share reflect the potential dilution that could occur if common shares
were issued pursuant to the exercise of options under the Bank's stock option
plans. Comparative earnings per share data for the years ended December 31,
1997, 1996, and 1995 have been restated to conform with the current year
presentation. The following table illustrates the computations of basic and
diluted earnings per share for the years ended December 31, 1997, 1996, and
1995 (dollars in thousands except per share amounts).
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
1997
- ----
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders......... $ 1,081 349,687 $ 3.09
-------- ------- -------
-------- ------- -------
Effect of dilutive securities
Outstanding common stock options................ - 12,564
-------- -------
Income available to common shareholders........... $ 1,081 362,251 $ 2.98
-------- ------- -------
-------- ------- -------
1996
- ----
Basic earnings per share
Income available to common shareholders......... $ 1,163 361,000 $ 3.22
-------
-------
Effect of dilutive securities
Outstanding common stock options................ - 9,725
-------- -------
Income available to common shareholders........... $ 1,163 370,725 $ 3.14
-------- ------- -------
-------- ------- -------
1995
- ----
Basic earnings per share
Income available to common shareholders......... $ 845 361,000 $ 2.34
-------
-------
Effect of dilutive securities
Outstanding common stock options................ - 7,495
-------- -------
Income available to common shareholders........... $ 845 368,495 $ 2.29
-------- ------- -------
-------- ------- -------
</TABLE>
27
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 20 - SUBSEQUENT EVENT
On February 4, 1998, the Company and InterWest Bancorp, Inc. (InterWest)
reached a definitive agreement for InterWest to acquire all of the
outstanding stock of the Company. In general, the agreement calls for $58.98
worth of InterWest stock to be exchanged for each share of the Company's
stock. The transaction is subject to approval by regulators and the
Company's stockholders.
28
<PAGE>
SUPPLEMENTAL INFORMATION
- ------------------------------------------------------------------------------
<PAGE>
[LOGO]
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors
Pioneer Bancorp, Inc.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental
information for the years ended December 31, 1997, 1996, and 1995 is
presented for purposes of additional analysis and is not a required part of
the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audit 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.
MOSS-ADAMS LLP
Yakima, Washington
January 26, 1998
[LOGO]
29
<PAGE>
PIONEER BANCORP, INC. AND SUBSIDIARY
AVERAGE BALANCE SHEET AND NET INTEREST INCOME
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- ----------------------------
Interest Interest Interest
Average Income Average Average Income Average Average Income Average
Balance (Expense) Rate Balance (Expense) Rate Balance (Expense) Rate
-------- --------- ------- ------- --------- ------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Loans........................... $ 59,257 $ 6,490 11.0% $ 54,096 $ 6,134 11.3% $ 44,220 $ 4,969 11.2%
Investments
Non-taxable................... 7,804 554* 7.1% 3,869 274* 7.1% 2,884 245* 8.5%
Taxable....................... 26,181 1,669 6.4% 19,026 1,169 6.1% 14,073 896 6.4%
Federal funds sold.............. 1,926 111 5.8% 3,007 166 5.5% 2,343 134 5.7%
--------- -------- -------- -------- -------- --------
Total earning assets
and interest income......... 95,168 8,824 9.3% 79,998 7,743 9.7% 63,520 6,244 9.8%
-------- -------- --------
Other assets
Cash and due from banks......... 4,619 4,119 3,933
Bank premises and equipment..... 1,061 876 913
Other........................... 2,263 1,860 1,676
Allowance for loan losses....... (763) (642) (434)
--------- -------- --------
Total assets $ 102,348 $ 86,211 $ 69,608
--------- -------- --------
--------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Savings deposits, MMA
and NOW accounts........... $ 25,115 (817) (3.3%) $ 19,400 (555) (2.9%) $ 16,336 (474) (2.9%)
Time deposits..................... 46,263 $ (2,636) (5.7%) $ 37,791 $ (2,176) (5.8%) $ 25,801 $ (1,500) (5.8%)
--------- -------- -------- -------- -------- --------
Total interest bearing deposits.. 71,378 (3,453) (4.8%) 57,191 (2,731) (4.8%) 42,137 (1,974) (4.7%)
Notes payable and other borrowings.. 6,899 (420) (6.1%) 6,590 (397) (6.0%) 8,170 (507) (6.2%)
Federal funds purchased............. - (4) 0.0% - (1) 0.0% - (9) 0.0%
--------- -------- -------- -------- -------- --------
Total interest bearing liabilities
and interest expense............ 78,277 (3,877) (5.0%) 63,781 (3,129) (4.9%) 50,307 (2,490) (4.9%)
-------- -------- --------
Other liabilities
Demand deposits................... 14,580 13,530 11,647
Other............................. 922 936 815
Stockholders' equity.............. 8,569 7,964 6,839
--------- -------- --------
Total liabilities, stockholders'
equity, and net interest
income........................ $ 102,348 $ 4,947 $ 86,211 $ 4,614 $ 69,608 $ 3,754
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Net interest income as a percentage
of average earning assets
Interest income................. 9.3% 9.7% 9.8%
Interest expense................ (4.1%) (3.9%) (3.9%)
------ ----- ------
Net interest income............... 5.2% 5.8% 5.9%
------ ----- ------
------ ----- ------
</TABLE>
- --------------------
* Tax equivalent basis
<PAGE>
APPENDIX A
______________________________________________
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
PACIFIC NORTHWEST BANK
AND
INTERWEST BANCORP, INC.
ON BEHALF OF
NEW PACIFIC NORTHWEST BANK
______________________________________________
DATED AS OF JANUARY 15, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. MERGER................................................. 6
1.1 THE MERGER............................................... 6
1.2 EFFECTIVE DATE........................................... 7
ARTICLE II. EXCHANGE CONSIDERATION................................ 7
2.1 EXCHANGE CONSIDERATION................................... 8
2.2 SHAREHOLDER RIGHTS; STOCK TRANSFERS...................... 8
2.3 FRACTIONAL SHARES........................................ 8
2.4 EXCHANGE PROCEDURES...................................... 8
2.5 EXCHANGE RATIO ADJUSTMENTS............................... 8
2.6 EXCEPTION SHARES......................................... 8
2.7 DISSENTING SHARES........................................ 8
2.8 RESERVATION OF RIGHT TO REVISE TRANSACTION............... 9
2.9 OPTIONS.................................................. 9
ARTICLE III. ACTIONS PENDING CONSUMMATION......................... 9
3.1 CAPITAL STOCK............................................ 9
3.2 DIVIDENDS, ETC........................................... 9
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 BANK'S REPRESENTATIONS AND WARRANTIES................ 11
4.2 INTERWEST'S 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........................................... 22
5.6 ACCESS; INFORMATION...................................... 23
5.7 BREAK-UP FEES............................................ 23
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY
APPLICATIONS PREPARATION................................. 24
5.9 APPOINTMENT OF DIRECTORS/OFFICERS; BYLAW AMENDMENTS...... 24
5.10 BLUE-SKY FILINGS......................................... 24
5.11 AFFILIATE AGREEMENTS..................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
5.12 CERTAIN POLICIES OF THE BANK............................. 24
5.13 STATE TAKEOVER LAW....................................... 25
5.14 NO RIGHTS TRIGGERED...................................... 25
5.15 SHARES LISTED............................................ 25
5.16 REGULATORY APPLICATIONS.................................. 25
5.17 REGULATORY DIVESTITURES.................................. 25
5.18 CURRENT INFORMATION...................................... 25
5.19 401(k) PLANS............................................. 25
5.20 INDEMNIFICATION.......................................... 26
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 THE BANK.................... 28
ARTICLE VII. TERMINATION.......................................... 29
7.1 EVENTS OF TERMINATION.................................... 29
7.2 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
</TABLE>
EXHIBITS
- --------
<TABLE>
<S> <C>
Exhibit A Approval by Directors of Pacific Northwest Bank
Exhibit B Director Agreements
Exhibit C Stock Option Agreement
Exhibit D Affiliate Undertakings and Agreements
Exhibit E Employment Agreement of Patrick M. Fahey
Exhibit F Employment Agreement of David H. Straus
Exhibit G Employment Agreement of George P. Brace
Exhibit H Employment Agreement of Kim S. Brace
Exhibit I Employment Agreement of Roderick Budd
Exhibit J Legal Opinion of Keller Rohrback L.L.P.
Exhibit K Legal Opinion of Graham & Dunn, P.C.
Exhibit L List of Bank Office Locations
Exhibit M List of InterWest Office Locations
Exhibit N List of New Bank Office Location
Exhibit O List of Officers and Directors of Continuing Corporation
</TABLE>
ii
<PAGE>
SCHEDULES
- ---------
<TABLE>
<CAPTION>
Bank Disclosures
- ----------------
<S> <C>
Schedule 2.9 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(DD) Derivative Contracts
Schedule 4.1(FF) Commitments and Contracts
</TABLE>
iii
<PAGE>
INTERWEST DISCLOSURES
- ---------------------
<TABLE>
<S> <C>
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
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of the 15th
day of January, 1998 (this "Plan"), is between PACIFIC NORTHWEST BANK (the
"Bank") and INTERWEST BANCORP, INC. ("InterWest") acting on its own behalf
and on behalf of NEW PACIFIC NORTHWEST BANK ("New Bank").
RECITALS
(A) THE BANK. The Bank is a banking corporation duly organized and
existing in good standing under the laws of the State of Washington, with its
principal executive offices located in Seattle, Washington. Attached to this
Plan as EXHIBIT L is a list setting forth the location of each of the Bank's
offices. As of the date of this Plan, the Bank has 800,000 authorized shares
of common stock, $1.00 par value per share ("Bank Common Stock") (no other
class of capital stock being authorized), of which 395,963 shares of Bank
Common Stock are issued and outstanding. As of December 31, 1997, the Bank
had capital of $15,977,629, divided into common stock of $389,926, surplus of
$8,059,158, and undivided profits of $7,494,650.
(B) 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. Attached to
this Plan as EXHIBIT M is a list setting forth the location of each of
InterWest's offices. InterWest 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, InterWest has 20,000,000 authorized shares of common stock,
$0.20 par value per share ("InterWest Common Stock") (no other class of
capital stock being authorized), of which 8,054,625 shares of InterWest
Common Stock are issued and outstanding.
(C) NEW BANK. New Bank will be organized by persons designated by
InterWest who will, immediately upon execution of this Plan by InterWest and
the Bank, apply for approval of the Washington Department of Financial
Institutions for New Bank to become a Washington State banking corporation.
Upon such approval, New Bank will become a body corporate and will execute
this Plan, thereby becoming a party to this Plan and ratifying all prior
actions taken on its behalf by InterWest. All of the capital stock of New
Bank ("New Bank Common Stock") shall be subscribed for solely by InterWest,
and the consideration for such subscription shall be paid in before the
Effective Date (as defined below). Attached to this Plan as EXHIBIT N is a
list setting forth the location of New Bank's offices.
(D) PRIOR AGREEMENT. Effective as of January 15, 1998, the Bank and
InterWest, entered into an Agreement and Plan of Reorganization, pursuant to
which the Bank would be reorganized to become a wholly owned subsidiary of
InterWest (the "Previous Agreement"). The Bank and InterWest have now
determined that it is in their mutual best interest that the transactions
contemplated in the Previous Agreement be restructured so that the Bank is
merged with a separate subsidiary of InterWest, newly formed for that
purpose. Accordingly, New Bank shall be merged with and into the Bank in
accordance with the provisions of RCW 30.49.040, 30.49.060, and 30.49.090 and
this Plan, and the Bank will become the wholly owned subsidiary of InterWest.
(E) DIRECTOR AND OFFICER AGREEMENTS. As a condition and an inducement
to InterWest's willingness to enter into this Plan, the directors of the Bank
have entered into agreements in the forms attached to this Plan as EXHIBIT A
and EXHIBIT B, pursuant to which, among other things, each director has
agreed to vote his or her shares of Bank Common Stock in favor of approval of
the actions
1
<PAGE>
contemplated by this Plan at the Meeting (as defined below) and to refrain
from competing with InterWest.
(F) STOCK OPTION AGREEMENT. Immediately after the execution and
delivery of the Previous Agreement, as a condition and an inducement to
InterWest's willingness to enter into the Previous Agreement, the Bank and
InterWest entered into a Stock Option Agreement (the "Stock Option
Agreement"), in the form attached to this Plan as EXHIBIT C, pursuant to
which the Bank granted to InterWest an option to purchase, under certain
circumstances, shares of Bank Common Stock.
(G) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
SCHEDULE 4.L(C) or as authorized by this Plan or the Stock Option Agreement:
there are no shares of capital stock of the Bank authorized and reserved for
issuance; the Bank does not have any Rights (as defined below) issued or
outstanding; and the Bank does not have 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 Bank Common Stock.
(H) APPROVALS. At meetings of the respective Boards of Directors of
the Bank and InterWest, each such Board has approved and authorized the
execution of this Plan and the Stock Option Agreement 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(A).
"ADDITIONAL SHARES" means the number equal to (1) the Bank's
undistributed net income (determined in accordance with GAAP) during the
period between June 30, 1998 and the Effective Date, DIVIDED by (2) the
Average Closing Price.
"ADJUSTMENT FACTOR" means the number equal to the Additional Shares
divided by 395,963.
"APPRAISAL LAWS" has the meaning assigned to such term in Section 2.7.
"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 twentieth 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).
"BANK REGULATORY REPORTS" has the meaning assigned to such term in
Section 4.1(H).
"BANK OPTION" has the meaning assigned to such term in Section 2.9.
"BUSINESS DAY" means any day other than a Saturday, Sunday, or legal
holiday in the State of Washington.
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"CAPITAL" means capital stock, surplus and retained earnings determined
in accordance with GAAP, the calculation of which shall exclude gains or
losses on securities available for sale, net of taxes.
"CODE" has the meaning assigned to such term in Section 4.1(Q)(2).
"COMPENSATION AND BENEFIT PLANS" has the meaning assigned to such term
in Section 4.1(Q)(1).
"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 quoting both bid and
asked prices, 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 Bank
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 Bank Common Stock or New Bank
Common Stock held by those shareholders of, respectively, the Bank or New
Bank 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 BANK COMMON STOCK" means shares of Bank Common Stock other
than Exception Shares and Dissenting Shares.
"EMPLOYMENT AGREEMENT" shall mean any of Exhibits E through I.
"ENVIRONMENTAL LAW" means (1) any federal, state, and/or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection, preservation or restoration of the environment (including air,
water vapor, surface water, groundwater, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource) or 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
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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).
"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 Bank'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.
"FAHEY" has the meaning assigned to such term in Section 5.9(A).
"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.
"FINAL CAPITAL REQUIREMENT" means a dollar amount equal to the sum of
$16 million plus $200,000 for each month elapsed between March 31, 1998 and
the Effective Date (with any partial month being pro-rated).
"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.
"INDEMNIFIED PARTY" has the meaning assigned to such term in Section
5.20(A).
"INTERWEST OPTION" has the meaning assigned to such term in Section 2.8.
"LOAN/FIDUCIARY PROPERTY" means any property owned or controlled by the
Bank or any of its Subsidiaries or in which the Bank or any of its
Subsidiaries holds a security or other interest, and, where required by the
context, includes any such property where the Bank 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
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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 Stock Option
Agreement or the consummation of any of the transactions contemplated by this
Plan or the Stock Option Agreement.
"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.
"NEW BANK COMMON STOCK" has the meaning assigned to such term in
paragraph (C) of the Recitals to this Plan.
"OPTION" has the meaning assigned to such term in the Stock Option
Agreement.
"OPTION SHARES" has the meaning assigned to such term in the Stock
Option Agreement.
"PARTICIPATION FACILITY" means any facility in which the Bank 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).
"PERSON" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization, labor union,
governmental body, or other entity.
"PREVIOUS AGREEMENT" has the meaning assigned to such term in paragraph
(D) of the Recitals to this Plan.
"PREVIOUSLY DISCLOSED" means information provided by a Party in a
Schedule that is delivered by that Party to the other Party contemporaneously
with the execution of this Plan.
"PROXY STATEMENT" has the meaning assigned to such term in Section 5.2.
"REGISTRATION STATEMENT" has the meaning assigned to such term in
Section 5.2.
"REGULATORY AUTHORITIES" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"RIGHTS" has the meaning assigned to such term in paragraph (G) of the
Recitals to this Plan.
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"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.
"STOCK OPTION AGREEMENT" has the meaning assigned to such term in
paragraph (F) of the Recitals to this Plan.
"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(BB).
"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 Bank or any Subsidiary of the
Bank, and (2) InterWest or any Subsidiary of InterWest.
(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 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. All references to the "Plan" or the "Agreement and
Plan of Reorganization" made in exhibits to and agreements executed in
connection with the Previous Agreement shall be deemed to be references to
this Plan. Nothing in this Plan shall be construed to impair or otherwise
affect the obligations of any party to such agreement.
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
30.49.040, 30.49.060, and 30.49.090, New Bank shall merge into the Bank (the
"Merger"), the separate existence of New Bank shall cease, and the Bank
("Continuing Corporation") shall survive, and the name of the Continuing
Corporation shall be "Pacific Northwest Bank." The authorized shares and par
value of each share of stock of the Continuing Corporation shall be those of
the Bank immediately prior to the
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Merger becoming effective, and the capital of the Continuing Corporation
shall be equal to the combined capital of New Bank and the Bank immediately
prior to the Merger becoming effective. The main office and the established
and authorized branches of the Continuing Corporation shall be the main
office and the established and authorized branches of the Bank immediately
prior to the Merger becoming effective.
(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 the Bank, as in effect immediately prior to the Merger becoming
effective. The directors and officers of the Continuing Corporation shall be
the directors and officers of the Bank in office immediately prior to the
Merger becoming effective, plus such additional directors as InterWest shall
determine. The names and mailing addresses of each director and officer of
the Continuing Corporation who will serve until the next annual meeting of
the Continuing Corporation are set forth on EXHIBIT O to this Plan:
1.2 EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" will be the tenth Business Day after the fulfillment or
waiver of each condition precedent set forth in, and the granting of each
approval (and expiration of any waiting period) required by, Article VI. If
the Merger is not consummated in accordance with this Plan on or prior to
September 30, 1998 (the "Termination Date"), the Bank or InterWest may
terminate this Plan in accordance with Article VII.
ARTICLE II. EXCHANGE CONSIDERATION
2.1 EXCHANGE 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 BANK COMMON STOCK. Each share of Eligible Bank
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, be exchanged for the right to receive 3.95
shares of InterWest Common Stock (as adjusted, if applicable, pursuant to
Section 2.5) (the "Exchange Ratio").
(C) OUTSTANDING NEW BANK COMMON STOCK. Each share of New Bank
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 InterWest, as the holder of such shares, be exchanged for the right
to receive immediately upon the Effective Date, one share of the capital
stock of the Continuing Corporation.
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2.2 SHAREHOLDER RIGHTS; STOCK TRANSFERS. On the Effective Date,
holders of Bank Common Stock shall cease to be, and shall have no rights as,
shareholders of the Bank, 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 Bank or the Continuing Corporation of the
shares of Bank 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 Bank 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 Bank of record immediately prior to the Effective Date transmittal
materials for use in exchanging such shareholder's certificates for Bank
Common Stock for the consideration set forth in this Article II. The
certificates representing the shares of InterWest Common Stock for which
shares of such shareholder's Bank Common Stock are exchanged 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's exchange agent (the "Exchange
Agent") of the certificates representing all of such shares of Bank 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 Bank 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 5.11. The certificates representing the shares of stock
of the Continuing Corporation for which shares of InterWest's New Bank Common
Stock are exchanged on the Effective Date will be delivered to InterWest only
upon delivery to the Continuing Corporation's exchange agent of the
certificate representing all of such shares of New Bank Common Stock.
2.5 EXCHANGE RATIO ADJUSTMENTS. 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. In the
event that the transactions contemplated by this Plan have not been
consummated on or before June 30, 1998, then the Exchange Ratio shall be
equal to 3.95 plus the Adjustment Factor.
2.6 EXCEPTION SHARES. Each of the Exception Shares of Bank Common Stock
shall be canceled and retired upon consummation of the Merger, and no
consideration shall be issued in exchange therefor.
2.7 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
30.49.090 (the "Appraisal Laws") shall not be converted into or represent a
right to receive InterWest Common Stock or stock of the Continuing Corporation,
as the case may be, 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 Bank
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Common Stock pursuant to the provisions of the Appraisal Laws shall receive
payment for such Dissenting Shares from the Bank or New Bank, as appropriate
(but only after the amount thereof shall have been agreed upon or finally
determined pursuant to the Appraisal Laws).
2.8 RESERVATION OF RIGHT TO REVISE TRANSACTION. In its sole discretion,
and notwithstanding any other provision in this Plan to the contrary,
InterWest or New Bank may at any time change the method of effecting its
acquisition of the Bank; PROVIDED, HOWEVER, that no such change shall (A)
alter or change the amount or kind of consideration to be issued to holders
of Bank Common Stock as provided for in this Plan, or (B) adversely affect
the tax treatment to the Bank shareholders as a result of receiving such
consideration. If InterWest or New Bank so elects to change the method of
acquisition, the Bank will cooperate with and assist InterWest and/or New
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.
2.9 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 Bank to purchase shares of Bank Common Stock ("Bank 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 Bank 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 Bank Common Stock subject to such
Bank 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 Bank Option by the Exchange Ratio, and rounding up to the nearest
cent. The number of shares of Bank Common Stock that are issuable upon
exercise of Bank Options as of the date of this Plan are Previously Disclosed
in SCHEDULE 2.9. 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 2.9.
