AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2000
REGISTRATION NO. 333-91741
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COWLITZ BANCORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 6712 91-1529841
(State or other jurisdiction (Primary standard (IRS Employer
of industrial Identification No.)
incorporation or organization) classification code number)
927 COMMERCE AVENUE LONGVIEW, WASHINGTON 98632
(360) 423-9800
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
CHARLES W. JARRETT
PRESIDENT AND CHIEF OPERATING OFFICER
COWLITZ BANCORPORATION
927 COMMERCE AVENUE
LONGVIEW, WASHINGTON 98632
(360) 423-9800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
WILLIAM SPICER
DAVID R. WILSON Chairman DAVID C. BACA
Heller Ehrman White & McAuliffe Northern Bank of Commerce Davis Wright Tremaine LLP
701 Fifth Avenue, Suite 6100 1001 Southwest Fifth Avenue, Suite 250 1300 SW Fifth Avenue, Suite 2300
Seattle, Washington 98104 Portland, Oregon 97204 Portland, Oregon 97201
(206) 389-4264 (503) 222-9164 (503) 241-2300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
AND THE SATISFACTION OR WAIVER OF ALL OTHER CONDITIONS TO THE MERGER DESCRIBED
IN THE JOINT PROXY STATEMENT.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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[LOGO]
January 11, 2000
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Cowlitz Bancorporation to be held at the Red Lion Hotel, 510 Kelso Drive, Kelso,
Washington, at 7:00 p.m. on Thursday, February 17, 2000.
At this very important meeting, you will be asked to consider and vote upon
a proposal to approve the issuance of shares of Cowlitz Bancorp common stock in
connection with a proposed merger of Northern Bank of Commerce into Cowlitz
Bancorp's wholly-owned subsidiary, Cowlitz Bank.
If the merger is completed, Northern Bank of Commerce shareholders will
receive a total of up to 1,012,149 shares of Cowlitz Bancorp common stock, or up
to approximately 0.825842 shares for each share of Northern Bank common stock
they own. If the merger had been completed at November 30, 1999, based on
Northern Bank's shareholders' equity at that date, Northern Bank shareholders
would have received 0.646046 shares of Cowlitz Bancorp stock for each Northern
Bank share. Northern Bank shareholders will also receive $1.63 in cash for each
share of Northern Bank common stock they own. The cash consideration will be
deposited, on the Northern Bank shareholders' behalf, into an escrow account
designed to protect Cowlitz Bancorp against losses incurred on identified
Northern Bank loans in the two years following the merger, to the extent these
losses exceed established thresholds. Both the cash portion and the stock
portion of the consideration are subject to possible reductions as described in
the accompanying joint proxy statement. In addition, in connection with the
merger, specified Northern Bank directors and employees will be granted options
to acquire a total of 231,466 shares of Cowlitz Bancorp common stock. The
exercise price of 150,000 of these options will be $12.00 per share. The
exercise price per share of the remaining options will be equal to 1.4 times
Cowlitz Bancorp's shareholders' equity per share immediately following the
merger.
The board of directors of Cowlitz Bancorp has unanimously approved the
merger and believes that the merger is in the best interest of Cowlitz Bancorp
and its shareholders. The Cowlitz Bancorp board recommends that all shareholders
vote "FOR" approval of the share issuance that will allow the merger to take
place. Cowlitz Bancorp's financial advisor, Sage Capital, LLC, has issued its
written opinion to Cowlitz Bancorp's board of directors that the merger is fair
to Cowlitz Bancorp and its shareholders from a financial point of view. A copy
of this opinion is attached as Appendix E to the joint proxy statement, and you
should read this opinion in its entirety.
Cowlitz Bancorp common stock is listed on The Nasdaq National Market under
the symbol "CWLZ." Northern Bank common stock is listed on The Nasdaq Small Cap
Market under the symbol "NBOC."
You should read carefully the accompanying Notice of Special Meeting of
Shareholders and joint proxy statement, which contain important information
about the merger.
Whether or not you attend the special meeting, it is important that your
shares be represented and voted at the meeting. Therefore, I urge you to sign,
date and promptly return the accompanying proxy card in the enclosed
postage-prepaid envelope. Please note, however, that if your shares are held
through a broker, you must follow the instructions forwarded to you by your
broker for instructing your broker how to vote your shares. Whether or not you
return the enclosed proxy card, you will have the opportunity to vote your
shares in person if you choose to attend the special meeting. On behalf of the
Cowlitz Bancorp board, I thank you for your continued support and again urge you
to vote to approve the share issuance.
Sincerely,
Benjamin Namatinia
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY GOVERNMENTAL AGENCY.
This joint proxy statement is also a prospectus of Cowlitz Bancorp with
respect to up to 1,243,615 shares of Cowlitz Bancorp common stock issuable to
Northern Bank shareholders in the merger.
This joint proxy statement is dated January 11, 2000 and was first mailed to
shareholders on or about January , 2000.
[LOGO]
January 11, 2000
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Northern Bank of Commerce to be held at the University Club, 1225 SW 6th Avenue,
Portland, Oregon 97204, at 9:00 a.m. on Thursday, February 17, 2000.
At this very important meeting, you will be asked to consider and vote upon
a proposal to approve an agreement providing for the merger of Northern Bank of
Commerce into Cowlitz Bank, a wholly-owned subsidiary of Cowlitz Bancorporation.
The merger agreement provides that each share of Northern Bank common stock will
be converted into the right to receive merger consideration, which will consist
of the following components:
- A number of shares of common stock of Cowlitz Bancorp that will be
determined on the effective date of the merger using a formula that takes
into account Northern Bank's shareholder equity as of the effective date
of the merger, and an exchange ratio that uses a fixed value for Cowlitz
Bancorp stock of $6.563 per share. Based on this formula, if the merger
had been concluded as of November 30, 1999, the exchange value of the
stock consideration would have been $4.24 per share, and the exchange
ratio would have been 0.646046 shares of Cowlitz Bancorp stock per
Northern Bank share; and
- Up to $1.63 in cash. However, this amount will be deposited into an escrow
account, on the Northern Bank shareholders' behalf, to indemnify Cowlitz
Bancorp for losses Cowlitz Bancorp incurs in excess of established
thresholds on specified Northern Bank loans during the two year period
following the merger. The escrowed funds also may be used to offset losses
in excess of reserves on those identified loans where, in Cowlitz
Bancorp's good faith estimate, further losses are reasonably expected to
occur following the release of escrow. Any cash remaining after this
indemnification, net of expenses, will be paid to Northern Bank
shareholders 24 months after the effective date of the merger. The cash
consideration remaining at release of escrow will be paid to persons who
were Northern Bank shareholders of record on the effective date of the
merger. It is not necessary to retain shares received as stock
consideration in order to receive the cash consideration after close of
escrow. However, there can be no assurance that sufficient cash will
remain to make such a disbursement.
As more fully described in the accompanying joint proxy statement, the
amount of stock merger consideration will be reduced if Northern Bank's
shareholders' equity falls below $4,718,841. As of November 30, 1999, Northern
Bank's shareholders' equity (adjusted for estimated closing expenses of
$158,000) was $3,889,967. If the merger been concluded as of November 30, 1999,
the exchange ratio would have been 0.646046 shares of Cowlitz Bancorp common
stock for each share of Northern Bank stock, and (based on the market value of
Cowlitz Bancorp stock on that date) the total merger consideration would have
been between $3.65 and $5.28 per Northern Bank share, depending on the amounts
ultimately realized from the escrow account. Northern Bank's shareholders'
equity may further be reduced as a result of, among other things, operating
losses incurred after November 30, 1999 including any additional provisions for
loan losses required to be made under the merger agreement based on a review of
Northern Bank's loan portfolio that will be conducted by a third party loan
examiner prior to the effective date of the merger.
In addition, since the maximum amount of the total merger consideration is
fixed, the merger consideration per share of Northern Bank common stock may be
further reduced if the number of
outstanding shares of Northern Bank common stock increases before the effective
date of the merger. Finally, because the number of shares of Cowlitz Bancorp
common stock you will receive for each share of Northern Bank common stock is
based on a fixed value of Cowlitz Bancorp common stock of $6.563, the actual
value of the merger consideration will decline if the value of Cowlitz Bancorp
stock at the effective date of the merger is less than $6.563 per share. As of
the day prior to the date of the accompanying joint proxy statement, the price
per share of Cowlitz Bancorp common stock was $4.94. To estimate the value of
the Cowlitz Bancorp stock you will receive for each Northern Bank share you own,
you should multiply the exchange ratio (which would have been 0.646046 if the
merger had closed on November 30, 1999) by the current per share price of
Cowlitz Bancorp common stock.
The accompanying Notice of Special Meeting of Shareholders and joint proxy
statement contain important information about the merger, and you should read
them carefully.
Cowlitz Bancorp common stock is listed on The Nasdaq National Market under
the symbol "CWLZ." Northern Bank common stock is listed on The Nasdaq Small Cap
Market under the symbol "NBOC."
Northern Bank's board of directors has unanimously approved the merger and
believes the merger is in the best interest of Northern Bank and its
shareholders. The Northern Bank board recommends that all shareholders vote
"FOR" approval of the merger. Northern Bank's financial advisor, D.A.
Davidson & Co., has issued its written opinion to Northern Bank's board of
directors that the merger is fair to Northern Bank and its shareholders from a
financial point of view. A copy of this opinion is attached as Appendix D to the
joint proxy statement, and you should read this opinion in its entirety.
If the shareholders of Northern Bank and Cowlitz Bancorp approve the merger
at the meeting, and if we receive the necessary regulatory approvals, we expect
to close the merger on or about March 1, 2000.
CONVERTING YOUR NORTHERN BANK SHARES TO COWLITZ BANCORP SHARES REPRESENTS AN
INVESTMENT IN COWLITZ BANCORP. INVESTING IN COWLITZ BANCORP COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK, AND THE INVESTMENT IN COMMON STOCK IS NOT A
DEPOSIT, NOR WILL INVESTED FUNDS BE INSURED BY THE FDIC OR OTHERWISE. SEE "RISK
FACTORS" ON PAGE 21 OF THE ACCOMPANYING JOINT PROXY STATEMENT.
Whether or not you attend the special meeting, it is important that your
shares be represented and voted at the meeting. Because approval of the merger
requires the affirmative vote of two-thirds of the outstanding Northern Bank
shares, a failure to vote amounts to a vote against the merger. Therefore, I
urge you to sign, date and promptly return the accompanying proxy card in the
enclosed postage-prepaid envelope. Please note, however, that if your shares are
held through a broker, you should follow the instructions forwarded to you by
your broker for instructing your broker how to vote your shares. Whether or not
you return the enclosed proxy card, you will have the opportunity to vote your
shares in person if you choose to attend the special meeting. On behalf of the
Northern Bank board, I thank you for your continued support and again urge you
to vote "FOR" adoption of the merger agreement.
Sincerely,
[SIGNATURE]
William V. Spicer
CHAIRMAN
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY GOVERNMENTAL AGENCY. AS A RESULT, ANY
INVESTMENT IN THESE SECURITIES MAY RESULT IN A LOSS OF PRINCIPAL.
This joint proxy statement is dated January 11, 2000 and this joint proxy
statement is first being mailed to shareholders on or about January , 2000.
[LOGO]
927 COMMERCE AVENUE
LONGVIEW, WASHINGTON 98632
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 17, 2000
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Notice is hereby given that a special meeting of shareholders of Cowlitz
Bancorporation will be held at the Red Lion Hotel, 510 Kelso Drive, Kelso,
Washington, at 7:00 p.m., on Thursday, February 17, 2000, for the following
purposes, as more fully described in the accompanying joint proxy statement:
1. To consider and vote upon a proposal to approve the issuance of shares
of common stock of Cowlitz Bancorporation pursuant to the Agreement and Plan of
Merger, dated as of September 14, 1999, among Cowlitz Bancorporation, Cowlitz
Bank and Northern Bank of Commerce, providing for the merger of Northern Bank of
Commerce into Cowlitz Bank. The merger agreement is attached as Appendix C to
the accompanying joint proxy statement.
2. To transact any other business as may properly come before the special
meeting or any adjournment or postponement of the meeting.
Only holders of record of Cowlitz Bancorp common stock at the close of
business on December 28, 1999 are entitled to receive notice of and to vote at
the special meeting or any adjournment or postponement of the meeting.
THE BOARD OF DIRECTORS OF COWLITZ BANCORP UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE SHARE ISSUANCE.
By order of the Board of Directors,
[SIGNATURE]
Donna P. Gardner
VICE PRESIDENT & SECRETARY/TREASURER
January 11, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN IF
YOU HAVE PREVIOUSLY SENT IN YOUR PROXY CARD. IF YOUR COWLITZ BANCORP SHARES ARE
HELD BY A BROKER IN STREET NAME, PLEASE FOLLOW YOUR BROKER'S INSTRUCTIONS FOR
DIRECTING YOUR BROKER HOW TO VOTE YOUR SHARES.
[LOGO]
1001 SOUTHWEST FIFTH AVENUE, SUITE 250
PORTLAND, OREGON 97204
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 17, 2000
------------------------
Notice is hereby given that a special meeting of shareholders of Northern
Bank of Commerce will be held at the University Club, 1225 SW 6th Avenue,
Portland, Oregon, at 9:00 a.m., on Thursday February 17, 2000, for the following
purposes, as more fully described in the accompanying joint proxy statement:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of September 14, 1999, among Cowlitz Bancorporation, Cowlitz
Bank and Northern Bank of Commerce, providing for the merger of Northern Bank of
Commerce into Cowlitz Bank. The merger agreement is attached as Appendix C to
the accompanying joint proxy statement.
2. To transact any other business as may properly come before the special
meeting or any adjournment or postponement of the meeting.
Only holders of record of Northern Bank common stock, at the close of
business on December 28, 1999 are entitled to receive notice of and to vote at
the special meeting or any adjournment or postponement of the meeting.
THE BOARD OF DIRECTORS OF NORTHERN BANK UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
By order of the Board of Directors,
[SIGNATURE]
William V. Spicer
CHAIRMAN
January 11, 2000
THE APPROVAL OF THE MERGER PROPOSAL REQUIRES THE AFFIRMATIVE VOTE OF TWO-THIRDS
OF THE ISSUED AND OUTSTANDING SHARES OF NORTHERN BANK COMMON STOCK. THEREFORE,
FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER PROPOSAL.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN IF
YOU HAVE PREVIOUSLY SENT IN YOUR PROXY CARD. IF YOUR NORTHERN BANK SHARES ARE
HELD BY A BROKER IN STREET NAME, PLEASE FOLLOW YOUR BROKER'S INSTRUCTIONS FOR
DIRECTING YOUR BROKER HOW TO VOTE YOUR SHARES.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 2
SUMMARY FINANCIAL DATA OF COWLITZ BANCORP................... 8
SUMMARY FINANCIAL DATA OF NORTHERN BANK..................... 10
RECENT DEVELOPMENTS......................................... 12
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA.... 17
SELECTED UNAUDITED COMPARATIVE PER SHARE DATA............... 18
COMPARATIVE MARKET PRICES AND DIVIDEND INFORMATION.......... 19
RISK FACTORS................................................ 21
THE SPECIAL MEETINGS........................................ 24
General................................................... 24
Matters To Be Considered at the Special Meetings.......... 24
Record Date and Voting.................................... 24
Proxies and Voting Instructions........................... 24
Quorum; Votes Required.................................... 25
Solicitation of Proxies................................... 26
THE MERGER.................................................. 27
General................................................... 27
The Merger Consideration.................................. 27
Payment of Cash; Escrow Arrangements...................... 30
Background of the Merger.................................. 30
Reasons for the Merger; Recommendations of the Boards of
Directors............................................... 33
Opinions of Financial Advisors............................ 35
Opinion of Cowlitz Bancorp's Financial Advisor............ 35
Opinion of Northern Bank's Financial Advisor.............. 38
Effective Date............................................ 42
Exchange of Certificates.................................. 42
Fractional Shares......................................... 43
Treatment of Escrow Proceeds.............................. 43
Representations and Warranties............................ 43
Conditions to the Completion of the Merger................ 44
Regulatory Approvals Required............................. 46
Amendment and Waiver of the Merger Agreement.............. 46
Termination of the Merger Agreement....................... 46
Termination Fees.......................................... 47
The Option Agreement...................................... 48
Conduct of Business Pending the Merger and Other
Agreements.............................................. 49
Expenses and Fees......................................... 51
Accounting Treatment...................................... 51
Nasdaq Listing of Cowlitz Bancorp Common Stock............ 52
Resale of Cowlitz Bancorp Stock Received by Northern Bank
Shareholders............................................ 52
Appraisal Rights.......................................... 52
i
PAGE
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Interests of Certain Persons in the Merger................ 52
Employee Matters.......................................... 53
Certain Federal Income Tax Consequences................... 54
MANAGEMENT AND OPERATIONS OF COWLITZ BANK FOLLOWING THE
MERGER.................................................... 60
General................................................... 60
Board of Directors........................................ 60
Operations After the Merger............................... 60
PRO FORMA COMBINED FINANCIAL INFORMATION.................... 61
COMPARISON RIGHTS OF COWLITZ BANCORP SHAREHOLDERS AND
NORTHERN BANK SHAREHOLDERS................................ 66
Capital Stock............................................. 66
Board of Directors........................................ 66
Monetary Liability of Directors........................... 66
Voting Rights............................................. 66
Removal of Directors and Filling Vacancies on the Board of
Directors............................................... 67
CERTAIN DIFFERENCES BETWEEN WASHINGTON AND OREGON CORPORATE
LAWS...................................................... 68
Amendments of Articles of Incorporation................... 68
Right to Call a Special Meeting of Shareholders........... 68
Transactions with Officers or Directors................... 68
Limitation of Liability of Directors...................... 69
Indemnification of Officers, Directors and Employees...... 69
Mergers, Sales of Assets and Other Transactions........... 70
Provisions Affecting Control Share Acquisition and
Business Combinations................................... 70
Consideration of Other Constituencies..................... 70
Dissenters' Rights........................................ 71
Dissolution............................................... 71
DESCRIPTION OF COWLITZ BANCORP CAPITAL STOCK................ 72
Cowlitz Bancorp Common Stock.............................. 72
Cowlitz Bancorp Preferred Stock........................... 72
DESCRIPTION OF NORTHERN BANK COMMON STOCK................... 73
LEGAL MATTERS............................................... 73
EXPERTS..................................................... 74
WHERE YOU CAN FIND MORE INFORMATION......................... 74
SHAREHOLDER PROPOSALS....................................... 75
Appendix A Information Concerning Cowlitz Bancorporation............... A-1
Appendix B Information Concerning Northern Bank of Commerce............ B-1
Appendix C Agreement and Plan of Merger................................ C-1
Appendix D Opinion of D.A. Davidson & Co............................... D-1
Appendix E Opinion of Sage Capital, LLC................................ E-1
Appendix F Escrow Agreement............................................ F-1
Appendix G Stock Option Agreement...................................... G-1
Appendix H Oregon Appraisal Statutes................................... H-1
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT ARE NORTHERN BANK SHAREHOLDERS BEING ASKED TO VOTE UPON?
A: Northern Bank shareholders are being asked to approve the merger agreement
that provides for the merger of Northern Bank into Cowlitz Bank.
Q: WHAT ARE COWLITZ BANCORP SHAREHOLDERS BEING ASKED TO VOTE UPON?
A: Cowlitz Bancorp shareholders are being asked to approve the issuance of
Cowlitz Bancorp common stock in connection with the proposed merger of
Northern Bank into Cowlitz Bank.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider the information in this document, mark your proxy
card either "FOR" or "AGAINST" the proposal described in your proxy card and
then mail your signed and dated proxy card in the enclosed return envelope
as soon as possible, so that your shares may be voted at the special
meeting. You should return your proxy card whether or not you plan to attend
the special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. Please tell your broker how you would like him or her to vote your
shares. If you do not tell your broker how to vote, your shares will not be
voted. For Northern Bank shareholders, this will have the same effect as a
"no" vote on the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY?
A: Yes. You can change your vote at any time before your proxy is voted at the
meeting. You can do this in one of the following three ways:
- delivering written notice of revocation to the corporate secretary;
- completing and submitting a proxy card with a later date; or
- attending the special meeting and voting in person.
To revoke your proxy or submit a later proxy, you should send your
instructions to Northern Bank of Commerce, Attn: Corporate Secretary,
1001 S.W. Fifth Avenue, Suite 250, Portland, Oregon 97204.
Q: SHOULD NORTHERN BANK SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. If the merger is completed, Cowlitz Bancorp will send you written
instructions on how to exchange your stock certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We hope to
complete it on or about March 1, 2000, assuming all governmental approvals
have been received by that date.
Q: IF THE MERGER IS CONCLUDED ON OR ABOUT MARCH 1, 2000, WHEN CAN NORTHERN BANK
SHAREHOLDERS EXPECT TO RECEIVE COWLITZ STOCK CERTIFICATES REPRESENTING THE
STOCK PORTION OF THE MERGER CONSIDERATION?
A: Once the merger has been completed, Northern Bank shareholders will receive a
letter of transmittal and instructions from the exchange agent. They should
expect to receive their certificates approximately 2 weeks following the
return of a properly completed letter of transmittal. See page 35.
Q: IF I SELL ALL OR PART OF THE COWLITZ BANCORP COMMON STOCK I RECEIVE IN THE
MERGER, WILL I STILL BE ENTITLED TO A PORTION OF THE CASH THAT MAY BE
DISTRIBUTED FROM ESCROW?
A: Yes. Cash consideration, if paid, will be paid to persons who were Northern
Bank shareholders on the effective date of the merger. Selling or
transferring the stock consideration will not affect your right to receive a
pro rata share of any cash ultimately distributed from the escrow account.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: Cowlitz Bancorp shareholders should direct questions to either Charles W.
Jarrett, President and Chief Operating Officer, or Don P. Kiser, Vice
President and Chief Financial Officer, of Cowlitz Bancorporation at
(360) 423-9800.
Northern Bank shareholders should direct questions to either William V.
Spicer, Chairman, John H. Holloway, Jr., Director, or James A. Wills,
President, of Northern Bank of Commerce at (503) 222-9164.
1
SUMMARY
THIS SUMMARY ONLY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THIS ENTIRE JOINT PROXY STATEMENT, INCLUDING THE APPENDICES
AND THE DOCUMENTS TO WHICH IT REFERS, BEFORE YOU DECIDE HOW TO VOTE ON THE
MERGER OR THE SHARE ISSUANCE. FOR A DESCRIPTION OF THE DOCUMENTS TO WHICH THIS
PROXY STATEMENT REFERS, SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 74.
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS REGARDING COWLITZ
BANCORP, COWLITZ BANK, NORTHERN BANK AND THE COMBINED COMPANY AFTER THE MERGER.
THE ACTUAL RESULTS OF THESE COMPANIES COULD DIFFER MATERIALLY FROM THOSE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS. THESE FACTORS INCLUDE
THE RISK FACTORS DESCRIBED ON PAGE 21 OF THIS JOINT PROXY STATEMENT.
THE PARTIES TO THE MERGER (SEE APPENDICES A AND B)
COWLITZ BANCORPORATION
COWLITZ BANK
927 COMMERCE AVENUE
LONGVIEW, WASHINGTON 98632
(360) 423-9800
Cowlitz Bancorporation was organized in 1991 under Washington law to become
the holding company for Cowlitz Bank, a Washington state chartered bank that
commenced operations in 1978. The principal executive offices of Cowlitz Bancorp
are located in Longview, Washington.
Cowlitz Bancorp offers or makes available a broad range of financial
services to its customers, primarily small and medium-sized businesses,
professionals and retail customers. Cowlitz Bank's commercial and personal
banking services include commercial and real estate lending, consumer lending,
mortgage origination and trust services. Cowlitz Bank has also developed
relationships with a securities brokerage firm and insurance agency with an
estate planner to provide its customers access to a variety of financial
services which are generally not available in community banks. During 1998,
Cowlitz Bancorp acquired Business Finance Corporation which provides asset-based
lending services to companies throughout the western United States.
Cowlitz Bancorp's goal is to continue to expand its position as a leading
community based provider of financial services in Cowlitz County and to become
one of the leading community based providers of financial services in other
selected areas of Washington and Oregon. In accordance with this strategy,
during 1999 Cowlitz Bancorp commenced operations in the Seattle, Washington area
through the acquisition of Bay Mortgage of Bellevue, Washington, Bay Mortgage of
Seattle, Washington, and Bay Escrow of Seattle, Washington. Cowlitz Bancorp has
also started a new branch of Cowlitz Bank, operating as Bay Bank, in Bellevue,
Washington. Cowlitz Bancorp's growth strategy is based on providing both
exceptional personal service and a wide range of financial services to its
customers including: emphasizing personal service and developing strong
community ties, providing a broad range of financial products and services,
increasing business volume in existing markets, and continuing to explore
opportunities for regional expansion through acquisitions.
NORTHERN BANK OF COMMERCE
1001 SOUTHWEST FIFTH AVENUE, SUITE 250
PORTLAND, OREGON 97204
(503) 222-9164
Northern Bank serves local businesses in the Portland, Oregon, metropolitan
area from a single location in downtown Portland. Northern Bank also serves
senior citizens from eight branches in residential retirement communities
throughout the Portland area. Northern Bank believes that its downtown Portland
headquarters provides it with a competitive advantage in serving its business
customers. Nearly all of Northern Bank's competitors are either super-regional
banks with out-of-state headquarters, or community banks headquartered in other
parts of Oregon with Portland-area branches. Northern Bank's Portland
headquarters provides more immediate access to its customers and more local
decision-making.
2
Northern Bank provides loan, deposit, and cash management services tailored
to the banking needs of small to middle market business customers. Northern Bank
also provides personal banking services to its business customers. In addition
to business banking, Northern Bank operates its eight branches in residential
retirement communities in Portland and surrounding areas. These branches provide
a relatively stable deposit base.
Since its opening in 1994, Northern Bank has grown by developing its core
market, opening new branches, introducing new lines of business, and expanding
and cross-marketing existing products and lending expertise. Almost all this
asset growth was in its core market, small and medium sized local businesses.
Northern Bank's goal is to continue building on its position as a leading
community-based business bank by providing exceptional personal service to its
current customers and by expanding into new markets by identifying and meeting
customers' unique financial services needs. If the merger is concluded, Northern
Bank's management anticipates that the goodwill the bank has built in the
Portland business community will provide a significant opportunity for Cowlitz
Bancorp to expand into the Portland market.
THE SPECIAL MEETINGS (SEE PAGE 24)
COWLITZ BANCORP. The Cowlitz Bancorp special meeting of shareholders will be
held on Thursday, February 17, 2000, at 7:00 p.m., at the Red Lion Hotel,
510 Kelso Drive, Kelso, Washington.
You can vote at the special meeting if you owned Cowlitz Bancorp common
stock at the close of business on December 28, 1999. On the record date, there
were 4,022,052 shares of Cowlitz Bancorp common stock entitled to vote at the
special meeting. You can cast one vote for each share of Cowlitz Bancorp common
stock you owned at that time.
To approve the issuance of shares necessary to complete the merger, the
holders of a majority of shares of Cowlitz Bancorp common stock voting at a
meeting in which a quorum is present must vote in favor of it. At the record
date, Cowlitz Bancorp directors and executive officers beneficially owned
1,106,140 shares, which represents 27.5% of the shares entitled to vote at the
meeting.
NORTHERN BANK. The Northern Bank special meeting of shareholders will be
held on Thursday, February 17, 2000, at 9:00 a.m., at the University Club, 1225
SW 6th Avenue, Portland, Oregon 97204.
You can vote at the special meeting if you owned Northern Bank common stock
at the close of business on December 28, 1999. On the record date, there were
1,225,597 shares of Northern Bank common stock entitled to vote at the special
meeting. You can cast one vote for each share of Northern Bank common stock you
owned at that time.
To approve the merger agreement, the holders of two-thirds of the
outstanding shares of Northern Bank common stock must vote in favor of it.
Shares not voted have the same effect as a vote against the merger. At the
record date, Northern Bank directors and executive officers beneficially owned
12,955 shares, which represents 1.03% of the shares entitled to vote at the
meeting.
THE MERGER AND RELATED TRANSACTIONS
The merger agreement is attached to this proxy statement as Appendix C. We
encourage you to read the merger agreement carefully, as it is the legal
document that governs the merger of Northern Bank into Cowlitz Bank.
WHAT NORTHERN BANK SHAREHOLDERS WILL RECEIVE (SEE PAGE 27)
At the effective date of the merger, each outstanding share of Northern Bank
common stock will convert into the right to receive merger consideration
consisting of:
- A number of shares of common stock of Cowlitz Bancorp that will be
determined on the date of the merger using a formula that takes into
account Northern Bank's shareholder equity as of the effective date of the
merger, and an exchange ratio that uses a fixed value of $6.563 per share
of
3
Cowlitz Bancorp stock. If the merger had been concluded as of
November 30, 1999, the exchange value of the stock consideration would
have been $4.24 and the exchange ratio would have been 0.646046 Cowlitz
shares per Northern Bank share; and
- Up to $1.63 in cash. However, the cash portion of the merger consideration
will be deposited in an escrow account, on the Northern Bank shareholders'
behalf, to indemnify Cowlitz Bancorp for losses it incurs in excess of
established thresholds during the two year period following the merger on
specified Northern Bank loans that will be identified prior to closing.
The escrowed funds also may be used to offset losses in excess of reserves
on those identified loans where, in Cowlitz Bancorp's good faith estimate,
further losses are reasonably expected to occur following the release of
escrow. The reason for the two-year escrow procedure is to minimize the
potential loss to Cowlitz Bancorp from Northern Bank loans that, as of the
effective date of the merger, will not be sufficiently seasoned to permit
a thorough analysis of potential future loan losses. Any amount remaining
in this account after this indemnification, net of expenses, will be paid
to Northern Bank shareholders 24 months after the effective date of the
merger; however, there can be no assurance that Northern Bank shareholders
ultimately will receive any disbursement from the escrowed funds.
The amount of stock merger consideration will be reduced further if Northern
Bank's shareholders' equity immediately prior to the effective date of the
merger continues to decrease. As of November 30, 1999, Northern Bank's
shareholders' equity (as adjusted for estimated closing expenses of $158,000)
was $3,889,967. If the closing of the merger had occurred on that date, the
exchange value of stock merger consideration payable per Northern Bank share
would have been reduced to $4.24 or 0.646046 shares of Cowlitz Bancorp common
stock. Based on the closing price of Cowlitz Bancorp common stock on January 7,
2000 of $4.938 per share, the value of the stock portion of the merger
consideration would have been $3.19 per share, and the total merger
consideration would have been between $3.19 and $4.82 per Northern Bank share,
depending on the amount ultimately realized from the escrow account. Northern
Bank's shareholders' equity may further be reduced as a result of, among other
things, operating losses Northern Bank incurs after November 30, 1999, including
any additional provision for loan losses required to be made under the merger
agreement based on a review of Northern Bank's loan portfolio that will be
conducted by a third party loan examiner prior to the effective date of the
merger.
In addition, since the maximum amount of the total merger consideration is
fixed, the per share consideration may decrease if the number of outstanding
shares of Northern Bank common stock increases prior to the closing.
COWLITZ BANCORP'S REASONS FOR THE MERGER (SEE PAGE 33)
In approving the merger, the Cowlitz Bancorp board of directors considered a
number of factors. These factors included the total consideration to be paid to
Northern Bank shareholders, the future prospects of Cowlitz Bank and the
structure of the transaction.
RECOMMENDATION OF COWLITZ BANCORP'S BOARD OF DIRECTORS (SEE PAGE 33)
The Cowlitz Bancorp and Cowlitz Bank boards of directors unanimously
approved the merger agreement. The Cowlitz Bancorp board of directors believes
that the proposed merger is fair to Cowlitz Bancorp shareholders and in their
best interests and unanimously recommends that Cowlitz Bancorp shareholders vote
"FOR" approval of the share issuance necessary to compete the merger.
OPINION OF COWLITZ BANCORP'S FINANCIAL ADVISOR (SEE PAGE 35)
Cowlitz Bancorp retained Sage Capital LLC to act as its financial advisor in
connection with the merger. Sage has delivered to the Cowlitz
4
Bancorp board of directors a written opinion stating that the merger is fair to
Cowlitz Bancorp and its shareholders from a financial point of view. The full
text of the opinion which sets forth the assumptions on which Sage Capital
relied and the limitations of its opinion, is attached as Appendix E to this
joint proxy statement.
