<PAGE>
KITTITAS VALLEY BANCORP, INC.
ELLENSBURG, WASHINGTON
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Kittitas Valley Bancorp, Inc. ("KVB") to be held on August , 1998. The meeting
will be held at the Hal Holmes Community Center, 201 North Ruby in Ellensburg,
Washington and will begin promptly at 7:00 p.m. local time. The Notice of
Special Meeting of Shareholders and the Prospectus/Proxy Statement that appear
on the following pages describe the business that will take place at the
meeting.
At the meeting, you will be asked to vote on an Agreement and Plan of Merger
dated as of April 20, 1998 between KVB, Kittitas Valley Bank, N.A. ("KV Bank")
and InterWest Bancorp, Inc. ("InterWest"). The Merger Agreement provides that
KVB will be merged with InterWest and that, thereafter, KV Bank will operate as
a wholly-owned subsidiary of InterWest. Upon consummation of the merger, each
share of KVB Common Stock will be converted into the right to receive either
$72.00 in cash (the "Cash Distribution"), 1.714 shares of InterWest Common Stock
(the "Stock Distribution"), or a combination of both the Cash Distribution and
the Stock Distribution.
Under the Merger Agreement, each KVB shareholder has the opportunity to
elect whether to receive the Cash Distribution, the Stock Distribution, or both
for each share of KVB Common Stock that you own, subject to the proration
procedures described in the attached Prospectus/Proxy Statement. The allocation
of cash and shares of InterWest Common Stock that you receive will depend upon
the stated preferences of KVB shareholders and the proration procedures to be
applied. Enclosed on yellow paper is the Form of Election for KVB shareholders
to complete. To make an election, you must complete the Form of Election and
return the Form of Election, along with your Proxy, to KVB at or prior to the
special meeting. You are urged to review carefully the enclosed Prospectus/Proxy
Statement, which contains a more complete description of the terms of the merger
and the election and proration procedures. You should note that the federal
income tax consequences of the merger to you will depend upon whether you
receive cash, stock or a combination of cash and stock in exchange for your
shares of KVB Common Stock.
The Board of Directors of KVB has unanimously approved the Merger Agreement
and recommends that you vote for the approval of the Merger Agreement. Approval
of the Merger Agreement requires the affirmative vote of 75% of the outstanding
shares of KVB Common Stock.
It is very important that your shares be represented at the meeting.
Regardless of whether you plan to attend in person, a failure to vote, either by
not returning the enclosed Proxy or by checking the "abstain" box on the Proxy
will have the same effect as a vote against approval of the Merger Agreement. To
assure that your shares are represented in voting on this very important matter,
please sign, date and return the enclosed blue Form of Proxy in the enclosed
postage-prepaid envelope whether or not you plan to attend the meeting. If you
do attend, you may, if you wish, revoke your Proxy and vote your shares in
person at the meeting. Also, please return your Form of Election with your
Proxy.
The Board of Directors believes this transaction is in the best interest of
KVB and its shareholders. On behalf of the Board of Directors, I urge you to
vote for approval of the Merger Agreement.
Sincerely,
Date: July 16, 1998 Steven F. Halverson,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Kittitas Valley Bancorp, Inc.
101 WEST 8TH STREET, ELLENSBURG, WASHINGTON 98926 TELEPHONE: 509/925-3000
<PAGE>
KITTITAS VALLEY BANCORP, INC.
101 WEST 8TH STREET
ELLENSBURG, WASHINGTON 98926
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
---------------------
Notice is hereby given that a Special Meeting of Shareholders of Kittitas
Valley Bancorp, Inc. ("KVB") will be held at the Hal Holmes Community Center,
201 North Ruby, Ellensburg, Washington, on Monday, August 24, 1998 at 7:00 p.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger dated as of April 20, 1998 (the "Merger Agreement") by and
between KVB, Kittitas Valley Bank, N.A. and InterWest Bancorp, Inc.
("InterWest"). Pursuant to the Merger Agreement, KVB will merge into
InterWest and each outstanding share of KVB Common Stock will be
converted into the right to receive either $72.00 in cash, 1.714 shares
of InterWest Common Stock or a combination of cash and stock, all on and
subject to the terms and conditions contained in the Merger Agreement.
2. To consider and act upon such matters as may properly come before the
meeting or any adjournments thereof.
Only those shareholders of record at the close of business on July 20, 1998
shall be entitled to notice of, and to vote at, the meeting or any adjournments
of the meeting. The affirmative vote of the holders of 75% of the outstanding
shares of KVB Common Stock is required for approval of the Merger Agreement.
KVB SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM THE MERGER AND OBTAIN
PAYMENT OF THE FAIR VALUE OF THEIR SHARES OF KVB COMMON STOCK UNDER THE
APPLICABLE PROVISIONS OF WASHINGTON LAW. IN ORDER TO PERFECT DISSENTERS' RIGHTS,
KVB SHAREHOLDERS MUST SEND A NOTICE TO KVB BEFORE THE SPECIAL MEETING ON AUGUST
24, 1998 AND MUST NOT VOTE IN FAVOR OF THE MERGER BY PROXY OR OTHERWISE. A copy
of the applicable Washington statutory provisions regarding dissenters' rights
is set forth in Appendix C to the accompanying Prospectus/ Proxy Statement and a
summary of such provisions is set forth under "THE MERGER--Dissenters' Rights of
Appraisal" beginning on page 29. Further information regarding voting rights and
the business to be transacted at the meeting is given in the accompanying
Prospectus/Proxy Statement.
THE BOARD OF DIRECTORS OF KVB UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors
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Ellensburg, Washington
---------------------------------------------
John E. Ludtka
July 16, 1998 SECRETARY
</TABLE>
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 PROPERLY RETURN
THE ACCOMPANYING BLUE FORM OF PROXY ALONG WITH THE YELLOW FORM OF ELECTION USING
THE ENCLOSED POSTAGE-PREPAID ENVELOPE. IF YOU ARE A RECORD SHAREHOLDER AND 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>
PROXY STATEMENT
KITTITAS VALLEY BANCORP, INC.
--------------------------
PROSPECTUS
INTERWEST BANCORP, INC. COMMON STOCK ($.20 PAR VALUE)
--------------------------
This Prospectus/Proxy Statement is being furnished to holders of common
stock, $1.00 par value per share ("KVB Common Stock") of Kittitas Valley
Bancorp, Inc. ("KVB"), a Washington corporation, in connection with the
solicitation of proxies by the Board of Directors of KVB for use at the KVB
Special Shareholders Meeting to be held on August 24 at 7:00 p.m. local time, at
the Hal Holmes Community Center, 201 North Ruby, Ellensburg, Washington, and at
any adjournments or postponements of such meeting. KVB shareholders will vote
upon a proposal to approve the merger (the "Merger") of KVB with and into
InterWest Bancorp, Inc. ("InterWest"), a Washington corporation, on the terms
described in the Agreement and Plan of Merger dated as of April 20, 1998 among
KVB, Kittitas Valley Bank, N.A., the wholly-owned subsidiary of KVB ("KV Bank")
and InterWest (the "Merger Agreement"). The Merger Agreement is incorporated
into this Prospectus/Proxy Statement by reference and is attached as APPENDIX A.
When the Merger becomes effective, each outstanding share of KVB Common
Stock will be converted into the right to receive, at the election of the
holder, either (i) $72.00 in cash ("Cash Distribution"), (ii) 1.714 shares of
InterWest Common Stock ("Stock Distribution"), or (iii) a combination of the
Cash Distribution and the Stock Distribution. However, the Merger Agreement
provides that the total consideration to be paid by InterWest in the Merger will
be evenly divided (50/50) between the Cash Distribution and the Stock
Distribution. Therefore, depending on the elections made by all KVB
shareholders, the election of each individual KVB shareholder may be adjusted,
as necessary, to achieve the 50/50 allocation. See "THE MERGER--Basic Terms of
the Merger."
Each KVB shareholder must elect whether he or she desires to receive the
Cash Distribution, the Stock Distribution, or a combination, on the Form of
Election provided with this Prospectus/Proxy Statement, not later than 7:00 p.m.
on August 24, 1998 (the "Election Deadline"), which is also the date of the KVB
Special Shareholders Meeting. If a shareholder fails to properly make an
election at or prior to the Election Deadline, his or her shares of KVB Common
Stock will be considered "Non-Election Shares" and such shareholder will have no
choice as to whether he or she will receive the Cash Distribution or the Stock
Distribution for his or her shares. See "THE MERGER--Basic Terms of the Merger"
and "--Election Procedures."
InterWest Common Stock trades on the Nasdaq National Market under the symbol
"IWBK". The reported sales price for the InterWest Common Stock was $44.81 per
share on July 14, 1998, the most recent date for which it was practicable to
obtain information prior to the printing of this Prospectus/Proxy Statement. KVB
Common Stock does not trade on any market, thus no current market price is
available. See "STOCK PRICE AND DIVIDEND INFORMATION."
This Prospectus/Proxy Statement also constitutes the Prospectus of InterWest
filed as part of a Registration Statement on Form S-4 with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the
"1933 Act"), relating to shares of the InterWest Common Stock to be issued in
the Merger. KVB shareholders desiring to do so may dissent from the Merger and
obtain payment for their shares in accordance with the provisions of the
Washington statute, RCW 23B.13, a copy of which is included in this
Prospectus/Proxy Statement as APPENDIX C. For a description of certain
significant considerations in connection with the Merger, see "THE MERGER--Basic
Terms of the Merger;" "--Dissenters' Rights of Appraisal"; "--Conditions to the
Merger"; and "--Interests of Certain Persons in the Merger."
THIS PROSPECTUS/PROXY STATEMENT DOES NOT COVER ANY RESALE OF THE SECURITIES
TO BE RECEIVED BY SHAREHOLDERS OF KVB UPON CONSUMMATION OF THE MERGER, AND NO
PERSON IS AUTHORIZED TO MAKE ANY USE OF THIS PROSPECTUS/PROXY IN CONNECTION WITH
ANY SUCH RESALE.
THE SHARES OF INTERWEST COMMON STOCK ISSUABLE IN THE MERGER ARE NOT SAVINGS
OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED
BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR
INSTRUMENTALITY.
THE SHARES OF INTERWEST COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus/Proxy Statement is July 16, 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. KVB is not subject to the information and reporting requirements of the
1934 Act.
Under the rules and regulations of the SEC, the solicitation of shareholders
to approve the Merger constitutes an offering of the InterWest Common Stock to
be issued in conjunction with the Merger. InterWest has filed a Registration
Statement with the SEC under the 1933 Act covering the InterWest Common Stock to
be issued in connection with the Merger. The Registration Statement and the
exhibits thereto, as well as the reports, proxy statements, and other
information filed with the SEC by InterWest under the 1934 Act may be inspected
and copied at prescribed rates at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at 7 World Trade Center,
Thirteenth Floor, New York, New York 10048, and at The Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of materials
filed by InterWest with the SEC may also be obtained through the Commission's
Internet address at http://www.sec.gov. In addition, materials filed by
InterWest are available for inspection at the offices of The Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus/Proxy Statement constitutes part of the Registration
Statement (File No. 333-57861) filed by InterWest with the SEC under the 1933
Act. This Prospectus/Proxy Statement omits certain information contained in the
Registration Statement in accordance with the rules and regulations of the SEC.
Reference is made hereby to the Registration Statement and related exhibits for
further information with respect to InterWest and the InterWest Common Stock.
Statements contained herein or in any document incorporated herein by reference
as to the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document incorporated herein by reference.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by InterWest with the SEC (File Number
0-20288) under the 1934 Act are incorporated by reference herein:
1. InterWest's Annual Report on Form 10-K for the year ended September 30,
1997 ("InterWest 1997 10-K");
2. InterWest's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1997 and March 31, 1998, ("InterWest 10-Qs");
3. InterWest's Annual Meeting Proxy Statement for the 1998 Annual Meeting
of Shareholders ("InterWest 1998 Proxy").
4. InterWest's Current Reports on Form 8-K filed during the fiscal year
1998.
All documents filed by InterWest under Sections 13(a), 13(c), 14 and 15(d)
of the 1934 Act after the date of this Prospectus/Proxy Statement and before the
KVB Special Meeting are incorporated by reference and are a part of this
Prospectus/Proxy Statement from each document's date of filing. Any statement
contained in a document incorporated by reference as modified or superseded for
purposes hereof to the extent that a statement contained herein or in any other
subsequently filed document that also is incorporated by reference herein
modifies or supersedes that statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement incorporates by reference documents that are
not presented herein of delivered herewith. These documents (other than exhibits
to such documents, unless such exhibits are
<PAGE>
specifically incorporated by reference into such documents) are available,
without charge, to each person, including any beneficial owner, to whom a copy
of this Prospectus/Proxy Statement is delivered. Requests for such copies should
be directed to Margaret Mordhorst, Corporate Secretary, InterWest Bancorp, Inc.,
275 S.E. Pioneer Way, Oak Harbor, Washington 98227, (360) 679-4181.
------------------------
All information contained in this Prospectus/Proxy Statement relating to
InterWest has been furnished by InterWest, and KVB is relying upon the accuracy
of that information. All information contained in this Prospectus/Proxy
Statement relating to KVB has been furnished by KVB, and InterWest is relying
upon the accuracy of that information.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY EITHER INTERWEST OR BANCORP. THIS PROSPECTUS/PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER,
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION
OF THE SECURITIES OFFERED UNDER THE TERMS OF THIS PROSPECTUS/PROXY STATEMENT
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF BANCORP,
INTERWEST OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS/PROXY STATEMENT.
<PAGE>
TABLE OF CONTENTS
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GLOSSARY OF CERTAIN KEY TERMS.............................................................................. G-1
SUMMARY.................................................................................................... 1
EQUIVALENT PER COMMON SHARE DATA........................................................................... 10
KVB SPECIAL SHAREHOLDERS MEETING........................................................................... 12
Date, Time, Place and Purpose............................................................................ 12
Shares Outstanding and Entitled to Vote; Record Date..................................................... 12
Vote Required............................................................................................ 12
Voting, Solicitation, and Revocation of Proxies.......................................................... 12
BACKGROUND OF AND REASONS FOR THE MERGER................................................................... 13
Background of the Merger................................................................................. 13
Reasons For The Merger--KVB.............................................................................. 13
Recommendation of the KVB Board.......................................................................... 14
Opinion of KVB Financial Advisor......................................................................... 14
Reasons For The Merger--InterWest........................................................................ 16
THE MERGER................................................................................................. 17
Basic Terms of the Merger (CONTAINS EXAMPLE OF ALLOCATION)............................................... 17
Election Procedures...................................................................................... 18
Allocation Procedures.................................................................................... 19
Mechanics of the Merger.................................................................................. 20
Effective Date of the Merger............................................................................. 20
Exchange of KVB Stock Certificates....................................................................... 20
Conditions to Consummation of the Merger; Regulatory Approvals........................................... 21
KVB Stock Option Agreement............................................................................... 22
Amendment or Termination................................................................................. 22
Conduct of Business Pending the Merger................................................................... 23
Directors and Executive Officers After the Merger........................................................ 23
Employee Benefit Plans................................................................................... 24
Interests of Certain Persons in the Merger............................................................... 24
Federal Income Tax Consequences of the Merger............................................................ 25
Accounting Treatment of the Merger....................................................................... 28
Dissenters' Rights of Appraisal.......................................................................... 28
Resale of InterWest Common Stock......................................................................... 29
No Solicitation.......................................................................................... 30
Expenses................................................................................................. 30
INTERWEST PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................ 31
BUSINESSES OF THE PARTIES TO THE MERGER.................................................................... 38
KVB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 41
MANAGEMENT OF KVB.......................................................................................... 50
Directors and Executive Officers......................................................................... 50
Security Ownership of Management and Certain Beneficial Owners........................................... 51
MANAGEMENT OF INTERWEST.................................................................................... 52
SUPERVISION AND REGULATION................................................................................. 52
DESCRIPTION OF INTERWEST CAPITAL STOCK..................................................................... 59
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COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST AND KVB COMMON STOCK.................................. 60
CERTAIN LEGAL MATTERS...................................................................................... 65
EXPERTS.................................................................................................... 65
OTHER MATTERS.............................................................................................. 66
FINANCIAL STATEMENTS OF KVB................................................................................ F-1
APPENDIX A--Agreement and Plan of Merger
APPENDIX B--Stock Option Agreement between InterWest and KVB
APPENDIX C-- RCW 23B.13 of the Revised Code of Washington (Dissenters' Rights of Appraisal under
Washington law)
APPENDIX D--Opinion of Southard Financial
</TABLE>
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GLOSSARY OF CERTAIN KEY TERMS
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1933 Act...................... The Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
1934 Act...................... The Securities Exchange Act of 1934, as amended, and
related rules and regulations.
BHCA.......................... The Bank Holding Company Act of 1956, as amended.
Board......................... Board of Directors.
Closing....................... The closing of the Merger transaction contemplated in the
Merger Agreement.
Code.......................... The Internal Revenue Code of 1986, as amended.
Dissenting Shares............. Those shares of KVB Common Stock with respect to which
KVB's shareholders have perfected their dissenters' rights
under Washington law.
Election Deadline............. August 24, 1998 at 7:00 p.m., the date and time after KVB
shareholders will not be entitled to make or change their
elections as to the Merger Consideration they desire to
receive.
Effective Date................ The date Closing of the Merger will occur.
Excluded Shares............... Shares of KVB Common Stock that are either (i) Dissenting
Shares, or (ii) shares held by InterWest or KVB, other than
in a fiduciary capacity or in satisfaction of a debt
previously contracted.
FDIC.......................... The Federal Deposit Insurance Corporation.
FRB........................... The Board of Governors of the Federal Reserve System.
GAAP.......................... Generally accepted accounting principles.
InterWest Common Stock........ InterWest's Common Stock, $.20 par value per share.
InterWest Financial InterWest's (i) audited consolidated statements of
Statements.................... financial condition as of September 30, 1997 and 1996, and
the related audited consolidated statements of income,
stockholders' equity and cash flows for each of the years
ended September 30, 1997, 1996 and 1995, and (ii) unaudited
consolidated statement of financial condition as of March
31, 1998, and the related unaudited statements of income,
stockholders' equity and cash flows for the six month
period then ended.
InterWest..................... InterWest Bancorp, Inc.
KV Bank....................... Kittitas Valley Bank, N.A., a national banking association
and wholly-owned subsidiary of KVB.
KVB........................... Kittitas Valley Bancorp, Inc.
KVB Common Stock.............. Kittitas Bancorp, Inc.'s Common Stock, $1.00 par value per
share.
</TABLE>
G-1
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KVB Financial Statements...... KVB's (i) audited consolidated balance sheets as of
December 31, 1997 and 1996 and the related audited
consolidated statements of income, cash flows and
shareholders' equity for each of the years ended December
31, 1997 and 1996, and (ii) KVB's unaudited consolidated
balance sheet as of March 31, 1998, and the related
unaudited statements of income, cash flows and
shareholders' equity for the three month periods ended
March 31, 1998 and 1997.
KVB Record Date............... July 20, 1998.
KVB Special Meeting........... Special meeting of KVB shareholders to be held on August
24, 1998.
Merger........................ The merger of KVB with and into InterWest in accordance
with the Merger Agreement.
Merger Agreement.............. The Agreement and Plan of Merger, dated as of April 20,
1998, between InterWest and KVB.
OCC........................... The Office of the Comptroller of the Currency.
Prospectus/Proxy Statement.... This Prospectus/Proxy Statement, filed with the SEC by
InterWest and to be mailed to KVB's shareholders, together
with any amendments and supplements.
Puget......................... Puget Sound Bancorp, Inc., the former parent and bank
holding company of First National Bank of Port Orchard;
Puget merged with and into InterWest as of January 15,
1998.
Registration Statement........ The Registration Statement on Form S-4, of which this
Prospectus/ Proxy Statement forms a part, filed with the
SEC by InterWest under the 1933 Act, for the purpose of
registering the shares of InterWest Common Stock to be
issued in the Merger.
SEC........................... The Securities and Exchange Commission.
Termination Date.............. December 31, 1998, the date after which each party has the
right to terminate the Merger Agreement, if the Closing has
not occurred by that date.
WBCA.......................... Washington Business Corporation Act.
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G-2
<PAGE>
SUMMARY
THE FOLLOWING MATERIAL SUMMARIZES CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS/PROXY STATEMENT. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION
CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT (INCLUDING THE
APPENDICES). CAPITALIZED TERMS USED IN THIS PROSPECTUS/PROXY STATEMENT, UNLESS
THE CONTEXT OTHERWISE REQUIRES, HAVE THE MEANINGS ASCRIBED TO THEM IN THE
GLOSSARY OF CERTAIN KEY TERMS INSIDE THE FRONT COVER. ADDITIONALLY, TERMS USED
PRINCIPALLY IN PARTICULAR SECTIONS OF THIS PROSPECTUS/PROXY STATEMENT ALSO MAY
BE DEFINED IN THE SECTIONS WHERE THEY ARE INITIALLY USED.
INTRODUCTION
InterWest and KVB propose to merge under the terms of the Merger Agreement.
If the Merger Agreement is approved by the shareholders of KVB and other
conditions to closing are satisfied, KVB will merge with and into InterWest
("Merger"). Consequently, all of KVB Common Stock will be converted into a right
to receive either cash or InterWest Common Stock, as described below, and KV
Bank, which is presently a subsidiary of KVB, would become a wholly-owned
subsidiary of InterWest. After the Merger is consummated, KVB shareholders will
no longer own any stock in KVB, and KVB will cease to exist.
The respective Boards of Directors of InterWest and KVB have unanimously
approved the Merger Agreement. The KVB Board recommends that the shareholders of
KVB vote to approve the Merger Agreement. As described in this Summary below
under "The Merger," each share of KVB Common Stock will be converted into the
right to receive, for each share of KVB Common Stock, $72.00 cash, or 1.714
shares of InterWest Common Stock, at the election of the holder, subject to
certain adjustment and allocation provisions contained in the 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 four subsidiary banks: InterWest Bank; First National Bank of Port
Orchard ("FNBP"); Pioneer National Bank ("Pioneer") and Pacific Northwest Bank
("Pacific"). At March 31, 1998, InterWest and its subsidiaries (which did not,
at such date, include Pioneer or Pacific) had consolidated total assets of
approximately $2.1 billion, total loans receivable and loans held for sale of
approximately $1.2 billion, total deposits of approximately $1.2 billion and
stockholders' equity of approximately $141.4 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. 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. As of March 31, 1998, InterWest Bank conducted its business
through 39 full-service branch offices in the western and central parts of the
State of Washington and one lending office located in Everett, Washington.
FNBP. 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 operates a main office in Port Orchard, a branch in
Bremerton and a branch in Gig Harbor, all in the State of Washington.
PACIFIC. Pacific Northwest Bank has been a wholly-owned subsidiary of
InterWest since June 15, 1998, when it merged with a newly-formed bank
subsidiary of InterWest. Pacific has locations in Seattle,
1
<PAGE>
Bellevue, Lynwood and Kent, Washington. Pacific is a Washington state-chartered
bank, and commenced operations in October 1988.
PIONEER. Pioneer National Bank has been a wholly-owned subsidiary of
InterWest since June 16, 1998, when Pioneer's former holding company merged with
InterWest. Pioneer operates a main office in Yakima, three branch offices in
Yakima, and one branch office in Kennewick, Washington. Pioneer is a national
bank, chartered under the laws of the United States in July 1977.
For additional information concerning the parties, see "BUSINESSES OF THE
PARTIES TO THE MERGER--Information Concerning InterWest." Additional information
concerning InterWest is also included in the InterWest documents incorporated by
reference in this Prospectus/Proxy Statement. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
KVB. Kittitas Valley Bancorp, Inc. is a bank holding company incorporated
under the laws of the State of Washington and is subject to the BHCA, which
places KVB under the supervision of the Board of Governors of the FRB. The
business of KVB consist primarily of holding 100% of the capital stock of KV
Bank. At March 31, 1998, KVB had consolidated assets of approximately $45.9
million, total loans of approximately $28.7 million, total deposits of
approximately $38.2 million, and total shareholders' equity of approximately
$4.0 million. KVB maintains it principal office at 101 West 8th Street,
Ellensburg, Washington 98926, and its telephone number is (509) - 925-3000.
KV BANK. Kittitas Valley Bank, N.A. is a national banking association
organized under the laws of the United States. KV Bank conducts a commercial
banking business and provides personal and business financial services primarily
to individuals and small businesses in the Ellensburg, Washington area. See
"BUSINESSES OF THE PARTIES TO THE MERGER--Information Concerning KVB."
SPECIAL SHAREHOLDER MEETING--KVB
PLACE, TIME AND DATE; PURPOSE. The KVB Special Meeting will be held on
August 24, 1998 at 7:00 p.m., local time at the Hal Holmes Community Center, 201
North Ruby, Ellensburg, Washington, for the purpose of considering and voting
upon a proposal to approve the Merger Agreement attached to this
Prospectus/Proxy Statement as APPENDIX A. See "KVB SPECIAL STOCKHOLDER MEETING."
RECORD DATE; SHARES ENTITLED TO VOTE. The KVB Board has fixed the close of
business on July 20, 1998 as the record date (the "KVB Record Date") for
determining shareholders entitled to notice of and to vote at the KVB Special
Meeting. Only those holders of shares of KVB Common Stock of record on the KVB
Record Date will be entitled to notice of and to vote at the KVB Special
Meeting. Each share of KVB Common Stock will be entitled to one vote.
Shareholders who execute proxies retain the right to revoke them at any time
prior to being voted at the KVB Special Meeting. At the KVB Record Date, there
were 178,787 shares of KVB Common Stock outstanding and entitled to be voted at
the KVB Special Meeting. See "KVB SPECIAL STOCKHOLDER MEETING."
VOTE REQUIRED. Approval of the Merger Agreement requires the affirmative
vote of the holders of at least 75% of the outstanding shares of KVB Common
Stock. At the KVB Record Date, the directors and executive officers of KVB
beneficially owned 43,893 shares of KVB Common Stock, which represents 24.55% of
the shares entitled to be voted at the KVB Special Meeting. All of the directors
of KVB have entered into an agreement with InterWest pursuant to which each
director has agreed to vote his or her shares for approval of the Merger
Agreement. See "KVB SPECIAL STOCKHOLDER MEETING."
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING
THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL
OF THE MERGER AGREEMENT.
2
<PAGE>
THE MERGER
GENERAL. The Merger Agreement provides for the merger of KVB with and into
InterWest, with InterWest to be the surviving corporation in the Merger. As a
result of the Merger, KVB will cease to exist. See "THE MERGER--Basic Terms of
the Merger." After consummation of the Merger, KV Bank will operate as a
wholly-owned subsidiary of InterWest.
Upon consummation of the Merger, each outstanding share of KVB Common Stock,
other than Excluded Shares, will be automatically converted into the right to
receive cash and/or shares of InterWest Common Stock.
MERGER CONSIDERATION AND ELECTION PROCEDURES. Each KVB shareholder will
have the opportunity to elect whether to receive, for each share of KVB Common
Stock held, either cash equal to $72.00 per share for his or her KVB Common
Stock (the "Cash Distribution"), or 1.714 shares of InterWest Common Stock (the
"Stock Distribution"). KVB shareholders may also elect to receive a combination
of cash and stock for their shares of KVB Common Stock. Enclosed with this Proxy
Statement/Prospectus is an election form ("Form of Election") on which KVB
shareholders may elect to receive a Cash Distribution, a Stock Distribution or a
combination of cash and stock.
KVB SHAREHOLDERS MUST MAKE AN ELECTION, BY SUBMITTING A PROPERLY COMPLETED
FORM OF ELECTION TO KVB NOT LATER THAN 7:00 P.M. ON AUGUST 24, 1998, THE DATE OF
THE SPECIAL KVB SHAREHOLDER MEETING (THE "ELECTION DEADLINE.")
If a KVB shareholder fails to deliver a properly completed and duly executed
Form of Election by the Election Deadline, his or her shares will be deemed to
be "Non-Election Shares" under the Merger Agreement, and such shareholder will
have no choice as to whether he or she receives a Cash Distribution or a Stock
Distribution in payment for such Non-Election Shares. See "THE MERGER--Basic
Terms of the Merger" and "--Election Procedures."
The actual consideration that will be paid to each holder of KVB Common
Stock upon consummation of the Merger may differ from the form of consideration
elected by such holder on his or her Form of Election. The Merger Agreement
provides that the total consideration to be paid by InterWest in the Merger will
be evenly divided (50/50) between Cash Distributions and Stock Distributions. As
a result, the election of a holder of KVB Common Stock to receive the Cash
Distribution, or the Stock Distribution, or a particular combination of cash and
stock may be adjusted, depending on the elections made by other KVB
shareholders, in order to achieve the overall 50/50 allocation. A description of
the manner in which merger consideration will be paid to KVB shareholders upon
the effectiveness of the Merger, including the conditions under which a portion
of the consideration elected by a KVB shareholder will be reallocated into the
other category of merger consideration, is set forth at "THE MERGER--Basic Terms
of the Merger"; --Election Procedures" and "--Allocation Procedures."
KVB shareholders should note that the market price of InterWest Common Stock
that they receive as a Stock Distribution in the Merger is subject to
fluctuation, and the market value of such shares may increase or decrease prior
to the date they are actually issued. See "THE MERGER--Basic Terms of the
Merger."
KVB shareholders should also note that cash that they receive in
consideration for their KVB Common Stock (either as a Cash Distribution or a
cash payment in lieu of fractional shares in the case of the Stock Distribution)
will result in the recognition of gain or loss, for tax purposes. No gain or
loss will be recognized upon the receipt of InterWest Common Stock (as a Stock
Distribution) in payment for KVB Common Stock. Also, KVB shareholders should
note that although the tax consequences of receiving either cash or InterWest
Common Stock in payment for their shares of KVB Common Stock are different, they
will not be able to predict or control the exact type of payment that they will
receive, due to the 50/50
3
<PAGE>
allocation requirement. See "THE MERGER--Basic Terms of the Merger" and
"--Federal Income Tax Consequences of the Merger."
EACH KVB SHAREHOLDER SHOULD:
- COMPLETE AND SIGN THE FORM OF ELECTION (YELLOW FORM)
- COMPLETE AND SIGN THE FORM OF PROXY (BLUE FORM)
SEND BOTH THE FORM OF ELECTION AND FORM OF PROXY TO KVB IN THE ENCLOSED
PRE-PAID, PRE-ADDRESSED ENVELOPE AS SOON AS POSSIBLE.
DO NOT SEND IN YOUR KVB STOCK CERTIFICATE(S) AT THIS TIME.
REASONS FOR THE MERGER; RECOMMENDATION OF THE KVB BOARD
The KVB Board has unanimously determined that the Merger Agreement is fair
to and in the best interests of KVB and its shareholders. In making this
determination, the KVB Board considered a variety of factors, including the
value of the consideration that the shareholders of KVB will receive in exchange
for their shares of KVB Common Stock, the continued ability of KV Bank to
provide competitive and comprehensive services in the market in which it
operates, and the parties' shared commitment to personalized community banking,
which emphasizes responsiveness to local markets and the delivery of
personalized services to customers.
The KVB Board believes that the Merger will allow KV Bank to provide a wider
array of products and services, while continuing to offer the advantages of
personalized community banking to its current customers, and will also allow KVB
to realize a premium, thus enhancing stockholder value. The KVB Board further
anticipates that the Merger will provide KV Bank with substantially greater
financial and technological resources, which will enable KV Bank to compete more
effectively in its market and better serve its customers and community.
Additionally, KVB shareholders would be able to obtain a premium over book value
for their shares of KVB Common Stock, and KVB Shareholders who receive Stock
Distributions for their shares of KVB Common Stock will obtain such premium on a
tax-deferred basis, while at the same time enjoying the benefits of a more
active trading market in the InterWest Common Stock.
THE KVB BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS BEING IN THE
BEST INTERESTS OF KVB AND KVB SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS
OF KVB VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
For a discussion of the circumstances surrounding the Merger and the factors
considered by the KVB Board in making its recommendation, see "BACKGROUND OF AND
REASONS FOR THE MERGER." Approval of the Merger Agreement by KVB shareholders is
required by law and is a condition to consummation of the Merger. See "THE
MERGER--Conditions to Consummation of the Merger." For a description of certain
economic interests that directors of KVB may be deemed to have in the Merger,
see "THE MERGER--Interests of Certain Persons in the Merger."
OPINION OF FINANCIAL ADVISOR TO KVB
Southard Financial, KVB's financial advisor, has delivered a written opinion
to the Board of Directors of KVB dated July 16, 1998, to the effect that the
terms of the Merger are fair to KVB shareholders from a financial point of view.
A copy of Southard Financial's opinion, setting forth the assumptions made,
matters considered, procedures followed, and limits of its review, is attached
hereto as Appendix D and should be read by shareholders in its entirety. See
"THE MERGER--Opinion of Financial Advisor to KVB."
4
<PAGE>
EFFECTIVE DATE OF THE MERGER
Unless the parties agree upon another date, the Effective Date of the Merger
will be the date ten business days after the fulfillment or waiver of each of
the conditions to the obligations of the parties to effect the Merger and the
granting of all regulatory approvals. The parties presently expect to consummate
the Merger by September 30, 1998, although the timing is subject to the
satisfaction of certain conditions (discussed below). Either InterWest or KVB
may terminate the Merger Agreement if the Effective Date does not occur on or
before December 31, 1998.
EXCHANGE OF STOCK CERTIFICATES
As promptly as practicable after the Effective Date, InterWest will send to
each record holder of KVB Common Stock, transmittal materials for use in
exchanging KVB Common Stock certificates for cash (in the case of Cash
Distributions) and/or InterWest stock (in the case of Stock Distributions). KVB
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER
OF TRANSMITTAL AND INSTRUCTIONS. See "THE MERGER--Exchange of KVB Stock
Certificates."
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things: (i) approval
of the Merger Agreement by the holders of not less than 75% of the outstanding
shares of KVB Common Stock; (ii) receipt of all applicable regulatory approvals
without any condition that, in the opinion of InterWest, would deprive InterWest
of the material economic or business benefits of the Merger, (iii) receipt by
InterWest and KVB of the opinion of Graham & Dunn, P.C., dated as of the
Effective Date, as to certain federal income tax consequences of the Merger;
(iv) the InterWest Common Stock to be issued to KVB shareholders having been
approved for listing on the Nasdaq National Market; (v) certain persons having
entered into employment agreements with KV Bank; (vi) receipt by InterWest of an
agreement from each "affiliate" of KVB restricting the resale of InterWest
Common Stock received by such affiliate in the Merger; and (vii) the number of
shares of KVB Common Stock for which cash is paid due to Dissenting Shares plus
cash payments in lieu of fractional shares does not exceed 5% of the outstanding
shares of KVB Common Stock. See "THE MERGER--Conditions to Consummation of the
Merger."
STOCK OPTION AGREEMENT
As an inducement to InterWest to enter into the Merger Agreement, KVB has
granted InterWest an option (the "Option") to purchase authorized but unissued
shares of KVB Common Stock on the occurrence of certain events. The Option, if
exercised, would allow InterWest to acquire a number of shares equal to 19.9% of
the outstanding shares of KVB Common Stock, at $50.00 per share. See "THE
MERGER--KVB Stock Option Agreement" and the copy of the Option Agreement
attached as APPENDIX B to this Prospectus/Proxy Statement.
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated, and the Merger abandoned, before the
Effective Date, whether before or after its adoption by the shareholders of KVB,
by the respective majority votes of both the InterWest and the KVB Boards, or by
either the InterWest Board or the KVB Board under certain specified
circumstances, including a failure to consummate the Merger by December 31,
1998. The Merger Agreement may be amended at any time before the Effective Date
if both the InterWest and the KVB Boards approve, and InterWest has the right,
without the approval of KVB, to change the method of its acquisition of KVB.
However, no amendment may under any circumstances change the consideration to be
received by KVB shareholders for their KVB Common Stock. See "THE
MERGER--Amendment or Termination."
5
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
Upon consummation of the Merger, the InterWest Board will consist of
InterWest's current directors. The executive officers of InterWest in office
immediately before the Effective Date will remain unchanged following the
Merger.