ARTICLE III. ACTIONS PENDING CONSUMMATION
The 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, and the Bank will not (and will not cause or allow any
of it Subsidiaries to):
3.1 CAPITAL STOCK. Except for or as otherwise expressly permitted in
this Plan or the Stock Option Agreement 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 Bank or any of its Subsidiaries, or
any Rights with respect thereto, or enter into any agreement with respect to
the foregoing, or permit any additional shares of Bank 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 or
the
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Stock Option 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 (A) the Bank may declare and pay, consistent with
past practice, an annual cash dividend of $0.80 per share only to the extent
that such dividend does not result in the failure of the Bank to comply with
Section 6.2(G).
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 5.12, 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 $50,000 individually or $100,000 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 Bank
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 Bank 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 Bank and its Subsidiaries taken as a whole (except
foreclosures or acquisitions by the 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.
3.10 CLAIMS. Settle any claim, litigation, action or proceeding
involving any liability for material money damages or restrictions upon the
operations of the Bank or any of its Subsidiaries.
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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. With
regard to any new extension of credit in excess of $1,000,000, the Chief
Executive Officer or Chief Credit Officer of the Bank shall report to the
Chief Executive Officer or Chief Financial Officer of InterWest, as
expeditiously as possible, the substance and nature of the transaction for
the purpose of keeping InterWest abreast of the ongoing credit quality at the
Bank.
3.13 TRANSACTION EXPENSES. Incur expenses in connection with the
transactions contemplated by this Plan that exceed $130,000 in the aggregate.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 THE BANK'S REPRESENTATIONS AND WARRANTIES. The Bank hereby
represents and warrants to InterWest and New Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan
with respect to the Bank and its Subsidiaries are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of the Bank 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 Bank 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. The Bank is an "insured depository institution" as
defined in the Federal Deposit Insurance Act, as amended, and applicable
regulations under such statute, and its deposits are insured by the Bank
Insurance Fund of the FDIC.
(C) SHARES. The outstanding shares of the Bank and its
Subsidiaries' capital stock are validly issued and outstanding, fully paid
and nonassessable, and subject to no preemptive rights. Except as Previously
Disclosed in SCHEDULE 4.1(C) and as provided under the Stock Option
Agreement, there are no shares of capital stock or other equity securities of
the Bank or its Subsidiaries outstanding and no outstanding Rights with
respect thereto.
(D) SUBSIDIARIES. The Bank has Previously Disclosed in SCHEDULE
4.1(D) a list of all of its Subsidiaries. No equity securities of any of the
Bank's Subsidiaries are or may become required to be issued (other than to
the Bank or one of its Subsidiaries) by reason of any Rights with respect
thereto. There are no contracts, commitments, understandings or arrangements
by which any of its Subsidiaries is or may be bound to sell or otherwise
issue any shares of such Subsidiary's capital stock, and there are no
contracts, commitments, understandings or arrangements relating to the rights
of the Bank 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 Bank or one of its Subsidiaries are fully paid and nonassessable and
are owned by the Bank 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
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reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on it. Except as Previously Disclosed in SCHEDULE 4.1(D), the
Bank 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.
(E) CORPORATE POWER. Each of the Bank 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 and the
Stock Option Agreement have been authorized by all necessary corporate action
of the Bank and each of its Subsidiaries that is a Party, and each such
agreement is a valid and binding agreement of the Bank and such Subsidiaries,
enforceable against the Bank 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 Stock Option Agreement and the
consummation by the Bank of the transactions contemplated by this Plan and
the Stock Option Agreement 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 Bank or of any of its Subsidiaries or to which
the Bank 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), 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 "Bank
Financial Reports"), and 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 Department (in
each case, the "Bank Regulatory Reports" and together with the Bank Financial
Reports, the "Financial Reports") did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Financial Reports
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date, and each of the statements of income and changes in
shareholders' equity and cash flows or equivalent statements in the Bank
Regulatory 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.
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(I) ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Bank 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 Bank 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 Bank 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 Bank Financial
Reports, the Bank 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 Financial Reports as being owned by the Bank 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 Bank
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 Bank 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 Bank 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 Bank nor any of its Subsidiaries has been advised by any of such
Regulatory Authorities that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, agreement, memorandum or understanding, commitment
letter or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in SCHEDULE
4.1(M), each of the Bank 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;
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(2) has received no notification or communication from any
Regulatory Authority or the staff thereof (a) asserting that the Bank 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 Bank
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 Bank
or its Subsidiaries, or (c) requiring any of the Bank 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 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 Bank 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 Bank 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 Bank 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 Bank nor any of its Subsidiaries is subject to
or bound by any contract containing covenants that limit the ability of the
Bank 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 Bank 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 Bank and its
Subsidiaries has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with (1) the Department, (2) the FDIC, (3) the Federal Reserve Board,
and (4) any other Regulatory Authorities having jurisdiction with respect to
the Bank 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.
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(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 Bank 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 Bank 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 Bank 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 the
Bank 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 Bank nor any of its Subsidiaries has engaged in a
transaction with respect to any ERISA Plan that could subject the Bank 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 Bank 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 Bank under Section 4001(a)(15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Neither the Bank 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 Bank 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
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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 Bank 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 Bank 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 Bank or any of
its Subsidiaries under any Compensation and Benefit Plan or otherwise from
the Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank and its Subsidiaries that have been classified by it
as of December 31, 1997 (the "Asset Classification"); and no amounts of
loans, extensions of credit or other assets that have been classified as of
December 31, 1997 by any regulatory examiner as "Other Loans Specially
Mentioned," 'Substandard," "Doubtful" "Loss," or words of similar import are
excluded from the amounts disclosed in the Asset Classification, other than
amounts of loans, extensions of credit or other assets that were charged off
by the Bank or any Subsidiary prior to December 31, 1997.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible
loan losses shown on the consolidated balance sheets in the December 31,
1996, Bank Financial Reports and the September 30, 1997, Bank Regulatory
Reports was, and the allowance for possible loan losses to be shown on
subsequent Bank Financial Reports was and will be, adequate in the opinion of
the Board of Directors of the Bank 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 Bank 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 Bank, except for such matters that,
individually or in the aggregate, are not
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reasonably likely to have a Material Adverse Effect on the Bank 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 Bank 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 Bank's knowledge, there is no person who, as of the date
of this Plan, may be deemed to be an "affiliate" of the Bank as that term is
used in Rule 145 under the Securities Act.
(X) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. The Bank and
its Subsidiaries have taken all necessary action to exempt this Plan and the
Stock Option Agreement and the transactions contemplated by this Plan and the
Stock Option Agreement from, and this Plan and the Stock Option Agreement 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 Bank's and its Subsidiaries' articles of
incorporation.
(Y) NO FURTHER ACTION. The Bank and its Subsidiaries have taken
all action so that the entering into of this Plan and the Stock Option
Agreement and the consummation of the transactions contemplated by this Plan
and the Stock Option Agreement (including the Merger and the exercise of the
Option) or any other action or combination of actions, or any other
transactions, contemplated by this Plan and the Stock Option Agreement 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 Bank or any of its
Subsidiaries or under any agreement to which the Bank 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 or the
Stock Option Agreement
(Z) ENVIRONMENTAL MATTERS.
(1) To the Bank'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 Bank or its Subsidiaries.
(2) There is no proceeding pending or, to the Bank's
knowledge, threatened before any court, governmental agency or board or other
forum in which the Bank or any of its Subsidiaries or any Participation
Facility has been, or with respect to threatened proceedings, reasonably
would be expected to be, named as a defendant or potentially responsible
party (a) for alleged noncompliance (including by any predecessor) with any
Environmental Law, or (b) relating to the release or threatened release into
the environment of any Hazardous Material, whether or not occurring at or on
a site owned, leased or operated by the Bank 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 Bank or its Subsidiaries or have been
Previously Disclosed in SCHEDULE 4.1(Z)(2).
(3) There is no proceeding pending or, to the Bank's knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or the Bank 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
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threatened that are not reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect on the Bank or have been Previously
Disclosed in SCHEDULE 4.1(Z)(3).
(4) To the Bank'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 Bank's knowledge, during the period of (a)
ownership or operation by the Bank or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Bank or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Bank 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 Bank or its Subsidiaries or have been Previously Disclosed in SCHEDULE
4.1(Z)(5).
(6) To the Bank's knowledge, prior to the period of (a)
ownership or operation by the Bank or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Bank or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Bank 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
Bank or its Subsidiaries or have been Previously Disclosed in SCHEDULE
4.1(Z)(6).
(AA) OPTION SHARES. The Option Shares, when issued upon exercise
of the Option, will be validly issued, fully paid and nonassessable and
subject to no preemptive rights.
(BB) 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 Bank or its Subsidiaries, including
consolidated federal income tax returns of the Bank 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 Bank or its Subsidiaries, and such Tax Returns
were true, complete and accurate in all material respects, (2) all Taxes
shown to be due on the Tax Returns have been paid in full, (3) the Tax
Returns have been examined by the Internal Revenue Service or the appropriate
state, local or foreign taxing authority, or the period for assessment of the
Taxes in respect of which such Tax Returns were required to be filed has
expired, (4) all Taxes due with respect to completed and settled examinations
have been paid in full, (5) no issues have been raised by the relevant taxing
authority in connection with the examination of any of the Tax Returns which
are reasonably likely, individually or in the aggregate, to result in a
determination that would have a Material Adverse Effect on the Bank or its
Subsidiaries, except as reserved against in the Bank Financial Reports, 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 Bank or its
Subsidiaries.
(CC) ACCURACY OF INFORMATION. The statements with respect to the
Bank and its Subsidiaries contained in this Plan, the Stock Option Agreement,
the Schedules and any other written documents executed and delivered by or on
behalf of the Bank 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
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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.
(DD) DERIVATIVES CONTRACTS. None of the Bank 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(DD). SCHEDULE 4.1(DD) includes a list of any assets of the Bank or its
Subsidiaries that are pledged as security for each such Derivatives Contract.
(EE) ACCOUNTING CONTROLS. Each of the Bank 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 Bank 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.
(FF) COMMITMENTS AND CONTRACTS. Neither the Bank 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(FF), 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 Bank or any such
Subsidiary without any obligation on the part of the Bank or any such
Subsidiary to make any payment in connection with such termination);
(2) except as Previously Disclosed in SCHEDULE 4.1(FF), 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(FF), any
material contract with any affiliate.
4.2 INTERWEST'S REPRESENTATIONS AND WARRANTIES. InterWest hereby
represents and warrants to the Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan
with respect to InterWest and New Bank are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. InterWest 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
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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. InterWest has the corporate power and
authority to carry on its business as it is now being conducted and to own
all its material properties and assets.
(E) CORPORATE AUTHORITY. This Plan and the Employment Agreement of
Pat Fahey (Exhibit E) have been authorized by all necessary corporate action
of InterWest and each such agreement is a valid and binding agreement of
InterWest, enforceable against InterWest in accordance with its terms,
subject to bankruptcy, insolvency and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
As of the date of this Plan, no approval by InterWest's shareholders of this
Plan and the Employment Agreements is required.
(F) NO DEFAULTS. Subject to receipt of the required regulatory
approvals referred to in Section 6.1, and the required filings under federal
and state securities laws, and except as Previously Disclosed in SCHEDULE
4.2(F), the execution, delivery and performance of this Plan and the
Employment Agreement of Pat Fahey (Exhibit E) 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, 1997, and all other documents filed or to be
filed subsequent to September 30, 1997 under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, in the form filed with the SEC (in each such case,
the "InterWest Financial Reports"), did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the 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, 1997, no event has occurred which is reasonably likely to
have a Material Adverse Effect on it.
(I) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed
in SCHEDULE 4.2(I) no litigation, proceeding or controversy before any court
or governmental agency is
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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, 1997, 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.
(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, 1997. Since September 30,
1997, 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.
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ARTICLE V. COVENANTS
The Bank hereby covenants to InterWest and New Bank, and InterWest and New
Bank hereby covenant to the 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 June 30, 1998 and to otherwise enable consummation of the
transactions contemplated by this Plan and the Stock Option Agreement, and
shall cooperate fully with the other Parties to that end.
5.2 THE PROXY. The Bank shall promptly assist InterWest in the
preparation of a proxy statement (the "Proxy Statement") to be mailed to the
holders of the Bank 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 Bank Common Stock to
be held as soon as practicable for purposes of voting upon the transactions
contemplated by this Plan and the Bank shall use its best efforts to solicit
and obtain votes of the holders of Bank 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 Bank 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 Bank relating to
the Bank 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 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. InterWest will advise the Bank,
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 Bank will not, without the prior approval of
InterWest, and InterWest and New Bank will not, without the prior approval of
the Bank, issue any press release or written statement for general circulation
relating to the transactions contemplated by this Plan, except as otherwise
required by law.
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5.6 ACCESS; INFORMATION.
(A) Upon reasonable notice, the 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 Bank and its Subsidiaries and, during such period, the Bank shall promptly
furnish (and cause its accountants and other agents to promptly furnish) to
InterWest (1) a copy of each material report, schedule and other document filed
by the Bank and its Subsidiaries with any Regulatory Authority, (2) such
representations and certifications as are necessary for purposes of the pooling
letter described in Section 6.2(F), and (3) all other information concerning
the business, properties and personnel of the Bank 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 Bank in this Plan or the conditions to
the obligations of the Bank to consummate the transactions contemplated by this
Plan; and
(B) Neither InterWest nor New Bank will 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 New Bank 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 or New Bank will, upon request by the Bank, deliver to the
Bank all documents so obtained by InterWest and New Bank or destroy such
documents and, in the case of destruction, will certify such fact to the Bank.
5.7 BREAK-UP FEES.
(A) Without the prior written consent of InterWest, the Bank 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 Bank (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 assets of, or
a substantial equity interest in, the Bank or any of its Subsidiaries or any
merger or other business combination with the Bank 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
Bank 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 June 30, 1999, Control of the Bank 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 Meeting or InterWest was
in material default of its covenants in this Plan as of such date, the Bank
will promptly pay to InterWest the amount of $250,000.
(C) In the event that a Party terminates or abandons this Plan
other than pursuant to the provisions of Section 7.1, such Party will
promptly pay to the other Party the amount of $250,000 as liquidated damages
for such termination or abandonment.
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5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS
PREPARATION. InterWest shall, as promptly as practicable following the date
of this Plan, prepare and file the Registration Statement with the SEC with
respect to the shares of InterWest Common Stock to be issued to the holders
of Bank Common Stock pursuant to this Plan, 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 APPOINTMENT OF DIRECTORS/OFFICERS; BYLAW AMENDMENTS.
(A) InterWest shall exercise its best efforts prior to the Effective
Date to make such amendments to its bylaws as may be necessary to facilitate
the appointment of Patrick M. Fahey ("Fahey") to serve on the Board of
Directors of InterWest following the Effective Date; and
(B) Immediately after the Effective Date, InterWest shall cause (1)
the appointment of Fahey to the Board of Directors of InterWest to hold
office until such time as his successor is elected and qualified, (2) the
appointment of Fahey to the Executive Committee of the Board of Directors of
InterWest, and (3) the appointment of Fahey as InterWest's Vice
Chairman/Commercial Banking Activities.
(C) Immediately after the Effective Date, the Continuing
Corporation shall amend its Bylaws to expand its Board of Directors to
include those InterWest representatives designated pursuant to Section 1.1.
5.10 BLUE-SKY FILINGS. 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.
5.11 AFFILIATE AGREEMENTS. The Bank will use its best efforts to induce
each person who may be deemed to be an "affiliate" of the Bank 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 D restricting the disposition of such
affiliate's shares of the Bank Common Stock and the shares of InterWest
Common Stock to be received by such person in exchange for such person's
shares of Bank 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".
5.12 CERTAIN POLICIES OF THE BANK. The Bank 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 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 5.12.
5.13 STATE TAKEOVER LAW. The Bank shall not take any action that would
cause the transactions contemplated by this Plan or the Stock Option
Agreement to be subject to any applicable
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state takeover statute, and the Bank shall take all necessary steps to exempt
(or ensure the continued exemption of) the transactions contemplated by this
Plan and the Stock Option Agreement from, or, if necessary, challenge the
validity or applicability of, any applicable state takeover law.
5.14 NO RIGHTS TRIGGERED. Except for those consents of Third Parties
Previously Disclosed on SCHEDULE 4.1(G), the Bank shall take all necessary
steps to ensure that the entering into of this Plan and the Stock Option
Agreement and the consummation of the transactions contemplated by this Plan
and the Stock Option Agreement (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 Bank or under any agreement to
which the Bank or any of its Subsidiaries is a party, or (B) restrict or
impair in any way the ability of InterWest to exercise the rights granted
under this Plan or the Stock Option Agreement.
5.15 SHARES LISTED. 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 Bank Common Stock.
5.16 REGULATORY APPLICATIONS. InterWest 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. 17 REGULATORY DIVESTITURES. Effective on or before the Effective
Date, the Bank shall cease engaging in such activities as InterWest shall
advise the Bank 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 Bank 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.
5.18 CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective
Date, each of the Bank 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 Bank 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.
5.19 401(K) PLANS. Prior to execution of this Plan, the Bank shall
take necessary steps to restrict its contributions to its 401(k) plan to cash
contributions.
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5.20 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 and officers of the Bank 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 and the Stock
Option Agreement), whether asserted or claimed prior to, at or after the
Effective Date, to the fullest extent that the Bank 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 5.20, 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 5.20 (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 5.20.
(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 5.20. The rights of each
Indemnified Party under this Section 5.20 shall be in addition to any other
rights such Indemnified Party may have under the articles of incorporation or
bylaws of the Bank 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 shareholders of the Bank and New Bank under
applicable law and the articles of incorporation and bylaws of, respectively,
the Bank and New Bank.
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(B) REGULATORY APPROVALS. The Parties shall have procured all
necessary regulatory consents and approvals by the appropriate Regulatory
Authorities, including approvals for the organization of New Bank, 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 Bank 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 Bank who receive shares of
InterWest Common Stock in exchange for their shares of the Bank 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 Bank 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.
6.2 CONDITIONS TO OBLIGATIONS OF INTERWEST. The obligations of
InterWest 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 Keller Rohrback L.L.P., counsel for the Bank, in the
form of EXHIBIT J.
(B) OFFICERS' CERTIFICATE. (1) Each of the representations and
warranties contained in this Plan of the 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 (2) each and all of the agreements and covenants of the 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 shall have received a certificate signed by
the chief executive officers, chief financial officers, and chief lending
officers of the Bank dated the Effective Date, to such effect.
(C) RECEIPT OF AFFILIATE AGREEMENTS. InterWest shall have received
from each affiliate of the Bank the agreement referred to in Section 5.11.
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(D) 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 Bank nor shall the
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 Bank to such effect.
(E) DISSENTERS' RIGHTS. The number of shares of Bank 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 Bank Common Stock.
(F) POOLING LETTER. 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.
(G) CAPITAL. The Bank's Capital shall not be less than $16 million
at March 31, 1998, and not less than the Final Capital Requirement on the
Effective Date.
(H) ALLOWANCE FOR LOAN AND LEASE LOSSES. The Bank's allowance for
possible loan and lease losses shall not be less than 1.00% of the Bank's
total outstanding loans and leases and will be adequate to absorb the Bank's
anticipated loan and lease losses.
(I) EMPLOYMENT AGREEMENTS. The Employment Agreements attached as
EXHIBITS E, F, G, H, AND I shall have been duly executed and delivered by all
individuals who are parties to such Employment Agreements.
(J) PURCHASE OF KEY MAN LIFE INSURANCE. The Bank shall have duly
authorized the sale to Fahey of, and Fahey shall have purchased from the
Bank, the "key man" life insurance policy relating to Fahey for a price equal
to the cash value of such policy on the date of purchase by Fahey.
6.3 CONDITIONS TO OBLIGATIONS OF THE BANK. The obligations of the Bank
to consummate the transactions contemplated by this Plan also are subject to
the written waiver by the Bank or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) LEGAL OPINION. The Bank shall have received an opinion, dated
the Effective Date, of Graham & Dunn, special counsel for InterWest, in the
form of EXHIBIT K.
(B) OFFICER'S CERTIFICATE. (1) Each of the representations and
warranties of InterWest contained in this Plan 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 (2) each and all of the agreements and covenants of InterWest 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 Bank shall have received a certificate signed by
an executive officer of InterWest dated the Effective Date, to such effect.
(C) ADVERSE CHANGE. During the period from September 30, 1997 to
the Effective Date, there shall not have been any material adverse change in
the financial position or results
28
<PAGE>
of operations of InterWest nor shall InterWest have sustained any loss or
damage to its properties, whether or not insured, that materially affects its
ability to conduct its business; and the Bank shall have received a
certificate dated the Effective Date signed by the Chief Executive Officers
of InterWest to such effect.
(D) FAIRNESS OPINION. The Bank shall have received, immediately
prior to the mailing of the Proxy Statement to the Bank's shareholders, an
opinion of Columbia Financial Advisors, Inc. to the effect that the financial
terms of the Merger are fair from a financial point of view to the Bank's
shareholders.
ARTICLE VII. TERMINATION
7.1 EVENTS OF TERMINATION. This Plan may be terminated prior to the
Effective Date, either before or after receipt of required shareholder
approvals:
(A) MUTUAL CONSENT. By the mutual consent of InterWest and the
Bank, if the Board of Directors of each so determines by vote of a majority
of the members of its entire board.
(B) BREACH. By InterWest or the Bank, 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.
(C) DELAY. By InterWest or the Bank, 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 September 30, 1998.
(D) NO SHAREHOLDER APPROVAL. By InterWest or the Bank, 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 of the Meeting.
(E) AVERAGE CLOSING PRICE BELOW $35.00. By InterWest or the Bank,
if the Average Closing Price is below $35.00.
7.2 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to Sections 5.7(B) and 5.7(C), in
the event of the termination or abandonment of this Plan pursuant to the
provisions of Section 7.1, this Plan shall become void and have no force or
effect, without any liability on the part of the Parties or any of their
respective directors or officers or shareholders with respect to this Plan.
