-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNFvpUcJ7p1nYGdUgTOaI/Neqj4pKIuKX+sX/fjxRssoNc20T2iHis2SGOT1Rtn3 QoqboFU/2byShB10oHG6Ow== 0001032210-97-000179.txt : 19971030 0001032210-97-000179.hdr.sgml : 19971030 ACCESSION NUMBER: 0001032210-97-000179 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19971029 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE FINANCIAL CORP /WA/ CENTRAL INDEX KEY: 0001046025 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-35573 FILM NUMBER: 97703088 BUSINESS ADDRESS: STREET 1: 201 5TH AVE SW STREET 2: P O BOX 1578 CITY: OLYMPIA STATE: WA ZIP: 98507 BUSINESS PHONE: 3609431500 MAIL ADDRESS: STREET 1: 201 5TH AVE SW STREET 2: P O BOX 1578 CITY: OLYMPIA STATE: WA ZIP: 98507 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997 REGISTRATION NO. 333-35573 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- HERITAGE FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 6036 (STATE OR OTHER (PRIMARY SICC NO.) 91-1857900 JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR IDENTIFICATION NUMBER) ORGANIZATION) ---------------- 201 5TH AVENUE S.W. OLYMPIA, WASHINGTON 98501 (360) 943-1500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DONALD V. RHODES CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER HERITAGE FINANCIAL CORPORATION 201 5TH AVENUE S.W. OLYMPIA, WASHINGTON 98501 (360) 943-1500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES OF COMMUNICATIONS TO: J. JAMES GALLAGHER, ESQ. SANDRA L. GALLAGHER, ESQ. GORDON, THOMAS, HONEYWELL, MALANCA, PETERSON & DAHEIM, P.L.L.C. 1201 PACIFIC AVENUE, SUITE 2200 TACOMA, WASHINGTON 98402 (253) 572-5050 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE ===============================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT BEING PURCHASE PRICE AGGREGATE AMOUNT OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(1) REGISTRATION FEE - ----------------------------------------------------------------------------------------------- Common Stock, no par value.................. 9,748,636 shares $10.00 $97,486,360 $29,541.32 ===============================================================================================
(1) Estimated solely for purposes of calculating the registration fee. As described in the Prospectus, the actual number of shares to be issued and sold are subject to adjustment based upon the estimated pro forma market value of the registrant and market and financial conditions. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ PROSPECTUS HERITAGE FINANCIAL CORPORATION [LOGO] (HOLDING COMPANY FOR HERITAGE SAVINGS BANK) UP TO 8,477,075 SHARES OF COMMON STOCK (ANTICIPATED MAXIMUM) $10.00 PER SHARE Heritage Financial Corporation (the "Company"), a Washington corporation, is offering up to 8,477,075 shares (which may be increased to 9,748,636 shares under certain circumstances described below) of its common (continued on following page) FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE CALL THE STOCK INFORMATION CENTER AT (360) 705-9190. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 14. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM ("FEDERAL RESERVE") OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION OR OTHER STATE AGENCY, INCLUDING THE WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS, DIVISION OF BANKS (THE "DIVISION"), NOR HAS THE SEC, THE FDIC, THE FEDERAL RESERVE OR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION OR OTHER STATE AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, NOR ARE THEY INSURED OR GUARANTEED BY THE COMPANY OR THE BANK.
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ESTIMATED FEES, UNDERWRITING PURCHASE COMMISSIONS AND OTHER ESTIMATED NET PRICE(1) EXPENSES(2) PROCEEDS(3) - ------------------------------------------------------------------------------ Minimum Per Share............ $ 10.00 $ 0.25 $ 9.75 - ------------------------------------------------------------------------------ Midpoint Per Share........... $ 10.00 $ 0.24 $ 9.76 - ------------------------------------------------------------------------------ Maximum Per Share............ $ 10.00 $ 0.22 $ 9.78 - ------------------------------------------------------------------------------ Maximum Per Share, as adjusted(4)................. $ 10.00 $ 0.21 $ 9.79 - ------------------------------------------------------------------------------ Minimum Total................ $42,500,000 $1,070,000 $41,430,000 - ------------------------------------------------------------------------------ Midpoint Total............... $50,000,000 $1,180,000 $48,820,000 - ------------------------------------------------------------------------------ Maximum Total................ $57,500,000 $1,290,000 $56,210,000 - ------------------------------------------------------------------------------ Maximum Total, as adjusted(4)................. $66,125,000 $1,417,000 $64,708,000 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range as hereinafter defined, respectively, determined in accordance with an independent appraisal prepared by RP Financial, LC. ("RP Financial"). Does not include shares of Common Stock to be issued to Minority Stockholders in the Exchange. (2) Consists of the estimated costs to the Company and the Bank to be incurred in connection with the Conversion, including estimated fixed expenses of $460,000 and marketing fees to be paid to the Agent in connection with the Offerings, which are estimated to be $720,000 at the midpoint of the Valuation Price Range, as hereinafter defined. See "The Conversion-- Marketing Arrangements." The actual fees and expenses may vary substantially from the estimates. See "Pro Forma Data." The fees paid to the Agent may be deemed to be underwriting fees. See "The Conversion-- Marketing Arrangements" for information relating to indemnification of the Agent. (3) Actual net proceeds may vary substantially from estimated amounts depending on the number of shares sold in the Offerings and other factors. Includes the proposed purchase of shares of Conversion Stock by the ESOP which will be funded by a loan to the ESOP from the Company. See "Capitalization" and "Pro Forma Data." (4) Gives effect to an increase in the number of shares which could occur without a resolicitation of subscribers or any right of cancellation of stock orders due to an increase in the Valuation Price Range of up to 15% above the maximum of the Valuation Price Range to reflect regulatory considerations and changes in market and financial conditions following commencement of the Offerings. See "The Conversion--Stock Pricing and Number of Shares to be Issued." ---------------- RYAN, BECK & CO. ---------------- The date of this Prospectus is , 1997. (continued from previous page) stock, no par value per share (the "Common Stock" or "Company Common Stock"), in connection with the conversion and reorganization (the "Conversion") of Heritage Financial Corporation, MHC (the "Mutual Holding Company" or "MHC") from a state chartered mutual holding company to a Washington stock corporation. Heritage Savings Bank, a Washington stock savings bank ("Heritage Bank" or the "Bank") is a 66.31% owned subsidiary of the MHC. The Conversion will cause the Bank to become a wholly owned subsidiary of the Company and will be effected pursuant to a Plan of Conversion and Reorganization (the "Plan of Conversion" or "Plan"). At June 30, 1997, the Mutual Holding Company held $120,000 in assets, in addition to 1,200,000 shares of common stock, par value $1.00 per share, of the Bank ("Bank Common Stock"). The remaining 609,616 shares, or approximately 33.69% of the Bank Common Stock (the "Minority Shares"), are owned by members of the public, including the Bank's employees, directors, and existing Employee Stock Ownership Plan ("ESOP") (together, the "Minority Stockholders"). The Minority Shares, as of consummation of the Conversion (the "Effective Time"), will be exchanged for Company Common Stock. THE OFFERINGS. Pursuant to the Plan, nontransferable subscription rights to subscribe for up to 5,750,000 shares (subject to adjustment up to 6,612,500 shares) of Common Stock (the "Conversion Stock") have been granted to certain depositors and borrowers of the Bank as of specified record dates (the "Subscription Offering"). In order of priority, the Subscription Offering is being made to (i) depositors with $50.00 or more on deposit at the Bank as of June 30, 1996 ("Eligible Account Holders"); (ii) the Bank's ESOP, a tax qualified employee benefit plan; (iii) depositors with $50.00 or more on deposit at the Bank as of September 30, 1997 ("Supplemental Eligible Account Holders"); and (iv) depositors of the Bank as of October 24, 1997 ("Voting Record Date") other than Eligible Account Holders and Supplemental Eligible Account Holders, and borrowers with loans outstanding on July 21, 1993 which continue to be outstanding as of October 24, 1997 ("Other Members"). Commencing concurrently with the Subscription Offering, the Company is offering the shares of Conversion Stock not subscribed for in the Subscription Offering in order of priority to (i) the Minority Stockholders as of October 24, 1997 who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members ("Minority Stockholders' Offering") and (ii) to certain members of the general public to whom a copy of this Prospectus is delivered by or on behalf of the Company (the "Community Offering"). The Mutual Holding Company and the Bank have determined that the Bank's local community consists of the counties of Thurston, Mason, Pierce, King, Snohomish, Kitsap and Grays Harbor in the State of Washington (the "Local Community"). In the Community Offering, a preference may be given to stock orders from natural persons who are residents of the Local Community. It is anticipated that shares of Conversion Stock not subscribed for in the Subscription, Minority Stockholders' and Community Offerings, will be offered on a best efforts basis by a selling group of broker-dealers to members of the general public to whom a copy of this Prospectus is delivered by or on behalf of the Company (the "Syndicated Community Offering"). The Subscription Offering, Minority Stockholders' Offering, Community Offering and any Syndicated Community Offering are referred to collectively as the "Offerings." The Company reserves the right, in its absolute discretion, to accept or reject, in whole or in part, any or all stock orders in the Minority Stockholders' Offering, Community Offering or Syndicated Community Offering either at the time of receipt of an order or as soon as practicable following the termination of the Offerings. If an order is rejected in part, the subscriber does not have the right to cancel the remainder of the order. Purchase of shares of Conversion Stock in the Offerings are subject to limitations. See "The Conversion--Limitations on Purchases and Ownership of Shares." The Company and the Bank have engaged Ryan Beck & Co., Inc. (hereinafter referred to as "Ryan Beck" or the "Agent") to consult with and advise them in the Conversion, and the Agent has agreed to use its best efforts to assist in the sale of Conversion Stock in the Offerings and to manage any Syndicated Community Offering. The Agent is not obligated to take or purchase any shares of Common Stock in the Offerings. See "The Conversion--Marketing Arrangements." (continued from previous page) THE SUBSCRIPTION OFFERING WILL EXPIRE AT NOON, PACIFIC TIME, ON , 1997 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE COMPANY FOR UP TO DAYS TO , 1997. THE COMMUNITY OFFERING AND MINORITY STOCKHOLDERS' OFFERING ARE ALSO EXPECTED TO TERMINATE AT NOON, PACIFIC TIME, ON , 1997, BUT MAY BE EXTENDED. If the Conversion is not consummated within 45 days after the last day of the Subscription Offering (which may conclude no later than , 1997) and the Company elects to extend the Offerings, with the approval of the Division, if necessary, subscribers will be notified in writing of the time period within which they must notify the Company of any intention to increase, decrease or rescind stock orders. If an affirmative response to any such resolicitation is not received by the Company, a subscriber's stock order will be rescinded and subscription funds will be returned promptly, together with interest from the date such funds were received by the Company, and all withdrawal authorizations from deposit accounts at the Bank will be terminated. If the Offerings are not extended or, in any event, if the Conversion is not consummated by , 1997, all stock orders will be rescinded, funds returned and withdrawal authorizations terminated, as described above. THE EXCHANGE. In addition to the Offerings, each share of Bank Common Stock held by the Mutual Holding Company will be canceled and each share of Bank Common Stock held by the Minority Stockholders will be converted into shares of Common Stock (the "Exchange Shares") pursuant to a ratio (the "Exchange Ratio") that will result in the Minority Stockholders owning in the aggregate approximately 32.17% of the Company (the "Exchange"), before giving effect to certain items, including any shares of Conversion Stock purchased by such Minority Stockholders in the Offerings. The dilution of Minority Stockholder ownership interest from the 33.69% current ownership interest in the Bank to an approximate 32.17% ownership interest in the Company reflects a policy of the FDIC requiring the Exchange Ratio to be adjusted downward to reflect the aggregate amount of Bank Common Stock dividends waived by the MHC and certain assets held by the MHC. The Exchange Ratio is expected to be between 3.3064 and 4.4734, resulting in a range of between 2,015,664 and 2,727,075 Exchange Shares to be issued in the Conversion (which may be increased to 3,136,136 shares, as described below). THE ACTUAL EXCHANGE RATIO WILL BE BASED ON THE NUMBER OF SHARES OF CONVERSION STOCK SOLD IN THE OFFERINGS AND THE MINORITY STOCKHOLDERS' PERCENTAGE OWNERSHIP INTEREST IN THE BANK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. THE EXCHANGE RATIO IS NOT DEPENDENT ON THE MARKET VALUE OF THE MINORITY SHARES. SEE "SUMMARY--THE EXCHANGE RATIO." INDEPENDENT VALUATION. Pursuant to applicable Washington law and regulations of the FDIC, the offering of Conversion Stock in the Offerings is required to be based on an independent valuation of the pro forma market value of the Bank and the Mutual Holding Company. RP Financial prepared an independent appraisal which states that the aggregate pro forma market value of the Bank, inclusive of the sale in the Offerings of the MHC's ownership interest in the Bank was $73,713,696 at the midpoint as of the October 10, 1997 update of the original August 15, 1997 appraisal (the "Appraisal"). The Appraisal was multiplied by 67.83%, which is the Mutual Holding Company's percentage ownership interest in the Bank as adjusted upward from the actual interest of 66.31% to reflect $1,230,000 of dividends declared by the Bank and waived by the Mutual Holding Company and the $120,000 in assets, other than Bank Common Stock, held by the MHC. The resulting amount, $50,000,000, is the midpoint of the dollar amount of Conversion Stock to be offered in the Offerings. The minimum and maximum of the offering range were set at 15% below and above the midpoint, respectively, resulting in an offering range of $42,500,000 to $57,500,000 (the "Valuation Price Range") of Conversion Stock. The Boards of Directors of the Company and the Bank determined that the Conversion Stock would be sold at $10.00 per share (the "Purchase Price"), resulting in a range of 4,250,000 to 5,750,000 shares of Conversion Stock being offered. THE 8,477,075 SHARES OF COMMON STOCK OFFERED HEREBY (SUBJECT TO ADJUSTMENT UP TO 9,748,636 SHARES AS DESCRIBED HEREIN) INCLUDE UP TO 5,750,000 SHARES OF CONVERSION STOCK AND UP TO 2,727,075 SHARES OF EXCHANGE SHARES. The Valuation Price Range, and therefore the number of shares offered, may be increased or decreased prior to completion of the Conversion to reflect regulatory considerations and changes in market and economic conditions. In any case, however, through the Exchange Ratio, the Conversion Stock and the Exchange (continued from previous page) Shares will represent approximately 67.83% and 32.17%, respectively, of Common Stock outstanding, unless the Company issues unissued shares to the ESOP immediately following the Conversion. See "The Conversion--Stock Pricing and Number of Shares to be Issued." No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless (i) the gross proceeds from the sale of the Conversion Stock are less than the minimum or more than 15% above the maximum of the current Valuation Price Range or (ii) the Offerings are extended beyond . PURCHASE LIMITATIONS AND OWNERSHIP LIMITATION. The Plan sets forth purchase limitations applicable to the Offerings. The minimum stock order is 25 shares. Except for the ESOP, which is expected to purchase 2% of the Conversion Stock sold, no person (or persons through a single subscription right), together with any associate or group of persons acting in concert, may subscribe for more than $250,000 in all categories of the Offerings combined. In addition to these purchase limitations, no person, together with any associate or group of persons acting in concert may, upon completion of the Conversion, own more than 2% of the Common Stock outstanding. This ownership limitation pertains to the aggregate of Conversion Stock purchased and Exchange Shares received by the subscriber. Notwithstanding the foregoing, no Minority Stockholder will be required to dispose of Minority Shares if, without purchasing Conversion Stock, the Exchange will result in ownership of in excess of 2% of the Common Stock. The purchase limitations and ownership limitation may be changed at the discretion of the Company, as described herein. See "The Conversion-- Limitations on Purchases and Ownership of Shares." REQUIRED APPROVALS. The consummation of the Conversion is subject to the receipt of regulatory approvals from the Division, the FDIC and the Federal Reserve, the ratification by members of the MHC and the approval of the Minority Stockholders of the Bank in the manner set forth herein. See "The Conversion--General." MARKET FOR COMMON STOCK. The Company has received conditional approval to have the Common Stock quoted on the National Association of Securities Dealers Automated Quotation ("Nasdaq") National Market under the symbol "HFWA." There can be no assurance that an active and liquid trading market for the Common Stock will develop, or, if developed, be maintained. The Minority Shares, which will be exchanged for Common Stock, are not traded on any exchange and there is currently no established trading market for them. [MAP SHOWS LOCATION OF THE COMPANY'S OFFICES IN THURSTON, MASON AND PIERCE COUNTIES IN THE STATE OF WASHINGTON] THE CONVERSION IS CONTINGENT UPON THE RECEIPT OF ALL REQUIRED REGULATORY APPROVALS, RATIFICATION BY MEMBERS OF THE MHC, APPROVAL BY THE STOCKHOLDERS OF THE BANK, AND THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN. THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, NOR ARE THEY INSURED OR GUARANTEED BY THE COMPANY OR THE BANK. SUMMARY The information set forth below should be read in conjunction with and is qualified in its entirety by, the more detailed information and Consolidated Financial Statements (including the Notes thereto) presented elsewhere in this Prospectus. The purchase of Common Stock is subject to certain risks. This Prospectus contains certain forward-looking statements within the meaning of the federal securities laws. Actual results and timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. HERITAGE FINANCIAL CORPORATION The Company is a Washington corporation organized in August 1997 at the direction of the Bank to hold all of the capital stock of the Bank upon consummation of the Conversion. The Company has not engaged in any significant business to date. Upon completion of the Conversion, the Company will be regulated by the Federal Reserve. The Company has filed an application with the Federal Reserve Bank of San Francisco to become a bank holding company and for approval to acquire the Bank. Immediately following the Conversion, the only significant assets of the Company will be the capital stock of the Bank, a portion of the net proceeds of the Offerings and a note receivable from the ESOP evidencing a loan from the Company to fund the purchase of Conversion Stock by the Bank's ESOP. See "Use of Proceeds." Management believes that the holding company structure and proceeds of the Offerings can facilitate possible future acquisitions of other financial institutions, such as commercial banks or savings institutions, or branches of other financial institutions and thereby further expansion in existing and new market areas. The holding company structure will also provide increased flexibility to the Company to diversify into a variety of banking-related activities and to repurchase its stock. There are no present plans, arrangements, agreements, or understandings, written or oral, regarding any such acquisitions, activities or repurchases. The main office of the Company is located at 201 5th Avenue S.W., Olympia, Washington 98501 and its telephone number is (360) 943-1500. HERITAGE BANK The Bank was established in 1927 and has maintained its headquarters in Olympia, Thurston County, Washington (the state capital) continuously since that date and currently serves Thurston, Pierce and Mason Counties in the South Puget Sound region of Washington as its primary market area. In 1992, the Bank converted from a federally chartered mutual savings bank to a state chartered mutual savings bank. In connection with the organization of the Mutual Holding Company in 1994 (the "MHC Reorganization"), the Bank merged into an interim institution formed as a subsidiary of the Mutual Holding Company, thereby becoming a stock savings bank and a subsidiary of the Mutual Holding Company. The Bank sold approximately 33.3% of its shares of common stock to the general public and to an ESOP in connection with the MHC Reorganization. The MHC was issued the remaining 66.7%. Stock options exercised by Minority Stockholders have increased total outstanding shares to 1,809,616 at June 30, 1997. The Bank is regulated by the Division as its primary state regulator and by the FDIC as its primary federal regulator. The Bank's deposits have been federally insured since 1935 by the FDIC (under the Savings Association Insurance Fund ("SAIF")) and its predecessor, the Federal Savings and Loan Insurance Corporation. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1932. At 1 June 30, 1997, the Bank had total assets of $242.2 million, total deposits of $209.8 million and stockholders' equity of $27.7 million, or 11.44% of total assets, on a consolidated basis. The Bank traditionally has offered a variety of savings products and originated one- to four-family mortgage loans (principally for sale in the secondary market) and, to a lesser extent, multifamily, commercial real estate and construction loans. Beginning in fiscal 1994, the Bank began to implement a growth strategy which is intended to broaden its products and services from traditional thrift products and services to those more closely related to commercial banking. That strategy entails: . Geographic and Product Expansion . Loan Portfolio Diversification . Development of Relationship Banking . Maintenance of Asset Quality The Bank's strategy to date has resulted in the following changes in the Bank's operations. Geographic and Product Expansion. Since the end of fiscal 1994, the Bank has doubled its number of offices, to ten full service locations. New branches were opened in the West Olympia and Indian Summer areas of Thurston County in fiscal 1995, and an office was opened in Lakewood, Pierce County, in fiscal 1996. In October 1996, an office was established in Tacoma, Pierce County, and the tenth office was opened, in downtown Tacoma, in the spring of 1997. During the last four years, the Bank has constructed new buildings in Lacey, Thurston County, and Shelton, Mason County, to replace existing branch buildings and to better serve customers in these markets. The Bank has installed Automated Teller Machines at six of its offices. The Bank intends to continue its growth strategy on a basis it considers prudent. The number and timing of future branch openings will depend on various factors, including maintaining an infrastructure to accommodate growth, targeting promising market areas, and, in the case of acquisitions of financial institutions or branches, identifying favorable opportunities. Concurrent with geographic expansion, the Bank has (i) developed business checking accounts and commercial lending products and other services for businesses and high net worth individuals; (ii) introduced Visa debit and credit cards; (iii) installed an automated voice response system for customer account inquiries and (iv) developed products to assist realtors and potential borrowers to obtain information about loan programs and qualifications. To accommodate new products and to improve internal operating and reporting, the Bank converted to a new data processing system with a data service bureau and installed a personal computer network. Loan Portfolio Diversification. Since initiating its expansion activities, total loans increased to $208.2 million at June 30, 1997 from $130.4 million at June 30, 1993. During this period, the Bank targeted growth in commercial loans, taking advantage of market opportunities and the higher interest rates and shorter terms of such loans relative to residential mortgage loans. As a result, commercial loans increased to $39.4 million, or 18.95% of total loans, from $1.2 million, or 0.92% of total loans, at June 30, 1993. One- to four- family residential loans increased in amounts outstanding but decreased to 49.68% from 56.29% of total loans, and multifamily and commercial real estate loans similarly increased in amounts outstanding while decreasing to 24.60% from 30.97% of total loans during that period. Most of the Bank's commercial business loans are collateralized by real estate, but repayment is expected from a source other than operation or sale of the real estate. See "Business of the Bank--Lending Activities." Development of Relationship Banking. In fiscal 1994, the Bank initiated efforts to develop a business banking department under the direction of a senior officer with commercial banking experience in Thurston County. The new department concentrated its efforts on development of expanded lending and deposit relationships with existing and new customers of the Bank in Thurston and Mason counties. In June 1996, the Bank hired a former south Puget Sound Regional Manager for a large commercial bank. The management 2 addition was made for the purpose of enhancing the Bank's relationship banking capacity and to establish a commercial banking presence in Pierce County. Since that time, the Bank has also hired six additional lending officers who have experience lending to small businesses and individuals in the Pierce County market. While the banking market is very competitive, recent mergers of regional commercial banks with significant presence in the Bank's principal market areas have, in management's view, provided a greater opportunity for community banks to fill a personal service niche which the Bank believes has been created by the mergers. Management believes that the Bank can develop a larger market share in the Pierce County market, while continuing to expand in the Thurston and Mason County markets, by delivering efficient and personalized banking service and developing relationships with small businesses and high net worth individuals who are seeking a relationship with a responsive, service oriented provider of financial services and products. Maintenance of Asset Quality. While pursuing its growth strategy, the Bank will continue its policy of seeking to employ consistent underwriting and loan monitoring procedures, in order to maintain asset quality. The Bank's loan portfolio grew 59.6% between June 30, 1993 and June 30, 1997. Nonperforming loans remained less than $436,000 during the four year period, as did total nonperforming assets. At June 30, 1997, nonperforming loans constituted 0.06% of the Bank's total loans and the allowance for loan losses to nonperforming loans was 2069.17%. See "Business of the Bank--Delinquencies and Nonperforming Assets." The Bank conducts business from its main office located at 201 5th Avenue S.W., Olympia, Washington 98501 and its nine branch offices located in Thurston, Pierce and Mason Counties of Washington. The Bank's telephone number is (360) 943-1500. THE MUTUAL HOLDING COMPANY The MHC is a Washington chartered mutual holding company which was incorporated in January 1994, in connection with the MHC Reorganization. The Mutual Holding Company's only significant assets are approximately 66.31% of the outstanding shares of Bank Common Stock and $120,000 in cash. Subsequent to the MHC Reorganization, the Mutual Holding Company has engaged in no significant activity other than holding the Bank Common Stock. Accordingly, the information set forth in this Prospectus includes the Mutual Holding Company but relates primarily to the Bank and its subsidiary. The Consolidated Financial Statements reflect only the financial condition and results of operations of the Bank and its subsidiaries. THE CONVERSION AND THE OFFERINGS On July 1, 1997, the Boards of Directors of the Bank and the Mutual Holding Company adopted the Plan, which was subsequently amended. In August 1997 the Bank incorporated the Company under Washington law as a wholly-owned subsidiary of the Bank. Pursuant to the Plan, (i) the Mutual Holding Company will convert from the mutual to stock form of organization and simultaneously merge into the Bank, with the Bank being the surviving institution, and the shares of Bank Common Stock currently held by the Mutual Holding Company will be canceled and (ii) the Bank will then merge with an interim bank ("Interim"), with the Bank being the surviving institution and becoming a wholly-owned subsidiary of the Company. Consummation of the Conversion is conditioned upon: (i) approval of the Plan by the Division; (ii) the nonobjection of the FDIC; (iii) approval by the Federal Reserve of the Company's acquisition of the Bank; (iv) approval of the Plan by at least a majority of the total number of votes eligible to be cast by members of the Mutual Holding Company; (v) approval of the Plan by a majority of the votes cast by the Minority Stockholders; and (vi) successful completion of the Offerings. Special Meetings of Members of the Mutual Holding Company and stockholders of the Bank, called for the purpose of submitting the Plan for approval, will be held on , 1997 (the "Special Meetings"). It is possible that there could be a significant delay in the completion of the Conversion as a result of, among other things, delays in receiving approval by the Division or 3 the Federal Reserve, or a notice of nonobjection to the Conversion from the FDIC, or by difficulty in completing the Offerings due to market conditions. See "Risk Factors--Risk of Delayed Offering." The Board of Directors of the Bank believes that the Conversion offers a number of advantages which will be important to the future growth and performance of the Bank. The Conversion is intended to: (i) provide substantially increased capital to expand the operations of the Bank; (ii) improve future access to capital markets; (iii) enhance the Company's and the Bank's ability to expand directly or through mergers and acquisitions and to diversify operations into new business activities (although there are no specific agreements, arrangements or understandings, written or oral, regarding any such mergers or diversified activities); and (iv) afford customers and others the opportunity to become stockholders of the Company and thereby participate more directly in any future growth of the Company and the Bank. Additionally, by converting to the stock holding company form of organization, the Company will be structured in the form used by many commercial banks and business entities and a growing number of savings institutions. The Company is offering up to 5,750,000 (or 6,612,500 if the Valuation Price Range is increased by 15%) shares of Conversion Stock at $10.00 per share to holders of subscription rights in the following order of priority: (i) Eligible Account Holders; (ii) the Bank's ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other Members. In the event the number of shares offered in the Conversion is increased above the maximum of the Valuation Price Range, the Bank's ESOP shall have a second priority right, after Eligible Account Holders, to purchase any such shares exceeding the maximum of the Valuation Price Range up to an aggregate of 2% of the Conversion Stock sold in the Offerings. Concurrently, and subject to the prior rights of holders of subscription rights, any shares of Conversion Stock not subscribed for in the Subscription Offering are being offered by the Company, in order of priority, in (i) the Minority Stockholders' Offering to Minority Stockholders and (ii) in the Community Offering to certain members of the general public. Preference may be given in the Community Offering to natural persons who are permanent residents of the Local Community. The Bank has engaged Ryan Beck to consult with and advise the Company and the Bank in the Offerings and Ryan Beck has agreed to use its best efforts to assist the Company in the sale of Conversion Stock in the Offerings. Ryan Beck is not obligated to take or purchase any shares of Conversion Stock in the Offerings. If all shares of Conversion Stock are not sold through the Subscription, Minority Stockholders', and Community Offerings, then the Company expects to offer the remaining shares to the general public in a Syndicated Community Offering managed by Ryan Beck. All shares of Conversion Stock will be sold at the $10.00 Purchase Price per share in the Offerings. See "Use Of Proceeds," "Pro Forma Data" and "The Conversion--Stock Pricing and Number of Shares to be Issued." The Subscription Offering will expire at Noon, Pacific Time, on , unless extended by the Bank and the Company. The Minority Stockholders' Offering, Community Offering and Syndicated Community Offering may terminate on the same date, however in no event later than , 1997, unless extended pursuant to regulatory approval. See "The Conversion." EFFECTS OF THE EXCHANGE ON MINORITY STOCKHOLDERS The following are effects of the Conversion on Minority Stockholders, assuming that at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, one Minority Share will be exchanged for 3.3064, 3.8899, 4.4734 and 5.1444 shares of Common Stock, respectively. See "Pro Forma Data." Effect of the Exchange on Stockholders' Equity Per Share. The Conversion will increase the stockholders' equity per share of Minority Stockholders. At June 30, 1997, stockholders' equity was $15.31 for each share of the Bank Common Stock outstanding, including shares held by the Mutual Holding Company. Based on the pro forma information set forth in "Pro Forma Data" assuming the sale of 5,000,000 shares of Conversion Stock at the midpoint of the Valuation Price Range, at June 30, 1997, the pro forma stockholders' equity per share of Common Stock was $10.20, and the pro forma stockholders' equity for the aggregate number of Exchange 4 Shares to be received for each Minority Share was $39.68. The pro forma stockholders' equity at June 30, 1997 for the aggregate number of Exchange Shares to be received for each Minority Share was $35.87, $43.44 and $47.79 at the minimum, maximum, and adjusted maximum of the Valuation Price Range. Effect of the Exchange on Earnings Per Share. The Conversion will also affect Minority Stockholders' pro forma earnings per share. For the year ended June 30, 1997, the earnings per share was $1.26 for each share of the Bank Common Stock outstanding, including shares held by the Mutual Holding Company. Based on the pro forma information set forth in "Pro Forma Data," assuming the sale of 5,000,000 shares of Common Stock at the midpoint of the Valuation Price Range, the pro forma earnings per share of Common Stock was $0.59 for such period, and the pro forma earnings for the aggregate number of Exchange Shares to be received for each Minority Share was $2.30. For the year ended June 30, 1997, the pro forma earnings per share for the aggregate number of Exchange Shares to be received for each Minority Share was $2.12, $2.46 and $2.62 at the minimum, maximum, and adjusted maximum of the Valuation Price Range. Effect of the Exchange on Market Value. The aggregate number of Exchange Shares to be received for each Minority Share will have a calculated estimated value of $33.06, $38.90, $44.73 and $51.44 at the minimum, midpoint, maximum and adjusted maximum of the Valuation Price Range based on the $10.00 Purchase Price of the Conversion Stock. The most recent known stock trade of Minority Shares preceding the date of this Prospectus was August 8, 1997 at a price of $18.00. PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES To ensure that each purchaser receives a Prospectus at least 48 hours prior to the Expiration Date, Prospectuses may not be mailed later than five days prior to such date or be hand delivered later than two days prior to such date. Order forms may only be distributed with a Prospectus. Execution of a stock order form will confirm receipt or delivery of the Prospectus. The Company will not be required to accept orders submitted on photocopied or telecopied stock order forms. Payment in full by check, bank draft, money order, or withdrawal authorization from any existing certificate of deposit or other deposit account at the Bank must accompany each stock order form. The Bank is prohibited from lending funds for the purchase of the Conversion Stock. See "The Conversion-- Procedure for Purchasing Shares in Offerings." To help ensure that each prospective purchaser is properly identified as to such person's stock purchase priority and to assist in stock allocation in the event of oversubscription, depositors as of the Eligibility Record Date and Supplemental Eligibility Record Date must list on the order form all Bank deposit accounts as of the applicable date, giving all account holders names for each account number. Failure to list all accounts may result in the subscriber's loss of subscription rights. PURCHASE LIMITATIONS AND OWNERSHIP LIMITATION The Plan sets forth purchase limitations applicable to the Offerings. The minimum stock order is 25 shares. Except for the ESOP, which is expected to purchase 2% of the Conversion Stock sold, no person (or persons through a single subscription right), together with any associate or group of persons acting in concert, may subscribe for more than $250,000 in all categories of the Offerings combined. In addition to these purchase limitations, no person, together with any associate or group of persons acting in concert may, upon completion of the Conversion, own more than 2% of the Common Stock outstanding. This ownership limitation pertains to the aggregate of Conversion Stock purchased and Exchange Shares received by the subscriber. Notwithstanding the foregoing, no Minority Stockholder will be required to dispose of Minority Shares if, without purchasing Conversion Stock, the Exchange will result in ownership of in excess of 2% of the Common Stock. The purchase limitations and ownership limitation may be changed at the discretion of the Company, as described herein. See "The Conversion--Limitations on Purchases and Ownership of Shares". 5 STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Pursuant to applicable Washington law and regulations of the FDIC, the offering of Conversion Stock in the Offerings is required to be based on an independent valuation of the pro forma market value of the Bank and the Mutual Holding Company. RP Financial prepared an independent appraisal, which states that the aggregate pro forma market value of the Bank and the Mutual Holding Company, inclusive of the sale of an approximate 67.83% ownership interest in the Offerings, was $73,713,696 at the midpoint as of the October 10, 1997 update of the original August 15, 1997 Appraisal. The Appraisal was multiplied by 67.83%, which is the Mutual Holding Company's percentage ownership interest in the Bank as adjusted upward from the actual interest of 66.31% to reflect $1,230,000 of dividends declared by the Bank and waived by the Mutual Holding Company and the $120,000 in assets held by the MHC. The resulting amount, $50,000,000, is the midpoint of the dollar amount of Conversion Stock to be offered in the Offerings. The minimum and maximum of the offering range were set at 15% below and above the midpoint, respectively, resulting in an offering range of $42,500,000 to $57,500,000 of Conversion Stock. The Boards of Directors of the Company and the Bank determined that the Conversion Stock would be sold at $10.00 per share Purchase Price, resulting in a range of 4,250,000 to 5,750,000 shares of Conversion Stock being offered. The $10.00 Purchase Price in the Offerings is a uniform price for all subscribers, including the Bank's Board of Directors, its management and ESOP. See "The Conversion--Stock Pricing and Number of Shares to be Issued." THE APPRAISAL IS BASED ON A NUMBER OF FACTORS AND IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING CONVERSION STOCK NOR CAN ASSURANCE BE GIVEN THAT PURCHASERS OF THE CONVERSION STOCK OR RECIPIENTS OF THE EXCHANGE SHARES WILL BE ABLE TO SELL SUCH SHARES AFTER THE CONVERSION AT A PRICE THAT IS EQUAL TO OR ABOVE THE PURCHASE PRICE. Further, the pro forma stockholders' equity reflected in "Pro Forma Data" is not intended to represent the fair market value of the Common Stock and may be greater than amounts that would be available for distribution to stockholders in the event of liquidation. If necessary, depending on regulatory considerations and changes in market and financial conditions or material changes in the financial condition or performance of the Bank, the Valuation Price Range may be revised based on an updated Appraisal prepared by RP Financial and approved by applicable regulatory agencies. The actual number of shares of Conversion Stock sold must be supported by a final Appraisal. No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of the Conversion Stock are less than the minimum or more than 15% above the maximum of the current Valuation Price Range or the Offerings are extended beyond . THE EXCHANGE RATIO The Bank and the Mutual Holding Company must demonstrate to the satisfaction of the Division and the FDIC that the basis for the Exchange is fair and reasonable. The Boards of Directors of the Bank and the Company have determined that each Minority Share will, on the Effective Time, be converted into Exchange Shares through the Exchange Ratio. The Exchange Ratio ensures that Minority Stockholders will own approximately the same aggregate percentage of the outstanding Common Stock (which will consist of Conversion Stock plus Exchange Shares) as they own of the outstanding Bank Common Stock immediately prior to the Effective Time. The Minority Stockholders, however, will experience a dilution in ownership interest, from a 33.69% current ownership interest in the Bank to an approximately 32.17% interest in the Company. This is because the FDIC requires that the Exchange Ratio be adjusted downward to reflect the aggregate amount of Bank Common Stock dividends waived by the Mutual Holding Company and the amount of assets other than Bank Common Stock held by the Mutual Holding Company. See "The Conversion--The Exchange." Based on the 609,616 Minority Shares outstanding at June 30, 1997, the Exchange Ratio is expected to be within a range of 2,015,664 to 2,727,075 Exchange Shares for the Minority Shares outstanding immediately prior to the Effective Time. See "The Conversion--Stock Pricing and Number of Shares to be Issued." 6 The following table sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range: (i) the total number of shares of Conversion Stock and Exchange Shares to be issued in the Conversion; (ii) the percentage of the total Common Stock represented by the Conversion Stock and the Exchange Shares; and (iii) the Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing fractional Exchange Shares.
CONVERSION STOCK EXCHANGE SHARES TOTAL SHARES TO BE ISSUED(1) TO BE ISSUED(1) OF COMMON ----------------- ----------------- STOCK TO BE EXCHANGE AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING(2) RATIO --------- ------- --------- ------- -------------- -------- Minimum................. 4,250,000 67.83% 2,015,664 32.17% 6,265,664 3.3064 Midpoint................ 5,000,000 67.83 2,371,369 32.17 7,371,369 3.8899 Maximum................. 5,750,000 67.83 2,727,075 32.17 8,477,075 4.4734 15% above maximum ...... 6,612,500 67.83 3,136,136 32.17 9,748,636 5.1444
- -------- (1) Assumes that outstanding options to purchase 42,717 shares of Bank Common Stock at June 30, 1997 are not exercised prior to consummation of the Conversion. Assuming that all of such options are exercised prior to such consummation, the percentages represented by the Conversion Stock and the Exchange Shares would amount to 66.40% and 33.60% respectively, and the Exchange Ratio would amount to 3.2968, 3.8786, 4.4604 and 5.1294 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively. (2) Assumes that the Company does not issue authorized, but unissued shares to the ESOP immediately following the Conversion. THE ACTUAL EXCHANGE RATIO IS NOT DEPENDENT ON THE MARKET VALUE OF MINORITY SHARES. IT WILL BE CALCULATED BASED UPON THE NUMBER OF SHARES OF CONVERSION STOCK SOLD IN THE OFFERINGS AND THE MINORITY STOCKHOLDERS' PERCENTAGE OWNERSHIP INTEREST IN THE BANK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. THE EXCHANGE RATIO IS NOT DEPENDENT ON THE MARKET VALUE OF THE MINORITY SHARES. RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES No person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or to transfer the shares of Conversion Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that a purchase of Conversion Stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. The Company and the Bank will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor subscriptions known by them to involve the transfer of such rights. Following the Conversion there generally will be no restrictions on the transfer or sale of shares by purchasers other than affiliates of the Company and the Bank. See "Supervision and Regulation--Federal Securities Laws" and "The Conversion--Restrictions on Transferability by Directors and Officers and NASD Members." BENEFITS OF THE CONVERSION TO MANAGEMENT ESOP. The Bank currently has an ESOP, a tax-qualified employee benefit plan for officers and employees of the Company and the Bank, which intends to purchase 2% of the Conversion Shares. The ESOP owned 21,763 shares of Bank Common Stock at June 30, 1997, all of which were allocated to participants' accounts. For additional information concerning the ESOP, see "Management-- Benefits--Employee Stock Ownership Plan" and "Risk Factors--Possible Dilutive Effects of Benefit Plans." MRP. The Company intends to seek stockholder approval of a Management Recognition Plan and Trust ("MRP") at a meeting of stockholders occurring no earlier than six months following consummation of the 7 Conversion. The MRP, which will be funded with a number of shares of Common Stock equal to up to 1% of the number of shares of Conversion Stock issued in the Conversion, is a non-tax-qualified restricted stock plan intended for the benefit of key employees and directors of the Company and the Bank. If stockholder approval of the MRP is obtained, it is expected that shares of Common Stock of the Company will be awarded at no cost to such recipients. For additional information concerning the MRP and shares intended to be awarded thereunder, see "Management--Benefits--Management Recognition Plan." Stock Option Plan. The Company intends to seek stockholder approval of a stock option plan ("1998 Stock Option Plan"), which will reserve a number of shares of Common Stock equal to up to 10% of the number of shares of Conversion Stock in the Conversion, at a meeting of stockholders occurring no earlier than six months following consummation of the Conversion. If stockholder approval of the 1998 Stock Option Plan is obtained, it is expected that options to acquire up to 575,000 shares of Common Stock will be awarded to key employees and directors of the Company and the Bank (based on the issuance of the maximum of the Valuation Price Range). The exercise price of such options will be 100% of the fair market value of the Common Stock on the date the option is granted. Options granted to officers and directors are valuable only to the extent that such options are exercisable and the market price for the underlying share of Common Stock is in excess of the exercise price. An option effectively eliminates the market risk of holding the underlying security since no consideration is paid for the option until it is exercised and, therefore, the recipient may, within the limits of the term of the option wait to exercise the option until such time as the market price exceeds the exercise price. For additional information concerning the 1998 Stock Option Plan and options intended to be granted thereunder, see "Management--Benefits--1998 Stock Option Plan." Employment and Severance Agreements. Effective October 1, 1997, the Company entered into an employment agreement with Mr. Donald V. Rhodes, the Chief Executive Officer of the Company and the Bank, for a term which initially expires on March 14, 2001 and renews annually thereafter unless terminated by either the Company or Mr. Rhodes. The Bank has also entered into severance agreements with Messrs. John D. Parry and Brian L. Vance, both Executive Vice Presidents, and with a total of 7 additional key members of management. The agreement with Mr. Rhodes provides that he will be entitled to compensation for up to three years in the event of a change in control of the Bank or the Company and two years in certain other circumstances. The agreements with Messrs. Parry and Vance provide that each will be entitled to compensation for up to two years in the event of a change in control of the Bank or the Company. The agreements with the additional officers provide that each will be entitled to compensation for one year in the event of a change in control of the Bank or the Company. See "Management--Executive Compensation--Employment and Severance Agreements." For information concerning the possible voting control of officers, directors and employees following the Conversion, see "Risk Factors--Voting Power of Directors and Executive Officers." USE OF PROCEEDS Depending upon the number of shares sold and the expenses of the Conversion, net proceeds from the sale of the Conversion Stock are estimated to range from $41.4 million to $56.2 million (or $64.7 million if the Valuation Price Range is increased by 15%). See "Pro Forma Data." After giving effect to the proposed purchase of shares by the ESOP and MRP, the Company plans to contribute to the Bank 50% of the net proceeds and retain the remaining net proceeds. This would result in the Company retaining approximately $24.4 million of net proceeds (50% of $48.8 million) based on the issuance of 5,000,000 shares at the midpoint of the Valuation Price Range. Because shares of Conversion Stock may be purchased in the Offerings by Bank customers using funds on deposit at the Bank, the net amount of funds available to the Bank following the Offerings will be reduced to the extent that shares are purchased with funds on deposit. Net proceeds contributed to the Bank will increase the Bank's capital. The Bank will use the funds contributed to it for general corporate purposes, including increased 8 lending, possible purchase of loan participation, and investment in securities of the type currently held by the Bank. In addition, depending on the level of market interest rates following consummation of the Conversion, the Bank may use a portion of the proceeds to retire any outstanding FHLB advances. A portion of the net proceeds retained by the Company will be used for a loan by the Company to the Bank's ESOP to fund the ESOP's purchase of shares in the Offerings. The remaining net proceeds will initially be invested primarily in U.S. Government and agency securities and other investment securities of the type currently held by the Bank. Such proceeds will be available for additional contributions to the Bank in the form of debt or equity, to support future internal growth of the Bank and the Company, for possible future acquisitions of financial institutions or branches, as a source of dividends to the stockholders of the Company, and for future repurchases of Common Stock to the extent permitted under applicable law and regulations. Currently, as discussed below under "Use of Proceeds," there are no specific plans, arrangements, agreements or understandings, written or oral, regarding any such acquisitions or repurchases. MARKET FOR COMMON STOCK The Company has received conditional approval to have the Common Stock listed on the Nasdaq National Market under the symbol "HFWA." Ryan Beck has agreed to act as a market maker for the Company's Common Stock following consummation of the Conversion. No assurance can be given that an active and liquid trading market for the Common Stock will develop, or, if developed, be maintained. Further, no assurance can be given that purchasers will be able to sell their shares at or above the Purchase Price after the Conversion. See "Risk Factors-- Absence of Prior Market for the Common Stock" and "Market for Common Stock." DIVIDENDS The Board of Directors of the Company intends to declare cash dividends on the Common Stock commencing with the first full quarter following consummation of the Conversion. The first quarterly dividend is expected to be in an amount that will be equivalent to $0.40, annually, on existing Minority Shares. Based upon the Valuation Price Range, the Exchange Ratio is expected to be 3.3064, 3.8899, 4.4734 and 5.1444 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively, resulting in an initial quarterly dividend of $0.030, $0.026, $0.022 and $0.019 per share, respectively, on the Exchange Shares following consummation of the Conversion. However, no assurances can be given as to the amount of a dividend or that a dividend will be paid, or if paid, that the dividend will not be reduced or eliminated in future periods. See "Dividend Policy," "The Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank" and "Supervision and Regulation--The Company." DISSENTERS' RIGHTS The Plan of Conversion provides that stockholders of the Bank have the right to dissent from the mergers of the Bank with the MHC and with an interim bank formed to facilitate the Conversion, with the Bank as the surviving entity in each merger, and, subject to certain conditions, to receive payment of the "value" of their shares of Bank Common Stock, as provided in the Washington Business Corporation Act ("WBCA"), Revised Code of Washington, Chapter 23B.13. See "The Conversion--The Exchange" and "--Dissenters' Rights." RISK FACTORS See "Risk Factors" for a discussion of certain risks that should be considered by all prospective investors. 9 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth selected consolidated financial and other data of the Bank at the dates and for the periods indicated. This information is derived from and is qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and Notes thereto presented elsewhere in this Prospectus. SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEARS ENDED JUNE 30 ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Net interest income.... $ 6,363 $ 6,788 $ 8,227 $ 8,332 $ 9,512 Provision for loan losses................ 926 -- -- -- (270) Noninterest income..... 4,648 4,019 3,040 4,298 3,347 Noninterest expense(1)............ 6,178 7,421 7,425 8,422 11,105 Federal income tax expense (benefit)..... 2,061 1,154 1,308 1,435 (245) Net income............. 1,846 2,232 2,534 2,773 2,269 Earnings per share(2).. N.A. $ 0.35 $ 1.41 $ 1.54 $ 1.26 PERFORMANCE RATIOS: Net interest spread(3)............. 3.35% 3.45% 4.14% 3.84% 4.06% Net interest margin(4)............. 3.72 3.83 4.57 4.31 4.50 Efficiency ratio(1).... 56.11 68.67 65.90 66.68 77.89 Return on average assets................ 1.03 1.18 1.30 1.31 0.99 Return on average equity................ 15.11 13.05 11.67 11.38 8.62 AT JUNE 30 ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets........... $ 179,236 $ 194,102 $ 204,897 $ 222,052 $ 242,164 Loans receivable, net.. 121,356 123,258 150,526 161,744 199,118 Loans held for sale.... 7,435 4,110 5,944 5,286 6,323 Deposits............... 153,266 165,922 174,797 191,119 209,781 FHLB advances.......... -- -- -- -- 890 Other borrowed funds... 7,174 4,100 3,252 -- -- Stockholders' equity... $ 12,863 $ 20,662 $ 23,065 $ 25,633 $ 27,714 Book value per share... N.A. $ 11.48 $ 12.78 $ 14.20 $ 15.31 Equity to assets ratio................. 7.18% 10.64% 11.26% 11.54% 11.44% ASSET QUALITY RATIOS: Nonperforming loans to loans................. 0.07% 0.07% 0.06% 0.03% 0.06% Allowance for loan losses to loans....... 1.27 1.32 1.09 1.11 1.32 Allowance for loan losses to nonperforming loans... 1,709.28 1,776.04 1,791.67 3,672.55 2,069.17 Nonperforming assets to total assets.......... 0.14 0.05 0.05 0.02 0.05 OTHER DATA: Number of full service banking offices....... 5 5 7 8 10 Number of full-time equivalent employees.. 98 119 116 136 145
- -------- (1) The efficiency ratio is recurring noninterest expense divided by the sum of net interest income and noninterest income. The Bank paid a one-time deposit assessment of $1.1 million to the FDIC, Savings Association Insurance Fund in November 1996 which was excluded from the calculation of the efficiency ratio for 1997. (2) The Bank became a stock bank as of January 31, 1994. Per share data prior to 1994 is not applicable. The earnings per share data for 1994 is calculated using only the earnings for the five months ended June 30, 1994. Weighted average number of shares of Bank Common Stock outstanding during the years ended June 30, 1994, 1995, 1996 and 1997 were 1,800,000 1,800,000, 1,805,166 and 1,807,910, respectively. (3) Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. (4) Net interest margin is net interest income divided by average interest earning assets. 10 RECENT DEVELOPMENTS The following table sets forth selected consolidated financial and other data at the dates and for the periods indicated. The data at September 30, 1997, and for the three months ended September 30, 1997 and 1996, are unaudited and, in the opinion of management, contain all adjustments (none of which were other than normal recurring entries) necessary for a fair presentation of the results for such unaudited periods. The selected operations data for the three months ended September 30, 1997 are not necessarily indicative of the results of operations for the entire fiscal year. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this Prospectus. SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------- 1996 1997 ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Net interest income.................................... $ 2,213 $ 2,645 Provision for loan losses.............................. -- 30 Noninterest income..................................... 867 893 Noninterest expense.................................... 3,414 2,563 Federal income tax expense (benefit)................... (1,051) 335 Net income............................................. 717 610 Earnings per share..................................... $ 0.40 $ 0.34 PERFORMANCE RATIOS:(1) Net interest spread(2)................................. 3.83% 4.22% Net interest margin(3)................................. 4.30% 4.70% Efficiency ratio(4).................................... 75.49% 72.44% Return on average assets............................... 1.28% 1.00% Return on average equity............................... 11.23% 8.87%
AT JUNE 30, AT SEPTEMBER 30, 1997 1997 ----------- ---------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets................................. $ 242,164 $248,704 Loans receivable, net........................ 199,188 202,028 Loans held for sale.......................... 6,323 5,451 Deposits..................................... 209,781 216,948 FHLB advances................................ 890 -- Other borrowed funds......................... -- -- Stockholders' Equity......................... 27,714 28,324 Book value per share......................... $ 15.31 $ 15.65 Equity to assets ratio....................... 11.44% 11.39% ASSET QUALITY RATIO: Nonperforming loans to loans................. 0.06% 0.23% Allowance for loan losses to loans........... 1.32 1.32 Allowance for loan losses to nonperforming loans....................................... 2,069.17 564.37 Nonperforming assets to total assets......... 0.05 0.20 OTHER DATA: Number of full service banking offices....... 10 10 Number of full-time equivalent employees..... 145 145
- -------- (1) On an annualized basis, except for calculation of the efficiency ratio. (2) Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. (3) Net interest margin is net interest income divided by average interest earning assets. (4) The efficiency ratio is recurring noninterest expense divided by the sum of net interest income and noninterest income, excluding nonrecurring items. The Bank accrued a one-time deposit assessment of $1.1 million to the Savings Association Insurance Fund in September 1996 which was excluded from the calculation of the efficiency ratio for the three months ended September 30, 1996. 11 NONPERFORMING ASSETS AND DELINQUENCIES At September 30, 1997, the Bank had $493,000 of loans accounted for on a nonaccrual basis ($344,000 in single family mortgage loans and $149,000 in an undeveloped land loan) compared to $133,000 at June 30, 1997. At September 30, 1997 and June 30, 1997, the Bank had no accruing loans which were contractually past due 90 days or more, no restructured loans and no real estate owned. The allowance for loan losses was $2.8 million at September 30, 1997 and June 30, 1997. There were no charge-offs and no recoveries for the three months ended September 30, 1997. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Net Income. Net income for the three months ended September 30, 1997, was $610,000, or $0.34 per share, compared to $717,000, or $0.40 per share, for the three months ended September 30, 1996. During the quarter ended September 30, 1996, based on recent legislation the Bank accrued $1.1 million for a one-time special assessment by the FDIC on all SAIF-insured institutions to recapitalize the SAIF deposit insurance fund. The Bank also reversed a $938,000 deferred tax liability related to the potential recapture of the pre-1988 additions to the tax bad debt reserve. Excluding the impact of these two nonrecurring items, net income for the three months ended September 30, 1996, would have been $498,000, or $0.28 per share. Thus, on a comparable fully taxed basis, net income in the first quarter of 1997 increased by $112,000, or $0.06 per share. The increase in net income on such a comparable basis was primarily attributable to an increase in net interest income partially offset by an increase in noninterest expense. Net Interest Income. Net interest income increased $431,000, or 19.5%, to $2.6 million for the three months ended September 30, 1997, compared to $2.2 million for the three months ended September 30, 1996. The increase was primarily due to a $19.4 million, or 9.4%, increase in the average balance of earning assets resulting from a $37.3 million increase in the average balance of loans and a decline in other interest earning assets. Net interest margin for the three months ended September 30, 1997 increased to 4.70% from 4.30% for the same period in 1996. The increase in margin was attributable to growth in assets and a shift from lower yielding investments, interest earning deposits and mortgage-backed securities into higher yielding loans, particularly commercial loans, coupled with a decrease in the average cost of interest bearing deposits, particularly certificates of deposit. Provisions for Loan Losses. The provision for loan losses for the three months ended September 30, 1997 was $30,000. There was no provision for loan losses during the same period in 1996. The allowance for loan losses at September 30, 1997 and June 30, 1997 was $2.8 million, or 1.32% of loans. At September 30, 1997, management deemed the allowance for loan losses adequate to cover reasonably foreseeable losses in the Bank's loan portfolio. Noninterest Income. There was no significant change in total noninterest income in the period ended September 30, 1997, compared with the same period in 1996. In August 1997, the Bank recognized income of $36,000 from a settlement with a title company concerning a boundary line adjustment at the Bank's Spanaway branch. Service charges on deposits increased $12,000, or 10.6%, due to growth in business and personal checking accounts. Gains on sales of loans decreased $34,000, or 5.9%, due to a lower volume of mortgage loans sold in the 1997 quarter. Noninterest Expense. Excluding the impact of the $1.1 million one-time SAIF assessment which the Bank accrued in September 1996, noninterest expense increased $238,000, or 10.2%, for the three months ended September 30, 1997, compared with the same period in 1996. The increase was attributable to the Bank's expansion of its branch network in Pierce County and the continued development of the Bank's relationship banking capacity. Salaries and employee benefits increased $157,000, or 11.9%, $81,000 of which resulted from the hiring of two additional experienced commercial lending officers in Pierce County and three branch staff for 12 the two new Pierce County branches (80th and Pacific Branch opened in October 1996 and Pierce County Business Banking Center opened in April 1997). The remaining increase in salaries and employee benefits was primarily the result of lower capitalized loan costs during the three months ended September 30, 1997, due to a lower volume of mortgage loans originated. Occupancy expense increased $49,000, or 13.2%, as a result of the operating costs of the two Pierce County branch facilities opened after September 1996. FDIC premiums and special assessments decreased $851,000, or 97.4%, due to the absence of the nonrecurring $1.1 million special SAIF assessment mentioned above. Excluding this special assessment, FDIC premiums decreased $78,000, or 71.4%, as the FDIC reduced the Bank's federal deposit insurance premiums from 0.23% (on an annualized basis) of insured deposits for the quarter ended September 30, 1996, to 0.06% of insured deposits for the quarter ended September 30, 1997. Income Taxes. Provision for federal income taxes was $335,000 for the three months ended September 30, 1997, compared to a federal income tax benefit of $1.1 million for the three months ended September 30, 1996. The federal income tax benefit for the 1996 quarter reflects the reversal of the $938,000 deferred tax liability mentioned above and the impact of the $1.1 million special SAIF assessment. 13 RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should carefully consider the matters presented below, in addition to matters discussed elsewhere in this Prospectus. RISKS OF PURSUING GROWTH STRATEGY The Bank's ability to pursue its growth strategy successfully is significantly dependent upon generating an increasing volume of loans and deposits, through internal growth or by acquisitions of banks or branches, at acceptable risk levels and upon acceptable terms. The Bank has expanded its loans to $208.2 million at June 30, 1997, from $130.4 million at June 30, 1993, an increase of 59.6%. During that same period, the commercial loan portfolio increased to $39.4 million from $1.2 million, and the Bank's full service offices increased to ten from five. Commercial loans generally involve a higher level of credit risk than do residential loans and many of the commercial loans, though granted to customers known to officers of the Bank, are relatively unseasoned since they have been on the books of the Bank for a short period of time. There can be no assurance that it will not incur significant credit losses in the future. Heritage Bank is continuing to emphasize its established mortgage banking business of originating and selling residential mortgage loans while broadening its products and services to those more closely related to commercial banking. There can be no assurance of the Bank's ability to sustain income derived from its mortgage banking business at recent levels or to increase such income. Moreover, there can be no assurance that the Bank will be successful in expanding its asset base and fee income to a level acceptable to management and in managing the costs and implementation risks associated with its growth strategy, identifying and acquiring attractive banks or branches on terms favorable to the Bank, integrating such acquisitions, or preventing deposit erosion at acquired institutions or branches. Acquisitions and branching by the Company or the Bank will also be subject to regulatory approvals and there can be no assurance that the Company or the Bank will succeed in securing such approvals. The Bank's ability to pursue its growth strategy also may be adversely affected by general economic conditions. See "Business of the Bank-- General" and "--Competition." IMPORTANCE OF MORTGAGE BANKING OPERATIONS Mortgage banking activities significantly influence the Bank's results of operations. The Bank's mortgage banking operations involve the origination and sale of mortgage loans primarily for the purpose of generating income. The profitability of mortgage banking operations depends primarily on managing the volume of loan originations and sales and the expenses associated with loan originations so that gains on the sale of loans together with any recurring fee income exceeds the costs of this activity. Changes in the level of interest rates and the condition of the local and national economies affect the amount of loans originated by the Bank and demanded by investors to whom the loans are sold. Generally, the Bank's loan origination and sale activity and, therefore, its results of operations, may be adversely affected by an increasing interest rate environment to the extent such environment results in decreased loan demand by borrowers and/or investors. Accordingly, the volume of loan originations and the profitability of this activity can vary significantly from period to period. During the years ended June 30, 1996 and 1997, the Bank's single family mortgage originations totaled $140.1 million and $104.2 million, respectively. In addition, the Bank's results of operations are affected by the amount of noninterest expenses associated with mortgage banking activities, such as compensation and benefits, occupancy and equipment expenses, and other operating expenses. During periods of reduced loan demand, the Bank's results of operations may be adversely affected to the extent that it is unable to reduce expenses commensurate with the decline in loan originations. During the years ended June 30, 1996 and 1997, the Bank's net gains on sales of loans were $3.0 million and $2.0 million, respectively. In comparison, the Bank's pre-tax income for these periods was $4.2 million and $2.0 million, respectively. HIGH OVERHEAD EXPENSES Competition in the banking industry has led many banks to focus on expense reduction as a method of increasing stockholder returns. The Bank, however, has embarked on a growth strategy as a method of increasing 14 profitability. That strategy has involved incurring substantial expenses concentrated in: (i) personnel hired in anticipation of growth and expanded market share; (ii) maintaining the Bank's mortgage origination capacity while mortgage origination volumes have fluctuated; (iii) facilities expansion; and (iv) upgrading of data processing capabilities. As a result of pursuing its growth strategy and emphasis on personal service, the Bank's expense ratios are higher than those of many similarly sized banking companies. At June 30, 1997, the Bank's efficiency ratio was 77.89%, and there can be no assurance that it will decline to the levels of certain of the Bank's more efficient competitors, many of whom are following strategies different from those of the Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Failure by the Bank to improve its efficiency ratio over time could adversely affect the value of the Common Stock. EXPANSION OF NONRESIDENTIAL LENDING The Bank has changed the relative concentration of its loan portfolio in recent years. One- to four-family permanent residential loans decreased to 49.68% of total loans at June 30, 1997 from 56.29% of total loans at June 30, 1993. During that same time commercial business loans increased to 18.95% of total loans from 0.92% of total loans. At June 30, 1997, $104.8 million, or 50.3%, of the Bank's total loan portfolio consisted of loans other than one- to four-family permanent residential loans. Included among these other loans are multi-family and commercial real estate, construction, commercial and consumer loans. Although such loans typically have higher yields than one- to four-family residential loans, such loans are typically more sensitive to economic conditions, involve higher concentrations of investment in a single borrower or project (with the exception of consumer loans) are more difficult to monitor and carry a higher level of credit risk than do permanent residential loans. There can be no assurance that the Bank's attempt to address these risks by utilizing conservative underwriting procedures, requiring real estate as collateral for most commercial business loans, and limiting its out-of-area loans and its multi-family and commercial construction loans will be successful. See "Business of the Bank--Lending Activities." POTENTIAL ADVERSE IMPACT OF CHANGES IN INTEREST RATES The financial condition and operations of the Bank, and of financial institutions in general, are influenced significantly by general economic conditions, by the related monetary and fiscal policies of the federal government and by the regulations of the Division and the FDIC. Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and by other factors affecting the supply of housing and the availability of funds. The Bank's profitability is dependent to a large extent on its net interest income, which is the difference between the interest income received from its interest earning assets and the interest expense incurred in connection with its interest bearing liabilities. The Bank is vulnerable to an increase in interest rates to the extent that its interest earning assets have longer effective maturities than its interest bearing liabilities. Under such circumstances, material and prolonged increases in interest rates generally would adversely affect net interest income, while material and prolonged decreases in interest rates generally would have a favorable effect on net interest income. See "Management's Discussion and Analysis of Financial Condition and Result of Operations--Asset/Liability Management." Changes in the level of interest rates also affect the amount of other loans originated by the Bank and, thus, the amount of loan and commitment fees, as well as the value of the Bank's investment securities and other interest earning assets. Decreases in rates may result in borrower prepayments, subjecting the Bank to reinvestment risk. Moreover, volatility in interest rates also can result in disintermediation, or the flow of funds away from savings institutions into direct investments, such as U.S. Government and corporate securities and other investment vehicles which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than insured savings institutions. 15 COMPETITION The Bank's strategy involves the significant expansion of the Bank throughout its principal market areas in the South Puget Sound region of Washington. During the past several years, substantial consolidation among financial institutions in Washington has occurred. The Bank anticipates a continuation of the consolidation trend in Washington. Many other financial institutions, most of which have greater resources than the Bank, compete with the Bank for banking business in the Bank's market area. Among the advantages of some of these institutions are their superior technological resources, and their ability to make larger loans, finance extensive advertising campaigns, access international money markets and allocate their investment assets to regions of highest yield and demand. The Bank does not have a significant market share of the deposit-taking or lending activities in the areas in which it conducts operations. There can be no assurance that the Bank will be able to compete effectively in this competitive environment in the future. The Bank also faces deposit competition from securities firms, mortgage bankers, insurance companies and other investment vehicles such as mutual funds. See "Business of the Bank--Competition." ANTI-TAKEOVER PROVISIONS Provisions in the Company's Governing Instruments and Washington Law. Certain provisions included in the Company's Articles of Incorporation and in the Washington Business Corporation Act will assist the Company in maintaining its independence as a separate, publicly owned corporation. These provisions may discourage potential takeover attempts, particularly those which have not been negotiated with the Board of Directors. As a result, these provisions may preclude takeover attempts which certain stockholders may deem to be in their interest and perpetuate existing management. These provisions include, among other things, a provision limiting voting rights of beneficial owners of more than 10% of the Common Stock. In addition, the Articles of Incorporation provide for the election of directors to staggered terms of three years and for their removal without cause only upon the vote of holders of 66 2/3% of the outstanding voting shares and provisions for approval of certain business combinations. The Articles of Incorporation also contain provisions regarding the timing and content of stockholder proposals and nominations. Certain provisions of the Articles of Incorporation of the Company cannot be amended by stockholders unless an 66 2/3% stockholder vote is obtained. The Board of Directors believes that these provisions are in the best interest of the Company and its stockholders. Policy of Independence. Potential investors should not invest with the expectation that the Company or the Bank may be merged into or its assets sold to another company in the foreseeable future. The Board of Directors of the Company believes it is in the long-term best interest of the Company and its stockholders to remain independent and the Board has adopted a statement of policy that the Company intends to remain independent for the foreseeable future. See "Restrictions on Acquisition of the Company and the Bank." GEOGRAPHIC CONCENTRATION Substantially all of the Bank's loans are collateralized by real estate located in the Puget Sound region of Washington. The Bank's growth and profitability are dependent upon economic conditions in the region. Unfavorable changes in economic conditions affecting the region, such as in the aerospace, natural resources or software industries, or significant decline in foreign trade or in the large military base presence in the area may have an adverse impact on the risk of loss associated with the loan portfolio and on operations of the Company in general. VOTING POWER OF DIRECTORS AND EXECUTIVE OFFICERS Directors and executive officers of the Company (11 persons), at June 30, 1997, beneficially owned 159,103 shares (including 33,216 unexercised stock options exercisable within 60 days under the existing 1994 and 1997 Stock Option Plans), or 8.6%, of the outstanding Bank Common Stock on a fully diluted basis. Based on their anticipated purchases of Conversion Stock at the midpoint of the Valuation Price Range, they expect to hold approximately 576,682 shares, or 7.8%, of the shares of Common Stock outstanding upon consummation of the Conversion (excluding 129,206 unexercised stock options exercisable within 60 days). See "Conversion Stock 16 to be Purchased by Management Pursuant to Subscription Rights" and "Management--Beneficial Ownership of Bank Common Stock." Directors and officers are also expected to control the voting of approximately 2% of the shares of Common Stock issued in the Conversion through the ESOP. Under the terms of the ESOP, the unallocated shares will be voted by the ESOP trustees in the same proportion as the votes cast by participants with respect to the allocated shares. At a meeting of stockholders to be held no earlier than six months following the consummation of the Conversion, the Company intends to seek stockholder approval of the Company's MRP. Assuming the receipt of stockholder approval, the Company expects to acquire Common Stock on behalf of the MRP in an amount equal to 1% of the Conversion Stock, or 57,500 shares at the maximum of the Valuation Price Range. These shares will be acquired either through open market purchases or from authorized but unissued Common Stock. Under the terms of the MRP, the MRP committee or the MRP trustees will have the power to vote unallocated and unvested shares in the same proportion as they receive instructions from recipients with respect to allocated shares which have not been earned and distributed. The trustees will not vote allocated shares which have not been distributed if they do not receive instructions from the recipient. The Company intends to reserve for future issuance pursuant to the 1998 Stock Option Plan a number of authorized shares of Common Stock equal to up to 10% of the Conversion Stock issued in the Conversion (575,000 shares at the maximum of the Valuation Price Range) and to seek stockholder approval of the 1998 Stock Option Plan at a meeting of stockholders to be held no earlier than six months following consummation of the Conversion. Consequently, assuming (1) the receipt of stockholder approval for the MRP and the 1998 Stock Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii) the purchase by the ESOP of 2% of the Conversion Stock sold in the Offerings, and (iv) the exercise of stock options equal to 10% of the number of shares of Common Stock issued in the Conversion, directors, officers and employees of the Holding Company and the Bank would have voting control on a fully diluted basis of 21.5% of the Common Stock, based on the issuance of the maximum of the Valuation Price Range. Management's potential voting control could, together with additional stockholder support, preclude or make more difficult takeover attempts that certain stockholders deem to be in their best interest and may tend to perpetuate existing management. NEW EXPENSES ASSOCIATED WITH ESOP AND MRP The Company will recognize additional material employee compensation and benefit expenses as a result of the ESOP's purchase of Conversion Stock in the Offerings and the expected subsequent implementation of the MRP. The actual aggregate amount of these new expenses cannot be currently predicted because applicable accounting practices require that they be based on the fair market value of the shares of Common Stock when the expenses are recognized, which would occur when shares are committed to be released in the case of the ESOP and over the vesting period of awards made to recipients in the case of the MRP. These expenses have been reflected in the pro forma financial information under "Pro Forma Data" assuming the Purchase Price ($10.00 per share) as fair market value. Actual expenses, however, will be based on the fair market value of the Common Stock at the time of recognition, which may be higher or lower than the Purchase Price. EXPECTED LOWER RETURN ON EQUITY AFTER THE CONVERSION As a result of the Conversion, stockholders' equity will be substantially increased. The increase in equity is likely to adversely affect the Company's ability to maintain a return on average equity (net income divided by average stockholders' equity) at historical levels, absent a corresponding increase in net income. There can be no assurance that the Company will be able to increase net income in future periods in amounts commensurate with the increase in equity resulting from the Conversion. "Management--Benefits-- Employee Stock Ownership Plan" and "--Management Recognition Plan." POSSIBLE DILUTIVE EFFECTS OF BENEFIT PLANS Subject to stockholder approval, the MRP intends to acquire an amount of Common Stock of the Company up to 1% of the shares issued in the Conversion. Such shares of Common Stock of the Company may be acquired 17 by the Company in the open market or from authorized but unissued shares of Common Stock of the Company. In the event that the MRP acquires authorized but unissued shares of Common Stock from the Company, the voting interests of existing stockholders will be diluted and net income per share and stockholders' equity per share will be decreased. See "Pro Forma Data" and "Management--Benefits--Management Recognition Plan." The 1998 Stock Option Plan, if approved by stockholders, will provide for options for up to a number of shares of Common Stock of the Company equal to up to 10% of the shares issued in the Conversion. Such shares will likely be authorized but unissued shares of Common Stock of the Company; therefore, upon exercise of the options will result in the dilution of the voting interests of existing stockholders and will decrease net income per share and stockholders' equity per share. See "Management--Benefits--1998 Stock Option Plan." If the ESOP is unable to purchase 2% of the Conversion Stock in the Offerings due to oversubscription by Eligible Account Holders, it may acquire authorized but unissued shares of Common Stock, which would reduce the voting interests of stockholders and would decrease net income per share and stockholders' equity per share. ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK The Company has not previously issued capital stock and, consequently, there is no existing market for the Common Stock. The Company has received conditional approval to list the Common Stock on the Nasdaq National Market under the symbol "HFWA." One of the requirements for initial quotation of the Common Stock is the presence of three market makers. Ryan Beck has advised the Company that it intends to make a market in the Common Stock following the completion of the Conversion so long as the volume of trading activity and certain other market-making considerations justify it doing so. While the Company anticipates that it will be able to obtain the commitment from at least two other broker-dealers to act as market makers for the Common Stock, there can be no assurance there will be three or more market makers for the Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those prices, subject to securities laws and regulatory constraints. Additionally, the development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of the Company, the Bank or any market maker. The number of active buyers and sellers of the Common Stock at any particular time may be limited. Under such circumstances, investors in the Common Stock could have difficulty disposing of their shares on short notice. Investors should not view the Common Stock as a short term investment. There can be no assurance that an active and liquid trading market for the Common Stock will develop or that, if developed, it will continue, nor is there any assurance that persons purchasing shares or receiving Exchange Shares will be able to sell them at or above the Purchase Price. See "Market for Common Stock." POSSIBLE INCREASE IN VALUATION PRICE RANGE AND NUMBER OF SHARES ISSUED The number of shares to be sold in the Conversion may be increased as a result of an increase in the Valuation Price Range of up to 15% to reflect regulatory considerations and changes in market and financial conditions following the commencement of the Offerings. In the event that the Valuation Price Range is so increased, it is expected that the Company will issue up to 6,612,500 shares of Common Stock at the Purchase Price for an aggregate price of up to $66,125,000. An increase in the number of shares will decrease a subscriber's proportionate share of the pro forma net income per share and stockholders' equity per share and will increase the Company's pro forma consolidated stockholders' equity and net income. Such an increase will also increase the Purchase Price as a percentage of pro forma stockholders' equity per share and net income per share. See "Pro Forma Data." RISK OF DELAYED OFFERING It is possible that there could be a significant delay in the completion of the Conversion as a result of delays in receiving approval of or non objection from a necessary regulatory authority, receiving member or stockholder 18 approval or completing the Offerings. If the Conversion is not completed by (45 days after the last day of the fully extended Subscription Offering) and the Division consents to an extension of time to complete the Conversion, subscribers will be given the right to modify or rescind their subscriptions. In such event, unless an affirmative indication is received from subscribers that they wish to continue to subscribe for shares, their funds will be returned promptly, together with interest at the Bank's passbook rate, or their withdrawal authorizations will be terminated. POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION RIGHTS If the subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are deemed to have an ascertainable value, receipt of such rights may result in a taxable gain (either as capital gain or ordinary income) to those Eligible Account Holders, Supplemental Eligible Account Holders and Other Members who receive and/or exercise the subscription rights, in an amount equal to such value. Additionally, the Bank could be required to recognize a gain for tax purposes on such distribution. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. The Bank has been advised by RP Financial that such rights have no value, however, RP Financial's conclusion is not binding on the Internal Revenue Service ("IRS"). See "The Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank--Tax Effects." 19 USE OF PROCEEDS Depending upon the number of shares sold and the expenses of the Conversion, net proceeds from the sale of the Conversion Stock are estimated to range from $41.4 million to $56.2 million (or $64.7 million if the Valuation Price Range is increased by 15%). See "Pro Forma Data." The Company plans to contribute to the Bank 50% of the net proceeds and retain the remaining net proceeds. This would result in the Company retaining approximately $24.4 million of net proceeds (50% of $48.8 million) based on the issuance of 5,000,000 shares at the midpoint of the Valuation Price Range. Receipt of the net proceeds of the sale of the Conversion Stock will increase the Bank's capital. The Bank will use the funds contributed to it for general corporate purposes, including increased lending, possible purchase of loan participations or investment in U.S. Government or agency securities and mortgage backed securities of the type currently held by the Bank. In addition, depending on the level of market interest rates following consummation of the Conversion, the Bank may use a portion of the proceeds to retire any outstanding FHLB advances. In connection with the Conversion and the establishment of the ESOP, the Company intends to loan the ESOP the amount necessary for it to acquire 2% of the shares issued in the Conversion. The Company's loan to fund the ESOP may range from $850,000 to $1,000,000 to $1,150,000 based on the sale of 4,250,000 shares (at the minimum of the Valuation Price Range), 5,000,000 shares (at the midpoint of the Valuation Price Range), and 5,750,000 shares (at the maximum of the Valuation Price Range), respectively, at $10.00 per share. If 15% above the maximum of the Valuation Price Range, or 6,612,500 shares, are sold in the Conversion, the Company's loan to the ESOP would be approximately $1,323,000. The remaining net proceeds retained by the Company initially will be invested primarily in investment securities of the type currently held by the Bank. Such proceeds will be available for additional contributions to the Bank in the form of debt or equity, to support future acquisition and diversification activities, as a source of dividends to the stockholders of the Company and for future repurchases of Common Stock to the extent permitted under applicable law and regulations. Currently, there are no specific plans, arrangements, agreements or understandings, written or oral, regarding any diversification or acquisition activities. The Conversion will also facilitate the Company's access to the capital markets. Upon completion of the Conversion, the Board of Directors will have the authority to adopt stock repurchase plans, subject to statutory and regulatory requirements. Since the Company has not yet issued stock, there is currently insufficient information upon which an intention to repurchase stock could be based. The facts and circumstances upon which the Board of Directors may determine to repurchase stock in the future may include but are not limited to: (i) market and economic factors such as the price at which the stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and an improvement in the Company's return on equity; (ii) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or to fund employee stock benefit plans; (iii) the ability of the Company to utilize pooling of interests accounting treatment in connection with future mergers and acquisitions; and (iv) any other circumstances in which repurchases would be in the best interests of the Company and its stockholders. Any stock repurchases will be subject to a determination by the Board of Directors that both the Company and the Bank will be capitalized in excess of all applicable regulatory requirements after any such repurchases and that capital will be adequate taking into account, among other things, the level of nonperforming and other risk assets, the Company's and the Bank's current and projected results of operations and asset/liability structure, the economic environment and tax and other regulatory considerations. 20 DIVIDEND POLICY GENERAL The Board of Directors of the Company intends to declare cash dividends on the Common Stock commencing with the first full quarter following consummation of the Conversion. The first quarterly dividend is expected to be in an amount that will be equivalent to $0.40, annually, on existing Minority Shares. Based upon the Valuation Price Range, the Exchange Ratio is expected to be 3.3064, 3.8899, 4.4734 and 5.1444 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively, resulting in an initial quarterly dividend of $0.030, $0.026, $0.022 and $0.019 per share, respectively, on the Exchange Shares following consummation of the Conversion. In addition, the Board of Directors may determine to pay periodic special cash or stock dividends in addition to, or in lieu of, regular cash dividends. Declarations or payments of any future dividends (regular and special) will be subject to determination by the Company's Board of Directors, which will take into account the amount of the net proceeds retained by the Company, the Company's financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions that affect the payment of dividends by the Bank to the Company discussed below. Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the Company would be unable to pay its debts as they became due in the normal course of business, or if the Company's total liabilities would exceed its total assets. In order to pay such cash dividends, however, the Company must have available cash either from the net proceeds raised in the Offerings and retained by the Company, dividends received from the Bank or earnings on Company assets. No assurances can be given that any dividends, either regular or special, will be declared or, if declared, what the amount of dividends will be or whether such dividends, if commenced, will continue. CURRENT REGULATORY RESTRICTIONS Dividends from the Company will depend, in part, upon receipt of dividends from the Bank because the Company initially will have no source of income other than dividends from the Bank and earnings from the investment of the net proceeds from the Conversion retained by the Company. The Division has the authority under its supervisory powers to prohibit the payment of dividends by the Bank to the Company. For a period of ten years after the Conversion, the Bank may not, without prior approval of the Division, declare or pay a cash dividend in an amount in excess of one-half of (i) the greater of the Bank's net income for the current fiscal year or (ii) the average of the Bank's net income for the current fiscal year and not more than two of the immediately preceding fiscal years. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the net worth of the Bank below the amount required for the liquidation account to be established pursuant to the Plan of Conversion. See "Supervision and Regulation--Banking Subsidiary" and "The Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank--Liquidation Account." TAX CONSIDERATIONS In addition to the foregoing, earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes cannot be used by the Bank to pay cash dividends to the Company without the payment of federal income taxes by the Bank at the then current income tax rate on the amount deemed distributed, which would include the amount of any federal income taxes attributable to the distribution. See "Business of the Bank--Federal Taxation" and Note 10 of Notes to the Consolidated Financial Statements included elsewhere herein. The Company does not contemplate any distribution by the Bank that would result in a recapture of the Bank's bad debt reserve or create the above-mentioned federal tax liabilities. 21 MARKET FOR COMMON STOCK The Company has not previously issued capital stock, and, consequently, there is no established market for the Common Stock. The Board of Directors of the Company and the Bank determined that the Common Stock would be sold at $10.00 per share. The Company has received conditional approval to have its Common Stock quoted on the Nasdaq National Market under the symbol "HFWA" upon completion of the Conversion. One of the requirements for initial quotation of the Common Stock on the Nasdaq National Market is that there be at least three market makers for the Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. Ryan Beck has advised the Company that it intends to make a market in the Common Stock following the completion of the Conversion, subject to compliance with applicable laws and regulations. While the Company anticipates that prior to the completion of the Conversion it will be able to obtain the commitment from at least two other broker- dealers to act as market makers for the Common Stock, there can be no assurance there will be three or more market makers for the Common Stock. Additionally, the development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of the Company, the Bank or any market maker. The number of active buyers and sellers of the Common Stock at any particular time may be limited. Under such circumstances, investors in the Common Stock could have difficulty disposing of their shares on short notice. Investors should not view the Common Stock as a short term investment. There can be no assurance that an active and liquid trading market for the Common Stock will develop or that, if developed, it will continue, nor is there any assurance that persons purchasing shares will be able to sell them at or above the Purchase Price or that quotations will be available on the Nasdaq National Market as contemplated. 22 CAPITALIZATION The following table presents the historical consolidated capitalization of the Bank at June 30, 1997, and the pro forma consolidated capitalization of the Company after giving effect to the assumptions set forth under "Pro Forma Data," based on the sale of the number of shares of Conversion Stock set forth below in the Conversion at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range.
COMPANY PRO FORMA CONSOLIDATED CAPITALIZATION BASED UPON THE SALE OF ---------------------------------------------------------- MAXIMUM AS MINIMUM MIDPOINT MAXIMUM ADJUSTED 4,250,000 5,000,000 5,750,000 6,612,500 SHARES AT SHARES AT SHARES AT SHARES AT PURCHASE PURCHASE PURCHASE PURCHASE CAPITALIZATION PRICE OF PRICE OF PRICE OF PRICE OF AS OF JUNE 30, $10.00 $10.00 $10.00 $10.00 PER 1997 PER SHARE PER SHARE PER SHARE SHARE(1) -------------- --------- --------- --------- ---------- (IN THOUSANDS) Deposits(2)............. $209,781 $209,781 $209,781 $209,781 $209,781 Borrowings: FHLB advances.......... 890 890 890 890 890 -------- -------- -------- -------- -------- Total deposits and borrowings............ $210,671 $210,671 $210,671 $210,671 $210,671 ======== ======== ======== ======== ======== Stockholders' equity:(3) Preferred stock (no par value per share); 2,500,000 shares authorized; none outstanding(4)........ -- -- -- -- -- Common Stock (no par value per share); 15,000,000 shares authorized(5)......... 1,810 -- -- -- -- Additional paid-in capital............... 4,103 47,343 54,733 62,123 70,621 Retained earnings...... 21,801 21,921 21,921 21,921 21,921 Less: Common Stock acquired by ESOP(6)........... -- (850) (1,000) (1,150) (1,323) Common Stock acquired by MRP(6)............ -- (425) (500) (575) (661) -------- -------- -------- -------- -------- Total stockholders' equity................. $ 27,714 $ 67,989 $ 75,154 $ 82,319 $ 90,558 ======== ======== ======== ======== ========
- ------- (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Valuation Price Range of up to 15% to reflect regulatory considerations and changes in market and financial conditions following the commencement of the Offerings. (2) Does not reflect withdrawals from deposit accounts for the purchase of Conversion Stock in the Offerings. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals. (3) Assumes (i) that the 609,616 Minority Shares outstanding at June 30, 1997 are converted into 2,015,664, 2,371,369, 2,727,075 and 3,136,136 Exchange Shares at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively, and (ii) that no fractional shares of Exchange shares will be issued by the Company. Pro forma retained earnings include $120,000 of assets held by the MHC. (4) The Bank has 5,000,000 shares of Preferred Stock authorized, $1.00 par value per share, none of which are outstanding. The Company has 2,500,000 shares of Preferred Stock authorized, no par value per share, none of which are outstanding or will be outstanding after the completion of the Conversion. (5) The Bank has 10,000,000 shares of Common Stock authorized, $1.00 par value per share, of which 1,809,616 were outstanding as of June 30, 1997. The Company has 15,000,000 shares of Common Stock authorized, no par value per share. (6) Assumes that 2% and 1% of the shares sold in the Offerings will be purchased by the ESOP and MRP, respectively. No shares actually will be purchased by the MRP in the Offerings. Such purchases by the MRP would occur only upon receipt of stockholder approval which is expected no earlier than six months after completion of the Conversion. A purchase by the MRP in the Offerings has been included on a pro forma basis to give an indication of its effect on capitalization. The pro forma presentation does not show the impact of (a) results of operations after the Conversion, (b) changing market prices of shares of Common Stock after the Conversion, (c) a smaller than 1% purchase by the MRP, or (d) the purchase by the MRP or ESOP of Common Stock out of authorized but unissued shares. Assumes that the funds used to acquire the ESOP shares will be borrowed from the Company for a 15 year term at the prime rate. For an estimate of the impact of the loan on earnings, see "Pro Forma Data." If the ESOP obtained a loan from a third party, other borrowings would increase by the amount of Common Stock acquired by the ESOP. The Bank intends to make contributions to the ESOP sufficient to service and ultimately retire its debt. The amount to be acquired by the ESOP and MRP is reflected as a reduction of stockholders' equity. There can be no assurance that stockholder approval of the MRP will be obtained. See "Management--Benefits--Employee Stock Ownership Plan" and "--Management Recognition Plan". 23 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE The following table presents the Bank's historical and pro forma capital position relative to its capital requirements at June 30, 1997. The amount of capital infused into the Bank for purposes of the following table is 50% of the net proceeds of the Offerings, plus the $120,000 of MHC assets, less the ESOP and MRP deductions. For purpose of the table below, the amount expected to be borrowed by the ESOP and the cost of the shares expected to be acquired by the MRP are deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data." The definitions of the terms used in the table are those provided in the applicable regulations.
PRO FORMA AT JUNE 30, 1997 ----------------------------------------------------------------------------------- MINIMUM OF MIDPOINT OF MAXIMUM OF 15% OF MAXIMUM OF VALUATION PRICE VALUATION PRICE VALUATION PRICE VALUATION PRICE RANGE RANGE RANGE RANGE ------------------- ----------------------- ------------------- ------------------- 4,250,000 SHARES AT 5,000,000 SHARES AT 5,750,000 SHARES AT 6,612,500 SHARES AT PURCHASE PRICE OF PURCHASE PRICE OF PURCHASE PRICE OF PURCHASE PRICE OF JUNE 30, 1997 $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE ------------------ ------------------ ----------------------- ------------------- ------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF ADJUSTED ADJUSTED ADJUSTED ADJUSTED ADJUSTED TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1) ------- ---------- ------- ---------- ----------- ------------- ------ ---------- ------ ------------ (DOLLARS IN THOUSANDS) Tier 1 (leverage) capital............ $27,714 11.68% $47,274 18.35% 50,744 19.43% 54,214 20.47% 58.204 21.64% Tier 1 (leverage) capital requirement(2)..... 7,118 3.00 7,728 3.00 7,837 3.00 7,945 3.00 8.070 3.00 ------- ----- ------- ----- ----------- ---------- ------ ----- ------ ----- Excess.............. $20,596 8.68% 39,546 15.35 42,907 16.43 46,269 17.47 50,134 18.64% ======= ===== ======= ===== =========== ========== ====== ===== ====== ===== Tier 1 risk based capital............ $27,714 15.65% 47,274 26.09 50,744 27.89 54,214 29.68 58,204 31.72% Tier 1 risk based capital requirement........ 7,085 4.00 7,249 4.00 7,278 4.00 7,307 4.00 7,340 4.00 ------- ----- ------- ----- ----------- ---------- ------ ----- ------ ----- Excess.............. $20,629 11.65% 40,025 22.09 43,466 23.89 46,907 25.68 50,864 27.72% ======= ===== ======= ===== =========== ========== ====== ===== ====== ===== Total risk based capital............ $29,935 16.90% 49,539 27.34 53,018 29.14 56,497 30.93 60,498 32.97% Total risk based capital requirement........ 14,171 8.00 14,497 8.00 14,555 8.00 14,613 8.00 14,680 8.00 ------- ----- ------- ----- ----------- ---------- ------ ----- ------ ----- Excess.............. $15,764 8.90% 35,042 19.34 38,463 21.14 41,884 22.93 45,818 24.97% ======= ===== ======= ===== =========== ========== ====== ===== ====== =====
- ------- (1) For the risk-based capital calculations, the portion of the net proceeds contributed to the Bank (after ESOP and MRP deductions) were assumed to be invested in U.S. Government Agency debt securities with a weighted average risk-weighing of 20%. (2) As a Washington state chartered savings bank, the Bank is subject to the capital requirements of the FDIC and the Division. The FDIC requires state-chartered banks, including the Bank, to have a minimum leverage ratio of Tier 1 capital to total assets of at least 3%, provided, however, that all institutions, other than those (i) receiving the highest rating during the examination process and (ii) not anticipating any significant growth, are required to maintain a ratio of 1% to 2% above the stated minimum, with an absolute total capital to risk-weighted assets of at least 8%. The Bank has not been notified by the FDIC of any leverage capital requirement specifically applicable to it. However, for the purposes of this table, the Bank has assumed that its leverage capital requirement is 3% of total average assets. 24 CONVERSION STOCK TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS The following table sets forth, for each director and executive officer and for all of the directors and executive officers as a group, (i) Exchange Shares to be held upon consummation of the Conversion based upon their beneficial ownership of Bank Common Stock (excluding options) as of June 30, 1997, (ii) proposed purchase of Conversion Stock, assuming shares are available to satisfy their subscriptions, and (iii) total shares of Common Stock to be held upon consummation of the Conversion, in each case assuming that the Conversion Stock is sold at the midpoint of the Valuation Price Range. No individual has entered into a binding agreement with respect to such intended purchases, and, therefore, actual purchases could be more or less than indicated below. Directors and executive officers and their associates may not purchase in excess of 20% of the shares sold in the Conversion. Directors, officers and employees will pay the Purchase Price ($10.00 per share) for each share for which they subscribe.
PROPOSED PURCHASE OF CONVERSION TOTAL COMMON STOCK NUMBER OF STOCK TO BE HELD EXCHANGE ------------------ ------------------ SHARES TO NUMBER NUMBER BE HELD OF OF PERCENTAGE (1)(2) AMOUNT SHARES SHARES OF TOTAL --------- -------- --------- ------- ---------- Donald V. Rhodes Director, Chairman of the Board, President and Chief Executive Officer of the Company; Chairman of the Board and President of the Bank......................... 108,061 $250,000 25,000 133,061 1.81% Lynn M. Brunton Director..................... 58,348 50,000 5,000 63,348 0.86 John A. Clees Director..................... 46,678 40,000 4,000 50,678 0.69 Daryl D. Jensen Director..................... 70,018 50,000 5,000 75,018 1.02 H. Edward Odegard Director..................... 58,348 25,000 2,500 60,848 0.83 James P. Senna Director..................... 38,899 75,000 7,500 46,399 0.63 Philip S. Weigand Director..................... 68,431 50,000 5,000 73,431 1.00 John D. Parry Executive Vice President-- Administration............... 12,447 70,000 7,000 19,447 0.26 Brian L. Vance Executive Vice President-- Loan Administration.......... 7,779 150,000 15,000 22,779 0.31 James Hastings Senior Vice President and Treasurer.................... 4,278 50,000 5,000 9,278 0.13 Wendy Gauksheim Senior Vice President-- Corporate Services Officer... 16,395 60,000 6,000 22,395 0.30 ------- -------- ------ ------- ---- All directors and executive officers as a group (11 persons)................. 489,682 $820,000 87,000 576,682 7.82% ======= ======== ====== ======= ====
- -------- (1) Excludes 67,546 shares which may be received upon the exercise of outstanding stock options granted under the existing 1994 and 1997 Stock Option Plans. Based upon the Exchange Ratio of 3.8899 Exchange Shares for each Minority Share at the midpoint of the Valuation Price Range, the persons named in the table would have options to purchase Common Stock as follows: Mr. Rhodes, 77,798 shares; Ms. Brunton, 12,965 shares; Mr. Clees, 12,965 shares; Mr. Jensen, 12,965 shares; Mr. Odegard, 12,965 shares; Mr. Senna, 12,965 shares; Mr. Weigand, 11,215 shares; Mr. Parry, 38,899 shares; Mr. Vance, 38,899 shares; Mr. Hastings, 25,284 shares; Ms. Gauksheim, 5,835 shares; and all directors and executive officers as a group, 262,755 shares. (2) Excludes stock options that may be granted under 1998 Stock Option Plan and awards that may be granted under the MRP if such plans are approved by stockholders at an annual or special meeting at least six months following the Conversion. See "Management--Benefits." 25 PRO FORMA DATA Applicable law requires that the aggregate Purchase Price of the Common Stock to be issued in the Conversion be based upon an independent appraisal of the estimated pro forma market value of the Common Stock. At October 10, 1997, the Valuation Price Range of the Offerings as set forth in the Appraisal is from a minimum of $42.5 million to a maximum of $57.5 million, with a midpoint of $50.0 million or, at a price per share of $10.00, a minimum number of shares of 4,250,000, a maximum number of shares of 5,750,000 and a midpoint number of shares of 5,000,000. The actual net proceeds from the sale of the Conversion Stock cannot be determined until the Conversion is completed. However, net proceeds are currently based upon the following assumptions: (i) all of the shares of Conversion Stock will be sold in the Subscription and Minority Stockholders' Offerings; (ii) Ryan Beck will receive a management and advisory fee of $50,000 and a marketing fee of 1.5% of the aggregate dollar amount of Conversion Stock sold in the Subscription and Minority Stockholders' Offerings; (iii) approximately 4.4%, 4.0%, 3.7% and 3.5% of the Conversion Stock issued in the Conversion at the minimum, midpoint, maximum, and 15% above the maximum, of the Valuation Price Range, respectively, will be sold to the ESOP and to directors, officers and employees or members of such persons' immediate families, for which no fee will be paid to Ryan Beck, and (iv) Conversion expenses, excluding the fees paid to Ryan Beck, will be approximately $460,000. Actual fees and expenses may vary from this estimate, because the fees paid will depend upon the percentages and total number of shares sold in the various categories of Offerings and other factors. See "The Conversion--Marketing Arrangements." The pro forma consolidated net income of the Company for the year ended June 30, 1997 has been calculated as if the Conversion had been completed at the beginning of the period and the estimated net proceeds received by the Company and the Bank had been invested at 6.74%, the arithmetic average of the yield earned by the Bank on its interest earning assets and the rates paid on its deposits. As discussed under "Use of Proceeds," the Company expects to retain 50% of the net Conversion proceeds from which it will fund the ESOP loan. A pro forma after-tax return of 4.45% is used for both the Company and the Bank for the 12 month period, after giving effect to an incremental tax rate of 34.0%. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of Common Stock. Per share amounts have been computed as if the Common Stock had been outstanding at the beginning of the period or at June 30, 1997, but without any adjustment of per share historical or pro forma stockholders' equity to reflect the earnings on the estimated net proceeds. The following table summarizes the historical net income and stockholders' equity of the Bank and the pro forma consolidated net income and stockholders' equity of the Company at and for the year ended June 30, 1997, based on the minimum, midpoint, maximum, and a 15% increase in the maximum of the Valuation Price Range. No effect has been given to (i) the shares to be reserved for issuance under the Company's 1998 Stock Option Plan, which is expected to be adopted by stockholders at a meeting to be held no earlier than six months following consummation of the Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing Conversion Stock in the Conversion; (iii) the issuance of shares from authorized but unissued shares to the ESOP in the event of over-subscription in the Offering by Eligible Account Holders; or (iv) the establishment of a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. See "Management-- Benefits--1998 Stock Option Plan" and "The Conversion--Stock Pricing and Number of Shares to be Issued." THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS. STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF CONSOLIDATED ASSETS AND LIABILITIES OF THE COMPANY COMPUTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS AND THEIR MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. 26
AT OR FOR THE YEAR ENDED JUNE 30, 1997 ---------------------------------------------- 15% ABOVE MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF VALUATION VALUATION VALUATION VALUATION PRICE RANGE PRICE RANGE PRICE RANGE PRICE RANGE ----------- ----------- ----------- ---------- 4,250,000 5,000,000 5,750,000 6,612,500 SHARES AT SHARES AT SHARES AT SHARES AT PURCHASE PURCHASE PURCHASE PURCHASE PRICE OF PRICE OF PRICE OF PRICE OF $10.00 PER $10.00 PER $10.00 PER $10.00 PER SHARE SHARE SHARE SHARE ---------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Gross proceeds................... $42,500 $50,000 $57,500 $66,125 Less: expenses................... (1,070) (1,180) (1,290) (1,417) --------- --------- --------- --------- Estimated Net Proceeds.......... $41,430 $48,820 $56,210 $64,708 Less: Common Stock purchased by ESOP(2)......................... (850) (1,000) (1,150) (1,323) Less: Common Stock purchased by MRP(3).......................... (425) (500) (575) (661) --------- --------- --------- --------- Estimated Net Proceeds for Reinvestment................... $40,155 $47,320 $54,485 $62,724 ========= ========= ========= ========= For the 12 Months Ended June 30, 1997 Consolidated Net Income: Historical(5)................... $ 2,269 $ 2,269 $ 2,269 $ 2,269 Pro forma income on net proceeds(1).................... 1,786 2,105 2,424 2,790 Earnings on assets at MHC....... 5 5 5 5 Pro forma ESOP Adjustment(2).... (37) (44) (51) (58) Pro forma MRP Adjustment(3)..... (56) (66) (76) (87) --------- --------- --------- --------- Pro forma Net Income............ $ 3,967 $ 4,269 $ 4,571 $ 4,919 ========= ========= ========= ========= Earnings Per Share (reflects SOP 93-6)(4): Historical(5)................... $ 0.37 $ 0.31 $ 0.27 $ 0.24 Pro forma income on net proceeds ............................... 0.29 0.30 0.30 0.29 Earnings on assets at MHC....... 0.00 0.00 0.00 0.00 Pro forma ESOP Adjustment(2).... (0.01) (0.01) (0.01) (0.01) Pro forma MRP adjustment(3)..... (0.01) 0.01) (0.01) (0.01) --------- --------- --------- --------- Pro forma Earnings Per Share.... $ 0.64 $ 0.59 $ 0.55 $ 0.51 ========= ========= ========= ========= Offering price as a multiple of pro forma earnings per share.... 15.63x 16.95x 18.18x 19.61x At June 30, 1997 Stockholders' Equity: Historical(5)................... $27,714 $27,714 $27,714 $27,714 Assets at MHC................... 120 120 120 120 Estimated Net Proceeds.......... 41,430 48,820 56,210 64,708 Less: Common Stock purchased by ESOP(2)........................ (850) (1,000) (1,150) (1,323) Less: Common Stock purchased by MRP(3)......................... (425) (500) (575) (661) --------- --------- --------- --------- Pro forma Stockholders' Equity.. $67,989 $75,154 $82,319 $90,558 ========= ========= ========= ========= Stockholders' equity per share (does not reflect SOP 93-6): Historical(5)................... $ 4.42 $ 3.76 $ 3.27 $ 2.84 Assets at MHC................... 0.02 0.02 0.01 0.01 Estimated net proceeds.......... 6.62 6.63 6.64 6.65 Less: Common Stock purchased by ESOP(2)........................ (0.14) (0.14) (0.14) (0.14) Less: Common Stock purchased by MRP(3)......................... (0.07) (0.07) (0.07) (0.07) --------- --------- --------- --------- Pro forma Stockholders' Equity Per Share...................... $ 10.85 $ 10.20 $ 9.71 $ 9.29 ========= ========= ========= ========= Offering price as a percentage of pro forma stockholders' equity per share............... 92.17% 98.04% 102.99% 107.64% Offering price as a percentage of pro forma tangible equity... 92.17% 98.04% 102.99% 107.64% Number of shares used in book value per share calculations... 6,265,664 7,371,369 8,477,075 9,748,636
27 - -------- (1) No effect has been given to withdrawals from deposit accounts for the purpose of purchasing Conversion Stock. The net amount of funds available to the Bank for investment following the Offerings will be reduced to the extent that shares are purchased with funds on deposit. (2) Assumes that 2% of the Conversion Stock issued in the Conversion will be purchased by the ESOP. The funds used to acquire such shares will be borrowed by the ESOP (at an interest rate equal to the prime rate as published in The Wall Street Journal on the closing date of the Conversion, which rate is currently 8.50%) from the net proceeds of the Offerings retained by the Company. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net proceeds for reinvestment. The Bank intends to make contributions to the ESOP at least equal to the principal and interest requirement of the debt. As the debt is repaid, stockholders' equity will be increased. The Bank's payment of the ESOP debt is based upon equal installments of principal over a 15 year period, assuming a federal income tax rate of 34.0%. Interest income earned by the Company on the ESOP debt offsets the interest paid by the Bank on the ESOP loan. No reinvestment is assumed on proceeds contributed to fund the ESOP. The ESOP expense reflects adoption of Statement of Position ("SOP") 93-6, which will require recognition of compensation expense as shares are committed to be released to employee's accounts and the exclusion of unallocated shares from earnings per share computations. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share Purchase Price. See "Management--Benefits--Employee Stock Ownership Plan." (3) Assumes that the required stockholder approval has been received, that the shares were acquired by the MRP at the beginning of the period presented in open market purchases at $10.00 per share, that 20% of the amount contributed was an amortized expense during such period, and that the federal income tax rate is 34.0%. For purposes of this table, compensation expense is recognized on a straight-line basis over the five year term of shares issued under the MRP. In the event the fair market value per share is greater than $10.00 per share on the date shares are awarded under the MRP, total MRP expense would increase. See "Risk Factors--New Expenses Associated with ESOP and MRP." The total of the estimated MRP purchases was multiplied by 20% (the total percent of shares for which expense is recognized in the first year) resulting in pre-tax MRP expense of $85,000, $100,000, $115,000 and $132,200 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively, for the year ended June 30, 1997. The issuance of authorized but unissued shares of Common Stock pursuant to the MRP in the amount of 1% of the Conversion Stock issued in the Offerings would dilute the voting interests of existing stockholders from 32.17% to 31.95%, and under such circumstances pro forma net income per share for the year ended June 30, 1997 would be $0.64, $0.58, $0.54 and $0.51 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively, and stockholders' equity per share at June 30, 1997 would be $10.78, $10.13, $9.65 and $9.23 at the minimum, midpoint, maximum and 15% above the maximum of such range, respectively. No effect has been given to the shares reserved for issuance under the proposed 1998 Stock Option Plan. If stockholders approve the 1998 Stock Option Plan following the Conversion, the Company will have reserved for issuance under the 1998 Stock Option Plan authorized by unissued shares of Common Stock representing an amount of shares equal to up to 10% of the Conversion Stock sold in the Offerings. See "Management--Benefits-- 1998 Stock Option Plan" and "--Benefits--Management Recognition Plan" and "Risk Factors--Possible Dilutive Effect of Benefit Plans." (4) Per share amounts are based upon shares outstanding of 6,183,497, 7,274,702, 8,365,908 and 9,620,794, at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range for the year ended June 30, 1997, respectively, which includes the Conversion Stock and Exchange Shares, less the number of shares assumed to be held by the ESOP not released within the first year following the Conversion. (5) Historical per share amounts have been computed as if the Conversion Stock expected to be issued in the Conversion had not been outstanding at the beginning of the period, and without any adjustment of historical net income or historical retained earnings to reflect the investment of the estimated net proceeds of the sale of shares in the Conversion, the additional ESOP expense or the proposed MRP expense, as described above. 28 HERITAGE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME The following Consolidated Statements of Income of Heritage Savings Bank and Subsidiaries for each of the fiscal years in the three year period ended June 30, 1997 are a part of the consolidated financial statements of Heritage Savings Bank and subsidiaries, and should be read in conjunction therewith, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The Consolidated Financial Statements as of June 30, 1996 and 1997, and for each of the years in the three year period ended June 30, 1997, and the report thereon, are included elsewhere herein.
YEARS ENDED JUNE 30, ----------------------- 1995 1996 1997 ------- ------- ------- (IN THOUSANDS) INTEREST INCOME: Loans..................... $13,115 $14,894 $16,743 Mortgage backed securities............... 722 552 464 Investment securities and FHLB dividends........... 1,118 854 757 Interest bearing deposits................. 268 575 548 ------- ------- ------- Total interest income... 15,223 16,875 18,512 ------- ------- ------- INTEREST EXPENSE: Deposits.................. 6,639 8,528 8,999 Borrowed funds............ 357 15 1 ------- ------- ------- Total interest expense.. 6,996 8,543 9,000 ------- ------- ------- Net interest income..... 8,227 8,332 9,512 PROVISION FOR LOAN LOSSES... -- -- (270) ------- ------- ------- Net interest income after provision for loan losses................... 8,227 8,332 9,782 ------- ------- ------- NONINTEREST EXPENSE: Gains on sales of loans, net...................... 1,665 3,049 2,006 Commissions on sales of annuities and securities............... 241 296 220 Service charges on deposits................. 207 353 462 Rental income............. 209 221 210 Gain on sale of premises.. 356 -- 84 Other income.............. 362 379 365 ------- ------- ------- Total noninterest income................. 3,040 4,298 3,347 ------- ------- ------- NONINTEREST EXPENSE: Salaries and employee benefits................. 4,176 4,711 5,468 Building occupancy........ 979 1,254 1,717 FDIC premiums and special assessment............... 380 407 1,262 Data processing........... 462 493 534 Marketing................. 200 162 257 Office supplies and printing................. 257 229 243 Other..................... 971 1,166 1,624 ------- ------- ------- Total noninterest expense................ 7,425 8,422 11,105 ------- ------- ------- Income before federal income tax expense..... 3,842 4,208 2,024 Federal income tax expense (benefit).................. 1,308 1,435 (245) ------- ------- ------- Net income.............. $ 2,534 $ 2,773 $ 2,269 ======= ======= ======= Earnings per common share... $1.41 $1.54 $1.26
29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in understanding the financial condition and results of operations of the Bank. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto and the other sections contained in this Prospectus. The Mutual Holding Company's only material activity is to hold Bank Common Stock and invest its available funds in accounts at the Bank. The MHC has not conducted any operations to date and therefore has no reported results of operations. OPERATING STRATEGY The Bank traditionally has offered a variety of savings products and originated one- to four-family mortgage loans (principally for sale in the secondary market) and, to a lesser extent, multi-family, commercial real estate and construction loans. Beginning in fiscal 1994, the Bank began to implement a growth strategy which is intended to broaden its products and services from traditional thrift products and services to those more closely related to commercial banking. That strategy entails (1) geographic and product expansion, (2) loan portfolio diversification, (3) development of relationship banking, and (4) maintenance of asset quality. (See "Business of the Bank--Implementation of Growth Strategy" and "--Lending Activities") The Bank intends to continue to fund its assets primarily with retail deposits, although FHLB advances may be used as a supplemental source of funds, and it believes that the capital raised in the Offerings will enhance its ability to continue implementing its growth strategy. Concurrent with geographic expansion, the Bank has (i) developed business checking accounts and commercial lending products and other services for businesses and high net worth individuals; (ii) introduced Visa(TM) debit and credit cards; (iii) installed an automated voice response system for customer account inquiries and (iv) developed products to assist realtors and potential borrowers to obtain information about loan programs and qualifications. To accommodate new products and to improve internal operating and reporting, the Bank converted to a new data processing system with a data service bureau and installed a personal computer network. The Bank has incurred substantial expenses as it carried out its growth strategy. Those expenses have been concentrated in (i) personnel hired in anticipation of growth and expanded market share; (ii) maintaining the Bank's mortgage origination capacity while mortgage origination volumes have fluctuated; (iii) facilities expansion and (iv) upgrading of data processing capabilities, and have reduced the Bank's return on average assets and return on equity for fiscal year 1997. Management believes that those expenditures will continue to have a negative impact on earnings in the near term, but that the investments are necessary to produce an expected improvement in earnings as the Bank seeks to broaden its product mix and expand its market share throughout its market area. The Bank's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowed funds. The Bank also generates noninterest income through service charges and fees and income from mortgage banking operations. The Bank's noninterest expenses consist primarily of compensation and employee benefits, occupancy, deposit insurance premiums, data processing and other operating costs. Like most financial institutions, the Bank's interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and the actions of regulatory authorities. NET INTEREST INCOME Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar amounts of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to net interest income divided by average interest earning assets and 30 is influenced by the level and relative mix of interest earning assets and interest bearing liabilities. During the years ended June 30, 1995, 1996 and 1997, average interest earning assets amounted to $180.2 million, $193.5 million and $211.2 million, respectively. During these same periods, average interest bearing liabilities were $162.5 million, $175.1 million and $191.1 million, respectively, and net interest margins were 4.57%, 4.31% and 4.50%, respectively. The following table sets forth for the periods indicated information for the Bank with respect to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest earning assets and interest expense on interest bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and the ratio of average interest earning assets to average interest bearing liabilities. The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the tables as loans carrying a zero yield.
YEAR ENDED JUNE 30 ------------------------------------------------------------------------------------- 1995 1996 1997 --------------------------- --------------------------- --------------------------- INTEREST INTEREST INTEREST AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE BALANCE(1) PAID RATE BALANCE(1) PAID RATE BALANCE(1) PAID RATE ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Loans................... $142,598 $13,115 9.20% $160,823 $14,894 9.26% $182,791 $16,743 9.16% Mortgage backed securities............. 9,231 722 7.82 6,715 552 8.22 5,598 464 8.29 Investment securities and FHLB stock......... 22,516 1,118 4.97 15,096 854 5.66 12,360 757 6.12 Interest earning deposits............... 5,837 268 4.59 10,820 575 5.31 10,414 548 5.26 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest earning assets................. 180,182 $15,223 8.45% $193,454 $16,875 8.72% $211,163 $18,512 8.77% Noninterest earning assets................. 14,818 18,002 18,974 -------- -------- -------- Total assets........... $195,000 $211,456 $230,137 ======== ======== ======== INTEREST BEARING LIABILITIES: Certificates of deposit................ $ 89,602 $ 4,415 4.93% $109,559 $ 6,336 5.78% $119,133 $ 6,599 5.54% Savings accounts........ 28,178 927 3.29 28,407 1,030 3.63 29,703 1,055 3.55 Interest bearing demand and money market accounts............... 40,594 1,297 3.19 36,930 1,162 3.15 42,271 1,345 3.18 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest bearing deposits.............. 158,374 6,639 4.19 174,896 8,528 4.88 191,107 8,999 4.71 FHLB advances........... 658 41 6.23 -- -- 27 1 4.99 Other borrowed funds.... 3,453 316 9.15 171 15 8.77 -- -- -- -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest bearing liabilities........... 162,485 6,996 4.31% 175,067 8,543 4.88 191,134 9,000 4.71% Demand and other noninterest bearing deposits............... 6,001 6,537 7,955 Other noninterest bearing liabilities.... 4,797 5,489 4,711 Stockholders' equity.... 21,717 24,363 26,337 -------- -------- -------- Total liabilities and stockholders' equity.. $195,000 $211,456 $230,137 ======== ======== ======== Net interest income..... $ 8,227 $ 8,332 $ 9,512 Net interest spread..... 4.14% 3.84% 4.06% Net interest margin..... 4.57% 4.31% 4.50% Average interest earning assets to average interest bearing liabilities............ 110.89% 110.51% 110.48%
31 The following table sets forth the amounts of the changes in the Bank's net interest income attributable to changes in volume and changes in interest rates. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to changes due to volume and the changes due to interest rates.
1995 COMPARED TO 1996 COMPARED TO 1996 INCREASE 1997 INCREASE (DECREASE) DUE TO (DECREASE) DUE TO ---------------------- --------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------ ------ ------ ----- ------ (IN THOUSANDS) Loans.......................... $1,676 $ 103 $1,779 $2,034 $(185) $1,849 Mortgage backed securities..... (197) 27 (170) (92) -- (88) Investment securities and FHLB stock......................... (368) 104 (264) (155) 58 (97) Interest earning deposits...... 229 78 307 (22) (5) (27) ------ ------ ------ ------ ----- ------ Total interest income........ $1,340 $ 312 $1,652 $1,765 $(128) $1,637 ====== ====== ====== ====== ===== ====== Certificates of deposit........ $ 984 $ 937 $1,921 $ 554 $(291) $ 263 Savings accounts............... 8 95 103 47 (22) 25 Interest bearing demand deposits...................... (118) (17) (135) 168 15 183 ------ ------ ------ ------ ----- ------ Total interest on deposits... 874 1,015 1,889 769 (298) 471 FHLB advances.................. (41) -- (41) 1 -- 1 Other borrowed funds........... (300) (1) (301) (15) -- (15) ------ ------ ------ ------ ----- ------ Total interest expense....... $ 533 $1,014 $1,547 $ 755 $(298) $ 457 ====== ====== ====== ====== ===== ======
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 Net Income. Net income was $2.3 million, or $1.26 per share, for the year ended June 30, 1997 compared to $2.8 million, or $1.54 per share, for the year ended June 30, 1996, an 18.2% decline, primarily as a result of noninterest expense increasing more rapidly than net interest income, coupled with a decrease in noninterest income. The increase in noninterest expenses was attributable to two factors: (1) the expansion in Pierce County of the Bank's branch office network and development of the Bank's relationship banking capacity; and (2) the legislatively-mandated, one-time assessment levied by the FDIC on all SAIF-insured institutions to recapitalize the SAIF deposit insurance fund. The decrease in noninterest income was principally the result of lower gains on sales of loans due to a decline in the volume of originations of residential mortgage loans. Net Interest Income. Net interest income increased $1.2 million, or 14.2%, in 1997 compared to 1996 primarily due to a $22.0 million increase in the average balance of loans. The growth in average loan balances was most pronounced in commercial loans ($17.7 million of the total $22.0 million increase). Net interest income increased as a result of an improved net interest spread coupled with average interest earning assets increasing more rapidly than average interest bearing liabilities, with the difference funded by noninterest bearing deposits. Net interest margin, which is net income divided by average interest earning assets, for 1997 increased to 4.50% from 4.31% in 1996. The increase was primarily the result of a growth in earning assets at increased rates coupled with a decline in the average cost of interest bearing deposits (particularly for certificates of deposit). Certificates of deposit with scheduled maturities of one year or less increased to 90% of certificate accounts as of June 30, 1997 compared to 83% as of June 30, 1996, while average rates on certificates decreased to 5.54% from 5.78%. The increase in the average yield on interest earning assets was the result of shifting funds from lower yielding investments and mortgage backed securities into higher yielding loans and the overall growth in loans, particularly commercial loans. Provision for Loan Losses. In 1997, the Bank recorded a $1.2 million recovery on a multifamily mortgage loan which had been partially charged off in a prior year. In reviewing the adequacy of the Bank's allowance for loan losses as of June 30, 1997, management determined that the allowance balance was more than adequate to cover any potential losses in the Bank's loan portfolio and therefore reduced the allowance balance through a $270,000 negative provision for loan losses. 32 Management considers the allowance for loan losses at June 30, 1997 to be adequate to cover reasonably foreseeable loan losses based on management's assessment of various factors affecting the loan portfolio, including the level of problem loans, business conditions, estimated collateral values, loss experience and credit concentrations. Noninterest Income. Total noninterest income decreased $951,000, or 22.1%, in 1997 compared with 1996. The major component of this category, gains on sales of loans, decreased $1.0 million, or 34.2% from 1996 to 1997 due to a lower volume of mortgage loans sold ($87.0 million in 1997 compared to $119.5 million in 1996). The decrease in volume of originations of one- to four- family residential mortgage loans in 1997 compared with 1996 was due to weakness in the residential mortgage market and the loss of two key producers by the end of fiscal 1996. Commissions on sales of annuities and securities declined $76,000, or 25.7%, as a result of lower sales volume due to staff turnover. Service charges on deposits increased $109,000, or 30.8%, due to growth in personal and business checking accounts. In June 1997, the Bank sold its former branch premises in Shelton, recognizing an $84,000 gain on the sale. Noninterest Expense. Total noninterest expense increased $2.7 million, or 31.9%, in 1997 compared with 1996. The increase was attributable to: (i) the Bank's expansion of its branch network in Pierce County and development of the Bank's relationship banking capacity; and (ii) a one-time special assessment of $1.1 million required by legislation enacted in August 1996, to recapitalize the SAIF fund of the FDIC. Total noninterest expense (less the nonrecurring SAIF assessment of $1.1 million) was 77.89% of adjusted revenue (the sum of net interest income plus noninterest income), for the year ended June 30, 1997 as compared to 66.68% for the same period in 1996. Salaries and employee benefits increased $757,000, or 16.1%. The increase reflects the hiring of a Senior Loan Administrator (in June 1996) and six commercial lending officers for the Pierce County market (four of which were hired in June 1996), the staffing additions for the 80th and Pacific branch (which opened in October 1996) and the full year effect of staffing additions for the Lakewood branch (which opened in February 1996). Occupancy expense increased $463,000, or 36.9%, as result of the operating costs of the new branch facilities opened during 1996 and 1997 and the full year depreciation impact of the installation of a bank-wide personal computer network in March 1996. FDIC premiums and special assessment increased $855,000, or 210%, due to the $1.1 million special assessment mentioned above. The Bank's federal deposit insurance premiums were reduced by the FDIC from 0.23% (on an annualized basis) of insured deposits for the quarter ended September 30, 1996 to 0.06% of insured deposits for the semi-annual period ended June 30, 1997. Income Taxes. The Bank recorded a Federal income tax benefit of $245,000 for the year ended June 30, 1997 as a result of the reversal of $938,000 deferred tax liability related to the potential recapture of the pre-1988 additions to the tax bad debt reserve which could have been triggered by the MHC Reorganization in January 1994. Based on subsequent legislation, the Bank reversed the $938,000 deferred tax liability as a reduction of Federal income tax expense during the year ended June 30, 1997. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 Net income. Net income increased $239,000, or 9.4%, for the year ended June 30, 1996 to $2.8 million from $2.5 million for the year ended June 30, 1995. This increase resulted primarily from noninterest income increasing more rapidly than noninterest expenses, while net interest income rose slightly. Net Interest Income. Net interest income increased $105,000, or 1.3%, in 1996 compared with 1995 despite growth in average loans of $18.2 million, or 12.8%, due principally to a decrease in net interest spread to 3.84% in 1996 from 4.14% in 1995. Average interest bearing liabilities increased by $16.5 million (concentrated in certificates of deposit), or 10.4%, in 1996, while average interest earning assets increased by $13.3 million, or 7.4%. The average rate on interest bearing liabilities rose to 4.88% from 4.31% in 1995, while the average rate on interest earning assets increased to 8.72% from 8.45%. 33 The increase in loans resulted from a greater emphasis on commercial lending coupled with an increase in residential and commercial real estate mortgage loans. The growth in certificates of deposit reflected rate promotions offered in concert with the new branch openings in 1995 and 1996 and was accompanied by a reduction of $3.7 million, or 9.0%, in lower cost interest bearing demand deposits. Provision for Loan Losses. There were no provisions for loan losses in 1995 or 1996 as management deemed the allowance for loan losses at June 30, 1995 and 1996 adequate to provide for reasonably foreseeable loan losses at those dates. Noninterest Income. Noninterest income increased $1.3 million, or 41.4%, to $4.3 million for 1996, from $3.0 million for 1995. Gains on sales of loans increased $1.4 million, or 83.1%, due to a larger volume of mortgage loan originations ($140.2 million in 1996 versus $93.6 million in 1995) and mortgage loans sold ($119.5 million in 1996 versus $63.3 million in 1995). Commissions on sales of annuities and securities increased $55,000, or 23%, as a result of higher sales volume and a shift in relative mix of sales from lower fee producing securities sales into variable annuities. Service charges on deposits increased $146,000, or 71%, due to growth in personal and business noninterest bearing checking accounts. The gain on sale of premises in 1995 occurred due to the sale of a former branch facility in Lacey. Noninterest Expense. Noninterest expense for 1996 increased $997,000, or 13.4%, from 1995 due principally to an increase in compensation and occupancy expense. Salaries, bonuses and employee benefits increased by $535,000, or 12.8%, due to staffing additions related to new branches opened (Indian Summer in January 1995 and Lakewood in February 1996), increases in mortgage banking support staff and information systems support, management bonuses and increases in employee benefit plan contributions. Occupancy expense increased $275,000, or 28.1%, due to the operating costs of the new branch facilities opened in 1995 and 1996 and the depreciation impact of the installation of a personal computer network in March 1996. Federal deposit insurance premiums increased as a result of higher average deposit levels in 1996, while data processing expenses increased due to greater transaction processing levels related to checking accounts (business and personal). Marketing expenses decreased by $38,000 as a result of one less new branch opening in 1996. Office supplies and printing decreased by $28,000 due to management's efforts in controlling the growth of these expenditures. Other noninterest expenses increased $195,000 as a result of branch expansion and growth in customer accounts, increased professional services and higher business and occupation taxes due to increased revenues in 1996. LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are customer deposits, loan repayments, loan sales, maturing investment securities and advances from the FHLB of Seattle. These funds, together with retained earnings, equity and other borrowed funds, are used to make loans, acquire investment securities and other assets and to fund continuing operations. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to fund operations. The Bank generally maintains sufficient cash and short term investments to meet short term liquidity needs. At June 30, 1997, cash and cash equivalents totaled $7.6 million, or 3.1% of total assets, and investment securities classified as held to maturity with maturities of one year or less amounted to $3.8 million, or 1.6% of total assets. At June 30, 1997, the Bank maintained a credit facility with the FHLB of Seattle for up to 20% of assets or $48.4 million (of which only $890,000 was outstanding at that date). To fund the growth of the Bank, management's strategy has been to build core deposits (which the Bank defines to include all deposits except public funds) through the development of its branch office network and commercial banking relationships. Total deposits increased $18.7 million, or 9.8%, to $209.8 million at June 30, 34 1997 from $191.1 million at June 30, 1996. Of this increase, $3.6 million was in the form of a short term public deposit which matured and was withdrawn in July 1997. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management anticipates that the Bank will continue to rely on the same sources of funds in the future and will use those funds primarily to make loans and purchase investment securities. Heritage Bank is subject to certain regulatory capital requirements. As of June 30, 1996 and 1997, the Bank was classified as a "well capitalized" institution under the criteria established by the FDIC Act. See "Historical and Pro Forma Regulatory Capital Compliance." ASSET/LIABILITY MANAGEMENT The Bank's primary financial objective is to achieve long term profitability while controlling its exposure to fluctuations in market interest rates. To accomplish this objective, management has formulated an interest rate risk management policy that attempts to manage the mismatch between asset and liability maturities while maintaining an acceptable interest rate sensitivity position. The principal strategies which the Bank employs to control its interest rate sensitivity are: (i) sale of most long term, fixed rate, one-to four-family residential mortgage loan originations in the secondary mortgage market; (ii) retention of some adjustable rate mortgage loans; (iii) the origination of commercial loans and residential construction loans at variable interest rates for terms generally one year or less; and (iv) keeping investment securities with generally short term maturities. Additionally, the Bank offers noninterest bearing demand deposit accounts to businesses and individuals. The Bank's longer term objective is to reduce its dependency on certificates of deposit, which tend to be a higher cost source of funds and most susceptible to movement from the Bank if market interest rates increase, by increasing its proportion of noninterest bearing demand deposits, interest bearing demand deposits and money market accounts and savings deposits. The Bank's asset and liability management strategies have resulted in a negative one year "gap" of 9.18% as of June 30, 1997. This one year gap is the difference between the dollar amount of its interest earning assets and interest bearing liabilities that mature or reprice within one year as a percentage of total interest earning amounts, based on certain estimates and assumptions as discussed below. Although management believes that the implementation of its operating strategies has reduced the potential effects of changes in market interest rates on the Bank's results of operations, the negative gap indicates that increases in market interest rates may adversely affect the Bank's results. 35 The following table sets forth the estimated maturity or repricing and the resulting interest rate sensitivity gap of the Bank's interest earning assets and interest bearing liabilities at June 30, 1997 based upon estimates of expected mortgage prepayment rates and deposit decay rates consistent with national trends. The Bank has adjusted mortgage loan maturities for loans held for sale by reflecting these loans in the zero to three month category which is consistent with their sale in the secondary mortgage market. The amounts in the table are derived from the Bank's internal data, and because certain assumptions have been utilized in presenting this data, the amounts may not be consistent with financial information appearing elsewhere in this Prospectus that have been prepared in accordance with generally accepted accounting principles. The amounts in the tables also could be significantly affected by external factors, such as changes in prepayment assumptions, early withdrawal of deposits and competition.