NORTHERN BANK'S REASONS FOR THE MERGER (SEE PAGE 34)
The Northern Bank board of directors considered a number of factors in
determining whether to approve the merger including the mandates imposed by
state and federal regulatory proceedings, the strength of Cowlitz Bancorp's
capital position and business plan, the value of the consideration offered and
the treatment of the Northern Bank loan portfolio.
RECOMMENDATION OF NORTHERN BANK'S BOARD OF DIRECTORS (SEE PAGE 35)
Northern Bank's board of directors voted unanimously to approve the merger
agreement because it believes that the proposed merger is in the best interest
of Northern Bank and its shareholders and is fair to Northern Bank's
shareholders economically and otherwise. Therefore, the Northern Bank board of
directors recommends unanimously that Northern Bank shareholders vote "FOR"
approval of the merger.
OPINION OF NORTHERN BANK'S FINANCIAL ADVISOR (SEE PAGE 38)
Northern Bank retained D.A. Davidson & Co. to act as its financial advisor
in connection with the merger. D.A. Davidson & Co. has delivered to the Northern
Bank board of directors a written opinion stating that the terms of the merger
are fair to Northern Bank's shareholders from a financial point of view. The
full text of the D.A. Davidson & Co. opinion, which sets forth the assumptions
on which D.A. Davidson & Co. relied and the limitations of its opinion, is
attached as Appendix D to this joint proxy statement.
INTERESTS OF NORTHERN BANK'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
(SEE PAGE 52)
In considering the recommendation of Northern Bank's board of directors to
approve the merger you should be aware that some executive officers and
directors of Northern Bank have employment and other compensation agreements or
plans that may give them interests in the merger that are somewhat different
from, or in addition to, the interests of other Northern Bank shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 54)
As discussed further below, the tax consequences of the merger depend in
large part on the aggregate actual market value of the Cowlitz Bancorp stock
that will be issued in the merger in relation to the amount of cash paid by
Cowlitz Bancorp. See discussion below under "The Merger Consideration." Because
both the number of Cowlitz Bancorp shares that will be issued to the Northern
Bank shareholders and the value of those shares will not be known until the
effective date of the merger, the tax consequences of the merger will not be
known at the time of the shareholder meetings. If the merger meets certain
requirements discussed below under the heading "Certain Federal Income Tax
Consequences," it can qualify as a partially tax-free reorganization. It is not
known at this time whether these requirements will be met. If they are not met,
the tax consequences of the merger will be different and, in some cases,
materially less favorable to Northern Bank shareholders than the tax
consequences of a merger that qualifies as a partially tax-free reorganization.
Therefore, in considering whether to vote for or against the merger, you should
consider the possibility that the merger may be treated as a fully taxable
transaction.
If the merger qualifies as a reorganization, generally:
- no gain or loss will be recognized by Cowlitz Bancorp, Cowlitz Bank or
Northern Bank as a result of the merger;
5
- Northern Bank shareholders whose tax basis in their Northern Bank shares
is less than the total value of Cowlitz Bancorp stock and cash they
receive in the merger will recognize gain on the merger, but the amount of
gain these shareholders will recognize will not exceed the amount of cash
they receive (including their pro rata share of the cash consideration
placed into escrow on behalf of the Northern Bank shareholders);
- Northern Bank shareholders will not recognize loss on the merger.
For more detailed information you should review the discussion of federal
income tax consequences to shareholders under the heading a "Partially Tax Free
Reorganization" beginning on page 56.
If the merger does not qualify as a reorganization, generally:
- no gain or loss will be recognized by Cowlitz Bancorp or Cowlitz Bank;
- Northern Bank will be treated as selling all of its assets to Cowlitz Bank
in a taxable sale and will realize gain or loss, with all taxes due on any
gain as a result of the merger to be paid by Cowlitz Bancorp and Cowlitz
Bank;
- Northern Bank shareholders will recognize gain or loss in an amount equal
to the total value of the merger consideration they receive less their tax
basis in the Northern Bank shares exchanged in the merger.
For more detailed information about the tax consequences of the merger if it
does not meet the requirements of a reorganization, you should review the
discussion of federal income tax consequences to shareholders under the heading
"Taxable Transaction" beginning on page 58. This summary addresses only U.S.
federal income taxes. This summary does not address other taxes which may be
relevant to Northern Bank shareholders, such as state, local or foreign taxes.
In addition, the tax consequences described above and elsewhere in this document
may not apply equally to all Northern Bank shareholders and are subject to the
limitations discussed on pages 54 and 55. The tax consequences of the merger to
a Northern Bank shareholder will depend on the facts of his or her own
situation. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS FOR A FULL UNDERSTANDING
OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. Following closing, Cowlitz Bancorp
will advise former Northern Bank shareholders as to the final breakdown of the
value of the merger consideration between cash and Cowlitz Bancorp stock and how
it intends to treat the merger for federal income tax purposes. The treatment by
Cowlitz Bancorp is not binding on the former Northern Bank shareholders, who
should consult their own tax advisors regarding this determination and the
corresponding tax consequences.
CONDITIONS TO THE COMPLETION OF MERGER (SEE PAGE 44)
Completion of the merger depends on a number of conditions being satisfied,
including the following:
- the Northern Bank shareholders must have approved the merger and Cowlitz
Bancorp shareholders must have approved the issuance of shares in the
merger;
- we must have received all required regulatory approvals and all statutory
waiting periods must have expired;
- there must be no statute, rule, regulation, order, injunction or decree
prohibiting or restricting the merger;
- no stop order shall have been issued suspending the effectiveness of the
registration statement of which this joint proxy statement is a part, and
no proceedings for that purpose shall have been initiated or threatened by
the SEC;
- the Cowlitz Bancorp shares to be issued in the merger must be authorized
for listing on The Nasdaq National Market;
- Cowlitz Bancorp shall have received assurances from the FDIC and the
Director of the Department of Consumer and Business Services of the State
of
6
Oregon that certain cease and desist orders issued with respect to
Northern Bank will not be applicable to Cowlitz Bank as the surviving bank
in the merger;
- Northern Bank's total deposits at the effective date of the merger must be
equal to at least 80% of its total deposits as of June 30, 1999 and must
have substantially similar interest rates and deposit mix as those
deposits Northern Bank had on June 30, 1999; and
- Northern Bank's total shareholders' equity as of the effective date of the
merger must be at least $1,150,000.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 46)
Cowlitz Bancorp and Northern Bank may terminate the merger agreement by
mutual consent. The merger agreement may also be terminated unilaterally by
either Cowlitz Bancorp or Northern Bank if any of several conditions occur.
REGULATORY APPROVALS REQUIRED FOR THE MERGER (SEE PAGE 46)
Cowlitz Bancorp and Northern Bank must obtain the approval of the FDIC. In
addition, they have identified Washington and Oregon as states in which filings
or prior regulatory approval are required. Cowlitz Bancorp and Northern Bank are
in the process of obtaining these approvals and filing these notices.
TERMINATION FEES (SEE PAGE 47)
The merger agreement requires Northern Bank to pay a $425,000 termination
fee to Cowlitz Bancorp if the merger agreement terminates under a number of
specified circumstances.
STOCK OPTION AGREEMENT (SEE PAGE 48)
Cowlitz Bancorp and Northern Bank have entered into an option agreement that
permits Cowlitz Bancorp under a number of specified circumstances to purchase
shares of Northern Bank common stock representing 19.9% of the total number of
outstanding shares of Northern Bank common stock at a price of $4.625 per share.
Cowlitz Bancorp's total profit under the option agreement is limited to $425,000
before taxes.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 51)
Cowlitz Bancorp will account for the merger as a purchase in accordance with
generally accepted accounting principles. This means that Northern Bank's
assets, including intangible assets, and liabilities will be recorded at their
fair values as of the effective date of the merger. Any excess of the merger
consideration over the fair values of Northern Bank's assets and liabilities
will be recorded as intangible asset and amortized over a fifteen year period.
Accordingly, any income (or loss) of Northern Bank prior to the effective date
of the merger will not be included in Cowlitz Bancorp's income statement.
APPRAISAL RIGHTS (SEE PAGE 52)
Under Oregon law, Northern Bank shareholders who dissent from the merger are
entitled to appraisal and payment for their shares under the rules provided in
Sections 711.175 to 711.185 of the Oregon Revised Statutes. If more than five
percent (5%) of the Northern Bank shareholders dissent from the merger, Cowlitz
Bancorp may unilaterally terminate the merger agreement.
7
SUMMARY FINANCIAL DATA OF COWLITZ BANCORP
Cowlitz Bancorp is providing the following information to aid you in your
analysis of the financial aspects of the merger. Cowlitz Bancorp derived the
information for the years ended, and as of, December 31, 1994 through
December 31, 1998 from its historical audited financial statements for these
fiscal years. Cowlitz Bancorp derived the financial information for the nine
months ended September 30, 1998 and September 30, 1999, and as of September 30,
1999, from its unaudited financial statements that include, in the opinion of
management, all normal and recurring adjustments that management considers
necessary for a fair statement of the results. The operating results for the
nine months ended September 30, 1999 do not necessarily indicate the results
that may be expected for the year ending December 31, 1999. This information is
only a summary and you should read it in conjunction with Cowlitz Bancorp's
consolidated financial statements and related notes contained in Appendix A to
this joint proxy statement.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income...................... $ 12,446 $ 12,074 $ 16,366 $ 15,086 $ 13,633 $ 10,644 $ 7,492
Interest expense..................... 4,190 4,954 6,501 6,943 6,174 4,548 2,841
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................. 8,256 7,120 9,865 8,143 7,459 6,096 4,651
Provision for loan losses............ 1,065 243 509 375 281 694 533
Noninterest income................... 1,200 734 978 749 296 877 287
Noninterest expense.................. 7,499 5,034 6,927 5,284 3,682 3,093 2,363
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes,
extraordinary items, cumulative
effect of accounting changes, and
minority interest.................. 892 2,577 3,407 3,233 3,792 3,186 2,042
Income taxes......................... 341 876 1,181 1,109 1,295 1,088 697
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 551 $ 1,701 $ 2,226 $ 2,124 $ 2,497 $ 2,098 $ 1,345
Basic earnings per share............. $ .14 $ .47 $ 0.60 $ 0.82 $ 0.97 $ 0.83 $ 0.78
Diluted earnings per share........... $ .13 $ .44 $ 0.57 $ 0.78 $ 0.97 $ 0.83 $ 0.78
Average number of shares used to
calculate earnings per share:
Basic............................ 4,046,872 3,619,488 3,715,901 2,601,650 2,586,711 2,514,769 1,723,733
Diluted.......................... 4,104,249 3,822,607 3,894,095 2,711,512 2,586,711 2,514,769 1,723,733
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets.......................................... $182,746 $178,345 $173,293 $159,157 $131,348 $94,728
Investment securities........................... $ 13,026 $ 11,530 $ 8,481 $ 5,391 $ 3,263 $ 3,565
Loans, net...................................... $138,539 $130,232 $129,993 $124,657 $105,900 $75,564
Deposits........................................ $122,860 $122,361 $136,209 $123,297 $106,371 $81,083
Borrowings...................................... $ 26,927 $ 24,074 $ 22,625 $ 23,392 $ 15,018 $ 8,161
Shareholders' equity............................ $ 31,839 $ 30,920 $ 13,887 $ 11,813 $ 9,391 $ 5,182
8
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
OTHER FINANCIAL DATA
Return on average assets............................. .43% 1.26% 1.24% 1.28% 1.75% 1.90% 1.57%
Return on average shareholders' equity............... 2.35% 8.94% 8.34% 16.65% 23.93% 26.06% 30.21%
Cash dividends:
Dividend payout ratio per common share............. 38.46% 9.09% 10.53% 6.41% 4.12% 3.61% 3.85%
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
Total shareholders' equity as a percentage of total
assets.................................................. 17.42% 17.34% 8.01% 7.42% 7.15% 5.47%
Nonperforming assets as a percentage of total assets...... 1.67% 1.86% 1.39% .36% .25% .22%
Allowance for loan losses as a percentage of:
Nonaccrual loans........................................ 69.73% 66.28% 103.85% 465.36% 743.88% 643.58%
Nonperforming assets.................................... 68.48% 54.66% 81.51% 328.82% 540.80% 548.57%
9
SUMMARY FINANCIAL DATA OF NORTHERN BANK
Northern Bank is providing the following information to aid you in your
analysis of the financial aspects of the merger. Northern Bank derived the
information for the periods ended, and as of, December 31, 1994 through
December 31, 1998 from its historical audited financial statements for those
fiscal periods. Northern Bank derived the financial information for the nine
months ended September 30, 1998 and September 30, 1999 and as of September 30,
1999, from its unaudited financial statements that include, in the opinion of
management, all normal and recurring adjustments that management considers
necessary for a fair statement of the results. Northern Bank also has included
in the following section entitled "Recent Developments" unaudited balance sheet,
statement of operations, statement of cash flows and statement of changes in
shareholder equity as of and for the eleven month period ended November 30,
1999. The operating results for the nine months ended September 30, 1999 and the
eleven months ended November 30, 1999 do not necessarily indicate the results
that may be expected for the year ending December 31, 1999. This information is
only a summary and you should read it in conjunction with Northern Bank's
financial statements and related notes contained in Appendix B to this joint
proxy statement.
PERIOD FROM
NINE MONTHS INCEPTION
ENDED (AUGUST 22,
SEPTEMBER 30, YEAR ENDED DECEMBER 31, 1994) TO
--------------------- --------------------------------------------- DECEMBER 31,
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income............................ $ 4,692 $ 3,763 $ 5,158 $ 3,974 $ 3,327 $ 1,567 $ 129
Interest expense........................... 1,949 1,539 (2,152) (1,623) (1,347) (474) (9)
--------- --------- --------- --------- --------- --------- ---------
Net interest income........................ 2,743 2,224 3,006 2,351 1,980 1,093 120
Provision for loan losses.................. 779 75 (683) (205) (99) (135) (11)
Noninterest income......................... 100 63 184 229 32 2 --
Noninterest expense........................ 2,260 1,740 (2,409) (2,067) (2,073) (1,706) (521)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary items, cumulative effect of
accounting changes, and minority
interest................................. (196) 472 98 308 (160) (746) (412)
Income taxes (Benefit)..................... -- (139) 22 119 195 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ (196) $ 333 $ 120 $ 427 $ 35 $ (746) $ (412)
Basic earnings (loss) per share............ $ (0.16) $ 0.28 $ 0.10 $ 0.37 $ 0.03 $ (0.65) $ (0.36)
Diluted earnings (loss) per share.......... $ (0.16) $ 0.24 $ 0.09 $ 0.32 $ 0.03 $ (0.65) $ (0.36)
Average number of shares used to calculate
net earnings (loss) per share:
Basic.................................... 1,225,597 1,178,982 1,194,517 1,152,820 1,150,672 1,150,672 1,150,672
Diluted.................................. 1,225,597 1,389,026 1,325,517 1,353,413 1,150,672 1,150,672 1,150,672
DECEMBER 31, (PARTIAL YEAR)
SEPTEMBER 30, ----------------------------------------- --------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets.................................... $60,987 $61,140 $44,530 $41,746 $23,849 $6,871
Investment securities..................... $ 4,720 $ 1,108 $ 2,048 $ 6,224 $ 3,790 $4,680
Loans, net................................ $49,012 $50,508 $40,702 $30,562 $17,969 $ 800
Deposits.................................. $56,024 $56,223 $40,206 $37,952 $20,085 $2,420
Borrowings................................ -- -- -- -- -- --
Shareholders' equity...................... $ 4,509 $ 4,735 $ 4,212 $ 3,726 $ 3,686 $4,433
10
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31, (PARTIAL YEAR)
------------------- ----------------------------------------- --------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------------
OTHER FINANCIAL DATA
Return on average assets.................. (0.38)% 0.86% 0.22% 1.02% 0.11% (3.56)% (25.59)%
Return on average shareholders' equity.... (5.51)% 9.93% 2.59% 10.83% 0.98% (16.19)% (36.34)%
Cash dividends:
Dividend payout ratio per common
share................................. 0% 0% 0% 0% 0%
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
Total shareholders' equity as a percentage
of total assets......................... 7.39% 7.74% 9.46% 8.93% 15.46% 64.52%
Nonperforming assets as a percentage of
total assets............................ 2.87% 1.83% 0.11% -- -- --
Reserve for loan losses as a percentage
of:
Nonaccrual loans.......................... 502.57% 241.99% -- -- -- --
Nonperforming assets...................... 107.63% 98.53% 836.62% -- -- --
11
RECENT DEVELOPMENTS
NORTHERN BANK OF COMMERCE
BALANCE SHEET
(UNAUDITED)
NOVEMBER 30, 1999
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks................................... $ 3,225
Federal funds sold........................................ 6,400
-------
Total cash and cash equivalents......................... 9,625
Investment securities, available-for-sale................. 4,722
Loans, net of unearned income and allowance for loan
losses.................................................. 42,506
Accrued interest receivable and other assets.............. 1,065
-------
Total assets............................................ $57,918
=======
LIABILITIES
Demand deposits........................................... $10,084
Money market and other interest-bearing accounts.......... 20,774
Time deposits............................................. 22,804
-------
Total deposits.......................................... 53,662
Accrued interest payable and other liabilities............ 208
-------
Total liabilities....................................... 53,870
SHAREHOLDERS' EQUITY
Common stock.............................................. 1,225
Surplus................................................... 2,961
Accumulated losses........................................ (109)
Accumulated other comprehensive losses, net of taxes...... (29)
-------
Total shareholders' equity.............................. 4,048
-------
Total liabilities and shareholders' equity.............. $57,918
=======
12
NORTHERN BANK OF COMMERCE
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Interest and fees on loans................................ $5,081
Interest on available-for-sale securities................. 123
Interest on fed funds sold................................ 369
------
Total interest income................................... 5,573
INTEREST EXPENSE
Interest on deposits...................................... 2,323
------
Net interest income..................................... 3,250
PROVISION FOR LOAN LOSSES................................... 1,079
------
Net interest income after provision for loan losses..... 2,171
NONINTEREST INCOME
Service charges and fees.................................. 110
Other income.............................................. 44
------
Total noninterest income................................ 154
NONINTEREST EXPENSE
Salaries and related payroll expenses..................... 1,301
Net occupancy............................................. 227
Data processing........................................... 269
Advertising and promotional............................... 124
Communications............................................ 97
Professional fees......................................... 241
Supplies.................................................. 55
Other expenses............................................ 668
------
Total noninterest expenses.............................. 2,982
LOSS BEFORE INCOME TAXES.................................... (657)
INCOME TAX EXPENSE.......................................... --
------
NET LOSS.................................................... $ (657)
======
BASIC LOSS PER SHARE OF COMMON STOCK........................ $(0.46)
======
DILUTED LOSS PER SHARE OF COMMON STOCK...................... $(0.46)
======
13
NORTHERN BANK OF COMMERCE
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (657)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................. 71
Provision for loan losses................................... 1,079
Increase (decrease) in cash due to changes in certain assets
and liabilities:
Accrued interest receivable and other assets................ (249)
Accrued interest payable and other liabilities.............. 154
-------
Net cash from operating activities...................... 398
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale investment securities....... (3,660)
Net decrease in loans....................................... 8,302
Payments made for purchase of premises, furniture and
equipment................................................. (71)
-------
Net cash from investing activities...................... 4,571
-------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposit accounts............................ (2,561)
-------
Net cash from financing activities...................... (2,561)
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,408
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD.......... 7,217
-------
CASH AND CASH EQUIVALENTS, ENDING OF PERIOD................. $ 9,625
=======
14
NORTHERN BANK OF COMMERCE
STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE ELEVEN MONTHS
ENDED NOVEMBER 30, 1999
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------- ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SURPLUS LOSSES INCOME EQUITY
-------- -------- -------- ----------- ------------- -------------
Balance, December 31, 1998.............. 1,225 $1,225 $2,961 $ 548 $ 1 $4,735
Net loss................................ (657) (657)
Unrealized loss on available-for-sale
securities............................ (30) (30)
------
Total comprehensive loss.............. (687)
----- ------ ------ ----- ---- ------
Balance, November 30, 1999.............. 1,225 $1,225 $2,961 $(109) $(29) $4,048
===== ====== ====== ===== ==== ======
FINANCIAL CONDITION AS OF NOVEMBER 30, 1999:
As of November 30, 1999, Northern Bank's total assets were $57,918,000
compared to total assets of $60,987,000 on September 30, 1999 and $61,140,000 on
December 31, 1998. This represents a decline in total assets of 5.03% from
September 30, 1999 and 5.27% from December 31, 1998. At the same time, book
value per common share decreased from $3.86 at December 31, 1998 to $3.68 on
September 30, 1999, and to $3.30 as of November 30, 1999.
The decrease in total assets is almost entirely attributable to a decline in
Northern Bank's net loan portfolio, which decreased from $50,508,000 as of
December 31, 1998 to $49,012,000 as of September 30, 1999, and further decreased
to $42,506,000 on November 30, 1999. The loan portfolio decline has been caused
by a general decrease in the portfolio during the period December 31, 1998
through November 30, 1999 and by the need for an increase to the allowance for
loan losses over the same period. From December, 1998 through November, 1999,
total gross loans have declined $7,597,000 or 14.70%. Of this amount,
approximately $674,000 is from charge-off of loans against the allowance for
loan losses, and $6,923,000 has been caused by net repayments from Northern
Bank's loan customers. In addition, during the eleven month period ended
November 30, 1999, Northern Bank increased its allowance for loan losses by
$1,079,000 such that the balance in the allowance for loan losses was 3.43% of
gross outstanding loans as of November 30, 1999, compared to 2.14% as of
December 31, 1998.
The decline in Northern Bank's loan portfolio was partially offset by
increases in federal funds sold and investment securities over the period from
December 31, 1998 to November 30, 1999. As of December 31, 1998, Northern Bank
had $4,783,000 in federal funds sold and available-for-sale investment
securities. These balances increased 50.95% to $7,220,000 as of September, 1999
and increased by 132.53% to $11,122,000 as of November 30, 1999. The increased
liquidity that this has provided Northern Bank was nearly entirely due to the
loan portfolio decrease experienced during the same period.
Northern Bank also has experienced some decreases in deposits, but at a
lesser rate than in its loan portfolio. As of December 31, 1998, total deposits
were $56,223,000. This compares to balances of $56,024,000 as of September 30,
1999 and $53,998,000 as of November 30, 1999 and represents declines
15
of 0.35% for the nine-month period ended September 30, 1999 and 3.96% for the
eleven months ended November 30, 1999. Northern Bank's experience in the decline
of its loan portfolio and its customers' reactions to regulatory findings, have
contributed to the decline in depository account balances.
As of December 31, 1998, shareholders' equity was $4,735,000 but declined to
$4,048,000 as of November 30, 1999. The decline from December 31, 1998 through
November 30, 1999 was the result of Northern Bank incurring net losses of
$657,000 and its experiencing a market decline in its investment portfolio of
$30,000, net of taxes, for the eleven months then ended. As of November 30,
1999, Northern Bank's leverage ratio, which is total shareholders' equity
divided by total assets, was 6.97%, which represents a decline from its
December 31, 1998 ratio of 7.74%. This decline in shareholders' equity impacts
Northern Bank's ability to grow its asset base and further limits the amount it
may lend to a single borrower.
RESULTS OF OPERATIONS FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1999:
For the eleven months ended November 30, 1999, Northern Bank earned interest
income of $5,573,000, which represented an annualized yield on total earning
assets of 9.45% compared to 10.03% for the year ended December 31, 1998.
Interest expense for the eleven months ended November 30, 1999 was $2,323,000,
which represented annualized interest expense on total interest-bearing
liabilities of 4.95% compared to 5.31% for the year ended December 31, 1998.
These resulted in net interest income for the period ended November 30, 1999 of
$3,250,000 and an annualized net interest margin of 4.50% compared to 4.73% for
the year ended December 31, 1998.
Northern Bank recorded $1,079,000 in its provision for loan losses for the
eleven-month period ending November 30, 1999, which is $396,000 greater than the
$683,000 recorded for the full year ended December 31, 1998. Nevertheless, the
increase in the provision for loan losses reflects management's re-evaluation
and close assessment of potential losses currently estimated in Northern Bank's
loan portfolio. This increase also contributed to the decline in Northern Bank's
net interest income after the provision for loan losses, which was $2,171,000
for the eleven months ended November 30, 1999 compared to $2,324,000 for the
year ended December 31, 1998.
On an annualized basis, noninterest income has been consistent in 1999
compared to the 1998 fiscal year. On the other hand, noninterest expenses have
significantly increased through November 30, 1999 as compared to the year ended
December 31, 1998. In 1998, noninterest expenses were $2,409,000 but increased
to $2,982,000 for the eleven months ended November 30, 1999 or $573,000 and
23.79%. Management attributes the increase in noninterest expenses to several
factors: increased salaries and benefits to enhance Northern Bank's lending and
operational activities; costs associated with Year 2000 compliance; and,
significant costs associated with the proposed Cowlitz Bank merger transaction.
For the eleven months ended November 30, 1999, Northern Bank's noninterest
expenses to total revenues were 52.06%, which compares to a ratio of 45.10% for
the year ended December 31, 1998.
These increases in the provision for loan losses and noninterest expenses
together with a decline in net interest margin have been primarily responsible
for Northern Bank incurring net losses of $657,000, or $.46 per common share,
for the eleven months ended November 30, 1999. These losses compare to net
income of $120,000, or $.09 per diluted common share that was reported for the
year ended December 31, 1998.
16
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth certain selected historical financial data
for Cowlitz Bancorp and Northern Bank and selected pro forma combined financial
data. The pro forma amounts included in the table below give effect to the
merger, accounted for as a purchase as if it had been completed on January 1,
1998 for income statement information and September 30, 1999 for balance sheet
information.
This information should be read in conjunction with and is qualified in its
entirety by reference to the consolidated financial statements and related notes
for Cowlitz Bancorp contained in Appendix A, the consolidated financial
statements and related notes of Northern Bank contained in Appendix B, and the
pro forma combined financial statements and accompanying discussion and notes
set forth under "Pro Forma Combined Financial Information." The pro forma
amounts in the table below are presented for informational purposes and are not
necessarily indicative of the financial position or the results of operations of
the combined company that actually would have occurred had the merger been
completed as of the dates or for the periods presented. The pro forma amounts
are also not necessarily indicative of the future financial position or future
results of operations of the combined company. See "Management and Operations of
Cowlitz Bancorp Following the Merger--Operations After the Merger."
HISTORICAL HISTORICAL
--------------------- ---------------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------- PRO FORMA --------------------- PRO FORMA
COWLITZ NORTHERN COMBINED COWLITZ NORTHERN COMBINED
--------- --------- --------- --------- --------- ---------
Interest income................. $ 12,446 $ 4,692 $ 17,138 $ 16,366 $ 5,158 $ 21,524
Interest expense................ 4,190 1,949 6,139 6,501 2,152 8,653
--------- --------- --------- --------- --------- ---------
Net interest income............. 8,256 2,743 10,999 9,865 3,006 12,871
Provision for loan losses....... 1,065 779 1,844 509 683 1,192
Noninterest income.............. 1,200 100 1,300 978 184 1,162
Noninterest expense............. 7,499 2,260 9,921 6,927 2,409 9,552
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes, extraordinary items,
cumulative effect of
accounting changes, and
minority interest............. 892 (196) 534 3,407 98 3,289
Income taxes (Benefit).......... 341 -- 266 1,181 (22) 1,159
--------- --------- --------- --------- --------- ---------
Net income (loss)............... $ 551 $ (196) $ 268 $ 2,226 $ 120 $ 2,130
========= ========= ========= ========= ========= =========
Basic earnings (loss) per
share......................... $ 0.14 $ (0.16) $ .04 $ 0.60 $ 0.10 $ 0.46
Diluted earnings (loss) per
share......................... $ 0.13 $ (0.16) $ .04 $ 0.57 $ 0.09 $ 0.44
Average number of shares used to
calculate earnings (loss) per
share:
Basic......................... 4,046,872 1,225,597 4,960,047 3,715,901 1,194,517 4,629,076
Diluted....................... 4,104,249 1,225,597 5,017,424 3,894,095 1,325,517 4,808,036
SEPTEMBER 30, 1999
------------------- PRO FORMA
COWLITZ NORTHERN COMBINED
-------- -------- ---------
Assets...................................................... $182,746 $60,987 $245,047
Investment securities....................................... $ 13,026 $ 4,720 $ 17,746
Loans, net.................................................. $138,539 $49,012 $187,551
Deposits.................................................... $122,860 $56,024 $178,884
Borrowings.................................................. $ 26,927 $ -- $ 26,927
Shareholders' equity........................................ $ 31,839 $ 4,509 $ 37,279
17
SELECTED UNAUDITED COMPARATIVE PER SHARE DATA
The following table shows certain per share data of Cowlitz Bancorp common
stock and Northern Bank common stock on an historical basis and a pro forma and
pro forma equivalent basis reflecting the merger. This information is only a
summary and you should read it in conjunction with the financial information
appearing elsewhere in this joint proxy statement. The per share pro forma data
in the following table are presented for comparative purposes only and are not
necessarily indicative of the combined financial position or results of
operations in the future or what the combined financial position or results of
operations would have been had the merger been completed during the period or as
of the date for which this pro forma table is presented.
AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------- ------------------------
COWLITZ BANCORP COMMON STOCK
Book value per share
Historical.................................. $ 7.79 $7.73
Pro forma................................... $ 7.45 $7.50
Cash dividends per share
Historical.................................. $ 0.05 $0.06
Pro forma................................... $ 0.05 $0.06
Net income per basic share
Historical.................................. $ 0.14 $0.60
Pro forma................................... $ 0.04 $0.46
Net income per diluted share
Historical.................................. $ 0.13 $0.57
Pro forma................................... $ 0.04 $0.44
NORTHERN BANK COMMON STOCK
Book value per share
Historical.................................. $ 3.68 $3.86
Pro forma equivalent(1)..................... $ 4.81 $4.85
Cash dividends per share
Historical.................................. -- --
Pro forma equivalent(1)..................... $ 0.03 $0.04
Net income (loss) per basic share
Historical.................................. $(0.16) $0.10
Pro forma equivalent(1)..................... $ 0.03 $0.30
Net income (loss) per diluted share
Historical.................................. $(0.16) $0.09
Pro forma equivalent(1)..................... $ 0.03 $0.28
- --------------------------
(1) The Northern Bank pro forma equivalent per share amounts are calculated by
multiplying the Cowlitz Bancorp pro forma per share amounts by an assumed
exchange ratio of 0.646046 at November 30, 1999. The merger agreement
provides that the exchange ratio will be determined using a formula based on
Northern Bank's shareholders' equity at closing. See "The Merger--Reductions
to Stock Consideration Based on Northern Bank's Shareholders' Equity and
Loan Portfolio." At November 30, 1999, Northern Bank's shareholders' equity
(as adjusted for estimated closing expenses of $158,000) was $3,889,967. The
calculation of the exchange ratio is as follows:
4,718,841 - 3,889,967
--------------------
Equity Adjustment Amount = 1.75 X 1,225,597 = 1.18
Stock Consideration = $5.42 - 1.18 = $4.24
4.24
Exchange Ratio = ---- = 0.646046
6.563
18
COMPARATIVE MARKET PRICES AND DIVIDEND INFORMATION
The table below sets forth, for the periods indicated, historical high and
low closing sales price information for Cowlitz Bancorp common stock and
Northern Bank common stock. Cowlitz Bancorp common stock commenced trading on
The Nasdaq National Market on March 12, 1998 under the symbol "CWLZ." Northern
Bank common stock trades on The Nasdaq Small Cap Market under the symbol "NBOC."