Following the Merger, InterWest anticipates that the directors of KV Bank
will continue to serve through 1998, along with Messrs. Stephen M. Walden and
Gary M. Bolyard of InterWest, and that effective January 1, 1999 the number of
directors of KV Bank will be reduced to between five and seven current KV Bank
directors plus Messrs. Walden and Bolyard. The executive officers of KV Bank
will remain unchanged immediately following the Merger. Certain officers of KVB
and/or KV Bank have executed employment agreements with KVB and/or KV Bank in
anticipation of the Merger. These employment agreements will be assumed by
InterWest following the Merger. See "THE MERGER--Interests of Certain Persons in
the Merger" and "--Directors and Executive Officers After the Merger."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Consummation of the Merger is conditioned, among other things, on the
receipt by InterWest and KVB of an opinion of Graham & Dunn, P.C., special
counsel for InterWest to the effect that, assuming the Merger occurs in
accordance with the Merger Agreement and the satisfaction of certain other
conditions, the Merger will constitute a "reorganization" for federal income tax
purposes and that, accordingly, no gain or loss will be recognized by InterWest,
KVB, or KVB shareholders who exchange their shares of KVB Common Stock solely
for shares of InterWest Common Stock in the Merger. However, KVB shareholders
who receive cash in exchange for KVB Common Stock (whether in lieu of fractional
shares, for Dissenting Shares, or as a Cash Distribution in respect of some or
all of their KVB Common Stock) will recognize taxable income to the extent of
cash received. See "THE MERGER--Federal Income Tax Consequences of the Merger."
EACH KVB SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for using the purchase
method of accounting by InterWest under generally accepted accounting
principles. Accordingly, using the purchase method of accounting, the assets and
liabilities of KVB will be recorded by InterWest at their respective fair values
at the time of the acquisition. The excess of InterWest's purchase price over
the net fair value of assets acquired and liabilities assumed, including
identifiable intangible assets, will be recorded as goodwill and amortized as an
expense over periods not to exceed 25 years. Under the purchase method of
accounting, prior period financial statements are not restated and the operating
results of KV Bank will be included in InterWest's consolidated statement of
operations after the date of acquisition. See "THE MERGER-- Accounting Treatment
of the Merger."
DISSENTERS' RIGHTS OF APPRAISAL
KVB shareholders have the right to dissent from the Merger and obtain
payment of the fair value of their shares of KVB Common Stock under the
provisions of Chapter 23B.13 of the Revised Code of Washington (the "Appraisal
Laws"). A STOCKHOLDER'S FAILURE TO FOLLOW EXACTLY THE PROCEDURES SPECIFIED IN
THE APPRAISAL LAWS WILL RESULT IN LOSS OF SUCH STOCKHOLDER'S DISSENTERS' RIGHTS.
Accordingly, KVB shareholders wishing to dissent from the Merger are urged to
read carefully "THE MERGER--Dissenters' Rights of Appraisal" and the copy of the
Appraisal Laws set forth in APPENDIX C to this Prospectus/Proxy Statement and to
consult with their own legal advisors. If the number of shares of KVB Common
Stock for which cash is paid (to Dissenting Shares plus cash payments in lieu of
fractional shares) exceeds 5% of the
6
<PAGE>
outstanding shares of KVB Common Stock, InterWest may elect not to consummate
the Merger. See "THE MERGER--Conditions to Consummation of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of KVB's or KV Bank's management and the KVB Board may be
deemed to have interests in the Merger in addition to their interests as
shareholders of KVB generally. These include, among other things, provisions in
the Merger Agreement relating to indemnification, employment agreements and
conversion of the existing KVB options into InterWest options.
The Merger Agreement provides that following the Effective Date, InterWest
will indemnify the directors, officers and employees of KVB against certain
liabilities to the extent that such persons were entitled to indemnification
under Washington law and the Articles of Incorporation and Bylaws of KVB. See
"THE Merger--Interests of Certain Persons in the Merger."
The following officers of KVB or KV Bank have entered into employment
agreements with KV Bank which will become effective upon consummation of the
Merger: President and Chief Executive Officer Steven F. Halverson; Senior Vice
President Ronald Goodwin; Vice President Zora Peterson; and Controller Jane
Kirsch. Pursuant to these agreements, Mr. Halverson will serve as President and
Chief Executive Officer of KV Bank until December 31, 1999 at a base salary of
$120,000; Mr. Goodwin will serve as Senior Vice President until June 30, 2000 at
a base salary of $68,900; Mrs. Peterson will serve as Vice President/ Cashier
until June 30, 2000 at a base salary of $48,000; and Ms. Kirsch will serve as
Controller until December 31, 1999 at a base salary of $44,004. Each agreement
provides for a severance payment under certain conditions. See "THE
MERGER--Interests of Certain Persons in the Merger."
COMPARISON OF SHAREHOLDERS' RIGHTS
Shareholders of KVB who receive shares of InterWest Common Stock as a Stock
Distribution in exchange for their shares of KVB Common Stock will be governed,
with respect to their rights as such shareholders, by InterWest's Articles of
Incorporation and Bylaws. For a discussion of certain material differences in
the rights of shareholders of InterWest and KVB and an explanation of certain
possible antitakeover effects of certain provisions in InterWest's Articles of
Incorporation and Bylaws, see "COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF
INTERWEST AND KVB COMMON STOCK."
TRADING MARKETS
InterWest Common Stock trades on the Nasdaq Stock Market under the symbol
"IWBK". KVB Common Stock does not trade on any exchange or market system. See
"STOCK PRICE AND DIVIDEND INFORMATION."
7
<PAGE>
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:
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW 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
Second quarter..................................................................... 45.12 37.25 .19
Third quarter...................................................................... 47.25 41.75 .20
Fourth quarter (Through 7/14/98)................................................... 45.25 43.13 N/A
</TABLE>
- ------------------------
* InterWest's Fiscal Year ends on September 30.
At July 14, 1998, there were approximately 7,100 holders of record of the
InterWest Common Stock.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as InterWest's subsidiary banks, including
dividends. Such restrictions are tied to the institution's capital levels after
giving effect to such distributions. See "SUPERVISION AND REGULATION."
KVB. No broker makes a market in KVB 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. KVB 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
8
<PAGE>
reflect the actual market value of KVB Common Stock. The following data includes
trades between individual investors, as reported to KVB as its own transfer
agent.
<TABLE>
<CAPTION>
KVB COMMON STOCK
PRICES
NUMBER OF SHARES --------------------
REPORTED AS TRADED HIGH LOW
------------------- --------- ---------
<S> <C> <C> <C>
1996
First quarter.............................................................. 2,258 $ 30.00 $ 29.00
Second quarter............................................................. 5,721 30.00 29.75
Third quarter.............................................................. 2,644 30.50 30.00
Fourth quarter............................................................. 950 30.50 30.50
1997
First quarter.............................................................. 1,999 32.00 31.00
Second quarter............................................................. 5,713 35.00 32.00
Third quarter.............................................................. 2,370 35.00 35.00
Fourth quarter............................................................. 1,765 36.00 35.00
1998
First quarter.............................................................. -0- N/A N/A
Second quarter............................................................. -0- N/A N/A
Third quarter.............................................................. -0- N/A N/A
Fourth quarter (Through 7/14/98)........................................... -0- N/A N/A
</TABLE>
As of May 31, 1998, there were approximately 335 shareholders of record of
KVB Common Stock.
Dividends paid on KVB Common Stock in 1998, 1997 and 1996, respectively,
were $2.90 per share, $2.25 per share and $.35 per share.
RECENT STOCK PRICE DATA
The following table sets forth the last reported sale price per share of
InterWest Common Stock, as reported on The Nasdaq Stock Market, and of KVB
Common Stock, in addition to the equivalent per share price for KVB Common
Stock, on April 20, 1998 (the last full trading day prior to the public
announcement of the execution of the Merger Agreement) and on July 14, 1998, the
most recent date for which it is practicable to obtain market price data prior
to the printing of this Prospectus/Proxy Statement. Holders of KVB Common Stock
are urged to obtain current market quotations for shares of InterWest Common
Stock.
<TABLE>
<CAPTION>
APRIL 20, JULY 14,
PRICE PER SHARE: 1998 1998
- ---------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
InterWest Common Stock........................................................................ $ 42.75 $ 44.81
KVB Common Stock(1)........................................................................... $ 36.00 $ 36.00
KVB Equivalent Pro Forma(2)................................................................... $ 73.27 $ 76.80
</TABLE>
- ------------------------
(1) There are no publicly available quotations of KVB Common Stock, and the
market prices per share as of April 20, 1998 and July 14, 1998, respectively
(quoted above), represent the purchase prices known to KVB's management to
have been paid for KVB Common Stock in the last transaction prior to such
dates. The last transaction prior to such dates occurred on December 8,
1997.
(2) Giving effect for the Merger and computed by multiplying the closing price
per share of InterWest Common Stock by the Exchange Ratio.
9
<PAGE>
EQUIVALENT PER COMMON SHARE DATA
The following table presents unaudited selected per common share data for
InterWest on a historical and pro forma combined basis and for KVB, on a
historical and pro forma equivalent basis, after giving effect to the Merger
using the purchase method of accounting. For a description of the purchase
method of accounting with respect to the Merger see "THE MERGER--Accounting
Treatment of the Merger." The pro forma combined financial data are not
necessarily indicative of actual or future operating results or the financial
position that would have occurred had the Merger become effective prior to the
period indicated or will occur upon consummation of the Merger. This data should
be read in conjunction with the financial statements and other financial data
with respect to InterWest and KVB included elsewhere in this Prospectus/Proxy
Statement or incorporated herein by reference. The data is not necessarily
indicative of the results of future operations of the combined entity or the
actual results that could have occurred had the Merger become effective prior to
the periods indicated. See "THE MERGER--Basic Terms of the Merger."
SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
INTERWEST,
PUGET,
PACIFIC AND
INTERWEST PUGET(2) PACIFIC(3) PIONEER(3) PIONEER(4) KVB
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BOOK VALUE AS OF:(1)
March 31, 1998........................ $ 16.79 $ 41.36 $ 27.09 $ 16.00 $ 22.46
BASIC NET INCOME PER SHARE (7)
Three months ended March 31, 1998..... 0.55 1.53 0.91 0.53 1.13
Three months ended March 31, 1997..... 0.62 1.16 0.54 0.56 0.65
Year ended September 30, 1997(8)...... 2.53 4.21 5.79 3.09 2.37 4.06
Year ended September 30, 1996(8)...... 1.62 3.39 4.80 3.22 1.61 2.84
Year ended September 30, 1995(8)...... 1.83 2.53 4.02 2.34 1.70 1.79
DILUTED NET INCOME PER SHARE(7)
Three months ended March 31, 1998..... 0.54 1.47 0.88 0.52 1.11
Three months ended March 31, 1997..... 0.61 1.12 0.52 0.55 0.62
Year ended September 30, 1997(8)...... 2.48 4.15 5.55 2.98 2.30 3.98
Year ended September 30, 1996(8)...... 1.58 3.39 4.63 3.14 1.57 2.74
Year ended September 30, 1995(8)...... 1.80 2.53 3.90 2.29 1.67 1.76
CASH DIVIDENDS DECLARED
Three months ended March 31, 1998..... 0.19 0.80 0.00 0.18 2.90
Three months ended March 31, 1997..... 0.14 0.60 0.51 0.15 0.00
Year ended September 30, 1997(8)...... 0.59 0.28 0.60 0.51 0.50 2.25
Year ended September 30, 1996(8)...... 0.51 0.00 0.40 0.46 0.43 0.59
Year ended September 30, 1995(8)...... 0.37 0.00 0.30 0.42 0.29 0.00
<CAPTION>
PRO FORMA
COMBINED
INTERWEST,
PUGET,
PACIFIC, PRO FORMA
PIONEER AND EQUIVALENT
KVB(5) KVB(6)
------------- -----------
<S> <C> <C>
BOOK VALUE AS OF:(1)
March 31, 1998........................ $ 15.91 $ 27.27
BASIC NET INCOME PER SHARE (7)
Three months ended March 31, 1998..... 0.54 0.93
Three months ended March 31, 1997..... 0.56 0.96
Year ended September 30, 1997(8)...... 2.37 4.06
Year ended September 30, 1996(8)...... 1.62 2.78
Year ended September 30, 1995(8)...... 1.68 2.88
DILUTED NET INCOME PER SHARE(7)
Three months ended March 31, 1998..... 0.52 0.89
Three months ended March 31, 1997..... 0.54 0.93
Year ended September 30, 1997(8)...... 2.30 3.94
Year ended September 30, 1996(8)...... 1.57 2.69
Year ended September 30, 1995(8)...... 1.65 2.83
CASH DIVIDENDS DECLARED
Three months ended March 31, 1998..... 0.23 0.39
Three months ended March 31, 1997..... 0.14 0.24
Year ended September 30, 1997(8)...... 0.53 0.91
Year ended September 30, 1996(8)...... 0.43 0.74
Year ended September 30, 1995(8)...... 0.28 0.48
</TABLE>
10
<PAGE>
FOOTNOTES TO SHARE DATA
(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 ("Puget") was merged into InterWest during January 1998,
in the transaction by which InterWest acquired FNBP. This merger has been
accounted for using the pooling of interests method by InterWest under
generally accepted accounting principles. Share data for InterWest as of and
for the quarters ended March 31, 1998 and 1997 includes Puget. Share data
for InterWest for the years ended September 30, 1997, 1996 and 1995 does not
include Puget.
(3) During the month of June, 1998, InterWest completed the mergers with Pacific
Northwest Bank ("Pacific") and Pioneer Bancorp, Inc. ("Pioneer"). These
mergers have been accounted for using the pooling of interests method by
InterWest under generally accepted accounting principles. Share data for
InterWest has not been restated to include the accounts of Pacific and
Pioneer.
(4) The pro forma combined share data for InterWest, Puget, Pacific and Pioneer
reflects the use of the pooling of interests method of accounting under
generally accepted accounting principles. Accordingly, this share data
reflects the restatement for InterWest to include the accounts and common
shares outstanding of Puget, Pacific and Pioneer converted at their
respective exchange ratios. The respective ratios are: 1.67 for Puget; 3.95
for Pacific and 1.34 for Pioneer.
(5) The pro forma combined share data is computed based on the pro forma
combined share data described in Note (4) and the respective common shares
outstanding and accounts of KVB. KVB share data has been adjusted to reflect
the exchange ratio of 1.714 which assumes all shares of KVB common stock are
converted to InterWest common stock on a historical basis. However, the
Merger Agreement provides for an aggregate distribution of 50% cash and 50%
InterWest Common Stock.
(6) The pro forma equivalent share data for KVB represents the pro forma
combined amount described in Note (5) multiplied by the exchange ratio of
1.714.
(7) Net income per share is calculated by dividing total actual historical and
pro forma combined net income for the periods presented by the actual
historical and pro forma combined weighted average number of shares of
common stock outstanding for the respective periods. Net income per share
has been computed in accordance with Statement of Financial Accounting
Standards No. 128, "EARNINGS PER SHARE". Basic net income per share excludes
dilution and is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted net income per
share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then share in
the net income.
(8) The share data for the years ended September 30, 1997, 1996 and 1995 have
been adjusted to conform Puget's, Pacific's, Pioneer's and KVB's December 31
fiscal year end with InterWest's September 30 fiscal year end in accordance
with generally accepted accounting principles.
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KVB SPECIAL SHAREHOLDERS MEETING
DATE, TIME, PLACE AND PURPOSE
The KVB Special Meeting will be held on August 24, 1998 at 7:00 p.m., local
time, at the Hal Holmes Community Center, 201 North Ruby, Ellensburg,
Washington. The purposes of the KVB Special Meeting are as follows: (i) to
consider and vote upon approval of the Merger Agreement and (ii) to act upon
other matters, if any, that may properly come before the KVB Special Meeting.
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
The KVB Board has fixed 5:00 p.m. on July 20, 1998 as the KVB Record Date
for determining the holders of shares of KVB Common Stock entitled to notice of
and to vote at the KVB Special Meeting. At the close of business on the KVB
Record Date, there were 178,787 shares of KVB Common Stock issued and
outstanding held by approximately 335 holders of record. Holders of record of
KVB Common Stock on the KVB Record Date are entitled to one vote per share and
are also entitled to exercise dissenters' rights under Appraisal Laws if certain
procedures are followed: See "THE MERGER--Dissenters' Rights of Appraisal" and
APPENDIX C.
VOTE REQUIRED
The affirmative vote of at least 75% of all shares of KVB Common Stock
outstanding on the KVB Record Date is required to approve the Merger Agreement.
KVB shareholders are entitled to one vote for each share of KVB Common Stock
held. The presence of a majority of the outstanding shares of KVB Common Stock
in person or by proxy is necessary to constitute a quorum of shareholders for
the KVB Special Meeting. For this purpose, abstentions and broker non-votes
(i.e. proxies from brokers or nominees indicating that such person has not
received instructions from the beneficial owners or other persons entitled to
vote shares as to a matter with respect to which the broker or nominees do not
have discretionary power to vote) are counted in determining the shares present
at a meeting. For voting purposes, however, only shares affirmatively voted for
the approval of the Merger Agreement, and neither abstentions nor broker
non-votes, will be counted as favorable votes in determining whether the Merger
Agreement is approved by the holders of KVB Common Stock. As a consequence,
abstentions and broker non-votes will have the same effect as votes against
approval of the Merger Agreement.
As of the KVB Record Date, directors and executive officers of KVB, and
their affiliates, owned and were entitled to vote 43,893 shares at the KVB
Special Meeting, representing approximately 24.54% of the outstanding shares of
KVB Common Stock. See "MANAGEMENT OF KVB--Security Ownership of Management and
Certain Beneficial Owners." Each director of KVB has agreed to vote all shares
of KVB Common Stock held or controlled by him or her (a total of 43,893 shares
or approximately 24.54% of the shares outstanding), in favor of approval of the
Merger.
VOTING, SOLICITATION, AND REVOCATION OF PROXIES
If the enclosed proxy is duly executed and received in time for the KVB
Special Meeting, it will be voted in accordance with the instructions given. If
no instruction is given, it is the intention of the persons named in the proxy
to vote the shares represented by the proxy FOR the approval of the Merger
Agreement and in the proxy's discretion on any other matter coming before the
meeting, unless otherwise directed by the proxy. Any proxy given by a
stockholder may be revoked before its exercise by written notice to the
Secretary of KVB, or by a subsequently dated proxy, or in open meeting before
the stockholder vote is taken. The shares represented by properly executed,
unrevoked proxies, will be voted in accordance with the instructions in the
proxy. Shareholders are entitled to one vote for each share of KVB Common Stock
held on the KVB Record Date.
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The proxy for the KVB Special Meeting is being solicited on behalf of the
KVB Board. KVB 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 the proxies. Officers and other employees of KVB may solicit
proxies personally. KVB is not expected to pay any compensation for the
solicitation of proxies, but will, upon request, pay the standard charges and
expenses of banks, brokerage houses, other institutions, nominees, and
fiduciaries for forwarding proxy materials to and obtaining proxies from their
principals.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
In early December, 1997, two financial institutions (including InterWest)
separately approached KVB and expressed an interest in acquiring KVB. At the
December, 1997 KVB Board meeting, the KVB Board voted to explore further the
interest expressed by the two interested financial institutions and instructed
KVB President and Chief Executive Officer Steven F. Halverson to contact the two
interested financial institutions (including InterWest) and make contact with
three other potential financial institution acquirors identified by the KVB
Board and inform them that the Board might be interested in exploring the
possible sale of KVB. Unaudited year-end 1997 financial information about KVB
was provided to each of the five potential acquirors (including InterWest)
shortly after January 1, 1998.
In mid-January, 1998, Mr. Halverson suffered a heart attack and underwent
heart surgery. The KVB Board asked Board Chairman Doug Rehaume to continue
discussions in Mr. Halverson's absence, and Mr. Rehaume visited with each of the
five potential acquirors, all of which (including InterWest) had a continuing
interest in the possible acquisition of KVB. Mr. Rehaume asked each potential
acquiror for an informal indication of the parameters under which each acquiror
would be willing to acquire KVB. Informal offers (either written or verbal) were
received from four of the five potential acquirors between the end of January,
1998 and the middle of February, 1998.
Based on the informal offers received, KVB pursued further discussions with
two of the potential acquirors (including InterWest). As part of these
discussions, InterWest revised its informal offer and presented to KVB a new
offer expressed in a term sheet that was considered and accepted by the KVB
Board at a meeting held on March 16, 1998. Further negotiations ensued between
KVB and InterWest that led to the Merger Agreement that was considered and
approved by the KVB Board on April 20, 1998.
REASONS FOR THE MERGER--KVB
In reaching its decision to approve the Merger and the Merger Agreement, the
KVB Board consulted with its counsel as well as with KVB's management and
considered a number of factors, including, without limitation, the following,
which constitute all of the material factors considered by the KVB Board:
- The KVB Board's familiarity with and review of InterWest's business,
operations, earnings and financial condition and future capital
requirements;
- The KVB Board's belief that the terms of the Merger Agreement are
attractive and that the Merger Agreement allows those KVB shareholders who
elect to receive InterWest Common Stock to become shareholders in
InterWest, an institution whose stock is publicly traded over the NASDAQ
Market;
- InterWest's wide range of banking products and services;
- The KVB Board's belief, based on analysis of the anticipated financial
effects of the Merger, that InterWest and its financial institution
subsidiaries would be well capitalized institutions, the financial
positions of which would be in excess of applicable regulatory capital
requirements;
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- The current and prospective economic and regulatory environment and
competitive restraints facing the banking industry and financial
institutions in KVB's market area;
- The KVB Board's belief that, in light of the reasons discussed above,
InterWest is the most attractive choice as a long-term affiliation partner
of KVB and for KVB's community, depositors, borrowers, and employees; and
- The expectation that the Merger will generally be a tax-free merger to KVB
and its shareholders to the extent they receive InterWest Common Stock in
exchange for their shares of KVB Common Stock.
The KVB Board did not assign any specific or relative weight to any of the
factors discussed above in their considerations.
RECOMMENDATION OF THE KVB BOARD
FOR THE REASONS SET FORTH ABOVE, THE KVB BOARD HAS APPROVED UNANIMOUSLY THE
MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF KVB AND KVB
SHAREHOLDERS AND RECOMMENDS THAT KVB SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
OPINION OF KVB FINANCIAL ADVISOR
KVB retained Southard Financial, a Memphis, Tennessee financial valuation
consulting firm, to render its opinion as to the fairness from a financial point
of view to the holders of KVB Common Stock of the consideration to be paid in
the Merger. In connection with this engagement, Southard Financial evaluated the
financial terms of the Merger, but was not asked to, and did not, recommend the
specific exchange ratio between InterWest's and KVB's respective common stocks
or the cash price for KVB Common Stock and did not assist in the Merger
negotiations. The consideration was determined by InterWest and KVB after
arm's-length negotiations. KVB did not place any limitations on the scope of
Southard Financial's investigation or review.
Southard Financial provided the KVB Board with a fairness opinion letter and
supporting documentation. The full text of the opinion letter of Southard
Financial, dated April 16, 1998, which sets forth certain assumptions made,
matters considered and limitations on the review performed is attached as
APPENDIX D and is incorporated herein by reference. The summary of the opinion
of Southard Financial set forth in this Prospectus/Proxy Statement is qualified
in its entirety by reference to the opinion.
In arriving at its opinion, Southard Financial conducted interviews with
officers of InterWest and KVB and reviewed the documents indicated in the
fairness letter. Southard Financial did not independently verify the accuracy
and/or the completeness of the financial and other information reviewed in
rendering its opinion. Southard Financial did not, and was not requested to,
solicit third party indications of interest in acquiring any or all of the
assets of KVB.
In connection with rendering its opinion, Southard Financial performed a
variety of financial analyses which are summarized below. Southard Financial
believes that its analyses must be considered as a whole and that considering
only selected factors could create an incomplete view of the analyses and the
process underlying the opinion. In its analyses, Southard Financial made
numerous assumptions, many of which are beyond the control of KVB and InterWest.
Any estimates contained in the analyses prepared by Southard Financial are not
necessarily indicative of future results or values, which may vary significantly
from such estimates. Estimates of values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. None of the analyses performed by Southard
Financial was assigned a greater significance than any other.
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Under the Merger Agreement, no more than 50% of the outstanding shares of
KVB Common Stock may be exchanged for cash and no more than 50% of the
outstanding shares of KVB Common Stock may be exchanged for InterWest Common
Stock. Each KVB stockholder will have the opportunity to elect to receive all
cash, all InterWest Common Stock, or a combination of both in exchange for his
or her shares of KVB Common Stock, subject to adjustments as described in the
Merger Agreement that are designed to limit the aggregate consideration in the
Merger to no more than 50% InterWest Common Stock and 50% cash. Because each KVB
shareholder's situation is unique, the summary of Southard Financial's analysis
set forth below is based on the total consideration to be paid in the Merger,
regardless of the mix of cash and InterWest Common Stock.
Based upon the Merger terms, KVB shareholders will receive above 331% of KVB
book value as of March 31, 1998; 16.2 times KVB earnings for the trailing
twelve-month period ended March 31, 1998; and 28.03% of consolidated KVB assets
as of March 31, 1998. Based upon the review conducted by Southard Financial, the
price/book value and price/assets ratios are above the range seen in recent bank
acquisition transactions. The price/earnings multiple is below the recent range
due to recent improving earnings performance of KVB. Southard Financial's
conclusion was that the terms of the Merger pursuant to the Merger Agreement are
fair, from a financial point of view, to KVB shareholders.
The analysis contained in the Southard Financial fairness opinion and
summarized below focus on the total consideration to be paid in the merger, and
do not represent investment advice. Southard Financial is not providing
investment advice.
DIVIDEND YIELD ANALYSIS. In evaluating the impact of the proposed Merger on
the shareholders of KVB, Southard Financial reviewed the dividend paying
histories of KVB and InterWest. Had the Merger been consummated prior to January
1, 1997, KVB shareholders would have received a lower dividend from InterWest
than from KVB. However, KVB does not have a history of paying regular dividends
and has only paid dividends since 1996. Conversely, InterWest paid dividends
averaging 23% of earnings in the past five years and increased its dividends per
share in each of those years. Therefore, the overall dividend impact of the
Merger should be positive for KVB shareholders, assuming that InterWest
continues dividend payments at or above current levels.
EARNINGS YIELD ANALYSIS. In evaluating the impact of the proposed Merger on
the shareholders of KVB, Southard Financial determined that the shareholders of
KVB would have seen an increase in their share of earnings during 1997 had the
Merger been consummated prior to January 1, 1997. The comparison is slightly
unfavorable based upon expected 1998 earnings of InterWest and KVB; however, in
Southard Financial's opinion, the long-term outlook for earnings growth is
better for InterWest than for KVB.
BOOK VALUE ANALYSIS. In evaluating the impact of the proposed Merger on the
shareholders of KVB, Southard Financial determined that the shareholders of KVB
would have seen an increase in the book value of their investment had the Merger
been consummated as of December 31, 1997 or March 31, 1998.
FUNDAMENTAL ANALYSIS. Southard Financial reviewed the financial
characteristics of KVB and InterWest with respect to profitability, capital
ratios, liquidity, asset quality, and other factors. Southard Financial compared
KVB and InterWest to a universe of publicly traded banks and bank holding
companies and to peer groups prepared by the Federal Financial Institutions
Examination Council ("FFIEC"). Southard Financial found that the post-merger
combined entity would have capital ratios and profitability ratios near those of
the public peer group and the FFIEC peer group.
LIQUIDITY. Unlike KVB's Common Stock, InterWest Common Stock is traded on
the NASDAQ market system. Further, InterWest Common Stock trades on a regular
basis, is followed by a number of analysts, and has institutional investors.
Finally, except in the case of certain officers, directors, and significant
shareholders of KVB, InterWest shares received will be freely tradable with no
restrictions.
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Southard Financial is a financial valuation consulting firm, specializing in
the valuation of closely-held companies and financial institutions. Since its
founding in 1987, Southard Financial has provided approximately 2,000 valuation
opinions for clients in 43 states. Further, Southard Financial provides
valuation services for approximately 120 financial institutions annually. For
rendering its opinion, Southard Financial received a fee of $12,000, plus
reasonable out of pocket expenses. Southard Financial has never been engaged
previously by KVB or InterWest, and neither Southard Financial nor its
principals own an interest in the securities of KVB or InterWest.
REASONS FOR THE MERGER--INTERWEST
At a meeting on April 20, 1998, the InterWest Board determined that the
Merger and Merger Agreement are fair to and in the best interests of InterWest
and its shareholders. In considering the Merger, the InterWest Board determined
that the Merger would be consistent with InterWest's strategic intent in
expanding its community banking business. InterWest can provide customers of KV
Bank with certain advantages of a community banking organization as well as a
larger banking organization.
InterWest determined that the Merger would advance InterWest's strategic
plan because of its belief that the Merger will combine two financially sound
organizations 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 organization is
currently well managed, (ii) the companies have compatible management
philosophies and strategic focuses, (iii) KV Bank will contribute complementary
business strengths to InterWest, (iv) the Merger would benefit the localities
currently served by KV Bank by providing additional lending capacity; and (v)
the combined organization will continue to be well capitalized. The InterWest
Board also believes that the Merger will allow the combined organization to
compete effectively in the rapidly changing marketplace of banking and financial
services and to take advantage of opportunities for growth and diversification
in Washington State.
In reaching its determination to adopt the Merger Agreement, the InterWest
Board considered a variety of factors, although it did not assign any relative
or specific weights to the factors considered. The factors considered included
the following:
- The InterWest Board's knowledge and review of the financial condition,
results of operation, and business operations and prospects of KVB;
- 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 KV Bank 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 Merger and
their effect on the shareholders of InterWest and the InterWest Board's
belief that such terms are fair to InterWest and its shareholders;
- KVB is not so large as to make the combination of the two organizations
difficult and costly;
- The InterWest Board's belief that the Merger would allow InterWest to
expand its commercial, agricultural, small business and consumer lending
activity in Kittitas County through KV Bank's existing branch network
faster and more efficiently than InterWest could develop it on its own;
and
- The InterWest Board's belief, after consultation with its legal counsel,
that the required regulatory approvals could be obtained to consummate the
Merger.
The foregoing discussion of the information and factors considered by the
InterWest Board is not intended to be exhaustive but is believed to encompass
all material factors considered by the InterWest
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Board. On the basis of the foregoing factors, the InterWest Board concluded that
the terms of the Merger are fair to and in the best interests of InterWest and
its shareholders.
THE MERGER
The following description of certain aspects of the Merger does not purport
to be complete and is qualified in its entirety by reference to the Merger
Agreement. KVB shareholders are being asked to approve the Merger in accordance
with the terms of the Merger Agreement, and are urged to carefully read the
Merger Agreement, which is attached at APPENDIX A.
BASIC TERMS OF THE MERGER
The Merger Agreement provides for the merger of KVB with and into InterWest,
with InterWest surviving the Merger. The separate existence of KVB will cease
upon completion of the Merger. While InterWest and KVB believe that they will
receive the requisite regulatory approvals for the Merger, there can be no
assurance that such approvals will be received or, if received, as to the timing
of such approvals or as to the ability to obtain such approvals on satisfactory
terms. See "--Conditions to Consummation of the Merger" and "--Regulatory
Requirements." After consummation of the Merger, KV Bank will operate as a
wholly-owned subsidiary of InterWest.
Subject to the terms, conditions and procedures in the Merger Agreement,
when the Merger becomes effective, each outstanding share of KVB Common Stock
will be converted into the right to receive, at the election of the holder,
either (i) $72.00 in cash, without interest (the "Cash Distribution") or (ii)
1.714 shares of InterWest Common Stock (the "Stock Distribution"). KVB
shareholders may elect to receive all Cash Distribution, or all Stock
Distribution, or a combination of the two, with respect to their shares of KVB
Common Stock. However, the Merger Agreement provides that the total
consideration to be paid by InterWest (the "Merger Consideration") will be
evenly divided: 50% Cash Distributions and 50% Stock Distributions. As a result,
if holders of more, or less, of KVB Common Stock elect to receive the Stock
Distribution, an adjustment will be made to achieve the required 50/50
allocation of cash and stock. An example of this adjustment is given below.
Holders of KVB Common Stock who do not specify whether they desire a Cash
Distribution or a Stock Distribution will be presumed to hold "Non-Election
Shares," which will be converted into either a Cash Distribution or a Stock
Distribution, depending on the adjustment necessary to achieve the 50/50
allocation. Cash will be paid in lieu of fractional shares in the Stock
Distribution. Shareholders who dissent from the Merger and preserve their
dissenters' rights will receive the cash appraisal value of their dissenting
shares from KVB. Shareholders who initially dissent, but who fail to preserve
their dissenters' rights will be deemed to hold Non-Election Shares. See
"--Election Procedures" and "--Allocation Procedures" below.
EXAMPLE OF ALLOCATION. Shareholder Smith owns 100 shares of KVB Common
Stock. He submits a Form of Election requesting that 60 of his shares be
converted into the Stock Distribution (60 shares times 1.714 shares of InterWest
Common Stock would result in receipt of 102 shares, and a cash payment of $60.48
for .84 fractional shares) and that 40 of his shares be converted into the Cash
Distribution (40 shares times $72.00 would result in receipt of $2,880).
IF exactly 50% of all holders of KVB Common Stock request Cash
Distributions, and 50% request Stock Distributions, then no adjustment would be
made to Shareholder Smith's election. See "--Allocation Procedures" below.
BUT IF, for example, the holders of 70% of KVB Common Stock elect to receive
the Stock Distribution, then each holder's election would be adjusted, on a pro
rata basis, so that the total Stock Distribution is exactly 50% of the total
consideration paid by InterWest. In such event, Shareholder Smith's Stock
Distribution would be reduced to 73 shares of InterWest Common Stock (plus cash
payment
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of $32.40 for .45 fractional shares) and his Cash Distribution would be
increased to $4,114.44. See "--Allocation Procedures" below.
EXAMPLE OF ADJUSTMENT. The foregoing allocation adjustment example is
calculated by first determining Shareholder Smith's pro rata portion of the
total number of Stock Election shares:
<TABLE>
<S> <C> <C> <C> <C>
# of Stock Election Shares Held by
Smith = 60 shares = 0.0004794
# of All Stock Election Shares 125,150.9*
</TABLE>
- ------------------------
*Seventy percent of the total 178,787 shares of outstanding KVB Common Stock
equals 125,150.9 shares.
Next, Shareholder Smith's pro rata portion of the Maximum Stock Election
Number must be determined. The Maximum Stock Election Number is defined in the
Merger Agreement as 50% of the number of shares of KVB Common Stock outstanding.
Based on 178,787 shares of KVB Common Stock outstanding, the Maximum Stock
Election Number would be 89,393.5 shares (i.e. 178,787 divided by two equals
89,393.5). Accordingly, Shareholder Smith's pro rata portion of the Maximum
Stock Election Number would be calculated as follows:
89,393.5 KVB shares x 0.0004794 = 42.855 STOCK ELECTION SHARES
Shareholder Smith's election to convert 60 KVB Common Stock shares into the
Stock Distribution is thus adjusted so that only 42.855 shares of his KVB Common
Stock will be exchanged for InterWest Common Stock. By multiplying this number
by the Exchange Ratio, the number of shares of InterWest Common Stock that
Shareholder Smith will receive is determined:
42.855 KVB shares x 1.714 = 73.45 SHARES OF INTERWEST COMMON STOCK
Shareholder Smith would receive 73 shares of InterWest Common Stock and
$32.40 cash in payment for the .45 fractional share. The remaining 57.145 shares
of Shareholder Smith's 100 shares of KVB Common Stock will be converted into the
Cash Distribution, which will be $4,114.44 (i.e. 57.145 multiplied by $72 equals
$4,114.44).
The amount of the Cash Distribution per share of KVB Common Stock ($72.00)
will not change or fluctuate prior to the Effective Date of the Merger. Although
the amount of the Stock Distribution (1.714 InterWest shares for each share of
KVB Common Stock) will not change or fluctuate, the market price of InterWest
Common Stock is subject to fluctuation, and the market value of the shares of
InterWest Common Stock that KVB shareholders receive as a Stock Distribution may
increase or decrease prior to the date such stock is actually issued.