(B) ENFORCEMENT PROCEEDINGS. In any action or proceeding in
connection with the enforcement of this Plan, the prevailing party will be
entitled to reasonable attorneys' fees and expenses.
29
<PAGE>
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 5.7(B), 5.7(C), 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 Bank, the consideration to be received by the shareholders of the Bank
for each share of Bank Common Stock shall not thereby be altered. Nothing
contained in this Section 8.2 is intended to modify InterWest's rights
pursuant to Section 2.8.
8.3 COUNTERPARTS. This Plan may be executed in one or more facsimile
counterparts, each of which shall be deemed to constitute an original. This
Plan shall become effective when one counterpart has been signed by each
Party.
8.4 GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law
may be applicable.
8.5 EXPENSES. Each Party will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated by this Plan,
except printing expenses which shall be shared equally between the Bank 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 (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 New 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
30
<PAGE>
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 Bank, to:
Pacific Northwest Bank
1111 3rd Avenue
Seattle, WA 98101-3207
Attn: Patrick M. Fahey, Chairman, Chief Executive
Officer, and President
Copies to:
Glen P. Garrison
Keller Rohrback L.L.P
1201 Third Avenue, Suite 3200
Seattle, Washington 98101-3052
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and
the Stock Option Agreement represents the entire understanding of the Parties
with reference to transactions contemplated by this Plan and the Stock Option
Agreement and supersedes any and all other oral or written agreements
previously made. Nothing in this Plan or the Stock Option Agreement,
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 or the Stock Option Agreement.
8.9 BENEFIT PLANS. Upon consummation of the Merger, all employees of
the Bank and its Subsidiaries shall be deemed to be at-will employees of the
Continuing Corporation except for those employees who are parties to the
Employment Agreements. From and after the Effective Date, employees of the
Bank and its Subsidiaries shall generally be entitled to (A) employee benefit
programs that, in the aggregate, are generally no less favorable to such
employees than those presently being provided to employees of the Bank, and
(B) participate in InterWest's stock option plans on substantially the same
terms and conditions as similarly situated 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 effect to years
of service with the Bank or the Bank's Subsidiaries, as the case may be, as
if such service were with InterWest or its Subsidiaries.
8.10 HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
31
<PAGE>
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/ STEPHEN M. WALDEN
-------------------------------------
NAME: STEPHEN M. WALDEN
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
PACIFIC NORTHWEST BANK
By: /S/ PATRICK M. FAHEY
-------------------------------------
NAME: PATRICK M. FAHEY
TITLE: CHAIRMAN, CHIEF EXECUTIVE OFFICER,
AND PRESIDENT
32
<PAGE>
APPROVAL AND RATIFICATION BY
NEW PACIFIC NORTHWEST BANK
The foregoing Amended and Restated Agreement and Plan of Merger is hereby
ratified and confirmed in all respects.
NEW PACIFIC NORTHWEST BANK
By -------------------------------------
33
<PAGE>
APPENDIX B
-----------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
PIONEER BANCORP, INC.,
PIONEER NATIONAL BANK
AND
INTERWEST BANCORP, INC.
AND
INTERWEST BANK
-----------------------------------------------
DATED AS OF FEBRUARY 4, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2 EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE II. CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 SHAREHOLDER RIGHTS; STOCK TRANSFERS. . . . . . . . . . . . . . . . 8
2.3 FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4 EXCHANGE PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 EXCHANGE RATIO ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . 9
2.6 EXCEPTION SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.7 RESERVATION OF RIGHT TO REVISE TRANSACTION . . . . . . . . . . . . 9
2.8 OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III. ACTIONS PENDING CONSUMMATION . . . . . . . . . . . . . . . . . 10
3.1 CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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 . . . . . . . . . . . . . 11
3.7 BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.8 CONTINUANCE OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . 11
3.9 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.10 CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.11 CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.12 LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.13 TRANSACTION EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . 12
4.1 THE COMPANY AND PIONEER BANK REPRESENTATIONS
AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 INTERWEST AND INTERWEST BANK REPRESENTATIONS
AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE V. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1 BEST EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2 THE PROXY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.3 REGISTRATION STATEMENT COMPLIANCE WITH
SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 REGISTRATION STATEMENT EFFECTIVENESS . . . . . . . . . . . . . . . 23
5.5 PRESS RELEASES . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.6 ACCESS; INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 24
5.7 ACQUISITION PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . 24
5.8 REGISTRATION STATEMENT PREPARATION;
REGULATORY APPLICATIONS PREPARATION . . . . . . . . . . . . . 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.9 BLUE-SKY FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.10 AFFILIATE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 25
5.11 CERTAIN POLICIES OF THE COMPANY AND PIONEER BANK . . . . . . . . . 25
5.12 STATE TAKEOVER LAW . . . . . . . . . . . . . . . . . . . . . . . . 25
5.13 NO RIGHTS TRIGGERED. . . . . . . . . . . . . . . . . . . . . . . . 25
5.14 SHARES LISTED. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.15 REGULATORY APPLICATIONS. . . . . . . . . . . . . . . . . . . . . . 26
5.16 REGULATORY DIVESTITURES. . . . . . . . . . . . . . . . . . . . . . 26
5.17 CURRENT INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 26
5.18 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.19 POST-MERGER ACTIONS. . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER. . . . . . . . . . . . 27
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS . . . . . . . . . . . . . . 27
6.2 CONDITIONS TO OBLIGATIONS OF INTERWEST . . . . . . . . . . . . . . 28
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY
AND PIONEER BANK. . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VII. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.1 GROUNDS FOR TERMINATION. . . . . . . . . . . . . . . . . . . . . . 30
7.2 CONSEQUENCES OF TERMINATION. . . . . . . . . . . . . . . . . . . . 31
ARTICLE VIII. OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 31
8.1 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.2 WAIVER; AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . 31
8.3 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.5 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.6 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.7 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES . . . . . . . . 33
8.9 BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.10 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
EXHIBITS
Exhibit A Approval by Directors of Pioneer Bancorp, Inc.
Exhibit B Director's Agreement
Exhibit C Stock Option Agreement
Exhibit D Affiliate Undertakings and Agreements -- InterWest
Exhibit E Affiliate Undertakings and Agreements -- Company
Exhibit F Employment Agreement of Paul L. Campbell
Exhibit G Employment Agreement of Don Kiser
Exhibit H Employment Agreement of Sherm G. Losee
Exhibit I Employment Agreement of Jeff M. Lindberg
Exhibit J Legal Opinion of Foster, Pepper & Shefelman, PLLC
Exhibit K Legal Opinion of Graham & Dunn, P.C.
ii
<PAGE>
SCHEDULES
Company Disclosures
<TABLE>
<S> <C>
Schedule 2.8 Outstanding Options
Schedule 3.4 Changes to Line of Business, Operating Procedures, etc.
Schedule 3.6 New or Changes to Compensation, Employment
Agreements, etc.
Schedule 3.7 New or Modifications to Benefit Plans
Schedule 3.11 New or Changes to Material Contracts
Schedule 4.1(C) Shares Outstanding
Schedule 4.1(D) Subsidiaries
Schedule 4.1(G) No Defaults - Agreements Requiring Third Party Consent
Schedule 4.1(H) Financial Reports
Schedule 4.1(I) Undisclosed Liabilities
Schedule 4.1(J) No Events Causing Material Adverse Effect
Schedule 4.1(L) Litigation, Regulatory Action
Schedule 4.1(M) Compliance with Laws
Schedule 4.1(N) Material Contracts
Schedule 4.1(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)(1) Employment Contracts Requiring Payment In Connection with
Termination
Schedule 4.1(EE)(2) Leases with Aggregate Annual Rent Exceeding $10,000
Schedule 4.1(EE)(3) Material Contracts with Affiliates
Schedule 6.2(H) Excluded Loans
</TABLE>
iii
<PAGE>
InterWest Disclosures
<TABLE>
<S> <C>
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
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 4th day of February,
1998 (this "Plan"), is between PIONEER BANCORP, INC. (the "Company"), PIONEER
NATIONAL BANK ("Pioneer 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 Yakima, Washington. The Company is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended. As of the date of this Plan, the Company has 1,000,000
authorized shares of common stock, no par value ("Company Common Stock") (no
other class of capital stock being authorized), of which 344,699 shares of
Company Common Stock are issued and outstanding. As of the date of this
Plan, the Company had 50,000 shares of Company Common Stock reserved for
issuance under employee stock option plans pursuant to which options covering
30,800 shares of Company Common Stock are outstanding as of the date of this
Plan.
(B) PIONEER BANK. Pioneer 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 Yakima, Washington. As of
the date of this Plan, Pioneer Bank has 160,000 authorized shares of common
stock, $5.00 par value per share ("Pioneer Bank Common Stock") (no other
class of capital stock being authorized), of which 110,000 shares of Pioneer
Bank Common Stock are issued and outstanding. All of the issued and
outstanding shares of Pioneer Bank Common Stock are owned by the Company, the
sole shareholder of Pioneer Bank. As of December 31, 1997, Pioneer Bank had
capital of $9,001,000, divided into common stock of $550,000, surplus of
$2,375,000, and undivided profits of $6,076,000.
(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 Bank Holding Company Act of 1956,
as amended. As of the date of this Plan, InterWest has 20,000,000 authorized
shares of common stock, $0.20 par value per share ("InterWest Common Stock")
(no other class of capital stock being authorized), of which 8,445,572 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, $0.20 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 December 31, 1997, InterWest Bank had capital of $133,398,000, divided
into common stock of $1,615,000, surplus of $20,362,000 and undivided profits
of $111,421,000.
(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 Pioneer 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 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.
1
<PAGE>
(F) STOCK OPTION AGREEMENT. Immediately after the execution and
delivery of this Plan, as a condition and an inducement to InterWest's
willingness to enter into this Plan, the Company and InterWest are entering
into a Stock Option Agreement (the "Stock Option Agreement") in the form
attached to this Plan as Exhibit C, pursuant to which the Company is granting
to InterWest an option to purchase, under certain circumstances, shares of
Company Common Stock.
(G) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
Schedule 4. l(C), or paragraph (A) of the Recitals to this Plan, or as
authorized by this Plan or the Stock Option Agreement: there are no shares
of capital stock of the Company or Pioneer Bank authorized and reserved for
issuance; neither the Company nor Pioneer Bank has any Rights (as defined
below) issued or outstanding; and neither the Company nor Pioneer 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.
(H) APPROVALS. At meetings of the respective Boards of Directors of
the Company, Pioneer Bank, InterWest and InterWest Bank, each such Board has
approved and authorized the execution of this Plan and the Stock Option
Agreement 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(A).
"Additional Shares" means the number (calculated to four decimals) equal
to (1) the product of (a) the average of the Company's monthly net income
(determined in accordance with GAAP) for the first six months of 1998
multiplied by (b) the greater of one or a fraction, the numerator of which
shall be the number of days elapsed during the period beginning on July 1,
1998, and ending on the Effective Date and the denominator of which shall be
30, divided by (2) the Average Closing Price.
"Adjusted Loans" means all loans and other extensions of credit by
Pioneer Bank other than (1) that portion of Small Business Administration
loans or the guaranteed portions of other loans guaranteed by the U.S.
Government or any of its agencies, (2) single-family residential loans in the
process of being sold, and (3) those loans set forth in Schedule 6.2(H).
"Adjustment Factor" means the number equal to the Additional Shares
divided by 344,699.
"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
four decimals) of each Daily Sales Price of InterWest Common Stock for the
ten consecutive trading days beginning on and including the twentieth 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).
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"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" has the meaning assigned to such term in the first paragraph
to this Plan.
"Company Common Stock" has the meaning assigned to such term in
paragraph (A) of the Recitals.
"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).
"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 closing bid and ask prices per share of all market makers quoting both
bid and ask prices, 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).
"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.
"Dividend Record Date" means the date in June, 1998, that is established
by InterWest for determining shareholders of record who will be entitled to
receive InterWest's regular quarterly cash dividend.
"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 F, G, H and I.
"Environmental Law" means (1) any federal, state, and/or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection,
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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).
"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.
"Final Capital Requirement" means a dollar amount equal to the sum of $9
million plus $100,000 for each month elapsed between June 30, 1998 and the
Effective Date (with any partial month being prorated).
"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).
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"Indemnified Party" has the meaning assigned to such term in Section
5.18(A).
"InterWest" has the meaning assigned to such term in the first paragraph of
this Plan.
"InterWest Bank Common Stock" has the meaning assigned to such term in
paragraph (D) of the Recitals.
"InterWest Common Stock" has the meaning assigned to such term in paragraph
(C) of the Recitals.
"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, 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 Stock Option Agreement or the consummation of any of the
transactions contemplated by this Plan or the Stock Option Agreement.
"Maximum Premium Amount" has the meaning assigned to such term in Section
5.18(C).
"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.
"Option" has the meaning assigned to such term in the Stock Option
Agreement.
"Option Shares" has the meaning assigned to such term in the Stock Option
Agreement.
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"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).
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, governmental
body, or other entity.
"Pioneer Bank" has the meaning assigned to such term in the first paragraph
of this Plan.
"Pioneer Bank Common Stock" has the meaning assigned to such term in
paragraph (B) of the Recitals.
"Plan" means this Agreement and Plan of Merger.
"Previously Disclosed" means information provided by a Party in a Schedule
that is delivered by that Party to the other Party contemporaneously with the
execution of this Plan.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Registration Statement" has the meaning assigned to such term in Section
5.2.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"Rights" has the meaning assigned to such term in paragraph (G) of the
Recitals to this Plan.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under such statute.
"SEC" means the Securities and Exchange Commission.
"Stock Option Agreement" has the meaning assigned to such term in paragraph
(F) of the Recitals to this Plan.
"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
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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.
"Valuation Price" means the Average Closing Price; provided, however, that
(1) if the Average Closing Price is less than or equal to $36.00, then the
Valuation Price shall be $36.00, and (2) if the Average Closing Price is equal
to or greater than $44.00, then the Valuation Price shall be $44.00.
(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 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.
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(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, unless and until such holder shall have failed to perfect or
shall have effectively withdrawn or lost the right to payment under the
Appraisal Laws, in which case each such share shall be deemed to have been
converted at the Effective Date into the right to receive InterWest Common
Stock without any interest thereon. 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).
(F) EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" will be the tenth Business Day after the fulfillment or
waiver of each condition precedent set forth in, and the granting of each
approval (and expiration of any waiting period) required by, Article VI;
provided, however, that if such tenth Business Day occurs during the period
commencing on the Dividend Record Date and terminating on (and including)
June 30, 1998, the Effective Date will be July 1, 1998. If the Merger is not
consummated in accordance with this Plan on or prior to September 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.
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 $58.98 divided by the Valuation Price (the quotient, as
adjusted, if applicable, pursuant to Section 2.5, being 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.
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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's exchange
agent (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 EXCHANGE RATIO ADJUSTMENTS. 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 Valuation Price shall be proportionately adjusted, and
the Exchange Ratio shall be recalculated on the basis of the adjusted
Valuation Price. In the event that the transactions contemplated by this
Plan have not been consummated before the Dividend Record Date, the Exchange
Ratio will be increased by the amount of the Adjustment Factor.
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 Pioneer Bank; provided, however, that (A) no
such change shall alter or change the amount or kind of consideration to be
issued to holders of Company Common Stock as provided for in this Plan, (B)
no such change shall adversely affect the tax treatment to the Company
shareholders as a result of receiving such consideration, and (C) no delay
caused by such a change shall be the basis upon which InterWest terminates
this Plan pursuant to Section 7.1(C). If InterWest elects to change the
method of acquisition pursuant to this section, and the Merger is not
accounted for on a pooling-of-interests basis as a result of such change,
InterWest will waive its pooling condition in Section 6.2(F). If InterWest
elects to change the method of acquisition, the Company and Pioneer 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.
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,
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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 or down 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 promptly 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
Unless otherwise agreed to in writing by InterWest, each of the Company and
Pioneer 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 Pioneer
Bank, without the prior written consent of InterWest, will (or cause or allow
any of it Subsidiaries to):
3.1 CAPITAL STOCK. Except for or as otherwise expressly permitted by
this Plan, the Stock Option Agreement, or Company Options, or as Previously
Disclosed in Schedule 4.1(C), issue, sell or otherwise permit to become
outstanding any additional shares of capital stock of the Company, Pioneer
Bank or any of their Subsidiaries, or any Rights with respect thereto, or
enter into any agreement with respect to the foregoing, or permit any
additional shares of 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 or
the Stock Option Agreement, authorize the creation or issuance of, or issue,
any additional shares of its capital stock or any Rights with respect thereto.
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 $25,000 individually or $50,000 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.
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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 Pioneer 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.
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 (excluding agreements and loans permitted under Section 3.12),
except in the ordinary course of business consistent with past practice with
respect to contracts, agreements and leases that are terminable by it without
penalty on no more than 60 days prior written notice.
3.12 LOANS. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except
that Pioneer Bank shall not, without the prior consent of InterWest's Chief
Executive Officer or Chief Financial Officer, make any new loan or modify,
restructure or renew any existing nonperforming loan (defined as on
non-accrual status, or 90 days or more past due) to any borrower if the
amount of the resulting loan, when aggregated with all other loans or
extensions of credit to such Person (or which would be required to be
aggregated for loans-to-one-borrower limitations), would be in excess of
$250,000 for any new customer or $500,000 to any customer as of the date of
this Plan, except that (i) single-family residential loans may be made in
amounts that would not exceed applicable FHLMC and FNMA limits, and (ii) such
limits shall not apply to SBA, FmHA, USDA Rural Development or other
governmental or governmental agency guaranteed amounts.
3.13 TRANSACTION EXPENSES. Incur expenses in connection with the
transactions contemplated by this Plan that exceed $425,000 in the aggregate.
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 THE COMPANY AND PIONEER BANK REPRESENTATIONS AND WARRANTIES. Each
of the Company and Pioneer 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. Pioneer Bank is an "insured depository institution" as
defined in the Federal Deposit Insurance Act, as amended, and applicable
regulations under such statute, and its deposits are insured by the Bank
Insurance Fund of the FDIC.
(C) SHARES. The outstanding shares of 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) and paragraph (A) of the Recitals, and as
provided under the Stock Option Agreement, 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 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.
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(F) CORPORATE AUTHORITY. Subject to any necessary receipt of
approval by its shareholders referred to in Section 6.1, this Plan and the
Stock Option Agreement 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 Stock Option Agreement and the
consummation by the Company and each of its Subsidiaries that is a Party to
the transactions contemplated by this Plan and the Stock Option Agreement do
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, 1997 and the related statements of income, changes in
shareholders' equity and cash flows for the fiscal year ended December 31,
1997 (collectively, the "Holding Company Financial Reports"), and (2) as to
each of the Company's Subsidiaries that is a bank, its call report for the
fiscal year ended December 31, 1997, and all other financial reports filed or
to be filed subsequent to December 31, 1997, in the form filed with the FDIC
and the 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 were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Financial Reports
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date, and each of the statements of income and changes in
shareholders' equity and cash flows or equivalent statements in the Bank
Financial Reports (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
shareholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein, in each case
in accordance with GAAP during the periods involved, except in each case as
may be noted therein, subject to normal and recurring year-end audit
adjustments in the case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Except as Previously
Disclosed on Schedule 4.1(I), neither 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, 1997. Except as Previously Disclosed on Schedule
4.1(I), since December 31, 1997, neither the Company nor any of its
Subsidiaries has incurred
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or paid any obligation or liability (including any obligation or liability
incurred in connection with any acquisitions in which any form of direct
financial assistance of the federal government or any agency thereof has been
provided to any Subsidiary) that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.1(J),
since December 31, 1997, no event has occurred that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(K) PROPERTIES. Except as reserved against in its Holding Company
Financial Reports, 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
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
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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,
(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.).
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(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 "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
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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 December 31, 1997 (the "Asset Classification"); and no amounts of
loans, extensions of credit or other assets that have been classified as of
December 31, 1997 by any regulatory examiner as "Other Loans Specially
Mentioned," 'Substandard," "Doubtful" "Loss," or words of similar import are
excluded from the amounts disclosed in the Asset Classification, other than
amounts of loans, extensions of credit or other assets that were charged off
by the Company or any Subsidiary prior to December 31, 1997.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for
possible loan losses shown on the consolidated balance sheets in the December
31, 1997 Holding Company Financial Reports of 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
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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 Stock Option Agreement and the transactions contemplated by this Plan and
the Stock Option Agreement from, and this Plan and the Stock Option Agreement
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 Stock Option
Agreement and the consummation of the transactions contemplated by this Plan
and the Stock Option Agreement (including the Merger and the exercise of the
Option) or any other action or combination of actions, or any other
transactions, contemplated by this Plan and the Stock Option Agreement 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 or the
Stock Option Agreement.
(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 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
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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 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 and the Stock Option
Agreement, 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.
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(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)(1),
any employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or
fringe benefits) with any present or former officer, director or employee
(other than those 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)(2),
any real or personal property lease with annual rental payments aggregating
$10,000 or more; or
(3) except as Previously Disclosed in Schedule 4.1(EE)(3),
any material contract with any affiliate.
(FF) OPTION SHARES. The Option Shares, when issued upon exercise
of the Option, will be validly issued, fully paid and nonassessable and
subject to no preemptive rights.
4.2 INTERWEST AND INTERWEST BANK REPRESENTATIONS AND WARRANTIES. Each
of InterWest and InterWest Bank hereby represents and warrants to the Company
and Pioneer 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.
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(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. This Plan, the Stock Option Agreement
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, 1997, and all other documents filed or to be
filed subsequent to September 30, 1997 under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, in the form filed with the SEC (in each such case,
the "InterWest Financial Reports"), did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the 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, 1997, no event has occurred which is reasonably likely to
have a Material Adverse Effect on it.