COWLITZ BANCORP NORTHERN BANK
COMMON STOCK COMMON STOCK
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
1997
First Quarter............................................... $ 6.50 $5.25
Second Quarter.............................................. 6.50 5.63
Third Quarter............................................... 8.25 5.81
Fourth Quarter.............................................. 11.75 7.63
1998
First Quarter............................................... $13.19 $12.00 $10.88 $8.75
Second Quarter.............................................. 14.13 11.88 9.88 7.75
Third Quarter............................................... 12.13 7.75 9.63 8.00
Fourth Quarter.............................................. 9.00 7.25 8.88 6.94
1999
First Quarter............................................... $ 8.00 $ 6.44 $ 8.00 $5.75
Second Quarter.............................................. 7.13 6.00 7.50 6.00
Third Quarter............................................... 7.00 5.13 6.38 4.00
Fourth Quarter.............................................. 6.50 4.88 4.63 3.81
RECENT CLOSING PRICES
The following table sets forth the closing sale price per share of Cowlitz
Bancorp common stock and Northern Bank common stock, and the equivalent per
share price for the Northern Bank common stock (which is the closing sale price
of Cowlitz Bancorp common stock multiplied by an assumed exchange ratio of
0.646046 shares of Cowlitz Bancorp common stock based on Northern Bank's
shareholders' equity as of November 30, 1999 (as adjusted for estimated closing
expenses of $158,000) shown with and without the $1.63 per share cash portion of
the merger consideration) as of September 13, 1999 (the last full trading day
before the public announcement of the merger) and January 7, 2000 (the last full
trading day for which it was practicable to obtain such information prior to the
mailing of this joint proxy statement):
EQUIVALENT
PRICE PER SHARE
-----------------------------
COWLITZ BANCORP NORTHERN BANK WITHOUT CASH WITH CASH
COMMON STOCK COMMON STOCK CONSIDERATION CONSIDERATION
--------------- --------------- ------------- -------------
September 13, 1999............................... $5.25 $ 4.63 $3.39 $5.02
January 7, 2000.................................. $4.94 $ 3.75 $3.19 $4.82
19
You are urged to obtain current market quotations for Cowlitz Bancorp common
stock and Northern Bank common stock. Because the number of shares of Cowlitz
Bancorp common stock to be exchanged for each share of Northern Bank common
stock is based on a fixed value for Cowlitz Bancorp common stock of $6.563, any
decrease in the market price of Cowlitz Bancorp common stock before the
effective date of the merger will reduce the market value of the stock
consideration to be received by Northern Bank shareholders in the merger.
Conversely, an increase above that price will increase the market value of the
stock consideration.
DIVIDEND INFORMATION
The following sets forth dividends paid by Cowlitz Bancorp on a per share
basis:
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
First Quarter.......................................... $.015 $.013 $.010
Second Quarter......................................... .018 .015 .013
Third Quarter.......................................... .018 .015 .013
Fourth Quarter......................................... -- .015 .013
Cowlitz Bancorp's board of directors' dividend policy is to review Cowlitz
Bancorp's financial performance, capital adequacy, regulatory compliance and
cash resources, and if such review is favorable, to declare and pay a cash
dividend to shareholders quarterly. Although Cowlitz Bancorp anticipates paying
a regular quarterly cash dividend, future dividends are subject to these
limitations and to the discretion of Cowlitz Bancorp's board of directors, and
may be reduced or eliminated. Cowlitz Bancorp's ability to pay cash dividends to
its shareholders is dependent on earnings generated by Cowlitz Bank and Cowlitz
Bancorp's other subsidiaries. Washington and federal banking laws and
regulations place restrictions on the payment of dividends by a bank to its
shareholders.
Under Oregon law and its governing documents, Northern Bank's board of
directors has the authority to declare cash dividends out of surplus earnings.
However, Northern Bank's board of directors has never declared a cash dividend
and currently is prohibited from doing so by the cease and desist orders issued
by the FDIC and the Oregon Department of Consumer and Business Services, as
described in "Risk Factors-Northern Bank is operating under regulatory orders"
below. On March 31, 1998 Northern Bank declared a 15% stock dividend in the form
of a 11 1/2-for-10 stock split payable on April 20, 1998 to shareholders of
record on March 31, 1998.
20
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT BEFORE VOTING TO APPROVE THE
MERGER OR THE SHARE ISSUANCE NECESSARY TO COMPLETE THE MERGER. APPROVAL OF THE
MERGER BY NORTHERN BANK SHAREHOLDERS REPRESENTS AN INVESTMENT IN COWLITZ
BANCORP'S COMMON STOCK, AND THAT INVESTMENT INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION, THE MERGER POSES A NUMBER OF RISKS TO COWLITZ BANCORP SHAREHOLDERS
WHICH ARE ALSO DESCRIBED BELOW. ANY OF THE FOLLOWING FACTORS MAY SERIOUSLY HARM
BUSINESS AND RESULTS OF OPERATIONS OF COWLITZ BANCORP AFTER THE MERGER OR BE
DETRIMENTAL TO THE VALUE OF COWLITZ BANCORP COMMON STOCK AND THE CONSIDERATION
NORTHERN BANK SHAREHOLDERS RECEIVE IN THE MERGER. MOREOVER, IN DETERMINING
WHETHER TO APPROVE THE MERGER, NORTHERN BANK SHAREHOLDERS SHOULD CONSIDER A
NUMBER OF FACTORS RELATED TO NORTHERN BANK'S CURRENT FINANCIAL AND OPERATING
CONDITION THAT MIGHT IMPACT NORTHERN BANK IF THE MERGER DOES NOT OCCUR.
COWLITZ BANCORP HAS RECENTLY EXPANDED ITS BUSINESS AND ITS RESULTS OF OPERATIONS
MAY BE ADVERSELY AFFECTED.
Cowlitz Bancorp has recently acquired two mortgage companies and an escrow
company and has established a DE NOVO bank branch in the greater Seattle,
Washington area. If the merger is completed, Cowlitz Bancorp will acquire nine
Northern Bank branches in the greater Portland area. Cowlitz Bancorp has not
operated in Portland or Seattle before, and there is substantially more
competition in those areas than in Cowlitz Bancorp's present service area.
Cowlitz Bancorp does not know if the financial services Cowlitz Bancorp offers
will be profitable in the face of that competition. In addition, Cowlitz Bancorp
has added new management personnel in connection with these acquisitions and
will need to hire additional management personnel in the future. Cowlitz Bancorp
cannot assure you that it will be able to hire qualified additional personnel or
that its new management personnel will perform satisfactorily.
Cowlitz Bancorp's results of operations will be adversely affected in the
short term by the costs of these acquisitions and the start-up costs of the new
branches. Cowlitz Bancorp must amortize over future periods intangible assets
created in these acquisitions, and that amortization will adversely affect
Cowlitz Bancorp's future financial performance. Cowlitz Bancorp cannot assure
you that any of these businesses will be profitable or will provide a reasonable
return on Cowlitz Bancorp's investment in them. If these businesses are not
profitable or do not provide a reasonable return, Cowlitz Bancorp's long-term
profitability could be adversely affected.
THE ACQUISITION OF NORTHERN BANK MAY ADVERSELY AFFECT THE CREDIT QUALITY OF
COWLITZ BANCORP'S LOAN PORTFOLIO AND MAY REQUIRE COWLITZ BANCORP TO INCREASE
ITS ALLOWANCE FOR LOAN LOSSES.
Northern Bank is presently subject to cease and desist orders from the
Federal Deposit Insurance Corporation and the Oregon Department of Consumer and
Business Services that cited, among other problems, operating with a large
volume of poor quality loans, operating with an inadequate allowance for loan
and lease losses and following inadequate lending and lax collection practices.
As a result of these problems, the level of loan losses that Northern Bank's
loan portfolio will incur is uncertain. Cowlitz Bancorp and Northern Bank have
negotiated the terms of the merger agreement to minimize exposure to Cowlitz
Bancorp by providing for a purchase price adjustment and an escrow arrangement
described in "The Merger--Payments of Cash; Escrow Arrangements" below. However,
Northern Bank and Cowlitz Bancorp cannot assure you that the level of loan loss
reserves established by Northern Bank or the loss indemnification provided
through the escrow arrangement will be sufficient to protect Cowlitz Bancorp
against possible losses in the Northern Bank loan portfolio. If actual loan
losses are greater than Northern Bank's loan loss reserves, Cowlitz Bancorp will
be entitled in most cases to reimbursement from the escrow account. However, to
the extent actual loan losses exceed both loan loss reserves and the escrowed
funds, Cowlitz Bancorp's operations will be affected adversely and those effects
may be material.
21
THE MERGER MAY BE TAXABLE TO NORTHERN BANK SHAREHOLDERS AND TO NORTHERN BANK.
The actual purchase price for purposes of determining the merger
consideration will not be known prior to the Northern Bank shareholders'
meeting. Accordingly, we do not know as of the date of this joint proxy
statement the exact percentage of the merger consideration that will consist of
Cowlitz Bancorp stock. If a "substantial part" of the value of the aggregate
consideration paid to Northern Bank shareholders in the merger does not consist
of Cowlitz Bancorp stock, the merger may be fully taxable to Northern Bank and
to the Northern Bank shareholders. The exact proportion of the consideration
required to be paid in stock is unclear. For advance ruling purposes, the
Internal Revenue Service takes the position that the continuity of interest
requirement will be satisfied if at least 50% of the value of all of the
consideration payable in the merger consists of stock of the issuing
corporation. If the merger is taxable, a Northern Bank shareholder will
recognize gain or loss on the merger in an amount equal to the difference
between the total value of the merger consideration received by a shareholder
and the shareholder's basis in the Northern Bank stock exchanged in the merger.
In addition, Northern Bank will be treated as selling all of its assets to
Cowlitz Bank in a taxable sale and will recognize gain or loss with all taxes
due on any gain as a result of the merger to be paid by Cowlitz Bancorp. A
taxable transaction could have an adverse affect on Cowlitz Bancorp's results of
operations and shareholder's equity in 2000. In deciding whether to vote in
favor of the merger, NORTHERN BANK SHAREHOLDERS SHOULD CONSIDER BOTH THE
POSSIBILITY THAT THE TRANSACTION WILL BE FULLY TAXABLE TO THEM AND THE CONTRARY
POSSIBILITY THAT REORGANIZATION TREATMENT WILL ADVERSELY AFFECT THE
DEDUCTIBILITY OF ANY LOSSES THEY MAY HAVE. See "Federal Income Tax Consequences
of the Merger" for a discussion of the tax effects of the merger to Northern
Bank shareholders.
THE FINAL MERGER CONSIDERATION TO NORTHERN BANK SHAREHOLDERS WILL NOT BE
DETERMINED BEFORE THE NORTHERN BANK SHAREHOLDERS' MEETING.
The initial exchange value of Northern Bank stock in the merger agreement
was set at $7.05 per share, which was based on Northern Bank's shareholders'
equity at June 30, 1999, as calculated before Northern Bank restated its second
quarter earnings in September 1999. The amount of the stock merger consideration
will be reduced in accordance with a formula set forth in the merger agreement
if Northern Bank's shareholders' equity immediately prior to closing is less
than $4,718,841. As of November 30, 1999, Northern Bank's shareholders' equity
(as adjusted for estimated closing expenses of $158,000) was $3,889,967. If the
closing of the merger had occurred on that date, the total merger consideration
would be up to $5.28 per share and the stock portion of that merger
consideration would be $3.65 per share, based on the market price of Cowlitz
Bancorp's common stock on that date. Northern Bank's shareholders' equity, and,
consequently the relative value of Northern Bank stock, may be reduced based on,
among other things, any operating losses Northern Bank experiences after
November 30, 1999, including any additional provision for loan losses required
to be made under the merger agreement based on a review of Northern Bank's loan
portfolio that will be conducted prior to the effective date of the merger. The
loan review will be performed by a third party examiner, followed by a dispute
resolution process if Northern Bank disagrees with the examiner's analysis. If
it is determined that Northern Bank requires additional loan loss reserves in
excess of those established at November 30, 1999, then Northern Bank's
shareholders' equity will be reduced. Accordingly, at the time Northern Bank
shareholders vote to accept or reject the merger agreement, they will not know
the exact value that will be placed on their shares for purposes of the merger.
In addition to the shareholders' equity adjustment, the total merger
consideration for each Northern Bank share will also be reduced if the number of
outstanding Northern Bank shares increases prior to the effective date of the
merger. See "The Merger--The Merger Consideration."
WHETHER NORTHERN BANK SHAREHOLDERS ULTIMATELY RECEIVE ANY OF THE CASH
CONSIDERATION IN THE MERGER WILL DEPEND ON THE PERFORMANCE OF THE NORTHERN
BANK LOAN PORTFOLIO FOLLOWING THE MERGER.
All of the cash consideration payable to Northern Bank shareholders will be
placed in escrow to indemnify Cowlitz Bancorp for losses Cowlitz Bank suffers
during the two years after closing from
22
certain Northern Bank loans that will be identified before closing. The parties
expect closing to occur late in the first quarter of 2000. Cowlitz Bancorp will
be reimbursed from the escrow to the extent that losses on these loans exceed
thresholds established in the merger agreement, up to the aggregate amount held
in the escrow. Any amounts remaining in the escrow on the second anniversary of
the closing date, net of expenses that exceed accumulated interest on the
escrowed funds, will be distributed to the former Northern Bank shareholders. We
expect expenses to arise primarily from the escrow agent's charges and expenses
for administrative matters such as correspondence and tax reporting. These
expenses are expected to be nominal, and the parties believe interest will be
sufficient to cover them. The escrowed funds also may be used to offset losses
in excess of reserves on those identified loans where, in Cowlitz Bancorp's good
faith estimate, further losses are reasonably expected to occur following the
release of escrow. Northern Bank shareholders may not receive any of the cash
consideration if the loan losses exceed the loan loss reserve plus the escrowed
reserve. Installment sale reporting will not be available to defer the
recognition of gain with respect to the cash consideration paid to Northern Bank
shareholders in connection with the merger. As a result, the cash consideration
placed into the escrow account will be treated as received pro rata by the
Northern Bank shareholders at the time of the merger, and taken into account in
determining the amount of gain if any, (or the amount of loss in the case of a
fully taxable transaction) that will be recognized by a Northern Bank
shareholder for the shareholder's taxable year in which the merger takes place.
This will be the case even though the Northern Bank shareholders will not
receive any cash unless and until it is paid out of escrow, even though they
ultimately may receive less than all, or even none of the cash consideration.
See "Federal Income Tax Consequences of the Merger--Escrowed Cash."
THE VALUE OF COWLITZ BANCORP COMMON STOCK MAY BE LESS THAN ITS PRICE FOR
PURPOSES OF THE MERGER.
For purposes of determining the exchange ratio under the merger agreement,
Cowlitz Bancorp stock is valued at $6.563 per share in the merger agreement,
which was its closing price on June 30, 1999. The value of the merger
consideration to Northern Bank shareholders will therefore decrease if the price
of Cowlitz Bancorp stock at the effective date of the merger is less than $6.563
per share. As of January 7, 2000, the closing price of Cowlitz Bancorp common
stock was $4.938 per share.
NORTHERN BANK IS OPERATING UNDER REGULATORY ORDERS.
Northern Bank is currently operating under orders from the Oregon Department
of Consumer and Business Services and the Federal Deposit Insurance Corporation,
both issued on July 19, 1999. These orders require Northern Bank to take a
number of actions to address specific "unsafe and unsound" practices that
allegedly had occurred prior to that date. The orders, identified as "Cease and
Desist Orders," require Northern Bank, among other things, to improve its
management, improve the quality of its loan portfolio, adopt more specific loan
administration and collection procedures, and increase its capital reserves. The
merger is Northern Bank's principal method of complying with the orders and, if
the merger does not occur, Northern Bank will be required to adopt other
measures to meet the requirements of the orders. These other measures will
require Northern Bank to raise additional capital and hire experienced
management personnel. Northern Bank's management believes the costs of acquiring
additional capital would be prohibitive and can give no assurance capital would
be available on acceptable terms. Moreover, experienced bank managers are in
high demand and, as a result, the necessary personnel may not be available, or
Northern Bank may not be able to compensate them adequately to hire and retain
them. Finally, whether or not Northern Bank raises additional capital and
retains the necessary management personnel, many of the requirements set forth
in the orders would place heavy demands on management and the targets set in the
orders may be difficult to meet without the merger. If Northern Bank ultimately
fails to comply with the cease and desist orders, banking regulators may take a
number of actions that could be materially adverse to the financial interests of
Northern Bank shareholders, including taking control of the bank, appointing a
receiver, or forcing a sale of the bank or its assets. Any of these actions
could affect the value of Northern Bank's stock materially and adversely.
23
THE SPECIAL MEETINGS
GENERAL
This joint proxy statement is being furnished to Cowlitz Bancorp
shareholders in connection with the solicitation of proxies by the Cowlitz
Bancorp board of directors for use at the special meeting to be held at
7:00 p.m., local time on Thursday, February 17, 2000 at the Red Lion Hotel, 510
Kelso Drive, Kelso, Washington, and at any adjournments or postponements of that
meeting. This joint proxy statement is also being furnished to Northern Bank
shareholders in connection with the solicitation of proxies by the Northern Bank
board of directors for use at the special meeting to be held at 9:00 a.m., local
time on Thursday, February 17, 2000 at the University Club, 1225 SW 6th Avenue,
Portland, Oregon 97204, and at any adjournments or postponements of that
meeting.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
COWLITZ BANCORP. The purpose of the Cowlitz Bancorp special meeting is to
consider and vote upon a proposal to approve the issuance of up to 1,243,615
shares of Cowlitz Bancorp common stock in connection with a proposed merger of
Northern Bank into Cowlitz Bancorp's wholly-owned subsidiary, Cowlitz Bank.
NORTHERN BANK. The purpose of the Northern Bank special meeting is to
consider and vote on a proposal to approve the merger agreement dated
September 14, 1999, by and among Cowlitz Bancorp, Cowlitz Bancorp's wholly-owned
subsidiary, Cowlitz Bank, and Northern Bank, which provides for the merger of
Northern Bank into Cowlitz Bank.
RECORD DATE AND VOTING
COWLITZ BANCORP. The Cowlitz Bancorp board of directors has fixed
December 28, 1999 as the record date for determining Cowlitz Bancorp
shareholders entitled to notice of and to vote at the Cowlitz Bancorp special
meeting. At the close of business on the record date, there were approximately
4,022,052 shares of Cowlitz Bancorp common stock outstanding, held by
approximately 326 holders of record. Each share of Cowlitz Bancorp common stock
is entitled to one vote. Only shareholders of record at the close of business on
the Cowlitz Bancorp record date will be entitled to notice of and to vote at the
Cowlitz Bancorp special meeting.
NORTHERN BANK. The Northern Bank board of directors has fixed December 28,
1999 as the record date for determining the Northern Bank shareholders entitled
to notice of and to vote at the Northern Bank special meeting. At the close of
business on the record date, there were approximately 1,225,597 shares of
Northern Bank common stock outstanding, held by approximately 500 holders of
record. Each share of Northern Bank common stock is entitled to one vote. Only
Northern Bank shareholders of record at the close of business on the Northern
Bank record date will be entitled to vote at the Northern Bank special meeting.
PROXIES AND VOTING INSTRUCTIONS
COWLITZ BANCORP. All shares of Cowlitz Bancorp common stock represented by
proxies that are properly completed, dated and executed will be voted at the
Cowlitz Bancorp special meeting in the specified manner. If no specification is
made in a proxy, the shares of Cowlitz Bancorp common stock represented by that
proxy will be voted "FOR" approval of the issuance of common stock in the
merger. Brokers who hold shares in nominee or "street" name for customers who
are the beneficial owner may not give a proxy to vote these shares without
specific instructions from their customers. However, since only the vote of a
majority of the shares voting at the special meeting, provided a quorum is
present, is required to approve the issuance of shares necessary to complete the
merger, these broker non-votes will be disregarded and will have no effect on
the outcome of the vote on the share issuance.
24
As of the date of this joint proxy statement, the Cowlitz Bancorp board of
directors is not aware of any business to be acted upon at the Cowlitz Bancorp
special meeting other than approval of the share issuance. If, however, any
other matters properly come before the Cowlitz Bancorp special meeting, the
proxy also confers discretionary authority on the persons named as proxies to
vote upon these matters. Cowlitz Bancorp shareholders may revoke their proxies
at any time before they are exercised by:
- delivering written notice of revocation to the corporate secretary of
Cowlitz Bancorp;
- completing and submitting a later-dated proxy card; or
- attending the special meeting and voting in person.
Written revocation notices and other communications about proxies should be
addressed to Cowlitz Bancorporation, 927 Commerce Avenue, Longview, Washington
98632, Attention: Corporate Secretary.
NORTHERN BANK. All shares of Northern Bank common stock represented by
proxies that are properly completed, dated and executed will be voted at the
Northern Bank special meeting in the specified manner. If no specification is
made in a proxy, the shares of Northern Bank common stock represented by that
proxy will be voted "FOR" approval of the merger agreement. Brokers who hold
shares in nominee or "street" name for customers who are the beneficial owners
of those shares may not give a proxy to vote these shares without specific
instructions from their customers. Therefore, the failure of beneficial owners
of shares held in "street name" to give voting instructions to their broker will
result in a broker non-vote. Since approval of the merger agreement requires the
approval of two-thirds of the outstanding shares of Northern Bank stock, all
abstentions and broker non-votes will have the same effect as a "NO" vote on the
merger agreement.
As of the date of this proxy statement, the Northern Bank board of directors
is not aware of any business to be acted upon at the Northern Bank special
meeting other than the merger agreement. If, however, any other matters properly
come before the Northern Bank special meeting, the proxy also confers
discretionary authority on the persons named as proxies to vote upon those
matters. Northern Bank shareholders may revoke their proxies at any time before
they are exercised by:
- delivering written notice of revocation to the corporate secretary of
Northern Bank;
- completing and submitting a later-dated proxy card; or
- attending the special meeting and voting in person.
Written revocation notices and other communications about proxies should be
addressed to Northern Bank of Commerce, 1001 Southwest Fifth Avenue, Suite 250,
Portland, Oregon 97204, Attention: Corporate Secretary.
QUORUM; VOTES REQUIRED
COWLITZ BANCORP. The presence, in person or represented by proxy, of the
holders of a majority of the outstanding Cowlitz Bancorp shares will constitute
a quorum at the Cowlitz Bancorp special meeting. Shares of Cowlitz Bancorp
common stock that are present in person or represented by proxy will be counted
for purposes of determining whether a quorum exists regardless of whether the
holder of any of these shares fails to or abstains from voting on the share
issuance or whether a broker holding any of these shares in "street" name has
not been given specific instructions for voting those shares.
Under Nasdaq rules, assuming a quorum is present, the approval of the
issuance of common stock in the merger will require the affirmative vote of the
holders of a majority of the shares of Cowlitz Bancorp common stock voting at
the meeting. As described in "The Merger--Conditions to Completion of the
Merger," shareholder approval is a condition to completion of the merger.
25
As of the Cowlitz Bancorp record date, directors and executive officers of
Cowlitz Bancorp and their affiliates beneficially owned and were entitled to
vote 1,106,140 shares of Cowlitz Bancorp common stock, which represented
approximately 27.5% of the shares of Cowlitz Bancorp common stock. Each Cowlitz
Bancorp director and executive officer has indicated that he or she intends to
vote his or her shares of Cowlitz Bancorp common stock "FOR" approval of the
share issuance.
NORTHERN BANK. The presence, in person or represented by proxy, of the
holders of a majority of the outstanding Northern Bank shares will constitute a
quorum at the Northern Bank special meeting. Shares of Northern Bank common
stock that are present in person or represented by proxy will be counted for
purposes of determining whether a quorum exists regardless of whether the holder
of any of these shares fails to or abstains from voting on the merger agreement
or whether a broker holding any of these shares in "street" name has been given
instructions for voting those shares.
Under Oregon law and under Northern Bank's Bylaws, approval of the merger
agreement requires the affirmative vote of the holders of two-thirds of the
shares of Northern Bank common stock entitled to vote at the Northern Bank
special meeting. BECAUSE APPROVAL OF THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF
TWO-THIRDS OF THE OUTSTANDING NORTHERN BANK SHARES ENTITLED TO VOTE AT THE
SPECIAL MEETING, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS
VOTING AGAINST THE MERGER AGREEMENT.
As of the Northern Bank record date, directors and executive officers of
Northern Bank and their affiliates beneficially owned and were entitled to vote
17,495 shares of Northern Bank common stock, which represented 1.03% of the
shares of Northern Bank common stock entitled to vote at the special meeting.
Each Northern Bank director and executive officer has indicated that he or she
intends to vote his or her shares of Northern Bank common stock "FOR" approval
of the merger agreement.
SOLICITATION OF PROXIES
Each of Cowlitz Bancorp and Northern Bank will bear the cost of soliciting
proxies from its own shareholders, and each will bear a portion of the printing
costs for this joint proxy statement attributable to its communications with its
own shareholders. In addition to solicitation by mail, the directors, officers
and employees of Cowlitz Bancorp and Northern Bank and their affiliates may,
without being additionally compensated, solicit proxies from their shareholders
by telephone, telegram, facsimile or in person. Arrangements will also be made
with brokerage houses and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of stock for which those
entities are holders of record, and Cowlitz Bancorp and Northern Bank will
reimburse these entities for their resulting out-of-pocket expenses.
Cowlitz has retained ChaseMellon Shareholder Services to assist it in
communicating with its shareholders with respect to, and to provide other
services to Cowlitz in connection with, the Cowlitz special meeting. ChaseMellon
Shareholder Services will receive up to $5,000 for its services and
reimbursement of out-of-pocket expenses in connection with these services.
Cowlitz has agreed to indemnify ChaseMellon Shareholder Services against
liabilities arising out of or in connection with its engagement.
Northern Bank has retained W.F. Doring & Company to assist it in
communicating with its shareholders with respect to, and to provide other
services to Northern Bank in connection with, the Northern Bank special meeting.
Doring will receive up to $5,000, for its services and reimbursement of
out-of-pocket expenses in connection with these services. Northern Bank has
agreed to indemnify Doring against specified liabilities arising out of or in
connection with its engagement.
SHAREHOLDERS ARE REQUESTED TO SIGN, DATE AND RETURN THE ACCOMPANYING PROXY
CARD PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. SHAREHOLDERS WHOSE
SHARES ARE HELD THROUGH A BROKER ARE REQUESTED TO FOLLOW THE INSTRUCTIONS
FORWARDED TO THEM BY THEIR BROKER.
NORTHERN BANK SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR
PROXY CARDS. IF THE MERGER IS COMPLETED, NORTHERN BANK SHAREHOLDERS WILL RECEIVE
INSTRUCTIONS REGARDING THE PROPER PROCEDURES TO EXCHANGE THEIR STOCK
CERTIFICATES. SEE "THE MERGER--THE MERGER CONSIDERATION--CONVERSION OF NORTHERN
BANK COMMON STOCK."
26
THE MERGER
THIS SECTION DESCRIBES MATERIAL ASPECTS OF THE PROPOSED MERGER INCLUDING THE
MERGER AGREEMENT. WHILE WE BELIEVE THAT THE DESCRIPTION IN THIS SECTION COVERS
THE MATERIAL TERMS OF THE MERGER AND THE RELATED TRANSACTIONS, THIS SUMMARY MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE
MERGER AGREEMENT INCLUDED AS APPENDIX C TO THIS JOINT PROXY STATEMENT AND OTHER
DOCUMENTS WE REFER TO CAREFULLY FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER.
GENERAL
The boards of directors of Cowlitz Bancorp, Cowlitz Bank and Northern Bank
have approved a merger agreement which provides for the merger of Northern Bank
into Cowlitz Bank. At the effective date of the merger, the separate corporate
existence of Northern Bank will terminate and the surviving corporation of the
merger will be Cowlitz Bank. Although Northern Bank will not be a separate
corporation, Cowlitz Bank intends to operate Northern Bank as a separate
division following the merger.
THE MERGER CONSIDERATION
CONVERSION OF NORTHERN BANK COMMON STOCK. At the effective date of the
merger, each share of Northern Bank common stock, other than shares held in
Northern Bank's treasury, shares held directly or indirectly by Cowlitz Bancorp
or any of its subsidiaries (other than shares held in a fiduciary capacity or in
respect of a previous debt) and shares as to which Northern Bank shareholders
have perfected appraisal rights (see "--Appraisal Rights" below) will
automatically convert into the right to receive merger consideration, which will
consist of the following components:
- A number of shares of Cowlitz Bancorp common stock that will be determined
on the effective date of the merger using a formula that takes into
account Northern Bank's shareholders' equity as of the effective date of
the merger and an exchange ratio based on a $6.563 value for Cowlitz
Bancorp common stock. Under this formula, if the merger had been concluded
as of November 30, 1999 the exchange value of the stock consideration
would have been $4.24 per share and the exchange ratio would have been
0.646046 Cowlitz shares per Northern Bank share; and
- $1.63 in cash. However, as more fully described below, this amount will be
deposited at closing on the Northern Bank shareholders' behalf into an
escrow account to indemnify Cowlitz Bancorp for losses Cowlitz Bancorp
incurs in the two year period following the merger as a result of
identified Northern Bank loans, to the extent these losses exceed the
thresholds established in the merger agreement. The escrowed funds also
may be used to offset losses in excess of reserves on those identified
loans where, in Cowlitz Bancorp's good faith estimate, further losses are
reasonably expected to occur following the release of escrow. The escrow
procedure was established to minimize the potential loss to Cowlitz
Bancorp from Northern Bank loans that were, as of the date the merger
agreement was executed, not sufficiently seasoned to provide reasonable
assurance that established reserves were sufficient. The cash remaining
after this indemnification, net of expenses, will be paid to Northern Bank
shareholders of record on the effective date of the merger 24 months after
the effective date of the merger. It is not necessary to retain shares
received as stock consideration in order to receive the cash consideration
after close of escrow. However, there can be no assurance that sufficient
cash will remain to make such a disbursement. See "--Payment of Cash;
Escrow Arrangements" below.
REDUCTIONS TO THE STOCK CONSIDERATION BASED ON NORTHERN BANK'S SHAREHOLDERS'
EQUITY AND LOAN PORTFOLIO. The merger consideration is based on Northern Bank's
shareholders' equity on June 30, 1999, as calculated before Northern Bank
restated its financial condition as of that date, and subject to adjustment for
decreases in shareholders' equity prior to closing. If Northern Bank's
shareholder's
27
equity immediately prior to closing is equal to or greater than $4,718,841, the
portion of the merger consideration payable in Cowlitz Bancorp stock will be
$5.42 per share or 0.825842 shares of Cowlitz Bancorp common stock per share. If
Northern Bank's shareholders' equity immediately prior to closing is less than
$4,718,841, the portion of the merger consideration payable in Cowlitz Bancorp
stock will be determined by the following formula:
Northern Bank
closing shareholders'
$4,718,841 - equity
--------------------------------------------
1. Equity Adjustment Amount = 1.75 X 1,225,597
2. $5.42 - Equity Adjustment Amount = Stock Consideration
Stock Consideration No. of Cowlitz
----------------- = Final Exchange Ratio X No. of Northern = Bancorp Shares
3. $6.563 Bank Shares Owned Received
For purposes of the above formula, Northern Bank's closing shareholders' equity
will be its shareholders' equity on the effective date of the merger determined
in accordance with generally accepted accounting principles less any reduction
in such equity to reflect additional losses or reserves as described below.
As of November 30, 1999, Northern Bank's shareholders' equity (as adjusted
for estimated closing expenses of $158,000) was $3,889,967. If the closing of
the merger had occurred on such date, under the formula, the exchange value of
Northern Bank stock would have been reduced to $4.24 and the exchange ratio
would have been 0.646046 shares of Cowlitz Bancorp common stock for each
Northern Bank share.
Prior to the effective date of the merger, Cowlitz Bancorp and Cowlitz Bank
will engage an independent loan examiner to review Northern Bank's loan
portfolio and to identify each loan that under standard commercial banking
practices should be classified as Special Mention, Substandard, Doubtful or Loss
(as defined below). This review may be followed by a dispute resolution process
if Northern Bank disagrees with the examiner's analysis. To the extent permitted
by United States generally accepted accounting principles, Northern Bank has
agreed that it will provide a reserve for each loan identified by the examiner
equal to at least (a) 5% of the principal amount of each loan classified as
Special Mention; (b) 15% of the principal amount of each loan classified as
Substandard; (c) 50% of the principal amount of each loan classified as
Doubtful; and (d) 100% of the principal amount of each loan classified as Loss.
Northern Bank also will provide a general reserve equal to at least 1 1/2% of
the principal balance of all its outstanding loans. If Northern Bank is required
to provide additional loan loss reserves to achieve the agreed-upon reserves as
a result of the review process, Northern Bank's shareholders' equity will be
reduced by the amount of these additional loan loss reserves.