Holders of KVB Common Stock should carefully consider the tax consequences
of electing to receive either a Cash Distribution, a Stock Distribution or a
combination of both. Cash proceeds (as in the Cash Distribution) are immediately
taxable, while taxation is deferred on shares of InterWest Common Stock received
as a Stock Distribution. For a discussion of the federal income tax consequences
to KVB shareholders, see "--Federal Income Tax Consequences of the Merger." KVB
SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR ADVISORS TO DETERMINE THE PERSONAL
TAX CONSEQUENCES OF THE MERGER.
ELECTION PROCEDURES
Holders of KVB Common Stock will be entitled to elect to receive the Cash
Distribution for all or a portion of their shares ("Cash Election Shares") or
the Stock Distribution for all or a portion of their shares ("Stock Election
Shares"). The election must be made on the form designed for that purpose (the
"Form of Election"). A Form of Election is being mailed with this
Prospectus/Proxy Statement to all holders of KVB Common Stock on the KVB Record
Date. Additional Forms of Election will be made
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available for all persons who become holders of KVB Common Stock after the
Record Date but before the date of the KVB Special Meeting.
The date of the KVB Special Meeting (August 24, 1998) is also the date by
which KVB shareholders must submit their Forms of Election (the "Election
Deadline"). An election will be effective only if KVB has received a properly
completed and duly executed Form of Election by the Election Deadline. A Form of
Election, once submitted to KVB, may be revoked or changed by the person who
submitted the Form of Election, or by any person to whom the subject shares are
subsequently transferred, by written notice to KVB prior to the Election
Deadline.
EACH KVB SHAREHOLDER SHOULD:
- COMPLETE AND SIGN THE FORM OF ELECTION (YELLOW FORM)
- COMPLETE AND SIGN THE PROXY (BLUE FORM)
SEND BOTH THE FORM OF ELECTION AND PROXY TO KVB IN THE ENCLOSED PREPAID,
PREADDRESSED ENVELOPE AS SOON AS POSSIBLE.
DO NOT SEND IN YOUR KVB STOCK CERTIFICATE(S) AT THIS TIME.
If a holder of KVB Common Stock does not submit a properly completed and
signed Form of Election that is RECEIVED by KVB prior to the Election Deadline,
or if any stockholder has withdrawn from or otherwise failed to perfect their
Dissenters' Rights, such stockholder will be deemed to hold "Non-Election
Shares" for the purpose of the allocation of the Cash Distribution and the Stock
Distribution. InterWest will have the discretion to determine whether Forms of
Election have been properly completed and signed, and to disregard immaterial
defects in Forms of Election. If a Form of Election is determined not to have
been properly made, the person having made the election will be deemed to have
Non-Election Shares.
Holders of Non-Election Shares will receive either a Cash Distribution or a
Stock Distribution for such shares, depending on the elections made by holders
of KVB Common Stock for which a proper election was made, and the resulting
adjustment that is required for the 50/50 allocation.
ALLOCATION PROCEDURES
As described above, the total Merger Consideration to be paid by InterWest
for KVB's Common Stock must, pursuant to the Merger Agreement, be divided
equally between the Cash Distribution (50%) and the Stock Distribution (50%).
This allocation will be achieved in the following manner:
EXCESS CASH ELECTION SHARES. If the number of Cash Election Shares exceeds
50% of the number of shares of KVB Common Stock outstanding immediately prior to
the Effective Date (the "Maximum Cash Election Number"), then
- Each Stock Election Share will receive the Stock Distribution;
- Each Non-Election Share will receive the Stock Distribution; and
- InterWest will reallocate the Merger Consideration payable to each holder
of Cash Election Shares, pro rata (based on the number of Cash Election
Shares owned by such holder, as compared with the total number of Cash
Election Shares owned by all holders) so that the holders of all Cash
Election Shares receive, in total, the Maximum Cash Consideration (the
Maximum Cash Election Number multiplied by $72.00), and such holders will
receive the remainder of the Merger Consideration payable to them in the
form of Stock Distributions.
EXCESS STOCK ELECTION SHARES. If the number of Stock Election Shares
exceeds 50% of the number of shares of KVB Common Stock outstanding immediately
prior to the Effective Date (the "Maximum Stock Election Number") then
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- Each Cash Election Share will receive the Cash Distribution;
- Each Non-Election Share will receive the Cash Distribution; and
- InterWest will reallocate the Merger Consideration payable to each holder
of Stock Election Shares, pro rata (based on the number of Stock Election
Shares owned by such holder, as compared with the total number of Stock
Election Shares owned by all holders) so that the holders of all Stock
Election Shares receive, in total, a number of shares of InterWest Common
Stock equal to the Maximum Stock Election Number multiplied by 1.714 and
such holders will receive the remainder of the Merger Consideration
payable to them in the form of Cash Distributions.
NO EXCESS. If there are neither excess Cash Election Shares nor excess
Stock Election Shares as described above, then
- Each Cash Election Share will receive the Cash Distribution;
- Each Stock Election Share will receive the Stock Distribution; and
- The Non-Election Shares will be converted into the right to receive either
the Cash Distribution or the Stock Distribution, in the following manner:
If the sum of the number of Non-Election Shares plus the number of Cash
Election Shares (the "Aggregate Number") equals or exceeds the Maximum Cash
Election Number, then (1) the number of Non-Election Shares to be converted into
the right to receive the Stock Distribution will be equal to the Aggregate
Number minus the Maximum Cash Election Number, (2) the remaining Non-Election
Shares will be converted into the right to receive the Cash Distribution, and
(3) InterWest will allocate the Merger Consideration payable to each holder of
Non-Election Shares in a manner that minimizes the creation of fractional shares
of InterWest Common Stock.
MECHANICS OF THE MERGER
On the Effective Date, KVB will be merged with and into InterWest. At that
time, all business, assets, and liabilities formerly carried on or owned by KVB
will be transferred to and owned by InterWest. KVB will cease to have a
corporate existence separate from InterWest, and KV Bank will be a wholly-owned
subsidiary of InterWest.
EFFECTIVE DATE OF THE MERGER
Unless the parties agree upon another date, the Effective Date of the Merger
will be the date ten business days after the fulfillment or waiver of each of
the conditions to the obligations of the parties to effect the Merger and the
granting of all regulatory approvals. Subject to the foregoing, it is currently
anticipated that the Merger will be consummated in the third quarter of 1998.
Either InterWest or KVB may terminate the Merger Agreement if the Effective Date
does not occur on or before December 31, 1998.
EXCHANGE OF KVB STOCK CERTIFICATES
As promptly as practicable after the Effective Date, InterWest will send or
cause to be sent to each holder of record of KVB Common Stock transmittal
materials for use in exchanging all of such holder's certificates representing
KVB Common Stock for the Stock Distribution and/or Cash Distribution to which
such holder is entitled, as described above. The transmittal materials will
contain information and instructions with respect to the surrender and exchange
of KVB Common Stock certificates.
KVB SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
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Upon surrender of all of the certificates for KVB Common Stock registered in
the name of a holder of such certificates (or indemnity satisfactory to
InterWest and the Exchange Agent selected by InterWest, if any of such
certificates are lost, stolen or destroyed), together with a properly completed
letter of transmittal, such Exchange Agent will mail to such holder the Merger
Consideration (Stock Distribution and/or Cash Distributions, together with a
check for any fractional share interest, as applicable).
All shares of InterWest Common Stock issued to the holders of KVB Common
Stock pursuant to the Merger will be deemed issued as of the Effective Date.
InterWest dividends having a record date after the Effective Date will include
dividends on all shares of InterWest Common Stock issued in the Merger, but no
dividend or other distribution payable to the holders of record of InterWest
Common Stock at or as of any time after the Effective Date will be distributed
to the holder of any KVB Common Stock certificates until such holder physically
surrenders all such certificates as described above. Promptly after such
surrender, all undelivered dividends and other distributions and, where
applicable, a check for any fractional share interest, will be delivered to such
holder, in each case, without interest. After the Effective Date, the stock
transfer books of KVB will be closed, and there will be no transfers on the
transfer books of KVB of the shares of KVB Common Stock that were outstanding
immediately prior to the Effective Date.
CONDITIONS TO CONSUMMATION OF THE MERGER; REGULATORY APPROVALS
The obligations of KVB and InterWest to consummate the Merger are subject
to, among other things, the satisfaction of the following conditions: (i)
approval of the Merger Agreement by the holders of at least 75% of the
outstanding shares of KVB Common Stock; (ii) receipt of all applicable
regulatory approvals without any condition that, in the opinion of InterWest,
would deprive InterWest of the material economic or business benefits of the
Merger; (iii) no court or government or regulatory authority having taken any
action which enjoins or prohibits the Merger; (iv) receipt by InterWest and KVB
of the opinion of Graham & Dunn, P.C., dated as of the Effective Date, as to
certain federal income tax consequences of the Merger; (v) the InterWest Common
Stock to be issued to KVB shareholders having been approved for listing on the
Nasdaq National Market; and (vi) employment agreements with the persons
described in "--Interests of Certain Persons in the Merger" having been
executed.
The obligations of InterWest are subject to the satisfaction or waiver of
certain additional conditions, including: (i) the delivery by KVB of opinions of
its legal counsel and certificates executed by certain of its executive officers
as to compliance with the Merger Agreement; (ii) the accuracy of the
representations and warranties, and compliance in all material respects with the
agreements and covenants of KVB; (iii) receipt by InterWest of an agreement from
each "affiliate" of KVB restricting the sale of InterWest Common Stock received
by such affiliate in the Merger; (iv) the absence of any material adverse change
in the financial position or results of operations of KVB; (v) the number of
shares of KVB Common Stock for which cash is paid because of payments for
Dissenting Shares plus cash payments in lieu of fractional shares does not
exceed 5% of the outstanding shares of KVB Common Stock; (vi) KVB's capital is
not less than $4.2 million on the Effective Date; and (vii) KV Bank's allowance
for possible loan and lease losses is not less than 1% of KV Bank's total
outstanding loans and leases and is adequate to absorb anticipated losses.
The obligations of KVB are also subject to the satisfaction or waiver of
certain additional conditions, including: (i) the delivery by InterWest of
opinions of its legal counsel and certificates executed by certain of its
executive officers as to compliance with the Merger Agreement; (ii) the accuracy
of the representations and warranties, and compliance in all material respects
with the agreements and covenants of InterWest; (iii) the absence of any
material adverse change in the financial position or results of operations of
InterWest.
The Merger is subject to prior approval by the FRB under the BHCA. A
Notice/Application for approval of the Merger has been filed with the FRB.
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The approval of any application merely implies satisfaction of regulatory
criteria for approval, which do not include review of the Merger from the
standpoint of the adequacy of the consideration to be received by, or fairness
to, shareholders. Regulatory approvals do not constitute an endorsement or
recommendation of the proposed Merger.
InterWest and KVB are not aware of any governmental approvals or compliance
with banking laws and regulations that are required for consummation of the
Merger other than those described above. Should any other approval or action be
required, it is presently contemplated that such approval or action would be
sought. There can be no assurance that any such approval or action, if needed,
could be obtained and, if such approvals or actions are obtained, there can be
no assurance as to the timing thereof. The Merger cannot proceed in the absence
of all requisite regulatory approvals. See "--Effective Date of the Merger,"
"--Conditions to Consummation of the Merger," and "--Amendment or Termination."
The Merger Agreement provides that if the Merger has not been consummated by
December 31, 1998, the Merger Agreement may be terminated by InterWest or KVB.
Since there is the possibility that regulatory approval may not be obtained for
a substantial period of time after approval of the Merger Agreement by KVB's
shareholders, there can be no assurance that the Merger will be consummated by
December 31, 1998. In addition, should regulatory approval require any material
change, a resolicitation of shareholders may be required if regulatory approval
is obtained after stockholder approval of the Merger Agreement.
KVB STOCK OPTION AGREEMENT
As an inducement to InterWest to enter into the Merger Agreement, KVB has
granted an option (the "Option") to InterWest, by agreement dated as of April
20, 1998 (the "Option Agreement") to purchase authorized but unissued shares of
KVB Common Stock , which, if issued, would constitute 19.9% of the outstanding
KVB Common Stock, at a price of $50 per share. InterWest may only exercise the
Option upon (i) the occurrence of certain events set forth in the Option
Agreement, and (ii) InterWest's obtaining of any regulatory approvals necessary
for the acquisition of the KVB Common Stock subject to the Option; additionally
InterWest must have performed its obligations under the Merger Agreement.
InterWest may transfer the Option only if an event occurs triggering InterWest's
right to exercise the Option. The Option Agreement is attached to this
Prospectus/Proxy Statement as APPENDIX B.
AMENDMENT OR TERMINATION
InterWest may elect to modify the structure of the Merger, but InterWest
will not have the right to make any revision to the structure of the Merger
which (i) changes the amount or kind of the consideration which KVB shareholders
are entitled to receive or (ii) adversely affects the tax treatment to KVB
shareholders of receiving such consideration. Prior to the Effective Date of the
Merger, any condition of the Merger Agreement may (to the extent allowed by law)
be waived in writing by the party benefited by the provision or may be amended
or modified by an agreement in writing approved by the Boards of Directors of
InterWest and KVB. After approval of the Merger Agreement by the shareholders of
KVB, the Merger Agreement may not, without further approval of such
shareholders, be amended in any manner that would alter the consideration to be
received by KVB shareholders in exchange for their KVB Common Stock.
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The Merger Agreement may be terminated prior to the Effective Date of the
Merger, either before or after approval by KVB shareholders, as follows: (i) by
the mutual consent of the parties; (ii) by either party if the other party has
committed a material breach that cannot be or has not been cured within 30 days
after the giving of written notice of such breach; (iii) by either party if the
Closing Date shall not have occurred by December 31, 1998; and (iv) by either
party if the shareholders of KVB fail to approve the Merger Agreement.
In the event of the valid termination of the Merger Agreement by either
InterWest or KVB, the obligations of the parties to the Merger Agreement will
terminate and there will be no liability on the part of either party or their
officers or directors except for liability for breach of the Merger Agreement or
for any misstatement or misrepresentation made prior to such termination.
CONDUCT OF BUSINESS PENDING THE MERGER
KVB and KV Bank have agreed in the Merger Agreement not to take certain
actions without the prior approval of InterWest relating to their operations
pending consummation of the Merger. These actions include among other things,
(i) issuing or selling any KVB Common Stock; (ii) KVB paying any dividends,
other than a dividend that may be declared and paid for the quarter ending
September 30, 1998, if the Merger has not been completed by that date, in an
amount (per share) equal to the amount of the InterWest 1998 third quarter cash
dividend multiplied by 1.714 (the Exchange Ratio), divided by two (2); (iii)
incurring any indebtedness for borrowed money or becoming liable for the
obligations of any other entity other than in the ordinary course of business;
(iv) changing its lending, investment, liability management or other material
banking policies in any respect; (v) imposing any lien on any share of stock
held by KVB; (vi) entering into or amending any employment agreements or any
employee benefit plans or granting any increases (other than in the ordinary
course of business); (vii) disposing of any material portion of its assets or
acquiring any material portion of the business or property of any other entity;
(viii) amending its articles of incorporation or bylaws; (ix) settling any
claims involving any liability for material money damages; (x) entering into,
terminating or changing any material agreements, except for those agreements
that may be terminated by KVB without penalty upon not more than 60 days' prior
written notice; and (xi) extending credit other than in accordance with existing
lending policies, with specific exceptions granted to KV Bank. Moreover, KVB and
KV Bank are required, among other things, to operate their businesses in the
usual, regular and ordinary course and to use their best efforts to preserve
their business relationships and to retain key employees. Additionally, KVB
agrees not to incur expenses in connection with the transaction contemplated by
the Merger Agreement in excess of $125,000.
DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
The persons serving as directors and executive officers of InterWest
immediately prior to the Merger will continue to serve in such capacities
following the Merger.
Following the Merger, the directors of KV Bank will continue to serve
through 1998 on the KV Bank Board, along with Mr. Stephen M. Walden, President,
Chief Executive Officer and a director of InterWest, and Mr. Gary M. Bolyard,
Vice Chairman/Commercial Banking and a director of InterWest. Effective January
1, 1998, InterWest anticipates that the number of directors of KV Bank will be
reduced to between five and seven current KV Bank directors, plus Messrs. Walden
and Bolyard. The executive officers of KV Bank will remain unchanged immediately
following the Merger.
As a condition to the consummation of the Merger, each of the directors of
KVB will enter into a Director's Agreement with InterWest. The Director's
Agreements prohibit these directors from competing with InterWest or any of its
subsidiaries in Kittitas County for a period of two years after the Effective
Date.
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EMPLOYEE BENEFIT PLANS
The Merger Agreement confirms InterWest's intention to allow the employees
of KVB and KV Bank who continue as employees after the Merger to participate in
certain InterWest employee benefit plans, on substantially the same terms as
employees of InterWest and its other subsidiaries. For the purposes of
determining eligibility to participate in such plans, and the vesting of
benefits under such plans (but not the accrual of benefits under such plans)
InterWest will give effect to years of service with KVB or KV Bank as though
such service was with InterWest. On the Effective Date, all outstanding and
unexercised options to purchase KVB Common Stock will be converted into options
to purchase InterWest Common Stock, adjusted as to both number of shares and
price using the Exchange Ratio.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The directors and executive officers of KVB, together with their affiliates,
beneficially owned a total of 58,123 shares of KVB Common Stock (representing
29.54% of all outstanding shares of KVB Common Stock) as of the KVB Record Date.
The directors and executive officers will receive the same consideration in the
Merger for their shares, including any shares which they may acquire prior to
the Effective Date pursuant to the exercise of stock options, as the other
shareholders of KVB. Certain members of KVB's management and the KVB Board have
certain interests in the Merger as described below that are in addition to their
interest as shareholders of KVB generally. KVB's Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the Merger contemplated thereby.
DIRECTORS' AND OFFICERS' LIABILITY. The Merger Agreement provides that
following the Effective Date, InterWest will indemnify the directors, officers
and employees of KVB against certain liabilities to the extent that such persons
were entitled to indemnification under Washington law and the Articles of
Incorporation and Bylaws of KVB and KV Bank.
EMPLOYMENT AGREEMENTS. The following officers of KVB or KV Bank have
entered into employment agreements with KV Bank which will become effective upon
the consummation of the Merger:
STEVEN F. HALVERSON. Mr. Halverson's employment agreement calls for him
to serve as President and Chief Executive Officer of KV Bank from the
Effective Date until December 31, 1999. Mr. Halverson will receive a base
annual salary during that term of $120,000 plus a car allowance and
director's fees. Mr. Halverson will be entitled to receive all benefits that
are generally provided to similarly situated employees of InterWest and will
be entitled to receive 40% of the total amount allocated in 1999 for the KV
Bank incentive bonus plan for officers. If prior to the end of the
agreement's term, Mr. Halverson resigns without good reason (as defined in
the agreement) or is dismissed for cause (as defined in the agreement), he
will receive a lump sum severance equal to 150% of his base annual salary.
If Mr. Halverson completes the term of the agreement or, if prior to the end
of the term, he resigns for good reason, is dismissed without cause or dies,
Mr. Halverson (or his estate) will receive a lump-sum payment equal to just
over twice his base annual salary. The agreement also provides for a
restriction of up to two years on Mr. Halverson's ability to compete with
InterWest or KV Bank following termination of his employment (voluntary or
otherwise).
RONALD GOODWIN. Mr. Goodwin's employment agreement calls for him to
serve as Senior Vice President of KV Bank from the Effective Date until June
30, 2000. Mr. Goodwin will receive a base annual salary of $68,900 and will
be entitled to receive all benefits that are provided to similarly situated
employees of InterWest and will be entitled to participate in the KV Bank
incentive bonus plan for officers. If prior to the end of the agreement's
term, Mr. Goodwin resigns without good reason (as defined in the agreement)
or is dismissed for cause (as defined in the agreement), he will receive no
severance. If before the end of the agreement's term, Mr. Goodwin resigns
for good reason or is dismissed without cause, he will receive his base
salary in effect through the end of the term plus
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an amount equal to one fourth of his base salary in effect as of the date of
termination. If Mr. Goodwin completes the term of his employment under the
agreement, he will receive a lump sum payment equal to one fourth of his
base salary in effect at the time. The agreement also provides for a
restriction of up to two years on Mr. Goodwin's ability to compete with
InterWest or KV Bank following termination of his employment (voluntary or
otherwise).
ZORA PETERSON. Mrs. Peterson's employment agreement calls for her to
serve as Vice President of KV Bank from the Effective Date until June 30,
2000. Mrs. Peterson will receive a base annual salary of $48,000 and will be
entitled to receive all benefits that are provided to similarly situated
employees of InterWest and will be entitled to participate in the KV Bank
incentive bonus plan for officers. If prior to the end of the agreement's
term, Mrs. Peterson resigns without good reason (as defined in the
agreement) or is dismissed for cause (as defined in the agreement), she will
receive a lump sum severance equal to one half of her base salary in effect
for the calendar year in which she is terminated. If prior to the end of the
term Mrs. Peterson resigns for good reason or is dismissed without cause,
Mrs. Peterson will receive a lump-sum payment equal to 18 months of her base
salary in effect for the calendar year in which her employment is
terminated. If Mrs. Peterson remains employed through the end of the term
and after expiration of the term is terminated by KV Bank for any reason or
resigns for any reason, she will receive a severance equal to 18 months of
her base salary in effect for the year of termination. Mrs. Peterson's
agreement also provides for a restriction of up to two years on her ability
to compete with InterWest or KV Bank following termination of her employment
(voluntary or otherwise).
JANE KIRSCH. Ms. Kirsch's employment agreement calls for her to serve
as Controller of KV Bank from the Effective Date until December 31, 1999.
Ms. Kirsch will receive a base annual salary of $44,004 and will be entitled
to receive all benefits that are provided to similarly situated employees of
InterWest and will be entitled to participate in the KV Bank incentive bonus
plan for officers. If prior to the end of the agreement's term, Ms. Kirsch
resigns without good reason (as defined in the agreement) or is dismissed
for cause (as defined in the agreement), Ms. Kirsch will be entitled no
severance payment. If before the end of the agreement's term, Ms. Kirsch
resigns for good reason or is dismissed without cause, she will receive her
base salary in effect through the end of the term plus an amount equal to
one fourth of her base salary in effect as of the date of termination. If
Ms. Kirsch completes the term of her employment under the agreement, she
will receive a lump sum payment equal to one fourth of her base salary in
effect at the time. Ms. Kirsch's agreement also provides for no restriction
on her ability to compete with InterWest or KV Bank following termination of
her employment.
DIRECTOR NON-COMPETITION AGREEMENTS. Each director of Kittitas has signed
an agreement which restricts such director's ability to compete with InterWest
or any of its subsidiaries or affiliates within Kittitas County, Washington for
a period of 2 years after the Effective Date of the Merger.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a discussion of the material federal income tax
consequences of the Merger that are generally applicable to KVB shareholders.
This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended ("Code"), existing regulations thereunder
(including final, temporary or proposed), and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences described herein.
The following discussion is intended only as a summary of the material federal
income tax consequences of the Merger and does not purport to be a complete
analysis or listing of all of the potential tax effects relevant to a decision
on whether to vote in favor of approval of the Merger Agreement.
Consummation of the Merger is conditioned upon the receipt by InterWest and
KVB of an opinion of Graham & Dunn, P.C., special counsel to InterWest, to the
effect that if the Merger is consummated in
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accordance with the term set forth in the Merger Agreement, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
The opinion of counsel, which will be delivered on the Closing Date, is filed as
an exhibit to the Registration Statement, and the foregoing is only a summary of
such tax consequences as described in the opinion. An opinion of counsel only
represents counsel's best legal judgment, and has no binding effect or official
status of any kind, and no assurance can be given that contrary positions may
not be taken by the Internal Revenue Service (the "IRS") or a court considering
the issues. Neither KVB nor InterWest has requested or will request a ruling
from the IRS with regard to the federal income tax consequences of the Merger.
If the Merger occurs in accordance with the Merger Agreement, the Merger
will constitute a "reorganization" for federal income tax purposes under Section
368(a)(1)(A) of the Code with the following federal income tax consequences:
(1) No gain or loss will be recognized by InterWest or KVB as a result of
the Merger.
(2) KVB shareholders who receive solely shares of InterWest Common Stock in
exchange for their KVB Common Stock pursuant to the Merger will recognize
no gain or loss, except with respect to cash received in lieu of
fractional shares, if any, as discussed below.
(3) A KVB shareholder who receives only cash (i) in exchange for shares of
KVB Common Stock pursuant to the Merger or (ii) as a result of the
exercise of dissenters' rights, will realize gain or loss for federal
income tax purposes (determined separately as to each block of KVB Common
Stock exchanged) in an amount equal to the difference between (x) the
amount of cash received by such shareholder, and (y) such shareholder's
tax basis for the shares of KVB Common Stock surrendered in exchange
therefor, provided that the cash payment does not have the effect of the
distribution of a dividend. Any such gain or loss will be recognized for
federal income tax purposes and will be treated as capital gain or loss.
However, if the cash payment does have the effect of the distribution of
a dividend, the amount of taxable income recognized generally will equal
the amount of cash received; such income generally will be taxable as a
dividend; and no loss (or other recovery of such shareholder's tax basis
for the shares of KVB Common Stock surrender in the exchange) generally
will be recognized by such shareholder. The determination of whether a
cash payment has the effect of the distribution of a dividend will be
made pursuant to the provisions and limitations of Section 302 of the
Code, taking into account the constructive stock ownership rules of
Section 318 of the Code. See "--Impact of Section 302 of the Code,"
below.
(4) A KVB shareholder who receives shares of InterWest Common Stock and cash
in exchange for shares of KVB Common Stock in the Merger will realize
gain (determined separately as to each block of KVB Common Stock
exchanged) if the sum of the amount of cash and the fair market value of
the shares of InterWest Common Stock received by such shareholder exceeds
such shareholder's tax basis for the shares of KVB Common Stock
surrendered in exchange therefor. The amount of such gain that is
recognized for federal income tax purposes will be limited to the amount
of cash received. If the amount of cash received exceeds the amount of
gain realized, only the amount of gain realized will be recognized for
federal income tax purposes. Any such gain recognized will be taxable as
capital gain, provided that the cash payment does not have the effect of
the distribution of a dividend. Any loss realized will not be recognized
for federal income tax purposes. Under Section 356 of the Code, the
determination of whether a cash payment has the effect of the
distribution of a dividend generally will be made in accordance with the
provisions and limitations of Section 302 of the Code, taking into
account the constructive stock ownership rules of Section 318 of the
Code. See "--Impact of Section 302 of the Code," below.
(5) The aggregate adjusted tax basis of the shares of InterWest Common Stock
received by each KVB shareholder in the Merger (including any fractional
share of InterWest Common Stock deemed to be received, as described in
paragraph 7 below), will be equal to the aggregate
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adjusted tax basis of the shares of KVB Common Stock surrendered,
decreased by the amount of any cash received and increased by the amount
of any gain (or dividend) recognized.
(6) The holding period of the shares of InterWest Common Stock (including
any fractional shares of InterWest Common Stock deemed to be received, as
described in paragraph 7 below) will include the holding period of the
shares of KVB Common Stock exchanged therefor.
(7) A KVB shareholder who receives cash in the Merger in lieu of a
fractional share of InterWest Common Stock will be treated as if the
fractional share had been received in the Merger and then redeemed by
InterWest in return for the cash. The receipt of such cash will cause the
recipient to recognize capital gain or loss equal to the difference
between the amount of cash received and the portion of such shareholder's
adjusted tax basis in the shares of InterWest Common Stock allocable to
the fractional share.
IMPACT OF SECTION 302 OF THE CODE. The determination of whether a cash
payment has the effect of the distribution of a dividend generally will be made
in accordance with the provisions of Section 302 of the Code. A cash payment to
a KVB shareholder will be considered not to have the effect of the distribution
of a dividend under Section 302 of the Code and such shareholder will recognize
capital gain or loss only if the cash payment (i) results in a "complete
redemption" of such shareholder's actual and constructive stock interest, (ii)
results in a "substantially disproportionate" reduction in such shareholder's
actual and constructive stock interest or (iii) is "not essentially equivalent
to a dividend."
A cash payment will result a "complete redemption" of a shareholder's stock
interest and such shareholder will recognize capital gain or loss if such
shareholder does not actually or constructively own any stock after the receipt
of the cash payment. A reduction in a shareholder's stock interest will be
"substantially disproportionate" and such shareholder will recognize capital
gain or loss if (i) the percentage of outstanding shares actually and
constructively owned by such shareholder after the receipt of the cash payment
is less than four-fifths (80%) of the percentage of outstanding shares actually
and constructively owned by such shareholder immediately prior to the receipt of
the cash payment. A cash payment will qualify as "not essentially equivalent to
a dividend" and a shareholder will recognize capital gain or loss if it results
in a meaningful reduction in the percentage of outstanding shares actually and
constructively owned by such shareholder. No specific tests apply to determine
whether a reduction in a shareholder's ownership interest is meaningful; rather,
such determination will be made based on all the facts and circumstances
applicable to such KVB shareholder. No general guidelines dictating the
appropriate interpretation of facts and circumstances have been announced by the
courts or issued by the Internal Revenue Service (the "Service"). However, the
Service has indicated in Revenue Ruling 76-385 that a minority shareholder
(i.e., a holder who exercises no control over corporate affairs and whose
proportionate stock interest is minimal in relation to the number of shares
outstanding) generally is treated as having had a "meaningful reduction" in
interest if a cash payment reduces such holder's actual and constructive stock
ownership to any extent.
The determination of ownership for purposes of the three foregoing tests
will be made by taking into account both shares owned actually by such
shareholder and shares owned constructively by such shareholder pursuant to
Section 318 of the Code. Under Section 318 of the Code, a shareholder will be
deemed to own stock that is actually or constructively owned by certain members
of his or her family (spouse, children, grandchildren and parents) and other
related parties including, for example, certain entities in which such
shareholder has a direct or indirect interest (including partnerships, estates,
trusts and corporations), as well as shares of stock that such shareholder (or a
related person) has the right to acquire upon exercise of an option or
conversion right. Section 302(c)(2) of the Code provides certain exceptions to
the family attribution rules for the purpose of determining whether a complete
redemption of shareholder's interest has occurred for purposes of Section 302 of
the Code. These exceptions apply only to KVB shareholders who receive, in the
Merger, solely cash in return for KVB Common Stock they actually own.
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BECAUSE THE DETERMINATION OF WHETHER A PAYMENT WILL BE TREATED AS HAVING THE
EFFECT OF THE DISTRIBUTION OF A DIVIDEND WILL GENERALLY DEPEND UPON THE FACTS
AND CIRCUMSTANCES OF EACH KVB SHAREHOLDER, KVB SHAREHOLDERS ARE STRONGLY ADVISED
TO CONSUL THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF CASH RECEIVED IN
THE MERGER.
Each KVB shareholder's ability to elect the type of consideration he or she
receives pursuant to the Merger affords each such shareholder the opportunity to
select that type of consideration which will best serve his or her personal tax
and financial planning needs. However, each KVB shareholder should be aware that
his or her ability to satisfy (or, alternatively, fail to satisfy) any of the
foregoing tests and thereby avoid (or, alternatively, obtain) dividend treatment
may be affected by any reallocation of the type of Merger Consideration by the
Exchange Agent, pursuant to the Merger Agreement. See "--Basic Terms of the
Merger" and "--Allocation Procedures."
THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND
CIRCUMSTANCES OF EACH KVB SHAREHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT,
THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY
NOT APPLY TO EACH KVB SHAREHOLDER. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME
TAX CONSEQUENCES, EACH KVB SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for using the purchase
method of accounting by InterWest under generally accepted accounting
principles. Accordingly, using the purchase method of accounting, the assets and
liabilities of KVB will be recorded by InterWest at their respective fair values
at the time of the acquisition. The excess of InterWest's purchase price over
the net fair value of assets acquired and liabilities assumed, including
identifiable intangible assets, is recorded as goodwill and amortized as an
expense over periods not to exceed 25 years. Under the purchase method of
accounting, prior period financial statements are not restated and the results
of operation of KV Bank will be included in InterWest's consolidated statement
of operations after the date of acquisition.
DISSENTERS' RIGHTS OF APPRAISAL
In accordance with the Appraisal Laws, KVB shareholders have the right to
dissent from the Merger and to receive payment in cash for the "fair value" of
their shares of KVB Common Stock.
If the number of shares of KVB Common Stock for which cash is paid (in
payments for Dissenting Shares plus cash payments in lieu of fractional shares
of KVB Common Stock) exceeds 5% of the outstanding shares of KVB Common Stock,
InterWest may elect not to consummate the Merger. KVB shareholders electing to
exercise dissenters' rights must comply with the provisions of the Appraisal
Laws in order to perfect their rights. KVB and InterWest will require strict
compliance with the statutory procedures. The following is intended as a brief
summary of the material provisions of the procedures required to be followed by
a KVB shareholder in order to dissent from the Merger and perfect the
shareholder's dissenters' rights. THIS SUMMARY, HOWEVER, IS NOT A COMPLETE
STATEMENT OF ALL APPLICABLE REQUIREMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE APPRAISAL LAWS, THE FULL TEXT OF WHICH IS SET FORTH IN APPENDIX
C HERETO.
28
<PAGE>
A KVB shareholder who wishes to assert dissenters' rights must (a) deliver
to KVB before the Special Meeting written notice of the shareholder's intent to
demand payment for the shareholder's shares if the Merger is effected, and (b)
not vote such shares in favor of the Merger. A shareholder wishing to deliver
such notice should hand deliver or mail such notice to KVB at the following
address:
Kittitas Valley Bancorp, Inc.
101 West 8th Avenue
Ellensburg, WA 98926
Attn: Steven F. Halverson
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all of the shares the shareholder owns or over which the
shareholder has the power to direct the vote. However, if a record shareholder
is a nominee for several beneficial shareholders some of whom which 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 KVB 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 KVB the record shareholder's written consent
and by dissenting with respect to all the shares of which the shareholder is the
beneficial shareholder or over which such shareholder has power to direct the
vote.
A SHAREHOLDER WHO DOES NOT DELIVER TO KVB PRIOR TO THE SPECIAL MEETING A
WRITTEN NOTICE OF THE SHAREHOLDER'S INTENT TO DEMAND PAYMENT FOR THE "FAIR
VALUE" OF THE SHARES WILL LOSE THE RIGHT TO EXERCISE DISSENTERS' RIGHTS. IN
ADDITION, ANY SHAREHOLDER ELECTING TO EXERCISE DISSENTERS' RIGHTS MUST EITHER
VOTE AGAINST THE MERGER OR ABSTAIN FROM VOTING.
If the Merger is effected, InterWest shall, within 10 days after the
Effective Date of the Merger, deliver a written notice to all shareholders who
properly perfected their dissenters' rights. Such notice will, among other
things, (a) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited; (b) inform holders of
uncertificated shares to what extent transfer of the shares will be restricted
after the payment demand is received; (c) supply a form for demanding payment;
and (d) set a date by which InterWest must receive the payment demand, which
date will be between 30 and 60 days after notice is delivered.
A shareholder wishing to exercise dissenters' rights must at that time file
the payment demand and deliver share certificates as required in the notice.
Failure to do so will cause such person to lose such dissenters' rights.
Within 30 days after the Merger occurs or receipt of the payment demand,
whichever is later, KVB will pay each dissenter with properly perfected
dissenters' rights InterWest's estimate of the "fair value" of the shareholder's
interest, plus accrued interest from the Effective Date of the Merger. With
respect to a dissenter who does not beneficially own shares of KVB Common Stock
prior to the public announcement of the Merger, KVB is required to make the
payment only after the dissenter has agreed to accept the payment in full
satisfaction of the dissenter's demands. "Fair value" means the value of the
shares immediately before the Effective Date of the Merger, excluding any
appreciation in anticipation of the Merger. The rate of interest is generally
required to be the rate at which KVB can borrow money from other banks.
A dissenter dissatisfied with InterWest's estimate of the fair value may
notify InterWest of the dissenter's estimate of the fair value. If InterWest
does not accept the dissenter's estimate and the parties do not otherwise settle
on a fair value, then InterWest must within 60 days petition a court to
determine the fair value.
In view of the complexity of the Appraisal Laws, shareholders of KVB who may
wish to dissent from the Merger and pursue appraisal rights should consult their
legal advisors.