ESTIMATED MATURITY OR REPRICING WITHIN ---------------------------------------------------------- 0-3 4-12 1-5 5-10 MORE THAN MONTHS MONTHS YEARS YEARS 10 YEARS TOTAL ------- -------- ------- ------- --------- -------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS: Loans.................. $45,321 $ 77,607 $57,294 $23,942 $4,029 $208,193 Mortgage backed securities............ -- 35 23 207 4,894 5,159 Investment securities.. 321 3,496 4,689 -- -- 8,506 FHLB stock............. 1,511 -- -- -- -- 1,511 Interest earning deposits.............. 175 -- -- -- -- 175 ------- -------- ------- ------- ------ -------- Total interest earning assets............... $47,328 $ 81,138 $62,006 $24,149 $8,923 $223,544 Noninterest earning assets................ 18,620 -------- Total assets.......... $242,164 ======== INTEREST BEARING LIABILITIES Deposits Certificates of deposit............... $35,412 $ 78,394 $12,866 $ 109 -- $126,781 Savings accounts....... 2,417 6,084 15,074 3,998 801 28,374 Interest bearing demand and money market deposits.............. 9,879 15,921 15,889 2,863 585 45,137 ------- -------- ------- ------- ------ -------- Total interest bearing deposits............. 47,708 100,399 43,829 6,970 1,386 200,292 FHLB advances.......... 890 -- -- -- -- 890 ------- -------- ------- ------- ------ -------- Total interest bearing liabilities.......... $48,598 $100,399 $43,829 $ 6,970 $1,386 $201,182 Noninterest bearing liabilities and equity................ 40,982 -------- Total liabilities and equity............... $242,164 ======== RATE SENSITIVITY GAP.... $(1,270) $(19,261) $18,177 $17,179 $7,537 $ 22,362 Cumulative rate sensitivity gap: Amount................. (1,270) (20,531) (2,354) 14,825 22,362 As a percentage of interest earning assets................ (0.57)% (9.18)% (1.05)% 6.63% ======= ======== ======= =======
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in the interest rates of such assets both on a short term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable rate debt may decrease in the event of a substantial increase in market interest rates. 36 MARKET RISK DISCLOSURES ON FINANCIAL INSTRUMENTS The table below provides information as of June 30, 1997 about the Bank's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The data in this table may not be consistent with the amounts in the preceding table which represents amounts by the repricing date or maturity date (whichever occurs sooner) adjusted by estimates such as mortgage prepayments and deposit decay or early withdrawal rates.
BY EXPECTED MATURITY DATE ------------------------------------------------------------------------ YEAR ENDED JUNE 30 ------------------------------------------------------------------------ AFTER FAIR 1998 1999 2000 2001 2002 2002 TOTAL VALUE -------- ------- ------ ------ ------- -------- -------- -------- (DOLLARS IN THOUSANDS) INVESTMENT SECURITIES Amounts maturing: Fixed rate............. $ 3,817 $ 4,689 $ -- $ -- $ -- $ -- $ 8,506 $ 8,498 Weighted average interest rate......... 5.87% 5.83% 5.85% MORTGAGE BACKED SECURITIES Amounts maturing: Fixed rate............. $ -- $ -- $ -- $ 23 $ -- $ 5,101 $ 5,124 $ 5,343 Weighted average interest rate......... 8.50% 8.30% 8.30% Adjustable rate........ -- -- -- -- -- 35 35 37 Weighted average interest rate......... 8.28% 5.85% -------- ------- ------ ------ ------- -------- -------- -------- Totals................ $ -- $ -- $ -- $ 23 $ -- $ 5,136 $ 5,159 $ 5,380 8.50% 8.30% 8.30% LOANS Amounts maturing Fixed rate............. $ 8,373 $ 1,910 $1,641 $ 930 $ 7,967 $ 86,982 $107,803 $ 98,896 Weighted average interest rate......... 8.94% 8.93% 9.15% 9.31% 8.90% 8.59% 8.66% Adjustable rate........ 29,351 5,908 1,001 2,704 3,913 57,513 100,390 110,948 Weighted average interest rate......... 9.62% 9.05% 9.48% 9.67% 9.01% 8.69% 9.03% -------- ------- ------ ------ ------- -------- -------- -------- Totals................ $ 37,724 $ 7,818 $2,642 $3,634 $11,880 $144,495 $208,193 $209,845 9.47% 9.02% 9.27% 9.57% 8.94% 8.63% 8.84% CERTIFICATES OF DEPOSIT Amounts maturing: Fixed rate............. $113,806 $10,437 $2,299 $ 61 $ 69 $ 109 $126,781 $126,568 Weighted average interest rate......... 5.46% 5.56% 5.75% 5.35% 5.14% 6.60% 5.47%
IMPACT OF INFLATION AND CHANGING PRICES The primary impact of inflation on the Bank's operations is increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Statements Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly-held common stock or potential common stock. It replaces the presentation of primary EPS with a presentation of basis EPS and requires the dual presentation of basic and diluted EPS on the fact of the income statement. SFAS No. 128 is effective for the financial statements for the periods ending after December 15, 1997. SFAS No. 128 requires restatement of all prior period EPS data presented. The impact of its adoption is not expected to be material to the Company. 37 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting comprehensive income and its components (revenues, expenses, gains and losses) in a full set of financial statements. This Statement requires that the Bank (a) classify items of other comprehensive income by their nature in its financial statements and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. This Statement is effective for the year ending June 30, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS 131 requires public companies to report financial and descriptive information about its operating segments. Operating segments are components of a business about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The adoption of SFAS 131 is required for the fiscal year ended June 30, 1999 and the Bank is currently evaluating the effect of this Statement. On January 28, 1997, the SEC amended their rules and regulations to require public companies to provide enhanced descriptions of accounting policies for derivative financial instruments and derivative commodity instruments in the footnotes to their financial statements. The accounting policy requirement became effective for all filings that include financial statements for periods ending after June 15, 1997. The Bank had no derivative financial instruments or derivative commodity instruments at June 30,1997 or at any time during the three year period then ended. The Bank believes that it is in compliance with this amended rule. BUSINESS OF THE COMPANY GENERAL The Company was organized as a Washington business corporation at the direction of the Board of Directors of the Bank in August 1997 for the purpose of becoming a holding company for the Bank upon completion of the Conversion. The Company has filed an application with the Federal Reserve Bank of San Francisco to become a bank holding company and for approval to acquire the Bank. Immediately following the Conversion, the only significant assets of the Company will be the capital stock of the Bank, that portion of the net proceeds of the Offerings to be retained by the Company and a note receivable from the ESOP evidencing a loan from the Company to fund the Bank's ESOP. See "Use of Proceeds." Management believes that the holding company structure and proceeds of the Offerings may facilitate possible future acquisitions of other financial institutions, such as commercial banks or savings institutions, or branches of other financial institutions and thereby further expansion into existing and new market areas. The holding company structure will also provide increased flexibility to the Company to diversify into a variety of banking- related activities and to repurchase its stock. BUSINESS Prior to the Conversion, the Company will not engage in any significant operations. Upon completion of the Conversion, the Company's sole business activity will be the ownership of the stock of the Bank. Following the Conversion, the Company will be engaged in the business of directing, planning and coordinating the business activities of the Bank. In the future, the Company may acquire or organize other operating subsidiaries, including other financial institutions, although there are no current plans, arrangements, agreements or understandings, written or oral, to do so. Initially, the Company will neither own nor lease any property but will instead use the premises, equipment and furniture of the Bank with the payment of appropriate rental fees in accordance with applicable laws and regulations. Since the Company will only hold the capital stock of the Bank, the competitive conditions applicable to the Company will be the same as those confronting the Bank. See "Business of the Bank--Competition." 38 BUSINESS OF THE BANK GENERAL The Bank is a state-chartered stock savings bank headquartered in Olympia, Washington, the state capital of Washington. The Bank was originally chartered in 1927 and since 1935 its savings accounts have been federally insured. At June 30, 1997, the Bank had $242.2 million of total assets, $214.5 million of total liabilities, including $209.8 million of deposits, and $27.7 million of stockholders' equity. The Bank presently has ten full service offices in its market areas of Thurston, Pierce and Mason Counties. IMPLEMENTATION OF GROWTH STRATEGY Geographic and Product Expansion. Since the end of fiscal 1994, the Bank has doubled its number of offices, to ten full service locations. New branches were opened in the West Olympia and Indian Summer areas of Thurston County in fiscal 1995, and an office was opened in Lakewood, Pierce County, in fiscal 1996. In October 1996, an office was established in Tacoma, Pierce County, and the tenth office was opened, in downtown Tacoma, in the Spring of 1997. During the last four years, the Bank has constructed new buildings in Lacey, Thurston County, and Shelton, Mason County, to replace existing branch buildings and to better service customers in these markets. The Bank has installed Automated Teller Machines at six of its offices. Concurrent with geographic expansion, the Bank has (i) developed business checking accounts and commercial lending products and other services for businesses and high net worth individuals; (ii) introduced Visa(TM) debit and credit cards; (iii) installed an automated voice response system for customer account inquiries and (iv) developed products to assist realtors and potential borrowers to obtain information about loan programs and qualifications. To accommodate new products and to improve internal operating and reporting, the Bank converted to a new data processing system with a data service bureau and installed a personal computer network. Loan Portfolio Diversification. Since initiating its expansion activities, the Bank has supplemented its traditional mortgage loan products with an increased emphasis on variable interest rate commercial loans. Total loans increased to $208.2 million at June 30, 1997 from $130.4 million at June 30, 1993, commercial loans increased to $39.4 million, or 18.95% of total loans, from $1.2 million, or 0.92% of total loans at June 30, 1993. One- to four- family residential loans increased in amounts outstanding but decreased to 49.68% from 56.29% of total loans, and multi-family and commercial real estate loans similarly increased in amounts outstanding while decreasing to 24.60% from 30.97% of total loans during that period. Most of the loans categorized by the Bank as commercial business loans are collateralized by real estate, but repayment is expected from a source other than operations or sale of the real estate. See "--Lending Activities." Development of Relationship Banking. In fiscal 1994, the Bank initiated efforts to develop a business banking department under the direction of a senior officer with commercial banking experience in Thurston County. The new department concentrated its efforts on development of expanded lending and deposit relationships with existing and new customers of the Bank in Mason and Thurston counties. In June 1996, the Bank hired a former south Puget Sound Regional Manager for a large commercial bank as Senior Vice President--Loan Administration. The management addition was made for the purpose of enhancing the Bank's relationship banking capacity and to establish a commercial banking presence in Pierce County. Since that time, the Bank has also hired six additional lending officers who have experience lending to small businesses and individuals in the Pierce County market. While the banking market is very competitive, recent mergers of regional commercial banks with significant presence in the Bank's principal market areas have, in management's view, provided a greater opportunity for community banks to fill a personal service niche which the Bank believes has been created by the mergers. Management believes that the Bank can develop a larger market share in the Pierce County market while continuing to expand in the Thurston and Mason County markets, by delivering an efficient and personalized banking service and developing relationships with small businesses and high net worth individuals who are seeking a relationship with a responsive, service oriented provider of financial products and services. 39 Maintenance of Asset Quality. While pursuing its growth strategy, the Bank will continue its policy of seeking to employ consistent underwriting and loan monitoring procedures, in order to maintain asset quality. The Bank's loan portfolio grew 59.6% between June 30, 1993 and June 30, 1997. Nonperforming loans remained at less than $436,000 during the four year period, as did total nonperforming assets. At June 30, 1997, nonperforming loans constituted 0.06% of the Bank's total loans and the allowance for loan losses to nonperforming loans was 2069.17%. The Bank's main office is located at 201 5th Avenue S.W., Olympia, Washington 98501 and its telephone number is (360) 943-1500. MARKET AREAS The Bank has been, and intends to continue to be, a community-oriented financial institution offering financial services to meet the needs of the communities it serves. Headquartered in Olympia, Thurston County, Washington, the Bank conducts business from ten full service offices, five in Thurston County, one in Mason County and four in Pierce County. The Bank has two mortgage origination offices, one in Thurston and one in Pierce County, both of which operate within banking offices. Olympia enjoys a stable economic climate, largely due to government employment and military personnel, both retired and active. State government is by far the largest and most important employer in Thurston County, employing over 40% of the total county work force. Federal, county, and municipal government comprise nearly 50% of the county's employment base. Fort Lewis and McChord Air Force Base are both located in the Bank's primary market area. Thurston County has a population of 197,600 as of April 1, 1997 and was one of the fastest growing metropolitan counties in the state of Washington as reported in the national 1990 census. Thurston County's growth has been spurred by an increase in government employment in the 1980's and the expansion of a large retirement population, including many former military personnel. Pierce County, where Tacoma is located, has a population of 674,300 as of April 1, 1997. Its economy is well-diversified, with the principal industry being aerospace, shipping, military-related government employment, agriculture and forest products. Pierce County's economy is expected to benefit over the next few years because of Intel Corporation's decision to build a computer chip facility in DuPont and the expansion of the Matsushita semiconductor plant in Puyallup, east of Tacoma. The Puget Sound Economic Forecaster, a regional publication providing economic forecasts and commentary, predicts that Pierce County will likely have the strongest economic performance in the Puget Sound region through 1999. Forbes magazine recently published its prediction that the Tacoma area would be among the top twenty-five cities in the United States in terms of job growth, especially in the areas of computers and semiconductors. The Bank's market area also includes Shelton and the surrounding Mason County area. The population of Mason County is approximately 47,900 and its economy is substantially dependent upon timber and the forest products industries. LENDING ACTIVITIES General. The Bank traditionally has originated one- to four-family mortgage loans and, to a lesser extent, multifamily, commercial real estate and construction loans. In fiscal 1994, the Bank implemented a growth strategy which is intended to broaden its products and services from traditional thrift products and services to those more closely related to commercial banking. In this regard, in 1993, the Bank began to emphasize relationship banking, in order to improve customer loyalty through maximizing the number of lending and deposit relationships with a customer. The focus also included expanding the Bank's commercial business lending capabilities. In early fiscal 1997, several commercial loan officers, experienced in the Puget Sound region, were hired to continue the expansion. The loan officers, in addition to bringing to the Bank some previous 40 customer relationships, have taken advantage of the opportunity to attract customers of banks that have been acquired in the recent wave of mergers with out-of-area acquirors. Such customers often perceive that non-local decision makers do not provide the efficient, personal service they were used to receiving. It is possible that the large out-of-area acquirors will begin to better serve small business and professionals. Heritage Bank anticipates, however, that it will, by then, have more fully developed its reputation as a commercial lender. As the Bank pursues its strategy, management is continuing to emphasize strong asset quality. The Bank's overall lending operations are guided by loan policies which are reviewed and approved annually by its Board of Directors, and which outline the basic policies and procedures by which lending operations are conducted. Generally, the policies address the types of loans, underwriting and collateral requirements, terms, interest rate and yield considerations, and compliance with laws and regulations. The Bank supplements its own supervision of the loan underwriting and approval process with periodic but informal loan audits by an experienced internal loan quality specialist, who reviews credit quality, loan documentation and compliance with laws and regulations. During the loan process, the Bank assesses both the borrower's ability to repay the loan and the adequacy of the underlying collateral. Potential residential borrowers complete an application which is submitted to a loan officer of the Bank. As part of the loan application process, qualified independent fee appraisers inspect and appraise the property which is offered to secure the loan. The Bank also obtains information concerning the income, financial condition, employment, and credit history of the applicant. The Bank's loan officers and the loan underwriting department analyze the loan application and the property to be used as collateral. Loans to be sold on the secondary market are approved or denied based on guidelines established by secondary market agencies such as the Federal National Mortgage Association ("FNMA"), the Federal Housing Authority (the "FHA") or the Veteran's Administration (the "VA"). Loans to be placed in the portfolio are approved or denied by a loan committee consisting of the loan officer and the Chief Executive Officer. Loan requests for less than $1.5 million and where the borrower's total bank liability is less than $1.5 million may be approved by the Chief Executive Officer. Loan requests for over $1.5 million or any request where the borrower's total bank liabilities exceeds $1.5 million must be approved by the Chief Executive Officer and either the Board of Directors or the Board Executive Committee. 41 The following table sets forth at the dates indicated the Bank's loan portfolio composition by type of loan. These balances are net of deferred loan fees and prior to deduction for the allowance for loan losses.
AT JUNE 30 ---------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------------- ---------------- ---------------- ---------------- ---------------- % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Commercial.............. $ 1,203 0.92% $ 4,902 3.80% $ 9,983 6.31% $ 18,269 10.82% $ 39,445 18.95% Real estate mortgages One- to four-family residential(1)........ 73,431 56.29 70,019 54.25 90,985 57.52 93,157 55.15 103,439 49.68 Five or more family residential and commercial properties............ 40,395 30.97 39,731 30.78 38,494 24.33 42,560 25.20 51,209 24.60 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total real estate mortgages............. 113,826 87.26 109,750 85.03 129,479 81.85 135,717 80.35 154,648 74.28 Real estate construction One- to four-family residential........... 12,115 9.29 13,251 10.26 16,504 10.43 14,509 8.59 12,683 6.09 Five or more family residential and commercial properties............ 2,970 2.28 -- -- 1,538 0.97 393 0.23 1,029 0.50 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total real estate construction(2)....... 15,085 11.57 13,251 10.26 18,042 11.40 14,902 8.82 13,712 6.59 Consumer................ 997 0.76 1,934 1.50 1,812 1.15 1,105 0.65 1,467 0.70 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Gross loans............. $131,111 100.51% $129,837 100.59% $159,316 100.71% $169,993 100.64% $209,272 100.52% Less deferred loan fees................... (662) (0.51) (763) (0.59) (1,126) (0.71) (1,090) (0.64) (1,079) (0.52) -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans............. $130,449 100.00% $129,074 100.00% $158,190 100.00% $168,903 100.00% $208,193 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- -------- (1) Includes loans held for sale of $7,435, $4,110, $5,944, $5,286 and $6,322, respectively. (2) Balances are net of undisbursed loan proceeds. The following table presents at June 30, 1997, (i) the aggregate maturities of loans in the named categories of the Bank's loan portfolio and (ii) the aggregate amounts of fixed rate and variable or adjustable rate loans in the named categories that mature after one year:
MATURING ------------------------------- WITHIN 1-5 AFTER 1 YEAR YEARS 5 YEARS TOTAL ------- ------- ------- ------- (IN THOUSANDS) Commercial.................................. $17,341 $ 8,791 $13,313 $39,445 Real estate construction.................... 10,718 2,364 630 13,712 ------- ------- ------- ------- Total..................................... $28,059 $11,155 $13,943 $53,157 ======= ======= ======= ======= Fixed rate loans............................ $ 6,444 $ 5,395 $11,839 Variable or adjustable rate loans........... 4,711 8,548 13,259 ------- ------- ------- Total..................................... $11,155 $13,943 $25,098 ======= ======= =======
REAL ESTATE LENDING One- to Four-Family Residential Real Estate Lending. The majority of residential loans have been originated through the Bank and are secured by one- to four-family residences located in the Bank's primary market area. The Bank's underwriting standards require that one- to four-family portfolio loans generally be owner-occupied and that loan amounts not exceed 80% (90% with private mortgage insurance) of the current appraised value or cost, whichever is lower, of the underlying collateral. Terms typically range from 15 to 30 years. The Bank offers both fixed-rate mortgages and adjustable rate mortgages ("ARMs"), with repricing based on a Treasury Bill or other index. The Bank's ability to generate volume in ARMs however, is largely a function 42 of consumer preference and the interest rate environment. The Bank's current policy is not to make ARMs with discounted initial interest rates (i.e., "teasers"). The Bank generally sells all government guaranteed mortgages both fixed rate and adjustable rate. In addition, in connection with management's strategies to control the Bank's interest rate sensitivity position, the Bank determines from time to time to what extent it will retain or sell other ARMs and other fixed rate mortgages. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management." At June 30, 1997, the Bank had $103.4 million, or 49.7%, of the Bank's total loans receivable, in one-to-four family residential mortgage loans of which $80.3 million, or 77.6% of this category, are at fixed interest rates. Multifamily and Commercial Real Estate Lending. The Bank has made, and anticipates continuing to make, on a selective basis, multifamily and commercial real estate loans in the Bank's primary market areas. Commercial real estate loans are made for small shopping centers, warehouses and professional offices, generally owner occupied. Cash flow coverage to debt servicing requirements is generally 1.2 times or more. The Bank's underwriting standards generally require that the loan-to-value ratio for multifamily and commercial real estate loans not exceed 80% of appraised value or cost, whichever is lower. At June 30, 1997, the Bank had $51.2 million, or 24.6% of the Bank's total loans receivable, in multifamily and commercial real estate loans secured by properties located primarily in the Bank's primary market area. Of the $51.2 million, $9.9 million, or 19.3% of this category, are at fixed interest rates. Multifamily and commercial real estate loans generally range in principal balance from $1.0 million to $2.0 million. At June 30, 1997, the largest such loan had an outstanding principal balance of $3.1 million and was secured by a 144 unit apartment complex located in the Bank's primary market area. At June 30, 1997, this loan was performing according to its terms. Multifamily and commercial real estate mortgage lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four- family residential mortgage loans. Because payments on loans secured by multifamily and commercial real estate properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also generally obtains personal guarantees from financially capable borrowers based on a review of personal financial statements. Construction Loans. The Bank originates one- to four-family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders for the construction of pre-sold homes and speculative residential construction. The Bank loans to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management understands and in which it is comfortable with the economic conditions. The Bank further endeavors to limit its construction lending risk through adherence to strict underwriting procedures. Loans to one builder are generally limited on a case-by-case basis with unsold home limits based on builder strengths. Heritage Bank's underwriting standards require that the loan-to-value ratio for pre-sold homes and speculative residential construction not exceed 80% of appraised value or builder's cost less overhead, whichever is less. Speculative construction and land development loans are generally priced with a variable rate of interest using the prime rate as the index. The Bank generally requires builders to have some tangible form of equity in each construction project. That objective may be achieved by restricting draws to less than the acquisition cost of land plus a percentage of the builder's costs less overhead incurred to date, requiring that loan fees be paid from outside funds, requiring the builder to place equity funds in a construction loan account or by not reimbursing fees incurred by the builder such as legal fees, architectural fees, and building permits. Also, the Bank generally requires prompt and thorough documentation of all draw requests and utilizes outside inspectors to inspect the project prior to paying any draw requests from builders. 43 Construction lending affords the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single- family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated costs of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction cost proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, the Bank may be confronted with a project whose value is insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder's ability to sell the property prior to the time that the construction loan is due. At June 30, 1997, the Bank had $13.7 million, or 6.6% of the Bank's total loans receivable, in real estate construction loans. The majority of these construction loans, $12.7 million, are for one-to-four family residential properties. Of the $13.7 million total, most of these loans have variable interest rates and only $2.8 million have fixed interest rates. The Bank has reduced its activity in residential construction lending with originations of $16.3 million for fiscal 1997, $20.5 million in fiscal 1996 and $21.3 million for fiscal 1995. The reductions reflect changes in market conditions rather than a decision to deemphasize residential construction lending. COMMERCIAL BUSINESS LENDING The Bank offers commercial loans to sole proprietorships, partnerships and corporations in real estate related industries and firms in the health care, legal and other professions. The types of commercial loans offered are business lines of credit which are secured by real estate or securities, business term loans secured by real estate for either working capital or lot acquisition, Small Business Association ("SBA") loans and unsecured business loans. Unsecured credit is reserved for business customers with impeccable character and demonstrated capability to repay. All unsecured loans in excess of $150,000 require the approval of the Chief Executive Officer. All unsecured loans in excess of $500,000 require approval of the Board of Directors. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although the Bank's commercial business loans are often collateralized by real estate, the decision to grant a commercial business loan depends primarily on the creditworthiness and cash flow of the borrower (and any guarantors), while liquidation of collateral is a secondary source of repayment. As of June 30, 1997, the Bank had $39.4 million, or 18.9% of the Bank's total loans receivable, in commercial business loans. Collateral for these loans is generally owner occupied business or residential real estate. The Bank generally limits its exposure to any one borrowing relationship to $1.5 million, though loan relationships up to $4.0 million have been approved. CONSUMER LENDING The Bank does not actively solicit consumer loans, which are offered primarily as a convenience to existing customers. While these types of loans are primarily secured by real estate, they also include savings and certificate of deposit loans, vehicle and recreational vehicle loans, stock secured loans and secured and unsecured lines of credit. 44 ORIGINATION AND SALES OF LOANS The Bank originates real estate and other loans at each of the Bank's offices with approximately two-thirds of the residential mortgage volumes generated from its two loan origination offices. Walk-in customers and referrals from real estate brokers are important sources of loan originations. Consistent with the Bank's asset/liability management strategy, the Bank sells a majority of its fixed rate and ARM residential mortgage loans into the secondary market. Commitments to sell mortgage loans generally are made during the period between the taking of the loan application and the closing of the mortgage loan. The timing of making these sale commitments is dependent upon the timing of the borrower's election to lock-in the mortgage interest rate and fees prior to loan closing. Most of these sale commitments are made on a "best efforts" basis whereby the Bank is only obligated to sell the mortgage if the mortgage loan is approved and closed by the Bank. When the Bank sells mortgage loans, it typically also sells the servicing of the loans (i.e., collection of principal and interest payments). The Bank serviced $23.3 million and $19.2 million in loans for others as of June 30, 1996 and 1997, respectively. The Bank received fee income of $75,000 during fiscal 1997 for these servicing activities. The following table presents summary information concerning the Bank's origination and sale of residential mortgage loans and the gains achieved on such activities.
YEAR ENDED JUNE 30, ------------------------- 1995 1996 1997 ------- -------- -------- (DOLLARS IN THOUSANDS) One- to four-family residential mortgage loans: Originated..................................... $93,564 $140,232 $104,145 Sold........................................... 63,261 119,544 87,003 Gains on sales of loans, net..................... $ 1,665 $ 3,049 $ 2,006
The decrease in volume of originations of one- to four-family residential mortgage loans in 1997 compared with 1996 was due to weakness in the residential mortgage market and the loss of two key producers by the end of fiscal 1996. The Bank has a minimal amount of purchased loans and loan participations. COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business, the Bank enters into various types of transactions that include commitments to extend credit that are not included in the Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The Bank's exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. At June 30, 1997, the Bank had outstanding commitments to extend credit, including letters of credit, in the amount of $17.8 million. DELINQUENCIES AND NONPERFORMING ASSETS Delinquency Procedures. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the delinquency to be cured by contacting the borrower. In the case of loans other than commercial business loans, a late notice is sent 15 days after the due date. If the delinquency is not cured by the 30th day, a second notice is mailed and, if appropriate, the borrower is contacted by telephone. Additional written and verbal contacts are made with the borrower between 60 and 90 days after the due date. In the event a real estate loan payment is past due for 45 days or more, loan servicing personnel perform an in-depth review of the loan status, the condition of the property, and the circumstances of the borrower. Based upon the results of its review, the Bank may negotiate and accept a repayment program with the borrower, accept a voluntary deed in lieu of foreclosure or, when deemed necessary, initiate foreclosure proceedings. If foreclosed 45 on, real property is sold at a public sale and the Bank may bid on the property to protect its interest. A decision as to whether and when to initiate foreclosure proceedings is made by the loan committee and is based on such factors as the amount of the outstanding loan in relation to the value of the property securing the original indebtedness, the extent of the delinquency, and the borrower's ability and willingness to cooperate in curing the delinquency. Real estate acquired by the Bank by deed in lieu of foreclosure or as a result of foreclosure is classified as real estate owned ("REO") until it is sold. When property is acquired, it is recorded at the lower of cost or estimated fair value at the date of acquisition, not to exceed net realizable value, and any write-down resulting therefrom is charged to the allowance for loan losses. Upon acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of the property's net realizable value. The Bank considers loans as in-substance foreclosed if the borrower has little or no equity in the property based upon its estimated fair value, if repayment can be expected only to come from operation or sale of the collateral, and if the borrower has effectively abandoned control of the collateral or has continued to retain control of the collateral but because of the borrower's current financial status, it is doubtful that the borrower will be able to repay the loan in the foreseeable future. Delinquencies in the commercial business loan portfolio are handled on a case-by-case basis. Generally, notices are sent and personal contact is made with the borrower when the loan is 15 days past due. Loan officers are responsible for collecting loans they originate or which are assigned to them. Depending on the nature of the loan and the type of collateral securing the loan, the Bank may negotiate and accept a modified payment program or take such other actions as the circumstances warrant. Classification of Assets. Federal regulations require that the Bank classify its assets on a regular basis. In addition, in connection with examinations of the Bank, the Division and FDIC examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: Substandard, Doubtful, and Loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as Loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Assets classified as Substandard or Doubtful require the institution to establish prudent general allowances for loan losses. If an asset or portion thereof is classified as Loss, the institution must charge off such amount. In March 1997, the FDIC performed its most recent examination of the Bank and the regulators' assessment of the Bank's classified assets is consistent with the Bank's internal classifications. 46 Nonperforming Assets. Nonperforming assets consist of nonaccrual loans, restructured loans and real estate owned. The following table sets forth at the dates indicated information with respect to nonaccrual loans, restructured loans and real estate owned of the Bank.
AT JUNE 30, ------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual loans................. $ 97 $ 96 $ 96 $ 51 $ 133 Restructured loans............... -- -- -- -- -- ------- ------- ------- ------- ------- Total nonperforming loans...... 97 96 96 51 133 Real estate owned................ 157 -- -- -- -- ------- ------- ------- ------- ------- Total nonperforming assets..... $ 254 $ 96 $ 96 $ 51 $ 133 ======= ======= ======= ======= ======= Accruing loans past due 90 days or more......................... -- -- -- -- -- Potential problem loans.......... $ 3,662 $ 3,568 $ 3,718 $ 1,613 $ 68 Allowance for loan losses........ 1,658 1,705 1,720 1,873 2,752 Nonperforming loans to loans..... 0.07% 0.07% 0.06% 0.03% 0.06% Allowance for loan losses to loans........................... 1.27% 1.32% 1.09% 1.11% 1.32% Allowance for loan losses to nonperforming loans............. 1709.28% 1776.04% 1791.67% 3672.55% 2069.17% Nonperforming assets to total assets.......................... 0.14% 0.05% 0.05% 0.02% 0.05%
Nonaccrual Loans. The Bank's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on nonaccrual status when there are serious doubts about the collectibility of principal or interest. The Bank's policy is to place a loan on nonaccrual status when the loan becomes past due for 90 days or more. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. At June 30, 1997, the Bank had $133,000 of nonaccrual loans which represents one single family mortgage. Interest on nonaccrual loans foregone was approximately $990 for the year ended June 30, 1997. There was no interest foregone on nonaccrual loans in fiscal 1995 and 1996. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate by management to provide for reasonably foreseeable loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral, holding and disposal costs and costs of capital. The allowance is increased by provisions for loan losses charged to operations and reduced by loans charged off, net of recoveries. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance. 47 The following table sets forth for the periods indicated information regarding changes in the Bank's allowance for loan losses:
YEAR ENDED JUNE 30, ------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total loans outstanding at end of period(1)........... $130,449 $129,074 $158,190 $168,903 $208,193 Average loans outstanding during period.............. 125,829 123,800 144,266 161,501 184,617 Allowance balance at beginning of period........ 2,511 1,658 1,705 1,720 1,873 Provision for loan losses... 926 -- -- -- (270) Charge-offs: Real estate(2)............ (1,866) -- -- -- -- Commercial................ -- -- -- -- (3) Consumer.................. -- -- -- -- -- -------- -------- -------- -------- -------- Total charge-offs....... (1,866) -- -- -- (3) -------- -------- -------- -------- -------- Recoveries: Real estate(2)............ 87 47 15 153 1,152 Commercial................ -- -- -- -- -- Consumer.................. -- -- -- -- -- -------- -------- -------- -------- -------- Total recoveries........ 87 47 15 153 1,152 -------- -------- -------- -------- -------- Net (charge-offs) recoveries........... (1,779) 47 15 153 1,149 -------- -------- -------- -------- -------- Allowance balance at end of period..................... $ 1,658 $ 1,705 $ 1,720 $ 1,873 $ 2,752 ======== ======== ======== ======== ======== Ratio of net (charge-offs) recoveries during period to average loans outstanding.. (1.41)% 0.04% 0.01% 0.09% 0.62% ======== ======== ======== ======== ========
- -------- (1) Includes loans held for sale. (2) During this five year period, all of the charge-offs and recoveries shown under the real estate category relate to real estate mortgages. None of the above activity related to real estate construction loans. The following table shows the allocation of the allowance for loan losses for the last five years. The allocation is based upon an evaluation of defined loan problems, historical ratios of loan losses for the Bank and industry wide and other factors which may affect future loan losses in the categories shown below:
AT JUNE 30 ------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 --------------- --------------- --------------- --------------- --------------- % OF % OF % OF %OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) BALANCE APPLICABLE TO: Commercial.............. $ 34 0.9% $ 144 3.8% $ 200 6.3% $ 446 10.8% $1,094 18.8% Real estate mortgages: One- to four-family residential........... 100 56.0 92 53.9 115 57.1 110 54.8 128 49.4 Five or more family residential and commercial properties............ 1,190 30.8 1,120 30.6 1,136 24.2 959 25.0 748 24.5 Real estate construction: One- to four-family residential........... 175 9.2 248 10.2 182 10.4 239 8.5 197 6.1 Five or more family residential and commercial properties............ 89 2.3 -- 0.0 29 0.9 12 0.2 31 0.5 Consumer................ 6 0.8 13 1.5 10 1.1 3 0.7 7 0.7 Unallocated............. 64 88 48 103 546 ------ ------ ------ ------ ------ Total.................. $1,658 100.0% $1,705 100.0% $1,720 100.0% $1,873 100.0% $2,752 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- -------- (1) Represents the total of all outstanding loans in each category as a percent of total loans outstanding. 48 INVESTMENT ACTIVITIES Investment securities are those securities which the Bank has the ability to hold to maturity and the intent to hold on a long-term basis or until maturity. Events which may be reasonably anticipated are considered when determining the Bank's intent to hold investment securities for the foreseeable future. Investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. At June 30, 1997, the Bank had no securities classified as available for sale or trading. The investment policy of the Bank, which is established by the Board of Directors and monitored by the Audit and Finance Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. This policy dictates that investments will be made with the intent of holding them to maturity. The Bank's policy permits investment in various types of liquid assets permissible under applicable regulations, which include U.S. Treasury obligations, U.S. Government agency obligations, certain certificates of deposit of insured banks, FHLB stock and federal funds. Investment in non-investment grade bonds is not permitted under this policy. The following table summarizes the amortized cost, gross unrealized gains and losses and the resulting fair value of securities held for investment:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- (IN THOUSANDS) June 30, 1995: U.S. Government and its agencies...... $18,094 $ 24 $ (70) $18,048 Mortgage backed securities............ 7,465 314 (5) 7,774 ------- ---- ----- ------- Total held for investment........... 25,559 338 (75) 25,822 June 30, 1996: U.S. Government and its agencies...... 15,292 5 (127) 15,170 Mortgage backed securities............ 5,979 159 (2) 6,136 ------- ---- ----- ------- Total held for investment........... 21,271 164 (129) 21,306 June 30, 1997: U.S. Government and its agencies...... 8,506 9 (17) 8,498 Mortgage backed securities............ 5,159 224 (3) 5,380 ------- ---- ----- ------- Total held for investment........... $13,665 $233 $ (20) $13,878 ======= ==== ===== =======
For the above indicated dates, the Bank had no securities available for sale or trading. The following table sets forth certain information regarding the carrying value, weighted average yields and maturities or periods to repricing of the Bank's investment securities and mortgage backed securities at June 30, 1997.
US GOVERNMENT AND ITS MORTGAGE BACKED AGENCIES SECURITIES TOTAL ---------------------- ---------------------- ----------------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD --------- ------ ----- --------- ------ ----- --------- ------- ----- (DOLLARS IN THOUSANDS) Less than one year...... $3,817 $3,820 5.87% $ 35 $ 37 8.28% $ 3,851 $ 3,857 5.90% One to five years....... 4,689 4,678 5.83 23 24 8.50 4,712 4,702 5.84 Five to ten years....... -- -- -- 207 209 7.92 207 209 7.92 After ten years......... -- -- -- 4,894 5,110 8.32 4,894 5,110 8.32 ------ ------ ------ ------ ------- ------- Total................. $8,506 $8,498 $5,159 $5,380 $13,665 $13,878 ====== ====== ====== ====== ======= =======
49 The Bank held $1.5 million of FHLB stock at June 30, 1997. The stock has no contractual maturity and amounts in excess of the required minimum for FHLB membership may be redeemed at par. At June 30, 1997, the Bank was required to maintain an investment in the stock of FHLB of Seattle of at least $1.4 million. DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS General. The Bank's primary sources of funds are customer deposits and loan repayments. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and unscheduled loan prepayments, which are influenced significantly by general interest rate levels, interest rates available on other investments, competition, economic condition and other factors, are not. Although the Bank's deposit balances have been increasing, such balances have been influenced in the past by adverse changes in the thrift industry and may be affected by such developments in the future. Borrowings may be used on a short term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. Deposit Activities. The Bank offers a variety of accounts for depositors designed to attract both short term and long term deposits. These accounts include certificates of deposit ("CDs"), regular savings accounts, money market accounts, checking and negotiable order of withdrawal ("NOW") accounts, and individual retirement accounts ("IRAs"). These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. At June 30, 1997, the Bank had no brokered deposits. The more significant deposit accounts offered by Heritage Bank are described below. CERTIFICATES OF DEPOSIT. The Bank offers several types of CDs with maturities ranging from 30 days to five years and which require a minimum deposit of $100. In addition, the Bank offers a CD that has a maturity of four to 11 months and a minimum deposit of $2,500 and permits additional deposits at the initial rate throughout the certificate term. Interest is credited quarterly or at maturity. Finally, jumbo CDs are offered in amounts of $100,000 or more for terms of 30 days to 12 months. The jumbo CDs pay simple interest and are credited either quarterly or at maturity. REGULAR SAVINGS ACCOUNTS. The Bank offers savings accounts that allow for unlimited deposits and withdrawals, provided that a $100 minimum balance is maintained. Interest is compounded daily and credited quarterly. MONEY MARKET ACCOUNTS. Money market accounts pay a variable interest rate that is tiered depending on the balance maintained in the account. Minimum opening balances vary. Interest is compounded daily and paid monthly. CHECKING AND NOW ACCOUNTS. Checking and NOW accounts are non-interest and interest bearing and may be charged service fees based on activity and balances. NOW accounts pay interest, but require a higher minimum balance to avoid services charges. INDIVIDUAL RETIREMENT ACCOUNTS. IRAs permit contributions of up to $2,000 per year and pay interest at fixed rates. Maturities are available from one to five years and interest is compounded daily and credited quarterly. 50 SOURCES OF FUNDS Deposit Activities. The following table sets forth for the periods indicated the average balances outstanding and the weighted average interest rates for each major category of deposits:
YEAR ENDED JUNE 30 ---------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------------ ------------------ ------------------ ------------------ ------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE BALANCE(1) PAID BALANCE(1) PAID BALANCE(1) PAID BALANCE(1) PAID BALANCE(1) PAID ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- (DOLLARS IN THOUSANDS) Interest bearing demand and money market Accounts............... $ 27,018 3.26% $ 34,932 2.99% $ 40,594 3.19% $ 36,930 3.15% $ 42,271 3.18% Savings................. 27,283 3.63 31,520 3.26 28,178 3.29 28,407 3.63 29,703 3.55 Certificates of deposit................ 95,622 5.32 88,904 4.68 89,602 4.93 109,559 5.78 119,133 5.54 Total interest bearing deposits.............. 149,923 4.64 155,355 4.02 158,374 4.19 174,895 4.88 191,107 4.71 Demand and other noninterest bearing deposits............... 4,256 6,183 6,001 6,537 7,955 -------- -------- -------- -------- -------- Total deposits......... $154,179 4.51% $161,538 3.86% $164,375 4.04% $181,432 4.70% $199,063 4.52% ======== ======== ======== ======== ========
- -------- (1) Average balances were calculated using average daily balances. The following table sets forth for the periods indicated the change in the balances of deposits during the year and the impact of interest credited thereon.
YEAR ENDED JUNE 30 ------------------------- 1995 1996 1997 ------- ------- ------- (IN THOUSANDS) Net increase in deposits........................ $ 8,875 $16,322 $18,662 Less: Interest credited....................... (6,639) (8,528) (8,999) ------- ------- ------- Net increase before interest credited........... $ 2,236 $ 7,794 $ 9,663 ======= ======= =======
The following table shows the amount and maturity of certificates of deposit that had balance of $100,000 or more as of June 30, 1997:
JUNE 30, 1997 -------------- (IN THOUSANDS) Remaining maturity: Three months or less...................................... $ 8,330 Over three months through six months...................... 1,670 Over six months through 12 months......................... 6,234 Over twelve months........................................ 1,748 ------- Total................................................... $17,982 =======
At June 30, 1996 and 1997 certificates of deposits with balances of $100,000 or more totaled $11.7 million and $18.0 million, respectively. In the unlikely event the Bank is liquidated after the Conversion, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the Company's stockholders. Substantially all of the Bank's depositors are residents of the State of Washington. Borrowings. Savings deposits are the primary source of funds for the Bank's lending and investment activities and for its general business purposes. The Bank has in the past, however, relied upon advances from the FHLB of Seattle to supplement its supply of lendable funds and to meet deposit withdrawal requirements. 51 The FHLB of Seattle has served as one of the Bank's secondary sources of liquidity. Advances from the FHLB of Seattle are typically secured by the Bank's first mortgage loans, and stock issued by the FHLB of Seattle, which is held by the Bank. At June 30, 1997, the Bank had advances from the FHLB of Seattle totaling $890,000. The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB's assessment of the institution's creditworthiness. Under its current credit policies, the FHLB of Seattle generally limits advances to 20.0% of a member's assets, and short term borrowings of less than one year may not exceed 10.0% of the institution's assets. The FHLB of Seattle determines specific lines of credit for each member institution. In August 1986, Heritage Capital Corporation ("HCC"), a special purpose wholly owned finance subsidiary, issued and sold $21.9 million aggregate principal amount of collateralized mortgage obligations. These bonds, including interest, were repaid in quarterly installments from principal and interest payments on the underlying collateral. In August 1995, HCC called and repaid the then remaining unpaid balance of the bonds in accordance with the terms of the indenture. HCC was then liquidated. COMPETITION The Bank competes for loans and deposits with other thrifts, commercial banks, credit unions, mortgage bankers and other institutions in the scope and type of services offered, interest rates paid on deposits, pricing of loans, and number and locations of branches, among other things. Many of these competitors have substantially greater resources than the Bank. Particularly in times of high interest rates, the Bank also faces significant competition for investors' funds from short term money market securities and other corporate and government securities. The Bank competes for loans principally through the range and quality of the services it provides, interest rates and loan fees, and the locations of its branches. The Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts and other services. Competition has intensified as a result of changes in Washington banking laws that permit (i) statewide branching of Washington-domiciled financial institutions and (ii) out-of-state holding companies to acquire Washington- based financial institutions, provided that the laws of the state in which the out-of-state institutions conduct their principal operations similarly permit a Washington-based institution to acquire financial institutions domiciled in their state. During the past several years, substantial consolidation among financial institutions in Washington has occurred. Management believes that due to this consolidation, customers in the Bank's market areas will seek a relationship with smaller, service-oriented institutions like the Bank. PROPERTIES The Company's executive offices and the main office of the Bank are located in approximately 18,000 square feet of the headquarters building and adjacent office space which is owned and located in downtown Olympia. At June 30, 1997, the Bank had five offices located in Thurston County, including the main office, all of which are owned, with one office located on leased land, one office in Shelton, Mason County, which is owned, and four offices in Tacoma and surrounding areas of Pierce County, all but one of which is owned. EMPLOYEES At June 30, 1997, the Bank had 145 full-time equivalent employees. The Bank believes that employees play a vital role in the success of a service company. None of the Bank's employees are covered by a collective bargaining agreement with the Bank and management believes that they have a good relationship with the employees. 52 SUBSIDIARIES At June 30, 1997, the Bank has one wholly-owned subsidiary, Sound Service Associates, Inc. Sound Service Associates, Inc.'s operations consist of the sale of tax-deferred annuities, mutual funds and other securities. LEGAL PROCEEDINGS Periodically and in the ordinary course of business, various claims and lawsuits are brought against the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interest, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. In the opinion of the Bank's management and outside legal counsel, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the financial position or results of operations of the Bank. FEDERAL TAXATION General. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank. The Bank has been permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. The deduction was based on either specified experience formulas or a percentage of taxable income before such deduction. The Bank used the percentage of taxable income method for the years ended June 30, 1995 and 1996. This deduction has historically been greater than the loan loss provisions recorded for financial accounting purposes. Deferred income taxes are provided on differences between the bad debt reserve for tax and financial reporting purposes only to the extent of the tax reserves arising subsequent to June 30, 1988. Savings institutions were not required to provide a deferred tax liability for the tax bad debt reserves accumulated as of June 30, 1988 which for the Bank amounted to $938,000. Starting in the fiscal year ended June 30, 1994, the Bank established and maintained a deferred income tax liability of $938,000 due to the potential recapture of the pre-1988 tax bad debt reserve which could have been triggered by the formation of the mutual holding company; a change to a commercial bank charter (which management had been contemplating); or possible legislation which was being debated in Congress. Legislation enacted in August 1996 eliminated certain conditions under which recapture of the pre-1988 additions to the tax bad debt reserve would be required. Such conditions are principally conversion to a commercial bank charter or merger with a commercial bank. The pre-1988 reserves would be required to be recaptured under certain other conditions such as payment of dividends in excess of accumulated earnings and profits or other distributions made in connection with the dissolution or liquidation of the Bank. Based on this legislation, the Bank reversed the $938,000 deferred tax liability as a reduction of Federal income tax expense during the year ended June 30, 1997. The legislation also repealed the reserve method for determining income tax deductions described above. Under the legislation, the Bank will be required to recapture the post-1988 additions to its bad debt reserve as taxable income over a six to eight year period. The Bank has provided the appropriate deferred tax liability for these post-1988 additions in the prior years so this legislation had no adverse impact on the results of operations for the year ended June 30, 1997. STATE TAXATION The State of Washington does not currently have a net income tax. A business and occupation tax based on a percentage of gross receipts is assessed on the Bank at 1.6% of gross receipts; however interest received on loans secured by first mortgages or deeds of trust on residential properties is not subject to such tax. The Bank was most recently audited in August 1995 by the Washington State Department of Revenue for the period January 1991 through September 1994. 53 MANAGEMENT The following table sets forth certain information with respect to the directors and executive officers of the Bank. The Board is presently comprised of seven members who are elected annually and until their successors are elected and qualified. Executive officers are elected to serve annually at the discretion of the Board of Directors. All persons listed below are expected to serve as the directors and executive officers of the Company and the Bank following the Conversion. DIRECTORS
DIRECTOR NAME AGE POSITION WITH BANK SINCE - ---- --- ------------------ -------- Donald V. Rhodes......... 61 Director, Chairman of the Board, 1989 President and Chief Executive Officer of the Company; Chairman of the Board, President and Chief Executive Officer of the Bank (1)(2) Lynn M. Brunton.......... 59 Director (1)(2)(3) 1990 John A. Clees............ 49 Director (1)(2)(3) 1990 Daryl D. Jensen.......... 58 Director (1)(3) 1985 H. Edward Odegard........ 66 Director (2) 1987 James P. Senna........... 62 Director 1976 Philip S. Weigand........ 59 Director (1)(2) 1985 EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS NAME AGE POSITION WITH BANK - ---- --- ------------------ John D. Parry............ 51 Executive Vice President--Administration Brian L. Vance........... 43 Executive Vice President--Loan Administration James Hastings........... 45 Senior Vice President and Treasurer Wendy K. Gauksheim....... 37 Senior Vice President--Corporate Services Officer and Corporate Secretary of the Bank
- -------- (1) Serves as a member of the Executive Committee. (2) Serves as a member of the Audit and Finance Committee. (3) Serves as a member of the Personnel and Compensation Committee. The principal occupation during the past five years of each director and executive officer of the Bank is set forth below. All directors and executive officers have held their present positions with Heritage Bank for five years unless otherwise stated. DONALD V. RHODES has been a director, President and Chief Executive Officer of the Bank since 1989. He was elected as Chairman of the Board in 1990. Since 1985, Mr. Rhodes has also served as Chairman, President and Chief Executive Officer of Washington Independent Bancshares, Inc., and as Chairman and Chief Executive Officer of that company's wholly owned subsidiary, Central Valley Bank, at June 30, 1997 a $48.6 million in assets commercial bank headquartered in Toppenish, Washington. LYNN M. BRUNTON is presently a community volunteer. As a community volunteer she serves as a member of the St. Peter Hospital Community Board and is actively involved in several local and community organizations. JOHN A. CLEES is the President of Clees Miles CPA Group, since October 1995 and was managing partner of Gattis, Clees and Company, an accounting firm located in Olympia, Washington prior to that time. DARYL D. JENSEN is the President and a director of Sunset Life Insurance Company of America, and serves as a director of its parent company, Kansas City Life Insurance Company. 54 H. EDWARD ODEGARD is recently retired. Mr. Odegard was the co-owner and manager of The Valley Athletic Club, Tumwater, Washington, from 1974 to 1993. JAMES P. SENNA is the President and Chief Executive Officer of Shee Atika, Incorporated, Sitka, Alaska. PHILIP S. WEIGAND is a retired Lieutenant Colonel after 20 years of service with the U.S. Marine Corps and is currently a real estate agent with Virgil Adams Real Estate, located in Olympia, Washington. JOHN D. PARRY has been employed by Heritage Bank since 1994, currently serving as Executive Vice President--Administration. Prior to joining the Bank, Mr. Parry was Senior Vice President in charge of Washington banking operations of the Washington Division, Great American First Savings Bank, a California headquartered thrift institution. BRIAN L. VANCE has been employed by Heritage Bank since 1996, currently serving as Executive Vice President--Loan Administration. Prior to joining the Bank, Mr. Vance was employed for over 20 years with West One Bank, an Idaho headquartered commercial bank, in both Idaho and Washington. Prior to leaving West One, he was Senior Vice President and Regional Manager of banking operations for the South Puget Sound Region. JAMES HASTINGS has been employed by Heritage Bank since 1985, currently serving as Senior Vice President and Treasurer. Mr. Hastings is a Certified Public Accountant with over 20 years of banking and thrift experience either in public accounting or with financial institutions. WENDY K. GAUKSHEIM has been employed by Heritage Bank since 1987, currently serving as Senior Vice President--Corporate Services Officer. 55 BENEFICIAL OWNERSHIP OF BANK COMMON STOCK The following table sets forth, as of June 30, 1997, certain information as to the beneficial ownership of Bank Common Stock by: (i) persons known by the Bank to beneficially own more than 5% of the outstanding shares of Common Stock, except for MHC; (ii) the directors of the Bank; (iii) the executive officers of the Bank; and (iv) by all officers and directors as a group. For purposes of this table, an individual is considered to beneficially own shares of Bank Common Stock if he or she has or shares voting power (which includes the power to vote or direct the voting of the shares) or investment power (which includes the power to dispose of or direct the disposition of the shares). Unless otherwise indicated, all shares are owned directly by the officers and directors or by the officers and directors indirectly through a trust, corporation or association, or by the officers and directors or their spouses as custodians or trustees for the shares of minor children. Shares which are subject to stock options that are exercisable within 60 days of June 30, 1997 are deemed to be beneficially owned. For information regarding proposed purchases of Conversion Stock by the directors and officers and their anticipated ownership of Common Stock upon consummation of the Conversion, see "Conversion Stock to be Purchased by Management Pursuant to Subscription Rights."
SHARES BENEFICIALLY OWNED AT JUNE 30, 1997 ------------------------------ PERCENT OF OUTSTANDING NAME NUMBER BANK COMMON STOCK ---- ------- ---------------------- Donald V. Rhodes (1)........................ 37,780 2.1% Lynn M. Brunton (2)......................... 17,000 0.9 John A. Clees (3)........................... 14,000 0.8 Daryl D. Jensen (4)......................... 20,000 1.1 H. Edward Odegard (5)....................... 17,000 0.9 James P. Senna (6).......................... 12,000 0.7 Philip S. Weigand (7)....................... 19,142 1.0 John D. Parry (8)........................... 8,200 0.4 Brian L. Vance (9).......................... 3,666 0.2 James Hastings (10)......................... 6,100 0.3 Wendy K. Gauksheim.......................... 4,215 0.2 ------- --- All officers and directors as a group (11 persons)................................... 159,103 8.6% ======= ===
- -------- (1) Includes 10,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (2) Includes 2,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (3) Includes 2,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (4) Includes 2,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (5) Includes 2,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (6) Includes 2,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (7) Includes 1,550 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (8) Includes 5,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (9) Includes 1,666 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. (10) Includes 5,000 shares of Bank Common Stock which may be received upon the exercise of stock options that are exercisable within 60 days of June 30, 1997. 56 MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The business of the Bank is conducted through meetings and activities of the Board of Directors and its committees. During the fiscal year ended June 30, 1997, the Board of Directors held 12 meetings, including one special meeting. No director attended fewer than 75% of the total meetings of the Board of Directors or of committees on which such director served. The Executive Committee of the Board of Directors consists of Donald V. Rhodes, Chairman of the Board, and directors Jensen, Weigand, Clees and Brunton. The Executive Committee did not meet during the fiscal year ended June 30, 1997. The Executive Committee meets as necessary between meetings of the full Board of Directors. The Audit and Finance Committee, consists of John Clees, who acts as Chairman, and directors Rhodes, Weigand, Odegard and Brunton. Mr. Rhodes will no longer participate as a member of the Audit and Finance Committee subsequent to completion of the Conversion. The Audit and Finance Committee met four times during the fiscal year ended June 30, 1997. The Bank's management and external auditors provide the Committee with reports and findings regarding compliance policies and procedures, internal controls, and operating procedures. The other standing committee of the Board is the Personnel and Compensation Committee, which reviews and recommends remuneration arrangements for senior management. The Committee, which met three times during the fiscal year ended June 30, 1997, consists of director Daryl Jensen, who acts as Chairman, and directors Brunton and Clees. In addition to the committees described above, the Bank has from time to time established other committees whose members consist of its directors and officers. These committees include the Strategic Planning Committee, the Donations Committee, and the Community Reinvestment Act Committee. DIRECTORS' COMPENSATION Directors receive an annual retainer of $6,000 and a monthly fee of $500 for each meeting attended. Directors also received $100 for each committee meeting attended with the Chairman of the Committee receiving $150. 57 EXECUTIVE COMPENSATION Summary Compensation Table. The following information is furnished for the Chief Executive Officer of the Bank and for the executive officers of the Bank who received salary and bonus in excess of $100,000 for the year ended June 30, 1997. No other executive officers of the Bank received salary and bonus in excess of $100,000 during the year ended June 30, 1997.
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------------- ------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL STOCK UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS AWARDS ($)(1) OPTIONS (#) COMPENSATION(2) - ------------------ ---- -------- ------- ------------- ----------- --------------- Donald V. Rhodes,....... 1997 $148,906 $19,470 10,000 $16,350 Chairman, President and 1996 135,385 64,350 -- 15,026 Chief Executive Officer 1995 135,560 47,190 $50,000 -- 13,200 John D. Parry,.......... 1997 95,621 13,644 5,000 13,686 Executive Vice 1996 90,406 28,803 -- 11,634 President-- 1995 85,195 23,459 5,000 -- Administration Brian L. Vance,......... 1997 91,004 14,994 5,000 -- Executive Vice 1996 -- -- 5,000 -- President--Loan Administration James Hastings,......... 1997 87,984 11,680 1,500 10,184 Senior Vice President 1996 87,684 27,070 -- 7,883 and Treasurer 1995 84,916 21,356 -- 7,316
- -------- (1) At June 30, 1997, the value of the aggregate restricted stock holdings outstanding was estimated at $90,000. Dividends are paid on the outstanding shares of restricted stock. (2) Includes the Bank's contribution to its defined contribution retirement plan and existing ESOP and 401(k) for Messrs. Rhodes, Parry, Vance and Hastings, respectively. EMPLOYMENT AGREEMENTS In connection with the Conversion, the Bank and Company entered into an employment agreement with Mr. Donald Rhodes effective as of October 1, 1997. The agreement provides an annual base salary for Mr. Rhodes of $174,000, which may be increased at the discretion of the Board of Directors of the Bank or the Company or by an authorized Committee thereof. In addition to base salary, the agreement provides for Mr. Rhodes' participation in employee benefit plans and other fringe benefits applicable to senior executives of the Bank. The term of the agreement will run until Mr. Rhodes attains age 65 (March 14, 2001), and will then be automatically renewed for additional terms of one year each unless notice is given one year prior to the expiration date of any term that renewal will not be effected. In the event the employment of Mr. Rhodes is terminated by the Company at any time for "cause" or by Mr. Rhodes without "good reason," both as defined in the agreement, no termination benefit will be payable. If Mr. Rhodes is terminated without cause or he terminates the agreement for good reason, a severance benefit will be payable in an amount equal to two times the amount of his then-current annual base salary, or the amount of such salary which would otherwise have been paid to him during the then-remaining term of the agreement, whichever is greater. The agreement also provides for the payment of a severance benefit to Mr. Rhodes in the event of his termination of employment in certain cases preceding, and for any reason following by up to two years, a change of control of the Bank or the Company. Under the terms of the agreement, Mr. Rhodes is entitled to receive his then-current base salary for three years following such termination or until the term of the agreement, whichever is longer. In such circumstances, he is also entitled to all benefits in his agreement, to be fully vested as to unvested options, and to have restrictions lapse with regard to any restricted stock or other restricted securities. 58 The Bank has entered into severance agreements with Messrs. John Parry, Executive Vice President-Administration, and Brian Vance, Executive Vice President-Loan Administration. The terms of each of these severance agreements is five years. The agreements provide that Messrs. Parry and Vance would each receive a severance benefit in an amount equal to two times the amount of their then-current annual base salary, if their employment is terminated in certain cases preceding, and for any reason following by up to two years, a change of control of the Bank or the Company. The Bank has also entered into severance agreements with seven additional Executives that provide each Executive with a severance agreement equal to the Executive's then-current base salary in the event their employment is terminated for any reason within up to two years following a change in control of the Bank or the Company. For purposes of the agreements, "change of control" includes, among other things, the acquisition by any person of 25% or more of the outstanding securities of the Bank or the Company; replacement of incumbent directors or election of newly-elected directors constituting a majority of the Board of the Company where such replacement or election has not been supported by the Board; dissolution, or sale of 50% or more in value of the assets, of either the Company, the Bank or any of their respective subsidiaries; or the merger of the Company into any corporation, 25% or more of the outstanding common stock of which is owned by other than owners of the common stock of the Company prior to such merger. The employment agreement for Mr. Rhodes and the severance agreements for Messrs. Parry and Vance provide that in the event any of those Executives receive an amount under the provisions of the agreements which results in imposition of a tax on the Executive under the provisions of the Internal Revenue Code Section 4999 (relating to Golden Parachute payments) the employer is obligated to reimburse the Executive for that amount, exclusive of any tax imposed by reason of receipt of reimbursement under the employment agreements. The agreements restrict the right of Messrs. Rhodes, Parry and Vance to compete against the Bank or the Company in the State of Washington for a period of two years in the case of Mr. Rhodes and one year in the case of Messrs. Parry and Vance following termination of employment, except in the case of Mr. Rhodes, where such employment is terminated without cause or for good reason. BENEFITS General. Following three months of employment, the Bank provides medical, dental, life and disability insurance benefits for full-time employees, subject to certain deductibles and copayments. Dependent medical and dental coverage are available at the employee's expense. Pension Plan. The Bank maintains a defined contribution retirement plan. The plan allows participation to all employees upon completion of one year of service and the attainment of 21 years of age. It is the Bank's policy to fund plan costs as accrued. Employee vesting occurs over a period of seven years, at which time they become fully vested. The Bank accrued a contribution in the amount of $246,000 to the pension plan in fiscal 1997. 401(k) Plan. The Bank maintains a salary savings 401(k) plan for its employees. All persons employed as of July 1, 1984 automatically participate in the plan. All employees hired after that date who are at least 21 years of age and with one year of service to the Bank may participate in the plan. Employees who participate may contribute a portion of their salary which is matched by the employer at 50% up to certain specified limits. Employee vesting in employer portions is similar to the retirement plan described above. Employee Stock Ownership Plan. The Board of Directors has authorized the amendment of the Bank's existing ESOP for employees of the Bank to become effective upon the completion of the Conversion. The ESOP is intended to satisfy the requirements for an employee stock ownership plan under the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Common Stock owned by the existing 59 ESOP are Minority Shares that will be converted into Exchange Shares on the Effective Time of the Conversion. Full-time employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12- month period and who have attained age 21 are eligible to participate in the ESOP. The ESOP owned 21,763 shares of Bank Common Stock at June 30, 1997, all of which were allocated to participants' accounts. There was no debt incurred in connection with the acquisition of those shares. In order to fund the purchase of up to 2% of the Conversion Stock to be issued in the Offerings, it is anticipated that the ESOP will borrow funds from the Company. Such loan will equal 100% of the aggregate purchase price of the Conversion Stock. The loan to the ESOP will be repaid principally from the Bank's contributions to the ESOP and dividends payable on Common Stock held by the ESOP over the fifteen-year term of the loan. The interest rate for the ESOP loan is expected to be the prime rate as published in The Wall Street Journal on the closing date of the Conversion. See "Pro Forma Data." In the event of oversubscription by Eligible Account Holders, the Company may issue shares of Common Stock to the ESOP at the Purchase Price immediately following the Offerings to satisfy the ESOP's order to purchase 2% of Conversion Stock in the Offerings and/or the ESOP may purchase shares of Common Stock in the open market. Purchases of additional shares of Common Stock from the Company would dilute the interests of other stockholders. In any plan year, the Bank may make additional discretionary contributions to the ESOP for the benefit of plan participants in either cash or shares of Common Stock, which may be acquired through the purchase of outstanding shares in the market or from individual stockholders or which constitute authorized but unissued shares or shares held in treasury by the Company. The timing, amount, and manner of such discretionary contributions will be affected by several factors, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. Shares purchased by the ESOP with the proceeds of the loan will be held in a suspense account and released on a pro rata basis as the loan is repaid. Discretionary contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of each participant's proportional share of total compensation. Forfeitures will be reallocated among the remaining plan participants and may reduce the amount of the Bank's contributions. Benefits may be payable upon a participant's retirement, early retirement, death, disability, or termination of employment. The Bank's contributions to the ESOP are not fixed so benefits payable under the ESOP cannot be estimated. A committee appointed by the Board of Directors of the Bank serves as trustee of the ESOP. Under the ESOP, the trustee must vote all allocated shares held in the ESOP in accordance with the instructions of plan participants. Unallocated shares and allocated shares for which no instructions are received must be voted in the same ratio on any matter as those shares for which instructions are given. The ESOP is subject to the requirements of ERISA and the regulations of the IRS and the Department of Labor issued thereunder. Pursuant to SOP 93-6, Employers' Accounting for Employee Stock Ownership Plans, the measure of compensation expense recorded by an employer for a leveraged ESOP is the fair market value of the ESOP shares when allocated to participants' accounts. See "Pro Forma Data" for a discussion of the effects of SOP 93-6 on the reporting of ESOP-related compensation expense. If the ESOP purchases unissued shares from the Company, total stockholders' equity would neither increase nor decrease. However, on a per share basis, stockholders' equity and net earnings would decrease because of the increase in the number of outstanding shares. Existing Stock Option Plans. In September 1994, the Bank's stockholders approved the adoption of the 1994 Stock Option Plan, providing for the award of a restricted stock award to a key officer, incentive stock options to employees and nonqualified stock options to directors of the Bank at the discretion of the Board of Directors. On September 24, 1996, the stockholders of the Bank approved the adoption of the 1997 Stock Option Plan which is generally similar to the 1994 plan. The 1997 plan does not affect any options granted under the 1994 plan. 60 Under both of these stock option plans, on the date of grant, the exercise price of the option must at least equal the market value per share of Bank Common Stock. The 1994 plan provides for the grant of options and stock awards of up to 67,000 shares. The 1997 plan provides for the granting of options for up to 50,000 common shares. All shares under the 1994 plan have been awarded and all shares subject to option are fully vested. A total of 5,000 shares were issued under the 1994 plan as a restricted stock award subject to lapse provisions that end in 1999. A total of 5,002 shares remain available for grant under the 1997 plan. All awards made under the plan require vesting over a three year period beginning January 31, 1998. Under both existing plans, options must be exercised within five years of vesting. Outstanding options will be converted in the Exchange, using the Exchange Ratio, to become options for Company Common Stock. Set forth below is certain information for Messrs. Rhodes, Parry, Vance and Hastings concerning options granted in fiscal year 1997.
INDIVIDUAL GRANTS ----------------------------------------------------- PERCENTAGE NUMBER OF OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES PRICE PER EXPIRATION GRANT DATE NAME GRANTED IN 1997 SHARE DATE(1) VALUE(2) - ---- ---------- ---------- --------- ---------- ---------- Donald V. Rhodes.......... 10,000 19.2% $18.45 1/31/05 $31,900 John D. Parry............. 5,000 9.6 18.45 1/31/05 15,950 Brian L. Vance............ 5,000 9.6 18.45 1/31/05 15,950 James Hastings............ 1,500 2.9 18.45 1/31/05 4,785
- -------- (1) One third of the options vest (become exercisable) on January 31, 1998, 1999 and 2000. These options expire five years after they become exercisable. (2) Calculated using the minimum value method. 1998 Stock Option Plan. The Board of Directors of the Company intends to adopt the Stock Option Plan and to submit the Stock Option Plan to the stockholders for approval at a meeting held no earlier than six months following consummation of the Conversion. The approval of a majority vote of the Company's stockholders is required prior to the implementation of the Stock Option Plan. The Stock Option Plan will comply with all applicable regulatory requirements. The Stock Option Plan will be designed to attract and retain qualified management personnel and nonemployee directors, to provide such officers, key employees and nonemployee directors with a proprietary interest in the Company as an incentive to contribute to the success of the Company and the Bank, and to reward officers and key employees for outstanding performance and the attainment of targeted objectives. The Stock Option Plan will provide for the grant of incentive stock options ("ISOs"), intended to comply with the requirements of Section 422 of the Code, and nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the Stock Option Plan, stock options may be granted to key employees of the Company and its subsidiaries, including the Bank and to nonemployee directors. The Stock Option Plan will be administered and interpreted by a committee of the Board of Directors ("Committee") which is "disinterested" pursuant to applicable regulations under the federal securities laws. Unless sooner terminated, the Stock Option Plan will continue in effect for a period of ten years from the date the Stock Option Plan is adopted by the Board of Directors. A number of authorized shares of Common Stock equal to up to 10% of the number of shares of Conversion Stock sold in connection with the Conversion (575,000 shares based on the issuance of 5,750,000 shares at the maximum of the Valuation Price Range) will be reserved for future issuance under the Stock Option Plan; provided that the aggregate number of options granted under the 1994, 1997 and 1998 Stock Option Plans cannot exceed 10% of the aggregate number of Conversion Shares and Exchange Shares issued in the Conversion. Such shares will be authorized but unissued shares or treasury shares. In the event of a stock split, reverse stock split, stock dividend, or similar event, the number of shares of Common Stock under the Stock Option Plan, the number of shares to which any award relates and the exercise price per share under any option may be adjusted by the Committee to reflect the increase or decrease in the total number of shares of Common Stock outstanding. 61 Under the Stock Option Plan, the Committee will determine which officers and nonemployee directors will be granted options, whether such options will be ISOs or NQOs (provided that nonemployee directors will receive only NQOs), the number of shares subject to each option, and the exercisability of such options. The per share exercise price of an option will at least equal 100% of the fair market value of a share of Common Stock on the date the option is granted. Each stock option that is awarded to an officer, key employee or nonemployee director will remain exercisable at any time on or after the date it vests through the earlier to occur of the tenth anniversary of the date of grant or three months after the date on which the optionee terminates employment or participation on the Board (one year in the event of the optionee's termination or death or disability), unless such period is extended by the Committee. However, unvested options will be immediately exercisable in the event of the recipient's death, disability, retirement, or a change in control of the Company. A "change in control" is deemed to occur when (a) a person other than the Company purchases shares of Common Stock pursuant to a tender or exchange offer for such shares; (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of Securities Exchange Act of 1934, as amended ("Exchange Act") who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (c) the membership of the Board of Directors changes as the result of a contested election; or (d) stockholders of the Company approve a merger, consolidation, sale or disposition of all or substantially all of the Company assets, or a plan of partial or complete liquidation. All stock options are nontransferable except by will or the laws of descent or distribution. Under current provisions of the Code, the federal tax treatment of ISOs and NQOs is different. With respect to ISOs, an optionee who satisfies certain holding period requirements will not recognize income at the time the option is granted or at the time the option is exercised. If the holding period requirements are satisfied, the optionee will generally recognize capital gain or loss upon a subsequent disposition of the shares of Common Stock received upon the exercise of a stock option. If the holding period requirements are not satisfied, the difference between the fair market value of the Common Stock on the date of grant and the option exercise price, if any, will be taxable to the optionee at ordinary income tax rates. A federal income tax deduction generally will not be available to the Company as a result of the grant or exercise of an ISO, unless the optionee fails to satisfy the holding period requirements. With respect to NQOs the grant of an NQO is generally not a taxable event for the optionee and no tax deduction will be available to the Company. However, upon the exercise of an NQO, the difference between the fair market value of the Common Stock on the date of exercise and the option exercise price will generally be treated as compensation to the optionee upon exercise, and the Company will be entitled to a compensation expense deduction in the amount of income realized by the optionee. Although no specific award determinations have been made at this time, the Company and the Bank anticipate that if stockholder approval is obtained it would provide awards to its nonemployee directors, officers and employees to the extent and under terms and conditions permitted by applicable regulations. The size of individual awards will be determined prior to submitting the 1998 Stock Option Plan for stockholder approval, and disclosure of anticipated awards will be included in the proxy materials for such meeting. Management Recognition Plan. Following the Conversion, the Board of Directors of the Company intends to adopt an MRP for officers, employees, and nonemployee directors of the Company and the Bank. The MRP will enable the Company and the Bank to provide participants with a proprietary interest in the Company as an incentive to contribute to the success of the Company and the Bank. The MRP will be submitted to stockholders for approval at a meeting no earlier than six months following the consummation of the Conversion. The approval of a majority vote of the Company's stockholders is required prior to implementation of the MRP. The MRP will comply with all applicable regulatory requirements. The MRP expects to acquire a number of shares of Common Stock equal to 1% of the Conversion Stock sold in connection with the Conversion (57,500 shares based on the issuance of 5,750,000 shares in the Conversion at the maximum of the Valuation Price Range). Such shares will be acquired on the open market with funds contributed by the Company to a trust which the Company may establish in conjunction with the MRP ("MRP Trust") or may be acquired from authorized but unissued or treasury shares of the Company. 62 A committee of the Board of Directors of the Company will administer the MRP, the members of which will also serve as trustees of the MRP Trust, if formed. The trustees will be responsible for the investment of all funds contributed by the Company to the MRP Trust. Shares of Common Stock granted pursuant to the MRP will be in the form of restricted stock payable ratably over a minimum five-year period following the date of grant. Compensation expense in the amount of the fair market value of the Common Stock at the date of grant will be recognized pro rata over the number of years during which the shares are payable. An MRP award recipient is entitled to voting, dividend, and other stockholder rights while the shares are restricted. During the period of restriction, all shares will be held in escrow by the Company or by the MRP Trust. If a recipient terminates employment for reasons other than death, disability, retirement, or a change in control of the Company, the recipient will forfeit all rights to allocated shares which are then subject to restriction. In the event of the recipient's death, disability, retirement, or a change in control of the Company, all restrictions will expire and all allocated shares will become unrestricted. A "change in control" is deemed to occur when (a) a person other than the Company purchases shares of Common Stock pursuant to a tender or exchange offer for such shares; (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (c) the membership of the Board of Directors changes as the result of a contested election; or (d) stockholders of the Company approve a merger, consolidation, sale or disposition of all or substantially all of the Company's assets, or a plan of partial or complete liquidation. All unallocated shares may be transferred by the Company to the MRP Trust. The trustees of the MRP Trust will be authorized to vote such shares in the same proportion as they receive instructions from award recipients with respect to allocated shares which have not been earned and distributed. The Board of Directors of the Company may terminate the MRP at any time and, upon termination, all unallocated shares of Common Stock will revert to the Company. A recipient of an MRP award in the form of restricted stock will generally not recognize income upon an award of shares of Common Stock, and the Company will not be entitled to a federal income tax deduction, until the termination of the restrictions. Upon such termination, the recipient will recognize ordinary income in an amount equal to the fair market value of the Common Stock at that time, and the Company will be entitled to a deduction in the same amount after satisfying federal income tax withholding requirements. However, the recipient may elect to recognize ordinary income in the year the restricted stock is granted in an amount equal to the fair market value of the shares at that time, determined without regard to the restrictions. In that event, the Company will be entitled to a deduction in such year and in the same amount. Any gain or loss recognized by the recipient upon subsequent disposition of the stock will be either a capital gain or capital loss. Although no specific award determinations have been made at this time, the Company and the Bank anticipate that if stockholder approval is obtained it would provide awards to its directors, officers and employees to the extent and under terms and conditions permitted by applicable regulations. Under current policy of the FDIC, if the 1997 MRP is implemented within one year of the consummation of the Conversion, (i) no officer or employees could receive an award covering in excess of 25%; (ii) no nonemployee director could receive in excess of 5%; and (iii) nonemployee directors, as a group, could not receive in excess of 30% of the number of shares reserved for issuance under the MRP. The size of individual awards will be determined prior to submitting the MRP for stockholder approval, and disclosure of anticipated awards will be included in the proxy materials for such meeting. CERTAIN TRANSACTIONS LOANS TO DIRECTORS AND EXECUTIVE OFFICERS Certain of the Bank and Company directors and executive officers and their immediate families are also customers and depositors of the Bank and it is anticipated that such individuals will continue to be customers of 63 the Bank in the future. All transactions between the Bank and the Bank's directors, executive officers and their immediate families were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and in the opinion of management did not involve more than the normal risk of collectibility or present other unfavorable features. At June 30, 1997, loans to directors and executive officers represented 3.9% of the Bank's stockholders' equity. TRANSACTIONS WITH CENTRAL VALLEY BANK In addition to his position as Chairman, President and Chief Executive Officer of the Company and the Bank, Mr. Donald V. Rhodes is the Chairman of the Board and Chief Executive Officer of Washington Independent Bancshares, Inc. ("WIB"), a closely held bank holding company, and its subsidiary, Central Valley Bank, N.A. ("CVB"), which is headquartered in Toppenish, Washington. Mr. Daryl D. Jensen, a director of the Company and the Bank, is also a director of WIB and CVB. WIB had total assets of $48.6 million at June 30, 1997. CVB serves a market area in central Washington approximately 150 miles east of Olympia. Mr. Rhodes beneficially owns 7.82% of WIB's common stock and Mr. Jensen beneficially owns 3.87% of such common stock. While Mr. Rhodes currently devotes and intends to continue devoting a majority of his time to Heritage Bank matters, there can be no assurance that this will continue to be the case. Since June 30, 1995, the Bank has entered into contractual agreements to purchase loan participations in an aggregate amount of $1.1 million from Central Valley Bank. The aggregate outstanding balance of such participations at June 30, 1997 was $531,300, consisting of two loan participations. Both participations are current and performing as agreed. In the opinion of management, the participations are on terms no less favorable than could have been obtained from an unaffiliated party. The agreement to purchase the participations was approved through the Bank's normal credit approval process, and Mr. Rhodes abstained from any participation in the process. SUPERVISION AND REGULATION The Company and the Bank are subject to extensive Federal and Washington state legislation, regulation and supervision. These laws and regulations are primarily intended to protect depositors and the FDIC rather than shareholders of the Company. The laws and regulations affecting banks and bank holding companies have changed significantly over recent years, and there is reason to expect that similar changes will continue in the future. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of the Company. The Company is unable to predict the nature or the extent of the effects on its business and earnings that any fiscal or monetary policies or new federal or state legislation may have in the future. The following information is qualified in its entirety by reference to the particular statutory and regulatory provisions described herein. The Company. The Company is subject to regulation as a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, (the "BHCA"). As such, the Company is supervised by the Federal Reserve. The Federal Reserve has the authority to order bank holding companies to cease and desist from unsound practices and violations of conditions imposed by it. The Federal Reserve is also empowered to assess civil money penalties against companies and individuals who violate the BHCA or orders or regulations thereunder in amounts up to $1.0 million per day or order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non- banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The FDIC is authorized to exercise comparable authority under the Federal Deposit Insurance Act and other statutes with respect to state nonmember banks such as the Bank. 64 The Federal Reserve takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's position that in serving as a source of strength to its subsidiary banks, bank holding companies should be prepared to use available resources to provide adequate capital funds to their subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting their subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice, a violation of the Federal Reserve's regulations or both. The Federal Deposit Insurance Act requires an undercapitalized institution to submit to the Federal Reserve a capital restoration plan with a guarantee by each company having control of the bank. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows a bank holding company to acquire an interest in companies whose activities are found by the Federal Reserve, by order or by regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company must obtain the approval of the Federal Reserve before it acquires all, or substantially all, of the assets of any bank, or ownership or control of more than 5% of the voting shares of a bank. The Company is required under the BHCA to file an annual report and periodic reports with the Federal Reserve and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may examine a bank holding company and any of its subsidiaries and charge the company for the cost of such an examination. The Company and any subsidiaries which it may control are deemed "affiliates" within the meaning of the Federal Reserve Act, and transactions between bank subsidiaries of the Company and its affiliates are subject to certain restrictions. With certain exceptions, the Company and its subsidiaries are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by the Company or its affiliates. Banking regulations require bank holding companies and banks to maintain a minimum "leverage" ratio of core capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital guidelines under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders' equity (which does not include unrealized gains and losses on securities), less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory risk-based capital guidelines require a minimum Tier I capital of 4% of risk-adjusted assets and minimum total capital ratio (combined Tier I and Tier II) of 8%. For a discussion of the Bank's capital ratios, see "Banking Subsidiary." Banking Subsidiary. The Bank is a Washington state-chartered savings bank, the deposits of which are insured by the FDIC. It is subject to regulation by the FDIC and the Division. Although the Bank is not a member of the Federal Reserve System, the Federal Reserve supervisory authority over the Company can also affect the Bank. Among other things, applicable federal and state statutes and regulations which govern a bank's operations relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations. The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe and unsound practices. 65 The Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities. Based upon such an evaluation, the regulators may revalue the assets of an institution and require that it establish specific reserves to compensate for the differences between the regulator-determined value and the book value of such assets. These examinations must be conducted every 12 months, except that certain well-capitalized banks may be examined every 18 months. The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination. As a subsidiary of a bank holding company, the Bank is subject to certain restrictions in its dealings with the Company and with other companies that may become affiliated with the Company. Dividends paid by the Bank will provide substantially all of the Company's cash flow. Applicable federal and Washington state regulations restrict capital distributions by institutions such as the Bank, including dividends. Such restrictions are tied to the institution's capital levels after giving effect to such distributions. At June 30, 1997, the Bank's leverage ratio was 11.7% compared with 11.6% at June 30, 1996. Tier I and total capital ratios for the Bank at June 30, 1997 were 15.6% and 16.9%, respectively, compared with 17.7% and 18.9%, respectively, at June 30, 1996. The FDIC has established the qualifications necessary to be classified as a "well-capitalized" bank, primarily for assignment of FDIC risk-based insurance premium rates discussed below. To qualify as "well-capitalized," banks must have a Tier I risk- adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. The Bank qualified as "well-capitalized" at June 30, 1997. Federal laws generally bar institutions which are not well capitalized from accepting brokered deposits. The FDIC has issued rules which prohibit under- capitalized institutions from soliciting or accepting such deposits. Adequately capitalized institutions are allowed to solicit such deposits, but only to accept them if a waiver is obtained from the FDIC. Other Regulatory Developments. Congress has enacted significant federal banking legislation in recent years. Included in this legislation have been the FIRREA and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other things, (i) created two deposit insurance funds administered by the FDIC, the Bank Insurance Fund ("BIF") and the SAIF; (ii) permitted commercial banks that meet certain housing-related asset requirements to secure advances and other financial services from local FHLBs; (iii) restructured the federal regulatory agencies for savings associations; and (iv) greatly enhanced the regulators' enforcement powers over financial institutions and their affiliates. FDICIA went substantially farther than FIRREA in establishing a more rigorous regulatory environment. Under FDICIA, regulatory authorities are required to enact a number of new regulations, substantially all of which are now effective. These regulations include, among other things, (i) a new method for calculating deposit insurance premiums based on risk, (ii) restrictions on acceptance of brokered deposits except by well-capitalized institutions, (iii) additional limitations on loans to executive officers and directors of banks, (iv) the employment of interest rate risk in the calculation of risk-based capital, (v) safety and soundness standards that take into consideration, among other things, management, operations, asset quality, earnings and compensation, (vi) a five-tiered rating system from well-capitalized to critically undercapitalized, along with the prompt corrective action the agencies may take depending on the category, and (vii) new disclosure and advertising requirements with respect to interest paid on savings accounts. FDICIA and regulations adopted by the FDIC impose additional requirements for annual independent audits and reporting when a bank begins a fiscal year with assets of $500 million or more. Such banks, or their holding companies, are also required to establish audit committees consisting of directors who are independent of management. The Bank had less than $500 million in assets at June 30, 1997. Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") provides banks with greater opportunities to merge with other institutions and to open branches 66 nationwide. The Interstate Banking Act also allows a bank holding company whose principal operations are in one state to apply to the Federal Reserve for approval to acquire a bank that is headquartered in a different state. States cannot "opt out" but may impose minimum time periods, not to exceed five years, for the target bank's existence. The Interstate Banking Act also allows bank subsidiaries of bank holding companies to establish "agency" relationships with their depository institution affiliates. In an agency relationship, a bank can accept deposits, renew time deposits, close and service loans, and receive payments for a depository institution affiliate. States cannot "opt out." In addition, the Interstate Banking Act allows banks whose principal operations are located in different states to apply to federal regulators to merge. This provision takes effect June 1, 1997, unless states enact laws to either (i) authorize such transactions at an earlier date or (ii) prohibit such transactions entirely. The Interstate Banking Act also allows banks to apply to establish de novo branches in states in which they do not already have a branch office. This provision took effect June 1, 1997, but (i) states must enact laws to permit such branching and (ii) a bank's primary federal regulator must approve any such branch establishment. The Washington legislature passed legislation that allows, subject to certain conditions, mergers or other combinations, relocations of banks' main office and branching across state lines in advance of the June 1, 1997 date established by federal law. Further effects on the Company and the Bank may result from the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"). The Community Development Act (i) establishes and funds institutions that are focused on investing in economically distressed areas and (ii) streamlines the procedures for certain transactions by financial institutions with federal banking agencies. Among other things, the Community Development Act requires the federal banking agencies to (i) consider the burdens that are imposed on financial institutions when new regulations are issued or new compliance burdens are created and (ii) coordinate their examinations of financial institutions when more than one agency is involved. The Community Development Act also streamlines the procedures for forming certain one-bank holding companies and engaging in authorized non-banking activities. The Bank's deposit accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law. The Bank pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital ("well capitalized", "adequately capitalized" or "undercapitalized"). The matrix so created results in nine assessment risk classifications, with rates that until September 30, 1996 ranged from 0.23% for well capitalized, financially sound institutions with only a few minor weaknesses to 0.31% for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. The Bank's assessments expensed for the year ended June 30, 1997 equaled $1.3 million, which includes the $1.1 million special SAIF assessment. Pursuant to recent changes in federal law, the FDIC imposed a special assessment on each depository institution with SAIF-assessable deposits which resulted in the SAIF achieving its designated reserve ratio. In connection therewith, the FDIC reduced the assessment schedule for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most institutions, including the Bank, paying 0%. This assessment schedule is the same as that for the BIF, which reached its designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment to help pay interest on the FICO bonds at a rate of approximately .013% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. 67 Recent legislative changes provide for the merger of the BIF and SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured depository institution is a savings association on that date. The recent change contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of the Bank. In addition to the changes to the BIF and SAIF assessment rates implemented by the recent legislation, various regulatory relief provisions were enacted. The new legislation includes, among other things, changes to (i) the Truth in Lending Act and the Real Estate Settlement Procedures Act to coordinate and simplify the two laws' disclosure requirements; (ii) eliminate civil liability for violations of the Truth in Savings Act after five years; (iii) streamline the application process for a number of bank holding company and bank applications; (iv) establish a privilege from discovery in any civil or administrative proceeding or bank examination for any fair lending self-test results conducted by, or on behalf of, a financial institution in certain circumstances; (v) repeal the FDICIA requirement that independent public accountants attest to compliance with designated safety and soundness regulations; (vi) impose a continuous regulatory review of regulations to identify and eliminate outdated and unnecessary rules; and (vii) various other miscellaneous provisions to reduce bank regulatory burden. FEDERAL SECURITIES LAWS The Company has filed a Registration Statement with the SEC under the Securities Act of 1933, as amended ("Securities Act") for the registration of the Common Stock to be issued in the Conversion. Upon completion of the Conversion, the Common Stock will be registered with the SEC under the Exchange Act and generally may not be deregistered for at least three years thereafter. The Company will then be subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act. The registration under the Securities Act of the Common Stock to be issued in the Conversion does not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company may comply with the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. There are currently no demand registration rights outstanding. However, in the event the Company, at some future time, determines to issue additional shares from its authorized but unissued shares, the Company might offer registration rights to certain of its affiliates who want to sell their shares. THE CONVERSION The Division has given approval to the Plan subject to the satisfaction of certain conditions imposed by the Division in its approval. In addition, the Conversion will not be consummated until the Bank receives from the FDIC a notice of nonobjection to the Conversion and the Federal Reserve approves the application of the Company to become a bank holding company and to acquire the Bank. The Division's approval, however, does not constitute a recommendation or endorsement of the Plan. GENERAL On July 1, 1997, the Boards of Directors of the Mutual Holding Company and the Bank unanimously adopted the Plan of Conversion, which was subsequently amended, pursuant to which the Bank will reorganize 68 into the stock holding company form of organization and the Company, a newly formed Washington corporation, will offer and sell the Common Stock. It is intended that following the Conversion all of the common stock of the Bank will be held by the Company. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS AVAILABLE FROM THE BANK UPON REQUEST. The Division has approved the Plan of Conversion subject to the satisfaction of certain conditions imposed by the Division in its approval. In addition, completion of the Conversion is subject to (i) the nonobjection of the FDIC; (ii) approval by the Federal Reserve of the Company's acquisition of the Bank; (iii) approval of the Plan by at least a majority of the total number of votes eligible to be cast by members of the Mutual Holding Company (iv) approval of the Plan by two-thirds of the outstanding shares of Bank Common Stock and a majority of the outstanding shares of Bank Common Stock held by the Minority Stockholders; and (v) successful completion of the Offerings. It is possible that there could be a significant delay in the completion of the Conversion as a result of delays in receiving a notice of nonobjection to the Conversion from the FDIC or in receiving the approval of the Federal Reserve. See "Risk Factors--Risk of Delayed Offering." The Plan of Conversion provides generally that (i) the Mutual Holding Company, which currently owns 66.31% of the Bank, will convert from mutual to stock form and simultaneously merge with the Bank, with the Bank being the surviving entity, and the shares of Bank Common Stock currently held by the Mutual Holding Company will be canceled; (ii) the Bank will then merge into Interim, a to be formed wholly-owned subsidiary of the Company, with the Bank being the surviving entity (and with the 1,200,000 shares of the Company's Common Stock currently held by the Bank being canceled); and (iii) the Conversion Stock will be offered by the Company in the Offerings. Applicable law requires that a minimum number of shares of Conversion Stock offered for sale in the Conversion be sold in order for the Conversion to become effective. The Conversion will be effected only upon completion of the sale of at least $42.5 million of Conversion Stock to be issued pursuant to the Plan of Conversion. As part of the Conversion, the Company is making a Subscription Offering of its Conversion Stock to holders of subscription rights in the following order of priority: (i) Eligible Account Holders; (ii) the Bank's ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other Members. Commencing concurrently with the Subscription Offering, the Company is offering the shares of Conversion Stock not subscribed for in the Subscription Offering in order of priority to (i) the Minority Stockholders who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members and (ii) to certain members of the general public to whom a copy of this Prospectus is delivered by or on behalf of the Company. Shares of Common Stock not sold in the Subscription, Minority Stockholders' and Community Offerings may be offered in the Syndicated Community Offering. If a Syndicated Community Offering is determined not to be feasible, the Board of Directors of the Bank will consult with the regulatory authorities to determine an appropriate alternative method for selling the unsubscribed shares of Conversion Stock. The Plan of Conversion provides that the Conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the Mutual Holding Company. No sales of Conversion Stock may be completed in the Offerings unless the Plan of Conversion is approved by the members of the Mutual Holding Company and Minority Stockholders of the Bank. The completion of the Offerings is subject to market conditions and other factors beyond the Bank's control. No assurance can be given as to the length of time after approval of the Plan of Conversion at the Special Meetings that will be required to complete the sale of the Conversion Stock or to receive the required approvals of regulatory authorities. If delays are experienced, significant changes may occur in the estimated pro forma market value of the Conversion Stock, together with corresponding changes in the net proceeds realized by the Company from the sale of the Conversion Stock. In the event the Conversion is terminated, the Bank would be required to charge all Conversion expenses against current income. Orders for shares of Conversion Stock will not be filled until at least 4,250,000 shares of Conversion Stock have been sold, the Division and the FDIC approve the final Appraisal, the Federal Reserve approves the application of the Company to become a bank holding company and acquire the Bank and the Conversion closes. If the Conversion is not completed by , 1997 (45 days after the last day of the fully extended 69 Subscription Offering) and the Division consents to an extension of time to complete the Conversion, subscribers will be given the right to increase, decrease or rescind their subscriptions. Unless an affirmative indication is received from subscribers that they wish to continue to subscribe for shares, the funds will be returned promptly, together with accrued interest at the Bank's passbook rate from the date payment was received by the Company, and all withdrawal authorizations from deposit accounts of those subscribers will be terminated. If such period is not extended, or, in any event, if the Conversion is not completed by , all withdrawal authorizations will be terminated and all funds held will be promptly returned together with accrued interest at the Bank's passbook rate from the date payment is received. PURPOSES OF CONVERSION The Mutual Holding Company, as a Washington-chartered mutual holding company, does not have stockholders and has no authority to issue capital stock. By converting to the stock holding company form of organization, the Company will be structured in the form used by many commercial banks and business entities and a growing number of savings institutions. Management of the Bank believes that the Conversion offers a number of advantages which will be important to the future growth and performance of the Bank. The Conversion is intended to: (i) provide substantially increased capital to expand the operations of the Bank; (ii) to improve future access to capital markets; (iii) enhance the Company's and the Bank's ability to expand directly or through mergers and acquisitions and to diversify operations into new business activities (although there are no specific agreements, arrangements or understandings, written or oral, regarding any such mergers or diversified activities); and (iv) afford customers and others the opportunity to become stockholders of the Company and thereby participate more directly in any future growth of the Bank. While the Bank, prior to the consummation of the Conversion, has the ability to raise additional capital through the sale of additional shares of its common stock, that ability is limited by the mutual holding company structure which, among other things, requires that the Mutual Holding Company hold a majority of the outstanding shares of Bank Common Stock. The Conversion also will result in an increase in the number of shares of Common Stock to be outstanding as compared to the number of outstanding shares of Minority Shares, which will increase the likelihood of the development of an active and liquid trading market. See "Market for Common Stock." In addition, the Conversion permits the Company to engage in repurchases of its outstanding stock without adverse federal income tax consequences, unlike the Bank and MHC. Currently, the Company has no plans to engage in any stock repurchases. After completion of the Conversion, there will be a substantial amount of authorized but unissued Common Stock available for issuance to raise additional equity capital or to be used in connection with possible acquisitions. At the present time, the Company has no plans with respect to specific acquisitions or additional offerings of securities, other than the issuance of authorized but unissued shares upon exercise of stock options, the possible issuance of authorized but unissued shares to the MRP. Following the Conversion, the Company will be able to use stock-based incentive programs to attract and retain executive and other personnel for itself and its subsidiaries. For a description of the programs which have been adopted by the Company, see "Management--Benefits--1998 Stock Option Plan." EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK Voting Rights. Depositors and borrowers will have no voting rights in the Bank or the Company and therefore will not be able to elect directors of the Bank or the Company or to control their affairs. Subsequent to the Conversion, voting rights will be vested exclusively in the Company, as the sole stockholder, with respect to the Bank and the holders of the Common Stock as to matters pertaining to the Company. Each holder of Common Stock shall be entitled to vote on any matter to be considered by the stockholders of the Company. A stockholder will be entitled to one vote for each share of Common Stock owned. Savings Accounts and Loans. The Bank's savings accounts, account balances and existing FDIC insurance coverage of savings accounts will not be affected by the Conversion. Furthermore, the Conversion will not affect 70 the loan accounts, loan balances or obligations of borrowers under their individual contractual arrangements with the Bank. Tax Effects. The Bank has received an opinion from KPMG Peat Marwick LLP that for federal income tax purposes: (1) the conversion of the Mutual Holding Company from mutual to stock form and the simultaneous merger of the Mutual Holding Company with and into the Bank, with the Bank being the surviving institution, will qualify as a conversion within the meaning of Section 368(a)(1)(A) of the Code, (2) no gain or loss will be recognized by the Bank upon the receipt of the assets of the Mutual Holding Company in such merger, (3) the merger of the Bank with and into Interim, with the Bank being the surviving institution, will qualify as a conversion within the meaning of Section 368(a)(1)(A) of the Code, (4) no gain or loss will be recognized by Interim upon the transfer of its assets to the Bank, (5) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim, (6) no gain or loss will be recognized by the Company upon the sale of shares of Common Stock in the Offering, (7) the Eligible Account Holders and Supplemental Eligible Account Holders will recognize gain, if any, upon the issuance to them of withdrawable savings accounts in the Bank following the Conversion, interests in the liquidation account and nontransferable subscription rights to purchase Common Stock, but only to the extent of the value, if any, of the subscription rights, and (8) the tax basis to the holders of Common Stock purchased in the Offering will be the amount paid therefor, and the holding period for the shares of Common Stock will begin on the date of consummation of the Offerings if purchased through the exercise of subscription rights and on the day after the date of purchase if purchased in the Community Offering or Syndicated Community Offering. Unlike a private letter ruling issued by the IRS, an opinion of a tax advisor is not binding on the IRS and the IRS could disagree with the conclusions reached therein. In the event of such disagreement, no assurance can be given that the conclusions reached in an opinion of a tax advisor would be sustained by a court if contested by the IRS. Based upon past rulings issued by the IRS, the opinion provides that the receipt of subscription rights by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members under the Plan will be taxable to the extent, if any, that the subscription rights are deemed to have a fair market value. RP Financial, whose findings are not binding upon the IRS, has issued a letter indicating that it believes the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are nontransferable and of short duration, and afford the recipients the right only to purchase shares of the Conversion Stock at a price equal to its estimated fair market value, which will be the same price paid by purchasers in the Offerings. If the subscription rights are deemed to have a fair market value, the receipt of such rights may be taxable to those Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members who exercise their subscription rights by purchasing Conversion Stock. The Bank could also recognize a gain on the distribution of such subscription rights. Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members are encouraged to consult with their own tax advisers as to the tax consequences in the event the subscription rights are deemed to have a fair market value. The Bank has also received an opinion from Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. that no gross receipts will be recognized for Washington business and occupation tax purposes by either the Bank or its Eligible Account Holders and Supplemental Eligible Account Holders as a result of the implementation of the Plan of Conversion. The opinions of KPMG Peat Marwick LLP and Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. and the letter from RP Financial are filed as exhibits to the Registration Statement. See "Additional Information." PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM. Liquidation Account. In the unlikely event of a complete liquidation of the Mutual Holding Company in its present mutual form, each depositor in the Bank would receive a pro rata share of any assets of the Mutual Holding Company remaining after payment of claims of all creditors (including the claims of all depositors up 71 to the withdrawal value of their accounts). Each depositor's pro rata share of such remaining assets would be in the same proportion as the value of his deposit account to the total value of all deposit accounts in the Bank at the time of liquidation. After the Conversion, each depositor, in the event of a complete liquidation of the Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of the Bank. However, except as described below, his or her claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. Each stockholder would not have an interest in the value or assets of the Bank or the Company above that amount. The Plan of Conversion provides for the establishment, upon the completion of the Conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the amount of any dividends waived by the MHC plus the greater of (1) the Bank's retained earnings of $12.9 million at June 30, 1993, the date of the latest statement of financial condition contained in the final offering circular utilized in the MHC Reorganization, or (2) 66.31% of the Bank's total stockholders' equity as reflected in its latest statement of financial condition contained in the final Prospectus utilized in the Offerings. As of the date of this Prospectus, the initial balance of the liquidation account would be $18.4 million. Each Eligible Account Holder and Supplemental Eligible Account Holder, if he were to continue to maintain his deposit account at the Bank, would be entitled, upon a complete liquidation of the Bank after the Conversion to an interest in the liquidation account prior to any payment to the Company as the sole stockholder of the Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in the Bank at the close of business on June 30, 1996 or September 30, 1997, as the case may be. Each Eligible Account Holder and Supplemental Eligible Account Holder will have a pro rata interest in the total liquidation account for each of his deposit accounts based on the proportion that the balance of each such deposit account on the June 30, 1996 Eligibility Record Date or the September 30, 1997 Supplemental Eligibility Record Date, as the case may be, bore to the balance of all deposit accounts in the Bank on such date. If, however, on any June 30 annual closing date of the Bank, commencing June 30, 1997, the amount in any deposit account is less than the amount in such deposit account on June 30, 1996 or September 30, 1997, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to the Company as the sole stockholder of the Bank. THE OFFERINGS THE OFFERINGS ARE EXPECTED TO EXPIRE ON THE EXPIRATION DATE, UNLESS EXTENDED OR CONTINUED AS DESCRIBED ON THE COVER PAGE OF THIS PROSPECTUS. ALL PURCHASES ARE SUBJECT TO THE MAXIMUM PURCHASE LIMITATIONS IN THE OFFERINGS AND THE OVERALL OWNERSHIP LIMITATIONS DESCRIBED UNDER "THE CONVERSION--LIMITATIONS ON PURCHASE AND OWNERSHIP OF SHARES". FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR CONVERSION STOCK, PLEASE CALL THE STOCK INFORMATION CENTER AT (360) 705-9190. Subscription Offering. In accordance with the Plan, nontransferable subscription rights to purchase the Conversion Stock have been granted to all persons and entities entitled to purchase the Conversion Stock in the Subscription Offering. The amount of the Conversion Stock which these parties may purchase will be subject to the availability of the Conversion Stock for purchase. Subscription priorities have been established for the allocation of available stock. If all the Conversion Stock offered is subscribed and purchased in categories of higher priority, no shares will be available for purchase to prospective purchasers in the remaining categories. These priorities are as follows: 72 CATEGORY 1: Eligible Account Holders. Each depositor with $50.00 or more on deposit at the Bank as of June 30, 1996 will receive nontransferable subscription rights to subscribe for up to the greater of the purchase limitation established by the Bank for the Community Offering, one-tenth of one percent (.10%) of the total offering of shares of Conversion Stock, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders. If the exercise of subscription rights in this category results in an oversubscription, shares of Conversion Stock will be allocated among subscribing Eligible Account Holders so as to permit each Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to 100 shares or the number of shares subscribed for, whichever is less. Thereafter, unallocated shares will be allocated among subscribing Eligible Account Holders proportionately, based on the amount of their respective qualifying deposits, as compared to total qualifying deposits of all subscribing Eligible Account Holders. Subscription rights received by officers and directors in this category based on their increased deposits in the Bank in the one year period preceding June 30, 1996 are subordinated to the subscription rights of other Eligible Account Holders. CATEGORY 2: ESOP. The Plan of Conversion provides that the ESOP shall receive nontransferable Subscription Rights to purchase up to 2% of the shares of Conversion Stock issued in the Conversion. The ESOP intends to purchase 2% of the shares of Conversion Stock issued in the Conversion. In the event the number of shares offered in the Conversion is increased above the maximum of the Estimated Valuation Range, the ESOP shall have a second priority right after Eligible Account Holders to purchase any available additional shares. In the event of an oversubscription by Eligible Account Holders and, as a result, the ESOP is unable to fill its order for up to 2% of the Conversion Stock, then the Company may issue such shares of Common Stock as are necessary for the ESOP to acquire a number of shares equal to 2% of the shares of Conversion Stock issued in the Conversion and/or the ESOP may purchase shares of Common Stock in the open market. CATEGORY 3: Supplemental Eligible Account Holders. Each depositor with $50.00 or more on deposit as of September 30, 1997 will receive nontransferable subscription rights to subscribe for up to the greater of the purchase limitation established by the Bank for the Community Offering, one- tenth (.10%) of one percent of the total offering of Conversion Stock or fifteen times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of qualifying deposits of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders. If the exercise of subscription rights in this category results in an oversubscription, shares of Conversion Stock will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. Thereafter, unallocated shares will be allocated among subscribing Supplemental Eligible Account Holders proportionately, based on the amount of their respective qualifying deposits as compared to total qualifying deposits of all Supplemental Eligible Account Holders. CATEGORY 4: Other Members. Each depositor of the Bank as of the Voting Record Date (October 24, 1997) and each borrower with a loan outstanding on July 21, 1993, which continues to be outstanding as of the Voting Record Date, will receive nontransferable Subscription Rights to subscribe for up to the purchase limitation established by the Bank, to the extent shares are available after filling subscriptions by Eligible Account Holders, the Bank's ESOP and Supplemental Eligible Account Holders. In the event of an oversubscription in this category, the available shares will be allocated proportionately based on the amount of the respective subscriptions. CATEGORY 5: Minority Stockholders. Minority Stockholders as of the Voting Record Date will receive nontransferable subscription rights to purchase shares up to the purchase limitation established by the Bank, to 73 the extent available after filling the Subscription Offering subscriptions. In the event of an oversubscription, the available shares will be allocated proportionately on the basis of the amounts of their respective subscriptions. Subscription rights are nontransferable. Persons selling or otherwise transferring their rights to subscribe for Conversion Stock in the Subscription Offering or subscribing for Conversion Stock on behalf of another person will be subject to forfeiture of such rights and possible further sanctions and penalties imposed by government agencies. Each person exercising subscription rights will be required to certify that he or she is purchasing such shares solely for his or her own account and that he or she has no agreement or understanding with any other person for the sale or transfer of such shares. Community Offering. Concurrently with the Subscription Offering and the Minority Stockholders' Offering, the Company is offering shares of the Conversion Stock to certain members of the general public in a Community Offering. Preference may be given first to natural persons residing in the Local Community (such persons are referred to as "Preferred Subscribers"). Purchasers, together with their associates and groups acting in concert, may order up to $250,000 in aggregate purchase price of Conversion Stock subject to maximum purchase limitations in the Offerings and the overall ownership limitation. If the amount of available stock is insufficient to fill the orders of Preferred Subscribers stock will be allocated first to each Preferred Subscriber in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such Preferred Subscriber, if possible. Thereafter, unallocated shares will be allocated among the Preferred Subscribers whose order remains unsatisfied proportionately, on the basis of the amounts of the respective subscriptions. If the orders of Preferred Subscribers are completely filled, but there are insufficient shares to fill the orders of others, available shares will be allocated to the other members of the general public who purchase in the Community Offering applying the same allocation described above for Preferred Subscribers. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE COMPANY AND THE BANK TO ACCEPT OR REJECT SUCH ORDERS IN WHOLE OR IN PART. If all of the Common Stock offered in the Subscription Offering and the Minority Stockholders' Offering is subscribed for, no Conversion Stock will be available for purchase in the Community Offering and all funds submitted pursuant to the Community Offering will be promptly refunded with interest. Syndicated Community Offering. The Plan provides that all shares of Conversion Stock not purchased in the Subscription, Minority Stockholders' and Community Offerings may be offered for sale to certain members of the general public in a Syndicated Community Offering through a syndicate of registered broker-dealers to be managed by Ryan Beck acting as agent of the Company to assist the Company and the Bank in the sale of the Common Stock. The Company and the Bank have the right to reject orders, in whole or part, in their sole discretion in the Syndicated Community Offering. Neither Ryan Beck nor any other registered broker-dealer shall have any obligation to take or purchase any shares of the Conversion Stock in the Syndicated Community Offering; however, Ryan Beck has agreed to use its best efforts in the sale of shares in the Syndicated Community Offering. No person, together with any associate or group of persons acting in concert, will be permitted to subscribe in the Syndicated Community Offering for in excess of $250,000 of Conversion Stock. See "--Marketing Arrangements" for a description of the commission to be paid to the selected dealers and to Ryan Beck. If a syndicate of selected dealers is formed to assist in the Syndicated Community Offering, a purchaser may pay for his shares with funds held by or deposited with a selected dealer. Selected dealers are expected to solicit indications of interest from their customers to place orders for shares. Such selected dealers shall subsequently contact their customers who indicated an interest and seek their confirmation as to their intent to purchase. The selected dealer will then acknowledge confirmation of the order by its customer in writing on the following business day and will debit such customer's account on the third business day after the customer has confirmed his intent to purchase (the "debit date"). On or before noon of the next business day following the debit date, the selected dealer will send funds to the Bank for deposit in a segregated account. Although purchasers' funds are not required to be in their accounts with selected dealers until the debit date, once a 74 confirmation of an intent to purchase has been given to the selected dealer, the purchaser has no right to rescind his order. The Syndicated Community Offering may run concurrent to the Subscription, Minority Stockholders' and Community Offering or subsequent to such offerings. The Syndicated Community Offering will terminate no more than 45 days following the Expiration Date, unless extended by the Company with any required regulatory approval, but in no case later than . THE SUBSCRIPTION OFFERING WILL EXPIRE AT NOON, PACIFIC TIME, ON , 1997 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE COMPANY FOR UP TO DAYS TO , 1997. THE MINORITY STOCKHOLDERS' OFFERING AND COMMUNITY OFFERING ARE ALSO EXPECTED TO TERMINATE AT NOON, PACIFIC TIME, ON , 1997, BUT MAY BE EXTENDED. Such extensions may be granted without notice to subscribers. If the Conversion is not consummated within 45 days after the last day of the Subscription Offering (which may conclude no later than , 1997) and the Company elects to extend the Offerings, with the approval of the Division, if necessary, subscribers will be notified in writing of the time period within which they must notify the Company of any intention to increase, decrease or rescind stock orders. If an affirmative response to any such resolicitation is not received by the Company, a subscriber's stock order will be rescinded and subscription funds will be returned promptly, together with interest from the date such funds were received by the Company, and all withdrawal authorizations from deposit accounts at the Bank will be terminated. No single extension may exceed 90 days. If the Offerings are not extended or, in any event, if the Conversion is not consummated by , 1997, all stock orders will be rescinded, funds returned and withdrawal authorizations terminated, as described above. In the event the Company is unable to find purchasers from the general public for an insignificant number of unsubscribed shares, other purchase arrangements will be made by the Board of Directors of the Bank, if feasible. Such other arrangements will be subject to the approval of the Division. Persons in Non-Qualified States. The Company and the Bank will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the Plan reside. However, the Company and the Bank are not required to offer stock in the Subscription Offering to any person who resides in a foreign country or resides in a state of the United States with respect to which (i) a small number of persons otherwise eligible to subscribe for shares of Conversion Stock reside in such state; or (ii) the Company or the Bank determines that compliance with the securities laws of such state would be impracticable for reasons of cost or otherwise, including but not limited to a request that the Company and the Bank or their officers, directors or trustees register as a broker, dealer, salesman or selling agent, under the securities laws of such state, or a request to register or otherwise qualify the subscription rights or Conversion Stock for sale or submit any filing with respect thereto in such state. Where the number of persons eligible to subscribe for shares in one state is small, the Company and the Bank will base their decision as to whether or not to offer the Conversion Stock in such state on a number of factors, including the size of accounts held by account holders in the state, the cost of registering or qualifying the shares or the need to register the Company, its officers, directors or employees as brokers, dealers or salesmen. THE EXCHANGE General. The regulations and policies governing mutual holding companies provide that in a conversion of a mutual holding company to the stock holding company form of organization, the Minority Stockholders will be entitled to exchange their Minority Shares for Exchange Shares, provided the Bank and the Mutual Holding Company demonstrate to the satisfaction of the Division and the FDIC that the basis for the exchange is fair and reasonable. The Boards of Directors of the Bank and the Company have determined that each Minority Share will, at the Effective Time of the Conversion, be converted into and become the right to receive a number of Exchange Shares determined pursuant to the Exchange Ratio that ensures that after the Conversion and before giving effect to purchases of Conversion Stock by Minority Stockholders in the Offering, and receipt by Minority Stockholders of cash in lieu of fractional shares, Minority Stockholders will own approximately the same 75 aggregate percentage of the Common Stock as they own of the Bank Common Stock immediately prior to the Effective Time adjusted downward to reflect the aggregate amount of Bank Common Stock dividends waived by the Mutual Holding Company and the amount of assets, other than Bank Common Stock, held by the Mutual Holding Company. The Mutual Holding Company had assets of $120,000 and waived $1,230,000 in dividends, as of June 30, 1997. No Bank common stock dividends are expected to be declared after such date. The adjustments described above decrease the Minority Stockholders' ownership interest to 32.17% from 33.69% based on the following calculation: Bank Stockholders' Equity at 6/30/97--Aggregate Dividends Waived by MHC x Minority Stockholders' 33.69% Ownership = 32.1925% Bank Stockholders' Equity at 6/30/97 The adjustments described above would further adjust the Minority Stockholders' ownership interest as follows: 32.1925% x Pro Forma Market Value of the Company--Market Value of Assets of MHC Other than Bank Common Stock = 32.17% Pro Forma Market Value of the Company To determine the Exchange Ratio, multiply the reciprocal of the adjusted Minority Stockholders' ownership interest was multiplied by the number of shares to be issued in the Conversion, and divide the result by the number of Minority Shares outstanding (609,616) shares as of June 30, 1997. Immediately prior to consummation of the Conversion, the Bank will recalculate the Minority Stockholders' ownership interest pursuant to the above formula, which will take into account changes in stockholders' equity and percentage ownership at such date. The following table sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, the following: (i) the total number of shares of Conversion Stock and Exchange Shares to be issued in the Conversion, (ii) the percentage of the total Common Stock represented by the Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing fractional Exchange Shares.