28
As used in the merger agreement and this joint proxy statement, the terms
"Special Mention, "Substandard," "Doubtful," and "Loss" have the following
meanings:
CLASSIFICATION DESCRIPTION
- -------------- -----------
Special Mention.............................. Marginally acceptable business credit; some
potential weakness. Generally undesirable
business constituting an undue and
unwarranted credit risk but not to the point
of justifying a Substandard classification.
While the asset is currently protected, it is
potentially weak. No loss of principal or
interest is envisioned. Potential weaknesses
might include a weakening financial
condition, an unrealistic repayment program,
inadequate sources of funds, or lack of
adequate collateral, credit information, or
documentation. Company is undistinguished and
mediocre.
Substandard.................................. Unacceptable business credit, normal
repayment in jeopardy. While no loss of
principal or interest is envisioned, there is
a positive and well-defined weakness which
jeopardizes collection of debt. The asset is
inadequately protected by the current sound
net worth and paying capacity of the obligor
or pledged collateral. There may already have
been a partial loss of interest.
Doubtful..................................... Full payment questionable. Serious problems
exist to the point where a partial loss of
principal is likely. Weaknesses are so
pronounced that on the basis of current
information, conditions and values,
collection is highly improbable.
Loss......................................... Expected total loss. An uncollectible asset
or one of such little value it does not
warrant classification as an active asset.
Such an asset may, however, have recovery or
salvage value, but not to the point where a
write-off should be deferred, even though a
partial recovery may occur in the future.
ADJUSTMENTS TO THE MERGER CONSIDERATION BASED ON THE NUMBER OF OUTSTANDING
NORTHERN BANK SHARES. Because the maximum amount of the total merger
consideration is fixed, the merger consideration per share may be reduced
further if the number of outstanding shares of Northern Bank common stock at the
effective date of the merger is greater than 1,225,597. Northern Bank has agreed
not to issue any additional shares prior to the effective date of the merger
except pursuant to stock options outstanding as of the date of the merger
agreement or issued in replacement of those options. Accordingly, any exercise
of Northern Bank stock options after September 14, 1999 would dilute the per
share amount of the merger consideration.
TREASURY STOCK AND SHARES HELD BY COWLITZ BANCORP OR NORTHERN BANK. Each
outstanding share of Northern Bank common stock held in Northern Bank's treasury
or owned directly or indirectly by Cowlitz Bancorp or Northern Bank or their
subsidiaries (other than shares held for others as a fiduciary or nominee and
shares beneficially owned by third parties and held in respect of a previous
debt) will be canceled at the effective date of the merger and will not affect
the calculation of the merger consideration.
29
NORTHERN BANK COMMON STOCK OPTIONS. Each option holder under Northern
Bank's stock option plan will have the right to exercise their option to the
extent vested, immediately prior to the effective date of the merger. Any
outstanding Northern Bank options that are not exercised as of the effective
date of the merger will be terminated without payment of any merger
consideration.
PAYMENT OF CASH; ESCROW ARRANGEMENTS
On the effective date of the merger, the cash component of the merger
consideration will be deposited on behalf of Northern Bank shareholders into an
escrow account. A copy of the escrow agreement is attached to this joint proxy
statement as Appendix F and is incorporated by reference. The escrowed funds
will be used to indemnify Cowlitz Bancorp for losses and expenses incurred in
the two years following the merger from the loans in Northern Bank's portfolio
identified as requiring a specific reserve prior to the effective date to the
extent these losses and expenses exceed established thresholds. The escrowed
funds may also be used to offset losses in excess of reserves on those
identified loans where, in Cowlitz Bancorp's good faith estimate, further losses
are reasonably expected to occur following the release of escrow. The escrow
procedure permits Cowlitz Bancorp to be reimbursed if a loan loss exceeds the
corresponding loan loss reserve, plus the 1 1/2% additional agreed-upon reserve
established for all Northern Bank loans, up to the total amount of the escrowed
funds. Northern Bank and Cowlitz Bancorp will each appoint two members to a
committee that will instruct the escrow agent about disbursement of escrowed
funds. The escrow will terminate on the later of (i) the date on which Cowlitz
Bancorp has been reimbursed for all losses incurred by way of non-payment or
reclassification of the previously identified Northern Bank loans during the two
years following the effective date, or (ii) when the escrowed funds have been
exhausted as a result of such reimbursements. When the escrow terminates, if any
funds are left in the escrow account, each former Northern Bank shareholder who
has properly surrendered his or her Northern Bank stock certificates will be
paid an amount per share equal to (a) the amount remaining in the escrow account
upon its termination (after deducting all expenses and costs) divided by
(b) the number of shares of Northern Bank common stock outstanding at the
effective date of the merger, less shares for which appraisal rights have been
perfected, as described in "--Appraisal Rights" below. The cash consideration
placed into the escrow account will generally be treated as received pro rata by
the Northern Bank shareholders at the time of the merger, and will therefore be
subject to federal income tax at that time, even though the Northern Bank
shareholders may ultimately not receive any cash unless and until it is paid to
the shareholders, and may ultimately receive less than all, or potentially none,
of the cash. See "Certain Federal Income Tax Consequences" below.
BACKGROUND OF THE MERGER
Beginning in March of 1998, Cowlitz Bancorp began implementing its long term
strategy of establishing financial "hubs" in the Pacific Northwest region. As
part of this strategy, Cowlitz Bancorp established a loan/mortgage/trust office
in Vancouver, Washington and began to search for a bank that could serve as the
center of a "hub" in the Portland, Oregon area.
Also in early 1998, Northern Bank's board of directors had determined that,
as a result of the increased complexity of its business, Northern Bank would
need additional capital for its business to continue to grow. On October 15,
1998, Northern Bank retained D.A. Davidson & Co., an investment banking firm
with experience in advising banks, to help Northern Bank raise additional
capital. Northern Bank initially planned to raise capital by making a secondary
public stock offering, and it developed disclosure materials and consulted with
D.A. Davidson & Co. throughout 1998 regarding a potential secondary offering.
In early January 1999, Northern Bank, D.A. Davidson & Co., their respective
attorneys, and Northern Bank's auditing firm began developing registration and
listing applications and conducted discussions with the FDIC Division of Finance
and Nasdaq relating to the offering. However, as a result of the examination by
the FDIC and the Oregon Department of Consumer and Business
30
Services, which concluded on January 19, 1999, Northern Bank elected to
terminate the public offering and seek alternative means of strengthening its
capital position. At that time, Northern Bank's board of directors began
exploring business combinations as the primary means of addressing its capital
and management needs. On April 16, 1999, Northern Bank engaged D.A. Davidson &
Co. to assist in this process.
On May 14, 1999, Charles W. Jarrett, the President and Chief Operating
Officer, and Benjamin Namatinia, the Chairman and Chief Executive Officer, of
Cowlitz Bancorp, met with John H. Holloway, Jr., then President and a Northern
Bank director, to discuss the possibility of Cowlitz Bank and Northern Bank
merging with Northern Bank serving as the central "hub" for financial services
in the greater Portland area. As a result of this meeting, both parties signed
mutual confidentiality agreements and began conducting due diligence
examinations of each other. As part of its investigation, Cowlitz Bancorp sent a
team of loan, financial and compliance experts to perform an on-site inspection
of Northern Bank and hired a third party consultant to help evaluate Northern
Bank's loan portfolio.
Throughout June and July, Messrs. Jarrett and Namatinia had a series of
meetings with Mr. Holloway and William V. Spicer, Chairman of the Northern Bank
board of directors, regarding the potential terms of the transaction.
Mr. Holloway was Chairman of the Board of Directors until June 24, 1999;
Mr. Spicer was elected to that position on June 25, 1999.
At a meeting on July 16, 1999, based on prior discussions and the results of
their due diligence examinations, the parties agreed to a basic transaction
structure with merger consideration equal to 1.75 times Northern Bank's
shareholders' equity as of June 30, 1999. The parties also agreed that the
merger consideration would be paid in Cowlitz Bancorp stock except for a portion
in cash that would be held in escrow after the merger to indemnify Cowlitz
Bancorp for loan losses. Following this meeting, Northern Bank terminated
discussions it had been engaged in with other potential merger partners.
On July 19, 1999, Northern Bank voluntarily entered into Cease and Desist
Orders with the FDIC and the State of Oregon, related to Northern Bank's quality
of loans, loan and lease loss allowances and lending and collection practice, as
more fully described in "Information Concerning Northern Bank--General"
beginning on page B-1. These orders underscored the need for Northern Bank to
increase its capital, improve loan administration and retain additional
management personnel. As a result of these orders and the recommendation of D.A.
Davidson & Co., the Northern Bank board of directors decided to proceed with
negotiations leading to the merger of Northern Bank into Cowlitz Bank.
Following a subsequent meeting of the parties on July 22, 1999, both Cowlitz
Bancorp and Northern Bank conducted meetings of their boards of directors who
decided to proceed with the merger along the terms outlined above. After
receiving initial approval from their boards of directors, both parties
consulted with their attorneys and investment bankers, and Cowlitz Bancorp also
consulted with its accountants, to determine the best way to structure the
transaction and Cowlitz Bancorp instructed its attorneys to begin drafting the
merger agreement.
Between July 23 and September 14, 1999, Cowlitz Bancorp's legal advisors
prepared and distributed drafts of the merger agreement and the related
documents and the parties negotiated the drafts and the details of the
transaction. During that period, the parties continued their due diligence
investigations and prepared disclosure schedules to the merger agreement.
On August 20, 1999, Northern Bank received a letter from the Oregon
Department of Consumer and Business Services requiring it amend its June 30,
1999 call report to provide additional loan loss reserves. The effect of this
restatement was to reduce Northern Bank's shareholders' equity as of June 30,
1999. However, rather than reducing the amount of the merger consideration at
that time, the parties agreed to provide for an adjustment immediately prior to
closing based on Northern Bank's shareholders' equity, which would be triggered
if Northern Bank's earnings between June 30, 1999 and closing did not equal or
exceed this reduction.
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On September 1, 1999, representatives of Cowlitz Bancorp and Northern Bank
attended an all-hands meeting in Longview, Washington with their attorneys and
Arthur Andersen LLP, accountants for Cowlitz Bancorp, to conduct final
negotiations of the transaction.
On September 10, 1999, the Northern Bank board of directors met to consider
the merger proposal. After considering the advice provided by its legal and
financial advisors and the opinion of D.A. Davidson & Co. as to the fairness of
the merger to the Northern Bank shareholders from a financial point of view, the
Northern Bank board of directors unanimously approved the merger.
On September 14, 1999, the Cowlitz Bancorp board of directors met to
consider the merger proposal. After considering the advice provided by its legal
and financial advisors as to the structure of the transaction and the opinion
from Sage Capital that the merger was fair to the Cowlitz Bancorp shareholders
from a financial point of view, the Cowlitz Bancorp board of directors
unanimously approved the merger. The parties signed the definitive merger
agreement and publicly announced the merger that day.
Before Northern Bank elected to enter into the agreement with Cowlitz
Bancorp, Northern Bank had canvassed opportunities with other banks both inside
and outside the State of Oregon. It did this by having its investment bankers
send written solicitations of offers to at least 10 banks inside Oregon and at
least 6 banks outside Oregon. In addition, Northern Bank management contacted at
least 4 other banks outside the State of Oregon and at least 3 additional banks
inside the State of Oregon.
As a result of these solicitations, several banks were interested in holding
merger discussions. Some were involved in other mergers or similar transactions
that would have necessitated delays in commencing discussions that were at the
time not acceptable to Northern Bank. Others were interested but unable to give
prompt consideration to a transaction with Northern Bank because of pending
regulatory matters and pending capital-raising efforts.
Of the banks that were interested in immediately pursuing merger
discussions, the following five are representative. Each conducted due diligence
on the premises of Northern Bank and each held extensive discussions with either
Northern Bank or Northern Bank's investment bankers.
Each of these alternatives to this transaction was considered in detail by
the bank from approximately April, 1999 through early September, 1999, when it
became clear the bank would enter into an agreement with Cowlitz Bancorp.
Northern Bank entered into an agreement with Cowlitz Bancorp because, in the
opinion of management and the board of directors, the terms and conditions on
which Cowlitz Bancorp and Northern Bank were able to agree were superior in all
respects to the terms and conditions on which Northern Bank was at the time
likely to be able to agree with any other party.
Northern Bank executed confidentiality agreements with each of these banks
and is prohibited from disclosing either their names or the specific terms of
the proposals they made. However, these proposals are summarized briefly below.
Northern Bank held extensive discussions with one bank from outside the
State of Oregon other than Cowlitz Bancorp. This bank performed due diligence
for approximately a week during the month of July 1999. This bank was interested
in conducting further due diligence in September of 1999 but was unable to
schedule a time prior to Northern Bank executing an agreement with Cowlitz
Bancorp. However, the CEO of this bank stated that this bank likely would be
interested in purchasing Northern Bank's stock for cash consideration at a price
and on terms Northern Bank deemed inferior to the terms proposed by Cowlitz
Bancorp.
One Oregon bank conducted due diligence very early in this process, during
or before April 1999. Though the results of this due diligence suggested the
bank could make an offer that perhaps both parties could accept, Northern Bank
never received an offer, even after both Northern Bank and its investment
bankers sought further confirmation that the bank was interested. Shortly
thereafter this bank announced a large transaction by which it would acquire
another financial institution.
32
Another Oregon bank conducted due diligence at approximately the same time
as Cowlitz Bancorp. This bank's examination and investigation of Northern Bank
yielded a satisfactory review by the bank's senior management, though this bank
made no offer to purchase Northern Bank. The reason senior management gave to
Northern Bank was that if this bank were to acquire Northern Bank, Northern
Bank's lending staff would be as important as its loans and deposits. At the
time, Northern Bank had terminated its relationship with two of its more senior
lending officers and was in the process of hiring additional loan personnel and,
as a result, this bank did not make an offer to acquire Northern Bank.
Another Oregon bank conducted due diligence and met with Northern Bank in
Portland. This bank's representative stated that this bank would expect to make
an offer to merge with Northern Bank on terms that would be attractive. However,
this bank only began its due diligence late in August and did not expect to be
completed until much later than September 1999. In addition, this bank appeared
to Northern Bank to be interested in purchasing the loans and deposits of
Northern Bank but not in maintaining personnel or premises to the extent
Northern Bank deemed would be necessary to maintain its customer relationships
and hence long-term value to shareholders. In any case this bank was not able to
make an offer in time for Northern Bank to give it any consideration prior to
entering into an agreement with Cowlitz Bancorp, and Northern Bank's board of
directors decided it was in the best interest of the shareholders to proceed
with the Cowlitz Bancorp transaction.
Another Oregon bank held extensive discussions and conducted due diligence
during the period from approximately May 1999 through September 1999. This bank
was in the first instance very familiar with Northern Bank through prior
dealings in loan participations and because some of its executives were familiar
with Northern Bank. These discussions led to a written proposal from this bank
that these two banks merge. Northern Bank gave very close and positive
consideration to this proposal. Though Northern Bank believed this transaction
would be in the interests of the bank's shareholders, both Northern Bank's board
and its investment bankers concluded that the proposal from Cowlitz Bancorp,
which came at about the same time, was superior in all respects and in the best
interests of the bank's shareholders.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
COWLITZ BANCORP. In reaching its conclusion to approve the merger, the
Cowlitz Bancorp board of directors and the Cowlitz Bank board of directors
considered a number of factors. These considerations included: (a) the long term
strategy of the company; (b) the current financial condition and market strength
of Cowlitz Bank; (c) the possible future growth of Cowlitz Bank; (d) the current
financial condition and market strength of Northern Bank; (e) the future growth
potential of Northern Bank; (f) the opportunity to enter the Oregon financial
services market; and (g) the value of a financial services company with "hubs"
in the Seattle/Bellevue, Cowlitz County and Portland/Vancouver markets.
The Cowlitz Bancorp board of directors believes that there is a need for a
strong, aggressive community oriented financial services company throughout the
Pacific Northwest. In order to be able to provide the wide range of financial
services that are necessary in markets that are quite diverse, Cowlitz Bancorp
has developed a strategy of establishing financial "hubs" in major market areas.
This strategy was first implemented in Cowlitz County by bringing together a
unique combination of financial services delivered in a manner that was most
appropriate for that local market area. Cowlitz Bancorp has recently established
its Puget Sound hub through the opening of Bay Bank and the acquisition of Bay
Mortgage-Seattle, Bay Mortgage-Bellevue and Bay Escrow Company. The
establishment of these hubs as functionally independent operating units allows
each hub to deliver the combination of financial services that is appropriate
for the local area. The establishment of the hubs also presents the opportunity
for Cowlitz Bancorp to diversify geographically and thus lessens the risk that
an adverse change in local economic conditions will materially affect the
company.
The acquisition of Northern Bank will enable Cowlitz Bancorp to expand its
hub strategy to the Portland/Vancouver area. Under Oregon law, Cowlitz Bancorp
cannot establish a new branch in
33
Oregon. To gain access to the Portland market, Cowlitz Bancorp must acquire an
existing Oregon chartered bank. Cowlitz Bancorp believes that Northern Bank is
an excellent fit, due to its personal-service culture. In addition, Northern
Bank is a commercial bank with an increasing involvement in branching through
retirement centers throughout the greater Portland area. As such, Cowlitz
Bancorp believes it will be able to offer its financial services products to
Northern Bank's existing customers.
The Cowlitz Bancorp board of directors believes that this unique ability to
reach this dynamic market in the greater Portland area will enhance Cowlitz
Bancorp's ability to increase its earnings and to expand within this larger
market. The merger with Northern Bank will provide an opportunity to begin to
expand into the Oregon market and reach many additional business customers as
well as provide the personalized service that has worked so successfully for it
in the past.
In considering its long term strategy, the strong financial condition of the
company, the maturity of the Cowlitz County market, the availability and access
to a large and dynamic market in the greater Portland area, and the value of
having the only community based financial services company that reaches from
Seattle to Portland, the Cowlitz Bancorp board of directors feels that this
merger will add to the future value of the company.
After consultations with attorneys, accountants, financial consultants and
its investment bankers (including their fairness opinion), the Cowlitz Bancorp
board of directors has concluded that it would be in the long-term best interest
of its shareholders and the future value of Cowlitz Bancorp to proceed with the
merger and unanimously recommends that shareholders vote "FOR" approval of the
share issuance.
NORTHERN BANK. In voting to approve the merger, Northern Bank's board of
directors considered the perspectives of Northern Bank's shareholder and
customers, as well as the requirements imposed by the cease and desist orders.
Specifically, Northern Bank's directors recognized that Cowlitz Bancorp would
bring to the surviving entity more capital, excellent management, geographic
diversity and an array of banking and financial services previously unavailable
to Northern Bank's customers. For shareholders, the combination will bring a
more widely traded stock and a fair price for their shares in Northern Bank. For
these reasons, the Northern Bank board of directors has voted unanimously to
recommend that shareholders approve the merger.
Northern Bank's management believes its customers and prospective customers
will respond enthusiastically to the greater lending ability and the variety of
financial services the combined organization would afford them, including a
trust company, finance company and escrow company, not to mention the added
convenience for businesses who operate in both Oregon and Washington.
The surviving institution also will be stronger in many ways. Northern
Bank's equity at June 30, 1999, stood at about $4.6 million, or 6.4% of June 30
assets. Cowlitz Bancorp's equity and assets on the same date were $31 million
and $169 million, respectively, resulting in a ratio of more than 18%. The pro
forma balance sheet for the combined entities would thus be much stronger and
should permit the surviving entity to better serve Northern Bank's growing
customer base and would be able to serve bigger companies in the Portland
market. A bank's loan-to-one-borrower limit is determined by its capital, and
Northern Bank's current limit is only about $700,000. After the merger, Northern
Bank management expects the loan limit for the combined entity could exceed
$3.7 million.
Another area of added strength is in management. Northern Bank has built an
excellent marketing and service organization, and has penetrated Portland's
small business market by building an excellent reputation for service. It now
stands poised for solid and profitable growth, but will need to address a number
of challenges before doing so. Cowlitz Bank has experienced the same kind of
growth Northern Bank seeks, and in the process it has built a solid, experienced
and efficient management team. Already, one of Cowlitz Bank's most senior
officers, Jim Wills, has resigned his position to become Northern Bank's Acting
President and Chief Lending Officer.
34
Equally important are the financial consequences to Northern Bank's
shareholders. If the merger had been concluded as of November 30, 1999 the
exchange value of the stock consideration would have been $4.24 per share and
the total consideration (based on Cowlitz Bancorp's share price on that date)
would have been between $3.65 and $5.28, depending on the amount of cash, if
any, ultimately disbursed from escrow. Subject to the adjustments discussed in
"The Merger--Merger Consideration," each Northern Bank shareholder would receive
up to a maximum of $5.42 per Northern Bank share, in the form of Cowlitz Bancorp
stock, and would receive up to $1.63 per Northern Bank share in cash upon
termination of the escrow account, resulting in a maximum total per share
consideration of up to $7.05. Although the merger consideration is subject to
reduction for decreases in Northern Bank's shareholders' equity and Northern
Bank has agreed to indemnify Cowlitz Bancorp for up to $2 million in additional
loan losses in the two years following closing of the merger, Northern Bank's
board of directors believes that the effect of any such reduction or
indemnification will not reduce the value of the merger consideration below an
acceptable level.
CONCLUSION AND RECOMMENDATION. Northern Bank's board of directors believes
the merger will bring additional resources to its business in the Portland
market that will benefit its existing customers, cementing old relationships and
providing a foundation for new relationships. For Northern Bank's shareholders
the advantages will be both immediate and long term. Assuming the current
financial terms of the transaction, the board of directors believes that
Northern Bank shareholders will become shareholders in a more well-capitalized
institution and will receive consideration in excess of the current market value
of Northern Bank stock. In the long term the growth Cowlitz Bancorp can generate
in the Portland market should add significantly to the value of the common stock
of the combined entity.
The Northern Bank board of directors therefore unanimously recommends that
each shareholder vote in favor of the merger.
OPINIONS OF FINANCIAL ADVISORS
OPINION OF COWLITZ BANCORP'S FINANCIAL ADVISOR
Cowlitz Bancorp retained Sage Capital LLC to act as financial advisor to
Cowlitz Bancorp in connection with the evaluation of certain elements of Cowlitz
Bancorp's acquisition strategy. Pursuant to this engagement, Sage was asked to
render an opinion to the Cowlitz Bancorp board of directors as to whether the
equity consideration to be paid for Northern Bank pursuant to the merger
agreement was fair to the shareholders of Cowlitz Bancorp from a financial point
of view. Sage was not requested to, and did not, make any recommendation to the
Cowlitz Bancorp board of directors as to the number of shares or the amount of
cash consideration from Cowlitz Bancorp to be issued to and received by Northern
Bank shareholders pursuant to the merger agreement, which number was determined
through arm's-length negotiations between Cowlitz Bancorp and Northern Bank.
Sage also did not advise as to the structure of the escrow arrangement.
As of September 14, 1999, Sage delivered its written opinion to the Cowlitz
Bancorp board of directors that, as of such date and based upon and subject to
certain assumptions and other matters described in its written opinion, the
total consideration to be paid by Cowlitz Bancorp pursuant to the merger
agreement is fair to the shareholders of Cowlitz Bancorp from a financial point
of view. Sage's opinion is addressed to the board of directors of Cowlitz
Bancorp, is directed only to the financial terms of the merger agreement and
does not address the underlying business decision of Cowlitz Bancorp and
Northern Bank to engage in the Merger and does not constitute a recommendation
to any shareholder of Cowlitz Bancorp as to how such shareholder should vote at
the Cowlitz Bancorp special meeting.
The complete text of the September 14, 1999 opinion (the "Sage Opinion"),
which sets forth the assumptions made, matters considered, and limitations on
and scope of the review undertaken by Sage,
35
is attached to this joint proxy statement Appendix E, and the summary of the
Sage Opinion set forth in this joint proxy statement is qualified in its
entirety by reference to the Sage Opinion. Cowlitz Bancorp shareholders are
urged to read the Sage Opinion carefully and in its entirety for a description
of the procedures followed, the factors considered, and the assumptions made by
Sage.
In arriving at its Opinion, Sage, among other things, (i) reviewed the
merger agreement; (ii) reviewed certain other documents relating to the merger
agreement; (iii) reviewed certain publicly available information concerning
Cowlitz Bancorp and Northern Bank; (iv) held discussions with members of senior
management of Cowlitz Bancorp concerning the business prospects of Cowlitz
Bancorp, including such managements' views as to the organization of and
strategies with respect to the merger; (v) reviewed certain operating and
financial information prepared by the managements of Cowlitz Bancorp and
Northern Bank; (vi) reviewed the recent reported prices and trading activity for
the common stock of certain other companies engaged in businesses Sage
considered comparable to those of Cowlitz Bancorp and compared certain publicly
available financial data for those comparable companies to similar data for
Cowlitz Bancorp; (vii) reviewed the financial terms of certain other merger and
acquisition transactions that Sage deemed generally relevant; and
(viii) performed and considered such other studies, analyses, inquiries and
investigations as Sage deemed appropriate. Sage was not, to the best of its
knowledge, denied access by Cowlitz Bancorp or Northern Bank to any requested
information and no restrictions were placed on Sage with respect to the
procedures followed by Sage in rendering its opinion.
Sage assumed and relied upon, without independent verification, the accuracy
and completeness of the information it reviewed for the purposes of its opinion.
With respect to the financial information of Cowlitz Bancorp and Northern Bank,
Sage assumed that such information was complete and accurate in all material
respects and had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of such companies, at the time
of preparation, of the operating and financial performance of Cowlitz Bancorp
and Northern Bank. Sage also assumed that there were no material changes in
Cowlitz Bancorp's or Northern Bank's assets, financial condition, results of
operations, business or prospects since the date of their last financial
statements made available to Sage and that all material liabilities (contingent
or other, known or unknown) of Cowlitz Bancorp and Northern Bank are as set
forth in the financial statements. Sage did not prepare or obtain any
independent evaluation or appraisal of the assets or liabilities of Cowlitz
Bancorp or Northern Bank, nor did Sage conduct a physical inspection of the
properties and facilities of Cowlitz Bancorp or Northern Bank in connection with
its opinion. The Sage Opinion states that it was based on economic, financial
and other conditions existing as of the date of such opinion. Sage does not have
any obligation to update, revise or reaffirm its opinion. Furthermore, Sage
expressed no opinion as to what the value of Cowlitz Bancorp common stock will
be when issued pursuant to the merger agreement or the prices at which Cowlitz
Bancorp common stock will trade at any time.
Based upon this information, Sage performed a variety of financial analyses
of the merger. The following paragraphs briefly summarize the principal
financial analyses performed by Sage in arriving at its opinion delivered to the
Cowlitz Bancorp board of directors. Such analyses are based on a number of
assumptions, including among other things, the projected performance of Cowlitz
Bancorp and Northern Bank and the comparable public companies.
CONTRIBUTION ANALYSIS. Sage reviewed the pro forma contribution of Cowlitz
Bancorp and Northern Bank to estimated combined financial results for the twelve
(12) months ending December 31, 1999, December 31, 2000 and December 31, 2001.
Sage reviewed, among other things, pro forma contributions to total revenues,
earnings before taxes ("EBT") and net income. Based on this analysis, for the
twelve (12) months ending December 31, 2000, Cowlitz Bancorp will contribute
84.1% of pro forma combined total revenues, 93.5% of pro forma combined EBT, and
91.5% of pro forma combined net income. For the twelve (12) months ended
December 31, 2001, Cowlitz Bancorp will contribute 82.4% of pro forma combined
total revenues, 83.9% of combined EBT, and 78.8% of pro forma combined net
income.
36
COMPARABLE COMPANY ANALYSIS. Sage compared selected historical and
projected operating and stock market data and operating and financial ratios for
Cowlitz Bancorp to the corresponding data and ratios of certain publicly traded
banks which it deemed generally comparable to Cowlitz Bancorp. Such data and
ratios included market value to historical and projected revenue, market value
to historical and projected EBT, market value to historical and projected net
income and market value to historical book value. Companies deemed to be
generally comparable to Cowlitz Bancorp included Cascade Bancorp, Columbia
Bancorp, Centennial Bancorp, Columbia Banking Systems, Pacific Continental Bank,
Six Rivers National Bank, United Security Bancorp, Umpqua Holdings, VRB Bancorp
and West Coast Bancorp.
For the comparable companies, the multiples of market value to last twelve
months ("LTM") book values ranged from 0.68 to 3.10 with a mean of 1.97;
dividend yields ranged from 0.0% to 3.6% with a mean of 1.3%,; market value to
LFY net income ranged from 9.2 to 27.8 with a mean of 12.3; and market value to
FY 1999 consensus earnings estimates ranged from 10.1 to 24.6 with a mean of
13.7, excluding Northern Bank. These ratios compared with the following ratios
for Cowlitz Bancorp, calculated on the $5.31 per share closing price of Cowlitz
Bancorp common stock on October 29, 1999: market value to book value of 0.68,
dividend yield of 1.4%, market value to LFY net income of 9.2, and market value
to FY 1999 earnings estimates of 20.3.
COMPARABLE TRANSACTION ANALYSIS. Sage also analyzed publicly available
financial information for twenty-nine (29) selected mergers and acquisitions
with aggregate transaction values up to $9.09 billion (the "Comparable Size
Transactions") of companies in the banking industry from January 1997 through
June 1999. For transactions in the banking industry, the mean values of market
capitalization to book value was 2.83. For the transactions evaluated in the
banking industry, mean values of market capitalization to LTM earnings was 20.0
times.
No company or transaction used in any comparable transaction analysis as a
comparison is identical to Cowlitz Bancorp or Northern Bank. Accordingly, these
analyses are not simply mathematical; rather, they involve complex
considerations and judgments concerning differences in the financial and
operating characteristics of the comparable companies and other factors that
could affect the public trading value of the comparable companies and the
transactions to which they are being compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Sage believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the evaluation process underlying its
opinion. In performing its analyses, Sage made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Cowlitz Bancorp or Northern
Bank. Any estimates contained in these analyses do not necessarily indicate
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. Additionally,
analyses relating to the values of businesses or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Sage is a regional investment banking firm based in Portland, Oregon. As
part of their investment banking services, the principals of Sage are regularly
engaged in the business of advising the managements and boards of directors of
corporations regarding the issuance of securities, providing advisory services
for mergers and acquisitions, issuing fairness opinions and providing market
valuations. Cowlitz Bancorp has agreed to pay Sage for its services in
connection with the transaction, including the delivery of its fairness opinion,
a fee of $50,000, contingent upon closing of the transaction. Cowlitz Bancorp
has also agreed to reimburse Sage for reasonable out-of-pocket expenses
37
and to indemnify Sage against certain liabilities relating to or arising out of
services performed by Sage as financial advisor to Cowlitz Bancorp.
OPINION OF NORTHERN BANK'S FINANCIAL ADVISOR
Northern Bank retained D.A. Davidson & Co. to act as its financial advisor
in connection with the merger. D.A. Davidson & Co. rendered a written opinion to
Northern Bank as of September 10, 1999 to the effect that, based upon and
subject to the factors and assumptions set forth in such opinion, and as of that
date, the merger consideration to be paid by Cowlitz Bancorp was fair from a
financial point of view to the shareholders of Northern Bank.
THE FULL TEXT OF THE D.A. DAVIDSON & CO. OPINION SETS FORTH ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, AMONG OTHER THINGS. THE FULL TEXT OF THE D.A. DAVIDSON & CO. OPINION
IS ATTACHED HERETO AS APPENDIX D AND IS INCORPORATED HEREIN BY REFERENCE.
NORTHERN BANK SHAREHOLDERS ARE URGED TO READ THE D.A. DAVIDSON & CO. OPINION IN
ITS ENTIRETY. DIRECTED TO THE NORTHERN BANK BOARD OF DIRECTORS, THE D.A.
DAVIDSON & CO. OPINION ADDRESSES ONLY THE FAIRNESS TO THE HOLDERS OF NORTHERN
BANK COMMON STOCK, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE
PAID BY COWLITZ BANCORP FOR THE NORTHERN BANK COMMON STOCK PURSUANT TO THE
MERGER AGREEMENT. THE D.A. DAVIDSON & CO. OPINION WAS RENDERED TO THE NORTHERN
BANK BOARD OF DIRECTORS FOR ITS CONSIDERATION IN DETERMINING WHETHER TO APPROVE
THE MERGER AGREEMENT. THE D.A. DAVIDSON & CO. OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY NORTHERN BANK SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE. THE FOLLOWING SUMMARY OF THE D.A. DAVIDSON & CO. OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE D.A. DAVIDSON &
CO. OPINION. No limitations were imposed by Northern Bank on the scope of D.A.