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(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, 1995, 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.
(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, 1997. Since September 30,
1997, 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.
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ARTICLE V. COVENANTS
Each of the Company and Pioneer Bank hereby covenants to InterWest and
InterWest Bank, and each of InterWest and InterWest Bank hereby covenants to
the Company and Pioneer Bank, that:
5.1 BEST EFFORTS. Subject to the terms and conditions of this Plan
and, in the case of the Company and Pioneer Bank, to the exercise by their
respective Boards of Directors of such Boards' fiduciary duties, each party
shall use its best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation
of the Merger by the Dividend Record Date, and to otherwise enable
consummation of the transactions contemplated by this Plan and the Stock
Option Agreement, 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
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 Pioneer Bank will not, without the
prior approval of InterWest, and InterWest and InterWest Bank will not,
without the prior approval of the
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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 Pioneer 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 Pioneer Bank shall furnish promptly (and
cause its accountants and other agents to 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, (2) such
representations and certifications as are necessary for purposes of the
pooling letter described in Section 6.2(F), and (3) all other information
concerning the business, properties and personnel of 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 Pioneer
Bank in this Plan or the conditions to the obligations of the Company and
Pioneer 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 to the extent
that the Board of Directors of the Company determines in its good faith
judgment after receipt of advice of counsel that such response is reasonably
required in order to discharge its fiduciary duties, 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 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 Meeting is held and the shareholder approval contemplated by Section
6.1 is not obtained at the Meeting, and (3) prior to June 30, 1999, 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 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.
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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 with respect to the shares of InterWest
Common Stock to be issued to the holders of Company Common Stock pursuant to
this Plan, 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. InterWest and the Company will use their
best efforts to induce each person who may be deemed to be an "affiliate" of,
respectively, InterWest or 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 D for "affiliates" of InterWest and Exhibit E for
"affiliates" of the Company, restricting the disposition of such affiliate's
shares of, respectively, InterWest Common Stock or Company Common Stock, and,
in the case of "affiliates" of the Company, the shares of InterWest Common
Stock to be received by such person in exchange for such person's shares of
Company Common Stock. 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 PIONEER BANK. In the case of
each of the Company and Pioneer 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 Pioneer Bank's representations, warranties,
covenants and conditions contained in this Plan shall not be deemed to be
untrue, breached or unsatisfied in any respect for any purpose as a
consequence of any modifications or changes undertaken pursuant to this
Section 5.11.
5.12 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 or the Stock Option Agreement 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 and the Stock Option Agreement 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 Stock Option Agreement and the consummation of the
transactions contemplated by this Plan and the Stock Option Agreement
(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
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(B) restrict or impair in any way the ability of InterWest or InterWest Bank
to exercise the rights granted under this Plan or the Stock Option Agreement.
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: No later
than 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 6.2(G) (which shall
be adjusted to the extent that assets are divested at less than book value),
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.
5.18 INDEMNIFICATION.
(A) For a period of six 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 and the Stock
Option Agreement), 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
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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) InterWest shall use all reasonable efforts to provide
directors' and officers' liability insurance covering each person who was an
officer or director of the Company or any Subsidiary prior to the Effective
Date for a period of three years after the Effective Date, providing coverage
not materially less favorable to such persons than that provided to similarly
situated persons under InterWest's existing liability insurance policies, as
in effect on the date of this Plan; provided, however, that InterWest shall
not be obligated to make annual premium payments for such insurance in excess
of 150% of the annual premiums paid as of the date of this Plan by the
Company for such insurance (the "Maximum Premium Amount"). If the amount of
the annual premiums necessary to maintain or procure such insurance coverage
exceeds the Maximum Premium Amount, InterWest shall use its best efforts to
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Premium Amount.
(D) 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.
(E) 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.
5.19 POST-MERGER ACTIONS. Following the Merger, neither InterWest nor
any of its affiliates shall take any action that will adversely affect the
federal income tax treatment of the Merger to the shareholders of the
Company, including failing to continue at least one historic business line of
the Company or to use at least a significant portion of the Company's
historic assets in a business, in each case with in the meaning of Treas.
Reg. Section 1.368-1(d).
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:
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(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.
(B) REGULATORY APPROVALS. The Parties shall have procured all
necessary regulatory consents and approvals by the appropriate Regulatory
Authorities, and any waiting periods relating thereto shall have expired;
provided, however, that no such approval or consent shall have imposed any
condition or requirement not normally imposed in such transactions that, in
the opinion of 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 F, G, H and I shall have been duly executed and delivered by all
parties to such Employment Agreements.
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 Foster Pepper & Shefelman PLLC, counsel for the
Company and Pioneer Bank, in the form of Exhibit J.
(B) OFFICERS' CERTIFICATE. (1) Each of the representations and
warranties contained in this Plan of the Company and Pioneer Bank shall be
true and correct in all material respects as of the date of this Plan and
upon the Effective Date with the same effect as though all such
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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 Company and Pioneer 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 Pioneer Bank dated the Effective Date, to such
effect.
(C) RECEIPT OF AFFILIATE AGREEMENTS. InterWest shall have
received from each affiliate of the Company the agreement referred to in
Section 5.10.
(D) ADVERSE CHANGE. During the period from December 31, 1997 to
the Effective Date, there shall not have been any material adverse change in
the financial position or results of operations of the Company or Pioneer
Bank, nor shall the Company or Pioneer 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 Pioneer Bank to such effect.
(E) 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.
(F) POOLING LETTER. InterWest shall have received a letter dated
as of the Effective Date, in form and substance acceptable to InterWest, from
Moss Adams, LLP to the effect that neither the Company or Pioneer Bank, nor
their respective shareholders, directors, or officers shall have taken any
action, or failed to take any action (other than actions or events required
or permitted by this Plan or by InterWest) that would disqualify the Merger
from qualifying for pooling-of-interests accounting treatment.
(G) CAPITAL. The Company's Capital shall not be less than $9
million (not including capital contributions upon exercise of outstanding
Company Options) at June 30, 1998, and not less than the Final Capital
Requirement (not including capital contributions upon exercise of outstanding
Company Options) on the Effective Date.
(H) ALLOWANCE FOR LOAN AND LEASE LOSSES. Pioneer Bank's allowance
for possible loan and lease losses shall not be less than 1.25% of Pioneer
Bank's Adjusted Loans and will be adequate to absorb Pioneer Bank's
anticipated loan and lease losses.
(I) FAIRNESS OPINION. The Company shall have received,
immediately prior to the mailing of the Proxy Statement to the Company's
shareholders, an opinion of Columbia Financial Advisors, Inc., to the effect
that the financial terms of the Merger are fair from a financial point of
view to the Company's shareholders.
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND PIONEER BANK. The
obligations of the Company and Pioneer Bank to consummate the transactions
contemplated by this Plan also are subject to the written waiver by the
Company and Pioneer Bank or the fulfillment on or prior to the Effective Date
of each of the following conditions:
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(A) LEGAL OPINION. The Company and Pioneer Bank shall have
received an opinion, dated the Effective Date, of Graham & Dunn, P.C.,
special counsel for InterWest, in the form of Exhibit K.
(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 in all material respects as of the date of this Plan and
upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except
for any such representations and warranties that specifically relate to an
earlier date, which shall be true and correct as of such earlier date, and
(2) each and all of the agreements and covenants 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 Pioneer 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, 1997 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.
(D) FAIRNESS OPINION. The Company shall have received,
immediately prior to the mailing of the Proxy Statement to the Company's
shareholders, an opinion of Columbia Financial Advisors, Inc., to the effect
that the financial terms of the Merger are fair from a financial point of
view to the Company's shareholders.
ARTICLE VII. TERMINATION
7.1 GROUNDS FOR TERMINATION. This Plan may be terminated prior to the
Effective Date, either before or after receipt of required shareholder
approvals:
(A) MUTUAL CONSENT. By the mutual consent of 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.
(B) 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 in this Agreement, 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 material breach by the other
party of any of the covenants or agreements contained in this Agreement,
which breach cannot be or has not been cured within 30 days after the giving
of written notice to the breaching party of such breach.
(C) DELAY.
(1) By InterWest, if its Board of Directors so determines by
vote of a majority of the members of the entire Board, in the event that the
Merger is not consummated by September 30, 1998, and such delay does not
result from (a) amendments to the Registration Statement or a resolicitation
of proxies as a consequence of an InterWest Transaction or (b) a change to
the method of acquisition pursuant to Section 2.7; provided, however, that
InterWest shall not be entitled to
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terminate the Plan pursuant to this Section 7.1(C) if it is in material
breach of any of the provisions of this Plan.
(2) By the Company, if its Board of Directors so determines
by vote of a majority of the members of the entire Board, in the event that
the Merger is not consummated by September 30, 1998; provided, however, that
if such delay is the result of (a) amendments to the Registration Statement
or a resolicitation of proxies as a consequence of an InterWest Transaction,
then the Company may terminate the Plan pursuant to this Section 7.1(C) only
if the Merger is not consummated by December 31, 1998; and provided further,
that the Company shall not be entitled to terminate the Plan pursuant to this
Section 7.1(C) if it is in material breach of any of the provisions of this
Plan.
(D) 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.
(E) FIDUCIARY DUTIES. By the Company, subject to the provisions
of Section 5.7 and the Stock Option Agreement, if its Board of Directors,
after receiving advice of counsel, determines in its good faith that it is
required to do so in order to discharge its fiduciary duties, shall withdraw
or modify or resolve to withdraw or modify its recommendation that the
shareholders vote in favor of the Merger.
7.2 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to subsection (B) of this
Section 7.2 and to Section 5.7(B), in the event of the termination or
abandonment of this Plan pursuant to the provisions of Section 7.1, this Plan
shall become void and have no force or effect, without any liability on the
part of the Parties or any of their respective directors or officers or
shareholders with respect to this Plan.
(B) 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
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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 facsimile
counterparts, each of which shall be deemed to constitute an original. This
Plan shall become effective when one counterpart has been signed by each
Party.
8.4 GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law
may be applicable.
8.5 EXPENSES. Each Party will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated by this Plan,
except printing expenses which shall be shared equally between 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, certified or registered mail, overnight
courier, telecopy or telex (confirmed in writing) to such Party at its
address set forth below or such other address as such Party may specify by
notice to the Parties.
If to 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 Pioneer Bank, to:
Pioneer Bancorp, Inc.
The Tower
PO Box 2949
Yakima, WA 98907
Attn: Paul L. Campbell, President and CEO
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Copies to:
Bernard L. Russell
Foster Pepper & Shefelman PLLC
1111 Third Avenue #3400
Seattle, WA 98101
Morris G. Shore
Velikanje, Moore & Shore, P.S.
405 East Lincoln Avenue
Yakima, WA 98901
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and
the Stock Option Agreement represent the entire understanding of the Parties
with reference to transactions contemplated by this Plan, the Stock Option
Agreement and the Confidentiality Agreement and related Addendum, dated
respectively December 12 and December 15, 1997 between the parties, and
supersede any and all other oral or written agreements previously made.
Except for Section 5.10, 5.18, 5.19 and 8.9, nothing in this Plan or the
Stock Option Agreement, 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 or the
Stock Option Agreement.
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 entitled to participate in the
pension, employee benefit and similar plans (including stock option, bonus or
other incentive plans) on substantially the same terms and conditions as
employees of InterWest and its Subsidiaries. For the purpose of determining
eligibility to participate in such plans and the vesting and related
calculations of benefits under such plans (but not for the accrual of
benefits), InterWest shall give 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. Employees of the Company and its
Subsidiaries will be entitled to carry over unused vacation days and sick
leave accrued as of the Effective Date. 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.
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IN WITNESS WHEREOF, the Parties have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
INTERWEST BANCORP, INC.
By: /s/ Stephen M. Walden
-------------------------------
NAME: STEPHEN M. WALDEN
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERWEST BANK
By: /s/ Stephen M. Walden
-------------------------------
NAME: STEPHEN M. WALDEN
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
PIONEER BANCORP, INC.
By: /s/ Paul L. Campbell
-------------------------------
NAME: PAUL L. CAMPBELL
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
PIONEER NATIONAL BANK
By: /s/ Paul L. Campbell
-------------------------------
NAME: PAUL L. CAMPBELL
TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER
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EXHIBIT C
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement"), dated as of January 15, 1998,
is between INTERWEST BANCORP, INC. ("InterWest") and PACIFIC NORTHWEST BANK
("PNB").
RECITALS
PNB and InterWest have executed a Plan and Agreement of Reorganization
("Plan"), of even date with this Agreement, under which PNB will become a
wholly owned subsidiary of InterWest upon completion of the reorganization
("Reorganization") contemplated in the Plan.
By negotiating and executing the Plan and by taking actions necessary or
appropriate to effect the transactions contemplated by the Plan, InterWest has
incurred and will incur substantial direct and indirect costs (including,
without limitation, the costs of management and employee time) and will forgo
the pursuit of certain alternative investments and transactions.
AGREEMENT
THEREFORE, in consideration of the promises set forth in this Agreement
and in the Plan, the parties agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in this
Agreement, PNB irrevocably grants an option ("Option") to InterWest to
purchase an aggregate of 107,855 authorized but unissued shares of PNB's
capital stock ("Common Stock") (which if issued, and assuming exercise
of outstanding options to acquire the Common Stock, would represent
approximately 19.9% of total stock issued and outstanding), at a per
share price of $85 ("Option Price").
2. EXERCISE OF OPTION. Subject to the provisions of this Section 2.2 and
of Section 13.13(a) of this Agreement, this Option may be exercised by
InterWest or any transferee as set forth in Section 5.5 of this
Agreement, in whole or in part, at any time, or from time to time in any
of the following circumstances:
(a) PNB or its board of directors enters into an agreement or
recommends to PNB shareholders an agreement (other than the Plan)
under which any entity, person or group (collectively "Person"),
within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), would: (1) merge or
consolidate with, acquire 51% or more of the assets or liabilities
of, or enter into any similar transaction with PNB, or (2) purchase
or otherwise acquire (including by merger, reorganization,
consolidation, share exchange or any similar transaction)
securities representing 10% or more of PNB's voting shares of PNB;
(b) any Person (other than InterWest or any of its subsidiaries and
other than any Person owning as of the date of this Agreement 10%
or more of PNB's voting
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shares) acquires the beneficial ownership or the right to acquire
beneficial ownership of securities which, when aggregated with
other such securities owned by such Person, represents 10% or more
of the voting shares of PNB (the term "beneficial ownership" for
purposes of this Agreement has the meaning set forth in Section
13(d) of the Exchange Act, and the regulations promulgated under
the Exchange Act); notwithstanding the foregoing, the Option will
not be exercisable in the circumstances described above in this
subsection 2(b) if a Person acquires the beneficial ownership of
securities which, when aggregated with other such securities owned
by such Person, represents 10% or more, but less than 25%, of PNB's
voting shares and the transaction does not result in, and is not
presumed to constitute, "control" as defined under Section 7(j) of
the Federal Deposit Insurance Act or 12 CFR Part 303.4; or
(c) failure of the shareholders to approve the Reorganization by the
required affirmative vote at a meeting of the shareholders, after
any Person (other than InterWest or a subsidiary of InterWest)
announces publicly or communicates, in writing, to PNB a proposal
to (1) acquire PNB (by merger, reorganization, consolidation, the
purchase of 51% or more of its assets or liabilities, or any other
similar transaction), (2) purchase or otherwise acquire securities
representing 25% or more of the voting shares of PNB or (3) change
the composition of the board of directors of PNB.
It is understood and agreed that the Option will become exercisable on the
occurrence of any of the above-described circumstances even though the
circumstance occurred as a result, in part or in whole, of the board of
PNB complying with its fiduciary duties.
NOTWITHSTANDING THE FOREGOING, the Option may not be exercised if either
(1) any applicable and required governmental approvals have not been
obtained with respect to such exercise or if such exercise would violate
any applicable regulatory restrictions, or (2) at the time of exercise,
InterWest is failing in any material respect to perform or observe its
material covenants or conditions under the Plan, unless the reason for
such failure is that PNB is failing to perform or observe its covenants
or conditions under the Plan.
3. NOTICE, TIME AND PLACE OF EXERCISE. Each time that InterWest or any
transferee wishes to exercise any portion of the Option, InterWest or
such transferee will give written notice of its intention to exercise
the Option specifying the number of shares as to which the Option is
being exercised ("Option Shares") and the place and date for the closing
of the exercise (which date may not be later than ten business days from
the date such notice is mailed). If any law, regulation or other
restriction will not permit such exercise to be consummated during this
ten-day period, the date for the closing of such exercise will be within
five days following the cessation of the restriction on consummation.
4. PAYMENT AND DELIVERY OF CERTIFICATE(S). At any closing for an exercise
of the Option or any portion thereof, (a) InterWest and PNB will each
deliver to the other certificates as to
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the accuracy, as of the closing date, of their respective
representations and warranties under this Agreement, (b) InterWest or
the transferees will pay the aggregate purchase price for the shares of
Common Stock to be purchased by delivery of a certified or bank
cashier's check in immediately available funds payable to the order of
PNB, and (c) PNB will deliver to InterWest or the transferees a
certificate or certificates representing the shares so purchased.
5. TRANSFERABILITY OF THE OPTION AND OPTION SHARES. Before the Option, or
a portion of the Option, becomes exercisable in accordance with the
provisions of Section 2.2 of this Agreement, neither the Option nor any
portion of the Option will be transferable. If any of the events or
circumstances set forth in Sections 2.2(a) through (c) above occur,
InterWest may freely transfer, subject to applicable federal and state
securities laws, the Option or any portion of the Option, or any of the
Option Shares.
For purposes of this Agreement, a Reorganization or consolidation of
InterWest (whether or not InterWest is the surviving entity) or an
acquisition of InterWest will not be deemed a transfer.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PNB. PNB represents and
warrants to InterWest as follows:
(a) DUE AUTHORIZATION. This Agreement has been duly authorized by all
necessary corporate action on the part of PNB, has been duly
executed by a duly authorized officer of PNB and constitutes a
valid and binding obligation of PNB. No shareholder approval by
PNB shareholders is required by applicable law or otherwise before
the exercise of the Option in whole or in part.
(b) OPTION SHARES. PNB has taken all necessary corporate and other
action to authorize and reserve and to permit it to issue and, at
all times from the date of this Agreement to such time as the
obligation to deliver shares under this Agreement terminates, will
have reserved for issuance, at the closing(s) upon exercise of the
Option, or any portion of the Option, the Option Shares (subject to
adjustment, as provided in Section 8.8 below), all of which, upon
issuance under this Agreement, will be duly and validly issued,
fully paid and nonassessable, and will be delivered free and clear
of all claims, liens, encumbrances and security interests,
including any preemptive right of any of the shareholders of PNB.
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated by it will
violate or result in any violation of or be in conflict with or
constitute a default under any term of the articles of
incorporation or bylaws of PNB or any agreement, instrument,
judgment, decree, law, rule or order applicable to PNB or any
subsidiary of PNB or to which PNB or any such subsidiary is a party.
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(d) NOTIFICATION OF RECORD DATE. At any time from and after the date
of this Agreement until the Option is no longer exercisable, PNB
will give InterWest or any transferee 30 days prior written notice
before setting the record date for determining the holders of
record of the Common Stock entitled to vote on any matter, to
receive any dividend or distribution or to participate in any
rights offering or other matters, or to receive any other benefit
or right, with respect to the Common Stock.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INTERWEST. InterWest
represents and warrants to PNB as follows:
(a) DUE AUTHORIZATION. This Agreement has been duly authorized by all
necessary corporate action on the part of InterWest, has been duly
executed by a duly authorized officer of InterWest and constitutes
a valid and binding obligation of InterWest.
(b) TRANSFERS OF COMMON STOCK. No shares of Common Stock acquired upon
exercise of the Option will be transferred except in a transaction
registered or exempt from registration under any applicable
securities laws.
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated by it will
violate or result in any violation of or be in conflict with or
constitute a default under any term of the certificate of
incorporation or bylaws of InterWest or any agreement, instrument,
judgment, decree, law, rule or order applicable to InterWest or any
subsidiary of InterWest or to which InterWest or any such
subsidiary is a party.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event of any change
in the Common Stock by reason of stock dividends, split-ups, mergers,
reorganizations, recapitalizations, combinations, exchanges of shares or
the like, the number and kind of shares or securities subject to the
Option and the purchase price per share of Common Stock will be
appropriately adjusted. If, before the Option terminates or is
exercised, PNB is acquired by another party, consolidates with or merges
into another corporation or liquidates, InterWest or any transferee will
thereafter receive, upon exercise of the Option, the securities or
properties to which a holder of the number of shares of Common Stock
then deliverable upon the exercise thereof would have been entitled upon
such acquisition, consolidation, merger, reorganization or liquidation,
and PNB will take all steps in connection with such acquisition,
consolidation, merger, reorganization or liquidation as may be necessary
to assure that the provisions of this agreement will thereafter be
applicable, as nearly as reasonably may be practicable, in relation to
any securities or property thereafter deliverable upon exercise of the
Option.
9. NONASSIGNABILITY. This Agreement binds and inures to the benefit of the
parties and their successors. This Agreement is not assignable by
either party, but InterWest may transfer the Option, the Option Shares
or any portion of the Option or Option Shares in
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accordance with Section 5.5. A merger, reorganization or consolidation
of InterWest (whether or not InterWest is the surviving entity) or an
acquisition of InterWest will not be deemed an assignment or transfer.
10. REGULATORY RESTRICTIONS. PNB will use its best efforts to obtain or to
cooperate with InterWest or any transferee in obtaining all necessary
regulatory consents, approvals, waivers or other action (whether
regulatory, corporate or other) to permit the acquisition of any or all
Option Shares by InterWest or any transferee.