29
<PAGE>
RESALE OF INTERWEST COMMON STOCK
The InterWest Common Stock to be issued in the Merger will be transferable
free of restrictions under the 1933 Act, except for shares received by persons,
including directors and executive officers of KVB, who may be deemed to be
"affiliates" of KVB, as that term is used in (i) paragraphs (c) and (d) of Rule
145 under the 1933 Act and/or (ii) Accounting Series Releases 130 and 135, as
amended, of the SEC. Affiliates may not sell their shares of InterWest Common
Stock acquired in the Merger, except (a) pursuant to an effective registration
statement under the 1933 Act covering those shares, (b) in compliance with Rule
145, or (c) in accordance with an opinion of counsel reasonably satisfactory to
InterWest, under other applicable exemptions from the registration requirements
of the 1933 Act. InterWest will obtain customary agreements with all KVB
directors, officers, and affiliates of KVB and InterWest, under which such
persons have represented that they will not dispose of their shares of InterWest
Common Stock received in the Merger or the shares of KVB Common Stock or
InterWest Common Stock held by them before the Merger, except in compliance with
the 1933 Act and the rules and regulations promulgated thereunder. This
Prospectus/Proxy Statement does not cover any resales of the InterWest Common
Stock received by affiliates of KVB.
NO SOLICITATION
The KVB has agreed in the Merger Agreement that neither it nor any of its
subsidiaries will solicit, initiate or encourage inquiries or proposals with
respect to or, except as required by the fiduciary duties of the KVB Board,
furnish any nonpublic information relating to or participate in any negotiations
concerning, any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, KVB or any of its subsidiaries
or any merger or other business combination with KVB or any of its subsidiaries.
EXPENSES
The Merger Agreement provides that InterWest and KVB will each pay their own
expenses in connection with the Merger Agreement and the transactions
contemplated thereby, except that printing expenses for this Prospectus/Proxy
Statement will be shared equally.
30
<PAGE>
INTERWEST PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following tables set forth unaudited condensed combined historical
financial statements for InterWest to reflect the recent mergers with Puget,
Pacific and Pioneer. These mergers have been accounted using the pooling of
interest method by InterWest under generally accepted accounting principles.
Accordingly, prior period financial statements are restated to include the
accounts of the merged companies as if the companies were combined for all
periods presented. The merger with Puget was completed during January, 1998 and
the financial statements for InterWest as of and for the quarters ended March
31, 1998 and 1997 include Puget. The mergers with Pacific and Pioneer were
completed during June, 1998 and InterWest's historical financial statements do
not currently include the accounts of Pacific or Pioneer.
31
<PAGE>
INTERWEST, PACIFIC AND PIONEER
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
COMBINED
INTERWEST,
PACIFIC AND
INTERWEST PACIFIC PIONEER PIONEER
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
Cash and cash equivalents.................................... $ 79,936 $ 29,850 $ 7,415 $ 117,201
Securities................................................... 725,770 22,688 33,564 782,022
Loans receivable, net........................................ 1,211,065 135,886 62,791 1,409,742
Other assets................................................. 74,251 5,759 4,147 84,157
------------ ---------- ---------- ------------
Total assets................................................. $ 2,091,022 $ 194,183 $ 107,917 $ 2,393,122
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Total deposits............................................... $ 1,238,725 $ 166,229 $ 86,623 $ 1,491,577
Borrowings................................................... 696,444 10,000 10,949 717,393
Accrued expenses and other liabilities....................... 14,497 1,577 1,008 17,082
------------ ---------- ---------- ------------
Total liabilities............................................ 1,949,666 177,806 98,580 2,226,052
Total stockholders' equity................................... 141,356 16,377 9,337 167,070
------------ ---------- ---------- ------------
Total liabilities and stockholders' equity................... $ 2,091,022 $ 194,183 $ 107,917 $ 2,393,122
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
CONDENSED COMBINED STATEMENT OF INCOME
Interest Income.............................................. $ 38,392 $ 3,692 $ 2,009 $ 44,093
Interest Expense............................................. 22,540 1,156 958 24,654
Net Interest Income Before Provision for Losses on Loans..... 15,852 2,536 1,051 19,439
------------ ---------- ---------- ------------
Provision for Losses on Loans................................ 420 22 129 571
------------ ---------- ---------- ------------
Net Interest Income After Provision for Losses on Loans...... 15,432 2,514 922 18,868
Noninterest income........................................... 5,340 433 901 6,674
Noninterest expense.......................................... 13,576 2,028 1,304 16,908
------------ ---------- ---------- ------------
Income before income taxes................................... 7,196 919 519 8,634
------------ ---------- ---------- ------------
Income Tax Expense........................................... 2,566 313 202 3,081
------------ ---------- ---------- ------------
Net Income................................................... $ 4,630 $ 606 $ 317 $ 5,553
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Basic Net Income Per Share................................... $ 0.55 $ 1.53 $ 0.91 $ 0.53
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Diluted Net Income Per Share................................. $ 0.54 $ 1.47 $ 0.88 $ 0.52
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
32
<PAGE>
INTERWEST, PACIFIC AND PIONEER
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE QUARTER ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
COMBINED
INTERWEST,
PACIFIC AND
INTERWEST PACIFIC PIONEER PIONEER
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Interest Income.............................................. $ 34,290 $ 3,078 $ 1,929 $ 39,297
Interest Expense............................................. 19,421 939 914 21,274
------------ ---------- ---------- ------------
Net Interest Income Before Provision for Losses on Loans..... 14,869 2,139 1,015 18,023
------------ ---------- ---------- ------------
Provision for Losses on Loans................................ 321 59 50 430
------------ ---------- ---------- ------------
Net Interest Income After Provision on Loans................. 14,548 2,080 965 17,593
Noninterest income........................................... 3,328 298 422 4,048
Noninterest expense.......................................... 9,918 1,688 1,105 12,711
------------ ---------- ---------- ------------
Income before income taxes................................... 7,958 690 282 8,930
------------ ---------- ---------- ------------
Income Tax Expense........................................... 2,752 239 93 3,084
------------ ---------- ---------- ------------
Net Income................................................... $ 5,206 $ 451 $ 189 $ 5,846
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Basic Net Income Per Share................................... $ 0.62 $ 1.16 $ 0.54 $ 0.56
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Diluted Net Income Per Share................................. $ 0.61 $ 1.12 $ 0.52 $ 0.55
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
33
<PAGE>
INTERWEST, PUGET, PACIFIC AND PIONEER
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
COMBINED
INTERWEST,
PUGET,
PACIFIC AND
INTERWEST PUGET PACIFIC PIONEER PIONEER
------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
CONDENSED COMBINED STATEMENT OF FINANCIAL
CONDITION
Cash and cash equivalents......................... $ 205,398 $ 3,327 $ 31,343 $ 8,046 $ 248,114
Securities........................................ 654,913 9,401 24,697 33,661 722,672
Loans receivable, net............................. 1,114,711 38,731 134,928 60,311 1,348,681
Other assets...................................... 71,683 1,651 6,275 3,853 83,462
------------ --------- ---------- ---------- ------------
Total assets...................................... $ 2,046,705 $ 53,110 $ 197,243 $ 105,871 $ 2,402,929
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Total deposits.................................... $ 1,171,440 $ 45,603 $ 165,817 $ 85,601 $ 1,468,461
Borrowings........................................ 731,077 1,200 13,500 10,191 755,968
Accrued expenses and other liabilities............ 14,364 379 1,948 1,039 17,730
------------ --------- ---------- ---------- ------------
Total liabilities................................. 1,916,881 47,182 181,265 96,831 2,242,159
Total stockholders' equity........................ 129,824 5,928 15,978 9,040 160,770
------------ --------- ---------- ---------- ------------
Total liabilities and stockholders' equity........ $ 2,046,705 $ 53,110 $ 197,243 $ 105,871 $ 2,402,929
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
CONDENSED COMBINED STATEMENT OF INCOME
Interest Income................................... $ 138,011 $ 4,446 $ 14,113 $ 8,636 $ 165,206
Interest Expense.................................. 80,903 1,672 4,629 3,877 91,081
Net Interest Income Before Provision for Losses on
Loans........................................... 57,108 2,774 9,484 4,759 74,125
------------ --------- ---------- ---------- ------------
Provision for Losses on Loans..................... 1,000 68 252 188 1,508
------------ --------- ---------- ---------- ------------
Net Interest Income After Provision for Losses on
Loans........................................... 56,108 2,706 9,232 4,571 72,617
Noninterest income................................ 14,714 492 1,531 1,908 18,645
Noninterest expense............................... 39,765 1,961 7,327 4,979 54,032
------------ --------- ---------- ---------- ------------
Income before income taxes........................ 31,057 1,237 3,436 1,500 37,230
------------ --------- ---------- ---------- ------------
Income Tax Expense................................ 10,758 322 1,182 419 12,681
------------ --------- ---------- ---------- ------------
Net Income........................................ $ 20,299 $ 915 $ 2,254 $ 1,081 $ 24,549
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Basic Net Income Per Share........................ $ 2.53 $ 4.21 $ 5.79 $ 3.09 $ 2.37
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Diluted Net Income Per Share...................... $ 2.48 $ 4.15 $ 5.55 $ 2.98 $ 2.30
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
</TABLE>
34
<PAGE>
INTERWEST, PUGET, PACIFIC AND PIONEER
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
COMBINED
INTERWEST,
PUGET,
PACIFIC AND
INTERWEST PUGET PACIFIC PIONEER PIONEER
------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
CONDENSED COMBINED STATEMENT OF FINANCIAL
CONDITION
Cash and cash equivalents......................... $ 48,501 $ 2,767 $ 18,623 $ 10,083 $ 79,974
Securities........................................ 624,791 10,664 28,319 30,102 693,876
Loans receivable, net............................. 975,971 30,473 109,333 54,494 1,170,271
Other assets...................................... 62,888 1,422 4,490 3,464 72,264
------------ --------- ---------- ---------- ------------
Total assets...................................... $ 1,712,151 $ 45,326 $ 160,765 $ 98,143 $ 2,016,385
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Total deposits.................................... $ 1,120,743 $ 40,111 $ 146,325 $ 82,223 $ 1,389,402
Borrowings........................................ 460,497 400 0 5,796 466,693
Accrued expenses and other liabilities............ 19,890 347 841 1,565 22,643
------------ --------- ---------- ---------- ------------
Total liabilities................................. 1,601,130 40,858 147,166 89,584 1,878,738
Total stockholders' equity........................ 111,021 4,468 13,599 8,559 137,647
------------ --------- ---------- ---------- ------------
Total liabilities and stockholders' equity........ $ 1,712,151 $ 45,326 $ 160,765 $ 98,143 $ 2,016,385
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
CONDENSED COMBINED STATEMENT OF INCOME
Interest Income................................... $ 120,913 $ 3,708 $ 11,548 $ 7,658 $ 143,827
Interest Expense.................................. 68,808 1,445 3,745 3,129 77,127
------------ --------- ---------- ---------- ------------
Net Interest Income Before Provision for Losses on
Loans........................................... 52,105 2,263 7,803 4,529 66,700
------------ --------- ---------- ---------- ------------
Provision for Losses on Loans..................... 1,960 62 158 272 2,452
------------ --------- ---------- ---------- ------------
Net Interest Income After Provision on Loans...... 50,145 2,201 7,645 4,257 64,248
Noninterest income................................ 12,553 333 1,167 1,691 15,744
Noninterest expense............................... 43,819 1,586 5,996 4,315 55,716
------------ --------- ---------- ---------- ------------
Income before income taxes........................ 18,879 948 2,816 1,633 24,276
------------ --------- ---------- ---------- ------------
Income Tax Expense................................ 6,108 237 970 470 7,785
------------ --------- ---------- ---------- ------------
Net Income........................................ $ 12,771 $ 711 $ 1,846 $ 1,163 $ 16,491
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Basic Net Income Per Share........................ $ 1.62 $ 3.39 $ 4.80 $ 3.22 $ 1.61
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
Diluted Net Income Per Share...................... $ 1.58 $ 3.39 $ 4.63 $ 3.14 $ 1.57
------------ --------- ---------- ---------- ------------
------------ --------- ---------- ---------- ------------
</TABLE>
35
<PAGE>
INTERWEST, PUGET, PACIFIC AND PIONEER
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
COMBINED
INTERWEST,
PUGET,
PACIFIC AND
INTERWEST PUGET PACIFIC PIONEER PIONEER
---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Interest Income............................................ $ 100,264 $ 3,224 $ 10,082 $ 6,161 $ 119,731
Interest Expense........................................... 57,926 1,337 3,366 2,490 65,119
---------- --------- --------- --------- -----------
Net Interest Income Before Provision for Losses on Loans... 42,338 1,887 6,716 3,671 54,612
---------- --------- --------- --------- -----------
Provision for Losses on Loans.............................. 720 22 35 152 929
---------- --------- --------- --------- -----------
Net Interest Income After Provision for Losses on Loans.... 41,618 1,865 6,681 3,519 53,683
Noninterest income......................................... 9,993 272 1,083 1,682 13,030
Noninterest expense........................................ 29,902 1,416 5,433 3,967 40,718
---------- --------- --------- --------- -----------
Income before income taxes................................. 21,709 721 2,331 1,234 25,995
---------- --------- --------- --------- -----------
Income Tax Expense......................................... 7,347 193 792 389 8,721
---------- --------- --------- --------- -----------
Net Income................................................. $ 14,362 $ 528 $ 1,539 $ 845 $ 17,274
---------- --------- --------- --------- -----------
---------- --------- --------- --------- -----------
Basic Net Income Per Share................................. $ 1.83 $ 2.53 $ 4.02 $ 2.34 $ 1.70
---------- --------- --------- --------- -----------
---------- --------- --------- --------- -----------
Diluted Net Income Per Share............................... $ 1.80 $ 2.53 $ 3.90 $ 2.29 $ 1.67
---------- --------- --------- --------- -----------
---------- --------- --------- --------- -----------
</TABLE>
36
<PAGE>
NOTES TO PRO FORMA UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. FISCAL YEAR ENDS
The pro forma condensed combined statements of income for the years ended
September 30, 1997, 1996 and 1995 have been adjusted to conform to Puget's,
Pacific's and Pioneer's December 31 fiscal year ends with InterWest's September
30 fiscal year end in accordance with generally accepted accounting principles.
2. NET INCOME PER SHARE
Basic and diluted net income per share is computed based on the weighted
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 Puget, Pacific and Pioneer of 1.67, 3.95 and
1.34, respectively.
37
<PAGE>
BUSINESSES OF THE PARTIES TO THE MERGER
INFORMATION CONCERNING INTERWEST
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, FNBP, Pacific and Pioneer. At March 31, 1998, InterWest
and its subsidiaries (which did not, as of such date, include Pacific or
Pioneer) had consolidated total assets of approximately $2.1 billion, total
loans receivable and loans held for sale of approximately $1.2 billion, total
deposits of approximately $1.2 billion and stockholders' equity of approximately
$141.4 million.
INTERWEST BANK. InterWest Bank is a state-chartered savings bank and is
regulated by the Division and by the FDIC, its primary federal regulator and the
insurer of its deposits. InterWest Bank's deposits are insured up to applicable
limits under the SAIF and BIF of the FDIC. InterWest Bank is 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 March 31, 1998, InterWest Bank
conducted its business through 39 full-service branch offices located in the
western and central parts of the State of Washington and one lending office
located in Everett, Washington. These offices are located primarily in towns,
small cities, suburbs and to a lesser extent, metropolitan markets.
FNBP. 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 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.
PACIFIC. Pacific Northwest Bank has been a wholly-owned subsidiary of
InterWest since June 15, 1998, when it merged with a newly-formed bank
subsidiary of InterWest. Pacific has locations in Seattle, Bellevue, Lynwood and
Kent, Washington. Pacific is a Washington state-chartered bank, and commenced
operations in October 1988.
PIONEER. Pioneer National Bank has been a wholly-owned subsidiary of
InterWest since June 16, 1998, when Pioneer's former holding company merged with
InterWest. Pioneer operates a main office in Yakima, three branch offices in
Yakima, and one branch office in Kennewick, Washington. Pioneer is a national
bank, chartered under the laws of the United States in July 1977.
InterWest anticipates that a source of future growth for InterWest will be
through acquisitions. InterWest believes that many shareholders 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 1998 10-Qs, and InterWest's 1998 Proxy
Statement, and the Form S-4 filed by InterWest (SEC File No. 333-49131) on
38
<PAGE>
April 1, 1998, 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 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.
INFORMATION CONCERNING KVB
BUSINESS
KVB was incorporated on April 25, 1995, in the State of Washington and
became a registered holding company through the acquisition of KV Bank on May
31, 1995. KVB's principal business is to hold 100% of the capital stock of its
bank subsidiary, KV Bank.
KV Bank was chartered as a national bank under the laws of the United States
on October 23, 1992, and conducts a commercial banking business in Ellensburg,
Washington. KV Bank 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. Services include those traditionally
offered by commercial banks, such as checking and savings accounts; commercial,
real estate, agricultural, personal and other installment and term loans;
travelers checks; safe deposit boxes; escrow accounts; collection services; wire
transfers and notary services. KV Bank operates a main office in Ellensburg, one
branch in Cle Elum and one branch in Roslyn, Washington. See "Facilities."
COMPETITION
The primary service area of KVB is Kittitas County in Washington. Kittitas
County covers 2,308 square miles and includes the communities of Ellensburg, Cle
Elum, Roslyn, Thorp, Kittitas and Easton. This area has a population of
approximately 25,802. With ten financial institutions serving this population,
competition is relatively high. KVB has competition within its service area from
many well-established financial institutions. In addition to competition from
five other commercial banking institutions, there is
39
<PAGE>
competition from three savings and loan companies and one credit union. Many of
KVB's competitors are larger and more substantially capitalized than KVB. They
have established positions in Kittitas County and have greater resources than
KVB for lending and to pay for advertising, physical facilities, personnel and
interest on deposited funds.
The primary factors affecting competition for deposits are interest rates
and the quality and range of financial services offered. 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 the customer.
KVB relies substantially on local promotional activity, personal contacts by
its officers, directors, employees and shareholders, extended drive-up hours,
personalized service and its reputation in the community to compete effectively.
FACILITIES
KV Bank operates out of three offices. Descriptions of KV Bank's facilities
at each location follow.
MAIN OFFICE located at 101 West 8th Avenue, Ellensburg, Washington. It has
four teller windows, one drive up window and one ATM. KV Bank owns this
building.
CLE ELUM BRANCH located at 303 East Railroad Avenue, Cle Elum, Washington.
It has three teller windows, one drive up window and one ATM. KV Bank owns this
building. Approximately 1,600 square feet of this building is leased to an
unrelated party pursuant to a lease expiring in September 2000, with a renewal
option of three years.
ROSLYN BRANCH located at 101 1/2 North 2nd Street, Roslyn, Washington. It
has two teller windows. KV Bank rents this property from an unrelated party on a
month to month basis.
EMPLOYEES
As of March 31, 1998, KVB employed 24 individuals with 19 persons working
full time and five persons working part time. KVB has no employees separate from
those of KV Bank. KVB provides a variety of benefits to its employees and
believes employee relations are good.
YEAR 2000
KV Bank has been working on becoming year 2000 compliant since October 1997.
Preparations and accomplishments to date include:
The first step was to make the KV Bank Board of Directors and senior
management aware of the issue, its risks and complexities. A Year 2000 Policy
was drawn up and a committee was appointed and assigned responsibility for
overseeing the project. The Year 2000 Committee is made up of representatives
from each department of KV Bank. A Year 2000 Plan was developed and 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 KV Bank's computer equipment and critical software programs have been
identified. KV Bank is in the process of setting up testing dates with vendors
and setting up a testing routine 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 KV Bank must
make to process into the year 2000. KV Bank plans to complete testing on all
programs by the end of the fourth quarter 1998. Management of KV Bank is
monitoring the progress that its vendors are making towards a solution. And
management is developing a contingency plan to ensure that year 2000 compliance
is achieved if solutions are not forthcoming in a timely manner.
40
<PAGE>
KV Bank does not write any of its software programs as it uses standard
programs available to the general banking community. The primary vendor for the
main processing system used by KV Bank is Jack Henry & Associates, Inc. ("JHA")
of Monet, Missouri. JHA has stated that its systems are year 2000 ready and is
providing KV Bank with instructions and assistance with testing and confirming
that its banking software is ready for the century date change.
LEGAL PROCEEDINGS
Management believes that there is no threatened or pending legal proceedings
against KVB which, if determined adversely, would have a material adverse effect
on the business or financial position of KVB.
KVB 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 KVB's subsidiary, KV Bank, as
KVB has no operations other than owning KV Bank. KV Bank operates three offices
in the communities of Ellensburg, Cle Elum and Roslyn. KV Bank's primary source
of revenue is derived from providing loans to customers, who are predominately
small and middle-market businesses and individuals.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
OVERVIEW. Total assets of $45.9 million at March 31, 1998, represents a
23.1% increase over total assets of $37.3 million at March 31, 1997. The growth
was funded primarily by increases in deposits and short-term borrowings, which
resulted in increases in loans and securities.
NET INCOME. For the three months ended March 31, 1998 and 1997, net income
was $201,000 and $108,000, respectively, an increase of $93,000 or 86.1%
compared with 1997. The increase in earnings is due to increased net interest
income and non-interest income, slightly offset by an increase in non-interest
expense. For the periods ended March 31, 1998 and 1997, basic earnings per share
were $1.13 and $0.65, respectively and diluted earnings per share were $1.11 and
$0.62, respectively.
NET INTEREST INCOME. Net interest income for the three-month period ended
March 31, 1998, increased $119,000 or 23.6%, compared to the three months ended
March 31, 1997. The increase in net interest income was primarily the result of
an $6.4 million increase in average earning assets (primarily loans) during the
period. Average earning assets were $39.2 million and $32.8 million for the two
periods ended March 31, 1998 and 1997, respectively. The KVB's net yield on
earning assets was 6.5% and 6.2% during the same periods, respectively.
NON-INTEREST EXPENSE. Non-interest expenses for the three-month period
ended March 31, 1998, increased $25,000 or 6%, from the three month period ended
March 31, 1997. The increase in expenses was primarily caused by increases in
salaries and benefits.
FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE YEARS ENDED DECEMBER 31,
1997 AND 1996
OVERVIEW. Total assets of $42.6 million at December 31, 1997, represents a
22.2% increase over total assets of $34.8 million at December 31, 1996. The
growth was funded primarily by increases in deposits, with such funds invested
primarily in loans and securities.
NET INCOME. For the years December 31, 1997 and 1996, net income was
$701,000 and $473,000, respectively, an increase of $228,000 or 48.2% from 1997
compared with 1996. The increase in earnings was due in part to increased net
interest income and non-interest income, partially offset by an increase in
41
<PAGE>
non-interest expense. For the periods ended December 31, 1997 and 1996, basic
earnings per share were $4.06 and $2.84, respectively and diluted earnings per
share were $3.99 and $2.74, respectively.
NET INTEREST INCOME. Net interest income for the years ended December 31,
1997, increased $420,000 or 22.5% compared to the year ended December 31, 1996.
The increase in net interest income was primarily the result of a $7.3 million
increase in average earning assets (largely loans and overnight investments)
during the period. Average earning assets were $35.3 million and $28.0 million
for the years ended December 31, 1997 and 1996, respectively. The KVB's net
yield on earning assets was 6.5% and 6.7% during the same periods, respectively.
NON-INTEREST EXPENSE. Non-interest expenses for the year ended December 31,
1997, increased $151,000 or 9.8% from the year ended December 31, 1996. The
increase in expenses was primarily associated with increased personnel expenses.
LOAN QUALITY, LIQUIDITY AND CAPITAL
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses represents
management's estimate of amounts required to absorb losses on existing loans.
The allowance of $286,000 at March 31, 1998 is an increase of $7,000 or 2.5%
from the December 31, 1997, allowance of $279,000. The allowance represents 1%
of total loans at March 31, 1998. The $279,000 allowance at December 31, 1997,
is an increase of $35,000 or 14.3% from the 1996 allowance of $244,000. The
allowance represents 1% of loans at December 31, 1997, compared to 1.07% at
December 31, 1996.
LIQUIDITY AND SOURCES OF FUNDS. KV Bank's primary sources of funds are
through borrowing lines arranged through the Federal Home Loan Bank of Seattle
(FHLB) as well as other correspondent lines of credit, sales of securities
"available for sale", customer deposits, loan repayments, maturities of
securities and net income. Scheduled loan repayments are a relatively stable
source of funds while deposit inflows and unscheduled loan prepayments are not.
Deposit inflows and unscheduled loan prepayments are influenced by general
interest rate levels, interest rates on other investments, competition, economic
conditions and other factors.
Total deposits were $38.2 million at March 31, 1998, up 2% from $37.4
million at December 31, 1997, which were up 22.4% from $30.6 million at December
31, 1996. KV Bank does not accept brokered deposits. A concerted effort has been
made to attract deposits in the market area KV Bank serves through competitive
pricing and delivery of quality products.
Management anticipates that KV Bank will continue to rely on borrowing lines
from the FHLB and other correspondent credit lines, sales of securities
"available for sale", customer deposits, loan repayments, maturities of
investment securities and net income to provide liquidity. Although deposit
balances have shown historical growth, such balances may be influenced by
changes in the banking industry, interest rates available on other investments,
general economic conditions, competition and other factors. Borrowings may be
used on a short-term basis to compensate for reductions in other sources of
funds. Borrowings may also be used on a long-term basis to support expanded
lending activities and to match maturities or re-pricing intervals on assets.
The sources of such funds will most likely be borrowings from the FHLB.
CAPITAL. The Tier 1 capital to average asset ratio for KVB was 9.3% at
March 31, 1998, compared to 10.3% at December 31, 1997, and 11% at December 31,
1996. 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. KVB's total risk adjusted capital-to-assets ratios were
13.9%, 15% and 16% at March 31, 1998, December 31, 1997 and 1996, respectively.
At March 31, 1998, KVB met all regulatory capital requirements and was
considered "well capitalized" under regulatory risk based capital guidelines.
42
<PAGE>
KVB declared a cash dividend on January 7, 1998, payable on January 30,
1998, to shareholders of record as of January 20, 1998. The dividend was $2.90
per share, which represented 73.9% of 1997 earnings.
LENDING
KV Bank's policy is to originate loans primarily in its local market area.
KV Bank's loan underwriting policies focus on an 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 amount of the loan, KV Bank's loans may be secured by a variety of
collateral including business assets, real estate, farm land and personal
assets. Many business loans may also be dependent upon the personal guarantee of
the business owner. KV Bank's loans are generally classified by the ability of
the borrowers to repay and the principal asset pledged as collateral to secure
the loan.
KV Bank's commercial and agricultural 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 KV 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.
TYPES OF LOANS. The following table sets forth the composition of KV Bank's
loan portfolio by type of loan at March 31, 1998, and at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
MARCH 31, 1998 1997 1996
---------------------- ---------------------- ----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and agricultural.................. $ 9,696 33.83% $ 9,410 33.56% $ 8,356 36.77%
Real estate:
1-4 residential............................ 4,294 14.98% 4,237 15.11% 4,417 19.44%
Commercial................................. 10,713 37.37% 10,616 37.87% 6,498 28.60%
Farm land.................................. 1,249 4.36% 998 3.56% 898 3.95%
Construction............................... 1,432 4.99% 1,308 4.67% 1,400 6.16%
Consumer..................................... 1,281 4.47% 1,467 5.23% 1,154 5.08%
--------- ----------- --------- ----------- --------- -----------
TOTAL.................................. $ 28,665 100.00% $ 28,036 100.00% $ 22,723 100.00%
</TABLE>
RISK ELEMENTS. Risk elements include accruing loans past due ninety days or
more, non-accrual loans, loans that have been restructured to provide a
reduction or deferral of interest or principal for reasons related to the
borrower's financial difficulties, potential problem loans and loan
concentrations. The following table states KV Bank's non-accrual loans as of
March 31, 1998, December 31, 1997 and 1996. There were no loans accruing past 90
days or more and no restructured loans on these dates.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
MARCH 31, 1998 1997 1996
----------------- ----- -----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual loans............................................ $ 0 $ 19 $ 0
</TABLE>
43
<PAGE>
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 is discontinued, all unpaid accrued interest is reversed against
current income. Interest income is subsequently recognized only to the extent
payments are received.
At March 31, 1998, KV 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. KV 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.
At March 31, 1998, KV Bank had no non-accrual loans compared to $19,000 or
6.8% of the allowance at December 31, 1997, and no non-accrual loans at December
31, 1996.
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES. KV 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 regulatory agencies, and any 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 KV
Bank's allowance.
The following table summarizes KV Bank's loan loss experience for the three
months ended March 31, 1998, and the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MARCH 31, 1998 1997 1996
-------------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period:......................... $ 279 $ 244 $ 180
Charge-offs:
Commercial and agricultural........................... (15) -- --
Consumer.............................................. -- (19) (1)
-------------- --------- ---------
Total charge-offs....................................... (15) (19) (1)
Recoveries:
Commercial and agricultural........................... 1 -- --
Consumer.............................................. -- 2 --
-------------- --------- ---------
Total recoveries........................................ 1 2 0
Net charge-offs......................................... (14) (17) (1)
Provision for credit losses............................. 21 52 65
-------------- --------- ---------
Balance at end of period:............................... $ 286 $ 279 $ 244
Ratio of net charge-offs to average outstanding loans
during the period..................................... .200% .070% .005%
(annualized)
Average outstanding loans............................... $ 27,947 $ 24,326 $ 20,559
</TABLE>
MARKET RISK
KVB'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 KV Bank's net earnings during various
44
<PAGE>
rate scenarios. This includes managing the risk/return relationships between
liquidity, capital adequacy and the potential for income fluctuations due to
mismatching of asset/liability maturities. KVB considers liquidity the greatest
risk followed by capital adequacy and then interest rate risk. KVB expects to
generate earnings from appropriate loan volume (fees), correct loan pricing
(interest) and expense control; not from trying to accurately forecast interest
rates.
KVB's loan portfolio has had very little interest rate risk compared to its
liabilities due to the fact that approximately 85% of its loans are variable.
KVB's liability side is also weighted toward short maturities. Most commercial
and agricultural loans are priced off the prime rate index. Over 33% of the
loans at March 31, 1998, are tied to the prime rate index which reprice
immediately with a change in the prime rate. Over 86% of KVB's certificates of
deposit mature within 12 months.
KVB 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 KVB's financial
instruments at the expected maturity dates as well as the fair value of those
financial instruments as of March 31, 1998.
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 2 percent, 1 percent, 1
percent and 2 percent, respectively. The weighted average interest rates for
financial instruments presented are actual rates as of March 31, 1998.
The estimated fair value amounts have been determined by KVB using available
market information and appropriate methodologies. Amounts that could actually be
realized may be different than those presented herein. The carrying value of
cash and cash equivalents, Federal funds sold and accrued interest receivable
and payable is a reasonable estimate of the fair value for these short-term
instruments. The fair values of securities available for sale are based on
quoted market rates. For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair value of fixed-rate and adjustable rate loans beyond one year is based on
discounted cash flows using estimated market rates for loans with similar
characteristics. FHLB and Federal Reserve Bank stock does not have a market and
the fair value is considered to be its carrying value. The fair value of
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 March 31, 1998. 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
45
<PAGE>
with similar maturities as of March 31, 1998. The fair value of securities sold
overnight under agreements to repurchase is considered to be its carrying value.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------------------------------------
AS OF MARCH 31,
------------------------------------------ FAIR
1999 2000 2001 2002 THEREAFTER TOTAL VALUE
--------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS
Cash and cash equivalents...................... 3,344 3,344 3,344
Weighted average interest rate............... -- --
Federal funds sold............................. 6,680 6,680 6,680
Weighted average interest rate............... 5.37% 5.37%
Interest-bearing deposits in banks............. 1 1 1
Weighted average interest rate............... 4.97% 4.97%
Securities available for sale
Fixed rate................................... 869 495 1,036 -- 2,463 4,863 4,863
Weighted average interest rate............... 5.68% 5.59% 5.94% -- 6.35% 6.06%
Securities--FHLB & FRB stock................... 739 739
Weighted average interest rate............... 7.49% 7.49%
Loans receivable, net
Fixed rate................................... 1,378 805 337 35 1,686 4,241 4,213
Weighted average interest rate............... 8.98% 10.9% 10.1% 10.38% 8.64% 9.37%
Adjustable rate.............................. 15,031 5,551 2,780 283 493 24,138 24,381
Weighted average interest rate............... 9.95% 9.98% 9.77% 9.02% 9.12% 9.91%
Accrued interest receivable.................... 297 297 297
Weighted average interest rate............... -- --
FINANCIAL LIABILITIES
Non-interest bearing deposits.................. 124 122 119 117 5,728 6,210 6,210
Weighted average interest rate............... -- -- -- -- -- --
Interest-bearing checking accounts............. 111 110 109 108 10,709 11,147 11,147
Weighted average interest rate............... 1.63% 1.63% 1.63% 1.63% 1.63% 1.63%
Money market accounts.......................... 39 39 38 38 3,752 3,906 3,906
Weighted average interest rate............... 3.08% 3.08% 3.08% 3.08% 3.08% 3.08%
Savings accounts............................... 134 132 129 126 6,194 6,715 6,715
Weighted average interest rate............... 2.82% 2.82% 2.82% 2.82% 2.82% 2.82%
Certificates of deposit
Fixed rate................................... 8,794 816 574 17 7 10,208 10,214
Weighted average interest rate............... 5.30% 5.65% 5.80% 5.50% 5.50% 5.34%
Securities sold under agreements to
repurchase................................... 3,378 3,378 3,378
Weighted average interest rate............... 3.89% 3.89%
Accrued interest payable....................... 32 32 32
Weighted average interest rate............... -- --
</TABLE>
SECURITIES ACTIVITY
KV Bank has no held to maturity debt securities. Securities available for
sale consist of securities issued by U.S. Government Agencies, which may be sold
to implement asset/liability management strategies, and in response to changes
in interest rates, prepayment rates and similar factors, and certain restricted
equity securities. 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
46
<PAGE>
shareholders' equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
KV Bank's investment policy is approved annually by its Board of Directors.
KV Bank has maintained relatively high levels of liquidity in order to meet
funding needs and because of ongoing deposit growth. The following table sets
forth the securities portfolio of KV Bank.
ANALYSIS OF SECURITIES. The amortized cost and estimated market values of
investments in debt securities follows as of March 31, 1998.
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- --------------------- ------------------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
US Government agencies and
corporations................. $ 4,876 $ 2 $ 15 $ 5,602
Equity securities.............. 739 -- -- --
--
----------- --- ------
TOTAL...................... $ 5,615 $ 4 $ 15 $ 5,602
</TABLE>
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>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------------ ------------------------------------------
1998 1997 1997 1996
-------------------- -------------------- -------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits:
Demand deposits....................... $ 6,420 -- $ 4,621 -- $ 5,872 -- $ 4,408 --
Savings, NOW and
money market........................ 19,975 2.23% 16,584 2.40% 18,181 2.35% 13,551 2.37%
Time deposits......................... 10,247 5.34% 10,219 5.48% 10,225 5.49% 9,110 5.68%
--------- --------- --------- ---------
TOTAL............................... $ 36,642 $ 31,424 $ 34,278 $ 27,069
</TABLE>
SHORT TERM BORROWINGS
For the three-month period ended March 31, 1998, and the years ended
December 31, 1997 and 1996, short-term borrowings consisted entirely of
securities sold under agreements to repurchase overnight.