CONVERSION STOCK EXCHANGE SHARES TOTAL SHARES TO BE ISSUED(1) TO BE ISSUED(1) OF COMMON ----------------- ----------------- STOCK TO BE EXCHANGE AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING RATIO --------- ------- --------- ------- ------------ -------- Minimum.............. 4,250,000 67.83% 2,015,664 32.17% 6,265,664 3.3064 Midpoint............. 5,000,000 67.83 2,371,369 32.17 7,371,369 3.8899 Maximum.............. 5,750,000 67.83 2,727,075 32.17 8,477,075 4.4734 15% above maximum.... 6,612,500 67.83 3,136,136 32.17 9,748,636 5.1444
- -------- (1) Assumes that outstanding options to purchase 42,717 shares of Bank Common Stock at June 30, 1997 are not exercised prior to consummation of the Conversion. Assuming that all of such options are exercised prior to such consummation, the percentages represented by the Conversion Stock and the Exchange Shares would amount to 66.40% and 33.60%, respectively, and the Exchange Ratio would amount to 3.2968, 3.8786, 4.4604 and 5.1294 at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price Range, respectively. (2) Assumes that the Company does not issue authorized but unissued shares to the ESOP immediately following the Conversion. The actual Exchange Ratio is not dependent on the market value of the Minority Shares. It will be determined based upon the number of shares of Conversion Stock issued in the Offerings and the Minority Stockholders' percentage ownership in the Bank prior to consummation of the Conversion adjusted downward to take into account the effect of the aggregate amount of dividends declared by the Bank and waived by the Mutual Holding Company and the assets of the Mutual Holding Company). At the minimum, midpoint and maximum of the Valuation Price Range, one Minority Share will be exchanged for 3.3064, 3.8899 and 4.4734 76 shares of common Stock, respectively (which have calculated equivalent estimated value of $33.06, $38.90 and $44.73 based on the Purchase Price of Conversion Stock in the Offerings and the aforementioned Exchange Ratios). However, there can be no assurance as to the actual market value of a share of Common Stock after the Conversion or that such shares can be sole at or above the $10.00 per share Purchase Price. Any increase or decrease in the number of shares of Conversion Stock will result in a corresponding change in the number of Exchange Shares, so that upon consummation of the Conversion, the Conversion Stock and the Exchange Stock will represent approximately 67.83% and 32.17%, respectively, of the Company's total outstanding shares of Common Stock. Each holder of a certificate or certificates evidencing issued and outstanding Minority Shares will be entitled to receive in exchange therefor a certificate or certificates representing the number of full shares of Common Stock for which the Minority Shares will have been converted based on the Exchange Ratio. To effect the Exchange, a duly appointed agent of the Bank will promptly mail to each such holder of record of an outstanding certificate which immediately prior to the consummation of the Conversion evidenced Minority Shares, a letter of transmittal (which will specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the Exchange Agent) advising such holder of the terms of the Exchange effected by the Conversion and of the procedure for surrendering to the Exchange Agent such certificate in exchange for a certificate or certificates evidencing Common Stock. MINORITY STOCKHOLDERS SHOULD NOT FORWARD TO THE BANK OR THE EXCHANGE AGENT CERTIFICATES UNTIL THEY HAVE RECEIVED THE TRANSMITTAL LETTER. No holder of a certificate representing shares of Bank Common Stock will be entitled to receive any dividends in respect of the Common Stock into which such shares shall have been converted by virtue of the conversion until the certificate representing such shares of Bank Common Stock is surrendered in exchange for certificates representing shares of Common Stock. In the event that dividends are declared and paid by the Company in respect of Common Stock after the consummation of the Conversion but prior to surrender of certificates representing shares of Bank Common Stock, dividends payable in respect of shares of Common Stock not then issued will accrue (without interest). Any such dividends will be paid (without interest) upon surrender of the certificates representing such shares of Bank Common Stock. The Company will be entitled, after the consummation of the Conversion, to treat certificates representing shares of Bank Common Stock as evidencing ownership of the number of full shares of Common Stock into which the shares of Bank Common Stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. The Company shall not be obligated to deliver a certificate or certificates representing shares of Common Stock to which a holder of Bank Common Stock would otherwise be entitled as a result of the Conversion until such holder surrenders the certificate or certificates representing the shares of Bank Common Stock for exchange as provided above, or, in default thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond as may be required in each case by the Company. DISSENTERS' RIGHTS The Plan of Conversion provides that stockholders of the Bank have the right to dissent from the mergers of the Bank with the MHC and with an interim bank formed to facilitate the Conversion, with the Bank as the surviving entity in each Merger, and, subject to certain conditions, to receive payment of the "value" of their shares of Bank Common Stock, as provided in Washington law. Under Washington state law (RCW 23B.13), a stockholder of the Bank may exercise "dissenters' rights" and receive the fair value of his or her shares in cash, if certain procedures are followed. To exercise these rights, a Bank stockholder must (i) deliver to the Bank, before the vote on approval of the Conversion is taken, written notice of intent to demand payment for his or her shares if the Conversion is effected, and (ii) not vote in favor of the Conversion. Following consummation of the Conversion, the Company will send a Dissenters' Notice to each Bank stockholder who has properly perfected his or her dissenters' rights. A dissenting shareholder must also follow the procedures set forth in the Dissenters' Notice. The Dissenters' Notice will include instructions to completing the exercise of dissenters' rights, including that the dissenting stockholder must (1) make written 77 demand for payment of the fair value of his or her shares in the form sent to the stockholder by the corporation along with the Dissenters' Notice (this notice will prescribe a time period within which the demand must be made), (2) certify that the beneficial ownership of his or Bank Common Stock shares was acquired before the date set forth in the Dissenters' Notice, and (3) surrender his or her stock certificates representing shares of the Bank Common Stock in accordance with the Dissenters' Notice. If a stockholder exercises dissenters' rights, the dissenting stockholder is entitled to receive the fair value of his or her shares in cash. Such value may be higher or lower than the value of Exchange Shares issuable pursuant to the Conversion. A vote against the Conversion will not in and of itself satisfy the requirements of the Washington statute; a stockholder who does not deliver to the Bank prior to the Special Meeting a written notice of the stockholder's intent to demand payment for the fair value of the shares of Bank Common Stock held will lose the right to exercise dissenters' rights. In addition, any stockholder electing to exercise dissenters' rights must either vote against the Conversion or abstain from voting. The failure of a stockholder to comply strictly with the statutory requirements will result in a loss of dissenters' rights. A copy of the relevant statutory provisions is attached as Appendix and Minority Stockholders are urged to refer to this Appendix for a complete statement concerning dissenters' rights. The foregoing summary of such rights is qualified in its entirety by reference to such Appendix . MARKETING ARRANGEMENTS The Bank and the Company have engaged Ryan Beck, a National Association of Securities Dealers ("NASD") member firm as a financial and marketing advisor in connection with the Offerings, and Ryan Beck has agreed to use its best efforts to assist the Company with the solicitation of subscriptions for shares of Conversion Stock in the Offerings. The services to be rendered by Ryan Beck include the following: (i) consulting as to the securities marketing implications of any aspect of the Plan or related corporate documents; (ii) reviewing all offering documents, including the Prospectus, stock order forms and related offering materials; (iii) assisting in the design and implementation of a marketing strategy for the Offerings; (iv) organizing and supervising the Stock Information Center, including the proxy solicitation in connection with the Special Meetings to approve the Conversion; (v) training Bank personnel with respect to the Conversion and their roles in the process; (vi) assisting management in scheduling and preparing for meetings with potential investors and broker-dealers; (vii) soliciting stock orders; and (viii) providing such other general advice and assistance as may be requested to promote the successful completion of the Conversion. In addition, Ryan Beck will manage any Syndicated Community Offering. The engagement of Ryan Beck and the services performed thereunder, including any "due diligence" investigation of the operations of the Bank, should not be construed as an endorsement or recommendation of the suitability of an investment in the Common Stock or a verification of the accuracy or completeness of the information contained herein. Ryan Beck has not prepared any report or opinion constituting a recommendation or advice to the Bank or to persons who may purchase shares in the Offerings regarding the suitability of an investment in the Common Stock or as to the prices at which the Common Stock may trade. Based upon negotiations between the Bank, the Company and Ryan Beck, Ryan Beck will receive a management and advisory fee of $50,000, a marketing fee equal to 1.50% of the aggregate Purchase Price of Conversion Stock sold in the Subscription and Minority Stockholders' Offerings, and a marketing fee of 2.0% on such sales in the Community Offering. No fees will be paid to Ryan Beck on subscriptions by any director, officer or employee of the Bank or the Company or members of their immediate families or the ESOP. In the event that a selected dealers agreement is entered into in connection with a Syndicated Community Offering, the Bank will pay a fee to such selected dealers of up to 7.0% including a management fee to Ryan Beck of 1.50% for shares sold by NASD member firms, other than Ryan Beck. Fees to Ryan Beck and to any other NASD member firm may be deemed to be underwriting fees and Ryan Beck and such broker-dealers may be deemed to be underwriters. 78 Ryan Beck will also be reimbursed for its reasonable out-of-pocket expenses, including legal fees of its counsel, up to $35,000, and other expenses not to exceed $15,000 without Company approval. The Bank and the Company have agreed to indemnity Ryan Beck in connection with certain claims or liabilities, including certain liabilities under the Securities Act. Ryan Beck has received advances towards its fees totaling $25,000. Total fees to Ryan Beck, including the $50,000 management and advisory fee, are estimated to be $610,000 and $830,000 at the minimum and the maximum of the Valuation Price Range, respectively. See "Pro Forma Data" for the assumptions used to arrive at these estimates. The management and employees of the Bank may participate in the Offerings in clerical capacities, providing administrative support in effecting sales transactions or answering questions of a mechanical nature, such as the proper execution of the order form. Management of the Bank may answer questions regarding the business of the Bank. Other questions of prospective purchasers, including investment related questions, will be directed to Ryan Beck registered representatives. The management and employees of the Bank have been instructed not to solicit offers to purchase Conversion Stock or to provide advice regarding the purchase of Conversion Stock. None of the Bank's employees or directors who participate in the Offerings will receive any special compensation or other remuneration for such activities. None of the Bank's personnel participating in the Offerings are registered or licensed as a broker or dealer or an agent of a broker or dealer. The Bank's personnel will assist in the above-described sales activities pursuant to an exemption from registration as a broker or dealer provided by Rule 3a4-l ("Rule 3a4-l ") promulgated under the Exchange Act. Rule 3a4-l generally provides that an "associated person of an issuer" of securities shall not be deemed a broker solely by reason of participation in the sale of securities of such issuer if the associated person meets certain conditions. Such conditions include, but are not limited to, that the associated person participating in the sale of an issuer's securities not be compensated in connection therewith at the time of participation, that such person not be associated with a broker or dealer and that such person observe certain limitations on his participation in the sale of securities. For purposes of this exemption, "associated person of an issuer" is defined to include any person who is a director, officer or employee of the issuer or a company that controls, is controlled by or is under common control with the issuer. PROCEDURE FOR PURCHASING SHARES IN OFFERINGS To ensure that each purchaser receives a Prospectus at least 48 hours before the Expiration Date in accordance with Rule l5c2-8 of the Exchange Act, no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the stock order form will confirm receipt or delivery in accordance with Rule 15c2-8. Stock order forms will only be distributed with a Prospectus. To purchase shares in the Subscription, Minority Stockholders' and Community Offerings, an executed stock order form, with the required payment for each share subscribed for, or with appropriate authorization for withdrawal from the subscriber's deposit accounts with the Bank must be received by the Bank at any of its branch offices by Noon, Pacific Time, on the Expiration Date. Stock order forms which are not received by such time or are executed defectively or are received without full payment (or appropriate withdrawal instructions) are not required to be accepted. In addition, the Bank is not obligated to accept orders submitted on photocopied or facsimilied stock order forms. Notwithstanding the foregoing, the Company shall have the right, in its sole discretion, to permit institutional investors to submit irrevocable orders together with a legally binding commitment for payment and to thereafter pay for the shares of Conversion Stock for which they subscribe in the Community Offering at any time prior to 48 hours before the completion of the Conversion. The Company and the Bank have the right to waive or permit the correction of incomplete or improperly executed stock order forms, but do not represent that they will do so. Pursuant to the Plan of Conversion, the interpretation by the Company and the Bank of the terms and conditions of the Plan of Conversion and acceptability of the order form will be final. Once received, an executed stock order form may not be modified, amended or rescinded without the consent of the Bank unless the Company conducts a resolicitation of subscribers. 79 In order to help ensure that prospective purchasers are properly identified as to their stock purchase priorities, depositors as of the Eligibility Record Date (June 30, 1996) or the Supplemental Eligibility Record Date (September 30, 1997) must list all accounts on the stock order form, all account holders' names in each Bank deposit account, and the account number. Payment for subscriptions may be made (i) in cash if delivered in person at any branch office of the Bank; (ii) by check, bank draft or money order; or (iii) by authorization of withdrawal from deposit accounts maintained with the Bank. Interest will be paid on payments made by cash, check, bank draft or money order at the Bank's passbook rate of interest from the date payment is received until the completion or termination of the Conversion. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn will continue to accrue interest at the contractual rates until completion or termination of the Conversion, but a hold will be placed on such funds, thereby making them unavailable to the depositor. At the completion of the Conversion, withdrawals will be made and the funds received in the Offerings will be used to purchase the shares of Conversion Stock. The shares issued in the Conversion cannot and will not be insured by the FDIC or any other governmental agency. The Bank will waive any applicable penalties for early withdrawal from certificate accounts at the Bank. If the remaining balance in a certificate account is reduced below the applicable minimum balance requirement at the time that the funds actually are transferred under the authorization, the certificate will be canceled at the time of the withdrawal, without penalty, and the remaining balance will earn interest at the passbook rate. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but rather, may pay for such shares of Conversion Stock subscribed for at the Purchase Price upon consummation of the Offerings; provided, that there is in force from the time of its subscription until such time, a loan commitment from an unrelated financial institution or the Company to lend to the ESOP, at such time, the aggregate Purchase Price of the shares for which it subscribed. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of Conversion Stock in the Offerings, provided that such IRAs are not maintained at the Bank. Persons with self-directed IRAs maintained at the Bank must have their accounts transferred to an unaffiliated institution or broker to purchase shares of Conversion Stock in the Offerings. In addition, the provisions of ERISA and IRS regulations require that officers, directors and ten percent shareholders who use self-directed IRA funds to purchase shares of Conversion Stock in the Offerings, make such purchases for the exclusive benefit of IRAs. Certificates representing, shares of Conversion Stock purchased, and any refund due, will be mailed to purchasers at such address as may be specified in properly completed stock order forms as soon as practicable following consummation of the sale of all shares of Conversion Stock. Any certificates returned as undeliverable will be disposed of in accordance with applicable law. Until certificates for the Common Stock are available and delivered to subscribers and purchasers, subscribers and purchasers may not be able to sell the shares of Common Stock for which they subscribed or purchased. STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED The Plan of Conversion requires that the aggregate purchase price of the securities sold in connection with the Conversion be based upon an estimated pro forma value of the Bank and the MHC (i.e., taking into account the expected receipt of proceeds from the sale of securities in the Conversion) as determined by an independent appraisal. The Bank and the Company have retained RP Financial to prepare an appraisal of the pro forma market value of the common stock and a business plan. A COPY OF THE APPRAISAL IS AVAILABLE FOR INSPECTION AT EACH OFFICE OF THE BANK. RP Financial will receive a fee expected to total approximately $35,000 for its appraisal services and preparation of a business plan, plus reasonable out-of-pocket expenses incurred in connection with the appraisal. The Bank has agreed to indemnify RP Financial under certain circumstances against liabilities and expenses (including legal fees) arising out of, related to, or based upon the Conversion. 80 RP Financial prepared the Appraisal dated August 15, 1997 and as updated on October 10, 1997, which states that the aggregate pro forma market value of the Bank and the Mutual Holding Company inclusive of the sale of an approximate 67.83% ownership interest in the Offerings was $53,034,770 at the midpoint as of August 15, 1997 and $73,713,696 at the midpoint as updated on October 10, 1997. The Appraisal was multiplied by 67.83%, which is the Mutual Holding Company's percentage ownership interest in the Bank as adjusted upward from the 66.31% to reflect $1,230,000 of dividends declared by the Bank and waived by the Mutual Holding Company and the $120,000 in assets held by the MHC. The resulting amount, $50,000,000, is the midpoint of the dollar amount of Conversion Stock to be offered in the Offerings. The minimum and maximum of the offering range were set at 15% below and above the midpoint, respectively, resulting in an offering range of $42,500,000 to $57,500,000 of Conversion Stock. The Boards of Directors of the Company and the Bank determined that the Conversion Stock would be sold at $10.00 per share, resulting in a range of 4,250,000 to 5,750,000 shares of Conversion Stock being offered. The Plan of Conversion requires that all of the shares subscribed for in the Offerings be sold at the same price per share. The Appraisal involved a comparative evaluation of the operating and financial statistics of the Bank with those of other thrift institutions. The Appraisal also took into account such other factors as the market for thrift institution stocks generally, prevailing economic conditions, both nationally and in the State of Washington, which affect the operations of thrift institutions, the competitive environment within which the Bank operates and the effect of the Bank becoming a subsidiary of the Company. No detailed individual analysis of the separate components of the MHC's and the Bank's assets and liabilities was performed in connection with the evaluation. The Board of Directors reviewed the appraisal, including the methodology and the appropriateness of the assumptions utilized by RP Financial, and the Board accepted the valuation. Following commencement of the Subscription and Community Offerings, the maximum of the Valuation Price Range may be increased up to 15% and the number of shares of Conversion Stock to be issued in the Conversion may be increased to 6,612,500 shares due to regulatory considerations, changes in market conditions or general financial and economic conditions, without the resolicitation of subscribers. See "--Limitations on Purchases and Ownership of Shares" as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the Valuation Price Range to fill unfilled orders in the Offerings. No sale of the shares will take place until RP Financial confirms to the Division and the FDIC that, to the best of RP Financial's knowledge and judgment, nothing of a material nature has occurred which would cause it to conclude that the aggregate Purchase Price (i.e. gross proceeds) received in the Offerings is incompatible with its Appraisal. If, however, the facts do not justify such a statement, the Offerings may be canceled, a new Valuation Price Range and price per share set and new Subscription, Minority Stockholders, Community and Syndicated Community Offerings held. If, based on RP Financial's estimate, the pro forma market value of Common Stock as of such date is not more than 15% above the maximum and not less than the minimum of the Valuation Price Range, then (1) with the approval of the Division and the FDIC, the number of shares of Conversion Stock to be issued may be increased or decreased, pro rata to the increase or decrease in value without resolicitation of subscriptions, to no more than 6,612,500 shares or no less than 4,250,000 shares, and (2) all shares purchased in the Offerings will be purchased for the Purchase Price of $10.00 per share. See "-- Limitations on Purchases and Ownership of Shares" for a description of the distribution and allocation of additional shares that may be issued in the event of an increase in the Valuation Price Range to fill unfilled orders in the Subscription, Minority Stockholders' and Community Offerings. In formulating the Appraisal, RP Financial relied upon the truthfulness, accuracy and completeness of all documents the Bank furnished it. RP Financial also considered financial and other information from regulatory agencies, other financial institutions and other public sources, as appropriate. While RP Financial believes this information to be reliable, RP Financial does not guarantee the accuracy or completeness of such information and did not independently verify the financial statements and other data provided by the Bank and the Company or independently value the assets or liabilities of the Company and the Bank. THE APPRAISAL BY RP 81 FINANCIAL IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE CONVERSION STOCK OR RECEIVE EXCHANGE SHARES IN THE CONVERSION WILL BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE PRICE. LIMITATIONS ON PURCHASES AND OWNERSHIP OF SHARES The Plan of Conversion sets forth purchase limitations applicable to the Offerings. The minimum stock order is 25 shares. Except for the ESOP, which is expected to purchase 2% of the Conversion Stock sold, no person (or persons through a single subscription right), together with any associate or group or persons acting in concert, may subscribe for more than $250,000 in all categories of the Offerings combined. In addition to these purchase limitations, no person, together with any associate or group of persons acting in concert may, upon completion of the Conversion, own more than 2% of the Common Stock outstanding. This ownership limitation pertains to the aggregate of Conversion Stock purchased and Exchange Shares received by the subscriber. Notwithstanding the foregoing, no Minority Stockholder will be required to dispose of Minority Shares if, without purchasing Conversion Stock, the Exchange will result in ownership of in excess of 2% of the Common Stock. The purchase limitations and ownership limitation may be changed at the discretion of the Company, as described herein. The Bank's and the Company's Boards of Directors may, in their sole discretion, increase the maximum purchase limitation to 9.99% of the shares of Conversion Stock sold in the Conversion, provided that orders for shares which exceed 5% of the shares of Conversion Stock sold in the Conversion may not exceed, in the aggregate, 10% of the shares sold in the Conversion. If the Board of Directors decides to increase the purchase limitation above $250,000, all persons who subscribed for the maximum number of shares will be given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. In the event of an increase in the total number of shares offered in the Conversion due to an increase in the Valuation Price Range of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated in the following priority in accordance with the Plan: (i) in the event that there is an oversubscription by Eligible Account Holders, to fill their unfulfilled subscriptions; (ii) to fill the ESOP's subscription of up to 2% of the Adjusted Maximum number of shares; (iii) in the event that there is an oversubscription by Supplemental Eligible Account Holders, to fill their unfulfilled subscriptions; (iv) in the event that there is an oversubscription by Other Members, to fill their unfulfilled subscriptions; (v) in the event that there is an oversubscription by Minority Stockholders to fill their subscriptions; and (iv) to fill unfulfilled subscriptions in the Community Offering with preference to Preferred Subscribers. The term "associate" of a person is defined in the Plan to mean (i) any corporation or organization (other than the Bank or a majority-owned subsidiary of the Bank or the Company) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity (excluding tax-qualified employee plans); and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Bank, or any of its subsidiaries, or the Mutual Holding Company. For example, a corporation of which a person serves as an officer would be an associate of such person and, therefore, all shares purchased by such corporation would be included with the number of shares which such person could purchase individually under the above limitations. The term "acting in concert" is defined in the Plan to mean (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express 82 agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company which acts in concert with another person or company ("other party") shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated. The term "officer" is defined in the Plan to mean an executive officer of the Bank, the Company or the MHC. The term "resident" as used herein means any person who, on the date of the Prospectus, maintained a bona fide residence within the Local Community (i.e., the counties of Thurston, Mason, Pierce, King, Snohomish, Kitsap, and Grays Harbor in the State of Washington) and has manifested an intent to remain within the Local Community for a period of time. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall be within the Local Community. To the extent the person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is bona fide resident of the Local Community. In all cases, however, such determination shall be in the sole discretion of the Bank and shall be determined on a case-by-case basis without regard to prior determination. Common Stock purchased in the Offerings or received in the Exchange pursuant to the Conversion will be freely transferable, except for shares purchased by directors and officers of the Bank and the Company and by NASD members. See "--Restrictions on Transferability by Directors and Officers and NASD Members." RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS Shares of Conversion Stock purchased by directors and officers of the Company may not be sold for a period of one year following completion of the Conversion, except in the event of the death of the stockholder or in any exchange of the Common Stock in connection with a merger or acquisition of the Company. Shares of Common Stock received by directors or officers upon exercise of options issued pursuant to the Stock Option Plan are not subject to this restriction. Accordingly, shares of Common Stock issued by the Company to directors and officers shall bear a legend giving appropriate notice of the restriction and, in addition, the Company will give appropriate instructions to the transfer agent for the Common Stock with respect to the restriction on transfers. Any shares issued to directors and officers as a stock dividend, stock split or otherwise with respect to restricted Common Stock shall be subject to the same restrictions. Purchases of outstanding shares of Common Stock of the Company by directors, executive officers (or any person who was an executive officer or director of the Bank after adoption of the Plan of Conversion) and their associates during the three-year period following Conversion may be made only through a broker or dealer registered with the SEC, except with the prior written approval of the Division. This restriction does not apply, however, to negotiated transactions involving more than 1% of the Company's outstanding Common Stock or to the purchase of stock pursuant to the Stock Option Plan. The Company has filed with the SEC a registration statement under the Securities Act for the registration of the Common Stock to be issued pursuant to the Conversion. The registration under the Securities Act of shares of the Common Stock to be issued in the Conversion does not cover the resale of such shares. Shares of Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including, those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading, in such shares during the 83 preceding, four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. In addition, under guidelines of the NASD, members of the NASD and their associates are subject to certain restrictions on the transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of such securities. RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK The following discussion is a summary of certain provisions of Washington and Federal law and regulations and Washington corporate law, as well as the Articles of Incorporation and Bylaws of the Company, relating to stock ownership and transfers, the Board of Directors and business combinations, all of which may be deemed to have "anti-takeover" effects. The description of these provisions is necessarily general and reference should be made to the actual law and regulations and to the Articles of Incorporation and Bylaws of the Company. See "Additional Information" as to how to obtain a copy of these documents. WASHINGTON LAW As required by Washington law, as soon as practicable following the Conversion, the Bank will enter into an agreement with the Division which will provide that for a period of three years following the date of Conversion, any company significantly engaged in an unrelated business activity (either directly or through an affiliate thereof) shall not be permitted to acquire control of the Bank. For purposes of this agreement, a person or company shall be deemed to have "control" of the Bank if the person directly or indirectly or acting, in concert with one or more other persons or through one or more subsidiaries, owns, controls, or holds with power to vote, or holds proxies representing, more than 25% of the voting shares of the Company, or controls in any manner the election of a majority of the directors of the Company. A company shall be deemed to be "significantly engaged" in an unrelated business activity if such activity represents on either an actual or a pro forma basis more than 15% of its consolidated net worth at the close of its preceding fiscal year or of its consolidated net earnings for such fiscal year. The term "unrelated business activity" means any business activity not authorized for a savings bank or any subsidiary thereof. In addition, for a period of three years following completion of the Conversion, no person or entity may make directly, or indirectly, any offer to acquire or actually acquire capital stock of the Bank (or the Company) if, after consummation of such acquisition, such person would be the beneficial owner of more than 10% of the Bank's (or Company's) capital stock, without the prior approval of the Division. However, approval is not required for purchases directly from the Bank or Company or the underwriters or selling group acting on their behalf with a view towards public resale, or for purchases not exceeding 1% per annum of the shares outstanding. FEDERAL BANKING LAW Federal Change in Bank Control Law. The Change in Bank Control Act requires any person or group of persons acting in concert who at any time intend to acquire control of an insured depository institution or its parent holding company to give 60 days prior written notice to the "appropriate Federal banking agency." The Federal Reserve is the "appropriate Federal banking agency" for bank holding companies. Control for these purposes exists when the acquiring party owns or controls at least 10% of any class of voting securities of a bank holding company registered under the Exchange Act or has the power to direct the management or policies of an institution. Federal Bank Holding Company Law. The BHCA provides that no company may acquire "control" of a bank or bank holding company) without the prior approval of the Federal Reserve. Any company that acquires such control becomes a "bank holding company" subject to registration, examination and regulation by the Federal Reserve. Pursuant to the BHCA, a company has control over a bank or bank holding company if it has 84 the power to vote 25% or more of any class of voting stock of the bank or bank holding company, controls the election of a majority of the directors of the bank or bank holding company, or exercises a controlling, influence over the management or policies of the bank or bank holding company. The Federal Reserve may find that a company controls a bank or bank holding company if the company owns or controls more than 10% of any class of voting securities of the bank or bank holding company and certain other relationships exist between the company and the bank or bank holding company. The Federal Reserve may prohibit an acquisition of control if it finds, among other things, that (i) the acquisition would result in a monopoly or substantially, lessen competition, (ii) the financial condition of the acquiring person might jeopardize the financial stability of the institution, or (iii) the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. ANTI-TAKEOVER PROVISIONS A number of provisions of the Company's Articles of Incorporation and Bylaws deal with matters of corporate government and certain rights of stockholders. The following discussion is a general summary of certain provisions of the Company's Articles of Incorporation and Bylaws and regulatory provisions relating to stock ownership and transfers, the Board of Directors and business combinations which might be deemed to have a potential "anti-takeover" effect. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual Company stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of incumbent Board of Directors or management of the Company more difficult. The following description of certain of the provisions of the Articles of Incorporation and Bylaws of the Company is necessarily general, and reference should be made in each case to such Articles of Incorporation and Bylaws, which are incorporated herein by reference. See "Additional Information" as to how to obtain a copy of these documents. Policy of Independence. In addition to Article and Bylaw provisions which might be deemed to have potential "anti-takeover" effects, the Company's Board of Directors has adopted a statement of policy that the Company intends to remain independent for the foreseeable future. Thus, potential investors should not invest in Company Common Stock with the expectation that the Company or the Bank may be merged into or its assets sold to another company in the foreseeable future. Restrictions on Acquisitions of Securities. The Articles of Incorporation provide that for a period of five years from the effective date of the Conversion, no person may acquire directly or indirectly acquire the beneficial ownership of more than 10% of any class of equity security of the Company, unless such offer or acquisition shall have been approved in advance by a two-thirds vote of the Company's Continuing Directors (as defined in the Articles of Incorporation). This provision does not apply to any employee stock benefit plan of the Company. In addition, during such five-year period, no shares beneficially owned in violation of the foregoing percentage limitation, as determined by the Company's Board of Directors, shall be entitled to vote in connection with any matter submitted to stockholders for a vote. Additionally, the Articles of Incorporation provides for further restrictions on voting rights of shares owned in excess of 10% of any class of equity security of the Company beyond five years after the Conversion. Specifically, the Articles of Incorporation provides that if, at any time after five years from the Conversion, any person acquires the beneficial ownership of more than 10% of any class of equity security of the Company, then, with respect to each vote in excess of 10%, the record holders of voting stock of the Company beneficially owned by such person shall be entitled to cast only one-hundredth of-one vote with respect to each vote in excess 10% of the voting power of the outstanding shares of voting stock of the Company which such record holders would otherwise be entitled to cast without giving effect to the provision, and the aggregate voting power of such record holders shall be allocated proportionately among such record holders. An exception from the restriction is provided if the acquisition of more than 10% of the securities received the prior approval by a two-thirds vote of the Company's "Continuing Directors." Under the Company's Articles of Incorporation, the restriction on voting shares beneficially owned in violation of the foregoing limitations is imposed automatically. In order to prevent the imposition of such restrictions, the Board 85 of Directors must take affirmative action approving in advance a particular offer to acquire or acquisition. Unless the Board took such affirmative action, the provision would operate to restrict the voting by beneficial owners of more than 10% of the Company's Common Stock in a proxy contest. Board of Directors. The Board of Directors of the Company is divided into three classes, each of which shall contain approximately one-third of the whole number of the members of the Board. The members of each class shall be elected for a term of three years, with the terms of office of all members of one class expiring each year so that approximately one-third of the total number of directors are elected each year. The Company's Articles of Incorporation provides that the size of the Board shall be as set forth in the Bylaws. The Bylaws currently set the number of directors at eight. The Articles of Incorporation provides that any vacancy occurring in the Board, including a vacancy created by an increase in the number of directors, shall be filled by a vote of two-thirds of the directors then in office and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires. The classified Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting, power to gain control of the Board of Directors without the consent of the incumbent Board of Directors of the Company. The Articles of Incorporation of the Company provide that a director may be removed from the Board of Directors prior to the expiration of his term only for cause and only upon the vote of 66.66% of the outstanding shares of voting stock. In the absence of this provision, the vote of the holders of a majority of the shares could remove the entire Board, but only with cause, and replace it with persons of such holders' choice. Cumulative Voting Special Meetings and Action by Written Consent. The Articles of Incorporation do not provide for cumulative voting for any purpose. Moreover, the Articles of Incorporation provides that special meetings of stockholders of the Company may be called only by the Board of Directors of the Company and that stockholders may take action only at a meeting and not by written consent. Authorized Shares. The Articles of Incorporation authorize the issuance of 15,000,000 shares of Common Stock and 2,500,000 shares of preferred stock. The shares of Common Stock and preferred stock were authorized in an amount greater than that to be issued in the Conversion to provide the Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and the exercise of employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the Board has the power to the extent consistent with its fiduciary duty to issue a series of preferred stock to persons friendly to management in order to attempt to block a tender offer, merger or other transaction by which a third party seeks control of the Company, and thereby assist members of management to retain their positions. The Company's Board currently has no plans for the issuance of additional shares, other than the issuance of shares of Common Stock upon exercise of stock options. Stockholder Vote Required to Approve Business Combinations with Principal Stockholders. The Articles of Incorporation require the approval of the holders of at least 66.66% of the Company's outstanding shares of voting stock to approve certain "Business Combinations" (as defined therein) involving a "Related Person" (as defined therein) except in cases where the proposed transaction has been approved in advance by a majority of those members of the Company's Board of Directors who are unaffiliated with the Related Person and were directors prior to the time when the Related Person became an Related Person. The term "Related Person" is defined to include any individual, corporation, partnership or other entity (other than the Company or its subsidiary) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Company or an affiliate of such person or entity. This provision of the Articles of Incorporation applies to any "Business Combination" which is defined to include: (i) any merger or consolidation of the Company with or into any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other disposition of 25% or more of the assets of the Company or combined assets of the Company and its subsidiaries to a Related Person; (iii) any, merger or consolidation of a Related Person with or into the Company 86 or a subsidiary of the Company; (iv) any sale, lease, exchange, transfer, or other disposition of 25% or more of the assets of a Related Person to the Company or a subsidiary of the Company; (v) the issuance of any securities of the Company or a subsidiary of the Company to a Related Person; (vi) the acquisition by the Company or a subsidiary, of the Company of any securities of a Related Person; (vii) any reclassification of common stock of the Company or any recapitalization involving the common stock of the Company; or (viii) any agreement or other arrangement providing for any of the foregoing. Under Washington law, absent this provision, business combinations, including mergers, consolidations and sales of substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of common stock of the Company and any other affected class of stock. One exception under Washington law to the majority approval requirement applies to stockholders owning 15% or more of the common stock of a corporation for a period of less than three years. Such 15% stockholder, in order to obtain approval of a business combination, must obtain the approval of two-thirds of the outstanding stock, excluding the stock owned by such 15% stockholder, or satisfy other requirements under Washington law relating to board of director approval of his acquisition of the shares of the Company. The increased stockholder vote required to approve a business combination may have the effect of foreclosing mergers and other business combinations which a majority of stockholders deem desirable and place the power to prevent such a merger or combination in the hands of a minority of stockholders. Amendment of Articles of Incorporation and Bylaws. Amendments to the Company's Articles of Incorporation must be approved by a majority of its Board of Directors and also by a majority of the outstanding shares of its voting stock, provided, however, that an affirmative vote of at least 66.66% of the outstanding voting stock entitled to vote (after giving effect to the provision limiting voting rights) is required to amend or repeal certain provisions of the Articles of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, calling special meetings, the number and classification of directors, director and officer indemnification by the Company and amendment of the Company's Bylaws and Articles of Incorporation. The Company's Bylaws may, be amended by its Board of Directors, or by a vote of 66.66% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Stockholder Nominations and Proposals. The Articles of Incorporation of the Company requires a stockholder who intends to nominate a candidate for election to the Board of Directors, or to raise new business at a stockholder meeting to give not less than 30 nor more than 50 days' advance notice to the Secretary of the Company. The notice provision requires a stockholder who desires to raise new business to provide certain information to the Company concerning the nature of the new business, the stockholder and the stockholder's interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide the Company with certain information concerning the nominee and the proposing stockholder. DESCRIPTION OF CAPITAL STOCK OF THE COMPANY GENERAL The Company is authorized to issue 15,000,000 shares of Common Stock having no par value per share and 2,500,000 shares of preferred stock having no par value per share. The Company, currently expects to issue up to 8,477,075 shares of Common Stock (at the maximum of the Valuation Price Range) and no shares of preferred stock in the Conversion. Each share of the Common Stock will have the same relative rights as, and will be identical in all respects with, each other share of Common Stock. Upon payment of the Purchase Price for the Common Stock, in accordance with the Plan of Conversion, all such stock will be duly authorized, fully paid and nonassessable. THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC. 87 COMMON STOCK Dividends. The Company can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its Board of Directors. The payment of dividends by the Company is subject to limitations which are imposed by law and applicable regulation. See "Dividend Policy" and "Supervision and Regulation." The holders of Common Stock of the Company will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors of the Company out of funds legally available therefor. If the Company issues preferred stock, the holders thereof may have a priority over the holders of the Common Stock with respect to dividends. Voting Rights. Upon Conversion, the holders of Common Stock of the Company will possess exclusive voting rights in the Company. They will elect the Company's Board of Directors and act on such other matters as are required to be presented to them under Washington law or as are otherwise presented to them by the Board of Directors. Except as discussed in "Restrictions on Acquisition of the Company and the Bank," each holder of Common Stock will be entitled to one vote per share and will not have any right to accumulate votes in the election of directors. If the Company issues preferred stock, holders of the Company preferred stock may also possess voting rights. Certain matters require a vote of 66.66% of the outstanding shares entitled to vote thereon. See "Restrictions on Acquisition of the Company and the Bank." Liquidation. In the event of any liquidation, dissolution or winding up of the Bank, the Company, as holder of the Bank's capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities of the Bank (including all deposit accounts and accrued interest thereon) and after distribution of the balance in the special liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders (see "The Conversion"), all assets of the Bank available for distribution. In the event of liquidation, dissolution or winding up of the Company, the holders of its Common Stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of the Company available for distribution. If Company preferred stock is issued, the holders thereof may have a priority over the holders of the Common Stock in the event of liquidation or dissolution. Preemptive Rights. Holders of the Common Stock of the Company will not be entitled to preemptive rights with respect to any shares which may be issued. The Common Stock is not subject to redemption. PREFERRED STOCK None of the shares of the authorized Company preferred stock will be issued in the Conversion and there are no plans to issue the preferred stock. Such stock may be issued with such designations, powers, preferences and rights as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the Common Stock and may assist management in impeding an unfriendly takeover or attempted change in control. RESTRICTIONS ON ACQUISITION Acquisitions of the Company are restricted by provisions in its Articles of Incorporation and Bylaws and by the rules and regulations of various regulatory agencies. See "Supervision and Regulation" and "Restrictions on Acquisition of the Company and the Bank." COMPARISON OF STOCKHOLDERS' RIGHTS GENERAL. As a result of the Conversion, holders of the Bank Common Stock will become stockholders of the Company, a Washington corporation. There are certain differences in stockholder rights arising from distinctions between the Bank's Washington State Stock Articles and Bylaws and the Company's Articles of 88 Incorporation and Bylaws and from distinctions between laws with respect to savings institutions and the Washington Business Corporation Act ("WBCA"). The discussion herein is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the material differences and similarities affecting the rights of stockholders. The discussion is qualified in its entirety by reference to the Articles of Incorporation and Bylaws of the Company and the Bank ("Articles" and "Bylaws") and the WBCA. See "Additional Information" for procedures for obtaining a copy of the Company's Articles and Bylaws. AUTHORIZED CAPITAL STOCK. The Company's authorized capital stock consists of 15,000,000 shares of Common Stock, no par value per share, and 2,500,000 shares of preferred stock, no par value per share ("Preferred Stock"). The Bank's authorized capital stock consists of 10,000,000 shares of Bank Common Stock, par value $1.00 per share, and 5,000,000 shares of blank check preferred stock, par value $1.00 per share. The shares of Common Stock and Preferred Stock were authorized in an amount greater than that to be issued in the Conversion to provide the Company's Board of Directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and grants of employee stock options. The Board of Directors has sole authority to determine the terms of any one or more series of Preferred Stock, including dividends, voting rights, conversion rates, if any, and liquidation preferences. ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and regulations, the MHC is required to own not less than a majority of the outstanding Bank Common Stock. There will be no such restriction applicable to the Company following consummation of the Conversion. Neither the Articles of the Bank or the Company contain restrictions on the issuance of shares of capital stock to directors, officers or controlling persons. Thus, stock-related compensation plans such as stock option plans could be adopted by either Company without stockholder approval and shares of capital stock could be issued directly to directors or officers without stockholder approval. Unlike the Bank, the Company will be subject to jurisdiction of the NASD. The Rules of the NASD generally require corporations with securities which are quoted on the Nasdaq National Market to obtain stockholder approval of most stock compensation plans for directors, officers and key employees of the corporation. Moreover, although generally not required, stockholder approval of stock related compensation plans may be sought in certain instances in order to qualify such plans for favorable federal income tax and securities law treatment under current laws and regulations. The Company plans to submit the stock compensation plans discussed herein to its stockholders for approval. VOTING RIGHTS. Neither the Bank's Articles or Bylaws nor the Company's Articles or Bylaws currently provide for cumulative voting in elections of directors. For additional information regarding voting rights, see "-- Limitations on Acquisitions of Voting Stock and Voting Rights" below. PAYMENT OF DIVIDENDS. The ability of the Bank to pay dividends on its capital stock is restricted by applicable Washington banking law and by federal income tax considerations related to savings institutions such as the Bank. See "Supervision and Regulation--Banking Subsidiary." Although the Company is not subject to these restrictions as a Washington corporation, such restrictions will indirectly affect the Company because dividends from the Bank will be a primary source of funds of the Company for the payment of dividends to stockholders of the Company. Certain restrictions generally imposed on Washington corporations may also have an impact on the Company's ability to pay dividends. The WBCA provides that dividends may be paid only if, after giving effect to the dividend, the Company will be able to pay its debts as they become due in the ordinary course of business and the Company's total assets will not be less than the sum of its total liabilities plus the amount that would be needed, if the Company 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. BOARD OF DIRECTORS. The Company's Articles require the Board of Directors of the Company to be divided into three classes as nearly equal in number as possible and that the members of each class shall be elected for a 89 term of three years and until their successors are elected and qualified, with one class being elected annually. No such provision is contained in the Articles or Bylaws of the Bank. Under the Bank's Bylaws, any vacancies in the Board of Directors of the Bank may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. Persons elected by the directors of the Bank to fill vacancies may only serve until the next annual meeting of stockholders. Under the Company's Articles, any vacancy occurring in the Board of Directors of the Company, including any vacancy created by reason of an increase in the number of directors, may be filled by the remaining directors, and any director so chosen shall hold office for the remainder of the term to which the director has been elected and until his or her successor is elected and qualified. Under the Bank's Bylaws, any director may be removed with or without cause by the holders of a majority of the outstanding voting shares. The Company's Articles provide that any director may be removed for cause by a majority of the directors of the Company or by the holders of at least 66 2/3% of the outstanding voting shares of the Company. LIMITATIONS ON LIABILITY. The Company's Articles provide that directors shall not be personally liable for monetary damages to the Company or Bank for conduct other than conduct that is adjudged to involve intentional misconduct and other acts defined in the Articles as "Egregious Conduct." 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 the Company. INDEMNIFICATION OF DIRECTORS AND OFFICERS-DIRECTORS. Directors and persons who serve as officers and directors of the Bank and the Company are indemnified with respect to certain actions pursuant to their respective Articles, which comply with applicable Washington law regarding indemnification. The WBCA allows the Company to indemnify the aforementioned persons for expenses, settlements, judgments and fines in suits in which such person has made a party by reason of the fact that he or she is or was an agent of the Company. 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. SPECIAL MEETINGS OF STOCKHOLDERS. The Company's and the Bank's Articles provide that special meetings of the stockholders may be called by the Chairman, President, a majority of the Board of Directors or the holders of not less than one tenth of the outstanding capital stock of the Company entitled to vote at the meeting. STOCKHOLDER NOMINATIONS. The Company's Articles and the Bank's Bylaws generally provide that any stockholder desiring to make a nomination for the election of directors at a meeting of stockholders must submit written notice to the Company at least 14 days and not more than 50 days in advance of the meeting, together with certain information relating to the nomination. Failure to comply with these advance notice requirements will preclude such nominations from being considered at the meeting. Management believes that it is in the best interests of the Company and its stockholders to provide sufficient time to enable management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations, should management determine that doing so is in the best interest of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted. In certain instances, such provisions could make it more difficult to oppose management's nominees, even if stockholders believe such nominees or proposals are in their best interests. STOCKHOLDER ACTION WITHOUT A MEETING. The Bylaws of the Company and the Bank provide that any action to be taken or which may be taken at any annual or special meeting of stockholders may be taken if a consent in writing, setting forth the actions so taken, is given by the holders of all outstanding shares entitled to vote. 90 STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. The WBCA provides that a stockholder may inspect books and records upon written demand stating the purpose of the inspection, if such purpose is reasonably related to such person's interest as a stockholder. LIMITATIONS ON ACQUISITIONS OF VOTING STOCK AND VOTING RIGHTS. The Company's Articles of Incorporation provide that no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of (i) more than 10% of the issued and outstanding shares of any class of an equity security of the Company, or (ii) any securities convertible into, or exercisable for, any equity securities of the Company if, assuming conversion or exercise by such person of all securities of which such person is the beneficial owner which are convertible into, or exercisable for, such equity securities (but of no securities convertible into, or exercisable for, such equity securities of which such person is not the beneficial owner), such person would be the beneficial owner of more than 10% of any class of an equity security of the Company. The term "person" is broadly defined in the Articles to prevent circumvention of this restriction. The foregoing restrictions do not apply to (i) any offer with a view toward public resale made exclusively to the Company by underwriters or a selling group acting on its behalf, (ii) any employee benefit plan established by the Company or the Bank, and (iii) any other offer or acquisition approved in advance by the affirmative vote of two-thirds of the Company's Board of Directors. In the event that shares are acquired in violation of this restriction, all shares beneficially owned by any person in excess of 10% during the period ending five years from the Effective Time of the Conversion shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to stockholders for a vote. If at any time after five years from the Effective Time of the Conversion shares are acquired in violation of this restriction, all shares beneficially owned in excess of 10% shall be counted at one hundredth of a vote. Neither the Articles nor the Bylaws of the Bank contains a provision which restricts voting rights of certain stockholders of the Bank in the manner set forth above. REGISTRATION REQUIREMENTS The Company will register the Common Stock with the SEC pursuant to Section 12(g) of the Exchange Act upon the completion of the Conversion and will not deregister its Common Stock for a period of at least three years following the completion of the Conversion. Upon such registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of the Exchange Act will be applicable to the Company and its stockholders. LEGAL AND TAX OPINIONS The legality of the Common Stock has been passed upon for the Company by Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. The federal tax consequences of the Offerings have been opined upon by KPMG Peat Marwick LLP and the Washington tax consequences of the Offerings have been opined upon by Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., Tacoma and Seattle, Washington, and they have consented to the references herein to their opinions. Certain legal matters will be passed upon for Ryan Beck by Breyer and Aguggia, Washington, D.C. EXPERTS The consolidated financial statements of Heritage Savings Bank and Subsidiaries as of June 30, 1996 and 1997, and for each of the years in the three year period ended June 30, 1997 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, upon the authority of said firm as experts in accounting and auditing. 91 RP Financial has consented to the publication herein of the summary of its letter to the Bank setting forth its opinion as to the estimated pro forma market value of the Common Stock and to the use of its name and statements with respect to it appearing herein. ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement on Form S-1 (File No. 333-35573) under the Securities Act with respect to the Common Stock offered in the Conversion. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. Such information may be inspected at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 7 World Trade Center (13th Floor), New York, New York 10048. Copies may be obtained at prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street N.W., Washington, D.C. 20549. The Bank has filed with the Division an Application for Approval of Conversion, which includes proxy materials for the Mutual Holding Company's Special Meeting, the Minority Stockholder Meeting and certain other information. This Prospectus omits certain information contained in such Application. The Application, including the proxy materials, exhibits and certain other information that are a part thereof, may be inspected, without charge, at the offices of the Division at the General Administration Building, Third Floor West, 210 11th Avenue West, Olympia, Washington 98504. 92 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS HERITAGE SAVINGS BANK AND SUBSIDIARIES
PAGES ----- Independent Auditors' Report............................................ F-2 Consolidated Statements of Financial Condition as of June 30, 1996 and 1997................................................................... F-3 Consolidated Statements of Income for the Years Ended June 30, 1995, 1996 and 1997.......................................................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1994, 1995, 1996 and 1997.......................................... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1996 and 1997.......................................................... F-6 Notes to the Consolidated Financial Statements.......................... F-7
Separate financial statements on the Company have not been included since it will not engage in material transactions until after the Conversion. The Company, which has been inactive to date, has no significant assets, liabilities, revenues, expenses or contingent liabilities. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Heritage Savings Bank We have audited the accompanying consolidated statements of financial condition of Heritage Savings Bank and subsidiaries as of June 30, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997. These consolidated financial statements are the responsibility of the Savings Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally acceptable auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Heritage Savings Bank and subsidiaries as of June 30, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Seattle, Washington August 8, 1997 F-2 HERITAGE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
JUNE 30 ----------------- 1996 1997 -------- ------- ASSETS Cash on hand and in banks................................... $ 6,308 7,412 Interest earning deposits................................... 11,774 175 Investment securities held to maturity...................... 15,292 8,506 Mortgage backed securities held to maturity................. 5,979 5,159 Loans held for sale......................................... 5,286 6,323 Loans receivable............................................ 163,617 201,870 Less: Allowance for loan losses............................. (1,873) (2,752) -------- ------- Loans, net.............................................. 161,744 199,118 Premises and equipment, net................................. 11,209 12,202 Federal Home Loan Bank stock................................ 1,400 1,511 Accrued interest receivable................................. 1,385 1,380 Prepaid expenses and other assets........................... 1,675 378 -------- ------- $222,052 242,164 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits.................................................... 191,119 209,781 Advances from Federal Home Loan Bank........................ -- 890 Advance payments by borrowers for taxes and insurance....... 535 473 Accrued expenses and other liabilities...................... 3,515 2,605 Deferred Federal income taxes............................... 1,250 701 -------- ------- 196,419 214,450 -------- ------- Stockholders' equity: Preferred stock, $1 par value per share. 5,000,000 shares authorized; none outstanding............................. -- -- Common stock, $1 par value per share 10,000,000 shares authorized; 1,805,666 and 1,809,616 shares outstanding, respectively............................................. 1,806 1,810 Additional paid-in capital................................ 4,067 4,103 Retained earnings, substantially restricted............... 19,760 21,801 -------- ------- Total stockholders' equity.............................. 25,633 27,714 Commitments and contingencies -------- ------- $222,052 242,164 ======== =======
See accompanying notes to consolidated financial statements. F-3 HERITAGE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts)
YEAR ENDED JUNE 30 --------------------- 1995 1996 1997 ------- ------ ------ Interest income: Loans................................................. $13,115 14,894 16,743 Mortgage backed securities............................ 722 552 464 Investment securities and Federal Home Loan Bank dividends............................................ 1,118 854 757 Interest bearing deposits............................. 268 575 548 ------- ------ ------ Total interest income............................... 15,223 16,875 18,512 ------- ------ ------ Interest expense: Deposits.............................................. 6,639 8,528 8,999 Borrowed funds........................................ 357 15 1 ------- ------ ------ Total interest expense.............................. 6,996 8,543 9,000 ------- ------ ------ Net interest income............................... 8,227 8,332 9,512 Provision for loan losses............................... -- -- (270) ------- ------ ------ Net interest income after provision for loan losses........................................... 8,227 8,332 9,782 ------- ------ ------ Noninterest income: Gains on sales of loans, net.......................... 1,665 3,049 2,006 Commissions on sales of annuities and securities...... 241 296 220 Services charges on deposits.......................... 207 353 462 Rental income......................................... 209 221 210 Gain on sale of premises.............................. 356 -- 84 Other income.......................................... 362 379 365 ------- ------ ------ Total noninterest income............................ 3,040 4,298 3,347 ------- ------ ------ Noninterest expense: Salaries and employee benefits........................ 4,176 4,711 5,468 Building occupancy.................................... 979 1,254 1,717 FDIC premiums and special assessment.................. 380 407 1,262 Data processing....................................... 462 493 534 Marketing............................................. 200 162 257 Office supplies and printing.......................... 257 229 243 Other................................................. 971 1,166 1,624 ------- ------ ------ Total noninterest expense........................... 7,425 8,422 11,105 ------- ------ ------ Income before Federal income tax expense (benefit)........................................ 3,842 4,208 2,024 Federal income tax expense (benefit).................... 1,308 1,435 (245) ------- ------ ------ Net income........................................ $ 2,534 2,773 2,269 ======= ====== ====== Earnings per common share............................... $ 1.41 1.54 1.26 ======= ====== ======
See accompanying notes to consolidated financial statements F-4 HERITAGE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
ADDITIONAL TOTAL COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK CAPITAL EARNINGS EQUITY ------ ---------- -------- ------------- Balance at June 30, 1994............... $1,800 4,017 14,845 20,662 Restricted stock award................. 5 45 -- 50 Net income............................. -- -- 2,534 2,534 Cash dividend paid..................... -- -- (181) (181) ------ ----- ------ ------ Balance at June 30, 1995............... $1,805 4,062 17,198 23,065 Exercise of stock options.............. 1 5 -- 6 Net income............................. -- -- 2,773 2,773 Cash dividend paid..................... (211) (211) ------ ----- ------ ------ Balance at June 30, 1996............... 1,806 4,067 19,760 25,633 Exercise of stock options.............. 4 36 -- 40 Net income............................. -- -- 2,269 2,269 Cash dividend paid..................... -- -- (228) (228) ------ ----- ------ ------ Balance at June 30, 1997............... $1,810 4,103 21,801 27,714 ====== ===== ====== ======
See accompanying notes to consolidated financial statements. F-5 HERITAGE SAVINGS BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
YEAR ENDED JUNE 30 ------------------------- 1995 1996 1997 ------- ------- ------- Cash flows from operating activities: Net income........................................ $ 2,534 2,773 2,269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 157 349 996 Deferred loan fees, net of amortization......... 363 35 11 Provision for loan losses....................... -- -- (270) Net increase in loans held for sale............. (1,816) 615 (1,037) Deferred Federal income tax expense (benefit)... 41 262 (549) Federal Home Loan Bank stock dividends.......... (108) (99) (111) Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities................. 70 411 392 ------- ------- ------- Net cash provided by operating activities..... 1,241 4,346 1,701 ------- ------- ------- Cash flows from investing activities: Loans originated, net of principal payments and loan sales....................................... (27,649) (11,211) (37,115) Principal payments of mortgage backed securities.. 2,771 1,493 825 Proceeds from: Sale of Federal Home Loan Bank Stock............ 860 -- -- Maturities of investment securities held to maturity....................................... 6,900 13,300 9,160 Purchase of investment securities held to maturity......................................... (2,132) (10,445) (2,345) Purchase of premises and equipment................ (2,696) (2,204) (2,023) ------- ------- ------- Net cash used in investing activities......... (21,946) (9,067) (31,498) ------- ------- ------- Cash flows from financing activities: Net increase in deposits.......................... 8,875 16,322 18,662 Net increase in FHLB advances..................... -- -- 890 Net decrease in other borrowed funds.............. (848) (3,252) -- Net decrease (increase) in advance payments by borrowers for taxes and insurance................ 100 (100) (62) Cash dividends paid............................... (181) (211) (228) Issuance of restricted stock award and exercise of stock options.................................... 50 6 40 ------- ------- ------- Net cash provided by financing activities..... 7,996 12,765 19,302 ------- ------- ------- Net increase (decrease) in cash and cash equivalents.................................. (12,709) 8,044 (10,495) Cash and cash equivalents at beginning of year...... 22,747 10,038 18,082 ------- ------- ------- Cash and cash equivalents at end of year............ $10,038 18,082 7,587 ======= ======= ======= Supplemental disclosures of cash flow information: Cash payments for: Interest expense................................ $ 6,631 8,527 8,945 Federal income taxes............................ 1,265 1,395 620
See accompanying notes to consolidated financial statements. F-6 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business The business of Heritage Savings Bank (the "Bank"), which is focused in Thurston, Mason and Pierce counties, consists primarily of attracting deposits from the general public and originating for sale or investment purposes first mortgage loans on residential properties located in western Washington. The Bank also makes residential construction loans, income property loans, business loans and consumer loans, primarily second mortgage loans. Although the Bank has a diversified loan portfolio and its market area enjoys a stable economic climate, a substantial portion of its borrowers ability to repay these loans is dependent upon the economic stability of the major employers, Federal, State and local governments. Loans originated by the Bank that are secured by real estate have loan to value ratios of generally no more than 80% of the appraised amount. The Bank currently requires customers to obtain private mortgage insurance on all fixed and adjustable rate mortgage loans above an 80% loan-to-value ratio. Heritage Savings Bank, a Washington State stock savings bank, is majority- owned by Heritage Financial Corporation, M.H.C. (HFC), a Washington State mutual holding company. (b) Basis of Presentation The accounting and reporting policies of the Bank and its subsidiaries conform to generally accepted accounting principles and to general practices within the financial institutions industry, where applicable. In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of income and expense during the reported periods. Actual results could differ from these estimates. All significant intercompany balances and transactions among the Bank and its subsidiaries have been eliminated in consolidation. The accompanying consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiaries, Sound Service Associates, Inc. and Heritage Capital Corporation. Sound Service Associates, Inc. operations primarily consist of the sale of tax-deferred investment products. Heritage Capital Corporation was incorporated as a limited purpose financing subsidiary to issue collateralized mortgage obligations which were retired in August 1995. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the current consolidated financial statement presentation. (c) Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents includes cash on hand and in banks and interest bearing deposits. (d) Investment Securities Investment securities are recorded at cost, adjusted for amortization of premiums or accretion of discounts using the interest method. These investments are carried at cost because the Bank has the ability, and it is management's intent, to hold them to maturity. The Bank has no investment securities classified available for sale or held for trading purposes. F-7 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (e) Loans Receivable and Mortgage-Backed Securities Loans and mortgage backed securities are generally recorded at cost, net of discounts, unearned fees and deferred fees. Discounts and premiums on purchased loans and mortgage-backed securities are amortized using the interest method over the remaining contractual life, adjusted for actual prepayments. Mortgage loans held for sale are carried at the lower of amortized cost or market value determined on an aggregate basis. Any loan that management determines will not be held to maturity is classified as held for sale at the time of origination, purchase or securitization. Unrealized losses on such loans are included in the consolidated statements of income. Mortgage backed securities are carried at amortized cost because the Bank has the ability, and it is management's intent, to hold them to maturity. (f) Loan Fees Loan origination fees and certain direct origination costs are deferred and amortized as an adjustment of the loans yields over the contractual lives, adjusted for prepayment of the loans, using the interest method. In the event loans are sold, the deferred net loan origination fees or costs are recognized as a component of the gains or losses on the sales of loans. (g) Allowance for Loan Losses A valuation allowance for loans is based on management's estimate of the amount necessary to recognize possible losses inherent in the loan portfolio. In determining the level to be maintained, management evaluates many factors including the borrowers ability to repay, economic and market trends and conditions, holding costs and absorption periods. In the opinion of management, the present allowance is adequate to absorb reasonably foreseeable loan losses. Effective July 1, 1995, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting for Creditors for Impairment of a Loan, and its amendment, SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures. These statements require that impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, based on the loan's observable market price or the fair value of collateral; if the loan is collateral dependent. In accordance with SFAS No. 114, the Bank excludes smaller balance, homogeneous loans from its impairment evaluation. The adoption of this statement had no impact on these financial statements. While management uses available information to recognize losses on these loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the western Washington region. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for losses on loans. Such agencies may require the Bank to make additions to the allowance based on their judgments about information available to them at the time of their examinations. (h) Nonaccrual Loans The accrual of interest on loans is discontinued and the loan is considered impaired when, in the opinion of management, the collectibility of principal or interest is in doubt or generally when the loans are contractually past due 90 days or more with respect to principal or interest. When accrual of interest is discontinued on a loan, the interest accrued but not collected is charged against operations. Thereafter, payments received are generally applied to principal. However, based on management's assessment of the ultimate collectibility of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Impaired loans and other nonaccrual loans (smaller balance, homogeneous loans) are returned to an accrual status when management determines that the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible. F-8 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (i) Mortgage Banking Operations The Bank sells mortgage loans primarily on a servicing released basis and recognizes a cash or a present value gain or loss. A cash gain or loss is recognized to the extent that the sales proceeds of the mortgage loans sold exceed or are less than the net book value at the time of sale. In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which provides consistent standards for distinguishing transfers of assets that are sales from transfers that are secured borrowings. This Standard supersedes SFAS No. 122, Accounting for Mortgage Servicing Rights, in the measurement and valuation of mortgage servicing rights. This Standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively only. The adoption of this pronouncement did not have a material impact on the financial statements of the Bank. Loan servicing income is recorded when earned. Loan servicing costs are charged to expense as incurred. (j) Real Estate Owned Real estate acquired by the Bank in satisfaction of debt is recorded at fair value at time of foreclosure and is carried at the lower of the new cost basis or fair value. Subsequently, foreclosed assets are carried at the lower of cost or fair value less estimated costs to sell. Costs related to the improvement of the property are capitalized subject to the above limitations; those related to holding the property, net of rental income, are charged to expense. (k) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation and amortization include buildings and building improvements, 30 to 40 years; and furniture, fixtures and equipment, 3 to 10 years. During 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This pronouncement deals with the measurement and reporting of long-lived assets that either will be held and used in operations or that will be disposed of. The adoption did not have a material impact on the results of operations or financial condition of the Bank. (l) Federal Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. (m) Recent Financial Accounting Pronouncements SFAS No. 128, "Earnings Per Share," issued in February 1997, establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly-held common stock or potential common stock. It replaces the presentation of primary EPS with a presentation of basic EPS and requires the dual presentation of basic and diluted EPS on the fact of the income statement. SFAS No. 128 is effective for the financial statements for the periods ending after December 15, 1997. SFAS No. 128 requires restatement of all prior period EPS data presented. The impact of its adoption is not expected to be material to the Bank. F-9 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components (revenues, expenses, gains and losses) in a full set of financial statements. This Statement requires that the Bank (a) classify items of other comprehensive income by their nature in its financial statements and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. This Statement is effective for the year ending June 30, 1999. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public companies to report financial and descriptive information about its operating segments. Operating segments are components of a business about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The adoption of SFAS 131 is required for the fiscal year ended June 30, 1999 and the Bank is currently evaluating the effect of this Statement. On January 28, 1997, the Securities and Exchange Commission amended their rules and regulations to require public companies to provide enhanced descriptions of accounting policies for derivative financial instruments and derivative commodity instruments in the footnotes to their financial statements. The accounting policy requirements become effective for all filings that include financial statements for periods ending after June 15, 1997. The Bank had no derivative financial instruments or derivative commodity instruments at June 30, 1997 or at any time during the three year period then ended. The Bank believes that it is in compliance with this amended rule. (2) LOANS RECEIVABLE AND LOANS HELD FOR SALE Loans receivable and loans held for sale at June 30 consist of the following:
1996 1997 -------- -------- Commercial loans........................................... $ 18,269 $ 39,445 -------- -------- Real Estate Mortgages: One to four family residential........................... 93,157 103,439 Five or more family residential and commercial real estate.................................................. 42,560 51,209 -------- -------- Total real estate mortgage............................. 135,717 154,648 -------- -------- Real Estate Construction: One to four family residential........................... 14,509 12,683 Five or more family residential and commercial real estate.................................................. 393 1,029 -------- -------- Total real estate construction......................... 14,902 13,712 Consumer................................................... 1,105 1,467 -------- -------- Subtotal................................................. 169,993 209,272 Unamortized yield adjustments.............................. (1,090) (1,079) -------- -------- Total Loans Receivable and Loans Held for Sale......... $168,903 $208,193 ======== ========
Loans to directors and officers amounted to $1,534 and $1,087 as of June 30, 1996 and 1997, respectively. Accrued interest on loans receivable amounted to $1,001 and $1,198 as of June 30, 1996 and 1997, respectively. The Bank had $51 and $133 of impaired loans which are nonaccruing as of June 30, 1996 and 1997, respectively. The weighted average interest rate on loans was 8.6% and 8.8% as of June 30, 1996 and 1997, respectively. F-10 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Details of certain mortgage banking activities at June 30 are as follows:
1996 1997 ------- ------ Loans held for sale at lower of cost or market............ $ 5,286 6,323 Loans serviced for others................................. 23,257 19,162 Commitments to sell mortgage loans........................ 10,170 8,134 Commitments to fund loans (at interest rates approximating market rates) Fixed rate.............................................. 5,533 1,902 Variable or adjustable rate............................. 877 193
Servicing fee income from loans serviced for others amounted to $114, $90, and $75 for the years ended June 30, 1995, 1996 and 1997, respectively. Commitments to sell mortgage loans are made primarily during the period between the taking of the loan application and the closing of the mortgage loan. The timing of making these sale commitments is dependent upon the timing of the borrowers election to lock-in the mortgage interest rate and fees prior to loan closing. Most of these sale commitments are made on a best-effort basis whereby the Bank is only obligated to sell the mortgage if the mortgage loan is approved and closed by the Bank. (3) MORTGAGE BACKED SECURITIES The amortized cost and fair values of mortgage backed securities held to maturity at June 30 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- 1996 Federal Home Loan Mortgage Corporation....................... $1,290 29 -- 1,319 Federal National Mortgage Association....................... 1,784 42 (2) 1,824 Government National Mortgage Association....................... 2,905 88 -- 2,993 ------ --- --- ----- $5,979 159 (2) 6,136 ====== === === ===== 1997 Federal Home Loan Mortgage Corporation....................... $1,062 47 (1) 1,108 Federal National Mortgage Association....................... 1,371 51 (2) 1,420 Government National Mortgage Association....................... 2,726 126 -- 2,852 ------ --- --- ----- $5,159 224 (3) 5,380 ====== === === =====
The amortized cost and fair values of mortgage backed securities, by contractual maturity, at June 30, 1997 are shown below:
AMORTIZED FAIR COST VALUE --------- ----- Due after three years through five years................... $ 23 24 Due after five years through ten years..................... 207 209 After ten years............................................ 4,929 5,147 ------ ----- Totals................................................... $5,159 5,380 ====== =====
F-11 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Mortgage backed securities included net unamortized discounts of $77 and $71 as of June 30, 1996 and 1997, respectively. Accrued interest receivable on mortgage backed securities was $50 and $43 at June 30, 1996 and 1997, respectively. (4) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows: Balance at June 30, 1994.............. $1,705 Recoveries............................ 15 ------ Balance at June 30, 1995.............. $1,720 Recoveries............................ 153 ------ Balance at June 30, 1996.............. $1,873 Provision............................. (270) Recovery.............................. 1,152 Chargeoff............................. (3) ------ Balance at June 30, 1997.............. $2,752 ======
In May 1996, the Bank sold its interest in two loans which were partially charged off. This sale resulted in an excess of net proceeds over the book basis of these loans of $1.3 million. The Bank recorded a recovery of $148 in 1996 which was the pro rata portion of the sale proceeds received in cash versus the amount the Bank financed for the purchaser. The additional $1,152 was recognized as a recovery in 1997 as the Bank received additional collateral on this financing. (5) INVESTMENT SECURITIES The amortized cost and fair values of investment securities held to maturity at June 30 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------ 1996 U.S. Government and its agencies... $15,292 5 (127) 15,170 ======= === ==== ====== 1997 U.S. Government and its agencies... $ 8,506 -- (17) 8,498 ======= === ==== ======
The amortized cost and fair value of investment securities, by contractual maturity, at June 30, 1997 are shown below:
AMORTIZED FAIR COST VALUE --------- ----- Due in one year or less.................................... $3,817 3,820 Due after one year through three years..................... 4,689 4,678 ------ ----- Totals................................................... $8,506 8,498 ====== =====
There were no sales of investment securities during the years ended June 30, 1995, 1996 and 1997. Accrued interest on investment securities amounted to $111 and $125 as of June 30, 1996 and 1997, respectively. F-12 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At June 30, 1996 and 1997, investment securities with amortized cost values of $897 and $1,244, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. (6) PREMISES AND EQUIPMENT A summary of premises and equipment at June 30 follows:
1996 1997 ------- ------ Land........................................................ $ 2,903 3,371 Buildings and building improvements......................... 7,724 8,029 Furniture, fixtures and equipment........................... 4,478 4,983 ------- ------ 15,105 16,383 Less accumulated depreciation............................... 3,896 4,181 ------- ------ $11,209 12,202 ======= ======
The Bank holds property for investment which is recorded at the lower of cost or fair value of $1,072 and $659 as of June 30, 1996 and 1997, respectively. (7) DEPOSITS Deposits at June 30 consist of the following:
WEIGHTED AVERAGE 1996 1997 INTEREST RATE AT ---------------- ---------------- JUNE 30, 1997 AMOUNT PERCENT AMOUNT PERCENT ---------------- -------- ------- -------- ------- Demand deposits.............. -- $ 7,510 3.9% $ 9,489 4.5% NOW accounts................. 2.38% 17,978 9.4 20,641 9.8 Money market accounts........ 3.91 19,331 10.1 24,496 11.7 Savings accounts............. 3.51 29,543 15.5 28,374 13.6 Certificate accounts: Below 3%................... -- -- 102 -- 3% to 4%................... 404 0.2 366 0.2 4% to 5%................... 12,183 6.4 14,044 6.7 5% to 6%................... 71,575 37.5 103,691 49.4 6% to 7%................... 27,783 14.5 7,806 3.7 7% to 8%................... 4,777 2.5 737 0.4 8% to 10%.................. 35 -- 35 -- ---- -------- ----- -------- ----- 5.47 116,757 61.1 126,781 60.4 ==== ======== ===== ======== ===== 4.47% $191,119 100.0% $209,781 100.0% ==== ======== ===== ======== =====
The combined weighted average interest rate of deposits was 4.66% and 4.47% at June 30, 1996 and 1997, respectively. Accrued interest payable on deposits was $24 and $78 at June 30, 1996 and 1997, respectively. F-13 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest expense, by category, for the year ended June 30 is as follows:
1995 1996 1997 ------ ----- ----- NOW accounts................................................. $ 360 404 490 Money market accounts........................................ 1,522 1,489 1,603 Savings accounts............................................. 342 300 307 Certificate accounts......................................... 4,415 6,335 6,599 ------ ----- ----- $6,639 8,528 8,999 ====== ===== =====
Scheduled maturities of certificate accounts at June 30 are as follows:
1996 1997 -------- ------- Within one year......................................... $ 96,928 113,806 Between one and two years............................... 12,138 10,437 Between two and three years............................. 5,995 2,299 Between three and four years............................ 1,465 61 Between four and five years............................. 125 69 Over five years......................................... 106 109 -------- ------- $116,757 126,781 ======== =======
As of June 30, 1996 and 1997, certificates of deposit issued in denominations in excess of $100 totaled $9,130 and $15,481, respectively. (8) FHLB ADVANCES AND STOCK The Bank is required to maintain an investment in the stock of the Federal Home Loan Bank of Seattle in an amount equal to at least 1% of the unpaid principal balances of the Bank's residential mortgage loans or 5% of its outstanding advances from the FHLB, whichever is greater. Purchases and sales of stock are made directly with the FHLB at par value. A summary of FHLB Advances follows:
AT OR FOR THE YEAR ENDED JUNE 30 ------------------------- 1995 1996 1997 -------- --------------- Balance at June 30........ $ -- $ -- $ 890 Average balance........... 658 -- 27 Maximum amount outstanding at any month end......... 3,875 -- 1,300 Average interest rate: During the year......... 6.24% -- 5.41% At June 30.............. -- -- 6.45%
The $890 outstanding balance of FHLB Advances at June 30, 1997 matured on July 1, 1997. Advances from the FHLB are collateralized by a blanket pledge on FHLB stock owned by the Bank, deposits at the FHLB and all mortgages or deeds of trust securing such properties. In accordance with the pledge agreement, the Bank must maintain unencumbered collateral in an amount equal to varying percentages ranging from 100% to 125% of outstanding advances depending on the type of collateral. The Bank may borrow from the FHLB in amounts up to 20% of the Bank's total assets. F-14 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (9) OTHER BORROWED FUNDS In August 1986, the Bank issued $21.9 million in collateralized mortgage obligations. The bonds have been repaid in quarterly installments, including interest, from principal and interest payments received on the underlying collateral (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation mortgage backed securities). Under the terms of the bond indenture, the Bank may call the bonds when their outstanding balance is equal to or less than 10% of the original issue amount which amounts to $2.2 million. On August 1, 1995, the Bank called and repaid the then outstanding balance of the remaining bonds. (10) FEDERAL INCOME TAXES Federal income tax expense (benefit) at June 30 consists of the following:
1995 1996 1997 ------ ----- ---- Current............................................... $1,267 1,173 304 Deferred.............................................. 41 262 (549) ------ ----- ---- $1,308 1,435 (245) ====== ===== ====
Federal income tax expense differs from that computed by applying the Federal statutory income tax rate of 34% for the year ended June 30 as follows:
1995 1996 1997 ------ ----- ---- Income tax expense at Federal statutory rate........ $1,306 1,431 688 Reversal of provision for base year bad debt reserve............................................ -- -- (938) Other, net.......................................... 2 4 5 ------ ----- ---- $1,308 1,435 (245) ====== ===== ====
The Bank has been permitted under the Internal Revenue Code to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. The deduction was based on either specified experience formulas or a percentage of taxable income before such deduction. The Bank used the percentage of taxable income method for the years ended June 30, 1995 and 1996. This deduction was historically greater than the loan loss provisions recorded for financial accounting purposes. Deferred income taxes are provided on differences between the bad debt reserve for tax and financial reporting purposes only to the extent of the tax reserves arising subsequent to June 30, 1988. Savings institutions were not required to provide a deferred tax liability for the tax bad debt reserves accumulated as of June 30, 1988 which for the Bank amounted to $938. Starting in the fiscal year ended June 30, 1994, the Bank established and maintained a deferred income tax liability of $938 due to the potential recapture of the pre-1988 tax bad debt reserve which could have been triggered by the formation of the mutual holding company; a change to a commercial bank charter (which management had been contemplating); or possible legislation which was being debated in Congress. Legislation enacted in August 1996 eliminated certain conditions under which recapture of the pre-1988 additions to the tax bad debt reserve would be required. Such conditions are principally conversion to a commercial bank charter or merger with a commercial bank. The pre-1988 reserves would be required to be recaptured under certain other conditions such as payment of dividends in excess of accumulated earnings and profits or other distributions made in connection with the dissolution or liquidation of the Bank. Based on this legislation, the Bank reversed the $938 deferred tax liability as a reduction of Federal income tax expense during the year ended June 30, 1997. F-15 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The legislation also repealed the reserve method for determining income tax deductions described above. Under the legislation, the Bank will be required to recapture the post-1988 additions to its bad debt reserve as taxable income over a six to eight year period. The Bank has provided the appropriate deferred tax liability for these post-1988 additions in the prior years so this legislation had no adverse impact on the results from operations for the year ended June 30, 1997. The following table presents major components of the deferred Federal income tax liability resulting from differences between financial reporting and tax bases at June 30:
1996 1997 ------ ----- Deferred tax liabilities: Provision for base year tax bad debt reserve.............. $ 938 -- Deferred loan fees........................................ 241 412 Premises and equipment.................................... 236 358 FHLB stock................................................ 287 324 Other..................................................... 37 11 ------ ----- Total deferred tax liabilities.......................... 1,739 1,105 ====== ===== Deferred tax assets: Loan loss allowances...................................... (407) (292) Vacation benefits......................................... (60) (64) Other..................................................... (22) (48) ------ ----- Total deferred tax assets............................... (489) (404) ------ ----- Deferred taxes payable, net............................. $1,250 701 ====== =====
(11) CONTINGENCIES The Bank is involved in numerous business transactions which, in some cases, depend on regulatory determination as to compliance with rules and regulations. Also, the Bank has certain litigation and negotiations in progress. All such matters are attributable to activities arising from normal operations. In the opinion of management, after review with legal counsel, the eventual outcome of the aforementioned matters is unlikely to have a materially adverse effect on the Bank's consolidated financial statements or its financial position. (12) STOCKHOLDERS' EQUITY (a) Stock Offering and Reorganization On July 1, 1997, the Board of Directors of Heritage Financial Corporation, MHC, approved a Plan of Conversion and Reorganization whose purpose is to convert the current Mutual Holding Company to the stock form of organization. The Mutual Holding Company currently owns a majority of the common stock of Heritage Savings Bank. The Holding Company will offer its common stock upon the terms and conditions set forth in the Plan of Conversion. As a part of the Conversion, each minority stockholder of the Bank will receive common stock of the Holding Company in exchange for their shares of common stock of the Bank. Conversion costs will be deferred and reduce the proceeds from the shares sold in the conversion. If the conversion is not completed, all costs will be charged as an expense. As of June 30, 1997, no significant conversion costs have been incurred. F-16 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (b) Earnings Per Common Share Earnings per common share is computed based on the weighted average number of shares of common stock outstanding during the year which amounted to 1,805,166 and 1,807,910 shares for the years ended June 30, 1996 and 1997, respectively. Common stock equivalents have not been considered because they do not have a dilutive impact. (c) Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Pursuant to minimum capital requirements of the Federal Deposit Insurance Corporation, the Bank is required to maintain a leverage ratio (capital to assets ratio) of 3% and risk-based capital ratios of Tier 1 capital and total capital (to total risk-weighted assets) of 4% and 8%, respectively. At June 30, 1997, the Bank exceeded the minimum capital requirements and the requirements for well capitalized institutions as shown below. As of June 30, 1996 and 1997, the Bank was classified as a "well capitalized" institution under the criteria established by the FDIC Act.
WELL- MINIMUM CAPITALIZED REQUIREMENTS REQUIREMENTS ACTUAL ----------------------------------------- $ % $ % $ % ------- -------------- ------------- ---- AS OF JUNE 30, 1996: Leverage ratio...................... $ 6,652 3% $ 11,087 5% $25,633 11.6% Risk-based capital: Tier 1............................ 5,799 4% 8,699 6% 25,633 17.7% Total............................. 11,598 8% 14,498 10% 27,446 18.9% AS OF JUNE 30, 1997: Leverage ratio...................... 7,118 3% 11,864 5% 27,714 11.7% Risk-based capital: Tier 1............................ 7,085 4% 10,628 6% 27,714 15.6% Total............................. 14,171 8% 17,714 10% 29,935 16.9%
On September 30, 1996, legislation was signed into law to recapitalize the Savings Association Insurance Fund (SAIF). The effect of this legislation was to require a one-time assessment on all federally insured savings institutions' deposits under SAIF at .657% of insured deposits at March 31, 1995. The Bank's assessment was approximately $1.1 million which was charged to earnings in the quarter ended September 30, 1996 and paid in November 1996. (d) Cash Dividend At the Board of Directors meeting on August 28, 1996, a cash dividend of $.375 per share on the Bank's issued and outstanding common stock was declared. The dividend was paid in October 1996 to shareholders of record as of September 30, 1996 and was paid only to shareholders other than HFC. The dividend waiver on the 1,200,000 shares owned by HFC was approved by regulatory agencies. The Bank's ability to pay dividends is predicated upon its earning capability and is subject to legal and regulatory restrictions. F-17 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (13) STOCK OPTION PLANS In September 1994, the Bank's stockholders approved the adoption of the 1994 stock option plan, providing for the award of a restricted stock award to a key officer, incentive stock options to employees and nonqualified stock options to directors of the Bank at the discretion of the Board of Directors. On September 24, 1996, the stockholders of the Bank approved the adoption of the 1997 stock option plan which is generally similar to the 1994 plan. The 1997 plan does not affect any options granted under the 1994 plan. Under both of these stock option plans, on the date of grant, the exercise price of the option must at least equal the market value per share of the Bank's common stock. The 1994 plan provides for the grant of options and stock awards up to 67,000 shares. The 1997 plan provides for the granting of options for up to 50,000 common shares. Stock options are generally exercisable ratably over three years and expire five years after they become exercisable which amounts to an average term of seven years. The following table summarizes activity on stock options for the years ended June 30, 1996 and 1997:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS -------------------------- ------------------------- SHARES UNDER OPTION SHARES AVG. OPTION PRICE SHARES AVG. OPTION PRICE - ------------------- ------- ----------------- ------ ----------------- Balance at July 1, 1994................... 50,000 $ 10.20 Options granted......... -- -- Became exercisable...... -- -- 15,000 $ 10.22 Less: Exercised -- -- Expired or canceled............ (5,000) 10.00 ------- ------- ------ ------- Balance at June 30, 1995................... 45,000 $ 10.22 15,000 $ 10.22 ======= ======= ====== ======= Options granted......... 7,000 16.00 Became exercisable...... 15,000 10.22 Less: Exercised......... (666) 10.00 (666) 10.00 Expired or canceled............ -- -- -- -- ------- ------- ------ ------- Balance at June 30, 1996................... 51,334 $ 11.01 29,334 $ 10.23 ======= ======= ====== ======= Options granted......... 59,998 18.45 -- -- Became exercisable...... -- -- 17,333 11.00 Less: Exercised......... (3,950) 10.00 (3,950) 10.00 Expired or canceled............ -- -- -- -- ------- ------- ------ ------- Balance at June 30, 1997................... 107,382 $ 15.21 42,717 $ 10.56 ======= ======= ====== =======
A restricted stock award of 5,000 shares has been awarded to the chairman and requires five years of continuous employment from the date of award. These 5,000 shares were issued to the Chairman during the year ended June 30, 1995 and recorded as compensation expense using the fair value of the shares on the date of award. F-18 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Financial data pertaining to outstanding stock options at June 30, 1997 were as follows:
WEIGHTED AVERAGE NUMBER OF REMAINING CONTRACTUAL EXERCISE PRICE OPTION SHARES LIFE (IN YEARS) -------------- ------------- --------------------- $10.00 35,384 3.6 $12.00 5,000 4.0 $16.00 7,000 6.0 $18.45 59,998 6.6 ------- --- 107,382 5.4 ======= ===
During 1995, the FASB issued the SFAS No. 123, Accounting for Stock-based Compensation, effective for years beginning after December 15, 1995. The statement requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) application of the fair value recognition provision in the statement. Under the fair value recognition method, compensation cost is measured at the grant date of the option, based on the value of the award and is recognized over the vesting period. Under existing rules ("intrinsic value based method"), compensation cost is the excess, if any, of the market value of the stock at grant date over the amount an employee must pay to acquire the stock. None of the Bank stock options have any intrinsic value at grant date and, under Accounting Principles Board Opinion No. 25 (APB No. 25), no compensation cost has been recognized for them. SFAS No. 123 does not alter the existing accounting rules for employee stock-based programs. Companies may continue to follow rules outlined in APB No. 25, but they will now be required to disclose the pro forma amounts of net income and earnings per share that would have been reported had they elected to follow the fair value recognition provision of SFAS No. 123. Effective July 1, 1996, the Bank adopted the disclosure requirements of SFAS No. 123, but has determined that it will continue to measure its employee stock-based compensation arrangements under the provisions of APB Opinion 25. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Bank's stock option plans been determined consistent with SFAS 123, the Bank's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED JUNE 30, ----------------------- 1995 1996 1997 ------- ------- ------- (DOLLARS IN THOUSANDS) Net income: As reported...................................... $ 2,534 $ 2,773 $ 2,269 Pro forma........................................ 2,534 2,772 2,239 Earnings per share: As reported...................................... $ 1.41 $ 1.54 $ 1.26 Pro forma........................................ 1.41 1.54 1.24
No options were granted during 1995; therefore, there is no pro forma impact on net income for the year ended June 30, 1995. The compensation expense included in the pro forma net income attributable to fully diluted common stock and fully diluted earnings per share is not likely to be representative of the effect on reported net income for future years because options vest over several years and additional awards generally are made each year. The fair value of options granted is estimated on the date of grant using the minimum value method with the following weighted average assumptions used for grants in 1996 and 1997: annual dividend yield of 3% for both years; risk-free interest rates of 6.50% for both years; and expected lives of seven years for both years. The weighted average grant date fair value per share of options granted during the years ended June 30, 1996 and 1997 was $3.09 and $3.19, respectively. F-19 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (14) EMPLOYEE BENEFIT PLANS The Bank maintains a defined contribution retirement plan. The plan allows participation to all employees upon completion of one year of service and the attainment of 21 years of age. It is the Bank's policy to fund plan costs as accrued. Employee vesting occurs over a period of seven years, at which time they become fully vested. Charges of approximately $172, $192 and $246 are included in the consolidated statements of income for the years ended June 30, 1995, 1996 and 1997, respectively. The Bank also maintains a salary savings 401(k) plan for its employees. All persons employed as of July 1, 1984 automatically participate in the plan. All employees hired after that date who are at least 21 years of age and with one year of service to the Bank may participate in the plan. Employees who participate may contribute a portion of their salary which is matched by the employer at 50% up to certain specified limits. Employee vesting in employer portions is similar to the retirement plan described above. Employer contributions for the years ended June 30, 1995, 1996 and 1997 were $84, $82 and $87, respectively. The Bank has established an Employee Stock Ownership Plan (ESOP) effective July 1, 1993, which allows participation to all employees upon completion of one year of service and the attainment of 21 years of age. The ESOP is funded by employer contributions in cash or common stock. Employee vesting occurs over a period of seven years. The Bank contributed $0 and $44 to the ESOP for the years ended June 30, 1995 and 1996. The Bank has accrued $75 for its ESOP contribution for the year ended June 30, 1997. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS Because broadly traded markets do not exist for most of the Bank's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of values. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Bank. When possible, quoted market prices are used to determine fair value. In cases where a quoted market price is not available, the fair value of financial instruments is estimated using the present value of future cash flows or other valuation methods. (a) Financial Instruments With Book Value Equal to Fair Value The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. Assets that are included in this category include cash and due from banks and interest-bearing deposits. Liabilities included in this category include deposits with no contractual maturity such as demand accounts, checking accounts, money market accounts, passbook savings accounts and FHLB advances which reprice daily. (b) Investment Securities The fair value of all investment securities excluding Federal Home Loan Bank (FHLB) stock was based upon quoted market prices. FHLB stock is not publicly traded, however it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold. The fair value is therefore equal to the book value. F-20 HERITAGE SAVINGS BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (c) Loans The loan portfolio is composed of single family and income property mortgages (both fixed rate and adjustable rate), construction, business and consumer loans. For most loans, fair value is estimated using market prices for mortgage backed securities with similar rates and average maturities adjusted for servicing costs or calculated by discounting expected cash flows over the estimated life of the loans using a current market rate reflecting the risk associated with comparable loans. Construction loans which are variable rate and short-term are reflected with fair values equal to book value. (d) Deposits Deposits are comprised of passbook, commercial and basic checking, money market and fixed maturity accounts. For deposits with no contractual maturity such as demand accounts, checking accounts, money market accounts and passbook savings accounts, SFAS 107 stipulates that the fair value is equal to the book value. The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and an alternative cost of funds rate. (e) Off-Balance Sheet Financial Instruments The fair value of off-balance sheet commitments to extend credit is considered equal to its notional amount. The table below presents the book value amount of the Bank's financial instruments and their corresponding fair values at June 30:
1996 1997 --------------------- --------------------- BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash on hand and in banks.......... $ 6,308 6,308 7,412 7,412 Interest bearing deposits.......... 11,774 11,774 175 175 Investment securities.............. 15,292 15,170 8,506 8,498 FHLB stock......................... 1,400 1,400 1,511 1,511 Mortgage backed securities......... 5,979 6,136 5,159 5,380 Loans.............................. 167,030 167,237 205,441 207,094 FINANCIAL LIABILITIES Savings, money market and demand... 74,362 74,362 83,000 83,000 Time certificates.................. 116,757 116,460 126,781 126,568 -------- ------- ------- ------- Total deposits..................... $191,119 190,822 209,781 209,568 -------- ------- ------- ------- FHLB advances...................... $ -- -- 890 890
F-21 =============================================================================== NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI- THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 1 Selected Consolidated Financial and Other Data........................... 10 Risk Factors............................................................. 14 Use of Proceeds.......................................................... 20 Dividend Policy.......................................................... 21 Market for Common Stock.................................................. 22 Capitalization........................................................... 23 Historical and Pro Forma Regulatory Capital Compliance................... 24 Conversion Stock to be Purchased by Management Pursuant to Subscription Rights.................................................................. 25 Pro Forma Data........................................................... 26 Heritage Savings Bank and Subsidiaries Consolidated Statements of Income.................................................................. 29 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 30 Business of the Company.................................................. 38 Business of the Bank..................................................... 39 Management............................................................... 54 Certain Transactions..................................................... 63 Supervision and Regulation............................................... 64 The Conversion........................................................... 68 Restrictions on Acquisition of the Company and the Bank.................. 84 Description of Capital Stock of the Company.............................. 87 Comparison of Stockholders' Rights....................................... 88 Registration Requirements................................................ 91 Legal and Tax Opinions................................................... 91 Experts.................................................................. 91 Additional Information................................................... 92 Index to Consolidated Financial Statements............................... F-1
=============================================================================== =============================================================================== 8,477,075 SHARES [LOGO] HERITAGE FINANCIAL CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- LOGO , 1997 =============================================================================== PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee. Commission registration fee.................................... $ 21,254 NASD Filing fee................................................ 5,000 Legal.......................................................... 125,000 Accounting Fees and Expenses................................... 75,000 Appraisal and Business Plan Fees and Expenses.................. 35,000 Conversion Agent Fees and Expenses............................. 11,500 Marketing Agent Fixed Fee...................................... 50,000 Marketing Agent Counsel Fees and Expenses...................... 40,000 Printing, Postage and Mailing.................................. 80,000 Transfer Agent and Registrar Fees, Expenses.................... 7,500 Miscellaneous Expenses......................................... 9,746 -------- Total........................................................ $460,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation provide, among other things, for the indemnification of directors, and authorize the Board to pay reasonable expenses incurred by, or to satisfy a judgment or fine against, a current or former director in connection with any personal legal liability incurred by the individual while acting for the Company within the scope of his or her employment, and which was not the result of conduct finally adjudged to be "egregious" conduct. "Egregious" conduct is defined as intentional misconduct, a knowing violation of law, or participation in any transaction from which the person will personally receive a benefit in money, property, or services to which that person is not legally entitled. The Articles of Incorporation also include a provision that limits the liability of directors of the Company from any personal liability to the Company or its shareholders for conduct not found to have been egregious. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Not applicable II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) List of Exhibits 1.1 Form of proposed Agency Agreement among Heritage Financial Corporation, Heritage Bank and Ryan Beck & Co., Inc.* 1.2 Engagement Letter by and between Heritage Financial Corporation, Heritage Bank and Ryan Beck & Co., Inc.* 2 Amended and Restated Plan of Conversion and Reorganization of Heritage Financial Corporation, M.H.C.* 3.1 Articles of Incorporation of the Registrant. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 3.2 Bylaws of the Registrant. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 4. Form of Certificate for Common Stock.* 5 Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. regarding legality of the Common Stock. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 8.1 Federal Tax Opinion of KPMG Peat Marwick LLP.* 8.2 State Tax Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.* 8.3 Letter from RP Financial, LC. as to the value of subscription rights. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 10.1 Proposed Form of Stock Option Plan. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 10.2 Proposed form of Management Recognition Plan and Trust Agreement. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 10.3 Employment Agreement between the Registrant and Donald V. Rhodes effective as of October 1, 1997.* 10.4 Severance Agreement between the Registrant and Brian Vance effective as of October 1, 1997.* 10.5 Severance Agreement between the Registrant and John Parry effective as of October 1, 1997.* 10.6 Form of Severance Agreement to be entered into between the Registrant and seven additional executives effective as of October 1, 1997.* 23.1 Consent of KPMG Peat Marwick LLP. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 23.2 Consent of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. (included in opinion filed as Exhibit 5 to this Registration Statement). 23.3 Consent of RP Financial, LC. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 24 Power of Attorney. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 27 Financial Data Schedule. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 99.1 Order and Acknowledgment Form.* 99.2 Solicitation and Marketing Materials.* 99.3(a) Appraisal Report of RP Financial, LC. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 99.3(b) Updated Appraisal Report of RP Financial, LC.*
- -------- * Filed herewith II-2 (b) Financial Statement Schedules. Not applicable. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended ("Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution of previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF OLYMPIA, STATE OF WASHINGTON, ON OCTOBER 24, 1997. HERITAGE FINANCIAL CORPORATION /s/ Donald V. Rhodes By: _________________________________ DONALD V. RHODES CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON OCTOBER 24, 1997 IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- PRINCIPAL EXECUTIVE OFFICER: /s/ Donald V. Rhodes Chairman, President and Chief - ------------------------------------- Executive Officer DONALD V. RHODES PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ James Hastings Senior Vice President and Treasurer - ------------------------------------- JAMES HASTINGS A MAJORITY OF THE BOARD OF DIRECTORS: /s/ Lynn M. Brunton _____________________________________ LYNN M. BRUNTON /s/ John A. Clees _____________________________________ JOHN A. CLEES /s/ Daryl D. Jensen _____________________________________ DARYL D. JENSEN
II-4 SIGNATURE --------- /s/ H. Edward Odegard* _____________________________________ H. EDWARD ODEGARD /s/ James P. Senna* _____________________________________ JAMES P. SENNA /s/ Philip S. Weigand* _____________________________________ PHILIP S. WEIGAND *By: /s/ Donald V. Rhodes _____________________________________ DONALD V. RHODES ATTORNEY-IN-FACT II-5 EXHIBIT INDEX
EXHIBIT NUMBER PAGE NO. ------- -------- 1.1 Form of proposed Agency Agreement among Heritage Financial Corporation, Heritage Bank and Ryan Beck & Co., Inc.* 1.2 Engagement Letter by and between Heritage Financial Corporation, Heritage Bank and Ryan Beck & Co., Inc.* 2 Amended and Restated Plan of Conversion and Reorganization of Heritage Financial Corporation, M.H.C.* 3.1 Articles of Incorporation of the Registrant. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 3.2 Bylaws of the Registrant. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333- 35573) and incorporated herein by reference.) 4. Form of Certificate for Common Stock.* 5 Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. regarding legality of the Common Stock. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 8.1 Federal Tax Opinion of KPMG Peat Marwick LLP.* 8.2 State Tax Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.* 8.3 Letter from RP Financial, LC. as to the value of subscription rights. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333- 35573) and incorporated herein by reference.) 10.1 Proposed Form of Stock Option Plan. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 10.2 Proposed form of Management Recognition Plan and Trust Agreement. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 10.3 Employment Agreement between the Registrant and Donald V. Rhodes effective as of October 1, 1997.* 10.4 Severance Agreement between the Registrant and Brian Vance effective as of October 1, 1997.* 10.5 Severance Agreement between the Registrant and John Parry effective as of October 1, 1997.* 10.6 Form of Severance Agreement between the Registrant and seven additional executives, effective October 1, 1997.* 23.1 Consent of KPMG Peat Marwick LLP. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 23.2 Consent of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. (included in opinion filed as Exhibit 5 to this Registration Statement). 23.3 Consent of RP Financial, LC. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333- 35573) and incorporated herein by reference.) 24 Power of Attorney. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 27 Financial Data Schedule. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333- 35573) and incorporated herein by reference.) 99.1 Order and Acknowledgment Form.* 99.2 Solicitation and Marketing Materials.* 99.3(a) Appraisal Report of RP Financial, LC. (Filed as an exhibit to the Registration Statement on Form S-1 (Registration No. 333-35573) and incorporated herein by reference.) 99.3(b) Updated Appraisal Report of RP Financial, LC.*
- -------- * Filed herewith EX-1.1 2 FORM OF PROPOSED AGENCY AGREEMENT EXHIBIT 1.1 HERITAGE FINANCIAL CORPORATION HERITAGE SAVINGS BANK COMMON STOCK (NO PAR VALUE) AGENCY AGREEMENT _______________, 1997 Ryan, Beck & Co., Inc. 220 S. Orange Ave. Livingston, NJ 07039 Gentlemen: Heritage Savings Bank (the "Savings Bank") and its proposed stock holding company, Heritage Financial Corporation (the "Company") hereby confirm their agreement with Ryan, Beck & Co., Inc. ("Agent" or "you") as follows: INTRODUCTION Heritage Financial Corporation, MHC (the "Mutual Holding Company"), the majority shareholder of the Savings Bank, the Savings Bank and the Company have adopted a Plan of Conversion and Reorganization (the "Plan") whereby the Mutual Holding Company will merge with and into the Savings Bank and the Savings Bank will become a subsidiary of the Company, a Washington chartered stock corporation. The reorganization and the share exchange and stock offering described below are referred to herein collectively as the "Conversion." The Company will offer shares (the "Shares") of its common stock, no par value (the "Common Stock"), in an initial public offering as follows: (a) to the holders of the outstanding common stock of the Savings Bank, other than the Savings Bank's current majority shareholder, the Mutual Holding Company, (the "Minority Stockholders") in mandatory exchange (the "Exchange") for their shares of the Savings Bank (the "Minority Shares"); (b) in a Subscription Offering to certain eligible account holders, the Savings Bank's tax-qualified employee stock benefit plans, certain other depositors and borrowers; (c) to the extent shares are available, to the Minority Shareholders in a Minority Stockholders' Offering; and (d) to the extent shares are available, in a Community Offering to members of the general public with preference given to natural persons residing in the counties that the Savings Bank considers its local community. The Subscription Offering, Minority Stockholders' Offering and the Community Offering (but not the Shares applicable to the Exchange) are referred to herein as the "Offering". The Company will conduct these offerings in compliance with Washington law, the Washington Department of Financial Institutions, Division of Banks (the "Division") and the Federal Deposit Insurance Corporation (the "FDIC") rules (together, the "Banking Regulations"), the Securities Act of 1933 (the "1933 Act") and the rules and regulations issued thereunder (the "1933 Act Regulations") by the Securities and Exchange Commission (the "SEC"). The Company has filed a bank holding company application with the Board of Governors of the Federal Reserve System (the "FRB"). Each term not defined herein shall have the meaning given it in the Prospectus contained in the Company's registration statement on Form S-1 (File No. 333-__________) (the "Registration Statement") filed with the SEC and in its Application for Conversion (the "Application") filed with the Division and the FDIC. SECTION 1. APPOINTMENT OF AGENT; COMPENSATION TO THE AGENT Subject to the terms and conditions set forth below, the Company hereby appoints Ryan Beck as its agent to consult with, advise and assist it, and to solicit purchase orders for Shares on its behalf, in connection with the Offering. On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, Ryan Beck accepts such appointment and agrees to consult with and advise the Company as to the matters set forth in Section 3 of the engagement letter between the Agent and the Bank dated June 26, 1997, included as Exhibit A attached hereto, and to use its best efforts to solicit purchase orders for Shares according to this Agreement; provided, however, that the Agent shall not be responsible for obtaining purchase orders for any specific number of Shares, shall not be required to purchase any Shares and shall not be obligated to take any action which is inconsistent with all applicable laws, regulations, decisions or orders. If requested by the Company, Ryan Beck may also assemble and manage a selling group of broker-dealers which are members of the National Association of Securities Dealers, Inc. ("NASD") to participate in the solicitation of purchase orders for the Shares under a selected dealers' agreement ("Selected Dealers' Agreement"), the form of which is set forth as Exhibit B to this Agreement. The Company acknowledges that, having appointed the Agent hereunder, only personnel employed by the Agent, and such other personnel as are assigned to specific purposes or services contemplated by this Agreement to be performed by the Agent, will be involved in providing the services described herein. In forming a selling group in connection with the Offering, the Agent may include the brokerage offices of the Agent located in Livingston, New Jersey. In such event, you would be required to execute and abide by the terms of a Selected Dealers' Agreement, and would be entitled to the same compensation as any other member of the selling group as set forth therein. In addition to the reimbursement of the expenses specified in Section 6, 7 and 8 hereof, the Agent will receive the following compensation in connection with the Conversion: 2 (1) an advisory and management fee of $50,000; (2) a fee equal to 1.5% of the aggregate dollar amount of the Shares sold in the Offering to members of the Mutual Holding Company and the shareholders of the Savings Bank, other than those shares sold pursuant to (3) and (4) below (no fee will be payable, however, with respect to Shares sold to officers, directors, employees, immediate family members of officers, directors, employees, ("Insiders") and qualified and non-qualified employee benefit plans of the Savings Bank and of the Insiders). For purposes of this paragraph, the term "immediate family members" shall be limited to spouses, parents, siblings, mothers and fathers in-law, children and their spouses; (3) a fee equal to 2.0% of the aggregate dollar amount of the Shares sold in the Offering to all persons other than those described in (2) above or pursuant to (4) below; and (4) a fee equal to 1.5% of the aggregate dollar amount of the Shares sold pursuant to the Selected Dealers' Agreement, provided that such fee along with the fee payable directly by the Savings Bank to selected dealers shall not exceed 7.0% of the aggregate dollar amount of all Shares sold pursuant to the Selected Dealers' Agreement. If (i) the Company or the Savings Bank abandons or terminates the Plan, (ii) the Conversion is not consummated by June 30, 1998, or (iii) Ryan Beck terminates this Agreement pursuant to Section 10(b), then the Agent shall not receive the fees described in (a)-(c) above but shall receive compensation of $50,000 for its advisory and administrative services, in addition to reimbursement of its reasonable out-of-pocket expenses as set forth in Section 6. In the event there is a resolicitation of subscriptions and you are required to provide significant additional services, the Company, the Savings Bank and the Agent shall negotiate in good faith an agreement to provide Agent additional compensation. In addition, in the event of unforeseen developments that otherwise require significant additional effort and expense on your part, the Company and the Savings Bank, in their sole discretion, may agree to negotiate in good faith an agreement to provide additional compensation and to cover such additional expenses. The compensation specified above shall be payable (to the extent not already paid) to the Agent in next day clearing house funds on the earlier of: (i) the consummation of the Conversion; or (ii) a determination by the Company and the Savings Bank on one hand or the Agent on the other to terminate or abandon the Conversion. The $25,000 paid to the Agent upon execution of the engagement letter and the $25,000 paid to the Agent upon the execution of this Agreement will be considered advance payments of compensation due hereunder. The Company and the Savings Bank agree to reimburse the Agent for the costs and expenses specified in Section 6, to the extent such costs and expenses are reasonably incurred by the Agent, promptly upon receiving a reasonable accounting of such costs and expenses from time to time. 3 SECTION 2. CLOSING DATE; RELEASE OF FUNDS AND DELIVERY OF CERTIFICATES If all conditions precedent to the consummation of the Conversion, including, without limitation, the sale of the minimum number of Shares as set forth in the Prospectus are satisfied, the Company agrees to issue or to cause to be issued the Shares sold in the Offering and to authorize the release for delivery of certificates for such Shares on the Closing Date (as hereinafter defined) against payment therefor to the Company by release of funds from the special interest-bearing account referred to in Section 5(o) hereof and by the authorized withdrawal of funds from deposit accounts of those who choose to purchase Shares in the Offering according to relevant section of the Plan; provided, however, that no such funds shall be released to the Company or withdrawn until the conditions specified in Section 9 hereof shall have been complied with to the reasonable satisfaction of the Agent and its counsel. Such release, withdrawal and payment shall be made at the Closing Date, on a business day and at a time and place selected by the Agent, which date and place are acceptable to the Company on at least two business days prior notice to the Company (it being understood that such business day shall not be more than 10 business days after the later of the termination of the Offering or the receipt of all necessary regulatory approvals, or such other time or place as shall be agreed upon by the Agent, the Company and the Savings Bank). Certificates for Shares shall be delivered directly to the purchasers thereof or in accordance with their directions. The hour and date upon which the Company shall release or deliver the Shares sold in the Offering, according to the terms hereof, are herein called the "Closing Date." SECTION 3. PROSPECTUS; THE OFFERING. There will be a maximum and minimum number of shares to be offered in the Offering and the anticipated price is $10.00 per share. The minimum and/or maximum number of Shares may be increased or decreased by the Company, subject to the provisions of the Plan, market conditions or a change in the estimated pro forma market value of the Company. SECTION 4. REPRESENTATIONS AND WARRANTIES. The Company and the Savings Bank represent and warrant to the Agent as follows: (a) The SEC declared the Registration Statement effective on ________, 1997. The Division granted conditional approval of the Application on ________, 1997, the FRB granted approval of the bank holding company application on ________, 1997, and the FDIC issued its conditional approval on ________, 1997. At the time the Registration Statement was declared effective the Registration Statement complied and at all times subsequent thereto until and at the Closing Date the Registration Statement will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations, unless otherwise expressly permitted by the SEC. At the time the Application was conditionally approved the Application complied and at all times subsequent thereto until and at the Closing Date the Application will comply in all material respects with the Banking Regulations and all other requirements established by the Division and the FDIC, 4 unless otherwise expressly permitted by the Division and the FDIC. When the Application was conditionally approved by the Division and when the Registration Statement was declared effective by the SEC, and at all times subsequent thereto until and at the Closing Date, the Application, the Registration Statement, any preliminary or final Prospectus (including all amendments and supplements), and any written information ("Blue Sky Information") supplied by the Company or the Savings Bank or its representatives (including counsel) that is filed along with other information authorized by the Company to be filed in any state or jurisdiction to register or qualify any or all of the Shares under the securities laws thereof (collectively "Blue Sky Applications") or any application or other document, advertisement or communication prepared, made or executed by or on behalf of the Company with its consent after review and authorized by the Company for use in connection with the Offering ("Sales Information") did not and will not contain an untrue statement of a material fact or omit any material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the -------- representations and warranties in this Section 4(a) shall not apply to statements in or omissions from such Application, Prospectus or Sales Information or Blue Sky Application made in reliance upon and in conformity with information furnished in writing to the Company by the Agent expressly regarding the Agent for use under the captions "The Conversion -- Marketing Arrangements." (b) At the Closing Date, the Company will have completed all conditions precedent to the Conversion and the offer and sale of the Shares in accordance with the Plan, the Banking Regulations and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Conversion imposed upon the Company or the Savings Bank by the Division, the FDIC, the FRB, the SEC or any other regulatory authority other than those which the Division, the FDIC, the SEC or other regulatory authorities waive or expressly permit to be completed after the Conversion is consummated. (c) No order has been issued by the Division, the FDIC, the FRB, the SEC or any other Federal or state regulatory or blue sky authority preventing or suspending the use of the Prospectus, and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Conversion is pending or, to the best of the Company's knowledge, threatened. (d) RP Financial, LC. ("RP Financial"), which prepared the appraisal of the Company in connection with the Conversion, is independent with respect to the Company and the Savings Bank within the meaning of the Plan and the Banking Regulations. (e) KPMG Peat Marwick, LLP, the firm which audited the financial statements filed as part of the Application and Prospectus, are, with respect to the Company and the Savings Bank independent certified public accountants as required by the regulations under the 1933 Act and the Securities Exchange Act of 1934, as amended (the "1934 Act"). (f) The financial statements, together with the related schedules and notes thereto included in the Application and the Registration Statement and which are part of the Prospectus, 5 present fairly the financial condition, results of operations, retained earnings and cash flows of the Savings Bank and its wholly-owned subsidiaries, at and for the dates indicated and the periods specified and comply as to form in all material respects with the applicable accounting requirements of the Banking Regulations and generally accepted accounting principles ("GAAP"). Said financial statements have been prepared in conformity with GAAP applied on a consistent basis during the periods involved, present fairly in all material respects the information required to be stated therein and are consistent with the most recent financial statements and other reports filed by the Savings Bank with the Division and the FDIC except that accounting principles employed in such filings conform to requirements of such authorities and not necessarily to GAAP. The other financial, statistical, and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited financial statements of the Savings Bank included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein. (g) Since the respective dates as of which information is given in the Application, the Registration Statement and the Prospectus, except as may otherwise be stated therein: (i) there has not been any material adverse change, financial or otherwise, in the condition of the Company or the Savings Bank or in the earnings, capital or properties of the Company or the Savings Bank, whether or not arising in the ordinary course of business, (ii) there has not been any material increase in the long term debt of the Company or the Savings Bank other than in the ordinary course of business and neither the Company nor the Savings Bank has issued any securities or incurred any material liability or obligation for borrowing other than in the ordinary course of business; (iii) there have not been any material transactions entered into by the Company or the Savings Bank, except those transactions entered into in the ordinary course of business; and (iv) the capitalization, liabilities, earnings, assets, properties and business of the Company and the Savings Bank conform in all material respects to the descriptions thereof contained in the Prospectus. Furthermore, neither the Company nor the Savings Bank has any material liability of any kind, contingent or otherwise, except as set forth in the Prospectus. (h) The Savings Bank is a Washington chartered stock savings bank with corporate authority to conduct its business and own its property as described in the Application and the Registration Statement. The Company has been duly organized as a Washington corporation and has the corporate authority to conduct its business and own its property as described in the Application and the Registration Statement. The Company and the Savings Bank have obtained all licenses, permits and other governmental authorizations currently required for the conduct of their respective businesses; all such licenses, permits and governmental authorizations currently are in full force and effect, and each is in all material respects complying with all laws, rules, regulations and orders applicable to the operation of its business; neither the Company nor the Savings Bank has received notice of any proceeding or action relating to the revocation or modification of any such license, permit or governmental authorization which, singly or in the aggregate, if subject to an unfavorable decision, ruling or finding, might materially and adversely affect the conduct of the business, or the condition, financial or otherwise, or the earnings, affairs or prospects of either the Company or the Savings Bank. The Savings Bank is in good standing with the Division and the 6 FDIC. The Company is in good standing with the State of Washington. Each of the Company and the Savings Bank is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which its ownership of property or leasing of properties or the conduct of its business requires such qualification, unless the failure to be so qualified in one or more of such jurisdictions would not have a material adverse effect on its condition, financial or otherwise, or its business, operations or income of the Company and the Savings Bank on a consolidated basis. The Savings Bank does not own equity securities or any equity interest in any other business enterprise except as described in the Prospectus. (i) The deposit accounts of the Savings Bank are insured by the Savings Association Insurance Fund ("SAIF") as administered by the FDIC up to the maximum amount allowed under law. (j) Upon consummation of the Conversion, (i) the authorized, issued and outstanding equity capital of the Company will be as set forth in the Prospectus; (ii) the Shares will have been duly and validly authorized for issuance and, when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and in the Prospectus, will be duly and validly issued and fully paid and nonassessable; (iii) the issuance of the Shares will not violate any preemptive rights; (iv) the terms and provisions of the Shares will conform in all material respects to the description thereof contained in the Application and the Prospectus; and (v) the Company will own 100% of the capital stock of the Savings Bank. Upon the issuance of the Shares, good title to the Shares will be transferred to the purchasers thereof against payment therefor, subject to such claims as may be asserted against the purchasers thereof by third-party claimants. (k) The Plan, the consummation of the Conversion, the execution, delivery and performance of this Agreement and the consummation of the transactions hereby contemplated have been duly and validly authorized by the Boards of Directors of the Company and the Savings Bank and all other corporate action on the part of the Company and the Savings Bank necessary to approve this Agreement, the Plan and the transactions contemplated thereby has been taken, excepting only the required approval of the shareholders of the Savings Bank and the voting members of the Mutual Holding Company. This agreement has been validly executed and delivered by the Company and the Savings Bank and is the valid, legal and binding obligation of the Company and the Savings Bank, enforceable according to its terms, except to the extent that the rights to indemnity hereunder may be limited under applicable laws or regulations, and subject to bankruptcy, insolvency, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally and equitable principles limiting the right to obtain specific enforcement or similar equitable relief. The consummation of the transactions herein contemplated will not: (i) conflict with or constitute a breach of, or default under, the Articles of Incorporation or bylaws of the Company or the Articles of Incorporation or bylaws of the Savings Bank or any material contract, lease or other instrument to which the Company or the Savings Bank is a party or in which either the Company or the Savings Bank has a beneficial interest, or any applicable law, rule, regulation or order; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or 7 regulation applicable to the Company or the Savings Bank; or (iii) result in the creation of any lien, charge or encumbrance upon any property of the Company or the Savings Bank. (l) The Company and the Savings Bank have all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares of the Company as provided in the Plan and as described in the Prospectus, subject to the satisfaction or waiver of the conditions of the Division's and the FDIC's approval of the Application, and except as may be required under the Blue Sky laws of the various States. (m) The Company and the Savings Bank have good and marketable title to all properties and assets which are material to their respective businesses. The properties and assets described in the Application and the Prospectus are owned by them, free and clear of all liens, except such liens as are described in the Application and the Prospectus or are not materially significant to the business of the Company and the Savings Bank. All of the leases and subleases material to the business of the Company and the Savings Bank under which the either company holds properties, including those described in the Application, are in full force and effect. (n) Other than as disclosed in the Prospectus, neither the Company nor the Savings Bank is in violation of any material directive from the Division, the FDIC, the FRB, or any other agency to make any material change in the method of conducting its business so as to comply in all material respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the Division, the FDIC and the FRB) and, there is no suit, proceeding, charge, investigation or action before or by any court, regulatory authority or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company or the Savings Bank, threatened, which might materially and adversely affect the Offering, the performance of this Agreement or the consummation of the transactions contemplated in the Plan and as described in the Application, or which might result in any material adverse change in the condition (financial or otherwise), earnings, capital or properties, of the Company or the Savings Bank, or which would materially affect their properties and assets. (o) The Savings Bank is in compliance in all material respects with the applicable financial record-keeping and reporting requirements of the Currency and Foreign Transaction Reporting Act of 1970, as amended, and the regulations and rules thereunder. (p) The only subsidiaries of the Savings Bank are Sound Service Associates, Inc. and Heritage Capital Corporation (the "Subsidiaries"). The Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of the jurisdiction of their incorporation, have full corporate power and authority to own, lease and operate their properties and to conduct its business as described in the Registration Statement and Prospectus, and are duly qualified to transact business and are in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify would not have a material adverse effect on the financial condition, results of operations or business of the Company, the Savings 8 Bank and the Subsidiaries, taken as a whole; the activities of the Subsidiaries are permitted to subsidiaries of a Washington-chartered savings bank by federal and Washington law and the rules, regulations, resolutions and practices of the FRB, the FDIC and the Division; all of the issued and outstanding capital stock of the Subsidiaries has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Savings Bank, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equitable claim. (q) The Company and the Savings Bank have received the opinion of KPMG Peat Marwick LLP with respect to the federal income tax consequences of the Conversion, the acquisition of the capital stock of the Savings Bank by the Company and the sale and exchange of the Shares as described in the Prospectus. The Company and the Savings Bank have receive the opinion of its counsel, Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., with respect to the Washington income tax consequences of the Conversion, the acquisition of the capital stock of the Savings Bank by the Company and the sale and exchange of the Shares as described in the Prospectus. All material aspects of such opinions are accurately summarized in the Prospectus, and the facts and representations upon which such opinions are based are accurate and complete, and neither the Company nor the Savings Bank will take any action inconsistent therewith. (r) As of the date hereof, neither the Company nor the Savings Bank is or will be in violation of its Articles of Incorporation or bylaws. No default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a default on the part of the Company or the Savings Bank, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other instrument or agreement to which the Company, the Savings Bank or its subsidiary is a party or by which they or their properties are bound or affected in any respect which, in any such case, is material to the Company, the Savings Bank and its subsidiary taken as a whole and no other party to any such agreements has instituted or, to the knowledge of the Company or the Savings Bank, threatened any action or proceeding wherein the Company or the Savings Bank would or might be alleged to be in material default thereunder. (s) Since the date of the financial information contained in the Prospectus, except as otherwise may be indicated or contemplated in the Application and Prospectus, neither the Company nor the Savings Bank has: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of its business, or (ii) entered into any transaction which is material in light of the business and properties of the Company and the Savings Bank, taken as a whole, excluding origination, purchase and sale of loans and other investments made in the ordinary course of its business. (t) The Savings Bank has filed all federal, state and local tax returns required to be filed and has made timely payments of all taxes due and payable with respect to such returns (except for any taxes which it might in good faith be contesting) and no deficiency has been asserted with 9 respect thereto by any taxing authority. (u) Neither the Company nor the Savings Bank has made any payment of funds as a loan for the purchase of the Shares. (v) Neither the Company nor the Savings Bank has: (i) placed any securities within the last 18 months (except for stock issued by the Savings Bank in its reorganization into the mutual holding company structure in 1993 and notes to evidence bank loans and mortgage-backed securities in the ordinary course of business); (ii) had any material dealings within the 12 months prior to the date hereof with any member of the NASD, or any person related to or associated with such member, other than discussions and meetings relating to the proposed Conversion and routine purchases and sales of securities for or from its portfolio; (iii) entered into a financial or management consulting agreement, except as contemplated hereunder; and (iv) engaged any intermediary between the Agent and the Company in connection with any offering of the Shares, and no person is being compensated in any manner for such service. (w) To the best of the Company's knowledge, the Company has taken all necessary action to make such filings and/or qualify or register the Shares for offer and sale in the Conversion under the laws of the states wherein such shares will be offered where such States require such filings or qualification and/or registration. (x) Neither the Company nor the Savings Bank has relied upon the Agent or its legal or other advisors for any legal, tax or accounting advice in connection with the Conversion. (y) All supplemental sales literature, i.e., "marketing materials", used by --- the Company in connection with the Offering, required by the Banking Regulations or SEC regulations to be filed, has been filed with and cleared by the Division, the FDIC and the SEC. (z) The Company and the Savings Bank are in compliance with all laws, rules and regulations relating to environmental protection, and neither the Company nor the Savings Bank has been notified or is otherwise aware that either of them is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any similar state law. There are no actions, suits, regulatory investigations or other proceedings pending, or, to the best knowledge of the Company and the Savings Bank, threatened against the Company or the Savings Bank relating to environmental protection, nor does the Company or the Savings Bank have any reason to believe any such proceedings may be brought against either of them. No disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has occurred on, in, at or about any of the facilities or properties of the Company or the Savings Bank. (aa) The records of Eligible Account Holders, Supplemental Eligible Account Holders and Other Members (as those terms are defined in the Plan) delivered to the Agent by the Savings 10 Bank or its agent for use during the Conversion have been reviewed by the Savings Bank and are believed to be accurate, reliable and complete and the Agent shall have no liability to any person relating to the reliability, accuracy or completeness of such records or for any denial or allocation of a subscription to purchase shares to any person based upon such records. Any certificate signed by an officer of the Company or of the Savings Bank and delivered to the Agent or its counsel that refers to this Agreement and is referred to therein as a "representation" or "warranty" shall be deemed to be a representation and warranty by the Company or by the Savings Bank, respectively, to the Agent and its counsel as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein. SECTION 5. COVENANTS OF THE COMPANY AND THE SAVINGS BANK The Company and the Savings Bank hereby covenant with you as follows: (a) The Company and the Savings Bank will not file any amendment or supplement to the Application or the Registration Statement without notifying you of its intention to do so and shall provide you and your counsel with the opportunity to review such amendment or supplement in advance of filing. (b) The Company will use its best efforts to cause the bank holding company application to be approved by the FRB and to satisfy all conditions imposed by the FRB in its approval of the bank holding company application. The Company will, immediately upon receipt of any information concerning the events listed below, notify you in writing: (i) approval of the bank holding company application; (ii) receipt of any comments from the Division, the FDIC, the FRB, the SEC or any other governmental entity with respect to the Application, bank holding company application and the Prospectus, or the transactions contemplated by this Agreement; (iii) requests by the Division, the FDIC, the FRB, the SEC or any other governmental entity for any amendment or supplement to the Application, bank holding company application or the Prospectus or for additional information; (iv) issuance by the Division, the FDIC, the FRB, the SEC or any other governmental entity of any order or other action suspending the Conversion or the use of the Application, bank holding company application or the Prospectus or any other filing of the Company under the Banking Regulations or other applicable law, or the threat of any such action; (v) issuance by the Division, the FDIC, the FRB, the SEC or any state authority of any stop order suspending the effectiveness of the Application, bank holding company application or the Prospectus or of the initiation or threat of any proceedings for that purpose; or (vi) occurrence of any event set forth in paragraph (f) below. The Company will make every reasonable effort to prevent the issuance by the Division, the FDIC, the FRB, the SEC or any state authority of any such order and, if any such order shall at any time be issued, to obtain the lifting thereof at the earliest possible time. The Company will provide copies of the foregoing comments, requests and orders to you upon its receipt of such items. (c) The Company will deliver to you and to your counsel two conformed copies of each 11 of the following documents, with all exhibits: the Application and the Registration Statement, as originally filed and of each amendment or supplement thereto. In addition, the Company will deliver to you and your counsel such number of copies of the Prospectus, as amended or supplemented, as you may reasonably request. (d) The Company will furnish to you, from time to time during the period when the Prospectus (or any later prospectus related to this Offering) is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of such Prospectus (as amended or supplemented) as you may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act or the respective applicable rules and regulations of the SEC as applicable thereunder. The Company authorizes the Agent to use the Prospectus (as amended or supplemented, if amended or supplemented) for any lawful manner in connection with the sale of the Shares by the Agent. (e) The Company will comply with any and all terms, conditions, requirements and provisions with respect to the Conversion and the transactions contemplated thereby imposed by the SEC, the Division, the FDIC, the FRB or any other governmental agency, including the terms, conditions, requirements and provisions contained in the Banking Regulations and the rules and regulations of the SEC promulgated under the 1934 Act ("1934 Act Regulations"), to be complied with prior and subsequent to the Closing Date. When the Prospectus is required to be delivered, the Company will comply, at its own expense, with all requirements imposed upon it by the Division and the FDIC and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, in each case as from time to time in force, in accordance with the provisions thereof and the Prospectus. (f) If, at any time during the period when the Prospectus relating to the Shares is required to be delivered to purchasers of Shares, any event relating to or affecting the Company shall occur, as a result of which it is necessary, in the reasonable opinion of counsel for the Company or, in your reasonable opinion, after consultation with your counsel, to amend or supplement the Application or Prospectus in order to make the Application or Prospectus not misleading in light of the circumstances existing at the time it is delivered to a purchaser, the Company will, at its expense, forthwith prepare, file with the Division, the FDIC and the SEC and furnish to you a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Application or Prospectus (in form and substance reasonably satisfactory to you and your counsel after a reasonable time for review) which will amend or supplement the Application or Prospectus so that as amended or supplemented it will not contain any untrue statement of a material fact or omit a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading. For the purpose of this Agreement, the Company will timely furnish to you such information with respect to itself as you may from time to time reasonably request. (g) The Company will take all necessary actions, in cooperation with you, and furnish such information as may be required to qualify or register the Shares for offering and sale by the Company under the applicable securities or blue sky laws of such jurisdictions as you may 12 reasonably designate; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify to do business in any jurisdiction in which it is not so qualified. In each jurisdiction where any of the Shares shall have been qualified or registered as above provided, the Company and the Savings Bank will make and file such statements and reports in each fiscal period as are or may be required by the laws of such jurisdiction. (h) The Company will not sell or issue, contract to sell or otherwise dispose of any shares of, or securities convertible into or exercisable for, shares of Common Stock for a period of 90 days after the closing date, excluding transactions related to stock options or other stock based upon management compensation plans. (i) During the period during which the Common Stock is registered under the 1934 Act or for three years from the Closing Date, whichever period is greater, the Company will furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including statements of income, stockholders' equity and cash flow of the Company and the Savings Bank as of the end of and for such year, certified by independent public accountants in accordance with Regulation S-X under the 1934 Act) and make available as soon as practicable after the end of the first three quarters of the fiscal year (beginning with the fiscal quarter ending after the Closing Date) financial information of the Company and the Savings Bank for such quarter in reasonable detail. In addition, such annual results and quarterly results shall be made public through the issuance of press releases as the Company deems appropriate at the same time or prior to the time it is furnished or made available to stockholders of the Company. (j) The Company will furnish to you during the period of three years from the date hereof: (i) as soon as available, a copy of each of its reports furnished to or filed with the SEC under the 1934 Act or any national securities exchange or system on which any class of securities of the Company is listed or quoted, (including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy statements and annual reports to stockholders), a copy of each other report of the Company mailed to its stockholders, each press release and material news items and articles released by the Company or the Savings Bank as you may reasonably request in writing, and (ii) from time to time, such other nonconfidential information concerning the Company or the Savings Bank as you may reasonably request in writing. (k) The Company and the Savings Bank will use the net proceeds from the sale of the Shares in the manner set forth in the Prospectus under the caption "Use of Proceeds." (l) Other than as permitted by the Banking Regulations and the laws of any state in which the Shares are qualified for sale, the Company will not distribute any Prospectus or other offering material in connection with the offer and sale of the Shares. (m) The Company and the Savings Bank will file with the Division, the FDIC or the FRB, as applicable, such post-Conversion reports as may be required pursuant to the Banking Regulations or the Division and the FDIC approval of the Conversion. 