11. REMEDIES. PNB agrees that if for any reason InterWest or any transferee
will have exercised its rights under this Agreement and PNB will have
failed to issue the Option Shares to be issued upon such exercise or to
perform its other obligations under this Agreement, unless such action
would violate any applicable law or regulation by which PNB is bound,
then InterWest or any transferee will be entitled to specific
performance and injunctive and other equitable relief. InterWest agrees
that if it fails to perform any of its obligations under this Agreement,
then PNB will be entitled to specific performance and injunctive and
other equitable relief. This provision is without prejudice to any
other rights that PNB or InterWest or any transferee may have against
the other party for any failure to perform its obligations under this
Agreement.
12. NO RIGHTS AS SHAREHOLDER. This Option, before it is exercised, will not
entitle its holder to any rights as a shareholder of PNB at law or in
equity. Specifically, this Option, before it is exercised, will not
entitle the holder to vote on any matter presented to the shareholders
of PNB or, except as provided in this Agreement, to any notice of any
meetings of shareholders or any other proceedings of PNB.
13. MISCELLANEOUS.
(a) TERMINATION. This Agreement and the Option, to the extent not
previously exercised, will terminate upon the earliest of (1) June
30, 1999; (2) the mutual agreement of the parties to this
Agreement; (3) 31 days after the date on which any application for
regulatory approval for the Reorganization has been denied, but if
before the expiration of the 31-day period, PNB or InterWest is
engaged in litigation or an appeal procedure relating to an attempt
to obtain approval of the Reorganization, this Agreement will not
terminate until the earlier of (i) June 30, 1999, or (ii) 31 days
after the completion of the litigation and appeal procedure; (4)
the 30th day following the termination of the Plan for any reason
other than a material noncompliance or default by InterWest with
respect to its obligations under it; or (5) the date of termination
of the Plan if the termination is due to a material noncompliance
or default by InterWest with respect to its obligations under it;
but if the Option has been exercised, in whole or in part, before
the termination of this Agreement, then the exercise will close
under Section 4.4 of this Agreement, even though that closing date
is after the termination of this Agreement; and if the Option is
sold before the termination of this Agreement, the Option may be
exercised by the transferee at any time within 31 days after the
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date of termination even though such exercise or the closing of
such exercise occurs after the termination of this Agreement.
(b) AMENDMENTS. This Agreement may not be modified, amended, altered
or supplemented, except upon the execution and delivery of a
written agreement executed by the parties.
(c) SEVERABILITY OF TERMS. Any provision of this Agreement that is
invalid, illegal or unenforceable is ineffective only to the extent
of the invalidity, illegality or unenforceability without affecting
in any way the remaining provisions or rendering any other
provisions of this Agreement invalid, illegal or unenforceable.
Without limiting the generality of the foregoing, if the right of
InterWest or any transferee to exercise the Option in full for the
total number of shares of Common Stock or other securities or
property issuable upon the exercise of the Option is limited by
applicable law, or otherwise, InterWest or any transferee may,
nevertheless, exercise the Option to the fullest extent permissible.
(d) NOTICES. All notices, requests, claims, demands and other
communications under this Agreement must be in writing and must be
given (and will be deemed to have been duly received if so given)
by delivery, by cable, telecopies or telex, or by registered or
certified mail, postage prepaid, return receipt requested, to the
respective parties at the addresses below, or to such other address
as either party may furnish to the other in writing. Change of
address notices will be effective upon receipt.
If to PNB to:
Pacific Northwest Bank
1111 3rd Avenue
Seattle, WA 98101-3207
Attn: Patrick M. Fahey, Chairman, Chief Executive Officer,
and President
With a copy to:
Glen P. Garrison
Keller Rohrback L.L.P
1201 Third Avenue, Suite 3200
Seattle, Washington 98101-3052
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If to InterWest, to:
InterWest Bancorp, Inc.
1259 West Pioneer Way
Oak Harbor, Washington 98277
Attn: Stephen Walden, President
With a copy to:
Stephen M. Klein, Esq.
Graham & Dunn, P.C.
1420 Fifth Avenue, 33rd Floor
Seattle, WA 98101-2390
(a) GOVERNING LAW AND VENUE. The parties intend this Agreement and the
Option, in all respects, including all matters of construction,
validity and performance, to be governed by the laws of the State
of Washington, without giving effect to conflicts of law
principles. Any actions brought by either party against the other
arising under this Agreement must be filed in King County,
Washington, and each party consents to personal jurisdication in
King County.
(b) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which is an original, and all of which
together constitute one and the same agreement.
(c) EFFECTS OF HEADINGS. The section headings in this Agreement are for
convenience only and do not affect the meaning of its provisions.
Dated January 15, 1998:
INTERWEST BANCORP, INC.
By: /S/ STEPHEN M. WALDEN
--------------------------------
Stephen M. Walden
Its: President
PACIFIC NORTHWEST BANK
By: /s/ Patrick M. Fahey
--------------------------------
Patrick M. Fahey
Its: President
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APPENDIX D
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement"), dated as of February 4, 1998,
is between INTERWEST BANCORP, INC. ("InterWest") and PIONEER BANCORP, INC.
("Pioneer").
RECITALS
Pioneer and InterWest have executed an Agreement and Plan of Merger
("Plan"), of even date with this Agreement, under which Pioneer will be
merged into InterWest and Pioneer National Bank, the wholly owned subsidiary
of Pioneer, will become a wholly owned subsidiary of InterWest upon
completion of the merger ("Merger") contemplated in the Plan.
By negotiating and executing the Plan and by taking actions necessary or
appropriate to effect the transactions contemplated by the Plan, InterWest
has incurred and will incur substantial direct and indirect costs (including,
without limitation, the costs of management and employee time) and will forgo
the pursuit of certain alternative investments and transactions.
AGREEMENT
THEREFORE, in consideration of the promises set forth in this Agreement
and in the Plan, the parties agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth in this
Agreement, Pioneer irrevocably grants an option ("Option") to InterWest to
purchase an aggregate of 85,637 authorized but unissued shares of Pioneer's
capital stock ("Common Stock") (which if issued, and assuming exercise of
outstanding options to acquire the Common Stock, would represent
approximately 19.9% of total stock issued and outstanding), at a per share
price of $39.35 ("Option Price").
2. EXERCISE OF OPTION. Subject to the provisions of this Section 2.2 and
of Section 13.13(a) of this Agreement, this Option may be exercised by
InterWest or any transferee as set forth in Section 5.5 of this Agreement,
in whole or in part, at any time, or from time to time in any of the
following circumstances:
(a) Pioneer or its board of directors enters into an agreement or
recommends to Pioneer shareholders an agreement (other than the Plan)
under which any entity, person or group (collectively "Person"),
within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended ("Exchange Act"), would: (1) merge or consolidate
with, acquire 51% or more of the assets or liabilities of, or enter
into any similar transaction with Pioneer, or (2) purchase or
otherwise acquire (including by merger, reorganization, consolidation,
share exchange or any similar transaction) securities representing
10% or more of Pioneer's voting shares;
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(b) any Person (other than InterWest or any of its subsidiaries and other
than any Person owning as of the date of this Agreement 10% or more
of Pioneer's voting shares) acquires the beneficial ownership or the
right to acquire beneficial ownership of securities which, when
aggregated with other such securities owned by such Person, represents
10% or more of the voting shares of Pioneer (the term "beneficial
ownership" for purposes of this Agreement has the meaning set forth
in Section 13(d) of the Exchange Act, and the regulations promulgated
under the Exchange Act); notwithstanding the foregoing, the Option
will not be exercisable in the circumstances described above in this
subsection 2(b) if a Person acquires the beneficial ownership of
securities which, when aggregated with other such securities owned by
such Person, represents 10% or more, but less than 25%, of Pioneer's
voting shares and the transaction does not result in, and is not
presumed to constitute, "control" as defined under Section 7(j) of
the Federal Deposit Insurance Act or 12 CFR Part 225 or as determined
by the Board of Governors of the Federal Reserve;
(c) failure of the board of directors of Pioneer to recommend, or
withdrawal by the board of directors of a prior recommendation of,
the Merger to the shareholders; or
(d) failure of the shareholders to approve the Merger by the required
affirmative vote at a meeting of the shareholders, after any Person
(other than InterWest or a subsidiary of InterWest) announces publicly
or communicates, in writing, to Pioneer a proposal to (1) acquire
Pioneer (by merger, reorganization, consolidation, the purchase of
51% or more of its assets or liabilities, or any other similar
transaction), (2) purchase or otherwise acquire securities
representing 25% or more of the voting shares of Pioneer or
(3) change the composition of the board of directors of Pioneer.
It is understood and agreed that the Option will become exercisable
on the occurrence of any of the above-described circumstances even though
the circumstance occurred as a result, in part or in whole, of the board
of Pioneer complying with its fiduciary duties.
NOTWITHSTANDING THE FOREGOING, the Option may not be exercised if
either (1) any applicable and required governmental approvals have not
been obtained with respect to such exercise or if such exercise would
violate any applicable regulatory restrictions, or (2) at the time of
exercise, InterWest is failing in any material respect to perform or
observe its material covenants or conditions under the Plan, unless the
reason for such failure is that Pioneer is failing to perform or observe
its covenants or conditions under the Plan.
3. NOTICE, TIME AND PLACE OF EXERCISE. Each time that InterWest or any
transferee wishes to exercise any portion of the Option, InterWest or such
transferee will give written notice of its intention to exercise the
Option specifying the number of shares as to which the Option is being
exercised ("Option Shares") and the place and date for the closing of the
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exercise (which date may not be later than ten business days from the date
such notice is mailed). If any law, regulation or other restriction will
not permit such exercise to be consummated during this ten-day period, the
date for the closing of such exercise will be within five days following
the cessation of the restriction on consummation.
4. PAYMENT AND DELIVERY OF CERTIFICATE(S). At any closing for an exercise of
the Option or any portion thereof, (a) InterWest and Pioneer will each
deliver to the other certificates as to the accuracy, as of the closing
date, of their respective representations and warranties under this
Agreement, (b) InterWest or the transferees will pay the aggregate purchase
price for the shares of Common Stock to be purchased by delivery of a
certified or bank cashier's check in immediately available funds payable
to the order of Pioneer, and (c) Pioneer will deliver to InterWest or the
transferees a certificate or certificates representing the shares so
purchased.
5. TRANSFERABILITY OF THE OPTION AND OPTION SHARES. Before the Option, or a
portion of the Option, becomes exercisable in accordance with the
provisions of Section 2.2 of this Agreement, neither the Option nor any
portion of the Option will be transferable. If any of the events or
circumstances set forth in Sections 2.2(a) through (d) above occur,
InterWest may freely transfer, subject to applicable federal and state
securities laws, the Option or any portion of the Option, or any of the
Option Shares.
For purposes of this Agreement, a reorganization or consolidation of
InterWest (whether or not InterWest is the surviving entity) or an
acquisition of InterWest will not be deemed a transfer.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PIONEER. Pioneer represents
and warrants to InterWest as follows:
(a) DUE AUTHORIZATION. This Agreement has been duly authorized by all
necessary corporate action on the part of Pioneer, has been duly
executed by a duly authorized officer of Pioneer and constitutes a
valid and binding obligation of Pioneer. No shareholder approval by
Pioneer shareholders is required by applicable law or otherwise
before the exercise of the Option in whole or in part.
(b) OPTION SHARES. Pioneer has taken all necessary corporate and other
action to authorize and reserve and to permit it to issue and, at all
times from the date of this Agreement to such time as the obligation
to deliver shares under this Agreement terminates, will have reserved
for issuance, at the closing(s) upon exercise of the Option, or any
portion of the Option, the Option Shares (subject to adjustment, as
provided in Section 8.8 below), all of which, upon issuance under
this Agreement, will be duly and validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims,
liens, encumbrances and security interests, including any preemptive
right of any of the shareholders of Pioneer.
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(c) NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated by it will
violate or result in any violation of or be in conflict with or
constitute a default under any term of the articles of incorporation
or bylaws of Pioneer or any agreement, instrument, judgment, decree,
law, rule or order applicable to Pioneer or any subsidiary of Pioneer
or to which Pioneer or any such subsidiary is a party.
(d) NOTIFICATION OF RECORD DATE. At any time from and after the date of
this Agreement until the Option is no longer exercisable, Pioneer will
give InterWest or any transferee 30 days prior written notice before
setting the record date for determining the holders of record of the
Common Stock entitled to vote on any matter, to receive any dividend
or distribution or to participate in any rights offering or other
matters, or to receive any other benefit or right, with respect to
the Common Stock.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INTERWEST. InterWest
represents and warrants to Pioneer as follows:
(a) DUE AUTHORIZATION. This Agreement has been duly authorized by all
necessary corporate action on the part of InterWest, has been duly
executed by a duly authorized officer of InterWest and constitutes
a valid and binding obligation of InterWest.
(b) TRANSFERS OF COMMON STOCK. No shares of Common Stock acquired upon
exercise of the Option will be transferred except in a transaction
registered or exempt from registration under any applicable
securities laws.
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated by it will
violate or result in any violation of or be in conflict with or
constitute a default under any term of the articles of
incorporation or bylaws of InterWest or any agreement, instrument,
judgment, decree, law, rule or order applicable to InterWest or any
subsidiary of InterWest or to which InterWest or any such subsidiary
is a party.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event of any change in
the Common Stock by reason of stock dividends, split-ups, mergers,
reorganizations, recapitalizations, combinations, exchanges of shares or
the like, the number and kind of shares or securities subject to the Option
and the purchase price per share of Common Stock will be appropriately
adjusted. If, before the Option terminates or is exercised, Pioneer is
acquired by another party, consolidates with or merges into another
corporation or liquidates, InterWest or any transferee will thereafter
receive, upon exercise of the Option, the securities or properties to
which a holder of the number of shares of Common Stock then deliverable
upon the exercise thereof would have been entitled upon such acquisition,
consolidation, merger, reorganization or liquidation, and Pioneer will
take all steps in connection with such acquisition, consolidation, merger,
reorganization or
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liquidation as may be necessary to assure that the provisions of this
agreement will thereafter be applicable, as nearly as reasonably may be
practicable, in relation to any securities or property thereafter
deliverable upon exercise of the Option.
9. NONASSIGNABILITY. This Agreement binds and inures to the benefit of the
parties and their successors. This Agreement is not assignable by either
party, but InterWest may transfer the Option, the Option Shares or any
portion of the Option or Option Shares in accordance with Section 5.5.
A merger, reorganization or consolidation of InterWest (whether or not
InterWest is the surviving entity) or an acquisition of InterWest will
not be deemed an assignment or transfer.
10. REGULATORY RESTRICTIONS. Pioneer will use its best efforts to obtain or
to cooperate with InterWest or any transferee in obtaining all necessary
regulatory consents, approvals, waivers or other action (whether
regulatory, corporate or other) to permit the acquisition of any or all
Option Shares by InterWest or any transferee.
11. REMEDIES. Pioneer agrees that if for any reason InterWest or any
transferee will have exercised its rights under this Agreement and Pioneer
will have failed to issue the Option Shares to be issued upon such exercise
or to perform its other obligations under this Agreement, unless such
action would violate any applicable law or regulation by which Pioneer is
bound, then InterWest or any transferee will be entitled to specific
performance and injunctive and other equitable relief. InterWest agrees
that if it fails to perform any of its obligations under this Agreement,
then Pioneer will be entitled to specific performance and injunctive and
other equitable relief. This provision is without prejudice to any other
rights that Pioneer or InterWest or any transferee may have against the
other party for any failure to perform its obligations under this
Agreement.
12. NO RIGHTS AS SHAREHOLDER. This Option, before it is exercised, will not
entitle its holder to any rights as a shareholder of Pioneer at law or in
equity. Specifically, this Option, before it is exercised, will not
entitle the holder to vote on any matter presented to the shareholders of
Pioneer or, except as provided in this Agreement, to any notice of any
meetings of shareholders or any other proceedings of Pioneer.
13. MISCELLANEOUS.
(a) TERMINATION. This Agreement and the Option, to the extent not
previously exercised, will terminate upon the earliest of (1) June 30,
1999; (2) the mutual agreement of the parties to this Agreement; (3)
31 days after the date on which any application for regulatory
approval for the Merger has been denied, but if before the expiration
of the 31-day period, Pioneer or InterWest is engaged in litigation
or an appeal procedure relating to an attempt to obtain approval of
the Merger, this Agreement will not terminate until the earlier of
(i) June 30, 1999, or (ii) 31 days after the completion of the
litigation and appeal procedure; (4) the 30th day following the
termination of the Plan for any reason other than a material
noncompliance or default by InterWest with respect to its obligations
under it; or
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(5) the date of termination of the Plan if the termination is due
to a material noncompliance or default by InterWest with respect to
its obligations under it; but if the Option has been exercised, in
whole or in part, before the termination of this Agreement, then
the exercise will close under Section 4.4 of this Agreement, even
though that closing date is after the termination of this
Agreement; and if the Option is sold before the termination of this
Agreement, the Option may be exercised by the transferee at any
time within 31 days after the date of termination even though such
exercise or the closing of such exercise occurs after the
termination of this Agreement.
(b) AMENDMENTS. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written
agreement executed by the parties.
(c) SEVERABILITY OF TERMS. Any provision of this Agreement that is
invalid, illegal or unenforceable is ineffective only to the extent
of the invalidity, illegality or unenforceability without affecting
in any way the remaining provisions or rendering any other provisions
of this Agreement invalid, illegal or unenforceable. Without limiting
the generality of the foregoing, if the right of InterWest or any
transferee to exercise the Option in full for the total number of
shares of Common Stock or other securities or property issuable
upon the exercise of the Option is limited by applicable law, or
otherwise, InterWest or any transferee may, nevertheless, exercise
the Option to the fullest extent permissible.
(d) NOTICES. All notices, requests, claims, demands and other
communications under this Agreement must be in writing and must be
given (and will be deemed to have been duly received if so given) by
delivery, by cable, telecopies or telex, or by registered or
certified mail, postage prepaid, return receipt requested, to the
respective parties at the addresses below, or to such other address
as either party may furnish to the other in writing. Change of
address notices will be effective upon receipt.
If to Pioneer to:
Pioneer Bancorp, Inc.
The Tower
P.O. Box 2949
Yakima, WA 98907
Attn: Paul L. Campbell, President and Chief Executive Officer
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With a copy to:
Bernard L. Russell, Esq.
Foster Pepper & Shefelman, PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
and
Morris G. Shore
Velikanje, Moore & Shore, P.S.
405 East Lincoln Avenue
Yakima, Washington 98901
If to InterWest, to:
InterWest Bancorp, Inc.
1259 West Pioneer Way
Oak Harbor, Washington 98277
Attn: Stephen Walden, President and Chief Executive Officer
With a copy to:
Stephen M. Klein, Esq.
Graham & Dunn, P.C.
1420 Fifth Avenue, 33rd Floor
Seattle, WA 98101-2390
(a) GOVERNING LAW AND VENUE. The parties intend this Agreement and the
Option, in all respects, including all matters of construction,
validity and performance, to be governed by the laws of the State of
Washington, without giving effect to conflicts of law principles. Any
actions brought by either party against the other arising under this
Agreement must be filed in King County, Washington, and each party
consents to personal jurisdiction in King County.
(b) COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which is an original, and all of which together constitute one
and the same agreement.
(c) EFFECTS OF HEADINGS. The section headings in this Agreement are for
convenience only and do not affect the meaning of its provisions.
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Dated February 4, 1998:
INTERWEST BANCORP, INC.
By: /s/ Stephen M. Walden
--------------------------------
Stephen M. Walden
Its: President
PIONEER BANCORP, INC.
By: /s/ Paul L. Campbell
--------------------------------
Paul L. Campbell
Its: President
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APPENDIX E
January 15, 1998
Board of Directors
Pacific Northwest Bank
1111 Third Avenue, Suite 250
Seattle, WA 98111
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Pacific Northwest Bank ("PNWB") of the
consideration to be received by such shareholders pursuant to the terms of
the Merger Agreement and Plan of Merger, dated January 15, 1998, (the
"Agreement") between PNWB and InterWest Bancorp, Inc. ("IWBK").
In connection with the proposed merger transaction (the "Merger")
whereby PNWB will merge into IWBK, each issued and outstanding share and
option of PNWB common stock (along with its associated rights) at the
effective time of the Merger (other than (i) shares of holders of which are
exercising appraisal rights pursuant to applicable law and (ii) shares held
directly by or indirectly by the Bank, its parent company or any subsidiary
thereof other than shares held in a fiduciary capacity or in satisfaction of
a debt previously contracted) shall be converted into the right to receive
3.95 of IWBK shares, except for fractional shares which will receive a
proportional amount of cash (the Merger "Consideration"). As of January 12,
1998, the estimated value of IWBK common stock is $149.11 per share of PNWB
common stock.
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. PNWB has agreed to pay
CFAI a fee for this opinion letter.
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Board of Directors
Pacific Northwest Bank
January 15, 1998
In connection with rendering this opinion, we have, among other things:
(I) reviewed the Agreement; (ii) reviewed PNWB's financial information for
the twelve months ended December 31, 1997; (iii) reviewed certain internal
financial analyses and certain other forecasts for PNWB prepared by and
reviewed with the management of PNWB; (iv) conducted interviews with senior
management of PNWB regarding the past and current business operations,
results thereof, financial condition and future prospects of PNWB; (v)
reviewed the current market environment generally and the banking environment
in particular; (vi) reviewed the prices paid in certain recent mergers and
acquisitions in the banking industry on a regional basis; (vii) reviewed
IWBK's audited financial information for the fiscal year ended September 30,
1997 including the Form 10-KSB 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
the PNWB 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 PNWB. 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 PNWB.
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 PNWB pursuant to the Agreement is fair, from a financial
point of view, to the shareholders of PNWB.