SIGNIFICANT FINANCIAL RATIOS
The following table sets forth consolidated operating ratios for KVB for the
periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER
MARCH 31, 31,
-------------------- --------------------
1998 1997 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Return on average assets.............................. 1.89% 1.22% 1.81% 1.52%
Return on average equity.............................. 20.21% 11.47% 18.46% 12.80%
Average equity to average assets...................... 9.37% 10.67% 9.80% 11.89%
Dividend pay out ratio to net income.................. 257.71% -- 57.35% 12.47%
</TABLE>
47
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following two tables set forth the average consolidated balance sheets
of KVB for the periods indicated along with an analysis of net interest earnings
for each major category of interest earning assets and interest bearing
liabilities, the average yield or rate paid on each category, and the net yield
on interest earning assets.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE(1) EXPENSE(2) RATE BALANCE(1) EXPENSE(2) RATE
----------- ------------- --------- ----------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING
Loans..................................... $ 27,947 $ 725 10.52% $ 22,326 $ 597 10.84%
Securities................................ 4,758 75 6.31% 5,677 84 5.92%
Federal funds sold and deposits in
banks................................... 6,476 87 5.45% 4,803 63 5.32%
----------- ----- --------- ----------- ----- ---------
Interest Earning........................ $ 39,181 $ 887 9.18% $ 32,806 $ 744 9.20%
NON-INTEREST EARNING
Cash and due from banks................... 2,275 1,732
Premises and fixed assets................. 1,517 1,179
Other assets.............................. 357 339
Less: allow. for credit losses............ (278) (244)
----------- -----------
TOTAL................................... $ 43,052 $ 35,812
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING
Savings, NOW and money market............. $ 19,975 $ 110 2.23% $ 16,584 $ 98 2.40%
Time deposits............................. 10,247 135 5.34% 10,219 138 5.48%
Short-term borrowings..................... 1,878 18 3.89% 283 3 4.30%
----------- ----- --------- ----------- ----- ---------
Interest Bearing........................ $ 32,100 $ 263 3.32% $ 27,086 $ 239 3.58%
NON-INTEREST BEARING
Demand deposits........................... 6,420 4,621
Other liabilities......................... 499 285
Shareholders' Equity...................... 4,033 3,820
----------- -----------
TOTAL................................... $ 43,052 $ 35,812
Net Interest Income....................... $ 624 $ 505
Net yield on earning assets............... 6.46% 6.24%
</TABLE>
- ------------------------
(1) For purposes of these computations, non-accrual loans are included in the
daily average loan amounts outstanding.
(2) Included in interest on loans are loan fees and late charges.
48
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE(1) EXPENSE(2) RATE BALANCE(1) EXPENSE(2) RATE
----------- ----------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING
Loans..................................... $ 24,326 $ 2,642 10.86% $ 20,559 $ 2,290 11.14%
Securities................................ 5,859 359 6.13% 5,179 299 5.77%
Federal funds sold and deposits in
banks................................... 5,141 283 5.50% 2,286 125 5.47%
----------- ----------- --------- ----------- ----------- ---------
Interest Earning........................ $ 35,326 $ 3,284 9.30% $ 28,024 $ 2,714 9.68%
NON-INTEREST EARNING
Cash and due from banks................... 1,969 1,727
Premises and fixed assets................. 1,197 1,201
Other assets.............................. 530 355
Less: allow. for credit losses............ (253) (214)
----------- -----------
TOTAL................................... $ 38,769 $ 31,093
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING
Savings, NOW and money market............. $ 18,181 $ 428 2.35% $ 13,551 $ 322 2.37%
Time deposits............................. 10,225 561 5.49% 9,110 518 5.68%
Short-term borrowings..................... 278 11 3.96% 10 10 4.41%
----------- ----------- --------- ----------- ----------- ---------
Interest Bearing........................ $ 28,684 $ 1,000 3.49% $ 22,846 $ 850
NON-INTEREST BEARING
Demand deposits........................... 5,872 4,408
Other liabilities......................... 415 143
Shareholders' Equity...................... 3,798 3,696
----------- -----------
TOTAL................................... $ 38,769 $ 31,093
Net Interest Income....................... $ 2,284 $ 1,864
Net yield on earning assets............... 6.47% 6.65%
</TABLE>
- ------------------------
(1) For purposes of these computations, non-accrual loans are included in the
daily average loan amounts outstanding.
(2) Included in interest on loans are loan fees and late charges.
49
<PAGE>
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>
YEAR ENDED DECEMBER
THREE MONTHS ENDED MARCH 31, 31,
--------------------------------- ----------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
--------------------------------- ----------------------
VOLUME RATE NET VOLUME RATE
----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans........................................................... $ 146 $ (18) $ 128 $ 410 $ (58)
Securities...................................................... (14) 5 (9) 41 19
Federal funds sold and deposits in banks........................ 22 2 24 157 1
----- --- --------- ----- ---
Interest Earning.............................................. $ 154 $ (11) $ 143 $ 608 $ (38)
INTEREST PAID ON:
Savings, NOW and money market................................... $ 19 $ (7) $ 12 $ 109 $ (3)
Time deposits................................................... 0 (3) (3) 61 (18)
Short-term borrowings........................................... 15 0 15 4 (3)
----- --- --------- ----- ---
Interest Bearing.............................................. $ 34 $ (10) $ 24 $ 174 $ (24)
Net Interest Income............................................. $ 120 $ (1) $ 119 $ 434 $ (14)
<CAPTION>
NET
---------
<S> <C>
INTEREST EARNED ON:
Loans........................................................... $ 352
Securities...................................................... 60
Federal funds sold and deposits in banks........................ 158
---------
Interest Earning.............................................. $ 570
INTEREST PAID ON:
Savings, NOW and money market................................... $ 106
Time deposits................................................... 43
Short-term borrowings........................................... 1
---------
Interest Bearing.............................................. $ 150
Net Interest Income............................................. $ 420
</TABLE>
MANAGEMENT OF KVB
DIRECTORS AND EXECUTIVE OFFICERS
The following table presents certain information with respect to the
directors and executive officers of KVB, including their age and current
positions held with KVB.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH KVB
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Dennis D. Cummings................................... 51 Director
James L. DeVere...................................... 53 Director; Vice Chairman
Brian E. Frederick................................... 54 Director
Steven F. Halverson.................................. 51 Director; President and Chief Executive Officer
John E. Ludtka....................................... 68 Director; Secretary
Richard S. Mack...................................... 55 Director
William R. Meyer..................................... 48 Director; Treasurer
Kenneth D. Peterson.................................. 53 Director
Douglas Rehaume...................................... 49 Chairman
Don A. Solberg....................................... 50 Director
</TABLE>
During the past five years, the business experience of each director and
executive officer is as follows:
DENNIS D. CUMMINGS has owned and operated Berry's Department Store in
Ellensburg, Washington and co-owned Berry's II in Moses Lake, Washington. He has
been a director of KV Bank since 1992 and director of KVB since its formation.
JAMES L. DEVERE is the owner of DeVere & Sons Distributing, Inc., a Chevron
oil and oil products distributorship. He has been a director and Vice Chairman
of KV Bank since 1992 and director and Vice Chairman of KVB since its formation.
BRIAN E. FREDERICK is an attorney in private practice. He has been a
director of KV Bank since 1992 and director of KVB since its formation.
50
<PAGE>
STEVEN F. HALVERSON has served as a director and President and CEO of KV
Bank since 1992 and director and President/CEO of KVB since its formation.
JOHN E. LUDTKA has been the editor and publisher of THE DAILY RECORD in
Ellensburg, Washington. He has served as a director and Secretary of KV Bank
since 1992 and director and Secretary of KVB since its formation.
RICHARD S. MACK is a Professor of Economics at Central Washington
University. He has served as a director of KV Bank since 1992 and director of
KVB since its formation.
WILLIAM R. MEYER is an optometrist in Ellensburg, Washington. He has served
as director and Treasurer of KV Bank since 1992 and director and Treasurer of
KVB since its formation.
KENNETH D. PETERSON is the owner of Ken's Auto Washes and Ken's Quick Lube.
He has served as a director of KV Bank since 1992 and director of KVB since its
formation.
DOUGLAS REHAUME is the owner of Kittitas County Title KVB. He has been a
director and Chairman of KV Bank since 1992 and has been a director and Chairman
of KVB since its formation.
DON A. SOLBERG is a family physician with Valley Clinic in Ellensburg,
Washington. He has been a director of KV Bank since 1992 and director of KVB
since its formation.
There are no arrangements or understandings among any of the directors,
officers or any other persons pursuant to which any of the above directors or
officers have been selected as directors or officers.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial
ownership of KVB Common Stock as of April 20, 1998, by (i) each person known by
KVB to own beneficially more than 5 percent of KVB Common Stock, (ii) each
current director of KVB, and (iii) all executive officers and directors of KVB
and KV Bank as a group. Except as otherwise indicated, each of the persons named
below has sole voting and investment power with respect to KVB Common Stock
owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL SHARES
NAME OF SHAREHOLDER OWNERSHIP OUTSTANDING
- --------------------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Dennis D. Cummings................................................... 5,770(1) 2.93%
James L. DeVere...................................................... 4,504(2) 2.29%
Brian E. Frederick................................................... 4,180(3) 2.13%
Steven F. Halverson.................................................. 13,300(4) 6.76%
John E. Ludtka....................................................... 4,205(5) 2.14%
Richard S. Mack...................................................... 4,060(6) 2.06%
William R. Meyer..................................................... 3,780(7) 1.92%
Kenneth D. Peterson.................................................. 7,145(8) 3.63%
Douglas Rehaume...................................................... 4,189(9) 2.13%
Don A. Solberg....................................................... 3,980(10) 2.02%
Executive officers and directors as a group (12 persons)............. 58,123(1-10) 29.54%
</TABLE>
- ------------------------
(1) Includes 4,820 shares held in a profit sharing trust for the benefit of Mr.
Cummings, 350 shares held in an IRA for the benefit of his spouse and 600
shares which could be acquired through exercise of stock options.
(2) Includes 1,400 shares held jointly with his spouse, 1,004 shares held in
IRAs for the benefit of Mr. DeVere and his spouse and 600 shares which
could be acquired through exercise of stock options.
51
<PAGE>
(3) Includes 1,500 shares held jointly with his spouse, 480 shares held by his
spouse, 1,200 shares held in an IRA for the benefit of Mr. Frederick and
800 shares which could be acquired through exercise of stock options.
(4) Includes 800 shares held in an IRA for the benefit of Mr. Halverson and
3,000 shares that could be acquired through exercise of stock options.
(5) Includes 3,480 shares held jointly with his spouse, 125 shares held by his
spouse and 600 shares that could be acquired through exercise of stock
options.
(6) Includes 3,460 shares held jointly with his spouse and 600 shares that
could be acquired through exercise of stock options.
(7) Includes 650 shares held jointly with his spouse, 2,730 shares held in IRAs
for the benefit of Mr. Meyer and his spouse and 600 shares that could be
acquired through exercise of stock options.
(8) Includes 1,800 held by his spouse, 165 shares held in an IRA for the
benefit of his spouse and 2,950 shares that could be acquired through
exercise of stock options for Mr. Peterson and his spouse.
(9) Includes 3,589 shares held jointly with his spouse and 600 shares that
could be acquired through exercise of stock options.
(10) Includes 1,570 shares held jointly with his spouse, 1,530 shares held in
IRAs for the benefit of Dr. Solberg and his spouse and 880 shares that
could be acquired through exercise of stock options.
MANAGEMENT OF INTERWEST
Information regarding the names, ages, positions and business backgrounds of
the executive officers and directors of InterWest, as well as additional
information, including executive compensation, security ownership of certain
beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to InterWest's 1998 Proxy Statement.
Information regarding Mr. Patrick Fahey, a member of the InterWest Board since
June 15, 1998, is incorporated by reference to the Registration Statement on
Form S-4 (SEC File No. 333-49131) filed with the SEC on April 1, 1998. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Shareholders desiring copies
of such documents may contact InterWest at the address or phone number indicated
under "AVAILABLE INFORMATION."
SUPERVISION AND REGULATION
INTRODUCTION
The following generally refers to certain statutes and regulations affecting
the banking industry. These references are only intended to provide brief
summaries and therefore, are not complete and are qualified by the statutes and
regulations referenced. In addition, due to the numerous statutes and
regulations which apply to and regulate the operation of the banking industry,
many are not referenced below.
52
<PAGE>
THE HOLDING COMPANIES
GENERAL
InterWest and KVB are bank holding companies by virtue of their respective
ownership of InterWest Bank and FNBP, and are registered as such with the FRB.
As bank holding companies, InterWest and KVB 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 KVB 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, KVB and their subsidiaries is unclear at this
time.
FRB REGULATION. Bank holding companies must obtain the FRB's approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5% of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; and (3) acquire
substantially all of the assets of any additional banks. Until September of
1995, the BHCA also prohibited bank holding companies from acquiring any such
interest in any bank or bank holding company located in a state other than the
state in which the bank holding company was located, unless the laws of both
states expressly authorized the acquisition. Now, subject to certain state laws,
such as age and contingency laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of an out-of-state
bank.
CONTROL OF NONBANKS. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds KVB'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.
Acceptable nonbanking activities include: (1) operating an industrial loan
company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate brokerage and syndication, land development, property
management, and the underwriting of life insurance not related to credit
transactions. From time to time, the FRB may add to or delete from the list of
activities permissible for bank holding companies.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' prior written notice of the
proposed acquisition. Following receipt of this notice, the FRB has 60 days to
issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before the disapproval period expires if the FRB issues
53
<PAGE>
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 KVB, or otherwise obtain control over KVB.
TRANSACTIONS WITH AFFILIATES
InterWest and its subsidiaries, and likewise KVB and KV Bank, are deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. These restrictions apply
to InterWest and KVB and their respective subsidiaries through the BHCA, which
provide that transactions between an insured subsidiary of a holding company and
its affiliates are subject to the restrictions applicable to transactions
between banks that are members of the Federal Reserve System and their
affiliates in accordance with Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B: (1) limit the extent to which the financial
institution or its subsidiaries may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of such institution's capital
and surplus and an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital and surplus, and (2) require all
transactions with an affiliate, whether or not "covered transactions," to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
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 shareholders, 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, KVB 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, KVB, 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
54
<PAGE>
exemptions from the statutory restriction on bank tying arrangements to allow
banks greater flexibility to package products with their affiliates; and (3)
establish a safe harbor from the tying restrictions for certain foreign
transactions. These amendments are designed to enhance competition in banking
and nonbanking products and allow banks and their affiliates to provide more
efficient a lower-cost service to customers. However, the impact of the
amendments on InterWest, KVB and their subsidiaries is unclear at this time.
STATE LAW RESTRICTIONS
As corporations chartered under the laws of the State of Washington,
InterWest and KVB 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 EXISTING AND PROPOSED SUBSIDIARIES
GENERAL
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
KV Bank, FNBP and Pioneer are national banking associations which are
subject to extensive regulation and supervision by the OCC. InterWest Bank is a
state-chartered savings bank, and Pacific is a state-chartered commercial bank,
both of which are subject to extensive regulation and supervision by the
Washington Department of Financial Institutions Division of Banks (the
"Division"). Under state law, savings banks in Washington generally have all of
the powers that federal mutual savings banks have under federal laws and
regulations. Each of InterWest's and KVB's banking subsidiaries are also subject
to regulation and examination by the FDIC, which insures the deposits of the
banking subsidiaries to the maximum extent permitted by law and by requirements
established by the FRB. The federal laws that apply to InterWest's and KVB's
banking subsidiaries regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing InterWest's and KVB's banking
subsidiaries generally have been promulgated to protect depositors and not to
protect shareholders of such institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal banking regulators to adopt regulations or guidelines in a
number of areas to ensure bank safety and soundness, including: internal
controls; credit underwriting; asset growth; management compensation; ratios of
classified assets to capital; and earnings. FDICIA also contains provisions
which are intended to change independent auditing requirements; restrict the
activities of state-chartered insured banks; amend various consumer banking
laws; limit the ability of "undercapitalized banks" to borrow from the FRB's
discount window; and require regulators to perform annual on-site bank
examinations and set standards for real estate lending.
55
<PAGE>
LOANS-TO-ONE BORROWER
Each of InterWest's and KVB's banking subsidiaries is subject to limitations
on the aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans-to-one borrower
to 15 to 20% of unimpaired capital and surplus. As of August 31, 1997, each of
InterWest's and KVB's banking subsidiaries was in compliance with applicable
loans-to-one borrower requirements.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the FDIC for up
to a maximum amount of $100,000. The FDIC has adopted a risk-based insurance
assessment system under which depository institutions contribute funds to the
Bank Insurance Fund ("BIF") and/or the Savings Association Insurance Fund
("SAIF"), as applicable, based on their risk classification.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted. The Funds Act, 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.
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. The Funds Act also provides for the merger of the BIF and SAIF
on January 1, 1999, ONLY IF no thrift institutions exist on that date. It is
expected that Congress will continue to address comprehensive legislation on the
merger of the funds and elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL REQUIREMENTS
CAPITAL ADEQUACY REQUIREMENTS. The FRB, the FDIC, and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.
The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common
56
<PAGE>
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. KV Bank has not
received any notice indicating that it will be subject to higher capital
requirements.
Under these guidelines, banks' assets are given risk-weights of 0%, 20%, 50%
or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total risk-
weighted assets. Most loans are assigned to the 100% risk category, except for
first mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier
1 capital as a percentage of average total assets less intangibles, to be used
as a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points. Any institution operating at or
near the 3% level is expected to have well-diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity and good
earnings, and in general, to be a strong banking organization without any
supervisory, financial or operational weaknesses or deficiencies. Any
institutions experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels.
PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as required
by FDICIA impose even more stringent capital requirements. The regulators
require the FDIC, the OCC and other Federal Banking Agencies to take certain
"prompt corrective action" when a bank fails to meet certain capital
requirements. The regulations establish and define five capital levels: (1)
"well-capitalized," (2) "adequately capitalized," (3) "undercapitalized," (4)
"significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10% total
risk-based capital, 6% Tier 1 risk-based capital, and a leverage ratio of no
less than 5%. Increasingly severe restrictions are imposed on the payment of
dividends and management fees, asset growth and other aspects of the operations
of institutions that fall below the category of being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital, and a leverage ratio of at least 4%). Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of the date of this Prospectus/Proxy Statement, neither InterWest, KVB, nor
their respective subsidiaries were subject to any regulatory order, agreement,
or directive to meet and maintain a specific capital level for any capital
measure.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process.
57
<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 KVB by KV Bank are
a material source of KVB's cash flow. Various federal and state statutory
provisions limit the amount of dividends InterWest's and KVB's banking
subsidiaries are permitted to pay to InterWest and KVB, 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.
According to Washington law, payment of dividends by Pacific and InterWest
Bank are subject to regulations imposed by the Director of the Division.
Under the National Bank Act, each of KV Bank, FNBP and Pioneer may not pay
dividends without advance approval of the OCC if the total of all dividends
declared by any such bank in any calendar year will exceed the sum of its net
profits (as defined by statute) for that year plus its retained profits for the
preceding two calendar years, less any required transfers to surplus. The
National Bank Act also prohibits national banks from paying dividends that would
be in an amount greater than net profits then on hand (as defined by statute)
after deducting losses and bad debts (as defined by statute). The amount
available for dividend distribution by KV Bank as of March 31, 1998, was
approximately $395,000.
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
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law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
DESCRIPTION OF INTERWEST CAPITAL STOCK
InterWest is authorized to issue 20,000,000 shares of Common Stock, $0.20
par value per share. At June 24, 1998, 10,442,799 shares of InterWest Common
Stock were issued and outstanding. A total of 614,079 shares are subject to
options under InterWest stock option plans; 455,138 of such options are fully
vested and exercisable. InterWest Common Stock is listed for trading on the
Nasdaq National Market under the symbol "IWBK." Each share of InterWest Common
Stock has the same relative rights and is identical in all respects with every
other share of InterWest Common Stock. The following summary describes the
material aspects of the InterWest Common Stock, but does not purport to be a
complete description of the applicable provisions of the InterWest Articles of
Incorporation and Bylaws or of applicable statutory or other law, and is
qualified in its entirety by reference thereto. See "AVAILABLE INFORMATION."
VOTING RIGHTS
The holders of InterWest Common Stock possess exclusive voting rights in
InterWest. Each holder of InterWest Common Stock is entitled to one vote for
each share held of record on all matters submitted to a vote of holders of
InterWest Common Stock. Holders of shares of InterWest Common Stock are not
entitled to cumulate votes for the election of directors.
DIVIDENDS
The holders of InterWest Common Stock are entitled to such dividends as the
InterWest Board may declare from time to time out of funds legally available
therefor. Dividends from InterWest depend upon the receipt to InterWest of
dividends from InterWest Bank because InterWest has no source of income other
than dividends from InterWest Bank. Accordingly, the dividend restrictions
imposed on InterWest's subsidiary bank by statute or regulation may effectively
limit the amount of dividends InterWest can pay. See "SUPERVISION AND
REGULATION--Dividend Restrictions."
LIQUIDATION
In the event of liquidation, dissolution or winding up of InterWest, the
holders of shares of InterWest Common Stock are entitled to share ratably in all
assets remaining after payment of all debts and other liabilities of InterWest.
OTHER CHARACTERISTICS
Holders of InterWest Common Stock do not have any preemptive, conversion or
other subscription rights with respect to any additional shares of InterWest
Common Stock which may be issued. Therefore, the InterWest Board may authorize
the issuance and sale of shares of capital stock of InterWest without
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first offering them to existing shareholders of InterWest. InterWest Common
Stock is not subject to any redemption or sinking fund provisions. The
outstanding shares of InterWest Common Stock are, and the shares to be issued in
the Merger will be, fully paid and non-assessable.
The InterWest Articles of Incorporation and Bylaws contain provisions that
may have the effect of discouraging persons from acquiring large blocks of
InterWest Common Stock or delaying or preventing a change in control of
InterWest. These provisions include the classification of the InterWest Board
into three classes with the term of only one class expiring each year and
requirements for the approval of certain business combinations. See "COMPARISON
OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST AND KVB COMMON STOCK."
COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF INTERWEST
AND KVB COMMON STOCK
GENERAL
InterWest is incorporated under the laws of the State of Washington and,
accordingly, the rights of InterWest's shareholders are governed by InterWest's
Articles of Incorporation, Bylaws and the WBCA. KVB, likewise, is incorporated
under the laws of the State of Washington and, accordingly, the rights of KVB's
shareholders are governed by KVB's Articles of Incorporation, Bylaws and the
WBCA.
Upon consummation of the Merger, shareholders of KVB will become
shareholders of InterWest, and as such, their rights will be governed by
InterWest's Articles of Incorporation, Bylaws and the WBCA. The following is a
summary of material differences between the Articles of Incorporation and Bylaws
of InterWest and the Articles of Incorporation and Bylaws of KVB. This
discussion is not intended to be a complete statement of the differences
affecting the rights of shareholders and is qualified in its entirety by
reference to the governing laws and the Articles and Bylaws of each entity.
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.
KVB. KVB'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 shareholders' shares of
common stock multiplied by the number of directors to be elected, and to
distribute such votes among one or more of the nominees to be elected. The
absence of cumulative voting rights limits the ability of minority shareholders
to obtain representation on the InterWest Board. All voting rights are vested in
the holders of InterWest Common Stock, with each share being entitled to one
vote.
KVB. All voting rights are vested in the holders of KVB Common Stock with
each share being entitled to one vote. KVB's Articles of Incorporation eliminate
cumulative voting.
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PREEMPTIVE RIGHTS
Neither InterWest's shareholders nor KVB's shareholders 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.
KVB. Similarly, if KVB is liquidated, holders of KVB Common Stock are
entitled to share, on a pro rata basis, KVB's remaining assets after payment of
or provision for all debts and other liabilities of KVB.
ASSESSMENTS
All outstanding shares of InterWest Common Stock and of KVB Common Stock are
fully paid and nonassessable.
STOCK REPURCHASES
Under Washington law, a corporation may acquire shares of its own stock.
Therefore, both InterWest and KVB may repurchase shares of their own capital
stock.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
INTERWEST. InterWest's Articles of Incorporation may be amended by the vote
of the holders of a majority of the outstanding shares of InterWest Common
Stock, except that the provisions of the Articles of Incorporation governing
approval of business combinations with "Related Persons" may not be amended,
altered, changed or repealed except by the vote of the holders of at least 80%
of the outstanding shares of InterWest, unless any such amendment has been
approved by a majority of the members of the InterWest Board who were directors
prior to the time any Related Person (as defined below) became a Related Person.
The Bylaws of InterWest may be amended by a majority vote of the Board of
Directors or by the holders of at least a majority of the outstanding shares of
InterWest.
KVB. KVB's Articles of Incorporation may be amended by the vote of the
holders of a majority of the outstanding shares of KVB Common Stock, except that
the provisions of the Articles of Incorporation requiring a classified Board of
Directors may not be amended unless first approved by the holders of at least
80% of the outstanding KVB Common Stock and the provisions requiring a 75% vote
to approve a merger transaction may not be amended without at least a 75% vote
in favor of amendment. KVB's Bylaws may be altered, amended or repealed and new
Bylaws may be adopted by the Board or by the affirmative vote of the holders of
a majority of shares of KVB Common Stock.
SPECIAL MEETINGS OF SHAREHOLDERS AND ACTION WITHOUT A MEETING
INTERWEST. The Articles of Incorporation of InterWest provide that special
meetings of shareholders 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 shareholders' 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 shareholders may be taken without a meeting if a consent in writing is signed
by all of the shareholders entitled to vote on the matter.
KVB. The Bylaws of KVB make no provision for special meetings of
shareholders. The WBCA provides that special meetings of shareholders shall be
held on call of KVB's board or if the holders of at
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least 10% of all the votes to be cast on any issue deliver to KVB's secretary
one or more written demands for a meeting.
APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS AND
DISSOLUTION
INTERWEST. Article X of InterWest's Articles of Incorporation requires the
approval of the holders of (i) at least 80% of InterWest's outstanding shares of
voting stock, and (ii) at least a majority of InterWest's outstanding shares of
voting stock, not including shares held by a "Related Person," to approve
certain "Business Combinations," except in cases where the proposed transaction
has been approved in advance by a majority of those members of the InterWest
Board who were directors prior to the time when the Related Person became a
Related Person. In the event the requisite approval of the Board were given, the
normal vote requirement of applicable Washington law would apply, or, for
certain transactions, no stockholder vote would be necessary. The term "Related
Person" is defined to include any individual, corporation, partnership or other
entity which owns beneficially or controls, directly or indirectly, 10% or more
of the outstanding shares of voting stock of InterWest. The provisions of
Article X apply to any "Business Combination" which is defined to include among
other things: (i) any merger or consolidation of InterWest or any of its
affiliates with or into any Related Person; (ii) any sale, lease, exchange,
mortgage, transfer, or other disposition of all or a substantial part of the
assets of InterWest or any of its affiliates to any Related Person (the term
"substantial part" is defined to include more than 25% of InterWest's total
assets); (iii) any sale, lease, exchange, or other transfer by any Related
Person to InterWest of all or a substantial part of the assets of Related
Person; (iv) the acquisition by InterWest of any securities of the Related
Person; (v) any reclassification of InterWest Common Stock; and (vi) any
agreement, contract or other arrangement providing for any of the transactions
described above. The increased stockholder vote required to approve a Business
Combination may have the effect of foreclosing mergers and other business
combinations which a majority of shareholders deem desirable and place the power
to prevent such a merger or combination in the hands of a minority of
shareholders.
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.
KVB. KVB's Articles of Incorporation require KVB's Board of Directors to
consider certain factors when evaluating any tender of exchange offer, merger of
consolidation proposal, or the purchase or acquisition of substantially all the
properties or assets of KVB. These factors include the social and economic
effects on the community, the deposits, borrowers, employees, suppliers and
other constituents. KVB's Articles of Incorporation also provide that the
affirmative vote of the holders of at least 75% of the outstanding shares of KVB
Common Stock is required to approve a merger transaction.
RIGHTS OF SHAREHOLDERS TO DISSENT
INTERWEST. Under the WBCA, shareholders 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, shareholders
generally will not have such dissenters' rights if stockholder approval is not
required by the WBCA for the corporate action. Approval of the Merger by the
holders of InterWest Common Stock is not required under the WBCA; therefore
shareholders of InterWest do not have dissenters' rights in connection with the
Merger.
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KVB. Under the WBCA, shareholders of KVB generally have dissenters'
appraisal rights in connection with (i) a plan of merger to which KVB is a
party; (ii) a plan of share exchange to which KVB is a party as the corporation
whose shares will be acquired; (iii) certain sales or exchanges of all, or
substantially all, of KVB's property other than in the regular course of
business; and (iv) amendments to KVB's Articles of Incorporation effecting a
material reverse stock split. However, shareholders generally will not have such
dissenter's rights if stockholder approval is not required for the corporate
action. Shareholders of KVB have dissenters' rights in connection with the
Merger. See "THE MERGER-- Dissenters' Rights of Appraisal."
SIZE OF BOARD OF DIRECTORS
INTERWEST. InterWest's Articles of Incorporation provide that its Board of
Directors shall consist of not less than five nor more than 15 members, with the
current number set at twelve by the Bylaws of InterWest. The Bylaws of InterWest
provide that the Board of Directors or the shareholders 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.
KVB. KVB's Articles of Incorporation provide that its Board of Directors
shall consist of not less than 5 members nor more than 25 members, the exact
number to be fixed from time to time in the manner provided in the Bylaws. KVB's
Bylaws provide that the exact number of Board members is to be fixed and
determined from time to time by resolution of a majority of the full Board or by
resolution of the shareholders at any shareholder meeting.
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 shareholders 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.
KVB. KVB's Articles of Incorporation provide for a classified Board divided
into three classes, with members of each class of directors being elected for a
term of three years.
REMOVAL OF DIRECTORS
INTERWEST. InterWest's Articles of Incorporation provide that at a meeting
of shareholders called expressly for that purpose, any director or the entire
Board of Directors may be removed for cause by a vote of the holder of a
majority of the shares then entitled to vote at such meeting. The requirement
that directors may be removed only upon a majority vote and only for cause makes
it difficult for a person or entity immediately to acquire control of
InterWest's Board through the removal of existing directors and the election of
such person's or entity's nominated to fill the newly created vacancies.
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KVB. KVB's Articles of Incorporation provide that the shareholders may
remove one or more directors, with or without cause, by the affirmative vote of
the holders of 75% or more of the shares entitled to vote at a special meeting
of shareholders called especially for that purpose.
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.
KVB. KVB's Articles of Incorporation provide that vacancies occurring in
the Board of Directors may be filled by the affirmative vote of a majority of
the remaining directors.
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 shareholders 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 shareholders 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 shareholders generally.
Similarly, adequate advance notice of stockholder proposals will give management
time to study such proposals and to determine whether to recommend to the
shareholders that such proposals be adopted. In certain instances, such
provisions could make it more difficult to oppose management's nominees or
proposals, even if shareholders believe such nominees or proposals are in their
best interests.
KVB. The Articles of Incorporation of KVB generally provide that any
stockholder desiring to make a nomination for the election of directors must
submit written notice to KVB at least 60 days prior to the first anniversary
date of the last meeting of shareholders of KVB called for the election of
directors. Failure to comply with this advance notice requirement will preclude
such nomination from being considered at the meeting.
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 shareholders or management from bringing
a lawsuit against directors for a breach of their duties even though such an
action, if successful, might have benefited InterWest.
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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.
KVB. Pursuant to KVB's Articles of Incorporation, KVB will, to the fullest
extent permitted by the WBCA, indemnify directors and officers against all
liability, damage or expense resulting from the fact that such person is or was
a director or officer except that KVB will not indemnify a director or officer
against liability, damage or expense resulting from the director's or officer's
gross negligence. In addition, KVB's Articles of Incorporation provide that the
directors of KVB shall not be personally liable for monetary damages to KVB or
its shareholders for conduct as directors except for liabilities that involve
intentional misconduct or a knowing violation of law by the director, conduct
violating Section 23B.08.310 of the WBCA or participation in any transaction
from which the director personally received a benefit to which the director was
not legally entitled.
POTENTIAL ANTITAKEOVER PROVISIONS
INTERWEST. The InterWest Articles of Incorporation contain provisions that
may have the effect of discouraging persons from acquiring large blocks of
InterWest Common Stock or delaying or preventing a change of control of
InterWest. These provisions include the classification of the InterWest Board
into three classes with the term of only one class expiring each year (see
"--Classified Board of Directors") and requirements for the approval of certain
business combinations (see "--Approval of Mergers, Consolidations, Sale of
Substantially All Assets and Dissolution.")
KVB. Provisions in KVB's Articles of Incorporation establishing a
classified Board of Directors (See"--Classified Board of Directors"), requiring
that certain matters be considered by the Board of Directors in connection with
the approval of certain business combinations (See "--Approval of Mergers,
Consolidations, Sale of Substantially All Assets and Dissolution") and requiring
a super-majority vote (75%) to approve a merger transaction (See "--Approval of
Mergers, Consolidations, Sale of Substantially All Assets and Dissolution") may
have the effect of discouraging persons from acquiring large blocks of KVB
Common Stock or delaying or preventing a change in control of KVB.
CERTAIN LEGAL MATTERS
The validity of the InterWest Common Stock to be issued in the Merger is
being passed upon for InterWest by Graham & Dunn, P.C., Seattle, Washington.
Graham & Dunn, P.C. will also deliver an opinion concerning certain federal
income tax consequences of the Merger.
EXPERTS
The consolidated statements of financial condition of InterWest as of
September 30, 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.
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The consolidated statements of operations, shareholders' equity and cash
flows of Central Bancorporation and subsidiaries ("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 Statements of Operations, Shareholders' Equity and Cash Flows 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 audited consolidated financial statements of KVB as of December 31, 1997
and 1996, and for each of the two years in the period ended December 31, 1997,
included in this Prospectus/Proxy Statement, have been audited by Knight Vale &
Gregory, Inc., P.S., independent auditors, as indicated in their report with
respect thereto appearing elsewhere in this Prospectus/Proxy Statement, and are
included herein in reliance upon the authority of such firm as experts in
accounting and auditing.
OTHER MATTERS
The KVB Board is not aware of any business to come before the KVB Special
Meeting other than those matters described above in this Prospectus/Proxy
Statement. However, if any other matters should properly come before the KVB
Special Meeting, it is intended that proxies in the accompanying form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies.
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KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31 1997
F-1
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INDEPENDENT AUDITORS' REPORT
Board of Directors
KITTITAS VALLEY BANCORP
Ellensburg, Washington
We have audited the accompanying consolidated balance sheets of KITTITAS
VALLEY BANCORP AND SUBSIDIARY as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these 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 consolidated financial statements are
free of material misstatement. 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 KITTITAS
VALLEY BANCORP AND SUBSIDIARY as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KNIGHT, VALE & GREGORY, INC. P.S.