13 (n) The Company will register the Common Stock with the SEC under Section 12(g) of the 1934 Act prior to or upon completion of the Conversion. (o) The Company will maintain appropriate arrangements for depositing all funds received from persons mailing orders to purchase Shares in the Offering in an interest-bearing account at the rate described in the Prospectus or until refunds of such funds have been made to the persons entitled thereto. The Company will maintain such records of all funds received as are necessary to enable the Company to make appropriate refunds of such funds in the event that such refunds are required to be made. (p) The Company will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with the NASD interpretation relating to "Free Riding and Withholding." (q) Prior to the Closing Date, the Company and the Savings Bank will conduct their respective businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the FRB, the Division and FDIC. (r) The Company will not amend the Plan, without the Agent's prior consent, which consent shall not be unreasonably withheld, in any manner that would materially and adversely affect the sale of the Shares or the terms of this Agreement, except as provided elsewhere herein. (s) The Company will use its best efforts to obtain approval for quotation of the Common Stock on the Nasdaq National Market effective on or before the Closing Date. (t) The Company and the Savings Bank will use all reasonable efforts to comply with, or cause to be complied with, the conditions precedent to the several obligations of the Agent specified in Section 9 hereof. (u) The Company will promptly register as a bank holding company under the Bank Holding Company Act and the regulations thereunder. (v) The Company shall advise the Agent, if necessary, as to the allocation of deposits, in the case of Eligible Account Holders and Supplemental Eligible Account Holders, and votes, in the case of Other Members, and of the Shares in the event of an oversubscription, and shall provide the Agent final instructions as to the allocation of the Shares ("Allocation Instructions") in such event and the Allocation Instructions shall be accurate, reliable and complete. The Agent shall be entitled to rely on the Allocation Instructions and shall have no liability in respect of its reliance thereon, including without limitation, no liability for or related to any denial or grant of a subscription in whole or in part. 14 SECTION 6. PAYMENT OF EXPENSES The Company and the Savings Bank agree to pay all reasonable and customary expenses incident to the performance of their obligations under this Agreement, including the following: (i) the preparation, issuance and delivery of certificates for the Shares to the purchasers in the Offering and the cost of printing all other documents applicable to the Conversion; (ii) the fees and disbursements of the Company's and the Savings Bank's counsel, accountants and other advisors; (iii) the qualification of the Shares under all applicable securities or Blue Sky laws, including filing fees and the fees and disbursements of the Company's counsel in connection therewith and in connection with the preparation of a Blue Sky Survey, concerning such jurisdictions as you shall reasonably request; (iv) the printing and delivery of the Prospectus as originally filed as amended or supplemented and all other documents in connection with this Agreement; (v) filing fees incurred in connection with the review of the Conversion by the Division, the FDIC, the SEC and the NASD; (vi) fees and expenses relating to the Appraisal; (vii) fees and expenses relating to advertising expenses, temporary personnel expenses, expenses related to operations of a facility to coordinate the Offering, investor meeting expenses, and other reasonable miscellaneous expenses relating to the marketing by the Agent of the Shares; and (viii) the fees and charges of any transfer agent, registrar and other agents. In the event the Agent incurs any of such expenses on behalf of the Company or the Savings Bank, the Company and the Savings Bank shall reimburse the Agent for such reasonable expenses regardless of whether the Conversion is successfully completed, and such reimbursements shall not be included in the expenses limitation discussed in the following paragraph. Ryan, Beck will not incur any single expense of more than $2,000 on behalf of the Company or the Savings Bank without the prior approval of the Company or the Savings Bank. The Company and the Savings Bank shall reimburse the Agent for all reasonable actual out-of-pocket expenses, including legal fees and expenses, incurred by you in connection with the services provided by you to the Company and the Savings Bank pursuant to this Agreement; the total out-of-pocket or reimbursable expenses of the Agent, excluding legal fees of its counsel, shall not exceed $15,000, unless otherwise agreed to by both parties in writing. The maximum reimbursable legal fees of the Agent's counsel (excluding expenses of counsel) shall not exceed $35,000, unless otherwise agreed to by both parties in writing. The Agent will provide the Company and the Savings Bank with a detailed accounting of all reimbursable expenses and will bill the Company and the Savings Bank quarterly. In the event of a material delay in the Offering which would require an update of the financial information presented in the Prospectus, the Company, the Savings Bank and the Agent shall negotiate in good faith an agreement to cover the Agent's additional expenses in connection therewith, including attorney's fees and expenses. In addition, in the event of unforeseen developments that otherwise require significant additional effort and expense on the part of the Agent, the Company and the Savings Bank, in their sole discretion, may agree to negotiate in good faith an agreement to cover such additional expenses. 15 SECTION 7. INDEMNIFICATION (a) The Company and the Savings Bank jointly and severally agree to indemnify and hold harmless you, your officers, directors, agents, and employees and each person, if any, who controls you within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses), joint or several, that you or any of them may suffer or to which you or any of them may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse you and any such persons upon written demand for any expenses (including reasonable fees and disbursements of yours and your counsel and all of your reasonable travel and other out-of-pocket expenses including hourly charges of your directors, officers and employees at their normal hourly billing rates) incurred by you or any of them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement, or alleged untrue statements, of any material fact contained in the Application (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Blue Sky Information, or the Sales Information, or any instrument or document prepared by the Company, the Savings Bank or their representatives; (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or, (iii) arise from any theory of liability whatsoever relating to or arising from or based upon any of the foregoing documents or information or other documentation prepared by the Company or the Savings Bank and distributed in connection with the Conversion; or (iv) are based on the treatment of the Exchange Shares; except to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statements or alleged untrue material statements in, or material omission or alleged material omission from any of the foregoing documents or information made in reliance upon and in conformity with information furnished in writing to the Company by you regarding you expressly for use under the caption "The Conversion -- Marketing Arrangements." Provided further, however, there shall be excluded from such indemnification any such claim, damage, loss, liability or expense that arises primarily out of or is based primarily upon any action or failure to act by you, other than action or failure to act undertaken at the request or with the consent of the Company or the Savings Bank beyond those services contemplated by this Agreement, that is found in a final judicial determination to constitute willful misconduct or gross negligence on the part of the Agent. (b) You agree to indemnify and hold harmless the Company and the Savings Bank, their officers, directors, agents, employees and each person, if any, who controls the Company and the Savings Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses), joint or several, which they, or any of them, may suffer or to which they, or any of them, may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Company and the Savings Bank, and any such persons upon written 16 demand for any expenses (including fees and disbursements of counsel) incurred by them, or any of them, in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Application (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto), any Blue Sky Application, the Sales Information, or are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided however that ---------------- your obligations under this Section 7(b) shall exist only if, and only to the extent, that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from any of the foregoing documents or information in reliance upon and in conformity with information furnished in writing to the Company or the Savings Bank by you regarding you expressly for use under the caption "The Conversion -- Marketing Arrangements." In addition, the Agent will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or action is found in a final judgment by a court to have resulted from the Company or the Savings Bank's willful misconduct or gross negligence. (c) Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section 7 and Section 8 herein. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys (and any special counsel that said firm may retain) for each indemnified party in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. The indemnifying party shall not be liable for any settlement of such action, proceeding or suit affected without its prior written consent. (d) The agreement contained in this Section 7 and in Section 8 hereof and the representations and warranties of the Company and the Savings Bank set forth in this Agreement shall remain operative and in full force and effect regardless of: (i) any investigation made by or on behalf of you or your officers, directors or controlling persons, agents or employees or by or on behalf of the Company, the Savings Bank, or any of their officers, directors or controlling persons, 17 agents or employees; (ii) delivery of and payment hereunder for the Shares; or (iii) any termination of this Agreement. SECTION 8. CONTRIBUTION In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7 is due in accordance with its terms but is for any reason held by a court to be unavailable from the Company and the Savings Bank or you, the Company and the Savings Bank, on the one hand, and you, on the other, shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding of any claims asserted, but after deducting any contribution received by the Company and the Savings Bank or you from persons other than the other parties hereto, who may also be liable for contribution) in such proportion so that you are responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 1 of this Agreement (not including expenses) bears to the gross proceeds received by the Company from the sale of the Shares in the Offering (net of the Agent's fees) and the Company and the Savings Bank shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 7 above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Savings Bank on the one hand and you on the other in connection with the statements or omissions which resulted in such losses, claims, damage or liabilities (or actions, proceedings or claims in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Savings Bank on the one hand and you on the other shall be deemed to be in the same proportion as the total gross proceeds from the Offering (net of the Agent's fees) received by the Company bear to the total fees (not including expenses) received by the Agent. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Savings Bank on the one hand or you on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro-rata allocation or by other method of allocation which does not take into account the equitable considerations referred to above in this Section 8. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof) referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be required to contribute to the Company or the Savings Bank for any loss, liability, claim, damage or expense any amount which in the aggregate exceeds the amount paid to the Agent under this Agreement. It is understood that the above-stated limitation on the Agent's liability for contribution to the Company and the Savings Bank is essential to the Agent and that the Agent would not have entered into this 18 Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. The obligations of the Company and the Savings Bank under this Section 8 and under Section 7 shall be in addition to any liability which the Company or the Savings Bank may otherwise have. For purposes of this Section 8 each of your officers and directors and each person, if any, who controls you within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as you and each person, if any, who controls the Company and the Savings Bank within the meaning of the 1933 Act and the 1934 Act, and each officer and director and each person, if any, who controls the Company and the Savings Bank, shall have the same rights to contribution as the Company and the Savings Bank. Any party entitled to contribution shall notify such other party promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect to which a claim for contribution may be made against another party, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 8. SECTION 9. CONDITIONS OF YOUR OBLIGATIONS Your obligations hereunder, as to the Shares to be delivered at the Closing Date, are subject in your discretion, to the condition that all representations and warranties and other statements of the Company and the Savings Bank herein are, at and as of commencement of the Offering and at and as of the Closing Date, true and correct in all material respects, the condition that the Company and the Savings Bank shall have performed in all material respects all of their obligations hereunder on or before such dates, and to the following further conditions: (a) The Registration Statement shall have been declared effective not later than 5:30 pm. on the date of this Agreement, or with your consent, not to be unreasonably withheld, at a later time and date; and at the Closing Date no order suspending the approval of the Application shall have been issued or proceedings therefor initiated or threatened by any state authority, and no order or other action suspending the effectiveness of the Registration Statement shall have been issued or proceedings therefor initiated or to the best of the Company's or the Savings Bank's knowledge threatened by the SEC, the FDIC, the FRB or any state or other governmental authority. (b) At the Closing Date you shall have received: (1) The opinions, dated as of the Closing Date and addressed to Ryan Beck and for its benefit, of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., in form and substance satisfactory to counsel for the Agent, providing that: (i) The Company has been duly organized and is validly existing as a 19 corporation in good standing under the laws of the State of Washington. The Company has full corporate authority to conduct its business and own its properties as described in the Application, the Registration Statement and the Prospectus. The Company is qualified as a foreign corporation to transact business in each jurisdiction in which its ownership of property or leasing of properties or the conduct of its business requires such qualification unless the failure to be so qualified in one or more such jurisdictions would not have a material adverse effect on the condition, financial or otherwise, or the business, operations, income or prospects of the Company and the Savings Bank, taken as a whole. The Savings Bank has been organized and is validly existing as a state-chartered stock savings bank under the laws of the State of Washington. The Savings Bank has full corporate authority to conduct its business and own its properties as described in the Application, the Registration Statement and the Prospectus. The Savings Bank is qualified as a foreign corporation to transact business in each jurisdiction in which its ownership of property or leasing of properties or the conduct of its business requires such qualification unless the failure to be so qualified in one or more such jurisdictions would not have a material adverse effect on the condition, financial or otherwise, or the business, operations, income or prospects of the Company and the Savings Bank, taken as a whole. (ii) The Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of the state of Washington, have full corporate power and authority to own, lease and operate their properties and to conduct their business as described in the Prospectus and are duly qualified as foreign corporations to transact business and are in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify would not have a material adverse effect upon the financial condition, results of operations or business of the Company, the Savings Bank and the Subsidiaries, taken as a whole; the activities of the Subsidiaries as described in the Prospectus are permitted to subsidiaries of a bank holding company and of a Washington chartered savings bank by federal and Washington law and the rules, regulations, resolutions and practices of the FRB, the FDIC and the Division; all of the issued and outstanding capital stock of the Subsidiaries has been duly authorized and validly issued, is fully paid and nonassessable and is owned directly by the Savings Bank, to the best of such counsel's knowledge, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. (iii) The Savings Bank is a member of the Federal Home Loan Bank of Seattle. The deposit accounts of the Savings Bank are insured by the SAIF up to the maximum amount allowed under law. (iv) Upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Company will be as set forth in the Prospectus and no shares of Common Stock, or securities exercisable into or exchangeable for Common Stock (except for those issued to the Savings Bank as contemplated by the Plan), have been issued by the Company prior to the Closing Date; the Shares issued in the Conversion have been 20 duly and validly authorized for issuance, and when issued and delivered by the Company pursuant to the Prospectus against payment of the consideration calculated as set forth in the Plan, will be duly and validly issued and fully paid and nonassessable and at such time all such capital stock shall be free and clear of any mortgage, pledge, lien, encumbrance or claim (legal or equitable) created by the Company; and the issuance of the Shares is not subject to preemptive rights. The Common Stock conforms to the description thereof contained in the Prospectus, and the form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable statutory requirements. Upon consummation of the Conversion, all of the issued and outstanding capital stock of the Savings Bank will be duly and validly issued, fully paid and nonassessable, and at such time the Company will own, beneficially and legally, all of the outstanding capital stock of the Savings Bank, free and clear of any mortgage, pledge, lien, encumbrance or claim (legal or equitable). (v) This Agreement has been authorized by all necessary corporate action by the Company and the Savings Bank, has been executed and delivered by the Company and the Savings Bank and is the legal, valid and binding agreement of the Company and the Savings Bank, enforceable in accordance with its terms, except as the rights of indemnification and contribution may be limited under applicable laws or regulations, and subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights or the rights of creditors of savings associations, the deposits of which are insured by the FDIC, to general principles of equity (whether considered in an action at law or in equity). (vi) The Plan has been approved by the required vote of the Directors, depositors and shareholders of the Savings Bank. (vii) The Application has been approved by the Division and the FDIC and no order suspending the approval has been issued or proceedings therefor initiated or, to the knowledge of such counsel, threatened by the Division or the FDIC. To such counsel's knowledge, no person has sought to obtain the review of the final actions of the Division and the FDIC in approving the Application. (viii) Subject to the satisfaction of the conditions to the approval of the Application by the Division and the FDIC no further approval, registration, authorization, consent or other order of any regulatory agency, public board or body is required in connection with the execution and delivery of this Agreement, the consummation of the Conversion, and the issuance of the Shares, except as may be required under the securities or blue sky laws of various jurisdictions. The Conversion has been consummated in all material respects according to all applicable provisions of the Banking Regulations, federal and state law, applicable Blue Sky laws and all applicable rules and regulations promulgated thereunder. 21 (ix) The Registration Statement has been declared effective under the 1933 Act. No stop order suspending its effectiveness has been issued under the 1933 Act nor, to the knowledge of such counsel, proceedings therefor initiated or threatened by the SEC or any state authority. (x) At such time as the Application was approved and at such time when the Registration Statement was declared effective: (i) the Application and the Registration Statement, and any amendment or supplement thereto (other than the financial statements and other financial, pro forma and statistical data included therein, and the Independent Valuation as to which no opinion need be rendered), complied as to form in all material respects with the Banking Regulations and with the 1933 Act and the 1933 Act Regulations, respectively, and (ii) the Prospectus (other than the financial, statements and other financial, pro forma and statistical data included therein, and the Independent Valuation as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) The information in the Prospectus under the captions "RISK FACTORS -- Anti-Takeover Provisions", "BUSINESS OF THE BANK -- Federal Taxation", "-- State Taxation," "SUPERVISION AND REGULATION", "THE CONVERSION", "RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK", "DESCRIPTION OF CAPITAL STOCK OF THE COMPANY", and "COMPARISON OF STOCKHOLDERS' RIGHTS", to the extent that it constitutes matters of law, summaries of legal matters, or proceedings, or legal conclusions, has been reviewed by such counsel and is correct in all material respects. (xii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or the Savings Bank which are required to be disclosed in the Application and the Prospectus, other than those disclosed therein, and all pending legal and governmental proceedings to which the Company or the Savings Bank is a party or to which any of their property is the subject which is not discussed in the Application and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material, provided that for this purpose, any litigation or governmental proceeding is not considered to be "threatened" unless the potential litigant or governmental authority has manifested to the management of the Company or the Savings Bank, or to counsel, a present intention to initiate such litigation or proceeding. (xiii) To such counsel's knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Application and the Prospectus or required to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, the descriptions thereof or references thereto are correct in all material respects, and no default exists in the due performance or observance of any material obligation, agreement, covenant or 22 condition contained in any contract, indenture, mortgage, loan agreement, note or lease or other instrument so described, referred to or filed. (xiv) To such counsel's knowledge, the Company and the Savings Bank have obtained all material licenses, permits and other governmental authorizations currently required for the conduct of their businesses and all such material licenses, permits and other governmental authorizations are in full force and effect, and the Company and the Savings Bank are in all material respects complying therewith. (xv) Neither the Company nor the Savings Bank is in violation of its Articles of Incorporation or, to such counsel's knowledge, in violation of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or its property may be bound; to such counsel's knowledge the execution, delivery and performance of this Agreement and the consummation of the Conversion will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or the Savings Bank pursuant to any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the either company is a party or by which either of them may be bound, or to which any of the property or assets of either company is subject; and such action will not result in any violation of the provisions of the Articles of Incorporation or bylaws of the Company or the Savings Bank or any applicable law, regulation or order. All provisions of the Company's and the Savings Bank's respective Articles of Incorporation and bylaws comply in all material respects with applicable law. (xvi) To such counsel's knowledge all of the leases and subleases material to the business of the Savings Bank under which the Savings Bank and any subsidiary holds properties, as described in the Application and Prospectus, are in full force and effect. (xvii) To such counsel's knowledge, the Savings Bank is not in violation of any directive from the Division or FDIC to make any material change in the method of conducting its business. In rendering such opinion, such counsels may rely (i) as to matters of fact, to the extent such counsel deems proper, on such certificates of responsible officers of the Company and the Savings Bank and public officials; provided copies of any such opinion(s) or certificates are delivered to you together with the opinion to be rendered hereunder by counsels to the Company and the Savings Bank; and (ii) on the practices and policies of the Division and the FDIC in approving similar transactions under the Banking Regulations. (2) The letter of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. special counsel for the Company and the Savings Bank, addressed to the Agent, dated the Closing Date, in form and substance to the effect that: 23 Nothing has come to the attention of counsel that would lead them to believe that the Application or any amendment or supplement thereto (other than the financial statements and other financial, pro forma and statistical data included therein, the Independent Valuation data and information relating to Ryan Beck as to which no view need be rendered), or the Prospectus or any supplemental sales literature reviewed by such counsel and authorized by the Company and the Savings Bank for use in the Offering (when read in conjunction with the Prospectus), contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (3) The favorable opinion, dated as of the Closing Date, of Breyer & Aguggia, your counsel, with respect to such matters as you may reasonably require. Such opinion may rely upon the opinions of counsel to the Company and the Savings Bank, and as to matters of fact, upon certificates of officers and directors of the Company and the Savings Bank delivered pursuant hereto or as such counsel shall reasonably request. (c) At the Closing Date, you shall receive a certificate of the Chief Executive Officer and the Treasurer of the Company and the Savings Bank, dated the Closing Date, to the effect that: (i) since the respective dates as of which information is given in the Application and the Prospectus, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties, affairs or prospects of the Company or the Savings Bank, whether or not arising in the ordinary course of business; (ii) the representations and warranties in Section 4 are true and correct with the same force and effect as though expressly made at and as of the Closing Date; (iii) the Company and the Savings Bank have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date under the Agreement and the Plan and will comply with all obligations under this Agreement and the Plan to be satisfied by them after the Conversion; (iv) the Company and the Savings Bank have conducted the Conversion in all material respects according to the Plan and all applicable laws and regulations and in the manner described in the Prospectus; (v) no stop order suspending the effectiveness of the Application has been initiated or threatened by the Division, the FDIC, other federal authority or any other state authority; and (vi) no order suspending the Conversion, or the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the SEC, other federal authority or any state authority. (d) Prior to and at the Closing Date: (i) in the reasonable opinion of the Agent, there shall have been no material adverse change in the condition, financial or otherwise, in the earnings, affairs or prospects of the Company or the Savings Bank from that as of the latest dates as of which such condition is set forth in the Prospectus, except as referred to therein; (ii) there shall have been no material transaction entered into by the Company or the Savings Bank from the latest date as of which the financial condition of the Savings Bank is set forth in the Prospectus other than transactions as contemplated by and disclosed in the Prospectus or transactions specifically referred to or contemplated therein; (iii) the Savings Bank shall not have received from the Division or 24 FDIC any direction (oral or written) to make any material change in the method of conducting its business with which it has not complied (which direction, if any, shall have been disclosed to the Agent) or which materially and adversely would affect the business, operations or financial condition or income of the Savings Bank; (iv) neither the Company nor the Savings Bank shall have been in material default (nor shall an event have occurred which, with notice or lapse of time or both, would constitute a material default) under any provision of any agreement or instrument relating to any material outstanding indebtedness; (v) no action, suit or proceedings, at law or in equity before any court or by any federal or state commission, board or other administrative agency, shall be pending or, to the knowledge of the Company or the Savings Bank, threatened against the Company or the Savings Bank or affecting any of their properties wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, operations, financial condition or income of the Company or the Savings Bank; (vi) the Shares shall have been qualified or registered for offering and sale under the securities or blue sky laws of the jurisdictions as set forth in the Blue Sky Memorandum of the law firm of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.; and (vii) no suit has been filed seeking judicial review of the final action of the Division and the FDIC in approving the Plan. (e) Concurrently with the execution of this Agreement, the Agent shall receive a letter from KPMG Peat Marwick LLP dated the date hereof and addressed to the Agent: (i) confirming that KPMG Peat Marwick LLP is a firm of independent public accountants within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants, the 1933 Act and the 1933 Act Regulations and no information concerning its relationship with or interests in the Savings Bank is required to be disclosed in the Prospectus, and stating that in its opinion the consolidated financial statements of the Savings Bank included in the Prospectus and covered by its opinion included therein comply as to form in all material respects with the applicable accounting requirements of the '33 Act and the '33 Act Regulations; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an examination in accordance with generally accepted auditing standards) consisting of the performance of the procedures specified by the American Institute of Certified Public Accountants for review of interim financial information, including, but not limited to, a reading of the latest available unaudited interim consolidated financial statements of the Savings Bank prepared by the Savings Bank, a reading of the minutes of the meetings of the Board of Directors and stockholders of the Savings Bank and consultations with officers of the Savings Bank responsible for financial and accounting matters, nothing came to its attention which caused it to believe that: (A) during the period from the date of the latest audited consolidated financial statements included in the Prospectus to a specified date not more than four business days prior to the date hereof, there was any material increase in borrowings by the Savings Bank; or (D) there was any material decrease in stockholders' equity of the Savings Bank at the date of such letter from the amounts shown in the latest audited statement of condition included in the Prospectus or there was any material decrease in net income, net interest income or non-interest income of the Savings Bank or any material increase in non-interest income or provision for loan losses of the Savings Bank for the number of full months commencing immediately after the period covered by the latest unaudited income statement included in the Prospectus and ended on the latest month end prior to the date of the Prospectus or as compared to the corresponding period in the preceding year 25 except as set forth in the Prospectus; and (iii) stating that, in addition to the examination referred to in its opinion included in the Prospectus and the performance of the procedures referred to in clause (ii) of this subsection (e), it has compared with the general accounting records of the Savings Bank, as applicable, which are subject to the internal controls of the Savings Bank's accounting system and other data prepared by the Savings Bank directly from such accounting records, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus as you may reasonably request; and they have found such amounts and/or percentages to be in agreement therewith (subject to rounding). (f) At the Closing Date, you shall receive a letter from KPMG Peat Marwick LLP dated the Closing Date, addressed to the Agent, confirming the statements made by it in the letter delivered by it pursuant to subsection (e) of this Section 9, the "specified date" referred to in clause (ii) (A) thereof to be a date specified in such letter, which shall not be more than five business days prior to the Closing Date. (g) At the Closing Date, you shall have received a letter from RP Financial, dated the Closing Date, confirming its appraisal. Such appraisal shall be in the form and substance reasonably satisfactory to you and shall be consistent with the terms of the Plan. (h) At the Closing Date, your counsel shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the sale of the Shares as herein contemplated and related proceedings or in order to evidence the occurrence or completeness of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Savings Bank in connection with the Conversion and the Offering and the sale of the Shares as herein contemplated shall be satisfactory in form and substance to you and your counsel. (i) Neither the Company nor the Savings Bank shall have sustained since the date of the latest unaudited financial statements included in the Application and Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Application and Prospectus, and since the respective dates as of which information is given in the Application and Prospectus, there shall not have been any material change in the consolidated long-term debt of the Company or the Savings Bank or any change, or any development involving a prospective change, in or affecting the general affairs of management, financial position, stockholders' equity, cash flow or results of operation of the Company or the Savings Bank, otherwise than as set forth or contemplated in the Application and Prospectus, the effect of which, in any such case described above, is in your reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Conversion or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the date hereof, there shall not have occurred any of the following: (i) 26 a suspension or limitation in trading in securities generally on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices for trading fixed, or maximum ranges for prices for securities required by either of such exchanges or the NASD or by order of the SEC or any other governmental authority; (ii) a general moratorium on the operation of commercial banks or savings banks in Washington or a general moratorium on the withdrawal of deposits from commercial banks, or savings banks in Washington declared by either federal or Washington authorities; (iii) the engagement by the United States in hostilities which have resulted in the declaration, on or after the date hereof, of a national emergency or war; or (iv) a material decline in the price of equity or debt securities if the effect of such a decline, in your judgment, makes it impracticable or inadvisable to proceed with the Conversion or the delivery of the Shares on the terms and in the manner contemplated in the Application and Prospectus. If any of the conditions specified in this Section 9 shall not have been fulfilled when and as required by this Agreement, or by June 30, 1998, this Agreement and all of your obligations hereunder may be canceled by you by notifying the Company and the Savings Bank of such cancellation in writing or by telegram at any time at or prior to the Closing Date, and any such cancellation shall be without liability of any party to any other party, except as otherwise provided in Section 1, 6, 7 and 8 hereof. Notwithstanding the above, if this Agreement is canceled pursuant to this paragraph, the Company and the Savings Bank agree to reimburse you for all of your reasonable out-of-pocket expenses (including without limitation the fees and expenses of your counsel), subject to the limits expressed in Section 6 hereof, reasonably incurred by you, and your counsel in connection with preparation of the Application, the Prospectus and contemplation of the proposed Reorganization. SECTION 10. TERMINATION (a) In the event the Savings Bank fails to sell the minimum number of the Shares as set forth in the Prospectus and does not modify the Conversion within the period specified in, and in accordance with the provisions of, the Plan or as required by the Banking Regulations and applicable law, this Agreement shall terminate upon refund by the Company to each person who has ordered any of the Shares the full amount which it may have received from such persons, together with interest as provided in the Prospectus, and no party to this Agreement shall have any obligation to the other hereunder, except for payment by the Company and the Savings Bank as set forth in Sections 1, 6, 7, 8 and 9 hereof and payment by the Agent pursuant to the provisions set forth in Sections 7 and 8 hereof. (b) This Agreement may be terminated by the Agent, with respect to the Agent's obligations hereunder, by notifying the Company and the Savings Bank at any time at or prior to the Closing Date, if any of the conditions specified in Section 9 hereof shall not have been fulfilled or waived in writing by the Agent when and as required by this Agreement, if the Company and the Savings Bank abandon or terminate the Plan, or if the Conversion has not been completed by June 30, 1998. 27 SECTION 11. SURVIVAL The respective indemnities, agreements, representations, warranties and other statements of the Company, the Savings Bank and you, as set forth in this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of you or any of your officers or directors or any person controlling you, or the Company or the Savings Bank, or any officer, director or person controlling the Company or the Savings Bank, and shall survive termination of the Agreement and the receipt or delivery of any payment for the Shares. SECTION 12. ARBITRATION Any claims, controversies, demands, disputes or differences between or among the parties hereto or any persons bound hereby arising out of, or by virtue of, or in connection with, or otherwise relating to this Agreement shall be submitted to and settled by arbitration conducted in Newark, New Jersey before one or three arbitrators, each of whom shall be knowledgeable in the field of securities law and investment banking. Such arbitration shall otherwise be conducted in accordance with the rules then obtaining of the American Arbitration Association. The parties hereto agree to share equally the responsibility for all fees of the arbitrators, abide by any decision rendered as final and binding, and waive the right to appeal the decision or otherwise submit the dispute to a court of law for a jury or non-jury trial. The parties hereto specifically agree that neither party may appeal or subject the award or decision of any such arbitrator to appeal or review in any court of law or in equity or by any other tribunal, arbitration system or otherwise. Judgement upon any award granted by such an arbitrator may be enforced in any court having jurisdiction thereof. SECTION 13. MISCELLANEOUS (a) Notices hereunder, except as otherwise provided herein, shall be given in writing or by telegraph, addressed (a) to the Agent at 220 S. Orange Avenue, Livingston, New Jersey 07039 (Attention: Ben A. Plotkin, President), with a copy to John F. Breyer, Jr., Breyer & Aguggia, 1300 I Street, NW, Suite 470 East, Washington, DC 20005 and (b) to the Company and the Savings Bank at their principal office (Attention: Donald V. Rhodes, President and Chief Executive Officer) with a copy to J. James Gallagher, Esquire, Gordon, Thomas Honeywell, Malanca, Peterson & Daheim, P.L.L.C., 1201 Pacific Avenue, Suite 2200, Tacoma, Washington 98402. (b) This Agreement is made solely for the benefit of and will be binding upon the parties hereto and their respective successors and the controlling persons, directors and officers referred to in Section 7 hereof, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of any of the Shares. (c) To the extent that terms in this Agreement are co-terminus with terms included in the letter of intent dated June 26, 1997 entered into by the Savings Bank, the Mutual Holding 28 Company and the Agent (the "Letter Agreement"), the terms of this Agreement shall supersede the terms of the Letter Agreement and shall be the controlling terms. (d) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey except as superseded by federal or other state law. (e) Time shall be of the essence of this Agreement. (f) This Agreement may be signed in various counterparts which together will constitute one agreement. If the foregoing correctly sets forth the arrangement among the Savings Bank, the Company and the Agent, please indicate acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement. Very truly yours, HERITAGE FINANCIAL CORPORATION HERITAGE SAVINGS BANK By:______________________________ By:______________________________ Donald V. Rhodes Donald V. Rhodes President and Chief President and Chief Executive Officer Executive Officer Accepted as of the date first above written. Ryan, Beck & Co., Inc. By:______________________________ Ben A. Plotkin President 29 EXHIBIT B HERITAGE FINANCIAL CORPORATION HERITAGE SAVINGS BANK Common Stock (No Par Value) SELECTED DEALERS' AGREEMENT ___________________, 1997 Gentlemen: We have agreed to assist Heritage Financial Corporation (the "Holding Company"), the proposed holding company of Heritage Savings Bank, in connection with the offer and sale of a minimum of and a maximum of shares of common stock, no par value ("Common Stock"). The price per share has been fixed at $10.00. The Common Stock, the number of shares to be issued, and certain of the terms on which they are being offered, are more fully described in the Prospectus of the Company dated ______________, 1997 (the "Prospectus"). The Company has offered the Common Stock to certain depositors of the Savings Bank; the Company's and the Savings Bank's employee benefit plans and certain members of the Company's community and the general public, subject to the purchase and other limitations contained in the Plan (the "Offering"). Common Stock is also being offered according to the Plan by a selling group of broker-dealers. We are offering the selected dealers (of which you are one) the opportunity to participate in the solicitation of offers to buy the Common Stock. We will pay you a fee in the amount of _____ percent (_____%) of the dollar amount of the Common Stock sold on behalf of the Company by you, as evidenced by the authorized designation of your firm on the order form or forms for the Common Stock accompanying the funds transmitted for payment therefor to the' special account established by the Company for the purpose of holding such funds. It is understood 1 that payment of your fee will be made only out of compensation received by us for the Common Stock sold on behalf of the Company by you, as evidenced according to the preceding sentence. As soon as practicable after the closing date of the Offering, we will remit to you, only out of our compensation as provided above, the fees to which you are entitled hereunder. Each order form for the purchase of Common Stock must set forth the identity and address of each person to whom the certificates for such Common Stock should be issued and delivered. Such order form should clearly identify your firm. You shall instruct any subscriber who elects to send his order form to you to make any accompanying check payable to Heritage Financial Corporation. This offer is made subject to the terms and conditions herein set forth and is made only to selected dealers who are (i) members in good standing of the National Association of Securities Dealers, Inc. ("NASD") who are to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation With Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice; or (ii) foreign dealers not eligible for membership in the NASD who agree (A) not to sell any Common Stock within the United States, its territories or possessions or to persons who are citizens thereof or resident therein and (B) in making other sales to comply with the above-mentioned Article III as if they were NASD members, and Section 25 of such Article III as it applies to non-member brokers or dealers in a foreign country. Orders for Common Stock will be strictly subject to confirmation and we, acting on behalf of the Company, reserve the right in our uncontrolled discretion to reject any order in whole or in part, to accept or reject orders in the order of their receipt or otherwise, and to allot. Neither you nor any other person is authorized by either the Company or us to give any information or make any representations other than those contained in the Prospectus in connection with the sale of any of the Common Stock. No selected dealer is authorized to act as agent for us when soliciting orders to buy the Common Stock from the public or otherwise. No selected dealer shall engage in any stabilization (as defined in Regulation M promulgated under the Securities Exchange Act of 1934, as amended ("1934 Act")) with respect to the Company's Common Stock during the Offering. We and each selected dealer assisting in selling Common Stock pursuant hereto agree to comply with the applicable requirements of the 1934 Act and applicable state rules and regulations. In addition, we and each selected dealer confirm that the Securities and Exchange Commission ("SEC") interprets Rule 15c2-8 promulgated under the 1934 Act as requiring that a Prospectus be supplied to each person who is expected to receive a confirmation of sale 48 hours prior to delivery of such person's order form. We and each selected dealer further agree to the extent that your customers desire to pay for shares with funds held by or to be deposited with us, according to the interpretation of the SEC of Rule 15c-2-4 promulgated under the 1934 Act, either (a) upon receipt of an executed order form or direction to execute an order form on behalf of a customer to forward the offering price of 2 the Common Stock ordered on or before twelve noon local New Jersey time of the next business day following receipt or execution of an order form by us to the Company for deposit in a segregated account or (b) to solicit indications of interest in which event (i) we will subsequently contact any customer indicating interest to confirm the interest and give instructions to execute and return an order form or to receive authorization to execute the order form on the customer's behalf, (ii) we will mail acknowledgements of receipt of orders to each customer confirming interest on the business day following such confirmation, (iii) we will debit accounts of such customers on the fifth business day ("debit date") following receipt of the confirmation referred to in (i), and (iv) we will forward completed order forms together with such funds to the Company on or before twelve noon on the next business day following the debit date for deposit in a segregated account. We and each selected dealer acknowledge that if the procedure in (b) is adopted, our customers' funds are not required to be in their accounts until the debit date. Unless terminated earlier by us, this Agreement shall terminate upon the closing date of the Offering. We may terminate this Agreement or any provisions thereof at any tune by written or telegraphic notice to you. Our obligations hereunder are subject to the successful completion of the Offering. You agree that at any time or times prior to the termination of this Agreement you will, upon our request, report to us the number of shares of Common Stock sold on behalf of the Company by you under this Agreement. We shall have full authority to take such actions as we may deem advisable in respect of all matters pertaining to the Offering. We shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us in this Agreement. Upon application to us, we will inform you as to the states in which we believe the Common Stock has been qualified for sale under or are exempt from the requirements of, the respective blue sky laws of such states, but we assume no responsibility or obligation as to your rights to sell Common Stock in any state. Additional copies of the Prospectus and any supplements thereto will be supplied in reasonable quantities upon request. Any notice from us to you shall be deemed to have been duly given if mailed, telephoned, or telegraphed to you at the address to which this Agreement is mailed. This Agreement shall be construed in accordance with the laws of the State of New Jersey. 3 Please confirm your agreement hereto by signing this agreement and returning it at once to the attention of the undersigned at Ryan, Beck & Co., Inc., 220 S. Orange Avenue, Livingston, New Jersey 07039. The enclosed duplicate copy will evidence the agreement between us. RYAN, BECK & CO., INC. By:__________________________ Ben A. Plotkin President Dated:___________________, 1997 [Name of Firm] By: _____________________ 4 EX-1.2 3 ENGAGEMENT LETTER EXHIBIT 1.2 [Ryan, Beck & Co. LOGO] CONFIDENTIAL June 26, 1997 Mr. Donald V. Rhodes Chairman, President & Chief Executive Officer Heritage Savings Bank 201 5th Avenue SW Olympia, WA 98501 Re: Stock Conversion--Subscription Enhancement and Administrative Services ---------------------------------------------------------------------- Dear Mr. Rhodes: Ryan, Beck & Co. ("Ryan, Beck") is pleased to submit this engagement letter setting forth the terms of the proposed engagement between Ryan, Beck, Heritage Savings Bank (the "Institution") and Heritage Financial, M.H.C. (the "MHC") in connection with the proposed conversion of the MHC from the mutual to the capital stock form of organization. 1. BACKGROUND ON RYAN, BECK & CO. Ryan, Beck is one of the nation's leading investment bankers for financial institutions. Ryan, Beck was organized in 1946 and has been publicly held since 1986. The firm is a registered broker-dealer with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc., the Securities Industry Association and a member of the Securities Investor Protection Corporation. Ryan, Beck's corporate finance department is one of the largest such groups devoted solely to financial institution matters in the country. Moreover, Ryan, Beck is one of the largest market makers in bank and thrift stocks. 2. PLAN OF CONVERSION The Institution proposes to cause the MHC to convert from the mutual to the stock form of organization (the "Conversion") pursuant to applicable regulations and form a new stock holding company (the "Company"). Accordingly, the Institution's and the MHC's Boards of Directors will adopt a plan of conversion (the "Plan") and will convene a meeting of the MHC's members and a meeting of the Institution's stockholders as soon as practicable thereafter to obtain member and stockholder approval of the Plan in accordance with applicable federal regulations. The Plan contemplates a Subscription and Community Offering (the "Offering") and an exchange of existing minority shares for shares of the Company. In connection with the MHC's Conversion, Ryan, Beck proposes to act as: . marketing representative; . proxy solicitor for both member and stockholder votes; . information agent for the exchange of shares; . financial advisor; and . conversion manager to the Institution and the MHC with respect to the Conversion and the offering of the shares of common stock of the Company (the "Common Stock") in the Offering. [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 2 Specific terms of the services contemplated hereunder shall be set forth in a definitive agency agreement (the "Definitive Agreement") between Ryan, Beck, the MHC, the Company and/or the Institution to be executed on the date the offering document is declared effective by the appropriate regulatory authorities. The purchase price of the Common Stock offered in the Offering will be that price which is established by an independent appraisal in accordance with applicable regulations and mutually acceptable to the parties hereto. 3. SERVICES TO BE PROVIDED BY RYAN, BECK & CO. a. Advisory Services--Thorough planning is essential to a successful conversion. Ryan, Beck serves as lead coordinator of the marketing and logistic efforts necessary to prepare for the Offering. Our actions are intended to clearly define responsibilities and timetables, while avoiding costly surprises. We assume responsibility for the initial preparation of marketing materials--saving you time and legal expense. Moreover, as your investment banker, Ryan, Beck will evaluate the financial, marketing and regulatory issues involved in the offering. Our specific responsibilities include: --Assisting in structuring the proposed Conversion with a focus on valuation and distribution issues; --Participating in drafting the Offering Circular and facilitating the regulatory approval process; --Developing a marketing plan including direct mail, advertising, community meetings and telephone solicitation; --Providing specifications and assistance in selecting a data processing agent, printer and other professionals; --Chairing a planning session, and subsequently coordinating the logistic effort of the professionals involved in preparing for the offering; --Calculating the number of new phone lines required; --Providing a list of equipment and supplies needed for the Conversion Center; and --Drafting marketing materials including letters, brochures, slide show script and advertisements. b. Administrative Services and Conversion Center Management--Ryan, Beck manages your "best efforts" community offering. A successful conversion requires an enormous amount of attention to detail. Working knowledge and familiarity with the law and "lore" of the Office of Thrift Supervision, Securities and Exchange Commission and NASD is essential. Ryan, Beck's experience in managing many thrift conversions will minimize the burden on your management and disruption to normal banking business. At the same time, our legal, accounting and regulatory background ensures that details are attended to in a professional fashion. A conversion requires accurate and timely recordkeeping and reporting. Furthermore, customer inquiries must be handled professionally and accurately. The Conversion Center centralizes all data and the work effort relating to the conversion. Ryan, Beck will assist the Institution in the establishment and supervision of the Conversion Center. We will train Conversion Center staff to solicit proxy votes, help record stock orders, answer customer inquiries and handle special situations as they arise. Conversion Center activities include the following: --Providing experienced on-site registered representatives to minimize disruption of day-to-day business; --Identifying and organizing space for the on-site Conversion Center, the focal point of conversion activity; --Administering the Conversion Center; [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 3 --Preparing procedures for processing proxies, stock orders and cash, and for handling requests for information; --Providing scripts, training and guidance for the telephone team in soliciting proxies and in the stock sales telemarketing effort; --Educating the Institution's directors, officers and employees about the conversion, their roles and relevant securities laws; --Training branch managers and customer-contact employees on the proper response to stock purchase inquiries; --Training and supervising Conversion Center staff assisting with proxy and order processing; --Preparing daily sales reports for management and ensure funds received balance to such reports; --Furnishing computer software for purposes of tracking sales prospects, processing proxies and stock orders and preparing daily sales reports; --Coordinating functions with the data processing agent, printer, transfer agent, stock certificate printer and other professionals; --Organizing and implementing a proxy solicitation campaign; --Designing and implementing procedures for handling IRA and Keogh orders; and --Interfacing with Depository Trust Company regarding the exchange of shares. c. Securities Marketing Services--Ryan, Beck uses various sales techniques including direct mail, advertising, community investor meetings, telephone solicitation, and if necessary, selling group formation. The sales approach is tailored to fit your specific situation. Our techniques are designed to attract a stockholder base comprised largely of community-oriented individuals loyal to the Institution. Our specific actions include: --Assigning licensed registered representatives from our staff to work at the Conversion Center to solicit orders on behalf of the Institution from eligible prospects who have been targeted as likely and desirable stockholders; --Assisting management in developing a list of potential investors who are reviewed as priority prospects; --Responding to inquiries concerning the investment opportunity; --Organizing, coordinating and participating in community informational meetings. These meetings are intended to both relieve customer anxiety and attract potential investors. The meetings generate widespread publicity for the conversion while providing local exposure of the Institution and promoting favorable stockholder relations; --Continually advising management on market conditions and the community's responsiveness to the Offering; and --If appropriate, assembling a selling group of selected local and institutional broker-dealers to assist in selling stock during the Offering. In so doing, preparing broker "fact sheets" and arranging "road shows" for the purpose of stimulating local and institutional interest in the Stock and informing the brokerage community and institutional investors of the particulars of the Offering. [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 4 4. COMPENSATION a. For its services hereunder, the Institution will pay to Ryan, Beck the following compensation in connection with the Conversion: (1) An advisory and management fee of $50,000 in connection with the advisory, administrative and proxy solicitation services set forth in section 3.a. and 3.b. hereof (the "Management Fee"); (2) A fee of one and one-half percent (1.50%) of the dollar amount of the Common Stock sold in the Offering to members of the MHC and stockholders of the Bank, other than those shares sold pursuant to (3) or (4) below. No fee shall be payable pursuant to this subsection in connection with the sale of stock to officers, directors, employees or immediate family of such persons ("Insiders") and qualified and non- qualified employee benefit plans of the Institution or the Insiders. (3) A fee of two percent (2.0%) of the dollar amount of the Common Stock sold in the Offering to all persons other than those described in (2) above or pursuant to (4) below. (4) For stock sold by a selling group of NASD member firms (which may include Ryan, Beck & Co.) under a selected dealers' agreement (the "Selling Group"), a fee equal to one and one-half percent (1.5%), which fee along with the fee payable directly by the Institution to selected dealers shall not exceed seven percent (7.0%) in the aggregate. Ryan, Beck will not commence sales of the stock through members of the Selling Group without the prior approval of the Institution. Such fees (less the amount of any advance payments) are to be paid to Ryan, Beck at the closing of the Conversion. As advance payments, the Institution will pay Ryan, Beck $25,000 upon execution of this letter and $25,000 upon commencement of the Offering, each of which will be offset against compensation due hereunder. If, pursuant to a resolicitation undertaken by the Institution, Ryan, Beck is required to provide significant additional services, or expend significant additional time, the parties shall mutually agree to the dollar amount of the additional compensation due. b. If (i) the Plan is abandoned or terminated by the Institution; (ii) the Community Offering is not consummated by June 30, 1998; (iii) Ryan, Beck terminates this relationship because there has been a material adverse change in the financial condition or operations of the Institution since June 30, 1997; or (iv) immediately prior to commencement of the Offering, Ryan, Beck terminates this relationship because the disclosure documents fail to satisfactorily disclose all relevant information or because of the existence of market conditions which might render the sale of the shares by the Institution hereby contemplated inadvisable, Ryan, Beck shall not be entitled to the compensation set forth above under subparagraph (a), but in addition to reimbursement of its reasonable out-of-pocket expenses as set forth in paragraph 7 below, shall be entitled to receive for its advisory and administrative services a fee of $50,000; provided however if (i) the Institution abandons or terminates the offering of the Common Stock prior to filing a registration statement; or (ii) Ryan, Beck terminates this relationship due to a failure to receive approval of its Commitment Committee, Ryan, Beck shall be entitled to receive for its advisory and administrative services a fee of $25,000. 5. MARKET MAKING Ryan, Beck agrees to use its best efforts to maintain a market and to solicit other broker-dealers to make a market in the Common Stock after the Conversion. [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 5 6. DOCUMENTS The Institution and the MHC and its counsel will complete, file with the appropriate regulatory authorities and, as appropriate, amend from time to time, the information to be contained in the MHC's Application for Conversion and any related exhibits thereto. In this connection, the Institution and its counsel will prepare prospectus and any other necessary disclosure documents relating to the offering of the Common Stock in conformance with applicable rules and regulations. As the Institution's financial advisor, Ryan, Beck will in conjunction with counsel, conduct an examination of the relevant documents and records of the Institution and will make such other reasonable investigation as deemed necessary and appropriate under the circumstances. The Institution and the MHC agree to make all such documents, records and other information deemed necessary by Ryan, Beck, or its counsel, available to them upon reasonable request. Ryan, Beck's counsel will prepare, subject to the approval of the Institution's counsel, the Definitive Agreement. 7. EXPENSES AND REIMBURSEMENT The Institution will bear all of its expenses in connection with the Conversion and the offering of its Common Stock including, but not limited to, the Institution's attorney fees, NASD filing fees, "blue sky" legal fees, expenses for appraisal, auditing and accounting services, advertising expenses, printing expenses, temporary personnel expenses and the preparation of stock certificates. In the event Ryan, Beck incurs such expenses on behalf of the Institution, the Institution shall pay or reimburse Ryan, Beck for such reasonable fees and expenses regardless of whether the Conversion is successfully completed. Ryan, Beck will not incur any single expense of more than $2,000, pursuant to this paragraph without the prior approval of the Institution. The Institution also agrees to reimburse Ryan, Beck for reasonable out-of- pocket expenses, including legal fees and expenses, incurred by Ryan, Beck in connection with the services contemplated hereunder. Ryan, Beck will not incur legal fees (excluding expenses of counsel) in excess of $35,000. Other out-of- pocket expenses will not exceed $15,000 without the approval of the Institution. The parties acknowledge, however, that such caps may be exceeded in the event of any material delay in the Offering not attributable to Ryan, Beck which would require an update of the financial information contained in the Offering Circular. We will provide you with a detailed accounting of all reimbursable expenses and will bill you quarterly. 8. BLUE SKY To the extent required by applicable state law, Ryan, Beck and the Institution will need to obtain or confirm exemptions, qualifications or registration of the Common Stock under applicable state securities laws and NASD policies. The cost of such legal work and related filing fees will be paid by the Institution to the law firm furnishing such legal work. The Institution will cause the counsel performing such services to prepare a Blue Sky memorandum related to the Offering including Ryan, Beck's participation therein and shall furnish Ryan, Beck a copy thereof addressed to Ryan, Beck or upon which such counsel shall state Ryan, Beck may rely. 9. INDEMNIFICATION The Definitive Agreement will provide for indemnification of the type usually found in underwriting agreements as to certain liabilities, including liabilities under the Securities Act of 1933. The Institution and the MHC also agree to defend, indemnify and hold harmless Ryan, Beck and its officers, directors, employees and agents against all claims, losses, actions, judgements, damages or expenses, including but not limited to [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 6 attorneys' fees, arising solely out of the engagement described herein, except that such indemnification shall not apply to Ryan, Beck's own negligence, if such negligence is determined to be material. This indemnification shall be superseded by the indemnification provisions of the Definitive Agreement. 10. ARBITRATION Any claims, controversies, demands, disputes or differences between or among the parties hereto or any persons bound hereby arising out of, or by virtue of, or in connection with, or otherwise relating to this Agreement shall be submitted to and settled by arbitration conducted in Seattle, Washington before one or three arbitrators, each of whom shall be knowledgeable in the field of securities law and investment banking. Such arbitration shall otherwise be conducted in accordance with the rules then obtaining of the American Arbitration Association. The parties hereto agree to share equally the responsibility for all fees of the arbitrators, abide by any decision rendered as final and binding, and waive the right to appeal the decision or otherwise submit the dispute to a court of law for a jury or non-jury trial. The parties hereto specifically agree that neither party may appeal or subject the award or decision of any such arbitrator to appeal or review in any court of law or in equity or by any other tribunal, arbitration system or otherwise. Judgement upon any award granted by such an arbitrator may be enforced in any court having jurisdiction thereof. 11. NASD MATTERS Ryan, Beck has an obligation to file certain documents and to make certain representations to the National Association of Security Dealers ("NASD") in connection with the Conversion. The Institution and the MHC agrees to cooperate with Ryan, Beck and provide such information as may be necessary for Ryan, Beck to comply with all NASD requirements applicable to it in connection with its participation as contemplated herein in the Conversion. Ryan, Beck is and will remain through completion of the Conversion a member in a good standing of the NASD and will comply with all applicable NASD requirements. 12. OBLIGATIONS (a) Except as set forth below, this engagement letter is merely a statement of intent. While Ryan, Beck and the Institution agree in principle to the contents hereof and propose to proceed promptly and in good faith to work out the arrangements with respect to the Conversion, any legal obligations between Ryan, Beck & Co. and the Institution shall be only: (i) those set forth herein in paragraphs 3 and 4 regarding services and payments; (ii) those set forth in paragraph 7 regarding reimbursement for certain expenses; (iii) those set forth in paragraph 9 regarding indemnification; (iv) those set forth in paragraph 10 regarding arbitration and (v) as set forth in a duly negotiated and executed Definitive Agreement. (b) The obligations of Ryan, Beck under the Definitive Agreement and hereunder shall be subject to, among other things, there being, in Ryan, Beck's opinion, which shall have been formed in good faith after reasonable determination and consideration of all relevant factors: (i) no material adverse change in the condition or operation of the Institution; (ii) satisfactory disclosure of all relevant information in the disclosure documents and a determination that the sale of stock is reasonable given such disclosures; (iii) no market conditions which might render the sale of the shares by the Institution hereby contemplated inadvisable; and (iv) agreement that the price established by the independent appraiser is reasonable in the then prevailing market conditions. [Ryan, Beck & Co. logo] Mr. Donald V. Rhodes June 26, 1997 Page 7 Please acknowledge your agreement to the foregoing by signing in the place provided below and returning one copy of this letter to our office together with the retainer payment of $25,000. We look forward to working with you. RYAN, BECK & CO. BY: /s/ Ben A. Plotkin -------------------------------------- Ben A. Plotkin--President and Chief Executive Officer Accepted and Agreed to This Day of July, 1997. HERITAGE SAVINGS BANK BY: /s/ Donald V. Rhodes -------------------------------------- Donald V. Rhodes--President, Chairman and Chief Executive Officer HERITAGE FINANCIAL, M.H.C. BY: /s/ Donald V. Rhodes -------------------------------------- Donald V. Rhodes--President, Chairman and Chief Executive Officer EX-2 4 AMENDED AND RESTATED PLAN OF CONVERSION Exhibit 2 AMENDED AND RESTATED PLAN OF CONVERSION AND REORGANIZATION OF HERITAGE FINANCIAL CORPORATION, MHC TABLE OF CONTENTS 1. INTRODUCTION........................................................ 1 2. DEFINITIONS......................................................... 2 3. PROCEDURES FOR CONVERSION........................................... 8 4. HOLDING COMPANY APPLICATIONS AND APPROVALS.......................... 11 5. SALE OF SUBSCRIPTION SHARES......................................... 11 6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK............. 12 7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY............. 14 8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)... 14 9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)............. 15 10. SUBSCRIPTION RIGHTS OF SUPPLEMENT ELIGIBLE ACCOUNT HOLDERS (THIRD PARTY)....................................................... 15 11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY).............. 16 12. MINORITY STOCKHOLDERS (FIFTH PRIORITY).............................. 17 13. COMMUNITY OFFERING (SIXTH PRIORITY)................................. 17 14. SYNDICATED COMMUNITY OFFERING....................................... 19 15. LIMITATION ON PURCHASES AND OWNERSHIP............................... 20 16. PAYMENT FOR CONVERSION STOCK........................................ 22 17. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS........ 23 18. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT..... 25 19. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES................... 25 20. ESTABLISHMENT OF LIQUIDATION ACCOUNT................................ 26
i 21. VOTING RIGHTS OF STOCKHOLDERS......................................... 27 22. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION...................... 27 23. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE CONVERSION.............................................. 28 24. TRANSFER OF DEPOSIT ACCOUNTS.......................................... 29 25. REGISTRATION AND MARKETING............................................ 29 26. TAX RULINGS OR OPINIONS............................................... 29 27. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS......................... 30 28. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY............... 31 29. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK.......................... 32 30. CHARTER AND BYLAWS.................................................... 32 31. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE......................... 33 32. EXPENSES OF CONVERSION................................................ 33 33. AMENDMENT OR TERMINATION OF PLAN...................................... 33 34. CONDITIONS TO CONVERSION.............................................. 34 35. INTERPRETATION........................................................ 34
PLAN OF CONVERSION AND REORGANIZATION OF HERITAGE FINANCIAL CORPORATION, MHC 1. INTRODUCTION This Plan of Conversion and Reorganization (the "Plan") provides for the conversion of Heritage Financial Corporation, MHC, a state of Washington mutual holding company (the "Mutual Holding Company") into Heritage Financial Corporation, a capital stock corporation organized under the state law of Washington (the "Holding Company"). The Mutual Holding company currently owns a majority of the common stock of Heritage Savings Bank (the "Bank"), a stock savings bank which is headquartered in Olympia, Washington. The purpose of the Conversion is to convert the Mutual Holding Company to the capital stock form of organization which will provide the Holding Company and the Bank with greater flexibility and capital resources to respond to changing regulatory and market conditions and to effect corporate transactions, including mergers and acquisitions. The Holding Company will offer its Common Stock upon the terms and conditions set forth herein to Eligible Account Holders, the Employee Plans established by the Bank or the Holding Company, Supplemental Eligible Account Holders, Other members, and Minority Stockholders in the respective priorities set forth in this Plan. Any shares of Conversion Stock not subscribed for by the foregoing classes of persons will be offered for sale to certain members of the public who reside in the Bank's Community directly by the Holding Company through a Community Offering or a Syndicated Community Offering or through an underwritten firm commitment public offering, or through a combination thereof. As part of the Conversion, each Minority Stockholder will receive Common Stock of the Holding Company in exchange for Minority Shares. The Conversion will result in the voting interests of the Mutual Holding Company's members being transferred to persons who purchase Conversion Stock in the Offering and persons who exchange common stock to the Bank for Common Stock of the Holding company. The Conversion will have no impact on depositors, borrowers or customers of the Bank. After the Conversion, the Bank will continue to be regulated by the Division as its chartering authority. The Bank also will continue to be a member of the Federal Home Loan Bank System and all its insured savings deposits will continue to be insured by the FDIC to the extent provided by applicable law. This Plan, as amended, has been adopted by the Board of Directors of the Mutual Holding Company, and must also be adopted by (i) the affirmative vote of a -1- majority of the total number of votes entitled to be cast by Voting Members of the Mutual Holding Company at a Special Meeting of Members to be called for that purpose, (ii) holders of at least two-thirds of the outstanding common stock of the Bank at the Special Meeting of Stockholders, and (iii) at least a majority of the votes cast, in person or by proxy, of the Minority Stockholders. Prior to the submission of this Plan to the Voting Members and stockholders of the Bank for consideration, the Plan must be approved by the Applicable Regulatory Authorities. 2. DEFINITIONS For the purposes of this Plan, the following terms have the following meanings: ACCOUNT HOLDER: Any Person holding a Deposit Account in the Bank. ACTING IN CONCERT: The term Acting in Concert means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company which acts in concert with another person or company ("other party") shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax- qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated. AFFILIATE: Any person that controls, is controlled by, or is under common control with another person. APPLICABLE REGULATORY AUTHORITIES: The Division, FDIC or Fed, as applicable in the circumstances. ASSOCIATE: The term Associate when used to indicate a relationship with any person, means (i) any corporation or organization (other than the Bank or a majority-owned subsidiary of the Bank) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity except that for the purposes of Sections 8 through 15 hereof, the term "Associate" does not include any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified -2- Employee Stock Benefit Plan in which a person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and except that, for purposes of aggregating total shares that may be held by Officers and Directors the term "Associate" does not include any Tax-Qualified Employee Stock Benefit Plan, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Bank or the Holding Company, if utilized, or any of its parents or subsidiaries. BANK: Heritage Savings Bank in its current stock form or in the form following the Conversion, as the context of the reference indicates. BANK MERGER: The merger of the Interim Bank with the Bank as set forth in this Plan pursuant to which the Bank will become a wholly owned subsidiary of the Holding Company. CODE: The Internal Revenue Code of 1986, as amended. COMMON STOCK: The shares of common stock, no par value per share, to be issued by the Holding Company. COMMUNITY: The Washington counties of Thurston, Mason, Pierce, King, Snohomish, Kitsap and Grays Harbor, which constitute the Bank's "local community". COMMUNITY OFFERING: The offering for sale to certain members of the general public directly by the Holding Company of any shares not subscribed for in the Subscription Offering. CONTROL (including the terms "controlled by", "controlling" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. CONVERSION: The conversion and reorganization of the Mutual Holding Company to stock form pursuant to this Plan, including the MHC Merger, the Bank Merger, the Share Exchange and the Offering, and all steps incident or necessary thereto. CONVERSION STOCK: The Subscription Shares and the Exchange Shares issued in the Conversion. -3- DEPOSIT ACCOUNT: The term Deposit Account means any withdrawable account as defined in Revised Code of Washington ("RCW") 32.32.180, including certificates of deposit. DIRECTOR: A member of the Board of Directors of the Bank, the Holding Company or the Mutual Holding Company, as appropriate in the context. DIVISION: Washington Department of Financial Institutions, Division of Banks. ELIGIBLE ACCOUNT HOLDER: Any Person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription rights and establishing subaccount balances in the Liquidation Account. ELIGIBILITY RECORD DATE: The date for determining Eligible Account Holders of the Bank which is June 30, 1996. EMPLOYEES: All Persons who are employed by the Bank or the Mutual Holding Company. EMPLOYEE PLANS: The Tax-Qualified Employee Stock Benefit Plans of the Bank or the Holding Company. ESOP: An Employee Stock Ownership Plan and related trust established by the Bank or the Holding Company. ESTIMATED PRICE RANGE: The range of the estimated pro forma market value of the total number of shares of Conversion Stock to be issued in the Conversion, as determined by the Independent Appraiser prior to the Subscription Offering and as it may be amended from time to time thereafter. EXCHANGE RATIO: The rate at which shares of Holding Company Common Stock are exchanged for Minority Shares upon consummation of the Conversion. The Exchange Ratio shall be determined as of the closing of the Conversion and shall be the rate that will result in the Minority Stockholders owning in the aggregate the same percentage of the outstanding shares of Common Stock of the Holding Company immediately upon completion of the Conversion as the percentage of Bank common stock owned by them in the aggregate immediately prior to the consummation of the Conversion before giving effect to (i) the payment of cash in lieu of issuing fractional shares of Holding Company Common Stock, and (ii) any shares of Common Stock purchased by the Minority Stockholders in the Conversion. -4- EXCHANGE SHARES: Shares of Common Stock, no par value per share, of the Holding Company issued to Minority Stockholders in exchange for Minority Shares. FDIC: The Federal Deposit Insurance Corporation. FED: Board of Governors of the Federal Reserve System or the Federal Reserve Bank of San Francisco. HOLDING COMPANY: The Washington corporation formed for the purpose of acquiring all of the shares of capital stock of the Bank in connection with the Conversion. Shares of Common Stock of the Holding Company will be issued in the Conversion to Participants and others. INDEPENDENT APPRAISER: The appraiser retained by the Mutual Holding Company and the Bank to prepare an appraisal of the pro forma market value of the Conversion Stock. INTERIM BANK: One or more interim bank subsidiaries of the Bank or the Holding Company established by the Bank or the Holding Company to effect the Conversion. LIQUIDATION ACCOUNT: The account established for the Members as set forth in Section 20. MHC MERGER: The merger of the Mutual Holding Company with the Bank as set forth in this Plan. MINORITY SHARES: Any outstanding common stock of the Bank held by persons other than the Mutual Holding Company. MINORITY STOCKHOLDER: Any owner of Minority Shares immediately prior to the closing of the Conversion. MINORITY STOCK OFFERING: The offering of the Bank's common stock to persons other than the Mutual Holding Company in connection with the formation of the Mutual Holding Company. MUTUAL HOLDING COMPANY: Heritage Financial Corporation, MHC, the mutual holding company of the Bank. OFFERING: The offering for sale, pursuant to this Plan, of Common Stock in a Subscription Offering, Community Offering, and Syndicated Community Offering (or -5- underwritten public offering), as the case may be. The term "Offering" does not include the Common Stock of the Holding Company issued in exchange for Minority Shares pursuant to this Plan. OFFICER: An executive officer of the Bank, the Holding Company or the Mutual Holding Company as appropriate in the context. ORDER FORM: Any form (together with any attached cover letter) sent by the Bank to any Participant or Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding subscriptions for Conversion Stock in the Subscription Offering. OTHER MEMBER: Any Member on the Voting Record Date who is not an Eligible Account Holder or Supplemental Account Holder. PARTICIPANT: Any Eligible Account Holder, Employee Plan, Supplemental Eligible Account Holder, Other Member or Minority Stockholder. PERSON: An individual, a corporation, a partnership, an association, a joint-stock company, a trust (including Individual Retirement Accounts and KEOGH Accounts), any unincorporated organization, a government or political subdivision thereof or any other entity. PLAN: The Plan of Conversion and Reorganization of the Mutual Holding Company, including the MHC Merger and the Bank Merger, as it exists on the date hereof and as it may hereafter be amended in accordance with its terms. PLAN OF MERGER: This document effecting the merger of the Mutual Holding Company with and into the Bank and cancellation of Bank shares held by the Mutual Holding Company. PROSPECTUS: The one or more documents used in offering the Conversion Stock in the Offering and the Exchange Shares. QUALIFYING DEPOSIT: The aggregate balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date, provided such aggregate balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date, provided such aggregate balance is not less than $50. -6- RECOGNITION PLANS: The Bank's Recognition and Retention Plans and Trusts adopted by the Board of Directors of the Bank and/or the Holding Company. RESIDENT: Any person who occupies a dwelling within the Community, has a present intent to remain within the Community for a period of time, and manifests the genuiness of that intent by establishing an ongoing physical presence within the Community together with an indication that such presence within the Community is something other than merely transitory in nature. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall be in the Community. To the extent a person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize such evidence provided to it to make a determination as to whether a person is a resident. In all cases, however, such a determination shall be in the sole discretion of the Bank. A Participant must be a "Resident" for purposes of determining whether such person "resides" in the Community as such term is used in this Plan. SEC: The Securities and Exchange Commission. SHARE EXCHANGE: The Exchange of Minority Shares for Holding Company Common Stock in the Conversion. SPECIAL MEETING OF MEMBERS: The special meeting of members of the Mutual Holding Company and any adjournments thereof held to consider and vote upon this Plan. SPECIAL MEETING OF STOCKHOLDERS: The special meeting of stockholders of the Bank and any adjournments thereof held to consider and vote upon the Plan. SUBSCRIPTION OFFERING: The offering of Conversion Stock to Participants. SUBSCRIPTION PRICES: The price per share of Conversion Stock to be paid by Participants in the Subscription Offering and Persons of the Community Offering. SUBSCRIPTION SHARES: The no par value common stock offered and issued by the Holding Company in the Offering, Subscription Shares do not include Bank common stock held by the Minority Stockholders exchanged for shares of Common Stock of the Holding Company in the Share Exchange. -7- SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER: Any Person, other than Directors and Officers of the Bank and their Associates, holding a Qualifying Deposit on the Supplemental Eligibility Record Date, who is not a Eligible Account Holder. SUPPLEMENTAL ELIGIBILITY RECORD DATE: The date for determining Supplemental Eligible Account Holders, as determined according to applicable law. SYNDICATED COMMUNITY OFFERING: The offering of Conversion Stock following the Subscription and Community Offerings through a syndicate of broker-dealers. TAX-QUALIFYING EMPLOYEE STOCK BENEFIT PLAN: Any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which, with its related trust, meets the requirements to be "qualified" under Section 401 of the Internal Revenue Code. The Bank may make scheduled discretionary contributions to a tax- qualified employee stock benefit plan, provided such contributions do not cause the Bank to fail to meets its regulatory capital requirement. A "Non-Tax- Qualified Employee Stock Benefit Plan" is any defined benefit plan or defined contribution plan which is not so qualified. VOTING MEMBER: Any Person who at the close of business on the Voting Record Date is entitled to vote as a member of the Mutual Holding Company pursuant to its charter and bylaws. VOTING RECORD DATE: The date fixed by the Directors in accordance with applicable law for determining eligibility to vote at the Special Meeting of Members and/or the Special Meeting of Stockholders. 3. PROCEDURES FOR CONVERSION A. After approval of the Plan by the Board of Directors of the Bank, the Plan shall be submitted together with all other requisite material to the Division , FDIC and Fed, as applicable for its approval. Notice of the adoption of the Plan by the Board of Directors of the Holding Company and the submission of the Plan to applicable regulators for approval will be published in a newspaper having general circulation in each community in which an office of the Bank is located and copies of the Plan will be made available at each office of the Bank for inspection by the Members. Upon receipt of notice from the applicable regulators to do so, the Mutual Holding Company also will cause to be published a notice of the filing of an application to convert in accordance with the provisions of the Plan. -8- B. The Plan will be submitted to a vote of (i) the Voting Members at the Special Meeting of Members, and (ii) the Stockholders of the Bank at the Special Meeting of Stockholders. The Mutual Holding Company may, at its option, mail to all Members of the Voting Record Date, at their last known address appearing on the records of the Bank, a proxy statement in either long or summary form describing the Plan which will be submitted to a vote of the members at the Special Meeting of Members. The Holding Company will also mail to all Participants either a Prospectus and Order Form for the purchase of Conversion Stock or a letter informing them of their right to receive a Prospectus and Order Form and a postage prepaid card to request such materials, subject to the provisions of Sections 17 and 18 hereof. In addition, all Participants will receive, or be given the opportunity to request by either returning a postage prepaid card which will be distributed with the proxy statement or letter, a copy of the Plan as well as the certificate of incorporation or bylaws of the Holding Company. Upon approval of the Plan by a majority of the total outstanding votes of the Voting Members, and two-thirds of the outstanding shares of common stock held by the stockholders of the Bank (including a majority of the outstanding shares of common stock held by the Minority Stockholders), the Mutual Holding Company, the Holding Company and the Bank will take all other necessary steps pursuant to applicable laws and regulations to consummate the Conversion and Offering. The Conversion must be completed within 24 months of the approval of the Plan by the Voting Members, unless a longer time period is permitted by governing laws and regulations. C. The Conversion will be effected as follows, or in any other manner approved by the applicable regulators which is consistent with the purposes of this Plan and applicable laws and regulations. The choice of which method to use to effect the Conversion will be made by the Board of Directors of the Mutual Holding Company immediately prior to the closing of the Conversion. Each of the steps set forth below shall be deemed to occur in such order as is necessary to consummate the Conversion pursuant to the Plan, the intent of the Board of Directors of the Mutual Holding Company and the Bank, and Applicable Regulatory Authorities regulations. Approval of the Plan by the Members and stockholders of the Bank shall also constitute approval of each of the conditions to the implementation of the Plan, including the Bank Merger and the MHC Merger, as discussed herein. 1. The Bank will organize the Holding Company (which will become the stock holding company of the Bank) as a first tier subsidiary of the Bank. 2. The Holding Company will organize Interim Bank as a wholly-owned subsidiary of the Holding Company. -9- 3. The Mutual Holding Company will merge with and into the Bank (the "MHC Merger") pursuant to the Plan of Merger attached hereto as Exhibit A between the Mutual Holding Company and the Bank whereby the shares of Bank common stock held by the Mutual Holding Company will be canceled and each Eligible Account Holder and Supplement Eligible Account Holder will receive an interest in the Liquidation Account of the Bank in exchange for such Member's interest in the Mutual Holding Company. 4. Interim Bank will merge with and into the Bank (the "Bank Merger") with the Bank as the resulting entity pursuant to the Plan of Reorganization attached hereto as Exhibit B between the Bank, the Holding Company and the Interim Bank whereby each Minority Stockholder shall receive Common Stock of the Holding Company in exchange for Minority Shares, based on the Exchange Ratio, with cash paid in lieu of fractional shares based upon the Actual Purchase Price. 5. All of the shares of common stock of Interim Bank held by the Holding Company shall be converted into shares of common stock of the Bank. 6. Contemporaneously with the Bank Merger, the Holding Company will offer for sale in the Offering Shares of Conversion Stock representing the pro forma market value of the Holding Company immediately prior to the Conversion. D. As part of the Conversion, each of the Minority Shares shall automatically, without further action of the holder thereof, be converted into and become the right to receive Common Stock based upon the Exchange Ratio established by the Board of Directors of the Holding Company and the Bank, subject to approval by Applicable Regulatory Authorities. The basis for exchange of Minority Shares for Common Stock shall be fair and reasonable and may, at the election of the Board of Directors, be supported by the opinion of an independent financial adviser. Options to purchase shares of Bank common stock which are outstanding immediately prior to the consummation of the conversion shall be converted into options to purchase shares of Common Stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the Exchange Ratio so that the aggregate exercise price remains unchanged, and with the duration of the option remaining unchanged. E. Concurrently with the filing of the Conversion Application with the Applicable Regulatory Authorities, the Holding Company shall also seek to register the -10- Conversion Stock with the SEC and any appropriate state securities authorities. In addition, if required by applicable law and regulations, the Bank shall prepare preliminary proxy materials as well as other applications and information for review by the Applicable Regulatory Authorities in connection with the solicitation of Voting Members and Minority Stockholder approval of the Bank Merger and the MHC Merger. F. The Articles of Incorporation of the Bank shall be amended upon consummation of the Conversion to reflect the establishment of the Liquidation Account. The Bylaws of the Bank shall be unaffected by the Conversion. G. The home office and branch offices of the Bank shall be unaffected by the Conversion. The executive offices of the Holding Company shall be located at the current offices of the Mutual Holding Company. H. Stockholders of the Bank shall have the right to dissent from the MHC Merger and the Bank Merger in the manner provided by Chapter 23B of the Washington Business Corporation Act, Revised Code of Washington Chapter 23B.13. 4. HOLDING COMPANY APPLICATIONS AND APPROVALS The Board of Directors of the Holding Company will take all necessary steps to complete the Conversion and the Offering. The Holding Company shall make timely applications for any requisite regulatory approvals, including an Application on Form Y-3 to be filed with the Fed and a Registration Statement on Form S-1 to be filed with the SEC. The Bank will be a wholly-owned subsidiary of the Holding Company unless the Holding Company is eliminated in the Conversion. 5. SALE OF SUBSCRIPTION SHARES The Subscription Shares will be offered simultaneously in the Subscription Offering to the Participants in the respective priorities set forth in Sections 8 and 13 of this Plan. The Subscription Offering may be commenced as early as the mailing of the Proxy Statement for the Special Meeting of Members and must be commenced in time to complete the Conversion within the time period specified in Section 3. The Common Stock will not be insured by the FDIC. The Bank will not knowingly lend funds or otherwise extend credit to any Person to purchase shares of the Common Stock. Any shares of Common Stock not subscribed for in the Subscription Offering will be offered for sale in the Community Offering as provided in Section 13 of this -11- Plan. The Subscription Offering may be commenced prior to the Special Meeting of Members and, in that event, the Community Offering may also be commended prior to the Special Meeting of Members. The offer and sale of Common Stock prior to the Special Meeting of Members shall, however, be conditioned upon approval of the Plan by the Voting Members and stockholders of the Bank. If feasible, any shares of Common Stock remaining after the Subscription and Community Offerings, will be sold in a Syndicated Community Offering as provided in Section 14 of this Plan in a manner that will achieve the widest distribution of the Common Stock. The sale of all Common Stock subscribed for in the Subscription and Community Offerings will be consummated simultaneously on the date the sale of Common Stock in the Syndicated Community Offering is Consummated and only if all unsubscribed for Common Stock is sold. 6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK The total number of shares (or a range thereof) of Common Stock to be issued and offered for sale in the Offering will be determined jointly by the Board of Directors of the Bank and Board of Directors of the Holding Company immediately prior to the commencement of the Subscription and Community Offerings, subject to adjustment thereafter if necessitated by market or financial conditions, with the approval of the Applicable Regulatory Authorities, if necessary. In particular, the total number of shares may be increased by up to 15% of the number of shares offered in the Subscription and Community Offerings if the Estimated Price Range is increased subsequent to the commencement of the Subscription and Community Offerings to reflect changes in market and financial conditions and the aggregate purchase price is not more than 15% above the maximum of the Estimated Price Range. All shares sold in the Offering will be sold at a uniform price per share referred to in this Plan as the Subscription Price. The aggregate purchase price for all shares of Common Stock will not be inconsistent with the estimated consolidated pro forma market value of the Holding Company. The estimated consolidated pro forma market value of the Holding Company will be determined for such purpose by the Independent Appraiser. Prior to the commencement of the Subscription and Community Offerings, an Estimated Price Range will be established, which range will vary within 15% above to 15% below the midpoint of such range. The number of shares of Conversion Stock to be issued and the purchase price per share may be increased or decreased by the Holding Company. In the event that the aggregate purchase price of the Conversion Stock is below the minimum of the Estimated Price Range, or materially above the -12- maximum of the Estimated Price Range, resolicitation of purchasers may be required, provided that up to a 15% increase above the maximum of the Estimated Price Range will not be deemed material so as to require a resolicitation. Any such resolicitation shall be effected in such manner and within such time as the Bank shall establish, with the approval of the Applicable Regulatory Authorities if required. Up to a 15% increase in the number of shares to be issued which is supported by an appropriate change in the estimated pro forma market value of the Holding Company will not be deemed to be material so as to require a resolicitation of subscriptions. Based upon the independent valuation as updated prior to the commencement of the Subscription and Community Offerings, the Board of Directors of the Holding Company will fix the Subscription Price. If there is a Syndicated Community Offering of shares of Common Stock not subscribed for in the Subscription and Community Offerings, the price per share at which the Common Stock is sold in such Syndicated Community Offering shall be equal to the Subscription Price. Notwithstanding the foregoing, no sale of Conversion Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the Holding company and to the Applicable Regulatory Authorities that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Common Stock at the Subscription Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the Holding Company. An increase in the aggregate value of the Common Stock by up to 15% would not be deemed to be material. If such confirmation is not received, the Holding Company may cancel the Subscription and Community Offerings and/or the Syndicated Community Offering, extend the Conversion, establish a new Subscription Price and/or Estimated Price Range, extend, reopen or hold new Subscription and Community Offerings and/or Syndicated Community Offering to take such other action as the Applicable Regulatory Authorities may permit. The Common Stock to be issued in the Conversion shall be fully paid and nonassessable. 7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY Upon the consummation of the Conversion, the Holding Company will own all of the capital stock of the Bank. -13- The Holding Company will apply to the Applicable Regulatory Authorities to retain 50% of the proceeds of the Offering. The Holding Company believes that the Offering proceeds will provide economic strength to the Holding company and the Bank for the future of a highly competitive and regulated environment and would facilitate the possible expansion through acquisitions of financial service organizations, possible diversification into other related businesses and for other business and investment purposes, including the possible payment of dividends and possible future repurchases of the Common Stock as permitted by the Applicable Regulatory Authorities. 8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY) A. Each Eligible Account Holder shall receive, without payment, nontransferable subscription rights to subscribe for shares of Common Stock equal to an amount up to the greater of $250,000 in aggregate purchase price of the Conversion Stock issued in the Conversion, or one-tenth of one percent (.10%) of the total offering of shares of Conversion Stock, or fifteen times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date, subject to the maximum purchase limitations specified in Section 15A and the minimum purchase limitation in Section 15C and exclusive of any increase in the total number of shares due to an increase in the Estimated Price Range up to 15%. B. In the event that Eligible Account Holders exercise Subscription Rights for a number of shares of Conversion Stock in excess of the total number of such shares eligible for subscription, the shares of Conversion Stock shall be allocated among the subscribing Eligible Account Holders as of the Eligibility Record Date so as to permit each subscribing Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation to Conversion Stock equal to the lesser of 100 shares or the number of share subscribed for by the Eligible Account Holder. Any shares remaining after that allocation will be allocated among the subscribing Eligible Account Holders as of the Eligibility Record Date whose subscriptions remain unsatisfied in the proportion that the amount of the Qualifying Deposit of each Eligible Account Holder whose subscription remains unsatisfied bears to the total amount of the Qualifying Deposits of all Eligible Account Holders whose subscriptions remain unsatisfied. If the amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders as of the Eligibility -14- Record Date, the excess shall be reallocated (one or more times as necessary) among those Eligible Account Holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated. C. Subscription rights as Eligible Account Holders received by Directors and Officers and their Associates which are based on deposits made by such persons during the twelve (12) months preceding the Eligibility Record Date shall be subordinated to the Subscription Rights of all other Eligible Account Holders. 9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY) The Employee Plans of the Holding Company and the Bank shall receive, without payment, subscription rights to purchase in the aggregate up to 8% of the Common Stock offered in the Subscription Offering, including any shares of Common Stock to be issued in the Subscription Offering as a result of an increase in the Estimated Price Range after commencement of the Subscription Offering and prior to completion of the Conversion. Consistent with applicable laws and regulations and practices and policies of the Applicable Regulatory Authorities, the Employee Plans may use funds contributed by the Holding Company or the Bank and/or borrowed from an independent financial institution to exercise such subscription rights, and the Holding Company and the Bank may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or the Bank to fail to meet any applicable regulatory capital requirements. The Employee Plans shall not be deemed to be Associates or Affiliates of or Persons Acting in Concert with any Director or Officer of the Holding company or the Bank. 10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PARTY) A. Each Supplemental Eligible Account Holder shall receive, without payment, nontransferable subscription rights to subscribe for shares of Common Stock equal to an amount up to the greater of $250,000 in aggregate purchase price of the Conversion Stock issued in the Conversion, or one-tenth of one percent (.10%) of the total offering of shares of Conversion Stock, or fifteen times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date, subject to -15- the availability of sufficient shares after filling in full all subscription orders of the Eligible Account Holders and Employee Plans under sections 8 and 9 hereof, subject to the maximum purchase limitation specified in Section 15A and the minimum purchase limitation in Section 15C and exclusive of any increase in the total number of shares issued due to an increase in the Estimated Price Range of up to 15%. B. In the event that Supplemental Eligible Account Holders exercise Subscription Rights for a number of shares of Conversion Stock in excess of the total number of such shares eligible for subscription, the shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders as of the Supplemental Eligibility Record Date so as to permit each such subscribing Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Conversion Stock equal to the lessor of 100 shares or the number of shares subscribed for by each such Supplemental Eligible account Holder. Any shares remaining after that allocation will be allocated among the subscribing Supplemental Eligible Account Holders as of the Supplemental Eligibility Record date whose subscriptions remain unsatisfied in the proportion that the amount of Qualifying Deposit of each such Supplemental Eligible Account Holder bears to the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders as of the Supplemental Eligibility Record Date. 11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY) A. Each Other Member shall receive, without payment, nontransferable subscription rights to subscribe for shares of Common Stock equal to an amount up to the greater of $250,000 in aggregate purchase price of the Conversion Stock issued in the Conversion or one-tenth of one percent (.10%) of the total offering of shares of Conversion Stock, subject to the maximum purchase limitation specified in Section 15A and the minimum purchase limitation specified in Section 15C and exclusive of any increase in the total number of shares issued due to an increase in the Estimated Price Range of up to 15%. B. In the event that such Other Members subscribe for a number of shares of Conversion Stock which, when added to the shares of conversion stock subscribed for by the Eligible Account Holders, Employee Plans and Supplemental Eligible Account Holders, is in excess of the total number of shares of Conversion Stock being issued, the subscriptions of such Other Members will be allocated first to Other Members as of the Voting Record Date in proportion to the amounts of their relative -16- subscriptions and thereafter to nonresident Other Members in proportion to the amounts of their relative subscriptions. 12. MINORITY STOCKHOLDERS (FIFTH PRIORITY) A. Each Minority Stockholder as of the Voting Record Date shall receive, without payment, nontransferable subscription rights to subscribe for shares of Common Stock equal to an amount up to the greater of $250,000 in aggregate purchase price of the Conversion Stock issued in the Conversion or one-tenth of one percent (.10%) of the total offering of shares of Conversion Stock, subject to the maximum purchase limitation specified in Section 15A and the minimum purchase limitation specified in Section 15C and exclusive of an increase in the total number of shares issued due to an increase in the Estimated Price Range of up to 15%. B. In the event that such Minority Stockholders subscribe for a number of shares of Conversion Stock which, when added to the shares of Conversion Stock subscribed for by Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders and Other Members, is in excess of the total number of shares of Conversion Stock being issued, the subscriptions of such Minority Stockholders will be allocated among subscribing Minority Stockholders in proportion to the amounts of their relative subscriptions. 13. COMMUNITY OFFERING (SIXTH PRIORITY) If less than the total number of shares of Common Stock to be subscribed for in the Offering are sold in the Subscription Offering, it is expected that shares remaining unsubscribed for will be made available for purchase in the Community Offering to certain members of the general public, which may subscribe together with any Associate or group of persons Acting in Concert for up to $250,000 in aggregate purchase price of the shares of Conversion Stock issued in the Conversion subject to the maximum purchase limitation specified in Section 15A and the minimum purchase limitation specified in Section 15C and exclusive of an increase in the total number of shares issued due to an increase in the Estimated Price Range of up to 15%. The shares may be made available in the Community Offering through a direct community marketing program which may provide for utilization of a broker, dealer, consultant or investment banking firm experienced and expert in the sale of savings institutions securities. Such entities may be compensated on a fixed fee basis or on a commission basis, or a combination thereof. In offering the unsubscribed for shares to the public in the Community Offering, a number of shares equal to the lesser of 25% of the Conversion Stock or 25% of the Common Stock not subscribed for in the Subscription -17- Offering, at the discretion of the Holding Company, may be initially reserved for institutional investors. Shares offered in the Community Offering will be available for purchase by the general public and preference may be given to natural persons residing in the Bank's Local Community which consists of the counties of Thurston, Mason, Pierce, King, Snohomish, Kitsap, and Grays Harbor in the State of Washington (such natural persons referred to as the "Preferred Subscribers"). Any excess of shares, and those not subscribed for by institutional investors, will be available for purchase by the general public. The Holding Company shall make distribution of the Conversion Stock to be sold in the Community Offering in such a manner as to promote a wide distribution of Conversion Stock. The Holding Company reserves the right to reject any or all orders in whole or in part, which are received in the Community Offering. The number of shares of Conversion Stock that any person may purchase in the Community Offering shall not exceed the maximum purchase limitation specified in Section 15A nor be less than the minimum purchase limitation specified in Section 15C. To the extent that there are shares remaining after all subscriptions by institutional investors are filled, if the Preferred Subscribers in the Community Offering, whose orders would otherwise be accepted, subscribe for more shares than are available for purchase, the shares available to them will be allocated among the Preferred Subscribers in the manner which permits each such person to the extent possible, to purchase the number of shares necessary to make his total allocation of Conversion Stock equal to the lesser of 100 shares or the number of shares subscribed for by such persons. Thereafter, unallocated shares will be allocated among the Preferred Subscribers whose subscriptions remain unsatisfied in the proportion that the number subscribed for by each bears to the total number of shares subscribed for by all Preferred Subscribers whose subscriptions remain unsatisfied. To the extent that there are shares remaining after all subscriptions by Preferred Subscribers, any remaining shares will be allocated among members of the general public using the foregoing allocation as applied to Preferred Subscribers. The Holding Company may establish all other terms and conditions of such offer. It is expected that the Community Offering will commence concurrently with the Subscription Offering. The Community Offering must be completed within 45 days after the completion of the Subscription Offering unless otherwise extended by the Applicable Regulatory Authorities. 14. SYNDICATED COMMUNITY OFFERING If feasible, the Board of Directors may determine to offer all shares of Common Stock not subscribed for in the Subscription and Community Offerings will be sold in a Syndicated Community Offering, subject to such terms, conditions and procedures as may be determined by the Holding Company, in a manner that will achieve the widest distribution of the Common Stock subject to the right of the Holding Company to -18- accept or reject in whole or in part all subscriptions in the Syndicated Community Offering. In the Syndicated Community Offering, any person together with any Associate or group of Persons acting in concert may purchase up to $250,000 in aggregate purchase price of the shares of Conversion Stock offered in the Conversion subject to the maximum purchase limitation specified in Section 15A and the minimum purchase limitation specified in Section 15C and exclusive of an increase in the total number of shares issued due to an increase in the Estimated Price Range of up to 15%. Provided that the Subscription Offering has commenced, the Bank may commence the Syndicated Community Offering at any time after the mailing to the Members of the Proxy Statement to be used in connection with the Special Meeting of Members, provided that the completion of the offer and sale of the Conversion Stock shall be conditioned upon the approval of this Plan by the Voting Members. If the Syndicated Community Offering is not sooner commenced pursuant to the provisions of the preceding sentence, the Syndicated Community Offering will be commenced as soon as practicable following the date upon which the Subscription and Community Offerings terminate. Alternatively, if a Syndicated Community Offering is not held, the Bank shall have the right to sell any shares of Conversion Stock remaining following the Subscription and Community Offerings in an underwritten firm commitment public offering. The provisions of Section 15 hereof shall not be applicable to sales to underwriters for purposes of such an offering but shall be applicable to the sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Actual Purchase Price less an underwriting discount to be negotiated among such underwriters and the Bank, which will in no event exceed an amount deemed to be acceptable by the Applicable Regulatory Authorities. If for any reason a Syndicated Community Offering or an underwritten firm commitment public offering of shares of Conversion Stock not sold in the Subscription and Community Offerings cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription and Community Offerings or in the Syndicated Community or underwritten firm commitment public offering, other arrangements will be made for the disposition of unsubscribed shares by the Bank, if possible. Such other purchase arrangements will be subject to the approval of the Applicable Regulatory Authorities. 15. LIMITATION ON PURCHASES AND OWNERSHIP The following limitations shall apply to all purchases of shares of Conversion Stock and ownership of Conversion Stock upon completion of the Conversion: -19- A. The maximum number of shares of Common Stock which may be subscribed for or purchased in all categories in the Offering by any Person or Participant together with any Associate or group of Persons Acting in Concert shall not exceed shares with an aggregate purchase price of $250,000, except for the Employee Plans which may subscribe for up to 8% of the Common Stock offered in the Subscription Offering (including shares issued in the event of an increase in the Estimated Price Range of 15%); provided, however, that, in the event the maximum purchase limitation is increased to allow purchase of shares of Conversion Stock with an aggregate purchase price that exceeds $250,000, orders for Conversion Stock in the Community Offering and in the Syndicated Offering (or, alternatively, an underwritten firm commitment public offering), if any, shall, as determined by the Bank, first be filled to a maximum of $250,000 in aggregate purchase price of shares of Conversion Stock offered and thereafter remaining shares shall be allocated, on an equal number of shares basis per order until all orders have been filled. B. The maximum number of shares of Common Stock which may be purchased in all categories of the Conversion by Officers and Directors of the Bank and their Associates in the aggregate, shall not exceed 20% of the Conversion Stock issued in the Conversion. C. A minimum of 25 shares of Common Stock must be purchased by each Person purchasing shares in the Offering to the extent those shares are available; provided, however, that in the event the minimum number of shares of Common Stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of shares which when multiplied by the price per share shall not exceed $500, as determined by the Board. If the number of shares of Common Stock otherwise allocable pursuant to Sections 8 through 14, inclusive, to any Person or that Person's Associates would be in excess of $250,000 in aggregate purchase price, the number of shares of Common Stock allocated to each such person shall be reduced to $250,000 in aggregate purchase price, and then the number of shares allocated to each group consisting of a Person and that Person's Associates shall be reduced so that the aggregate allocation to that Person and his or her Associates complies with the above limits, and such maximum number of shares shall be reallocated among that Person and his or her Associates as they may agree, or in the absence of an agreement, in proportion to the shares subscribed by each (after first applying the maximums applicable to each Person, separately). In addition to their purchase limitations, no person, together with any associate or group of persons acting in concert may, upon completion of the Conversion, own -20- more than 2% of the Common Stock outstanding; provided that no Minority Stockholders will be required to dispose of Minority Shares if, without purchasing Conversion Stock, the Exchange Rate will result in ownership of an excess of 2% of the Common Stock. Depending upon market or financial conditions, the Board of Directors of the Holding Company, with the approval of the Applicable Regulatory Authorities and without further approval of the Members, may decrease or further increase the purchase and ownership limitations in this Plan, provided that the maximum purchase limitations may not be increased to a percentage in excess of 9.99%. In the event that the maximum purchase limitation is increased, orders for Common Stock exceeding 50% of the shares of Conversion Stock issued in the Conversion shall not exceed, in the aggregate, 10% of the total shares of Conversion Stock sold in the Conversion. If the Holding Company increases the maximum purchase limitations, the Holding Company is only required to resolicit Persons who subscribed for the maximum purchase amount and may, in the sole discretion of the Holding Company resolicit certain other large subscribers. In the event of an increase in the total number of shares offered in the Conversion due to an increase in the Estimated Price Range of up to 15% (the "Adjusted Maximum"), the additional shares will be used in the following order of priority: (i) to fill the Employee Plans' subscription to the Adjusted Maximum; (ii) in the event that there is an oversubscription at the Eligible Account Holder, Supplemental Eligible Account Holder, Other Member, or Minority Stockholder levels, to fill unfulfilled subscriptions of such subscribers according to such respective priorities exclusive of the Adjusted Maximum; and (iii) to fill unfulfilled subscriptions in the Community Offering exclusive of the Adjusted Maximum with preference given to natural persons residing in the Community. For purposes of this Section 15, the Directors of the Bank and the Holding Company shall not be deemed to be associates or a group affiliated with each other or otherwise Acting in Concert solely as a result of their being Directors of the Bank or the Holding Company. Each Person purchasing Conversion Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the above purchase limitations contained in this Plan. -21- 16. PAYMENT FOR CONVERSION STOCK All payments for Conversion Stock subscribed for in the Subscription, Community and Syndicated Community Offerings must be delivered in full to the Holding Company, together with a properly completed and executed Order Form, or purchase order in the case of the Syndicated Community Offering, on or prior to the expiration date of the Offering; provided, however, that if the Employee Plans subscribe for shares during the Subscription Offering, such plans will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Conversion Stock subscribed for by such plans at the Subscription Price upon consummation of the Conversion. Notwithstanding the foregoing, the Holding Company shall have the right, in its sole discretion, to permit institutional investors to submit contractually irrevocable orders in the Offering and to thereafter submit payment by wire transfer for the Conversion Stock for which they are subscribing in the Offering at any time prior to 48 hours before the completion of the Conversion, unless such 48 hour period is waived by the Holding Company in its sole discretion. Payment for Conversion Stock subscribed for shall be made either in cash (if delivered in person), check, money order, certified or teller's check or bank draft. Alternatively, subscribers in the Subscription and Community Offerings may pay for the shares subscribed for by authorizing the Bank on the Order Form to make a withdrawal from the subscriber's Deposit Account at the Bank in an amount equal to the Subscription Price of such shares. Such authorized withdrawal, whether from a savings passbook or certificate account, shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate account, and the remaining balance does not meet the applicable minimum balance requirement, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the passbook rate. Funds for which a withdrawal is authorized will remain in the subscriber's Deposit Account but may not be used by the subscriber during the Subscription and Community Offerings. Thereafter, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Subscription Price per share. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect. Interest will be paid by the Bank at not less than the passbook annual rate on payments for Conversion Stock received in cash or by check. Such interest will be paid from the date payment is received by the Bank until consummation or termination of the Conversion. If for any reason the Conversion is not consummated, all payments made by subscribers in the Subscription, Community -22- and Syndicated Community Offerings will be refunded to them with interest. In case of amounts authorized for withdrawal from Deposit Accounts, refunds will be made by canceling the authorization for withdrawal. The Bank is prohibited by regulation from knowingly making any loans or granting any lines of credit for the purchase of stock in the Conversion, and therefore, will not do so. 17. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS As soon as practicable after the Prospectus prepared by the Holding Company and Bank has been declared effective by the SEC, Order Forms will be distributed to the Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders, Other Members and Minority Stockholders at their last known addresses appearing on the records of the Bank for the purpose of Subscribing for shares of Conversion Stock in the Subscription Offering and will be made available for use by those Persons entitled to purchase in the Community Offering. Notwithstanding the foregoing, the Bank may elect to send Order Forms only to those Persons who request them after receipt of such notice in a form approved by the Applicable Regulatory Authorities and which is adequate to apprise the Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders, Other Members and Minority Stockholders of the pendency of the Subscription Offering. Such notice may be included with the proxy statement for the Special Meeting of Members and the proxy statement for the Special Meeting of Stockholders and may also be included in the notice of the pendency of the Conversion and the Special Meeting of Members sent to all Eligible Account Holders in accordance with regulations of the Applicable Regulatory Authorities. Each Order Form will be preceded or accompanied by a prospectus describing the Holding Company, the Bank, the Conversion Stock and the Subscription and Community Offerings. Each Order Form will contain, among other things, the following: A. A specified date by which all Order Forms must be received by the Holding Company, which date shall be not less than twenty (20), nor more than forty-five (45) days, following the date on which the Order Forms are mailed by the Holding Company, and which date will constitute the termination of the Subscription Offering; B. The Subscription Price per share for shares of Conversion Stock to be sold in the Subscription and Community Offerings; -23- C. A description of the minimum and maximum number of shares of Conversion Stock which may be subscribed for pursuant to the exercise of Subscription Rights or otherwise purchased in the Community Offering; D. Instructions as to how the recipient of the Order Form is to indicate thereon the number of shares of Conversion Stock for which such person elects to subscribe and the available alternative methods of payment therefor; E. An acknowledgment that the recipient of the Order Form has received a final copy of the prospectus prior to execution of the Order Form; F. A statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Holding Company within the subscription period such properly completed and executed Order Form, together with payment, in the full amount of the aggregate purchase price as specified in the Order Form for the shares of Conversion Stock for which the recipient elects to subscribe in the Subscription Offering (or by authorizing on the Order Form that the Bank withdraw said amount from the subscriber's Deposit Account at the Bank); and G. A statement to the effect that the executed Order Form, once received by the Holding Company, may not be modified or amended by the subscriber without the consent of the Holding Company. Notwithstanding the above, the Holding Company reserves the right in its sole discretion to accept or reject orders received on photocopied or facsimilied order forms. 18. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT In the event Order Forms (a) are not delivered and are returned to the Holding Company or the Bank by the United States Postal Service or the Holding Company is unable to locate the addressee, (b) are not received back by the Holding Company or are received by the Holding Company after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment, or, in the case of institutional investors in the Community Offering, by delivering irrevocable orders together with a legally binding commitment to pay in cash, check, money order or wire transfer the full amount of the Purchase Price prior to 48 hours before the completion of the Conversion, unless waived by the Holding Company, for the shares of Conversion Stock subscribed for (including cases in which -24- deposit accounts from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a "no mail" order placed in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed Order Form within the time period specified thereon; provided, however, that the Holding Company may, but will not be required to, waive any immaterial irregularity on any Order Form or require the submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as the Holding Company may specify. The interpretation of the Holding Company of terms and conditions of this Plan and of the Order Forms will be final, subject to the authority of the Applicable Regulatory Authorities. 19. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES The Holding Company will make reasonable efforts to comply with the securities laws of all States in the United States in which Persons entitled to subscribe for shares of Conversion Stock pursuant to this Plan reside. However, no such Person will be issued subscription rights or be permitted to purchase shares of Conversion Stock in the Subscription Offering if such Person resides in a foreign country; or in a State of the United States with respect to which all of the following apply: A. a small number of Persons otherwise eligible to subscribe for shares under the Plan reside in such state; B. the issuance of subscription rights or the offer or sale of shares of Conversion Stock to such Persons would require the Holding Company under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; such registration or qualification would be impracticable for reasons of cost or otherwise. 20. ESTABLISHMENT OF LIQUIDATION ACCOUNT The Bank shall establish at the time of Conversion a liquidation account in an amount equal to 66.31% (the Mutual Holding Company stock ownership interest in the Bank) of the Bank's total stockholders' equity as reflected in its June 30, 1997 statement of financial condition, which is the latest statement of financial condition expected to be contained in the final Prospectus utilized in the Conversion. The liquidation account will be maintained by the Bank for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their Deposit Accounts at the Bank. Each Eligible Account Holder shall, with respect to his Deposit Account, hold a related inchoate interest in a portion of the liquidation account balance, in relation to his Deposit Account balance at the Eligibility Record Date or to such balance as it may be subsequently reduced, as hereinafter provided. -25- In the unlikely event of a complete liquidation of the Bank (and only in such event), following all liquidation payments to creditors (including those to Account Holders to the Extent of their Deposit Accounts) each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidating distribution from the liquidation account, in the amount of the then adjusted subaccount balance for his Deposit Account then held, before any liquidation distribution may be made to any holders of the Bank's capital stock. No merger, consolidation, purchase of bulk assets with assumption of Deposit Accounts and other liabilities, or similar transactions with an FDIC-insured institution, in which the Bank is not the surviving institution, shall be deemed to be a complete liquidation for this purpose. In such transactions, the liquidation account shall be assumed by the surviving institution. The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction, the numerator of which is the amount of the Qualifying Deposits of such account holder and the denominator of which is the total amount of all Qualifying Deposits of all Eligible Account Holders and Supplemental Account Holders. Such initial subaccount balance shall not be increased, but shall be subject to downward adjustment as described below. If, at the close of business on any June 30 annual closing date, commencing on or after the effective date of the Conversion, the deposit balance in the Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder is less than the lesser of (i) the balance in the Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying Deposit in such Deposit Account as of the Eligibility Record Date or Supplemental Eligibility Record Date, the subaccount balance for such Deposit Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of such downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related Deposit Account. If any such Deposit Account is closed, the related subaccount shall be reduced to zero. The creation and maintenance of the liquidation account shall not operate to restrict the use or application of any of the net worth accounts of the Bank, except that the Bank shall not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its net worth to be reduced below (i) the amount required for the liquidation account; or (ii) the net worth requirements contained in the Rules and Regulations of the Applicable Regulatory Authorities. -26- 21. VOTING RIGHTS OF STOCKHOLDERS Following consummation of the Conversion, voting rights with respect to the Bank shall be held and exercised exclusively by the holders of its capital stock. The holders of the voting capital stock of the Holding Company shall have the exclusive voting rights with respect to the Holding Company. 22. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION A. All shares of Conversion Stock purchased or received by Directors or Officers of the Holding Company or the Bank in the Conversion shall be subject to the restriction that, except as provided in Section 22B, below, or as may be approved by the Applicable Regulatory Authorities, no interest in such shares may be sold or otherwise disposed of for value for a period of one (1) year following the date of purchase. B. The restriction on disposition of shares of Conversion Stock set forth in Section 22A above shall not apply to the following: (i) Any exchange of such shares in connection with a merger or acquisition involving the Bank or the Holding Company, as the case may be, which has been approved by the Applicable Regulatory Authorities; and (ii) Any disposition of such shares following the death of the person to whom such shares were initially sold under the terms of the Plan. C. With respect to all shares of Conversion Stock subject to restrictions on resale or subsequent disposition, each of the following provisions shall apply: (i) Each certificate representing shares restricted within the meaning of Section 22A, above, shall bear a legend prominently stamped on its face giving notice of the restriction; (ii) Instructions shall be issued to the stock transfer agent for the Holding Company not to recognize or effect any transfer of any certificate or record of ownership of any such shares in violation of the restriction on transfer; and (iii) Any shares of capital stock of the Holding Company issued with respect to a stock dividend, stock split, or otherwise with respect to ownership of outstanding shares of Conversion Stock subject to the restriction on transfer -27- hereunder shall be subject to the same restriction as is applicable to such Conversion Stock. 23. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE CONVERSION For a period of three years following the Conversion, no Officer, Director or their Associates shall purchase, without the prior written approval of the Applicable Regulatory Authorities, any outstanding shares of Common Stock of the Holding Company except from a broker-dealer registered with the SEC. This provision shall not apply to negotiated transactions involving more than 1% of the outstanding shares of Common Stock of the Holding Company, the exercise of any options pursuant to a stock option plan or purchase of common stock of the Holding Company made by or held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the Bank or the Holding Company (including the Employee Plans or the Recognition Plans) which may be attributable to any Officer or Trustee. As used herein, the term "negotiated transaction" means a transaction in which the securities are offered and the terms and arrangements relating to any sale are arrived at through direct communications between the seller or any person acting on its behalf and the purchaser or his investment representative. The term "investment representative" shall mean a professional investment advisor acting as agent for the purchaser and independent of the seller and not acting on behalf of the seller in connection with the transaction. 24. TRANSFER OF DEPOSIT ACCOUNTS Each person holding a Deposit Account at the Bank at the time of Conversion shall retain an identical Deposit Account at the Bank following Conversion in the same amount and subject to the same terms and conditions (except as to voting and liquidation rights). 25. REGISTRATION AND MARKETING Within the time period required by applicable laws and regulations, the Holding Company will register the securities issued in connection with the Conversion pursuant to the Securities Exchange Act of 1934 and will not deregister such securities for a period of at least three years thereafter, except that the maintenance of registration for three years requirement may be fulfilled by any successor to the Bank or any holding company of the Bank. In addition, the Bank or Holding Company will use its best efforts to encourage and assist a market-maker to establish and maintain a market for -28- the Conversion Stock and to list those securities on a national or regional securities exchange or the NASDAQ National Market. 26. TAX RULINGS OR OPINIONS Consummation of the Conversion is expressly conditioned upon prior receipt by the Mutual Holding Company and the Bank of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion of counsel with respect to Washington tax laws, to the effect that consummation of the transactions contemplated by the Conversion and this Plan will not result in a taxable reorganization under the provisions of the applicable codes or otherwise result in any adverse tax consequences to the Mutual Holding Company, the Holding Company or the Bank, or the account holders receiving subscription rights before or after the Conversion, except in each case to the extent, if any, that subscription rights are deemed to have value on the date such rights are issued. 27. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS A. The Holding Company and the Bank are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion, including without limitation, an ESOP. Existing as well as any newly created Tax- Qualified Employee Stock Benefit Plans may purchase shares of Conversion Stock in the Conversion, to the extent permitted by the terms of such benefit plans and this Plan. B. As a result of the Conversion, the Holding Company shall be deemed to have ratified and approved the Bank's 1994 Stock Option Plan, 1997 Stock Option Plan, Employee Stock Ownership Plan, and 1994 Management and Directors Recognition Plans and shall have agreed to issue (and reserve for issuance) Holding Company Common Stock in lieu of Bank common stock pursuant to the terms of such benefit plans. Upon consummation of the Conversion, the Bank common stock held by such benefit plans shall be converted into Holding Company Common Stock based upon the Exchange Ratio. Also upon consummation of the Conversion, (i) all rights to purchase, sell or receive Bank common stock and all rights to elect to make payment in Bank common stock under any agreement between the Bank and any Director, Officer or Employee thereof or under any plan or program of the Bank shall automatically, by operation of law, be converted into and shall become an identical right to purchase, sell or receive Holding Company Common Stock and an identical right to make payment in Holding Company Common Stock under any such agreement between the Bank and any Director, Officer or Employee thereof or under such plan or program of the Bank, and (ii) rights outstanding under existing Stock Option Plans shall be assumed by the -29- Holding Company and thereafter shall be rights only for shares of Holding Company Common Stock, with each such right being for a number of shares of Holding Company common stock based upon the Exchange Ratio and the number of shares of Savings Bank Common Stock that were available thereunder immediately prior to consummation of the Conversion, and the price adjusted to reflect the Exchange Ratio but with no change in any other term or condition of such right. C. The Holding Company and the Bank are authorized to enter into employment agreements and their executive officers. D. The Holding Company and the Savings Bank are authorized to adopt stock option plans, restricted stock grant plans and other Non-Tax-Qualified Employee Stock Benefit Plans, provided that no such plans be established, no stock options shall be grated, and no shares of Conversion Stock shall be purchased pursuant to any of such plans prior to the earlier of (i) the one-year anniversary of the consummation of the Conversion or (ii) the receipt of stockholder approval of such plans at the first annual meeting of stockholders following the Conversion. 28. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY A. In accordance with Applicable Regulatory Authorities regulations, for a period of three years from the date of consummation of the Conversion, no Person, other than the Holding Company, shall directly or indirectly offer to acquire to acquire the beneficial ownership of more than 10% of any class of an equity security of the Bank without the prior written consent of the Applicable Regulatory Authorities. B. (i) The charter of the Bank contains a provision stipulating that no person, except the Holding Company, for a period of five years following the date of Conversion shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Bank, without the prior written approval of the Applicable Regulatory Authorities. In addition, such charter may also provide that for a period of five years following Conversion, shares beneficially owned in violation of the above-described charter provision shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to stockholders for a vote. In additional, special meetings of the stockholders relating to changes in control or amendment of the charter may only be called by the Board of Directors, and shareholders shall not be permitted to cumulate their votes for the election of directors. -30- (ii) The Articles of Incorporation of the Holding Company will contain a provision stipulating that in no event shall any record owner of any outstanding shares of the Holding Company's common stock who beneficially owns in excess of 10% of such outstanding shares to be entitled or permitted to any vote in respect to any shares held in excess of 10%. In addition, the Articles of Incorporation and Bylaws of the Holding Company contain provisions which provide for staggered terms of the directors, noncumulative voting for directors, limitations on the call of special meetings, a fair price provision for certain business combinations and certain notice requirements. C. For the purposes of Section 28.B(i): (i) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. (ii) The term "offer" includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value; (iii) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise, and; (iv) The term "security" includes non-transferable subscription rights issued pursuant to a plan of conversion as well as a "security" as defined in 15 U.S.C. (S) 8c(a)(10). 29. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK A. The Holding Company may not repurchase any shares of its capital stock during the first three years following consummation of the Conversion, other than pursuant to (i) an offer to repurchase made by the Holding Company on a pro rata basis to all of its stockholders and which is approved by the Applicable Regulatory Authorities, (ii) the repurchase of qualifying shares of a director, if any (iii) purchases in the open market by a Tax-Qualified or Non-Tax- Qualified Employee Stock Benefit Plan in an amount reasonable and appropriate to fund the plan, or (iv) a repurchase program approved by the Applicable Regulatory Authorities. B. The Bank shall not declare or pay a cash dividend on, or repurchase of any of, its capital stock if the effect thereof would cause its regulatory capital to be -31- reduced below (i) the amount required for the Liquidation Account or (ii) the regulatory capital requirements of Applicable Regulatory Authorities. Otherwise, the Bank may declare dividends to make capital distributions in accordance with applicable law and regulations. C. Notwithstanding anything to the contrary in this Plan, the Holding Company may repurchase capital stock to the extent and subject to the requirements set forth in applicable statutes or regulations, or as otherwise may be approved by the Applicable Regulatory Authorities. 30. CHARTER AND BYLAWS By voting to adopt this Plan, Members of the Mutual Holding Company will be voting to adopt a Stock Certificate of Incorporation and Bylaws for a Washington corporation attached as Exhibits C and D to this Plan. 31. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE The Effective Date of the Conversion shall be the date upon which the Articles of Combination shall be filed with the Division of Banks with respect to the MHC Merger and the Bank Merger, with the Bank being the surviving institution in each case. The Articles of Combination shall be filed with the Applicable Regulatory Authorities after all requisite regulatory, member and stockholder approvals have been obtained, all applicable waiting periods have expired, and sufficient subscriptions and orders for Conversion Stock have been received. The Closing of the sale of all shares of Conversion Stock sold in the Subscription Offering, Community Offering and/or Syndicated Community Offering shall occur simultaneously on the effective date of the Closing. 32. EXPENSES OF CONVERSION The Mutual Holding Company, the Bank and the Holding Company may retain and pay for the services of legal, financial and other advisors to assist in connection with any or all aspects of the Conversion, including the Offering, and such parties shall use their best efforts to assure that such expenses shall be reasonable. 33. AMENDMENT OR TERMINATION OF PLAN If deemed necessary or desirable, this Plan may be substantively amended as a result of comments from regulatory authorities or otherwise at any time prior to solicitation of proxies from Members and Bank stockholders to vote on this Plan by the -32- Board of Directors of the Mutual Holding Company, and at any time thereafter by the Board of Directors of the Mutual Holding Company with the concurrence of the Applicable Regulatory Authorities. Any amendment to this Plan made after approval by the Members and Bank stockholders with the approval of the Applicable Regulatory Authorities shall not necessitate further approval by the Members unless otherwise required by the Applicable Regulatory Authorities. This Plan may be terminated by the Board of Directors of the Mutual Holding Company at any time prior to the Special Meeting of Members and the Special Meeting of Stockholders to vote on this Plan, and at any time thereafter with the concurrence of the Applicable Regulatory Authorities. By adoption of the Plan, the Members of the Mutual Holding Company authorize the Board of Directors of the Mutual Holding Company to amend or terminate the Plan under the circumstances set forth in this Section. 34. CONDITIONS TO CONVERSION Consummation of the Conversion pursuant to this Plan is expressly conditioned upon the following: A. Prior receipt by the Mutual Holding Company and the Bank of rulings of the United States Internal Revenue Service and the Washington State taxing authorities, or opinions of counsel or tax advisors as described in Section 26 hereof; B. The sale of all of the Conversion Stock offered in the Conversion; and C. The completion of the Conversion within the time period specified in Section 3 of this Plan. 35. INTERPRETATION All interpretations of this Plan and application of its provisions to particular circumstances by a majority of the Board of Directors of the Bank shall be final, subject to the authority of the Applicable Regulatory Authorities. This Amended and Restated Plan of Conversion and Reorganization was adopted on this 28th day of August, 1997. -33- EXHIBIT A --------- PLAN OF MERGER This Plan of merger, dated as of ________________________, 1997, is made by and between Heritage Financial Corporation MHC ("MHC"), a Washington state-charted mutual holding company and Heritage Savings Bank, ("Bank" or "Surviving Corporation"), a Washington State chartered savings bank (collectively, the "Constituent Corporations"). WITNESSETH: WHEREAS, the MHC and the Bank have adopted a Plan of Conversion from mutual holding company form to stock holding company form ("Plan of Conversion") pursuant to which (i) the MHC will convert to a Washington State chartered interim stock bank ("Interim Bank A"), and simultaneously merge with and into the Bank, with the Bank as the surviving entity ("MHC Merger"), (ii) the Bank will form a new stock corporation as a wholly-owned first tier subsidiary of the Bank ("Heritage Financial"), and Heritage Financial will form a wholly-owned first tier subsidiary Washington State chartered interim savings Bank ("Interim Bank B"), (iii) the Bank and Interim Bank B will merge, pursuant to which the Bank will become a wholly-owned subsidiary of Heritage Financial ("Bank Merger"), and (iv) Heritage Financial will offer shares of its common stock in the manner set forth in the Plan of Conversion; and WHEREAS, the MHC and the Bank desire to provide for the terms and conditions of the MHC Merger; NOW, THEREFORE, the MHC and the Bank hereby agree as follows: 1. EFFECTIVE DATE. The conversion of MHC to Interim Bank A and the MHC Merger will become effective on the date specified in the Certificate of Charter Conversion and Merger relating to the MHC Merger issued by the Director of the Department of the Financial Institutions of the State of Washington, Division of Banks ("Director") ("Effective Date"). 2. THE MHC MERGER AND EFFECT THEREOF. Subject to the terms and conditions set forth herein and the prior approval of the Conversion, as defined in the Plan of Conversion, by the Director and any other applicable regulatory authority and the expiration of all applicable waiting periods, the MHC shall convert from the mutual form to a interim stock bank and simultaneously merge with and into the Bank, which shall be the Surviving Corporation. Upon consummation of the MHC Merger, the Surviving Corporation shall be considered the same business and corporate entity as each of the Constituent Corporations and the Surviving Corporation shall be subject to and be deemed to have assumed all of the property, rights, privileges, powers, franchises, debts, liabilities, obligations, duties and relationships of each of the Constituent Corporations and shall have succeeded to all of each of their relationships, fiduciary or otherwise, as fully and to the same extent as if such property, rights, privileges, powers, franchises, debts, obligations, duties and relationships had been originally acquired, incurred or entered into by the Surviving Corporation. In addition, any reference to either of the Constituent Corporations in any contract or document, whether executed or taking effect before or after the Effective Date, shall be considered a reference to the Surviving Corporation if not inconsistent with the other provisions of the contract or document; and any pending action or other judicial proceeding to which either of the Constituent Corporations is a party shall not be deemed to have abated or to have been discontinued by reason of the MHC Merger, but may be prosecuted to final judgment, order or decree in the same manner as if the MHC Merger had not occurred, or the Surviving Corporation may be substituted as a party to such action or proceeding, and any judgment, order or decree may be rendered for or against it that might have been rendered for or against either of the Constituent Corporations if the MHC Merger had not occurred. 3. CANCELLATION OF BANK COMMON STOCK HELD BY THE MUTUAL HOLDING COMPANY AND MEMBER INTERESTS; LIQUIDATION ACCOUNT. (a) On the Effective Date: (i) each share of common stock, $1.00 par value per share, of the Bank ("Bank Common Stock") issued and outstanding immediately prior to the Effective Date and held by the MHC shall, by virtue of the MHC Merger and without any action on the part of the holder thereof, be canceled, (ii) the interests in the MHC of any person, firm or entity who or which qualified as a member of the MHC in accordance with its mutual charter and bylaws and the laws of the State of Washington prior to the MHC's conversion from mutual to stock form ("Members") shall, by virtue of the MHC Merger and without any action on the part of any Member, be canceled, and (iii) the Bank shall establish a liquidation account on behalf of each depositor member of the MHC as provided for in the Plan of Conversion. (b) At or after the Effective Date and prior to the Bank Merger, each certificate or certificates therefore, evidencing issued and outstanding shares of Bank Common Stock, other than any such certificate or certificates held by the MHC, which shall be canceled, shall continue to represent issued and outstanding shares of Bank Common Stock. -2- 4. RIGHTS OF DISSENT AND APPRAISAL. Holders of the Bank Common Stock shall have the right to dissent from the MHC Merger in the manner provided by Chapter 23B of the Washington Business Corporation Act, Revised Code of Washington, Chapter 23B.13. 5. NAME OF SURVIVING CORPORATION. The name of the Surviving Corporation shall be "Heritage Savings Bank." 6. DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Articles and Bylaws of the Surviving Corporation and applicable law, the number of directors of the Surviving Corporation shall be seven. The names of those persons who, upon and after the Effective Date, shall be directors of the Surviving Corporation are set forth below. Each such director shall serve for one year and until a successor is elected and qualified. Name ---- Donald V. Rhodes Lynn M. Brunton John A. Clees Daryl D. Jensen H. Edward Odegard James P. Senna Philip S. Weigand The address of each such director is 201 5th Avenue SW, Olympia, Washington 98501. 7. OFFICERS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Articles and Bylaws of the Surviving Corporation and applicable law, the officers of the Bank immediately prior to the Effective Date shall be the officers of the Surviving Corporation. 8. OFFICES. Upon the Effective Date, all offices of the Bank shall be offices of the Surviving corporation. As of the Effective Date, the home office of the Surviving Corporation shall remain at 201 5th Avenue SW, Olympia, Washington, 98501, and the locations of the branch offices of the Surviving Corporation shall be as follows: -3- Thurston County Home Loan Center Tumwater Branch 520 Water Street 5301 Capitol Blvd. Olympia, WA 98501 Tumwater, WA 98501 Lacey Branch West Olympia Branch 4400 Pacific Avenue S.E. 900 Cooper Point Road S.W. Lacey, WA 98503 Olympia, WA 98502 Shelton Branch Indian Summer Branch 301 East Wallace Kneeland Blvd. 5800 Rainier Loop S.E. Suite 115 Lacey, WA 98513 Shelton, WA 98584 Spanaway Branch Lakewood Branch 15211 Pacific Avenue So. 9802 Gravelly Lake Dr. S.W. Tacoma, WA 98444 Tacoma, WA 98499 80th and Pacific Branch Pierce County Business Banking Branch 8002 Pacific Avenue 1201 Pacific Avenue Tacoma, WA 98408 Fountain Court, Suite 5 Tacoma, WA 98402 9. ARTICLES AND BYLAWS. On and after the Effective Date, the Articles of the Bank as in effect immediately prior to the Effective Date shall be the Articles of the Surviving Corporation until amended in accordance with the terms thereof and applicable law, except that the Articles shall be amended to provide for the establishment of a liquidation account in accordance with applicable law and the Plan of Conversion. 10. STOCKHOLDER AND MEMBER APPROVALS. The affirmative votes of the holders of Bank Common Stock and of the Members as set forth in the Plan of Conversion shall be required to approve the Plan of Conversion, of which this Plan of Merger is a part, on behalf of the Bank and the MHC, respectively. 11. ABANDONMENT OF PLAN. This Plan of Merger may be abandoned by either the MHC or the Bank at any time before the Effective Date in the manner set forth in the Plan of Conversion. -4- 12. AMENDMENTS. This Plan of merger may be amended in the manner set forth in the Plan of Conversion by a subsequent writing signed by the parties hereto upon the approval of the Board of Directors of the Constituent Corporations. 13. SUCCESSORS. This Agreement shall be binding on the successors of the Constituent Corporations. 14. GOVERNING LAWS. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, except to the extent superseded by the laws of the United States. IN WITNESS WHEREOF, the MHC and the Bank have caused this Plan of Merger to be executed by their duly authorized officers as of the day and year first above written. HERITAGE FINANCIAL Attest: CORPORATION, MHC. /s/ Wendy K. Gauksheim - ------------------------------- By: /s/ Donald V. Rhodes Wendy K. Gauksheim ---------------------------------- Corporate Secretary Donald V. Rhodes Chairman, President and Chief Executive Officer HERITAGE SAVINGS BANK Attest: By /s/ Donald V. Rhodes ---------------------------------- /s/ Wendy K. Gauksheim Donald V. Rhodes - ------------------------------- Chairman, President and Chief Wendy K. Gauksheim Executive Officer Corporate Secretary -5- EXHIBIT B --------- PLAN OF REORGANIZATION This Plan of Reorganization, dated as of _________________________, 1997, is made by and among Heritage Savings Bank, ("Bank" or the "Surviving Corporation"), a Washington State chartered savings bank and majority owned subsidiary of Heritage Financial Corporation, MHC, a Washington State chartered mutual holding company; and Heritage Financial Corporation ("Holding Company"), a Washington stock corporation organized by the Bank acting for itself and its to-be formed wholly-owned interim Washington state chartered interim stock bank ("Interim Bank B"). WITNESSETH: WHEREAS, the Bank has organized the Holding Company as a first-tier, wholly owned subsidiary for the purpose of becoming the stock holding company of the Bank upon completion of the Conversion, as defined in the Plan of Conversion and Reorganization from mutual holding company form to stock holding company form (the "Plan of Conversion") adopted by the Boards of Directors of the MHC and the Bank; and WHEREAS, the MHC owns as of the date hereof 66.31% of the outstanding common stock of the Bank, par value $1.00 per share ("Bank Common Stock") and will convert to a Washington state chartered interim stock savings bank ("Interim Bank A") and simultaneously merge with and into the Bank pursuant to the Plan of Conversion and the Plan of Merger included as Annex A thereto ("MHC Merger"), pursuant to which all shares of Bank Common Stock held by the MHC will be canceled; and WHEREAS, the formation of a stock holding company by the Bank will be facilitated by causing the Holding Company to become the sole stockholder of a newly-formed Interim Bank B and then merging Interim Bank B with and into the Bank, pursuant to which the Bank will reorganize as a wholly owned subsidiary of the Holding Company ("Reorganization") and, in connection therewith, all outstanding shares of Bank Common Stock not held by the MHC will be converted automatically into and become shares of common stock of the Holding Company, no par value per share ("Holding Company Common Stock"); and WHEREAS, the Bank and Interim Bank B ("Constituent Corporations") and the Holding Company desire to provide for the terms and conditions of the Reorganization. NOW, THEREFORE, the Bank, Interim Bank B and the Holding Company hereby agree as follows: 1. EFFECTIVE DATE. The Reorganization shall become effective on the effectiveness of the Conversion and the dated specified in the Certificate of Charter Conversion and Merger relating to the MHC Merger issued by the Director of the Department of the Financial Institutions of the State of Washington, Division of Banks ("Director") ("Effective Date"). 