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Board of Directors
Pacific Northwest Bank
January 15, 1998
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the
merger transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/ Robert J. Rogowski
Principal
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APPENDIX F
February 4, 1998
Board of Directors
Pioneer Bancorp, Inc.
402 East Yakima Avenue
Yakima, Washington
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Pioneer Bancorp, Inc. ("Pioneer") of the
consideration to be received by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated February 4, 1998, (the "Agreement")
between Pioneer and InterWest Bancorp, Inc. ("IWBK").
In connection with the proposed merger transaction (the "Merger") whereby
Pioneer will merge into IWBK, each issued and outstanding share and option of
Pioneer common stock (along with its associated rights) at the effective time
of the Merger (other than (i) shares of holders of which are exercising
appraisal rights pursuant to applicable law and (ii) shares held directly by or
indirectly by the Bank, its parent company or any subsidiary thereof other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) shall be converted into the right to receive a varying amount of
IWBK common stock when IWBK trades between $36.00 and $44.00 per share to equal
$58.98 per Pioneer 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. Pioneer has agreed to pay CFAI a fee for
this opinion letter.
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Board of Directors
Pioneer Bancorp, Inc.
February 4, 1998
In connection with rendering this opinion, we have, among other things:
(I) reviewed the Agreement; (ii) reviewed Pioneer's financial information for
the twelve months ended December 31, 1997; (iii) reviewed certain internal
financial analyses and certain other forecasts for Pioneer prepared by and
reviewed with the management of Pioneer; (iv) conducted interviews with senior
management of Pioneer regarding the past and current business operations,
results thereof, financial condition and future prospects of Pioneer; (v)
reviewed the current market environment generally and the banking environment
in particular; (vi) reviewed the prices paid in certain recent mergers and
acquisitions in the banking industry on a regional basis; (vii) reviewed IWBK's
audited financial information for the fiscal year ended September 30, 1997
including the Form 10-KSB 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 the
Pioneer 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
Pioneer. 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 Pioneer.
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 Pioneer pursuant to the Agreement is fair, from a financial point of view,
to the shareholders of Pioneer.
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Board of Directors
Pioneer Bancorp, Inc.
February 4, 1998
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the
merger transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/ Robert J. Rogowski
----------------------
Principal
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APPENDIX G
RCW 30.49.090
RIGHTS OF DISSENTING SHAREHOLDER - APPRAISAL -
AMOUNT DUE AS DEBT
The owner of shares of a state bank which were voted against a merger to
result in a state bank, or against the conversion of a state bank into a
national bank, shall be entitled to receive their value in cash, if and when
the merger or conversion becomes effective, upon written demand made to the
resulting state or national bank at any time within thirty days after the
effective date of the merger or conversion, accompanied by the surrender of the
stock certificates. The value of such shares shall be determined, as of the
date of the shareholders' meeting approving the merger or conversion, by three
appraisers, one to be selected by the owners of two-thirds of the dissenting
shares, one by the board of directors of the resulting state or national bank,
and the third by the two so chosen. The valuation agreed upon by any two
appraisers shall govern. If the appraisal is not completed within ninety days
after the merger or conversion becomes effective, the director shall cause an
appraisal to be made.
The dissenting shareholders shall bear, on a pro rata basis based on the
number of dissenting shares owned, the cost of their appraisal and one-half of
the cost of a third appraisal, and the resulting bank shall bear the cost of
its appraisal and one-half of the cost of the third appraisal. If the director
causes an appraisal to be made, the cost of that appraisal shall be borne
equally by the dissenting shareholders and the resulting bank, with the
dissenting shareholders sharing their half of the cost on a pro rata basis
based on the number of dissenting shares owned.
The resulting state or national bank may fix an amount which it considers
to be not more than the fair market value of the shares of a merging or the
converting bank at the time of the stockholders' meeting approving the merger
or conversion, which it will pay dissenting shareholders of the bank entitled
to payment in cash. The amount due under such accepted offer or under the
appraisal shall constitute debt of the resulting state or national bank.
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APPENDIX H
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;
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(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under RCW
23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply 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.
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(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.
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.
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(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.
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.
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<PAGE>
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 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.
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<PAGE>
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled, parties to the proceeding as in
an action against their shares and all parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.
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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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
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 each
of the directors of InterWest and InterWest Bank that 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.
Item 21. Exhibits and Financial Statement Schedules
(a) The exhibits are listed on the accompanying "Exhibit Index".
(b) Financial Statement Schedules. None.
(c) The opinions of the financial advisor to Pacific and Pioneer,
respectively, are set forth as Appendices E and F to this Prospectus/Joint
Proxy Statement.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to;
(i) Include any prospectus required by Section
10(a)(3) of the 1933 Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC pursuant
to Rule 424(b) if, in the aggregate,
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<PAGE>
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed information on
the plan of distribution;
(2) For determining liability under the 1933 Act, to treat
each such post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) To advise all directors and officers that insofar as indemnification
for liabilities arising under the 1933 Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date, of the registration
statement through the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Oak Harbor, Washington
on March 30, 1998.
INTERWEST BANCORP, INC.
/s/ STEPHEN M. WALDEN
By:--------------------------------------
Stephen M. Walden
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby
authorizes and appoints Stephen M. Walden and H. Glenn Mouw, and each of
them, with full power of substitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file any and all
amendments to this Registration Statement, including any and all
post-effective amendments.
Pursuant to the requirements of the 1933 Act, this Power of Attorney
has been signed by the following persons in the capacities indicated, on the
30th day of March, 1998.
Signature Title
-------- -----
/s/ STEPHEN M. WALDEN
- ---------------------------- President, Chief Executive Officer
Stephen M. Walden and Director (Principal Executive Officer)
/s/ H. GLENN MOUW
- ---------------------------- Executive Vice President & Chief Financial
H. Glenn Mouw Officer(Principal Financial Officer)
/s/ ERIC D. JENSEN
- ---------------------------- Chief Accounting Officer
Eric D. Jensen (Principal Accounting Officer)
/s/ BARNEY R. BEEKSMA
- ---------------------------- Chairman of the Board
Barney R. Beeksma
/s/ GARY M. BOLYARD
- ---------------------------- Director
Gary M. Bolyard
/s/ LARRY CARLSON
- ---------------------------- Director
Larry Carlson
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<PAGE>
Director
- ----------------------------
Michael T. Crawford
Director
- ----------------------------
Jean Gorton
Director
- ----------------------------
Henry Koetje
/s/ STEPHEN LEWIS Director
- ----------------------------
Stephen Lewis
Director
- ----------------------------
Clark H. Mock
/s/ RUSSEL E. OLSON Director
- ----------------------------
Russel E. Olson
/s/ VERN SIMS Director
- ----------------------------
Vern Sims
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
2.1 Agreement and Plan of Merger between InterWest and Pacific dated as of
January 15, 1998, (included in this Registration Statement as Appendix
A to the Prospectus/Joint Proxy Statement).
2.2 Agreement and Plan of Merger between InterWest and Pioneer dated as of
February 4, 1998, (included in this Registration Statement as Appendix
B to the Prospectus/Joint Proxy Statement).
5.1 Opinion of Graham & Dunn, P.C. as to the legality of securities issued
in connection with the Pacific Merger and the Pioneer Merger. 8.1 Form
of Opinion of Graham & Dunn, P.C. as to federal income tax consequences
for the Pacific Merger. 8.2 Form of Opinion of Graham & Dunn, P.C. as
to federal income tax consequences for the Pioneer Merger. 10.1 Stock
Option Agreement between InterWest and Pacific dated as of January 15,
1998 (included as Appendix C to the Prospectus/Joint Proxy Statement).
10.1 Stock Option Agreement between InterWest and Pioneer dated as of
February 4, 1998 (included as Appendix D to the Prospectus/Joint Proxy
Statement).
10.2 Employment Agreement between Pacific and Patrick M. Fahey dated
January 15, 1998.
10.3 Form of Noncompetition Agreement between InterWest and each respective
director of Pacific, dated as of January 15, 1998.
10.4 Form of Noncompetition Agreement between InterWest and each respective
director of Pioneer, dated as of February 4, 1998.
10.5 Voting Agreement of Pacific directors.
10.6 Voting Agreement of Pioneer directors.
21.1 Subsidiaries of InterWest.
23.1 Consent of Graham & Dunn, P.C., as to its legality of securities
opinion for Pacific and Pioneer (contained in its opinion filed as
Exhibit 5.1).
23.2 Consent of Graham & Dunn, P.C. as to its tax opinion for Pacific
(contained in its opinion filed as Exhibit 8.1).
23.3 Consent of Graham & Dunn, P.C. as to its tax opinion for Pioneer
(contained in its opinion filed as Exhibit 8.2).
23.4 Consent of Ernst & Young LLP, Independent Auditors for InterWest and
Pacific.
23.5 Consent of Deliotte & Touche LLP, former Independent Auditors for
Central Bancorporation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
23.6 Consent of Moss Adams LLP, Independent Auditors for Pioneer.
23.7 Consent of Columbia Financial for Pacific (contained in its opinion
included in this Registration Statement as Appendix E to the
Prospectus/Joint Proxy Statement).
23.8 Consent of Columbia Financial for Pioneer (contained in its opinions
included in this Registration Statement as Appendix F to the
Prospectus/Joint Proxy Statement).
24.1 Power of Attorney (included in the signature page of this Registration
Statement) and certified resolutions of the InterWest Board.
27.1 Restated Financial Data Schedule for periods 9/30/97, 6/30/97, 3/31/97
and 12/31/96
27.2 Restated Financial Data Schedule for periods 9/30/96, 6/30/96
and 3/31/96
99.1 Opinion of Columbia Financial with respect to Pacific Merger (included
as Appendix E to the Prospectus/Joint Proxy Statement).
99.2 Consent of Columbia Financial with respect to Pioneer Merger (included
as Appendix F to the Prospectus/Joint Proxy Statement).
99.3 Form of proxy to be mailed to the stockholders of Pacific.
99.4 Form of proxy to be mailed to the stockholders of Pioneer.
99.5 Rule 438 Consent of Patrick M. Fahey.
</TABLE>
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<PAGE>
Exhibit 5.1
April 1, 1998
The Board of Directors of
InterWest Bancorp, Inc.
275 SE Pioneer Way
Oak Harbor, WA 98277
Re: Issuance of Securities by InterWest Bancorp, Inc.
Ladies and Gentlemen:
We are acting as counsel for InterWest Bancorp, Inc. a Washington bank
holding company ("InterWest"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act") of up to 2,330,643 shares of
common stock of InterWest, $.20 par value per share (the "Shares") to be issued
in accordance with (i) the Amended and Restated Agreement and Plan of Merger,
dated as of January 15, 1998, between InterWest and Pacific Northwest Bank (the
"Pacific Merger Agreement") and (ii) the Agreement and Plan of Merger, dated as
of February 4, 1998, among InterWest, InterWest Bank, Pioneer Bancorp, Inc. and
Pioneer National Bank (the "Pioneer Merger Agreement"). A Registration
Statement on Form S-4 (the "Registration Statement") is being filed under the
Act with respect to the offering of the Shares pursuant to the Pacific Merger
Agreement and the Pioneer Merger Agreement.
In connection with the offering of the Shares, we have examined: (i) the
Pacific Merger Agreement; (ii) the Pioneer Merger Agreement; (iii) the
Registration Statement; and (iv) such other documents as we have deemed
necessary to form the opinion expressed below. As to various questions of fact
material to such opinion, where relevant facts were not independently
established, we have relied upon statements of officers of InterWest or
representations and warranties of InterWest contained in the Pacific Merger
Agreement and the Pioneer Merger Agreement.
Based and relying solely upon the foregoing, we advise you that in our
opinion, the Shares, or any portion thereof, when issued pursuant to the Pacific
Merger Agreement and the Pioneer Merger Agreement, after the Registration
Statement has become effective under the Act, will be validly issued under the
laws of the State of Washington and will be fully paid and nonassessable.
Consent is hereby given to the filing of this opinion as an exhibit to the
Registration Statement and to the legal reference to this firm under the caption
"Certain Legal Matters" as
<PAGE>
InterWest Bancorp, Inc.
April 1, 1998
Page 2
having passed upon the validity of the Shares. In giving this consent, we do
not admit that we are experts within the meaning of the Act.
Very truly yours,
Graham & Dunn
/s/ Graham & Dunn
<PAGE>
_______________, 1998
Interwest Bancorp, Inc. Pacific Northwest Bank
1259 West Pioneer Way 111 Third Avenue
Oak Harbor, Washington 98277 Seattle, Washington 98101-3207
Re: Reorganization -- Tax Consequences
Ladies and Gentlemen:
This letter responds to your request for our opinion as to certain of the
federal income tax consequences of the proposed reorganization (the
"Reorganization") of Pacific Northwest Bank ("Pacific"), pursuant to which each
outstanding share of common stock of Pacific will be exchanged for one share of
common stock of Interwest Bancorp, Inc. ("Interwest") and Pacific will become a
wholly owned subsidiary of Interwest.
We have acted as legal counsel to Pacific in connection with the
Reorganization. For the purpose of rendering this opinion, we have examined and
relied upon originals, certified copies, or copies otherwise identified to our
satisfaction as being true copies of the originals of, the following documents,
including all exhibits and schedules attached to them:
a. The Agreement and Plan of Reorganization, dated as of January 15,
1998, between Pacific and Interwest (the "Plan");
b. Form S-4 Registration Statement of Interwest filed with the Securities
and Exchange Commission on April ___, 1998;
c. The Proxy Statement of Pacific (included as part of the Registration
Statement);
d. The factual representations set forth in a letter from Pacific and
Interwest; and
e. Such other documents, instruments, records and information pertaining
to the Reorganization as we have deemed necessary for rendering our
opinion.
We have assumed, without independent investigation or review, the accuracy
and completeness of the facts and representations and warranties contained in
those documents or otherwise made known to us, and that the Reorganization will
be effected in accordance with the terms of the Plan.
We have assumed that in connection with the Reorganization and pursuant to
the Plan, each share of Pacific's voting common stock will be exchanged for one
share of Interwest's voting common stock, and Interwest will become the sole
shareholder of Pacific. No fractional
<PAGE>
Interwest Bancorp, Inc.
Pacific Northwest Bank
________________, 1998
Page 2
shares will be involved. Shareholders of Pacific who perfect their dissenters
rights under state law will be paid the cash value for their Pacific shares.
Such payments will be made by Pacific without reimbursement by Interwest. Upon
the consummation of the Reorganization, Pacific will continue business under its
existing name and using substantially all of its assets.
Based upon our review of the facts described above and our analysis of the
law, and subject to the qualifications and limitations set forth herein, and the
completion of the transactions described in the matter contemplated, it is our
opinion that:
1. The acquisition by Interwest of at least eighty percent (80%) of the
outstanding shares of Pacific stock, solely for Interwest voting common
stock , as described above, will constitute a reorganization within the
meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as
amended (the "Code "). Pacific and Interwest will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Pacific shareholders upon the receipt
of Interwest voting common stock solely in exchange for their shares of
Pacific stock, pursuant to Section 354(a)(1) of the Code.
3. The basis of the shares of Interwest voting common stock received by
Pacific share holders will be the same as the basis of Pacific stock
surrendered in exchange there for, pursuant to Section 358(a)(1)
of the Code.
4. The holding period of the shares of Interwest voting common stock received
by Pacific shareholders will include the holding period during which
Pacific stock surrendered in exchange therefor was held, provided that the
shares of Pacific stock were held as a capital asset in the hands of the
exchanging shareholders on the date of the exchange, pursuant to Section
1223(1) of the Code.
5. No gain or loss will be recognized to Interwest upon the receipt of the
shares of Pacific stock in exchange for shares of Interwest voting common
stock, as described above, pursuant to Section 1032(a) of the Code.
6. The basis of the shares of Pacific stock received by Interwest will be the
same as the basis of such Pacific stock in the hands of Pacific
shareholders immediately prior to the exchange, pursuant to Section 362(b)
of the Code.
7. The holding period of Pacific stock received by Interwest will include the
period during which Pacific stock was held by Pacific shareholders pursuant
to Section 1223(2) of the Code.
<PAGE>
Interwest Bancorp, Inc.
Pacific Northwest Bank
________________, 1998
Page 3
8. Where cash is received by any dissenting shareholder of Pacific in exchange
for the surrender of all of such shareholder's Pacific stock, the cash will
be treated as received by the shareholder as a distribution in redemption
of his or her Pacific stock, subject to the provisions and limitations of
Section 302 of the Code.
Our opinion represents only our best legal judgment as to the probable
federal income tax consequences of the transaction described, based upon
existing law. Our opinion is not intended to be a conclusive statement as to
all of the tax consequences of the transaction and is expressly limited to the
matters addressed. Further, our opinion is not binding upon the Internal
Revenue Service (the "IRS") or any court and has no official status of any kind,
and no private ruling regarding the matters discussed has been or will be
requested from the IRS. The IRS has ruled in a number of private rulings that
transactions substantially identical to the Reorganization result in tax
consequences consistent with those described in this opinion. Although such
rulings do not constitute authority on which we can rely in expressing our
opinion, such rulings generally do reflect the position of the IRS. Each
shareholder, however, is urged to consult with his or her own tax advisor with
respect to their individual tax situation. Our opinion is intended solely for
the benefit of Pacific, Interwest and the shareholders of Pacific, and may not
be relied upon for any other purpose or by any other person or entity or made
available to any other person or entity without our prior written consent.
Very truly yours,
Graham & Dunn
<PAGE>
, 1998
------------
Interwest Bancorp, Inc. Pioneer Bancorp, Inc.
1259 West Pioneer Way The Tower
Oak Harbor, Washington 98277 P.O. Box 2949
Yakima, Washington 98907
Re: Holding Company Merger / Tax Consequences
Ladies and Gentlemen:
This letter responds to your request for our opinion as to certain of
the federal income tax consequences of the proposed merger (the "Merger") of
Pioneer Bancorp, Inc. ("Pioneer") into Interwest Bancorp, Inc. ("Interwest").
We have acted as legal counsel to Interwest in connection with the
Merger. For the purpose of rendering this opinion, we have examined and
relied upon originals, certified copies, or copies otherwise identified to
our satisfaction as being true copies of the originals of the following
documents, including all exhibits and schedules attached to them:
a. The Agreement and Plan of Merger, dated as of February 4, 1998,
between Pioneer, Pioneer National Bank, Interwest and Interwest Bank
(the "Merger Agreement")
b. Form S-4 Registration Statement of Interwest filed with the Securities
and Exchange Commission on April ___, 1998;
c. The Proxy Statement of Pioneer (included as part of the Registration
Statement);
d. The factual representations set forth in a letter from Interwest and
Pioneer, dated ___________________, 1998; and
e. Such other documents, instruments, records and information pertaining
to the Merger as we have deemed necessary for rendering our opinion.
We have assumed, without independent investigation or review, the
accuracy and completeness of the facts and representations and warranties
contained in those documents or otherwise made known to us, and that the
Merger will be effected in accordance with the terms of the Merger Agreement.
In connection with the Merger and pursuant to the Merger Agreement, each
share of Pioneer voting common stock will be exchanged for that number of
shares of Interwest voting common stock based on the exchange rate
established in the Merger Agreement. No fractional
<PAGE>
Interwest Bancorp, Inc.
Pioneer Bancorp, Inc.
, 1998
- -------------
Page 2
shares will be involved. Pioneer shareholders who perfect their dissenters
rights under state law will be paid the cash value for their Pioneer shares.
Such payments will be made by Pioneer without reimbursement by Interwest.
Upon the consummation of the Merger, Interwest will continue the historic
business of Pioneer.
Based upon our review of the facts described above and our analysis of
the law, and subject to the qualifications and limitations set forth herein,
and the completion of the transactions described in the matter contemplated,
it is our opinion that:
1. The merger of Pioneer into Interwest solely for Interwest voting
common stock, as described above, will constitute a reorganization
within the meaning of Section 368(a)(1)(A) of the Internal Revenue
Code, as amended (the "Code"). Pioneer and Interwest will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code.
2. No gain or loss will be recognized by Pioneer shareholders upon the
receipt of Interwest voting common stock solely in exchange for their
shares of Pioneer stock, pursuant to Section 354(a)(1) of the Code.
3. The basis of the shares of Interwest voting common stock received by
Pioneer shareholders will be the same as the basis of the Pioneer
stock surrendered exchange therefor, pursuant to Section 358(a)(1) of
the Code.
4. The holding period of the shares of Interwest voting common stock
received by Pioneer shareholders will include the holding period
during which the Pioneer stock surrendered in exchange therefor was
held, provided that the shares of Pioneer stock were held as a capital
asset in the hands of the exchanging shareholders on the date of the
exchange, pursuant to Section 1223(1) of the Code.
5. Where cash is received by any dissenting shareholder of Pioneer in
exchange for the surrender of all of such shareholder's Pioneer stock,
the cash will be treated as received by the shareholder as a
distribution in redemption of his or her Pioneer stock, subject to the
provisions and limitation of Section 302 of the Code.
<PAGE>
Interwest Bancorp, Inc.
Pioneer Bancorp, Inc.
, 1998
- -------------
Page 3
6. No gain or loss will be recognized by Pioneer upon the transfer of its
assets to Interwest, pursuant to Sections 361 and 357(a) of the Code.
7. The basis of the assets of Pioneer acquired by Interwest will be the
same as the basis of Pioneer in the assets immediately before the
Merger, pursuant to Section 362(b) of the Code.
8. The holding period of the assets acquired by Interwest will include
the period such assets were held by Pioneer, pursuant to Section
1223(2) of the Code.
9. No gain or loss will be recognized by Interwest upon the receipt by
Interwest of the assets of Pioneer, as described above.