Davidson & Co.'s investigation or the procedures to be followed by D.A.
Davidson & Co. in rendering its opinion. The form and amount of consideration to
be paid by Cowlitz Bancorp to Northern Bank shareholders in the merger was
determined through arm's-length negotiations between the parties. D.A.
Davidson & Co. was not requested to opine as to, and its opinion does not
address, Northern Bank's underlying business decision to proceed with or effect
the merger.
During the course of the engagement, D.A. Davidson & Co. reviewed and
analyzed material bearing on the financial and operating conditions of Cowlitz
Bancorp and Northern Bank and material prepared in connection with the proposed
transaction, including the following: (1) the merger agreement; (2) certain
publicly available information concerning Cowlitz Bancorp and Northern Bank,
including financial statements for each of the three years ended December 31,
1998 and for the six months ended June 30, 1999; (3) various regulatory
reporting statements of Northern Bank; (4) certain internal reports and
financial projections for Northern Bank; (5) the nature and terms of recent sale
and merger transactions involving banks and bank holding companies that D.A.
Davidson & Co. considered relevant; (6) financial and common stock performance
information of certain publicly-traded banking organizations that D.A.
Davidson & Co. considered relevant; and (7) financial and other information
provided by the management of Northern Bank and Cowlitz Bancorp. In arriving at
its opinion, D.A. Davidson & Co. assumed and relied upon the accuracy and
completeness of the financial and other information used by it without assuming
any responsibility for independent verification of such information, and further
relied upon the assurances of the managements of Cowlitz Bancorp and Northern
Bank that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to any financial projections
reviewed by D.A. Davidson & Co., D.A. Davidson & Co. assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the managements of either Cowlitz Bancorp
or Northern Bank.
38
D.A. Davidson & Co. understands that the merger will be accounted for using
the purchase method of accounting. D.A. Davidson & Co. has further assumed for
purposes of its analysis that the merger will generally be treated as a tax-free
exchange of shares to Northern Bank shareholders. Although the opinion would not
adversely be effected by a finding that the transaction is fully taxable,
shareholders should review carefully the section entitled "Certain Federal Tax
Consequences" for a more detailed discussion of the potential tax treatment. In
arriving at its opinion, D.A. Davidson & Co. did not conduct a physical
inspection of the properties and facilities of Cowlitz Bancorp or Northern Bank
and did not make or obtain any evaluations or appraisals of the assets or
liabilities of Cowlitz Bancorp or Northern Bank. D.A. Davidson & Co. is not an
expert in the evaluation of allowance for loan losses and it has not made an
independent evaluation of the allowance for loan losses of Northern Bank or
Cowlitz Bank nor has it reviewed any individual credit files. D.A. Davidson &
Co.'s opinion necessarily was based upon market, economic and other conditions
as they existed on, and could be evaluated as of, the date of D.A. Davidson &
Co.'s opinion.
The following is a summary of the analyses D.A. Davidson & Co. performed in
arriving at its September 10, 1999 opinion as to the fairness of the merger
consideration from a financial point of view to Northern Bank's shareholders. In
connection with the preparation and delivery of its opinion to the board of
directors of Northern Bank, D.A. Davidson & Co. performed a variety of financial
and comparative analyses, as described below. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial and comparative analysis and the application of those
methods to the particular circumstances. Therefore, such an opinion is not
readily susceptible to summary description. Furthermore, in arriving at its
opinion, D.A. Davidson & Co. did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, D.A.
Davidson & Co. believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, D.A. Davidson & Co. made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Northern Bank. Any estimates contained in these analyses were not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth herein. In addition,
analyses relating to the value of businesses did not purport to be appraisals or
to reflect the prices at which businesses may actually be sold.
PURCHASE PRICE ANALYSIS. Based on the $5.25 closing price of Cowlitz
Bancorp common stock on September 14, 1999, the aggregate transaction value
ranged from $5.31 million to $7.31 million and the per share transaction value
ranged from $4.34 to $5.97. These ranges result from the approximately
$2.00 million in cash which will be placed in escrow and will become payable to
Northern Bank shareholders two years after closing, subject to reduction or
elimination if loan losses on certain Northern Bank loans exceed the reserves
established for those loans. If the entire $2.00 million to be placed in escrow
is paid out to Northern Bank shareholders, the price-to-book ratio paid in the
merger is 158.3%, based on Northern Bank's book value at June 30, 1999 of
$4.62 million. If none of the $2.00 million to be placed in escrow is paid out
to Northern Bank shareholders because actual loan losses on certain Northern
Bank loans exceed the reserves established for those loans by the entire
$2.00 million, the price-to-book ratio paid in the merger is 203.0% based on
Northern Bank's adjusted book value at June 30, 1999 of $2.62 million (adjusted
for additional loan losses, that is $4.62 million actual book value less
$2.00 million in additional loan loss reserves or a net $2.62 million). The
deposit premium paid in the merger (defined as the transaction value, minus the
book value, divided by the total deposits) using June 30, 1999 financial data is
4.03%. The price-to-earnings multiple and price-to-estimated earnings multiple
paid in the merger cannot be computed because Northern Bank incurred a net loss
for the 12-month period ended June 30, 1999 and is expected to incur a net loss
for the 12-month period ended December 31, 1999.
39
PRO FORMA MERGER ANALYSIS. D.A. Davidson & Co. analyzed certain pro forma
effects resulting from the merger. D.A. Davidson & Co. noted that under the
terms of the merger, current Northern Bank shareholders would own approximately
19.6% of the combined entity and that current Cowlitz Bancorp shareholders would
own approximately 80.4% of the combined entity after giving effect for the
merger. D.A. Davidson & Co. noted that these relative ownership positions
compared to the relative contributions of Northern Bank and Cowlitz Bancorp to
the combined entity's pro forma financial condition at June 30, 1999 as follows:
29.8% and 70.2%, respectively, of assets, and 37.0% and 63.0%, respectively, of
deposits, 12.9% and 87.1% of book value. The relative contributions of Northern
Bank and Cowlitz Bancorp to the combined entity's pro forma financial results
for the 12 months ended June 30, 1999 could not be computed because Northern
Bank incurred a net loss for the period. In comparing these relative
contributions of Northern Bank and Cowlitz Bancorp to the relative ownership
positions of the combined entity, D.A. Davidson & Co. also noted and considered
the additional cash of up to approximately $2 million which may become payable
to Northern Bank shareholders two years after closing. D.A. Davidson & Co. noted
the merger would result in pro forma book value per share accretion at June 30,
1999 ranging from 43.3% to 51.8%, depending on the amount of cash which becomes
payable to Northern Bank shareholders. D.A. Davidson & Co. also noted that
earnings per share for the 12 months ended June 30, 1999 would increase from a
loss of $0.15 per share to pro forma earnings per share ranging from $0.19 to
$0.21 per share, depending on the amount of cash which becomes payable to
Northern Bank shareholders.
COMPARISON OF SELECTED PUBLIC COMPANIES. D.A. Davidson & Co. reviewed and
compared certain financial, operating and market information of Northern Bank
with the following publicly-traded banking organizations that it believed to be
appropriate for comparison: First State Bancorp, Security Bank Holding Co.,
Umpqua Holdings Corp., Columbia Bancorp-OR, United Security Bancorp, Northrim
Bank, Union Bankshares Ltd., Cascade Bancorp, Centennial Bancorp, Colorado
Business Bankshares, VRB Bancorp, Washington Banking Co., Glacier Bancorp,
American Pacific Bank, and Vail Banks Inc. Such information included market
valuation, profitability and capital ratios. Market information reviewed and
compared included market price to: latest 12 months earnings, estimated 1999
earnings, book value, total assets and total deposits. D.A. Davidson & Co. noted
the price-to-book ratios of the selected public companies averaged 179.9% and
ranged from a low of 89.1% to a high of 345.3%. D.A. Davidson & Co. also noted
the price-to-earnings multiples based on the latest 12 months earnings and on
estimated 1999 earnings averaged 15.9x and 14.9x respectively, and ranged from a
low of 8.5x to a high of 32.1x (based on latest 12 months earnings) and a low of
9.9x to a high of 34.0x (based on estimated 1999 earnings). Because of the
inherent differences in the businesses, operations, financial conditions and
prospects of Northern Bank, Cowlitz Bancorp and the selected public companies,
D.A. Davidson & Co. believed that a purely quantitative analysis would not be
particularly meaningful in the context of the merger. D.A. Davidson & Co.
believed that the appropriate use of a comparable company analysis in this
instance would involve qualitative judgments concerning the differences between
Northern Bank and the selected public companies which would affect the trading
values of the selected public companies and Northern Bank.
ANALYSIS OF ACQUISITION TRANSACTIONS. Using publicly available information,
D.A. Davidson & Co. reviewed certain terms and financial characteristics of the
following recently completed merger or acquisition transactions of banking
organizations that it believed to be appropriate for comparison: First
Washington Bancorp's acquisitions of Whatcom State Bancorp and Seaport Citizens
Bank, Glacier Bancorp's acquisition of Big Sky Western Bank, United Security
Bancorp's acquisition of BancWest Financial Corp., Heritage Financial Corp.'s
acquisition of Washington Independent Bankshares, Norwest Corp.'s acquisition of
Riverton State Bank Holding Corp., First Security Corp.'s acquisitions of
Comstock Bancorp and XEON Financial Corp., and Horizon Financial Corp's
acquisition of Bellingham Bancorp. The information reviewed included the size of
the acquired company, the transaction values and the resulting price-to-book
ratios and price-to-earnings multiples. D.A. Davidson & Co. noted the aggregate
transaction values of the selected transactions averaged
40
$21.7 million and ranged from a low of $5.7 million to a high of $64.1 million.
D.A. Davidson & Co. also noted the price-to-book ratios of the selected
transactions averaged 236.2% and ranged from a low of 189.7% to a high of
293.2%, and the price-to-earnings multiples based on trailing 12 months earnings
averaged 17.7x and ranged from a low of 12.8x to a high of 25.3x. Because the
reasons for and circumstances surrounding each of the selected transactions were
so diverse and because of the inherent differences in the businesses, operations
and financial conditions and prospects of Northern Bank, Cowlitz Bancorp and the
companies included in the analysis of acquisition transactions. D.A. Davidson &
Co. believed that a purely qualitative analysis would not be particularly
meaningful in the context of the evaluation of the fairness of the merger
consideration. D.A. Davidson & Co. believed that the appropriate use of an
analysis of acquisition transactions in this instance would involve qualitative
judgements concerning the differences between the characteristics of these
transactions which would affect the acquisition values of the acquired companies
and the merger.
DISCOUNTED TERMINAL VALUE ANALYSIS. D.A. Davidson & Co. estimated the
present value per share of the Northern Bank common stock by assuming a range of
discount rates from 10% to 20% and a range of growth rates in net earnings from
10% to 20% through 2004, starting with estimated net earnings of $0.60 million
in 2000. In addition, D.A. Davidson & Co. used a range of price-to-earnings
multiples from 12.0 to 16.0 in calculating the net present value per share. This
analysis and its underlying assumptions yielded a range of value for Northern
Bank's shares of approximately $3.46 per share to $10.09 per share. This
compares to a per share transaction value ranging from $4.34 to $5.97. In
arriving at the value of Northern Bank's book value at December 31, 2004, D.A.
Davidson & Co. assumed 100% earnings retention from June 30, 1999 through
December 31, 2004 and assumed that no additional capital was raised during this
period. These rates and values were chosen to reflect different assumptions
regarding the required rates of return of holders or prospective buyers of
Northern Bank common stock.
OTHER CONSIDERATIONS. On July 19, 1999, the Federal Deposit Insurance
Corporation and the State of Oregon, the regulators primarily responsible for
providing oversight of Northern Bank, presented to Northern Bank, and Northern
Bank signed, proposed cease and desist orders. Among other things, the orders
stipulated that Northern Bank's management, equity capital and reserves are
inadequate for the volume and quality of its assets, and that Northern Bank's
collection practices are lax. The orders directed Northern Bank to hire
additional senior management with proven ability to manage a bank of Northern
Bank's size and with experience upgrading a loan portfolio and improving
earnings. The orders also directed Northern Bank to reduce all loans classified
as substandard or doubtful to specified levels and to increase Northern Bank's
tier 1 capital by at least $2.0 million within a specified time. D.A.
Davidson & Co. considered the impact of the orders on Northern Bank in arriving
at its opinion.
D.A. Davidson & Co. is a nationally recognized investment banking firm. As
part of its investment banking business, D.A. Davidson & Co. is continuously
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, competitive biddings, private placements and valuations for
corporate and other purposes. The Northern Bank board of directors retained D.A.
Davidson & Co. based upon D.A. Davidson & Co.'s experience and expertise and its
familiarity with Northern Bank, Cowlitz Bank and Cowlitz Bancorp. D.A.
Davidson & Co. is acting as financial advisor to Northern Bank in connection
with the merger. Pursuant to a letter agreement with D.A. Davidson & Co.
executed by Northern Bank on April 26, 1999, Northern Bank has agreed to pay
D.A. Davidson & Co. a fee equal to 2.25% of the aggregate consideration payable
in connection with the merger, $5,000 of which has been paid to D.A. Davidson &
Co.. The letter agreement with D.A. Davidson & Co. also provides that Northern
Bank will reimburse D.A. Davidson & Co. for its reasonable out-of-pocket
expenses incurred in connection with the merger and indemnify D.A. Davidson &
Co. and certain related persons and entities against certain liabilities,
including liabilities under securities laws, incurred in connection with its
services thereunder. In the ordinary course of business, D.A. Davidson & Co.
41
may trade the common stock of Northern Bank and Cowlitz Bancorp for its own
account and the accounts of its customers and, accordingly, may at any time hold
a long or short position in such securities.
EFFECTIVE DATE
The merger will become effective on the date and time set forth in the
articles of merger filed with the Washington Secretary of State, the Washington
Director of Financial Institutions and the Oregon Department of Consumer and
Business Affairs. The parties will file the articles of merger on the first
business day following the later of (a) the date which is at least five business
days after the last of the conditions to closing the merger has been satisfied
or waived or (b) 35 days after the special meeting of Northern Bank shareholders
if holders of more than 5% of the outstanding Northern Bank shares have
delivered a notice of dissent or voted against the merger (but have not
perfected their appraisal rights), or any other date as Cowlitz Bancorp and
Northern Bank may agree. The merger agreement may be terminated by either party
if, among other reasons, the merger is not completed on or before March 31,
2000. See "--Conditions to Completion of the Merger" and "--Termination of the
Merger Agreement" below.
EXCHANGE OF CERTIFICATES
By the effective date, Cowlitz Bancorp will deposit with an exchange agent,
for exchange under the terms of the merger agreement (a) the Cowlitz Bancorp
stock certificates for stock payable to Northern Bank shareholders, and an
estimated amount of cash to be paid in lieu of fractional shares, and (b) the
cash portion of the merger consideration.
As soon as practicable after the effective date, the exchange agent will
mail a transmittal letter to the Northern Bank shareholders. The transmittal
letter will contain instructions for the surrender of their certificates in
exchange for the merger consideration and will specify that delivery will be
effective and risk of loss will pass only upon delivery of the certificates to
the exchange agent.
After the effective date, after submitting a completed and executed
transmittal letter and surrendering all certificates representing Northern Bank
stock, a Northern Bank shareholder will receive a certificate representing the
number of shares of Cowlitz Bancorp common stock to which the former Northern
Bank shareholder is entitled, and a check for the fractional Cowlitz Bancorp
shares the holder would otherwise be entitled to receive. No interest will be
paid on the cash payable in lieu of fractional share.
Northern Bank shareholders will not be paid any dividends or other
distributions declared on Cowlitz Bancorp common stock with a record date after
the effective date until the shareholders surrender their Northern Bank stock
certificates for exchange. After surrendering their Northern Bank stock
certificates, former Northern Bank shareholders will be paid any dividends and
other distributions declared on Cowlitz Bancorp stock after the effective date,
but no interest will be paid on those distributions.
Any portion of the certificates delivered to the exchange agent and any cash
delivered as payment for fractional shares that remain unclaimed twelve months
after the effective date will be paid to Cowlitz Bancorp. Thereafter, former
Northern Bank shareholders who have not yet complied with the exchange procedure
can look only to Cowlitz Bancorp for delivery of certificates and payment of any
cash due for fractional shares. None of Cowlitz Bancorp, Cowlitz Bank, Northern
Bank, the exchange agent, or any other person will be liable to any former
Northern Bank shareholder for any amount properly delivered to a public official
under applicable abandoned property, escheat or similar laws.
If a Northern Bank stock certificate has been lost, stolen or destroyed, the
exchange agent will issue the Cowlitz Bancorp shares and, where applicable, the
cash consideration upon receipt of an affidavit from the shareholder as to the
loss, theft or destruction and the posting of a bond in an amount that Cowlitz
Bancorp may determine is reasonably necessary.
42
For a description of the differences between the rights of the Cowlitz
Bancorp shareholders and Northern Bank shareholders, see "Comparison of Rights
of Cowlitz Bancorp shareholders and Northern Bank Shareholders."
FRACTIONAL SHARES
No fractional shares of Cowlitz Bancorp common stock will be issued to any
holder of Northern Bank common stock upon completion of the merger. In lieu of
each fractional share, Cowlitz Bancorp will pay cash in an amount equal to the
fraction multiplied by $6.563. No interest will accrue or be paid on the cash to
be paid for fractional shares. No holder of fractional shares will be entitled
to dividends, voting rights or any other shareholder rights. To determine any
fractional share interests all shares of Northern Bank common stock owned by any
Northern Bank shareholder will be combined so as to calculate the maximum number
of shares of Cowlitz Bancorp common stock issuable to that Northern Bank
shareholder.
TREATMENT OF ESCROW PROCEEDS
Shortly before the second anniversary of the effective date of the merger,
Cowlitz Bancorp will examine those Northern Bank loans that were identified
prior to the effective date to determine whether any of those loans have caused,
or are likely to cause, a loss to Cowlitz Bancorp. Thereafter, the escrow agent
will deduct its fees and expenses, first from the interest earned on the escrow
account, and then, if necessary, from the principal. Cowlitz Bancorp and
Northern Bank expect that those charges will not be substantial, and that the
interest should be sufficient to cover them; however, there can be no assurance
in this regard. Once all deductions from the account have been made, former
Northern Bank shareholders will receive a pro rata disbursement from the escrow
account of the remaining proceeds, together with a statement showing how the
disbursement was calculated.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, Cowlitz Bancorp and Northern Bank each make
representations and warranties to the other regarding, among other things:
- its corporate organization and existence;
- its capitalization;
- its corporate power and authority to carry on its business and to enter
into the merger agreement;
- its due authorization, execution and delivery of the merger agreement and
related agreements;
- required governmental and third party approvals;
- that neither the merger agreement nor the transactions contemplated in the
merger agreement violate its charter, bylaws, applicable law or certain
material agreements;
- the timely filing and payment of required fees in connection with material
regulatory reports;
- its financial statements and securities filings;
- the absence of certain material legal proceedings or regulatory actions;
- the absence of certain materially adverse changes in its business;
- its compliance with applicable law;
- its agreements or understandings with, or the existence of any order
issued by, regulatory agencies;
- any broker's fees payable in connection with the merger;
- year 2000 compliance of their hardware and software;
43
- the opinions of their respective financial advisors; and
- the completeness and accuracy and compliance as to form of this joint
proxy statement, the related registration statement and any other
governmental filing in connection with the merger.
In addition, Northern Bank has made certain other representations and
warranties to Cowlitz Bank and Cowlitz Bancorp regarding, among other things:
- the filing and accuracy of all tax returns and payment or provision for
all taxes;
- its employee benefit plans and related matters;
- its filings with the FDIC;
- its material contracts;
- the absence of any undisclosed liabilities;
- its real and personal property;
- its insurance coverage;
- certain environmental matters;
- its intellectual property;
- the loans reflected as assets on its books and records;
- labor matters;
- compliance with the Community Reinvestment Act of 1977;
- the absence of powers of attorney;
- that no Northern Bank common stock is available through a benefit plan;
and
- that its board of directors has taken all action necessary so that neither
the merger agreement, the merger, the option agreement nor the exercise of
the option (as described in "--The Option Agreement" below) will cause
application of the anti-takeover provisions of Oregon law.
CONDITIONS TO THE COMPLETION OF THE MERGER
Cowlitz Bancorp's, Cowlitz Bank's and Northern Bank's obligations to effect
the merger are subject to, among other things, satisfaction of the following
conditions by the effective date:
- the merger must have been approved by the Northern Bank shareholders and
the issuance of the Cowlitz Bancorp stock in the merger must have been
approved by the Cowlitz Bancorp shareholders;
- all required regulatory approvals must have been obtained and must remain
in full force and effect, and all statutory waiting periods must have
expired;
- no court or agency order, injunction or decree or other legal prohibition
may be in effect to prevent completion of the merger or any of the
transactions contemplated by the merger agreement;
- no statute, rule, regulation, order, injunction or decree shall have been
enacted, entered or promulgated that would prohibit, restrict or make
illegal the completion of the merger;
- no stop order will have been issued or threatened by the SEC that would
suspend the effectiveness of the registration statement of which this
joint proxy statement is a part; and
- the Cowlitz Bancorp shares to be issued in the merger must have been
authorized for listing on the Nasdaq Stock Market, subject to official
notice of issuance.
44
Cowlitz Bancorp's obligation to effect the merger is also subject to, among
other things, the satisfaction or waiver by Cowlitz Bancorp, at or prior to the
effective date, of the following conditions:
- Northern Bank's representations and warranties set forth in the merger
agreement must be true and correct in all respects as of the date of the
merger agreement and as of the closing date of the merger (subject to
certain exceptions);
- Northern Bank must have performed in all material respects all obligations
required to be performed by it under the merger agreement;
- none of the required regulatory approvals may contain any restriction,
term or condition that would reasonably be expected to have a material
adverse effect on Cowlitz Bancorp or Cowlitz Bank, or to prevent Cowlitz
Bancorp from realizing substantially all of the contemplated benefits of
the merger;
- Cowlitz Bancorp must have received resignations from each of the Northern
Bank directors other than Mr. Spicer;
- Mr. Holloway's employment agreement with Cowlitz Bank (as described in
"--Employee Matters" below) must be in full force and effect and
Mr. Holloway must not have defaulted under that agreement;
- each of the non-competition agreements and option agreements entered into
between Cowlitz Bancorp and certain Northern Bank directors must be in
full force and effect, and no director may have defaulted under these
agreements;
- no more than 5% of the total outstanding Northern Bank shares may have
perfected dissenters' rights with respect to these shares (unless those
rights are withdrawn before the effective date);
- there must be no pending or threatened legal, administrative, arbitral or
other proceeding or investigation against Northern Bank, Cowlitz Bancorp
or any subsidiary of Cowlitz Bancorp or challenging the validity of the
merger agreement which (a) has a significant possibility of an adverse
outcome and (b) could have a material adverse effect on Northern Bank,
Cowlitz Bancorp or Cowlitz Bank;
- Cowlitz Bancorp or Cowlitz Bank must have received assurances from the
FDIC and the Director of the Department of Consumer and Business Services
of the State of Oregon that the cease and desist orders issued to Northern
Bank will not apply to Cowlitz Bank as the surviving bank in the merger;
- Northern Bank's total deposits on the effective date must be equal to at
least 80% of its total deposits as of June 30, 1999 and must have
substantially the same interest rates and be in substantially the same mix
as its deposits on that date;
- Northern Bank's total shareholders' equity on the effective date must be
at least $1,150,000;
- Cowlitz Bancorp must have received an opinion from Arthur Andersen LLP as
to the treatment of certain accounting matters; and
- Cowlitz Bancorp must have received written agreements from each Northern
bank officer and director immediately prior to the effective date agreeing
to the terms on which Cowlitz Bancorp will provide directors' and
officers' insurance after the merger, and to the limitations on Cowlitz
Bancorp's obligation to indemnify those individuals.
Northern Bank's obligation to effect the merger is also subject to, among
other things, the satisfaction or waiver by Northern Bank, at or prior to the
effective date, of the following conditions:
- Cowlitz Bancorp's representations and warranties set forth in the merger
agreement must be true and correct in all respects as of the date of the
merger agreement and as of the closing date of the merger (subject to
certain exceptions);
45
- Cowlitz Bancorp must have performed in all material respects all
obligations required to be performed by it under the merger agreement; and
- there must be no pending or threatened legal, administrative, arbitral or
other proceeding or investigation against Cowlitz Bancorp or any Cowlitz
Bancorp subsidiary or challenging the validity of the merger agreement
which (a) has a significant possibility of an adverse outcome and
(b) could have a material adverse effect on Cowlitz Bancorp or Cowlitz
Bank.
REGULATORY APPROVALS REQUIRED
Under the merger agreement, the obligations of both Cowlitz Bancorp and
Northern Bank to complete the merger are conditioned upon the receipt of all
required regulatory approvals. Cowlitz Bancorp and Northern Bank have agreed to
use their reasonable best efforts to obtain these regulatory approvals. Cowlitz
Bancorp and Northern Bank must obtain the approval of the FDIC and they have
identified Washington and Oregon as states in which filings or regulatory
approvals are required. To date, neither Cowlitz Bancorp nor Northern Bank has
received any approvals or notices of disapproval. It is possible that these
approvals may not be granted, may be granted at a later date than expected, or
may be granted subject to unfavorable conditions.
AMENDMENT AND WAIVER OF THE MERGER AGREEMENT
Cowlitz Bancorp and Northern Bank may amend the merger agreement at any time
before or after the Northern Bank shareholders approve the merger unless the
amendment reduces or changes the form of consideration payable to the Northern
Bank shareholders. Any amendment to the merger agreement must be in writing and
signed on behalf of Cowlitz Bancorp, Cowlitz Bank and Northern Bank.
At any time prior to the effective date, Cowlitz Bancorp or Northern Bank
may (a) extend the time for the other party to perform its obligations,
(b) waive any inaccuracies contained in the representations and warranties in
the merger agreement or any document delivered pursuant to the merger agreement,
and (c) waive compliance with any of the agreements or conditions contained in
the merger agreement. Any such extension or waiver must be in writing and signed
on behalf of the party agreeing to the extension or waiver.
TERMINATION OF THE MERGER AGREEMENT
Cowlitz Bancorp and Northern Bank may terminate the merger agreement by
mutual consent. The merger agreement also may be terminated unilaterally by
either Cowlitz Bancorp or Northern Bank:
- if the approval of any governmental authority required for the completion
of the merger and the other transactions contemplated by the merger
agreement is denied by final non-appealable action;
- if the merger does not occur on or before March 31, 2000, although this
date will be extended to June 30, 2000 if the failure is due solely to a
delay in obtaining regulatory approvals;
- in certain events involving a material breach by the other party of any of
its representations, warranties or covenants in the merger agreement, or
any related agreements pertaining to the merger; or
- if the required shareholder approvals are not obtained.
Cowlitz Bancorp may terminate the merger agreement if:
- Northern Bank's board of directors withdraws, modifies or changes its
approval or its recommendation that the Northern Bank shareholders approve
the merger agreement;
- there is a "change in control" of Northern Bank (defined as the
acquisition of 30% of the voting power of Northern Bank's capital stock);
46
- any person acquires beneficial ownership of 25% or more of the then
outstanding shares of Northern Bank common stock, or Northern Bank enters
into an agreement to engage in, or Northern Bank's board of directors
recommends that the Northern Bank shareholders approve (a) a merger or
consolidation, or any similar transaction, involving Northern Bank or any
significant subsidiary of Northern Bank, (b) a purchase, lease or other
acquisition or assumption of all or a substantial portion of the assets or
deposits of Northern Bank, or (c) a purchase or other acquisition of
securities representing 25% or more of the voting power of Northern Bank
(those events are referred to below as "subsequent triggering events"); or
- a tender offer or exchange offer is commenced for 25% or more of the
outstanding Northern Bank common stock and Northern Bank's board of
directors recommends that the Northern Bank shareholders tender their
shares in this offer or fails to recommend that the Northern Bank
shareholders reject the offer.
Northern Bank may terminate the merger agreement if, prior to approval of
the merger by the Northern Bank shareholders, a "superior proposal" is made and
Northern Bank's board of directors determines that failure to terminate the
merger agreement in order to accept the proposal would constitute a breach of
fiduciary duty. A "superior proposal" will exist if:
- a third party inquires about, proposes or makes (a) a tender or exchange
offer or a merger, consolidation or other business combination involving
Northern Bank, or (b) an offer or proposal to acquire 25% or more of the
voting stock or equity, or a substantial portion of the assets, of
Northern Bank; and
- any financing to support the proposal is committed or reasonably capable
of being obtained; and
- Northern Bank's board of directors determines that the proposal represents
superior value to Northern Bank shareholders.
However, Northern Bank's board of directors may not terminate the merger
agreement to pursue a superior proposal unless it has given Cowlitz Bancorp 10
business days prior written notice of its intention and offered Cowlitz Bancorp
the opportunity to amend the terms of the merger agreement. Northern Bank also
must pay Cowlitz Bancorp a $425,000 termination fee at the time it enters into a
definitive agreement to consummate that transaction. See "--Termination Fees"
below.
TERMINATION FEES
The merger agreement requires Northern Bank to pay a $425,000 termination
fee to Cowlitz Bancorp if the merger agreement is terminated by Cowlitz Bancorp
upon any of the following events:
- Northern Bank's board of directors withdraws, modifies or changes its
recommendation that the Northern Bank shareholders approve the merger;
- a "change in control" (as defined above) of Northern Bank occurs;
- a third party makes a tender or exchange offer for 25% or more of the
outstanding Northern Bank shares unless the Northern Bank board recommends
that the shareholders reject that proposal;
- Northern Bank willfully breaches any representation, warranty, covenant or
other agreement in the merger agreement, if at the time of that breach
another party has made an alternative proposal to acquire Northern Bank;
or
- a "subsequent triggering event" (as defined in "--Termination of the
Merger Agreement" above) occurs.
Northern Bank also must pay this fee if either Cowlitz Bancorp or Northern
Bank terminates the merger agreement because the Northern Bank shareholders fail
to approve the merger if an alternative proposal to acquire Northern Bank had
been publicly disclosed at the time of such failure. In addition,
47
Northern Bank must pay the termination fee if it terminates the merger agreement
because of a "superior proposal" (as defined in "--Termination of the Merger
Agreement" above).
Northern Bank will not be required to pay a termination fee, however, if
immediately prior to the termination, Northern Bank was entitled to terminate
the merger agreement because of a breach of the merger agreement by Cowlitz
Bancorp. If Northern Bank fails to timely pay the $425,000 termination fee,
Northern Bank must pay the costs and expenses incurred by Cowlitz Bancorp to
collect such payment, together with interest.
THE OPTION AGREEMENT
Cowlitz Bancorp and Northern Bank have entered into an option agreement
commonly known as a "lock-up option." Under the option agreement, Northern Bank
granted to Cowlitz Bancorp an option to purchase up to 243,893 Northern Bank
shares (approximately 19.9% of the issued and outstanding shares) at a price of
$4.625 per share. A copy of the option agreement is attached to this joint proxy
statement as Appendix G and is incorporated by reference.
The option may be exercised in whole or in part if both an "initial
triggering event" (as defined below) and a "subsequent triggering event" (as
defined above in "--Termination of the Merger Agreement") occur prior to
termination of Cowlitz Bancorp's ability to exercise the option. Under the
option agreement, an "initial triggering event" will occur if:
- Northern Bank enters into an agreement with a third party to engage in, or
the Northern Bank board recommends that the Northern Bank shareholders
approve or accept a third party's offer to engage in, (a) a merger or
consolidation, or any similar transaction, involving Northern Bank, (b) a
purchase, lease or other acquisition or assumption of all or a substantial
portion of Northern Bank's assets or deposits, or (c) a purchase or other
acquisition of securities representing 10% or more of the voting power of
Northern Bank (any such event being referred to herein as an "acquisition
transaction");
- Northern Bank authorizes, recommends, proposes or publicly announces an
intention to authorize, recommend or propose an acquisition transaction;
- Northern Bank's board fails to recommend or withdraws its recommendation
that Northern Bank shareholders approve the merger;
- Any person (other than specified current holders) acquires beneficial
ownership of 10% or more of the outstanding Northern Bank common stock;
- The Northern Bank shareholders fail to approve the merger agreement after
any person proposes an "acquisition transaction";
- Northern Bank willfully breaches any covenant, obligation, representation
or warranty in the merger agreement, which would entitle Cowlitz Bancorp
to terminate the merger agreement, after a third party makes an overture
to Northern Bank or the Northern Bank shareholders to engage in an
"acquisition transaction";
- Any person files an application or notice with any federal or state bank
regulatory authority for approval to engage in an "acquisition
transaction"; or
- Any person commences or publicly announces an intention to commence a
tender offer or exchange offer for securities representing 10% or more of
the voting power of Northern Bank.