2. THE MERGER AND EFFECT THEREOF. Subject to the terms and conditions set forth herein and the prior approval of the Conversion, as defined in the Plan of Conversion, by the Director and any other applicable regulatory authority and the expiration of all applicable waiting periods, Interim Bank B shall merge with and into the Bank, with the Bank as the Surviving Corporation. Upon consummation of the Reorganization, the Surviving Corporation shall be considered the same business and corporate entity as each of the Constituent Corporations and thereupon and thereafter all the property, rights, privileges, powers and franchises of each of the Constituent Corporations shall vest in the Surviving Corporation and the Surviving Corporation shall be subject to and be deemed to have assumed all of the property, rights, privileges, powers, franchises, debts, obligations, duties of each of the Constituent Corporations and shall have succeeded to all or each of their relationships, fiduciary or otherwise, fully and to the same extent as if such property, rights, privileges, powers, franchises, debts, obligations, duties and relationships had been originally acquired, incurred or entered into by the Surviving Corporation. In addition, any reference to either of the Constituent Corporations in any contract or document, whether executed or taking effect before or after the Effective Date, shall be considered a reference to the Bank if not inconsistent with the other provisions of the contract or document; and any pending action or other judicial proceeding to which either of the Constituent Corporations is a party shall not be deemed to have abated or to have been discontinued by reason of the Reorganization, but may be prosecuted to final judgment, order or decree in the same manner as if the Reorganization had not occurred or the Surviving Corporation may be substituted as a party to such action or proceeding, and any judgment, order or decree may be rendered for or against it that might have been rendered for or against either of the Constituent Corporations if the Reorganization had not occurred. -2- 3. CONVERSION OF STOCK. (a) On the Effective Date: (i) each share of Bank Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted into the right to receive Holding Company Common Stock based on the Exchange Ratio, as defined in the Plan of Conversion, plus the right to receive cash in lieu of any fractional share interest, as determined in accordance with Section 3(c) hereof, (ii) each share of common stock, par value $1.00 per share, of Interim Bank B ("Interim B Common Stock") issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be converted into one share of Bank Common Stock, and (iii) each share of Holding Company Common Stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Reorganization and without any action on the part of the holder thereof, be cancelled. By voting in favor of this Plan of Reorganization, the Holding Company, as the sole stockholder of Interim Bank B, shall have agreed (i) to issue shares of Holding Company Common Stock in accordance with the terms hereof and (ii) to cancel all previously issued and outstanding shares of Holding Company Common Stock upon the effectiveness of the Reorganization. (b) On and after the Effective Date, there shall be no registrations or transfers on the stock transfer books of Interim Bank B or the Bank of shares of Interim B Common Stock or Bank Common Stock which were outstanding immediately prior to the Effective Date. (c) Notwithstanding any other provision hereof, no fractional shares of Holding Company Common Stock shall be issued to holders of Bank Common Stock. In lieu thereof, the holder of shares of Bank Common Stock entitled to a fraction of a share of Holding Company Common Stock shall, at the time of surrender of the certificate or certificates representing such holder shares, receive an amount of cash equal to the product arrived at by multiplying such fraction of a share of Holding Company Common Stock by the Purchase Price, as defined in the Plan of Conversion. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share. 4. EXCHANGE OF SHARES. (a) At or after the Effective Date, each holder of a certificate or certificates theretofore evidencing issued and outstanding shares of Bank Common Stock, upon surrender of the same to an agent, duly appointed by the Holding Company ("Exchange -3- Agent"), shall be entitled to receive in exchange therefor certificate(s) representing the number of full shares of Holding Company Common Stock for which the shares of Bank Common Stock theretofore represented by the certificate or certificates so surrendered shall have been converted as provided in Section 3(a) hereof. The Exchange Agent shall mail to each holder of record of Bank Common Stock which is to be exchanged for Holding Company Common Stock as provided in Section 3(a) hereof, a form of letter of transmittal advising such holder of the terms of the exchange effected by the Reorganization and of the procedure for surrendering stock certificates to the Exchange Agent in exchange for stock certificate(s) evidencing Holding Company Common Stock. (b) No holder of a certificate theretofore representing shares of Bank Common Stock shall be entitled to receive any dividends in respect of the Holding Company Common Stock into which such shares shall have been converted by virtue of the Bank Merger until the certificate representing such shares of Bank Common Stock is surrendered in exchange for certificates representing shares of Holding Company Common Stock. Any such dividends shall be paid (without interest) upon surrender of the certificates representing such shares of Bank Common Stock. The Holding Company shall be entitled, after the Effective Date, to treat certificates representing shares of Bank Common Stock as evidencing ownership of the number of full shares of Holding Company Common Stock into which the shares of Bank Common Stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates. (c) The Holding Company shall not be obligated to deliver a certificate or certificates representing shares of Holding Company Common Stock to which a holder of Bank Common Stock would otherwise be entitled as a result of the Reorganization until such holder surrenders the certificate or certificates representing the shares of Bank Common Stock for exchange as provided in this Section 4, or, in default thereof, an appropriate Affidavit of Loss and Indemnification Agreement and/or an indemnity bond as may be required in each case by the Holding Company. If any certificate evidencing shares of Holding Company Common Stock is to be issued in a name other than that in which the certificate evidencing Bank Common Stock surrendered in exchanged therefor is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange pay to the Exchange Agent any transfer or other tax required by reason of the issuance of a certificate for shares of Holding Company Common Stock in any name other than that of the registered Holder of the certificate surrendered or otherwise establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. -4- (d) If, between the date hereof and the Effective Date, the shares of Bank Common Stock shall be changed into a different number or class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or a stock dividend thereon shall be declared with a record date within said period, the Exchange Ratio specified in Section 3(a) hereof shall be adjusted accordingly. 5. RIGHTS OF DISSENT AND APPRAISAL. Holders of the Bank Common Stock shall have the right to dissent from the MHC Merger in the manner provided by Chapter 23B of the Washington Business Corporation Act, Revised Code of Washington, Chapter 23B.13. 6. NAME OF SURVIVING CORPORATION. The name of the Surviving Corporation shall be "Heritage Savings Bank." 7. DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Charter and Bylaws of the Surviving Corporation and applicable law, the number of directors of the Surviving Corporation shall be seven. The names of those person who, upon and after the Effective Date, shall be directors of the Surviving Corporation are set forth below. Each such director shall serve for the term which expires at the annual meeting of stockholders of the Surviving Corporation in the year set forth after his respective name, and until a successor is elected and qualified. Name ---- Donald V. Rhodes Lynn M. Brunton John A. Clees Daryl D. Jensen H. Edward Odegard James P. Senna Philip S. Weigand The address of each such director is 201 5th Avenue SW, Olympia, Washington 98501. -5- 8. OFFICERS OF THE SURVIVING CORPORATION. Upon and after the Effective Date, until changed in accordance with the Charter and Bylaws of the Surviving Corporation and applicable law, the officers of the Bank immediately prior to the Effective Date shall be the officers of the Surviving Corporation. 9. OFFICES. Upon the Effective Date, all offices of the Bank shall be offices of the Surviving corporation. As of the Effective Date, the home office of the Surviving Corporation shall remain at 201 5th Avenue SW, Olympia, Washington, 98501, and the locations of the branch offices of the Surviving Corporation shall be as follows: Thurston County Home Loan Center Tumwater Branch 520 Water Street 5301 Capitol Blvd. Olympia, WA 98501 Tumwater, WA 98501 Lacey Branch West Olympia Branch 4400 Pacific Avenue S.E. 900 Cooper Point Road S.W. Lacey, WA 98503 Olympia, WA 98502 Shelton Branch Indian Summer Branch 301 East Wallace Kneeland Blvd. 5800 Rainier Loop S.E. Suite 115 Lacey, WA 98513 Shelton, WA 98584 Spanaway Branch Lakewood Branch 15211 Pacific Avenue So. 9802 Gravelly Lake Dr. S.W. Tacoma, WA 98444 Tacoma, WA 98499 80th and Pacific Branch Pierce County Business Banking 8002 Pacific Avenue Branch Tacoma, WA 98408 1201 Pacific Avenue Fountain Court, Suite 5 Tacoma, WA 98402 10. ARTICLES AND BYLAWS. On and after the Effective Date, the Articles and Bylaws of the Bank as in effect immediately prior to the Effective Date shall be the Articles and Bylaws of the Surviving Corporation until amended in accordance with the terms thereof and applicable law. -6- 11. STOCK COMPENSATIONS. By voting in favor of this Agreement, the Holding Company shall have approved adoption of the existing Bank's 1994 Stock Option Plan, 1997 Stock Option Plan and Employee Stock Ownership Plan (collectively, the "Plans") as plans of the Holding Company and shall have agreed to issue Holding Company Common Stock in lieu of Bank Common Stock pursuant to the terms of such Plans. As of the Effective Date, rights outstanding under the Plans shall be assumed by the Holding Company and thereafter shall be rights only for shares of Holding Company Common Stock, with each such right being for a number of shares of Holding Company Common Stock equal to the number of shares of Bank Common Stock that were available thereunder immediately prior to the Effective Date times the Exchange Ratio, as defined in the Plan of Conversion, and the price of each such right shall be adjusted to reflect the Exchange Ratio and so that the aggregate purchase price of the right is unaffected, but with no change in any other term or condition of such right. The Holding Company shall make appropriate amendments to the Plans to reflect the adoption of the plans by the Holding Company without adverse effect upon the rights outstanding thereunder. 12. STOCKHOLDER APPROVAL. The affirmative votes of the holders of Bank Common Stock set forth in the Plan of Conversion shall be required to approve the Plan of Conversion, of which this Plan of Reorganization is a part, on behalf of the Bank. The approval of the Holding Company, as the sole holder of the Interim Bank B Common Stock, shall be required to approve the Plan of Conversion, of which this Plan of Reorganization is a part, on behalf of Interim Bank B. 13. REGISTRATION; OTHER APPROVALS. In addition to the approvals set forth in Sections 1 and 12 hereof and in the Plan of Conversion, the obligations of the parties hereto to consummate the Reorganization shall be subject to the Registration Statement for the Holding Company Common Stock to be issued hereunder being deemed effective by the Securities and Exchange Commission, and no stop order being in effect regarding such Registration Statement, as well as the receipt of all other approvals, consents or waivers as the parties may deem necessary or advisable. 14. ABANDONMENT OF PLAN. This Plan of Reorganization may be abandoned by either the Bank or Interim Bank B at any time before the Effective Date in the manner set forth in the Plan of Conversion. 15. AMENDMENTS. This Plan of Reorganization may be amended in the manner set forth in the Plan of Conversion by a subsequent writing signed by the parties hereto upon the approval of the Board of Directors of each of the parties hereto. -7- 16. SUCCESSORS. This Agreement shall be binding on the successors of the Constituent Corporations. 17. GOVERNING LAWS. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, except to the extent superseded by the laws of the United States. IN WITNESS WHEREOF, the Parties hereto have caused this Plan of Reorganization to be duly executed on its behalf by its officers thereunto duly authorized, all as of the date first above. HERITAGE FINANCIAL CORPORATION Attest: /s/ Wendy K. Gauksheim By: /s/ Donald V. Rhodes - ----------------------- ------------------------------- Wendy K. Gauksheim Donald V. Rhodes Corporate Secretary Chairman, President and Chief Executive Officer HERITAGE SAVINGS BANK Attest: /s/ Wendy K. Gauksheim By: /s/ Donald V. Rhodes - ----------------------- ------------------------------- Wendy K. Gauksheim Donald V. Rhodes Corporate Secretary Chairman, President and Chief Executive Officer -8- EXHIBIT C ARTICLES OF INCORPORATION OF HERITAGE FINANCIAL CORPORATION The undersigned, being the Chairman, President and Chief Executive Officer of Heritage Financial Corporation, executes in duplicate the following Articles of Incorporation for the corporation. ARTICLE 1 (Name) The name of the corporation shall be HERITAGE FINANCIAL CORPORATION. ARTICLE 2 (Duration) The corporation's period of duration shall be perpetual. ARTICLE 3 (Purpose) The purpose for which the corporation is organized is the transaction of any and all lawful business for which corporations may be incorporated under the Washington Business Corporation Act. ARTICLE 4 (Shares Authorized) Section 4.1 The aggregate number of shares which the corporation shall ----------- have authority to issue is 15,000,000 common shares with no par value (hereinafter referred to as "the common stock") and 2,500,000 preferred shares with no par value (hereinafter referred to as "the preferred stock"). The preferred stock is senior to the common stock, and the common stock is subject to the rights and preferences of the preferred stock as provided in the following section. Section 4.2 The board of directors is hereby vested with authority to ----------- divide any or all of the preferred stock into one or more series and, within the limitations set forth in the Washington Business Corporation Act, as amended from time to time, to fix and determine or to amend the relative rights and preferences of the preferred stock or of any series so established. ARTICLE 5 (Preemptive Rights) No shareholder shall have the preemptive right to acquire unissued shares of the corporation. ARTICLE 6 (Cumulative Voting) Each shareholder entitled to vote at any election for directors shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, and no shareholder shall be entitled to cumulate his votes. ARTICLE 7 (Amendment of Articles) The corporation reserves the right to amend, alter, change or repeal any provision of its Articles of Incorporation to the extent permitted by the laws of the State of Washington. All rights of shareholders are granted subject to this reservation. ARTICLE 8 (Registered Office and Agent) The address of the initial registered office of the corporation is 1201 Pacific Avenue, Suite 2200, Tacoma, WA 98402. The name of its initial registered agent at that address is Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., attention: J. James Gallagher. ARTICLE 9 (Directors) 9.1. Number, Vacancies. The number of directors of the corporation shall ----------------- be such number, not less than 5 nor more than 25 (exclusive of directors, if any, to be elected by holders of preferred stock of the corporation, voting separately as a class), as shall be provided from time to time in or in accordance with the Bylaws; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further, that no action shall be taken to decrease or increase the number of directors from time to time unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which the director has been chose expires and when the director's successor is elected and qualified. 9.2 Classified Board. The board of directors of the corporation shall be ---------------- divided into three classes of directors which shall be designated Class 1, Class 2 and Class 3. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire board of directors shall permit, with the terms of office of all members of one class expiring each year. Subject to the provisions of Section 9.1, should the number of directors not be equally divisible by three, the excess director or directors shall be assigned to Classes 2 or 3 as follows: (i) if there shall be an excess of one directorship over a number equally divisible by three, such extra directorship shall be classified in Class 3; and (ii) if there be an excess of two directorships over a number equally divisible by three, one shall be classified in Class 2 and the other in Class 3. At the first annual meeting of stockholders, directors in Class 1 shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. At the second annual meeting of stockholders, directors of Class 2 shall be elected to hold office for a term expiring at the third succeeding meeting thereafter. At the third annual meeting of stockholders, directors of Class 3 shall be elected to hold office for a term expiring at the third succeeding meeting thereafter. Thereafter, at each succeeding annual meeting, directors of each class shall be elected for three year terms. Notwithstanding the foregoing, the director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. Should the number of directors of the corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. The board of directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. Whenever the holders of any one or more series of preferred stock of the corporation shall have the right, voting separately as a class, to elect one or more directors of the corporation, the board of directors shall consist of said directors so elected in addition to the number of directors fixed as provided in Section 9.1. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of preferred stock of the corporation shall have the right, voting separately as a class, to elect one or more directors of the corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. ARTICLE 10 (Nominations to Board of Directors) Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the board of directors, shall be made in writing and shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than twenty-one days' notice of the meeting is given to shareholders, such nomination shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) The name and address of each proposed nominee; (b) The principal occupation of each proposed nominee; (c) The total number of shares of stock of the corporation that will be voted for each proposed nominee; (d) The name and address of the notifying shareholder; and (e) The number of shares of common stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the vote teller may disregard all votes cast for such nominee. ARTICLE 11 (Removal of Directors) Notwithstanding any other provision of these Articles of Incorporation or the Bylaws of the corporation, any director or the entire board of directors of the corporation may be removed, at any time, but only for cause and only by the affirmative vote of the holders of at least 66-2/3% of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the corporation shall have the right, voting separately as a class, to elect one or more directors of the corporation, the preceding provisions of this Article 11 shall not apply with respect to the director or directors elected by such holders of preferred stock. ARTICLE 12 (Acquisition of Capital Stock) 12.1 Five Year Prohibition. For a period of five years from the effective --------------------- date of the completion of the conversion of Heritage Savings Bank to become a wholly-owned subsidiary of this corporation, no person shall directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of equity security of the corporation, unless such offer or acquisition shall have been approved in advance by two-thirds vote of the Continuing Directors, as defined in Article 14. In addition, for a period for five years from the completion of the conversion of Heritage Savings Bank to become a wholly-owned subsidiary of this corporation upon such conversion, and notwithstanding any provision to the contrary in these Articles of Incorporation or in the Bylaws of the corporation, where any person directly or indirectly acquires beneficial ownership of more than 10% of any class of equity security of the corporation in violation of this Article 12, the securities beneficially owned in excess of 10% shall not be counted as shares entitled to vote, shall not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and shall not be counted as outstanding for purposes of determining a quorum or the affirmative vote necessary to approve any matter submitted to the stockholders for a vote. 12.2 Prohibition after Five Years. If, at any time after five years from ---------------------------- the effective date of the completion of the conversion of Heritage Savings Bank to become a wholly-owned subsidiary of the corporation upon such conversion, any person shall acquire the beneficial ownership of more than 10% of any class of equity security of the Corporation without the prior approval by a two-thirds vote of the Continuing Directors (as defined in Article 14), then the record holders of voting stock of the corporation beneficially owned by such acquiring person shall have only the voting rights set forth in this Section 12.2 on any matter requiring their vote or consent. With respect to each vote in excess of 10% of the voting power of the outstanding shares of voting stock of the corporation which such record holders would otherwise be entitled to cast without giving effect to this Section 12.2, the record holders in the aggregate shall be entitled to cast only one-hundredth of a vote, and the aggregate voting power of such record holders, so limited for all shares of voting stock of the corporation beneficially owned by such acquiring person, shall be allocated proportionately among such record holders. For each such record holder, this allocation shall be accomplished by multiplying the aggregate voting, as so limited, of the outstanding shares of voting stock of the corporation beneficially owned by such acquiring person by a fraction whose numerator is the number of votes represented by the shares of voting stock of the corporation that are beneficially owned by such acquiring person. A person who is a record owner of shares of voting stock of the corporation that are beneficially owned simultaneously by more than one person shall have, with respect to such shares, the right to cast the least number of votes that such person would be entitled to cast under this Section 12.2 by virtue of such shares being so beneficially owned by any of such acquiring persons. Section 12.3 Definitions. The term "person" means an individual, a group ----------- acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group acting in concert formed for the purpose of acquiring, holding or disposing of securities of the corporation. The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. The term "group acting in concert" includes (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, and (b) a combination or pooling of voting or other interest in the corporation's outstanding shares for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. The term "beneficial ownership" shall have the meaning defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange At of 1934, as amended. Section 12.4 Exclusion for Employee Benefit Plans, Directors, Officers, ---------------------------------------------------------- Employees and Certain Proxies. The restrictions contained in this Article 12 - ----------------------------- shall not apply to (i) any underwriter or member of an underwriting or selling group involving a public sale or resale of securities of the corporation or a subsidiary thereof; provided, however, that upon completion of the sale or resale of such securities, no such underwriter or member of such selling group is a beneficial owner of more than 10% of any class of equity security of the corporation, (ii) any proxy granted to one or more Continuing Directors (as defined in Article 14) by a stockholder of the corporation or (iii) any employee benefit plans of the corporation. In addition, the Continuing Directors of the corporation, the officers and employees of the corporation and its subsidiaries, the directors of subsidiaries of the corporation, the employee benefit plans of the corporation and its subsidiaries, entities organized or established by the corporation or any subsidiary thereof pursuant to the terms of such plans and trustees and fiduciaries with respect to such plans acting in such capacity shall not be deemed to be a group with respect to their beneficial ownership or voting stock of the corporation solely by virtue of their being directors, officers or employees of the corporation or subsidiary thereof or by virtue of the Continuing Directors of the corporation, the officers and employees of the corporation and its subsidiaries and the directors of subsidiaries of the corporation being fiduciaries or beneficiaries of an employee benefit plan of the corporation or a subsidiary of the corporation. Notwithstanding the foregoing, no director, officer or employee of the corporation or any of its subsidiaries or group of any of them shall be exempt from the provisions of this Article 12 should any such person or group become a beneficial owner or more than 10% of any class or equity security of the corporation. Section 12.5 Determinations. A majority of the Continuing Directors (as -------------- defined in Article 14) shall have the power to construe and apply the provisions of the Article and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares beneficially owned by any person, (ii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iii) the application of any other definition or operative provision of this Article 12 to the given facts or (iv) any other matter relating to the applicability or effect of this Article 12 in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the corporation and its stockholders. ARTICLE 13 (Business Transactions with Officers, Directors and Shareholders) The corporation may enter into a contract and otherwise transact business as vendor, purchaser, or otherwise, with its directors, officers and shareholders, and with corporations, associations, firms and entities in which they are or may become interested as directors, officers, shareholders, members or otherwise, as freely as though such adverse interest did not exist, even though the vote, action or presence of such director, officer or shareholder may be necessary to obligate the corporation upon such contract or transaction; and in the absence of fraud, no such contract or transaction shall be avoided and no such director, officer or shareholder shall be held liable to account to the corporation, by reason of such adverse interest or any fiduciary relationship to the corporation arising out of such office or stock ownership, for any profit or benefit realized by him through any such contract or transaction; provided that the nature of the interest of such director, officer or shareholder, though not necessarily the details or extent thereof, be disclosed or known to the board of directors or shareholders of the corporation, at the meeting thereof at which such contract or transaction is authorized or confirmed. A general notice that a director, officer or shareholder of the corporation is interested in any corporation, association, firm or entity shall be sufficient disclosure as to such director, officer or shareholder with respect to all contracts and transactions with that corporation, association, firm or entity. ARTICLE 14 (Certain Business Combinations) Section 14.1 In addition to the requirements of any applicable statute, ------------ and notwithstanding any other provisions of any other articles of these Articles of Incorporation, the affirmative vote of not less than 66 2/3% of the total shares attributable to persons other than a Control Person (as defined below), considered for the purposes of this Article 11 as one class, which are entitled to be voted in an election of directors shall be required for the approval of any Business Combination (as defined below) between the corporation and any Control Person. Section 14.2 The approval requirements of Section 11.1 shall not apply if ------------ either: (a) The Business Combination is approved by at least a majority of Continuing Directors (as defined below) of the corporation; or (b) All the following conditions are satisfied: (i) The cash or fair market value of the property, securities or other consideration to be received per share in the Business Combination by holders of the common stock of the corporation is not less than the higher of: (A) the highest price per share (including brokerage commissions, soliciting dealers' fees and dealer-management compensation) paid by such Control Person in acquiring any of its holdings of the corporation's common stock; (B) the highest per share market price of the common stock during the three-month period immediately preceding the date of the proxy statement described in (iii) below; or (C) the per share value of the common stock at the end of the fiscal quarter immediately prior to the Business Combination, as determined by an appraisal prepared by persons, selected by the Continuing Directors, who are independent of the corporation and the Control Person, and who are experienced and expert in the area of corporate appraisal. (ii) After becoming a Control Person and prior to the consummation of such Business Combination (A) such Control Person shall not have acquired any newly issued shares of capital stock, directly or indirectly, from the corporation (except upon conversion of convertible securities acquired by it prior to becoming a Control Person or upon compliance with the provisions of this Article 11 or as a result of a pro rata stock dividend or stock split), and (B) such Control Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the corporation, or made any major changes in the corporation's business or equity capital structure; and (iii) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the corporation is then subject to such requirements, shall be mailed to the public stockholders of the corporation for the purpose of soliciting stockholder approval of such Business Combination. Section 14.3 For the purpose of this Article 14: ------------ (a) The term "Business Combination" shall mean (i) any merger or consolidation of the corporation with or into a Control Person, (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any Substantial Part (as defined below) of the assets of the corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Control Person, (iii) any merger or consolidation of a Control Person with or into the corporation or a subsidiary of the corporation, (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Control Person to the corporation or a subsidiary of the corporation, (v) the issuance of any securities of the corporation or a subsidiary of the corporation to a Control Person, (vi) the acquisition by the corporation or a subsidiary of the corporation of any securities of a Control Person, (vii) any reclassification of common stock of the corporation, or any recapitalization involving common stock of the corporation, consummated within five years after a Control Person becomes a Control Person, or (viii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Combination; (b) The term "Continuing Director" shall mean (i) a director who was a member of the board of directors of the corporation immediately prior to the time that a Control Person became the beneficial owner (as this term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 on the date on which this amendment becomes effective) of 10% or more of the outstanding shares of common stock of the corporation or (ii) a person so designated before initially becoming a director by a majority of the then Continuing Directors. (c) The term "Control Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with their Affiliates and Associates (as those terms are defined on the date on which this amendment becomes effective in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) is the beneficial owner in the aggregate of 20% or more of the outstanding shares of common stock of the corporation, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity; (d) The term "Substantial Part" shall mean more than 10% of the total assets of the corporation in question, as of the end of its most recent fiscal year prior to the time the determination is being made; (e) Without limitation, any shares of common stock of the corporation which any Control Person has the right to acquire at any time pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed outstanding and beneficially owned by such Control Person for purposes of this Article 14; and (f) For the purposes of Section 14.2(b)(i) of this Article 14, the phrase "other consideration to be received" shall include, without limitation, common stock of the corporation retained by its existing public stockholders in the event of a Business Combination with such Control Person in which the corporation is the surviving corporation. Section 14.4 For the purposes of this Article 14, a majority of the ------------ Continuing Directors shall have the power and duty to determine on the basis of information known to them (a) whether a proposed transaction is subject to the provisions of this Article 14, (b) the amount of shares of the corporation Beneficially Owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) such other matters as to which a determination may be required by the provisions of this Article 14. Section 14.5 The provisions set forth in this Article 14 may not be ------------ repealed or amended in any respect or in any manner including any merger or consolidation of the corporation with any other corporation unless the surviving corporation's Articles of Incorporation contain an article to the same effect as this Article 14, except by the affirmative vote of the holders of not less than 66-2/3% of the outstanding shares of common stock of the corporation, subject to the provisions of any series of preferred stock which may at the time be outstanding; provided, however, that if there is a Control Person such action must be approved by not less than 66-2/3% of the total shares entitled to be voted in an election of directors attributable to shares owned by person other than the Control Persons. ARTICLE 15 (Consideration of Non-Monetary Factors) The board of directors of the corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its stockholders, give due consideration to all relevant factors, including without limitation the social and economic effects on the employees, customers, suppliers and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located. ARTICLE 16 (Indemnification - Limitation of Liability) Section 16.1 - Defined Terms. As used in this Article 16: ---------------------------- (a) "Egregious conduct" by a person shall mean acts or omissions that involve intentional misconduct or a knowing violation of law, conduct violating section 23A.08.450 of the Revised Code of Washington, or participation in any transaction from which the person will personally receive a benefit in money, property, or services to which the person is not legally entitled. (b) "Finally adjudged" shall mean stated in a judgment based upon clear and convincing evidence by a court having jurisdiction, from which there is no further right to appeal. (c) "Director" shall mean any person who is a director of the corporation and any person who, while a director of the corporation, is serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of the corporation or of any employer in which it has an ownership interest; and "conduct as a director" shall include conduct while a director is acting in any of such capacities. (d) "Officer-director" shall mean any person who is simultaneously both an officer and director of the corporation and any person who, while simultaneously both an officer and director of the corporation, is serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of the corporation or of any employer in which it has an ownership interest; and "conduct as an officer-director" shall include conduct while an officer-director is acting as an officer of the corporation or in any of such other capacities. (e) "Subsidiary corporation" shall mean any corporation at least eighty percent of the voting stock of which is held beneficially by this corporation. Section 16.2 - Liability of Directors. No director, officer-director, ------------------------------------- former director or former officer-director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for conduct as a director or officer-director unless the conduct is finally adjudged to have been egregious conduct, as defined herein. Section 16.3 - Liability of Subsidiary Directors. No director, officer- ------------------------------------------------ director, former director, or former officer-director of a subsidiary corporation shall be personally liable in any action brought directly by this corporation as a shareholder of the subsidiary corporation or derivatively on behalf of the subsidiary corporation (or by any shareholder of this corporation double-derivatively on behalf of this corporation and the subsidiary corporation) for monetary damages for conduct as a director or officer-director of such subsidiary corporation unless the conduct is finally adjudged to have been egregious conduct, as defined herein. Section 16.4 - Indemnification of Directors. The corporation shall ------------------------------------------- indemnify any person who is, or is threatened to be made, a party to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and whether by or in the right of the corporation or its shareholders or by any other party, by reason of the fact that the person is or was a director or officer-director of the corporation or of a subsidiary corporation against judgments, penalties or penalty taxes, fines, settlements (even if paid or payable to the corporation or its shareholders or to a subsidiary corporation) and reasonable expenses, including attorneys' fees, actually incurred in connection with such proceeding unless the liability and expenses were on account of conduct finally adjudged to be egregious conduct, as defined herein. The reasonable expenses, including attorneys' fees, of such person incurred in connection with such proceeding shall be paid or reimbursed by the corporation, upon request of such person, in advance of the final disposition of such proceeding upon receipt by the corporation of a written, unsecured promise by the person to repay such amount if it shall be finally adjudged that the person is not eligible for indemnification. All expenses incurred by such person in connection with such proceeding shall be considered reasonable unless finally adjudged to be unreasonable. Section 16.5 - Procedure. No action by the board of directors, the ------------------------ shareholders, independent counsel, or any other person or persons shall be necessary or appropriate to the determination of the corporation's indemnification obligation in any specific case, to the determination of the reasonableness of any expenses incurred by a person entitled to indemnification under this Article 16, nor to the authorization of indemnification in any specific case. Section 16.6 - Internal Claims Excepted. Notwithstanding section 16.4, the --------------------------------------- corporation shall not be obligated to indemnify any person for any expenses, including attorneys' fees, incurred to assert any claim against the corporation (except a claim based on section 16.7) or any person related to or associated with it, including any person who would be entitled hereby to indemnification in connection with the claim. Section 16.7 - Enforcement of Rights. The corporation shall indemnify any ------------------------------------ person granted indemnification rights under this Article 16 against any reasonable expenses incurred by the person to enforce such rights. Section 16.8 - Set-off of Claims. Any person granted indemnification -------------------------------- rights herein may directly assert such rights in set-off of any claim raised against the person by or in the right of the corporation and shall be entitled to have the same tribunal which adjudicates the corporation's claim adjudicate the person's entitlement to indemnification by the corporation. Section 16.9 - Continuation of Rights. The indemnification rights provided ------------------------------------- in this Article 16 shall continue as to a person who has ceased to be a director or officer-director and shall inure to the benefit of the heirs, executors, and administrators of such person. Section 16.10 - Effect of Amendment or Repeal. Any amendment or repeal of --------------------------------------------- this Article 16 shall not adversely affect any right or protection of a director, officer-director, former director or former officer-director existing at the time of such amendment or repeal with respect to acts or omissions occurring prior to such amendment or repeal. Section 16.11 - Severability of Provisions. Each of the substantive ------------------------------------------ provisions of this Article 13 is separate and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions. ARTICLE 17 (Amendments) The corporation reserves the right to amend or repeal any provision contained in these Articles of Incorporation in the manner prescribed by the Washington Business Corporation Act and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of these Articles of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of the corporation required by law or by these Articles of Incorporation, the affirmative vote of the holders of 66-2/3% of the voting power of all the then- outstanding shares of the capital stock of the corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article 12), voting together as a single class, shall be required to amend or repeal this Article 17, Article 9, Article 12, Article 14 or Article 16. The name and address of the incorporator is Donald V. Rhodes, Heritage Bank, 201 5th Avenue S.W., Olympia, Washington 98502. Executed in duplicate this 18th day of August, 1997. HERITAGE FINANCIAL CORPORATION By: /s/ Donald V. Rhodes ----------------------------------------- Donald V. Rhodes Chairman, President and Chief Executive Officer CONSENT TO APPOINTMENT AS REGISTERED AGENT The undersigned hereby consents to serve as registered agent, in the State of Washington, for the following corporation: Heritage Financial Corporation. DATED this 18th day of August, 1997. /s/ J. James Gallagher ------------------------------------- J. James Gallagher Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim P.L.L.C. 1201 Pacific Avenue 2200 First Interstate Plaza Tacoma, WA 98401 EXHIBIT D BYLAWS OF HERITAGE FINANCIAL CORPORATION August 28, 1997 TABLE OF CONTENTS Page ---- ARTICLE 1 - MEETINGS OF SHAREHOLDERS.........................................1 - --------- Section 1.1 - Shareholder Meetings......................................1 Section 1.2 - Annual Meeting............................................1 Section 1.3 - Special Meetings..........................................1 Section 1.4 - Notice....................................................1 Section 1.5 - Quorum....................................................2 Section 1.6 - Adjournment...............................................2 Section 1.7 - Chairman of Meeting.......................................2 Section 1.8 - Secretary of Meeting......................................2 Section 1.9 - Conduct of Meetings.......................................2 Section 1.10 - Consent to Action........................................2 Section 1.11 - Proxies..................................................2 Section 1.12 - Shareholder Advisor......................................3 Section 1.13 - Recording of Proceedings.................................3 Section 1.14 - Record Date..............................................3 Section 1.15 - List of Shareholders.....................................3 ARTICLE 2 - DIRECTORS........................................................4 - --------- Section 2.1 - Management of Corporation.................................4 Section 2.2 - Number of Directors.......................................4 Section 2.3 - Qualifications and Nominations of Directors...............4 Section 2.4 - Annual Meetings...........................................4 Section 2.5 - Place of Meetings.........................................4 Section 2.6 - Regular Meetings..........................................4 Section 2.7 - Special Meetings..........................................4 Section 2.8 - Notices...................................................4 Section 2.9 - Quorum....................................................5 Section 2.10 - Attendance by Conference Telecommunication...............5 Section 2.11 - Consent to Action........................................5 Section 2.12 - Compensation.............................................5 Section 2.13 - Manifestation of Dissent.................................6 ARTICLE 3 - COMMITTEES OF THE BOARD OF DIRECTORS.............................6 - --------- i Section 3.1 - Executive Committee.......................................5 Section 3.2 - Audit Committee...........................................6 Section 3.3 - Other Committees..........................................7 Section 3.4 - Rules of Procedure........................................7 ARTICLE 4 - OFFICERS AND EMPLOYEES...........................................7 - --------- Section 4.1 - Officers..................................................7 Section 4.2 - Election..................................................7 Section 4.3 - Removal and Vacancy.......................................8 Section 4.4 - Compensation..............................................8 Section 4.5 - Exercise of Rights as Stockholders........................8 Section 4.6 - Duties of Chairman of the Board...........................8 Section 4.7 - Duties of Vice Chairman...................................9 Section 4.8 - Duties of President.......................................9 Section 4.9 - Duties of Vice President..................................9 Section 4.10 - Duties of Secretary......................................9 Section 4.11 - Duties of Treasurer......................................9 Section 4.11 - Other Officers...........................................9 Section 4.12 - Clerks and Agents.......................................10 ARTICLE 5 - SHARES AND CERTIFICATES FOR SHARES..............................10 - --------- Section 5.1 - Consideration............................................10 Section 5.2 - Stock Certificates.......................................10 Section 5.3 - Lost Certificates........................................10 Section 5.4 - Transfer of Shares.......................................11 Section 5.5 - Holder of Record.........................................11 Section 5.6 - Issuance of Shares.......................................11 Section 5.7 - Subscriptions............................................11 Section 5.8 - Payment of Subscriptions.................................11 Section 5.9 - Default in Payment of Subscriptions......................12 ARTICLE 6 - SEAL............................................................11 - --------- Section 6.1 - Corporate Seal...........................................12 ARTICLE 7 - MISCELLANEOUS PROVISIONS........................................12 - --------- Section 7.1 - Fiscal Year..............................................12 Section 7.2 - Records..................................................12 ii ARTICLE 8 - BYLAWS..........................................................13 - --------- Section 8.1 - Inspection...............................................13 Section 8.2 - Amendments...............................................13 iii BYLAWS OF HERITAGE FINANCIAL CORPORATION ARTICLE 1 --------- Meetings of Shareholders ------------------------ SECTION 1.1 - Shareholder Meetings. Shareholder meetings shall be held at ---------------------------------- the principal office of the corporation, or at such other location within or without the State of Washington as shall be determined by the Board of Directors and stated in the Notice of Meeting. SECTION 1.2 - Annual Meeting. The regular annual meeting of the ---------------------------- shareholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on such day and at such time following the close of the corporation's fiscal year as shall be determined each year by the Board of Directors. If such annual meeting is omitted by oversight or otherwise during such period, a subsequent annual meeting may nonetheless be held, and any business transacted or elections held at such meeting shall be as valid as if the annual meeting had been held during the period provided above. SECTION 1.3 - Special Meetings. Special meetings of the shareholders may ------------------------------ be called at any time by the Chairman, the President, a majority of the Board of Directors, or any shareholder or shareholders holding in the aggregate not less than one-tenth of all shares entitled to vote at the special meeting. Shareholders may hold a meeting at any time and place without notice or call, upon appropriate waivers signed by all shareholders who are entitled to vote at a shareholders' meeting. SECTION 1.4 - Notice. Written notice stating the place, day, and hour of -------------------- the meeting, and in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more that sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the person or persons calling the meeting to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation. Each shareholder shall be responsible for providing the Secretary with the shareholder's current mailing 1 address to which notices of meetings and all other corporate notices may be sent. A shareholder may waive any notice required for any meeting by executing a written waiver of notice either before or after said meeting and such waiver shall be equivalent to the giving of such notice. The attendance of a shareholder at a shareholders' meeting, in person or by proxy, shall constitute a waiver of notice of the meeting. SECTION 1.5 - Quorum. A majority of the shares entitled to vote, -------------------- represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. When a quorum is present at any meeting, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless otherwise provided by law. SECTION 1.6 - Adjournment. A majority of the shares entitled to vote, ------------------------- represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. SECTION 1.7 - Chairman of Meeting. The Chairman, or in his absence, the --------------------------------- President or the Vice Chairman, shall preside at all meetings of the shareholders unless the Board of Directors shall otherwise determine. The Board of Directors may appoint any shareholder to act as chairman of the meeting. SECTION 1.8 - Secretary of Meeting. The Secretary shall act as a secretary ---------------------------------- at all meeting of the shareholders, and in his absence, the presiding officer may appoint any person to act as secretary. SECTION 1.9 - Conduct of Meetings. Shareholder meetings shall be conducted --------------------------------- in an orderly and fair manner, but the presiding officer shall not be bound by any technical rules of parliamentary procedure. SECTION 1.10 - Voting. Each outstanding share entitled to vote shall have --------------------- one vote on each matter submitted to a vote at a meeting of shareholders. SECTION 1.11 - Proxies. At all meetings of shareholders, a shareholder may ---------------------- vote by a proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 2 SECTION 1.12 - Shareholder Advisor. A shareholder or holder of a valid ---------------------------------- proxy may be accompanied at any shareholders' meeting by one personal advisor, but no such advisor may address the meeting without the consent of the presiding officer. SECTION 1.13 - Recording of Proceedings. The proceedings of a --------------------------------------- shareholders' meeting may not be mechanically or electronically recorded other than by the Secretary or acting secretary without the express approval of all individuals in attendance at the meeting. SECTION 1.14 - Record Date. For the purpose of determining shareholders -------------------------- entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall not be more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the Board of Directors, the date on which notice of the meeting is mailed or the date on which the resolution of the Board declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 1.15 - List of Shareholders. The Secretary of the corporation ----------------------------------- shall make a complete record of the shareholders entitled to vote at a meeting of shareholders, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each as shown on the corporation's stock transfer books on the record date. Such record shall be kept on file at the registered office of the corporation for a period of ten (10) days prior to the meeting of shareholders. Such record shall be produced and kept open at the time and place of the shareholders' meeting and shall be subject to the inspection of any shareholder during the meeting for any proper purpose. 3 ARTICLE 2 --------- Directors --------- SECTION 2.1 - Management of Corporation. All corporate powers shall be --------------------------------------- exercised by, or under authority of, and the business and affairs of the corporation shall be managed under the direction of the Board of Directors (hereinafter sometimes referred to as the "Board"). SECTION 2.2 - Number of Directors. The initial number of directors is --------------------------------- stated in the Articles of Incorporation. The number to be elected by the shareholders shall consist of not less than five (5) nor more than twenty-five (25) persons. The exact number within such minimum and maximum limits shall be fixed and determined by resolution of the Board of Directors. SECTION 2.3 - Nominations of Directors. Any nomination to the Board of -------------------------------------- Directors (other than one proposed by the existing Board of the corporation) must be made in the manner set forth in the Articles of Incorporation. SECTION 2.4 - Annual Meetings. Immediately after the annual meeting of ----------------------------- shareholders, the Directors shall meet to elect officers and transact any other business they deem appropriate. SECTION 2.5 - Place of Meetings. Meetings of the Board of Directors, ------------------------------- regular or special, may be held within or without this state. SECTION 2.6 - Regular Meetings. Regular meetings of the Board of Directors ------------------------------ may be held without notice at such time and at such place as the Board may by vote from time to time designate. SECTION 2.7 - Special Meetings. Special meetings of the Board of Directors ------------------------------ may be called by the Chairman, the President or the Vice Chairman or by any two (2) directors. SECTION 2.8 - Notices. Notices of special meetings of the Board of --------------------- Directors stating the date, time, place and in general terms the purpose or purposes thereof shall be delivered to each director, by mailing written notice at least two (2) days before the meeting or by telephoning, telegraphing or personally advising each director at least one (1) day before the meeting. A special meeting shall be held not more than twenty (20) days after the delivery of said notice. If mailed, such notice shall be deemed to be delivered when deposited in the United 4 States mail, postage prepaid, addressed to the director at the address provided to the Secretary. An entry of the service of notice, given in the manner above provided, shall be made in the minutes of the proceedings of the Board of Directors, and such entry, if read and approved at the subsequent meeting of the Board, shall be conclusive on the question of service. Attendance of a director at a special meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. A director also may waive any notice required for any meeting by executing a written waiver of notice either before or after said meeting, and such waiver shall be the equivalent of giving such notice. SECTION 2.9 Quorum. A majority of the directors shall constitute a quorum ------------------ for the transaction of business. Unless otherwise provided in the Articles of Incorporation or these Bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. A majority of those present at the time and place of any regular or special meeting, although less than a quorum, may adjourn from time to time, without further notice, until a quorum shall attend. When a quorum shall attend, any business may be transacted which might have been transacted at the meeting had the same been held on the date stated in the notice of meeting. SECTION 2.10 - Attendance by Conference Telecommunication. Members of the --------------------------------------------------------- Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. SECTION 2.11 - Consent to Action. Any action which may be taken at a -------------------------------- meeting of the Board of Directors, or at a meeting of any committee of the Board, may be taken without a meeting if a consent in writing, setting forth the action so taken shall be signed by all of the directors or all the members of the committee. Such consent shall have the same force and effect as a unanimous vote at a duly convened meeting. SECTION 2.12 - Compensation. The directors shall receive such reasonable --------------------------- compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors, and may be reimbursed by the corporation for ordinary and reasonable expenses incurred in the performance of their duties. SECTION 2.13 - Manifestation of Dissent. A director of the corporation who --------------------------------------- 5 is present at a meeting of the Board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE 3 --------- Committees of the Board of Directors ------------------------------------ SECTION 3.1 - Executive Committee. By resolution adopted by a majority of --------------------------------- the entire Board of Directors, the Board may designate from among its members an Executive Committee of not less than three (3) nor more than seven (7) members, one of whom shall be the Chairman, who shall also act as chairman of the Executive Committee. Any member of the Board may serve as an alternate member of the Executive Committee in the absence of a regular member or members. The Executive Committee shall have and may exercise all of the authority of the Board of Directors during the intervals between meetings of the Bank, except that the committee shall not have the authority to: (1) authorize or approve a distribution or issuance of shares, except according to a general formula or method prescribed by the Board of Directors, (2) approve or propose to shareholders actions or proposals requiring shareholder approval, (3) fill vacancies on the Board of Directors or any committee thereof, (4) amend the Articles of Incorporation pursuant to RCW 23B.10.020, (5) adopt, amend or repeal Bylaws, (6) approve a plan of merger not requiring shareholder approval, or (7) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except within certain limits specifically prescribed by the Board of Directors. SECTION 3.2 - Audit Committee. By resolution adopted by a majority of the ----------------------------- entire Board of Directors, the Board may appoint from among its members an Audit Committee of three (3) or more, none of whom shall be active officers of the corporation, and may designate one (1) of such members as chairman of the Committee. The Board may also designate one or more directors as alternates to serve as a member or members of the Committee in the absence of a regular member or members. The Committee shall establish and maintain continuing communications between the Board and the corporation's independent auditors, 6 internal auditors, and members of financial management with respect to the audit of the corporation's accounts and financial affairs and the audit of the corporation's controlled subsidiaries. The Committee shall have such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors. SECTION 3.3 - Other Committees. By resolution adopted by a majority of the ------------------------------ entire Board of Directors, the Board may designate from among its members such other committees as it may deem necessary, each of which shall consist of not less than two (2) directors and have such powers and duties as may from time to time be prescribed by the Board. SECTION 3.4 - Rules of Procedure. The majority of the members of any -------------------------------- committee may fix its rules of procedure. All actions by any committee shall be reported in written minutes available at any reasonable time to any Board member. Such actions shall be subject to revision, alteration and approval by the Board of Directors; provided, that no rights or acts of third parties who have relied in good faith on the authority granted herein shall be affected by such revision or alteration. ARTICLE 4 --------- Officers and Employees ---------------------- SECTION 4.1 - Officers. The Board of Directors may elect a Chairman and a ---------------------- Vice Chairman of the Board and shall elect a President. It shall also elect one or more Vice Presidents, a Secretary and a Treasurer and such additional officers as in the opinion of the Board the business of the corporation requires. The Board may also elect or appoint, or in its discretion delegate to the Chairman the authority to appoint, from time to time such other or additional officers as are desirable for the conduct of the business of the corporation. SECTION 4.2 - Election. None of the officers, except the Chairman, Vice ---------------------- Chairman, and President, need be directors. The officers shall be elected annually by the Board of Directors at the meeting of the Board following the annual meeting of shareholders, and they shall hold office at the pleasure of the Board of Directors. SECTION 4.3 - Removal and Vacancy. Any officer, agent, or employee of the --------------------------------- corporation may be removed by the Board of Directors at any time with or without cause. Such removal, however, shall be without prejudice to the contract rights, if any, of the persons so removed. Election or appointment of an officer or 7 agent or employee shall not of itself create contract rights. If any corporate office becomes vacant by reason of death, resignation, removal or otherwise, the Board of Directors or the executive officer possessing delegated authority to appoint such an officer, shall have power to fill such vacancies. In case of the absence or disability of any officer, the Board of Directors or the Chairman may delegate the powers or duties of any such officer to another officer for the time being. SECTION 4.4 - Compensation. The compensation of the Chairman shall be -------------------------- fixed by the Board of Directors. Unless fixed by the Board of Directors, the compensation for all other officers, employees or agents of the corporation shall be established by or at the direction of the Chairman. SECTION 4.5 - Exercise of Rights as Stockholders. Unless otherwise ordered ------------------------------------------------ by the Board of Directors, the Chairman or his designee acting by written designation, shall have full power and authority on behalf of the corporation to attend and to vote at any meeting of shareholders of any corporation in which this corporation may hold stock, other than in a fiduciary capacity, and may exercise on behalf of this corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting, and shall have power and authority to execute and deliver proxies and consents on behalf of this corporation in connection with the exercise by this corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. SECTION 4.6 - Duties of Chairman of the Board. Unless the Board shall --------------------------------------------- otherwise determine, the Chairman shall preside at all meetings of the shareholders and at meetings of the Board of Directors and the Executive Committee. The Chairman shall see that all orders and resolutions of the Board of Directors and the Executive Committee are carried into effect and shall be the person to whom the Vice Chairman and President, and all other officers designated by the Chairman, shall report. The Chairman may delegate such duties as he sees fit to delegate to the Vice Chairman, the President, or other officers of the corporation. The Chairman may appoint agents or employees other than those appointed by the Board of Directors, and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws. 8 SECTION 4.7 - Duties of Vice Chairman. The Vice Chairman may assist the ------------------------------------- Chairman in the performance of the Chairman's duties and shall have such powers and exercise such other duties as shall be delegated to such officer by the Chairman or the Board. In the absence of the Chairman, the Vice Chairman shall perform all of the duties and assume all of the responsibilities of the Chairman. SECTION 4.8 - Duties of President. The President shall, subject to the --------------------------------- authority granted to the Chairman and the Vice Chairman, be the chief operating officer of the corporation and shall have general supervision over the day-to- day business of the corporation. The President shall have such other authority and shall exercise such other duties as shall, from time to time, be delegated to such officer by the Chairman or by the Board. SECTION 4.9 - Duties of Vice President. The Vice Presidents shall have -------------------------------------- such powers and perform such duties as may be assigned to them by the Board of Directors or the Chairman. A Vice President designated by the Board of Directors shall perform all of the duties of the President in case of absence or disability of the President SECTION 4.10 - Duties of Secretary. The Secretary shall, subject to the ---------------------------------- direction of the Chairman keep the minutes of all meetings of the shareholders and of the Board of Directors, and to the extent ordered by the Board of Directors or the Chairman the minutes of all meetings of all committees. He shall cause notice to be given of the meetings of the shareholders, of the Board of Directors, and of any committee appointed by the Board. He shall have custody of the corporate seal and general charge of the records, documents, and papers of the corporation not pertaining to the performance of the duties vested in other officers, which shall at all reasonable times be open to the examination of any director. Without limiting the generality of the foregoing, the Secretary shall have charge (directly or through such transfer agents or registrars as the Board of Directors may appoint) of the issuance, transfer, and registration of certificates for shares of the corporation and of the records pertaining thereto. Said records shall be kept in such manner as to show at any time the number of shares of the corporation issued and outstanding, the manner in which and the time when such shares were paid for, the names and addresses of the holders of record thereof, the numbers and classes of shares held by each, and the time when each became such holder of record. He shall perform such other duties as may be assigned to him by the Board of Directors or the Chairman. SECTION 4.11 - Duties of Treasurer. Except as otherwise set forth herein, ---------------------------------- the Treasurer shall, subject to the direction of the Chairman have general custody 9 of all the property, funds and securities of the corporation and have general supervision of the collection and disbursement of funds of the corporation. He shall provide for the keeping of proper records of all transactions of the corporation. He shall perform such other duties as may be assigned to him by the Board of Directors or the Chairman. SECTION 4.12 - Other Officers. Such other officers as shall be appointed ----------------------------- by the Board of Directors, or the Chairman, acting pursuant to delegated authority of the Board, shall exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon or assigned to them by the Board of Directors or the Chairman or his designee. SECTION 4.13 - Clerks and Agents. The Chairman, or any other officer of -------------------------------- the corporation authorized by him, may, subject to the supervision of the Board of Directors, appoint such custodians, bookkeepers and other clerks, agents, and employees as he shall deem advisable for the prompt and orderly transaction of the business of the corporation and shall define their duties, fix the salaries to be paid to them and dismiss them. ARTICLE 5 --------- Shares and Certificates for Shares ---------------------------------- SECTION 5.1 - Consideration. Certificates for shares of the corporation --------------------------- shall be issued only when fully paid for. SECTION 5.2 - Stock Certificates. The certificates shall be in such form -------------------------------- as designated by the Board of Directors, shall be numbered in the order in which they shall be issued, and shall be signed, either manually or in facsimile, by the President and by the Secretary, or by such officers as may be designated by the Board of Directors. If a corporate seal is maintained, it or a facsimile thereof may be affixed to the certificates. Each certificate shall state upon its face the name of the corporation and that the corporation is organized under the laws of the State of Washington, the name of the person to whom it is issued, and the number and class of shares and the designation of the series, if any, the certificate represents. SECTION 5.3 - Lost Certificates. No new certificates shall be issued until ------------------------------- the former certificate for the shares represented thereby shall have been surrendered and cancelled, except in the case of lost or destroyed certificates, and in that case only after the receipt of a bond or other security by the corporation, 10 satisfactory to the Board of Directors, indemnifying the corporation and all persons against loss in consequence of the issuance of such new certificate. SECTION 5.4 - Transfer of Shares. Shares of the corporation may be -------------------------------- transferred by endorsement by the signature of the owner, his agent, attorney or legal representative, and the delivery of the certificate; but no transfer shall be valid except between the parties thereto, until the same shall have been entered upon the books of the corporation, so as to show the names of the parties, by and to whom transferred, the numbers and designation of the shares and the date of transfer. SECTION 5.5 - Holder of Record. The person registered on the books of the ------------------------------ corporation as the owner of the issued shares shall be recognized by the corporation as the person exclusively entitled to have and to exercise the rights and privileges incident to the ownership of such shares. Notwithstanding the preceding sentence, the Board of Directors may adopt by resolution a procedure whereby a shareholder may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such an adopted procedure, the person specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. SECTION 5.6 - Issuance of Shares. Any shares authorized but not issued by -------------------------------- this corporation shall be issued, sold, or otherwise transferred by this corporation only upon authorization of the Board of Directors. SECTION 5.7 - Subscriptions. A subscription for shares of this corporation --------------------------- shall be in writing and upon such terms as may be approved by the Board of Directors. SECTION 5.8 - Payment of Subscriptions. A subscription for shares shall be -------------------------------------- paid in accordance with the terms set forth in the subscription or related subscription agreement, if any. If the subscription or subscription agreement does not require payment on or before a stated date or at a fixed period after a stated date, then payment shall be made in such manner and at such times as may be determined by the Board of Directors and expressed by it in a written call for payment; provided that the call shall be uniform as to all shares of the same class or series and that the call shall be mailed to each subscriber at his last post office address known to the corporation at least thirty (30) days in advance of the date upon which payment or the first installment, if installment payments are called for, 11 is due. SECTION 5.9 - Default in Payment of Subscriptions. If a payment required ------------------------------------------------- by a subscription, a subscription agreement, or a call of the Board of Directors is not paid when due, then the corporation may make written demand for payment upon the defaulting subscriber by personal service or by mailing a copy of the demand to the subscriber at his last post office address known to the corporation. If the payment is not made within twenty (20) days of the serving or mailing of the demand for payment, the corporation may terminate the subscription, forfeit the subscriber's rights thereunder, retain as liquidated damages any sums previously paid on the subscription, and hold and dispose of the shares as though never subject to the subscription. In lieu of forfeiture, the corporation may proceed to collect the amount due in the same manner as any debt due the corporation. ARTICLE 6 --------- Seal ---- SECTION 6.1 - Corporate Seal. In the exercise of its discretion the Board ---------------------------- of Directors may adopt and maintain a suitable seal for the corporation. ARTICLE 7 --------- Miscellaneous Provisions ------------------------ SECTION 7.1 - Fiscal Year. The fiscal year of the corporation shall be the ------------------------- June 30. SECTION 7.2 - Records. The Articles of Incorporation, the Bylaws, and the --------------------- proceedings of all meetings of the shareholders, the Board of Directors and standing committees of the Board shall be recorded in appropriate minute books provided for that purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as Secretary. ARTICLE 8 --------- Bylaws ------ SECTION 8.1 - Inspection. A copy of the Bylaws, with all amendments ------------------------ thereto, shall at all times be kept in a convenient place at the principal office of the corporation, and shall be open for inspection by all shareholders during normal 12 business hours. SECTION 8.2 - Amendments. The Bylaws may be amended, altered or repealed, ------------------------ at any regular meeting of the Board of Directors, by a vote of the majority of the whole Board of Directors, provided that a written statement of the proposed action shall have been personally delivered or mailed to all directors at least two (2) days prior to any such meeting. I HEREBY CERTIFY that the foregoing are the Bylaws of Heritage Financial Corporation in effect on this 28th day of August, 1997. /s/ Wendy K. Gauksheim ---------------------- Secretary 13 EX-4 5 FORM OF CERTIFICATE FOR COMMON STOCK Exhibit 4 - -------------------------------------------------------------------------------- INCORPORATED UNDER THE LAWS OF NO. _____ STATE OF WASHINGTON SHARES _____ [PICTURE OF EAGLE HERITAGE FINANCIAL CORPORATION APPEARS HERE] Authorized Common Stock: 15,000,000 This Certifies that ________________________________________ is the owner of ______________________Shares of common stock each of the Capital Stock of HERITAGE FINANCIAL CORPORATION transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this [SEAL Certificate properly endorsed APPEARS HERE] IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and to be sealed with the Seal of the Corporation this ____________ day of _____________ A.D. ---------------------------- -------------------------- President Secretary - ------------------------- SHARES (No Par Value) EACH --------------------------- CERTIFICATE FOR SHARES [PICTURE OF EAGLE APPEARS HERE] OF THE CAPITAL STOCK ISSUED TO ------------------------- DATED ------------------------- For Value Received, _________ hereby sell, assign and transfer unto _______ ________________________________________________________________________________ _______________________________________ Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________________ to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises. NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. Dated ________________ 19__ In presence of -------------------------------------------- ------------------------------ EX-8.1 6 FEDERAL TAX OPINION OF KPMG PEAT MARWICK LLP [LETTERHEAD OF KPMG PEAT MARWICK LLP] EXHIBIT 8.1 October 27, 1997 PRIVATE & CONFIDENTIAL The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank Olympia, Washington You have requested the opinions of KPMG Peat Marwick LLP ("KPMG") regarding certain federal income tax consequences of two integrated transactions described below. All section references herein are, unless otherwise specified, to the Internal Revenue Code of 1986, as amended (the "Code"). In rendering the tax opinions contained herein, we have examined such corporate records, certificates and other documents as we have considered necessary or appropriate. In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such copies. In order to facilitate a full and complete understanding of the FACTS AND REPRESENTATIONS upon which our opinions would be based, prior to finalization of this opinion, a draft dated October 15, 1997 was circulated for review and concurrence by Heritage Financial Corporation, MHC. The opinions contained herein are based solely upon the FACTS AND REPRESENTATIONS as contained herein. If any of the FACTS or REPRESENTATIONS are not correct or complete it is imperative that we be so informed in writing immediately as such could cause us to change our opinions. FACTS - ----- Heritage Financial Corporation, MHC (the "Mutual Holding Company") is a state- chartered mutual holding company organized in the state of Washington. The Mutual Holding Company maintains its books on the accrual method of accounting and files a tax return on a June 30 year end basis. As a mutual holding company, the Mutual Holding Company has no capital stock. [LOGO OF KPMG PEAT MARWICK LLP] Page 2 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 Heritage Savings Bank (the "Bank") is a state-chartered stock savings bank organized in Washington. The Mutual Holding Company owns approximately 66.3 percent of the issued and outstanding stock of the Bank. The remaining 33.7 percent of the Bank's stock is held by the public. The Mutual Holding Company and the Bank were organized on January 31, 1994 in connection with the reorganization of Heritage Bank, a Mutual Savings Bank, (the "Mutual Bank") from a state mutual savings bank into the Mutual Holding Company (the "1994 Reorganization"). In June of 1993 the Bank received rulings from the Internal Revenue Service (the "Service") holding that the 1994 Reorganization constituted a tax-free transaction under Section 351 of the Code. The Bank issued common stock to the Mutual Holding Company in exchange for substantially all of the assets and all of the liabilities of the Mutual Bank. As part of the 1994 Reorganization, the Bank issued a portion of its stock to the public in exchange for cash whereby immediately after the 1994 Reorganization the public owned approximately 33.3 percent of the outstanding Bank Stock and the Mutual Holding Company owned the remaining 66.7 percent. The principal business of the Bank is the acceptance of savings deposits from the general public and originating for sale or investment purposes first mortgage loans on residential properties located in western Washington. The Bank also makes residential construction loans, income property loans, business loans, consumer loans and second mortgage loans. The Bank's income is derived largely from interest and fees in connection with its lending activities. Its principal expenses are interest paid on savings deposits and operating expenses. Currently, the management of the Bank and the Mutual Holding Company believe it would be in their best interest, as well as the best interest of their stockholders and members (respectively) to operate in the corporate structure specified below. The proposed transactions will result in the Bank being wholly owned by Heritage Financial Corporation, a capital stock corporation organized under the state law of Washington (the "Holding Company"), which is a more common structure and form of ownership than a mutual holding company. The new corporate structure would also provide greater organizational flexibility, and enable the resulting institutions to increase their equity capital base available for expansion of services, facilities, possible future acquisitions of other financial institutions, possible diversification into other related financial services activities, and enhance their ability to render services to the public in a competitive manner. In addition, the proposed transactions will result in the raising of additional [LOGO OF KPMG PEAT MARWICK LLP] Page 3 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 capital for the Bank and the Holding Company. As well, the proposed transactions have been structured to re-unite the accumulated earnings and profits tax attribute retained by the Mutual Holding Company with the retained earnings of the Bank through a tax-free reorganization. This would increase the Bank's ability to pay dividends in the future. The Bank and the Mutual Holding Company have adopted the Amended and Restated Plan of Conversion and Reorganization of Heritage Financial Corporation, MHC referred to herein as the "Plan of Conversion". The Mutual Holding Company and the Bank represent that the Plan of Conversion shall be submitted together with all requisite material to the Washington Department of Financial Institutions, Division of Banks (the "Division"), the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of San Francisco. For valid business reasons, as described above and in the prospectus to be used in the public offerings of Holding Company Stock described herein ("Prospectus"), the present corporate structure of the Mutual Holding Company and the Bank will be changed pursuant to the following proposed transactions: (1) The Bank will form the Holding Company as a new, wholly owned, first tier subsidiary of the Bank. (2) The Holding Company will form an interim corporation ("Interim Bank B") as a new, wholly owned first tier subsidiary that is a state-chartered stock bank. (3) Pursuant to the Plan of Merger between the Mutual Holding Company and the Bank, the Mutual Holding Company will convert from the mutual form to a state interim stock bank ("Interim Bank A") and Interim Bank A will immediately merge with and into the Bank with the Bank being the surviving corporation ("Merger 1"). Pursuant to Merger 1, the common stock of the Bank which was previously held by the Mutual Holding Company will be canceled and eligible members of the Mutual Holding Company will receive an interest in a liquidation account (the "Bank Liquidation Interests") of the Bank in exchange for such member's interest in the Mutual Holding Company. The initial balance of the liquidation account will equal 66.31 percent of the Bank's total shareholder equity as reflected in its June 30, 1997 statement of [LOGO OF KPMG PEAT MARWICK LLP] Page 4 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 financial condition, which is the latest statement of financial condition expected to be contained in the Prospectus to be utilized in the Mutual Holding Company's mutual-to-stock conversion (the "Conversion") plus an amount equal to the aggregate amount of Bank Common Stock dividends waived by the Mutual Holding Company since January 1, 1994, when the Mutual Holding Company was formed, and the amount of assets other than Bank Common Stock (approximately $120,000) held by the Mutual Holding Company. (4) Immediately following Merger 1, pursuant to the Plan of Reorganization among the Bank, the Holding Company and Interim Bank B, Interim Bank B will merge with and into the Bank, with the Bank surviving ("Merger 2"). Merger 2 will be completed in accordance with applicable federal and state laws. The stock of the Bank held by the public, which then will constitute all of the outstanding shares of the Bank, will automatically be converted into common stock of the Holding Company ("Holding Company Stock") based upon a exchange ratio which ensures that the public shareholders will own, in the aggregate, approximately the same percentage of stock of the Holding Company outstanding upon completion of the Conversion as the percentage of the stock of the Bank owned by them in the aggregate immediately prior to the consummation of the Conversion, before giving effect to (a) cash paid in lieu of issuing fractional shares of stock of the Holding Company, (b) an adjustment downward to reflect the aggregate amount of Bank Common Stock dividends waived by the Mutual Holding Company since January 1, 1994, when the Mutual Holding Company was formed and the amount of assets other than Bank Common Stock (approximately $120,000) held by the Mutual Holding Company, and (c) any shares of stock of the Holding Company purchased by such public stockholders in the offering described below. (5) All of the shares of common stock of Interim Bank B held by the Holding Company shall be converted into one share of common stock of the Bank which will continue to be owned by the Holding Company. The shares of Holding Company issued prior to the effective date of the conversion shall be canceled. (6) Simultaneously with the consummation of Merger 2, the Holding Company will sell additional shares of Holding Company Stock, with priority [LOGO OF KPMG PEAT MARWICK LLP] Page 5 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 subscription rights granted to certain members of the Mutual Holding Company at specified dates, and to tax qualified employee benefit plans, directors, employees, the public stockholders of the Bank and members of the public. REPRESENTATIONS - --------------- Representations related to the conversion of MHC into Interim Bank A: - --------------------------------------------------------------------- (1) The fair market value of the mutual interests in the Mutual Holding Company will approximately equal the fair market value of the interest in the liquidation account in Interim Bank A constructively received in exchange therefor. All proprietary rights in the Mutual Holding Company are being surrendered in the exchange. (2) Immediately following such conversion, Interim Bank A will possess the same assets and liabilities as the Mutual Holding Company held immediately prior to the proposed transaction. Assets used to pay expenses of the conversion and all distributions will in the aggregate constitute less than one percent of the assets of the Mutual Holding Company, net of liabilities associated with such assets. Following such conversion, Interim Bank A will continue to engage in its business in substantially the same manner as engaged in Mutual Holding Company prior to such Conversion. Except for the Merger, as described above, Interim Bank A has no plan or intention to sell or otherwise dispose of any of its assets, except in the ordinary course of business. (3) Compensation to be paid to the mutual owner-employees of Mutual Holding Company will be commensurate with the amounts paid to third parties bargaining at arm's length for similar services. (4) The aggregate fair market value of the "qualifying deposits" entitled to interests in the liquidation account to be established constructively by Interim Bank A will equal or exceed 99 percent of the aggregate fair market value of all savings accounts in Bank as of the close of business on such date. (5) No shares of Interim Bank A stock will be issued in the transaction. [LOGO OF KPMG PEAT MARWICK LLP] Page 6 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 (6) Holders of Mutual Holding Company equity interests will constructively receive only interests in the liquidation account of Interim Bank A in the conversion. (7) Mutual Holding Company and Interim Bank A are corporations within the meaning of Section 7701(a)(3) of the Code. (8) Bank's savings depositors will pay expenses of the conversion solely attributable to them, if any. Mutual Holding Company, the Stock Association and the Association will pay their own expenses for the transaction and will not pay any expenses solely attributable to the savings depositors or to the Holding Company stockholders. (9) The liabilities of Mutual Holding Company, if any, assumed by Interim Bank A, plus the liabilities, if any, to which the transferred assets are subject were incurred by Mutual Holding Company in the ordinary course of its business. (10) The Mutual Holding Company is not under the jurisdiction of a court in Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. (11) At the time of the proposed transaction, the fair market value of the assets of Mutual Holding Company on a going concern basis will exceed the amount of its liabilities plus the amount of liability to which its assets are subject. Representations related to Merger 1: - ------------------------------------ (1) The fair market value of the Bank Liquidation Interests received by each Mutual Holding Company member will approximately equal the fair market value of the Mutual Holding Company liquidation interests surrendered in Merger 1. (2) To the best of the knowledge of management of the Mutual Holding Company, there is no plan on the part of any members of the Mutual Holding Company to reduce their ownership interest in the Bank Liquidation Interests to an interest having a value, as of the date of [LOGO OF KPMG PEAT MARWICK LLP] Page 7 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 Merger 1, of less than 50 percent of the value of all of the formerly outstanding liquidation interests of the Mutual Holding Company as of the same date. For purposes of this representation, liquidation interests of the Mutual Holding Company exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of Bank stock will be treated as outstanding Mutual Holding Company liquidation interests on the date of Merger 1. (3) The Bank has no plan or intention to reacquire any of the Bank Liquidation Interests issued in Merger 1. (4) The Bank has no plan or intention to sell or otherwise dispose of any of the assets of the Mutual Holding Company acquired in the transaction, except for the dispositions made in the ordinary course of business or transfers described in Section 368(a)(2)(C) of the Code. (5) The Liabilities of the Mutual Holding Company assumed by the Bank and the liabilities to which the transferred assets of the Mutual Holding Company are subject were incurred by the Mutual Holding Company in the ordinary course of its business. (6) Following the transaction the Bank will continue the historic business of the Mutual Holding Company or use a significant portion of the Mutual Holding Company's assets in a business and Bank will continue its business in a significantly unchanged manner. (7) The Bank, the Mutual Holding Company and the members of the Mutual Holding Company will pay their respective expenses, if any, incurred in connection with Merger 1. (8) There is no intercorporate indebtedness existing between the Mutual Holding Company and the Bank that was issued, acquired, or will be settled at a discount. (9) No two parties to Merger 1 are investment companies as defined in Section 368(a)(2(F)(iii) and (iv) of the Code. [LOGO OF KPMG PEAT MARWICK LLP] Page 8 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 (10) The Mutual Holding Company is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. (11) The fair market value of the assets of the Mutual Holding Company transferred to the Bank will equal or exceed the sum of the liabilities assumed by the Bank plus the amount of liabilities, if any, to which the transferred assets are subject. Representations related to Merger 2: - ------------------------------------ (1) The fair market value of the Holding Company Stock received by the Bank shareholders will approximately equal the fair market value of the Bank stock surrendered in Merger 2. (2) To the best of the knowledge of management of the Bank, there is no plan on the part of any Bank stockholders to reduce their ownership interest in the Holding Company Stock to an interest having a value, as of the date of Merger 2, of less than 50 percent of the value of all of the formerly outstanding stock of the Bank as of the same date. For purposes of this representation, stock of the Bank exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of Holding Company stock will be treated as outstanding Bank stock on the date of Merger 2. Moreover, shares of the Bank stock and shares of Holding Company Stock held by Bank shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to Merger 2 will be considered in making this representation (3) Following Merger 2, the Bank will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of Interim Bank B's net assets and at least 70 percent of the fair market value of Interim Bank B's gross assets held immediately prior to Merger. For purposes of this representation, amounts paid by the Bank or Interim Bank B to dissenters, amounts paid by the Bank or Interim Bank B to shareholders who receive cash or other property, amount used by the Bank or Interim Bank B to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by the Bank will be included as [LOGO OF KPMG PEAT MARWICK LLP] Page 9 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 assets of the Bank or Interim Bank B, respectively, immediately prior to the transaction. (4) Prior to Merger 2, the Holding Company will be in control of Interim Bank B within the meaning of Section 368(c) of the Code. (5) The Bank has no plan or intention to issue additional shares of its stock that would result in the Holding Company losing control of the Bank within the meaning of Section 368(c) of the Code. (6) The Holding Company has no plan or intention to reacquire any of its stock issued in Merger 2. (7) The Holding Company has no plan or intention to liquidate the Bank: to merge the Bank with or into another corporation; to sell or otherwise dispose of the Bank stock except for transfers of stock to a corporation controlled by the Holding Company; or to cause the Bank to sell or otherwise dispose of any of its assets or any of the assets acquired form Interim Bank B, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by the Bank. (8) Interim Bank B will have no liabilities assumed by the Bank, and will not transfer to the Bank any assets subject to liabilities, in Merger 2. (9) Following Merger 2, the Bank will continue its historic business or use a significant portion of its historic assets in a business. (10) The Holding Company, Interim Bank B, Bank and the shareholders of the Bank will pay their respective expenses, if any, incurred in connection with Merger 2. (11) There is no intercorporate indebtedness existing between the Holding Company and the Bank or between the Interim Bank B and that was issued, acquired, or will be settled at a discount. (12) In Merger 2, shares of the Bank stock representing control of the Bank, as defined in Section 368(c) of the Code, will be exchanged solely for voting stock of the Holding Company. For purposes of this representation, shares [LOGO OF KPMG PEAT MARWICK LLP] Page 10 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 of Bank stock exchanged for cash or other property originating with the Holding Company will be treated as outstanding Bank stock on the date of Merger 2. (13) At the time of Merger 2, the Bank will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the Bank, if exercised or converted would affect the Holding Company's acquisition or retention of control of the Bank, as defined in Section 368(c) of the Code. (14) The Holding Company does not own, nor has it owned during the past five years, any shares of the Bank stock. (15) No two parties to Merger 2 are investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (16) On the date of Merger 2, the fair market value of the assets of the Bank will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (17) The Bank is not under the jurisdiction of a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. ANALYSIS - -------- Momentary existence of Interim Bank A - ------------------------------------- A question can be raised whether the brief existence of Stock Interim should be respected. If the existence is not respected, Bank could be treated as acquiring the Mutual Holding Company assets directly from MHC. However, because the form of the state law mergers will be (a) merger of Mutual Holding Company into Interim Bank A and (b) Interim Bank A into Bank, the acquisition may not qualify under section 368(a)(1)(A) if there is no state law merger of Mutual Holding Company directly into Bank. Generally, a mere change in form that qualifies as a reorganization described by section 368(a)(1)(F) will be treated separately from its surrounding steps. For example, in Rev. Rul. 69-516, 1969-2 C.B. 66, a corporation changed its state of incorporation and then [LOGO OF KPMG PEAT MARWICK LLP] Page 11 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 transferred its assets to an other corporation solely for stock of the acquiring corporation. The ruling respected the change of the state of incorporation of the target corporation, notwithstanding the fact that the target immediately transferred all of its assets to the acquiring corporation. Specifically, the ruling holds that the change of the state of incorporation will be a reorganization within the meaning of section 368(a)(1)(F) and the asset acquisition by the second corporation will qualify under section 368(a)(1)(C). Similarly, Rev. Rul. 96-29, 1996-1 C.B. 72, emphasizes that a section 368(a)(1)(F) reorganization will generally be viewed as separate from surrounding transactions. Accordingly, KPMG believes that the conversion of Mutual Holding Company into Interim Bank A should be viewed separately from the merger of Interim Bank A into Bank, notwithstanding the brief existence of Interim Bank A. Under this analysis, the conversion shall be analyzed under section 368(a)(1)(F) and the downstream merger of Interim Bank A into Bank should be respected as a statutory merger for purposes of section 368(a)(1)(A). Rev. Proc. 94-76 - ---------------- Historically, a downstream merger of a parent into its subsidiary could qualify as a reorganization. See, e.g., Anna Gilmore v. Commissioner, 44 B.T.A. 881 (1941), acq. 1942-2 C.B. 2; George v. Commissioner, 26 T.C. 396 (1956) acq. 1956-2 C.B. 5; Rev. Rul. 78-47, 1978 C.B. 113; Rev. Rul 70-223, 190-1 C.B. 79; and Rev. Rul. 85-197, 1985-2 C.B. 120; cf, G.C.M. 39404 (Apr. 15, 1982) (Service permitted upstream merger of less than 80 percent owned subsidiary); see also PLR 9506036 (Nov. 15, 1994). However, the Service announced in Rev. Proc. 94-76, 1994-2 C.B. 825, that it would not issue advance rulings in cases involving a combination by reorganization of a parent and its less than 80 percent owned subsidiary. The revenue procedure explained that such cases were under extensive study by the Service. Following the Tax Reform Act of 1986, there was concern that the disappearance of the parent's gain in its subsidiary stock may be inconsistent with the repeal of the General Utilities doctrine (which generally requires a corporation to recognize gain on a disposition of its assets). The study project considered whether the Service should address the disappearance of the stock gain with regulations under section 337(d). In Notice 96-6, 1996-5 I.R.B. 27, the Service announced that combining transactions were no longer an area under extensive study by the Service. However, the Service still refuses to issue advance rulings in the area. See section 3.01(23) of Rev. Proc. 97-3 I.R.B. 84, 88. [LOGO OF KPMG PEAT MARWICK LLP] Page 12 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 Given the issuance of Rev. Proc. 94-76, a question may be raised whether the downstream merger of Interim Bank A into Bank can qualify as a reorganization because Interim Bank A owns less than 80 percent of Bank. However, as evidenced by the citations above, both the courts and the Service have agreed for over half a century that downstream reorganizations such as Merger 1 can be bona fide tax-free reorganizations. Any change would present a change to an extremely long standing principle of tax law. It is noteworthy that Rev. Proc. 94-76 does not indicate any potential effective date should the IRS decide to change this long standing tax principle. Normally, when the IRS believes that change to a tax policy is required, it announces an effective date to notify taxpayers that transactions after such date may well suffer adverse tax consequences. See, e.g., Notice 94-76, Notice 94-73, and Notice-87-14. The Service could argue that because section 337(d) grants the Service extremely broad authority to issue regulations to enforce General Utilities repeal, it clearly has the authority to change the long standing tax policy on downstream mergers. It is also noteworthy that in over ten years, the Service has not issued any regulation under section 337(d) that would adversely impact the second merger. Therefore, while the matter is not free from doubt, it is the professional judgment of KPMG that because: (1) Downstream mergers such as Merger 1 have been bona fide tax-free reorganizations for over 50 years; (2) Rev. Proc. 94-76 merely announced a study project which was formally closed without any conclusion about a change in tax policy; and (3) Rev. Proc. 94-76 does not announce any date regarding any potential change of tax policy; any adverse change in tax policy regarding transactions such as the merger occasioned by Rev. Proc. 94-76 will be prospective in effect. Liquidation accounts as a class of stock - ---------------------------------------- In order to qualify under section 368(a)(2)(E), Bank shareholders must receive solely voting stock in Holding Company in exchange for an amount of Bank stock constituting control of Bank. Section 368(a)(2)(E)(ii). Section 368(c) defines control as 80 percent of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other [LOGO OF KPMG PEAT MARWICK LLP] Page 13 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 classes of stock of the corporation. Liquidation accounts of Bank will remain outstanding after the acquisition of Bank by Holding Company. Accordingly, if the liquidation accounts are treated as a class of non-voting stock of Bank, the section 368(a)(2)(E)(ii) control requirement will not be satisfied in the acquisition. The Service has held that liquidation accounts can be treated as equity for purposes of the continuity of proprietary interest requirement for corporate reorganizations. See Rev. Rul. 80-105, 80-1 C.B. 78. Also, mutual interests have been treated as stock in the context of a corporate acquisition. See Rev. Rul. 69-3, 1969-1 C.B. 1969-1 C.B. 103 (section 354 applies to the exchange of a mutual interest in one corporation for a mutual interest in another). While acknowledging the role of a liquidation account as equity (Rev. Rul. 80-105), the Service historically has not accorded liquidation accounts the status of stock. For example, in PLR 9510044 (March 10, 1995), a mutual holding company merged downstream into its subsidiary bank. The mutual owners received liquidation accounts in the bank. The newly formed holding company then acquired the bank stock in a reverse triangular reorganization purporting to qualify under section 368(a)(2)(E). The Service specifically held that it would disregard the liquidation accounts in the bank for purposes of applying the control requirement under section 368(a)(2)(E)(ii). While a PLR may not be used or cited as precedent pursuant to section 6110(j)(3) of the Code, it illustrates the Service's analysis and position on this issue. If Merger 1 and Merger 2 are consummated as described herein, based solely upon information contained in the documents reviewed by us, and the FACTS and REPRESENTATIONS above, KPMG renders the following opinions with respect to the proposed transactions: Conversion of Mutual Holding Company to Interim Bank A - ------------------------------------------------------ (1) The conversion of Mutual Holding Company from a state mutual holding company to Interim Bank A, a state stock savings, as described above, should constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized to either the Mutual Holding Company or to Interim Bank A as a result of such conversion (Revenue Ruling 80-105, 1980-1 C.B. 78). The Mutual Holding Company and Interim Bank A will each be a party to a reorganization within [LOGO OF KPMG PEAT MARWICK LLP] Page 14 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 the meaning of Section 368(b) of the Code (Revenue Ruling 72-206, 1972-1 C.B. 104). (2) Interim Bank A's basis of the assets received from the Mutual Holding Company will equal the basis of such assets in the hands of Mutual Holding Company immediately before the conversion (Section 362(b) of the Code). (3) Interim Bank A's holding period of the assets received from Mutual Holding Company include the period during which Mutual Holding Company held such assets prior to the Conversion (Section 1223(2) of the Code). (4) Owners of mutual interests in Mutual Holding Company will recognize no gain or loss on their constructive exchange of their mutual interests for liquidation accounts in Interim Bank A (Rev. Rul. 69-3 and Rev. Rul. 69-646). (5) The part of the taxable year of Mutual Holding Company before the conversion and the part of the taxable year of Interim Bank A after the conversion will constitute a single taxable year of Interim Bank A. (See Revenue Ruling 57-276, 1957-1 C.B. 126). Consequently, the Mutual Holding Company will not be required to file a federal income tax return for any portion of such taxable year (Section 1.381(b)-1(a)(2) of the Treasury Regulations). (6) As provided by Section 381(c)(2) of the Code and Section 1.381(c)(2)-1 of the Treasury Regulations, Interim Bank A will succeed to and take into account the earnings and profits or deficit in earnings and profits of Mutual Holding Company. (7) For purposes of Section 381 of the Code, the Interim Bank A will be treated the same as the Mutual Holding Company would have been had there been no reorganization. Accordingly, the taxable year of the Mutual Holding Company will not end on the effective date of the proposed transaction merely because of the transfer of assets of the Mutual Holding Company to the Interim Bank A and the tax attributes of Mutual Holding Company enumerated in Section 381(c) will be taken into account by Interim Bank A as if there had been no reorganization (Section 1.381(b)-1(a)(2)) of the Treasury Regulations). [LOGO OF KPMG PEAT MARWICK LLP] Page 15 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 Downstream merger of Interim Bank A into Bank and Holding Company formation - --------------------------------------------------------------------------- (1) Merger 1 should qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Therefore, both Interim Bank A and the Bank will be a party to a "reorganization" as defined in Section 368(b) of the Code. (2) Interim Bank A will recognize no gain or loss pursuant to Merger 1. (3) Bank will recognize no gain or loss upon the receipt of the assets of Interim Bank A in Merger 1. (4) Merger 2 will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Pursuant to Section 368(a)(2)(E) of the Code, Merger 2 is not disqualified from qualifying as a reorganization within the meaning of Section 368(a)(1)(A) because Holding Company Stock will be conveyed to the Bank's public stockholders in exchange for their Bank Stock. Therefore, the Bank, the Holding Company, and Interim Bank B will each be a party to a reorganization as defined in Section 368(b) of the Code. (5) Interim Bank B will recognize no gain or loss upon the transfer of its assets to the Bank pursuant to Merger 2. (6) Bank will recognize no gain or loss upon the receipt of the assets of Interim Bank B. (7) Holding Company will recognize no gain or loss upon the receipt of Bank Stock solely in exchange for Holding Company Stock. (8) Bank's public shareholders will recognize no gain or loss upon their receipt of Holding Company Stock solely in exchange for their shares of Bank Stock. (9) A Bank public shareholder's basis of the Holding Company Stock received in exchange for its Bank stock will equal the basis of the Bank stock [LOGO OF KPMG PEAT MARWICK LLP] Page 16 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 surrendered in exchange therefor, before giving effect to any payment of cash in lieu of fraction shares. (10) A Bank public shareholder's holding period of the Holding Company Stock received in exchange for its Bank stock will include the Holding period of the Bank Stock, provided that the Bank Stock was held as a capital asset on the date of the exchange. (11) Holding Company will recognize no gain or loss upon the sale of Holding Company Stock to investors. (12) The Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members (as such terms are defined in the Plan of Conversion) will recognize gain, if any, upon the issuance to them of: (i) withdrawable savings accounts in the Bank following the Conversion, (ii) Bank Liquidation Interest, and (iii) nontransferable subscription rights to purchase Holding Company Stock but only to the extent of the value, if any, of the subscription rights. (13) The tax basis to the holders of Holding Company Stock purchased in the public stock offerings will be the amount paid therefor, and the holding period for such shares will begin on the date of consummation of such offerings if purchased through the exercise of subscription rights. SCOPE OF OPINION - ---------------- The opinions expressed above are rendered only with respect to the specific matters discussed herein and we express no opinion with respect to any other federal or state income tax or legal aspect of the offering. If any of the above stated facts, circumstances, or assumptions are not entirely complete or accurate, it is imperative that we be informed immediately because the inaccuracy of incompleteness could have a material effect on our conclusions. In rendering our opinions, we are relying upon the relevant provisions of the Code, the regulations thereunder, and judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative, regulatory, administrative, or judicial decisions. Any such changes also could have an effect on the validity of our opinions. Unless you specifically request otherwise, we will not update these opinions for subsequent changes or modifications to the law and regulations or to the judicial and administrative interpretations thereof. The opinions contained herein are not binding upon the Internal [LOGO OF KPMG PEAT MARWICK LLP] Page 17 The Boards of Directors Heritage Financial Corporation, MHC Heritage Savings Bank October 27, 1997 Revenue Service, any other tax authority, or any court and no assurance can be given that a position contrary to that expressed herein will not be asserted by a tax authority and ultimately sustained by a court. USE OF OPINION - -------------- This opinion is solely for the information and use of the Bank and the Mutual Holding Company in connection with Merger 1 and Merger 2, and may not be used or relied upon for any other purpose and may not be circulated, quoted, or otherwise referred to, nor is it to be filed with any governmental agency or other person without our express written consent. CONSENT - ------- We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1 ("Form S-1O") to be filed by the Holding Company with the Securities and Exchange Commission, to the Mutual Holding Company's Application for Conversion as filed with the Division and the FDIC. /s/ KPMG Peat Marwick LLP EX-8.2 7 STATE TAX OPINION OF GORDON, THOMAS, HONEYWELL EXHIBIT 8.2 October 28, 1997 Board of Directors Heritage Savings Bank 201 5th Avenue S.W. Olympia, WA 98501 Dear Sirs: You have asked for our opinion regarding the Washington State tax consequences in connection with (i) the proposed conversion of Heritage Financial Corporation, MHC, a Washington state chartered mutual holding company (the "Mutual Holding Company" or "MHC"), from mutual to stock form by means of a conversion to stock form ("Interim Bank A") and simultaneous merger with and into Heritage Savings Bank, a Washington state chartered stock savings bank ("Bank"), and (ii) the acquisition of Bank by Heritage Financial Corporation, a Washington state chartered stock corporation ("Holding Company"), by means of the merger of Bank with a Washington chartered interim stock bank ("Interim Bank B"), which will be organized as a wholly-owned subsidiary of the Holding Company. Except as defined herein all capitalized terms have the same meaning as in the Plan of Conversion adopted by the Board of Directors of MHC and the Bank on July 1, 1997 as amended ("Plan of Conversion"). FACTS For purposes of our opinion, we have relied upon the terms of the Plan of Conversion, the opinions rendered in the federal income tax opinion prepared by the certified public accounting offices of KPMG Peat Marwick LLP dated October 27, 1997, relating to the above described transactions under the Internal Revenue Code of 1986 (the "Code") and the facts and assumptions set forth in the Affidavit of management delivered to KPMG Peat Marwick in connection with the federal tax opinion (the "Affidavit"). It is the opinion of KPMG Peat Marwick LLP that, for federal income tax purposes: (1) the conversion of the Mutual Holding Company from mutual to stock form as October 28, 1997 Page 2 Interim Bank A should qualify as a reorganization within the meaning of (S)368(a)(1)(F) of the Code and the simultaneous merger of Interim Bank A with and into the Bank, with the Bank being the surviving institution, should qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code; (2) no gain or loss will be recognized by Interim Bank A upon its merger, with and into the Bank; (3) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim Bank A in such merger; (4) the merger of Interim Bank B, with and into Bank, will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code; (5) no gain or loss will be recognized by Interim Bank B upon the transfer of its assets to the Bank; (6) no gain or loss will be recognized by the Bank upon the receipt of the assets of Interim Bank B; (7) no gain or loss will be recognized by Holding Company upon the sale of its shares of common stock to investors; (8) no gain or loss will be recognized by the Bank existing stockholders other than the MHC upon their receipt of Holding Company stock; (9) the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will recognize gain, if any, upon the issuance to them of (i) withdrawable savings accounts in the Bank following the Conversion, (ii) Bank Liquidation Interest and (iii) nontransferable Subscription Rights to purchase Holding Company common stock, but only to the extent of the value, if any, of the Subscription Rights; and (10) the tax basis to the holders of common stock purchased in the Offering will be the amount paid therefor, and the holding period for such shares will begin on the date of consummation of the Offerings if purchased through the exercise of Subscription Rights. OPINION Based on the terms of the Plan of Conversion, the facts and assumptions set forth in the Affidavit and the opinions rendered in the KPMG Peat Marwick LLP opinion letter, all of which are incorporated herein by reference, and our review and analysis of Washington State tax law, it is our opinion that if the transaction is undertaken in accordance with the Plan of Conversion, the following should be the result for Washington State business and occupation, sales and use, and excise tax purposes: 1. No Washington business and occupation, sales or use taxes should be incurred by either the Bank or its Eligible Account Holders, Supplemental Eligible Account Holders or Other Members as a result of the implementation of the Plan of Conversion. 2. No Washington State real estate excise tax should be imposed in connection with the transaction. October 28, 1997 Page 3 ANALYSIS WAC 458-20-106 (Rule 106) provides that the business and occupation tax does not apply to casual and isolated sales. Rule 106 specifically provides under the heading of "Retail Sales Tax," "a transfer of capital assets to or by a business is deemed not taxable to the extent the transfer is accomplished through an adjustment of the beneficial interest in the business." The Department of Revenue has previously held that this provision applies to the business and occupation tax as well as the retail sales tax. Det. No. 87-22,WTD 259 (1987). Rule 106 contains six separate examples of instances when sales tax will not apply, including: transfers of capital assets pursuant to a reorganization under 26 U.S.C. Section 368 (Internal Revenue Code, Section 368). The Use Tax is also not applicable. WAC 453-20-106 states: Where there has been transfer of the capital assets to or by a business, the use of such property is not deemed taxable to the extent the transfer was accomplished through an adjustment of the beneficial interest in the business, provided, the transferor previously paid sales or use tax on the property transferred. (See the exempt situations listed under the retail sales tax subdivision of this rule.) The State of Washington imposes an excise tax on real estate sales. The term "sale" includes the transfer or acquisition for valuable consideration within any twelve-month period of a controlling interest in any entity that holds an interest in real property located in Washington. All acquisitions by persons acting in concert are aggregated for purposes of determining whether a transfer or acquisition of a controlling interest has taken place. The term "sale," however, specifically excludes certain transactions including: (o) A transfer that for federal income tax purposes does not involve the recognition of gain or loss for entity formation, liquidation or dissolution, and reorganization, including but not limited to nonrecognition of gain or loss because of application of Section 332, 337, 351, 368(a)(1), 721, or 731 of the Internal Revenue Code of 1986, as amended (RCW 82.45.010(3)(o)). Based on KPMG Peat Marwick's opinion that the Conversion from a mutual to a stock holding company format involves transactions that qualify under Section 368(a)(1) of the Code, the transaction should fall within the statutory exemptions and the real estate excise tax should not be imposed on the Bank. October 28, 1997 Page 4 ASSUMPTIONS AND LIMITATIONS Our opinion is based solely upon: The representations, information, documents, and facts ("representations") referred to in this letter. Our assumption (without independent verification or review) that all of the representations and all of the original, copies, and signatures of documents are accurate, true and authentic. Our assumption (without independent verification or review) that there will be timely execution and delivery of, and performance as required by the representations and documents. Our assumption (without independent verification or review) that all documents pertaining to the proposed transaction and provided for our review are accurate, true and authentic. Our opinion is limited to those expressed above and we express no opinion with regard to any sections of Washington state law other than those referred to above. We express no opinion with regard to taxation of the proposed transaction described herein under the laws of any other state or local jurisdiction. We express the opinions contained herein as on the date of this letter only. No opinion is expressed as to the federal income tax treatment of the transaction as covered by the KPMG Peat Marwick LLP opinion letter or to the tax treatment for Washington tax purposes of any existing conditions or effects of the transaction which are not specifically set forth in the KPMG Peat Marwick LLP opinion or in our opinion above. This opinion letter is solely for your information and inclusion in Form S-1 as filed with the Securities and Exchange Commission, in the Application for Approval of Conversion filed with the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation, and as incorporated by reference into the Application to the Board of Governors of the Federal Reserve System on Form F.R.Y-3 with regard to the transaction described herein. Other than the uses indicated in the October 28, 1997 Page 5 preceding sentence, our opinion may not be relied upon, distributed, or disclosed by anyone without our prior written consent. Very truly yours, GORDON, THOMAS, HONEYWELL, MALANCA, PETERSON & DAHEIM, P.L.L.C. /S/ J. JAMES GALLAGHER EX-10.3 8 EMPLOYMENT AGREEMENT EXHIBIT 10.3 EMPLOYMENT AGREEMENT BY AND AMONG HERITAGE FINANCIAL CORPORATION, HERITAGE SAVINGS BANK AND DONALD V. RHODES THIS EMPLOYMENT AGREEMENT is made and entered into effective this ____ day of _______________, 1997, by and between HERITAGE FINANCIAL CORPORATION, a Washington corporation (the "Company"), HERITAGE SAVINGS BANK, a Washington banking corporation (the "Bank") and DONALD V. RHODES ("Executive"). RECITALS 1. The Company has been formed for the purpose of being the parent corporation of the Bank. Upon completion of a currently pending conversion and reorganization transaction, the Bank will be a first tier wholly owned subsidiary of the Company. 2. Executive is the President and Chief Executive Officer of the Company and the President and Chief Executive Officer of the Bank (hereinafter, the Company and the Bank are collectively referred to as the "Employer"), and has developed an intimate and thorough knowledge of Employer's business methods and operations. 3. The retention of the Executive's services for and on behalf of the Employer is of material importance to the preservation and enhancement of the value of the Employer's business. In consideration of the mutual promises made in this Agreement, the parties agree as follows: AGREEMENT 1. EMPLOYMENT. ---------- Employer hereby employs Executive and Executive hereby accepts employment with Employer on the terms and conditions set forth in this Agreement. 2. TERM. ---- The original term of this Agreement will commence as of the date first above written and will continue until March 14, 2001, the date that Executive attains age 65, after which time this Agreement will automatically renew for additional terms of one year each. Subject to the terms and conditions set forth below, this Agreement may be terminated by either party by -1- giving written notice to the other party at least one year prior to the expiration date of the original term or any renewal term. 3. DUTIES. ------ 3.1 Executive will be the Chairman, President and Chief Executive Officer of Employer and such other subsidiaries or affiliates as the respective Boards of Directors of the Company and the Bank (collectively, the "Board") shall determine. In such capacities, Executive will render those executive management services and perform those tasks in connection with the affairs of the Employer which are normal and customary to the position of Chief Executive Officer. Unless otherwise agreed by Executive and the Board, Executive shall preside at all meetings of the Board and the Executive Committee. Executive will be the person to whom all other officers of the Employer and, as appropriate, subsidiaries or affiliates of Employer, shall report. 3.2 Executive will perform such other duties as may be appropriate to his office and as may be prescribed from time to time by the Board. Executive may delegate such duties as he sees fit to any Executive Vice President or other officer(s) of the Employer. 3.3 Executive will devote his best efforts and all necessary time, attention, and effort to the business and affairs of the Employer and any affiliated companies as such business and affairs now exist or hereafter may be changed or supplemented, in order to properly discharge his responsibilities under this Agreement. 4. SALARY, BONUS, AND OTHER COMPENSATION. ------------------------------------- 4.1 Base Salary. ----------- 4.1.1 During the term of this Agreement, Employer will pay to Executive an annual base salary of not less than $174,000 per year effective beginning on October 1, 1997. Payment of such salary will be made in accordance with Employer's normal payroll practices applicable to senior executives and will be subject to required withholding for federal income tax and other purposes. 4.1.2 The Company will guarantee payment of any portion of Executive's compensation that may be allocated to the Bank or any other subsidiary or affiliate of the Company. 4.1.3 If this Agreement terminates prior to the end of the original or any renewal term, then Employer will pay Executive such amount of Executive's then-current annual base salary as is provided in Section 5. 4.2 Bonus. During the term of this Agreement, Executive will be ----- eligible to participate in the bonus pool, if any, established by the Board for Employer's senior -2- executives, and will be entitled to participate in Employer's Short-Term Incentive Compensation Plan, which shall include specific performance targets as the same shall be determined and/or amended on an annual basis by the Board or Employer's Compensation Committee. 4.3 Benefits. In addition to the base salary and bonus payable to -------- Executive pursuant to this Section 4, Executive will be entitled to the following benefits, which shall not be less than those provided in benefit programs generally maintained for senior executives of the Employer: 4.3.1 Participation in health insurance, disability insurance, and other health and welfare benefit programs generally available to senior executives; 4.3.2 Participation in retirement plans, including defined contribution and 401(k) Plans and any supplements or additions to those plans; 4.3.3 Participation in stock bonus or stock option plans generally available to senior executives of the Employer; 4.3.4 Other employment benefits, as may be approved from time to time by Employer; 4.3.5 Memberships in clubs as deemed appropriate; and 4.3.6 Reimbursement for Executive's reasonable expenses incurred in promoting the business of Employer. Executive shall present from time to time itemized accounts of any such expenses, within limits of Employer policy and the rules and regulations of the Internal Revenue Service. 5. TERMINATION OF AGREEMENT. ------------------------ 5.1 Early Termination. ----------------- 5.1.1 This Agreement may be terminated at any time by either the Employer or Executive and shall terminate automatically upon Executive's death or Disability (as defined in Section 8). No termination by the Board other than termination for Cause (as defined below) shall prejudice the Executive's right to compensation or other benefits under this Agreement. 5.1.2 Except as provided in Section 6 with respect to a Change of Control, if Executive voluntarily terminates his employment effective before the end of the original or any renewal term without "Good Reason" as defined in section 8 Executive will be entitled to such compensation and benefits as he would have the right to receive upon -3- termination for Cause under subsection 5.1.4, and Executive's unvested stock options shall terminate in the manner provided in such subsection. 5.1.3 Except in the event of a Change of Control as provided in Section 6, if (i) Employer terminates this Agreement without Cause or (ii) Executive terminates this Agreement for Good Reason, and either termination is effective before the end of the original or any renewal term, Employer shall pay Executive upon the effective date of such termination all salary and benefits earned and all reimbursable expenses incurred through such termination date and, in addition, a severance benefit in an amount equal to the greater of two times the amount of his then-current base annual salary, or the amount of such salary which would otherwise have been paid to Executive during the then-remaining term of the Agreement. In such event, all forfeiture provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of termination. 5.1.4 If Employer terminates this Agreement for Cause effective before the end of the original or any renewal term, Employer shall pay Executive upon the effective date of such termination only such salary earned and expenses reimbursable hereunder incurred through such termination date. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause, and in the case of termination for Cause before the effective date of a Change of Control, Executive's unvested stock options, if any, shall terminate immediately. 5.1.5 In the event of termination of this Agreement by reason of Executive's death or Disability, Employer shall pay Executive only such salary earned and expenses reimbursable hereunder incurred through upon the date of Executive's death or the effective date of Executive's Disability, and all forfeiture provisions regarding restricted stock awards or vesting requirements concerning options shall lapse or be considered completed, as applicable. 5.1.6 The Board, acting in good faith, shall make the final determination of whether Employee is suffering under any Disability and, for purposes of making such determination, may require Employee to submit himself to a physical examination by a physician mutually agreed upon by Employee and the Board at Employer's expense. For purposes of this Agreement, the date of such determination shall constitute the effective date of such Disability. 5.2 Exercise of Stock Options. Executive's rights to vested but ------------------------- unexercised stock options will continue for a period of one year after early termination (provided that the terms of any option grant agreement shall not be extended by this provision), except in the case of a termination for Cause or without Good Reason. -4- 6. CHANGE OF CONTROL. ----------------- 6.1 Benefits. The parties recognize that a "Change of Control," as -------- defined below, could be detrimental to Executive's continued employment. Accordingly, in order to give further assurances to the Executive to enter into this Agreement, if there is a Change of Control and either (a) within 730 days following the effective date of such Change of Control Executive or Employer terminates Executive's employment; or (b) at any time from and after sixty days prior to the public announcement by Employer or any other party of the transaction which will result in the Change of Control, Employer (or its successor) terminates Executive's employment without Cause, then Executive, upon the date of termination of his employment, subject to the remaining provisions of this Section 6.1, shall be paid by Employer a severance benefit in an amount equal to the greater of three times the amount of his then-current base annual salary or the amount of such salary which would otherwise have been paid to Executive during the then-remaining term of this Agreement, and vesting of all stock options and lapse of all restrictions with respect to restricted stock awards shall occur. As a condition to receipt of the benefits described in this Section 6, upon request by the Board Executive will not voluntarily terminate his employment with Employer until after the effective date of the Change of Control in order to assist the Bank and the Company in evaluating and effectuating the Change of Control. 6.2 Reimbursement. In the event the provisions of this Section 6 ------------- result in imposition of a tax on Executive under the provisions of Internal Revenue Code (S) 4999, Employer agrees to reimburse Executive for the same, exclusive of any tax imposed by reason of receipt of reimbursement under this Section 6.2. 7. RESTRICTIVE COVENANT. -------------------- 7.1 Noncompetition. Executive agrees that except as otherwise set -------------- forth in this Agreement, he will not during the term of this Agreement and for a period of two years after his termination, directly or indirectly, become interested in, as principal shareholder, director, or officer, any financial institution that competes with Employer or its successor or any of its affiliates within the State of Washington, provided that such covenant shall not apply in the event that Executive's employment is terminated without Cause or for Good Reason. The provisions restricting competition by Executive may be waived by action of the Board. Executive recognizes and agrees that any breach of this covenant by Executive will cause immediate and irreparable injury to Employer, and Executive hereby authorizes recourse by Employer to injunction and/or specific performance, as well as to other legal or equitable remedies to which Employer may be entitled. 7.2 Noninterference. During the noncompetition period described in --------------- Section 7.1, Executive shall not solicit or attempt to solicit any other employee of Employer or its affiliates to leave the employ of those companies, or in any way interfere with the relationship between Employer and any other employee of Employer. -5- 7.3 Interpretation. If a court or any other administrative body -------------- with jurisdiction over a dispute related to this Agreement should determine that the restrictive covenant set forth above is unreasonably broad, the parties hereby authorize said court or administrative body to narrow same so as to make it reasonable, given all relevant circumstances, and to enforce same. The covenants in this paragraph shall survive termination of this Agreement. 8. DEFINITIONS. ----------- 8.1 Cause. "Cause" shall mean only (i) willful misfeasance or gross ----- negligence in the performance of his duties, (ii) conduct demonstrably and significantly harmful to the Company (which would include willful violation of any final cease and desist order applicable to Employer or a financial institution subsidiary), or (iii) conviction of a felony. 8.2 Change of Control. "Change of Control" shall mean the occurrence ----------------- of one or more of the following events: 8.2.1 One person or entity acquiring or otherwise becoming the owner of twenty-five percent (25%) or more of the Company's outstanding common stock. 8.2.2 Replacement of incumbent directors or election of newly- elected directors constituting a majority of the Board of the Company where such replacement or election has not been supported by the Board. 8.2.3 Dissolution, or sale of fifty percent (50%) or more in value of the assets, of either the Company or the Bank. 8.2.4 The merger of the Company into any corporation, twenty- five percent (25%) or more of the outstanding common stock of which is owned by other than owners of the common stock of the Company prior to such merger. 8.3 Disability. "Disability" shall mean a medically reimbursable ---------- physical or mental impairment that may be expected to result in death, or to be of long, continued duration, and that renders Employee incapable of performing the duties required under this Agreement. 8.4 Good Reason. "Good Reason" shall mean (i) termination by ----------- Executive as a result of any material breach of this Agreement by Employer, (ii) termination by Executive or Employer following a Change of Control pursuant to Section 6.1, (iii) Any reduction of Executive's salary or any reduction or elimination of any compensation or benefit plan, which reduction or elimination is not of general application to substantially all employees of the Bank or such employees of any successor entity or of any entity in control of the Bank, -6- or (iv) the assignment to Executive of any authority or duties substantially inconsistent with Executive's position. 9. MISCELLANEOUS. ------------- 9.1 This Agreement contains the entire agreement between the parties with respect to Executive's employment with Employer and his covenant not to compete with Employer, and is subject to modification or amendment only upon amendment in writing signed by both parties. 9.2 This Agreement shall bind and inure to the benefit of the heirs, legal representatives, successors, and assigns of the parties. The provisions of Section 7.1 of this Agreement are intended to confer upon Employer and any of its subsidiaries and affiliates the benefits of Executive's covenant not to compete. 9.3 If any provision of this Agreement is invalid or otherwise unenforceable, all other provisions shall remain unaffected and shall be enforceable to the fullest extent permitted by law. 9.4 Notwithstanding any other provision in this Agreement, Employer shall make no payment of any severance benefit provided for herein to the extent that such payment would be prohibited by the provisions of Part 359 of the regulations of the Federal Deposit Insurance Corporation as the same may be amended from time to time, and if such payment is so prohibited, Employer shall use its best efforts to secure the consent of the FDIC or other applicable banking agencies to make such payments in the highest amount permissible, up to the amount provided for in this Agreement. 9.5 This Agreement is made with reference to and is intended to be construed in accordance with the laws of the State of Washington. Venue for any action arising out of or concerning this Agreement shall lie in Thurston County, Washington. In the event of a dispute under this Agreement not involving injunctive relief, the dispute shall be arbitrated pursuant to the Superior Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State Supreme Court, irrespective of the amount in controversy. This Agreement shall be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1 The arbitrator, in his or her discretion, may award attorney's fees to the prevailing party or parties. 9.6 Any notice required to be given under this Agreement to either party shall be given by personal service or by depositing a copy thereof in the United States registered or certified mail, postage prepaid, addressed to the following address, or such other address as addressee shall designate in writing: -7- Employer: Heritage Savings Bank -------- 201 5th Avenue S.W. Olympia, WA 98501 Attn: ___________________ Executive: Donald V. Rhodes --------- 3544 Sunset Beach Drive N.W. Olympia, WA 98502 IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written. HERITAGE FINANCIAL CORPORATION HERITAGE SAVINGS BANK By: ____________________________ By: _________________________ Its: ____________________________ By: _________________________ EXECUTIVE: _________________________________ -8- EX-10.4 9 SEVERANCE AGREEMENT EXHIBIT 10.4 SEVERANCE AGREEMENT BETWEEN HERITAGE SAVINGS BANK AND BRIAN VANCE THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into effective this ____ day of _______________, 1997, by and between HERITAGE SAVINGS BANK, a Washington banking corporation (the "Bank") and BRIAN VANCE ("Executive"). RECITALS 1. The Bank currently receives the exclusive services of Executive as its employee, and both the Bank and Executive desire that this employment relationship continue. 2. In order to encourage Executive to continue his employment relationship with the Bank, thereby allowing the Bank to maximize the benefits obtainable by its shareholder and the shareholders of its holding company, Heritage Financial Corporation (the "Company"), from any such change, the Bank desires to provide a severance benefit to Executive. In consideration of the mutual promises, covenants, agreements and undertakings contained in this Agreement, the parties hereby contract and agree as follows: AGREEMENT 1. TERM. The term of this Agreement ("Term") shall commence as of the ---- date first above written and shall end on the fifth anniversary of such date, unless extended in writing by the parties. 2. SEVERANCE PAYMENT. ----------------- 2.1. Determination of Payment. In the case of a Termination Event, ------------------------ as defined in Section 4, the Bank shall pay to Executive upon the effective date of termination a severance payment ("Severance Payment") in an amount equal to two times the amount of Executive's then-current annual base salary in addition to all salary and benefits earned through such termination date. In such event, all future provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of the termination. 2.2. Reimbursement of Excise Tax. In the event the provisions of --------------------------- this Section 2 result in imposition of a tax on Executive under the provisions of Internal Revenue Code (S) 4999, the Bank agrees to reimburse Executive for the same, exclusive of any tax imposed by reason of receipt of reimbursement under this Section 2.2. 3. OTHER COMPENSATION AND TERMS OF EMPLOYMENT. Except with respect to the ------------------------------------------ Severance Payment, this Agreement shall have no effect on the determination of any compensation payable by the Bank to the Executive, or upon any of the other terms of Executive's employment with the Bank. 4. TERMINATION EVENTS. A Termination Event shall be deemed to occur upon, ------------------ and only upon, one or more of the following: 4.1 Termination of Executive's employment by either party for any reason within 730 days following the effective date of a Change of Control (as defined below); or 4.2 Termination of Executive's employment by the Bank without Cause prior to a Change of Control if such termination occurs at any time from and after sixty days prior to the public announcement by the Bank or any other party of a transaction which will result in a Change of Control; provided that (i) the effective date of the Change of Control occurs within eighteen (18) months of Executive's termination, and further provided that (ii) as a condition to the receipt of the Severance Payment, upon request by the Board of Directors of the Bank, Executive will not voluntarily terminate his employment with the Bank until after the effective date of the Change of Control in order to assist the Bank in evaluating and effectuating the Change of Control. 5. RESTRICTIVE COVENANT. -------------------- 5.1 Noncompetition. Executive agrees that he will not during the -------------- term of this Agreement and for a period of one year following the payment to Executive of a Severance Payment directly or indirectly become interested in, as principal shareholder, director, or officer, any financial institution that competes with Bank, including any successor, or any of its affiliates within the State of Washington. The provisions restricting competition by Executive may be waived by action of the Board. Executive recognizes and agrees that any breach of this covenant by Executive will cause immediate and irreparable injury to Bank, and Executive hereby authorizes recourse by Bank to injunction and/or specific performance, as well as to other legal or equitable remedies to which Bank may be entitled. 5.2 Noninterference. During the noncompetition period described in --------------- Section 5.1, Executive shall not solicit or attempt to solicit any other employee of Bank or its affiliates to leave the employ of those companies, or in any way interfere with the relationship between Bank and any other employee of Bank. 5.3 Interpretation. If a court or any other administrative body -------------- with jurisdiction over a dispute related to this Agreement should determine that the restrictive covenant set forth above is unreasonably broad, the parties hereby authorize said court or administrative body to narrow same so as to make it reasonable, given all relevant circumstances, and to enforce same. The covenants in this paragraph shall survive termination of this Agreement. -2- 6. DEFINITIONS. ----------- 6.1. Cause. "Cause" shall mean only (i) willful misfeasance, failure ----- to follow direction by a senior officer or gross negligence in the performance of Executive's duties, (ii) conduct demonstrably and significantly harmful to the Bank (which would include willful violation of any final cease and desist order applicable to the Bank), or (iii) conviction of a felony. 6.2. Change of Control. "Change of Control" shall mean the ----------------- occurrence of one or more of the following events: 6.2.1. One person or entity acquiring or otherwise becoming the owner of twenty-five percent (25%) or more of the Company's outstanding common stock; 6.2.2. Replacement of incumbent directors or election of newly- elected directors constituting a majority of the Board of the Company where such replacement or election has not been supported by the Board; 6.2.3. Dissolution, or sale of fifty percent (50%) or more in value of the assets, of either the Company, the Bank or any of their respective subsidiaries; or 6.2.4 The merger of the Company into any corporation, twenty-five percent (25%) or more of the outstanding common stock of which is owned by other than owners of the common stock of the Company prior to such merger. 7. MISCELLANEOUS. ------------- 7.1 This Agreement contains the entire agreement between the parties with respect to the subject matter, and is subject to modification or amendment only upon amendment in writing signed by both parties. 7.2 This Agreement shall bind and inure to the benefit of the heirs, legal representatives, successors, and assigns of the parties. 7.3 If any provision of this Agreement is invalid or otherwise unenforceable, all other provisions shall remain unaffected and shall be enforceable to the fullest extent permitted by law. 7.4 Notwithstanding any other provision in this Agreement, Bank shall make no payment of any severance benefit provided for herein to the extent that such payment would be prohibited by the provisions of Part 359 of the regulations of the Federal Deposit Insurance Corporation as the same may be amended from time to time, and if such payment is so prohibited, Bank shall use its best efforts to secure the consent of the FDIC or other applicable banking agencies to make such payments in the highest amount permissible, up to the amount provided for in this Agreement. -3- 7.5 This Agreement is made with reference to and is intended to be construed in accordance with the laws of the State of Washington. Venue for any action arising out of or concerning this Agreement shall lie in Thurston County, Washington. In the event of a dispute under this Agreement, the dispute shall be arbitrated pursuant to the Superior Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State Supreme Court, irrespective of the amount in controversy. This Agreement shall be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1 The arbitrator, in his or her discretion, may award attorney's fees to the prevailing party or parties. 7.6 Any notice required to be given under this Agreement to either party shall be given by personal service or by depositing a copy thereof in the United States registered or certified mail, postage prepaid, addressed to the following address, or such other address as addressee shall designate in writing: Bank: Heritage Savings Bank ---- 201 5th Avenue S.W. Olympia, WA 98501 Attn: ___________________ Executive: Brian Vance --------- ________________________ ________________________ IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written. HERITAGE SAVINGS BANK: EXECUTIVE: By: ____________________________ ____________________________ Its: ___________________________ -4- EX-10.5 10 SEVERANCE AGREEMENT EXHIBIT 10.5 SEVERANCE AGREEMENT BETWEEN HERITAGE SAVINGS BANK AND JOHN PARRY THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into effective this ____ day of _______________, 1997, by and between HERITAGE SAVINGS BANK, a Washington banking corporation (the "Bank") and JOHN PARRY ("Executive"). RECITALS 1. The Bank currently receives the exclusive services of Executive as its employee, and both the Bank and Executive desire that this employment relationship continue. 2. In order to encourage Executive to continue his employment relationship with the Bank, thereby allowing the Bank to maximize the benefits obtainable by its shareholder and the shareholders of its holding company, Heritage Financial Corporation (the "Company"), from any such change, the Bank desires to provide a severance benefit to Executive. In consideration of the mutual promises, covenants, agreements and undertakings contained in this Agreement, the parties hereby contract and agree as follows: AGREEMENT 1. TERM. The term of this Agreement ("Term") shall commence as of the ---- date first above written and shall end on the fifth anniversary of such date, unless extended in writing by the parties. 2. SEVERANCE PAYMENT. ----------------- 2.1. Determination of Payment. In the case of a Termination Event, ------------------------ as defined in Section 4, the Bank shall pay to Executive upon the effective date of termination a severance payment ("Severance Payment") in an amount equal to two times the amount of Executive's then-current annual base salary in addition to all salary and benefits earned through such termination date. In such event, all future provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of the termination. 2.2. Reimbursement of Excise Tax. In the event the provisions of --------------------------- this Section 2 result in imposition of a tax on Executive under the provisions of Internal Revenue Code (S) 4999, the Bank agrees to reimburse Executive for the same, exclusive of any tax imposed by reason of receipt of reimbursement under this Section 2.2. 3. OTHER COMPENSATION AND TERMS OF EMPLOYMENT. Except with respect to the ------------------------------------------ Severance Payment, this Agreement shall have no effect on the determination of any compensation payable by the Bank to the Executive, or upon any of the other terms of Executive's employment with the Bank. 4. TERMINATION EVENTS. A Termination Event shall be deemed to occur upon, ------------------ and only upon, one or more of the following: 4.1 Termination of Executive's employment by either party for any reason within 730 days following the effective date of a Change of Control (as defined below); or 4.2 Termination of Executive's employment by the Bank without Cause prior to a Change of Control if such termination occurs at any time from and after sixty days prior to the public announcement by the Bank or any other party of a transaction which will result in a Change of Control; provided that (i) the effective date of the Change of Control occurs within eighteen (18) months of Executive's termination, and further provided that (ii) as a condition to the receipt of the Severance Payment, upon request by the Board of Directors of the Bank, Executive will not voluntarily terminate his employment with the Bank until after the effective date of the Change of Control in order to assist the Bank in evaluating and effectuating the Change of Control. 5. RESTRICTIVE COVENANT. -------------------- 5.1 Noncompetition. Executive agrees that he will not during the -------------- term of this Agreement and for a period of one year following the payment to Executive of a Severance Payment directly or indirectly become interested in, as principal shareholder, director, or officer, any financial institution that competes with Bank, including any successor, or any of its affiliates within the State of Washington. The provisions restricting competition by Executive may be waived by action of the Board. Executive recognizes and agrees that any breach of this covenant by Executive will cause immediate and irreparable injury to Bank, and Executive hereby authorizes recourse by Bank to injunction and/or specific performance, as well as to other legal or equitable remedies to which Bank may be entitled. 5.2 Noninterference. During the noncompetition period described in --------------- Section 5.1, Executive shall not solicit or attempt to solicit any other employee of Bank or its affiliates to leave the employ of those companies, or in any way interfere with the relationship between Bank and any other employee of Bank. 5.3 Interpretation. If a court or any other administrative body with -------------- jurisdiction over a dispute related to this Agreement should determine that the restrictive covenant set forth above is unreasonably broad, the parties hereby authorize said court or administrative body to narrow same so as to make it reasonable, given all relevant circumstances, and to enforce same. The covenants in this paragraph shall survive termination of this Agreement. -2- 6. DEFINITIONS. ----------- 6.1. Cause. "Cause" shall mean only (i) willful misfeasance, failure ----- to follow direction by a senior officer or gross negligence in the performance of Executive's duties, (ii) conduct demonstrably and significantly harmful to the Bank (which would include willful violation of any final cease and desist order applicable to the Bank), or (iii) conviction of a felony. 6.2. Change of Control. "Change of Control" shall mean the ----------------- occurrence of one or more of the following events: 6.2.1. One person or entity acquiring or otherwise becoming the owner of twenty-five percent (25%) or more of the Company's outstanding common stock; 6.2.2. Replacement of incumbent directors or election of newly- elected directors constituting a majority of the Board of the Company where such replacement or election has not been supported by the Board; 6.2.3. Dissolution, or sale of fifty percent (50%) or more in value of the assets, of either the Company, the Bank or any of their respective subsidiaries; or 6.2.4 The merger of the Company into any corporation, twenty-five percent (25%) or more of the outstanding common stock of which is owned by other than owners of the common stock of the Company prior to such merger. 7. MISCELLANEOUS. ------------- 7.1 This Agreement contains the entire agreement between the parties with respect to the subject matter, and is subject to modification or amendment only upon amendment in writing signed by both parties. 7.2 This Agreement shall bind and inure to the benefit of the heirs, legal representatives, successors, and assigns of the parties. 7.3 If any provision of this Agreement is invalid or otherwise unenforceable, all other provisions shall remain unaffected and shall be enforceable to the fullest extent permitted by law. 7.4 Notwithstanding any other provision in this Agreement, Bank shall make no payment of any severance benefit provided for herein to the extent that such payment would be prohibited by the provisions of Part 359 of the regulations of the Federal Deposit Insurance Corporation as the same may be amended from time to time, and if such payment is so prohibited, Bank shall use its best efforts to secure the consent of the FDIC or other applicable banking agencies to make such payments in the highest amount permissible, up to the amount provided for in this Agreement. -3- 7.5 This Agreement is made with reference to and is intended to be construed in accordance with the laws of the State of Washington. Venue for any action arising out of or concerning this Agreement shall lie in Thurston County, Washington. In the event of a dispute under this Agreement, the dispute shall be arbitrated pursuant to the Superior Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State Supreme Court, irrespective of the amount in controversy. This Agreement shall be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1 The arbitrator, in his or her discretion, may award attorney's fees to the prevailing party or parties. 7.6 Any notice required to be given under this Agreement to either party shall be given by personal service or by depositing a copy thereof in the United States registered or certified mail, postage prepaid, addressed to the following address, or such other address as addressee shall designate in writing: Bank: Heritage Savings Bank ---- 201 5th Avenue S.W. Olympia, WA 98501 Attn: ___________________ Executive: John Parry --------- ________________________ ________________________ IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written. HERITAGE SAVINGS BANK: EXECUTIVE: By: ____________________________ ____________________________ Its: ___________________________ -4- EX-10.6 11 SEVERANCE AGREEMENT EXHIBIT 10.6 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into effective this ____ day of _______________, 1997, by and between HERITAGE SAVINGS BANK, a Washington banking corporation (the "Bank") and _______________________ ("Executive"). RECITALS 1. The Bank currently receives the exclusive services of Executive as its employee, and both the Bank and Executive desire that this employment relationship continue. 2. In order to encourage Executive to continue his employment relationship with the Bank, thereby allowing the Bank to maximize the benefits obtainable by its shareholder and the shareholders of its holding company, Heritage Financial Corporation (the "Company"), from any such change, the Bank desires to provide a severance benefit to Executive. In consideration of the mutual promises, covenants, agreements and undertakings contained in this Agreement, the parties hereby contract and agree as follows: AGREEMENT 1. TERM. The term of this Agreement ("Term") shall commence as of the ---- date first above written and shall end on the fifth anniversary of such date, unless extended in writing by the parties. 2. SEVERANCE PAYMENT. ----------------- 2.1. Determination of Payment. In the case of a Termination Event, ------------------------ as defined in Section 4, the Bank shall pay to Executive upon the effective date of termination a severance payment ("Severance Payment") in an amount equal to the amount of Executive's then-current annual base salary in addition to all salary and benefits earned through such termination date. In such event, all future provisions regarding restricted stock awards or vesting requirements regarding options shall lapse or be considered completed as of the effective date of the termination. 3. OTHER COMPENSATION AND TERMS OF EMPLOYMENT. Except with respect to the ------------------------------------------ Severance Payment, this Agreement shall have no effect on the determination of any compensation payable by the Bank to the Executive, or upon any of the other terms of Executive's employment with the Bank. 4. TERMINATION EVENTS. A Termination Event shall be deemed to occur upon, ------------------ and only upon, one or more of the following: 4.1 Termination of Executive's employment by either party for any reason within 730 days following the effective date of a Change of Control (as defined below); or 4.2 Termination of Executive's employment by the Bank without Cause prior to a Change of Control if such termination occurs at any time from and after sixty days prior to the public announcement by the Bank or any other party of a transaction which will result in a Change of Control; provided that the effective date of the Change of Control occurs within eighteen (18) months of Executive's termination. 5. DEFINITIONS. ----------- 5.1. Cause. "Cause" shall mean only (i) willful misfeasance, failure ----- to follow direction by a senior officer or gross negligence in the performance of Executive's duties, (ii) conduct demonstrably and significantly harmful to the Bank (which would include willful violation of any final cease and desist order applicable to the Bank), or (iii) conviction of a felony. 5.2. Change of Control. "Change of Control" shall mean the ----------------- occurrence of one or more of the following events: 5.2.1. One person or entity acquiring or otherwise becoming the owner of twenty-five percent (25%) or more of the Company's outstanding common stock; 5.2.2. Replacement of incumbent directors or election of newly- elected directors constituting a majority of the Board of the Company where such replacement or election has not been supported by the Board; 5.2.3. Dissolution, or sale of fifty percent (50%) or more in value of the assets, of either the Company, the Bank or any of their respective subsidiaries; or 5.2.4 The merger of the Company into any corporation, twenty-five percent (25%) or more of the outstanding common stock of which is owned by other than owners of the common stock of the Company prior to such merger. 6. MISCELLANEOUS. ------------- 6.1 This Agreement contains the entire agreement between the parties with respect to the subject matter, and is subject to modification or amendment only upon amendment in writing signed by both parties. 6.2 This Agreement shall bind and inure to the benefit of the heirs, legal representatives, successors, and assigns of the parties. 6.3 If any provision of this Agreement is invalid or otherwise unenforceable, all other provisions shall remain unaffected and shall be enforceable to the fullest extent permitted by law. 6.4 Notwithstanding any other provision in this Agreement, Bank shall make no payment of any severance benefit provided for herein to the extent that such payment would be prohibited by the provisions of Part 359 of the regulations of the Federal Deposit Insurance -2- Corporation as the same may be amended from time to time, and if such payment is so prohibited, Bank shall use its best efforts to secure the consent of the FDIC or other applicable banking agencies to make such payments in the highest amount permissible, up to the amount provided for in this Agreement. 6.5 This Agreement is made with reference to and is intended to be construed in accordance with the laws of the State of Washington. Venue for any action arising out of or concerning this Agreement shall lie in Thurston County, Washington. In the event of a dispute under this Agreement, the dispute shall be arbitrated pursuant to the Superior Court Mandatory Arbitration Rules ("MAR") adopted by the Washington State Supreme Court, irrespective of the amount in controversy. This Agreement shall be deemed as stipulation to that effect pursuant to MAR 1.2 and 8.1 The arbitrator, in his or her discretion, may award attorney's fees to the prevailing party or parties. 6.6 Any notice required to be given under this Agreement to either party shall be given by personal service or by depositing a copy thereof in the United States registered or certified mail, postage prepaid, addressed to the following address, or such other address as addressee shall designate in writing: Bank : Heritage Savings Bank ---- 201 5th Avenue S.W. Olympia, WA 98501 Attn: ___________________ Executive: _________________________ --------- _________________________ _________________________ IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written. HERITAGE SAVINGS BANK: EXECUTIVE By: ____________________________ _________________________ Its: ___________________________ -3- EX-99.1 12 ORDER AND ACKNOWLEDGEMENT FORM Exhibit 99.1 [HERITAGE FINANCIAL LOGO] STOCK ORDER FORM PLEASE READ AND COMPLETE THIS STOCK ORDER FORM. INSTRUCTIONS ARE INCLUDED ON THE REVERSE SIDE OF THIS FORM. - -------------------------------------------------------------------------------- DEADLINE FOR DELIVERY 10:00 A.M., PACIFIC TIME, ON , 1997 Please mail the Stock Order Form in the enclosed envelope to the address listed below or hand-deliver to any Heritage Savings Bank office. Heritage Financial is not required to accept copies of Stock Order Forms.