Tacoma, Washington
January 12, 1998
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CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................... $ 6,096 $ 3,680
Deposits in banks......................................................................... 2,431 1,428
Securities available for sale............................................................. 4,391 5,699
Loans..................................................................................... 28,036 22,723
Less allowance for credit losses.......................................................... 279 244
--------- ---------
NET LOANS................................................................................. 27,757 22,479
Premises and equipment.................................................................... 1,528 1,185
Accrued interest receivable............................................................... 289 271
Other assets.............................................................................. 78 84
--------- ---------
TOTAL ASSETS.............................................................................. $ 42,570 $ 34,826
--------- ---------
--------- ---------
LIABILITIES
Deposits:
Demand.................................................................................. $ 7,594 $ 5,449
Savings and interest-bearing demand..................................................... 19,473 15,453
Time.................................................................................... 10,358 9,675
--------- ---------
TOTAL DEPOSITS............................................................................ 37,425 30,577
Repurchase agreements..................................................................... 373 224
Accrued interest payable.................................................................. 30 32
Other liabilities......................................................................... 520 225
--------- ---------
TOTAL LIABILITIES......................................................................... 38,348 31,058
--------- ---------
COMMITMENTS AND CONTINGENCIES............................................................... -- --
SHAREHOLDERS' EQUITY
Common stock (par value: $1); authorized 500,000 shares; issued: 175,117 shares in 1997;
167,000 shares in 1996.................................................................. 175 167
Surplus................................................................................... 3,482 3,344
Retained earnings......................................................................... 579 280
Net unrealized losses on securities available for sale, net of tax of $8 in 1997 and $11
in 1996................................................................................. (14) (23)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY................................................................ 4,222 3,768
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................................ $ 42,570 $ 34,826
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
INTEREST INCOME
Loans........................................................................................ $ 2,642 $ 2,290
Federal funds sold and deposits in banks..................................................... 283 125
Securities available for sale................................................................ 359 299
--------- ---------
TOTAL INTEREST INCOME........................................................................ 3,284 2,714
INTEREST EXPENSE
Deposits..................................................................................... 989 840
Federal funds purchased...................................................................... -- 9
Repurchase agreements........................................................................ 11 1
--------- ---------
TOTAL INTEREST EXPENSE....................................................................... 1,000 850
--------- ---------
NET INTEREST INCOME.......................................................................... 2,284 1,864
PROVISION FOR CREDIT LOSSES.................................................................... 52 65
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES........................................ 2,232 1,799
NON-INTEREST INCOME
Service charges on deposit accounts.......................................................... 314 219
Origination fees on brokered mortgage loans.................................................. 154 128
Other operating income....................................................................... 50 42
--------- ---------
TOTAL NON-INTEREST INCOME.................................................................... 518 389
NON-INTEREST EXPENSE
Salaries..................................................................................... 787 662
Employee benefits............................................................................ 112 107
Occupancy.................................................................................... 72 76
Equipment.................................................................................... 113 113
Other operating expenses..................................................................... 606 581
--------- ---------
TOTAL NON-INTEREST EXPENSE................................................................... 1,690 1,539
--------- ---------
INCOME BEFORE INCOME TAXES................................................................... 1,060 649
INCOME TAXES................................................................................... 359 176
--------- ---------
NET INCOME................................................................................... $ 701 $ 473
--------- ---------
--------- ---------
EARNINGS PER SHARE DATA
Basic earnings per share..................................................................... $ 4.06 $ 2.84
Diluted earnings per share................................................................... 3.99 2.74
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
LOSSES ON
RETAINED SECURITIES
COMMON EARNINGS/ AVAILABLE FOR
STOCK SURPLUS (DEFICIT) SALE TOTAL
----------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................................. $ 167 $ 3,334 $ (134) $ (40) $ 3,327
Net income................................................. -- -- 473 -- 473
Sale of common stock (300 shares).......................... -- 10 -- -- 10
Cash dividend on common stock ($.35 per share)............. -- -- (59) -- (59)
Valuation change, net of tax............................... -- -- -- 17 17
----- --------- ----- --- ---------
BALANCE, DECEMBER 31, 1996............................... 167 3,344 280 (23) 3,768
Net income................................................. -- -- 701 -- 701
Exercise of options (17,700 shares)........................ 17 456 -- -- 473
Repurchase of common stock (9,583 shares).................. (9) (318) -- -- (327)
Cash dividend on common stock ($2.25 per share)............ -- -- (402) -- (402)
Valuation change, net of tax............................... -- -- -- 9 9
----- --------- ----- --- ---------
BALANCE, DECEMBER 31, 1997............................... $ 175 $ 3,482 $ 579 ($ 14) $ 4,222
----- --------- ----- --- ---------
----- --------- ----- --- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................................. $ 701 $ 473
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses.............................................................. 52 65
Depreciation and amortization............................................................ 135 131
Deferred federal income taxes............................................................ 34 126
Stock dividends received................................................................. (46) (28)
Increase in accrued interest receivable.................................................. (18) (17)
Decrease in accrued interest payable..................................................... (2) (12)
Other--net............................................................................... 268 109
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................................. 1,124 847
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold......................................................... -- 500
Net (increase) decrease in deposits in banks............................................... (1,003) 2,882
Proceeds from maturities of securities available for sale.................................. 3,014 1,431
Proceeds from sales of securities available for sale....................................... 5,801 2,491
Purchases of securities available for sale................................................. (7,459) (5,259)
Net increase in loans...................................................................... (5,332) (5,350)
Purchases of premises and equipment........................................................ (470) (45)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................................... (5,449) (3,350)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................................................... 6,848 4,071
Issuance of common stock................................................................... 473 10
Net increase in repurchase agreements...................................................... 149 224
Cash dividends paid........................................................................ (402) (59)
Repurchase of common stock................................................................. (327) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................................. 6,741 4,246
--------- ---------
NET INCREASE IN CASH AND DUE FROM BANKS.................................................... 2,416 1,743
CASH AND DUE FROM BANKS
Beginning of year.......................................................................... 3,680 1,937
--------- ---------
END OF YEAR................................................................................ $ 6,096 $ 3,680
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest................................................................................. $ 1,002 $ 862
Income taxes............................................................................. 58 50
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Valuation change in net unrealized losses on securities available for sale, net of tax..... $ 9 $ 17
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kittitas
Valley Bancorp (the Company) and its wholly owned subsidiary, Kittitas Valley
Bank, N.A. (the Bank). All significant intercompany transactions and balances
have been eliminated.
NATURE OF OPERATIONS
The Bank operates three branches in Ellensburg, Cle Elum and Roslyn,
Washington. The Bank's primary source of revenue is providing loans to
customers, who are predominately small and middle-market businesses and
individuals.
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet, and revenues and
expenses for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for credit losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
credit losses and the valuation of foreclosed real estate, management obtains
independent appraisals for significant properties.
Certain prior year amounts have been reclassified to conform to the 1997
presentation. All dollar amounts are stated in thousands, except per share
information.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold
to implement the Company's asset/liability management strategies, and in
response to changes in interest rates, prepayment rates and similar factors, and
certain restricted equity securities. Securities available for sale are reported
at fair value. Unrealized gains and losses, net of the related deferred tax
effect, are reported as a net amount in a separate component of shareholders'
equity. Realized gains and losses on securities available for sale, determined
using the specific identification method, are included in earnings. Amortization
of premiums and accretion of discounts are recognized in interest income over
the period to maturity.
Declines in the fair value of individual securities available for sale below
their carrying value that are other than temporary result in write-downs of the
individual securities that are included in earnings as realized losses.
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance
for credit losses. Interest on loans is accrued daily based on the principal
amount outstanding.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
they are past due 90 days as to either principal or
F-8
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest. When interest accrual is discontinued, all unpaid accrued interest is
reversed against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal balance.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. This evaluation requires the use of
current estimates, which may vary from the ultimate collectibility experienced
in the future. The estimates used are reviewed periodically and, as adjustments
become necessary, they are charged to operations in the period in which they
become known.
When management determines that it is possible a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation,
which is computed on a straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is less. Gains or losses on dispositions are reflected in earnings.
CASH EQUIVALENTS
The Bank considers all amounts included in the balance sheets caption "Cash
and due from banks" to be cash equivalents.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required pro
forma disclosures have been provided in accordance with SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION.
F-9
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Bank provides for income taxes on a separate return basis and remits to
the Company amounts currently due.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128),
which the Company adopted in the fourth quarter of 1997. SFAS No. 128 requires a
dual presentation of basic and diluted earnings per share. Basic earnings per
share exclude dilution and are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share reflect
the potential dilution that could occur if common shares were issued pursuant to
the exercise of options under the Company's stock option plans. Earnings per
share for 1996 have been restated to conform to the presentation required by
SFAS No. 128.
NOTE 2--ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statements of
Accounting Standards Nos. 130, REPORTING COMPREHENSIVE INCOME, and 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, both of
which are effective for years beginning after December 31, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items that
are required to be recognized under accounting standards as components of
comprehensive income will have to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Also, the
accumulated balance of other comprehensive income will have to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS No. 131 requires that public enterprises
report financial and descriptive information about their reportable operating
segments. Both of these pronouncements will require additional disclosures about
the Company's operations, but are not anticipated to have any effect on
financial position or results of operations.
NOTE 3--RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances on deposit with the Federal Reserve Bank. The amounts
of such balances for the years ended December 31, 1997 and 1996 were
approximately $570 and $435, respectively.
F-10
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 4--DEBT AND EQUITY SECURITIES
Debt and restricted equity securities have been classified as available for
sale according to management's intent. The carrying amount of securities and
their approximate fair values at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Government and agency securities............................. $ 2,451 $ -- $ 8 $ 2,443
Collateralized mortgage obligations............................... 1,224 -- 15 1,209
Federal Reserve Bank, Federal Home Loan Bank and Federal
Agriculture Mortgage Corp. stock................................ 739 -- -- 739
----------- --- --- ---------
$ 4,414 $ -- $ 23 $ 4,391
----------- --- --- ---------
----------- --- --- ---------
DECEMBER 31, 1996
U.S. Government and agency securities............................. $ 2,303 $ 11 $ 7 $ 2,307
Corporate debt securities......................................... 878 -- 1 877
Collateralized mortgage obligations............................... 1,859 -- 37 1,822
Federal Reserve Bank, Federal Home Loan Bank and Federal
Agriculture Mortgage Corp. stock................................ 693 -- -- 693
----------- --- --- ---------
$ 5,733 $ 11 $ 45 $ 5,699
----------- --- --- ---------
----------- --- --- ---------
</TABLE>
The scheduled maturities of debt securities available for sale at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Due in one year or less.................................................. $ 890 $ 889
Due from one year to five years.......................................... 847 846
Due from five to ten years............................................... 499 498
Due after ten years...................................................... 215 210
Collateralized mortgage obligations...................................... 1,224 1,209
----------- ---------
$ 3,675 $ 3,652
----------- ---------
----------- ---------
</TABLE>
Securities carried at approximately $3,917 at December 31, 1997 and $3,091
at December 31, 1996 were pledged to secure public deposits and for other
purposes required or permitted by law.
F-11
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 5--LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Commercial and agricultural............................................. $ 9,410 $ 8,356
Real estate:
1 to 4 family residential............................................. 4,237 4,417
Commercial............................................................ 10,616 6,498
Farm land............................................................. 998 898
Construction.......................................................... 1,308 1,400
Consumer................................................................ 1,467 1,154
--------- ---------
TOTAL LOANS......................................................... $ 28,036 $ 22,723
--------- ---------
--------- ---------
</TABLE>
Changes in the allowance for credit losses for the years ended December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of year.................................................. $ 244 $ 180
Provision for credit losses................................................... 52 65
Charge-offs................................................................... (19) (1)
Recoveries.................................................................... 2 --
--------- ---------
NET CHARGE-OFFS........................................................... (17) (1)
--------- ---------
BALANCE AT END OF YEAR.................................................... $ 279 $ 244
--------- ---------
--------- ---------
</TABLE>
There were no impaired loans at December 31, 1997 or 1996. At December 31,
1997, there were no commitments to lend additional funds to borrowers whose
loans have been modified. Loans 90 days and over past due still accruing
interest were $19 at December 31, 1997. There were no loans 90 days and over
past due still accruing interest at December 31, 1996.
Certain related parties of the Bank, principally directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1997 and 1996. Total loans outstanding at December 31, 1997 and 1996 to
key officers and directors were $1,067 and $1,219, respectively. During 1997,
loan advances totaled $186, and loan repayments totaled $338 on these loans.
F-12
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 6--PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land....................................................................... $ 374 $ 374
Buildings.................................................................. 812 419
Leasehold improvements..................................................... 106 130
Equipment, furniture and fixtures.......................................... 611 544
--------- ---------
TOTAL COST............................................................... 1,903 1,467
Less accumulated depreciation.............................................. 375 282
--------- ---------
TOTAL PREMISES AND EQUIPMENT............................................. $ 1,528 $ 1,185
--------- ---------
--------- ---------
</TABLE>
The Bank leases premises under a month-to-month lease. Rental expense for
the leased premises was $14 and $16 for 1997 and 1996, respectively.
NOTE 7--DEPOSITS
The aggregate amount of certificates of deposit, each within a minimum
denomination of one hundred thousand dollars, was approximately $2,132 and
$1,759 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 8,898
1999............................................................... 766
2000............................................................... 633
2001............................................................... 49
2002 and thereafter................................................ 12
---------
$ 10,358
---------
---------
</TABLE>
NOTE 8--INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current....................................................................... $ 325 $ 50
Deferred...................................................................... 34 126
--------- ---------
TOTAL INCOME TAXES........................................................ $ 359 $ 176
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 8--INCOME TAXES (CONTINUED)
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
PERCENT OF PERCENT OF
PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax at statutory rates............................... $ 360 34.0% $ 221 34.0%
Increase (decrease) resulting from:
Reduction in valuation reserve............................ -- -- (34) (5.2)
Other..................................................... (1) (0.1) (11) (1.7)
----- --- ----- ---
TOTAL INCOME TAX EXPENSE................................ $ 359 33.9% $ 176 27.1%
----- --- ----- ---
----- --- ----- ---
</TABLE>
The following shows the nature and components of the Company's net deferred
tax liabilities at December 31, established at a rate of 34%:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Alternative minimum tax credit carryforward................................. $ -- $ 23
Allowance for credit losses................................................. 72 53
Unrealized loss on securities available for sale............................ 8 11
Other....................................................................... -- 9
--------- ---------
TOTAL DEFERRED TAX ASSETS................................................... 80 96
--------- ---------
DEFERRED TAX LIABILITIES
Depreciation................................................................ 46 50
Cash basis reporting........................................................ 51 55
Deferred income............................................................. 135 106
--------- ---------
TOTAL DEFERRED TAX LIABILITIES.............................................. 232 211
--------- ---------
NET DEFERRED TAX LIABILITIES................................................ $ 152 $ 115
--------- ---------
--------- ---------
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
F-14
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
conditional obligations as it does for on-balance-sheet instruments. A summary
of the Bank's commitments December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Commitments to extend credit:
Real estate secured...................................................... $ 3,847 $ 3,148
Credit card lines........................................................ 1,438 1,070
--------- ---------
TOTAL COMMITMENTS TO EXTEND CREDIT..................................... $ 5,285 $ 4,218
--------- ---------
--------- ---------
Standby letters of credit.................................................. $ 59 $ 66
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers. The Bank, as a matter of practice, generally does not
extend credit to any single borrower or group of related borrowers in excess of
$500,000. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank's experience has been that approximately 65% of loan
commitments are drawn upon by customers. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the party. Collateral held varies, but may include accounts
receivable, crops, livestock, inventory, property and equipment, residential
real estate, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
The Bank has agreements with three commercial banks for lines of credit
totaling $2,750, none of which were used at December 31, 1997 or 1996, and a
credit line with the Federal Home Loan Bank of 10% of total assets. The Bank
also has a facility of $1,400 available under a cash management advance program
offered by the Federal Home Loan Bank. No advances were outstanding under this
program at December 31, 1997 or 1996.
The Bank has entered into an employment contract with its president which
provides for contingent payments subject to future events.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
F-15
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 10--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS--DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash............................................................................... $ 20 $ 24
Investment in Bank................................................................. 4,202 3,744
--------- ---------
TOTAL ASSETS....................................................................... $ 4,222 $ 3,768
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities........................................................................ $ -- $ --
Shareholders' equity............................................................... 4,222 3,768
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................... $ 4,222 $ 3,768
--------- ---------
--------- ---------
</TABLE>
CONDENSED STATEMENTS OF INCOME--YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
DIVIDEND RECEIVED FROM BANK............................................................. $ 452 $ 75
OPERATING EXPENSES...................................................................... -- 2
--------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF BANK.................................. 452 73
EQUITY IN UNDISTRIBUTED INCOME OF BANK.................................................. 249 400
--------- ---------
NET INCOME............................................................................ $ 701 $ 473
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 10--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS--YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................... $ 701 $ 473
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of bank............................................. (249) (400)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 452 73
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock............................................................. 473 10
Repurchase of stock.................................................................. (327) --
Investment in Bank................................................................... (200) --
Dividends paid....................................................................... (402) (59)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................................................ (456) (49)
--------- ---------
NET INCREASE (DECREASE) IN CASH...................................................... (4) 24
--------- ---------
CASH
Beginning of year.................................................................... 24 --
--------- ---------
END OF YEAR.......................................................................... $ 20 $ 24
--------- ---------
--------- ---------
</TABLE>
NOTE 11--BENEFIT PLANS
401(K) PLAN
The Bank has a 401(k) plan which covers substantially all employees who meet
eligibility requirements set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. The Bank's contribution to the plan
is determined by the Board of Directors. The Bank's contributions for the years
ended December 31, 1997 and 1996 were $12 and $17, respectively.
STOCK OPTION PLANS
At December 31, 1997, the Company has two stock-based option plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant dates for
awards granted in 1997 and 1996 under these plans, consistent with the method
described by FASB Statement
F-17
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 11--BENEFIT PLANS (CONTINUED)
No. 123, the Company's net income and earnings per share would have been reduced
to these pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net income:
As reported................................................................ $ 701 $ 473
Pro forma.................................................................. 660 333
Earnings per share:
Basic:
As reported.............................................................. $ 4.06 $ 2.84
Pro forma................................................................ 3.82 2.00
Diluted:
As reported.............................................................. $ 3.99 $ 2.74
Pro forma................................................................ 3.78 1.98
</TABLE>
The fair value of each option grant is estimated on the date of grant, based
on the Black-Scholes option-pricing model and using the following
weighted-average assumptions: 1% dividend yield; risk-free interest rate of 6%;
and expected lives of ten years for the options.
DIRECTOR STOCK OPTION PLAN
Effective March 1996, the Company adopted a director stock option plan
whereby the Company reserved 25,000 of its $1 par value common stock to be
granted to directors. Options vest at the date of grant or ratably over five
years, beginning in the first year of the grant. Options expire on the tenth
anniversary of the date of grant, or in accordance with various termination
clauses enumerated within the plan. Options to purchase 1,000 shares of common
stock at $30 per share were outstanding and exercisable at December 31, 1997.
Also, options to purchase 6,800 shares of common stock at $30.50 per share were
outstanding and 1,800 were exercisable at December 31, 1997. There were 10,200
shares exercised in 1997.
EMPLOYEE STOCK OPTION PLAN
The Company's 1992 stock option plan, as amended on March 28, 1996, reserves
a total of 40,000 shares of common stock for option to key employees, as defined
in the plan. The exercise price for the option may not be less than the fair
value of the Company stock at the date of grant. Options vest ratably over three
to five years, beginning in the first year of the grant, and expire on the third
or tenth anniversary of the date of grant, or in accordance with various
termination clauses enumerated within the plan. Options to purchase 13,850
shares of common stock were outstanding and 1,750 were exercisable at December
31, 1997. There were 7,500 shares exercised in 1997.
F-18
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 11--BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1997 and 1996, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................................ 39,750 $ 27.33 17,250 $ 23.75
Granted......................................................... 3,000 31.00 22,500 30.07
Exercised....................................................... 17,700 26.77 -- --
Repurchased..................................................... 3,400 25.15 -- --
--------- ---------
OUTSTANDING AT END OF YEAR.................................. 21,650 28.64 39,750 27.33
--------- ---------
--------- ---------
Options exercisable at year-end................................. 4,550 18,400 26.87
Weighted average fair value of options granted during the
year.......................................................... 10.64 10.31
</TABLE>
The following information summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ---------------------------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$20.00 - $25.00 1,900 4.74 $ 20.00 600 $ 20.00
$25.00 - $30.00 9,950 7.19 28.30 2,150 29.37
Over $30.00 9,800 8.90 30.65 1,800 30.50
----------- -----
21,650 7.75 28.64 4,550 28.58
----------- -----
----------- -----
</TABLE>
NOTE 12--REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines of the regulatory framework for prompt corrective action,
the Bank must meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt
F-19
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 12--REGULATORY MATTERS (CONTINUED)
corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1
risk-based, and total risk-based ratios as set forth in the table.
As of December 31, 1997, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Consolidated........................................ $ 4,236 10.29% $ 1,646 4.00% N/A N/A
Bank................................................ 4,216 10.24 1,646 4.00 $ 2,058 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated........................................ 4,236 14.10 1,202 4.00 N/A N/A
Bank................................................ 4,216 14.04 1,202 4.00 1,802 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated........................................ 4,515 15.03 2,403 8.00 N/A N/A
Bank................................................ 4,495 14.96 2,403 8.00 3,004 10.00
DECEMBER 31, 1996
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Consolidated........................................ $ 3,771 10.96% $ 1,378 4.00% N/A N/A
Bank................................................ 3,747 10.88 1,378 4.00 $ 1,722 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated........................................ 3,771 15.11 997 4.00 N/A N/A
Bank................................................ 3,747 15.03 997 4.00 1,496 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Consolidated........................................ 4,015 16.09 1,995 8.00 N/A N/A
Bank................................................ 3,991 16.01 1,995 8.00 2,494 10.00
</TABLE>
Management believes, as of December 31, 1997, that the Company and the Bank
meet all capital requirements to which they are subject.
RESTRICTIONS ON RETAINED EARNINGS
The Bank, as a national bank, is subject to dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller of the
F-20
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 12--REGULATORY MATTERS (CONTINUED)
Currency, declare dividends in excess of the sum of the current year's earnings
(as defined) plus retained earnings (as defined) from the prior two years.
NOTE 13--EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated:
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income........................................................... $ 701 172,736 $ 4.06
Effect of dilutive securities:
Options.............................................................. -- 3,320 (.07)
----- ------------- -----
Diluted earnings per share:
NET INCOME........................................................... $ 701 176,056 $ 3.99
----- ------------- -----
----- ------------- -----
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share:
Net income........................................................... $ 473 166,836 $ 2.84
Effect of dilutive securities:
Options.............................................................. -- 5,805 (.10)
----- ------------- -----
Diluted earnings per share:
NET INCOME........................................................... $ 473 172,641 $ 2.74
----- ------------- -----
----- ------------- -----
</TABLE>
F-21
<PAGE>
KITTITAS VALLEY BANCORP INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL REPORT
MARCH 31 1998
F-22
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS--(UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................... $ 3,344 $ 6,096
Deposits in banks and Federal funds sold.............................................. 6,681 2,431
Securities available for sale......................................................... 5,602 4,391
Loans................................................................................. 28,665 28,036
Less allowance for credit losses...................................................... 286 279
----------- ------------
NET LOANS............................................................................. 28,379 27,757
Premises and equipment................................................................ 1,509 1,528
Accrued interest receivable........................................................... 297 289
Other assets.......................................................................... 110 78
----------- ------------
TOTAL ASSETS.......................................................................... $ 45,922 $ 42,570
----------- ------------
----------- ------------
LIABILITIES
Deposits:
Demand.............................................................................. $ 6,210 $ 7,594
Savings and interest-bearing demand................................................. 21,768 19,473
Time................................................................................ 10,208 10,358
----------- ------------
TOTAL DEPOSITS........................................................................ 38,186 37,425
Repurchase agreements................................................................. 3,378 373
Accrued interest payable.............................................................. 32 30
Other liabilities..................................................................... 311 520
----------- ------------
TOTAL LIABILITIES..................................................................... 41,907 38,348
----------- ------------
COMMITMENTS AND CONTINGENCIES........................................................... -- --
SHAREHOLDERS' EQUITY
Common stock (par value: $1); authorized 500,000 shares; issued: 178,787 shares in
1998; 175,117 shares in 1997........................................................ 179 175
Surplus............................................................................... 3,583 3,482
Retained earnings..................................................................... 261 579
Accumulated other comprehensive income................................................ (8) (14)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY............................................................ 4,015 4,222
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 45,922 $ 42,570
----------- ------------
----------- ------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME--(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
INTEREST INCOME
Loans........................................................................................... $ 725 $ 597
Federal funds sold and deposits in banks........................................................ 87 63
Securities available for sale................................................................... 75 84
--------- ---------
TOTAL INTEREST INCOME........................................................................... 887 744
INTEREST EXPENSE
Deposits........................................................................................ 245 236
Federal funds purchased and repurchase agreements............................................... 18 3
--------- ---------
TOTAL INTEREST EXPENSE.......................................................................... 263 239
--------- ---------
NET INTEREST INCOME............................................................................. 624 505
PROVISION FOR CREDIT LOSSES....................................................................... 21 --
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES........................................... 603 505
NON-INTEREST INCOME
Service charges on deposit accounts............................................................. 88 59
Loss on sale of securities available for sale................................................... -- (10)
Other operating income.......................................................................... 52 35
--------- ---------
TOTAL NON-INTEREST INCOME....................................................................... 140 84
NON-INTEREST EXPENSE
Salaries and employee benefits.................................................................. 238 218
Occupancy and equipment......................................................................... 40 46
Other operating expenses........................................................................ 161 150
--------- ---------
TOTAL NON-INTEREST EXPENSE...................................................................... 439 414
--------- ---------
INCOME BEFORE INCOME TAXES...................................................................... 304 175
INCOME TAXES...................................................................................... 103 67
--------- ---------
NET INCOME...................................................................................... 201 108
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on securities available for sale......................................... 6 (5)
--------- ---------
COMPREHENSIVE INCOME............................................................................ $ 207 $ 103
--------- ---------
--------- ---------
NET INCOME PER SHARE DATA
Basic earnings per share........................................................................ $ 1.13 $ .65
Diluted earnings per share...................................................................... 1.11 .62
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-24
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
----------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............................... $ 167 $ 3,344 $ 280 $ (23) $ 3,768
Net income............................................... -- -- 108 -- 108
Repurchase of common stock (1,625 shares)................ (2) (49) -- -- (51)
Unrealized gain (loss) on securities, net of tax......... -- -- -- (5) (5)
----- --------- ----- --- ---------
BALANCE, MARCH 31, 1997................................ $ 165 $ 3,295 $ 388 $ (28) $ 3,820
Balance, December 31, 1997............................... $ 175 $ 3,482 $ 579 $ (14) $ 4,222
Net income............................................... -- -- 201 -- $ 201
Exercise of options (3,670 shares)....................... 4 101 -- -- 105
Cash dividend on common stock ($2.90 per share).......... -- -- (519) -- (519)
Unrealized gain (loss) on securities, net of tax......... -- -- -- 6 6
----- --------- ----- --- ---------
BALANCE, MARCH 31, 1998................................ $ 179 $ 3,583 $ 261 $ (8) $ 4,015
----- --------- ----- --- ---------
----- --------- ----- --- ---------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
KITTITAS VALLEY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1988 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................................. $ 201 $ 108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses.............................................................. 21 --
Depreciation and amortization............................................................ 32 29
(Increase) decrease in accrued interest receivable....................................... (8) 6
Increase in accrued interest payable..................................................... 2 7
Other--net............................................................................... (241) (58)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................................. 7 92
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and deposits in banks................................... (4,250) (3,391)
Proceeds from sales and maturities of securities available for sale........................ 1,390 1,716
Purchases of securities available for sale................................................. (2,595) (2,496)
Net (increase) decrease in loans........................................................... (643) 93
Purchases of premises and equipment........................................................ (13) (15)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................................... (6,111) (4,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................................................... 761 2,223
Net increase in repurchase agreements...................................................... 3,005 141
Issuance of common stock................................................................... 105 --
Cash dividends paid........................................................................ (519) --
Repurchase of common stock................................................................. -- (51)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................................. 3,352 2,313
--------- ---------
NET DECREASE IN CASH AND DUE FROM BANKS.................................................... (2,752) (1,688)
CASH AND DUE FROM BANKS
Beginning of period........................................................................ 6,096 3,680
--------- ---------
END OF PERIOD.............................................................................. $ 3,344 $ 1,992
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest................................................................................. $ 261 $ 232
Income taxes............................................................................. 270 2
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities, net of tax........................................... $ 6 $ (5)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
KITTIAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The interim condensed consolidated financial statements include the accounts
of Kittitas Valley Bancorp (the Company) and its wholly owned subsidiary,
Kittitas Valley Bank, N.A. (the Bank). All significant intercompany transactions
and balances have been eliminated.
The interim condensed consolidated financial statements are unaudited but
have been prepared in accordance with generally accepted accounting principles
for condensed interim financial statements. Accordingly, the condensed
consolidated interim financial statements do not include all of the information
and footnotes required by generally accepted financial statements. In the
opinion of management, all adjustments necessary for a fair presentation are
reflected in the condensed interim consolidated financial statements.
The condensed consolidated interim financial statements should be read in
conjunction with the December 31, 1997 consolidated financial statements,
including notes thereto.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with general
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 period. Actual results
could differ from those estimates.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128),
which the Company adopted in the fourth quarter of 1997. SFAS No. 128 requires a
dual presentation of basic and diluted earnings per share. Basic earnings per
share exclude dilution and are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share reflect
the potential dilution that could occur if common shares were issued pursuant to
the exercise of options under the Company's stock option plans.
Following is information regarding the calculation of basic and diluted
earnings per share for the three months ended as indicated (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------- -----------
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Basic earnings per share:
Net income........................................................... $ 201 178,418 $ 1.13
Effect of dilutive securities:
Options.............................................................. -- 2,486 (.02)
----- ------------- -----
Diluted earnings per share:
NET INCOME........................................................... $ 201 180,904 $ 1.11
----- ------------- -----
----- ------------- -----
</TABLE>
F-27
<PAGE>
KITTIAS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------- -----------
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1997
Basic earnings per share:
Net income........................................................... $ 108 167,000 $ .65
Effect of dilutive securities:
Options.............................................................. -- 5,898 (.03)
----- ------------- -----
Diluted earnings per share:
NET INCOME........................................................... $ 108 172,898 $ .62
----- ------------- -----
----- ------------- -----
</TABLE>
ACCOUNTING CHANGES
In the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No.
130), which was effective for Companies with years beginning after December 15,
1997. SFAS No. 130 requires that an entity report and display comprehensive
income with the same prominence as other financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. With regard to the Company, currently the only items of comprehensive
income are changes in the fair value of its available for sale securities
portfolio. Accordingly, changes in the value of that portfolio during the
period, net of tax, are reported as "Other Comprehensive Income" in the
accompanying Consolidated Statements of Income and Comprehensive Income. Changes
in the fair value of the available for sale securities portfolio for the three
months ended March 31, 1998, which are reported in the Statement of
Shareholders' Equity, have been reclassified and retroactively reported as Other
Comprehensive Income. There was no effect on previously reported net income as a
result of this change.
F-28
<PAGE>
APPENDIX A
----------------------------------------------
----------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
KITTITAS VALLEY BANCORP, INC.,
KITTITAS VALLEY BANK, N.A.
AND
INTERWEST BANCORP, INC.
----------------------------------------------
----------------------------------------------
DATED AS OF APRIL 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
ARTICLE I. MERGER................................................................................................. A-6
1.1 THE MERGER.................................................................................. A-6
1.2 EFFECTIVE DATE.............................................................................. A-6
ARTICLE II. CONSIDERATION......................................................................................... A-7
2.1 CONVERSION OF STOCK......................................................................... A-7
2.2 CONVERSION ELECTION PROCEDURES AND ALLOCATION............................................... A-7
2.3 CONVERSION OF COMPANY OPTIONS............................................................... A-9
2.4 SHAREHOLDER RIGHTS; STOCK TRANSFERS......................................................... A-9
2.5 FRACTIONAL SHARES........................................................................... A-9
2.6 EXCHANGE PROCEDURES......................................................................... A-10
2.7 MERGER CONSIDERATION ADJUSTMENTS............................................................ A-10
2.8 EXCEPTION SHARES............................................................................ A-10
2.9 RESERVATION OF RIGHT TO REVISE TRANSACTION.................................................. A-10
ARTICLE III. ACTIONS PENDING CONSUMMATION......................................................................... A-10
3.1 CAPITAL STOCK............................................................................... A-10
3.2 DIVIDENDS, ETC.............................................................................. A-11
3.3 INDEBTEDNESS; LIABILITIES; ETC.............................................................. A-11
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC................................................. A-11
3.5 LIENS AND ENCUMBRANCES...................................................................... A-11
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC.................................................... A-11
3.7 BENEFIT PLANS............................................................................... A-11
3.8 CONTINUANCE OF BUSINESS..................................................................... A-11
3.9 AMENDMENTS.................................................................................. A-11
3.10 CLAIMS...................................................................................... A-12
3.11 CONTRACTS................................................................................... A-12
3.12 LOANS....................................................................................... A-12
3.13 TRANSACTION EXPENSES........................................................................ A-12
ARTICLE IV. REPRESENTATIONS AND WARRANTIES........................................................................ A-12
4.1 THE COMPANY AND KITTITAS BANK REPRESENTATIONS AND WARRANTIES................................ A-12
4.2 INTERWEST REPRESENTATIONS AND WARRANTIES.................................................... A-20
ARTICLE V. COVENANTS.............................................................................................. A-22
5.1 BEST EFFORTS................................................................................ A-23
5.2 THE PROXY................................................................................... A-23
5.3 REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS...................................... A-23
5.4 REGISTRATION STATEMENT EFFECTIVENESS........................................................ A-23
5.5 PRESS RELEASES.............................................................................. A-23
5.6 ACCESS; INFORMATION......................................................................... A-23
5.7 ACQUISITION PROPOSALS....................................................................... A-24
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS PREPARATION..................... A-24
5.9 BLUE-SKY FILINGS............................................................................ A-24
5.10 AFFILIATE AGREEMENTS........................................................................ A-24
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
5.11 CERTAIN POLICIES OF THE COMPANY AND KITTITAS BANK........................................... A-24
5.12 STATE TAKEOVER LAW.......................................................................... A-25
5.13 NO RIGHTS TRIGGERED......................................................................... A-25
5.14 SHARES LISTED............................................................................... A-25
5.15 REGULATORY APPLICATIONS..................................................................... A-25
5.16 REGULATORY DIVESTITURES..................................................................... A-25
5.17 CURRENT INFORMATION......................................................................... A-25
5.18 INDEMNIFICATION............................................................................. A-26
5.19 EMPLOYEE OPTIONS............................................................................ A-26
5.20 OFFICER BONUS PLAN.......................................................................... A-26
5.21 OPERATION OF KITTITAS BANK.................................................................. A-26
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER.............................................................. A-27
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS...................................................... A-27
6.2 CONDITIONS TO OBLIGATIONS OF INTERWEST...................................................... A-27
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND KITTITAS BANK...................................... A-28
ARTICLE VII. TERMINATION.......................................................................................... A-29
7.1 GROUNDS FOR TERMINATION..................................................................... A-29
7.2 CONSEQUENCES OF TERMINATION................................................................. A-29
ARTICLE VIII. OTHER MATTERS....................................................................................... A-29
8.1 SURVIVAL.................................................................................... A-29
8.2 WAIVER; AMENDMENT........................................................................... A-30
8.3 COUNTERPARTS................................................................................ A-30
8.4 GOVERNING LAW............................................................................... A-30
8.5 EXPENSES.................................................................................... A-30
8.6 CONFIDENTIALITY............................................................................. A-30
8.7 NOTICES..................................................................................... A-30
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES.......................................... A-31
8.9 BENEFIT PLANS............................................................................... A-31
8.10 HEADINGS.................................................................................... A-31
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Approval by Directors of Kittitas Valley Bancorp, Inc.
Exhibit B Director's Agreement
Exhibit C Stock Option Agreement
Exhibit D Kittitas Valley Bancorp, Inc. Affiliate Undertakings and Agreements
Exhibit E Employment Agreement of Steven F. Halverson
Exhibit F Employment Agreement of Zora Peterson
Exhibit G Employment Agreement of Ronald Goodwin
Exhibit H Employment Agreement of Jane Kirsch
Exhibit I Severance Agreement for Chip Spall
Exhibit J Severance Agreement for Kathy Thayer
Exhibit K Legal Opinion of Gerrish & McCreary, P.C.
Exhibit L Legal Opinion of Graham & Dunn, P.C.
</TABLE>
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<PAGE>
SCHEDULES
<TABLE>
<CAPTION>
COMPANY DISCLOSURES
- ------------------------
<S> <C>
Schedule 2.3(B) 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
INTERWEST DISCLOSURES
- ------------------------
Schedule 4.2(C) Shares
Schedule 4.2(F) No Defaults
Schedule 4.2(G) Financial Reports
Schedule 4.2(H) No Events Causing Material Adverse Effect
Schedule 4.2(I) Litigation, Regulatory Action
Schedule 4.2(L) Derivative Contracts
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 20th day of April, 1998 (this
"Plan"), is between KITTITAS VALLEY BANCORP, INC. (the "Company"), KITTITAS
VALLEY BANK, N.A. ("Kittitas Bank"), and INTERWEST BANCORP, INC. ("InterWest").
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 Ellensburg, 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 2,000,000 authorized shares of common
stock, $1.00 par value per share ("Company Common Stock") (no other class of
capital stock being authorized), of which 178,787 shares of Company Common Stock
are issued and outstanding. As of the date of this Plan, the Company has 40,000
shares of Company Common Stock reserved for issuance under employee stock option
plans pursuant to which options covering 10,950 shares of Company Common Stock
are outstanding (the "Employee Options"). As of the date of this Plan, the
Company has 30,000 shares of Company Common Stock reserved for issuance under
director stock option plans pursuant to which options covering 7,030 shares of
Company Common Stock are outstanding (the "Director Options"). As of December
31, 1997, the Company had capital of $4,236,000, divided into common stock of
$175,000, surplus of $3,482,000 and undivided profits of $579,000.