Our opinion represents only our best legal judgment as to the probable
federal income tax consequences of the transaction described, based upon
existing law. Our opinion is not intended to be a conclusive statement as to
all of the tax consequences of the transaction and is expressly limited to
the matters addressed. Further, our opinion is not binding upon the Internal
Revenue Service (the "IRS") or any court and has no official status of any
kind, and no private ruling regarding the matters discussed has been or will
be requested from the IRS. The IRS has ruled in a number of private rulings
that transactions substantially identical to the Merger result in tax
consequences consistent with those described in this opinion. Although such
rulings do not constitute authority on which we can rely in expressing our
opinion, such rulings generally do reflect the position of the IRS. Each
shareholder, however, is urged to consult with his or her own tax advisor
with respect to their individual tax situation. Our opinion is intended
solely for the benefit of Interwest, the shareholders of Interwest and the
shareholders of Pioneer, and may not be relied upon for any other purpose or
by any other person or entity or made available to any other person or entity
without our prior written consent.
Very truly yours,
GRAHAM & DUNN
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), signed January 15, 1998, between
INTERWEST BANCORP, INC. ("InterWest"), PACIFIC NORTHWEST BANK ("Bank") and
PATRICK M. FAHEY ("Executive") takes effect on the effective date of the
Reorganization ("Effective Date").
RECITALS
A. InterWest has entered into a Plan and Agreement of Reorganization ("Plan")
with the Bank, under which the Bank will become a wholly owned subsidiary
of InterWest ("Reorganization").
B. Executive is presently the Bank's Chairman, President, and Chief Executive
Officer ("CEO"). The Bank wishes to continue Executive's employment in that
capacity under the terms and conditions of this Agreement. In addition,
InterWest wishes to employ Executive as Vice Chairman/Commercial Banking.
C. Under the terms of this Agreement, Executive wishes to continue his
employment with the Bank and to accept employment with InterWest.
AGREEMENT
The parties agree as follows.
1. EMPLOYMENT. The Bank will continue Executive's employment during the Term,
and Executive accepts employment by the Bank and InterWest on the terms and
conditions set forth in this Agreement. Executive's title will be
"Chairman of the Board, President, and CEO." In addition, during the
Term, Executive will have the title with InterWest of "Vice
Chairman/Commercial Banking," and Executive will be considered a member of
the Executive Management Team of InterWest.
2. EFFECTIVE DATE AND TERM.
(a) EFFECTIVE DATE. This Agreement is effective as of the Effective Date.
(b) TERM. The term of this Agreement ("Term") is three years, beginning on
the Effective Date.
(c) ABANDONMENT OF THE REORGANIZATION. If the Plan terminates before
Closing, this Agreement will not become effective and will be void.
3. DUTIES. Executive will faithfully and diligently perform the duties
assigned to Executive from time to time by the Bank's board of directors,
by InterWest's board of directors, or by the President or CEO of InterWest.
Executive will use his best efforts to perform his duties and will devote
full time and attention to these duties during working hours. These
duties will include, without limitation, the following:
(a) BANK PERFORMANCE. Executive will be responsible for all aspects of
the Bank's performance, including, without limitation, directing that
daily operational and managerial matters are performed in a manner
consistent with InterWest's and the Bank's policies. These duties
will also include formulating and implementing the Bank's
1
<PAGE>
expansion strategies and performing all other tasks in connection with
the Bank's management and affairs that are normal and customary to
Executive's position.
(b) COMMERCIAL BANKING. Executive will participate in the management team
that is responsible for oversight of InterWest's commercial banking
activities and for the integration of these activities with
InterWest's existing operations. Executive's duties will also
include assisting InterWest management with the development and
implementation of acquisition strategies, and any other duties
assigned to Executive by the CEO of InterWest after consultation with
Executive.
(c) DEVELOPMENT AND PRESERVATION OF BUSINESS. Executive will be
responsible for the development and preservation of banking relation-
ships and other business development efforts (including appropriate
civic and community activities) in the Bank's market areas.
(d) REPORT TO BOARD. Executive will report directly to the Bank's
board of directors and to the CEO of InterWest. The Bank's or
InterWest's board of directors may, from time to time, modify
Executive's title or add to, delete from, or modify Executive's
performance responsibilities to accommodate management succession,
as well as any other management objectives of the Bank or of Inter-
West. Executive will assume any additional positions, duties, and
responsibilities as may reasonably be requested of him with or
without additional compensation, as appropriate and consistent with
Sections 3(a), 3(b),and 3(c) of this Agreement.
4. SALARY. Initially, Executive will receive a salary of $275,000 per year,
to be paid in accordance with the Bank's regular payroll schedule.
5. INCENTIVE COMPENSATION. The Bank's board of directors, subject to
ratification by InterWest's board of directors, will determine the amount
of bonus, if any, to be paid by the Bank to Executive for each year during
the Term. In making this determination, the Bank's board of directors
will consider factors such as Executive's performance of his duties and
the safety, soundness, and profitability of the Bank. Executive's bonus,
if any, will reflect Executive's contribution to the performance of the
Bank during the year.
6. INCOME DEFERRAL AND BENEFITS. Subject to eligibility requirements and in
accordance with and subject to any policies adopted by the Bank's or
InterWest's board of directors with respect to any benefit plans or
programs, Executive will be entitled to receive benefits (including stock
options) similar to those offered to other executive officers of InterWest
and its subsidiaries with position and duties comparable to those of
Executive. The foregoing notwithstanding, it is the specific and agreed
intent that the total compensation of Executive shall be, in the
aggregate, comparable to the total compensation Executive is presently
receiving at the Bank (including but not limited to benefits under the
make whole plan, retirement plans, director fees, and long-term disability
plans).
7. BUSINESS EXPENSES. The Bank will reimburse Executive for ordinary and
necessary expenses (including, without limitation, Bank automobile,
travel, entertainment, and similar expenses) incurred in performing and
promoting the Bank's business. Executive will present from time to time
itemized accounts of these expenses, subject to any limits of Bank policy
or the rules and regulations of the Internal Revenue Service.
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<PAGE>
8. TERMINATION.
(a) TERMINATION BY BANK FOR CAUSE. If, before the end of the Term, the
Bank terminates Executive's employment for Cause or Executive
terminates his employment without Good Reason, the Bank will pay
Executive the salary earned and expenses reimbursable under this
Agreement incurred through the date of Executive's termination.
Executive will have no right to receive compensation or other
benefits for any period after termination under this Section 8(a).
(b) OTHER TERMINATION BY BANK. If, before the end of the Term, the Bank
terminates Executive's employment without Cause or Executive
terminates his employment for Good Reason (defined below), the Bank
will pay Executive for the remainder of the Term the salary Executive
would have been entitled to under this Agreement if his employment
had not terminated.
(c) DEATH OR DISABILITY. This Agreement terminates (1) if Executive dies
or (2) if Executive is unable to perform his duties and obligations
under this Agreement for a period of 90 days as a result of a
physical or mental disability arising at any time during the term of
this Agreement, unless with reasonable accommodation Executive could
continue to perform his duties under this Agreement and making these
accommodations would not require the Bank to expend any funds. If
termination occurs under this Section 8(c), Executive or his estate
will be entitled to receive only the compensation and benefits earned
and expenses reimbursable through the date this Agreement terminated.
(d) EXECUTIVE TERMINATION WINDOW. During the period commencing with the
25th month of the Term through the 30th month of the Term, Executive
may terminate this Agreement by delivering written notice to the Bank
and to InterWest. If Executive does so, regardless of whether
Executive had Good Reason to terminate the Agreement, the Bank will
pay Executive a single cash payment in an amount equal to Executive's
W-2 income before salary deferrals over the twelve (12) months
preceding the date of termination ("Total Annual Compensation").
(e) TERMINATION RELATED TO A CHANGE IN CONTROL.
(1) TERMINATION BY BANK. If the Bank, or its successor in interest by
merger, or its transferee in the event of a purchase and
assumption transaction, (for reasons other than Executive's
death, disability, or Cause) (1) terminates Executive's
employment within one year following a Change in Control (as
defined below) or (2) terminates Executive's employment before a
Change in Control and a Change in Control occurs within nine
months after the termination, the Bank will pay Executive the
payment described in Section 8(e)(3).
(2) TERMINATION BY EXECUTIVE. If Executive terminates Executive's
employment, with or without Good Reason, within one year
following a Change in Control, the Bank will pay Executive the
payment described in Section 8(e)(3).
(3) PAYMENTS. If Section 8(e)(1) or (2) is triggered as described in
those Sections, the Bank will pay Executive a single payment in
an amount equal to his Total Annual Compensation (as defined in
Section 8(d) above).
3
<PAGE>
(f) LIMITATIONS ON PAYMENTS RELATED TO CHANGE IN CONTROL. The following
apply notwithstanding any other provision of this Agreement:
(1) the payment described in Section 8(e)(3) will be less than the
amount that would cause it to be a "parachute payment" within the
meaning of Section 280G(b)(2)(A) of the Internal Revenue Code;
and
(2) Executive's right to receive the payment described in Section
8(e)(3) terminates (i) immediately, if before the Change in
Control transaction closes, Executive terminates his employment
without Good Reason or the Bank terminates Executive's employment
for Cause, or (ii) one year after a Change in Control occurs.
(g) DEFINITION OF "CHANGE IN CONTROL". "Change in Control" means a change
"in the ownership or effective control" or "in the ownership of a
substantial portion of the assets" of InterWest, within the meaning
of section 280G of the Internal Revenue Code.
(h) RETURN OF BANK PROPERTY. If and when Executive ceases, for any
reason, to be employed by the Bank, Executive must return to the
Bank all keys, pass cards, identification cards and any other property
of the Bank or InterWest. At the same time, Executive also must return
to the Bank all originals and copies (whether in hard copy, electronic
or other form) of any documents, drawings, notes, memoranda, designs,
devices, diskettes, tapes, manuals, and specifications which
constitute proprietary information or material of the Bank or
InterWest. The obligations in this paragraph include the return of
documents and other materials which may be in Executive's desk at
work, in Executive's car or place of residence, or in any other
location under Executive's control.
9. DEFINITION OF "CAUSE". "Cause" means any one or more of the following:
(a) Willful misfeasance or gross negligence in the performance of
Executive's duties;
(b) Conviction of a crime in connection with his duties;
(c) Conduct demonstrably and significantly harmful to the Bank, as
reasonably determined by the Bank's board of directors on the advice
of legal counsel; or
(d) Permanent disability, meaning a physical or mental impairment which
renders Executive incapable of substantially performing the duties
required under this Agreement, and which is expected to continue
rendering Executive so incapable for the reasonably foreseeable
future.
10. DEFINITION OF "GOOD REASON". "Good Reason" means only any one or more of
the following:
(a) Reduction, without Executive's consent, of Executive's salary or
elimination of any compensation or benefit plan benefiting Executive,
unless the reduction or elimination is generally applicable to
substantially all similarly situated Bank employees (or employees of
a successor or controlling entity of the Bank) formerly benefited;
(b) The assignment to Executive without his consent of any authority or
duties materially inconsistent with Executive's position as of the
date of this Agreement; or
4
<PAGE>
(c) A relocation or transfer of Executive's principal place of employment
that would require Executive to commute on a regular basis more than
60 miles each way from his current business office at the Bank on the
date of this Agreement, unless Executive consents to the relocation
or transfer.
11. CONFIDENTIALITY. Executive will not, after signing this Agreement,
including during and after its Term, use for his own purposes or disclose
to any other person or entity any confidential information concerning the
Bank or InterWest or their business operations or customers, unless (1)
the Bank or InterWest consents to the use or disclosure of their respective
confidential information, (2) the use or disclosure is consistent with
Executive's duties under this Agreement, or (3) disclosure is required by
law or court order.
12. NONCOMPETITION.
(a) PARTICIPATION IN A COMPETING BUSINESS. During the Term and for
eighteen (18) months after Executive's employment with the Bank,
InterWest, or any Subsidiary of InterWest ends (regardless of whether
Executive's employment ends at the end of the Term or at some other
point after the end of the Term), Executive will not become involved
with a Competing Business or serve, directly or indirectly, a
Competing Business in any manner, including, without limitation, as a
shareholder, member, partner, director, officer, manager, investor,
organizer, "founder," employee, consultant, or agent; PROVIDED,
HOWEVER, that Executive may acquire and passively own an interest not
exceeding 2% of the total equity interest in any entity (whether or
not such entity is a Competing Business).
(b) NO SOLICITATION. During the Term and for eighteen (18) months after
Executive's employment with the Bank, InterWest, or any affiliate of
InterWest ends (regardless of whether Executive's employment ends at
the end of the Term or at some other point after the end of the
Term), Executive will not directly or indirectly solicit or attempt
to solicit (1) any employees of the Bank, InterWest, or any of
InterWest's Subsidiaries, to leave their employment or (2) any
customers of the Bank, InterWest, or any of InterWest's Subsidiaries
to remove their business from the Bank, InterWest, or any of
InterWest's Subsidiaries, or to participate in any manner in a
Competing Business. Solicitation prohibited under this Section
includes solicitation by any means, including, without limitation,
meetings, letters or other mailings, electronic communications of any
kind, and internet communications.
(c) EMPLOYMENT OUTSIDE THE WASHINGTON STATE. Nothing in this Agreement
prevents Executive from accepting employment after the end of the
Term outside Washington State from a Competing Business, as long as
Executive will not (a) act as an employee or other representative or
agent of the Competing Business within Washington State or (b) have
any responsibilities for the Competing Business' operations within
Washington State.
(d) COMPETING BUSINESS. "Competing Business" means any financial
institution or trust company that competes with, or will compete in
Washington State with, InterWest, the Bank, or any of InterWest's
Subsidiaries. The term "Competing Business" includes, without
limitation, any start-up or other financial institution or trust
company in formation.
5
<PAGE>
13. ENFORCEMENT.
(a) The Bank and Executive stipulate that, in light of all of the facts
and circumstances of the relationship between Executive and the Bank,
the agreements referred to in Sections 11 and 12 (including without
limitation their scope, duration and geographic extent) are fair and
reasonably necessary for the protection of the Bank's and InterWest's
confidential information, goodwill and other protectable interests.
If a court of competent jurisdiction should decline to enforce any of
those covenants and agreements, Executive and the Bank request the
court to reform these provisions to restrict Executive's use of
confidential information and Executive's ability to compete with the
Bank and InterWest to the maximum extent, in time, scope of
activities, and geography, the court finds enforceable.
(b) Executive acknowledges that the Bank and InterWest will suffer
immediate and irreparable harm that will not be compensable by
damages alone, if Executive repudiates or breaches any of the
provisions of Sections 11 or 12 or threatens or attempts to do so.
For this reason, under these circumstances, the Bank and InterWest,
in addition to and without limitation of any other rights, remedies
or damages available to it at law or in equity, will be entitled to
obtain temporary, preliminary, and permanent injunctions in order to
prevent or restrain the breach, and neither the Bank nor InterWest
will be required to post a bond as a condition for the granting of
this relief.
14. ADEQUATE CONSIDERATION. Executive specifically acknowledges the receipt of
adequate consideration for the covenants contained in Sections 11 and 12
and that the Bank is entitled to require him to comply with these
Sections. These Sections will survive termination of this Agreement.
Executive represents that if his employment is terminated, whether
voluntarily or involuntarily, Executive has experience and capabilities
sufficient to enable Executive to obtain employment in areas which do not
violate this Agreement and that the Bank's enforcement of a remedy by way
of injunction will not prevent Executive from earning a livelihood.
15. ARBITRATION.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with,
or relating to, this Agreement or any breach or alleged breach of
this Agreement, to arbitration under the American Arbitration
Association's rules then in effect (or under any other form of
arbitration mutually acceptable to the parties). A single arbitrator
agreed on by the parties will conduct the arbitration. If the
parties cannot agree on a single arbitrator, each party must select
one arbitrator and those two arbitrators will select a third
arbitrator. This third arbitrator will hear the dispute. The
arbitrator's decision is final (except as otherwise specifically
provided by law) and binds the parties, and either party may request
any court having jurisdiction to enter a judgment and to enforce the
arbitrator's decision. The arbitrator will provide the parties with
a written decision naming the substantially prevailing party in the
action. This prevailing party is entitled to reimbursement from the
other party for its costs and expenses, including reasonable
attorneys' fees.
(b) GOVERNING LAW. All proceedings will be held at a place designated by
the arbitrator in King County, Washington. The arbitrator, in
rendering a decision as to any state law claims, will apply Washington
law.
6
<PAGE>
(c) EXCEPTION TO ARBITRATION. Notwithstanding the above, if Executive
violates Section 11 or 12, the Bank will have the right to initiate
the court proceedings described in Section 13(b), in lieu of an
arbitration proceeding under this Section 15. The Bank may initiate
these proceedings wherever appropriate within Washington State; but
Executive will consent to venue and jurisdiction in King County,
Washington.
16 MISCELLANEOUS PROVISIONS.
(a) DEFINED TERMS. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those
terms in the Plan.
(b) ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties concerning its subject matter and supersedes all
prior agreements. Accordingly, Executive specifically waives the
terms of and all of his rights under all employment, change-in-
control and salary continuation agreements, whether written or oral,
he has previously entered into with the Bank or any of its
Subsidiaries or affiliates.
(c) BINDING EFFECT. This Agreement will bind and inure to the benefit of
the Bank's, InterWest's, and Executive's heirs, legal representatives,
successors and assigns.
(d) LITIGATION EXPENSES. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be
due under it, this party will be entitled to reimbursement from the
other party for any and all of its out-of-pocket expenses and costs
including, without limitation, reasonable attorneys' fees and costs
incurred in connection with the enforcement or collection.
(e) Waiver. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A party's
waiver of the other party's breach of any provision of this Agreement
will not operate as a waiver of any other breach by the breaching
party.
(f) COUNSEL REVIEW. Executive acknowledges that he has had the
opportunity to consult with independent counsel with respect to the
negotiation, preparation, and execution of this Agreement.
(g) Assignment. The services to be rendered by Executive under this
Agreement are unique and personal. Accordingly, Executive may not
assign any of his rights or duties under this Agreement.
(h) Amendment. This Agreement may be modified only through a written
instrument signed by both parties.
(i) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(j) GOVERNING LAW AND VENUE. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent
that certain matters may be governed by federal law. Except as
otherwise provided in Section 15(c), the parties must bring any legal
proceeding arising out of this Agreement in King County, Washington,
and the parties will submit to jurisdiction in that county.
7
<PAGE>
(k) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of
which taken together will constitute one and the same document.
Signed: January 15, 1998:
INTERWEST BANCORP, INC. PACIFIC NORTHWEST BANK
___/s/ Stephen M. Walden _____/s/ Patrick M. Fahey
By: Stephen M. Walden By: Patrick M. Fahey
Its: President Its: President
PATRICK M. FAHEY, individually
/s/ Patrick M. Fahey
PATRICK M. FAHEY
8
<PAGE>
EXHIBIT 10.3
DIRECTOR'S AGREEMENT
This Agreement, dated as of January 15, 1998, is between INTERWEST
BANCORP, INC., a Washington corporation ("InterWest") and ____________________
("Director"), a director of Pacific Northwest Bank ("Bank").
RECITALS
1. Pursuant to the terms of the Plan and Agreement of Reorganization,
dated as of January 15, 1998 ("Plan") between InterWest and the Bank, the
Bank will become the wholly owned subsidiary of InterWest.
2. InterWest's obligation to consummate the transactions contemplated
by the Plan is conditioned upon their receipt of non-competition agreements
from all directors of the Bank.
3. Director is both a director and a shareholder of the Bank.
AGREEMENT
In consideration of InterWest's performance under the Plan, Director
agrees that for a period of two years after the Effective Date, as defined in
the Plan, he or she will not, directly or indirectly, become involved in, as
a principal shareholder, director or officer, "founder," employee, or other
agent of, any financial institution or trust company that competes or will
compete with the Bank, InterWest, or any of their subsidiaries or affiliates,
within Washington State.
Director also agrees that during this two year period, Director will not
directly or indirectly solicit or attempt to solicit (1) any employees of the
Bank, InterWest, or any of their subsidiaries or affiliates, to leave their
employment or (2) any customers of the Bank, InterWest, or any of their
subsidiaries or affiliates to remove their business from the Bank, InterWest,
or any of their subsidiaries or affiliates, or to participate in any manner
in any financial institution or trust company that competes or will compete
with the Bank, InterWest, or any of their subsidiaries or affiliates, within
Washington State. Solicitation prohibited under this section includes
solicitation by any means, including, without limitation, meetings, telephone
calls, letters or other mailings, electronic communication of any kind, and
internet communications.
For purposes of this Agreement, the term "principal shareholder" means
any person who owns, directly or indirectly, five percent (5%) or more of the
outstanding shares of any class of equity security of a company.
Director recognizes and agrees that any breach of this Agreement by
Director will entitle InterWest and any of its successors or assigns to
injunctive relief and/or specific performance, as well as any other legal or
equitable remedies to which such entities may otherwise be entitled.
INTERWEST BANCORP, INC. DIRECTOR
By:____________________________ ____________________________
Its: __________________________
<PAGE>
Exhibit 10.4
DIRECTOR'S AGREEMENT
This Agreement is made and entered into as of the ____ day of February,
1998, between INTERWEST BANCORP, INC., a Washington corporation ("InterWest")
and _____________________ ("Director"), a director of Pioneer Bancorp, Inc.
("Pioneer") and/or Pioneer National Bank ("Pioneer Bank") (collectively, the
"Company").
RECITALS
1. Pursuant to the terms of the Agreement and Plan of Merger dated as
of the 4th day of February, 1998 (the "Plan") among InterWest, its wholly
owned subsidiary InterWest Bank, Pioneer and its wholly owned subsidiary,
Pioneer Bank, Pioneer will be merged into InterWest, and Pioneer Bank will
become the wholly owned subsidiary of InterWest.