NUMBER OF SHARES OFFICE USE ONLY (1) Number of Price Total Shares per Share Amount Due ------------- ------- ----- [_____________] X $10.00 = [$_____] Date Received Batch # Order (25 Share Minimum)
METHOD OF PAYMENT PURCHASER INFORMATION (2) [_] Enclosed is a check or money (4) [_] Check here if you were a order payable to HERITAGE FINANCIAL Heritage Savings Bank stockholder CORPORATION for $ . on , 1997. (3) [_] I authorize Heritage Savings (a) [_] Check here if you are a Bank to make the withdrawal(s) from Heritage Savings Bank employee, or a the Heritage Savings Bank account(s) member of the immediate family of a listed below, and understand that the Heritage Savings employee. amounts I authorize will not be available for withdrawal once this (5) Check the box which applies. Stock Order Form is submitted: (a) [_] Check here if you were a ACCOUNT NUMBER(S) AMOUNT(S) Depositor of Heritage Savings Bank $ on June 30, 1996. List any account(s) - ------------------------------------- you had on that date below. $ - ------------------------------------- (b) [_] Check here if you were NOT $ a depositor at June 30, 1996, - ------------------------------------- but you were a depositor on $ September 30, 1997. List any - ------------------------------------- account(s) you had on that date Total Withdrawal $ below. THERE IS NO EARLY WITHDRAWAL PENALTY (c) [_] Check here if you were not FOR THE PURCHASE OF STOCK. a depositor at either of the above dates, but were a depositor on , 1997. List any accounts you had on that date below. (d) [_] Check here if you have never been a Heritage Savings Bank depositor. ACCOUNT TITLE (NAME(S) ACCOUNT ON ACCOUNT) NUMBER ------------------------------------ ------------------------------------ ------------------------------------ IF ADDITIONAL SPACE IS NEEDED, PLEASE USE THE BACK OF THIS STOCK ORDER FORM. STOCK REGISTRATION (PLEASE PRINT CLEARLY) (6) (7) - ----------------------------------------------------------------------------- (First Name) (M.I.) (Last Name) Social Security # or Tax ID# (stock certificate will show this number) - ----------------------------------------------------------------------------- (First Name) (M.I.) (Last Name) Social Security # or Tax ID# (8) - ----------------------------------------------------------------------------- (Street Address) (Daytime Phone Number) - ----------------------------------------------------------------------------- (City) (State) (Zip) (Evening Phone Number) (9) Form of Stock Ownership (check one) [_] Individual [_] Joint Tenants [_] Tenants in Common [_] Uniform Transfer to Minors [_] Individual [_] Corporation [_] Fiduciary (Under [_] Other Retirement Agreement Dated Account (IRA) , 199 )
NASD AFFILIATION (IF APPLICABLE) [_] Check here and initial below if you are a member of the NASD ("National Association of Securities Dealers") or a person associated with an NASD member or a member of the immediate family of any such person to whose support such person contributes, directly or indirectly, or if you have an account in which an NASD member, or person associated with an NASD member, has a beneficial interest. I agree (i) not to sell, transfer, or hypothecate the stock for a period of 90 days following issuance; and (ii) to report this subscription in writing to the applicable NASD member I am associated with within one day of payment for the stock. _______ (Please initial) ACKNOWLEDGMENT AND SIGNATURE (VERY IMPORTANT) I(we) acknowledge receipt of the Prospectus dated , 1997, and I(we) have read the terms and conditions described therein (including the section entitled "Risk Factors"). I(we) understand that, after receipt by Heritage Financial, this order may not be modified or withdrawn without the consent of Heritage Financial. I(we) hereby certify that the shares which are being subscribed for are for my(our) account only, and that I(we) have no present agreement or understanding regarding any subsequent sale or transfer of such shares and I(we) confirm that my(our) order does not conflict with the purchase limitation and ownership limitation provisions in the Plan of Conversion. I(we) acknowledge that the common stock being ordered is not a deposit or savings account, is not federally-insured, and is not guaranteed by Heritage Financial, or the Washington state government. Under penalties of perjury, I(we) certify that (1) the Social Security #(s) or Tax ID#(s) given above is(are) correct; and (2) I(we) am(are) not subject to backup withholding tax (You must cross out #2 above if you have been notified by the Internal Revenue Service that you are subject to backup withholding because of underreporting interest or dividends on your tax return). Please sign and date this form. Only one signature is required, unless authorizing a withdrawal from a Heritage Savings Bank deposit account requiring more than one signature to withdraw funds. If signing as a custodian, corporate officer, etc., please include your full title. STOCK INFORMATION CENTER: ------------------------------------------- Heritage Savings Bank Signature Title (if applicable) Date 201 5th Ave., S.W. Olympia, WA 98501 ------------------------------------------- Signature (if required) Date QUESTIONS? Call (800) - or (360) - 9:00 am to 4:00 pm, Monday-Friday THIS ORDER NOT VALID UNLESS SIGNED THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. STOCK ORDER FORM INSTRUCTIONS 1--Indicate the number of shares of Heritage Financial common stock that you wish to purchase and indicate the amount due. The minimum purchase is 25 shares or $250. The maximum aggregate purchase in the Offering, i.e. the SUBSCRIPTION, MINORITY STOCKHOLDERS' AND COMMUNITY OFFERING, combined, is $250,000 for an individual (or persons exercising subscription rights through a single eligible account at Heritage Savings Bank), together with associates or group acting in concert. The categories of the Offering are described in the Prospectus, page . Heritage Financial Corporation reserves the right to accept or reject orders placed in the Community Offering or Minority Stockholders Offering. NOTICE TO HERITAGE SAVINGS BANK STOCKHOLDERS: See the Prospectus, page for the overall limitation on ownership of Heritage Financial common stock. 2--Payment for shares may be made by check or money order payable to HERITAGE FINANCIAL CORPORATION. Funds received in this form of payment will be cashed immediately and deposited into a separate account established for the purposes of this Offering. You will earn interest at Heritage Savings Bank's passbook rate from the time funds are received until the Offering is consummated. 3--You may pay for your shares by withdrawal from your Heritage Savings Bank deposit account(s). Indicate the account number(s) and the amount(s) to be withdrawn. These funds will be unavailable to you from the time this Stock Order Form is received until the Offering is consummated. The funds will continue to earn interest at the account's contractual rate until the Offering is consummated. PLEASE CONTACT THE STOCK INFORMATION CENTER EARLY IN THE OFFERING PERIOD, IF YOU ARE INTENDING TO UTILIZE HERITAGE SAVINGS BANK IRA FUNDS (OR ANY OTHER IRA FUNDS) TO MAKE YOUR STOCK PURCHASE. 4--Please check one or both of these boxes, if applicable. 5--Check the applicable box. THIS INFORMATION IS VERY IMPORTANT BECAUSE ELIGIBILITY DATES ARE UTILIZED TO PRIORITIZE YOUR ORDER IN THE EVENT THAT WE RECEIVE MORE STOCK ORDERS THAN AVAILABLE STOCK. List the name(s) on the deposit account(s) and account number(s) that you held at the applicable date. Please see the portion of the Prospectus entitled "The Conversion--The Offerings" for a detailed explanation of how shares will be allocated in the event the Offering is oversubscribed. Failure to complete this section could result in a loss of all or part of your stock allocation. (Continued from previous page) ACCOUNT TITLE (NAME(S) ON ACCOUNT) ACCOUNT NUMBER -------------------------- --------------------- -------------------------- --------------------- -------------------------- --------------------- -------------------------- --------------------- 6--Please CLEARLY PRINT the name(s) and address in which you want the stock certificate registered and mailed. If you are exercising subscription rights by purchasing in the Subscription Offering as a Heritage Savings Bank (i) eligible depositor as of 6/30/96 or (ii) eligible depositor as of 9/30/97 or depositor or eligible borrower as of /97, you must register the stock in the name of one of the account holders listed on your account as of the applicable date. However, adding the name(s) of other persons who are not account holders, or were account holders at a later date than yourself, will be a violation of your subscription right and will result in a loss of your purchase priority. NOTE: ONE STOCK CERTIFICATE WILL BE GENERATED PER ORDER FORM. IF VARIOUS REGISTRATIONS AND SHARE AMOUNTS ARE DESIRED ON VARIOUS CERTIFICATES, A SEPARATE STOCK ORDER FORM MUST BE COMPLETED FOR EACH CERTIFICATE DESIRED. 7--Enter the Social Security Number or Tax ID Number of the registered owner(s). The first number listed will be identified with the stock certificate. 8--Be sure to include at least one phone number, in the event you must be contacted regarding this Stock Order Form. 9--Please check the one type of ownership applicable to your registration. An explanation of each follows: GUIDELINES FOR REGISTERING STOCK For reasons of clarity and standardization, the stock transfer industry has developed uniform stockholder registrations which we will utilize in the issuance of your Heritage Financial Stock Certificate(s). If you have any questions, please consult your legal advisor. Stock ownership must be registered in one of the following manners: - ------------------------------------ INDIVIDUAL: Avoid the use of two initials. Include the first given name, middle initial and last name of the stockholder. Omit words of limitation that do not affect ownership rights such as "special account," "single man," "personal property," etc. If the stock is held individually upon the individual's death, the stock will be owned by the individual's estate and distributed as indicated by the individual's will or otherwise in accordance with law. - ------------------------------------ JOINT: Joint ownership of stock by two or more persons shall be inscribed on the certificate with one of the following types of joint ownership. Names should be joined by "and"; do not connect with "or." Omit titles such as "Mrs.," "Dr.," etc. JOINT TENANTS--Joint Tenancy with Right of Survivorship and not as Tenants in Common may be specified to identify two or more owners where ownership is intended to pass automatically to the surviving tenant(s). TENANTS IN COMMON--Tenants in Common may be specified to identify two or more owners. When stock is held as tenancy in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co- tenant. All parties must agree to the transfer or sale of shares held in this form of ownership. - ------------------------------------ UNIFORM Stock may be held in the name of a custodian for a minor under the TRANSFER Uniform Transfers to Minors laws of individual states. There may TO MINORS: be only one custodian and one minor designated on a stock certificate. The standard abbreviation of custodian is "CUST,", while the description "Uniform Transfers to Minors Act" is abbreviated "UNIF TRAN MIN ACT." Standard U.S. Postal Service state abbreviations should be used to describe the appropriate state. For example, stock held by John P. Jones under the Uniform Transfers to Minors Act will be abbreviated: JOHN P. JONES CUST SUSAN A. JONES UNIF TRAN MIN ACT WA - ------------------------------------ FIDUCIARIES:Stock held in a fiduciary capacity must contain the following: 1. The name(s) of the fiduciary: --If an individual, list the first given name, middle initial, and last name. --If a corporation, list the corporate title. --If an individual and a corporation, list the corporation's title before the individual. 2. The fiduciary capacity: --Administrator --Conservator --Committee --Executor --Trustee --Personal Representative --Custodian 3. The type of document governing the fiduciary relationship. Generally, such relationships are either under a form of living trust agreement or pursuant to a court order. Without a document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity. 4. The date of the document governing the relationship. The date of the document need not be used in the description of a trust created by a will. 5. Either of the following: The name of the maker, donor or testator OR The name of the beneficiary Example of Fiduciary Ownership: JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH UNDER AGREEMENT DATED 6/9/74 EX-99.2 13 SOLICITATION AND MARKETING MATERIALS EXHIBIT 99.2 [RYAN, BECK LOGO] Dear Sir/Madam: At the request of Heritage Bank and Heritage Financial Corporation, we are enclosing materials regarding the offering of Heritage Financial Corporation common stock. The materials include a Prospectus and Question and Answer Brochure describing the stock offering. Ryan, Beck & Co., Inc., has been retained by Heritage Financial Corporation as selling agent in connection with the stock offering. We have been asked to forward these materials to you in view of certain regulatory requirements and the securities laws of your state. Sincerely, [LOGO TO COME] Ryan, Beck & Co. THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. NOTE: To accompany one of the preceding letters for prospects in states where the offer must be made by a broker-dealer. [HERITAGE FINANCIAL LOGO] LETTER TO MEMBERS ELIGIBLE TO VOTE Dear Customer: It is my pleasure to inform you of an investment opportunity and to request your vote on our Plan of Conversion (the "Plan"). In connection with the Plan, we will change from a mutual holding company corporate structure to a fully stockholder-owned structure (the "Conversion"). To effect the change, Heritage Financial Corporation, a company that we recently organized to serve as the Bank's parent company, is conducting a stock offering of up to shares of its common stock at a purchase price of $10 per share. THE VOTE: YOUR VOTE IS IMPORTANT IN ORDER FOR US TO IMPLEMENT THE PLAN. We have received conditional regulatory approval of our Plan, but we must also receive the approval of the Bank's customers eligible to vote on the Plan. Included herein is a Proxy Statement describing the Plan of Conversion and business reasons for the change in corporate structure. We have also included a Question and Answer Brochure. PLEASE VOTE AND SIGN THE ENCLOSED PROXY CARD(S). PLEASE MAIL THE CARD(S) IN THE ENCLOSED PROXY REPLY ENVELOPE, TO BE RECEIVED BY P.M., PACIFIC TIME, ON DECEMBER , 1997. NOT VOTING MUST BE TREATED THE SAME AS VOTING "AGAINST" THE PLAN, SO YOUR VOTE IS VERY IMPORTANT. I HOPE YOU WILL VOTE "FOR". VOTING DOES NOT OBLIGATE YOU TO PURCHASE STOCK IN THE OFFERING. THE PLAN WILL NOT RESULT IN CHANGES IN THE ACCOUNT NUMBERS OR TERMS OF YOUR DEPOSIT ACCOUNTS OR LOANS. YOUR DEPOSIT ACCOUNTS WILL CONTINUE TO BE INSURED BY THE FDIC. THE PLAN DOES NOT INVOLVE ANY OUTSIDE COMPANIES OR PERSONS. OUR CUSTOMERS WILL CONTINUE TO ENJOY THE SAME SERVICES IN THE SAME OFFICES WITH THE SAME STAFF AND BOARD OF DIRECTORS. THE STOCK OFFERING: AS AN ELIGIBLE DEPOSITOR OR BORROWER OF HERITAGE BANK, YOU HAVE A PURCHASE PRIORITY (BUT NO OBLIGATION TO BUY) IN THE OFFERING. Please read the enclosed Prospectus carefully before making an investment decision. If you would like to place an order for common stock, you may do so WITHOUT PAYING A COMMISSION. Please complete the enclosed Stock Order Form and return it in the Order Reply Envelope, along with payment or authorization to withdraw funds (WITHOUT PENALTY FOR EARLY WITHDRAWAL) from any Heritage Bank deposit account(s) that you may have. ORDERS MUST BE RECEIVED BY THE BANK BY 10:00 A.M., PACIFIC TIME, ON DECEMBER , 1997. (over) If you wish to purchase common stock through an existing Heritage Bank IRA or any other IRA you may have, please be sure to call the Stock Information Center within the first two weeks of the Offering period, as IRA-related procedures require additional processing time. Upon consummation of the Offering, we expect that Heritage Financial common stock will be listed on the Nasdaq National Market under the symbol "HFWA". Our Board of Directors believes that this transaction is in the best interests of our customers. The net proceeds of the Offering will be available for lending and investing, and the additional capital will support continued growth and expansion of products and services. IF YOU HAVE ANY QUESTIONS, PLEASE REFER TO THE ENCLOSED QUESTION AND ANSWER BROCHURE OR CALL OUR STOCK INFORMATION CENTER AT A NUMBER SHOWN BELOW. I hope that you will take advantage of this opportunity to share in our future. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE LETTER TO MEMBERS ELIGIBLE TO VOTE Page 2 [HERITAGE FINANCIAL LOGO] LETTER TO REGISTERED PUBLIC STOCKHOLDERS Dear Stockholder: As you know, Heritage Bank conducted an initial stock offering in early 1994 in connection with reorganizing into the mutual holding company form of organization. We are now completing the transition to full public ownership through another stock offering. Pursuant to a Plan of Conversion (the "Plan"), our holding company will convert from the mutual form (no stockholders) to a stockholder-owned holding company, Heritage Financial Corporation. In connection with the Plan, Heritage Financial is offering for sale up to 4,140,000 shares of its common stock at a purchase price of $10 per share. In addition to the shares of Heritage Financial common stock that are for sale in the Offering, additional shares are designated for exchange. Shares of Heritage Bank common stock owned by you and other public stockholders at the conclusion of the transaction will be exchanged for shares of Heritage Financial common stock (the "Exchange"). Additionally, the mutual holding company's shares of Heritage Bank stock will be canceled. As soon as practicable after the consummation of the transaction, each stockholder of Heritage Bank common stock will receive a transmittal form explaining the procedure for effecting the Exchange. We are pleased to inform you that we have received conditional approval for Heritage Financial common stock to be listed on the Nasdaq National Market under the symbol "HFWA". The Plan of Conversion requires the approval of the Bank's stockholders. Included herein is a Proxy Statement describing the Plan of Conversion and business reasons for the transaction. We have also included a Question and Answer Brochure. PLEASE VOTE AND SIGN THE ENCLOSED PROXY CARD. PLEASE MAIL THE CARD IN THE ENCLOSED PROXY REPLY ENVELOPE, TO BE RECEIVED BY :00 P.M., PACIFIC TIME, ON , 1997. ON BEHALF OF THE BOARD OF DIRECTORS I URGE YOU TO VOTE "FOR" THE PLAN. YOU HAVE THE OPPORTUNITY TO PURCHASE HERITAGE FINANCIAL COMMON STOCK IN THE OFFERING. AS A STOCKHOLDER OF THE BANK ON , 1997, YOU HAVE A PURCHASE PREFERENCE OVER MEMBERS OF THE GENERAL PUBLIC. Please read the enclosed Prospectus carefully before making an investment decision. If you choose to participate in the Offering, you may do so WITHOUT PAYING A COMMISSION. Please complete the enclosed Stock Order Form and return it in the Order Reply Envelope, along with payment or authorization to withdraw funds (WITHOUT PENALTY FOR EARLY WITHDRAWAL) from any Heritage Bank deposit account(s) that you may have. ORDERS MUST BE RECEIVED BY THE BANK BY 10:00 A.M., PACIFIC TIME, ON , 1997. If you wish to purchase common stock through an existing Heritage Bank IRA or any other IRA you may have, please be sure to call the Stock Information Center within the first two weeks of the Offering period, as IRA-related procedures require additional processing time. (over) LETTER TO REGISTERED PUBLIC STOCKHOLDERS Page 2 The Board of Directors believes that the conversion of the mutual holding company and the related Offering and Exchange are consistent with the goal of enhancing value for stockholders. The net proceeds of the Offering will be available for lending and investing, and the additional capital will support continued growth. IF YOU HAVE ANY QUESTIONS, PLEASE REFER TO THE ENCLOSED QUESTION AND ANSWER BROCHURE OR CALL THE STOCK INFORMATION CENTER AT A NUMBER SHOWN BELOW. We look forward to continued association with you as a Heritage Financial stockholder. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE [HERITAGE FINANCIAL LOGO] LETTER TO CLOSED ACCOUNTS (Can Buy, Not Vote) Dear Friend: It is my pleasure to inform you of an investment opportunity. As you may know, Heritage Bank concluded an initial stock offering in 1994. We are now conducting another stock offering. Heritage Financial Corporation, a company that we recently organized to serve as the Bank's parent company, is conducting a stock offering of up to 4,140,000 shares of its common stock at a purchase price of $10 per share. AS AN ELIGIBLE DEPOSITOR OF HERITAGE BANK ON JUNE 30, 1996, WHOSE ACCOUNT WAS CLOSED THEREAFTER, YOU HAVE A PURCHASE PRIORITY IN THE OFFERING. Enclosed please find a Prospectus, Stock Order Form, Question and Answer Brochure and Reply Envelope. Please read the Prospectus carefully before making an investment decision. If you choose to participate in the Offering, you may do so WITHOUT PAYING A COMMISSION. Please complete the enclosed Stock Order Form and return it in the enclosed Reply Envelope, along with payment. ORDERS MUST BE RECEIVED BY THE BANK BY 10:00 A.M., PACIFIC TIME, ON , 1997. If you wish to purchase common stock through an IRA, please be sure to call the Stock Information Center within the first two weeks of the Offering period, as IRA-related procedures require additional processing time. Upon consummation of the Offering, we expect that Heritage Financial common stock will be listed on the Nasdaq National Market under the symbol "HFWA". IF YOU HAVE ANY QUESTIONS, PLEASE REFER TO THE ENCLOSED QUESTION AND ANSWER BROCHURE OR CALL THE STOCK INFORMATION CENTER AT A NUMBER SHOWN BELOW. I hope that you will take advantage of this opportunity to share in our future. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE [HERITAGE FINANCIAL LOGO] POTENTIAL INVESTOR LETTER (CALL-INS) Dear Friend: It is my pleasure to inform you of an investment opportunity. Heritage Financial Corporation, a company that we recently organized to serve as the Bank's parent company, is conducting a stock offering of up to 4,140,000 shares of its common stock at a purchase price of $10 per share. Enclosed please find a Prospectus, Stock Order Form, Question and Answer Brochure and Reply Envelope. Please read the Prospectus carefully before making an investment decision. If you choose to participate in the Offering, you may do so WITHOUT PAYING A COMMISSION. Please complete the Stock Order Form and return it in the enclosed Reply Envelope, along with payment. ORDERS MUST BE RECEIVED BY THE BANK BY 10:00 A.M., PACIFIC TIME, ON , 1997. If you wish to purchase common stock through an IRA, please be sure to call the Stock Information Center within the first two weeks of the Offering period, as IRA-related procedures require additional processing time. Upon consummation of the Offering, we expect that Heritage Financial common stock will be listed on the Nasdaq National Market under the symbol "HFWA". IF YOU HAVE ANY QUESTIONS, PLEASE REFER TO THE ENCLOSED QUESTION AND ANSWER BROCHURE OR CALL THE STOCK INFORMATION CENTER AT A NUMBER SHOWN BELOW. Thank you for your interest in Heritage Bank. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE LOBBY POSTER (optional) [HERITAGE FINANCIAL LOGO] HOLDING COMPANY FOR HERITAGE BANK UP TO 4,140,000 SHARES COMMON STOCK $10 PER SHARE PURCHASE PRICE WE ARE CONDUCTING AN OFFERING OF COMMON STOCK! If you have any questions or would like to obtain a copy of the Prospectus, please call our Stock Information Center at (888) 849-1078 or (360) 705-9190, from 9:00 a.m. to 4:00 p.m., Monday through Friday. Our Stock Information Center is located in our main office. THIS NOTICE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. TOMBSTONE NEWSPAPER ADVERTISEMENT (optional) [HERITAGE FINANCIAL LOGO] HOLDING COMPANY FOR HERITAGE BANK UP TO 4,140,000 SHARES COMMON STOCK $10 PER SHARE PURCHASE PRICE Heritage Financial Corporation, newly organized to be the holding company of Heritage Bank, is conducting an offering of common stock. Shares may be purchased directly from Heritage Financial during the offering period. THIS OFFERING EXPIRES ON , 1997 To receive a Prospectus, please call the Stock Information Center at (888) 849-1078 or (360) 705-9190, from 9:00 a.m. to 4:00 p.m., Monday through Friday. THIS ADVERTISEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. CUSTOMER PROXYGRAM--PLAN OF CONVERSION [YELLOW PAPER] REMINDER WE NEED YOUR VOTE! (NOT VOTING MUST BE CONSIDERED AS VOTING AGAINST THE PLAN) In order to implement the Plan, we must receive a majority of our customers' votes IN FAVOR of the Plan, which authorizes our Stock Offering. We recently mailed to you a large envelope including a Proxy Statement describing our Plan. If you have not returned the proxy card(s) that we included with the Proxy Statement, please vote, sign, and mail the enclosed replacement proxy card, using the enclosed Reply Envelope. VOTING DOES NOT OBLIGATE YOU TO PURCHASE STOCK IN OUR STOCK OFFERING. If you recently mailed your proxy card(s), please accept our thanks and disregard this request. Thank you for your cooperation. WE HOPE YOU WILL VOTE FOR THE PLAN OF CONVERSION --- QUESTIONS? Please call our Stock Information Center at (888) 849-1078 or (360) 705- 9190, 9:00 a.m. to 4:00 p.m., Monday through Friday. THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. [STOCK ORDER ACKNOWLEDGEMENT LETTER] Name: Address: Dear Friend: We are pleased to confirm receipt of your remittance (and/or authorized account withdrawal) of $ and your order for the purchase of Heritage Financial Corporation common stock. THIS NOTICE HOWEVER, CANNOT CONFIRM THE NUMBER OF SHARES THAT YOU WILL RECEIVE AT THE CONCLUSION OF THE OFFERING. The procedure for allocation of common stock depends on the orders received and is described in detail in the Heritage Financial Prospectus, dated , 1997. Allocations will be made after the conclusion of the offering period, , 1997. Your stock certificate will be registered in the name(s) shown above. Please verify the spelling and accuracy of your name and address. If this information is incorrect, please contact our Stock Information Center at (888) 849-1078 or (360) 705-9190. STOCK INFORMATION CENTER 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE NOTE: To be mailed by data processing agent. [HERITAGE FINANCIAL LOGO] "BLUE SKY" LETTER FOR MEMBERS AND INDIVIDUAL PUBLIC STOCKHOLDERS Dear Friend: I am pleased to request your vote on our Plan of Conversion (the "Plan"). As you may know, Heritage Bank conducted an initial stock offering in 1994 in connection with reorganizing into the mutual holding company form of organization. We are now conducting another stock offering. In connection with the Plan, Heritage Financial is conducting a stock offering, and our holding company will convert from the mutual form (no stockholders) to a stockholder- owned holding company. We have named the new company Heritage Financial. In connection with the Plan, Heritage Financial is offering for sale up to 4,140,000 shares of its common stock at a purchase price of $10 per share. YOUR PARTICIPATION IS IMPORTANT IN ORDER TO ACCOMPLISH THIS TRANSACTION. We have received conditional regulatory approval of our Plan, subject to the approval of the Bank's depositors and stockholders. Included herein is a Proxy Statement describing the Plan of Conversion and business reasons for the transaction. We have also included a Question and Answer Brochure. PLEASE VOTE AND SIGN THE ENCLOSED PROXY CARD(S) AND PROMPTLY RETURN THEM, USING THE ENCLOSED REPLY ENVELOPE. YOUR VOTE IS VERY IMPORTANT; ON BEHALF OF THE BOARD OF DIRECTORS I URGE YOU TO VOTE "FOR" THE PLAN. THERE WILL BE NO CHANGE IN THE TERMS OF YOUR DEPOSIT ACCOUNTS OR LOANS. YOUR DEPOSIT ACCOUNTS WILL CONTINUE TO BE INSURED BY THE FDIC. OUR CUSTOMERS WILL CONTINUE TO ENJOY THE SAME SERVICES IN THE SAME OFFICES WITH THE SAME STAFF AND BOARD OF DIRECTORS. Although you may vote on the Plan, unfortunately, Heritage Financial is unable to offer or sell its common stock to you. The small number of members in your state makes it impractical to register or qualify Heritage Financial, its officers, directors or employees under your state securities laws. (over) "BLUE SKY" LETTER FOR MEMBERS AND INDIVIDUAL PUBLIC STOCKHOLDERS Page 2 If you have any questions about your voting rights or the Plan, please call the Stock Information Center at a number shown below. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE [HERITAGE FINANCIAL LOGO] LETTER TO "STREET NAME" BENEFICIAL OWNERS Dear Stockholder: As you know, Heritage Bank conducted an initial stock offering in early 1994 in connection with reorganizing into the mutual holding company form of organization. We are now completing the transition to full public ownership through another stock offering. Pursuant to a Plan of Conversion, our holding company will convert from the mutual form (no stockholders) to a stockholder- owned holding company, Heritage Financial Corporation. In connection with the Plan, Heritage Financial is offering for sale up to 4,140,000 shares of common stock at a purchase price of $10 per share. In addition to the shares of Heritage Financial common stock that are for sale in the Offering, additional shares are designated for exchange. Shares of Heritage Bank common stock owned by you and other public stockholders at the conclusion of the transaction will be exchanged for shares of Heritage Financial common stock (the "Exchange"). Additionally, the mutual holding company's shares of Heritage Bank will be canceled. We are pleased to inform you that we have received conditional approval for Heritage Financial common stock to be listed on the Nasdaq National Market under the symbol "HFWA". The Plan of Conversion requires the approval of the Bank's stockholders. Included herein is a Proxy Statement and Prospectus describing the Plan of Conversion and business reasons for the transaction. We have also included a Question and Answer Brochure. PLEASE VOTE AND SIGN THE ENCLOSED PROXY CARD AND PROMPTLY RETURN THEM, USING THE ENCLOSED REPLY ENVELOPE. ON BEHALF OF THE BOARD OF DIRECTORS I URGE YOU TO VOTE "FOR" THE PLAN. The Board of Directors believes that the conversion of the mutual holding company and the related Offering and Exchange are consistent with the goal of enhancing value for stockholders. The net proceeds of the Offering will be available for lending and investing, and the additional capital will support continued growth. IF YOU HAVE ANY QUESTIONS, PLEASE REFER TO THE ENCLOSED QUESTION AND ANSWER BROCHURE OR CALL THE STOCK INFORMATION CENTER AT A NUMBER SHOWN BELOW. If you would like to receive a Stock Order Form, please call the Stock Information Center. The Offering will conclude on . (over) LETTER TO "STREET NAME" BENEFICIAL OWNERS Page 2 We look forward to continued association with you as a Heritage Financial stockholder. Sincerely, /s/ Donald V. Rhodes Donald V. Rhodes Chairman of the Board, President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. - ------------------------------------------------------------------------------- STOCK INFORMATION CENTER (888) 849-1078 OR (360) 705-9190 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY LOCATED AT HERITAGE BANK'S MAIN OFFICE (NOTE: This letter is used for all beneficial owners whose mailing must be done through proxy delivery channels.) PRESS RELEASE--EFFECTIVE DATE CONTACT: DONALD V. RHODES, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER TELEPHONE: (360) 943-1500 FOR IMMEDIATE RELEASE , 1997 - ------------------------------------------------------------------------------- HERITAGE BANK ANNOUNCES COMMENCEMENT OF STOCK OFFERING. OLYMPIA, WASHINGTON: Donald V. Rhodes, Chairman, President and CEO of Heritage Bank, announced today that Heritage Financial, the proposed holding company for the Bank, has received regulatory approval to conduct an offering of common stock pursuant to an amended Plan of Conversion. In accordance with the Plan, Heritage Financial Corporation, M.H.C., mutual holding company of Heritage Bank, will merge with Heritage Bank, which will become a wholly-owned subsidiary of Heritage Financial, a newly-chartered corporation. The mutual holding company owns 66% of Heritage Bank's outstanding shares of common stock. The remaining 34% of the outstanding shares are owned by Heritage Bank's public stockholders. At the conclusion of the transaction, the mutual holding company will cease to exist, and its shares of Heritage Bank will be canceled. In connection with the Conversion, Heritage Financial is offering for sale between 3,060,000 and 4,140,000 shares of common stock (subject to a possible 15% increase) at a purchase price of $10 per share. The amount and pricing of the stock is based on an independent appraisal of the organization, estimated to be $53.0 million at August 15, 1997. The FDIC, the State of Washington and the Federal Reserve Board have granted contingent approval of various regulatory applications, and the Securities and Exchange Commission has declared effective the Registration Statement for the offering of Heritage Financial common stock. The Plan is also subject to the approval of depositors and stockholders of Heritage Bank, both as of , 199 . The common stock is being offered on a priority basis in a Subscription Offering to (1) eligible depositors of Heritage Bank on , 199 and (2) eligible depositors on , 199 . Shares not sold in the Subscription Offering will be offered in a concurrent Public Stockholders Offering to public stockholders of Heritage Bank as of , 199 . Any remaining shares will be available to the general public in a concurrent Community Offering. The best efforts offering, which is being managed by Ryan, Beck & Co., Inc., is expected to conclude on , 1997. In addition to the shares of stock that are for sale in the Offering, up to shares of Heritage Financial common stock (subject to a possible 15% increase) will be exchanged for outstanding shares of Heritage Bank's common stock. It is presently expected that each share of stock of the Bank held by the public stockholders will be exchanged for between approximately and shares of common stock of Heritage Financial (the "Exchange Ratio"), based on the offering range of between and shares. The Exchange Ratio may change significantly as a result of updates of the independent appraisal or regulatory review of the transaction. The final Exchange Ratio will be determined based upon the number of shares sold in the offering and the public stockholders' ownership interest in the Bank at the conclusion of the transaction. As a result of the exchange of shares, public stockholders of the Bank will own approximately % of Heritage Financial. The dilution of ownership interest from % reflects a downward adjustment, pursuant to FDIC policy, to take into account the amount of various assets of the mutual holding company and dividends declared by the Bank and waived by the mutual holding company. In order to effect the exchange of shares, the public stockholders will automatically receive transmittal forms shortly after the conclusion of the offering. (over) PRESS RELEASE--EFFECTIVE DATE Page 2 Heritage Bank is a Washington chartered stock savings bank headquartered in Olympia. It has a branch offices in . Heritage Savings emphasizes traditional deposit and mortgage loan products. At , 199 , Heritage Savings had unaudited total assets, deposits, and stockholders' equity of approximately $ million, $ million and $ million, respectively. After the Conversion, Heritage Bank will operate as a subsidiary of Heritage Financial. Its deposits will continue to be insured by the FDIC. Heritage Financial has applied to have its common stock listed on the Market under the symbol "HFWA" upon consummation of the transaction. Further information, including the details of the offering and business and financial information about the Bank and Heritage Financial, is described in the Prospectus. The Prospectus should be received by the Bank's depositors and public stockholders on or about , 1997. Copies of the Prospectus will be available after that date by calling (888) 849-1078 or (360) 705-9190. THIS RELEASE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS WHEN ACCOMPANIED BY A STOCK ORDER FORM. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. EX-99.3(B) 14 UPDATED APPRAISAL REPORT OF RP FINANCIAL, LC EXHIBIT 99.3(B) - -------------------------------------------------------------------------------- CONVERSION APPRAISAL UPDATE REPORT HERITAGE FINANCIAL CORPORATION, M.H.C. PROPOSED HOLDING COMPANY FOR HERITAGE BANK OLYMPIA, WASHINGTON STOCK PRICES AS OF: OCTOBER 10, 1997 - -------------------------------------------------------------------------------- PREPARED BY: RP FINANCIAL, LC. 1700 NORTH MOORE STREET SUITE 2210 ARLINGTON, VIRGINIA 22209 [Letterhead Appears Here] October 10, 1997 Boards of Directors Heritage Financial Corporation, M.H.C Heritage Bank 201 5th Avenue Olympia, Washington 98501 Gentlemen: We have completed and hereby provide an updated appraisal of the estimated pro forma market value of the common stock which is to be issued by Heritage Financial Corporation, Olympia, Washington (the "Holding Company"), in connection with the mutual-to-stock conversion of Heritage Financial Corporation, a Washington-chartered mutual holding company (the "Mutual Holding Company"). The Mutual Holding Company currently has a majority ownership interest in, and its principal asset consists of, the common stock of Heritage Bank ("Heritage" or the "Bank"). We understand that the Board of Directors of the Mutual Holding Company and the Bank, have adopted a Plan of Conversion, incorporated herein by reference, in which the Mutual Holding Company will be combined with the Bank simultaneously with the Mutual Holding Company's conversion to stock form and a newly-formed Washington stock corporation, to be known as Heritage Financial Corporation, will become the holding company of the Bank. Pursuant to the reorganization, the Mutual Holding Company will cease to exist and the outstanding shares of Common Stock held by the Mutual Holding Company will be cancelled (67.82 percent of the outstanding Common Stock as of the date hereof adjusted for the impact of waived dividends and the value of Mutual Holding Company assets), and the outstanding Minority Shares (32.18 percent of the outstanding Common Stock as of the date hereof) will be converted into the Exchange Shares pursuant to the Exchange Ratio. The Exchange Ratio will result in the holders of the outstanding Minority Shares owning in the aggregate approximately the same percentage of the Common Stock to be outstanding upon the completion of the Conversion and Reorganization (i.e., the Conversion Shares and the Exchange Shares). Specifically, minority shareholders of the Bank will own the same percentage of Heritage Common Stock as owned by them immediately before consummation of the Conversion and Reorganization adjusted for the impact of waived dividends and the value of Mutual Holding Company assets but before giving effect to any (i) payment of cash in lieu of issuing fractional Exchange Shares and (ii) shares of Conversion Stock purchased by the Bank's stockholders in the Conversion Offerings. Other than shares of the Bank, the only material asset of the Mutual Holding Company is approximately $120,000 of cash that will be merged with the Bank's assets upon completion of the reorganization. This appraisal is furnished pursuant to the requirements of 563b.7 and has been prepared in accordance with the "Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization" (Valuation Guidelines) of the Office of Thrift Supervision ("OTS"), including the most recent revisions as of October 21, 1994, and applicable regulatory interpretations thereof. Such Valuation Guidelines are relied upon by the Washington Department of Financial Institutions, Division of Banks (the "Division") and the Federal Deposit Insurance Corporation ("FDIC") in evaluating conversion appraisals in the absence of separate written valuation guidelines by the respective agencies. ________________________________________________________________________________ RP Financial, LC. Boards of Directors October 10, 1997 Page 2 This updated appraisal reflects the following: (1) a review of recent developments in the Bank's financial condition, including updated financial data through September 30, 1997; (2) an updated comparison of Heritage's financial condition and operating results versus the Peer Group companies identified in the Original Appraisal; (3) a review of stock market conditions since the Original Appraisal date, along with updated stock prices as of October 10, 1997; and (4) and incorporates the impact of revised pro forma assumptions including a reduction in the ESOP stock purchases from 8 percent to 2 percent of the offering and a reduction in purchases by the Recognition Plans from 4 percent to 1 percent of the offering. Pro forma market value is defined as the price at which Heritage's stock, immediately upon completion of the conversion offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the pro forma market value thereof. RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits the company, its principals or employees from purchasing stock of its client institutions. Discussion of Relevant Considerations - ------------------------------------- 1. Financial Results ----------------- Table 1 presents summary balance sheet details as of June 30, 1997, and updated unaudited financial information through September 30, 1997. The overall composition of Heritage's September 30, 1997 balance sheet changed modestly to the June 30, 1997 data, with the Bank posting a moderate increase in assets consistent with recent trends. Updated earnings for the Bank reflect a slight decline, although net income adjusted to exclude the special SAIF assessment and gains on the sale of premises on a tax-effected basis increased modestly. Heritage's total assets increased moderately by $6.5 million, or 2.7 percent, from June 30, 1997 to September 30, 1997. The composition of the Bank's interest-earning assets ("IEA") reflected modest change. While the loan portfolio continued to grow, primarily in the area of permanent residential mortgage loans and commercial loans, the concentration of loans equaled 81.2 percent of assets as of September 30, 1997, which reflects a decrease from the 82.2 percent ratio reported as of June 30, 1997. The balance of interest-earning assets consisted of cash, investments and mortgage-backed securities ("MBS"). Heritage's portfolio of cash, investments, and MBS reflects modest overall growth, primarily as a result of a modest increase noted in the cash and interest-bearing deposit account, which increased from $7.6 million as of June 30, 1997, to $12.4 million as of September 30, 1997. The cash and investment portfolio increased primarily as a result of an influx of deposits, and somewhat lower loan origination volumes as well as some unanticipated loan repayments. The Bank's philosophy with respect to the management of cash and investments has been to maintain the portfolio at relatively modest levels in short- to intermediate-term high quality securities. No major changes to the composition and practices with respect to the management of the investment portfolio are anticipated over the near term and, accordingly, the level of cash and investments is expected to remain at low to moderate levels. The level of cash and investments is RP Financial, LC. Boards of Directors October 10, 1997 Page 3 expected to increase initially following conversion although it is management's expectation that such funds at the Bank level will gradually be redeployed into lending activities. Asset quality ratios remained favorable for the Bank, with the ratio of non-performing assets to total assets equaling 0.20 percent as of September 30, 1997, as compared to 0.19 percent as of June 30, 1997. Furthermore, allowances for loan losses as a percent of non-performing loans equaled 564.37 percent while allowances for loan losses as a percent of total loans remained unchanged at 1.32 percent as of September 30, 1997. Table 1 Heritage Bank Summary Balance Sheet Data
At June 30, 1997 At Sept. 30, 1997 ---------------- ----------------- (% of (% of Amount Assets) Amount Assets) ------ ------ ------ ------ ($000) (%) ($000) (%) Balance Sheet Data - ------------------ Total Assets $242,164 100.0% $248,704 100.0% Loans Receivable, Net 199,032 82.2 202,028 81.2 Loans Held for Sale 6,409 2.6 5,451 2.2 Mortgage-Backed Securities 5,159 2.1 4,927 2.0 Cash & Interest-Bearing Deposits 7,587 3.1 12,397 5.0 Investment Securities 8,506 3.5 9,483 3.8 Deposits 209,781 86.6 216,948 87.2 FHLB Advances 890 0.4 0 0.00 Stockholders' Equity 27,714 11.4 28,324 11.4
Source: Heritage's prospectus and internal financial reports. Heritage's operations continued to be funded primarily with retail deposits, and deposits increased modestly to equal $216.9 million as of September 30, 1997. Deposit growth in recent periods has been facilitated by the opening of five new retail branch offices since the beginning of fiscal 1995. In the future, the Bank will be seeking to continue to increase retail deposits by offering a competitive array of products and services, with the objective of growing the deposit base in conjunction with the overall growth in its southern Puget Sound markets. The employment of borrowed funds by Heritage has been relatively limited over the last five fiscal years as the Bank has preferred to build its franchise through the expansion of the retail deposit base; the Bank retired its small balance of outstanding FHLB advances during the quarter ended September 30, 1997 given the increase in deposits. Positive earnings during the quarter ended September 30, 1997 supported the increase in the Bank's capital to $28.3 million at September 30, 1997, versus a comparative balance of $27.7 million at June 30, 1997. Asset growth during the quarter resulted in the Bank's capital ratio remaining unchanged at 11.4 percent of assets. Table 2 presents summary information pertaining to the Bank's operating results for the twelve months ended June 30, 1997, and updated unaudited financial information for the twelve months ended RP Financial,LC. Boards of Directors October 10, 1997 Page 4 Table 2 Heritage Bank Summary Operating Results
12 Months Ended 12 Months Ended June 30, 1996 Sept. 30, 1997 --------------- --------------- (% of (% of Avg. Avg. Amount Assets) Amount Assets) ------ ------- ------ ------ ($000) (%) ($000) (%) Summary Income Statement - ------------------------ Interest Income $ 18,512 8.00% $ 19,104 8.11% Interest Expense (9,000) (3.89) (9,161) (3.89) -------- -------- ----- Net Interest Income $ 9,512 4.11% $ 9,944 4.22% Provision for Loan Losses 270 0.12 240 0.10 -------- ------ -------- ----- Net Interest Income After Provisions $ 9,782 4.22% $ 10,184 4.32% Other Non-Interest Income 1,257 0.54 1,281 0.54 Operating Expense (10,016) (4.33) (10,254) (4.35) ------- ------ -------- ----- Net Operating Income $ 1,023 0.44% $ 1,210 0.51% Gain on the Sale of Loans 2,006 0.87 1,972 0.84 Special SAIF Assessment (1,089) (0.47) 0 0.00 Gains on the Sale of Premises 84 0.04 120 0.05 -------- ------ -------- ----- Net Non-Operating Income ($1,005) (0.43)% $ 120 0.05% Net Income Before Tax 2,024 1.39 3,302 1.40 Income Taxes 245 0.11 (1,141) (0.48) -------- ------ -------- ----- Net Income (Loss) $ 2,269 0.98% $ 2,162 0.92% Adjusted Net Income Calculations - -------------------------------- Net Operating Income $ 1,023 0.44% $ 1,210 0.51% Tax Effect (348) (0.15) (411) (0.17) -------- ----- -------- ----- Adjusted Net Income $ 675 0.29% $ 798 0.34% Net Oper. Inc. & Gains on Sale of Loans $ 3,029 1.31% $ 3,182 1.35% Tax Effect (1,030) (0.44) (1,082) (0.46) -------- ----- -------- ----- Adjusted Net Income $ 1,999 0.86% $ 2,100 0.89% Efficiency Ratio Excluding Gains on the Sale of Loans 93.01% 91.36% Including Gains on the Sale of Loans 78.40 77.71 Effective Tax Rate (12.10)(1) 34.56
(1) Excluding the reversal of the deferred tax liability of $938,000, the effective tax rate would have equaled 34.2 percent. Sources: Heritage's prospectus, data provided by Heritage and RP Financial calculations. RP Financial, LC. Boards of Directors October 10, 1997 Page 5 September 30, 1997. Updated earnings for the Bank declined slightly, to equal $2.2 million, or 0.92 percent of assets, for the twelve months ended September 30, 1997. Earnings adjusted to exclude gains on sale and the impact of the special SAIF assessment increased modestly, primarily as a result of growth in net operating income. The Bank's updated net interest income increased to $9.9 million as of September 30, 1997 from $9.5 million as of June 30, 1997, and the ratio of net interest income to average increased to 4.22 percent from 4.11 percent, respectively. Net interest income increased principally as a result of higher interest income as measured as a percent of average assets, as interest expense as a percent of average assets remained substantially unchanged. Operating expenses were also higher as the larger asset size and higher level of business activity increased overall operating costs. For the twelve months ended September 30, 1997, Heritage's operating expenses equaled $10.3 million, equal to 4.34 percent of average assets, as compared to $10.0 million, or 4.33 percent of average assets, for the twelve months ended June 30, 1997. Heritage's operating expenses remain inflated relative to thrift industry averages by its diversification into construction and commercial lending, as well as its mortgage banking activities. Additionally, the Bank's operating expenses have been subject to upward pressures owing to the doubling of Heritage's branch offices to a total of ten over the last three fiscal years and the implementation of the business banking strategy and the employment of a total of seven additional commercial loan officers since 1993. As discussed in the Original Appraisal, management believes the Bank is making the requisite investment in fixed assets and personnel to realize growth in the Bank's franchise value and future earnings over the longer term. Heritage expects that operating expenses will continue to increase in the future as the Bank continues to grow and expand. In this regard, management believes it will continue to open new branches over time and/or acquire other branches or smaller financial institutions which will also serve to increase operating expenses (no new branches or acquisitions are planned at this time). Furthermore, Heritage expects to experience upward pressure on expense levels due to inflation, the cost of stock based benefit plans resulting from the second step conversion and the costs of an expanded shareholder base. Heritage's diversified lending operations coupled with its various fee generating activities (i.e., secondary market loan sales) continue to support non-interest income. For both periods shown in Table 1, non-interest income equaled $1.3 million, or 0.54 percent of average assets. Gains on the sale of loans has been a regular contributor to the Bank's revenues over the last five fiscal years and declined modestly over the most recent twelve month period to equal $1.2 million, or 0.54 percent of average assets. Non-operating expenses declined substantially based on updated financial data as the special SAIF assessment, recorded during the quarter ended September 30, 1996, was eliminated from trailing twelve month earnings. At the same time, gains on the sale of premises increased modestly to equal $120,000, or 0.05 percent of assets, for the twelve months ended September 30, 1997. Asset quality for the Bank remained relatively strong, and the Bank posted loan loss recoveries as a result, equal to $240,000, or 0.10 percent of assets. As discussed in the Original Appraisal, Heritage reported an income tax benefit for the twelve months ended June 30, 1997, equal to $245,000, primarily as a result of a $938,000 deferred tax liability established at the time of the mutual holding company reorganization for the potential recapture of pre-1988 tax bad debt reserves. Heritage reported a $1.1 million tax expenses for the twelve months ended September 30, 1997, as the reversal of the deferred tax liability was eliminated from trailing twelve month earnings. RP Financial, LC. Boards of Directors October 10, 1997 Page 6 2. Peer Group Financial Comparisons -------------------------------- Tables 3 and 4 present the financial characteristics and operating results for Heritage, the Peer Group and all publicly-traded SAIF-insured thrifts. Heritage's financial information is based on results through September 30, 1997, while financial data for the Peer Group is as of June 30, 1997, which is the latest data which is publicly available. In general, the comparative balance sheet ratios for the Bank and the Peer Group did not vary significantly from the ratios exhibited in the Original Appraisal. Relative to the Peer Group, the Bank's interest-earning asset composition continued to reflect a higher level of loans and lower levels of MBS and investments. Furthermore, as discussed in the Original Appraisal: (1) both Heritage and the Peer Group are primarily mortgage lenders; and (2) Heritage has diversified its loan portfolio to include a greater proportion of high risk weight loans including construction, multi-family and commercial mortgage loans and commercial business loans. Overall, Bank's interest-earning assets amounted to 94.2 percent of assets, which was below the Peer Group ratio of 96.6 percent. The mix of deposits and borrowings maintained by Heritage and the Peer Group also did not change significantly. Heritage's funding composition continued to reflect a higher concentration of deposits and a lower level of borrowed funds. Updated interest-bearing liabilities to assets ratios equaled 87.2 percent and 84.2 percent for the Bank and the Peer Group, respectively, with Heritage's higher ratio continuing to be largely attributable to the maintenance of a lower capital position. Heritage posted an updated equity-to- assets ratio of 11.4 percent, versus a comparative ratio of 14.3 percent for the Peer Group. Overall, Heritage's updated interest-earning assets to interest- bearing liabilities ("IEA/IBL") ratio equaled 108.0 percent, which remained below the comparative Peer Group average of 114.7 percent. As noted in the Original Appraisal, the additional capital realized from the stock conversion should serve to largely address the lower IEA/IBL ratio currently maintained by the Bank. Updated growth rates for Heritage and the Peer Group growth rates reflect growth for the twelve months ended September 30, 1997 and June 30, 1997. Asset growth rates of positive 8.7 percent and 20.3 percent were posted by the Bank and the Peer Group, respectively. The Bank's asset growth measures reflect that strong loan growth was recorded during the period (positive growth rate of 20.4 percent), with funding for the loan portfolio being largely provided by the cash and investments portfolio (shrinkage of 29.3 percent). The Peer Group's stronger asset growth was skewed upward by the strong growth posted by First Savings Bancorp of Washington and WesterFed of Montana which completed acquisitions during the year. (The median growth rate for the Peer Group equaled 14.8 percent which more closely approximated the average for the Bank.) Paralleling growth trends observed with respect to Heritage's operations, the Peer Group's growth was primarily realized in the loan and MBS portfolio while growth in the cash and investments portfolio was nominal. Heritage's operations were funded both through growth of deposits, which increased by 9.7 percent for the twelve months ended September 30, 1997. The Peer Group's deposit growth was skewed somewhat by the aforementioned institutions that completed an acquisition, but the median deposit growth nonetheless exceeded the level posted by Heritage. Despite recording a relatively comparable return on average assets ratio, Bank posted a stronger capital growth rate than the Peer Group (positive 8.3 percent 2.9 percent for the Peer Group). Higher dividend payments and stock repurchases (the Peer Group is comprised of full stock companies) contributed to the Peer Group's capital shrinkage. Following the increase in capital realized from conversion proceeds, the Bank's capital growth rate will be depressed by (1) a higher pro forma capital position and comparatively lower marginal returns, (2) dividends which will be paid on all outstanding shares (dividends on shares owned by the mutual holding company have been waived to date) and (3) potential capital management programs. RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 3 Balance Sheet Composition and Growth Rates Comparable Institution Analysis As of June 30, 1997
Balance Sheet as a Percent of Assets ---------------------------------------------------------------------------------------- Cash and Borrowed Subd. Net Goodwill Tng Net MEMO: Investments Loans MBS Deposits Funds Debt Worth & Intang Worth Pref.Stock ----------- ----- ------ -------- -------- ------ ------ --------- ------- ---------- Heritage Bank ------------- September 30, 1997 8.8 83.4 2.0 87.2 0.0 0.0 11.4 0.0 11.4 0.0 SAIF-Insured Thrifts 18.0 67.2 11.5 70.8 14.6 0.2 12.7 0.2 12.5 0.0 State of WA 16.1 69.1 11.0 68.7 19.6 0.1 10.1 0.5 9.6 0.2 Comparable Group Average 21.0 67.6 8.0 66.6 17.6 0.0 14.3 0.4 13.9 0.0 Mid-West Companies 22.1 74.5 0.0 57.4 25.1 0.0 16.5 0.0 16.5 0.0 North-West Companies 17.2 71.1 8.9 67.5 18.2 0.0 12.7 0.3 12.4 0.0 Western Companies (Excl CA) 26.5 57.4 11.7 71.1 11.6 0.0 15.5 0.8 14.7 0.0 Comparable Group ---------------- Mid-West Companies ------------------ CMRN Cameron Fin. Corp. of MO 11.4 84.0 0.0 60.0 16.9 0.0 21.7 0.0 21.7 0.0 FFHH FSF Financial Corp. of MN 32.7 65.1 0.0 54.7 33.3 0.0 11.4 0.0 11.4 0.0 North-West Companies -------------------- FMSB First Mutual SB of Bellevue WA 3.5 79.9 14.4 79.8 12.0 0.0 6.8 0.0 6.8 0.0 FWWB First Savings Bancorp of WA(1) 29.2 64.1 3.1 54.1 29.1 0.0 14.8 1.2 13.6 0.0 HRZB Horizon Financial Corp. of WA 9.2 78.1 10.5 82.6 0.0 0.0 15.6 0.0 15.6 0.0 IWBK Interwest SB of Oak Harbor WA 29.6 60.1 6.4 64.1 28.5 0.0 6.8 0.1 6.6 0.0 KFBI Klamath First Bancorp of OR 14.7 73.0 10.3 57.2 21.4 0.0 19.5 0.0 19.5 0.0 Western Companies (Excl CA) --------------------------- FFBA First Colorado Bancorp of Co 20.6 73.1 3.7 75.9 9.4 0.0 12.9 0.2 12.7 0.0 UBMT United Fin. Corp. of MT(1) 42.7 33.1 20.6 71.5 4.6 0.0 22.6 0.0 22.6 0.0 WSTR WesterFed Fin. Corp. of MT 16.3 66.0 10.8 66.0 20.8 0.0 10.9 2.2 8.7 0.0 Balance Sheet Annual Growth Rates Regulatory Capital ------------------------------------------------------------ ---------------------------- Cash and Loans Borrows. Net Tng Net Assets Investments & MBS Deposits &Subdebt Worth Worth Tangible Core Reg.Cap. ------ ----------- ----- -------- -------- ----- -------- -------- ----- -------- Heritage Bank ------------- September 30, 1997 8.68 -29.26 20.35 9.68 NM 8.33 8.33 11.68 11.68 16.90 SAIF-Insured Thrifts 12.28 8.85 13.00 8.32 17.66 0.85 0.09 11.01 11.07 23.21 State of WA 14.74 15.73 12.70 17.00 7.65 9.62 9.14 8.59 9.85 19.21 Comparable Group Average 20.32 7.58 22.17 20.34 20.81 2.86 -0.49 11.84 11.89 23.09 Mid-West Companies 16.24 1.98 20.23 5.58 34.25 -6.22 -6.22 13.71 13.71 22.85 North-West Companies 19.53 -1.64 18.76 22.12 -1.33 5.97 4.59 11.84 11.90 25.61 Western Companies (Excl CA) 24.35 23.61 29.12 27.22 36.23 3.74 -5.14 9.98 10.05 18.32 Comparable Group ---------------- Mid-West Companies ------------------ CMRN Cameron Fin. Corp. of MO 18.35 2.30 18.47 1.28 NM -2.59 -2.59 17.11 17.11 25.59 FFHH FSF Financial Corp. of MN 14.13 1.66 22.00 9.88 34.25 -9.85 -9.85 10.30 10.30 20.10 North-West Companies -------------------- FMSB First Mutual SB of Bellevue W 11.82 4.10 11.49 21.47 -26.73 15.38 15.38 6.90 6.90 11.94 FWWB First Savings Bancorp of WA(1) 35.58 19.16 41.09 45.69 NM -3.57 -11.30 NM 13.65 24.77 HRZB Horizon Financial Corp. of WA 5.10 -17.96 8.40 5.49 NM 1.19 1.19 NM 15.38 30.39 IWBK Interwest SB of Oak Harbor WA 29.61 NM 11.06 32.30 24.07 28.92 29.75 NM 6.79 NM KFBI Klamath First Bancorp of OR 15.55 -11.85 21.78 5.64 NM -12.07 -12.07 16.77 16.77 35.32 Western Companies (Excl CA) --------------------------- FFBA First Colorado Bancorp of Co 0.57 -10.68 4.44 3.82 14.14 -20.54 -20.68 11.41 11.56 22.10 UBMT United Fin. Corp. of MT(1) 3.01 -14.65 24.34 -2.31 NM -0.86 -0.86 NM NM NM WSTR WesterFed Fin. Corp. of MT 69.46 96.17 58.59 80.14 58.33 32.63 6.12 8.54 8.54 14.54
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 4 Income as a Percent of Average Assets and Yields, Costs, Spreads Comparable Institution Analysis For the Twelve Months Ended June 30, 1997
Net Interest Income Other Income ---------------------------- -------------------- Loss NII Total Net Provis. After Loan R.E. Other Other Income Income Expense NII on IEA Provis. Fees Oper. Income Income ------ ------ ------- ----- ------- ------- ---- ----- ------ ------ Heritage Bank - ------------- September 30, 1997 0.92 8.11 3.89 4.22 -0.10 4.32 0.00 0.00 0.54 0.54 SAIF-Insured Thrifts 0.65 7.38 4.09 3.29 0.13 3.16 0.12 0.01 0.29 0.42 State of WA 0.83 7.58 4.28 3.30 0.14 3.16 0.12 0.00 0.40 0.52 Comparable Group Average 0.96 7.53 4.11 3.43 0.12 3.31 0.18 0.01 0.19 0.37 Mid-West Companies 0.86 7.70 4.17 3.53 0.13 3.39 0.06 0.00 0.18 0.24 North-West Companies 1.06 7.78 4.31 3.47 0.15 3.32 0.14 0.01 0.18 0.34 Western Companies (Excl CA) 0.86 7.01 3.72 3.29 0.05 3.24 0.31 0.01 0.20 0.52 Comparable Group - ---------------- Mid-West Companies - ------------------ CMRN Cameron Fin. Corp. of MO 1.06 8.01 3.99 4.03 0.24 3.78 0.08 0.00 0.02 0.10 FFHH FSF Financial Corp. of MN 0.66 7.39 4.36 3.03 0.03 3.00 0.05 0.00 0.33 0.38 North-West Companies - -------------------- FMSB First Mutual SB of Bellevue WA 1.02 8.29 4.71 3.58 0.37 3.21 0.21 0.00 0.14 0.36 FWWB First Savings Bancorp of WA(1) 1.05 7.58 4.10 3.48 0.16 3.32 0.09 0.00 0.19 0.28 HRZB Horizon Financial Corp. of WA 1.56 7.73 4.16 3.56 0.03 3.53 0.21 0.00 0.05 0.27 IWBK Interwest SB of Oak Harbor WA 0.87 7.89 4.55 3.34 0.12 3.23 0.21 0.05 0.47 0.73 KFBI Klamath First Bancorp of OR 0.81 7.42 4.03 3.38 0.05 3.33 0.00 0.01 0.06 0.06 Western Companies (Excl CA) - --------------------------- FFBA First Colorado Bancorp of Co 0.86 7.02 3.89 3.13 0.09 3.04 0.00 0.01 0.34 0.35 UBMT United Fin. Corp. of MT(1) 1.09 6.86 3.30 3.56 0.00 3.56 0.41 0.00 0.23 0.64 WSTR WesterFed Fin. Corp. of MT 0.63 7.16 3.97 3.19 0.06 3.13 0.52 0.00 0.04 0.56 G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads -------------- ------------- -------------------------- MEMO: MEMO: G&A Goodwill Net Extrao. Yield Cost Yld-Cost Assets/ Effective Expense Amort. Gains Items On Assets Of Funds Spread FTE Emp. Tax Rate ------- ------- ----- -------- --------- -------- ------ -------- -------- Heritage Bank - ------------- September 30, 1997 4.35 0.00 0.05 0.00 8.85 4.67 4.18 1,789 34.56 SAIF-Insured Thrifts 2.22 0.02 -0.31 0.00 7.41 4.65 2.76 4,443 37.03 State of WA 2.19 0.06 -0.15 0.00 7.16 4.45 2.71 3,907 35.10 Comparable Group Average 1.96 0.01 -0.22 0.00 7.79 4.98 2.80 4,130 35.48 Mid-West Companies 1.89 0.00 -0.34 0.00 7.94 5.19 2.75 4,102 38.67 North-West Companies 1.86 0.01 -0.19 0.00 8.00 5.16 2.84 4,256 34.23 Western Companies (Excl CA) 2.18 0.03 -0.20 0.00 7.32 4.55 2.76 3,936 35.44 Comparable Group - ---------------- Mid-West Companies - ------------------ CMRN Cameron Fin. Corp. of MO 1.78 0.00 -0.41 0.00 8.33 5.36 2.97 4,002 37.23 FFHH FSF Financial Corp. of MN 2.01 0.00 -0.27 0.00 7.56 5.02 2.54 4,203 40.12 North-West Companies - -------------------- FMSB First Mutual SB of Bellevue WA 1.98 0.00 0.03 0.00 8.52 5.14 3.38 3,823 32.92 FWWB First Savings Bancorp of WA(1) 2.15 0.04 0.08 0.00 7.82 5.40 2.42 3,463 29.64 HRZB Horizon Financial Corp. of WA 1.47 0.00 0.04 0.00 7.91 5.05 2.86 4,322 33.89 IWBK Interwest SB of Oak Harbor WA 2.24 0.01 -0.47 0.00 8.22 4.92 3.30 3,117 34.31 KFBI Klamath First Bancorp of OR 1.47 0.00 -0.63 0.00 7.55 5.29 2.26 6,558 40.38 Western Companies (Excl CA) - --------------------------- FFBA First Colorado Bancorp of Co 2.01 0.02 0.02 0.00 7.21 4.66 2.55 5,153 37.75 UBMT United Fin. Corp. of MT(1) 2.09 0.00 -0.38 0.00 7.15 4.36 2.79 3,715 37.16 WSTR WesterFed Fin. Corp. of MT 2.45 0.07 -0.25 0.00 7.59 4.65 2.95 2,940 31.40
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. Boards of Directors October 10, 1997 Page 9 Table 4 displays the latest trailing 12 month operating results for Heritage and the Peer Group. Updated earnings for the Bank relative to the Peer Group did not change significantly from the Original Appraisal, and thus, the return on average assets for the Bank and the Peer Group continued to compare closely. Specifically, the Peer Group's return on average assets ratio equaled 0.96 percent versus 0.92 percent for Heritage. The Bank's operations continue to compare favorably to the Peer Group with respect to net interest income and non- interest income, which is partially reflective of the higher yields and fee income generated by Heritage's construction and commercial lending operations. The benefits of the Bank's higher revenues, however, are offset by its higher operating expenses. Heritage's net interest margin equaled 4.22 percent based on updated financial data and continued to exceed the Peer Group average 3.43 percent. A number of factors contribute to Heritage's favorable level of net interest income including a strong spread supported by higher yields and lower cost of funds. Asset yields are supported by Heritage's greater proportionate investment in higher yielding loans and the composition of the loan portfolio which is heavily weighted toward comparatively higher yielding loans including commercial and construction loans. Consistent with the financial data reported in the Original Appraisal, Heritage's operating expenses remain well above the Peer Group average, equal to 4.35 percent and 1.96 percent, respectively. The Bank's higher operating expense ratio can in part be explained by its higher risk weight lending emphasis, which are personnel intensive but which also generate notably higher yields and fee revenues. Additionally, the Bank's secondary market activities generate gains on sale and compensation expense without a corresponding level of assets reflected on the books. The Bank also maintains a relatively large number of branches for its asset size, as the number of branches has doubled over the last three years as Heritage has sought to expand its franchise. Overall, the relatively high level of personnel maintained by the Bank is indicated by an assets per full time equivalent employee measure of $1.8 million, which was well below the Peer Group average of $4.1 million. Non-operating items, including gains on the sale of loans, continued to have a greater impact on the Bank's operations relative to the Peer Group. Overall, gains on the sale of loans and premises combined to equal 0.89 percent for Heritage while non-operating expenses averaged 0.22 percent for the Peer Group. As discussed previously, the impact of the special SAIF assessment has been eliminated from Heritage's trailing twelve month earnings through September 30, 1997 (the Peer Group reflects the special assessment since the latest reported data is through June 30, 1997). Both the Bank and the Peer Group companies are currently in a fully taxable position with effective tax rates in the range of 34 to 36 percent. 3. Stock Market Conditions ----------------------- Since the date of the Original Appraisal, the overall stock market has strengthened in volatile trading. The DJIA moved at least 100 points for five consecutive days from August 18, 1997 through August 21, 1997, which set a record for volatility. Profit worries among some of the large blue chip companies and mixed inflation readings were factors contributing to the roller- coaster performance of the stock market. Despite strengthening bond prices, stocks traded lower through the end of August. Bond prices moved higher on inflation data which showed that prices stayed low during the second quarter, even though second quarter GDP growth was revised upward to annual rate of 3.6 percent compared to an original estimate of 2.2 percent. Volatility returned to the stock market in early-September, with the DJIA posting a record breaking point increase of 257.36 on September 2, 1997. The rally was sparked by economic data that indicated manufacturing growth slowed in August, thereby easing investors' inflation worries. However, the rally was not sustained, as RP Financial, LC. Boards of Directors October 10, 1997 Page 10 the DJIA pulled back following the one day rally. The pull back was largely attributed to profit worries, which more than offset favorable inflation news indicated by a slight increase in the national unemployment rate for August (4.9 percent in August versus 4.8 percent in July). Stocks fluctuated in a narrow trading range in mid-September, in anticipation of third quarter earnings and August economic data. The low inflation reading indicated by the August consumer price index sent stock and bond prices sharply higher on September 16, 1997, with the DJIA posting a 175 point increase and the yield on the 30-year U.S. Treasury bond posting its second largest decline in the 1990s. Stocks traded in a narrow at the end of September 1997 in anticipation of third quarter earnings, while the stable inflation environment pushed bond prices to their highest level in two years. The release of September employment data on October 10, 1997 caused bond and stock prices to soar in early trading activity, as the September unemployment rate was unchanged at 4.9 percent and fewer jobs than expected were added to the economy during September. However, most of the initial gains were erased by news of rising tensions between Iraq and Iran. On October 10, 1997, the DJIA closed at 8045.21, an increase of 4.6 percent since the date of the Original Appraisal. Since the date of the Original Appraisal, thrift issues in general have outperformed the overall stock market. Generally favorable second quarter earnings and the 30-year U.S. Treasury bond yield declining supported a generally positive trend in thrift prices since mid-August. Thrift stock prices were supported during the second half of August, as the Federal Reserve left short-term interest rates unchanged at its August meeting. Thrift stocks participated in the one day stock market rally on September 2, 1997, as evidenced by a 1.95 percent increase in the SNL Index. News of NationsBank's proposed acquisition of Barnett Banks for more than four times its book value appears to have further contributed to the one day run-up in thrift prices. During late-September and early-October, interest rate-sensitive issues in general continued to benefit from the declining interest rate environment and expectations of strong third quarter earnings. Prices of thrift and bank stocks also continued to be positively influenced by industry consolidation and the rising acquisition multiples being paid for thrift and bank franchises. On October 10, 1997, the SNL Index for all publicly-traded thrifts closed at 762.9, an increase of 15.7 percent since the date of the Original Appraisal. Consistent with the SNL index, the pricing measures for all publicly- traded SAIF-insured thrifts and the Peer Group generally increased since the date of the Original Appraisal. Overall, the increases posted by all publicly- traded SAIF-insured thrifts were below the comparative increases posted by the Peer Group. More detailed pricing information for all publicly-traded SAIF- insured institutions, as well as the Peer Group and recent conversions, is shown on the following page. The "new issue" market is separate and distinct from the market for seasoned issues like the Peer Group companies. Accordingly, as discussed in the Original Appraisal, RP Financial has considered the pro forma pricing and trading level of recently converted companies in this updated appraisal. In general, the pace of conversion activity has been relatively strong and investor reception to these offerings has been strong with most offerings oversubscribed. In initial trading activity, all of the new issues traded higher. The two second steps which had completed their conversion offerings over the last three months increased by a much lesser amount, equal to 25.7 percent after one week. RP Financial, LC. Boards of Directors October 10, 1997 Page 11 Average Pricing Characteristics
At Aug. 15, Oct. 10, % 1997 1997 Change ---- ---- ------ Peer Group - ---------- Price/Earnings(x) 21.71x 23.73x 9.3% Price/Core Earnings (x) 19.61 21.53 9.8 Price/Book (%) 151.65% 173.22% 14.2 Price/Tangible Book(%) 156.63 179.15 14.4 Price/Assets (%) 19.95 22.61 13.3 Avg. Market Capitalization ($Mil) $148.05 167.20 12.9 Price/Share 21.84 24.72 13.2 SAIF-Insured Thrifts - -------------------- Price/Earnings(x) 21.03x 22.53x 7.1% Price/Core Earnings (x) 18.56 19.94 7.4 Price/Book (%) 138.23% 155.64% 12.6 Price/Tangible Book (%) 142.95 159.27 11.4 Price/Assets (%) 17.28 19.17 10.9 Avg. Market Capitalization ($Mil) 147.75 172.95 17.1 Price/Share 21.88 24.63 12.6 Recent Conversions Last Three Months(1) - --------------------------------------- Price/Core Earnings (x) 27.98x 26.43x (5.5)% Price/Tangible Book (%) 118.89% 129.84 9.2 Second Step Conversions Last Three Months(1) - -------------------------------------------- Price/Core Earnings 27.98x 26.43x (5.5)% Price/Tangible Book Value 104.72 138.10 31.9
(1) Ratios based on conversions completed for prior three months. Shown in Table 5 is a summary of recently completed conversions which closed in the last three months. Relative to the date of the Original Appraisal, which reflected pricing ratios as of August 15, 1997, the newly converted companies increased in value by 6.9 percent on a price-to-book basis, from an average 118.89 percent pro forma P/TB ratio at August 15, 1997, to 129.84 percent as of October 10, 1997. We consider the P/E multiple to be less meaningful given the characteristics of conversion pricing coupled with the fact that most companies reported not meaningful pro forma P/E ratios (i.e., in excess of 30 times annual earnings) Table 6 reflects the pricing characteristics and after-market trends for second step conversions of mutual holding companies. Heritage's P/B ratio is priced at a premium relative to these transactions reflecting today's strong market for thrift issues generally as well as new issues. RP FINANCIAL, LC. - ------------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 5 Market Pricing Comparatives Prices As of October 10, 1997
Market Per Share Data ------------------ Capitalization Core Book Pricing Ratios(3) Dividends(4) -------------- -------------------------------- -------------------------- Price Market 12-Mth Value Amount/ Payout Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5) - --------------------- -------- ------ ------- ------ ----- ----- ----- ------ ------- -------- ------- --------- ($) ($Mil) ($) ($) (X) (%) (%) (%) (X) ($) (%) (%) SAIF-insured Thrifts 24.63 172.95 1.14 15.58 22.53 155.64 19.17 159.59 19.94 0.37 1.57 30.29 Special Selection Grouping(B) 14.75 72.77 0.38 11.55 26.43 129.84 23.93 129.84 26.43 0.30 0.76 14.29 Comparable Group - ---------------- Special Comparative Group(B) - ---------------------------- FSNJ Bayonne Banchsares of NJ 12.81 115.20 -0.04 9.91 NM 129.26 18.64 129.26 NM 0.17 1.33 NM OTFC Oregon Trail Fin. Corp of OR 16.44 77.19 0.59 13.29 27.86 123.70 29.71 123.70 27.86 0.00 0.00 0.00 RVSB Riverview Bancrop of WA 14.00 85.79 0.56 9.18 25.00 152.51 32.99 152.51 25.00 0.24 1.71 42.86 SHSB SHS Bancorp, Inc. of PA 15.75 12.92 0.41 13.83 NM 113.88 14.39 113.88 NM 0.00 0.00 0.00 Financial characteristics(6) ----------------------------------------------- Total Equity/ NPAs/ Reported Core ------------ ------------- Financial Institution Assets Assets Assets ROA ROE ROA ROE - --------------------- ------ ------- ------ ------ ----- ------ ------ ($Mil) (%) (%) (%) (%) (%) (%) SAIF-insured Thrifts 1,152 12.93 0.79 0.64 5.47 0.85 7.45 Special Selection Grouping(B) 307 18.18 0.73 0.60 2.77 0.68 3.28 Comparable Group - ---------------- Special Comparative Group(B) - ---------------------------- FSNJ Bayonne Banchsares of NJ 618 14.42 1.22 -0.35 -2.42 -0.06 -0.40 OTFC Oregon Trail Fin. Corp of OR 260 24.02 0.10 1.07 4.44 1.07 4.44 RVSB Riverview Bancrop of WA 260 21.63 0.14 1.32 6.10 1.32 6.10 SHSB SHS Bancorp, Inc. of PA 90 12.64 1.44 0.37 2.96 0.37 2.96
(1) Average of High/Low or Bid/Ask price per share. (2) EPS (estimate core basis) is based on actual trailing twelve month data, adjusted to omit non-operating items (including the SAIF assessment) on a tax effected basis. (3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/CORE = Price to estimated core earnings. (4) Indicated twelve month dividend, based on last quarterly dividend declared. (5) Indicated dividend as a percent of trailing twelve month estimated core earnings. (6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances. (7) Excludes from averages those companies the subject of actual or rumored acquisition activities or unusual operating characteristics. (8) Includes Converted Last 3 Mths (no MHC); Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP Financial, LC. October 10, 1997 -------------------------------------------------------------- Table 6 Recent Conversions (Last Three Months) Conversion Pricing Characteristics: Sorted Chronologically --------------------------------------------------------------
Institutional Information Pre-Conversion Data Offering Insider Purchases ------------------------------- Financial Info. Asset Quality Information - --------------------------------------------------------------------------------------------------------------------------------- Benefit Plans ---------------- Conversion Equity/ NPAs/ Res. Gross % of Exp./ Recog. Mgmt. Institution State Date Ticker Assets Assets Assets Cov. Proc. Mid. Proc. ESOP Plans & Dirs. - ----------- ------ ----- ------ ------- ------- ------- ----- ------- ----- ------ ---------------------------- ($Mil) (%) (%)(2) (%) ($Mil) (%) (%) (%) (%) (%)(3) - --------------------------------------------------------------------------------------------------------------------------------- Oregon Trail Financial Corp. OR 10/06/97 OTFC 220 10.08% 0.12% 280% 46.9 132% 2.3% 8.0% 4.0% 3.9% Riverview Bancorp, Inc. (8) WA *10/01/97 RVSB 230 11.24% 0.14% 245% 35.7 132% 2.8% 8.0% 4.0% 2.9% SHS Bancorp, Inc. PA 10/01/97 SHSB 83 5.52% 1.41% 36% 8.2 132% 5.7% 8.0% 4.0% 5.2% Ohio State Financial Serv OH *09/29/97 P. Sheet 34 14.45% 0.47% 86% 6.3 94% 5.7% 8.0% 4.0% 8.3% Citizens Bancorp IN 09/19/97 P. Sheet 46 12.28% 0.45% 84% 10.6 132% 4.6% 8.0% 4.0% 16.1% WSB Holding Company PA 08/29/97 P. Sheet 33 6.04% 2.34% 26% 3.3 132% 8.5% 8.0% 4.0% 31.0% Bayonne Bancshares (8) NJ 08/22/97 FSNJ 577 8.33% 0.81% 53% 48.7 132% 3.8% 8.0% 4.0% 10.0% Averages: $186 10.29% 0.81% 109% 28.0 127% 4.6% 8.0% 4.0% 9.7% Medians: $89 11.53% 0.61% 68% 16.5 132% 4.3% 8.0% 4.0% 6.8% Averages, Excluding 2nd Step $83 9.67% 0.96% 128% $15.1 125% 5.3% 8.0% 4.0% 12.9% Medians, Excluding 2nd Steps 46 10.08% 0.47% 84% 8.2 132% 5.7% 8.0% 4.0% 8.3% Institutional Information Pro Forma Data ----------------------------------- Pricing Ratios(Fin. Characteristics - -------------------------------------------------------------------------------------------------- Conversion Institution State Date Ticker P/TB P/E(5) P/A ROA TE/A ROE - -------------------------------------------------------------------------------------------------- (%) (x) (%) (%) (%) (%) - -------------------------------------------------------------------------------------------------- Oregon Trail Financial Corp. OR 10/06/97 OTFC 75.3% 13.6 18.1% 1.0% 20.7% 5.1% Riverview Bancorp, Inc. (8) WA *10/01/97 RVSB 109.0% 17.7 23.6% 1.3% 21.6% 6.2% SHS Bancorp, Inc. PA 10/01/97 SHSB 72.3% 24.5 9.1% 0.4% 12.6% 3.0% Ohio State Financial Serv OH *09/29/97 P. Sheet 62.3% 13.4 16.0% 1.2% 25.7% 4.6% Citizens Bancorp IN 09/19/97 P. Sheet 72.9% 14.8 14.8% 1.1% 46.3% 2.4% WSB Holding Company PA 08/29/97 P. Sheet 71.4% 16.6 9.2% 0.6% 12.9% 4.3% Bayonne Bancshares (8) NJ 08/22/97 FSNJ 100.9% NM 14.6% NM 14.4% NM Averages: 79.2% 15.9 15.8% 0.8% 23.4% 3.5% Medians: 72.5% 17.3 15.4% 1.1% 23.7% 4.2% Averages, Excluding 2nd Step 70.8% 20.7 13.4% 1.1% 23.6% 3.9% Medians, Excluding 2nd Steps 72.3% 14.8 14.8% 1.0% 20.7% 4.3% Institutional Information Post-IPO Pricing Trends - ------------------------------------------------------------------------------------------------------------ Closing Price: - ------------------------------------------------------------------------------------------------------------ First After After Conversion IPO Trading % First % First % Institution State Date Ticker Price Day Chg. Week(6) Chg. Month(7) Chg. ----- ---- ------ ----- ------- ---- ------- ---- -------- ---- ($) ($) (%) ($) (%) ($) (%) - ------------------------------------------------------------------------------------------------------------ Oregon Trail Financial Corp. OR 10/06/97 OTFC 10.00 $16.75 67.5% $16.75 67.5% N.A. N.A. Riverview Bancorp, Inc. (8) WA *10/01/97 RVSB 10.00 13.25 32.5% 13.63 36.2% 13.63 36.2% SHS Bancorp, Inc. PA 10/01/97 SHSB 10.00 14.75 47.5% 16.25 62.5% 16.25 62.5% Ohio State Financial Serv OH *09/29/97 P. Sheet 10.00 15.50 55.0% 15.50 55.0% 14.88 48.7% Citizens Bancorp IN 09/19/97 P. Sheet 10.00 14.00 40.0% 14.00 40.0% 14.75 47.5% WSB Holding Company PA 08/29/97 P. Sheet 10.00 13.50 35.0% 14.50 45.0% 13.75 37.5% Bayonne Bancshares (8) NJ 08/22/97 FSNJ 10.00 11.75 17.5% 11.88 18.8% 12.38 23.8% Averages:$11.25 $16.76 44.6% $17.06 47.7% $17.73 47.6% Medians:$10.00 $14.31 43.1% $14.63 46.3% $14.56 45.6% Averages, Excluding 2nd Step$10.00 $14.90 49.0% $15.40 54.0% $14.91 49.1% Medians, Excluding 2nd Steps 10.00 14.75 47.5% 15.50 55.0% 14.81 48.1%
Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available. (1) Non-OTS regulated thrifts. October 10, 1997 (2) As reported in summary pages of prospectus. (3) As reported in prospectus. (4) Does not take into account the adoption of SOP 93-6. (5) Excludes impact of special SAIF assessment on earnings (6) Latest price if offering less than one week old. (7) Latest price if offering more than one week but less than one month old. (8) Second-step conversions. (9) Simultaneously converted to commercial bank charter. - ------------------------------------------------------------------------------- RP Financial, LC. October 13, 1997 ------------------------------------------------ Pricing Characteristics and After-Market Trends Second Step Conversions ------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- Institutional Information Pre-Conversion Data Offering Insider Purchases ----------------------------- Financial Info. Asset Quality Information - --------------------------------------------------------------------------------------------------------------------------------- Benefit Plans ------------- Conversion Equity/ NPAs/ Res. Gross % of Exp./ Recog. Mgmt. Institution State Date Ticker Assets Assets Assets Cov. Proc. Mid. Proc. ESOP Plans & Dirs. P/TB ($Mil (%) (%)(2 (%) ($Mil) (%) (%) (%) (%) (%)(3) (%) - --------------------------------------------------------------------------------------------------------------------------------- Riverview Bancorp, Inc. WA 10/01/97 RVSB $230 11.24% 0.14% 245% $35.7 132% 2.8% 8.0% 4.0% 2.9% 109.0% Bayonne Bancshares NJ 08/22/97 FSNJ 577 8.33% 0.81% 53% 48.7 132% 3.8% 8.0% 4.0% 10.0% 100.9% Montgomery Fin. Corp. IN 07/01/97 MONT 94 9.83% 0.91% 20% 11.9 132% 4.5% 8.0% 4.0% 4.6% 89.1% Cumberland Mtn. Bncshrs. KY *04/01/97 P. Sheet 92 5.14% 1.31% 19% 4.4 132% 8.0% 6.2% 4.0% 4.5% 81.2% Kenwood Bancorp OH *07/01/96 P. Sheet 48 6.88% 0.00% NM 1.6 102% 22.2% 8.0% 4.0% 6.4% 67.6% Commonwealth Bancorp PA *06/17/96 CMSB 2,054 6.71% 0.51% 109% 98.7 110% 1.9% 8.0% 4.0% 0.1% 109.3% Westwood Financial Corp. NJ 06/07/96 WWFC 85 7.05% 0.00% NM 3.9 99% 9.9% 0.0% 0.0% 2.5% 80.0% Jacksonville Bancorp TX 04/01/96 JXVL 198 10.47% 1.41% 36% 16.2 106% 4.4% 8.0% 4.0% 2.0% 77.7% North Central Bancshares IA 03/21/96 FFFD 180 16.47% 0.17% 562% 26 106% 3.5% 3.2% 0.0% 0.5% 74.2% Fidelity Financial of Ohio OH *03/04/96 FFOH 227 13.23% 0.50% 69% 22.8 132% 3.2% 8.0% 4.0% 5.6% 82.6% First Colorado Bancorp CO *01/02/96 FFBA 1,400 12.71% 0.31% 20% 134.1 105% 1.9% 10.0% 2.0% 2.0% 87.0% Charter Financial IL *12/29/95 CBSB 293 12.17% 0.27% 281% 29.2 116% 3.4% 3.3% 0.0% 0.1% 81.4% American Nat'l Bancorp MD *11/03/95 ANBK 426 6.80% 2.23% 67% 21.8 132% 3.3% 8.0% 4.0% 0.6% 83.9% First Defiance Fin. Corp. OH *10/02/95 FDEF 476 15.27% 0.24% 135% 64.8 132% 2.3% 8.0% 4.0% 0.9% 85.6% Community Bank Shares IN *04/10/95 CBIN 205 7.00% 0.33% 80% 10.1 132% 4.4% 8.0% 0.0% 17.9% 85.5% Fed One Bancorp WV *01/19/95 FOBC 305 9.2% 0.32% 142% 16.1 85% 7.7% 7.0% 4.0% 0.9% 67.9% Home Financial Corp. FL *10/25/94 HOFL 1,005 13.4% 0.91% 44% 175.6 112% 3.1% 8.0% 4.0% 0.6% 86.4% Jefferson Bancorp LA *08/18/94 JEBC 257 6.3% 0.9% 25% 16.1 107% 3.9% 7.0% 3.0% 1.5% 71.7% Average:$426 9.11% 0.59% 112% $38.7 106% 4.9% 6.6% 2.8% 3.3% 76.5% Medians: 257 9.83% 0.50% 69% $22.8 116% 3.8% 8.0% 4.0% 2.0% 83.9% Pro Forma Data Post-IPO Pricing Trends --------------------------------------------------------------------------------------- Pricing Ratios(4) Fin. Characteristics Closing Price: ------------------------------------------- --------------------------------------- First After After IPO Trading % First % First % P/E(7)P/Core P/A ROA TE/A ROE Price Day Chg. Week(5) Chg. Month(6) Chg. (x) (x) (%) (%) (%) (%) ($) ($) (%) ($) (%) ($) (%) ---------------------------------------------------------------------------------------------------- Riverview Bancorp, Inc. 17.7 17.7 23.6% 1.3% 21.6% 6.2% $10.00 $13.25 32.5% $13.63 36.3% NA NA Bayonne Bancshares NM NM 14.6% -0.5% 14.4% -6.6% $10.00 11.75 17.5% 11.94 19.4% $12.38 23.8% Montgomery Fin. Corp. 24.1 24.1 16.0% 0.7% 17.9% 3.7% 10.00 11.13 11.3% 11.25 12.5% 12.13 21.3% Cumberland Mtn. Bncshrs. 13.8 13.8 7.1% 0.5% 8.8% 5.9% 10.00 11.88 18.8% 12.25 22.5% 12.63 26.3% Kenwood Bancorp NM NM 6.0% 0.1% 8.8% 1.7% 10.00 NT NA NT NA NT NA Commonwealth Bancorp 12.1 12.5 8.4% 0.7% 6.7% 10.4% 10.00 10.50 5.0% 10.75 7.5% 10.00 0.0% Westwood Financial Corp. 10.1 10.1 7.3% 0.7% 9.2% 7.9% 10.00 10.75 7.5% 10.38 3.8% 10.62 6.2% Jacksonville Bancorp 14.9 14.9 12.6% 0.8% 16.2% 5.2% 10.00 9.75 -2.5% 9.63 -3.8% 9.88 -1.2% North Central Bancshares 12.1 12.5 19.7% 1.6% 26.5% 6.1% 10.00 10.88 8.8% 10.69 6.9% 10.44 4.4% Fidelity Financial of Ohio 18.1 18.1 16.6% 0.9% 20.0% 4.6% 10.00 10.50 5.0% 10.00 0.0% 10.13 1.3% First Colorado Bancorp 12.7 13.4 13.2% 1.0% 15.2% 6.9% 10.00 11.44 14.4% 11.63 16.3% 12.00 20.0% Charter Financial 12.3 12.3 15.5% 1.3% 19.1% 6.6% 10.00 10.81 8.1% 10.88 8.8% 11.38 13.8% American Nat'l Bancorp 17.7 17.7 9.0% 0.5% 10.7% 4.7% 10.00 9.38 -6.3% 9.75 -2.5% 9.88 -1.3% First Defiance Fin. Corp. 18.2 18.2 20.6% 1.1% 24.1% 4.7% 10.00 10.38 3.8% 10.31 3.1% 10.13 1.3% Community Bank Shares 10.3 9.0 9.3% 0.9% 10.9% 8.3% 10.00 12.00 20.0% 12.75 27.5% 12.25 22.5% Fed One Bancorp 9.0 9.0 8.8% 1.0% 13.0% 7.6% 10.00 11.00 10.0% 11.00 10.0% 11.62 16.2% Home Financial Corp. 10.6 12.4 21.3% 2.0% 24.6% 8.2% 10.00 9.59 -4.1% 10.00 0.0% 10.31 3.1% Jefferson Bancorp 10.2 10.2 7.9% 0.8% 11.1% 7.0% 10.00 13.00 30.0% 14.25 42.5% 14.25 42.5% 13.2 13.3 12.2% 0.9% 14.3% 5.9% $8.95 10.44 8.8% $10.60 9.5% $9.86 10.4% 12.7 13.4 13.2% 0.9% 15.2% 6.2%$10.00 $10.94 8.4% $10.94 8.1% $10.62 6.2%
October 13, 1997 Note:"NT" -- Not Traded; "NA" -- Not Applicable, Not Avaibable. (1) Non-OTS regulated thrifts. (2) As reported in summary pages of prospectus. (3) As reported in prospectus. (4) Does not take into account the adoption of SOP 93-6. (5) Latest price if offering less than one week old. (6) Latest price if offering more than one week but less than one month old. (7) Price to core earnings if converted after 9/30/96 due to impact of SAIF assessment. - ------------------------------------------------------------------------------ RP Financial, LC. Boards of Directors October 10, 1997 Page 15 Summary of Adjustments - ---------------------- We have changed only one key valuation parameter since the Original Appraisal, as shown below.
Previous Current Key Valuation Parameters: Valuation Adjustment Valuation Adjustment - ------------------------ -------------------- -------------------- Financial Condition No Adjustment No Change Profitability, Growth and Viability of Earnings Moderate Downward No Change Asset Growth No Adjustment No Change Primary Market Area No Adjustment No Change Dividends No Adjustment No Change Liquidity of the Shares Slight Downward No Change Marketing of the Issue No Adjustment Moderate Upward Management No Adjustment No Change Effect of Government Regulations & Regulatory Reform No Adjustment No Change
There were no material changes in the updated financial condition of the Bank and the Peer Group and in their updated operating results. Heritage's balance sheet remained substantially unchanged while reported and adjusted earnings also remained relatively consistent in relation to the Peer Group. The factors concerning the valuation parameters of asset growth, primary market area, dividends, liquidity of the shares, management and effect of government regulation and regulatory reform did not change since the Original Appraisal date. Accordingly, those parameters were not discussed further in this update. The new issue market for thrift stocks remains strong with all the recent issues being oversubscribed and trading above their IPO price. Additionally, we also considered the increase in the Peer Group prices in the range of 9 to 14 percent coupled with the continued retention of earnings by Heritage through the quarter ended September 30, 1997. We have also considered the results of recent second step offerings of mutual holding companies including the offering of Riverview Bancorp, Inc., Camas, Washington, which was oversubscribed and increased by more than 30 percent in aftermarket trading. Valuation Approaches - -------------------- In applying the accepted valuation methodology promulgated by the regulatory agencies, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing Heritage's to-be-issued stock -- the price/earnings ("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches --all performed on a pro forma basis including the effects of the conversion proceeds from selling the MHC's interest to the public. In computing the pro forma impact of the conversion and the related pricing ratios, the valuation parameters for effective tax rate, reinvestment rate, offering expenses and stock benefit plan assumptions have been derived from the assumptions set forth in the prospectus. In this regard, Heritage has reduced the anticipated level of ESOP and Recognition Plan purchases from 8 percent and 4 percent of the total offering, respectively, to 2 percent and 1 percent, respectively. The amortization of the ESOP remains unchanged at 15 years and the recognition plan will continue to be amortized over 5 years. The pro assumptions are summarized in Exhibits 3 and 4. Consistent with the Original Appraisal, this updated appraisal continues to be based primarily on fundamental analysis techniques applied to the Peer Group, including the P/E approach, the P/B approach and the P/A approach. To capture the anticipated aftermarket trading of Heritage's stock, the updated appraisal RP Financial, LC. Boards of Directors October 10, 1997 Page 16 also incorporates a technical analysis of recently completed stock conversions, including principally the P/B approach which (as discussed in the Original Appraisal) is the most meaningful pricing ratio as the pro forma P/E ratios reflect an assumed reinvestment rate and do not yet reflect the actual use of proceeds. Based on the foregoing, we have concluded that the pro forma market value range of Heritage's stock is subject to an increase. Therefore, as of October 10, 1997, the pro forma market value of Heritage's conversion stock has been increased from $53,034,770 to $73,713,700 (please note that this figure reflects rounding of the stock offering amount). This updated midpoint value reflects a 39 percent increase in value relative to the Original Appraisal, and incorporates the valuation impact of the reduction of the stock benefit plans and the strength of the new issue market, including the market for second step conversions. The Bank has adopted Statement of Position ("SOP" 93-6) which will cause earnings per share computations to be based on shares issued and outstanding excluding shares owned by an ESOP where there is not a commitment to release such shares. For the purpose of preparing the pro forma pricing tables and exhibits, we have reflected all shares issued in the offering including shares purchased by the ESOP as outstanding to capture the full dilutive impact of such stock to the Bank's shareholders. However, we have considered the impact of the Bank's adoption of SOP 93-6 in the determination of Heritage's pro forma value. 1. P/TB Approach. Based on the updated midpoint value of $73.7 ------------- million, Heritage's pro forma P/TB ratio at the midpoint equaled 97.24 percent. The resulting discount relative to the Peer Group's average and median P/TB ratio equaled 43.9 and 45.7 percent, respectively, versus 42.2 percent and 35.9 percent, respectively in the Original Appraisal. RP Financial considered the discount under the P/TB approach to be reasonable in light of the valuation adjustments discussed previously, the nature of the calculation of the pro forma P/TB ratio which mathematically results in a ratio discounted to book value, comparatively lower ROE and the resulting pricing ratios under the earnings and assets approaches. 2. P/E Approach. The application of the P/E valuation method ------------ requires calculating the Bank's pro forma market value by applying a valuation P/E multiple times the pro forma earnings base. Ideally, the pro forma earnings base is composed principally of the Bank's recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of net conversion proceeds. The typical financial institution's earnings are more heavily influenced by standard sources of profitability rather than on gains, and thus we look to base the valuation primarily on "core" profitability. In the case of Heritage, however, gains on sale of loans stemming from the Bank's mortgage banking activities have represented approximately 80 percent of pre-tax profits on average over the last five fiscal years. In Table 2, we evaluated the Bank's adjusted earnings inclusive and exclusive of the gains on sale of loans, both excluding non-operating items (the gain on the sale of premises). In evaluating the Peer Group, we have computed core earnings, which excludes all gains/losses as well as the impact of the SAIF assessment and extraordinary items. (Note: the adjustments applied to the Peer Group's earnings in the calculation of core earnings are shown in Exhibit 2, including the SAIF assessment.) The same adjustments applied to the Bank would result in "core" earnings being very low, given the Bank's earnings composition. For these reasons, we have considered both reported earnings of $2.162 million and "core" earnings of $0.798 million (computed in the same fashion as the Peer Group's core earnings) in reaching a valuation conclusion. We have also considered the Bank's adjusted earnings to account only for the non-operating items (the gain on sale of premises), approximating $2.1 million. In comparison, the Bank's business plan indicates an annual earnings rate of $2.26 million on a pre-conversion basis. Based on Heritage's reported and core earnings, and incorporating the impact of the pro forma assumptions discussed previously, including the revised benefit plan assumptions, as well as the revised $73,713,700 midpoint value, the indicated pro forma P/E multiples at the midpoint and supermaximum relative to the Peer Group medians are as follows: RP Financial, LC. Boards of Directors October 10, 1997 Page 17