Cowlitz Bancorp's option will terminate upon (a) the effective date of the
merger; (b) termination of the merger agreement according to its terms before an
initial triggering event occurs; (c) 12 months after the merger agreement
terminates following an initial triggering event, or is terminated by Cowlitz
Bancorp because of a breach by Northern Bank of its representations, warranties,
covenants or agreements in the merger agreement (subject to certain extensions
stated in the option agreement); or (d) Cowlitz Bancorp receives payment of the
termination fees.
48
Cowlitz Bancorp's maximum benefit under the termination fee and the option
agreement generally is limited to $425,000 before taxes. Cowlitz Bancorp cannot
exercise the option if it has received payment of termination fees, and cannot
receive termination fees if it has exercised all or any part of the option.
Cowlitz Bancorp and Northern Bank believe the termination fees and option
described above are customary and typical for transactions such as the proposed
merger. These agreements are intended, among other things, to increase the
likelihood that the merger will be completed according to the terms of the
merger agreement and, if the merger is not completed because a third party
acquires or attempts to acquire Northern Bank, to compensate Cowlitz Bancorp for
its efforts, expenses and lost opportunities. These agreements may discourage
acquisition offers by third parties to, even if there are parties that otherwise
would be prepared to pay a greater price or offer more attractive terms.
CONDUCT OF BUSINESS PENDING THE MERGER AND OTHER AGREEMENTS
Except as expressly contemplated or permitted by the merger agreement and
any of its disclosure schedules, or required by applicable law, Northern Bank
has agreed before the effective date to:
- conduct its business in the ordinary and usual course consistent with past
practices;
- use its reasonable best efforts to maintain and preserve intact its
business organization, employees and relationships and retain the services
of its officers and key employees;
- refrain from taking any action reasonably expected to affect its ability
to obtain any governmental approvals necessary to complete the merger;
- file all tax returns required to be filed for all periods ending on or
prior to the effective date;
- use its reasonable best efforts to sell all of its obligations under a
specific accounts receivable financing program; and
- establish reasonable reserves for certain current disputes.
In addition, except as expressly contemplated or permitted by the merger
agreement and any of its disclosure schedules, or required by applicable law,
Northern Bank has agreed that it will not, without the prior written consent of
Cowlitz Bancorp, among other things:
- issue any additional shares of Northern Bank common stock (except upon the
exercise of stock options outstanding as of the date of the merger
agreement) or grant any stock appreciation rights or rights to acquire its
capital stock;
- adjust, split, combine, reclassify, redeem, purchase or otherwise acquire
any capital stock or declare or pay dividends except in the ordinary and
usual course of business consistent with past practices;
- incur any indebtedness for borrowed money other than certain permitted
indebtedness;
- subject to certain exceptions, increase in any material respect
compensation or fringe benefits of any of its employees, pay any pension
or retirement allowance not required under an existing plan or agreement,
or enter into or modify any employee benefit plans or employment
agreements or accelerate the vesting of any stock options or other
stock-based compensation;
- sell, transfer, mortgage or encumber or otherwise dispose of any of its
properties or assets or cancel, release or assign any indebtedness to any
person except for nonmaterial transactions in the ordinary course of
business consistent with past practice or as expressly required by
contracts in existence on the date of the merger agreement;
- form any subsidiary or make any acquisition or investment in, or make any
property transfers to, or material purchases, of any property or assets
of, any other entity;
- amend its certificate of incorporation, bylaws or similar governing
documents;
49
- enter into, renew or terminate any contract or agreement, other than loans
made in the ordinary course of business, that calls for aggregate annual
payments of $50,000 or more and which either is not terminable at will on
60 days or less notice without payment of a penalty in excess of $20,000,
or has a term of less than one year;
- make any changes in its accounting methods unless required under generally
accepted accounting principles, law, rule or regulation, as concurred by
its independent public accountants;
- settle any material litigation except in the ordinary course of business
consistent with past practice;
- make or acquire loans or issue commitments for any loans except in the
ordinary course of business consistent with past practice at not less than
the prevailing market rates or agree to issue any letters of credit or
guarantee the obligation of other persons except for letters of credit
issued in the ordinary course of business consistent with past practice;
- take any action intended or reasonably expected to result in any of its
representations or warranties being or becoming untrue in any material
respect, any closing condition not being satisfied, or in a violation of
any provision of the merger agreement, except as required by applicable
law;
- subject to certain exceptions, make capital expenditures in excess of
specified amounts;
- foreclose on or otherwise acquire any real property other than 1-to-4
family residential properties in the ordinary course of business;
- subject to certain exceptions, open, relocate or close any branch or loan
production or servicing facility or make any application therefor;
- materially change its investment securities portfolio policy or the manner
in which its portfolio is classified or reported, except in the ordinary
course of business consistent with past practice;
- except as required to comply with current outstanding cease and desist
orders, make any material changes with respect to its policies and
practices with respect to hedging its loan positions or commitments;
- except as required to comply with current outstanding cease and desist
orders, make any material change in its policies and practices with
respect to underwriting, pricing, originating, acquiring, selling,
servicing, or buying or selling rights to service loans;
- except as otherwise permitted, engage or participate in any material
transaction or incur or sustain any material obligation not in the
ordinary course of business;
- except as required to comply with certain current outstanding cease and
desist orders, increase the number of employees from the number employed
as of June 30, 1999;
- take any actions that would prevent the merger from qualifying as a
tax-free "reorganization" under the Internal Revenue Code;
- except as required to comply with certain existing cease and desist
orders, agree to or make any commitment to take any of the foregoing
actions.
In addition, except as expressly contemplated or permitted by the merger
agreement or required by applicable law, Cowlitz Bancorp has agreed that it will
not, without the prior written consent of Northern Bank, amend its articles of
incorporation or bylaws in a manner that would materially and adversely affect
the economic benefits of the merger to holders of Northern Bank common stock, or
agree to or make any commitment to take such action.
In the merger agreement, Northern Bank has agreed not to authorize or permit
any of its officers, directors, employees, representatives or agents to solicit
or encourage any inquiries or proposals,
50
participate in any discussions or negotiations regarding, or provide any
confidential information to any person relating to, or otherwise facilitate any
effort or attempt to make or implement, any "takeover proposal" (as defined
below). However, at any time before the Northern Bank shareholders vote to
approve the merger agreement, Northern Bank may provide third parties with
nonpublic information and participate in discussions and negotiations with any
third party relating to a "takeover proposal" that it has not solicited after
the date of the merger agreement if it complies with certain limitations. In
particular, Northern Bank may only respond to an inquiry or proposal if its
board of directors has determined in its reasonable good faith judgment based on
advice of outside counsel and financial advisors that failure to do so would
breach its fiduciary duties under applicable law. Northern Bank will advise
Cowlitz Bancorp immediately of any such inquiry or proposal and inform Cowlitz
Bancorp of the terms and status of any proposal unless it would constitute a
breach of the board's fiduciary duty. Northern Bank may not furnish any
nonpublic information to any third party except pursuant to the terms of a
confidentiality agreement containing terms substantially identical to the terms
of the confidentiality agreement between Northern Bank and Cowlitz Bancorp. The
merger agreement defines a "takeover proposal" as any inquiry, proposal or offer
relating to any tender or exchange offer, proposal for a merger, consolidation
or other business combination involving Northern Bank, or the acquisition in any
manner of 25% or more of the voting stock or equity, or a substantial portion of
the assets, of Northern Bank, other than the transactions contemplated by the
merger agreement.
Northern Bank and Cowlitz Bancorp have also agreed to cooperate with each
other and to use their reasonable best efforts to promptly prepare all necessary
documentation, to effect all filings, and to obtain and comply with the terms or
conditions of, all permits, consents, approvals and authorizations of all third
parties and governmental entities necessary or advisable to consummate the
transactions contemplated by the merger agreement. Northern Bank and Cowlitz
Bancorp have agreed subject to the restrictions set forth in the merger
agreement, to furnish to the other party all information concerning themselves
and their subsidiaries, directors, officers and shareholders and such other
matters as may be necessary in furtherance of the merger upon request and to
permit reasonable access to their properties, books, contracts and records.
Northern Bank and Cowlitz Bancorp have also agreed, subject to the terms and
conditions of the merger agreement, to use their reasonable best efforts to
take, or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed or which are necessary
or advisable to consummate and make the merger effective. Cowlitz Bancorp has
further agreed to use its reasonable best efforts to cause the shares of Cowlitz
Bancorp common stock to be issued in the merger to be approved for listing on
Nasdaq, subject to official notice of issuance.
Cowlitz Bancorp will also cooperate with the current officers and directors
of Northern Bank so that they are covered, to the extent available and subject
to specific limitations, by a directors' and officers' liability insurance
covering claims arising from facts or events occurring prior to the effective
date, for a period of three years after the merger. See "--Interests of Certain
Persons in the Merger."
EXPENSES AND FEES
Except for any termination fee that may become payable as discussed in
"--Termination Fees" above, all legal and other costs and expenses incurred in
connection with the merger agreement and related transactions will be borne by
the party incurring such costs and expenses unless otherwise specified in the
merger agreement.
ACCOUNTING TREATMENT
Cowlitz Bancorp will account for the merger as a purchase in accordance with
generally accepted accounting principles. The reported results of operations of
Cowlitz Bancorp will include the results of Northern Bank from and after the
closing date of the merger. The assets, including intangible assets, and
liabilities of Northern Bank will be recorded at their fair values as of the
closing date of the
51
merger. Any excess of the purchase consideration over the fair values of the
assets and liabilities of Northern Bank will be recorded as intangible asset and
amortized over a fifteen year period.
NASDAQ LISTING OF COWLITZ BANCORP COMMON STOCK
The merger agreement requires Cowlitz Bancorp to use its best efforts to
cause the shares of Cowlitz Bancorp common stock to be issued in the merger to
be approved for listing on The Nasdaq National Stock Market, subject to official
notice of issuance, before the effective date.
RESALE OF COWLITZ BANCORP STOCK RECEIVED BY NORTHERN BANK SHAREHOLDERS
The Cowlitz Bancorp shares to be issued to Northern Bank shareholders upon
completion of the merger have been registered under the Securities Act and may
be traded freely without restriction by those shareholders who are not deemed to
be "affiliates" of Northern Bank or Cowlitz Bancorp, as that term is defined in
rules promulgated under the Securities Act.
Cowlitz Bancorp common stock received by those Northern Bank shareholders
who are deemed to be "affiliates" of Northern Bank at the time of the Northern
Bank shareholders meeting with respect to the merger may be resold without
registration under the Securities Act only as permitted by Rule 145 under the
Securities Act or as otherwise permitted under the Securities Act. Northern Bank
has agreed to use its reasonable best efforts to cause each "affiliate" to
deliver a written agreement relating to these transfer restrictions.
APPRAISAL RIGHTS
Under Oregon law, shareholders who dissent from a proposed bank merger are
entitled to dissenters' rights under ORS 711.175 to ORS 711.185. Copies of these
statutes are enclosed as Appendix H. In order to perfect his or her dissenters'
rights, a shareholder must notify Northern Bank at or before the shareholder
meeting that he or she is dissenting as to all shares of Northern Bank he or she
beneficially owns. Within 30 days after the effective date, dissenting
shareholders will receive from Cowlitz Bancorp, as the surviving company, an
acknowledgement of their dissent with a written offer to pay cash for the fair
market value of those shares as determined by Cowlitz Bancorp. If a shareholder
notifies Cowlitz Bancorp that he or she accepts the offer, Cowlitz Bancorp will
pay the fair market value to the shareholders within 30 days after receiving the
acceptance.
If a shareholder declines Cowlitz Bancorp's offer, the Oregon Department of
Consumer and Business Services will appoint an appraiser, who will make a final
determination of fair market value. Within 30 days after receiving the
appraiser's valuation, Cowlitz Bancorp must notify the dissenting Northern Bank
shareholders of the valuation. One-half the costs of appraisal would be borne by
Cowlitz Bancorp and one-half shared pro rata among the dissenting shareholders
unless the appraised value differs by more than 15% from Cowlitz Bancorp's
initial offer to dissenters. If Cowlitz Bancorp's offer was less than the
appraiser's valuation by more than 15%, Cowlitz Bancorp would be required to pay
the entire cost of valuation. If Cowlitz Bancorp's offer was more than the
appraiser's valuation by more than 15%, the dissenting shareholders who did not
accept Cowlitz Bancorp's initial offer would bear the entire cost of the
valuation on a pro rata basis.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some members of Northern Bank's management and board of directors have
interests in the merger that are in addition to their interests as Northern Bank
shareholders generally. The Northern Bank board of directors was aware of these
interests and considered them in approving the merger agreement.
52
NORTHERN BANK
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. The merger agreement
provides that Cowlitz Bancorp will cooperate with those persons serving as
officers and directors of Northern Bank immediately before the merger so that
they are covered for three years after the merger by a directors' and officers'
liability insurance policy, to the extent available, which will contain
substantially the same coverage, amounts, terms and conditions as Northern
Bank's policy in effect on the date of the merger agreement. However, the merger
agreements provides that Cowlitz Bancorp will not be required to expend in any
one year more than 100% of the annual premiums paid by Northern Bank for
directors' and officers' insurance as of the date of merger agreement.
COWLITZ BANCORP STOCK OPTIONS. In exchange for the surrender of options to
purchase Northern Bank common stock prior to the effective date, Cowlitz Bancorp
granted the following individuals, each of whom is a Northern Bank director,
options to purchase the number of shares of Cowlitz Bancorp common stock set
forth opposite their names below at an exercise price equal to 1.4 times the
book value per share of Cowlitz Bancorp common stock as of the effective date,
after taking into account the shares to be issued in the merger. These options
are immediately vested upon issuance and have a term of ten years.
OPTIONEE NUMBER OF SHARES
- -------- ----------------
William V. Spicer........................................... 21,400
Christopher Brown........................................... 21,400
John F. Walrod.............................................. 21,400
Kurt G. Wollenberg.......................................... 17,266
In addition, Cowlitz Bancorp granted John H. Holloway, Jr., a Northern Bank
director and Director of Marketing and its former Chairman, President and Chief
Executive Officer, an option to purchase 150,000 shares of Cowlitz Bancorp
common stock at an exercise price of $12.00 per share. This option was granted
in exchange for Mr. Holloway surrendering options he currently holds to purchase
Northern Bank common stock and agreeing to waive payment of amounts which would
otherwise become due as a result of the merger under "change of control"
provisions in his employment agreement. Twenty percent of this option will be
immediately vested as of the effective date, and the remainder will vest in four
equal installments on each annual anniversary of the effective date. This option
has a term of ten years. As described in "Employee Matters--Employee Options"
below, the stock options listed above may be reduced to provide for the issuance
of stock options on similar terms and conditions to specified Northern Bank
employees who become employed by Cowlitz Bancorp or an affiliate after the
effective date of the merger.
EMPLOYMENT AGREEMENT WITH COWLITZ BANK. In connection with the merger,
Mr. Holloway has entered into an employment agreement with Cowlitz Bank to serve
as the Director of Marketing for the Greater Portland area. The terms of this
employment agreement are described below under "--Employee Matters."
COWLITZ BANCORP
As of December 28, 1999, a director of Cowlitz Bancorp beneficially owned
450 shares of Northern Bank common stock.
EMPLOYEE MATTERS
EMPLOYMENT ARRANGEMENTS
In connection with the merger, Cowlitz Bank has entered into an employment
agreement with Mr. Holloway on an "at-will" basis to serve as Cowlitz Bank's
Director of Marketing for the Greater Portland area. Mr. Holloway will receive
an annual base salary of $123,000, as well as the use of an
53
automobile. In addition, Mr. Holloway will receive other employee benefits that
are comparable to other similarly situated employees of Cowlitz Bank (other than
stock options). This employment agreement may be terminated by Cowlitz Bank at
any time without any further liability to Mr. Holloway.
Mr. Holloway was a party to an employment agreement with Northern Bank that
provides for compensation upon a "change of control" of Northern Bank, which
compensation would become payable in connection with the merger. In full
satisfaction of Northern Bank's obligations under that agreement in connection
with the merger, Cowlitz Bancorp agreed to grant Mr. Holloway an option to
purchase 150,000 shares of Cowlitz Bancorp common stock at an exercise price of
$12.00 per share. See "--Interests of Certain Persons in the Merger" above.
Following the merger, William V. Spicer will serve as a director of Cowlitz
Bank. Mr. Spicer will be compensated in a manner similar to Cowlitz Bank's other
outside directors. In addition, Messrs. Walrod and Wollenberg, who are currently
directors of Northern Bank, will serve as members of the loan committee that
will administer the identified loans pursuant to the escrow agreement described
above. For their services on this committee, Messrs. Walrod and Wollenberg will
be paid $1,000 per year during each of the two years in which the escrow is to
be maintained.
EMPLOYEE OPTIONS
Mr. Holloway and the other Northern Bank directors who will be granted
Cowlitz Bancorp options as described above have agreed to reduce the number of
options they would otherwise be issued in order to provide for the issuance of
stock options to previously identified Northern Bank employees who become
employed by Cowlitz Bank after the merger. Any options issued to Northern Bank
employees based on these reductions will have similar terms as the options which
would have been issued to Mr. Holloway and the Northern Bank directors,
respectively, except that they are subject to a continuation of employment
requirement, and only twenty percent of these employees' options will be
immediately vested with the remainder to vest in four equal installments on each
anniversary of the effective date of the merger.
EMPLOYEE BENEFIT PLANS
Under the merger agreement, Cowlitz Bank has agreed from and after the
effective date to (a) comply with the Northern Bank employee benefit plans,
arrangements and agreements in accordance with their terms; (b) provide Northern
Bank employees who remain as Cowlitz Bank employees credit for years of service
with Northern Bank prior to the effective date for the purpose of eligibility
and vesting; and (c) cause any and all "pre-existing condition" limitations (to
the extent such limitations did not apply to the pre-existing condition under
comparable Northern Bank compensation and benefit plans) and eligibility waiting
periods under group health plans of Cowlitz Bank to be waived with respect to
former employees of Northern Bank who remain as employees of Cowlitz Bank (and
their eligible dependents) and who become participants in these group health
plans. However, Cowlitz Bancorp and its subsidiaries will be entitled to amend,
modify or terminate any Northern Bank compensation and benefit plans, or other
contracts, arrangements, commitments or understandings, in a manner consistent
with their terms and applicable law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax
considerations generally applicable to the Northern Bank shareholders. The
discussion below is based on United States federal income tax law, including the
Internal Revenue Code of 1986, as amended (the "Code"), regulations, rulings,
decisions and administrative practice all as in effect on the date hereof.
Future legislation, regulations, administrative interpretations or court
decisions could change such laws either prospectively or
54
retroactively and affect the federal income tax consequences of the merger to
the Northern Bank shareholders.
This discussion assumes that Northern Bank shareholders hold their Northern
Bank common stock as capital assets within the meaning of Section 1221 of the
Code. This discussion does not address the tax consequences of the merger under
state, local or foreign law, nor does the discussion address all aspects of
federal income taxation that may be important to a Northern Bank shareholder in
light of his or her particular circumstances or tax issues that may be
significant to Northern Bank shareholders subject to special rules such as:
- dissenting shareholders;
- financial institutions;
- foreign individuals and entities;
- tax-exempt entities;
- persons who are subject to the alternative minimum tax provisions of the
Code;
- persons who acquired their common stock pursuant to the exercise of an
employee option (or otherwise as compensation);
- persons who acquired or hold their Northern Bank common stock as a hedge
or as part of a hedging, straddle, conversion or other risk reduction
transaction;
- dealers in securities;
- banks; and
- insurance companies.
In addition, the following discussion does not address the tax consequences
of transactions occurring before or after the merger (whether or not such
transactions are in connection with the merger).
Because the tax consequences of the merger to the Northern Bank shareholders
depend on the relative value of the Cowlitz Bancorp common stock and cash
received as consideration in the merger, which will not be known until the time
of the merger, the tax consequences of the merger cannot be determined with
certainty before the effective date of the merger. Neither a ruling from the IRS
nor an opinion of tax counsel will be received with respect to the United States
federal income tax treatment of the merger. Following closing, Cowlitz Bancorp
will advise former Northern Bank shareholders as to the final breakdown of the
value of the merger consideration between cash and Cowlitz Bancorp stock and how
it intends to treat the merger for federal income tax purposes. The treatment by
Cowlitz Bancorp is not binding on the former Northern Bank shareholders, who
should consult with their tax advisors regarding this determination and its
consequences. ACCORDINGLY, NORTHERN BANK SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
REQUIREMENTS FOR A PARTIALLY TAX FREE REORGANIZATION
To qualify as a "reorganization" for federal income tax purposes, the merger
must satisfy certain statutory and judicial requirements, including the
"continuity of interest" requirement. The tax consequences of the merger to
Cowlitz Bancorp, Cowlitz Bank and former Northern Bank shareholders if the
merger meets these requirements are discussed below under the heading "Partially
Tax Free Reorganization". To satisfy the "continuity of interest" requirement,
the Cowlitz Bancorp common stock delivered in the merger must represent a
substantial portion of the overall consideration received by Northern Bank
shareholders. For advance ruling purposes, the Internal Revenue Service takes
the position that the continuity of interest requirement will be satisfied if at
least 50% of the value of all of the consideration payable in the merger
consists of stock in the acquiring corporation; courts have found
55
this requirement satisfied at thresholds less than 50%. However, this
determination can be highly fact specific, particularly in transactions in which
stock represents less than 50% of the total consideration, and there can be no
certainty that the IRS or the courts would view this transaction as a
reorganization. In addition, to satisfy the continuity of interest requirement,
Northern Bank shareholders, must not, pursuant to a plan existing at or prior to
the effective date of the merger, dispose of or transfer so much of either
(i) their Northern Bank stock in anticipation of the merger to Cowlitz Bancorp
or to any person related to Cowlitz Bancorp or (ii) the Cowlitz Bancorp common
stock to be received in the merger to Cowlitz Bancorp or to any persons related
to Cowlitz Bancorp, such that the Cowlitz Bancorp stock that the Northern Bank
shareholders collectively own after such disposition or transfer no longer
represents a substantial portion of the overall consideration received in the
merger.
Because, as discussed above under "The Merger Consideration" the number of
shares of Cowlitz Bancorp common stock which will be received by the Northern
Bank shareholders and the value of such shares will not be known until the
effective date of the merger, it is unclear at this time whether the Cowlitz
Bancorp stock will represent a substantial portion of the total consideration
received. Therefore it is not known whether the continuity of interest
requirement will be satisfied. If that requirement or any other applicable
requirement is not satisfied, the merger will not be treated as a
reorganization, but instead will be treated as a taxable sale. The consequences
to the Northern Bank shareholders and to Cowlitz Bancorp, Cowlitz Bank and
Northern Bank of such a transaction are discussed below under "Taxable
Transaction".
PARTIALLY TAX FREE REORGANIZATION
The following discussion applies only if the merger qualifies as a
reorganization for federal income tax purposes.
CONSEQUENCE TO COWLITZ BANCORP, COWLITZ BANK AND NORTHERN BANK. If the
merger qualifies as a reorganization for federal income tax purposes, no gain or
loss will be recognized by Cowlitz Bancorp, Cowlitz Bank or Northern Bank as a
result of the merger.
CONSEQUENCE TO NORTHERN BANK SHAREHOLDERS. If the merger qualifies as a
reorganization for federal income tax purposes, Northern Bank shareholders will
recognize gain, if any, with respect to their shares of Northern Bank common
stock surrendered in the merger but only to the extent of the lesser of (a) the
amount of gain realized with respect to such Northern Bank common stock and
(b) the amount of cash received (including the cash deposited in escrow on
behalf of Northern Bank shareholders), but not including cash received in lieu
of a fractional share, which is discussed below. The amount of gain realized
with respect to the exchanged Northern Bank common stock will equal the excess,
if any, of the cash, including the cash received in lieu of a fractional share,
and the fair market value of the Cowlitz Bancorp common stock received over such
shareholder's adjusted tax basis in the Northern Bank common stock exchanged
therefor. No loss will be recognized by Northern Bank shareholders in the
merger, except in connection with cash received in lieu of a fractional share,
as discussed below. The determination of gain, which is recognized or loss which
is not, is to be made on a share by share basis. That is, each Northern Bank
share, or block of shares acquired at the same price, will be treated as
exchanged for a pro rata portion of cash and Cowlitz Bancorp common stock.
Any gain recognized by former Northern Bank shareholders will be treated as
capital gain unless, as discussed below, the receipt of the cash has the effect
of the distribution of a dividend for federal income tax purposes, in which case
such gain will be treated as ordinary dividend income to the extent of the
shareholder's ratable share of Northern Bank's current or accumulated earnings
and profits. Any capital gain will be long-term capital gain if, as of the date
of the merger, the holding period for such stock is more than one year.
The adjusted tax basis of the Cowlitz Bancorp common shares received in such
exchange, including any fractional interest in a Cowlitz Bancorp share for which
cash is received, generally will be equal to the tax basis of the shares
surrendered therefor, decreased by the amount of cash received and
56
increased by the amount of gain or dividend income recognized, if any. The
holding period of the Cowlitz Bancorp common stock received will include the
holding period of Northern Bank common stock exchanged therefor. As a result of
these "substitute" basis rules, in general, any gain inherent or loss with
respect to Northern Bank common stock that is not recognized in the merger will
be reflected as the difference between the basis and the value of the Cowlitz
Bancorp common stock received therefor, after making the basis adjustments
described above.
In determining whether gain recognized with respect to cash received by a
Northern Bank shareholder pursuant to the merger will be treated as a dividend,
a Northern Bank shareholder will be treated as if the portion of the Northern
Bank common stock exchanged for cash in the merger had been instead exchanged
for Cowlitz Bancorp common stock, followed immediately by a redemption of such
hypothetical shares by Cowlitz Bancorp for cash, referred to in this document as
the "hypothetical redemption." A Northern Bank shareholder will recognize
capital gain rather than dividend income with respect to the cash received if
the hypothetical redemption is "not essentially equivalent to a dividend" or is
"substantially disproportionate" with respect to such shareholder, taking into
account in each case the shareholder's actual and constructive ownership of
Cowlitz Bancorp common shares.
The hypothetical redemption would be "not essentially equivalent to a
dividend" with respect to a Northern Bank shareholder if, based on all the facts
and circumstances, it results in a "meaningful reduction" in such shareholder's
percentage ownership of Cowlitz Bancorp common shares. The Internal Revenue
Service has indicated in a published ruling that a shareholder in a
publicly-held corporation whose relative stock interest in the corporation is
minimal and who exercises no control over corporate affairs is generally treated
as having a meaningful reduction in his or her stock after a redemption
transaction if his or her percentage stock ownership in the corporation has been
reduced to any extent, taking into account the shareholder's actual and
constructive ownership before and after the hypothetical redemption.
The hypothetical redemption transaction would be "substantially
disproportionate," and therefore would not have the effect of the distribution
of a dividend with respect to a Northern Bank shareholder if the percentage of
Cowlitz Bancorp common stock actually and constructively owned by such
shareholder immediately after the hypothetical redemption is less than 80% of
the percentage of Cowlitz Bancorp common shares actually, hypothetically and
constructively owned by such shareholder immediately after both the actual and
deemed receipt of the Cowlitz Bancorp common shares, but before the hypothetical
redemption.
In the case of an individual, capital gain is generally subject to
preferential long term capital gain rates if such individual has held his or her
common stock for more than one year at the time of the merger, and as short-term
capital gain, taxable at the higher ordinary income tax rate, if the individual
has held his or her common stock for one year or less at the time of the
consummation of the merger. The deductibility of capital losses is substantially
limited.
Northern Bank shareholders should consult their tax advisors as to the
possibility that all or a portion of any cash received in the exchange for their
Northern Bank common stock will be treated as a dividend and with respect to the
consequences thereof, including the eligibility of the Northern Bank
shareholders that are corporations for a dividend received deduction and
treatment of the dividend as a "extraordinary dividend" under Section 1059 of
the Code.
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES BY NORTHERN BANK SHAREHOLDERS
A Northern Bank shareholder who receives cash in lieu of a fractional share
of Cowlitz Bancorp common stock will be treated as having received such
fractional share pursuant to the merger and then as having exchanged such
fractional share for cash in a redemption by Cowlitz Bancorp. Such a deemed
redemption will be treated as a sale of the fractional share, provided that it
is either "not essentially equivalent to a dividend" or is "substantially
disproportionate" with respect to the Northern Bank shareholder, as discussed in
the preceding section. If the deemed redemption is treated as a sale of a
57
fractional share, a Northern Bank shareholder will recognize gain or loss equal
to the difference between the amount of cash received and the portion of the
basis of the Cowlitz Bancorp common stock allocable to such fractional share
interest. Such gain or loss will be long-term capital gain or loss if, as of the
date of the merger, the holding period for such shares is more than one year.
TAXABLE TRANSACTION
CONSEQUENCE TO NORTHERN BANK SHAREHOLDERS. If the merger does not qualify
as a reorganization under the Code (as a result of a failure of the "continuity
of interest" requirement or otherwise), Northern Bank shareholders will
recognize gain or loss with respect to each share of Northern Bank common stock
surrendered equal to the difference between that shareholder's basis in such
share and the fair market value, as of the effective date of the merger, of the
Cowlitz Bancorp common stock and the cash (including the cash deposited in
escrow on behalf of the Northern Bank shareholders) received in exchange
therefor. Such gain or loss recognized by a Northern Bank shareholder will be
capital gain or loss; and will be long-term capital gain or loss if the
shareholder held the Northern Bank stock for more than one year at the time of
the merger. As noted above, the deductibility of capital losses is substantially
limited. A Northern Bank shareholder's aggregate basis in the Cowlitz Bancorp
common stock received would equal its fair market value at the effective date of
the merger, and a Northern Bank shareholder's holding period for such stock
would begin the day after the closing of the merger.
CONSEQUENCE TO COWLITZ BANCORP AND COWLITZ BANK. If the merger does not
qualify as a reorganization under the Code, Northern Bank would be treated as
selling all of its assets to Cowlitz Bank in a fully taxable transaction and
Cowlitz Bank and Cowlitz Bancorp would be responsible for paying all taxes due
on any gain recognized by Northern Bank as a result of the merger.
TAX CONSEQUENCE OF THE ESCROWED CASH TO NORTHERN BANK SHAREHOLDERS
As discussed above under the heading "The Merger Consideration" all of the
cash consideration payable by Cowlitz Bancorp in the merger will be placed in an
escrow account at closing. For federal income tax purposes, the cash will be
treated as if it had been paid directly to the Northern Bank shareholders at the
time of the merger, even though the cash may not be transferred to the Northern
Bank shareholders until a later date and may never be transferred to them at
all. Therefore, Northern Bank shareholders will not be able to defer any gain
they recognize with respect to cash placed into escrow in connection with the
merger under the installment sale method of reporting. A Northern Bank
shareholder will be required to take into account his or her pro rata share of
such cash in determining the amount of gain (or loss in the event of a fully
taxable transaction) if any, that the Northern Bank shareholder will recognize
for the taxable year of such shareholder in which the Merger occurs. Northern
Bank shareholders will be required to report on their federal income tax returns
their allocable share of any income or gain realized with respect to the assets
held in the escrow account, and may be entitled to deduct their allocable share
of any fees or expenses of the escrow, subject to applicable limitations.
If less than all of the cash placed into the escrow account is ultimately
paid to the Northern Bank shareholders, the tax consequences of this loss are
uncertain. It is possible that a Northern Bank shareholder will recognize gain
with respect to his or her allocable share of the cash consideration placed in
escrow at the time of the merger as discussed above, but will be entitled only
to a capital loss (which cannot be carried back to offset the earlier income) in
the event that he or she ultimately receives less than or none of such cash.