(B) KITTITAS BANK. Kittitas 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 Ellensburg, Washington. As of
the date of this Plan, Kittitas Bank has 500,000 authorized shares of common
stock, $10.00 par value per share ("Kittitas Bank Common Stock") (no other class
of capital stock being authorized), of which 165,600 shares of Kittitas Bank
Common Stock are issued and outstanding. All of the issued and outstanding
shares of Kittitas Bank Common Stock are owned by the Company, the sole
shareholder of Kittitas Bank. As of December 31, 1997, Kittitas Bank had capital
of $3,767,000, divided into common stock of $1,656,000, surplus of $1,823,000,
and undivided profits of $288,000.
(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. As of December 31, 1997, InterWest 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.
(D) VOTING AGREEMENT. As a condition and an inducement to InterWest's
willingness to enter into this Plan, the directors and officers of Kittitas 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), to refrain from competing with InterWest and its Subsidiaries, and to
refrain from exercising prior to the Effective Date any vested Director Options
or Employee Options.
(E) 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.
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<PAGE>
(F) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
Schedule 4. l(C), or paragraph (A) of the Recitals to this Plan, or as
authorized by this Plan or the Stock Option Agreement: there are no shares of
capital stock of the Company or Kittitas Bank authorized and reserved for
issuance; neither the Company nor Kittitas Bank has any Rights (as defined
below) issued or outstanding; and neither the Company nor Kittitas Bank has any
commitment to authorize, issue or sell any such shares or any Rights. The term
"Rights" means securities or obligations convertible into or exchangeable for,
or giving any Person any right to subscribe for or acquire, or any options,
calls or commitments relating to, shares of capital stock. There are no
preemptive rights with respect to the Company Common Stock.
(G) APPROVALS. At meetings of the respective Boards of Directors of the
Company, Kittitas 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:
"AGGREGATE NUMBER" has the meaning assigned to such term in Section
2.2(E)(3).
"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).
"BANK FINANCIAL REPORTS" has the meaning assigned to such term in Section
4.1(H).
"CAPITAL" means capital stock, surplus and retained earnings determined in
accordance with GAAP.
"CASH DISTRIBUTION" has the meaning assigned to such term in Section
2.1(B)(1).
"CASH ELECTION SHARES" has the meaning assigned to such term in Section
2.2(A).
"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" means an Employee Option or Director Option.
"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).
"CONTINUING EMPLOYEES" has the meaning assigned to such term in Section 8.9.
"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 of the foregoing).
"DIRECTOR OPTIONS" has the meaning assigned to such term in paragraph (A) of
the Recitals.
"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 the third calendar quarter of 1998,
that is established by InterWest for determining shareholders of record who will
be entitled to receive the InterWest Dividend.
"EFFECTIVE DATE" has the meaning assigned to such term in Section 1.2.
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<PAGE>
"ELIGIBLE COMPANY COMMON STOCK" means shares of Company Common Stock validly
issued and outstanding on the Effective Date other than Exception Shares and
Dissenting Shares.
"ELECTION DEADLINE" means the date of the Meeting.
"EMPLOYEE OPTIONS" has the meaning assigned to such term in paragraph (A) of
the Recitals.
"EMPLOYMENT AGREEMENT" means any of Exhibits E, F, G and H.
"ENVIRONMENTAL LAW" means (1) any federal, state, and/or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, legal doctrine, order, judgment, decree, injunction, requirement or
agreement with any governmental entity, relating to (a) the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, groundwater, drinking water supply, surface land, subsurface
land, plant and animal life or any other natural resource) or to human health or
safety, or (b) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of Hazardous Material, in each case as amended and as now in effect,
including the Federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the
Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the
Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, and the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and Health Act of 1970, and (2) any common law or equitable doctrine
(including injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 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 2.6.
"EXCHANGE RATIO" has the meaning assigned to such term in Section 2.1(B)(2).
"FDIC" means the Federal Deposit Insurance Corporation.
"FINANCIAL REPORTS" has the meaning assigned to such term in Section 4.1(H).
"FEDERAL RESERVE BOARD" means the Board of Governors of the Federal Reserve
System.
"FORM OF ELECTION" has the meaning assigned to such term in Section 2.2(A).
"GAAP" means generally accepted accounting principles.
"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.
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<PAGE>
"HOLDING COMPANY FINANCIAL REPORTS" has the meaning assigned to such term in
Section 4.1(H).
"INDEMNIFIED PARTY" has the meaning assigned to such term in Section
5.18(A).
"INTERWEST" has the meaning assigned to such term in the first paragraph of
this Plan.
"INTERWEST COMMON STOCK" has the meaning assigned to such term in paragraph
(C) of the Recitals.
"INTERWEST DIVIDEND" means InterWest's regular quarterly cash dividend that
is declared in the third calendar quarter of 1998.
"INTERWEST OPTION" has the meaning assigned to such term in Section 2.3(B).
"KITTITAS BANK" has the meaning assigned to such term in the first paragraph
of this Plan.
"KITTITAS BANK COMMON STOCK" has the meaning assigned to such term in
paragraph (B) of the Recitals.
"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 CASH CONSIDERATION" means the dollar amount (rounded to the nearest
cent), equal to the product of $72.00 multiplied by the Maximum Cash Election
Number.
"MAXIMUM CASH ELECTION NUMBER" has the meaning assigned to such term in
Section 2.2(D).
"MAXIMUM STOCK ELECTION NUMBER" has the meaning assigned to such term in
Section 2.2(D).
"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).
"MERGER CONSIDERATION" means the aggregate of the Cash Distributions and
Stock Distributions payable or issuable pursuant to the Merger.
"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.
"NON-ELECTION SHARES" has the meaning assigned to such term in Section
2.2(C).
"OFFICER BONUS PLAN" has the meaning assigned to such term in Section
4.1(GG).
"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 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.
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<PAGE>
"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.
"PLAN" means this Agreement and Plan of Merger.
"PREVIOUSLY DISCLOSED" with respect to information, means that the
information is provided by a Party in a Schedule that is delivered
contemporaneously with the execution of this Plan.
"PROXY STATEMENT" has the meaning assigned to such term in Section 5.2.
"REGISTRATION STATEMENT" has the meaning assigned to such term in Section
5.2.
"REGULATORY AUTHORITIES" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"RIGHTS" has the meaning assigned to such term in paragraph (F) of the
Recitals.
"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.
"SEVERANCE AGREEMENT" means either of Exhibits I and J.
"STOCK DISTRIBUTION" has the meaning assigned to such term in Section
2.1(B).
"STOCK ELECTION SHARES" has the meaning assigned to such term in Section
2.2(A).
"STOCK OPTION AGREEMENT" has the meaning assigned to such term in paragraph
(E) of the Recitals.
"SUBSIDIARY" means, with respect to any entity, each partnership, limited
liability company, or corporation the majority of the outstanding partnership
interests, membership interests, capital stock or voting power of which is (or
upon the exercise of all outstanding warrants, options and other rights would
be) owned, directly or indirectly, at the time in question by such entity.
"TAX RETURNS" has the meaning assigned to such term in Section 4.1(AA).
"TAXES" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, withholding or similar taxes imposed on the income,
properties or operations of the respective Party or its Subsidiaries, together
with any interest, additions, or penalties relating to such taxes and any
interest charged on those additions or penalties.
"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.
(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
A-5
<PAGE>
Subsections refer to the Subsections of the Section in which the reference
appears. All pronouns used in this Plan include the masculine, feminine and
neuter gender, as the context requires. All accounting terms used in this Plan
that are not expressly defined in this Plan have the respective meanings given
to them in accordance with GAAP.
ARTICLE I. MERGER
1.1 THE MERGER. Subject to the provisions of this Plan, on the Effective
Date:
(A) THE CONTINUING CORPORATION. In accordance with the terms of RCW Ch.
23B.11, the Company shall merge into InterWest (the "Merger"), the separate
existence of the Company shall cease and InterWest (the "Continuing
Corporation") shall survive, and the name of the Continuing Corporation shall be
"InterWest Bancorp, Inc."
(B) RIGHTS, ETC. Upon consummation of the Merger, the Continuing
Corporation shall possess all of the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of the merging
corporations; and all property, real, personal and mixed, and all debts due on
whatever account, and all other choses in action, and all and every other
interest, of or belonging to or due to each of the corporations so merged, shall
be deemed to be vested in the Continuing Corporation without further act or
deed; and the title to any real estate or any interest therein, vested in each
of such corporations, shall not revert or be in any way impaired by reason of
the Merger.
(C) LIABILITIES. The Continuing Corporation shall be responsible and
liable for all the liabilities, obligations and penalties of each of the
corporations so merged.
(D) ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. The Articles
of Incorporation and Bylaws of the Continuing Corporation shall be those of
InterWest, as in effect immediately prior to the Merger becoming effective. The
directors and officers of InterWest in office immediately prior to the Merger
becoming effective shall be the directors and officers of the Continuing
Corporation, who shall hold office until such time as their successors are
elected and qualified.
(E) DISSENTING SHARES. Notwithstanding anything to the contrary in this
Plan, each Dissenting Share whose holder, as of the Effective Date of the
Merger, has not effectively withdrawn or lost his dissenters' rights under RCW
23B.13 (the "Appraisal Laws") shall not be converted into or represent a right
to receive any Merger Consideration, 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 a Non-Election Share. 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 the Company (but only after the amount thereof shall have been
agreed upon or finally determined pursuant to the Appraisal Laws).
1.2 EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" will be the 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. A business day is any
day other than a Saturday, Sunday or legal holiday in the State of Washington.
If the Merger is not consummated in accordance with this Plan on or prior to
December 31, 1998, the Company or InterWest may terminate this Plan in
accordance with Article VII. On the Effective Date, InterWest and the Company
shall execute and deliver to the Secretary of State of the State of Washington
articles of merger in accordance with applicable law.
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<PAGE>
ARTICLE II. CONSIDERATION
2.1 CONVERSION OF STOCK. Subject to the provisions of this Plan, on the
Effective Date, by virtue of the Merger and without any action on the part of
InterWest or the Company:
(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, automatically and without any action on the part of the holder of such
share, be converted into the right to receive from InterWest either
(1) $72.00 in cash, without interest (the "Cash Distribution") or
(2) 1.714 shares (the "Exchange Ratio") of InterWest Common Stock (the
"Stock Distribution")
in such proportions as the holder of such share of Eligible Company Common Stock
shall elect or be deemed to have elected as provided in Section 2.2(E).
2.2 CONVERSION ELECTION PROCEDURES AND ALLOCATION.
(A) ELECTION OPTIONS. Subject to the election and allocation procedures
set forth in this Section 2.2, each record holder of Company Common Stock will
be entitled to elect to receive (i) the Cash Distribution for all or a portion
of the holder's shares ("Cash Election Shares"), or (ii) the Stock Distribution
for all or a portion of the holder's shares ("Stock Election Shares"). All such
elections shall be made on a form designated by InterWest for that purpose
("Form of Election"). InterWest and the Company shall mail the Form of Election
with the Proxy Statement to all holders of Company Common Stock on the record
date for the Meeting and shall make the Form of Election available to all
persons who become holders of Company Common stock subsequent to such date and
no later than the close of business on the business day immediately prior to the
Election Deadline.
(B) EFFECTIVE ELECTION. Any election for the purposes of this Section 2.2
shall be effective only if the Exchange Agent shall have received a properly
completed and signed Form of Election by the Election Deadline. A Form of
Election may be revoked or changed by the person submitting such Form of
Election or any other person to whom the subject shares are subsequently
transferred by written notice by such person to the Exchange Agent at or prior
to the Election Deadline. All Forms of Elections shall be deemed to be revoked
if the Exchange Agent is notified in writing by either InterWest or the Company
that this Plan has been terminated in accordance with its terms.
(C) NON-ELECTION; DISCRETION OF EXCHANGE AGENT. Any holder of Company
Common Stock who does not submit a properly completed and signed Form of
Election that is received by the Exchange Agent prior to the Election Deadline,
and any holder who has failed to perfect or has effectively withdrawn or lost
the right to payment under the Appraisal Laws, shall be deemed to hold
"Non-Election Shares" for the purposes of Section 2.2(E). InterWest shall have
the discretion, which it may delegate in whole or in part to the Exchange Agent,
to determine whether Forms of Election have been properly completed and signed,
and to disregard immaterial defects in Forms of Election. If InterWest or the
Exchange Agent determines that any purported Cash Election or Stock Election was
not properly made, such purported election shall be deemed to be of no force and
effect and the holder making such election shall be deemed to have Non-Election
Shares for the purposes of Section 2.2(E). The decision of InterWest or the
Exchange Agent as to such matters shall be conclusive and binding. Neither
InterWest nor the Exchange Agent will be under any obligation to notify any
holder of any defect in a Form of Election submitted to the Exchange Agent.
(D) MAXIMUM CONVERSION AMOUNTS. The number of shares of Company Common
Stock to be converted into the right to receive cash in the Merger shall not
exceed 50% ("Maximum Cash
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Election Number") of the number of shares of Company Common Stock outstanding
immediately prior to the Effective Date (excluding Dissenting Shares and shares
exchanged for cash pursuant to Section 2.5). The number of shares of Company
Common Stock to be converted into the right to receive InterWest Common Stock in
the Merger shall not exceed 50% ("Maximum Stock Election Number") of the number
of shares of Company Common Stock outstanding immediately prior to the Effective
Date (excluding Dissenting Shares and shares exchanged for cash pursuant to
Section 2.5). If the application of the provisions of Sections 2.2(A), 2.2(B)
and 2.2(C) would otherwise result in Cash Distributions or Stock Distributions
in excess of the limits set forth in this Section 2.2(D), then the Cash
Distributions and Stock Distributions shall be allocated in the manner set forth
in Section 2.2(E).
(E) ALLOCATION. As soon as practicable after the Effective Date, InterWest
shall cause the Exchange Agent to allocate among the holders of Company Common
Stock the rights to receive the Cash Distribution or the Stock Distribution as
follows:
(1) EXCESS CASH ELECTION SHARES. If the number of Cash Election Shares
exceeds the Maximum Cash Election Number, then:
(a) Each Stock Election Share shall be converted into the right to
receive the Stock Distribution;
(b) Each Non-Election Share shall be converted into the right to
receive the Stock Distribution; and
(c) The Exchange Agent will reallocate the Merger Consideration
payable to each holder of Cash Election Shares pro rata (based upon the
number of Cash Election Shares owned by such holder, as compared with the
total number of Cash Election Shares owned by all holders) such that the
holders of Cash Election Shares will receive an amount of Cash
Distributions that, in the aggregate, will equal the Maximum Cash
Consideration, and will receive the remainder of the Merger Consideration
due to them as Stock Distributions.
(2) EXCESS STOCK ELECTION SHARES. If the number of Stock Election Shares
exceeds the Maximum Stock Election Number, then:
(a) Each Cash Election Share shall be converted into the right to
receive the Cash Distribution;
(b) Each Non-Election Share shall be converted into the right to
receive the Cash Distribution; and
(c) The Exchange Agent will reallocate the Merger Consideration
payable to each holder of Stock Election Shares pro rata (based upon the
number of Stock Election Shares owned by such holder, as compared with
the total number of Stock Election Shares owned by all holders) such that
the holders of Stock Election Shares will receive, as Stock
Distributions, a number of shares of InterWest Common Stock equal to the
product of the Maximum Stock Election Number multiplied by the Exchange
Ratio, and will receive the remainder of the Merger Consideration due to
them as Cash Distributions.
(3) NO EXCESS. If neither of Subsections (1) or (2) above is applicable,
all Cash Election Shares shall be converted into the right to receive the
Cash Distribution, all Stock Election Shares shall be converted into the
right to receive the Stock Distribution, and the Non-Election Shares shall
be converted into the right to receive the Cash Distribution and/or the
Stock Distribution as follows:
(a) If sum of the number of Non-Election Shares plus the number of
Cash Election Shares (the "Aggregate Number") equals or exceeds the
Maximum Cash Election Number, then (1) the number of Non-Election Shares
to be converted into the right to receive the Stock Distribution shall be
equal to the Aggregate Number minus the Maximum Cash Election Number, (2)
the
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remaining Non-Election Shares shall be converted into the right to
receive the Cash Distribution, and (3) the Exchange Agent shall allocate
the Merger Consideration payable to each holder of a Non-Election Share
in a manner that minimizes the creation of fractional shares of InterWest
Common Stock.
(b) If the Aggregate Number is less than the Maximum Cash Election
Number, then (1) all Non-Election Shares shall be converted into the
right to receive the Cash Distribution, and (2) the Exchange Agent will
reallocate the Merger Consideration payable to each holder of Stock
Election Shares pro rata (based upon the number of Stock Election Shares
owned by such holder, as compared with the total number of Stock Election
Shares owned by all holders) such that the holders of Stock Election
Shares will receive, as Stock Distributions, a number of shares of
InterWest Common Stock equal to the product of the Maximum Stock Election
Number multiplied by the Exchange Ratio, and will receive the remainder
of the Merger Consideration due to them as Cash Distributions.
(4) PRO RATA COMPUTATIONS. The pro rata computations performed by the
Exchange Agent pursuant to this Section 2.2(E) shall be binding and
conclusive as to the allocation of the Merger Consideration among holders of
Company Common Stock.
2.3 CONVERSION OF COMPANY OPTIONS.
(A) EXERCISE AFTER ELECTION DEADLINE. If any holder of an Employee Option
exercises such Employee Option after the Election Deadline, the shares of
Company Common Stock issued upon such exercise will be deemed to be Non-Election
Shares for purposes of Section 2.2(E).
(B) CONVERSION ON EFFECTIVE DATE. On the Effective Date, by virtue of the
Merger, and without any action on the part of any holder of a Company Option,
each Company Option that is then outstanding and unexercised shall be converted
into and become an option to purchase InterWest Common Stock ("InterWest
Option") on the same terms and conditions as are in effect with respect to the
Company Option immediately prior to the Effective Date, except that (A) each
such InterWest Option may be exercised solely for shares of InterWest Common
Stock, (B) the number of shares of InterWest Common Stock subject to such
InterWest Option shall be equal to the number of shares of Company Common Stock
subject to such Option immediately prior to the Effective Date multiplied by the
Exchange Ratio, the product being rounded, if necessary, up or down to the
nearest whole share, and (C) the per share exercise price under each such
InterWest Option shall be adjusted by dividing the per share exercise price of
the Company Option by the Exchange Ratio, and rounding up or down to the nearest
cent. The number of shares of Company Common Stock that are issuable upon
exercise of Options (whether vested or unvested) as of the date of this Plan are
Previously Disclosed in Schedule 2.3(B).
2.4 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.
2.5 FRACTIONAL SHARES. Notwithstanding any other provision of this Plan,
no fractional shares of InterWest Common Stock and no certificates or scrip for,
or other evidence of ownership of fractional shares, 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 $72.00.
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2.6 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 or Cash Distribution 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.
2.7 MERGER CONSIDERATION ADJUSTMENTS. If, before the Effective Date,
InterWest changes the number of shares of InterWest Common Stock issued and
outstanding as a result of a stock split, stock dividend, recapitalization or
similar transaction, and the record date therefor shall be prior to the
Effective Date, the Exchange Ratio shall be proportionately adjusted.
2.8 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.
2.9 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 Kittitas 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, the Company and Kittitas
Bank will cooperate with and assist InterWest 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.
ARTICLE III. ACTIONS PENDING CONSUMMATION
Unless otherwise agreed to in writing by InterWest, each of the Company and
Kittitas 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 neither the Company nor Kittitas Bank, without the
prior written consent of InterWest, will (or cause or allow any of its
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, Kittitas Bank or any of their
Subsidiaries, or any Rights with respect thereto, or enter into any agreement
with respect to the
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foregoing, or permit any additional shares of Company Common Stock to become
subject to grants of employee stock options, stock appreciation rights or
similar stock-based employee compensation rights.
3.2 DIVIDENDS, ETC. Make, declare or pay any dividend on or in respect of,
or declare or make any distribution on, or directly or indirectly combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock or, other than as permitted in or contemplated by this Plan 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;
PROVIDED, however, that, prior to the Effective Date, the Company may declare
and pay, with respect to each share of Company Common Stock outstanding on the
Dividend Record Date, a per-share cash dividend for the quarter ending September
30, 1998, equal to (A) the product of the per-share dollar amount of the
InterWest Dividend multiplied by the Exchange Ratio, DIVIDED by (B) two. For
illustrative purposes only, if the dollar amount of the InterWest Dividend were
$0.20 per share, the Company could accordingly pay a dividend with respect to
Company Common Stock of $0.17 per share ($0.20 x 1.714 = $0.3428; $0.3428 (4) 2
= $0.17 (rounded)).
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 $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 (other than the Employment Agreements and the Severance
Agreements) 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 and
except as expressly contemplated by the agreement attached to this Plan as
EXHIBIT A and the Employment Agreements, 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 Kittitas Bank in its fiduciary capacity, in each case in the
ordinary course of business consistent with past practice).
3.9 AMENDMENTS. Amend its articles of incorporation or bylaws.
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3.10 CLAIMS. Settle any claim, litigation, action or proceeding involving
any liability for material money damages or restrictions upon the operations of
the Company or any of its Subsidiaries.
3.11 CONTRACTS. Except as previously disclosed on SCHEDULE 3.11, enter
into, renew, terminate or make any change in any material contract, agreement or
lease, except in the ordinary course of business consistent with past practice
with respect to contracts, agreements and leases that are terminable by it
without penalty on no more than 60 days prior written notice.
3.12 LOANS. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except that
Kittitas 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 $300,000 for any new
customer or $600,000 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 $125,000 in the aggregate.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 THE COMPANY AND KITTITAS BANK REPRESENTATIONS AND WARRANTIES. Each of
the Company and Kittitas Bank hereby represents and warrants to InterWest 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.
Kittitas 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
(except with respect to the assessability of Kittitas Bank Common Stock under 12
U.S.C. Section55), 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
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vote or to dispose of such shares. All of the shares of capital stock of each of
its Subsidiaries held by the Company or one of its Subsidiaries are fully paid
and nonassessable and are owned by the Company or one of its Subsidiaries free
and clear of any charge, mortgage, pledge, security interest, restriction,
claim, lien or encumbrance. Each of its Subsidiaries is in good standing under
the laws of the jurisdiction in which it is incorporated or organized, and is
duly qualified to do business and in good standing in the jurisdictions where
the failure to be duly qualified is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it. Except as Previously
Disclosed in SCHEDULE 4.1(D), it does not own beneficially, directly or
indirectly, any shares of any equity securities or similar interests of any
corporation, bank, partnership, joint venture, business trust, association or
other organization. In the case of representations by the Company, the deposits
of its Subsidiaries that are banks are insured by the Bank Insurance Fund of the
FDIC.
(E) CORPORATE POWER. Each of the Company and its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by
its shareholders referred to in Section 6.1, this Plan 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
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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 for the Holding Company Financial Reports in accordance with GAAP
during the periods involved, and in each case for the Bank Financial Reports in
accordance with regulatory accounting principles 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
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.
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(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in SCHEDULE
4.1(M), each of the Company and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to own its
businesses presently conducted and that are material to the business of it
and its Subsidiaries taken as a whole; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect
and, to its best knowledge, no suspension or cancellation of any of them is
threatened; and all such filings, applications and registrations are
current;
(2) has received no notification or communication from any Regulatory
Authority or the staff thereof (a) asserting that the Company or any of its
Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances which such Regulatory Authority enforces, which, as a result of
such noncompliance in any such instance, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on the Company or its
Subsidiaries, (b) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries, or (c) requiring any of the Company or its
Subsidiaries (or any of its or their officers, directors or controlling
persons) to enter into a cease and desist order, agreement or memorandum of
understanding (or requiring the board of directors thereof to adopt any
resolution or policy);
(3) is not required to give prior notice to any federal banking or
thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive;
(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; and
(5) has adopted and is implementing a program to address any problems
associated with the capacity and capability of the computer software,
hardware, code and programs utilized by the Company, its Subsidiaries and
their vendors to properly process transactions after December 31, 1999.
(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
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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.
(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
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Code or Section 302 of ERISA. Neither the Company nor any of its
Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year, the actuarially determined present
value of all "benefit liabilities," within the meaning of Section
4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan's most recent actuarial valuation) did not
exceed the then current value of the assets of such plan, and there has been
no material change in the financial condition of such plan since the last
day of the most recent plan year.
(6) Neither the Company nor any of its Subsidiaries has any obligations
for retiree health and life benefits under any plan, except as set forth in
SCHEDULE 4.1(Q)(6). There are no restrictions on the rights of the Company
or any of its Subsidiaries to amend or terminate any such plan without
incurring any liability thereunder.
(7) Except as Previously Disclosed in SCHEDULE 4.L(Q)(7) and except as
expressly contemplated by the Employment Agreements and the Severance
Agreements, 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.
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(V) INSURANCE. Each of the Company and its Subsidiaries has taken all
requisite action (including the making of claims and the giving of notices)
pursuant to its directors' and officers' liability insurance policy or policies
in order to preserve all rights thereunder with respect to all matters that are
known to the Company, except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries. Set forth in SCHEDULE 4.L(V) is a list of all
insurance policies maintained by or for the benefit of the Company or its
Subsidiaries or their respective directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in SCHEDULE 4.1(W), to the
best of the Company's knowledge, there is no person who, as of the date of this
Plan, may be deemed to be an "affiliate" of the Company as that term is used in
Rule 145 under the Securities Act.
(X) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. The Company and its
Subsidiaries have taken all necessary action to exempt this Plan and the 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.
(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).
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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 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.
(GG) OFFICER BONUS PLAN. The Company's officer bonus plan in effect as of
the date of this Plan allocates 8% of the Company's pre-tax earnings to payment
of annual officer bonuses (such plan, the "Officer Bonus Plan").
4.2 INTERWEST REPRESENTATIONS AND WARRANTIES. InterWest hereby represents
and warrants to the Company and Kittitas Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with
respect to InterWest 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 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, the Stock Option Agreement and each of
the Employment Agreements and Severance Agreements have been authorized by all
necessary corporate action of
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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.
(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 Severance 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.
(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 of understanding, commitment letter or similar submission.
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(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 of Financial Institutions of the State of
Washington, (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.
ARTICLE V. COVENANTS
Each of the Company and Kittitas Bank hereby covenants to InterWest, and
InterWest hereby covenants to the Company and Kittitas Bank, that:
5.1 BEST EFFORTS. Subject to the terms and conditions of this Plan and, in
the case of the Company and Kittitas 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 September
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.
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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 Kittitas Bank will not, without the
prior approval of InterWest, and InterWest will not (and will cause its
Subsidiaries not to), without the prior approval of the Company, issue any press
release or written statement for general circulation relating to the
transactions contemplated by this Plan, except as otherwise required by law.
5.6 ACCESS; INFORMATION.
(A) Upon reasonable notice, the Company and Kittitas 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 Kittitas 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, and (2) all other information concerning the
business, properties and personnel of the Company and its Subsidiaries as
InterWest may reasonably request, provided that no investigation pursuant to
this Section 5.6 shall affect or be deemed to modify or waive any representation
or warranty made by the Company or Kittitas Bank in this Plan or the conditions
to the obligations of the Company and Kittitas 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
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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. 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; 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.
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 the Company, restricting the disposition of such
affiliate's shares of Company Common Stock and the shares of InterWest Common
Stock to be received by such person in exchange for such person's shares of
Company Common Stock. 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 KITTITAS BANK. In the case of
each of the Company and Kittitas 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 basis satisfactory to InterWest; 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 Kittitas Bank's
representations, warranties, covenants and conditions contained in this Plan
shall not
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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 (B)
restrict or impair in any way the ability of InterWest to exercise the rights
granted under this Plan or the Stock Option Agreement.
5.14 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. InterWest shall, and shall cause its
Subsidiaries to (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
its Subsidiaries, 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 conditions
set forth in Section 6.1(G), have been satisfied or waived.
5.17 CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective Date, each
of the Company and InterWest shall, and shall cause its representatives to,
confer on a regular and frequent basis with representatives of the other.
(B) Each of the Company and InterWest shall promptly notify the other of (1)
any material change in the business or operations of it or its Subsidiaries, (2)
any material complaints, investigations or hearings (or communications
indicating that the same may be contemplated) of any Regulatory Authority
relating to it or its Subsidiaries, (3) the initiation or threat of material
litigation involving or relating to it or its Subsidiaries, or (4) any event or
condition that might reasonably be expected to cause any of its representations
or warranties set forth in this Plan not to be true and correct in all material
respects as of the Effective Date or prevent it or its Subsidiaries from
fulfilling its or their obligations under this Plan.
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5.18 INDEMNIFICATION.
(A) 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 undertaking to
repay such advances within a reasonable period of time if it is ultimately
determined that applicable law does not allow for such indemnification).
(B) Any Indemnified Party wishing to claim indemnification under paragraph
(A) of this Section 5.18, upon learning of such claim, action, suit, proceeding
or investigation, shall promptly notify InterWest thereof, PROVIDED, HOWEVER,
that the failure so to notify shall not affect the obligations of InterWest
under paragraph (A) of this Section 5.18 (unless such failure materially and
adversely increases InterWest's liability under such paragraph (A)). In the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Date), (1) InterWest shall have the right
to assume the defense thereof and InterWest shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; PROVIDED, HOWEVER, that InterWest shall be obligated
pursuant to this paragraph (B) to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction for any single action, suit or
proceeding, (2) the Indemnified Parties will cooperate in the defense of any
such matter, and (3) InterWest shall not be liable for any settlement effected
without its prior written consent.
(C) If InterWest or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of InterWest shall assume the
obligations set forth in this Section 5.18.
(D) InterWest shall pay all expenses, including attorneys' fees, that may be
incurred by any Indemnified Party in enforcing the indemnity and other
obligations provided for in this Section 5.18. The rights of each Indemnified
Party under this Section 5.18 shall be in addition to any other rights such
Indemnified Party may have under the articles of incorporation or bylaws of the
Company or under applicable Washington law.
5.19 EMPLOYEE OPTIONS. The Company will use its best efforts to encourage
each Employee Option holder not to exercise such option prior to the Effective
Date.
5.20 OFFICER BONUS PLAN. InterWest will cause the Officer Bonus Plan to
remain in effect through December 31, 1999, and the Officer Bonus Plan will be
administered without taking into account any adjustments to the policies and
practices of the Company or the Bank that are made pursuant to Section 5.11.
5.21 OPERATION OF KITTITAS BANK. Kittitas Bank shall operate as a
separately chartered subsidiary of InterWest until at least December 31, 1999.
The board of directors of Kittitas Bank immediately after the Effective Date
shall consist of the directors of Kittitas Bank immediately prior to the
Effective Date, who shall continue as directors of Kittitas Bank through
December 31, 1998, plus Gary M. Bolyard and Stephen M. Walden. Effective January
1, 1999, the board of directors of Kittitas Bank will consist of five to seven
current directors designated by Kittitas Bank, plus Gary M. Bolyard and Stephen
M. Walden.
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ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the transactions contemplated by this Plan are subject
to the written waiver by such Party or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) SHAREHOLDER VOTE. This Plan shall have been duly approved by the
requisite vote of the Company's shareholders under applicable law and the
articles of incorporation and bylaws of the Company.
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 the Merger, 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) FAIRNESS OPINION. The Company shall have received, immediately prior
to the mailing of the Proxy Statement to the Company's shareholders, an opinion
of Southard Financial to the effect that the financial terms of the Merger are
fair from a financial point of view to the Company's shareholders.
(I) EMPLOYMENT CONTRACTS. The Employment Agreements attached as Exhibits
E, F, G and H shall have been duly executed and delivered by all parties to such
Employment Agreements.
(J) SEVERANCE AGREEMENTS. The Severance Agreements attached as EXHIBITS I
AND J shall have been duly executed and delivered by all parties to such
Severance Agreements.
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 Gerrish & McCreary, P.C., counsel for the Company and
Kittitas Bank, in the form of EXHIBIT K.
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(B) OFFICERS' CERTIFICATE. (1) Each of the representations and warranties
contained in this Plan of the Company and Kittitas Bank shall be true and
correct in all material respects (except the representations and warranties in
Section 4.1(C) and those representations and warranties that are qualified by
reference to "Material Adverse Effect" or any other materiality caveat, which
shall be true and correct in all respects) as of the date of this Plan and upon
the Effective Date with the same effect as though all such representations and
warranties had been made on the Effective Date, except for any such
representations and warranties that specifically relate to an earlier date,
which shall be true and correct as of such earlier date and except as otherwise
provided in Section 5.11, and (2) each and all of the agreements and covenants
of the Company and Kittitas 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 Company and Kittitas 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 Kittitas Bank, nor
shall the Company or Kittitas 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
Kittitas 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 payment of cash in lieu of fractional shares of InterWest Common
Stock shall not exceed in the aggregate 5% of the outstanding shares of Company
Common Stock.
(F) CAPITAL. The Company's Capital shall not be less than $4.2 million
(not including capital contributions upon exercise of Company Options and net of
transaction expenses) on the Effective Date.
(G) ALLOWANCE FOR LOAN AND LEASE LOSSES. Kittitas Bank's allowance for
possible loan and lease losses shall not be less than 1% of Kittitas Bank's
total outstanding loans and leases and will be adequate to absorb Kittitas
Bank's anticipated loan and lease losses.
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND KITTITAS BANK. The
obligations of the Company and Kittitas Bank to consummate the transactions
contemplated by this Plan also are subject to the written waiver by the Company
and Kittitas Bank or the fulfillment on or prior to the Effective Date of each
of the following conditions:
(A) LEGAL OPINION. The Company and Kittitas Bank shall have received an
opinion, dated the Effective Date, of Graham & Dunn, P.C., special counsel for
InterWest, in the form of Exhibit L.
(B) OFFICER'S CERTIFICATE. (1) Each of the representations and warranties
of InterWest contained in this Plan shall be true and correct in all material
respects (except the representations and warranties in Section 4.2(C) and those
representations and warranties that are qualified by reference to "Material
Adverse Effect" or any other materiality caveat, which shall be true and correct
in all 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 to be performed and complied with pursuant to this Plan on or prior to
the Effective Date shall have been duly performed and complied
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with in all material respects, and the Company and Kittitas 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 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 Company
shall have received a certificate dated the Effective Date signed by the Chief
Executive Officers of InterWest to such effect.
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. By InterWest or 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 December 31, 1998; PROVIDED,
HOWEVER, that a Party that is in material breach of any of the provisions of
this Plan shall not be entitled to terminate the Plan pursuant to this Section
7.1(C).
(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 of the
Meeting.
7.2 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to subsection (B) of this Section 7.2,
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.
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8.2 WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this
Plan may be (A) waived in writing by the Party benefited by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated by this Plan) by an agreement in writing among the Parties approved
by their respective Boards of Directors and executed in the same manner as this
Plan, except that, after the vote by the shareholders of the Company, the
consideration to be received by the shareholders of the Company for each share
of Company Common Stock shall not thereby be altered. Nothing contained in this
Section 8.2 is intended to modify InterWest's rights pursuant to Section 2.9.
8.3 COUNTERPARTS. This Plan may be executed in one or more counterparts,
including 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 to:
InterWest Bancorp, Inc.
1259 West Pioneer Way
Oak Harbor, Washington 98277
Attn: Stephen Walden, President
Copies to:
Edward C. Beeksma
Zylstra, Beeksma & Waller
791 S.E. Barrington Drive
Oak Harbor, Washington 98277
Stephen M. Klein
Graham & Dunn, P.C.
1420 Fifth Avenue, Suite 3300
Seattle, Washington 98101
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If to the Company or Kittitas Bank, to:
Kittitas Valley Bancorp, Inc.