Peer Heritage Heritage Group Midpoint Supermax Median Reported Earnings 17.72x 20.27x 20.58x "Core" Earnings (excludes gain on sale of loans) 26.37x 28.29x 18.04x Adjusted Earnings (includes gains on sale of loans) 17.99x 20.53x N/A
RP Financial also considered the impact of SOP 936 in examining the Bank's P/E ratios. The implied conversion pricing ratios relative to the Peer Group's pricing ratios are indicated in Table 8, and the updated pro forma calculations are detailed in Exhibits 3 and 4. 3. P/A Approach. P/A ratios are generally not as a reliable ------------ indicator of market value, as investors do not place significant weight on total assets as a determinant of market value. Investors place significantly greater weight on book value and earnings -- which have received greater weight in our valuation analysis. At the $73.7 million midpoint value, Heritage exhibited a pro forma P/A ratio of 24.89 percent. In comparison to the Peer Group's median P/A ratio of 23.53 percent, Heritage's P/A ratio indicated a premium of 5.8 percent (versus a discount of 2.6 percent at the midpoint valuation in the Original Appraisal). Summary - ------- We have concluded that the Bank's estimated pro forma market value should be increased since the date of the Original Appraisal based on the revised benefit plan assumptions (i.e., the ESOP and Recognition Plans are purchasing 2 percent and 1 percent of the offering, respectively), trends exhibited in the market for thrift stocks and the growth of the Bank's capital and earnings based on updated financial data. Accordingly, it is our opinion, as of October 10, 1997 the aggregate pro forma market value of the Bank, inclusive of the sale of the MHC's ownership interest in the Subscription and Community Offering was $73,713,700 at the midpoint. Based on this valuation and the approximate 67.83 percent ownership interest being sold in the Subscription and Community Offerings, the midpoint value of the Holding Company's stock offering was $50,000,000 (i.e., 0.6783 x $73,713,700), equal to 5,000,000 shares at a per share value of $10.00. Pursuant to regulatory conversion guidelines, the 15 percent offering range includes a minimum offering value of $42,500,000 and a maximum value of $57,500,000. Based on the $10.00 per share offering price, this range equates to an offering of 4,250,000 shares at the minimum to 5,750,000 shares at the maximum. The Holding Company's offering also includes a provision for a superrange, which if exercised, would result in an offering size of $66,125,000, equal to 6,612,500 shares at the $10.00 per share offering price. The comparative pro forma valuation ratios relative to the Peer Group are shown in Table 8, and the key valuation assumptions are detailed in Exhibit 3. The pro forma calculations for the range are detailed in Exhibit 4. Establishment of Exchange Ratio - ------------------------------- The conversion regulations provide that in a conversion of a mutual holding company, the minority stockholders are entitled to exchange their shares of the Bank's common stock for common stock of the Holding Company. The Board of Trustees of the Mutual Holding Company has independently established a formula to determine the exchange ratio. The formula has been designed to preserve the current aggregate percentage ownership in the Bank represented by the Minority Shares, adjusted for the impact of waived dividends and Mutual Holding Company assets, which is an approximate 32.17 percent ownership interest. RP Financial, LC. Boards of Directors October 10, 1997 Page 18 Pursuant to the formula, the Exchange Ratio will be determined at the end of the Holding Company's stock offering based on the total number of shares sold in the Subscription and Community offerings. Based upon this formula, and the valuation conclusion and offering range concluded above, the Exchange Ratio would be 3.3064 shares, 3.8899 shares, 4.4734 shares and 5.1444 shares of Heritage Financial Corp. stock issued for each Minority Share, at the minimum, midpoint, maximum and supermaximum of the offering, respectively. The Exchange Ratio formula and share exchange procedures were determined independently by the Board of Directors. RP Financial expresses no opinion on the proposed exchange of Holding Company shares for the Minority Shares or on the proposed Exchange Ratio. Table 9 Heritage Bank Calculation of Exchange Ratios
Shares Price/ Exchange Implied Offered Share Shares(1) Exch. Ratio(2) --------- -------- ----------- -------------- Super Maximum 6,612,500 $10.00 3,136,136 5.1444 Maximum 5,750,000 10.00 2,727,075 4.4734 Midpoint 5,000,000 10.00 2,371,369 3.8899 Minimum 4,250,000 10.00 2,015,664 3.3064
(1) Calculated to preserve the Minority Shares percentage ownership in the Holding Company at 32.17 percent. (2) Calculated as pro forma exchange shares divided by 609,616 existing Minority Shares outstanding. Respectfully submitted, RP FINANCIAL, LC. /s/ Ronald S. Riggins Ronald S. Riggins /s/ James P. Hennessey James P. Hennessey Senior Vice President RP FINANCIAL, L.C. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Table 8 Public Market Pricing Heritage Bank and the Comparables As of October 10, 1997
Market Per Share Data -------------- Capitalization Core Book Pricing Ratios(3) Dividends(4) -------------- ----------------- ----------- Price/ Market 12-Mth Value/ Amount/ Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share -------- ----- ------ ----- --- --- --- ---- ----- ----- ($) ($Mil) ($) ($) (X) (%) (%) (%) (X) ($) Heritage Bank - ------------- Superrange 10.00 97.49 0.49 9.36 20.27 106.86 31.28 106.86 28.29 0.08 Range Maximum 10.00 84.77 0.53 9.79 19.00 102.16 27.94 102.16 27.36 0.08 Range Midpoint 10.00 73.71 0.56 10.28 17.72 97.24 24.89 97.24 26.37 0.10 Range Minimum 10.00 62.66 0.62 10.95 16.24 91.29 21.68 91.29 25.13 0.12 SAIF-Insured Thrifts(7) - ----------------------- Averages 24.63 172.95 1.14 15.58 22.53 155.64 19.17 159.27 19.94 0.37 Medians -- -- -- -- 22.85 149.53 17.30 151.38 19.96 -- All Non-MHC State of WA(7) - -------------------------- Averages 24.70 318.65 1.24 12.71 21.39 192.40 22.09 200.84 19.29 0.34 Medians -- -- -- -- 20.58 177.98 23.54 198.56 18.04 -- Comparable Group Averages - ------------------------- Averages 24.72 167.20 1.16 14.74 23.73 173.22 22.61 179.15 21.53 0.45 Medians -- -- -- -- 25.11 161.19 23.53 168.11 20.52 -- State of WA - ----------- CASB Cascade SB of Everett WA(7) 13.75 35.34 0.71 8.78 29.26 156.61 9.60 156.61 19.37 0.00 FMSB First Mutual SB of Bellevue WA 29.50 79.71 1.52 10.91 18.91 270.39 18.45 270.39 19.41 0.20 FWWB First Savings Bancorp of WA 26.25 276.12 0.84 14.13 29.49 185.77 27.40 201.92 NM 0.28 FBHW FirstBank Corp. of Clarkson WA 17.12 33.97 0.44 14.00 NM 122.29 22.06 122.29 NM 0.00 HRZB Horizon Financial Corp. of WA 17.50 129.80 1.05 10.91 16.36 160.40 25.03 160.40 16.67 0.44 IWBK Interwest SB of Oak Harbor WA 40.50 325.46 2.47 15.46 22.25 261.97 17.76 267.86 16.40 0.64 RVSB Riverview Bancorp of WA 14.00 85.79 0.56 9.18 25.00 152.51 32.99 152.51 25.00 0.24 STSA Sterling Financial Corp. of WA 21.12 117.58 0.90 12.41 NM 170.19 6.97 195.19 23.47 0.00 WFSL Washington FS&LA of Seattle WA 31.62 1500.75 2.14 14.66 16.30 215.69 26.05 236.15 14.78 0.92 WAHU Washington Mutual Inc. of WA(7) 67.87 8575.85 2.42 19.30 NM NM 17.59 NM 28.05 1.08 Comparable Group - ---------------- CMRN Cameron Fin. Corp. of MO 19.25 50.57 0.97 17.18 24.68 112.05 24.30 112.05 19.85 0.28 FFHH FSF Financial Corp. of MN 20.31 61.60 0.99 14.16 26.04 143.43 16.29 143.43 20.52 0.50 FFBA First Colorado Bancorp of CO 20.75 343.64 0.77 11.76 26.60 176.45 22.76 178.88 26.95 0.48 FMSB First Mutual SB of Bellevue WA 29.50 79.71 1.52 10.91 18.91 270.39 18.45 270.39 19.41 0.20 FWWB First Savings Bancorp of WA 26.25 276.12 0.84 14.13 29.49 185.77 27.40 201.92 NM 0.28 HRZB Horizon Financial Corp. of WA 17.50 129.80 1.05 10.91 16.36 160.40 25.03 160.40 16.67 0.44 IWBK Interwest SB of Oak Harbor WA 40.50 325.46 2.47 15.46 22.25 261.97 17.76 267.86 16.40 0.64 KFBI Klamath First Bancorp of OR 23.00 230.44 0.83 14.20 NM 161.97 31.66 161.97 27.71 0.30 UBMT United Fin. Corp. of MT 24.00 29.35 1.16 19.95 25.53 120.30 27.25 120.30 20.69 0.98 WSTR Westerfed Fin. Corp. of NT 26.12 145.36 1.02 18.73 NM 139.46 15.21 174.25 25.61 0.44 Dividends(4) Financial Charateristics(6) MEMO: ----------- --------------------------- Payout Total Equity/ NPAs/ Reported Core Exchange Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE Ratio ----- ------- ------ ------ ------ --- --- --- --- (%) (%) ($Mil) (%) (%) (%) (%) (%) (%) Heritage Bank - ------------- Superrange 0.78 15.76 312 29.28 0.16 1.54 5.27 1.11 3.78 5.1444 Range Maximum 0.84 16.02 303 27.35 0.16 1.47 5.38 1.02 3.73 4.7434 Range Midpoint 1.03 18.22 296 25.59 0.17 1.40 5.49 0.94 3.69 3.8899 Range Minimum 1.21 19.65 289 23.75 0.17 1.33 5.62 0.86 3.63 3.3064 SAIF-Insured Thrifts(7) - ----------------------- Averages 1.57 30.29 1,152 12.93 0.79 0.64 5.47 0.85 7.45 Medians -- -- -- -- -- -- -- -- -- All Non-MHC State of WA(7) - -------------------------- Averages 1.31 25.02 1,456 12.47 0.64 1.04 8.91 1.09 10.15 Medians -- -- -- -- -- -- -- -- -- Comparable Group Averages - ------------------------- Averages 1.91 37.26 768 14.30 0.28 0.96 7.36 1.11 8.40 Medians -- -- -- -- -- -- -- -- -- State of WA - ----------- CASB Cascade SB of Everett WA(7) 0.00 0.00 368 6.13 0.41 0.35 5.65 0.52 8.53 FMSB First Mutual SB of Bellevue WA 0.68 13.16 432 6.82 0.01 1.02 15.34 1.00 14.95 FWWB First Savings Bancorp of WA 1.07 33.33 1,008 14.75 0.30 1.05 6.25 1.00 5.90 FBHW FirstBank Corp. of Clarkson WA 0.00 0.00 154 18.04 2.07 0.70 3.86 0.57 3.14 HRZB Horizon Financial Corp. of WA 2.51 41.90 519 15.60 NA 1.57 9.99 1.54 9.80 IWBK Interwest SB of Oak Harbor WA 1.58 25.91 1,833 6.78 0.64 0.87 12.91 1.18 17.52 RVSB Riverview Bancorp of WA 1.71 42.86 260 21.63 0.14 1.32 6.10 1.32 6.10 STSA Sterling Financial Corp. of WA 0.00 0.00 1,686 4.10 0.61 0.10 2.46 0.3 7.91 WFSL Washington FS&LA of Seattle WA 2.91 22.99 5,660 12.08 0.73 1.67 14.37 1.84 15.85 WAHU Washington Mutual Inc. of WA(7) 1.59 44.63 48,764 5.00 0.81 0.35 6.81 0.74 14.45 Comparable Group - ---------------- CMRN Cameron Fin. Corp. of MO 1.45 28.87 208 21.69 0.73 1.07 4.43 1.33 5.51 FFHH FSF Financial Corp. of MN 2.46 50.51 378 11.35 0.03 0.66 5.22 0.84 6.63 FFBA First Colorado Bancorp of CO 2.31 62.34 1,510 12.90 0.23 0.86 6.02 0.84 5.94 FMSB First Mutual SB of Bellevue WA 0.68 13.16 432 6.82 0.01 1.02 15.34 1.00 14.95 FWWB First Savings Bancorp of WA 1.07 33.33 1,008 14.75 0.30 1.05 6.25 1.00 5.90 HRZB Horizon Financial Corp. of WA 2.51 41.90 519 15.60 NA 1.57 9.99 1.54 9.80 IWBK Interwest SB of Oak Harbor WA 1.58 25.91 1,833 6.78 0.64 0.87 12.91 1.18 17.52 KFBI Klamath First Bancorp of OR 1.30 36.14 728 19.55 0.08 0.81 3.67 1.23 5.54 UBMT United Fin. Corp. of MT 4.08 NM 108 22.65 NA 1.09 4.70 1.34 5.80 WSTR Westerfed Fin. Corp. of NT 1.68 43.14 956 10.91 0.25 0.63 5.09 0.79 6.41 MEMO: Offering ($Mil) Heritage Bank - ------------- Superrange 66.1 Range Maximum 57.5 Range Midpoint 50.0 Range Minimum 42.5
RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (701) 528-1700 Table 8 Public Marketing Pricing Heritage Bank and the Comparables As of October 10, 1997
Market Per Share Data ------------------- Capitalization Core Book Pricing Ratios(3) Dividends(4) ---------------- ----------------------------------- ------------------------ Price/ Market 12-Mth Value/ Amount/ Payout Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5) -------- ------ ------ ----- --- ---- ---- ---- ------ ------- ----- -------- ($) ($Mil) ($) ($) (K) (%) (%) (%) (X) ($) (%) (%) Financial Characteristics(6) ------------------------------------------------------------------------ Total Equity/ NPAs/ Reported Core --------------------- --------------- Assets Assets Assets ROA ROE ROA ROE ------ ------- ------ ------ -------- ----- ------ ($Mil) (%) (%) (%) (%) (%) (%)
(1) Average of high/low or bid/ask price per share. (2) EPS (core basis) is based on actual trailing twelve month data, adjusted to omit the impact of non-operating items (including the SAIF assessment) on a tax effected basis, and is shown on a pro forma basis where appropriate. (3) P/E * Price to Earnings; P/B * Price to Book; P/A * Price to Assets; P/TB * Price to Tangible Book; P/CORE * Price to Core Earnings. (4) Indicated twelve month dividend, based on last quarterly dividend declared. (5) Indicated twelve month dividend as a percent of trailing twelve month estimated core earnings. (6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and total assets balances. (7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics. Sources: Corporate reports, offering circulars, and RP Financial,Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. EXHIBITS RP Financial, LC. LIST OF EXHIBITS
Exhibit Number Description - ------- ----------- 1 Stock Prices: As of October 10, 1997 2 Peer Group Core Earnings Analysis 3 Pro Forma Analysis Sheet 4 Pro Forma Effect of Conversion Proceeds 5 Firm Qualifications Statement
EXHIBIT 1 Stock Prices As of October 10, 1997 RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) Market Averages. SAIF-Insured Thrifts(no MHC) --------------------------------------------- SAIF-Insured Thrifts(302) 24.36 5,521 178.7 25.15 15.54 23.85 2.14 238.02 43.47 NYSE Traded Companies(9) 45.41 36,632 1,885.2 46.55 25.75 44.17 3.22 342.18 51.61 AMEX Traded Companies(17) 20.12 3,580 84.8 21.79 13.80 19.84 1.42 303.95 32.66 NASDAQ Listed OTC Companies(276) 23.89 4,563 125.4 24.62 15.30 23.39 2.14 224.22 43.84 California Companies(21) 30.37 18,905 853.5 31.12 17.56 29.67 2.57 164.06 51.06 Florida Companies(5) 31.74 13,095 447.4 32.18 16.92 28.52 7.96 205.30 56.86 Mid-Atlantic Companies(60) 25.64 6,318 175.1 26.19 15.71 25.20 1.75 217.97 53.27 Mid-West Companies(144) 22.75 3,422 99.2 23.48 14.85 22.23 2.30 262.77 39.27 New England Companies(9) 30.35 5,009 186.0 30.83 17.58 29.65 2.72 421.94 57.18 North-West Companies(8) 23.97 11,479 333.1 25.26 17.14 23.68 1.17 184.69 38.11 South-East Companies(42) 23.73 3,527 81.4 25.34 16.30 23.66 0.81 208.65 36.26 South-West Companies(7) 20.63 1,898 44.5 21.12 12.79 20.16 2.93 25.93 46.64 Western Companies (Excl CA)(6) 22.50 5,288 116.5 22.85 15.78 21.82 3.16 337.62 33.43 Thrift Strategy(240) 23.26 3,648 93.8 24.01 15.16 22.79 2.09 213.51 41.65 Mortgage Banker Strategy(37) 29.30 14,018 588.7 30.26 17.51 28.90 1.47 307.33 53.72 Real Estate Strategy(10) 26.59 7,817 242.0 27.46 15.32 25.95 1.81 230.40 51.57 Diversified Strategy(11) 37.88 25,590 1,043.1 39.02 21.15 35.80 5.98 227.26 51.47 Retail Banking Strategy(4) 18.03 3,472 72.9 19.22 12.00 17.50 2.79 410.71 32.23 Companies Issuing Dividends(255) 24.56 5,375 177.6 25.39 15.72 24.09 2.05 251.12 42.14 Companies Without Dividends(47) 23.19 6,367 184.9 23.76 14.49 22.43 2.64 150.33 52.75 Equity/Assets less than 6%(23) 28.83 17,625 619.4 29.64 16.48 27.97 2.62 200.64 53.18 Equity/Assets 6-12%(142) 27.47 5,885 214.5 28.16 16.51 26.81 2.66 254.04 51.00 Equity/Assets >12%(137) 20.62 3,183 71.9 21.51 14.45 20.32 1.56 192.41 33.69 Converted Last 3 Mths (no MHC)(3) 15.00 4,836 68.4 15.35 12.16 14.96 0.26 0.00 63.39 Actively Traded Companies(41) 34.04 17,298 735.9 34.97 20.13 33.15 3.19 263.43 54.97 Market Value Below $20 Million(50) 18.60 835 14.4 18.94 12.77 17.88 3.97 266.50 38.39 Holding Company Structure(267) 24.40 5,315 178.0 25.18 15.67 23.86 2.28 223.00 42.54 Assets Over $1 Billion(60) 35.88 17,646 698.1 36.76 21.12 34.96 2.46 279.61 50.17 Assets $500 Million-$1 Billion(49) 23.84 5,718 120.6 24.75 14.39 23.61 1.35 264.60 51.68 Assets $250-$500 Million(66) 24.53 2,624 60.5 25.20 15.63 24.06 1.90 219.20 48.71 Assets less than $250 Million(127) 19.27 1,452 26.5 20.04 13.42 18.81 2.41 144.09 34.18 Goodwill Companies(124) 28.66 9,073 309.5 29.42 17.22 28.00 2.32 270.53 49.01 Non-Goodwill Companies(177) 21.45 3,127 90.5 22.27 14.42 21.05 1.95 189.25 39.41 Acquirors of FSLIC Cases(10) 39.33 33,589 1,695.9 40.25 22.86 38.14 4.35 328.81 55.97 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share --------------------- -------- ------- ------- ------- ------- ($) ($) ($) ($) ($) Market Averages. SAIF-Insured Thrifts(no MHC) --------------------------------------------- SAIF-Insured Thrifts(302) 0.85 1.16 15.77 15.45 153.86 NYSE Traded Companies(9) 1.96 2.77 20.08 19.19 358.54 AMEX Traded Companies(17) 0.55 0.84 15.60 15.41 109.57 NASDAQ Listed OTC Companies(276) 0.84 1.12 15.63 15.33 149.50 California Companies(21) 0.96 1.43 17.01 16.41 262.00 Florida Companies(5) 0.98 0.88 13.59 12.87 185.74 Mid-Atlantic Companies(60) 0.98 1.36 16.19 15.55 168.74 Mid-West Companies(144) 0.82 1.08 15.71 15.38 135.55 New England Companies(9) 0.81 1.39 17.48 16.28 242.59 North-West Companies(8) 0.87 1.12 14.11 19.67 128.61 South-East Companies(42) 0.76 0.99 15.03 14.70 119.15 South-West Companies(7) 0.62 1.09 14.77 14.00 192.60 Western Companies (Excl CA)(6) 0.89 1.05 15.96 15.27 106.34 Thrift Strategy(240) 0.80 1.10 15.97 15.76 139.46 Mortgage Banker Strategy(37) 1.12 1.48 15.48 14.45 229.08 Real Estate Strategy(10) 0.90 1.39 14.35 14.06 220.82 Diversified Strategy(11) 1.60 1.86 14.01 13.46 198.90 Retail Banking Strategy(4) 0.18 0.00 13.14 12.70 169.23 Companies Issuing Dividends(255) 0.91 1.22 15.88 15.38 150.76 Companies Without Dividends(47) 0.51 0.79 15.11 15.89 171.81 Equity/Assets less than 6%(23) 0.96 1.57 13.78 12.91 286.16 Equity/Assets 6-12%(142) 1.04 1.39 16.12 15.40 194.07 Equity/Assets >12%(137) 0.66 0.87 15.76 15.92 93.44 Converted Last 3 Mths (no MHC)(3) 0.25 0.32 12.34 26.38 77.83 Actively Traded Companies(41) 1.46 2.00 17.37 16.73 234.07 Market Value Below $20 Million(50) 0.52 0.82 15.27 15.23 121.47 Holding Company Structure(267) 0.83 1.13 16.01 15.73 150.93 Assets Over $1 Billion(60) 1.33 1.85 17.82 16.52 253.25 Assets $500 Million-$1 Billion(49) 0.91 1.11 14.07 13.60 153.29 Assets $250-$500 Million(66) 0.87 1.18 16.43 16.61 161.24 Assets less than $250 Million(127) 0.62 0.85 15.15 15.09 105.53 Goodwill Companies(124) 1.07 1.42 16.38 15.23 201.11 Non-Goodwill Companies(177) 0.71 0.99 15.36 15.61 122.15 Acquirors of FSLIC Cases(10) 1.66 2.43 18.85 17.79 305.74
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. (9) For MHC institutions, market value reflects share price multiplied by public (non-MHC) shares. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) Market Averages. BIF-Insured Thrifts(no MHC) -------------------------------------------- BIF-Insured Thrifts(64) 26.88 8,048 237.4 27.59 15.94 26.52 1.53 249.51 53.23 NYSE Traded Companies(2) 43.81 74,382 2,666.3 45.09 27.69 43.47 3.06 134.79 47.44 AMEX Traded Companies(6) 25.52 4,007 97.8 26.23 15.05 25.41 0.23 128.73 56.75 NASDAQ Listed OTC Companies(56) 26.35 5,835 155.4 27.05 15.57 25.96 1.62 270.86 53.04 California Companies(4) 21.62 6,822 159.4 22.16 12.37 21.75 -0.70 513.78 48.96 Mid-Atlantic Companies(15) 28.52 17,788 561.8 29.34 16.57 28.20 1.46 178.46 52.90 Mid-West Companies(2) 12.75 942 12.0 12.75 9.50 12.37 3.07 0.00 25.99 New England Companies(34) 26.50 4,649 129.9 27.27 15.35 26.12 1.66 263.14 57.25 North-West Companies(4) 24.42 6,879 161.9 24.42 13.31 23.00 5.75 166.94 59.13 South-East Companies(5) 31.70 2,083 46.4 32.42 22.60 31.65 -0.56 0.00 34.57 Thrift Strategy(44) 27.10 4,980 169.0 27.83 16.32 26.72 1.76 242.17 52.64 Mortgage Banker Strategy(8) 27.86 25,700 622.4 28.35 15.76 27.31 2.17 273.89 60.17 Real Estate Strategy(6) 20.50 4,200 85.3 21.53 11.85 20.81 -1.48 357.07 42.48 Diversified Strategy(6) 29.19 13,224 433.5 29.84 16.34 28.69 0.94 182.86 59.79 Companies Issuing Dividends(52) 28.16 8,449 256.9 28.90 16.82 27.81 1.27 240.20 51.73 Companies Without Dividends(12) 19.01 5,594 117.9 19.60 10.53 18.61 3.10 342.57 62.25 Equity/Assets less than 6%(5) 18.86 30,528 695.6 19.12 9.53 18.23 3.48 174.55 88.30 Equity/Assets 6-12%(43) 28.77 6,271 223.0 29.61 16.49 28.40 1.52 264.03 55.06 Equity/Assets >12%(16) 23.88 6,576 146.5 24.40 16.25 23.63 0.99 53.24 36.98 Actively Traded Companies(19) 29.04 11,777 323.7 29.72 16.55 28.41 2.85 302.83 55.61 Market Value Below $20 Million(6) 16.82 940 15.4 17.12 10.80 16.32 2.91 320.00 38.47 Holding Company Structure(42) 26.57 6,929 189.7 27.34 16.02 26.34 0.96 247.46 50.17 Assets Over $1 Billion(15) 31.84 22,938 743.6 32.51 18.44 31.57 1.00 242.04 55.79 Assets $500 Million-$1 Billion(16) 29.06 5,024 121.9 29.81 17.13 28.61 1.45 227.52 54.59 Assets $250-$500 Million(15) 22.51 2,968 62.5 23.37 12.94 22.12 2.18 276.69 51.53 Assets less than $250 Million(18) 23.94 1,478 29.9 24.53 15.16 23.62 1.48 260.93 51.11 Goodwill Companies(30) 28.53 12,019 377.5 29.23 16.92 28.13 1.62 237.99 53.47 Non-Goodwill Companies(34) 25.39 4,474 111.3 26.12 15.06 25.07 1.44 269.67 53.03 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share --------------------- -------- ------- ------- ------- ------- ($) ($) ($) ($) ($) Market Averages. BIF-Insured Thrifts(no MHC) -------------------------------------------- BIF-Insured Thrifts(64) 1.57 1.56 15.61 14.79 155.54 NYSE Traded Companies(2) 2.11 2.21 20.33 13.43 244.47 AMEX Traded Companies(6) 1.14 1.11 16.02 13.92 167.23 NASDAQ Listed OTC Companies(56) 1.60 1.59 15.37 14.96 150.47 California Companies(4) 1.37 1.27 12.48 12.46 155.24 Mid-Atlantic Companies(15) 1.22 1.30 15.94 14.08 167.40 Mid-West Companies(2) 0.21 0.32 12.77 12.04 50.95 New England Companies(34) 1.89 1.83 14.36 13.80 167.32 North-West Companies(4) 1.17 1.14 11.98 11.61 108.54 South-East Companies(5) 1.29 1.33 26.77 26.77 98.52 Thrift Strategy(44) 1.53 1.52 16.49 15.55 149.68 Mortgage Banker Strategy(8) 1.51 1.57 14.44 14.00 187.42 Real Estate Strategy(6) 1.52 1.45 11.02 11.01 129.69 Diversified Strategy(6) 2.12 2.08 13.04 12.03 187.10 Companies Issuing Dividends(52) 1.53 1.52 16.32 15.38 160.69 Companies Without Dividends(12) 1.81 1.77 11.28 11.18 123.96 Equity/Assets less than 6%(5) 1.13 1.04 7.41 7.19 136.87 Equity/Assets 6-12%(43) 1.88 1.85 15.32 14.20 182.24 Equity/Assets >12%(16) 0.82 0.88 18.77 18.63 86.48 Actively Traded Companies(19) 1.87 1.81 15.29 14.53 179.62 Market Value Below $20 Million(6) 1.44 1.50 13.44 13.25 85.19 Holding Company Structure(42) 1.50 1.49 15.91 15.22 141.22 Assets Over $1 Billion(15) 1.79 1.80 15.24 13.73 182.56 Assets $500 Million-$1 Billion(16) 1.85 1.78 16.33 15.03 183.85 Assets $250-$500 Million(15) 1.20 1.20 13.19 12.91 133.59 Assets less than $250 Million(18) 1.42 1.43 17.63 17.48 120.12 Goodwill Companies(30) 1.61 1.59 15.69 13.97 188.18 Non-Goodwill Companies(34) 1.53 1.53 15.54 15.54 126.16
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. (9) For MHC institutions, market value reflects share price multiplied by public (non-MHC) shares. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) Market Averages. MHC Institutions --------------------------------- SAIF-Insured Thrifts(20) 29.80 5,158 63.8 30.22 13.87 27.34 8.46 369.88 99.98 BIF-Insured Thrifts(2) 33.12 32,163 451.4 33.12 12.75 28.38 17.67 358.96 139.04 NASDAQ Listed OTC Companies(22) 30.19 8,335 109.4 30.56 13.73 27.46 9.55 366.24 105.56 Florida Companies(3) 34.75 5,931 97.7 35.38 16.25 33.22 4.66 0.00 81.42 Mid-Atlantic Companies(10) 30.60 6,470 73.1 30.82 12.57 27.21 11.53 345.00 145.29 Mid-West Companies(7) 26.45 2,109 24.6 27.05 14.32 24.60 7.61 394.75 71.11 New England Companies(1) 36.12 61,054 883.2 36.12 16.25 32.50 11.14 358.96 87.64 Thrift Strategy(21) 29.82 5,040 61.0 30.21 13.58 27.15 9.45 369.88 106.94 Diversified Strategy(1) 36.12 61,054 883.2 36.12 16.25 32.50 11.14 358.96 87.64 Companies Issuing Dividends(21) 31.00 8,683 114.9 31.37 13.74 28.10 10.14 366.24 105.56 Companies Without Dividends(1) 17.25 2,760 21.4 17.50 13.62 17.25 0.00 0.00 0.00 Equity/Assets 6-12%(16) 31.79 10,134 135.6 32.13 13.99 28.46 11.38 366.24 111.94 Equity/Assets >12%(6) 25.00 2,487 24.2 25.44 12.91 24.22 3.60 0.00 82.17 Actively Traded Companies(1) 44.50 7,990 151.5 44.50 14.05 36.00 23.61 345.00 164.57 Holding Company Structure(1) 44.50 7,990 151.5 44.50 14.05 36.00 23.61 345.00 164.57 Assets Over $1 Billion(5) 41.34 25,911 351.2 41.34 14.29 35.83 15.26 351.98 144.77 Assets $500 Million-$1 Billion(3) 34.75 5,931 97.7 35.38 16.25 33.22 4.66 0.00 81.42 Assets $250-$500 Million(5) 30.42 2,845 37.1 31.42 15.69 28.08 8.55 394.75 76.63 Assets less than $250 Million(9) 23.39 2,207 18.5 23.64 12.09 21.61 8.28 0.00 101.20 Goodwill Companies(8) 38.31 18,874 258.2 38.65 15.61 33.79 13.02 366.24 120.96 Non-Goodwill Companies(14) 25.76 2,586 28.2 26.15 12.71 24.01 7.65 0.00 94.00 MHC Institutions(22) 30.19 8,335 109.4 30.56 13.73 27.46 9.55 366.24 105.56 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share --------------------- -------- ------- ------- ------- ------- ($) ($) ($) ($) ($) Market Averages. MHC Institutions --------------------------------- SAIF-Insured Thrifts(20) 0.50 0.79 11.86 11.60 110.67 BIF-Insured Thrifts(2) 0.81 0.73 9.79 9.78 101.80 NASDAQ Listed OTC Companies(22) 0.54 0.78 11.61 11.39 109.62 Florida Companies(3) 0.62 0.94 13.91 13.87 142.53 Mid-Atlantic Companies(10) 0.45 0.69 11.05 10.65 101.45 Mid-West Companies(7) 0.49 0.84 11.84 11.81 107.32 New England Companies(1) 1.39 1.03 10.93 10.92 128.90 Thrift Strategy(21) 0.48 0.77 11.66 11.42 108.42 Diversified Strategy(1) 1.39 1.03 10.93 10.92 128.90 Companies Issuing Dividends(21) 0.55 0.80 11.73 11.49 111.30 Companies Without Dividends(1) 0.36 0.54 9.71 9.71 82.81 Equity/Assets 6-12%(16) 0.54 0.81 11.68 11.38 122.04 Equity/Assets >12%(6) 0.52 0.69 11.41 11.41 69.26 Actively Traded Companies(1) 0.72 1.14 12.18 10.86 129.26 Holding Company Structure(1) 0.72 1.14 12.18 10.86 129.26 Assets Over $1 Billion(5) 0.87 1.00 11.55 10.64 132.45 Assets $500 Million-$1 Billion(3) 0.62 0.94 13.91 13.87 142.53 Assets $250-$500 Million(5) 0.57 0.96 12.57 12.53 120.57 Assets less than $250 Million(9) 0.34 0.57 10.71 10.71 85.88 Goodwill Companies(8) 0.78 0.99 12.05 11.41 140.51 Non-Goodwill Companies(14) 0.41 0.67 11.38 11.38 92.77 MHC Institutions(22) 0.54 0.78 11.61 11.39 109.62
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. (9) For MHC institutions, market value reflects share price multiplied by public (non-MHC) shares. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- ------- ------- ------- ------- ------ ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NYSE Traded Companies --------------------- AHM Ahmanson and Co. H.F. of CA 57.31 97,336 5,578.3 59.31 29.00 57.12 0.33 205.65 76.34 CSA Coast Savings Financial of CA 57.37 18,616 1,068.0 58.87 31.37 54.00 6.24 396.28 56.66 CFB Commercial Federal Corp. of NE 50.37 21,553 1,085.6 50.37 27.92 49.00 2.80 ***.** 57.41 DME Dime Bancorp, Inc. of NY* 23.62 103,719 2,449.8 23.62 14.25 21.94 7.66 134.79 60.14 DSL Downey Financial Corp. of CA 25.94 26,733 693.5 25.94 15.87 24.87 4.30 138.86 38.79 FED FirstFed Fin. Corp. of CA 36.56 10,575 386.6 37.50 20.50 36.37 0.52 126.38 66.18 GSB Glendale Fed. Bk, FSB of CA 33.37 50,349 1,680.1 33.94 17.50 32.00 4.28 105.35 43.53 GDW Golden West Fin. Corp. of CA 90.56 56,739 5,138.3 93.81 59.87 90.44 0.13 245.78 43.47 GPT GreenPoint Fin. Corp. of NY* 64.00 45,044 2,882.8 66.56 41.12 65.00 -1.54 N.A. 34.74 NYB New York Bancorp, Inc. of NY 35.06 21,591 757.0 35.37 16.44 30.50 14.95 394.50 81.00 WES Westcorp Inc. of Orange CA 22.12 26,195 579.4 23.87 13.25 23.19 -4.61 201.77 1.10 AMEX Traded Companies --------------------- ANA Acadiana Bancshares of LA* 24.62 2,731 67.2 24.75 13.75 23.75 3.66 N.A. 65.57 BKC American Bank of Waterbury CT* 41.62 2,306 96.0 41.62 27.00 40.75 2.13 121.97 48.64 BFD BostonFed Bancorp of MA 21.75 5,947 129.3 22.25 13.12 21.37 1.78 N.A. 47.46 CFX CFX Corp of NH* 22.00 13,144 289.2 22.87 13.81 22.62 -2.74 84.87 41.94 CNY Carver Bancorp, Inc. of NY 12.75 2,314 29.5 13.37 7.37 12.87 -0.93 104.00 54.55 CBK Citizens First Fin.Corp. of IL 18.62 2,594 48.3 19.00 11.62 18.25 2.03 N.A. 29.58 ESX Essex Bancorp of VA(8) 4.31 1,057 4.6 7.94 1.00 4.62 -6.71 -74.27 96.80 FCB Falmouth Co-Op Bank of MA* 20.50 1,455 29.8 21.25 12.00 20.62 -0.58 N.A. 56.25 FAB FirstFed America Bancorp of MA 21.62 8,707 188.2 22.12 13.62 21.94 -1.46 N.A. N.A. GAF GA Financial Corp. of PA 19.50 7,985 155.7 19.50 12.87 18.69 4.33 N.A. 28.97 JSB JSB Financial, Inc. of NY 48.75 9,845 479.9 49.44 35.62 49.31 -1.14 323.91 28.29 KNK Kankakee Bancorp of IL 33.75 1,425 48.1 33.75 21.88 32.62 3.46 237.50 36.36 KYF Kentucky First Bancorp of KY 14.06 1,319 18.5 15.12 10.56 14.25 -1.33 N.A. 29.35 MBB MSB Bancorp of Middletown NY* 27.44 2,844 78.0 28.87 15.50 27.75 -1.12 174.40 39.86 PDB Piedmont Bancorp of NC 10.87 2,751 29.9 19.12 9.25 11.12 -2.25 N.A. 3.52 SSB Scotland Bancorp of NC 12.00 1,914 23.0 19.25 12.00 12.69 -5.44 N.A. -15.01 SZB SouthFirst Bancshares of AL 20.87 848 17.7 20.87 12.25 20.37 2.45 N.A. 57.51 SRN Southern Banc Company of AL 17.00 1,230 20.9 17.37 12.25 16.25 4.62 N.A. 29.57 SSM Stone Street Bancorp of NC 21.00 1,898 39.9 27.25 18.12 21.00 0.00 N.A. 2.44 TSH Teche Holding Company of LA 22.62 3,438 77.8 23.50 13.00 22.25 1.66 N.A. 57.41 FTF Texarkana Fst. Fin. Corp of AR 26.81 1,790 48.0 26.81 13.62 24.37 10.01 N.A. 71.53 THR Three Rivers Fin. Corp. of MI 18.62 824 15.3 18.62 12.87 16.44 13.26 N.A. 33.00 TBK Tolland Bank of CT* 16.94 1,560 26.4 18.00 8.25 16.94 0.00 133.66 88.22 WSB Washington SB, FSB of MD 8.13 4,247 34.5 8.13 4.38 8.00 1.63 550.40 66.94 NASDAQ Listed OTC Companies --------------------------- FBCV 1st Bancorp of Vincennes IN 37.00 698 25.8 41.00 27.14 37.00 0.00 N.A. 29.82 AFED AFSALA Bancorp, Inc. of NY 19.00 1,455 27.6 19.00 11.37 18.00 5.56 N.A. 58.33 ALBK ALBANK Fin. Corp. of Albany NY 45.00 12,825 577.1 45.87 27.50 44.37 1.42 93.55 43.45 AMFC AMB Financial Corp. of IN 16.50 964 15.9 16.50 12.50 15.81 4.36 N.A. 24.53 ASBP ASB Financial Corp. of OH 13.37 1,721 23.0 18.25 11.50 13.12 1.91 N.A. 2.85 ABBK Abington Savings Bank of MA* 32.50 1,852 60.2 33.00 18.25 32.00 1.56 390.94 66.67 AABC Access Anytime Bancorp of NM 8.50 1,193 10.1 8.50 5.25 8.37 1.55 25.93 54.55 AFBC Advance Fin. Bancorp of WV 17.75 1,084 19.2 17.75 12.75 17.12 3.68 N.A. N.A. AADV Advantage Bancorp of WI 57.75 3,234 186.8 58.00 31.25 55.50 4.05 527.72 79.07 AFCB Affiliated Comm BC, Inc of MA 31.25 6,465 202.0 32.12 16.00 28.75 8.70 N.A. 82.75 ALBC Albion Banc Corp. of Albion NY 29.12 250 7.3 29.25 16.50 26.50 9.89 124.00 73.85 ABCL Allied Bancorp of IL 26.75 8,017 214.5 28.37 15.50 24.25 10.31 301.05 60.47 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share --------------------- ------- ------- ----- -------- ------ ($) ($) ($) ($) ($) NYSE Traded Companies --------------------- AHM Ahmanson and Co. H.F. of CA 1.98 3.16 20.35 17.34 488.33 CSA Coast Savings Financial of CA 0.99 2.48 24.06 23.76 488.97 CFB Commercial Federal Corp. of NE 2.05 2.89 19.77 17.53 329.27 DME Dime Bancorp, Inc. of NY* 1.05 1.33 10.21 9.74 193.67 DSL Downey Financial Corp. of CA 0.86 1.43 15.26 15.05 220.16 FED FirstFed Fin. Corp. of CA 1.13 2.07 19.14 18.93 396.52 GSB Glendale Fed. Bk, FSB of CA 0.79 1.85 17.81 15.83 322.12 GDW Golden West Fin. Corp. of CA 6.74 8.22 43.90 43.90 689.03 GPT GreenPoint Fin. Corp. of NY* 3.17 3.09 30.44 17.11 295.27 NYB New York Bancorp, Inc. of NY 1.98 2.32 7.73 7.73 152.08 WES Westcorp Inc. of Orange CA 1.11 0.55 12.71 12.67 140.42 AMEX Traded Companies --------------------- ANA Acadiana Bancshares of LA* 0.47 0.47 16.70 16.70 95.82 BKC American Bank of Waterbury CT* 3.13 2.69 21.77 20.90 262.73 BFD BostonFed Bancorp of MA 0.74 0.96 14.42 13.94 164.10 CFX CFX Corp of NH* 1.10 1.31 10.52 9.84 141.44 CNY Carver Bancorp, Inc. of NY -0.74 0.01 14.93 14.32 178.81 CBK Citizens First Fin.Corp. of IL 0.30 0.59 14.74 14.74 104.69 ESX Essex Bancorp of VA(8) -0.05 0.05 0.49 0.31 179.83 FCB Falmouth Co-Op Bank of MA* 0.52 0.49 15.40 15.40 64.49 FAB FirstFed America Bancorp of MA -0.21 0.50 14.26 14.26 117.25 GAF GA Financial Corp. of PA 0.80 1.02 14.25 14.10 93.89 JSB JSB Financial, Inc. of NY 2.78 2.65 35.54 35.54 155.52 KNK Kankakee Bancorp of IL 1.62 2.02 26.59 24.99 239.77 KYF Kentucky First Bancorp of KY 0.58 0.75 11.17 11.17 67.44 MBB MSB Bancorp of Middletown NY* 0.49 0.51 21.15 10.38 286.18 PDB Piedmont Bancorp of NC -0.19 0.30 7.42 7.42 44.62 SSB Scotland Bancorp of NC 0.51 0.62 13.44 13.44 36.30 SZB SouthFirst Bancshares of AL -0.03 0.25 16.06 16.06 114.72 SRN Southern Banc Company of AL 0.12 0.43 14.58 14.43 85.72 SSM Stone Street Bancorp of NC 0.80 0.96 16.13 16.13 55.91 TSH Teche Holding Company of LA 0.78 1.08 15.53 15.53 118.17 FTF Texarkana Fst. Fin. Corp of AR 1.31 1.62 15.03 15.03 95.73 THR Three Rivers Fin. Corp. of MI 0.62 0.90 15.54 15.48 115.45 TBK Tolland Bank of CT* 1.11 1.16 10.60 10.30 152.71 WSB Washington SB, FSB of MD 0.30 0.44 5.05 5.05 60.83 NASDAQ Listed OTC Companies --------------------------- FBCV 1st Bancorp of Vincennes IN 1.18 0.50 32.00 31.34 387.52 AFED AFSALA Bancorp, Inc. of NY 0.82 0.82 14.74 14.74 109.40 ALBK ALBANK Fin. Corp. of Albany NY 2.29 2.82 25.85 22.59 280.88 AMFC AMB Financial Corp. of IN 0.66 0.73 14.61 14.61 97.70 ASBP ASB Financial Corp. of OH 0.39 0.56 10.29 10.29 65.35 ABBK Abington Savings Bank of MA* 2.16 1.92 18.73 16.87 270.66 AABC Access Anytime Bancorp of NM -0.45 -0.11 6.53 6.53 87.72 AFBC Advance Fin. Bancorp of WV 0.51 0.77 14.88 14.88 96.46 AADV Advantage Bancorp of WI 1.27 2.81 29.05 27.16 315.25 AFCB Affiliated Comm BC, Inc of MA 1.53 1.74 16.49 16.40 168.67 ALBC Albion Banc Corp. of Albion NY 0.27 0.96 23.96 23.96 274.51 ABCL Allied Bancorp of IL 0.61 0.89 15.60 15.41 175.16
RP FINANCIAL, LC. - ------------------------------------------ Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- --------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- ------- ------- -------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) --------------------------------------- ATSB AmTrust Capital Corp. of IN 14.25 526 7.5 14.25 9.12 13.50 5.56 N.A. 42.50 AHCI Ambanc Holding Co., Inc. of NY* 17.12 4,392 75.2 17.37 10.00 17.00 0.71 N.A. 52.18 ASBI Ameriana Bancorp of IN 21.88 3,230 70.7 22.00 14.00 20.50 6.73 137.05 36.75 AFFFZ America First Fin. Fund of CA(8) 42.62 6,011 256.2 43.12 28.00 42.62 0.00 127.31 40.89 ANBK American Nat'l Bancorp of MD(8) 20.12 3,613 72.7 20.50 11.37 20.12 0.00 N.A. 66.01 ABCW Anchor Bancorp Wisconsin of WI 31.75 9,049 287.3 31.75 17.25 30.00 5.83 116.13 77.67 ANDB Andover Bancorp, Inc. of MA* 36.37 5,148 187.2 37.50 21.41 36.50 -0.36 238.33 41.96 ASFC Astoria Financial Corp. of NY 56.50 20,978 1,185.3 56.50 32.25 55.87 1.13 115.24 53.24 AVND Avondale Fin. Corp. of IL 18.37 3,495 64.2 18.87 12.75 17.50 4.97 N.A. 7.30 BKCT Bancorp Connecticut of CT* 31.75 2,534 80.5 36.00 21.25 35.25 -9.93 262.86 41.11 BPLS Bank Plus Corp. of CA 13.31 19,308 257.0 13.75 9.62 13.44 -0.97 N.A. 15.74 BWFC Bank West Fin. Corp. of MI 21.25 1,753 37.3 21.25 10.25 20.87 1.82 N.A. 100.09 BANC BankAtlantic Bancorp of FL 15.25 22,473 342.7 17.12 12.12 15.50 -1.61 266.59 14.06 BKUNA BankUnited SA of FL 13.25 8,869 117.5 13.31 8.00 13.12 0.99 144.01 32.50 BVCC Bay View Capital Corp. of CA 28.62 12,979 371.5 28.69 17.62 28.37 0.88 44.91 35.06 FSNJ Bayonne Banchsares of NJ 12.81 8,993 115.2 13.06 5.37 12.87 -0.47 N.A. 63.39 BFSB Bedford Bancshares of VA 24.50 1,142 28.0 25.25 16.75 24.50 0.00 133.33 39.05 BFFC Big Foot Fin. Corp. of IL 19.50 2,513 49.0 19.62 12.31 18.62 4.73 N.A. 50.00 BSBC Branford SB of CT(8)* 5.75 6,559 37.7 6.31 3.19 6.00 -4.17 171.23 48.58 BYFC Broadway Fin. Corp. of CA 11.75 835 9.8 11.75 9.00 11.37 3.34 N.A. 27.03 CBES CBES Bancorp of MO 21.50 1,025 22.0 21.50 13.25 21.25 1.18 N.A. 50.88 CCFH CCF Holding Company of GA 19.50 820 16.0 19.50 13.12 17.12 13.90 N.A. 32.20 CENF CENFED Financial Corp. of CA 39.00 5,729 223.4 39.75 22.95 37.25 4.70 148.72 46.67 CFSB CFSB Bancorp of Lansing MI 29.69 5,096 151.3 31.00 16.36 28.75 3.27 229.89 67.46 CKFB CKF Bancorp of Danville KY 18.50 925 17.1 20.75 17.50 19.00 -2.63 N.A. -8.64 CNSB CNS Bancorp of MO 18.00 1,653 29.8 20.00 13.00 20.00 -10.00 N.A. 19.05 CSBF CSB Financial Group Inc of IL* 12.75 942 12.0 12.75 9.50 12.37 3.07 N.A. 25.99 CBCI Calumet Bancorp of Chicago IL 48.94 2,111 103.3 48.94 27.75 48.00 1.96 141.68 47.19 CAFI Camco Fin. Corp. of OH 22.87 3,214 73.5 22.87 14.05 22.50 1.64 N.A. 51.26 CMRN Cameron Fin. Corp. of MO 19.25 2,627 50.6 19.25 14.50 18.87 2.01 N.A. 20.31 CAPS Capital Savings Bancorp of MO 17.50 1,892 33.1 18.25 11.12 16.75 4.48 32.08 34.62 CFNC Carolina Fincorp of NC* 17.12 1,851 31.7 17.87 13.00 17.75 -3.55 N.A. 28.05 CASB Cascade SB of Everett WA(8) 13.75 2,570 35.3 16.80 10.40 13.25 3.77 7.42 6.59 CATB Catskill Fin. Corp. of NY* 16.50 4,720 77.9 17.25 12.37 16.87 -2.19 N.A. 17.86 CNIT Cenit Bancorp of Norfolk VA 65.00 1,650 107.3 67.87 38.50 67.25 -3.35 309.32 56.63 CEBK Central Co-Op. Bank of MA* 24.00 1,965 47.2 24.87 14.75 23.00 4.35 357.14 37.14 CENB Century Bancshares of NC* 80.75 407 32.9 82.12 62.00 80.00 0.94 N.A. 24.23 CBSB Charter Financial Inc. of IL 20.75 4,150 86.1 21.56 12.50 21.37 -2.90 N.A. 66.00 COFI Charter One Financial of OH 63.25 46,186 2,921.3 65.00 38.75 63.25 0.00 261.43 50.60 CVAL Chester Valley Bancorp of PA 23.25 2,162 50.3 23.25 13.90 23.25 0.00 105.21 64.89 CTZN CitFed Bancorp of Dayton OH 54.25 8,638 468.6 54.25 28.08 52.25 3.83 502.78 64.39 CLAS Classic Bancshares of KY 16.25 1,305 21.2 16.25 11.25 15.75 3.17 N.A. 39.85 CMSB Cmnwealth Bancorp of PA 19.00 17,096 324.8 19.50 11.75 18.37 3.43 N.A. 26.67 CBSA Coastal Bancorp of Houston TX 31.00 4,972 154.1 33.25 21.25 32.00 -3.13 N.A. 35.55 CFCP Coastal Fin. Corp. of SC 24.37 4,641 113.1 27.75 14.25 24.25 0.49 143.70 54.73 CMSV Commty. Svgs, MHC of FL (48.5) 38.00 5,090 93.9 39.25 16.75 36.50 4.11 N.A. 85.37 CFTP Community Fed. Bancorp of MS 17.50 4,629 81.0 20.00 13.50 17.50 0.00 N.A. 2.94 CFFC Community Fin. Corp. of VA 23.50 1,275 30.0 23.50 20.50 23.00 2.17 235.71 13.25 CFBC Community First Bnkg Co. of GA 39.25 2,414 94.7 40.00 31.87 40.00 -1.88 N.A. N.A. CIBI Community Inv. Bancorp of OH 15.25 929 14.2 16.00 10.33 15.25 0.00 N.A. 34.60 COOP Cooperative Bk.for Svgs. of NC 15.50 2,983 46.2 17.00 9.25 16.87 -8.12 210.00 53.16 CRZY Crazy Woman Creek Bncorp of WY 15.12 955 14.4 15.12 11.25 15.12 0.00 N.A. 26.00 DNFC D&N Financial Corp. of MI 23.75 8,191 194.5 24.00 13.75 22.75 4.40 171.43 41.79 DCBI Delphos Citizens Bancorp of OH 17.75 2,039 36.2 18.00 11.75 17.75 0.00 N.A. 47.92 DIME Dime Community Bancorp of NY 22.50 13,093 294.6 23.12 13.25 22.00 2.27 N.A. 52.54 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share - --------------------- -------- ------- ------- ------- -------- ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - ---------------------------------------- ATSB AmTrust Capital Corp. of IN 0.25 0.41 14.19 14.05 137.35 AHCI Ambanc Holding Co., Inc. of NY* -0.64 -0.67 14.29 14.29 110.42 ASBI Ameriana Bancorp of IN 0.75 1.05 13.49 13.48 123.14 AFFFZ America First Fin. Fund of CA(8) 5.51 6.76 30.76 30.38 364.44 ANBK American Nat'l Bancorp of MD(8) 0.37 0.86 12.54 12.54 139.86 ABCW Anchor Bancorp Wisconsin of WI 1.55 2.00 13.24 13.00 212.83 ANDB Andover Bancorp, Inc. of MA* 2.57 2.65 19.59 19.59 243.00 ASFC Astoria Financial Corp. of NY 1.96 2.80 28.59 24.01 365.36 AVND Avondale Fin. Corp. of IL -0.85 -2.63 15.85 15.85 173.75 BKCT Bancorp Connecticut of CT* 2.15 2.03 17.32 17.32 169.05 BPLS Bank Plus Corp. of CA -0.46 0.04 9.27 9.26 183.03 BWFC Bank West Fin. Corp. of MI 0.53 0.47 12.89 12.89 88.80 BANC BankAtlantic Bancorp of FL 0.98 0.71 6.83 5.61 121.50 BKUNA BankUnited SA of FL 0.29 0.48 7.59 6.15 203.77 BVCC Bay View Capital Corp. of CA 0.97 1.58 15.12 12.69 238.56 FSNJ Bayonne Banchsares of NJ -0.24 -0.04 9.91 9.91 68.72 BFSB Bedford Bancshares of VA 1.14 1.46 16.80 16.80 118.61 BFFC Big Foot Fin. Corp. of IL 0.04 0.35 14.34 14.34 84.46 BSBC Branford SB of CT(8)* 0.32 0.32 2.64 2.64 28.44 BYFC Broadway Fin. Corp. of CA -0.19 0.29 14.65 14.65 146.40 CBES CBES Bancorp of MO 0.84 1.03 17.34 17.34 98.61 CCFH CCF Holding Company of GA 0.05 0.07 14.36 14.36 122.93 CENF CENFED Financial Corp. of CA 1.98 2.82 20.85 20.81 400.68 CFSB CFSB Bancorp of Lansing MI 1.37 1.73 12.65 12.65 165.90 CKFB CKF Bancorp of Danville KY 1.17 0.86 15.75 15.75 65.74 CNSB CNS Bancorp of MO 0.25 0.46 14.84 14.84 59.50 CSBF CSB Financial Group Inc of IL* 0.21 0.32 12.77 12.04 50.95 CBCI Calumet Bancorp of Chicago IL 2.72 3.45 36.46 36.46 235.23 CAFI Camco Fin. Corp. of OH 1.11 1.24 14.58 13.45 152.41 CMRN Cameron Fin. Corp. of MO 0.78 0.97 17.18 17.18 79.22 CAPS Capital Savings Bancorp of MO 0.82 1.15 11.28 11.28 128.18 CFNC Carolina Fincorp of NC* 0.68 0.65 13.75 13.75 60.24 CASB Cascade SB of Everett WA(8) 0.47 0.71 8.78 8.78 143.24 CATB Catskill Fin. Corp. of NY* 0.85 0.86 15.08 15.08 60.22 CNIT Cenit Bancorp of Norfolk VA 3.75 3.44 31.12 28.58 430.03 CEBK Central Co-Op. Bank of MA* 1.44 1.46 17.07 15.20 163.33 CENB Century Bancshares of NC* 4.33 4.36 74.45 74.45 247.27 CBSB Charter Financial Inc. of IL 1.05 1.47 13.71 12.13 94.76 COFI Charter One Financial of OH 2.98 3.73 21.15 19.80 315.35 CVAL Chester Valley Bancorp of PA 0.89 1.27 12.52 12.52 149.71 CTZN CitFed Bancorp of Dayton OH 1.94 2.73 22.83 20.57 358.59 CLAS Classic Bancshares of KY 0.45 0.63 14.84 12.52 100.81 CMSB Cmnwealth Bancorp of PA 0.69 0.88 12.89 10.08 133.89 CBSA Coastal Bancorp of Houston TX 1.45 2.52 19.85 16.50 596.15 CFCP Coastal Fin. Corp. of SC 0.95 1.04 6.68 6.68 108.33 CMSV Commty. Svgs, MHC of FL (48.5) 0.73 1.09 15.46 15.46 137.48 CFTP Community Fed. Bancorp of MS 0.59 0.72 12.40 12.40 45.16 CFFC Community Fin. Corp. of VA 1.32 1.67 18.86 18.86 137.58 CFBC Community First Bnkg Co. of GA 1.05 1.06 28.74 28.35 186.68 CIBI Community Inv. Bancorp of OH 0.63 0.96 11.96 11.96 99.36 COOP Cooperative Bk.for Svgs. of NC -0.90 0.22 9.02 9.02 118.15 CRZY Crazy Woman Creek Bncorp of WY 0.58 0.71 14.67 14.67 56.83 DNFC D&N Financial Corp. of MI 1.10 1.45 10.95 10.84 196.42 DCBI Delphos Citizens Bancorp of OH 0.72 0.72 14.93 14.93 52.56 DIME Dime Community Bancorp of NY 0.94 1.01 14.58 12.56 100.44
RP FINANCIAL, LC. - ------------------------------------------ Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ------------------------ ----------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) ---------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) ------------------------------------------ DIBK Dime Financial Corp. of CT* 31.25 5,147 160.8 31.75 16.50 30.50 2.46 197.62 81.16 EGLB Eagle BancGroup of IL 19.00 1,238 23.5 19.00 13.12 18.50 2.70 N.A. 27.77 EBSI Eagle Bancshares of Tucker GA 19.37 5,660 109.6 20.94 13.62 19.37 0.00 167.17 24.97 EGFC Eagle Financial Corp. of CT 40.25 6,279 252.7 40.25 26.50 39.50 1.90 360.00 31.97 ETFS East Texas Fin. Serv. of TX 21.37 1,025 21.9 21.37 14.75 20.50 4.24 N.A. 30.54 EMLD Emerald Financial Corp of OH 17.00 5,062 86.1 17.00 10.50 16.50 3.03 N.A. 51.11 EIRE Emerald Island Bancorp, MA* 25.00 2,246 56.2 25.87 12.40 25.50 -1.96 228.08 56.25 EFBC Empire Federal Bancorp of MT 18.00 2,592 46.7 18.25 12.50 18.00 0.00 N.A. N.A. EFBI Enterprise Fed. Bancorp of OH 25.50 1,985 50.6 27.37 14.00 25.25 0.99 N.A. 75.86 EQSB Equitable FSB of Wheaton MD 43.75 602 26.3 43.75 26.25 42.50 2.94 N.A. 54.87 FCBF FCB Fin. Corp. of Neenah WI 27.50 4,073 112.0 28.13 18.25 27.50 0.00 N.A. 48.65 FFBS FFBS Bancorp of Columbus MS 23.00 1,557 35.8 26.00 21.00 21.25 8.24 N.A. 0.00 FFDF FFD Financial Corp. of OH 18.37 1,455 26.7 18.37 11.50 17.37 5.76 N.A. 38.64 FFLC FFLC Bancorp of Leesburg FL 34.12 2,301 78.5 34.12 18.25 30.75 10.96 N.A. 58.70 FFFC FFVA Financial Corp. of VA 33.00 4,521 149.2 34.75 17.75 33.62 -1.84 N.A. 60.98 FFWC FFW Corporation of Wabash IN 32.25 711 22.9 32.25 20.25 30.25 6.61 N.A. 47.39 FFYF FFY Financial Corp. of OH 27.62 4,145 114.5 28.25 24.00 27.87 -0.90 N.A. 9.13 FMCO FMS Financial Corp. of NJ 29.00 2,388 69.3 31.50 15.63 27.25 6.42 222.22 58.90 FFHH FSF Financial Corp. of MN 20.31 3,033 61.6 21.00 13.62 19.75 2.84 N.A. 34.33 FOBC Fed One Bancorp of Wheeling WV 25.87 2,373 61.4 27.00 15.37 26.00 -0.50 158.70 64.25 FBCI Fidelity Bancorp of Chicago IL 25.00 2,792 69.8 25.62 16.37 25.62 -2.42 N.A. 47.06 FSBI Fidelity Bancorp, Inc. of PA 23.50 1,550 36.4 23.50 16.82 22.25 5.62 204.01 29.26 FFFL Fidelity FSB, MHC of FL (47.7) 31.50 6,771 101.6 31.50 15.75 29.94 5.21 N.A. 77.46 FFED Fidelity Fed. Bancorp of IN 9.25 2,487 23.0 11.75 7.50 9.38 -1.39 31.21 -5.13 FFOH Fidelity Financial of OH 15.50 5,579 86.5 16.37 10.12 15.75 -1.59 N.A. 34.78 FIBC Financial Bancorp, Inc. of NY 22.50 1,722 38.7 23.94 14.00 22.75 -1.10 N.A. 50.00 FBSI First Bancshares of MO 25.50 1,096 27.9 25.50 15.00 23.00 10.87 100.00 53.43 FBBC First Bell Bancorp of PA 17.25 6,511 112.3 17.50 13.12 17.25 0.00 N.A. 30.19 FBER First Bergen Bancorp of NJ 17.87 3,000 53.6 19.50 11.00 18.75 -4.69 N.A. 55.39 SKBO First Carnegie,MHC of PA(45.0) 19.00 2,300 19.7 19.50 11.62 19.12 -0.63 N.A. N.A. FSTC First Citizens Corp of GA 35.25 1,833 64.6 35.25 21.25 35.00 0.71 182.00 39.60 FCME First Coastal Corp. of ME* 14.37 1,359 19.5 15.75 6.62 14.25 0.84 N.A. 85.42 FFBA First Colorado Bancorp of Co 20.75 16,561 343.6 21.50 15.00 21.00 -1.19 528.79 22.06 FDEF First Defiance Fin.Corp. of OH 16.00 9,366 149.9 16.00 10.87 15.75 1.59 N.A. 29.35 FESX First Essex Bancorp of MA* 19.12 7,527 143.9 20.50 11.75 20.00 -4.40 218.67 45.73 FFES First FS&LA of E. Hartford CT 35.75 2,676 95.7 37.12 18.75 36.75 -2.72 450.00 55.43 FFSX First FS&LA. MHC of IA (46.1) 33.00 2,828 43.0 35.00 20.75 29.50 11.86 394.75 69.23 BDJI First Fed. Bancorp. of MN 23.75 683 16.2 23.75 16.00 22.00 7.95 N.A. 28.38 FFBH First Fed. Bancshares of AR 21.75 4,896 106.5 21.75 15.50 21.50 1.16 N.A. 37.05 FTFC First Fed. Capital Corp. of WI 28.00 9,141 255.9 29.00 15.00 28.50 -1.75 273.33 78.69 FFKY First Fed. Fin. Corp. of KY 21.25 4,170 88.6 23.00 17.75 21.00 1.19 34.92 4.94 FFBZ First Federal Bancorp of OH 18.75 1,572 29.5 20.50 13.25 20.50 -8.54 87.50 17.19 FFCH First Fin. Holdings Inc. of SC 38.00 6,357 241.6 39.25 19.50 38.50 -1.30 210.20 68.89 FFBI First Financial Bancorp of IL 19.50 415 8.1 19.50 15.50 19.50 0.00 N.A. 22.87 FFHC First Financial Corp. of WI(8) 35.50 36,209 1,285.4 36.87 20.40 35.25 0.71 125.40 44.90 FFHS First Franklin Corp. of OH 23.00 1,192 27.4 23.75 14.25 23.00 0.00 75.30 39.39 FGHC First Georgia Hold. Corp of GA 8.50 3,052 25.9 9.50 4.17 9.00 -5.56 121.93 49.91 FSPG First Home Bancorp of NJ 23.25 2,708 63.0 23.25 13.50 23.25 0.00 287.50 67.63 FFSL First Independence Corp. of KS 14.62 997 14.6 14.75 9.81 14.75 -0.88 N.A. 40.98 FISB First Indiana Corp. of IN 24.00 10,561 253.5 26.00 17.37 24.75 -3.03 77.78 12.15 FKFS First Keystone Fin. Corp of PA 32.75 1,228 40.2 33.25 18.25 32.25 1.55 N.A. 70.13 FLKY First Lancaster Bncshrs of KY 16.12 959 15.5 16.25 14.00 15.87 1.58 N.A. 10.26 FLFC First Liberty Fin. Corp. of GA 25.25 7,725 195.1 25.50 16.50 25.25 0.00 397.05 37.45 CASH First Midwest Fin. Corp. of IA 19.87 2,734 54.3 20.75 15.00 19.87 0.00 N.A. 29.62 FMBD First Mutual Bancorp of IL 19.50 3,507 68.4 19.75 13.50 19.00 2.63 N.A. 30.00 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share --------------------- -------- ------- ------- ------- ------- ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) --------------------------------------- DIBK Dime Financial Corp. of CT* 2.82 2.83 13.52 13.08 169.78 EGLB Eagle BancGroup of IL -0.12 0.27 16.69 16.69 140.80 EBSI Eagle Bancshares of Tucker GA 0.64 0.87 12.45 12.45 149.91 EGFC Eagle Financial Corp. of CT 0.19 1.08 22.02 17.19 320.65 ETFS East Texas Fin. Serv. of TX 0.34 0.70 19.97 19.97 109.95 EMLD Emerald Financial Corp of OH 0.81 1.00 9.03 8.89 119.14 EIRE Emerald Island Bancorp, MA* 1.52 1.60 13.39 13.39 189.23 EFBC Empire Federal Bancorp of MT 0.35 0.46 14.76 14.76 42.30 EFBI Enterprise Fed. Bancorp of OH 0.82 0.92 15.94 15.92 129.32 EQSB Equitable FSB of Wheaton MD 2.20 3.51 25.80 25.80 511.96 FCBF FCB Fin. Corp. of Neenah WI 0.60 0.71 11.65 11.65 66.58 FFBS FFBS Bancorp of Columbus MS 0.95 1.20 16.15 16.15 83.98 FFDF FFD Financial Corp. of OH 0.98 0.55 14.76 14.76 60.48 FFLC FFLC Bancorp of Leesburg FL 1.07 1.54 22.68 22.68 168.23 FFFC FFVA Financial Corp. of VA 1.32 1.60 16.29 15.95 123.62 FFWC FFW Corporation of Wabash IN 1.89 2.36 24.11 21.72 253.24 FFYF FFY Financial Corp. of OH 1.28 1.82 19.82 19.82 144.57 FMCO FMS Financial Corp. of NJ 1.56 2.29 15.24 14.97 232.38 FFHH FSF Financial Corp. of MN 0.78 0.99 14.16 14.16 124.71 FOBC Fed One Bancorp of Wheeling WV 0.99 1.41 16.63 15.86 150.32 FBCI Fidelity Bancorp of Chicago IL 0.95 1.33 18.22 18.18 175.45 FSBI Fidelity Bancorp, Inc. of PA 1.08 1.72 15.83 15.83 234.39 FFFL Fidelity FSB, MHC of FL (47.7) 0.50 0.79 12.36 12.27 147.58 FFED Fidelity Fed. Bancorp of IN 0.05 0.31 5.20 5.20 96.50 FFOH Fidelity Financial of OH 0.51 0.75 12.17 10.74 94.06 FIBC Financial Bancorp, Inc. of NY 0.87 1.55 15.35 15.28 164.04 FBSI First Bancshares of MO 1.29 1.56 20.26 20.23 149.61 FBBC First Bell Bancorp of PA 1.06 1.23 10.78 10.78 109.72 FBER First Bergen Bancorp of NJ 0.38 0.66 13.47 13.47 94.92 SKBO First Carnegie,MHC of PA(45.0) 0.33 0.33 10.52 10.52 63.97 FSTC First Citizens Corp of GA 1.45 1.43 16.26 12.20 178.05 FCME First Coastal Corp. of ME* 4.50 4.36 10.35 10.35 112.13 FFBA First Colorado Bancorp of Co 0.78 0.77 11.76 11.60 91.17 FDEF First Defiance Fin.Corp. of OH 0.43 0.59 12.57 12.57 58.96 FESX First Essex Bancorp of MA* 1.32 1.15 11.54 10.02 165.46 FFES First FS&LA of E. Hartford CT 1.52 2.50 23.63 23.63 367.56 FFSX First FS&LA. MHC of IA (46.1) 0.69 1.19 13.74 13.63 165.69 BDJI First Fed. Bancorp. of MN 0.47 1.00 17.60 17.60 161.92 FFBH First Fed. Bancshares of AR 0.81 1.11 16.36 16.36 109.31 FTFC First Fed. Capital Corp. of WI 1.18 1.37 10.64 9.97 167.40 FFKY First Fed. Fin. Corp. of KY 1.14 1.36 12.39 11.66 90.50 FFBZ First Federal Bancorp of OH 0.88 1.23 9.66 9.65 128.03 FFCH First Fin. Holdings Inc. of SC 1.43 2.10 16.03 16.03 262.26 FFBI First Financial Bancorp of IL -0.85 0.94 17.63 17.63 203.69 FFHC First Financial Corp. of WI(8) 1.51 2.03 11.67 11.37 163.81 FFHS First Franklin Corp. of OH 0.36 1.21 17.17 17.06 190.39 FGHC First Georgia Hold. Corp of GA 0.32 0.25 4.21 3.86 51.24 FSPG First Home Bancorp of NJ 1.64 2.14 12.85 12.64 192.91 FFSL First Independence Corp. of KS 0.47 0.75 11.60 11.60 111.21 FISB First Indiana Corp. of IN 1.17 1.43 13.77 13.60 144.00 FKFS First Keystone Fin. Corp of PA 1.35 1.93 19.09 19.09 261.24 FLKY First Lancaster Bncshrs of KY 0.47 0.57 14.71 14.71 44.64 FLFC First Liberty Fin. Corp. of GA 1.32 1.08 12.30 11.09 166.85 CASH First Midwest Fin. Corp. of IA 1.00 1.27 15.62 13.84 137.10 FMBD First Mutual Bancorp of IL 0.10 0.32 15.30 11.59 119.10
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data --------------------- ---------------------------------------- Shares Market 52 Week (1) % Change From ------------ ---------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) - --------------------- ------- ------ --------- -------- ------ ------ ----- ------ ------ ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- FMSB First Mutual SB of Bellevue WA* 29.50 2,702 79.7 29.50 12.73 27.25 8.26 280.65 85.42 FNGB First Northern Cap. Corp of WI 13.00 8,834 114.8 14.00 8.00 13.62 -4.55 79.06 59.90 FFPB First Palm Beach Bancorp of FL 40.25 5,031 202.5 40.56 22.75 39.37 2.24 N.A. 70.41 FSLA First SB SLA MHC of NJ (47.5) 44.50 7,990 151.5 44.50 14.05 36.00 23.61 345.00 164.57 SOPN First SB, SSB, Moore Co. of NC 23.94 3,679 88.1 25.00 17.50 24.50 -2.29 N.A. 27.68 FWWB First Savings Bancorp of WA* 26.25 10,519 276.1 26.25 16.56 24.75 6.06 N.A. 42.90 SHEN First Shenango Bancorp of PA 32.50 2,072 67.3 33.37 20.50 32.87 -1.13 N.A. 44.44 FSFC First So.east Fin. Corp. of SC(8) 16.00 4,388 70.2 16.75 9.25 16.25 -1.54 N.A. 70.58 FBNW FirstBank Corp of Clarkston WA 17.12 1,984 34.0 19.00 15.50 17.00 0.71 N.A. N.A. FFDB FirstFed Bancorp of AL 19.75 1,148 22.7 19.75 12.50 17.75 11.27 N.A. 58.00 FSPT FirstSpartan Fin. Corp. of SC 38.50 4,430 170.6 39.00 35.00 38.75 -0.65 N.A. N.A. FLAG Flag Financial Corp of GA 17.50 2,037 35.6 18.00 10.25 16.75 4.48 78.57 62.79 FLGS Flagstar Bancorp, Inc of MI 19.50 13,670 266.6 21.50 13.00 20.50 -4.88 N.A. N.A. FFIC Flushing Fin. Corp. of NY* 23.06 7,979 184.0 24.00 17.37 23.00 0.26 N.A. 27.26 FBHC Fort Bend Holding Corp. of TX 23.00 1,654 38.0 24.00 9.38 22.50 2.22 N.A. 80.39 FTSB Fort Thomas Fin. Corp. of KY 14.37 1,495 21.5 14.75 9.25 14.00 2.64 N.A. -1.71 FKKY Frankfort First Bancorp of KY 10.25 3,280 33.6 12.25 8.00 10.00 2.50 N.A. -9.85 FTNB Fulton Bancorp of MO 23.00 1,719 39.5 26.50 12.50 22.50 2.22 N.A. 49.64 GFSB GFS Bancorp of Grinnell IA 16.44 988 16.2 16.44 10.12 14.75 11.46 N.A. 54.80 GUPB GFSB Bancorp of Gallup NM 21.88 801 17.5 22.00 13.75 21.75 0.60 N.A. 37.87 GSLA GS Financial Corp. of LA 17.00 3,438 58.4 17.00 13.37 16.37 3.85 N.A. N.A. GOSB GSB Financial Corp. of NY 15.50 2,248 34.8 16.75 14.25 16.25 -4.62 N.A. N.A. GWBC Gateway Bancorp of KY(8) 19.00 1,076 20.4 19.00 13.75 18.00 5.56 N.A. 33.33 GBCI Glacier Bancorp of MT 22.00 6,812 149.9 22.50 15.33 19.37 13.58 355.49 34.72 GFCO Glenway Financial Corp. of OH 32.00 1,140 36.5 32.00 18.25 30.25 5.79 N.A. 56.10 GTPS Great American Bancorp of IL 19.00 1,760 33.4 19.50 13.87 18.50 2.70 N.A. 28.29 GTFN Great Financial Corp. of KY(8) 43.75 13,791 603.4 43.75 28.25 43.00 1.74 N.A. 50.24 GSBC Great Southern Bancorp of MO 21.50 8,105 174.3 21.50 15.21 19.75 8.86 636.30 20.72 GDVS Greater DV SB,MHC of PA (19.9)* 30.12 3,272 19.6 30.12 9.25 24.25 24.21 N.A. 190.45 GSFC Green Street Fin. Corp. of NC 20.12 4,298 86.5 20.75 14.87 20.25 -0.64 N.A. 29.81 GFED Guarnty FS&LA,MHC of MO (31.0)(8) 26.75 3,125 25.9 27.87 10.50 24.75 8.08 N.A. 121.81 HCBB HCB Bancshares of AR 13.87 2,645 36.7 14.12 12.62 13.62 1.84 N.A. N.A. HEMT HF Bancorp of Hemet CA 16.50 6,282 103.7 17.12 10.50 17.12 -3.62 N.A. 48.38 HFFC HF Financial Corp. of SD 25.87 2,979 77.1 27.00 15.00 26.50 -2.38 417.40 49.45 HFNC HFNC Financial Corp. of NC 16.62 17,192 285.7 22.06 14.87 15.87 4.73 N.A. -6.99 HMNF HMN Financial, Inc. of MN 25.25 4,212 106.4 25.75 17.00 25.50 -0.98 N.A. 39.35 HALL Hallmark Capital Corp. of WI 29.25 1,443 42.2 29.25 17.00 27.00 8.33 N.A. 64.79 HARB Harbor FSB, MHC of FL (46.6)(8) 65.75 4,970 152.3 65.75 29.50 55.87 17.68 N.A. 83.92 HRBF Harbor Federal Bancorp of MD 23.00 1,693 38.9 23.50 15.00 23.50 -2.13 130.00 46.03 HFSA Hardin Bancorp of Hardin MO 18.06 859 15.5 18.50 12.00 18.12 -0.33 N.A. 44.48 HARL Harleysville SA of PA 26.12 1,652 43.2 28.00 14.00 26.12 0.00 47.15 65.32 HFGI Harrington Fin. Group of IN 13.25 3,257 43.2 13.50 9.75 13.50 -1.85 N.A. 23.26 HARS Harris SB, MHC of PA (24.3) 53.50 11,223 145.7 53.50 15.00 47.06 13.68 N.A. 193.15 HFFB Harrodsburg 1st Fin Bcrp of KY 16.12 2,025 32.6 19.00 14.75 16.12 0.00 N.A. -14.57 HHFC Harvest Home Fin. Corp. of OH 13.00 915 11.9 13.00 9.25 12.75 1.96 N.A. 33.33 HAVN Haven Bancorp of Woodhaven NY 44.75 4,377 195.9 44.75 26.62 43.00 4.07 N.A. 56.36 HTHR Hawthorne Fin. Corp. of CA 20.00 3,035 60.7 20.00 6.62 19.00 5.26 -27.27 146.00 HMLK Hemlock Fed. Fin. Corp. of IL 17.37 2,076 36.1 17.37 12.50 16.50 5.27 N.A. N.A. HBNK Highland Federal Bank of CA 31.50 2,300 72.5 31.50 14.75 31.00 1.61 N.A. 85.29 HIFS Hingham Inst. for Sav. of MA* 29.00 1,303 37.8 29.00 15.50 27.75 4.50 535.96 54.67 HBEI Home Bancorp of Elgin IL 18.06 6,856 123.8 19.31 12.25 17.75 1.75 N.A. 33.78 HBFW Home Bancorp of Fort Wayne IN 24.25 2,525 61.2 24.75 16.75 24.50 -1.02 N.A. 27.63 HBBI Home Building Bancorp of IN 23.25 312 7.3 23.25 17.00 22.00 5.68 N.A. 17.72 HCFC Home City Fin. Corp. of OH 16.00 952 15.2 16.25 12.00 15.75 1.59 N.A. 20.75 HOMF Home Fed Bancorp of Seymour IN 32.50 3,396 110.4 34.25 19.83 33.00 -1.52 223.38 26.21 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share - --------------------- ------ ----- ----- ------- ------ ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - --------------------------------------- FMSB First Mutual SB of Bellevue WA* 1.56 1.52 10.91 10.91 159.89 FNGB First Northern Cap. Corp of WI 0.44 0.63 8.14 8.14 72.19 FFPB First Palm Beach Bancorp of FL -0.09 0.08 21.76 21.23 331.23 FSLA First SB SLA MHC of NJ (47.5) 0.72 1.14 12.18 10.86 129.26 SOPN First SB, SSB, Moore Co. of NC 1.06 1.27 18.26 18.26 79.97 FWWB First Savings Bancorp of WA* 0.89 0.84 14.13 13.00 95.79 SHEN First Shenango Bancorp of PA 1.69 2.20 21.75 21.75 198.56 FSFC First So.east Fin. Corp. of SC(8) 0.53 0.80 7.99 7.99 79.43 FBNW FirstBank Corp of Clarkston WA 0.54 0.44 14.00 14.00 77.62 FFDB FirstFed Bancorp of AL 0.95 1.45 14.48 13.20 153.77 FSPT FirstSpartan Fin. Corp. of SC 1.00 1.16 27.63 27.63 104.97 FLAG Flag Financial Corp of GA -0.03 0.17 10.44 10.44 108.95 FLGS Flagstar Bancorp, Inc of MI 0.00 0.00 6.07 6.07 111.13 FFIC Flushing Fin. Corp. of NY* 0.93 0.97 16.68 16.68 107.79 FBHC Fort Bend Holding Corp. of TX 0.37 0.86 11.62 10.82 192.67 FTSB Fort Thomas Fin. Corp. of KY 0.33 0.50 10.40 10.40 64.84 FKKY Frankfort First Bancorp of KY -0.11 0.22 6.81 6.81 40.26 FTNB Fulton Bancorp of MO 0.51 0.61 14.69 14.69 58.50 GFSB GFS Bancorp of Grinnell IA 0.88 1.08 10.66 10.66 93.18 GUPB GFSB Bancorp of Gallup NM 0.79 1.00 17.41 17.41 117.09 GSLA GS Financial Corp. of LA 0.34 0.34 16.36 16.36 35.85 GOSB GSB Financial Corp. of NY 0.52 0.44 13.78 13.78 50.92 GWBC Gateway Bancorp of KY(8) 0.52 0.72 16.04 16.04 59.32 GBCI Glacier Bancorp of MT 1.10 1.23 8.12 7.90 83.33 GFCO Glenway Financial Corp. of OH 1.06 1.78 23.89 23.57 251.83 GTPS Great American Bancorp of IL 0.19 0.24 16.68 16.68 77.83 GTFN Great Financial Corp. of KY(8) 1.59 1.51 20.40 19.53 220.89 GSBC Great Southern Bancorp of MO 1.15 1.30 7.45 7.45 87.33 GDVS Greater DV SB,MHC of PA (19.9)* 0.23 0.42 8.64 8.64 74.69 GSFC Green Street Fin. Corp. of NC 0.56 0.68 14.73 14.73 40.62 GFED Guarnty FS&LA,MHC of MO (31.0)(8) 0.37 0.56 8.80 8.80 63.83 HCBB HCB Bancshares of AR 0.09 0.10 14.27 13.73 75.75 HEMT HF Bancorp of Hemet CA -0.40 -2.74 12.87 10.53 156.71 HFFC HF Financial Corp. of SD 1.23 1.67 17.78 17.78 188.54 HFNC HFNC Financial Corp. of NC 0.43 0.59 9.37 9.37 52.08 HMNF HMN Financial, Inc. of MN 0.94 1.17 19.42 19.42 134.58 HALL Hallmark Capital Corp. of WI 1.33 1.68 20.56 20.56 284.01 HARB Harbor FSB, MHC of FL (46.6)(8) 2.05 2.64 18.85 18.23 224.69 HRBF Harbor Federal Bancorp of MD 0.58 0.90 16.48 16.48 127.80 HFSA Hardin Bancorp of Hardin MO 0.58 0.89 15.69 15.69 125.75 HARL Harleysville SA of PA 1.46 2.00 13.31 13.31 203.79 HFGI Harrington Fin. Group of IN 0.61 0.51 7.67 7.67 137.18 HARS Harris SB, MHC of PA (24.3) 0.79 0.99 14.59 12.76 182.15 HFFB Harrodsburg 1st Fin Bcrp of KY 0.55 0.73 14.49 14.49 53.80 HHFC Harvest Home Fin. Corp. of OH 0.23 0.50 11.35 11.35 90.82 HAVN Haven Bancorp of Woodhaven NY 2.09 3.11 24.20 24.12 407.02 HTHR Hawthorne Fin. Corp. of CA 0.64 1.38 13.07 13.07 284.38 HMLK Hemlock Fed. Fin. Corp. of IL 0.10 0.55 14.88 14.88 79.26 HBNK Highland Federal Bank of CA 0.96 1.41 16.39 16.39 219.30 HIFS Hingham Inst. for Sav. of MA* 1.86 1.86 15.62 15.62 166.99 HBEI Home Bancorp of Elgin IL 0.25 0.43 13.73 13.73 51.43 HBFW Home Bancorp of Fort Wayne IN 0.72 1.15 17.62 17.62 132.62 HBBI Home Building Bancorp of IN 0.29 0.74 18.51 18.51 144.44 HCFC Home City Fin. Corp. of OH 0.61 0.80 15.00 15.00 73.49 HOMF Home Fed Bancorp of Seymour IN 2.02 2.35 17.05 16.53 201.06
RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ---------------------------- ------------------------------------------------- Shares Market 52 Week (1) % Change From ---------------- ------------------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) - --------------------- ---------- ------ ---------- --------- ------ ------ ------ ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- HWEN Home Financial Bancorp of IN 17.00 470 8.0 17.25 12.00 16.75 1.49 N.A. 33.33 HPBC Home Port Bancorp, Inc. of MA* 24.50 1,842 45.1 24.50 15.75 24.12 1.58 206.25 48.48 HMCI Homecorp, Inc. of Rockford IL 19.25 1,693 32.6 19.25 11.83 17.50 10.00 92.50 50.98 HZFS Horizon Fin'l. Services of IA 26.00 426 11.1 26.00 14.50 20.00 30.00 N.A. 71.96 HRZB Horizon Financial Corp. of WA* 17.50 7,417 129.8 17.50 10.65 17.00 2.94 53.24 49.06 IBSF IBS Financial Corp. of NJ 17.87 11,012 196.8 18.75 12.94 17.12 4.38 N.A. 31.49 ISBF ISB Financial Corp. of LA 26.75 6,901 184.6 27.75 15.63 26.87 -0.45 N.A. 48.61 ITLA Imperial Thrift & Loan of CA* 20.62 7,836 161.6 21.12 14.00 20.75 -0.63 N.A. 37.47 IFSB Independence FSB of DC 15.00 1,281 19.2 15.00 7.00 14.50 3.45 650.00 87.50 INCB Indiana Comm. Bank, SB of IN 15.00 922 13.8 19.00 14.50 15.25 -1.64 N.A. -7.69 INBI Industrial Bancorp of OH 18.00 5,277 95.0 18.00 12.00 17.50 2.86 N.A. 41.18 IWBK Interwest SB of Oak Harbor WA 40.50 8,036 325.5 43.25 27.62 40.31 0.47 305.00 25.58 IPSW Ipswich SB of Ipswich MA* 13.50 2,376 32.1 14.12 4.87 12.75 5.88 N.A. 125.00 JXVL Jacksonville Bancorp of TX 18.94 2,490 47.2 19.00 12.62 18.25 3.78 N.A. 29.55 JXSB Jcksnville SB,MHC of IL (45.6) 22.50 1,272 13.1 23.25 11.50 22.00 2.27 N.A. 69.81 JSBA Jefferson Svgs Bancorp of MO 42.00 5,005 210.2 43.00 22.25 40.87 2.76 N.A. 61.54 JOAC Joachim Bancorp of MO 15.63 722 11.3 15.63 14.00 15.00 4.20 N.A. 7.79 KSAV KS Bancorp of Kenly NC 20.50 885 18.1 20.50 14.06 18.75 9.33 N.A. 37.49 KSBK KSB Bancorp of Kingfield ME(8)* 14.00 1,238 17.3 16.00 7.08 13.12 6.71 N.A. 82.53 KFBI Klamath First Bancorp of OR 23.00 10,019 230.4 24.25 13.94 24.25 -5.15 N.A. 46.03 LSBI LSB Fin. Corp. of Lafayette IN 26.75 932 24.9 26.75 16.43 26.00 2.88 N.A. 44.05 LVSB Lakeview SB of Paterson NJ 43.25 2,302 99.6 44.50 21.48 42.75 1.17 N.A. 73.90 LARK Landmark Bancshares of KS 26.50 1,711 45.3 27.25 16.00 25.25 4.95 N.A. 47.22 LARL Laurel Capital Group of PA 25.00 1,443 36.1 25.00 15.00 24.87 0.52 95.31 51.52 LSBX Lawrence Savings Bank of MA* 15.81 4,274 67.6 15.81 6.75 13.00 21.62 359.59 94.46 LFED Leeds FSB, MHC of MD (36.3) 31.25 3,455 39.2 32.25 13.50 30.50 2.46 N.A. 95.31 LXMO Lexington B&L Fin. Corp. of MO 16.75 1,138 19.1 16.75 11.50 16.50 1.52 N.A. 24.07 LIFB Life Bancorp of Norfolk VA 24.94 9,847 245.6 26.62 16.75 26.25 -4.99 N.A. 38.56 LFBI Little Falls Bancorp of NJ 18.50 2,745 50.8 18.75 11.50 18.50 0.00 N.A. 45.10 LOGN Logansport Fin. Corp. of IN 16.00 1,260 20.2 16.00 11.12 15.75 1.59 N.A. 42.22 LONF London Financial Corp. of OH 18.00 515 9.3 18.00 11.25 16.00 12.50 N.A. 27.48 LISB Long Island Bancorp, Inc of NY 46.56 23,968 1,116.0 47.50 28.25 45.75 1.77 N.A. 33.03 MAFB MAF Bancorp of IL 33.00 15,393 508.0 34.75 17.50 33.25 -0.75 288.24 42.43 MBLF MBLA Financial Corp. of MO 26.25 1,298 34.1 27.00 19.00 26.25 0.00 N.A. 38.16 MFBC MFB Corp. of Mishawaka IN 23.75 1,690 40.1 23.75 15.50 23.75 0.00 N.A. 42.90 MLBC ML Bancorp of Villanova PA(8) 29.00 11,293 327.5 29.00 13.75 28.25 2.65 N.A. 105.38 MSBF MSB Financial Corp. of MI 16.00 1,249 20.0 18.00 9.12 17.25 -7.25 N.A. 68.42 MGNL Magna Bancorp of MS(8) 31.50 13,754 433.3 32.31 16.75 30.00 5.00 530.00 80.00 MARN Marion Capital Holdings of IN 26.87 1,768 47.5 28.00 19.25 26.25 2.36 N.A. 39.58 MRKF Market Fin. Corp. of OH 14.75 1,336 19.7 15.25 12.25 14.75 0.00 N.A. N.A. MFCX Marshalltown Fin. Corp. of IA(8) 17.06 1,411 24.1 17.25 14.25 17.00 0.35 N.A. 14.73 MFSL Maryland Fed. Bancorp of MD 47.62 3,210 152.9 50.50 30.71 46.50 2.41 353.52 37.04 MASB MassBank Corp. of Reading MA* 47.50 3,575 169.8 47.75 24.84 46.00 3.26 381.74 66.14 MFLR Mayflower Co-Op. Bank of MA* 21.00 890 18.7 21.00 14.75 20.00 5.00 320.00 23.53 MECH Mechanics SB of Hartford CT* 25.87 5,290 136.9 27.25 15.37 25.62 0.98 N.A. 64.25 MDBK Medford Bank of Medford, MA* 36.12 4,541 164.0 36.50 24.00 35.50 1.75 416.00 40.27 MERI Meritrust FSB of Thibodaux LA 47.25 774 36.6 48.00 30.75 48.00 -1.56 N.A. 49.43 MWBX MetroWest Bank of MA* 8.37 13,953 116.8 9.00 4.00 8.25 1.45 103.16 55.87 MCBS Mid Continent Bancshares of KS(8) 41.50 1,958 81.3 41.50 18.75 40.00 3.75 N.A. 77.58 MIFC Mid Iowa Financial Corp. of IA 10.50 1,676 17.6 10.50 6.00 10.12 3.75 110.00 64.84 MCBN Mid-Coast Bancorp of ME 26.50 233 6.2 27.00 18.00 27.00 -1.85 364.10 39.47 MWBI Midwest Bancshares, Inc. of IA 42.50 348 14.8 42.50 25.50 41.00 3.66 325.00 60.38 MWFD Midwest Fed. Fin. Corp of WI 24.75 1,628 40.3 26.50 16.75 26.00 -4.81 395.00 33.78 MFFC Milton Fed. Fin. Corp. of OH 15.00 2,310 34.7 16.00 12.75 14.50 3.45 N.A. 3.45 MIVI Miss. View Hold. Co. of MN 18.50 819 15.2 18.50 11.75 18.25 1.37 N.A. 54.17 Current Per Share Financials ------------------------------------------ Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share - ---------------------- ---------- ------- ------- -------- ------- ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - --------------------------------------- HWEN Home Financial Bancorp of IN 0.54 0.68 15.31 15.31 90.44 HPBC Home Port Bancorp, Inc. of MA* 1.72 1.71 11.39 11.39 107.90 HMCI Homecorp, Inc. of Rockford IL 0.27 0.85 12.81 12.81 195.87 HZFS Horizon Fin'l. Services of IA 0.65 1.04 19.75 19.75 201.81 HRZB Horizon Financial Corp. of WA* 1.07 1.05 10.91 10.91 69.93 IBSF IBS Financial Corp. of NJ 0.33 0.58 11.59 11.59 66.59 ISBF ISB Financial Corp. of LA 0.77 1.04 16.58 14.06 136.06 ITLA Imperial Thrift & Loan of CA* 1.45 1.45 11.92 11.87 108.50 IFSB Independence FSB of DC 0.29 0.66 13.38 11.73 205.12 INCB Indiana Comm. Bank, SB of IN 0.19 0.53 12.37 12.37 101.63 INBI Industrial Bancorp of OH 0.45 0.88 11.63 11.63 65.68 IWBK Interwest SB of Oak Harbor WA 1.82 2.47 15.46 15.12 228.05 IPSW Ipswich SB of Ipswich MA* 0.84 0.66 4.55 4.55 79.70 JXVL Jacksonville Bancorp of TX 0.90 1.18 13.55 13.55 90.84 JXSB Jcksnville SB,MHC of IL (45.6) 0.36 0.79 13.43 13.43 127.94 JSBA Jefferson Svgs Bancorp of MO 0.69 1.63 21.24 16.18 259.13 JOAC Joachim Bancorp of MO 0.23 0.38 13.63 13.63 48.39 KSAV KS Bancorp of Kenly NC 1.08 1.40 16.22 16.21 119.91 KSBK KSB Bancorp of Kingfield ME(8)* 1.04 1.08 8.10 7.62 113.08 KFBI Klamath First Bancorp of OR 0.55 0.83 14.20 14.20 72.65 LSBI LSB Fin. Corp. of Lafayette IN 1.51 1.33 18.44 18.44 208.28 LVSB Lakeview SB of Paterson NJ 2.78 1.93 19.91 15.92 209.23 LARK Landmark Bancshares of KS 1.13 1.33 18.38 18.38 133.31 LARL Laurel Capital Group of PA 1.61 2.03 14.73 14.73 146.91 LSBX Lawrence Savings Bank of MA* 1.40 1.38 7.45 7.45 85.71 LFED Leeds FSB, MHC of MD (36.3) 0.68 0.95 13.53 13.53 83.07 LXMO Lexington B&L Fin. Corp. of MO 0.55 0.71 14.74 14.74 52.05 LIFB Life Bancorp of Norfolk VA 1.01 1.23 15.94 15.49 151.14 LFBI Little Falls Bancorp of NJ 0.29 0.51 14.51 13.40 109.29 LOGN Logansport Fin. Corp. of IN 0.74 0.96 12.67 12.67 65.99 LONF London Financial Corp. of OH 0.48 0.73 14.60 14.60 74.25 LISB Long Island Bancorp, Inc of NY 1.44 1.67 22.17 21.95 246.53 MAFB MAF Bancorp of IL 1.84 2.43 16.79 14.67 215.78 MBLF MBLA Financial Corp. of MO 1.11 1.42 21.98 21.98 180.91 MFBC MFB Corp. of Mishawaka IN 0.77 1.16 20.05 20.05 146.89 MLBC ML Bancorp of Villanova PA(8) 1.27 1.15 12.70 12.48 183.32 MSBF MSB Financial Corp. of MI 0.65 0.80 10.16 10.16 59.81 MGNL Magna Bancorp of MS(8) 1.35 1.49 10.06 9.79 98.39 MARN Marion Capital Holdings of IN 1.38 1.65 22.10 22.10 98.02 MRKF Market Fin. Corp. of OH 0.32 0.32 14.82 14.82 42.35 MFCX Marshalltown Fin. Corp. of IA(8) 0.30 0.65 14.23 14.23 90.38 MFSL Maryland Fed. Bancorp of MD 2.17 3.14 30.22 29.84 360.57 MASB MassBank Corp. of Reading MA* 2.73 2.59 26.94 26.94 253.26 MFLR Mayflower Co-Op. Bank of MA* 1.39 1.31 13.67 13.44 141.20 MECH Mechanics SB of Hartford CT* 2.76 2.76 15.93 15.93 155.69 MDBK Medford Bank of Medford, MA* 2.45 2.29 21.24 19.79 236.19 MERI Meritrust FSB of Thibodaux LA 1.99 3.10 24.22 24.22 295.20 MWBX MetroWest Bank of MA* 0.52 0.52 3.02 3.02 40.60 MCBS Mid Continent Bancshares of KS(8) 1.87 2.12 19.59 19.59 208.68 MIFC Mid Iowa Financial Corp. of IA 0.71 1.00 7.00 7.00 74.91 MCBN Mid-Coast Bancorp of ME 1.06 1.66 22.06 22.06 256.39 MWBI Midwest Bancshares, Inc. of IA 1.81 3.01 29.09 29.09 421.10 MWFD Midwest Fed. Fin. Corp of WI 1.79 1.37 11.21 10.81 127.18 MFFC Milton Fed. Fin. Corp. of OH 0.39 0.54 11.37 11.37 86.68 MIVI Miss. View Hold. Co. of MN 0.59 0.88 16.08 16.08 85.20
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ----------------------- ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) - --------------------- -------- ------ ---------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- MBSP Mitchell Bancorp of NC* 17.25 931 16.1 17.37 12.12 17.25 0.00 N.A. 21.05 MBBC Monterey Bay Bancorp of CA 20.00 3,242 64.8 20.50 14.50 20.00 0.00 N.A. 35.59 MONT Montgomery Fin. Corp. of IN 13.00 1,653 21.5 14.00 11.00 12.37 5.09 N.A. 0.00 MSBK Mutual SB, FSB of Bay City MI 13.62 4,274 58.2 14.62 5.12 14.12 -3.54 55.66 147.64 NHTB NH Thrift Bancshares of NH 22.00 2,048 45.1 22.00 11.62 21.00 4.76 376.19 74.33 NSLB NS&L Bancorp of Neosho MO 19.50 707 13.8 19.50 13.00 19.00 2.63 N.A. 43.17 NMSB Newmil Bancorp. of CT* 12.75 3,834 48.9 14.25 7.50 14.00 -8.93 100.16 30.77 NASB North American SB of MO 52.00 2,229 115.9 55.00 30.75 51.00 1.96 ***.** 51.82 NBSI North Bancshares of Chicago IL 24.12 997 24.0 24.50 15.75 24.50 -1.55 N.A. 46.18 FFFD North Central Bancshares of IA 18.87 3,258 61.5 19.25 12.37 19.25 -1.97 N.A. 39.16 NBN Northeast Bancorp of ME* 21.25 1,275 27.1 21.25 13.00 19.75 7.59 80.85 51.79 NEIB Northeast Indiana Bncrp of IN 20.12 1,763 35.5 20.25 12.87 19.50 3.18 N.A. 47.72 NWEQ Northwest Equity Corp. of WI 17.50 839 14.7 17.50 11.25 16.12 8.56 N.A. 44.39 NWSB Northwest SB, MHC of PA (30.7) 31.25 23,376 224.3 31.25 11.87 27.75 12.61 N.A. 133.73 NSSY Norwalk Savings Society of CT* 36.25 2,410 87.4 37.00 22.75 35.00 3.57 N.A. 55.11 NSSB Norwich Financial Corp. of CT* 31.25 5,413 169.2 31.25 18.00 29.62 5.50 346.43 59.28 NTMG Nutmeg FS&LA of CT 11.75 738 8.7 11.75 7.00 10.75 9.30 N.A. 56.67 OHSL OHSL Financial Corp. of OH 27.25 1,196 32.6 27.25 19.50 26.00 4.81 N.A. 27.52 OCFC Ocean Fin. Corp. of NJ 36.25 8,606 312.0 36.50 24.00 36.44 -0.52 N.A. 42.16 OCN Ocwen Financial Corp. of FL 55.81 26,800 1,495.7 55.81 23.50 43.87 27.22 N.A. 108.64 OTFC Oregon Trail Fin. Corp of OR 16.44 4,695 77.2 16.75 16.37 16.50 -0.36 N.A. N.A. OFCP Ottawa Financial Corp. of MI 27.25 5,402 147.2 28.00 14.66 28.00 -2.68 N.A. 78.22 PFFB PFF Bancorp of Pomona CA 20.50 18,716 383.7 21.12 12.50 19.25 6.49 N.A. 37.86 PSFI PS Financial of Chicago IL 17.06 2,182 37.2 18.00 11.62 17.12 -0.35 N.A. 45.19 PVFC PVF Capital Corp. of OH 19.06 2,556 48.7 21.75 13.18 19.00 0.32 333.18 33.10 PCCI Pacific Crest Capital of CA* 16.62 2,938 48.8 17.75 8.25 16.87 -1.48 N.A. 44.52 PAMM PacificAmerica Money Ctr of CA(8)* 26.50 3,799 100.7 27.00 11.75 26.75 -0.93 N.A. 82.76 PALM Palfed, Inc. of Aiken SC(8) 25.37 5,284 134.1 26.50 13.00 25.75 -1.48 65.06 81.21 PBCI Pamrapo Bancorp, Inc. of NJ 25.75 2,843 73.2 26.75 18.50 24.75 4.04 357.37 28.75 PFED Park Bancorp of Chicago IL 17.25 2,431 41.9 18.12 11.37 17.75 -2.82 N.A. 32.69 PVSA Parkvale Financial Corp of PA 33.75 4,055 136.9 33.75 23.60 32.50 3.85 307.61 29.81 PEEK Peekskill Fin. Corp. of NY 17.12 3,193 54.7 17.25 13.25 17.00 0.71 N.A. 20.14 PFSB PennFed Fin. Services of NJ 33.50 4,822 161.5 33.50 18.87 33.00 1.52 N.A. 65.43 PWBC PennFirst Bancorp of PA 18.50 5,306 98.2 19.50 12.27 19.00 -2.63 131.83 49.31 PWBK Pennwood SB of PA* 18.75 580 10.9 18.75 11.00 17.75 5.63 N.A. 36.36 PBKB People's SB of Brockton MA* 19.87 3,595 71.4 20.00 10.12 19.87 0.00 234.51 87.10 PFDC Peoples Bancorp of Auburn IN 32.00 2,274 72.8 32.50 19.25 29.25 9.40 82.86 58.02 PBCT Peoples Bank, MHC of CT (40.1)* 36.12 61,054 883.2 36.12 16.25 32.50 11.14 358.96 87.64 PFFC Peoples Fin. Corp. of OH 14.44 1,491 21.5 19.00 12.00 14.00 3.14 N.A. 6.96 PHBK Peoples Heritage Fin Grp of ME* 42.19 27,371 1,154.8 43.12 22.62 41.50 1.66 175.57 50.68 PSFC Peoples Sidney Fin. Corp of OH 16.37 1,785 29.2 17.25 12.56 16.50 -0.79 N.A. N.A. PERM Permanent Bancorp of IN 24.87 2,011 50.0 26.50 16.75 24.06 3.37 N.A. 22.81 PMFI Perpetual Midwest Fin. of IA 23.81 1,883 44.8 25.00 18.25 23.25 2.41 N.A. 23.69 PERT Perpetual of SC, MHC (46.8)(8) 57.50 1,505 40.5 58.00 20.25 56.00 2.68 N.A. 137.11 PCBC Perry Co. Fin. Corp. of MO 21.37 828 17.7 22.25 17.00 20.87 2.40 N.A. 25.71 PHFC Pittsburgh Home Fin. of PA 19.62 1,969 38.6 19.62 11.50 19.37 1.29 N.A. 46.75 PFSL Pocahnts Fed, MHC of AR (47.0)(8) 34.75 1,632 26.7 35.00 14.25 32.50 6.92 N.A. 98.57 PTRS Potters Financial Corp of OH 28.50 487 13.9 28.50 17.00 26.00 9.62 N.A. 42.50 PKPS Poughkeepsie Fin. Corp. of NY 9.87 12,595 124.3 9.94 5.00 9.00 9.67 27.35 88.00 PHSB Ppls Home SB, MHC of PA (45.0) 17.25 2,760 21.4 17.50 13.62 17.25 0.00 N.A. N.A. PRBC Prestige Bancorp of PA 19.25 915 17.6 19.37 12.00 19.25 0.00 N.A. 42.59 PETE Primary Bank of NH(8)* 27.50 2,089 57.4 29.00 12.14 27.25 0.92 N.A. 80.45 PFNC Progress Financial Corp. of PA 14.62 4,005 58.6 15.12 7.02 14.50 0.83 32.79 83.21 PSBK Progressive Bank, Inc. of NY* 35.25 3,821 134.7 38.00 20.83 35.00 0.71 163.65 54.95 PROV Provident Fin. Holdings of CA 20.62 4,920 101.5 21.12 12.50 19.75 4.41 N.A. 47.29 Current Per Share Financials ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share - --------------------- -------- ------- ------- -------- ------ ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - --------------------------------------- MBSP Mitchell Bancorp of NC* 0.51 0.60 15.39 15.39 35.49 MBBC Monterey Bay Bancorp of CA 0.29 0.55 14.43 13.30 127.33 MONT Montgomery Fin. Corp. of IN 0.36 0.36 11.72 11.72 62.55 MSBK Mutual SB, FSB of Bay City MI 0.18 0.07 9.57 9.57 157.56 NHTB NH Thrift Bancshares of NH 0.54 0.80 11.78 10.03 153.95 NSLB NS&L Bancorp of Neosho MO 0.41 0.64 16.52 16.52 84.46 NMSB Newmil Bancorp. of CT* 0.68 0.65 8.27 8.27 84.26 NASB North American SB of MO 4.10 3.86 25.37 24.52 330.46 NBSI North Bancshares of Chicago IL 0.58 0.81 16.96 16.96 119.95 FFFD North Central Bancshares of IA 1.02 1.18 14.81 14.81 65.34 NBN Northeast Bancorp of ME* 1.10 1.06 14.04 12.30 205.33 NEIB Northeast Indiana Bncrp of IN 0.98 1.15 15.19 15.19 100.01 NWEQ Northwest Equity Corp. of WI 0.88 1.11 13.22 13.22 115.48 NWSB Northwest SB, MHC of PA (30.7) 0.58 0.82 8.49 8.00 89.47 NSSY Norwalk Savings Society of CT* 2.42 2.76 20.64 19.90 256.17 NSSB Norwich Financial Corp. of CT* 1.42 1.35 14.70 13.27 131.66 NTMG Nutmeg FS&LA of CT 0.33 0.45 7.72 7.72 138.80 OHSL OHSL Financial Corp. of OH 1.12 1.57 21.21 21.21 192.34 OCFC Ocean Fin. Corp. of NJ 0.04 1.49 27.35 27.35 168.27 OCN Ocwen Financial Corp. of FL 2.65 1.60 9.10 8.69 103.99 OTFC Oregon Trail Fin. Corp of OR 0.59 0.59 13.29 55.39 55.34 OFCP Ottawa Financial Corp. of MI 0.74 1.20 13.92 11.17 159.45 PFFB PFF Bancorp of Pomona CA 0.21 0.61 14.51 14.36 140.60 PSFI PS Financial of Chicago IL 0.70 0.71 14.66 14.66 37.88 PVFC PVF Capital Corp. of OH 1.43 1.83 10.28 10.28 145.96 PCCI Pacific Crest Capital of CA* 1.11 1.04 8.95 8.95 126.32 PAMM PacificAmerica Money Ctr of CA(8)* 1.82 1.82 6.63 6.63 29.57 PALM Palfed, Inc. of Aiken SC(8) 0.13 0.76 10.37 10.37 125.83 PBCI Pamrapo Bancorp, Inc. of NJ 1.16 1.60 16.62 16.49 130.49 PFED Park Bancorp of Chicago IL 0.62 0.86 16.27 16.27 72.22 PVSA Parkvale Financial Corp of PA 1.72 2.54 18.54 18.40 244.45 PEEK Peekskill Fin. Corp. of NY 0.57 0.75 14.71 14.71 57.18 PFSB PennFed Fin. Services of NJ 1.43 2.09 20.17 16.87 274.11 PWBC PennFirst Bancorp of PA 0.63 0.91 12.44 11.63 153.97 PWBK Pennwood SB of PA* 0.57 0.92 15.04 15.04 86.17 PBKB People's SB of Brockton MA* 1.16 0.69 8.56 8.20 152.65 PFDC Peoples Bancorp of Auburn IN 1.39 1.82 19.23 19.23 126.46 PBCT Peoples Bank, MHC of CT (40.1)* 1.39 1.03 10.93 10.92 128.90 PFFC Peoples Fin. Corp. of OH 0.53 0.53 15.78 15.78 58.01 PHBK Peoples Heritage Fin Grp of ME* 2.36 2.39 15.77 13.29 204.27 PSFC Peoples Sidney Fin. Corp of OH 0.32 0.48 14.40 14.40 57.78 PERM Permanent Bancorp of IN 0.72 1.30 19.74 19.45 215.43 PMFI Perpetual Midwest Fin. of IA 0.25 0.61 18.00 18.00 210.96 PERT Perpetual of SC, MHC (46.8)(8) 1.00 1.41 20.13 20.13 170.24 PCBC Perry Co. Fin. Corp. of MO 0.90 1.04 18.80 18.80 97.95 PHFC Pittsburgh Home Fin. of PA 0.69 0.88 14.21 14.06 130.15 PFSL Pocahnts Fed, MHC of AR (47.0)(8) 1.39 1.93 14.76 14.76 232.05 PTRS Potters Financial Corp of OH 1.16 2.06 21.97 21.97 248.85 PKPS Poughkeepsie Fin. Corp. of NY 0.24 0.37 5.85 5.85 69.88 PHSB Ppls Home SB, MHC of PA (45.0) 0.36 0.54 9.71 9.71 82.81 PRBC Prestige Bancorp of PA 0.47 0.83 16.51 16.51 148.33 PETE Primary Bank of NH(8)* 1.24 1.47 14.33 14.31 206.65 PFNC Progress Financial Corp. of PA 0.52 0.62 5.50 4.86 104.53 PSBK Progressive Bank, Inc. of NY* 2.30 2.26 19.67 17.56 230.00 PROV Provident Fin. Holdings of CA 0.39 0.34 17.37 17.37 125.10
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ------------------------ ----------------------------------------------- Shares Market 52 Week (1) % Change From --------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- PULB Pulaski SB, MHC of MO (29.8) 28.25 2,094 17.6 28.25 13.75 28.00 0.89 N.A. 94.83 PLSK Pulaski SB, MHC of NJ (46.0) 21.75 2,070 20.7 21.75 11.50 18.00 20.83 N.A. N.A. PULS Pulse Bancorp of S. River NJ 29.50 3,071 90.6 29.50 15.50 28.75 2.61 138.48 87.30 QCFB QCF Bancorp of Virginia MN 25.00 1,426 35.7 26.25 15.75 25.00 0.00 N.A. 36.99 QCBC Quaker City Bancorp of CA 23.87 4,703 112.3 24.56 12.40 22.75 4.92 218.27 57.04 QCSB Queens County Bancorp of NY* 37.25 15,271 568.8 37.50 17.45 37.06 0.51 N.A. 76.96 RARB Raritan Bancorp. of Raritan NJ* 28.00 2,412 67.5 28.62 14.17 28.00 0.00 334.78 80.65 REDF RedFed Bancorp of Redlands CA 19.47 7,174 139.7 20.25 11.50 17.62 10.50 N.A. 44.22 RELY Reliance Bancorp, Inc. of NY 33.00 8,776 289.6 33.44 17.50 33.00 0.00 N.A. 69.23 RELI Reliance Bancshares Inc of WI(8)* 8.87 2,528 22.4 10.12 6.50 8.56 3.62 N.A. 31.41 FRBK Republic First Bancorp of CA* 27.62 9,693 267.7 27.62 14.87 27.62 0.00 513.78 64.90 RIVR River Valley Bancorp of IN 17.50 1,190 20.8 17.50 13.25 17.00 2.94 N.A. 27.27 RVSB Riverview Bancorp of WA 14.00 6,128 85.8 13.50 10.00 14.00 0.00 N.A. 122.22 RSLN Roslyn Bancorp, Inc. of NY* 23.44 43,642 1,023.0 24.31 15.00 23.25 0.82 N.A. N.A. SCCB S. Carolina Comm. Bnshrs of SC 24.00 700 16.8 25.25 15.00 23.62 1.61 N.A. 60.00 SBFL SB Fngr Lakes MHC of NY (33.1) 26.75 1,785 15.8 27.00 12.75 25.00 7.00 N.A. 94.55 SFED SFS Bancorp of Schenectady NY 22.53 1,236 27.8 23.00 14.75 22.50 0.13 N.A. 52.75 SGVB SGV Bancorp of W. Covina CA 19.00 2,342 44.5 19.00 9.38 18.50 2.70 N.A. 68.89 SHSB SHS Bancorp, Inc. of PA 15.75 820 12.9 16.25 14.75 15.50 1.61 N.A. N.A. SISB SIS Bancorp Inc of MA* 37.00 5,577 206.3 37.00 22.12 34.87 6.11 N.A. 61.78 SWCB Sandwich Co-Op. Bank of MA* 37.50 1,915 71.8 39.00 21.75 38.00 -1.32 335.03 26.05 SFSL Security First Corp. of OH 18.50 7,574 140.1 19.25 9.83 19.00 -2.63 77.88 53.15 SFNB Security First Netwrk Bk of GA(8) 10.12 8,620 87.2 23.75 5.50 11.00 -8.00 N.A. -1.27 SMFC Sho-Me Fin. Corp. of MO(8) 47.75 1,499 71.6 47.75 18.87 43.25 10.40 N.A. 119.54 SOBI Sobieski Bancorp of S. Bend IN 18.75 760 14.3 19.25 13.00 18.87 -0.64 N.A. 29.31 SOSA Somerset Savings Bank of MA(8)* 5.19 16,652 86.4 5.25 1.94 5.00 3.80 1.37 163.45 SSFC South Street Fin. Corp. of NC* 18.75 4,496 84.3 20.00 12.12 19.50 -3.85 N.A. 33.93 SCBS Southern Commun. Bncshrs of AL 18.25 1,137 20.8 18.25 13.00 16.75 8.96 N.A. 37.74 SMBC Southern Missouri Bncrp of MO 18.00 1,633 29.4 18.00 14.00 17.62 2.16 N.A. 20.00 SWBI Southwest Bancshares of IL 24.12 2,657 64.1 24.12 17.92 20.75 16.24 141.20 32.16 SVRN Sovereign Bancorp of PA 18.87 70,010 1,321.1 19.00 9.64 18.56 1.67 322.15 72.49 STFR St. Francis Cap. Corp. of WI 40.25 5,308 213.6 40.25 25.00 38.75 3.87 N.A. 54.81 SPBC St. Paul Bancorp, Inc. of IL 28.00 33,988 951.7 28.50 13.73 25.87 8.23 151.57 78.69 SFFC StateFed Financial Corp. of IA 26.75 784 21.0 26.87 16.44 25.75 3.88 N.A. 62.12 SFIN Statewide Fin. Corp. of NJ 22.50 4,710 106.0 22.62 12.62 21.88 2.83 N.A. 56.58 STSA Sterling Financial Corp. of WA 21.12 5,567 117.6 22.00 13.00 19.75 6.94 132.34 49.58 SFSB SuburbFed Fin. Corp. of IL 33.25 1,262 42.0 33.25 17.75 32.00 3.91 398.50 75.00 ROSE T R Financial Corp. of NY* 32.37 17,519 567.1 33.00 14.37 33.00 -1.91 N.A. 82.37 THRD TF Financial Corp. of PA 25.50 4,083 104.1 25.69 14.75 25.37 0.51 N.A. 56.92 TPNZ Tappan Zee Fin., Inc. of NY 20.75 1,497 31.1 20.75 13.00 18.37 12.96 N.A. 52.35 ESBK The Elmira SB FSB of Elmira NY* 30.00 706 21.2 31.00 14.75 29.62 1.28 108.77 64.38 TSBS Trenton SB,FSB MHC of NJ(35.9)(8) 39.12 9,037 127.0 39.12 14.00 34.50 13.39 N.A. 144.50 TRIC Tri-County Bancorp of WY 27.00 609 16.4 27.37 18.00 25.94 4.09 N.A. 50.00 TWIN Twin City Bancorp of TN 14.50 1,280 18.6 14.50 11.25 13.50 7.41 N.A. 26.09 UFRM United FS&LA of Rocky Mount NC 12.25 3,074 37.7 12.75 7.50 12.25 0.00 276.92 44.12 UBMT United Fin. Corp. of MT 24.00 1,223 29.4 24.25 18.50 23.75 1.05 128.57 24.68 VABF Va. Beach Fed. Fin. Corp of VA 16.25 4,976 80.9 17.25 8.62 17.12 -5.08 246.48 72.14 VFFC Virginia First Savings of VA(8) 24.25 5,810 140.9 24.50 12.37 24.06 0.79 ***.** 90.20 WHGB WHG Bancshares of MD 15.75 1,462 23.0 16.50 12.62 16.25 -3.08 N.A. 20.05 WSFS WSFS Financial Corp. of DE* 18.44 12,421 229.0 18.75 8.87 18.37 0.38 154.34 80.96 WVFC WVS Financial Corp. of PA* 32.50 1,747 56.8 32.50 21.50 29.37 10.66 N.A. 32.01 WRNB Warren Bancorp of Peabody MA* 19.75 3,781 74.7 21.37 12.75 20.12 -1.84 486.05 31.67 WFSL Washington FS&LA of Seattle WA 31.62 47,462 1,500.7 33.31 21.02 29.94 5.61 116.72 31.26 WAMU Washington Mutual Inc. of WA(8)* 67.87 126,357 8,575.8 70.25 38.12 67.87 0.00 265.68 56.71 WYNE Wayne Bancorp of NJ 22.50 2,120 47.7 24.87 13.69 24.00 -6.25 N.A. 47.54 Current Per Share Financial ---------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ Financial Institution EPS(3) EPS(3) Share Share(4) Share - --------------------- -------- ------- ------- ------- ------- ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - --------------------------------------- PULB Pulaski SB, MHC of MO (29.8) 0.59 0.82 11.04 11.04 84.92 PLSK Pulaski SB, MHC of NJ (46.0) 0.21 0.51 10.20 10.20 85.68 PULS Pulse Bancorp of S. River NJ 1.20 1.80 13.63 13.63 169.39 QCFB QCF Bancorp of Virginia MN 1.41 1.41 19.23 19.23 109.91 QCBC Quaker City Bancorp of CA 0.60 0.98 14.94 14.93 170.40 QCSB Queens County Bancorp of NY* 1.43 1.45 11.39 11.39 96.06 RARB Raritan Bancorp. of Raritan NJ* 1.46 1.55 12.48 12.27 157.31 REDF RedFed Bancorp of Redlands CA 0.31 0.80 10.75 10.71 127.16 RELY Reliance Bancorp, Inc. of NY 1.25 1.85 18.54 13.36 225.25 RELI Reliance Bancshares Inc of WI(8)* 0.16 0.17 9.08 9.08 18.60 FRBK Republic First Bancorp of CA* 1.56 1.33 16.56 16.55 230.89 RIVR River Valley Bancorp of IN 0.46 0.62 14.63 14.41 118.02 RVSB Riverview Bancorp of WA 0.56 0.56 9.18 9.18 42.44 RSLN Roslyn Bancorp, Inc. of NY* 0.59 0.93 14.58 14.51 72.39 SCCB S. Carolina Comm. Bnshrs of SC 0.60 0.79 17.09 17.09 66.57 SBFL SB Fngr Lakes MHC of NY (33.1) 0.15 0.50 11.63 11.63 121.93 SFED SFS Bancorp of Schenectady NY 0.60 1.07 17.44 17.44 139.85 SGVB SGV Bancorp of W. Covina CA 0.31 0.75 12.77 12.56 174.78 SHSB SHS Bancorp, Inc. of PA 0.41 0.41 13.83 13.83 109.44 SISB SIS Bancorp Inc of MA* 3.31 3.29 18.52 18.52 257.23 SWCB Sandwich Co-Op. Bank of MA* 2.34 2.39 20.83 19.94 262.09 SFSL Security First Corp. of OH 0.88 1.10 8.13 7.99 86.25 SFNB Security First Netwrk Bk of GA(8) -3.30 -3.38 3.02 2.97 9.12 SMFC Sho-Me Fin. Corp. of MO(8) 2.08 2.35 19.81 19.81 219.35 SOBI Sobieski Bancorp of S. Bend IN 0.32 0.62 16.26 16.26 107.54 SOSA Somerset Savings Bank of MA(8)* 0.25 0.24 1.96 1.96 30.90 SSFC South Street Fin. Corp. of NC* 0.45 0.57 13.58 13.58 53.77 SCBS Southern Commun. Bncshrs of AL 0.19 0.47 13.54 13.54 61.66 SMBC Southern Missouri Bncrp of MO 0.65 0.63 16.17 16.17 98.22 SWBI Southwest Bancshares of IL 1.04 1.44 15.66 15.66 142.39 SVRN Sovereign Bancorp of PA 0.62 0.96 6.25 4.71 155.67 STFR St. Francis Cap. Corp. of WI 1.77 1.95 24.43 21.59 310.01 SPBC St. Paul Bancorp, Inc. of IL 0.93 1.34 11.67 11.64 135.68 SFFC StateFed Financial Corp. of IA 1.17 1.42 19.43 19.43 109.28 SFIN Statewide Fin. Corp. of NJ 0.76 1.29 13.90 13.88 142.93 STSA Sterling Financial Corp. of WA 0.28 0.90 12.41 10.82 302.93 SFSB SuburbFed Fin. Corp. of IL 1.23 1.79 21.92 21.84 338.12 ROSE T R Financial Corp. of NY* 1.84 1.66 12.58 12.58 202.74 THRD TF Financial Corp. of PA 0.84 1.13 17.44 15.30 156.93 TPNZ Tappan Zee Fin., Inc. of NY 0.53 0.49 14.35 14.35 80.07 ESBK The Elmira SB FSB of Elmira NY* 1.13 1.10 20.32 19.48 322.70 TSBS Trenton SB,FSB MHC of NJ(35.9)(8) 0.86 0.73 11.79 10.81 69.82 TRIC Tri-County Bancorp of WY 1.10 1.40 22.50 22.50 146.89 TWIN Twin City Bancorp of TN 0.44 0.62 10.78 10.78 83.86 UFRM United FS&LA of Rocky Mount NC 0.19 0.33 6.70 6.70 89.63 UBMT United Fin. Corp. of MT 0.94 1.16 19.95 19.95 88.08 VABF Va. Beach Fed. Fin. Corp of VA 0.26 0.58 8.50 8.50 124.16 VFFC Virginia First Savings of VA(8) 1.81 1.66 11.34 10.95 140.67 WHGB WHG Bancshares of MD 0.34 0.34 14.16 14.16 68.56 WSFS WSFS Financial Corp. of DE* 1.47 1.48 6.32 6.27 121.45 WVFC WVS Financial Corp. of PA* 1.69 2.12 18.83 18.83 168.69 WRNB Warren Bancorp of Peabody MA* 2.01 1.71 9.82 9.82 94.69 WFSL Washington FS&LA of Seattle WA 1.94 2.14 14.66 13.39 121.37 WAMU Washington Mutual Inc. of WA(8)* 1.14 2.42 19.30 18.32 385.92 WYNE Wayne Bancorp of NJ 0.50 0.50 16.44 16.44 123.13
RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part One Prices As Of October 10, 1997
Market Capitalization Price Change Data ------------------------ ----------------------------------------------- Shares Market 52 Week (1) % Change From ---------------- ----------------------- Price/ Outst- Capital- Last Last Dec 31, Dec 31, Financial Institution Share(1) anding ization(9) High Low Week Week 1994(2) 1995(2) --------------------- -------- ------ --------- ------- ------- ------- ------- ------- -------- ($) (000) ($Mil) ($) ($) ($) (%) (%) (%) NASDAQ Listed OTC Companies (continued) --------------------------------------- WAYN Wayne S&L Co. MHC of OH (47.8) 27.00 2,251 29.0 27.00 12.83 24.25 11.34 N.A. 65.34 WCFB Wbstr Cty FSB MHC of IA (45.2) 21.50 2,100 20.4 21.75 12.75 19.25 11.69 N.A. 56.36 WBST Webster Financial Corp. of CT 62.25 11,985 746.1 62.87 33.62 59.81 4.08 559.43 69.39 WEFC Wells Fin. Corp. of Wells MN 16.62 1,959 32.6 17.50 12.50 17.50 -5.03 N.A. 26.68 WCBI WestCo Bancorp of IL 28.75 2,474 71.1 29.25 20.00 26.25 9.52 187.50 33.72 WSTR WesterFed Fin. Corp. of MT 26.12 5,565 145.4 26.37 16.62 25.75 1.44 N.A. 43.12 WOFC Western Ohio Fin. Corp. of OH 28.75 2,339 67.2 29.25 19.62 28.00 2.68 N.A. 32.18 WWFC Westwood Fin. Corp. of NJ(8) 27.50 645 17.7 27.62 13.00 27.50 0.00 N.A. 66.67 WEHO Westwood Hmstd Fin Corp of OH 17.25 2,795 48.2 18.00 10.37 17.50 -1.43 N.A. 42.33 WFI Winton Financial Corp. of OH 19.25 1,986 38.2 19.25 11.25 18.12 6.24 N.A. 67.39 FFWD Wood Bancorp of OH 17.00 2,119 36.0 18.00 10.50 18.00 -5.56 N.A. 50.04 YFCB Yonkers Fin. Corp. of NY 20.37 3,036 61.8 20.50 12.12 20.00 1.85 N.A. 58.28 YFED York Financial Corp. of PA 25.75 7,008 180.5 26.75 16.00 25.75 0.00 172.49 58.46 Current Per Share Financials ----------------------------------------- Tangible Trailing 12 Mo. Book Book 12 Mo. Core Value/ Value/ Assets/ EPS(3) EPS(3) Share Share(4) Share -------- ------- ------ -------- ------- ($) ($) ($) ($) ($) NASDAQ Listed OTC Companies (continued) - --------------------------------------- WAYN Wayne S&L Co. MHC of OH (47.8) 0.35 0.74 10.44 10.44 112.94 WCFB Wbstr Cty FSB MHC of IA (45.2) 0.48 0.64 10.53 10.53 45.09 WBST Webster Financial Corp. of CT 1.60 2.86 24.91 21.28 495.93 WEFC Wells Fin. Corp. of Wells MN 0.73 1.08 14.64 14.64 103.13 WCBI WestCo Bancorp of IL 1.41 1.78 19.20 19.20 125.96 WSTR WesterFed Fin. Corp. of MT 0.81 1.02 18.73 14.99 171.72 WOFC Western Ohio Fin. Corp. of OH 0.52 0.72 23.38 21.79 169.51 WWFC Westwood Fin. Corp. of NJ(8) 0.78 1.34 15.76 14.04 172.70 WEHO Westwood Hmstd Fin Corp of OH 0.30 0.45 14.17 14.17 48.18 WFI Winton Financial Corp. of OH 1.60 1.34 11.36 11.12 159.81 FFWD Wood Bancorp of OH 0.79 0.94 9.52 9.52 77.36 YFCB Yonkers Fin. Corp. of NY 0.76 1.02 14.14 14.14 94.89 YFED York Financial Corp. of PA 1.01 1.29 14.28 14.28 165.87
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ----------------------- Tang. Equity/ Equity/ Reported Earnings Core Earnings NPAs Resvs/ Resvs/ ---------------------- --------------- Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) Market Averages. SAIF-Insured Thrifts(no MHCs) - ---------------------------------------------- SAIF-Insured Thrifts(302) 12.99 13.02 0.64 5.52 3.22 0.85 7.47 0.80 131.30 0.82 NYSE Traded Companies(9) 5.88 5.64 0.61 10.41 4.01 0.80 14.37 1.25 74.44 1.28 AMEX Traded Companies(17) 16.09 15.99 0.55 2.87 2.14 0.87 5.21 0.65 149.41 0.69 NASDAQ Listed OTC Companies(276) 13.05 13.09 0.65 5.51 3.25 0.85 7.37 0.79 132.43 0.81 California Companies(21) 7.44 7.18 0.30 4.48 2.19 0.43 6.99 1.88 70.98 1.33 Florida Companies(5) 7.63 7.18 0.92 11.46 3.26 0.74 9.13 1.53 85.76 0.81 Mid-Atlantic Companies(60) 11.07 10.73 0.62 6.30 3.50 0.85 8.73 0.90 93.57 0.92 Mid-West Companies(144) 14.09 13.90 0.69 5.40 3.41 0.89 7.11 0.63 157.79 0.71 New England Companies(9) 7.87 7.46 0.36 4.81 2.65 0.63 8.55 0.63 116.41 1.00 North-West Companies(8) 17.06 27.69 0.86 6.30 3.29 1.04 8.22 0.61 146.76 0.58 South-East Companies(42) 16.10 15.90 0.70 4.83 2.76 0.94 6.61 0.83 128.84 0.83 South-West Companies(7) 10.60 10.34 0.38 2.97 2.25 0.66 6.49 0.64 102.37 0.70 Western Companies (Excl CA)(6) 16.22 15.79 0.98 6.62 3.95 1.15 7.68 0.29 169.72 0.72 Thrift Strategy(240) 14.22 14.33 0.66 5.05 3.22 0.89 6.95 0.72 134.33 0.74 Mortgage Banker Strategy(37) 7.36 6.90 0.48 7.03 3.17 0.64 9.49 0.99 111.38 1.02 Real Estate Strategy(10) 7.34 7.14 0.55 6.98 3.61 0.76 10.25 1.42 97.09 1.35 Diversified Strategy(11) 7.66 7.42 1.06 13.44 4.18 1.08 14.25 1.31 120.54 1.12 Retail Banking Strategy(4) 8.35 8.13 0.11 2.31 0.80 0.04 1.83 1.42 211.39 1.87 Companies Issuing Dividends(255) 13.29 13.03 0.69 5.92 3.49 0.91 7.88 0.70 134.93 0.77 Companies Without Dividends(47) 11.26 12.96 0.38 3.21 1.61 0.50 5.11 1.42 109.57 1.07 Equity/Assets less than 6%(23) 4.96 4.66 0.37 7.44 3.06 0.56 11.41 1.43 85.24 1.04 Equity/Assets greater than 6-12%(142) 8.62 8.28 0.57 6.66 3.40 0.75 8.85 0.91 125.91 0.94 Equity/Assets greater than 12%(137) 18.52 18.95 0.76 4.11 3.06 0.99 5.49 0.57 145.10 0.66 Converted Last 3 Mths (no MHC)(3) 17.02 42.38 0.36 1.66 1.44 0.46 2.33 0.92 112.16 0.84 Actively Traded Companies(41) 8.66 8.42 0.72 8.69 4.02 0.95 11.96 1.14 117.94 0.98 Market Value Below $20 Million(50) 15.00 14.98 0.55 3.39 2.66 0.79 5.42 0.77 114.85 0.66 Holding Company Structure(267) 13.48 13.56 0.64 5.28 3.15 0.85 7.22 0.80 126.41 0.80 Assets Over $1 Billion(60) 7.82 7.30 0.62 8.12 3.49 0.81 10.96 0.97 100.59 0.98 Assets $500 Million-$1 Billion(49) 10.28 9.99 0.63 6.46 3.38 0.79 8.02 0.95 170.38 1.06 Assets $250-$500 Million(66) 11.42 12.32 0.60 5.35 3.26 0.82 7.47 0.75 127.51 0.74 Assets less than $250 Million(127) 17.14 17.09 0.68 4.08 3.01 0.91 5.68 0.69 133.23 0.69 Goodwill Companies(124) 9.08 8.48 0.62 7.06 3.58 0.79 9.11 0.86 112.24 0.88 Non-Goodwill Companies(177) 15.62 16.07 0.66 4.48 2.97 0.89 6.37 0.75 144.92 0.77 Acquirors of FSLIC Cases(10) 7.19 6.79 0.57 7.79 3.63 0.82 11.71 1.54 51.84 0.89 Pricing Ratios Dividend Data(6) ----------------------------------------- ----------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Earning Book Assets Book Earnings Share Yield Ratio(7) ------- ------- ------- ------ -------- ------- ------- --------- (X) (%) (%) (%) (x) ($) (%) (%) Market Averages. SAIF-Insured Thrifts(no MHCs - --------------------------------------------- SAIF-Insured Thrifts(302) 22.53 152.81 18.69 156.55 19.86 0.36 1.56 34.98 NYSE Traded Companies(9) 20.92 212.94 13.56 212.28 17.33 0.32 0.81 18.69 AMEX Traded Companies(17) 24.70 130.00 20.33 131.25 19.70 0.40 1.97 45.49 NASDAQ Listed OTC Companies(276) 22.44 152.36 18.77 156.61 19.97 0.36 1.56 35.19 California Companies(21) 22.30 170.53 11.98 170.64 19.15 0.15 0.47 12.75 Florida Companies(5) 18.31 183.32 21.03 206.83 23.75 0.24 0.75 14.53 Mid-Atlantic Companies(60) 23.01 154.87 16.69 159.68 18.89 0.39 1.49 37.17 Mid-West Companies(144) 21.90 146.18 19.28 148.58 19.74 0.36 1.67 35.29 New England Companies(9) 24.58 170.56 13.13 185.31 20.89 0.46 1.39 34.62 North-West Companies(8) 22.14 168.25 25.25 162.16 22.04 0.31 1.07 22.86 South-East Companies(42) 23.69 156.10 23.33 161.02 21.38 0.44 1.95 44.15 South-West Companies(7) 22.73 141.88 14.09 150.39 18.12 0.33 1.48 50.80 Western Companies (Excl CA)(6) 24.55 155.03 22.77 162.50 21.95 0.56 2.52 56.60 Thrift Strategy(240) 22.72 144.61 19.59 148.66 19.87 0.38 1.67 37.55 Mortgage Banker Strategy(37) 22.82 188.55 13.54 197.00 20.49 0.31 1.03 27.16 Real Estate Strategy(10) 16.56 181.63 13.07 184.89 18.09 0.13 0.66 12.64 Diversified Strategy(11) 21.84 238.62 22.39 234.89 18.04 0.46 1.31 30.22 Retail Banking Strategy(4) 21.59 141.54 11.18 146.03 22.47 0.20 1.18 18.18 Companies Issuing Dividends(255) 22.52 154.16 19.09 158.39 19.74 0.43 1.82 41.39 Companies Without Dividends(47) 22.64 144.74 16.36 145.68 20.89 0.00 0.00 0.00 Equity/Assets less than 6%(23) 21.60 194.54 10.77 198.20 19.77 0.22 0.75 15.26 Equity/Assets greater than 6-12%(142) 22.01 169.04 14.68 176.55 18.53 0.38 1.40 33.52 Equity/Assets greater than 12%(137) 23.38 131.51 23.85 132.46 21.43 0.37 1.84 40.90 Converted Last 3 Mths (no MHC)(3) 27.86 122.28 20.91 90.94 27.86 0.06 0.44 0.00 Actively Traded Companies(41) 21.95 194.71 16.31 196.38 18.16 0.49 1.53 32.11 Market Value Below $20 Million(50) 22.80 122.42 18.03 122.78 20.77 0.33 1.79 40.59 Holding Company Structure(267) 22.92 150.43 19.15 153.28 20.00 0.37 1.60 36.30 Assets Over $1 Billion(60) 22.29 194.52 15.78 207.35 19.05 0.43 1.19 29.99 Assets $500 Million-$1 Billion(49) 22.18 169.57 17.20 175.22 19.80 0.35 1.43 36.72 Assets $250-$500 Million(66) 22.72 153.65 17.12 156.17 19.36 0.37 1.53 32.46 Assets less than $250 Million(127) 22.71 128.76 21.36 129.46 20.62 0.34 1.78 38.70 Goodwill Companies(124) 21.98 173.11 15.43 183.93 19.21 0.40 1.41 33.12 Non-Goodwill Companies(177) 22.98 139.05 20.87 138.48 20.38 0.34 1.65 36.44 Acquirors of FSLIC Cases(10) 22.48 199.72 13.93 201.48 19.09 0.38 1.21 23.87