Northern Bank shareholders should consult with their own tax advisors to
determine the tax consequences to them of the cash paid into escrow, the income
on such cash and the consequences to them if less than all or none of the cash
is transferred to them from the escrow.
58
INFORMATION REPORTING AND BACKUP WITHHOLDING REQUIREMENTS FOR NORTHERN BANK
SHAREHOLDERS
Certain Northern Bank shareholders may be subject to information reporting
and backup withholding at a rate of 31% on some or all of the consideration
received in the merger and their allocable share of income on the cash in
escrow. Backup withholding generally will apply only if a shareholder fails to
furnish a correct social security number or other taxpayer identification number
or otherwise fails to comply with applicable backup withholding rules and
certification requirements. A shareholder who fails to provide the correct
taxpayer identification number on Form W-9 or an appropriate substitute form may
be subject to a $50 penalty imposed by the IRS. Northern Bank shareholders
should consult their tax advisors regarding the imposition of backup withholding
and information reporting with respect to the receipt of cash and Cowlitz
Bancorp shares in the merger and income on the cash held in escrow. Each
shareholder will be required to retain records and file with his or her U.S.
federal income tax return a statement setting forth facts relating to the
merger.
THE PRECEDING DISCUSSION IS NOT A COMPLETE ANALYSIS OR DISCUSSION OF ALL
POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, NORTHERN BANK SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER TO THEM, INCLUDING TAX REPORTING REQUIREMENTS, FEDERAL, STATE,
LOCAL AND OTHER APPLICABLE TAX LAWS AND THE AFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
59
MANAGEMENT AND OPERATIONS OF COWLITZ BANK
FOLLOWING THE MERGER
GENERAL
The merger agreement provides for the merger of Northern Bank with and into
Cowlitz Bank, with Cowlitz Bank as the surviving corporation. The separate
existence of Northern Bank will cease upon completion of the merger and Northern
Bank shareholders will become shareholders of Cowlitz Bancorp as described
herein.
BOARD OF DIRECTORS
At the effective date, Mr. William V. Spicer, a director of Northern Bank,
will be added to the existing Cowlitz Bank board of directors. Cowlitz Bank
expects to compensate Mr. Spicer in the same manner it compensates its other
outside directors.
OPERATIONS AFTER THE MERGER
After the merger, Northern Bank will operate as a separate division of
Cowlitz Bank and will retain its name. Cowlitz Bank intends to retain Northern
Bank's existing branches and may expand the number of branches located in
retirement centers. It is anticipated that Cowlitz Bank will retain many of the
existing products and services offered by Northern Bank, although Northern
Bank's Business Manager program will be discontinued. Cowlitz Bank will convert
Northern Bank branches to Cowlitz Bank's information and data processing systems
for certain major functions, including deposit operations, loan servicing and
item processing. Since much of Northern Bank's existing operations will be
retained following the merger, Cowlitz Bancorp does not anticipate any
significant cost savings as a result of the integration of operations following
the merger.
Prior to the merger, Mr. James Wills, formerly the Executive Vice President
of Cowlitz Bank, was hired as the Chief Lending Officer and Acting President of
Northern Bank and he has become a member of the Northern Bank board of
directors. Cowlitz Bancorp intends to conduct a search following the closing for
a full-time President of the Northern Bank division. It is anticipated that
Mr. Wills will be a candidate for that position.
60
PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES)
HISTORICAL
-------------------------------
SEPTEMBER 30, 1999 PRO FORMA PRO FORMA
COWLITZ BANCORP NORTHERN BANK ADJUSTMENTS COMBINED
--------------- ------------- ----------- ---------
ASSETS
Cash and due from banks.................. $ 15,173 $ 6,205 $(1,998)(3) $ 19,380
Investment securities
Investments available-for-sale......... 8,462 4,720 13,182
Investments held-to-maturity........... 4,564 4,564
Loans, net............................... 138,539 49,012 187,551
Premises and equipment................... 6,011 107 6,118
Federal Home Loan Bank stock............. 3,035 -- -- 3,035
Intangible assets........................ 5,062 -- 3,237 (6) 8,299
Other assets............................. 1,900 943 75 (9) 2,918
-------- ------- ------- --------
TOTAL ASSETS............................. $182,746 $60,987 $ 1,314 $245,047
======== ======= ======= ========
LIABILITIES
Deposits................................. $122,860 $56,024 $ -- $178,884
Borrowings............................... 26,927 -- -- 26,927
Other liabilities........................ 1,120 454 225 (4)
158 (5) 1,957
-------- ------- ------- --------
TOTAL LIABILITIES........................ 150,907 56,478 383 207,768
SHAREHOLDERS' EQUITY
Preferred stock.......................... -- -- --
Common stock............................. 18,887 1,226 (1,226)(8)
5,365 (2) 24,252
Additional paid in capital............... 1,538 2,961 (2,961)(8) 1,538
Retained earnings........................ 11,428 351 (158)(5)
(193)(8)
75 (9) 11,503
Net unrealized loss on investments
available-for-sale..................... (14) (29) 29 (8) (14)
-------- ------- ------- --------
TOTAL SHAREHOLDERS' EQUITY............... 31,839 4,509 931 37,279
-------- ------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. $182,746 $60,987 $ 1,314 $245,047
======== ======= ======= ========
61
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
HISTORICAL
-------------------------------
SEPTEMBER 30, 1999 PRO FORMA PRO FORMA
COWLITZ BANCORP NORTHERN BANK ADJUSTMENTS COMBINED
--------------- ------------- ----------- ----------
INTEREST INCOME
Interest and fees on loans.............. $ 11,110 $ 4,297 $ -- $ 15,407
Interest investment securities.......... 656 76 -- 732
Interest from other banks............... 680 319 -- 999
---------- ---------- ---------- ----------
Total interest income................. 12,446 4,692 -- 17,138
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits................................ 2,974 1,949 -- 4,923
Borrowings.............................. 1,216 -- -- 1,216
---------- ---------- ---------- ----------
Total interest expense................ 4,190 1,949 -- 6,139
---------- ---------- ---------- ----------
Net interest income before provision
for loan losses..................... 8,256 2,743 -- 10,999
PROVISION FOR LOAN LOSSES............... (1,065) (779) -- (1,844)
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses..................... 7,191 1,964 -- 9,155
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charge on deposit accounts...... 511 48 -- 559
Other income............................ 691 52 -- 743
Net gain (loss) on sale of
available-for-sale securities......... (2) -- -- (2)
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME.............. 1,200 100 -- 1,300
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits.......... 4,228 993 -- 5,221
Net occupancy and equipment expense..... 980 186 -- 1,166
Other operating expense................. 2,291 1,081 162 (7) 3,534
---------- ---------- ---------- ----------
Total noninterest expense............. 7,499 2,260 162 9,921
---------- ---------- ---------- ----------
Income (loss) before income taxes..... 892 (196) (162) 534
Income Taxes (Benefit).................. 341 -- (75)(9) 266
---------- ---------- ---------- ----------
NET INCOME (LOSS)....................... $ 551 $ (196) $ (87) $ 268
========== ========== ========== ==========
Basic earnings (loss) per share......... $ 0.14 $ (0.16) $ .04
Diluted earnings (loss) per share....... $ 0.13 $ (0.16) $ .04
Average common shares outstanding:
Basic................................. 4,046,872 1,225,597 4,960,047
Diluted............................... 4,104,249 1,225,597 5,017,424
62
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSAND OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
HISTORICAL
-------------------------------
DECEMBER 31, 1998 PRO FORMA PRO FORMA
COWLITZ BANCORP NORTHERN BANK ADJUSTMENTS COMBINED
--------------- ------------- ----------- ---------
INTEREST INCOME
Interest and fees on loans............... $ 14,103 $ 4,852 $ -- $ 18,955
Interest on investment securities........ 958 76 -- 1,034
Interest from other banks................ 1,305 230 -- 1,535
--------- --------- --------- ---------
Total interest income.................. 16,366 5,158 -- 21,524
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits................................. 4,942 2,152 -- 7,094
Borrowings............................... 1,559 -- -- 1,559
--------- --------- --------- ---------
Total interest expense................. 6,501 2,152 -- 8,653
Net interest income before provision
for loan losses...................... 9,865 3,006 -- 12,871
PROVISION FOR LOAN LOSSES................ (509) (683) -- (1,192)
--------- --------- --------- ---------
Net interest income after provision for
loan losses.......................... 9,356 2,323 -- 11,679
--------- --------- --------- ---------
NONINTEREST INCOME
Service charge on deposit accounts....... 656 46 -- 702
Other income............................. 317 138 -- 455
Net gain on sale of available-for-sale
securities............................. 5 -- -- 5
--------- --------- --------- ---------
Total noninterest income............... 978 184 -- 1,162
--------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits........... 3,775 1,004 -- 4,779
Net occupancy and equipment expense...... 888 244 -- 1,132
Other operating expense.................. 2,264 1,161 216 (7) 3,641
--------- --------- --------- ---------
Total noninterest expense.............. 6,927 2,409 216 9,552
--------- --------- --------- ---------
Income (loss) before income taxes...... 3,407 98 (216) 3,289
Income Taxes (Benefit)................... 1,181 (22) -- 1,159
--------- --------- --------- ---------
NET INCOME............................... $ 2,226 $ 120 $ (216) $ 2,130
========= ========= ========= =========
Basic earnings per share................. $ 0.60 $ 0.10 $ 0.46
Diluted earnings per share............... $ 0.57 $ 0.09 $ 0.44
Average common shares outstanding:
Basic.................................. 3,715,901 1,194,517 4,629,076
Diluted................................ 3,894,095 1,325,517 4,808,036
63
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS:
1. Basis of Presentation
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of Cowlitz Bancorp and Northern Bank as if the
merger had become effective on September 30, 1999. The pro forma combined
statements of income for the nine months ended September 30, 1999 and the year
ended December 31, 1998 combine the historical consolidated statements of income
of Cowlitz Bancorp and Northern Bank as if the merger had become effective on
January 1, 1998.
The merger is accounted for as a purchase. Under this method of accounting,
assets and liabilities of Northern Bank are adjusted to their estimated fair
value and combined with the recorded book values of the assets and liabilities
of Cowlitz Bancorp. Fair value adjustments are subject to update as additional
information becomes available.
2. Purchase Price: Stock Consideration
Under the terms of the merger agreement, the purchase price is up to $7.05
per share of Northern Bank stock. The purchase price consists of two components,
the stock consideration and the cash consideration. The stock consideration is
$5.42 per Northern Bank share in the form of a number of shares of common stock
of Cowlitz Bancorp (based on a fixed value for Cowlitz Bancorp stock of $6.563
per share). The stock consideration is subject to reduction based on Northern
Bank's shareholders' equity at the time of closing below $4,718,841. If Northern
Bank's shareholders' equity immediately prior to closing is less than
$4,718,841, the portion of the merger consideration payable in Cowlitz Bancorp
stock will be reduced by an amount equal to 1.75 times the difference between
$4,718,841 and Northern Banks' shareholders' equity immediately prior to
closing. As of September 30, 1999, Northern Bank's proforma shareholders' equity
(as adjusted for estimated closing costs of $158,000) was $4,350,703. The amount
of stock consideration payable per Northern Bank share is reduced to $4.89, or
.745086 shares of Cowlitz Bancorp common stock.
Northern Bank's shareholders' equity may be further reduced as a result of,
among other things, provisions for additional loan losses required to be made
under the Merger Agreement following an examination of Northern Bank's loan
portfolio prior to the closing date by an independent loan examiner. Such
reductions, if they occur, will further reduce the stock consideration.
Additionally, because the maximum amount of the total purchase price is
fixed, the purchase price paid per share may be reduced further if the number of
outstanding shares of Northern Bank common stock at the closing date is greater
than the number of outstanding shares on the date of the merger agreement.
Shares issuable upon exercise of Northern Bank's stock options are not included
in the number of outstanding shares of Northern Bank common stock in the
calculation of the stock consideration component of the purchase price as such
shares were not issued and outstanding as of September 30, 1999. Each option
holder under Northern Bank's stock option plan will have the right to exercise
that option to the extent vested, immediately prior to the closing of the
merger. Issuance of these additional shares of Northern Bank common stock will
reduce the per share stock consideration as additional Northern Bank shares will
become outstanding. Any outstanding Northern Bank options that are not exercised
as of the closing date of the merger will be terminated without the payment of
any merger consideration.
3. Purchase Price: Cash Consideration
The cash portion of the merger consideration is equal to $1,997,723, or
$1.63 per share of Northern Bank's common stock.
64
As noted in note 2 above, since the maximum amount of total merger
consideration is fixed, the per share consideration may decrease if the number
of outstanding shares of Northern Bank's common stock increases prior to the
closing.
4. Direct Acquisition Costs of Cowlitz Bancorp
In addition to the common stock and cash, also included in the purchase
price are Cowlitz Bancorp's other direct acquisition costs, such as legal,
accounting and other professional fees. These costs are preliminarily expected
to be approximately $225,000.
5. Merger Expenses of Northern Bank
Northern Bank estimates that it will incur $158,000 in expenses associated
with the merger that are not already reflected in its September 30, 1999
financial statements. This amount has been reflected as an accrued liability and
as a reduction of Northern Bank's net assets in the September 30, 1999 combined
balance sheet.
6. Allocation Of Purchase Price and Calculation Of Goodwill
The unaudited pro forma combined financial statements assume the following
with respect to the allocation of the purchase price and determination of
intangible asset:
Purchase price:
Stock consideration (913,175 shares of Cowlitz common stock
issued at a fair market value of $5.875 per share--market
price of Cowlitz Bancorp common stock on November 10,
1999)..................................................... $5,364,903
Cash consideration.......................................... 1,997,723
Estimated direct costs...................................... 225,000
----------
Total purchase price........................................ $7,587,626
Estimated fair value of Northern Bank's net assets at
September 30, 1999........................................ 4,350,703
----------
Estimated intangible asset.................................. $3,236,923
==========
For purposes of the pro forma combined balance sheet, estimates have been
made of the fair value of Northern Bank's assets and liabilities as of
September 30, 1999. Fair value adjustments are subject to update as additional
information becomes available.
7. Intangible Asset
The intangible asset recorded in connection with the merger will be
amortized on a straight-line basis over a fifteen-year period.
8. Northern Bank Shareholders' Equity
For purposes of the pro forma combined financial statements, Northern Bank's
equity has been eliminated.
9. Income Taxes
The additional income tax benefit in the pro forma income statement for the
nine month period ended September 30, 1999 represents Cowlitz Bancorp's
utilization of Northern Bank's pretax loss for that period.
65
COMPARISON RIGHTS OF COWLITZ BANCORP SHAREHOLDERS
AND NORTHERN BANK SHAREHOLDERS
Cowlitz Bancorp is incorporated under the laws of the State of Washington
and Northern Bank is incorporated under the laws of the State of Oregon. Upon
completion of the merger, the Northern Bank shareholders, whose rights as
shareholders are currently governed by the Oregon Bank Act (the "OBA"), Northern
Bank's Amended and Restated Articles of Incorporation and Northern Bank's Bylaws
will, upon exchange of their Northern Bank common stock, become holders of
Cowlitz Bancorp common stock and their rights as such will be governed by the
Washington Business Corporation Act (the "WBCA"), Cowlitz Bancorp's Restated
Articles of Incorporation and Cowlitz Bancorp's Bylaws. The material differences
between the rights of holders of Northern Bank common stock and Cowlitz Bancorp
common stock resulting from the differences in their governing documents and the
application of the WBCA or the OBA, are summarized below.
The following summary is not a complete summary and is qualified in its
entirety by reference to the governing corporate documents of each of Cowlitz
Bancorp and Northern Bank and applicable law.
CAPITAL STOCK
Cowlitz Bancorp's articles of incorporation currently authorize 25,000,000
shares of common stock and 5,000,000 shares of preferred stock.
Northern Bank's articles of incorporation currently authorize 10,000,000
shares of common stock and no shares of preferred stock.
BOARD OF DIRECTORS
Cowlitz Bancorp's articles of incorporation currently provide that Cowlitz
Bancorp's board of directors will consist of five members. The directors are not
divided into classes and each director's term lasts for one year.
Northern Bank's articles of incorporation provide that Northern Bank's board
of directors will consist of no fewer than five and no more than 15 members and
that the Northern Bank board of directors may increase or decrease the number of
directors within that range. Northern Bank's bylaws currently cap the Northern
Bank board of directors at no more than nine members and currently there are six
members of the Northern Bank board of directors. Northern Bank's bylaws also
require that at least one half of the members of the Northern Bank board of
directors be citizens of the United States, residents of Oregon or of any place
within a 100 miles of Northern Bank's principal offices, and at least one member
must be a Oregon resident.
MONETARY LIABILITY OF DIRECTORS
Cowlitz Bancorp's articles of incorporation and Northern Bank's articles of
incorporation each provide for the elimination of personal monetary liability of
directors to the fullest extent permissible under the laws of Washington and
Oregon, respectively.
VOTING RIGHTS
Neither Cowlitz Bancorp's articles of incorporation nor Northern Bank's
articles of incorporation provides for cumulative voting in the election of
directors. Upon completion of the merger, based on the capitalization of Cowlitz
Bancorp and Northern Bank on September 30, 1999, and assuming no adjustments to
the merger consideration, current Cowlitz Bancorp common shareholders will hold
approximately 4,089,570 shares of Cowlitz Bancorp common stock, constituting
approximately 82% of Cowlitz Bancorp's voting power, and former Northern Bank
common shareholders will hold
66
approximately 913,175 shares of Cowlitz Bancorp common stock, constituting
approximately 18% of Cowlitz Bancorp's voting power.
REMOVAL OF DIRECTORS AND FILLING VACANCIES ON THE BOARD OF DIRECTORS
Cowlitz Bancorp's articles of incorporation provide that directors may be
removed only "for cause" and only by the affirmative vote of the holders of at
least 75% of the shares entitled to vote on the removal of such director. "For
cause" means either: (a) conviction of a felony by a court of competent
jurisdiction which is no longer subject to direct appeal or (b) adjudication for
gross negligence or dishonest conduct in the performance of a director's duty to
this corporation by a court of competent jurisdiction which is no longer subject
to direct appeal. The applicable provision of Cowlitz Bancorp's articles of
incorporation may be amended only with the approval of two-thirds of the votes
entitled to be cast by each voting group entitled to vote on such amendment.
Northern Bank's articles of incorporation provide that directors may be
removed by a vote of the holders of a majority of the shares currently entitled
to vote at an election of directors.
67
CERTAIN DIFFERENCES BETWEEN WASHINGTON AND OREGON CORPORATE LAWS
The Washington Business Corporation Act (WBCA) governs the rights of Cowlitz
Bancorp shareholders and will govern the rights of Northern Bank shareholders
who become Cowlitz Bancorp shareholders after the merger. The Oregon Bank Act
(OBA) governs the rights of current Northern Bank shareholders. The WBCA and the
OBA differ in many respects. The following discussion summarizes some
significant differences between the provisions of the WBCA and the OBA that
could materially affect the rights of Northern Bank shareholders.
AMENDMENTS OF ARTICLES OF INCORPORATION
Under the WBCA, with certain exceptions, amendments to a corporation's
articles of incorporation must be recommended to the shareholders by the board
of directors, unless the board of directors determines that because of a
conflict of interest or other special circumstances it should make no
recommendation and communicates the basis for its determination to the
shareholders with the amendment. All amendments must be approved by a majority
of all the votes entitled to be cast by any voting group entitled to vote
thereon unless another proportion is specified in the articles of incorporation,
by the board of directors as a condition to its recommendation or by provision
of the WBCA.
Oregon law provides that a bank's board of directors may initiate the
process for amending its articles of incorporation, by first adopting a
resolution setting forth the proposed amendment and directing that it be
submitted to the shareholders. The proposed amendment must then be submitted to
a vote at a meeting of shareholders, and the notice of that meeting must
describe the amendment. The articles of incorporation may be amended if a quorum
exists and the votes cast favoring the amendment amount to a majority of the
total outstanding shares. Where a bank has multiple classes of stock,
shareholders are entitled to vote by class where the proposed amendment would
impact one class of shareholders disproportionately with other classes.
Supermajority voting requirements may be imposed by the articles of
incorporation, or by the board of directors with respect to any proposed
amendment.
RIGHT TO CALL A SPECIAL MEETING OF SHAREHOLDERS
Under the WBCA, a special meeting of shareholders may be called by the board
of directors, any person authorized by a corporation's articles or bylaws, or by
holders of 10% or more of all the votes entitled to be cast at the special
meeting. The articles of incorporation of a public company, such as Cowlitz
Bancorp, may limit or deny the right shareholders to call special meetings.
The OBA provision is similar to that of the WBCA, except that the OBA
permits a special meeting to be called by the chief executive officer, a
majority of the board of directors, or any person granted that authority by the
articles of incorporation or bylaws. A group of not fewer than three
shareholders who collectively hold not less than one-third of the outstanding
voting stock of a bank may call a meeting by delivering to the secretary a
notice of their intent to do so. All special meetings must be held in Oregon,
and the articles or bylaws may reserve to the board of directors or an officer
the right to set the time and place of a meeting.
TRANSACTIONS WITH OFFICERS OR DIRECTORS
The WBCA sets forth a safe harbor for transactions between a corporation and
one or more of its directors. A conflicting interest transaction may not be
enjoined, set aside or give rise to damages if: (a) it is approved by a majority
of qualified directors (but no fewer than two); (b) it is approved by the
affirmative vote of the majority of all qualified shares after notice and
disclosure to the shareholders; or (c) at the time of commitment, the
transaction is established to have been fair to the corporation. For purposes of
this provision, a "qualified director" is one who does not have either: (a) a
conflicting
68
interest respecting the transaction or (b) a familial, financial, professional
or employment relationship with a second director who does have a conflicting
interest respecting the transaction, which relationship would, in the
circumstances, reasonably be expected to exert an influence on the first
director's judgment when voting on the transaction. "Qualified shares" are
defined generally as shares other than those beneficially owned, or the voting
of which is controlled, by a director (or an affiliate of the director) who has
a conflicting interest respecting the transaction.
Under the OBA, a conflict of interest transaction is not voidable by a
corporation solely because of a director's interest in the transaction if:
(a) the material facts of the transaction and the director's interest were
disclosed or known to the board of directors or to a committee of the board of
directors and the board or committee authorized, approved or ratified the
transaction, (b) the material facts of the transaction and the director's
interest were disclosed or known to the shareholders entitled to vote and they
authorized, approved or ratified the transaction or (c) the transaction was fair
to the corporation. A conflict of interest transaction is "authorized, approved
or ratified" by the board or a board committee if it receives the affirmative
vote of a majority of directors on the board or on the committee who have no
direct or indirect interest in the transaction. If a majority of the directors
who have no direct or indirect interest in the transaction vote to authorize,
approve, or ratify the transaction, a quorum is deemed present at that board or
board committee meeting for the purpose of taking such action.
LIMITATION OF LIABILITY OF DIRECTORS
Under the WBCA, a corporation's articles of incorporation may set forth a
provision eliminating or limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for conduct as a director.
However, such provisions may not eliminate or limit a director's liability for:
(a) acts or omissions which involve intentional misconduct or a knowing
violation of the law; (b) the payment of unlawful distributions; or (c) any
transaction from which the director derived an improper personal benefit.
Similarly, under Oregon Law, a corporation's articles of incorporation may
set forth a provision eliminating or limiting the personal liability of a
director to the corporation or its shareholders for monetary damages for conduct
as a director. However, in addition to exceptions contained in the WBCA, such
provisions may not eliminate or limit a director's liability for breaches of the
director's duty of loyalty to the corporation or its shareholders or acts or
omissions not in good faith.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
Under the WBCA, if authorized by its articles of incorporation, a bylaw
adopted or ratified by its shareholders, or a resolution adopted or ratified,
before or after the event, by its shareholders, a corporation has the power to
indemnify a director, officer or employee made a party to a proceeding, or
advance or reimburse expenses incurred in a proceeding, under any circumstances,
except that no such indemnification shall be allowed for: (a) acts or omissions
of a director, officer or employee finally adjudged to have engaged in
intentional misconduct or a knowing violation of the law; (b) conduct of a
director, officer or employee finally adjudged to be an unlawful distribution;
or (c) any transaction with respect to which it was finally adjudged that such
director, officer or employee personally received a benefit in money, property
or services to which the director, officer or employee was not legally entitled.
The WBCA's legislative history suggests that a corporation may indemnify its
directors, officers and employees for amounts paid in settlement of derivative
actions, provided that the director's, officer's or employee's conduct does not
fall within one of the categories set forth above. Generally, Cowlitz Bancorp's
bylaws provide that Cowlitz Bancorp shall indemnify its directors, officers,
employees and agents to the fullest extent permitted by the WBCA, including
indemnification of persons seeking to enforce indemnification rights through a
proceeding authorized by Cowlitz Bancorp's board of directors and initiated by
such person.
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Under the OBA, a financial institution may, subject to the limitations
imposed by federal law, indemnify a director against liability incurred if the
conduct was in good faith, the individual reasonably believed the individual's
conduct was in the best interests of the corporation and, in the case of a
criminal proceeding, the individual had no reasonable cause to believe the
conduct was unlawful. The OBA provides for mandatory indemnification of officers
and directors when the indemnified party is wholly successful on the merits or
otherwise in the defense of any proceeding to which the director or officer was
a party because of being a director or officer.
MERGERS, SALES OF ASSETS AND OTHER TRANSACTIONS
Under the WBCA, a merger, share exchange or dissolution of a corporation
must be approved by the affirmative vote of a majority of directors when a
quorum is present, and by each voting group entitled to vote separately on the
plan by two-thirds of all votes entitled to be cast on the plan by that voting
group, unless another proportion is specified in the articles of incorporation.
The WBCA also provides that, in general, a corporation may sell, lease, exchange
or otherwise dispose of all, or substantially all, of its property, other than
in the usual and regular course of business, or dissolve if the board of
directors recommends the proposed transaction to the shareholders and the
shareholders approve the transaction by two-thirds of all the votes entitled to
be cast, unless another proportion is specified in the articles of
incorporation.
The OBA merger procedures are similar to those of the WBCA. The notable
difference is that the OBA requires approval of each voting group entitled to
vote separately on the plan by two-thirds of all the outstanding shares, unless
a higher proportion is specified in the articles of incorporation. The same is
true in the case of disposition of all or substantially all of a bank's assets
or deposits.
The OBA and the WBCA contain nearly identical provisions setting forth
certain circumstances under which no vote by the shareholders of a corporation
surviving a merger is required.
PROVISIONS AFFECTING CONTROL SHARE ACQUISITION AND BUSINESS COMBINATIONS
The WBCA prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions" with a person or group
of persons who or which beneficially owns 10% or more of the voting securities
of a target corporation (an "Acquiring Person") for a period of five years after
the acquisition of such securities, unless the transaction or acquisition of
shares is approved by a majority of the members of the target corporation's
board of directors prior to the date of the acquisition. A significant business
transaction includes among other transactions: (a) a merger with or
consolidation with, disposition of assets to or with, or issuance or redemption
of stock to or from, the Acquiring Person, (b) termination of 5% or more of the
employees of the target corporation employed in Washington State as a result of
the Acquiring Person's acquisition of 10% or more of the shares, or
(c) allowing the Acquiring Person to receive any disproportionate benefit as a
shareholder. Target corporations include domestic corporations have a class of
voting securities registered under Section 12 or Section 15 of the Securities
Exchange Act of 1934. Cowlitz Bancorp believes it currently meets these
standards and is subject to the statute. A corporation may not "opt out" of this
statute.
Unlike the Oregon Business Corporation Act, the OBA contains no provision
similar to the WBCA's takeover statute.
CONSIDERATION OF OTHER CONSTITUENCIES
The OBA provides that the directors of a corporation, when evaluating any
tender offer or exchange offer made by a third party, a third party's proposal
of merger or consolidation, or a third party's offer to acquire all or
substantially all of the assets of the corporation, may, in determining what
they believe to be in the best interests of the corporation, give due
consideration to the following: (a) the social, legal and economic effects on
employees, customers and suppliers of the corporation and
70
on the communities and geographical areas in which the corporation and its
subsidiaries operate, (b) the economy of the state and nation, (c) the long-term
as well as short-term interests of the corporation and its shareholders,
including the possibility that these interests may be best served by the
continued independence of the corporation, and (d) other relevant factors.
The WBCA does not contain provisions relating to the ability of a board of
directors to consider the impact of constituencies other than shareholders.
DISSENTERS' RIGHTS
Under the WBCA, a shareholder is entitled to dissent from and, upon
perfection of the shareholder's appraisal right, to obtain the fair value of his
or her shares in the event of certain corporate actions, including certain
mergers, share exchanges, sales of substantially all assets of the corporation,
and certain amendments to the corporation's articles of incorporation that
materially and adversely affect shareholder rights. However, shareholders
generally will not have such dissenters' rights if shareholder approval is not
required to effect the corporate action.
Under the OBA, shareholders who dissent from a proposed merger are entitled
to dissenters' rights under ORS 711.175 to ORS 711.185. Copies are contained in
Appendix H. In order to perfect his or her dissenters' rights, a shareholder
must notify the bank at or before the shareholder meeting that he or she is
dissenting as to all shares of the bank he or she beneficially owns. Within
30 days after the effective date, the surviving institution must deliver to the
dissenters an acknowledgement of their dissent with a written offer to pay cash
for the fair market value of those shares. If a shareholder notifies the
institution that he or she accepts the offer, the surviving institution must pay
the fair market value to the shareholders within 30 days after receiving the
acceptance.
If a shareholder declines the offer, the Oregon Department of Consumer and
Business Services will appoint an appraiser, who will make a final determination
of fair market value. Within 30 days after receiving the appraiser's valuation,
the surviving entity must notify the dissenting shareholders of the valuation.
The costs of appraisal are to be borne equally by the entity and the dissenting
shareholders unless the appraised value differs by more than 15% from the
entity's initial offer to dissenters. If the offer was less than the appraiser's
valuation by more than 15%, the entity would be required to pay the entire cost
of valuation. If the entity's offer was more than the appraiser's valuation by
more than 15%, the dissenting shareholders would bear entire cost of the
valuation on a pro rata basis.
DISSOLUTION
Under the WBCA a dissolution must be recommended by the board of directors
and approved by two-thirds of all the shares entitled to vote, unless either the
articles of incorporation or the board of directors requires a higher proportion
or the articles of incorporation require a lower proportion (but at least a
majority).
Under the OBA, a dissolution must be approved by written consent of all
shareholders or the dissolution must be initiated by the board of directors and,
unless the articles of incorporation or the board requires a greater vote or a
vote by voting groups, approved by a simple majority of the votes entitled to be
cast on the proposal for dissolution.
71
DESCRIPTION OF COWLITZ BANCORP CAPITAL STOCK
Cowlitz Bancorp's articles of incorporation currently authorize 25,000,000
shares of common stock and 5,000,000 shares of preferred stock, no par value. As
of December 28, 1999, there were issued and outstanding 4,077,052 shares of
Cowlitz Bancorp common stock and no shares of Cowlitz Bancorp preferred stock.
In the merger, Cowlitz Bancorp will issue approximately 1,243,615 shares of
Cowlitz Bancorp common stock to Northern Bank shareholders.
The following description summarizes the material features of Cowlitz
Bancorp's capital stock. This summary is not complete and is subject in all
respects to the applicable provisions of the WBCA and is qualified in its
entirety by reference to Cowlitz Bancorp's articles of incorporation.
COWLITZ BANCORP COMMON STOCK
Each holder of Cowlitz Bancorp common stock is entitled to one vote for each
share held on all matters voted upon by shareholders. Shareholders are not
permitted to cumulate their votes for the election of directors.
In the event of the liquidation, dissolution or distribution of assets of
Cowlitz Bancorp, holders of Cowlitz Bancorp common stock will be entitled to
share ratably in any remaining assets of Cowlitz Bancorp legally available for
distribution to the shareholders after payment of all liabilities and amounts
owed with respect to Cowlitz Bancorp preferred stock.
Holders of Cowlitz Bancorp common stock are not entitled to preemptive
rights with respect to any additional shares of capital stock that may be
issued.
The authorized but unissued and unreserved shares of Cowlitz Bancorp common
stock will be available for general corporate purposes, including but not
limited to possible issuance in exchange for capital notes, as stock dividends
or stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment plan, for employee benefit plans, or in a future underwritten or
other public offering. Except as described above or as otherwise required to
approve the transactions in which the additional authorized shares of Cowlitz
Bancorp common stock would be issued, no shareholder approval will be required
for the issuance of these shares.