2. The obligation of InterWest and InterWest Bank to consummate the
transactions contemplated by the Plan is conditioned upon their receipt of
non-competition agreements from directors of Pioneer and Pioneer Bank.
3. Director is a shareholder of Pioneer as well as a director of
Pioneer and/or Pioneer Bank.
AGREEMENT
In consideration of the performance of InterWest and InterWest Bank
under the Plan, Director agrees that for a period of three (3) years after
the Effective Date, as defined in the Plan, he or she will not, directly or
indirectly, become interested in, as a promoter, principal shareholder,
director or officer of, any financial institution that competes or will
compete with InterWest or any of its subsidiaries or their affiliates within
Yakima and/or Benton Counties in the State of Washington (the "Counties").
Director also agrees that during this three (3) year period, Director
will not directly or indirectly solicit or attempt to solicit on behalf or
for the benefit of any financial institution (i) any employees located in the
Counties of the Company, InterWest, or any of their subsidiaries or
affiliates, to leave their employment for employment with another financial
institution or (ii) any customers located in the Counties of the Company,
InterWest, or any of their subsidiaries or affiliates to remove their
business from the Company, InterWest, or any of their subsidiaries or
affiliates. Solicitation prohibited under this section includes solicitation
by any means, including, without limitation, meetings, telephone calls,
letters or other mailings, electronic communication of any kind, and internet
communications.
For purposes of this Agreement, the term "principal shareholder" means
any person who owns, directly or indirectly, five percent (5%) or more of the
outstanding shares of any voting class of equity security of a company.
<PAGE>
Director recognizes and agrees that any breach of this Agreement by
Director will entitle InterWest and InterWest Bank and any of their
successors or assigns to injunctive relief and/or specific performance, as
well as any other legal or equitable remedies to which such entities may
otherwise be entitled.
Executed as of the ____ day of February, 1998.
INTERWEST BANCORP, INC. DIRECTOR
By:
------------------------------ --------------------------------
Its:
-----------------------------
<PAGE>
APPROVAL BY DIRECTORS OF
PACIFIC NORTHWEST BANK
The undersigned, all of the members of the Board of Directors of Pacific
Northwest Bank (the "Bank"), approve the roregoing Plan and, except as
otherwise required by applicable law, including, without limitation, their
fiduciary duties to the Bank's shareholders, agree to (a) vote their shares in
favor of the transactions contemplated by the Plan, (b) recommend to the
shareholders of the Bank that they approve the Plan, and (c) refrain from any
actions or omissions inconsistent with such transactions or recommendation.
/s/ William Bain, Jr. /s/ James P. Crutcher
- ------------------------- -------------------------
William Bain, Jr. James P. Crutcher
/s/ Patrick M. Fahey /s/ Robert E. Hartley
- ------------------------- -------------------------
Patrick M. Fahey Robert E. Hartley
/s/ William G. Lucks /s/ Douglas A. Swerland
- ------------------------- -------------------------
William G. Lucks Douglas A. Swerland
/s/ Betty Woods
- -------------------------
Betty Woods
<PAGE>
APPROVAL BY DIRECTORS OF
PIONEER BANCORP, INC.
The undersigned, all of the members of the Board of Directors of Pioneer
Bancorp, Inc. (the "Company"), approve the Agreement and Plan of Merger,
dated February 4, 1998 (the "Plan") between InterWest Bancorp, Inc.,
InterWest Bank, the Company, and Pioneer National Bank, and, except as
otherwise required by applicable law, including without limitation their
fiduciary duties to the Company's shareholders, agree to (a) vote their
shares in favor of the transactions contemplated by the Plan, (b) recommend
to the shareholders of the Company that they approve the Plan, and (c)
refrain from any actions or omissions inconsistent with such transactions or
recommendation.
This Approval may be executed in one or more facsimile counterparts,
each of which shall be deemed an original, but all of which taken together
will constitute one and the same document.
/s/ Donald H. Ballew, MD /s/ Ed Kershaw
- ------------------------ -------------------
Donald H. Ballew, M.D. Ed Kershaw
/s/ Joanne Almon /s/ Robert P. Lewis
- ------------------------ -------------------
Joanne Almon Robert P. Lewis
/s/ Paul L. Campbell /s/ Robert R. Lynch
- ------------------------ -------------------
Paul L. Campbell Robert R. Lynch
/s/ Ardell Curtis /s/ Sandra Matheson
- ------------------------ -------------------
Ardell Curtis Sandra Matheson
/s/ William Doyle /s/ Eugene Shields
- ------------------------ -------------------
William Doyle Eugene Shields
/s/ Robert Hall /s/ Melvin G. Wagner
- ------------------------ -------------------
Robert Hall Melvin G. Wagner
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
INTERWEST BANCORP, INC.
<TABLE>
<CAPTION>
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership Incorporation
- ----------------------- ------------- ----------------
<S> <C> <C>
InterWest Bank 100% Washington
First National Bank of Port
Orchard 100% Washington
InterWest Financial Services, Inc. (b) 100% Washington
InterWest Insurance Agency, Inc. (c) 70% Washington
InterWest Properties, Inc. (b) 100% Washington
I & B, Inc. (c) 90% Washington
Island Beach of Washington, Inc.
and Beach Club (b) 100% Washington
Islander Resort (d) 100% Florida
CI Resorts Equity Corp. (b) 100% Washington
Cornerstone Northwest Mortgage, Inc. (b) 100% Washington
____________________
</TABLE>
(a) The operation of Bancorp's wholly owned subsidiaries are included in
Bancorp's Financial Statements contained in the Annual Report attached
hereto as Exhibit 13.
(b) Wholly-owned subsidiary of InterWest Bank.
(c) Interest owned by InterWest Bank.
(d) Wholly-owned by Island Beach of Washington, Inc. and Beach Club.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of InterWest Bancorp,
Inc. for the registration of its shares of common stock related to the planned
mergers with Pacific Northwest Bank and Pioneer Bancorp, Inc. and to the
incorporation by reference therein of our report dated October 30, 1997, with
respect to the consolidated financial statements of InterWest Bancorp, Inc.
included in its Annual Report (Form 10-K) for the year ended September 30, 1997,
filed with the Securities and Exchange Commission, and to the use of our report
dated January 30, 1998 with respect to the financial statements of Pacific
Northwest Bank for the year ended December 31, 1997 included therein.
ERNST & YOUNG LLP
/s/Ernst & Young LLP
Seattle, Washington
April 1, 1998
<PAGE>
Exhibit 23.5
INDEPENDENT AUDITOR'S CONSENT
- -------------------------------------------------------------------------------
Board of Directors
InterWest Bancorp, Inc.
Oak Harbor, Washington
We consent to the Incorporation by reference in this Registration Statement of
InterWest Bancorp, Inc. on Form S-4 of our report dated January 19, 1996
(relating to the consolidated statements of operations, stockholders' equity
and cash flows of Central Bancorporation and subsidiaries for the year ended
December 31, 1995, not presented separately herein) appearing in the
Annual Report on Form 10-K of InterWest Bancorp, Inc. for the year ended
September 30, 1997, and to the reference to us under the heading "Experts" in
the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Seattle, Washington
April 1, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 or our
report dated January 26, 1998, on our audit of the financial statements of
Pioneer Bancorp, Inc. as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997. We also consent to the reference to
our Firm under the caption "Experts" only to the extent that it relates to our
report on our audits of the Pioneer Bancorp, Inc.
financial statements referred to above.
MOSS ADAMS LLP
/s/ Moss Adams
Yakima, Washington
April 1, 1998
<PAGE>
SECRETARY'S CERTIFICATE
I certify that I am the Secretary of INTERWEST BANCORP, INC., located in
Oak Harbor, State of Washington ("InterWest"), and that I have been duly elected
and am presently serving in that capacity in accordance with the Bylaws of
InterWest.
I further certify that:
1. Attached as Exhibit A is a full, true and correct copy of resolutions
passed and adopted by a majority of the Board of Directors of Bancorp at a
meeting of the Board duly held and convened on January 20, 1998.
The attached resolutions are in full force and effect and have not been
revoked or rescinded as of the date hereof.
IN WITNESS WHEREOF, I have affixed my signature as of this 1st day of
April, 1998.
/s/ Margaret Mordhorst
-----------------------------------
Margaret Mordhorst, Secretary
<PAGE>
RESOLUTIONS
OF THE
BOARD OF DIRECTORS
OF
INTERWEST BANCORP, INC.
(FOR MEETING OF JANUARY 20, 1998)
1. The Board of Directors ("Board") of InterWest Bancorp, Inc. ("InterWest"),
has considered and discussed the acquisition of Pacific Northwest Bank (the
"Acquisition"), a Washington banking corporation headquartered in Seattle,
Washington ("Pacific") (also referred to as Project Belltown).
2. On December 15, 1997, the Board authorized management to prepare,
negotiate, execute and deliver (with the advice of its advisors) a definitive
agreement with Pacific, consistent with the Term Sheet developed between the
parties (the "Agreement"), and the Board further authorized management to
prepare, negotiate, execute and deliver (with the advice of its advisors) such
additional agreements and documents as were necessary to cause the proper
execution of the Agreement, including a stock option agreement with Pacific (the
"Option Agreement") and an employment agreement with Patrick M. Fahey (the
"Fahey Employment Agreement").
3. The Board deems it best to ratify the actions previously taken in
connection with its authorization of the Acquisition.
RESOLUTIONS
[RATIFICATION OF PREVIOUS ACTS]
A. The Board's action in authorizing the preparation and negotiation of
the Acquisition Agreement is ratified.
B. The Board's action in authorizing the Proper Officers, or any one of
them, to execute and deliver the Agreement, consistent with the Term Sheet,
is ratified.
C. The Board's action in authorizing the preparation, execution and
delivery of the Option Agreement is ratified.
D. The Board's action in authorizing the preparation, execution and
delivery of the Fahey Employment Agreement is ratified.
[AMENDMENTS TO ACQUISITION AGREEMENT]
E. The Proper Officers or the Executive Committee of the Board (as
appropriate) are authorized to make and approve, upon the advice of legal
counsel, such amendments to the Agreement that are deemed necessary to
assure that the transactions contemplated by
1
<PAGE>
the Agreement will be tax-free, such action to be construed as the approval
of the full Board of Directors; the Proper Officers are authorized and
empowered to execute and deliver such amendments to the Agreement.
[PREPARATION OF APPLICATIONS AND REGISTRATION]
F. The Proper Officers are authorized and directed to prepare and file,
with the assistance of legal counsel and independent accountants, all
necessary applications, notices, waivers, agreements and other related
documents, as appropriate, with applicable federal and state regulatory
authorities having jurisdiction over the proposed transaction as such
officers, on the advice of counsel, deem necessary or appropriate to comply
with applicable statutes, rules and regulations.
G. The Proper Officers are authorized and directed to prepare and file,
with the assistance of legal counsel and independent accountants, with the
Securities and Exchange Commission ("SEC"), a Registration Statement on
Form S-4 (the "Registration Statement"), and all exhibits, amendments,
supplements, and other related documents, as shall be necessary to cause
the Registration Statement to become effective.
[POWER OF ATTORNEY]
H. Each officer of InterWest who may be required to sign and execute the
Registration Statement or any amendment thereto or related documents, is
authorized to execute a Power of Attorney, appointing the Proper Officers
or any of them individually, to act as his/her true and lawful attorney or
attorneys, to sign in his/her name, place and stead, in any such capacity,
the Registration Statement and all amendments and other related documents,
and to file the same with the SEC.
[MISCELLANEOUS]
I. For purposes of these Resolutions, the Proper Officers of InterWest
are Stephen M. Walden, President and Chief Executive Officer and H. Glenn
Mouw, Executive Vice President and Chief Financial Officer, and Gary M.
Bolyard, Vice-Chairman.
J. The Proper Officers, or any of them acting alone, are authorized and
directed to take such other actions as may be necessary, advisable,
convenient, or proper to carry out the intent of these Resolutions, to
fully perform the provisions of the Agreement (including the execution of
any necessary or appropriate consents), and to comply with all applicable
laws, rules and regulations.
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1996 OCT-01-1996 OCT-01-1996 OCT-01-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<CASH> 45,834 41,529 34,151 40,073
<INT-BEARING-DEPOSITS> 159,564 20,664 10,905 9,797
<FED-FUNDS-SOLD> 0 0 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 511,354 433,782 463,450 377,365
<INVESTMENTS-CARRYING> 119,993 142,436 144,052 205,664
<INVESTMENTS-MARKET> 117,071 138,226 139,159 200,077
<LOANS> 1,114,711 1,102,128 1,047,296 993,655
<ALLOWANCE> 8,667 8,619 8,510 8,430
<TOTAL-ASSETS> 2,046,705 1,832,582 1,771,523 1,703,244
<DEPOSITS> 1,171,440 1,173,989 1,176,117 1,154,774
<SHORT-TERM> 526,362 371,321 462,882 194,025
<LIABILITIES-OTHER> 14,364 12,535 11,840 12,526
<LONG-TERM> 204,715 150,537 75,204 225,847
0 0 0 0
0 0 0 0
<COMMON> 1,614 1,611 1,609 1,605
<OTHER-SE> 128,210 122,589 117,183 114,467
<TOTAL-LIABILITIES-AND-EQUITY> 2,046,705 1,832,582 1,771,523 1,703,244
<INTEREST-LOAN> 92,899 68,099 44,451 22,181
<INTEREST-INVEST> 43,334 31,385 20,684 10,458
<INTEREST-OTHER> 1,778 1,450 1,160 473
<INTEREST-TOTAL> 138,011 100,934 66,295 33,112
<INTEREST-DEPOSIT> 51,706 38,323 25,321 12,517
<INTEREST-EXPENSE> 80,903 58,482 38,077 19,069
<INTEREST-INCOME-NET> 57,108 42,452 28,218 14,043
<LOAN-LOSSES> 1,000 800 600 300
<SECURITIES-GAINS> 516 391 297 322
<EXPENSE-OTHER> 39,765 28,530 18,960 9,528
<INCOME-PRETAX> 31,057 22,991 15,105 7,474
<INCOME-PRE-EXTRAORDINARY> 20,299 15,057 9,916 4,952
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 20,299 15,057 9,916 4,952
<EPS-PRIMARY> 2.53 1.88 1.24 0.62
<EPS-DILUTED> 2.48 1.84 1.21 0.61
<YIELD-ACTUAL> 3.35 3.41 3.45 3.49
<LOANS-NON> 4,857 4,790 5,587 5,252
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 8,074 8,074 8,074 8,074
<CHARGE-OFFS> 762 505 328 78
<RECOVERIES> 355 250 164 134
<ALLOWANCE-CLOSE> 8,667 8,619 8,510 8,430
<ALLOWANCE-DOMESTIC> 4,479 8,619 8,510 8,430
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 4,188 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996 SEP-30-1996
<PERIOD-START> OCT-01-1995 OCT-01-1995 OCT-01-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 36,983 22,322 62,473
<INT-BEARING-DEPOSITS> 11,518 0 0
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 368,123 336,060 395,147
<INVESTMENTS-CARRYING> 237,436 182,094 89,778
<INVESTMENTS-MARKET> 230,896 174,119 89,778
<LOANS> 984,045 806,529 759,787
<ALLOWANCE> 8,074 4,876 4,748
<TOTAL-ASSETS> 1,712,151 1,413,926 1,368,548
<DEPOSITS> 1,120,743 887,385 892,722
<SHORT-TERM> 334,798 153,319 373,107
<LIABILITIES-OTHER> 19,890 9,571 8,601
<LONG-TERM> 125,699 267,312 0
0 0 0
0 0 0
<COMMON> 1,592 1,299 1,299
<OTHER-SE> 109,429 95,040 92,819
<TOTAL-LIABILITIES-AND-EQUITY> 1,712,151 1,413,926 1,368,548
<INTEREST-LOAN> 82,925 51,579 34,128
<INTEREST-INVEST> 35,186 23,487 15,508
<INTEREST-OTHER> 2,802 1,655 690
<INTEREST-TOTAL> 120,913 76,721 50,326
<INTEREST-DEPOSIT> 48,166 31,495 21,200
<INTEREST-EXPENSE> 68,808 45,800 30,468
<INTEREST-INCOME-NET> 52,105 30,921 19,858
<LOAN-LOSSES> 1,960 760 550
<SECURITIES-GAINS> 531 531 559
<EXPENSE-OTHER> 43,819 20,497 13,080
<INCOME-PRETAX> 18,879 17,172 11,115
<INCOME-PRE-EXTRAORDINARY> 12,771 11,259 7,320
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,771 11,259 7,320
<EPS-PRIMARY> 1.62 1.75 1.14
<EPS-DILUTED> 1.58 1.72 1.12
<YIELD-ACTUAL> 3.53 3.38 3.33
<LOANS-NON> 3,165 2,079 2,900
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 6,078 4,283 4,283
<CHARGE-OFFS> 360 167 85
<RECOVERIES> 396 0 0
<ALLOWANCE-CLOSE> 8,074 4,876 4,748
<ALLOWANCE-DOMESTIC> 8,074 4,876 4,748
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<PAGE>
Exhibit 99.3
REVOCABLE PROXY OF PACIFIC NORTHWEST BANK
- -------------------------------------------------------------------------------
SPECIAL MEETING OF SHAREHOLDERS
, 1998
-----------------
- -------------------------------------------------------------------------------
The undersigned hereby appoints Kim S. Brace and David H. Straus and
each of them (with full power to act alone) as proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as
designated below, all the shares of common stock, $1.00 par value, of Pacific
Northwest Bank held of record by the undersigned on___________, 1998, at the
Special Meeting of Shareholders to be held at the Seattle Financial Center of
the Pacific, 111 Third Avenue, Seattle Washington on ______________,
______________, 1998, at __:00 __.m., local time, and at any and all
adjournments of such Meeting, as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. A proposal to approve the merger FOR AGAINST ABSTAIN
among InterWest Bancorp, Inc., [ ] [ ] [ ]
Pacific Northwest Bank and New
Pacific Northwest Bank pursuant
to the Amended and Restated
Agreement and Plan of Merger
dated as of January 15, 1998.
2. Whatever other business may
properly be brought before the
Special Meeting or any adjournment.
</TABLE>
The Board of Directors recommends a vote "FOR" the above proposal.
- -------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING. HOWEVER, IF ANY
OTHER MATTERS ARE PROPERLY PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED
IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT.
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Special
Meeting or at any adjournment thereof, and after notifying the Secretary of
Pacific Northwest Bank at or prior to the Special Meeting of your decision to
terminate this proxy, then the power of said attorneys and proxies shall be
deemed terminated and of no further force and effect.
The undersigned acknowledges receipt from Pacific Northwest Bank
prior to the execution of this proxy of Notice of the Meeting and the
Prospectus/Proxy Statement dated .
--------------
Dated: , 1998
-------------------
<PAGE>
-----------------------------------------
PRINT NAME OF SHAREHOLDER(S)
(As it appears on Stock Certificate)
- ------------------------ -------------------------
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
No. of Shares Owned:
-----------
* * * * *
Please sign exactly as your name appears on this proxy card and
complete the number of shares owned. When signing as attorney,
executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder must sign.
- -------------------------------------------------------------------------------
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE
ENCLOSED, POSTAGE-PREPAID ENVELOPE.
- -------------------------------------------------------------------------------
<PAGE>
REVOCABLE PROXY OF PIONEER BANCORP, INC.
- -------------------------------------------------------------------------------
SPECIAL MEETING OF SHAREHOLDERS
, 1998
-----------------
- -------------------------------------------------------------------------------
The undersigned hereby appoints ___________and ____________, and each
of them (with full power to act alone) as proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, all the shares of common stock, no par value, of Pioneer Bancorp, Inc.
held of record by the undersigned on___________, 1998, at the Special Meeting of
Shareholders to be held at _____________________, ___________, Washington
on______________, ______________, 1998, at __:00 __.m., local time, and at any
and all adjournments of such Meeting, as follows:
1. A proposal to approve the merger FOR AGAINST ABSTAIN
among InterWest Bancorp, Inc., [ ] [ ] [ ]
InterWest Savings Bank, Pioneer
Bancorp, Inc. and Pioneer National
Bank pursuant to the Agreement and
Plan of Merger dated as of February 4,
1998.
2. Whatever other business may properly
be brought before the Special
Meeting or any adjournment.
The Board of Directors recommends a vote "FOR" the above proposal.
- -------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING. HOWEVER, IF ANY OTHER MATTERS ARE
PROPERLY PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT.
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Special
Meeting or at any adjournment thereof, and after notifying the Secretary of
Pioneer Bancorp, Inc. at or prior to the Special Meeting of your decision to
terminate this proxy, then the power of said attorneys and proxies shall be
deemed terminated and of no further force and effect.
The undersigned acknowledges receipt from Pioneer Bancorp, Inc. prior
to the execution of this proxy of Notice of the Meeting and the Prospectus/Proxy
Statement dated ______________.
Dated: _____________________, 1998
<PAGE>
-----------------------------------------
PRINT NAME OF SHAREHOLDER(S)
(As it appears on Stock Certificate)
- ------------------------ ------------------------
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
No. of Shares Owned:
o o o o o
Please sign exactly as your name appears on this proxy card and
complete the number of shares owned. When signing as attorney,
executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder must sign.
- -------------------------------------------------------------------------------
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE
ENCLOSED, POSTAGE-PREPAID ENVELOPE.
- -------------------------------------------------------------------------------
<PAGE>
Exhibit 99.5
RULE 438 CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as amended,
the undersigned hereby consents to being named as a prospective director of
InterWest Bancorp, Inc. ("InterWest") in the Registration Statement on Form
S-4 filed by InterWest with the Securities and Exchange Commission on April
1, 1998.
/s/ Patrick M. Fahey
--------------------
Patrick M. Fahey
March 25, 1998
--------------------
Date Signed