101 West 8th Avenue
Ellensburg, WA 98926
Attn: Steven F. Halverson, President and CEO
Copies to:
Jeffrey C. Gerrish
Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38117
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 and the Stock Option
Agreement, and supersede 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
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 (all such employees being "Continuing Employees"). 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 employee stock ownership, stock option, bonus or other
incentive 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 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. Notwithstanding the foregoing, if, under
InterWest's existing benefit plans, the Continuing Employees must pay more for
medical, dental and similar health benefits than they previously paid for such
benefits as employees of the Company or its Subsidiaries, then InterWest shall
pay the Continuing Employees additional compensation so as to maintain their
level of after-tax compensation.
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.
<TABLE>
<S> <C> <C>
INTERWEST BANCORP, INC.
By: /s/ STEPHEN M. WALDEN
-------------------------------------------
Name: Stephen M. Walden
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
KITTITAS VALLEY BANCORP, INC.
By: /s/ STEVEN F. HALVERSON
-------------------------------------------
Name: Steven F. Halverson
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
KITTITAS VALLEY BANK, N.A.
By: /s/ STEVEN F. HALVERSON
-------------------------------------------
Name: Steven F. Halverson
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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APPENDIX B
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement"), dated as of April 20, 1998, is
between INTERWEST BANCORP, INC. ("InterWest") and KITTITAS VALLEY BANCORP, INC.
("Kittitas").
RECITALS
Kittitas and InterWest have executed an Agreement and Plan of Merger
("Plan"), of even date with this Agreement, under which Kittitas will be merged
into InterWest and Kittitas Valley Bank, N.A., the wholly owned subsidiary of
Kittitas, 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, Kittitas irrevocably grants an option ("Option") to InterWest to
purchase an aggregate of 44,418 authorized but unissued shares of Kittitas'
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 then issued and outstanding), at a per share price of $50
("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) Kittitas or its board of directors enters into an agreement or
recommends to Kittitas 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 Kittitas, or (2) purchase or otherwise acquire (including
by merger, reorganization, consolidation, share exchange or any similar
transaction) securities representing 10% or more of Kittitas' voting shares;
(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
Kittitas' 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 Kittitas (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 Kittitas' 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;
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(c) failure of the board of directors of Kittitas 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 Kittitas a proposal to (1) acquire Kittitas (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 Kittitas or (3) change the composition of the board of directors of
Kittitas.
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 Kittitas
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 Kittitas 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 Kittitas 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 Kittitas,
and (c) Kittitas 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 KITTITAS. Kittitas
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 Kittitas, has been duly executed by a
duly authorized officer of Kittitas and constitutes a valid and binding
obligation of Kittitas. No shareholder approval by Kittitas shareholders is
required by applicable law or otherwise before the exercise of the Option in
whole or in part.
(b) OPTION SHARES. Kittitas 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
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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 Kittitas.
(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 Kittitas or any agreement,
instrument, judgment, decree, law, rule or order applicable to Kittitas or any
subsidiary of Kittitas or to which Kittitas 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, Kittitas 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 Kittitas 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, Kittitas 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 Kittitas 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 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.
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10. REGULATORY RESTRICTIONS. Kittitas 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. Kittitas agrees that if for any reason InterWest or any
transferee will have exercised its rights under this Agreement and Kittitas 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 Kittitas 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 Kittitas will be
entitled to specific performance and injunctive and other equitable relief. This
provision is without prejudice to any other rights that Kittitas 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 Kittitas 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 Kittitas or,
except as provided in this Agreement, to any notice of any meetings of
shareholders or any other proceedings of Kittitas.
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, Kittitas 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 (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.
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If to Kittitas to:
Kittitas Valley Bancorp, Inc.
101 West 8th Avenue
P.O. Box 978
Ellensburg, WA 98926
Attn: Steven F. Halverson, President and Chief Executive Officer
With a copy to:
Jeffrey C. Gerrish, Esq.
Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38117
If to InterWest, to:
InterWest Bancorp, Inc.
1259 West Pioneer Way
Oak Harbor, Washington 98277
Attn: Stephen M. 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,
including facsimile 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 April 20, 1998:
<TABLE>
<S> <C> <C>
INTERWEST BANCORP, INC.
By: /s/ STEPHEN M. WALDEN
-------------------------------------------
Stephen M. Walden
Its: PRESIDENT
By: /s/ STEVEN F. HALVERSON
-------------------------------------------
Steven F. Halverson
Its: PRESIDENT
</TABLE>
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APPENDIX C
TITLE 23B. WASHINGTON BUSINESS CORPORATION ACT
CHAPTER 23B.13. DISSENTERS' RIGHTS
SECTION 23B.13.010 DEFINITIONS. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 23B.13.020 RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled
to vote on the merger, or (ii) if the corporation is a subsidiary that is
merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
(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.
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(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation. 1991 c 269 Section 37; 1989 c 165 Section 141.
SECTION 23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote. 1989 c 165 Section 142.
SECTION 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 it
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220. 1989 c 165 Section
143.
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.
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SECTION 23B.13.220 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of
the shares before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
SECTION 23B.13.230 DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220 must
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to RCW 23B.13.220(2)(c), and deposit the shareholder's certificates in
accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's share
certificates under subsection (1) of this section retains all other rights of a
shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
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.
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(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
SECTION 23B.13.260 FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
SECTION 23B.13.270 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of 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.
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(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within thirty days after the corporation
made or offered payment for the dissenter's shares.
SECTION 23B.13.300 COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The 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
C-5
<PAGE>
(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.
C-6
<PAGE>
APPENDIX D
FAIRNESS OPINION
MERGER BY AND BETWEEN
INTERWEST BANCORP, INC.
AND
KITTITAS VALLEY BANCORP, INC.
REPORT DATED
JULY 16, 1998
<PAGE>
July 16, 1998
Board of Directors
Kittitas Valley Bancorp, Inc.
Ellensburg, Washington
RE: FAIRNESS OPINION RELATIVE TO PROPOSED AGREEMENT OF KITTITAS VALLEY
BANCORP, INC., ELLENSBURG, WASHINGTON, TO MERGE WITH AND INTO
INTERWEST BANCORP, INC., OAK HARBOR, WASHINGTON
Directors:
The Board of Directors of Kittitas Valley Bancorp, Inc. ("KVB") retained
Southard Financial, in its capacity as a financial valuation and consulting
firm, to render its opinion of the fairness, from a financial viewpoint, of the
acquisition of KVB by InterWest Bancorp, Inc. ("InterWest"). Southard Financial
and its principals have no past, present, or future contemplated financial,
equity, or other interest in either KVB or InterWest. This opinion is issued
based upon financial data as of December 31, 1997 and March 31, 1998.
This opinion is being issued prior to the execution of the Definitive
Agreement. The opinion reflects our understanding of the proposed transaction as
of the current date.
APPROACH TO ASSIGNMENT
The approach to this assignment was to consider the following factors:
- A review of the financial performance and position of KVB and the value of
its common stock;
- A review of the financial performance and position of InterWest and the
value of its common stock;
- A review of recent Bank merger transactions in the United States,
Washington, and nearby states;
- A review of the current and historical market prices of bank holding
companies in the United State, Washington, and nearby states;
- A review of the investment characteristics of the common stock of KVB and
InterWest;
- An evaluation of the impact of the merger on the expected return to the
current shareholders of KVB; and,
- An evaluation of other factors as was considered necessary to render this
opinion.
It is Southard Financial's understanding that the merger and resulting
exchange of the stock of InterWest for the outstanding common stock of KVB
constitute a non-taxable exchange for federal income tax purposes. The exchange
of stock for cash may have tax consequences.
DUE DILIGENCE REVIEW PROCESS
In performing this assignment, Southard Financial reviewed the documents
specifically outlined in Exhibit 1 pertaining to KVB and in Exhibit 2 pertaining
to InterWest.
REVIEW OF KITTITAS VALLEY BANCORP, INC.
Southard Financial visited with the management of KVB. Discussions included
questions regarding the current and historical financial position and
performance of KVB, its outlook for the future, and other pertinent factors.
Details pertaining to KVB are contained in Southard Financial's file.
REVIEW OF INTERWEST BANCORP, INC.
Southard Financial visited with the management of InterWest in Oak Harbor,
Washington. Discussions included questions regarding the current and historical
financial position and performance of
<PAGE>
Board of Directors
Kittitas Valley Bancorp, Inc.
Page 2
InterWest and its operating subsidiaries, its outlook for the future, and other
pertinent factors. Details pertaining to InterWest are contained in Southard
Financial's file.
MERGER DOCUMENTATION
Southard Financial reviewed the merger terms with the management of KVB and
with legal counsel for KVB. Further, Southard Financial reviewed the Agreement
and Plan of Merger dated April 20, 1998 (the "Agreement"). The analysis in this
opinion reflects the merger terms as outlined below. (See Exhibit 3, Terms of
the Agreement)
Southard Financial did not independently verify the information reviewed,
but relied on such information as being complete and accurate in all material
respects. Southard Financial did not make any independent evaluation of the
assets of InterWest or KVB, but reviewed data supplied by the management of both
institutions.
MAJOR CONSIDERATIONS
Numerous factors were considered in the overall review of the proposed
merger. The review process included considerations regarding KVB, InterWest, and
the proposed merger. The major considerations are as follows:
KITTITAS VALLEY BANCORP, INC.
- Historical earnings;
- Historical dividend payments;
- Outlook for future performance, earnings, and dividends;
- Economic conditions and outlook in KVB's market;
- The competitive environment in KVB's market;
- Comparisons with peer banks;
- Potential risks in the loan and securities portfolios;
- Recent minority stock transactions in KVB's common stock; and,
- Other such factors as were deemed appropriate in rendering this opinion.
INTERWEST BANCORP, INC.
- Historical earnings;
- Historical dividend payments;
- Outlook for future performance, earnings, and dividends;
- Economic conditions and outlook in InterWest's market;
- The competitive environment in InterWest's market;
- Comparisons with peer banks;
- Potential risks in the loan and securities portfolios;
- Recent minority stock transactions in InterWest's common stock; and,
- Other such factors as were deemed appropriate in rendering this opinion.
<PAGE>
Board of Directors
Kittitas Valley Bancorp, Inc.
Page 3
COMMON FACTORS
- Historical and current bank merger pricing; and,
- Current market prices for minority blocks of common stocks of regional
bank holding companies in the United States, Washington, and nearby
states.
1. THE PROPOSED MERGER
- The terms of the Agreement as described herein;
- The specific pricing of the merger;
- Adequacy of the consideration paid to the shareholders of KVB;
- The assumption that the stock portion of the merger will be treated as a
tax-free exchange;
- The amount of debt and goodwill on the balance sheet of InterWest and the
impact of the merger of KVB on InterWest's capital and liquidity
positions;
- The historical dividend payments of InterWest and the likely impact on the
dividend income of the current shareholders of KVB (equivalency of cash
dividends);
- Pro-forma combined income statements for InterWest post merger and the
expected returns to KVB shareholders (equivalency of earnings yield);
- The market for minority blocks of InterWest common stock; and,
- Other such factors as deemed appropriate.
OVERVIEW OF FAIRNESS ANALYSIS
In connection with rendering its opinion, Southard Financial performed a
variety of financial analyses, which are summarized below. Southard Financial
believes that its analyses must be considered as a whole and that considering
only selected factors could create an incomplete view of the analyses and the
process underlying the opinion. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not susceptible to partial
analyses.
In its analyses, Southard Financial made numerous assumptions, many of which
are beyond the control of KVB and InterWest. Any estimates contained in the
analyses prepared by Southard Financial are not necessarily indicative of future
results or values, which may vary significantly from such estimates. Estimates
of value of companies do not purport to be appraisals or necessarily reflect the
prices at which companies or their securities may actually be sold. None of the
analyses performed by Southard Financial was assigned a greater significance
than any other. More details on the analyses prepared by Southard Financial are
contained in Exhibits 3-5, which also provide an overview of the exchange
options in the merger.
FAIRNESS OF THE MERGER PRICE
a. Analysis of Market Transactions
Based upon the merger terms and the estimated purchase price, KVB
shareholders will receive about 300% of KVB book value at December 31, 1997,
18.0 times fully diluted 1997 KVB earnings, and 30.2% of KVB assets at December
31, 1997. Further, the price represents about 312% of KVB book value at March
31, 1998, 16.2 times undiluted trailing 12-month KVB earnings at March 31, 1998,
and 28% of KVB assets at March 31, 1998. Based upon the review conducted by
Southard Financial, the pricing for KVB in the merger is within the range of
multiples seen in recent bank acquisitions (see Exhibit 5). Further, the merger
pricing compares favorably to recent transactions in central and eastern
Washington (highest price/
<PAGE>
Board of Directors
Kittitas Valley Bancorp, Inc.
Page 4
book ratio and price/asset ratio) during the past two years. Finally, the merger
price represents a significant premium to the most recent transaction prices for
KVB stock.
b. Analysis of Liquidity
Unlike KVB stock, InterWest shares are traded on the NASDAQ market system
(ticker symbol "IWBK"). InterWest stock trades on a regular basis and the
bid/ask spread ranges from $1.00 to $1.50 per share. The stock is actively
traded, has several institutional holders, and is followed by at least seven
investment analysts. Finally, except in the case of certain officers, directors,
and significant shareholders of KVB, InterWest shares received will be freely
tradable with no restrictions.
SUMMARY OF ANALYSES
The summary set forth does not purport to be a complete description of the
analyses performed by Southard Financial. The analyses performed by Southard
Financial are not necessarily indicative of actual values, which may differ
significantly from those suggested by such analyses. Southard Financial did not
appraise any individual assets or liabilities of KVB or InterWest.
Throughout the due diligence process, all information provided by KVB,
InterWest, and third party sources was relied upon by Southard Financial without
independent verification.
Based upon the analyses discussed above and other analyses performed by
Southard Financial, the impact of the merger on the shareholders of KVB is
expected to be favorable.
FAIRNESS OPINION
Based upon the analyses of the foregoing and such matters as were considered
relevant, it is the opinion of Southard Financial that the terms of the offer
for the acquisition of Kittitas Valley Bancorp, Inc. by InterWest Bancorp, Inc.
pursuant to the Agreement and Plan of Merger are fair, from a financial
viewpoint, to the shareholders of Kittitas Valley Bancorp, Inc.
Thank you for this opportunity to be of service to the shareholders of
Kittitas Valley Bancorp, Inc.
Sincerely yours,
SOUTHARD FINANCIAL
/s/ Southard Financial
Attachments:
Exhibit 1: Kittitas Valley Bancorp, Inc., Document Review List
Exhibit 2: InterWest Bancorp, Inc., Document Review List
Exhibit 3: Terms of the Agreement and Plan of Merger
Exhibit 4: Overview of Exchange Options
Exhibit 5: Comparison of the Merger Pricing to Public Market Transactions
Exhibit 6: Qualifications of Southard Financial
<PAGE>
EXHIBIT 1
KITTITAS VALLEY BANCORP, INC.
DOCUMENT REVIEW LIST
1. Consolidated Reports of Condition and Income ("Call Report") of Kittitas
Valley Bank, N.A. for the period ended March 31, 1998.
2. Uniform Bank Performance Report ("UBPR") of Kittitas Valley Bank, N.A.
for the period ended December 31, 1997.
3. Summary financial statements of Kittitas Valley Bank, N.A. for the
periods ended March 31, 1997 and March 31, 1998, prepared by management.
4. Audited financial statements of Kittitas Valley Bancorp and Subsidiary
for the years ended December 31, 1994-97, prepared by Knight Vale & Gregory,
Inc., certified public accountants, Tacoma, Washington.
5. Budgeted financial statements of Kittitas Valley Bank, N.A. for the year
ending December 31, 1998.
6. List of stock options to purchase the common stock of Kittitas Valley
Bancorp, Inc.
7. Additional pertinent information deemed necessary to render this opinion.
<PAGE>
EXHIBIT 2
INTERWEST BANCORP, INC.
DOCUMENT REVIEW LIST
1. SEC Form 10-K of InterWest Bancorp, Inc. for the fiscal year ended
September 30, 1997.
2. SEC Form 10-Q of InterWest Bancorp, Inc. for the quarter ended December
31, 1997.
3. SEC Form 8-K for the Agreement and Plan of Reorganization between Pacific
Northwest Bank and InterWest Bancorp, Inc., dated January 15, 1998.
4. SEC Form 8-K for the Agreement and Plan of Merger between Pioneer
Bancorp, Inc., Pioneer National Bank, and InterWest Bancorp, Inc. and InterWest
Bank, dated February 4, 1998.
5. Annual Reports of InterWest Bancorp and Subsidiary for the years ended
December 31, 1995-97, including audited consolidated financial statements
prepared by Ernst & Young LLP, certified public accountants, Seattle,
Washington.
6. Analyst reports on InterWest Bancorp, Inc. by BT Alex. Brown; Fox-Pitt,
Kelton Incorporated; Jensen Securities Co.; Ryan, Beck & Co.; Pacific Crest
Securities; Sandler O'Neill Equity Research; Dain Bosworth Incorporated.
7. Additional pertinent information deemed necessary to render this opinion.
<PAGE>
EXHIBIT 3
TERMS OF THE
AGREEMENT AND PLAN OF MERGER
The discussion below is based upon our understanding of the key financial
terms that are contained in the definitive agreement by and between InterWest
Bancorp, Inc. and Kittitas Valley Bancorp, Inc. (the "Agreement").
In exchange for each share of KVB common stock outstanding, KVB shareholders
will receive either $72.00 in cash, without interest ("Cash Election Shares")
1.714 shares (the "Exchange Ratio") of InterWest common stock ("Stock Election
Shares"), or a combination of both suject to the limitations described below and
in the Agreement. Notwithstanding these election options, the Agreement contains
further conditions regarding the aggregate elections in the merger:
(1) In the aggregate, the sum of the number of shares of KVB to be converted
into cash shall not be more than 50% of the total number of outstanding
shares of KVB (excluding Dissenting Shares and cash associated with
Fractional Shares).
(2) In the aggregate, the sum of the number of shares of KVB to be converted
into the right to receive InterWest Common Stock shall not exceed 50% of the
total number of outstanding shares of KVB (excluding Dissenting Shares and
cash associated with Fractional Shares).
(3) A holder of KVB common stock who does not submit a form of election that is
received by the Exchange Agent prior to the election deadline shall be
deemed to have made a non-election (Non-Election Shares).
(4) Should either the Cash Election Shares or the Stock Election Shares exceed
50% of the total consideration, then the excess Election Shares and the
Non-Election Shares shall be converted to the Excess Election Share's
counterpart on a prorata basis according to a formula as prescribed in the
Agreement.
(5) Should any holder of a KVB stock option exercise the option after the
Election Deadline, such shares will be deemed to be Non-Election Shares. On
the Effective Date, any non-exercised option of KVB is subject to the same
terms with respect to the KVB option, and any such options will be converted
into InterWest shares as multiplied by the Exchange Ratio.
No fractional shares will be issued by InterWest. KVB shareholders who would
otherwise have been entitled to fractional shares (after aggregating all shares
owned) will be paid in cash in an amount equal to $72 times such fractional part
of a share.
The parties intend for the merger to qualify as a "reorganization" under the
Internal Revenue Code. Thus, the exchange of KVB stock for InterWest stock is
expected to qualify as a tax-free exchange for Federal income tax purposes. The
exchange of cash for KVB shares or for fractional shares may have tax
consequences.
The Agreement may be terminated by either party:
- upon the mutual consent of each institution;
- upon a breach by either party of any representation, warranty, obligation,
or covenant;
- if the merger is not consummated on or before December 31, 1999 or such
later date as the parties may agree upon; or,
- under the terms and conditions as set forth in the Agreement.
If, before the Effective Date, InterWest changes the number of its shares
issued and outstanding as a result of a stock split, stock dividend,
recapitalization or similar transaction, the Exchange Ratio shall be adjusted
proportionally.
<PAGE>
EXHIBIT 4
OVERVIEW OF EXCHANGE OPTIONS
c. EXPECTED IMPACT ON KVB SHAREHOLDERS
d. WHO ELECT TO RECEIVE INTERWEST STOCK
The following is a summary of the various analyses undertaken in conjunction
with this fairness opinion. This summary is not intended to represent all
analyses performed by Southard Financial, but is presented here for the
convenience of KVB and its shareholders.
According to the Agreement, the Exchange Ratio is 1.714 shares of InterWest
common stock for each share of KVB common stock outstanding, with the
consideration being a combination of cash and InterWest common stock. The
following analysis focuses on the total consideration to be paid in the merger.
The analysis presented below does provide information to KVB shareholders to
assist in their determination of which exchange options to accept. However,
Southard Financial is not providing investment advice.
EARNINGS: KVB reported earnings of $3.99 per share (diluted) in 1997.
InterWest reported earnings of $2.48 per share in fiscal 1997. Based upon the
exchange ratio as derived above, had the merger been consummated prior to
January 1, 1997, each former KVB share would have earned $4.25 in 1997
(InterWest 1997 earnings of $2.48 times 1.714 equivalent shares). This
represents a 6.5% increase over KVB's reported earnings for 1997.
KVB's management projects earnings of $5.36 per share in 1998, while
InterWest is expected to earn approximately $2.70 per share in fiscal 1998.
Based upon the exchange ratio as derived above, had the merger been consummated
prior to January 1, 1998, each former KVB share would be expected to earn $4.63
(InterWest expected 1998 earnings of $2.70 times 1.714 equivalent shares). This
represents a slight dilution in earnings. However, it must be noted that the
long-term outlook for earnings growth is better, in our opinion, for InterWest
than for KVB. This long-term outlook for growth is a key factor.
DIVIDENDS: The shareholders of KVB received cash dividends of $2.25 per
share in 1997, while InterWest shareholders received cash dividends of $0.59 per
share in fiscal 1997. Based upon the exchange ratio as derived above, had the
merger been consummated prior to January 1, 1997, each former KVB share would
have received dividends of $1.01 in 1997 (InterWest 1997 dividends of $0.59
times 1.714 equivalent shares). This represents less than half of KVB's reported
dividends for 1997. However, KVB does not have a history of paying regular
dividends. KVB paid dividends of $0.35 per share in 1996 and no dividends in
1995 or 1994. Conversely, InterWest paid out an average of 23% of earnings over
the past five years, and dividends per share increased in each of those years.
Therefore, the overall dividend impact of the merger should be positive for the
shareholders of KVB, assuming that InterWest continues dividend payments at or
above current levels. In the first quarter of 1998, KVB paid cash dividends of
$2.90 per share.
BOOK VALUE: Reported book value of KVB was $24.11 per share at December 31,
1997. Reported book value of InterWest at December 31, 1997 was $16.60 per
share. Had the merger been consummated prior to December 31, 1997, each former
KVB share would have book value of $28.45 (InterWest book value of $16.60 per
share times 1.714 equivalent shares). This represents an increase of 18.0% over
KVB's book value at December 31, 1997.
Reported book value of KVB was $21.74 per share at March 31, 1998. Estimated
book value of InterWest at March 31, 1998 was $16.45 per share (December 31,
1997 book value plus estimated second quarter earnings of $0.64 per share, less
quarterly dividends of $0.19 per share). Had the merger been consummated prior
to March 31, 1998, each former KVB share would have book value of $28.20
2
<PAGE>
(InterWest book value of $16.45 per share times 1.714 equivalent shares). This
represents an increase of 29.7% over KVB's book value at March 31, 1998.
The favorable impact on the book value of KVB shares reflects the fact that
the proposed transaction is nearly 300% of KVB's year-end book value, while
InterWest common shares are trading at approximately 260% of book value.
LIQUIDITY: Unlike KVB stock, InterWest shares are registered with the SEC,
and are traded on the NASDAQ market (IWBK). Further, except in the case of
officers, directors, and certain significant shareholders (Affiliates) of KVB,
InterWest shares received will be freely tradable with no restrictions.
InterWest stock trades on a regular basis and the bid/ask spread ranges from
$1.00 to $1.50 per share. Further, the stock is followed by a number of analysts
and has institutional investors.
FUNDAMENTAL ANALYSIS: Southard Financial reviewed the financial
characteristics of KVB and InterWest with respect to profitability, capital
ratios, liquidity, asset quality, and other factors. Southard Financial compared
KVB and InterWest to a universe of publicly traded banks and bank holding
companies and to peer groups prepared by the Federal Financial Institutions
Examination Council (FFIEC). Southard Financial found that the post-merger
combined entity will have capital ratios and profitability ratios near those of
the public peer group and the FFIEC peer group (predominantly non-publicly
traded banks).
Further, the merger will result in the shareholders of KVB owning stock in a
company with more geographically diverse operations and with a more diversified
loan portfolio. Typically, diversification results in a lower risk investment.
3
<PAGE>
EXHIBIT 5
COMPARISON OF THE MERGER PRICING
TO PUBLIC MARKET TRANSACTIONS
Southard Financial compared the pricing terms of the Agreement to the
pricing of recent acquisitions of banks and bank holding companies across the
United States, and to the minority interest prices of publicly traded banks and
bank holding companies in the Northwest.
Pricing data for recent acquisitions of banks and bank holding companies
(nationwide and in Washington and contiguous states) is summarized as follows:
<TABLE>
<CAPTION>
# OF PRICE/ PRICE/ PRICE/ RET ON
TRANSACTIONS ANNOUNCED IN 1997(1) BANKS EARNINGS BOOK ASSETS EQUITY
- ----------------------------------------------------------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
All Transactions........................................... 119 23.2x 2.246x 22.38x 11.70%
Assets $0-$100 Million..................................... 48 23.9 2.054 23.17 10.22
Assets $100-$300 Million................................... 41 21.8 2.420 22.40 13.12
Assets $300-$500 Million................................... 15 20.6 2.181 20.31 13.95
Equity/Assets 6%-8%........................................ 28 21.5 2.585 19.15 14.30
Equity/Assets 8%-10%....................................... 46 22.5 2.235 19.78 11.60
Equity/Assets 10%-12%...................................... 25 20.7 2.278 24.63 12.54
ROA 0.00%-0.75%............................................ 21 31.3 1.843 16.57 6.41
ROA 0.75%-1.00%............................................ 29 27.7 2.263 22.69 9.42
ROA 1.00%-1.50%............................................ 55 19.8 2.380 23.33 13.13
Washington Banks........................................... 5 21.5 2.470 20.38 11.95
<CAPTION>
TRANSACTIONS ANNOUNCED IN 1998(2)
- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All Transactions........................................... 33 23.3x 2.809x 27.76x 13.44%
Washington Banks........................................... 2 26.8 2.134 24.90 8.32
KVB(3)..................................................... 16.2 3.312 28.03 19.37
</TABLE>
- ------------------------
(1) Through December 31; only includes transactions for Banks with assets under
$1 billion for which sufficient data was available
(2) Through March 31; only includes transactions for Banks with assets under $1
billion for which sufficient data was available
(3) Based upon the merger price of $72.00 per share (therefore, an assumed
market price of $42.00 per share for InterWest), KVB shares outstanding of
178,787, KVB trailing 12-month undiluted earnings of $4.44 per share (at
March 31, 1998), KVB book value of $21.74 per share at March 31, 1998, and
KVB assets of $45.92 million at March 31, 1998.
Based upon the assumptions noted in the table above, the merger of KVB into
InterWest will take place at 16.2 times KVB trailing 12-month earnings, 331.2%
of March 31, 1998 KVB book value at March 31, 1998, and 28.03% of KVB assets at
March 31, 1998. The price/book value ratio and price/assets multiple are above
the range of recent market multiples. The price/earnings multiple is below the
recent range due to improving performance of KVB.
In determining the attractiveness of owning InterWest stock, it is important
to examine InterWest's recent pricing in comparison with recent pricing
multiples for publicly traded banks and bank holding
<PAGE>
companies. This pricing data is presented below as of December 31, 1997, the
most recent quarter-end for the banking industry. most recent quarter-end for
the banking industry.
<TABLE>
<CAPTION>
PRICE/ PRICE/ CURRENT CURRENT
PUBLICLY TRADED BANKS(1) EARNINGS BOOK VAL ROAE YIELD
- --------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
All Banks (168)................................................ 18.42x 237.2% 12.40% 1.73%
Banks Under $100MM Mkt Cap (54)................................ 17.11 201.0 12.50 1.45
West Coast Banks (12).......................................... 16.95 218.7 14.70 0.57
Washington and Oregon Banks (2)................................ 15.79 202.6 9.81 0.00
Washington Banks (1)........................................... 16.80 268.3 11.29 0.00
InterWest-12/31/97 Price ($37.750)............................. 15.22 227.4 14.94 1.91
InterWest-Merger Price ($42.000)............................... 15.56(2) 253.0(3) 16.41(4) 1.71(5)
InterWest-Average April Price ($43.458)........................ 16.10(2) 264.2(3) 16.41(4) 1.66(5)
</TABLE>
- ------------------------
(1) As of December 31, 1997; subject to certain screens performed by Southard
Financial
(2) Based upon estimated fiscal 1998 InterWest earnings of $2.70 per share
(3) Based upon estimated March 31, 1998 InterWest book value of $16.45 per share
(4) Based upon estimated fiscal 1998 InterWest earnings of $2.70 per share and
estimated March 31, 1998 InterWest book value of $16.45 per share
(5) Based upon estimated fiscal 1998 InterWest dividends of $0.72 per share
Based upon an analysis of the data provided above, InterWest's
price/earnings multiple, price/book value multiple, and return on average equity
are all within the range of other publicly traded banks.
<PAGE>
EXHIBIT 6
QUALIFICATIONS OF SOUTHARD FINANCIAL
<PAGE>
AN OVERVIEW OF SOUTHARD FINANCIAL
<TABLE>
<CAPTION>
BACKGROUND
<S> <C>
/ / Founded in 1987.
/ / Principals have combined business valuation experience of nearly
thirty years.
/ / Clients served throughout the United States, with concentration in
the Southeast.
/ / Broad industry experience.
/ / Services provided for public and closely-held companies.
/ / Annual valuation services provided for over 100 ESOPs, making
Southard Financial one of the largest ESOP appraisers in the United
States.
PROFESSIONAL
CREDENTIALS
/ / David A. Harris is a senior member of the American Society of
Appraisers (ASA).
/ / Both principals of Southard Financial are Chartered Financial
Analysts (CFA).
/ / Both principals are former officers of the West Tennessee Chapter of
the ASA.
EDUCATIONAL
CREDENTIALS
/ / Douglas K. Southard holds Doctor of Business Administration and
Master of Business Administration degrees from Indiana University, with
concentrations in finance, economics, and quantitative analysis.
/ / David A. Harris holds the Master of Business Administration degree
from Memphis State University, with a concentration in finance and
business investments.
BUSINESS ETHICS
/ / Southard Financial and its principals adhere to the ethical standards
of the Institute of Chartered Financial Analysts and the American Society
of Appraisers.
/ / All reports conform to the Uniform Standards of Professional
Appraisal Practice.
/ / Southard Financial is committed to providing unbiased opinions to be
used for decision making.
/ / Fees for valuation services are not contingent upon the conclusion
of value or the completion of a transaction.
</TABLE>
<PAGE>
BIOSKETCH
DOUGLAS K. SOUTHARD, DBA, CFA
<TABLE>
<CAPTION>
EDUCATIONAL AND PROFESSIONAL CREDENTIALS
<S> <C>
DOCTOR OF BUSINESS ADMINISTRATION, 1981, Indiana University
MASTER OF BUSINESS ADMINISTRATION, 1976, Indiana University
BACHELOR OF ARTS, 1975, Rhodes College (formerly Southwestern at Memphis)
CHARTERED FINANCIAL ANALYST, 1987, Institute of Chartered Financial Analysts (now
part of the Association for Investment Management and Research)
PROFESSIONAL BACKGROUND
FOUNDER AND PRINCIPAL, Southard Financial, Memphis TN
PARTNER, Mercer Capital Management, Inc., Memphis TN (1984-87)
CONSULTING ASSOCIATE, Mercer Capital Management, Inc., Memphis TN (1983-84)
PRINCIPAL, Douglas K. Southard, Financial Consultant, Memphis TN (1982-83)
ACADEMIC POSITIONS HELD
ASSISTANT PROFESSOR OF FINANCE, Rhodes College, Memphis TN
ASSISTANT PROFESSOR OF FINANCE, Virginia Polytechnic Institute & State University,
Blacksburg VA
LECTURE IN FINANCE, Indiana University, Bloomington IN
RELATED EXPERIENCE
FREQUENT SPEAKER, professional organizations, business valuation topics
EXPERT WITNESS, business valuation, local, state and federal courts
BOARD OF DIRECTORS, Management Computing Solutions, Inc., Memphis TN
BOARD OF DIRECTORS, Columbian Rope Company, Auburn NY
ADVISORY BOARD, MicroAge, Memphis TN
BOARD OF DIRECTORS, Explorer Systems, Inc., Memphis, TN
FORMER OFFICER, West Tennessee Chapter, American Society of Appraisers
PUBLICATIONS
"Using the Capital Asset Pricing Model to Determine Capitalization Rates: Adjusting
for Differences in Financial Structure," with Severin C. Carlson, BUSINESS VALUATION
REVIEW, June 1991
"Business Valuation Can Serve in Lifetime Planning," with Z.C. Mercer MEMPHIS
BUSINESS JOURNAL, April 1-5, 1985
"Valuation Process Holds Keys to Executive Wealth," with Z.C. Mercer, MEMPHIS
BUSINESS JOURNAL, March 25-29, 1985
"What IRA's Are Worth," with Z.C. Mercer, THE SOUTHERN BANKER, June 1984
</TABLE>
<PAGE>
BIOSKETCH
DAVID A. HARRIS, CFA, ASA
<TABLE>
<CAPTION>
EDUCATIONAL AND PROFESSIONAL CREDENTIALS
<S> <C>
MASTER OF BUSINESS ADMINISTRATION, Memphis State University, 1982
BACHELOR OF ARTS, Colorado State University, 1979
CHARTERED FINANCIAL ANALYST, Institute of Chartered Financial Analysts, 1989 (now
part of the Association for Investment Management and Research)
SENIOR MEMBER, American Society of Appraisers, Business Valuation, 1990
PROFESSIONAL BACKGROUND
PRINCIPAL, Southard Financial, Memphis TN (1990-present)
ASSOCIATE, Mercer Capital Management, Inc., Memphis TN (1985-90)
FINANCIAL ANALYST, Methodist Hospitals of Memphis, Inc. (1983-85)
COST ANALYST, Schering-Plough, Inc., Memphis TN (1982-83)
PROFESSIONAL/COMMUNITY SERVICE
ADVISORY COMMITTEE, Special Kids and Families, Inc. (1998)
PRESIDENT, West Tennessee Chapter, American Society of Appraisers (1994-95)
VICE PRESIDENT, West Tennessee Chapter, American Society of Appraisers (1993-94)
PRESIDENT, West Tennessee Chapter, American Society of Appraisers (1990-91)
BOARD OF DIRECTORS, Solomon Schechter Day School of Memphis, Inc. (1993-94)
VICE PRESIDENT, Sea Isle Park Neighborhood Association, Memphis TN (1992-96)
BOARD OF DIRECTORS, Sea Isle Park Neighborhood Association, Memphis TN (1990-96)
BUSINESS LIAISON, Junior Achievement of Memphis TN (1984-85)
RELATED EXPERIENCE
EXPERT WITNESS, business valuation
CO-AUTHOR, "The Perils of Excess," with Z. C. Mercer, ABA BANKING JOURNAL, October
1987
</TABLE>
<PAGE>
SOUTHARD
FINANCIAL
SERVICES FOR COMMUNITY BANKS
VALUATION SERVICES
<TABLE>
<CAPTION>
MINORITY STOCK APPRAISALS
<S> <C>
/ / ESOPs
/ / Dissenting Shareholders
/ / Insider Transactions
/ / Gift & Estate Taxes
/ / Charitable Gifts
/ / Private Placements/Offerings
/ / Share Repurchase Plans
/ / Dividend Reinvestment Plans
/ / Stock Option Plans
/ / Other Purposes
CONTROL VALUATIONS
/ / Pricing Merger/Acquisition Candidates
/ / Negotiating Pricing/Terms
/ / Fairness Opinions for Buyers and Sellers
/ / Evaluation of Offers Received
CONSULTING SERVICES
ECONOMIC & FINANCIAL ANALYSIS
/ / Branch Feasibility Studies
/ / Holding Company Formations
/ / Expert Witness Testimony
STRATEGIC PLANNING
/ / Long-range Financial Plans
/ / Evaluation of Financing Alternatives
/ / Board of Director Seminars
</TABLE>