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances; ROI (return on investment) is current EPS divided by current price. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ----------------------- Tang. Equity/ Equity/ Reported Earnings Core Earnings NPAs Resvs/ Resvs/ ---------------------- --------------- Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) Market Averages. BIF-Insured Thrifts(no MHCs) - --------------------------------------------- BIF-Insured Thrifts(64) 11.70 11.33 1.12 11.06 5.92 1.12 10.90 0.83 160.24 1.43 NYSE Traded Companies(2) 7.79 5.41 0.81 10.28 4.70 0.87 11.56 2.23 29.91 1.08 AMEX Traded Companies(6) 11.89 11.10 0.74 7.96 4.22 0.74 8.04 0.99 209.73 1.25 NASDAQ Listed OTC Companies(56) 11.84 11.60 1.17 11.48 6.17 1.18 11.23 0.75 159.41 1.47 California Companies(4) 8.41 8.40 1.07 12.37 6.45 1.01 11.55 1.32 77.71 1.37 Mid-Atlantic Companies(15) 11.42 10.75 0.83 8.44 4.03 0.91 9.04 0.84 164.21 1.37 Mid-West Companies(2) 25.06 23.63 0.43 1.59 1.65 0.66 2.42 0.56 57.14 0.57 New England Companies(34) 8.98 8.69 1.27 13.80 7.48 1.23 13.21 0.87 165.32 1.66 North-West Companies(4) 12.39 12.00 1.21 10.53 4.93 1.18 10.22 0.16 215.39 1.03 South-East Companies(5) 27.80 27.80 1.14 4.44 3.32 1.23 4.76 0.63 179.97 0.75 Thrift Strategy(44) 12.92 12.50 1.12 9.98 5.74 1.13 9.77 0.81 170.29 1.38 Mortgage Banker Strategy(8) 8.83 8.62 0.86 11.23 5.23 0.95 11.87 0.71 135.17 1.41 Real Estate Strategy(6) 8.88 8.87 1.37 15.11 7.49 1.29 14.24 1.08 103.33 1.46 Diversified Strategy(6) 6.77 6.23 1.23 17.81 7.35 1.21 17.45 1.03 155.58 2.06 Companies Issuing Dividends(52) 11.91 11.50 1.04 10.54 5.25 1.04 10.40 0.76 167.72 1.37 Companies Without Dividends(12) 10.46 10.27 1.60 14.68 9.98 1.59 14.42 1.21 119.09 1.84 Equity/Assets less than 6%(5) 5.45 5.32 0.97 17.27 6.12 0.87 15.46 1.41 68.96 1.56 Equity/Assets 6-12%(43) 8.62 8.15 1.20 12.95 6.96 1.18 12.73 0.88 150.11 1.53 Equity/Assets greater than 12%(16) 22.10 21.90 0.92 4.15 2.95 1.03 4.63 0.52 215.58 1.12 Actively Traded Companies(19) 8.86 8.44 1.18 13.70 6.58 1.13 13.05 0.80 147.19 1.51 Market Value Below $20 Million(6) 20.96 20.64 1.55 4.88 9.12 1.69 5.70 1.31 63.72 1.25 Holding Company Structure(42) 13.20 12.84 1.17 10.25 5.82 1.19 10.19 0.72 171.02 1.49 Assets Over $1 Billion(15) 9.09 8.43 1.06 12.66 5.62 1.09 12.80 0.96 131.86 1.50 Assets $500 Million-$1 Billion(16) 9.48 8.95 1.16 12.71 6.31 1.12 12.15 0.84 142.79 1.54 Assets $250-$500 Million(15) 10.85 10.70 0.98 10.53 5.29 0.97 10.34 0.67 198.56 1.59 Assets less than $250 Million(18) 17.55 17.40 1.26 8.00 6.42 1.30 8.00 0.86 167.74 1.10 Goodwill Companies(30) 9.26 8.47 0.93 11.23 5.56 0.94 11.10 0.99 126.82 1.49 Non-Goodwill Companies(34) 13.90 13.90 1.28 10.90 6.24 1.28 10.71 0.69 191.18 1.38 Pricing Ratios Dividend Data(6) ----------------------------------------- ---------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Earning Book Assets Book Earnings Share Yield Ratio(7) ------- ------- ------- ------- -------- ------- ------- ------- (X) (%) (%) (%) (x) ($) (%) (%) Market Averages. BIF-Insured Thrifts(no MHCs) - --------------------------------------------- BIF-Insured Thrifts(64) 16.88 180.21 19.35 185.15 17.52 0.46 1.60 27.61 NYSE Traded Companies(2) 21.34 220.80 16.94 242.51 19.24 0.58 1.12 23.39 AMEX Traded Companies(6) 16.19 161.73 18.26 188.68 15.62 0.61 2.21 34.16 NASDAQ Listed OTC Companies(56) 16.72 180.83 19.58 183.48 17.57 0.44 1.55 27.36 California Companies(4) 15.63 175.16 14.71 175.43 16.99 0.00 0.00 0.00 Mid-Atlantic Companies(15) 20.31 178.37 19.57 189.81 20.07 0.46 1.53 34.48 Mid-West Companies(2) 0.00 99.84 25.02 105.90 0.00 0.00 0.00 0.00 New England Companies(34) 14.88 190.74 16.63 194.32 15.67 0.51 1.81 27.34 North-West Companies(4) 21.59 205.52 23.63 210.91 18.04 0.31 1.42 28.47 South-East Companies(5) 21.91 126.11 34.05 126.11 24.54 0.68 1.96 40.74 Thrift Strategy(44) 17.36 171.29 20.41 178.08 18.00 0.51 1.72 31.47 Mortgage Banker Strategy(8) 18.05 199.66 16.79 206.17 18.65 0.37 1.35 18.95 Real Estate Strategy(6) 13.87 186.63 16.56 186.81 14.34 0.20 0.94 11.07 Diversified Strategy(6) 14.02 231.19 15.44 228.23 14.50 0.45 1.46 21.37 Companies Issuing Dividends(52) 17.73 180.44 19.81 186.05 18.34 0.54 1.86 32.74 Companies Without Dividends(12) 11.90 178.82 16.53 179.97 12.51 0.00 0.00 0.00 Equity/Assets less than 6%(5) 17.06 262.99 14.33 268.91 19.87 0.18 0.95 16.86 Equity/Assets 6-12%(43) 16.00 188.88 16.60 195.47 16.26 0.51 1.70 26.82 Equity/Assets greater than 12%(16) 22.31 133.04 28.42 134.68 22.35 0.40 1.50 34.81 Actively Traded Companies(19) 15.89 194.03 16.86 197.97 16.86 0.52 1.73 27.19 Market Value Below $20 Million(6) 9.15 125.81 24.62 127.55 17.11 0.28 1.45 26.27 Holding Company Structure(42) 17.23 173.90 21.09 179.66 17.70 0.48 1.67 27.97 Assets Over $1 Billion(15) 18.35 207.83 19.14 209.69 17.99 0.50 1.55 26.13 Assets $500 Million-$1 Billion(16) 15.94 186.18 17.19 202.14 17.02 0.53 1.69 27.04 Assets $250-$500 Million(15) 16.56 175.66 17.77 178.69 16.53 0.36 1.49 25.28 Assets less than $250 Million(18) 16.65 152.72 23.44 154.13 18.69 0.46 1.67 32.19 Goodwill Companies(30) 17.53 185.72 16.38 196.84 17.93 0.49 1.63 27.12 Non-Goodwill Companies(34) 16.23 175.08 22.01 175.08 17.15 0.44 1.57 28.07
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances; ROI (return on investment) is current EPS divided by current price. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios ---------------------------------------------------------- Tang. Equity/ Equity/ Reported Earnings Core Earnings ---------------------- --------------- Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) --------------------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) Market Averages. MHC Institutions --------------------------------- SAIF-Insured Thrifts(20) 11.79 11.61 0.51 4.47 1.69 0.79 7.04 BIF-Insured Thrifts(2) 10.02 10.02 0.72 8.22 2.31 0.71 7.56 NASDAQ Listed OTC Companies(22) 11.58 11.42 0.54 4.91 1.76 0.78 7.10 Florida Companies(3) 9.81 9.78 0.47 4.51 1.75 0.72 6.91 Mid-Atlantic Companies(10) 11.60 11.31 0.47 4.37 1.47 0.72 6.75 Mid-West Companies(7) 12.88 12.86 0.56 4.28 1.86 0.89 7.17 New England Companies(1) 8.48 8.47 1.12 13.72 3.85 0.83 10.17 Thrift Strategy(21) 11.77 11.61 0.50 4.36 1.63 0.77 6.91 Diversified Strategy(1) 8.48 8.47 1.12 13.72 3.85 0.83 10.17 Companies Issuing Dividends(21) 11.57 11.40 0.54 4.98 1.74 0.78 7.19 Companies Without Dividends(1) 11.73 11.73 0.43 3.71 2.09 0.65 5.56 Equity/Assets 6-12%(16) 9.83 9.62 0.46 4.91 1.67 0.70 7.33 Equity/Assets >12%(6) 17.27 17.27 0.78 4.91 2.06 1.02 6.34 Actively Traded Companies(1) 9.42 8.40 0.58 6.17 1.62 0.91 9.77 Holding Company Structure(1) 9.42 8.40 0.58 6.17 1.62 0.91 9.77 Assets Over $1 Billion(5) 8.85 8.21 0.72 8.18 2.20 0.84 9.29 Assets $500 Million-$1 Billion(3) 9.81 9.78 0.47 4.51 1.75 0.72 6.91 Assets $250-$500 Million(5) 11.27 11.25 0.53 4.61 1.85 0.86 7.83 Assets less than $250 Million(9) 13.50 13.50 0.46 3.49 1.50 0.73 5.77 Goodwill Companies(8) 8.68 8.23 0.62 7.01 2.08 0.78 8.78 Non-Goodwill Companies(14) 13.16 13.16 0.49 3.76 1.58 0.77 6.18 MHC Institutions(22) 11.58 11.42 0.54 4.91 1.76 0.78 7.10 Asset Quality Ratios Pricing Ratios ----------------------- ----------------------------------------- Price/ Price/ NPAs Resvs/ Resvs/ Price/ Price/ Price/ Tang. Core Financial Institution Assets NPAs Loans Earning Book Assets Book Earnings --------------------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (X) (%) (%) (%) (x) Market Averages. MHC Institutions --------------------------------- SAIF-Insured Thrifts(20) 0.51 145.36 0.72 0.00 221.63 28.37 221.94 28.11 BIF-Insured Thrifts(2) 1.85 82.27 1.77 25.99 0.00 34.17 0.00 0.00 NASDAQ Listed OTC Companies(22) 0.70 136.35 0.84 25.99 221.63 29.05 221.94 28.11 Florida Companies(3) 0.45 64.99 0.46 0.00 250.32 24.49 251.26 0.00 Mid-Atlantic Companies(10) 0.89 148.38 1.02 0.00 206.49 30.50 206.49 0.00 Mid-West Companies(7) 0.44 154.71 0.52 0.00 225.28 28.47 225.67 28.11 New England Companies(1) 0.90 121.39 1.60 25.99 0.00 28.02 0.00 0.00 Thrift Strategy(21) 0.68 137.50 0.80 0.00 221.63 29.12 221.94 28.11 Diversified Strategy(1) 0.90 121.39 1.60 25.99 0.00 28.02 0.00 0.00 Companies Issuing Dividends(21) 0.70 136.35 0.81 25.99 225.62 29.57 225.97 28.11 Companies Without Dividends(1) 0.00 0.00 1.40 0.00 177.65 20.83 177.65 0.00 Equity/Assets 6-12%(16) 0.79 95.58 0.95 25.99 223.48 26.59 223.96 28.11 Equity/Assets >12%(6) 0.15 380.97 0.50 0.00 217.91 37.07 217.91 0.00 Actively Traded Companies(1) 0.68 83.02 1.06 0.00 0.00 34.43 0.00 0.00 Holding Company Structure(1) 0.68 83.02 1.06 0.00 0.00 34.43 0.00 0.00 Assets Over $1 Billion(5) 0.74 89.86 1.13 25.99 0.00 31.69 0.00 0.00 Assets $500 Million-$1 Billion(3) 0.45 64.99 0.46 0.00 250.32 24.49 251.26 0.00 Assets $250-$500 Million(5) 0.29 334.04 0.43 0.00 243.25 27.15 243.90 27.73 Assets less than $250 Million(9) 1.01 83.46 0.95 0.00 204.16 29.59 204.16 28.48 Goodwill Companies(8) 0.57 127.39 0.89 25.99 247.51 28.00 249.42 27.73 Non-Goodwill Companies(14) 0.80 143.06 0.82 0.00 216.45 29.63 216.45 28.48 MHC Institutions(22) 0.70 136.35 0.84 25.99 221.63 29.05 221.94 28.11 Dividend Data(6) ----------------------- Ind. Divi- Div./ dend Payout Financial Institution Share Yield Ratio(7) --------------------- ------- ------- ------- ($) (%) (%) Market Averages. MHC Institutions --------------------------------- SAIF-Insured Thrifts(20) 0.55 1.89 51.85 BIF-Insured Thrifts(2) 0.52 1.54 48.92 NASDAQ Listed OTC Companies(22) 0.55 1.85 51.36 Florida Companies(3) 0.90 2.61 0.00 Mid-Atlantic Companies(10) 0.38 1.24 47.43 Mid-West Companies(7) 0.68 2.63 69.57 New England Companies(1) 0.68 1.88 48.92 Thrift Strategy(21) 0.54 1.85 51.85 Diversified Strategy(1) 0.68 1.88 48.92 Companies Issuing Dividends(21) 0.58 1.96 61.64 Companies Without Dividends(1) 0.00 0.00 0.00 Equity/Assets 6-12%(16) 0.49 1.52 51.36 Equity/Assets >12%(6) 0.74 2.91 0.00 Actively Traded Companies(1) 0.44 0.99 61.11 Holding Company Structure(1) 0.44 0.99 61.11 Assets Over $1 Billion(5) 0.51 1.24 59.66 Assets $500 Million-$1 Billion(3) 0.90 2.61 0.00 Assets $250-$500 Million(5) 0.62 2.06 69.57 Assets less than $250 Million(9) 0.46 1.88 0.00 Goodwill Companies(8) 0.57 1.55 61.64 Non-Goodwill Companies(14) 0.54 2.01 0.00 MHC Institutions(22) 0.55 1.85 51.36
(1) Average of high/low or bid/ask price per share. (2) Or since offering price if converted or first listed in 1994 or 1995. Percent change figures are actual year-to-date and are not annualized (3) EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis. (4) Excludes intangibles (such as goodwill, value of core deposits, etc.). (5) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances; ROI (return on investment) is current EPS divided by current price. (6) Annualized, based on last regular quarterly cash dividend announcement. (7) Indicated dividend as a percent of trailing twelve month earnings. (8) Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics. * All thrifts are SAIF insured unless otherwise noted with an asterisk. Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings. Source: Corporate reports and offering circulars for publicly traded companies, and RP Financial, Inc. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios ---------------------------------------------------------- Tang. Equity/ Equity/ Reported Earnings Core Earnings ---------------------- --------------- Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) --------------------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) NYSE Traded Companies --------------------- AHM Ahmanson and Co. H.F. of CA 4.17 3.55 0.39 9.68 3.45 0.62 15.44 CSA Coast Savings Financial of CA 4.92 4.86 0.21 4.28 1.73 0.53 10.73 CFB Commercial Federal Corp. of NE 6.00 5.32 0.65 11.03 4.07 0.91 15.55 DME Dime Bancorp, Inc. of NY* 5.27 5.03 0.56 10.57 4.45 0.71 13.39 DSL Downey Financial Corp. of CA 6.93 6.84 0.44 5.82 3.32 0.73 9.68 FED FirstFed Fin. Corp. of CA 4.83 4.77 0.29 6.19 3.09 0.53 11.34 GSB Glendale Fed. Bk, FSB of CA 5.53 4.91 0.26 4.71 2.37 0.61 11.03 GDW Golden West Fin. Corp. of CA 6.37 6.37 1.02 16.09 7.44 1.24 19.62 GPT GreenPoint Fin. Corp. of NY* 10.31 5.79 1.06 9.99 4.95 1.03 9.74 NYB New York Bancorp, Inc. of NY 5.08 5.08 1.38 26.83 5.65 1.62 31.44 WES Westcorp Inc. of Orange CA 9.05 9.02 0.87 9.10 5.02 0.43 4.51 AMEX Traded Companies --------------------- ANA Acadiana Bancshares of LA* 17.43 17.43 0.50 3.67 1.91 0.50 3.67 BKC American Bank of Waterbury CT* 8.29 7.95 1.27 15.35 7.52 1.10 13.19 BFD BostonFed Bancorp of MA 8.79 8.49 0.51 5.08 3.40 0.66 6.58 CFX CFX Corp of NH* 7.44 6.96 0.94 11.53 5.00 1.12 13.73 CNY Carver Bancorp, Inc. of NY 8.35 8.01 -0.44 -4.95 -5.80 0.01 0.07 CBK Citizens First Fin.Corp. of IL 14.08 14.08 0.29 1.95 1.61 0.58 3.84 ESX Essex Bancorp of VA(8) 0.27 0.17 -0.03 -16.67 -1.16 0.03 16.67 FCB Falmouth Co-Op Bank of MA* 23.88 23.88 0.84 3.43 2.54 0.79 3.23 FAB FirstFed America Bancorp of MA 12.16 12.16 -0.20 -2.35 -0.97 0.47 5.61 GAF GA Financial Corp. of PA 15.18 15.02 1.00 5.26 4.10 1.27 6.71 JSB JSB Financial, Inc. of NY 22.85 22.85 1.80 8.12 5.70 1.71 7.74 KNK Kankakee Bancorp of IL 11.09 10.42 0.66 6.35 4.80 0.82 7.92 KYF Kentucky First Bancorp of KY 16.56 16.56 0.87 4.64 4.13 1.12 6.00 MBB MSB Bancorp of Middletown NY* 7.39 3.63 0.17 2.40 1.79 0.18 2.50 PDB Piedmont Bancorp of NC 16.63 16.63 -0.42 -1.94 -1.75 0.66 3.07 SSB Scotland Bancorp of NC 37.02 37.02 1.41 3.88 4.25 1.72 4.72 SZB SouthFirst Bancshares of AL 14.00 14.00 -0.03 -0.19 -0.14 0.23 1.62 SRN Southern Banc Company of AL 17.01 16.83 0.14 0.79 0.71 0.50 2.84 SSM Stone Street Bancorp of NC 28.85 28.85 1.43 4.18 3.81 1.71 5.02 TSH Teche Holding Company of LA 13.14 13.14 0.69 5.03 3.45 0.96 6.96 FTF Texarkana Fst. Fin. Corp of AR 15.70 15.70 1.41 8.40 4.89 1.74 10.38 THR Three Rivers Fin. Corp. of MI 13.46 13.41 0.57 4.02 3.33 0.82 5.83 TBK Tolland Bank of CT* 6.94 6.74 0.75 11.37 6.55 0.78 11.89 WSB Washington SB, FSB of MD 8.30 8.30 0.50 6.00 3.69 0.73 8.80 NASDAQ Listed OTC Companies --------------------------- FBCV 1st Bancorp of Vincennes IN 8.26 8.09 0.31 3.80 3.19 0.13 1.61 AFED AFSALA Bancorp, Inc. of NY 13.47 13.47 0.79 6.46 4.32 0.79 6.46 ALBK ALBANK Fin. Corp. of Albany NY 9.20 8.04 0.84 9.16 5.09 1.04 11.28 AMFC AMB Financial Corp. of IN 14.95 14.95 0.73 4.14 4.00 0.81 4.57 ASBP ASB Financial Corp. of OH 15.75 15.75 0.60 3.24 2.92 0.86 4.66 ABBK Abington Savings Bank of MA* 6.92 6.23 0.82 12.05 6.65 0.73 10.71 AABC Access Anytime Bancorp of NM 7.44 7.44 -0.50 -8.75 -5.29 -0.12 -2.14 AFBC Advance Fin. Bancorp of WV 15.43 15.43 0.56 4.60 2.87 0.85 6.94 AADV Advantage Bancorp of WI 9.21 8.62 0.40 4.49 2.20 0.89 9.94 AFCB Affiliated Comm BC, Inc of MA 9.78 9.72 0.96 9.78 4.90 1.09 11.12 ALBC Albion Banc Corp. of Albion NY 8.73 8.73 0.11 1.14 0.93 0.38 4.07 ABCL Allied Bancorp of IL 8.91 8.80 0.52 5.89 2.28 0.76 8.60 ATSB AmTrust Capital Corp. of IN 10.33 10.23 0.18 1.81 1.75 0.30 2.96 Asset Quality Ratios Pricing Ratios ----------------------- ----------------------------------------- Price/ Price/ NPAs Resvs/ Resvs/ Price/ Price/ Price/ Tang. Core Financial Institution Assets NPAs Loans Earning Book Assets Book Earnings --------------------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (X) (%) (%) (%) (x) NYSE Traded Companies --------------------- AHM Ahmanson and Co. H.F. of CA 1.90 42.90 1.25 28.94 281.62 11.74 NM 18.14 CSA Coast Savings Financial of CA 1.40 65.70 1.37 NM 238.45 11.73 241.46 23.13 CFB Commercial Federal Corp. of NE 0.89 76.36 0.91 24.57 254.78 15.30 287.34 17.43 DME Dime Bancorp, Inc. of NY* 1.57 31.98 0.85 22.50 231.34 12.20 242.51 17.76 DSL Downey Financial Corp. of CA 0.95 55.76 0.58 NM 169.99 11.78 172.36 18.14 FED FirstFed Fin. Corp. of CA 1.39 134.39 2.46 NM 191.01 9.22 193.13 17.66 GSB Glendale Fed. Bk, FSB of CA 1.46 69.38 1.36 NM 187.37 10.36 210.80 18.04 GDW Golden West Fin. Corp. of CA 1.31 42.43 0.68 13.44 206.29 13.14 206.29 11.02 GPT GreenPoint Fin. Corp. of NY* 2.89 27.84 1.30 20.19 210.25 21.68 NM 20.71 NYB New York Bancorp, Inc. of NY 1.22 48.76 0.97 17.71 NM 23.05 NM 15.11 WES Westcorp Inc. of Orange CA 0.74 134.25 1.95 19.93 174.04 15.75 174.59 NM AMEX Traded Companies --------------------- ANA Acadiana Bancshares of LA* 0.52 190.96 1.35 NM 147.43 25.69 147.43 NM BKC American Bank of Waterbury CT* 1.81 48.13 1.45 13.30 191.18 15.84 199.14 15.47 BFD BostonFed Bancorp of MA 0.52 114.29 0.74 29.39 150.83 13.25 156.03 22.66 CFX CFX Corp of NH* 0.72 120.07 1.23 20.00 209.13 15.55 223.58 16.79 CNY Carver Bancorp, Inc. of NY 1.37 42.60 1.02 NM 85.40 7.13 89.04 NM CBK Citizens First Fin.Corp. of IL 0.59 37.65 0.26 NM 126.32 17.79 126.32 NM ESX Essex Bancorp of VA(8) 2.63 42.63 1.34 NM NM 2.40 NM NM FCB Falmouth Co-Op Bank of MA* 0.07 806.45 0.98 NM 133.12 31.79 133.12 NM FAB FirstFed America Bancorp of MA 0.40 235.98 1.10 NM 151.61 18.44 151.61 NM GAF GA Financial Corp. of PA 0.12 132.49 0.43 24.38 136.84 20.77 138.30 19.12 JSB JSB Financial, Inc. of NY 1.08 33.98 0.62 17.54 137.17 31.35 137.17 18.40 KNK Kankakee Bancorp of IL 0.94 67.06 0.92 20.83 126.93 14.08 135.05 16.71 KYF Kentucky First Bancorp of KY 0.07 630.51 0.75 24.24 125.87 20.85 125.87 18.75 MBB MSB Bancorp of Middletown NY* 0.71 38.66 0.63 NM 129.74 9.59 264.35 NM PDB Piedmont Bancorp of NC 0.91 71.58 0.79 NM 146.50 24.36 146.50 NM SSB Scotland Bancorp of NC NA NA 0.50 23.53 89.29 33.06 89.29 19.35 SZB SouthFirst Bancshares of AL 0.75 39.15 0.40 NM 129.95 18.19 129.95 NM SRN Southern Banc Company of AL NA NA 0.21 NM 116.60 19.83 117.81 NM SSM Stone Street Bancorp of NC 0.27 187.50 0.62 26.25 130.19 37.56 130.19 21.88 TSH Teche Holding Company of LA 0.27 304.97 0.96 29.00 145.65 19.14 145.65 20.94 FTF Texarkana Fst. Fin. Corp of AR 0.46 145.12 0.79 20.47 178.38 28.01 178.38 16.55 THR Three Rivers Fin. Corp. of MI 1.15 44.56 0.78 NM 119.82 16.13 120.28 20.69 TBK Tolland Bank of CT* 2.13 54.09 1.87 15.26 159.81 11.09 164.47 14.60 WSB Washington SB, FSB of MD NA NA 0.92 27.10 160.99 13.37 160.99 18.48 NASDAQ Listed OTC Companies --------------------------- FBCV 1st Bancorp of Vincennes IN 0.94 45.77 0.66 NM 115.63 9.55 118.06 NM AFED AFSALA Bancorp, Inc. of NY 0.45 150.77 1.43 23.17 128.90 17.37 128.90 23.17 ALBK ALBANK Fin. Corp. of Albany NY 0.91 78.77 0.99 19.65 174.08 16.02 199.20 15.96 AMFC AMB Financial Corp. of IN 0.81 49.41 0.53 25.00 112.94 16.89 112.94 22.60 ASBP ASB Financial Corp. of OH 1.02 71.62 1.09 NM 129.93 20.46 129.93 23.88 ABBK Abington Savings Bank of MA* 0.20 211.97 0.69 15.05 173.52 12.01 192.65 16.93 AABC Access Anytime Bancorp of NM 1.60 29.31 0.92 NM 130.17 9.69 130.17 NM AFBC Advance Fin. Bancorp of WV 0.58 60.53 0.43 NM 119.29 18.40 119.29 23.05 AADV Advantage Bancorp of WI 0.44 128.03 1.01 NM 198.80 18.32 212.63 20.55 AFCB Affiliated Comm BC, Inc of MA 0.39 191.75 1.20 20.42 189.51 18.53 190.55 17.96 ALBC Albion Banc Corp. of Albion NY 0.72 53.94 0.54 NM 121.54 10.61 121.54 NM ABCL Allied Bancorp of IL 0.15 257.09 0.53 NM 171.47 15.27 173.59 NM ATSB AmTrust Capital Corp. of IN 3.63 19.92 1.02 NM 100.42 10.37 101.42 NM Dividend Data(6) ----------------------- Ind. Divi- Div./ dend Payout Financial Institution Share Yield Ratio(7) --------------------- ------- ------- ------- ($) (%) (%) NYSE Traded Companies --------------------- AHM Ahmanson and Co. H.F. of CA 0.88 1.54 44.44 CSA Coast Savings Financial of CA 0.00 0.00 0.00 CFB Commercial Federal Corp. of NE 0.28 0.56 13.66 DME Dime Bancorp, Inc. of NY* 0.16 0.68 15.24 DSL Downey Financial Corp. of CA 0.32 1.23 37.21 FED FirstFed Fin. Corp. of CA 0.00 0.00 0.00 GSB Glendale Fed. Bk, FSB of CA 0.00 0.00 0.00 GDW Golden West Fin. Corp. of CA 0.44 0.49 6.53 GPT GreenPoint Fin. Corp. of NY* 1.00 1.56 31.55 NYB New York Bancorp, Inc. of NY 0.60 1.71 30.30 WES Westcorp Inc. of Orange CA 0.40 1.81 36.04 AMEX Traded Companies --------------------- ANA Acadiana Bancshares of LA* 0.36 1.46 NM BKC American Bank of Waterbury CT* 1.44 3.46 46.01 BFD BostonFed Bancorp of MA 0.28 1.29 37.84 CFX CFX Corp of NH* 0.88 4.00 NM CNY Carver Bancorp, Inc. of NY 0.20 1.57 NM CBK Citizens First Fin.Corp. of IL 0.00 0.00 0.00 ESX Essex Bancorp of VA(8) 0.00 0.00 NM FCB Falmouth Co-Op Bank of MA* 0.20 0.98 38.46 FAB FirstFed America Bancorp of MA 0.00 0.00 NM GAF GA Financial Corp. of PA 0.48 2.46 60.00 JSB JSB Financial, Inc. of NY 1.40 2.87 50.36 KNK Kankakee Bancorp of IL 0.48 1.42 29.63 KYF Kentucky First Bancorp of KY 0.50 3.56 NM MBB MSB Bancorp of Middletown NY* 0.60 2.19 NM PDB Piedmont Bancorp of NC 0.40 3.68 NM SSB Scotland Bancorp of NC 0.30 2.50 58.82 SZB SouthFirst Bancshares of AL 0.50 2.40 NM SRN Southern Banc Company of AL 0.35 2.06 NM SSM Stone Street Bancorp of NC 0.45 2.14 56.25 TSH Teche Holding Company of LA 0.50 2.21 64.10 FTF Texarkana Fst. Fin. Corp of AR 0.56 2.09 42.75 THR Three Rivers Fin. Corp. of MI 0.40 2.15 64.52 TBK Tolland Bank of CT* 0.20 1.18 18.02 WSB Washington SB, FSB of MD 0.10 1.23 33.33 NASDAQ Listed OTC Companies --------------------------- FBCV 1st Bancorp of Vincennes IN 0.40 1.08 33.90 AFED AFSALA Bancorp, Inc. of NY 0.16 0.84 19.51 ALBK ALBANK Fin. Corp. of Albany NY 0.72 1.60 31.44 AMFC AMB Financial Corp. of IN 0.24 1.45 36.36 ASBP ASB Financial Corp. of OH 0.40 2.99 NM ABBK Abington Savings Bank of MA* 0.40 1.23 18.52 AABC Access Anytime Bancorp of NM 0.00 0.00 NM AFBC Advance Fin. Bancorp of WV 0.32 1.80 62.75 AADV Advantage Bancorp of WI 0.40 0.69 31.50 AFCB Affiliated Comm BC, Inc of MA 0.48 1.54 31.37 ALBC Albion Banc Corp. of Albion NY 0.32 1.10 NM ABCL Allied Bancorp of IL 0.44 1.64 72.13 ATSB AmTrust Capital Corp. of IN 0.20 1.40 NM
RP FINANCIAL, LC. ------------------------------------------ Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- --------------------- Tang. Reported Earnings Core Earnings Equity/ Equity/ ---------------------- --------------- NPAs Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs --------------------- ------ ------ ----- ----- ----- ----- ----- ------ ----- (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) --------------------------------------- AHCI Ambanc Holding Co., Inc. of NY* 12.94 12.94 -0.59 -4.26 -3.74 -0.62 -4.45 0.63 124.04 ASBI Ameriana Bancorp of IN 10.96 10.95 0.61 5.52 3.43 0.85 7.73 0.40 71.19 AFFFZ America First Fin. Fund of CA(8) 8.44 8.34 1.49 19.31 12.93 1.83 23.69 0.40 81.55 ANBK American Nat'l Bancorp of MD(8) 8.97 8.97 0.28 2.90 1.84 0.65 6.74 0.74 102.82 ABCW Anchor Bancorp Wisconsin of WI 6.22 6.11 0.75 12.06 4.88 0.96 15.56 0.92 126.05 ANDB Andover Bancorp, Inc. of MA* 8.06 8.06 1.10 13.91 7.07 1.13 14.34 1.01 99.08 ASFC Astoria Financial Corp. of NY 7.83 6.57 0.56 7.09 3.47 0.79 10.12 0.51 37.96 AVND Avondale Fin. Corp. of IL 9.12 9.12 -0.49 -5.19 -4.63 -1.51 -16.06 3.18 96.19 BKCT Bancorp Connecticut of CT* 10.25 10.25 1.32 12.60 6.77 1.24 11.90 1.19 100.82 BPLS Bank Plus Corp. of CA 5.06 5.06 -0.26 -5.31 -3.46 0.02 0.46 2.88 58.99 BWFC Bank West Fin. Corp. of MI 14.52 14.52 0.64 3.91 2.49 0.57 3.47 0.28 51.72 BANC BankAtlantic Bancorp of FL 5.62 4.62 0.90 14.98 6.43 0.65 10.86 0.97 102.98 BKUNA BankUnited SA of FL 3.72 3.02 0.21 4.55 2.19 0.34 7.54 0.66 26.19 BVCC Bay View Capital Corp. of CA 6.34 5.32 0.39 6.37 3.39 0.63 10.37 0.83 137.32 FSNJ Bayonne Banchsares of NJ 14.42 14.42 -0.35 -2.42 -1.87 -0.06 -0.40 1.22 43.59 BFSB Bedford Bancshares of VA 14.16 14.16 1.01 6.98 4.65 1.29 8.94 0.60 79.85 BFFC Big Foot Fin. Corp. of IL 16.98 16.98 0.05 0.28 0.21 0.42 2.45 0.09 151.52 BSBC Branford SB of CT(8)* 9.28 9.28 1.16 12.75 5.57 1.16 12.75 1.42 141.26 BYFC Broadway Fin. Corp. of CA 10.01 10.01 -0.14 -1.23 -1.62 0.21 1.88 2.06 39.74 CBES CBES Bancorp of MO 17.58 17.58 0.91 5.54 3.91 1.11 6.80 NA NA CCFH CCF Holding Company of GA 11.68 11.68 0.05 0.30 0.26 0.07 0.42 0.18 325.68 CENF CENFED Financial Corp. of CA 5.20 5.19 0.51 10.04 5.08 0.73 14.30 1.28 58.93 CFSB CFSB Bancorp of Lansing MI 7.63 7.63 0.85 10.96 4.61 1.07 13.84 0.17 308.01 CKFB CKF Bancorp of Danville KY 23.96 23.96 1.81 7.25 6.32 1.33 5.33 1.26 14.79 CNSB CNS Bancorp of MO 24.94 24.94 0.42 1.70 1.39 0.77 3.13 0.53 72.14 CSBF CSB Financial Group Inc of IL* 25.06 23.63 0.43 1.59 1.65 0.66 2.42 0.56 57.14 CBCI Calumet Bancorp of Chicago IL 15.50 15.50 1.15 7.22 5.56 1.46 9.16 1.16 102.51 CAFI Camco Fin. Corp. of OH 9.57 8.82 0.82 9.11 4.85 0.92 10.18 0.49 54.74 CMRN Cameron Fin. Corp. of MO 21.69 21.69 1.07 4.43 4.05 1.33 5.51 0.73 111.82 CAPS Capital Savings Bancorp of MO 8.80 8.80 0.67 7.61 4.69 0.93 10.68 0.31 97.24 CFNC Carolina Fincorp of NC* 22.83 22.83 1.14 4.92 3.97 1.09 4.70 0.18 194.17 CASB Cascade SB of Everett WA(8) 6.13 6.13 0.35 5.65 3.42 0.52 8.53 0.41 191.64 CATB Catskill Fin. Corp. of NY* 25.04 25.04 1.43 5.21 5.15 1.45 5.27 0.47 140.85 CNIT Cenit Bancorp of Norfolk VA 7.24 6.65 0.87 12.05 5.77 0.80 11.05 0.51 103.23 CEBK Central Co-Op. Bank of MA* 10.45 9.31 0.88 8.78 6.00 0.90 8.90 0.85 97.49 CENB Century Bancshares of NC* 30.11 30.11 1.76 5.85 5.36 1.77 5.89 0.13 423.08 CBSB Charter Financial Inc. of IL 14.47 12.80 1.13 7.49 5.06 1.59 10.49 0.56 104.84 COFI Charter One Financial of OH 6.71 6.28 0.98 14.64 4.71 1.23 18.32 0.27 164.80 CVAL Chester Valley Bancorp of PA 8.36 8.36 0.65 7.42 3.83 0.93 10.59 0.23 381.68 CTZN CitFed Bancorp of Dayton OH 6.37 5.74 0.58 9.12 3.58 0.82 12.83 0.41 143.79 CLAS Classic Bancshares of KY 14.72 12.42 0.55 3.05 2.77 0.77 4.27 0.94 65.45 CMSB Cmnwealth Bancorp of PA 9.63 7.53 0.55 5.26 3.63 0.70 6.71 0.50 86.54 CBSA Coastal Bancorp of Houston TX 3.33 2.77 0.25 7.57 4.68 0.44 13.16 0.58 39.81 CFCP Coastal Fin. Corp. of SC 6.17 6.17 0.94 15.22 3.90 1.03 16.67 0.21 436.85 CMSV Commty. Svgs, MHC of FL (48.5) 11.25 11.25 0.56 4.87 1.92 0.84 7.27 0.55 67.15 CFTP Community Fed. Bancorp of MS 27.46 27.46 1.33 4.15 3.37 1.62 5.07 0.30 91.63 CFFC Community Fin. Corp. of VA 13.71 13.71 1.01 7.32 5.62 1.28 9.26 0.39 148.67 CFBC Community First Bnkg Co. of GA 15.40 15.19 0.56 3.65 2.68 0.57 3.69 2.02 26.10 CIBI Community Inv. Bancorp of OH 12.04 12.04 0.62 5.22 4.13 0.94 7.95 0.63 82.56 COOP Cooperative Bk.for Svgs. of NC 7.63 7.63 -0.80 -10.08 -5.81 0.19 2.46 0.46 50.09 CRZY Crazy Woman Creek Bncorp of WY 25.81 25.81 1.06 3.69 3.84 1.30 4.52 0.39 136.15 DNFC D&N Financial Corp. of MI 5.57 5.52 0.61 10.68 4.63 0.80 14.08 0.34 198.09 DCBI Delphos Citizens Bancorp of OH 28.41 28.41 1.45 6.45 4.06 1.45 6.45 0.35 27.76 DIME Dime Community Bancorp of NY 14.52 12.50 0.96 5.96 4.18 1.04 6.41 0.73 112.22 DIBK Dime Financial Corp. of CT* 7.96 7.70 1.90 23.27 9.02 1.91 23.35 0.40 355.33 EGLB Eagle BancGroup of IL 11.85 11.85 -0.09 -0.77 -0.63 0.20 1.73 1.48 35.83 Pricing Ratios Dividend Data(6) ------------------------------------------ --------------------------- Price/ Price/ Ind. Divi- Resvs/ Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Loans Earning Book Assets Book Earnings Share Yield Ratio(7) - --------------------- ------- -------- ------ -------- ----- --------- ------- ------ -------- (%) (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- AHCI Ambanc Holding Co., Inc. of NY* 1.40 NM 119.80 15.50 119.80 NM 0.20 1.17 NM ASBI Ameriana Bancorp of IN 0.38 29.17 162.19 17.77 162.31 20.84 0.64 2.93 NM AFFFZ America First Fin. Fund of CA(8) 0.49 7.74 138.56 11.69 140.29 6.30 1.60 3.75 29.04 ANBK American Nat'l Bancorp of MD(8) 1.17 NM 160.45 14.39 160.45 23.40 0.12 0.60 32.43 ABCW Anchor Bancorp Wisconsin of WI 1.48 20.48 239.80 14.92 244.23 15.88 0.32 1.01 20.65 ANDB Andover Bancorp, Inc. of MA* 1.41 14.15 185.66 14.97 185.66 13.72 0.68 1.87 26.46 ASFC Astoria Financial Corp. of NY 0.48 28.83 197.62 15.46 235.32 20.18 0.60 1.06 30.61 AVND Avondale Fin. Corp. of IL 5.33 NM 115.90 10.57 115.90 NM 0.00 0.00 NM BKCT Bancorp Connecticut of CT* 1.98 14.77 183.31 18.78 183.31 15.64 1.00 3.15 46.51 BPLS Bank Plus Corp. of CA 2.11 NM 143.58 7.27 143.74 NM 0.00 0.00 NM BWFC Bank West Fin. Corp. of MI 0.20 NM 164.86 23.93 164.86 NM 0.32 1.51 60.38 BANC BankAtlantic Bancorp of FL 1.39 15.56 223.28 12.55 271.84 21.48 0.13 0.85 13.27 BKUNA BankUnited SA of FL 0.21 NM 174.57 6.50 215.45 27.60 0.00 0.00 0.00 BVCC Bay View Capital Corp. of CA 1.51 29.51 189.29 12.00 225.53 18.11 0.32 1.12 32.99 FSNJ Bayonne Banchsares of NJ 1.36 NM 129.26 18.64 129.26 NM 0.17 1.33 NM BFSB Bedford Bancshares of VA 0.56 21.49 145.83 20.66 145.83 16.78 0.56 2.29 49.12 BFFC Big Foot Fin. Corp. of IL 0.34 NM 135.98 23.09 135.98 NM 0.00 0.00 0.00 BSBC Branford SB of CT(8)* 3.06 17.97 217.80 20.22 217.80 17.97 0.08 1.39 25.00 BYFC Broadway Fin. Corp. of CA 1.01 NM 80.20 8.03 80.20 NM 0.20 1.70 NM CBES CBES Bancorp of MO NA 25.60 123.99 21.80 123.99 20.87 0.40 1.86 47.62 CCFH CCF Holding Company of GA 0.72 NM 135.79 15.86 135.79 NM 0.55 2.82 NM CENF CENFED Financial Corp. of CA 1.10 19.70 187.05 9.73 187.41 13.83 0.36 0.92 18.18 CFSB CFSB Bancorp of Lansing MI 0.61 21.67 234.70 17.90 234.70 17.16 0.68 2.29 49.64 CKFB CKF Bancorp of Danville KY 0.20 15.81 117.46 28.14 117.46 21.51 0.50 2.70 42.74 CNSB CNS Bancorp of MO 0.58 NM 121.29 30.25 121.29 NM 0.24 1.33 NM CSBF CSB Financial Group Inc of IL* 0.57 NM 99.84 25.02 105.90 NM 0.00 0.00 0.00 CBCI Calumet Bancorp of Chicago IL 1.57 17.99 134.23 20.81 134.23 14.19 0.00 0.00 0.00 CAFI Camco Fin. Corp. of OH 0.32 20.60 156.86 15.01 170.04 18.44 0.52 2.27 46.85 CMRN Cameron Fin. Corp. of MO 0.97 24.68 112.05 24.30 112.05 19.85 0.28 1.45 35.90 CAPS Capital Savings Bancorp of MO 0.39 21.34 155.14 13.65 155.14 15.22 0.24 1.37 29.27 CFNC Carolina Fincorp of NC* 0.51 25.18 124.51 28.42 124.51 26.34 0.24 1.40 35.29 CASB Cascade SB of Everett WA(8) 0.94 29.26 156.61 9.60 156.61 19.37 0.00 0.00 0.00 CATB Catskill Fin. Corp. of NY* 1.48 19.41 109.42 27.40 109.42 19.19 0.28 1.70 32.94 CNIT Cenit Bancorp of Norfolk VA 0.76 17.33 208.87 15.12 227.43 18.90 1.00 1.54 26.67 CEBK Central Co-Op. Bank of MA* 1.21 16.67 140.60 14.69 157.89 16.44 0.32 1.33 22.22 CENB Century Bancshares of NC* 0.87 18.65 108.46 32.66 108.46 18.52 2.00 2.48 46.19 CBSB Charter Financial Inc. of IL 0.79 19.76 151.35 21.90 171.06 14.12 0.32 1.54 30.48 COFI Charter One Financial of OH 0.73 21.22 299.05 20.06 NM 16.96 1.00 1.58 33.56 CVAL Chester Valley Bancorp of PA 1.10 26.12 185.70 15.53 185.70 18.31 0.42 1.81 47.19 CTZN CitFed Bancorp of Dayton OH 0.95 27.96 237.63 15.13 263.73 19.87 0.36 0.66 18.56 CLAS Classic Bancshares of KY 0.93 NM 109.50 16.12 129.79 25.79 0.28 1.72 62.22 CMSB Cmnwealth Bancorp of PA 0.79 27.54 147.40 14.19 188.49 21.59 0.28 1.47 40.58 CBSA Coastal Bancorp of Houston TX 0.51 21.38 156.17 5.20 187.88 12.30 0.48 1.55 33.10 CFCP Coastal Fin. Corp. of SC 1.15 25.65 NM 22.50 NM 23.43 0.36 1.48 37.89 CMSV Commty. Svgs, MHC of FL (48.5) 0.63 NM 245.80 27.64 245.80 NM 0.90 2.37 NM CFTP Community Fed. Bancorp of MS 0.46 29.66 141.13 38.75 141.13 24.31 0.30 1.71 50.85 CFFC Community Fin. Corp. of VA 0.65 17.80 124.60 17.08 124.60 14.07 0.56 2.38 42.42 CFBC Community First Bnkg Co. of GA 0.83 NM 136.57 21.03 138.45 NM 0.60 1.53 57.14 CIBI Community Inv. Bancorp of OH 0.62 24.21 127.51 15.35 127.51 15.89 0.32 2.10 50.79 COOP Cooperative Bk.for Svgs. of NC 0.29 NM 171.84 13.12 171.84 NM 0.00 0.00 NM CRZY Crazy Woman Creek Bncorp of WY 1.04 26.07 103.07 26.61 103.07 21.30 0.40 2.65 68.97 DNFC D&N Financial Corp. of MI 0.93 21.59 216.89 12.09 219.10 16.38 0.20 0.84 18.18 DCBI Delphos Citizens Bancorp of OH 0.13 24.65 118.89 33.77 118.89 24.65 0.00 0.00 0.00 DIME Dime Community Bancorp of NY 1.43 23.94 154.32 22.40 179.14 22.28 0.24 1.07 25.53 DIBK Dime Financial Corp. of CT* 3.17 11.08 231.14 18.41 238.91 11.04 0.40 1.28 14.18 EGLB Eagle BancGroup of IL 0.76 NM 113.84 13.49 113.84 NM 0.00 0.00 NM
RP FINANCIAL, LC. ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios --------------------------------------------------------- ----------------------- Tang. Equity/ Equity/ Reported Earnings Core Earnings NPAs Resvs/ ---------------------- --------------- Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs ---------------------- ------- ------- ------ ------- ------- ------- ------- ------- -------- (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) --------------------------------------- EBSI Eagle Bancshares of Tucker GA 8.30 8.30 0.43 5.14 3.30 0.58 6.99 1.07 63.66 EGFC Eagle Financial Corp. of CT 6.87 5.36 0.08 1.08 0.47 0.44 6.15 0.52 94.68 ETFS East Texas Fin. Serv. of TX 18.16 18.16 0.31 1.65 1.59 0.63 3.40 0.17 141.97 EMLD Emerald Financial Corp of OH 7.58 7.46 0.72 9.43 4.76 0.89 11.64 0.24 106.84 EIRE Emerald Island Bancorp, MA* 7.08 7.08 0.85 12.35 6.08 0.89 13.00 0.40 151.40 EFBC Empire Federal Bancorp of MT 34.89 34.89 0.83 2.37 1.94 1.09 3.12 0.06 312.50 EFBI Enterprise Fed. Bancorp of OH 12.33 12.31 0.70 5.12 3.22 0.79 5.74 NA NA EQSB Equitable FSB of Wheaton MD 5.04 5.04 0.46 9.09 5.03 0.74 14.50 0.49 36.72 FCBF FCB Fin. Corp. of Neenah WI 17.50 17.50 0.92 5.20 2.18 1.09 6.16 0.15 412.16 FFBS FFBS Bancorp of Columbus MS 19.23 19.23 1.16 5.96 4.13 1.47 7.53 0.37 118.76 FFDF FFD Financial Corp. of OH 24.40 24.40 1.68 6.68 5.33 0.94 3.75 0.07 421.88 FFLC FFLC Bancorp of Leesburg FL 13.48 13.48 0.70 4.58 3.14 1.01 6.60 0.18 226.46 FFFC FFVA Financial Corp. of VA 13.18 12.90 1.11 7.86 4.00 1.34 9.52 0.18 318.63 FFWC FFW Corporation of Wabash IN 9.52 8.58 0.84 8.39 5.86 1.05 10.48 0.16 203.56 FFYF FFY Financial Corp. of OH 13.71 13.71 0.90 5.84 4.63 1.27 8.31 0.67 74.18 FMCO FMS Financial Corp. of NJ 6.56 6.44 0.69 10.76 5.38 1.02 15.79 1.06 48.50 FFHH FSF Financial Corp. of MN 11.35 11.35 0.66 5.22 3.84 0.84 6.63 0.03 636.64 FOBC Fed One Bancorp of Wheeling WV 11.06 10.55 0.68 5.85 3.83 0.97 8.33 0.40 101.18 FBCI Fidelity Bancorp of Chicago IL 10.38 10.36 0.55 5.34 3.80 0.78 7.48 0.80 21.76 FSBI Fidelity Bancorp, Inc. of PA 6.75 6.75 0.51 7.35 4.60 0.81 11.71 0.43 115.46 FFFL Fidelity FSB, MHC of FL (47.7) 8.38 8.31 0.38 4.15 1.59 0.60 6.56 0.34 62.82 FFED Fidelity Fed. Bancorp of IN 5.39 5.39 0.05 0.95 0.54 0.30 5.90 0.14 519.24 FFOH Fidelity Financial of OH 12.94 11.42 0.70 4.68 3.29 1.02 6.89 0.08 381.04 FIBC Financial Bancorp, Inc. of NY 9.36 9.31 0.56 5.74 3.87 1.00 10.23 1.81 26.91 FBSI First Bancshares of MO 13.54 13.52 0.91 6.15 5.06 1.10 7.44 0.56 52.51 FBBC First Bell Bancorp of PA 9.83 9.83 1.07 7.64 6.14 1.24 8.87 0.07 147.42 FBER First Bergen Bancorp of NJ 14.19 14.19 0.44 2.73 2.13 0.77 4.74 0.83 129.82 SKBO First Carnegie,MHC of PA(45.0) 16.45 16.45 0.52 4.42 1.74 0.52 4.42 NA NA FSTC First Citizens Corp of GA 9.13 6.85 1.12 11.27 4.11 1.11 11.11 NA NA FCME First Coastal Corp. of ME* 9.23 9.23 4.21 NM 31.32 4.08 NM 2.01 85.72 FFBA First Colorado Bancorp of Co 12.90 12.72 0.86 6.02 3.76 0.84 5.94 0.23 121.82 FDEF First Defiance Fin.Corp. of OH 21.32 21.32 0.75 3.36 2.69 1.03 4.62 0.45 96.96 FESX First Essex Bancorp of MA* 6.97 6.06 0.96 13.04 6.90 0.84 11.36 NA NA FFES First FS&LA of E. Hartford CT 6.43 6.43 0.42 6.80 4.25 0.70 11.19 0.37 71.33 FFSX First FS&LA. MHC of IA (46.1) 8.29 8.23 0.43 5.21 2.09 0.73 8.99 0.11 342.10 BDJI First Fed. Bancorp. of MN 10.87 10.87 0.30 2.56 1.98 0.63 5.44 0.27 137.04 FFBH First Fed. Bancshares of AR 14.97 14.97 0.77 4.84 3.72 1.06 6.63 0.19 119.50 FTFC First Fed. Capital Corp. of WI 6.36 5.96 0.74 11.34 4.21 0.86 13.16 0.12 408.79 FFKY First Fed. Fin. Corp. of KY 13.69 12.88 1.30 9.45 5.36 1.55 11.28 0.46 99.48 FFBZ First Federal Bancorp of OH 7.55 7.54 0.73 9.58 4.69 1.02 13.38 0.53 163.59 FFCH First Fin. Holdings Inc. of SC 6.11 6.11 0.57 9.30 3.76 0.84 13.65 1.66 41.99 FFBI First Financial Bancorp of IL 8.66 8.66 -0.38 -4.73 -4.36 0.42 5.23 0.41 142.00 FFHC First Financial Corp. of WI(8) 7.12 6.94 0.96 13.35 4.25 1.28 17.95 0.26 148.86 FFHS First Franklin Corp. of OH 9.02 8.96 0.19 2.14 1.57 0.65 7.20 0.52 82.31 FGHC First Georgia Hold. Corp of GA 8.22 7.53 0.66 7.98 3.76 0.51 6.23 3.10 20.52 FSPG First Home Bancorp of NJ 6.66 6.55 0.89 13.61 7.05 1.16 17.76 0.64 114.23 FFSL First Independence Corp. of KS 10.43 10.43 0.43 3.84 3.21 0.69 6.12 0.87 69.37 FISB First Indiana Corp. of IN 9.56 9.44 0.83 8.86 4.88 1.01 10.83 1.50 91.12 FKFS First Keystone Fin. Corp of PA 7.31 7.31 0.54 7.21 4.12 0.77 10.30 1.60 30.58 FLKY First Lancaster Bncshrs of KY 32.95 32.95 1.13 3.29 2.92 1.38 3.99 1.93 15.10 FLFC First Liberty Fin. Corp. of GA 7.37 6.65 0.88 12.11 5.23 0.72 9.91 0.81 110.00 CASH First Midwest Fin. Corp. of IA 11.39 10.09 0.74 6.46 5.03 0.94 8.21 0.85 75.48 FMBD First Mutual Bancorp of IL 12.85 9.73 0.10 0.57 0.51 0.31 1.84 0.19 182.28 FMSB First Mutual SB of Bellevue WA* 6.82 6.82 1.02 15.34 5.29 1.00 14.95 0.01 NA FNGB First Northern Cap. Corp of WI 11.28 11.28 0.64 5.50 3.38 0.91 7.88 0.06 798.69 FFPB First Palm Beach Bancorp of FL 6.57 6.41 -0.03 -0.42 -0.22 0.03 0.37 0.73 55.75 Asset Quality Ratios Pricing Ratios Dividend Data(6) ------------------------ ----------------------------------- ------------------- Price/ Price/ Ind. Divi- Resvs/ Price/ Price/ Price/ Tang. Core Div./ dend Payout Loans Earning Book Assets Book Earnings Share Yield Ratio(7) ------- ---------- ----- ------- ----- --------- ----- ------ ------- (%) (%) (%) (X) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) --------------------------------------- EBSI Eagle Bancshares of Tucker GA 0.95 NM 155.58 12.92 155.58 22.26 0.60 3.10 NM EGFC Eagle Financial Corp. of CT 0.86 NM 182.79 12.55 234.15 NM 1.00 2.48 NM ETFS East Texas Fin. Serv. of TX 0.50 NM 107.01 19.44 107.01 NM 0.20 0.94 58.82 EMLD Emerald Financial Corp of OH 0.35 20.99 188.26 14.27 191.23 17.00 0.24 1.41 29.63 EIRE Emerald Island Bancorp, MA* 0.89 16.45 186.71 13.21 186.71 15.63 0.28 1.12 18.42 EFBC Empire Federal Bancorp of MT 0.46 NM 121.95 42.55 121.95 NM 0.30 1.67 NM EFBI Enterprise Fed. Bancorp of OH 0.28 NM 159.97 19.72 160.18 27.72 1.00 3.92 NM EQSB Equitable FSB of Wheaton MD 0.26 19.89 169.57 8.55 169.57 12.46 0.00 0.00 0.00 FCBF FCB Fin. Corp. of Neenah WI 0.82 NM 236.05 41.30 236.05 NM 0.80 2.91 NM FFBS FFBS Bancorp of Columbus MS 0.62 24.21 142.41 27.39 142.41 19.17 0.50 2.17 52.63 FFDF FFD Financial Corp. of OH 0.48 18.74 124.46 30.37 124.46 NM 0.30 1.63 30.61 FFLC FFLC Bancorp of Leesburg FL 0.52 NM 150.44 20.28 150.44 22.16 0.48 1.41 44.86 FFFC FFVA Financial Corp. of VA 0.98 25.00 202.58 26.69 206.90 20.63 0.48 1.45 36.36 FFWC FFW Corporation of Wabash IN 0.50 17.06 133.76 12.73 148.48 13.67 0.72 2.23 38.10 FFYF FFY Financial Corp. of OH 0.64 21.58 139.35 19.10 139.35 15.18 0.70 2.53 54.69 FMCO FMS Financial Corp. of NJ 0.92 18.59 190.29 12.48 193.72 12.66 0.28 0.97 17.95 FFHH FSF Financial Corp. of MN 0.34 26.04 143.43 16.29 143.43 20.52 0.50 2.46 64.10 FOBC Fed One Bancorp of Wheeling WV 0.93 26.13 155.56 17.21 163.11 18.35 0.62 2.40 62.63 FBCI Fidelity Bancorp of Chicago IL 0.22 26.32 137.21 14.25 137.51 18.80 0.32 1.28 33.68 FSBI Fidelity Bancorp, Inc. of PA 1.01 21.76 148.45 10.03 148.45 13.66 0.36 1.53 33.33 FFFL Fidelity FSB, MHC of FL (47.7) 0.29 NM 254.85 21.34 256.72 NM 0.90 2.86 NM FFED Fidelity Fed. Bancorp of IN 0.87 NM 177.88 9.59 177.88 29.84 0.40 4.32 NM FFOH Fidelity Financial of OH 0.37 NM 127.36 16.48 144.32 20.67 0.28 1.81 54.90 FIBC Financial Bancorp, Inc. of NY 0.89 25.86 146.58 13.72 147.25 14.52 0.40 1.78 45.98 FBSI First Bancshares of MO 0.36 19.77 125.86 17.04 126.05 16.35 0.20 0.78 15.50 FBBC First Bell Bancorp of PA 0.13 16.27 160.02 15.72 160.02 14.02 0.40 2.32 37.74 FBER First Bergen Bancorp of NJ 2.50 NM 132.67 18.83 132.67 27.08 0.20 1.12 52.63 SKBO First Carnegie,MHC of PA(45.0) 0.68 NM 180.61 29.70 180.61 NM 0.30 1.58 NM FSTC First Citizens Corp of GA 1.47 24.31 216.79 19.80 288.93 24.65 0.44 1.25 30.34 FCME First Coastal Corp. of ME* 2.52 3.19 138.84 12.82 138.84 3.30 0.00 0.00 0.00 FFBA First Colorado Bancorp of Co 0.38 26.60 176.45 22.76 178.88 26.95 0.48 2.31 61.54 FDEF First Defiance Fin.Corp. of OH 0.56 NM 127.29 27.14 127.29 27.12 0.32 2.00 74.42 FESX First Essex Bancorp of MA* 1.43 14.48 165.68 11.56 190.82 16.63 0.48 2.51 36.36 FFES First FS&LA of E. Hartford CT 1.42 23.52 151.29 9.73 151.29 14.30 0.60 1.68 39.47 FFSX First FS&LA. MHC of IA (46.1) 0.52 NM 240.17 19.92 242.11 27.73 0.48 1.45 69.57 BDJI First Fed. Bancorp. of MN 0.76 NM 134.94 14.67 134.94 23.75 0.00 0.00 0.00 FFBH First Fed. Bancshares of AR 0.30 26.85 132.95 19.90 132.95 19.59 0.24 1.10 29.63 FTFC First Fed. Capital Corp. of WI 0.65 23.73 263.16 16.73 280.84 20.44 0.48 1.71 40.68 FFKY First Fed. Fin. Corp. of KY 0.52 18.64 171.51 23.48 182.25 15.63 0.56 2.64 49.12 FFBZ First Federal Bancorp of OH 1.01 21.31 194.10 14.65 194.30 15.24 0.24 1.28 27.27 FFCH First Fin. Holdings Inc. of SC 0.84 26.57 237.06 14.49 237.06 18.10 0.72 1.89 50.35 FFBI First Financial Bancorp of IL 0.91 NM 110.61 9.57 110.61 20.74 0.00 0.00 NM FFHC First Financial Corp. of WI(8) 0.64 23.51 NM 21.67 NM 17.49 0.60 1.69 39.74 FFHS First Franklin Corp. of OH 0.62 NM 133.95 12.08 134.82 19.01 0.32 1.39 NM FGHC First Georgia Hold. Corp of GA 0.75 26.56 201.90 16.59 220.21 NM 0.05 0.59 15.63 FSPG First Home Bancorp of NJ 1.39 14.18 180.93 12.05 183.94 10.86 0.40 1.72 24.39 FFSL First Independence Corp. of KS 0.91 NM 126.03 13.15 126.03 19.49 0.25 1.71 53.19 FISB First Indiana Corp. of IN 1.62 20.51 174.29 16.67 176.47 16.78 0.48 2.00 41.03 FKFS First Keystone Fin. Corp of PA 0.84 24.26 171.56 12.54 171.56 16.97 0.20 0.61 14.81 FLKY First Lancaster Bncshrs of KY 0.33 NM 109.59 36.11 109.59 28.28 0.50 3.10 NM FLFC First Liberty Fin. Corp. of GA 1.29 19.13 205.28 15.13 227.68 23.38 0.40 1.58 30.30 CASH First Midwest Fin. Corp. of IA 0.93 19.87 127.21 14.49 143.57 15.65 0.36 1.81 36.00 FMBD First Mutual Bancorp of IL 0.46 NM 127.45 16.37 168.25 NM 0.32 1.64 NM FMSB First Mutual SB of Bellevue WA* 1.27 18.91 270.39 18.45 270.39 19.41 0.20 0.68 12.82 FNGB First Northern Cap. Corp of WI 0.53 29.55 159.71 18.01 159.71 20.63 0.32 2.46 72.73 FFPB First Palm Beach Bancorp of FL 0.60 NM 184.97 12.15 189.59 NM 0.60 1.49 NM
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ----------------------- Tang. Reported Earnings Core Earnings Equity/ Equity/ ---------------------- --------------- NPAs Resvs/ Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- FSLA First SB SLA MHC of NJ (47.5) 9.42 8.40 0.58 6.17 1.62 0.91 9.77 0.68 83.02 1.06 SOPN First SB, SSB, Moore Co. of NC 22.83 22.83 1.44 5.83 4.43 1.73 6.99 0.08 241.60 0.31 FWWB First Savings Bancorp of WA* 14.75 13.57 1.05 6.25 3.39 1.00 5.90 0.30 215.39 0.97 SHEN First Shenango Bancorp of PA 10.95 10.95 0.89 7.82 5.20 1.16 10.18 0.53 137.62 1.15 FSFC First So.east Fin. Corp. of SC(8) 10.06 10.06 0.70 6.85 3.31 1.05 10.34 0.06 655.50 0.50 FBNW FirstBank Corp of Clarkston WA 18.04 18.04 0.70 3.86 3.15 0.57 3.14 2.07 31.12 0.78 FFDB FirstFed Bancorp of AL 9.42 8.58 0.62 6.31 4.81 0.94 9.63 0.84 49.36 0.59 FSPT FirstSpartan Fin. Corp. of SC 26.32 26.32 0.95 3.62 2.60 1.11 4.20 0.44 61.30 0.49 FLAG Flag Financial Corp of GA 9.58 9.58 -0.03 -0.29 -0.17 0.15 1.65 4.27 47.62 2.91 FLGS Flagstar Bancorp, Inc of MI 5.46 5.46 0.00 0.00 0.00 0.00 0.00 3.41 8.26 0.32 FFIC Flushing Fin. Corp. of NY* 15.47 15.47 0.93 5.55 4.03 0.97 5.78 0.29 223.21 1.15 FBHC Fort Bend Holding Corp. of TX 6.03 5.62 0.19 3.18 1.61 0.45 7.40 0.37 141.08 1.03 FTSB Fort Thomas Fin. Corp. of KY 16.04 16.04 0.54 2.94 2.30 0.81 4.45 1.48 32.73 0.54 FKKY Frankfort First Bancorp of KY 16.92 16.92 -0.28 -1.14 -1.07 0.56 2.28 0.09 86.21 0.08 FTNB Fulton Bancorp of MO 25.11 25.11 0.89 4.03 2.22 1.07 4.83 0.81 112.62 1.03 GFSB GFS Bancorp of Grinnell IA 11.44 11.44 1.00 8.59 5.35 1.22 10.55 1.00 70.07 0.82 GUPB GFSB Bancorp of Gallup NM 14.87 14.87 0.76 4.35 3.61 0.96 5.50 0.15 247.45 0.65 GSLA GS Financial Corp. of LA 45.63 45.63 1.08 3.63 2.00 1.08 3.63 0.11 293.18 0.84 GOSB GSB Financial Corp. of NY 27.06 27.06 1.02 3.77 3.35 0.86 3.19 NA NA NA GWBC Gateway Bancorp of KY(8) 27.04 27.04 0.83 3.23 2.74 1.15 4.47 0.90 14.14 0.38 GBCI Glacier Bancorp of MT 9.74 9.48 1.44 15.09 5.00 1.61 16.87 0.27 229.89 0.85 GFCO Glenway Financial Corp. of OH 9.49 9.36 0.43 4.51 3.31 0.72 7.57 0.31 91.62 0.34 GTPS Great American Bancorp of IL 21.43 21.43 0.26 1.09 1.00 0.32 1.37 0.23 140.69 0.44 GTFN Great Financial Corp. of KY(8) 9.24 8.84 0.75 7.89 3.63 0.71 7.50 3.06 15.68 0.72 GSBC Great Southern Bancorp of MO 8.53 8.53 1.38 14.76 5.35 1.56 16.69 1.91 114.73 2.59 GDVS Greater DV SB,MHC of PA (19.9)* 11.57 11.57 0.32 2.71 0.76 0.58 4.95 2.79 43.15 1.93 GSFC Green Street Fin. Corp. of NC 36.26 36.26 1.37 3.84 2.78 1.66 4.66 0.16 83.63 0.18 GFED Guarnty FS&LA,MHC of MO (31.0)(8) 13.79 13.79 0.61 4.30 1.38 0.92 6.51 0.74 148.40 1.36 HCBB HCB Bancshares of AR 18.84 18.13 0.13 0.92 0.65 0.14 1.02 0.43 173.49 1.49 HEMT HF Bancorp of Hemet CA 8.21 6.72 -0.27 -3.07 -2.42 -1.88 -21.03 NA NA NA HFFC HF Financial Corp. of SD 9.43 9.43 0.66 7.12 4.75 0.89 9.66 0.33 244.25 1.01 HFNC HFNC Financial Corp. of NC 17.99 17.99 0.86 3.47 2.59 1.19 4.76 0.87 97.22 1.14 HMNF HMN Financial, Inc. of MN 14.43 14.43 0.71 4.79 3.72 0.88 5.96 0.08 531.97 0.71 HALL Hallmark Capital Corp. of WI 7.24 7.24 0.48 6.83 4.55 0.61 8.62 0.16 274.03 0.64 HARB Harbor FSB, MHC of FL (46.6)(8) 8.39 8.11 0.95 11.52 3.12 1.23 14.84 0.46 222.68 1.37 HRBF Harbor Federal Bancorp of MD 12.90 12.90 0.46 3.52 2.52 0.71 5.46 0.05 379.63 0.28 HFSA Hardin Bancorp of Hardin MO 12.48 12.48 0.52 3.53 3.21 0.79 5.41 0.09 179.21 0.32 HARL Harleysville SA of PA 6.53 6.53 0.75 11.71 5.59 1.03 16.04 0.03 NA 0.77 HFGI Harrington Fin. Group of IN 5.59 5.59 0.39 8.22 4.60 0.33 6.87 0.25 18.93 0.23 HARS Harris SB, MHC of PA (24.3) 8.01 7.01 0.49 5.78 1.48 0.62 7.24 0.65 64.15 0.97 HFFB Harrodsburg 1st Fin Bcrp of KY 26.93 26.93 1.03 3.77 3.41 1.36 5.01 0.47 59.81 0.38 HHFC Harvest Home Fin. Corp. of OH 12.50 12.50 0.27 1.87 1.77 0.58 4.07 0.11 117.00 0.26 HAVN Haven Bancorp of Woodhaven NY 5.95 5.93 0.56 9.27 4.67 0.83 13.79 0.74 86.28 1.15 HTHR Hawthorne Fin. Corp. of CA 4.60 4.60 0.23 5.32 3.20 0.51 11.47 7.17 19.99 1.67 HMLK Hemlock Fed. Fin. Corp. of IL 18.77 18.77 0.13 0.98 0.58 0.73 5.40 NA NA 1.30 HBNK Highland Federal Bank of CA 7.47 7.47 0.46 6.25 3.05 0.68 9.17 3.09 55.00 2.13 HIFS Hingham Inst. for Sav. of MA* 9.35 9.35 1.21 12.60 6.41 1.21 12.60 0.41 165.13 0.89 HBEI Home Bancorp of Elgin IL 26.70 26.70 0.49 1.99 1.38 0.85 3.42 0.41 69.84 0.36 HBFW Home Bancorp of Fort Wayne IN 13.29 13.29 0.56 3.93 2.97 0.89 6.27 0.05 835.54 0.51 HBBI Home Building Bancorp of IN 12.82 12.82 0.20 1.59 1.25 0.52 4.05 0.38 47.98 0.29 HCFC Home City Fin. Corp. of OH 20.41 20.41 0.91 5.48 3.81 1.19 7.18 0.59 106.97 0.79 HOMF Home Fed Bancorp of Seymour IN 8.48 8.22 1.05 12.65 6.22 1.22 14.72 0.46 117.33 0.62 HWEN Home Financial Bancorp of IN 16.93 16.93 0.64 3.78 3.18 0.80 4.76 1.76 30.84 0.67 HPBC Home Port Bancorp, Inc. of MA* 10.56 10.56 1.67 15.78 7.02 1.66 15.69 0.08 NA 1.56 HMCI Homecorp, Inc. of Rockford IL 6.54 6.54 0.14 2.17 1.40 0.43 6.83 3.35 14.24 0.59 HZFS Horizon Fin'l. Services of IA 9.79 9.79 0.36 3.35 2.50 0.57 5.36 1.22 33.30 0.66 Pricing Ratios Dividend Data(6) ----------------------------------------- ---------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Earning Book Assets Book Earnings Share Yield Ratio(7) - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- FSLA First SB SLA MHC of NJ (47.5) NM NM 34.43 NM NM 0.44 0.99 61.11 SOPN First SB, SSB, Moore Co. of NC 22.58 131.11 29.94 131.11 18.85 0.88 3.68 NM FWWB First Savings Bancorp of WA* 29.49 185.77 27.40 201.92 NM 0.28 1.07 31.46 SHEN First Shenango Bancorp of PA 19.23 149.43 16.37 149.43 14.77 0.60 1.85 35.50 FSFC First So.east Fin. Corp. of SC(8) NM 200.25 20.14 200.25 20.00 0.24 1.50 45.28 FBNW FirstBank Corp of Clarkston WA NM 122.29 22.06 122.29 NM 0.00 0.00 0.00 FFDB FirstFed Bancorp of AL 20.79 136.40 12.84 149.62 13.62 0.50 2.53 52.63 FSPT FirstSpartan Fin. Corp. of SC NM 139.34 36.68 139.34 NM 0.00 0.00 0.00 FLAG Flag Financial Corp of GA NM 167.62 16.06 167.62 NM 0.34 1.94 NM FLGS Flagstar Bancorp, Inc of MI NM NM 17.55 NM NM 0.00 0.00 NM FFIC Flushing Fin. Corp. of NY* 24.80 138.25 21.39 138.25 23.77 0.24 1.04 25.81 FBHC Fort Bend Holding Corp. of TX NM 197.93 11.94 212.57 26.74 0.20 0.87 54.05 FTSB Fort Thomas Fin. Corp. of KY NM 138.17 22.16 138.17 28.74 0.25 1.74 NM FKKY Frankfort First Bancorp of KY NM 150.51 25.46 150.51 NM 0.36 3.51 NM FTNB Fulton Bancorp of MO NM 156.57 39.32 156.57 NM 0.20 0.87 39.22 GFSB GFS Bancorp of Grinnell IA 18.68 154.22 17.64 154.22 15.22 0.26 1.58 29.55 GUPB GFSB Bancorp of Gallup NM 27.70 125.67 18.69 125.67 21.88 0.40 1.83 50.63 GSLA GS Financial Corp. of LA NM 103.91 47.42 103.91 NM 0.28 1.65 NM GOSB GSB Financial Corp. of NY 29.81 112.48 30.44 112.48 NM 0.00 0.00 0.00 GWBC Gateway Bancorp of KY(8) NM 118.45 32.03 118.45 26.39 0.40 2.11 NM GBCI Glacier Bancorp of MT 20.00 270.94 26.40 278.48 17.89 0.48 2.18 43.64 GFCO Glenway Financial Corp. of OH NM 133.95 12.71 135.77 17.98 0.80 2.50 NM GTPS Great American Bancorp of IL NM 113.91 24.41 113.91 NM 0.40 2.11 NM GTFN Great Financial Corp. of KY(8) 27.52 214.46 19.81 224.01 28.97 0.60 1.37 37.74 GSBC Great Southern Bancorp of MO 18.70 288.59 24.62 288.59 16.54 0.44 2.05 38.26 GDVS Greater DV SB,MHC of PA (19.9)* NM NM 40.33 NM NM 0.36 1.20 NM GSFC Green Street Fin. Corp. of NC NM 136.59 49.53 136.59 29.59 0.44 2.19 NM GFED Guarnty FS&LA,MHC of MO (31.0)(8) NM NM 41.91 NM NM 0.44 1.64 NM HCBB HCB Bancshares of AR NM 97.20 18.31 101.02 NM 0.00 0.00 0.00 HEMT HF Bancorp of Hemet CA NM 128.21 10.53 156.70 NM 0.00 0.00 NM HFFC HF Financial Corp. of SD 21.03 145.50 13.72 145.50 15.49 0.42 1.62 34.15 HFNC HFNC Financial Corp. of NC NM 177.37 31.91 177.37 28.17 0.28 1.68 65.12 HMNF HMN Financial, Inc. of MN 26.86 130.02 18.76 130.02 21.58 0.00 0.00 0.00 HALL Hallmark Capital Corp. of WI 21.99 142.27 10.30 142.27 17.41 0.00 0.00 0.00 HARB Harbor FSB, MHC of FL (46.6)(8) NM NM 29.26 NM 24.91 1.40 2.13 68.29 HRBF Harbor Federal Bancorp of MD NM 139.56 18.00 139.56 25.56 0.48 2.09 NM HFSA Hardin Bancorp of Hardin MO NM 115.11 14.36 115.11 20.29 0.48 2.66 NM HARL Harleysville SA of PA 17.89 196.24 12.82 196.24 13.06 0.40 1.53 27.40 HFGI Harrington Fin. Group of IN 21.72 172.75 9.66 172.75 25.98 0.12 0.91 19.67 HARS Harris SB, MHC of PA (24.3) NM NM 29.37 NM NM 0.58 1.08 73.42 HFFB Harrodsburg 1st Fin Bcrp of KY 29.31 111.25 29.96 111.25 22.08 0.40 2.48 72.73 HHFC Harvest Home Fin. Corp. of OH NM 114.54 14.31 114.54 26.00 0.44 3.38 NM HAVN Haven Bancorp of Woodhaven NY 21.41 184.92 10.99 185.53 14.39 0.60 1.34 28.71 HTHR Hawthorne Fin. Corp. of CA NM 153.02 7.03 153.02 14.49 0.00 0.00 0.00 HMLK Hemlock Fed. Fin. Corp. of IL NM 116.73 21.92 116.73 NM 0.24 1.38 NM HBNK Highland Federal Bank of CA NM 192.19 14.36 192.19 22.34 0.00 0.00 0.00 HIFS Hingham Inst. for Sav. of MA* 15.59 185.66 17.37 185.66 15.59 0.48 1.66 25.81 HBEI Home Bancorp of Elgin IL NM 131.54 35.12 131.54 NM 0.40 2.21 NM HBFW Home Bancorp of Fort Wayne IN NM 137.63 18.29 137.63 21.09 0.20 0.82 27.78 HBBI Home Building Bancorp of IN NM 125.61 16.10 125.61 NM 0.30 1.29 NM HCFC Home City Fin. Corp. of OH 26.23 106.67 21.77 106.67 20.00 0.32 2.00 52.46 HOMF Home Fed Bancorp of Seymour IN 16.09 190.62 16.16 196.61 13.83 0.50 1.54 24.75 HWEN Home Financial Bancorp of IN NM 111.04 18.80 111.04 25.00 0.20 1.18 37.04 HPBC Home Port Bancorp, Inc. of MA* 14.24 215.10 22.71 215.10 14.33 0.80 3.27 46.51 HMCI Homecorp, Inc. of Rockford IL NM 150.27 9.83 150.27 22.65 0.00 0.00 0.00 HZFS Horizon Fin'l. Services of IA NM 131.65 12.88 131.65 25.00 0.32 1.23 49.23
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-I(continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ----------------------- Tang. Reported Earnings Core Earnings Equity/ Equity/ ---------------------- --------------- NPAs Resvs/ Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) Listed OTC Companies (continued) - --------------------------------------- HRZB Horizon Financial Corp. of WA* 15.60 15.60 1.57 9.99 6.11 1.54 9.80 NA NA 0.84 IBSF IBS Financial Corp. of NJ 17.41 17.41 0.49 2.68 1.85 0.86 4.71 0.08 171.10 0.52 ISBF ISB Financial Corp. of LA 12.19 10.33 0.69 4.59 2.88 0.93 6.20 NA NA 0.80 ITLA Imperial Thrift & Loan of CA* 10.99 10.94 1.47 12.75 7.03 1.47 12.75 1.47 84.20 1.50 IFSB Independence FSB of DC 6.52 5.72 0.14 2.19 1.93 0.33 4.98 2.02 9.82 0.32 INCB Indiana Comm. Bank, SB of IN 12.17 12.17 0.19 1.55 1.27 0.54 4.31 0.13 541.46 0.90 INBI Industrial Bancorp of OH 17.71 17.71 0.72 3.87 2.50 1.42 7.57 0.30 156.98 0.55 IWBK Interwest SB of Oak Harbor WA 6.78 6.63 0.87 12.91 4.49 1.18 17.52 0.64 73.79 0.78 IPSW Ipswich SB of Ipswich MA* 5.71 5.71 1.21 20.39 6.22 0.95 16.02 1.52 56.87 1.18 JXVL Jacksonville Bancorp of TX 14.92 14.92 1.02 6.45 4.75 1.34 8.46 0.78 67.63 0.70 JXSB Jcksnville SB,MHC of IL (45.6) 10.50 10.50 0.30 2.72 1.60 0.66 5.97 0.66 72.96 0.61 JSBA Jefferson Svgs Bancorp of MO 8.20 6.24 0.30 3.91 1.64 0.70 9.25 0.46 140.15 0.84 JOAC Joachim Bancorp of MO 28.17 28.17 0.47 1.59 1.47 0.77 2.62 0.20 109.86 0.32 KSAV KS Bancorp of Kenly NC 13.53 13.52 0.96 6.86 5.27 1.25 8.89 0.35 80.53 0.33 KSBK KSB Bancorp of Kingfield ME(8)* 7.16 6.74 0.96 13.72 7.43 1.00 14.25 1.78 43.20 1.03 KFBI Klamath First Bancorp of OR 19.55 19.55 0.81 3.67 2.39 1.23 5.54 0.08 213.23 0.23 LSBI LSB Fin. Corp. of Lafayette IN 8.85 8.85 0.77 8.34 5.64 0.68 7.35 1.17 63.71 0.84 LVSB Lakeview SB of Paterson NJ 9.52 7.61 1.37 13.73 6.43 0.95 9.53 0.98 66.74 1.50 LARK Landmark Bancshares of KS 13.79 13.79 0.89 5.95 4.26 1.05 7.01 0.31 123.70 0.57 LARL Laurel Capital Group of PA 10.03 10.03 1.14 10.88 6.44 1.43 13.72 0.43 212.35 1.31 LSBX Lawrence Savings Bank of MA* 8.69 8.69 1.75 20.90 8.86 1.73 20.60 0.30 328.94 2.29 LFED Leeds FSB, MHC of MD (36.3) 16.29 16.29 0.84 5.20 2.18 1.18 7.27 0.03 609.09 0.31 LXMO Lexington B&L Fin. Corp. of MO 28.32 28.32 1.03 3.49 3.28 1.33 4.50 0.48 78.37 0.49 LIFB Life Bancorp of Norfolk VA 10.55 10.25 0.71 6.60 4.05 0.87 8.03 0.39 166.43 1.48 LFBI Little Falls Bancorp of NJ 13.28 12.26 0.27 1.94 1.57 0.48 3.41 1.04 33.93 0.82 LOGN Logansport Fin. Corp. of IN 19.20 19.20 1.17 5.64 4.63 1.52 7.31 0.61 44.88 0.38 LONF London Financial Corp. of OH 19.66 19.66 0.66 3.18 2.67 1.00 4.83 0.80 61.11 0.63 LISB Long Island Bancorp, Inc of NY 8.99 8.90 0.61 6.58 3.09 0.71 7.63 1.03 55.02 0.92 MAFB MAF Bancorp of IL 7.78 6.80 0.88 11.34 5.58 1.16 14.98 0.45 120.51 0.71 MBLF MBLA Financial Corp. of MO 12.15 12.15 0.67 5.10 4.23 0.85 6.52 0.25 109.19 0.50 MFBC MFB Corp. of Mishawaka IN 13.65 13.65 0.57 3.66 3.24 0.86 5.52 0.08 177.07 0.19 MLBC ML Bancorp of Villanova PA(8) 6.93 6.81 0.74 10.25 4.38 0.67 9.28 0.46 163.34 1.71 MSBF MSB Financial Corp. of MI 16.99 16.99 1.19 6.43 4.06 1.47 7.91 0.66 61.34 0.44 MGNL Magna Bancorp of MS(8) 10.22 9.95 1.39 14.23 4.29 1.53 15.70 2.92 26.42 1.11 MARN Marion Capital Holdings of IN 22.55 22.55 1.39 6.09 5.14 1.67 7.28 0.81 144.01 1.35 MRKF Market Fin. Corp. of OH 34.99 34.99 0.84 3.14 2.17 0.84 3.14 0.75 12.24 0.20 MFCX Marshalltown Fin. Corp. of IA(8) 15.74 15.74 0.34 2.15 1.76 0.73 4.66 NA NA 0.19 MFSL Maryland Fed. Bancorp of MD 8.38 8.28 0.61 7.41 4.56 0.89 10.72 0.47 85.38 0.46 MASB MassBank Corp. of Reading MA* 10.64 10.64 1.10 10.79 5.75 1.04 10.24 0.16 149.80 0.87 MFLR Mayflower Co-Op. Bank of MA* 9.68 9.52 1.03 10.64 6.62 0.97 10.03 0.96 92.14 1.52 MECH Mechanics SB of Hartford CT* 10.23 10.23 1.92 19.45 10.67 1.92 19.45 1.13 152.02 2.58 MDBK Medford Bank of Medford, MA* 8.99 8.38 1.08 12.07 6.78 1.01 11.29 0.27 219.01 1.12 MERI Meritrust FSB of Thibodaux LA 8.20 8.20 0.67 8.71 4.21 1.05 13.56 0.37 83.87 0.58 MWBX MetroWest Bank of MA* 7.44 7.44 1.38 18.37 6.21 1.38 18.37 0.91 126.64 1.48 MCBS Mid Continent Bancshares of KS(8) 9.39 9.39 1.02 9.79 4.51 1.16 11.10 0.15 71.76 0.19 MIFC Mid Iowa Financial Corp. of IA 9.34 9.34 1.00 10.76 6.76 1.40 15.15 0.02 NA 0.45 MCBN Mid-Coast Bancorp of ME 8.60 8.60 0.43 4.92 4.00 0.67 7.71 0.73 70.32 0.62 MWBI Midwest Bancshares, Inc. of IA 6.91 6.91 0.45 6.61 4.26 0.75 10.99 0.77 63.17 0.81 MWFD Midwest Fed. Fin. Corp of WI 8.81 8.50 1.43 16.39 7.23 1.09 12.55 0.12 658.13 1.05 MFFC Milton Fed. Fin. Corp. of OH 13.12 13.12 0.49 3.07 2.60 0.68 4.25 0.32 86.42 0.46 MIVI Miss. View Hold. Co. of MN 18.87 18.87 0.69 3.74 3.19 1.03 5.57 0.33 370.39 1.91 MBSP Mitchell Bancorp of NC* 43.36 43.36 1.40 3.24 2.96 1.64 3.81 2.03 26.19 0.62 MBBC Monterey Bay Bancorp of CA 11.33 10.45 0.25 2.04 1.45 0.47 3.87 0.33 111.47 0.60 MONT Montgomery Fin. Corp. of IN 18.74 18.74 0.60 4.17 2.77 0.60 4.17 0.59 29.46 0.21 MSBK Mutual SB, FSB of Bay City MI 6.07 6.07 0.11 1.93 1.32 0.04 0.75 0.11 272.91 0.67 NHTB NH Thrift Bancshares of NH 7.65 6.52 0.39 5.25 2.45 0.58 7.77 0.70 125.20 1.05 Pricing Ratios Dividend Data(6) ----------------------------------------- ----------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Earning Book Assets Book Earnings Share Yield Ratio(7) - --------------------- ------- ------- ------- ------- -------- ------- ------- ------- (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- HRZB Horizon Financial Corp. of WA* 16.36 160.40 25.03 160.40 16.67 0.44 2.51 41.12 IBSF IBS Financial Corp. of NJ NM 154.18 26.84 154.18 NM 0.40 2.24 NM ISBF ISB Financial Corp. of LA NM 161.34 19.66 190.26 25.72 0.50 1.87 64.94 ITLA Imperial Thrift & Loan of CA* 14.22 172.99 19.00 173.72 14.22 0.00 0.00 0.00 IFSB Independence FSB of DC NM 112.11 7.31 127.88 22.73 0.22 1.47 NM INCB Indiana Comm. Bank, SB of IN NM 121.26 14.76 121.26 28.30 0.36 2.40 NM INBI Industrial Bancorp of OH NM 154.77 27.41 154.77 20.45 0.56 3.11 NM IWBK Interwest SB of Oak Harbor WA 22.25 261.97 17.76 267.86 16.40 0.64 1.58 35.16 IPSW Ipswich SB of Ipswich MA* 16.07 296.70 16.94 296.70 20.45 0.12 0.89 14.29 JXVL Jacksonville Bancorp of TX 21.04 139.78 20.85 139.78 16.05 0.50 2.64 55.56 JXSB Jcksnville SB,MHC of IL (45.6) NM 167.54 17.59 167.54 28.48 0.40 1.78 NM JSBA Jefferson Svgs Bancorp of MO NM 197.74 16.21 259.58 25.77 0.40 0.95 57.97 JOAC Joachim Bancorp of MO NM 114.67 32.30 114.67 NM 0.50 3.20 NM KSAV KS Bancorp of Kenly NC 18.98 126.39 17.10 126.47 14.64 0.60 2.93 55.56 KSBK KSB Bancorp of Kingfield ME(8)* 13.46 172.84 12.38 183.73 12.96 0.08 0.57 7.69 KFBI Klamath First Bancorp of OR NM 161.97 31.66 161.97 27.71 0.30 1.30 54.55 LSBI LSB Fin. Corp. of Lafayette IN 17.72 145.07 12.84 145.07 20.11 0.34 1.27 22.52 LVSB Lakeview SB of Paterson NJ 15.56 217.23 20.67 271.67 22.41 0.25 0.58 8.99 LARK Landmark Bancshares of KS 23.45 144.18 19.88 144.18 19.92 0.40 1.51 35.40 LARL Laurel Capital Group of PA 15.53 169.72 17.02 169.72 12.32 0.52 2.08 32.30 LSBX Lawrence Savings Bank of MA* 11.29 212.21 18.45 212.21 11.46 0.00 0.00 0.00 LFED Leeds FSB, MHC of MD (36.3) NM 230.97 37.62 230.97 NM 0.76 2.43 NM LXMO Lexington B&L Fin. Corp. of MO NM 113.64 32.18 113.64 23.59 0.30 1.79 54.55 LIFB Life Bancorp of Norfolk VA 24.69 156.46 16.50 161.01 20.28 0.48 1.92 47.52 LFBI Little Falls Bancorp of NJ NM 127.50 16.93 138.06 NM 0.20 1.08 68.97 LOGN Logansport Fin. Corp. of IN 21.62 126.28 24.25 126.28 16.67 0.40 2.50 54.05 LONF London Financial Corp. of OH NM 123.29 24.24 123.29 24.66 0.24 1.33 50.00 LISB Long Island Bancorp, Inc of NY NM 210.01 18.89 212.12 27.88 0.60 1.29 41.67 MAFB MAF Bancorp of IL 17.93 196.55 15.29 224.95 13.58 0.28 0.85 15.22 MBLF MBLA Financial Corp. of MO 23.65 119.43 14.51 119.43 18.49 0.40 1.52 36.04 MFBC MFB Corp. of Mishawaka IN NM 118.45 16.17 118.45 20.47 0.32 1.35 41.56 MLBC ML Bancorp of Villanova PA(8) 22.83 228.35 15.82 232.37 25.22 0.40 1.38 31.50 MSBF MSB Financial Corp. of MI 24.62 157.48 26.75 157.48 20.00 0.28 1.75 43.08 MGNL Magna Bancorp of MS(8) 23.33 NM 32.02 NM 21.14 0.60 1.90 44.44 MARN Marion Capital Holdings of IN 19.47 121.58 27.41 121.58 16.28 0.88 3.28 63.77 MRKF Market Fin. Corp. of OH NM 99.53 34.83 99.53 NM 0.28 1.90 NM MFCX Marshalltown Fin. Corp. of IA(8) NM 119.89 18.88 119.89 26.25 0.00 0.00 0.00 MFSL Maryland Fed. Bancorp of MD 21.94 157.58 13.21 159.58 15.17 0.84 1.76 38.71 MASB MassBank Corp. of Reading MA* 17.40 176.32 18.76 176.32 18.34 0.96 2.02 35.16 MFLR Mayflower Co-Op. Bank of MA* 15.11 153.62 14.87 156.25 16.03 0.68 3.24 48.92 MECH Mechanics SB of Hartford CT* 9.37 162.40 16.62 162.40 9.37 0.00 0.00 0.00 MDBK Medford Bank of Medford, MA* 14.74 170.06 15.29 182.52 15.77 0.72 1.99 29.39 MERI Meritrust FSB of Thibodaux LA 23.74 195.09 16.01 195.09 15.24 0.70 1.48 35.18 MWBX MetroWest Bank of MA* 16.10 277.15 20.62 277.15 16.10 0.12 1.43 23.08 MCBS Mid Continent Bancshares of KS(8) 22.19 211.84 19.89 211.84 19.58 0.40 0.96 21.39 MIFC Mid Iowa Financial Corp. of IA 14.79 150.00 14.02 150.00 10.50 0.08 0.76 11.27 MCBN Mid-Coast Bancorp of ME 25.00 120.13 10.34 120.13 15.96 0.52 1.96 49.06 MWBI Midwest Bancshares, Inc. of IA 23.48 146.10 10.09 146.10 14.12 0.60 1.41 33.15 MWFD Midwest Fed. Fin. Corp of WI 13.83 220.79 19.46 228.95 18.07 0.34 1.37 18.99 MFFC Milton Fed. Fin. Corp. of OH NM 131.93 17.31 131.93 27.78 0.60 4.00 NM MIVI Miss. View Hold. Co. of MN NM 115.05 21.71 115.05 21.02 0.16 0.86 27.12 MBSP Mitchell Bancorp of NC* NM 112.09 48.61 112.09 28.75 0.40 2.32 NM MBBC Monterey Bay Bancorp of CA NM 138.60 15.71 150.38 NM 0.12 0.60 41.38 MONT Montgomery Fin. Corp. of IN NM 110.92 20.78 110.92 NM 0.22 1.69 61.11 MSBK Mutual SB, FSB of Bay City MI NM 142.32 8.64 142.32 NM 0.00 0.00 0.00 NHTB NH Thrift Bancshares of NH NM 186.76 14.29 219.34 27.50 0.50 2.27 NM
RP FINANCIAL, LC. - ----------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ------------------------ Tang. Reported Earnings Core Earnings Equity/ Equity/ ---------------------- --------------- NPAs Resvs/ Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- NSLB NS&L Bancorp of Neosho MO 19.56 19.56 0.49 2.37 2.10 0.77 3.71 0.03 210.00 0.13 NMSB Newmil Bancorp. of CT* 9.81 9.81 0.83 8.14 5.33 0.79 7.78 1.11 152.08 3.18 NASB North American SB of MO 7.68 7.42 1.26 17.18 7.88 1.19 16.18 3.11 27.16 0.98 NBSI North Bancshares of Chicago IL 14.14 14.14 0.49 3.27 2.40 0.68 4.57 NA NA 0.27 FFFD North Central Bancshares of IA 22.67 22.67 1.64 6.41 5.41 1.90 7.41 0.12 814.90 1.19 NBN Northeast Bancorp of ME* 6.84 5.99 0.58 8.14 5.18 0.56 7.84 1.11 86.32 1.22 NEIB Northeast Indiana Bncrp of IN 15.19 15.19 1.04 6.33 4.87 1.22 7.42 0.40 158.86 0.71 NWEQ Northwest Equity Corp. of WI 11.45 11.45 0.78 6.47 5.03 0.98 8.16 1.26 38.04 0.59 NWSB Northwest SB, MHC of PA (30.7) 9.49 8.94 0.69 7.05 1.86 0.98 9.96 0.72 90.87 0.88 NSSY Norwalk Savings Society of CT* 8.06 7.77 0.97 12.53 6.68 1.11 14.29 NA NA 1.54 NSSB Norwich Financial Corp. of CT* 11.17 10.08 1.09 10.08 4.54 1.04 9.58 1.29 151.12 2.83 NTMG Nutmeg FS&LA of CT 5.56 5.56 0.26 4.60 2.81 0.35 6.28 1.19 40.69 0.55 OHSL OHSL Financial Corp. of OH 11.03 11.03 0.61 5.29 4.11 0.85 7.42 0.14 161.25 0.31 OCFC Ocean Fin. Corp. of NJ 16.25 16.25 0.03 0.16 0.11 0.98 5.97 0.55 79.68 0.87 OCN Ocwen Financial Corp. of FL 8.75 8.36 2.81 33.59 4.75 1.69 20.28 5.11 17.43 1.34 OTFC Oregon Trail Fin. Corp of OR 24.02 100.09 1.07 4.44 3.59 1.07 4.44 0.10 257.62 0.41 OFCP Ottawa Financial Corp. of MI 8.73 7.01 0.48 5.21 2.72 0.78 8.44 0.34 105.17 0.42 PFFB PFF Bancorp of Pomona CA 10.32 10.21 0.16 1.41 1.02 0.46 4.09 1.73 60.66 1.46 PSFI PS Financial of Chicago IL 38.70 38.70 1.94 4.74 4.10 1.96 4.81 0.79 28.66 0.51 PVFC PVF Capital Corp. of OH 7.04 7.04 1.04 15.23 7.50 1.33 19.49 1.24 57.99 0.78 PCCI Pacific Crest Capital of CA* 7.09 7.09 1.04 13.26 6.68 0.97 12.43 1.29 79.26 1.67 PAMM PacificAmerica Money Ctr of CA(8)* 22.42 22.42 5.63 41.65 6.87 5.63 41.65 4.97 27.75 2.34 PALM Palfed, Inc. of Aiken SC(8) 8.24 8.24 0.10 1.29 0.51 0.61 7.54 2.12 51.22 1.32 PBCI Pamrapo Bancorp, Inc. of NJ 12.74 12.64 0.90 6.37 4.50 1.24 8.78 2.77 26.10 1.29 PFED Park Bancorp of Chicago IL 22.53 22.53 0.87 4.19 3.59 1.21 5.81 0.25 115.74 0.73 PVSA Parkvale Financial Corp of PA 7.58 7.53 0.73 9.76 5.10 1.08 14.42 0.27 537.53 1.97 PEEK Peekskill Fin. Corp. of NY 25.73 25.73 0.98 3.54 3.33 1.29 4.65 1.22 27.98 1.35 PFSB PennFed Fin. Services of NJ 7.36 6.15 0.57 7.43 4.27 0.84 10.86 0.59 33.53 0.28 PWBC PennFirst Bancorp of PA 8.08 7.55 0.46 6.31 3.41 0.67 9.12 0.65 93.15 1.49 PWBK Pennwood SB of PA* 17.45 17.45 0.70 4.05 3.04 1.12 6.54 0.98 57.43 1.03 PBKB People's SB of Brockton MA* 5.61 5.37 0.80 14.41 5.84 0.47 8.57 0.82 91.19 1.57 PFDC Peoples Bancorp of Auburn IN 15.21 15.21 1.12 7.33 4.34 1.47 9.59 0.36 83.87 0.38 PBCT Peoples Bank, MHC of CT (40.1)* 8.48 8.47 1.12 13.72 3.85 0.83 10.17 0.90 121.39 1.60 PFFC Peoples Fin. Corp. of OH 27.20 27.20 0.90 3.32 3.67 0.90 3.32 NA NA 0.39 PHBK Peoples Heritage Fin Grp of ME* 7.72 6.51 1.28 15.68 5.59 1.29 15.88 0.91 126.66 1.66 PSFC Peoples Sidney Fin. Corp of OH 24.92 24.92 0.61 4.54 1.95 0.92 6.81 0.84 45.79 0.44 PERM Permanent Bancorp of IN 9.16 9.03 0.34 3.64 2.90 0.62 6.57 1.09 45.43 0.99 PMFI Perpetual Midwest Fin. of IA 8.53 8.53 0.12 1.38 1.05 0.29 3.36 0.48 155.74 0.95 PERT Perpetual of SC, MHC (46.8)(8) 11.82 11.82 0.67 5.44 1.74 0.94 7.68 0.12 502.32 0.87 PCBC Perry Co. Fin. Corp. of MO 19.19 19.19 0.93 4.93 4.21 1.07 5.70 0.03 104.17 0.19 PHFC Pittsburgh Home Fin. of PA 10.92 10.80 0.62 4.71 3.52 0.79 6.00 1.60 32.18 0.76 PFSL Pocahnts Fed, MHC of AR (47.0)(8) 6.36 6.36 0.60 9.75 4.00 0.84 13.54 0.15 308.72 1.12 PTRS Potters Financial Corp of OH 8.83 8.83 0.48 5.37 4.07 0.85 9.54 0.69 252.21 2.78 PKPS Poughkeepsie Fin. Corp. of NY 8.37 8.37 0.35 4.21 2.43 0.54 6.49 4.29 25.19 1.45 PHSB Ppls Home SB, MHC of PA (45.0) 11.73 11.73 0.43 3.71 2.09 0.65 5.56 NA NA 1.40 PRBC Prestige Bancorp of PA 11.13 11.13 0.37 2.84 2.44 0.65 5.01 0.30 85.33 0.38 PETE Primary Bank of NH(8)* 6.93 6.92 0.61 9.35 4.51 0.73 11.09 0.82 75.47 1.08 PFNC Progress Financial Corp. of PA 5.26 4.65 0.54 10.30 3.56 0.65 12.28 2.03 37.35 1.08 PSBK Progressive Bank, Inc. of NY* 8.55 7.63 0.99 12.02 6.52 0.98 11.81 0.85 131.46 1.65 PROV Provident Fin. Holdings of CA 13.88 13.88 0.32 2.24 1.89 0.28 1.95 NA NA 1.31 PULB Pulaski SB, MHC of MO (29.8) 13.00 13.00 0.69 5.42 2.09 0.96 7.53 NA NA 0.33 PLSK Pulaski SB, MHC of NJ (46.0) 11.90 11.90 0.25 2.97 0.97 0.61 7.21 0.65 71.47 0.81 PULS Pulse Bancorp of S. River NJ 8.05 8.05 0.72 9.24 4.07 1.08 13.86 0.69 65.20 1.93 QCFB QCF Bancorp of Virginia MN 17.50 17.50 1.34 7.33 5.64 1.34 7.33 0.17 499.62 2.10 QCBC Quaker City Bancorp of CA 8.77 8.76 0.37 4.12 2.51 0.60 6.74 1.31 74.10 1.19 QCSB Queens County Bancorp of NY* 11.86 11.86 1.60 10.77 3.84 1.62 10.92 0.68 95.23 0.74 Pricing Ratios Dividend Data(6) ----------------------------------------- ----------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Earning Book Assets Book Earnings Share Yield Ratio(7) - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- NSLB NS&L Bancorp of Neosho MO NM 118.04 23.09 118.04 NM 0.50 2.56 NM NMSB Newmil Bancorp. of CT* 18.75 154.17 15.13 154.17 19.62 0.24 1.88 35.29 NASB North American SB of MO 12.68 204.97 15.74 212.07 13.47 0.80 1.54 19.51 NBSI North Bancshares of Chicago IL NM 142.22 20.11 142.22 29.78 0.48 1.99 NM FFFD North Central Bancshares of IA 18.50 127.41 28.88 127.41 15.99 0.25 1.32 24.51 NBN Northeast Bancorp of ME* 19.32 151.35 10.35 172.76 20.05 0.32 1.51 29.09 NEIB Northeast Indiana Bncrp of IN 20.53 132.46 20.12 132.46 17.50 0.32 1.59 32.65 NWEQ Northwest Equity Corp. of WI 19.89 132.38 15.15 132.38 15.77 0.52 2.97 59.09 NWSB Northwest SB, MHC of PA (30.7) NM NM 34.93 NM NM 0.32 1.02 55.17 NSSY Norwalk Savings Society of CT* 14.98 175.63 14.15 182.16 13.13 0.40 1.10 16.53 NSSB Norwich Financial Corp. of CT* 22.01 212.59 23.74 235.49 23.15 0.56 1.79 39.44 NTMG Nutmeg FS&LA of CT NM 152.20 8.47 152.20 26.11 0.00 0.00 0.00 OHSL OHSL Financial Corp. of OH 24.33 128.48 14.17 128.48 17.36 0.88 3.23 NM OCFC Ocean Fin. Corp. of NJ NM 132.54 21.54 132.54 24.33 0.80 2.21 NM OCN Ocwen Financial Corp. of FL 21.06 NM 53.67 NM NM 0.00 0.00 0.00 OTFC Oregon Trail Fin. Corp of OR 27.86 123.70 29.71 29.68 27.86 0.00 0.00 0.00 OFCP Ottawa Financial Corp. of MI NM 195.76 17.09 243.96 22.71 0.36 1.32 48.65 PFFB PFF Bancorp of Pomona CA NM 141.28 14.58 142.76 NM 0.00 0.00 0.00 PSFI PS Financial of Chicago IL 24.37 116.37 45.04 116.37 24.03 0.32 1.88 45.71 PVFC PVF Capital Corp. of OH 13.33 185.41 13.06 185.41 10.42 0.00 0.00 0.00 PCCI Pacific Crest Capital of CA* 14.97 185.70 13.16 185.70 15.98 0.00 0.00 0.00 PAMM PacificAmerica Money Ctr of CA(8)* 14.56 NM 89.62 NM 14.56 0.00 0.00 0.00 PALM Palfed, Inc. of Aiken SC(8) NM 244.65 20.16 244.65 NM 0.12 0.47 NM PBCI Pamrapo Bancorp, Inc. of NJ 22.20 154.93 19.73 156.16 16.09 1.00 3.88 NM PFED Park Bancorp of Chicago IL 27.82 106.02 23.89 106.02 20.06 0.00 0.00 0.00 PVSA Parkvale Financial Corp of PA 19.62 182.04 13.81 183.42 13.29 0.65 1.93 37.79 PEEK Peekskill Fin. Corp. of NY NM 116.38 29.94 116.38 22.83 0.36 2.10 63.16 PFSB PennFed Fin. Services of NJ 23.43 166.09 12.22 198.58 16.03 0.28 0.84 19.58 PWBC PennFirst Bancorp of PA 29.37 148.71 12.02 159.07 20.33 0.36 1.95 57.14 PWBK Pennwood SB of PA* NM 124.67 21.76 124.67 20.38 0.32 1.71 56.14 PBKB People's SB of Brockton MA* 17.13 232.13 13.02 242.32 28.80 0.44 2.21 37.93 PFDC Peoples Bancorp of Auburn IN 23.02 166.41 25.30 166.41 17.58 0.64 2.00 46.04 PBCT Peoples Bank, MHC of CT (40.1)* 25.99 NM 28.02 NM NM 0.68 1.88 48.92 PFFC Peoples Fin. Corp. of OH 27.25 91.51 24.89 91.51 27.25 0.50 3.46 NM PHBK Peoples Heritage Fin Grp of ME* 17.88 267.53 20.65 NM 17.65 0.76 1.80 32.20 PSFC Peoples Sidney Fin. Corp of OH NM 113.68 28.33 113.68 NM 0.28 1.71 NM PERM Permanent Bancorp of IN NM 125.99 11.54 127.87 19.13 0.40 1.61 55.56 PMFI Perpetual Midwest Fin. of IA NM 132.28 11.29 132.28 NM 0.30 1.26 NM PERT Perpetual of SC, MHC (46.8)(8) NM 285.64 33.78 285.64 NM 1.40 2.43 NM PCBC Perry Co. Fin. Corp. of MO 23.74 113.67 21.82 113.67 20.55 0.40 1.87 44.44 PHFC Pittsburgh Home Fin. of PA 28.43 138.07 15.07 139.54 22.30 0.24 1.22 34.78 PFSL Pocahnts Fed, MHC of AR (47.0)(8) 25.00 235.43 14.98 235.43 18.01 0.90 2.59 64.75 PTRS Potters Financial Corp of OH 24.57 129.72 11.45 129.72 13.83 0.36 1.26 31.03 PKPS Poughkeepsie Fin. Corp. of NY NM 168.72 14.12 168.72 26.68 0.10 1.01 41.67 PHSB Ppls Home SB, MHC of PA (45.0) NM 177.65 20.83 177.65 NM 0.00 0.00 0.00 PRBC Prestige Bancorp of PA NM 116.60 12.98 116.60 23.19 0.12 0.62 25.53 PETE Primary Bank of NH(8)* 22.18 191.91 13.31 192.17 18.71 0.00 0.00 0.00 PFNC Progress Financial Corp. of PA 28.12 265.82 13.99 NM 23.58 0.11 0.75 21.15 PSBK Progressive Bank, Inc. of NY* 15.33 179.21 15.33 200.74 15.60 0.68 1.93 29.57 PROV Provident Fin. Holdings of CA NM 118.71 16.48 118.71 NM 0.00 0.00 0.00 PULB Pulaski SB, MHC of MO (29.8) NM 255.89 33.27 255.89 NM 1.10 3.89 NM PLSK Pulaski SB, MHC of NJ (46.0) NM 213.24 25.39 213.24 NM 0.30 1.38 NM PULS Pulse Bancorp of S. River NJ 24.58 216.43 17.42 216.43 16.39 0.70 2.37 58.33 QCFB QCF Bancorp of Virginia MN 17.73 130.01 22.75 130.01 17.73 0.00 0.00 0.00 QCBC Quaker City Bancorp of CA NM 159.77 14.01 159.88 24.36 0.00 0.00 0.00 QCSB Queens County Bancorp of NY* 26.05 NM 38.78 NM 25.69 0.67 1.80 46.85
RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios ---------------------------------------------------------- ------------------------ Tang. Reported Earnings Core Earnings Equity/ Equity/ ---------------------- --------------- NPAs Resvs/ Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- RARB Raritan Bancorp. of Raritan NJ* 7.93 7.80 0.96 12.55 5.21 1.02 13.33 0.29 297.45 1.29 REDF RedFed Bancorp of Redlands CA 8.45 8.42 0.25 3.24 1.59 0.65 8.37 2.19 45.70 1.15 RELY Reliance Bancorp, Inc. of NY 8.23 5.93 0.58 7.07 3.79 0.86 10.46 0.79 33.33 0.57 RELI Reliance Bancshares Inc of WI(8)* 48.82 48.82 0.86 1.78 1.80 0.92 1.89 NA NA 0.53 FRBK Republic First Bancorp of CA* 7.17 7.17 0.70 11.10 5.65 0.60 9.46 1.19 69.68 0.94 RIVR River Valley Bancorp of IN 12.40 12.21 0.46 4.24 2.63 0.62 5.72 0.49 170.62 1.03 RVSB Riverview Bancorp of WA 21.63 21.63 1.32 6.10 4.00 1.32 6.10 0.14 278.46 0.56 RSLN Roslyn Bancorp, Inc. of NY* 20.14 20.04 0.86 4.12 2.52 1.35 6.49 0.27 278.21 3.46 SCCB S. Carolina Comm. Bnshrs of SC 25.67 25.67 0.93 3.47 2.50 1.22 4.56 1.06 59.43 0.81 SBFL SB Fngr Lakes MHC of NY (33.1) 9.54 9.54 0.13 1.32 0.56 0.44 4.40 0.69 76.89 1.16 SFED SFS Bancorp of Schenectady NY 12.47 12.47 0.44 3.41 2.66 0.79 6.09 0.73 57.17 0.57 SGVB SGV Bancorp of W. Covina CA 7.31 7.19 0.20 2.37 1.63 0.47 5.74 NA NA 0.44 SHSB SHS Bancorp, Inc. of PA 12.64 12.64 0.37 2.96 2.60 0.37 2.96 1.44 35.26 0.75 SISB SIS Bancorp Inc of MA* 7.20 7.20 1.38 18.82 8.95 1.37 18.70 0.47 244.29 2.48 SWCB Sandwich Co-Op. Bank of MA* 7.95 7.61 0.95 11.65 6.24 0.97 11.90 0.83 92.55 1.09 SFSL Security First Corp. of OH 9.43 9.26 1.07 11.49 4.76 1.34 14.36 0.28 273.91 0.85 SFNB Security First Netwrk Bk of GA(8) 33.11 32.57 -29.36 NM NM -30.07 NM NA NA 1.28 SMFC Sho-Me Fin. Corp. of MO(8) 9.03 9.03 1.04 10.44 4.36 1.17 11.79 0.14 425.11 0.66 SOBI Sobieski Bancorp of S. Bend IN 15.12 15.12 0.30 1.83 1.71 0.59 3.55 0.17 145.99 0.33 SOSA Somerset Savings Bank of MA(8)* 6.34 6.34 0.81 13.81 4.82 0.78 13.26 6.28 22.01 1.81 SSFC South Street Fin. Corp. of NC* 25.26 25.26 0.92 4.51 2.40 1.17 5.71 0.27 65.44 0.39 SCBS Southern Commun. Bncshrs of AL 21.96 21.96 0.32 2.52 1.04 0.79 6.23 2.48 46.17 1.94 SMBC Southern Missouri Bncrp of MO 16.46 16.46 0.66 4.10 3.61 0.64 3.97 0.89 49.20 0.65 SWBI Southwest Bancshares of IL 11.00 11.00 0.74 6.89 4.31 1.03 9.54 NA NA NA SVRN Sovereign Bancorp of PA 4.01 3.03 0.44 11.07 3.29 0.68 17.14 0.57 78.85 0.72 STFR St. Francis Cap. Corp. of WI 7.88 6.96 0.64 7.35 4.40 0.70 8.09 0.19 181.58 0.80 SPBC St. Paul Bancorp, Inc. of IL 8.60 8.58 0.72 8.22 3.32 1.03 11.84 0.32 232.75 1.09 SFFC StateFed Financial Corp. of IA 17.78 17.78 1.11 6.16 4.37 1.35 7.47 1.55 16.68 0.32 SFIN Statewide Fin. Corp. of NJ 9.73 9.71 0.54 5.46 3.38 0.91 9.26 0.43 95.58 0.83 STSA Sterling Financial Corp. of WA 4.10 3.57 0.10 2.46 1.33 0.32 7.91 0.61 79.43 0.82 SFSB SuburbFed Fin. Corp. of IL 6.48 6.46 0.39 5.87 3.70 0.56 8.55 0.48 41.27 0.31 ROSE T R Financial Corp. of NY* 6.20 6.20 0.98 15.73 5.68 0.89 14.19 0.46 90.99 0.80 THRD TF Financial Corp. of PA 11.11 9.75 0.55 4.76 3.29 0.74 6.40 0.33 92.84 0.62 TPNZ Tappan Zee Fin., Inc. of NY 17.92 17.92 0.70 4.22 2.55 0.65 3.90 1.73 31.27 1.18 ESBK The Elmira SB FSB of Elmira NY* 6.30 6.04 0.36 5.66 3.77 0.35 5.51 0.66 96.75 0.85 TSBS Trenton SB,FSB MHC of NJ(35.9)(8) 16.89 15.48 1.34 7.53 2.20 1.14 6.39 0.73 55.92 0.67 TRIC Tri-County Bancorp of WY 15.32 15.32 0.80 5.14 4.07 1.02 6.55 NA NA 1.11 TWIN Twin City Bancorp of TN 12.85 12.85 0.53 4.13 3.03 0.75 5.82 0.16 130.95 0.29 UFRM United FS&LA of Rocky Mount NC 7.48 7.48 0.22 2.87 1.55 0.38 4.98 0.58 135.44 0.98 UBMT United Fin. Corp. of MT 22.65 22.65 1.09 4.70 3.92 1.34 5.80 NA NA 0.22 VABF Va. Beach Fed. Fin. Corp of VA 6.85 6.85 0.21 3.15 1.60 0.47 7.02 1.26 56.59 0.93 VFFC Virginia First Savings of VA(8) 8.06 7.78 1.36 17.16 7.46 1.25 15.73 2.30 47.12 1.19 WHGB WHG Bancshares of MD 20.65 20.65 0.51 2.23 2.16 0.51 2.23 0.15 160.96 0.29 WSFS WSFS Financial Corp. of DE* 5.20 5.16 1.31 23.71 7.97 1.32 23.87 1.71 95.78 2.65 WVFC WVS Financial Corp. of PA* 11.16 11.16 1.07 8.59 5.20 1.35 10.77 0.09 733.21 1.25 WRNB Warren Bancorp of Peabody MA* 10.37 10.37 2.13 22.09 10.18 1.81 18.79 1.15 98.45 1.79 WFSL Washington FS&LA of Seattle WA 12.08 11.03 1.67 14.37 6.14 1.84 15.85 0.73 59.65 0.60 WAMU Washington Mutual Inc. of WA(8)* 5.00 4.75 0.35 6.81 1.68 0.74 14.45 0.81 93.26 1.12 WYNE Wayne Bancorp of NJ 13.35 13.35 0.44 2.94 2.22 0.44 2.94 0.91 83.50 1.15 WAYN Wayne S&L Co. MHC of OH (47.8) 9.24 9.24 0.31 3.42 1.30 0.66 7.23 0.73 50.94 0.45 WCFB Wbstr Cty FSB MHC of IA (45.2) 23.35 23.35 1.06 4.61 2.23 1.42 6.15 0.26 152.85 0.69 WBST Webster Financial Corp. of CT 5.02 4.29 0.41 8.14 2.57 0.74 14.55 0.85 103.47 1.45 WEFC Wells Fin. Corp. of Wells MN 14.20 14.20 0.72 5.07 4.39 1.06 7.49 0.28 121.72 0.37 WCBI WestCo Bancorp of IL 15.24 15.24 1.12 7.28 4.90 1.42 9.19 0.21 139.06 0.37 WSTR WesterFed Fin. Corp. of MT 10.91 8.73 0.63 5.09 3.10 0.79 6.41 0.25 191.01 0.73 WOFC Western Ohio Fin. Corp. of OH 13.79 12.85 0.33 2.24 1.81 0.45 3.10 NA NA 0.58 Pricing Ratios Dividend Data(6) ----------------------------------------- ----------------------- Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Earning Book Assets Book Earnings Share Yield Ratio(7) - --------------------- ------- ------- ------- ------- ------- ------- ------- ------- (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) - --------------------------------------- RARB Raritan Bancorp. of Raritan NJ* 19.18 224.36 17.80 228.20 18.06 0.48 1.71 32.88 REDF RedFed Bancorp of Redlands CA NM 181.12 15.31 181.79 24.34 0.00 0.00 0.00 RELY Reliance Bancorp, Inc. of NY 26.40 177.99 14.65 247.01 17.84 0.64 1.94 51.20 RELI Reliance Bancshares Inc of WI(8)* NM 97.69 47.69 97.69 NM 0.00 0.00 0.00 FRBK Republic First Bancorp of CA* 17.71 166.79 11.96 166.89 20.77 0.00 0.00 0.00 RIVR River Valley Bancorp of IN NM 119.62 14.83 121.44 28.23 0.16 0.91 34.78 RVSB Riverview Bancorp of WA 25.00 152.51 32.99 152.51 25.00 0.24 1.71 42.86 RSLN Roslyn Bancorp, Inc. of NY* NM 160.77 32.38 161.54 25.20 0.24 1.02 40.68 SCCB S. Carolina Comm. Bnshrs of SC NM 140.43 36.05 140.43 NM 0.60 2.50 NM SBFL SB Fngr Lakes MHC of NY (33.1) NM 230.01 21.94 230.01 NM 0.40 1.50 NM SFED SFS Bancorp of Schenectady NY NM 129.19 16.11 129.19 21.06 0.28 1.24 46.67 SGVB SGV Bancorp of W. Covina CA NM 148.79 10.87 151.27 25.33 0.00 0.00 0.00 SHSB SHS Bancorp, Inc. of PA NM 113.88 14.39 113.88 NM 0.00 0.00 0.00 SISB SIS Bancorp Inc of MA* 11.18 199.78 14.38 199.78 11.25 0.56 1.51 16.92 SWCB Sandwich Co-Op. Bank of MA* 16.03 180.03 14.31 188.06 15.69 1.20 3.20 51.28 SFSL Security First Corp. of OH 21.02 227.55 21.45 231.54 16.82 0.32 1.73 36.36 SFNB Security First Netwrk Bk of GA(8) NM NM 110.96 NM NM 0.00 0.00 NM SMFC Sho-Me Fin. Corp. of MO(8) 22.96 241.04 21.77 241.04 20.32 0.00 0.00 0.00 SOBI Sobieski Bancorp of S. Bend IN NM 115.31 17.44 115.31 NM 0.32 1.71 NM SOSA Somerset Savings Bank of MA(8)* 20.76 264.80 16.80 264.80 21.63 0.00 0.00 0.00 SSFC South Street Fin. Corp. of NC* NM 138.07 34.87 138.07 NM 0.40 2.13 NM SCBS Southern Commun. Bncshrs of AL NM 134.79 29.60 134.79 NM 0.30 1.64 NM SMBC Southern Missouri Bncrp of MO 27.69 111.32 18.33 111.32 28.57 0.50 2.78 NM SWBI Southwest Bancshares of IL 23.19 154.02 16.94 154.02 16.75 0.76 3.15 73.08 SVRN Sovereign Bancorp of PA NM NM 12.12 NM 19.66 0.08 0.42 12.90 STFR St. Francis Cap. Corp. of WI 22.74 164.76 12.98 186.43 20.64 0.48 1.19 27.12 SPBC St. Paul Bancorp, Inc. of IL NM 239.93 20.64 240.55 20.90 0.40 1.43 43.01 SFFC StateFed Financial Corp. of IA 22.86 137.67 24.48 137.67 18.84 0.40 1.50 34.19 SFIN Statewide Fin. Corp. of NJ 29.61 161.87 15.74 162.10 17.44 0.44 1.96 57.89 STSA Sterling Financial Corp. of WA NM 170.19 6.97 195.19 23.47 0.00 0.00 0.00 SFSB SuburbFed Fin. Corp. of IL 27.03 151.69 9.83 152.24 18.58 0.32 0.96 26.02 ROSE T R Financial Corp. of NY* 17.59 257.31 15.97 257.31 19.50 0.60 1.85 32.61 THRD TF Financial Corp. of PA NM 146.22 16.25 166.67 22.57 0.40 1.57 47.62 TPNZ Tappan Zee Fin., Inc. of NY NM 144.60 25.91 144.60 NM 0.28 1.35 52.83 ESBK The Elmira SB FSB of Elmira NY* 26.55 147.64 9.30 154.00 27.27 0.64 2.13 56.64 TSBS Trenton SB,FSB MHC of NJ(35.9)(8) NM NM 56.03 NM NM 0.35 0.89 40.70 TRIC Tri-County Bancorp of WY 24.55 120.00 18.38 120.00 19.29 0.60 2.22 54.55 TWIN Twin City Bancorp of TN NM 134.51 17.29 134.51 23.39 0.40 2.76 NM UFRM United FS&LA of Rocky Mount NC NM 182.84 13.67 182.84 NM 0.24 1.96 NM UBMT United Fin. Corp. of MT 25.53 120.30 27.25 120.30 20.69 0.98 4.08 NM VABF Va. Beach Fed. Fin. Corp of VA NM 191.18 13.09 191.18 28.02 0.20 1.23 NM VFFC Virginia First Savings of VA(8) 13.40 213.84 17.24 221.46 14.61 0.10 0.41 5.52 WHGB WHG Bancshares of MD NM 111.23 22.97 111.23 NM 0.20 1.27 58.82 WSFS WSFS Financial Corp. of DE* 12.54 291.77 15.18 294.10 12.46 0.00 0.00 0.00 WVFC WVS Financial Corp. of PA* 19.23 172.60 19.27 172.60 15.33 0.80 2.46 47.34 WRNB Warren Bancorp of Peabody MA* 9.83 201.12 20.86 201.12 11.55 0.52 2.63 25.87 WFSL Washington FS&LA of Seattle WA 16.30 215.69 26.05 236.15 14.78 0.92 2.91 47.42 WAMU Washington Mutual Inc. of WA(8)* NM NM 17.59 NM 28.05 1.08 1.59 NM WYNE Wayne Bancorp of NJ NM 136.86 18.27 136.86 NM 0.20 0.89 40.00 WAYN Wayne S&L Co. MHC of OH (47.8) NM 258.62 23.91 258.62 NM 0.62 2.30 NM WCFB Wbstr Cty FSB MHC of IA (45.2) NM 204.18 47.68 204.18 NM 0.80 3.72 NM WBST Webster Financial Corp. of CT NM 249.90 12.55 292.53 21.77 0.80 1.29 50.00 WEFC Wells Fin. Corp. of Wells MN 22.77 113.52 16.12 113.52 15.39 0.48 2.89 65.75 WCBI WestCo Bancorp of IL 20.39 149.74 22.82 149.74 16.15 0.60 2.09 42.55 WSTR WesterFed Fin. Corp. of MT NM 139.46 15.21 174.25 25.61 0.44 1.68 54.32 WOFC Western Ohio Fin. Corp. of OH NM 122.97 16.96 131.94 NM 1.00 3.48 NM
RP FINANCIAL, LC. _________________________________________ Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Exhibit IV-1 (continued) Weekly Thrift Market Line - Part Two Prices As Of October 10, 1997
Key Financial Ratios Asset Quality Ratios __________________________________________________________ ________________________ Tang. Reported Earnings Core Earnings Equity/ Equity/ ______________________ _______________ NPAs Resvs/ Resvs/ Financial Institution Assets Assets ROA(5) ROE(5) ROI(5) ROA(5) ROE(5) Assets NPAs Loans _____________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) NASDAQ Listed OTC Companies (continued) _______________________________________ WWFC Westwood Fin. Corp. of NJ(8) 9.13 8.13 0.49 5.12 2.84 0.85 8.80 0.13 159.15 0.55 WEHO Westwood Hmstd Fin Corp of OH 29.41 29.41 0.70 2.41 1.74 1.04 3.62 0.06 255.81 0.21 WFI Winton Financial Corp. of OH 7.11 6.96 1.00 14.08 8.31 0.84 11.80 0.35 78.21 0.32 FFWD Wood Bancorp of OH 12.31 12.31 1.07 8.25 4.65 1.27 9.81 0.24 143.64 0.44 YFCB Yonkers Fin. Corp. of NY 14.90 14.90 0.86 5.06 3.73 1.16 6.79 0.57 65.19 1.02 YFED York Financial Corp. of PA 8.61 8.61 0.62 7.41 3.92 0.79 9.46 2.39 23.05 0.64 Pricing Ratios Dividend Data(6) _________________________________________ _______________________ Price/ Price/ Ind. Divi- Price/ Price/ Price/ Tang. Core Div./ dend Payout Financial Institution Earning Book Assets Book Earnings Share Yield Ratio(7) _____________________ _______ _______ _______ _______ _______ _______ _______ _______ (X) (%) (%) (%) (x) ($) (%) (%) NASDAQ Listed OTC Companies (continued) _______________________________________ WWFC Westwood Fin. Corp. of NJ(8) NM 174.49 15.92 195.87 20.52 0.20 0.73 25.64 WEHO Westwood Hmstd Fin Corp of OH NM 121.74 35.80 121.74 NM 0.28 1.62 NM WFI Winton Financial Corp. of OH 12.03 169.45 12.05 173.11 14.37 0.46 2.39 28.75 FFWD Wood Bancorp of OH 21.52 178.57 21.98 178.57 18.09 0.40 2.35 50.63 YFCB Yonkers Fin. Corp. of NY 26.80 144.06 21.47 144.06 19.97 0.24 1.18 31.58 YFED York Financial Corp. of PA 25.50 180.32 15.52 180.32 19.96 0.60 2.33 59.41
EXHIBIT 2 Core Earnings Analysis RP FINANCIAL, LC. - --------------------------------------- Financial Services Industry Consultants 1700 North Moore Street, Suite 2210 Arlington, Virginia 22209 (703) 528-1700 Core Earnings Analysis Comparable Institution Analysis For the Twelve Months Ended June 30, 1997
Estimated Net Income Less: Net Tax Effect Less: Extd Core Income Estimated to Common Gains(Loss) @ 34% Items to Common Shares Core EPS ---------- ----------- ---------- ---------- ----------- --------- -------- ($000) ($000) $000) ($000) ($000) ($000) ($) Comparable Group ---------------- CMRN Cameron Fin. Corp. of MO 2,037 793 -270 0 2,560 2,627 0.97 FFHH FSF Financial Corp. of MN 2,373 977 -332 0 3,018 3,033 0.99 FFBA First Colorado Bancorp of Co 12,948 -251 85 0 12,782 16,561 0.77 FMSB First Mutual SB of Bellevue WA 4,210 -137 47 0 4,120 2,702 1.52 FWWB First Savings Bancorp of WA(1) 9,314 -701 238 0 8,851 10,519 0.84 HRZB Horizon Financial Corp. of WA 7,912 -208 71 0 7,775 7,417 1.05 IWBK Interwest SB of Oak Harbor WA 14,629 7,910 -2,689 0 19,850 8,036 2.47 KFBI Klamath First Bancorp of OR 5,494 4,252 -1,446 0 8,300 10,019 0.83 UBMT United Fin. Corp. of MT(1) 1,150 400 -136 0 1,414 1,223 1.16 WSTR WesterFed Fin. Corp. of MT 4,507 1,784 -607 0 5,684 5,565 1.02
(1) Financial information is for the quarter ending March 31, 1997. Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information. Copyright (c) 1997 by RP Financial, LC. EXHIBIT 3 Pro Forma Analysis Sheet Exhibit 3 PRO FORMA ANALYSIS SHEET Heritage Bank Prices as of October 10, 1997
Peer Group Washington Companies All SAIF Insured ---------------------- ---------------------- -------------------- Price Multiple Symbol Subject (1) Mean Median Mean Median Mean Median - -------------- ------ ----------- ---- ------ ---- ------ ---- ------ Price-earnings ratio = P/E 17.72x 23.73x 25.11x 21.39x 20.58x 22.53x 22.85x Price-book ratio = P/B 97.24% 173.22% 161.19% 192.40% 177.98% 155.64% 149.53% Price-tangible book ratio = P/TB 97.24% 179.15% 168.11% 200.84% 198.56% 159.27% 151.83% Price-assets ratio = P/A 24.89% 22.61% 23.53% 22.09% 19.29% 19.17% 17.30% Valuation Parameters
Pre-Conversion Earnings (Y) $ 2,162,000 ESOP Stock Purchases (E) 2.00% Pre-Conversion Book Value (B) $ 28,444,000 Cost of ESOP Borrowings (S) 0.00% (4) Pre-Conv. Tang. Book Value (TB) $ 28,444,000 ESOP Amortization (T) 15.00 years Pre-Conversion Assets (A) $248,824,000 RRP Amount (M) 1.00% Reinvestment Rate (2)(R) 4.45% RRP Vesting (N) 5.00 years Est. Conversion Expenses (3)(X) 2.27% Percentage Sold (PCT) 67.83% Tax rate (TAX) 34.00%
Calculation of Pro Forma Value After Conversion 1. V= P/E * Y V= $73,713,696 ----------------------------------------------------- 1 - P/E * PCT * ((1-X-E-M)*R - (1-TAX)*E/T - (1-TAX)*M/N) 2. V= P/B * B V= $73,713,696 ------------------------------------- 1 - P/B * PCT * (1-X-E-M) 3. V= P/TB * TB V= $73,713,696 --------------------------------------- 1 - P/TB * PCT * (1-X-E-M) 4. V= P/A * A V= $73,713,696 --------------------------------------- 1 - P/A * PCT * (1-X-E-M)
Full Gross Exchange Conversion Conclusion Proceeds Ratio Value - ---------- -------- ----- ----- Minimum $42,500,000 3.3064 $62,656,642 Midpoint $50,000,000 3.8899 $73,713,696 Maximum $57,500,000 4.4734 $84,770,750 Supermaximum Value $66,125,000 5.1444 $97,486,363
(1) Pricing ratios shown reflect the midpoint of the offering. (2) Net return reflects a reinvestment rate of 6.74 percent, and a tax rate of 34.00 percent. (3) Estimated offering expenses based on prospectus. (4) No cost is applicable since holding company will fund the ESOP loan. EXHIBIT 4 Pro Forma Effect of Conversion Proceeds Exhibit 4 PRO FORMA EFFECT OF CONVERSION PROCEEDS Heritage Bank At the Minimum Value 1. Conversion Proceeds Full Conversion Value $62,656,642 Exchange Ratio 3.3064 Offering Proceeds $42,500,000 Less: Estimated Offering Expenses 1,031,500 ----------- Net Conversion Proceeds $41,468,500 2. Estimated Additional Income from Conversion Proceeds Net Conversion Proceeds $41,468,500 Less: Non-Cash Stock Purchases (1) 1,275,000 ----------- Net Proceeds Reinvested $40,193,500 Estimated net incremental rate of return 4.45% Earnings Increase $ 1,788,611 Less: Estimated cost of ESOP borrowings (2) 0 Less: Amortization of ESOP borrowings (3) 37,400 Less: Recognition Plan Vesting (4) 56,100 ----------- Net Earnings Increase $ 1,695,111
Net Before Earnings After 3. Pro Forma Earnings Conversion Increase Conversion ---------- -------- ---------- 12 Months ended September 30, 1997 (reported) $ 2,162,000 $ 1,695,111 $ 3,857,111 12 Months ended September 30, 1997 (core) $ 798,000 $ 1,695,111 $ 2,493,111 Before Net Cash After 4. Pro Forma Net Worth Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $ 28,444,000 $40,193,500 $ 68,637,500 Tangible as of September 30, 1997 $ 28,444,000 $40,193,500 $ 68,637,500 5. Pro Forma Assets Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $248,824,000 $40,193,500 $289,017,500
(1) Includes ESOP and Recognition Plan stock purchases equal to 2.0 percent and 1.0 percent of the offering, respectively. (2) ESOP stock purchases are internally financed by a loan from the holding company. (3) ESOP borrowings are amortized over 15 years, amortization expense is tax-effected at a 34.00 percent rate. (4) Recognition plan is vested over five years, amortization expense is tax-effected at a 34.00 percent rate. Exhibit 4 PRO FORMA EFFECT OF CONVERSION PROCEEDS Heritage Bank At the Midpoint Value 1. Conversion Proceeds $73,713,696 Full Conversion Value 3.8899 Exchange Ratio Offering Proceeds $50,000,000 Less: Estimated Offering Expenses 1,135,000 ----------- Net Conversion Proceeds $48,865,000 2. Estimated Additional Income from Conversion Proceeds Net Conversion Proceeds $48,865,000 Less: Non-Cash Stock Purchases (1) 1,500,000 ----------- Net Proceeds Reinvested $47,365,000 Estimated net incremental rate of return 4.45% Earnings Increase $ 2,107,743 Less: Estimated cost of ESOP borrowings (2) 0 Less: Amortization of ESOP borrowings (3) 44,000 Less: Recognition Plan Vesting (4) 66,000 ----------- Net Earnings Increase $ 1,997,743
Net Before Earnings After 3. Pro Forma Earnings Conversion Increase Conversion ---------- -------- ---------- 12 Months ended September 30, 1997 (reported) $ 2,162,000 $ 1,997,743 $ 4,159,743 12 Months ended September 30, 1997 (core) $ 798,000 $ 1,997,743 $ 2,795,743 Before Net Cash After 4. Pro Forma Net Worth Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $ 28,444,000 $47,365,000 $ 75,809,000 Tangible as of September 30, 1997 $ 28,444,000 $47,365,000 $ 75,809,000 5. Pro Forma Assets Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $248,824,000 $47,365,000 $296,189,000
(1) Includes ESOP and Recognition Plan stock purchases equal to 2.0 percent and 1.0 percent of the offering, respectively. (2) ESOP stock purchases are internally financed by a loan from the holding company. (3) ESOP borrowings are amortized over 15 years, amortization expense is tax-effected at a 34.00 percent rate. (4) Recognition plan is vested over five years, amortization expense is tax-effected at a 34.00 percent rate. Exhibit 4 PRO FORMA EFFECT OF CONVERSION PROCEEDS Heritage Bank At the Maximum Value 1. Conversion Proceeds Full Conversion Value $84,770,750 Exchange Ratio 4.4734 Offering Proceeds $57,500,000 Less: Estimated Offering Expenses 1,238,500 ----------- Net Conversion Proceeds $56,261,500 2. Estimated Additional Income from Conversion Proceeds Net Conversion Proceeds $56,261,500 Less: Non-Cash Stock Purchases (1) 1,725,000 ----------- Net Proceeds Reinvested $54,536,500 Estimated net incremental rate of return 4.45 % Earnings Increase $ 2,426,874 Less: Estimated cost of ESOP borrowings (2) 0 Less: Amortization of ESOP borrowings (3) 50,600 Less: Recognition Plan Vesting (4) 75,900 ----------- Net Earnings Increase $ 2,300,374
Net Before Earnings After 3. Pro Forma Earnings Conversion Increase Conversion ---------- -------- ---------- 12 Months ended September 30, 1997 (reported) $ 2,162,000 $ 2,300,374 $ 4,462,374 12 Months ended September 30, 1997 (core) $ 798,000 $ 2,300,374 $ 3,098,374 Before Net Cash After 4. Pro Forma Net Worth Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $ 28,444,000 $54,536,500 $ 82,980,500 Tangible as of September 30, 1997 $ 28,444,000 $54,536,500 $ 82,980,500 5. Pro Forma Assets Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $248,824,000 $54,536,500 $303,360,500
(1) Includes ESOP and Recognition Plan stock purchases equal to 2.0 percent and 1.0 percent of the offering, respectively. (2) ESOP stock purchases are internally financed by a loan from the holding company. (3) ESOP borrowings are amortized over 15 years, amortization expense is tax-effected at a 34.00 percent rate. (4) Recognition plan is vested over five years, amortization expense is tax-effected at a 34.00 percent rate. Exhibit 4 PRO FORMA EFFECT OF CONVERSION PROCEEDS Heritage Bank At the Supermaximum Value 1. Conversion Proceeds Full Conversion Value $97,486,363 Exchange Ratio 5.1444 Offering Proceeds $66,125,000 Less: Estimated Offering Expenses 1,357,525 ----------- Net Conversion Proceeds $64,767,475 2. Estimated Additional Income from Conversion Proceeds Net Conversion Proceeds $64,767,475 Less: Non-Cash Stock Purchases (1) 1,983,750 ----------- Net Proceeds Reinvested $62,783,725 Estimated net incremental rate of return % 4.45 Earnings Increase $ 2,793,876 Less: Estimated cost of ESOP borrowings (2) 0 Less: Amortization of ESOP borrowings (3) 58,190 Less: Recognition Plan Vesting (4) 87,285 ----------- Net Earnings Increase $ 2,648,401
Net Before Earnings After 3. Pro Forma Earnings Conversion Increase Conversion ---------- -------- ---------- 12 Months ended September 30, 1997 (reported) $ 2,162,000 $ 2,648,401 $ 4,810,401 12 Months ended September 30, 1997 (core) $ 798,000 $ 2,648,401 $ 3,446,401 Before Net Cash After 4. Pro Forma Net Worth Conversion Proceeds Conversion ---------- -------- ---------- Reported as of September 30, 1997 $ 28,444,000 $62,783,725 $ 91,227,725 Tangible as of September 30, 1997 $ 28,444,000 $62,783,725 $ 91,227,725 5. Pro Forma Assets Conversion Proceeds Conversion ---------- -------- ---------- September 30, 1997 $248,824,000 $62,783,725 $311,607,725
(1) Includes ESOP and Recognition Plan stock purchases equal to 2.0 percent and 1.0 percent of the offering, respectively. (2) ESOP stock purchases are internally financed by a loan from the holding company. (3) ESOP borrowings are amortized over 15 years, amortization expense is tax-effected at a 34.00 percent rate. (4) Recognition plan is vested over five years, amortization expense is tax-effected at a 34.00 percent rate. EXHIBIT 5 Firm Qualifications Statement RP FINANCIAL, LC. - ------------------------------------------- Financial Services Industry Consultants FIRM QUALIFICATION STATEMENT RP Financial provides financial and management consulting and valuation services to the financial services industry nationwide, particularly federally-insured financial institutions. RP Financial establishes long-term client relationships through its wide array of services, emphasis on quality and timeliness, hands-on involvement by our principals and senior consulting staff, and careful structuring of strategic plans and transactions. RP Financial's staff draws from backgrounds in consulting, regulatory agencies and investment banking, thereby providing our clients with considerable resources. STRATEGIC AND CAPITAL PLANNING RP Financial's strategic and capital planning services are designed to provide effective workable plans with quantifiable results. Through a program known as SAFE (Strategic Alternatives Financial Evaluations), RP Financial analyzes strategic options to enhance shareholder value or other established objectives. Our planning services involve conducting situation analyses; establishing mission statements, strategic goals and objectives; and identifying strategies for enhancement of franchise value, capital management and planning, earnings improvement and operational issues. Strategy development typically includes the following areas: capital formation and management, asset/liability targets, profitability, return on equity and market value of stock. Our proprietary financial simulation model provides the basis for evaluating the financial impact of alternative strategies and assessing the feasibility/compatibility of such strategies with regulations and/or other guidelines. MERGER AND ACQUISITION SERVICES RP Financial's merger and acquisition (M&A) services include targeting candidates and potential acquirors, assessing acquisition merit, conducting detailed due diligence, negotiating and structuring transactions, preparing merger business plans and financial simulations, rendering fairness opinions and assisting in implementing post-acquisition strategies. Through our financial simulations, comprehensive in-house data bases, valuation expertise and regulatory knowledge, RP Financial's M&A consulting focuses on structuring transactions to enhance shareholder returns. VALUATION SERVICES RP Financial's extensive valuation practice includes valuations for a variety of purposes including mergers and acquisitions, mutual-to-stock conversions, ESOPs, subsidiary companies, mark-to-market transactions, loan and servicing portfolios, non-traded securities, core deposits, FAS 107 (fair market value disclosure), FAS 122 (loan servicing rights) and FAS 123 (stock options). Our principals and staff are highly experienced in performing valuation appraisals which conform with regulatory guidelines and appraisal industry standards. RP Financial is the nation's leading valuation firm for mutual-to-stock conversions of thrift institutions. OTHER CONSULTING SERVICES AND DATA BASES RP Financial offers a variety of other services including branching strategies, feasibility studies and special research studies, which are complemented by our quantitative and computer skills. RP Financial's consulting services are aided by its in-house data base resources for commercial banks and savings institutions and proprietary valuation and financial simulation models. YEAR 2000 SERVICES RP Financial, through a relationship with a computer research and development company with a proprietary methodology, offers Year 2000 advisory and conversion services to financial institutions which are more cost effective and less disruptive than most other providers of such service. RP Financial's Key Personnel (Years of Relevant Experience) Ronald S. Riggins, Managing Director (17) William E. Pommerening, Managing Director (13) Gregory E. Dunn, Senior Vice President (15) James P. Hennessey, Senior Vice President (12) James J. Oren, Vice President (10) ________________________________________________________________________________ WASHINGTON HEADQUARTERS -----END PRIVACY-ENHANCED MESSAGE-----