At December 28, 1999, options to purchase 464,000 shares of Cowlitz Bancorp
common stock had been granted, but not exercised or terminated. There are 81,000
shares available for further grants under Cowlitz Bancorp's stock option plans.
COWLITZ BANCORP PREFERRED STOCK
Under Cowlitz Bancorp's articles of incorporation, the Cowlitz Bancorp board
of directors is authorized to provide for the issuance of up to 5,000,000 shares
of preferred stock in one or more series. Cowlitz Bancorp's board of directors
is authorized to establish series; to fix and determine the variations in the
relative rights and preferences as between series and as between holders of the
same series; to amend the relative rights and preferences of any series that is
wholly unissued; and to designate the number of shares of each series and the
designation thereof. The Cowlitz Bancorp board of directors may, after the issue
of shares of a series, amend the resolution establishing the series to decrease
(but not below the number of shares of such series then outstanding) the number
of shares of that series, and the number of shares constituting the decrease
shall resume the status which they had before the adoption of the resolution
establishing the series. The rights and preferences which may be established by
the Cowlitz Bancorp board of directors may include, without limitation:
- The right to vote, or limitations upon the right to vote, and in the
absence of any such provision with respect to a particular series no
shares of that series shall have any right to vote, and no right to vote
as a class, for any purpose except as may be required by law;
72
- The right of Cowlitz Bancorp to redeem any of such shares at a price and
upon terms fixed by the resolution establishing the series, including
sinking fund provisions, if any;
- The right to receive dividends including whether any such dividend is
cumulative, noncumulative, or partially cumulative;
- Preference over any other class or classes of shares, or over any other
series of this or any other class or classes of shares, as to the payment
of dividends;
- Preference in the assets of the corporation over any other class or
classes of shares, or over any other series of this or any other class or
classes of shares, upon the voluntary or involuntary liquidation of
Cowlitz Bancorp;
- The right to convert the shares into shares of any other class or into
shares of any series of the same or any other class, except a class having
prior or superior rights and preferences as to dividends or distribution
of assets upon liquidation.
DESCRIPTION OF NORTHERN BANK COMMON STOCK
Northern Bank has a single class of common stock and has not authorized or
issued any class or series of preferred stock. Each Northern Bank shareholder is
entitled to one vote per share on all matters voted upon by shareholders.
Shareholders are not permitted to cumulate their votes for the election of
directors, nor are any preemptive rights available to Northern Bank
shareholders.
In the event Northern Bank is liquidated, dissolves or distributes its
assets, Northern Bank shareholders will be entitled to share ratably in all
remaining assets of Northern Bank legally available for distribution to the
shareholders after payment of all liabilities.
Northern Bank is entitled to use authorized but unissued and unreserved
shares of Northern Bank common stock for general corporate purposes, including
without limitation issuance in conversion of debt, as payment for stock
dividends or stock splits, under a cash dividend reinvestment plan, and for
employee benefit plans.
At December 28, 1999, Northern Bank had outstanding options to purchase
675,121 shares of Northern Bank common stock.
LEGAL MATTERS
The validity of the shares of Cowlitz Bancorp common stock which will be
issued in connection with the merger and certain legal matters in connection
with the merger will be passed upon for Cowlitz Bancorp by Heller Ehrman
White & McAuliffe.
On July 19, 1999 Northern Bank entered into stipulated Orders to Cease and
Desist with the Federal Deposit Insurance Corporation and the Oregon Department
of Business and Consumer Services. The two orders, which were similar in their
findings and requirements, stated that Northern Bank had engaged in specified
"unsafe or unsound banking practices." The regulatory agencies cited Northern
Bank for failing to adhere to laws and regulations relating primarily to loan
administration by, among other things, operating with inadequate management,
operating with inadequate equity capital and reserves in relation to the
quantity and quality of its loan portfolio, operating with a large volume of
poor quality loans, operating without an adequate reserve for loan and lease
losses, and following inadequate lending and lax collection practices.
Northern Bank has responded to these citations by shifting to a more
conservative view of its loan portfolio, increasing its allowance for loan and
lease losses from $1,160,000 at June 30, 1999 to $1,507,654 at November 30,
1999. In doing so, Northern Bank restated its second quarter financial
statements to increase its loan loss reserve by an additional $474,000 during
that quarter, and further
73
increasing its reserve during the third quarter to a total of $1,881,000. In
November 1999 Northern Bank determined to charge off nonperforming loans
totaling $673,000 against allocated reserves of $600,000, and management expects
to increase substantially the loan loss reserve during the fourth fiscal
quarter.
Northern Bank also has adopted a comprehensive plan to address qualitative
factors noted by banking regulators, including hiring additional qualified loan
officers and loan administration personnel. (See "Appendix B--Information
Concerning Northern Bank--General" for more information.)
The merger is conditioned upon Cowlitz Bancorp receiving assurances from the
FDIC and the State of Oregon that the orders will not be applicable to the
merged entity following closing. The parties are working closely with regulators
to ensure that the necessary approvals are obtained, but there can be no
assurances that regulators will grant those approvals.
EXPERTS
The consolidated financial statements of Cowlitz Bancorp included in this
joint proxy statement and in the Registration Statement to the extent and for
the periods indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
The consolidated financial statements of Northern Bank included in this
joint proxy statement and in the Registration Statement have been audited by
Moss Adams LLP, independent public accountants, to the extent and for the
periods indicated in their report, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
WHERE YOU CAN FIND MORE INFORMATION
Cowlitz Bancorp files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy these reports and other information at the public
reference facilities maintained by the SEC at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511
Seven World Trade Center
13th Floor
New York, New York 10048
You may also obtain copies of these documents by mail from the public
reference room of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. In
addition, Cowlitz Bancorp files reports and other information with the SEC
electronically, and the SEC maintains a web site located at http://www.sec.gov
containing this information.
Northern Bank files annual, quarterly and special reports, proxy statements
and other information with the Federal Deposit Insurance Corporation. You may
read and copy these reports and other information at the offices of the FDIC
located at 550 17th Street NW, Room F-6043, Washington, D.C. 20429, by calling
(202) 898-8913, or by FAX to (202) 898-3909. You also may obtain copies of these
documents from Northern Bank's Investor Relations Manager, Michelle Luchs, by
calling (503) 222-9164.
Cowlitz Bancorp's common stock is quoted on The Nasdaq National Market, and
Northern Bank's common stock is quoted on The Nasdaq Small Cap Market. You may
obtain copies of Cowlitz Bancorp's and Northern Bank's reports and other
information at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
74
Cowlitz Bancorp has filed a registration statement on Form S-4 to register
with the SEC up to 1,243,615 shares of Cowlitz Bancorp common stock that may be
issued in the merger. This joint proxy statement is a part of that registration
statement. As permitted by the SEC rules, this joint proxy statement does not
contain all of the information included in the registration statement or in the
exhibits or schedules to the registration statement. You may read and copy the
registration statement, including any amendments, schedules and exhibits at the
addresses set forth above. Statements contained in this joint proxy statement as
to the contents of any contract or other document referred to in this document
include all material terms of the contracts or other documents but are not
necessarily complete. In each case, you should refer to the copy of the
applicable contract or other document filed as an exhibit to the registration
statement.
SHAREHOLDER PROPOSALS
Cowlitz Bancorp must receive a shareholder proposal by December 15, 1999 to
consider it for inclusion in Cowlitz Bancorp's proxy statement and form of proxy
relating to the Cowlitz Bancorp's Annual Meeting of Shareholders in 2000. In
addition, if Cowlitz Bancorp is not notified prior to February 28, 2000 that a
shareholder intends to present a proposal at the Annual Meeting in 2000, Cowlitz
Bancorp's management will have discretionary authority with respect to each
proxy received by it to vote on such matter. Cowlitz Bancorp's address for these
purposes is P.O. Box 1518, Longview, Washington 98632.
Any Northern Bank shareholder who wishes to submit a proposal for
presentation to the 2000 Annual Meeting of Shareholders must have submitted the
proposal to Northern Bank at 1001 S.W. Fifth Avenue, Suite 250, Portland, Oregon
97204, not later than December 1, 1999, for inclusion, if appropriate, in
Northern Bank's proxy statement and the form of proxy relating to the 2000
Annual Meeting, which meeting will be held only if the merger is not completed
prior to the planned date of the annual meeting.
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APPENDIX A
INFORMATION CONCERNING COWLITZ BANCORPORATION
GENERAL
Cowlitz Bancorporation was organized in 1991 under Washington law to become
the holding company for Cowlitz Bank, a Washington state chartered bank that
commenced operations in 1978. The principal executive offices of Cowlitz are
located in Longview, Washington.
Cowlitz offers or makes available a broad range of financial services to its
customers, primarily small and medium-sized businesses, professionals and retail
customers. Cowlitz Bank's commercial and personal banking services include
commercial and real estate lending, consumer lending, mortgage origination and
trust services. Cowlitz Bank has also developed relationships with a securities
brokerage firm and insurance agency with an estate planner to provide its
customers access to a variety of financial services which are generally not
available in community banks. During 1998, Cowlitz acquired Business Finance
Corporation which provides asset-based lending services to companies throughout
the western United States.
Cowlitz' goal is to continue to expand its position as a leading community
based provider of financial services in Cowlitz County and to become one of the
leading community based providers of financial services in other selected areas
of Washington and Oregon. In accordance with this strategy, during 1999 Cowlitz
commenced operations in the Seattle, Washington area through the acquisition of
Bay Mortgage of Bellevue, Washington, Bay Mortgage of Seattle, Washington, and
Bay Escrow of Seattle, Washington. Cowlitz has also started a new branch of
Cowlitz Bank, operating as Bay Bank, in Bellevue, Washington. Cowlitz' growth
strategy is based on providing both exceptional personal service and a wide
range of financial services to its customers including: emphasizing personal
service and developing strong community ties, providing a broad range of
financial products and services, increasing business volume in existing markets,
and continuing to explore opportunities for regional expansion through
acquisitions.
PRODUCTS AND SERVICES
Cowlitz offers a broad portfolio of products and services tailored to meet
the financial needs of targeted customers in its market areas. It believes this
portfolio is generally competitive with the products and services of its
competitors, including major regional and national banks. These products and
services include:
DEPOSIT PRODUCTS. Cowlitz provides a range of deposit products for
customers, including non-interest-bearing checking accounts, interest-bearing
checking and savings accounts, money market accounts and certificates of
deposit. These accounts generally earn interest at rates established by
management based on competitive market factors and management's desire to
increase certain types or maturities of deposit liabilities. Cowlitz does not
pay brokerage commissions to attract deposits. It strives to establish customer
relations to attract core deposits in non-interest-bearing transactional
accounts and thus to reduce its cost of funds.
LOAN PRODUCTS. Cowlitz offers a broad range of loan products to its retail
and business customers. Cowlitz maintains sound loan underwriting standards with
written loan policies, conservative individual and branch limits and reviews by
the loan committee. Further, in the case of particularly large loan commitments
or loan participations, loans are reviewed by Cowlitz' board of directors.
Underwriting standards are designed to achieve a high-quality loan portfolio,
compliance with lending regulations and the desired mix of loan maturities and
industry concentrations. Management seeks to minimize credit losses by closely
monitoring the financial condition of its borrowers and the value of collateral.
A-1
COMMERCIAL LOANS. Cowlitz offers specialized loans for its business and
commercial customers. These include equipment and inventory financing, operating
lines of credit and accounts receivable financing. Commercial lending is the
primary focus of Cowlitz' lending activities, and a significant portion of its
loan portfolio consists of commercial loans. For regulatory purposes, a
substantial portion of Cowlitz' commercial loans are designated as real estate
loans, as the loans are secured by mortgages and trust deeds on real property,
although the loans may be made for purposes of financing commercial activities,
such as accounts receivable, equipment purchases and inventory or other working
capital needs. Lending decisions are based on careful evaluation of the
financial strength, management and credit history of the borrower, and the
quality of the collateral securing the loan. Commercial loans secured by real
property are generally limited to 70% of the value of the collateral. In some
cases, Cowlitz may require personal guarantees and secondary sources of
repayment. Cowlitz also offers asset-based lending through its subsidiary
Business Finance Corporation. These loans tend to have higher credit risk, but
provide a higher rate of return than Cowlitz' normal commercial loans.
REAL ESTATE LOANS. Real estate loans are available for construction,
purchasing and refinancing residential owner-occupied and rental properties.
Borrowers can choose from a variety of fixed and adjustable rate options and
terms. Real estate loans reflected in the loan portfolio also include loans made
to commercial customers that are secured by real property.
Cowlitz provides customers access to long-term conventional real estate
loans through Cowlitz Bank's Cowlitz Mortgage and Bay Mortgage divisions. These
divisions specialize in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction and bridge
loans.
Payments on loans are often dependent on the successful operation and
management of the properties securing the loans, and are therefore strongly
affected by the conditions of the local real estate market. Fluctuating land
values and local economic conditions make loans secured by real property
difficult to evaluate and monitor.
CONSUMER LOANS. Cowlitz provides loans to individual borrowers for a
variety of purposes, including secured and unsecured personal loans, home
equity, personal lines of credit and motor vehicle loans. Consumer loans can
carry significantly greater risks than other loan products, even if secured, if
the collateral consists of rapidly depreciating assets such as automobiles and
equipment. Repossessed collateral securing a defaulted consumer loan may not
provide an adequate source of repayment of the loan. Consumer loan collections
are dependent on borrowers' continuing financial stability, and are sensitive to
job loss, illness and other personal factors. Cowlitz attempts to manage the
risks inherent in consumer lending by following strict credit guidelines and
conservative underwriting practices. Cowlitz also offers Visa and MasterCard
credit cards to its customers.
OTHER BANKING PRODUCTS AND SERVICES. In support of its focus on
personalized service, Cowlitz offers additional products and services for the
convenience of its customers. These services include a debit card program,
automated teller machines located at branch locations and an automated telephone
banking service with 24-hour access to accounts. Cowlitz does not currently
charge fees for any of these services. Cowlitz provides drive-through facilities
at four of its branches.
TRUST SERVICES. Cowlitz has established a trust department, which is the
only Trust Department located in Cowlitz County. The trust department provides
trust services to individuals, partnerships, corporations and institutions and
acts as a fiduciary of estates and conservatorships and as a trustee under
various wills, trusts and other plans. Cowlitz believes this service has
attracted additional customers to Cowlitz Bank, and helps provide local access
to these services which were previously sought at out of area financial
institutions.
A-2
OTHER FINANCIAL SERVICES
Cowlitz believes that providing its customers a full range of financial
services is an important element of its strategy to attract and retain
customers. To this end, Cowlitz has entered into arrangements with Raymond James
Financial Services, Inc., a securities broker, and Commerce Business & Estate
Services, Inc., an insurance agency. Each of these organizations maintains an
office on the main floor of the Cowlitz Financial Center, where Cowlitz'
headquarters are located and has access to space in Cowlitz' other branches.
Representatives of these companies meet with clients at each of Cowlitz Bank's
Cowlitz County branches, thereby making their services available to all of the
these customers. Cowlitz has no financial interest in either of these companies.
Cowlitz believes that by making available through these relationships, brokerage
and insurance and estate planning services, it can increase foot traffic through
its branches and market more extensively its full line of core banking products
and services.
RECENT ACQUISITIONS
On July 1, 1999, Cowlitz acquired Bay Mortgage, of Bellevue, Washington. The
acquisition was accounted for using the purchase method, including a cash
payment of $1 million and issuance of common stock with a value of $977,000.
Remaining payments of approximately $1.26 million in cash and common stock may
be issued under the terms of a three-year performance earn-out agreement. Bay
Mortgage specializes in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction loans and
bridge loans. Bay Mortgage will operate as a division of Cowlitz Bank and serves
customers throughout the greater Bellevue/Seattle market area.
On August 1, 1999, Cowlitz acquired Bay Mortgage, of Seattle, Washington.
The acquisition was accounted for using the purchase method, including a cash
payment of $675,000. Remaining payments of approximately $180,000 in cash may be
paid under the terms of a three-year performance earn-out agreement. Bay
Mortgage of Seattle and Bay Mortgage of Bellevue will join together as a
division of Cowlitz Bank and serve customers throughout the greater
Bellevue/Seattle market area.
On September 1, 1999, Cowlitz acquired Bay Escrow, of Seattle, Washington.
The acquisition was accounted for using the purchase method, including a cash
payment of $125,000. Bay escrow will operate as a separate division of Cowlitz
Bank and will complete escrow transactions for Bay Mortgage.
MARKET AREA
Cowlitz' primary market area from which it accepts deposits and makes loans
is Cowlitz County, Washington, and the surrounding counties in Washington and
Oregon. With Cowlitz' acquisitions in the third quarter of 1999 it has expanded
its market area to include Bellevue and the greater Puget Sound areas. As a
community oriented bank, Cowlitz Bank has certain competitive advantages due to
its local focus, but is also more closely tied to the local economy than many of
its competitors, which serve a large number of geographic markets. Business
Finance Corporation provides assets-based lending services throughout the
western United States.
EMPLOYEES
As of September 30, 1999, Cowlitz employed a total of 162 full-time
equivalent employees. None of the employees are subject to a collective
bargaining agreement and Cowlitz considers its relationships with its employees
to be favorable.
COMPETITION
Competition in the banking industry for deposits and loans has intensified
with decreased interest rates over the last few years. Furthermore, competition
from outside the traditional banking system
A-3
from credit unions, investment banking firms, insurance companies and related
industries offering bank-like products has increased the competition for
deposits and loans.
The banking industry in the market area is generally characterized by well
established branches of large banks with headquarters located out of the market
area and in many cases, out of the state. These large multi-bank holding company
branches have transferred a number of their banking functions outside the local
area. There are also thrift institutions, including branches of the country's
largest thrift institution, and credit unions within the market area that are
very competitive in the deposit and consumer lending areas.
The major competition for commercial banking services in Cowlitz County
comes from U.S. Bank, Key Bank, Bank of America and Columbia State Bank. None of
these competitors are headquartered in Cowlitz County and many have relocated
key functions (e.g., loan decisions) into regional offices outside of the area.
Its local decision making and strong community ties have allowed Cowlitz to
provide a level of personal service and direct customer contact that management
believes is superior to that provided by other banks.
The offices of the major financial institutions have competitive advantages
over Cowlitz in that they have high public visibility, may offer a wider variety
of products and are able to maintain advertising and marketing activities on a
much larger scale than Cowlitz can economically maintain. Since single borrower
lending limits imposed by law are dependent on the capital of the institution,
the branches of larger institutions with substantial capital bases also have an
advantage with respect to loan applications which are in excess of Cowlitz'
legal lending limits.
In competing for deposits, Cowlitz is subject to certain limitations not
applicable to nonbank financial institution competitors. Previous laws limiting
the deposit instruments and lending activities of savings and loan associations
have been substantially eliminated, thus increasing the competition from these
institutions.
REGULATION AND SUPERVISION
Cowlitz and Cowlitz Bank are subject to extensive regulation under federal
and state laws. The laws, together with the regulations promulgated under them,
significantly affect respective activities of Cowlitz and Cowlitz Bank and the
competitive environment in which they operate. The laws and regulations are
primarily intended to protect depositors and the deposit insurance fund, rather
than shareholders.
The description herein of the laws and regulations applicable to Cowlitz and
Cowlitz Bank, does not purport to be a complete description of the laws and
regulations mentioned herein or of all such laws and regulations. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of Cowlitz and Cowlitz Bank. The operations of Cowlitz and Cowlitz
Bank may be affected by legislative and regulatory changes as well as by changes
in the policies of various regulatory authorities. Cowlitz cannot accurately
predict the nature or the extent of the effects that such changes may have in
the future on its business and earnings.
BANK HOLDING COMPANY REGULATION. Cowlitz is a bank holding company within
the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA") and, as
such, is subject to the regulations of the Federal Reserve. Bank holding
companies are required to file periodic reports with and are subject to periodic
examination by the Federal Reserve. The Federal Reserve has issued regulations
under the BHCA requiring a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. It is the policy of
the Federal Reserve that, pursuant to this requirement, a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity. Additionally,
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding
A-4
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" (as defined in the
statute) with the terms of any capital restoration plan filed by such subsidiary
with its appropriate federal banking agency up to the lesser of (i) an amount
equal to 5% of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
Cowlitz is prohibited by the BHCA from acquiring direct or indirect control
of more than 5% of the outstanding shares of any class of voting stock or
substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve.
Additionally, Cowlitz is prohibited by the BHCA from engaging in or from
acquiring ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The Federal Reserve
is the federal regulatory and examining authority for bank holding companies.
The Federal Reserve has adopted capital adequacy guidelines for bank holding
companies. These guidelines are similar to, although not identical with, the
guidelines applicable to banks. See "Bank Capital Requirements." At
September 30, 1999, Cowlitz' Tier 1 leverage capital ratio was 16.00%, its Tier
1 risk-based capital ratio was 19.62% and its total risk-based capital ratio was
20.87%.
BANK REGULATION. Cowlitz Bank is organized under the laws of the State of
Washington and is subject to the supervision of the Department of Financial
Institutions ("DFI"), whose examiners conduct periodic examinations of state
banks. Cowlitz Bank is not a member of the Federal Reserve System, so its
principal federal regulator is the FDIC, which also conducts periodic
examinations of Cowlitz Bank. Cowlitz Bank's deposits are insured, to the
maximum extent permitted by law, by the Bank Insurance Fund ("BIF") administered
by the FDIC and are subject to the FDIC's rules and regulations respecting the
insurance of deposits. See "Deposit Insurance."
Both federal and state laws extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are generally prohibited under FDICIA from
engaging as principal in activities that are not permitted for national banks,
unless (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund, and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. Cowlitz does not
believe that these restrictions will have a material adverse effect on its
current operations.
BANK CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital ratio
guidelines to which Cowlitz Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations.
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk weighted categories, with higher
levels of capital being required for the categories perceived as representing
greater risk.
A-5
These guidelines divide a bank's capital into two tiers. Tier 1 includes
common equity, certain noncumulative perpetual preferred stock (excluding
auction rate issues) and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and certain other intangible assets (except mortgage
servicing rights and purchased credit card relationships, subject to certain
limitations). Supplementary (Tier 2) capital includes, among other items,
cumulative perpetual and long-term, limited-life, preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term-subordinated
debt and the allowance for loan and lease losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC
may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC has established guidelines prescribing a minimum Tier
1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios for Cowlitz and Cowlitz Bank and for
Cowlitz Bancorp on a pro forma combined basis with Northern Bank at
September 30, 1999 are set forth below:
COWLITZ PRO FORMA
COWLITZ BANK COMBINED
-------- -------- ---------
Tier 1 Capital to Risk-Weighted Assets............. 19.62% 11.75% 15.67%
Total-Risk Based Capital to Risk-Weighted Assets... 20.87% 13.00% 16.93%
Tier 1 Leverage Ratio.............................. 16.00% 9.53% 12.15%
DIVIDENDS. The principal source of Cowlitz' cash revenues is dividends from
Cowlitz Bank. Under Washington law, Cowlitz Bank may not pay dividends in an
amount greater than its retained earnings as determined by generally accepted
accounting principles. In addition, the DFI has the authority to require a
state-chartered bank to suspend payment of dividends. The FDIC has the authority
to prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice in light of the
financial condition of the bank or if it would cause a bank to become
undercapitalized.
LENDING LIMITS. Under Washington law, the total loans and extensions of
credit by a Washington-chartered bank to a borrower outstanding at one time may
not exceed 20% of such bank's capital and surplus. However, this limitation does
not apply to loans or extensions of credit which are fully secured by readily
marketable collateral having market value of at least 115% of the amount of the
loan or the extension of credit at all times.
BRANCHES AND AFFILIATES. Establishment of bank branches is subject to
approval of the DFI and FDIC and geographic limits established by state laws.
Washington's branch banking law permits a bank having its principal place of
business in the State of Washington to establish branch offices in any county in
Washington without geographic restrictions. A bank may also merge with any
national or state chartered bank located anywhere in the State of Washington
without geographic restrictions.
Under Oregon law, an out-of-state bank or bank holding company may merge
with or acquire an Oregon state chartered bank or bank holding company if the
Oregon bank, or in the case of a bank holding company, the subsidiary bank, has
been in existence for a minimum of three years, and the law of the state in
which the acquiring bank is located permits such merger. Branches may not be
acquired or opened separately, but once an out-of-state bank has acquired
branches in Oregon, either through a
A-6
merger with or acquisition of substantially all of the assets of an Oregon bank,
the bank may open additional branches.
The Bank is subject to Sections 22 (h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
FDICIA. FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
provisions of FDICIA. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well capitalized" if it has a total, risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
Cowlitz Bank currently exceeds all of the ratios.
FDICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institutions holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value of publicly traded shares and such other standards as the agency
deems appropriate.
DEPOSIT INSURANCE. Cowlitz Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by BIF,
Cowlitz Bank is required to pay deposit insurance premiums to BIF.
FDICIA required the FDIC to issue regulations establishing a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association poses to the deposit insurance funds. This system bases an
institution's risk category partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of three "supervisory"
categories based on reviews by regulators, statistical analysis of financial
statements and other relevant information. An institution's assessment rate
depends upon the capital category and supervisory category to which it is
assigned. Annual assessment rates currently range from $.03 per $100 of domestic
deposits for the highest rated institution to $0.27 per $100 of domestic
deposits for an institution in the lowest category. Cowlitz Bank is currently in
the class of the highest rated institutions and, accordingly, pays the minimum
assessment for deposit insurance. Under legislation enacted in 1996 to
recapitalize the Savings Association Insurance Fund, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
Corporation ("FICO") to service FICO debt incurred in the 1980's. The current
FICO assessment rate for BIF insured deposits is 1.220 cents per $100 of
deposits per year. Any increase in deposit insurance of FICO assessments could
have an adverse effect on Cowlitz Bank's earnings.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act ("CRA") requires
financial institutions regulated by the federal financial supervisory agencies
to ascertain and help meet the credit needs of their delineated communities,
including low-income and moderate-income neighborhoods within those communities,
while maintaining safe and sound banking practices. The regulatory agency
assigns one of four possible ratings to an institution's CRA performance and is
required to make public
A-7
an institution's rating and written evaluation. The four possible ratings are
"outstanding," satisfactory," "needs to improve" and "substantial
noncompliance."
Under new regulations that apply to CRA performance ratings after July 1,
1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics and the
competitive environment in which it operates. The evaluation does not rely on
absolute standards and financial institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
Cowlitz' most recent rating under CRA is "outstanding." This rating reflects
Cowlitz' commitment to meeting the credit needs of the communities it serves. No
assurance can be given, however, that Cowlitz will be able to maintain an
"outstanding" rating under the new regulations in the future.
ADDITIONAL MATTERS. In addition to the matters discussed above, Cowlitz and
Cowlitz Bank are subject to additional regulation of their activities, including
a variety of consumer protection regulations affecting their lending, deposit
and collection activities and regulations affecting secondary mortgage market
activities.
The earnings of financial institutions, including Cowlitz and Cowlitz Bank,
are also affected by general economic conditions and prevailing interest rates,
both domestic and foreign and by the monetary and fiscal policies of the U.S.
Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, the Washington
Legislature and various regulatory agencies, including those referred to above.
It cannot be predicted with certainty whether such legislation or administrative
action will be enacted or the extent to which the banking industry in general or
Cowlitz and Cowlitz Bank in particular would be affected thereby.
A-8
SUMMARY FINANCIAL DATA OF COWLITZ
Cowlitz is providing the following information to aid you in your analysis
of the financial aspects of the merger. Cowlitz derived the information for the
years ended, and as of, December 31, 1994 through December 31, 1998 from its
historical audited financial statements for these fiscal years. Cowlitz derived
the financial information for the nine months ended September 30, 1998 and
September 30, 1999, and as of September 30, 1999, from its unaudited financial
statements that include, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
results. The operating results for the nine months ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. This information is only a summary and you should read
it in conjunction with Cowlitz' consolidated financial statements and related
notes contained in Appendix A to this joint proxy statement.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income............................ $ 12,446 $ 12,074 $ 16,366 $ 15,086 $ 13,633 $ 10,644 $ 7,492
Interest expense........................... 4,190 4,954 6,501 6,943 6,174 4,548 2,841
--------- --------- --------- --------- --------- --------- ---------
Net interest income........................ 8,256 7,120 9,865 8,143 7,459 6,096 4,651
Provision for loan losses.................. 1,065 243 509 375 281 694 533
Noninterest income......................... 1,200 734 978 749 296 877 287
Noninterest expense........................ 7,499 5,034 6,927 5,284 3,682 3,093 2,363
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes, extraordinary
items, cumulative effect of accounting
changes, and minority interest........... 892 2,577 3,407 3,233 3,792 3,186 2,042
Income taxes............................... 341 876 1,181 1,109 1,295 1,088 697
--------- --------- --------- --------- --------- --------- ---------
Net income................................. $ 551 $ 1,701 $ 2,226 $ 2,124 $ 2,497 $ 2,098 $ 1,345
Basic earnings per share................... $ 0.14 $ 0.47 $ 0.60 $ 0.82 $ 0.97 $ 0.83 $ 0.78
Diluted earnings per share................. $ 0.13 $ 0.44 $ 0.57 $ 0.78 $ 0.97 $ 0.83 $ 0.78
Average number of shares used to calculate
earnings per share:
Basic.................................... 4,046,872 3,619,488 3,715,901 2,601,650 2,586,711 2,514,769 1,723,733
Diluted.................................. 4,104,249 3,822,607 3,894,095 2,711,512 2,586,711 2,514,769 1,723,733
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets.......................................... $182,746 $178,345 $173,293 $159,157 $131,348 $94,728
Investment securities........................... $ 13,026 $ 11,530 $ 8,481 $ 5,391 $ 3,263 $ 3,565
Loans, net...................................... $138,539 $130,232 $129,993 $124,657 $105,900 $75,564
Deposits........................................ $122,860 $122,361 $136,209 $123,297 $106,371 $81,083
Borrowings...................................... $ 26,927 $ 24,074 $ 22,625 $ 23,392 $ 15,018 $ 8,161
Shareholders' equity............................ $ 31,839 $ 30,920 $ 13,887 $ 11,813 $ 9,391 $ 5,182
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
OTHER FINANCIAL DATA
Return on average assets....... .43% 1.26% 1.24% 1.28% 1.75% 1.90% 1.57%
Return on average shareholders'
equity....................... 2.35% 8.94% 8.34% 16.65% 23.93% 26.06% 30.21%
Cash dividends:
Dividend payout ratio per
common share............... 38.46% 9.09% 10.53% 6.41% 4.12% 3.61% 3.85%
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------- -------- -------- -------- -------- --------
Total shareholders' equity as a percentage of total
assets.................................................. 17.42% 17.34% 8.01% 7.42% 7.15% 5.47%
Nonperforming assets as a percentage of total assets...... 1.67% 1.86% 1.39% .36% .25% .22%
Allowance for loan losses as a percentage of:
Nonaccrual loans........................................ 69.73% 66.28% 103.85% 465.36% 743.88% 643.58%
Nonperforming assets.................................... 68.48% 54.66% 81.51% 328.82% 540.80% 548.57%
A-9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements and is
intended to be read in conjunction with and is qualified in its entirety by
reference to the consolidated financial statements of Cowlitz and accompanying
notes included elsewhere in this joint proxy statement. For a discussion of
important factors that could cause actual results to differ materially from such
forward-looking statements, see "Risk Factors" above.
OVERVIEW
Cowlitz has recently undertaken significant business changes to strengthen
its position as a leading provider of financial services in Cowlitz County and
to expand its services throughout western Washington. Beginning in
November 1996, Cowlitz expanded its operating base by opening a branch in Kelso,
Washington. In July 1997, Cowlitz acquired three Wells Fargo Bank branches,
located in Castle Rock, Kalama, and Longview, Washington. In this acquisition,
Cowlitz acquired branch sites, retained the existing employees and assumed
approximately $25.2 million in deposit liabilities, but did not acquire any
loans or other revenue producing assets. During 1997, Cowlitz established a
trust department at its main office in Longview. In March 1998, Cowlitz
completed an initial public offering and in September 1998, Cowlitz acquired
Business Finance Corporation ("BFC") of Bellevue, Washington which provides
asset-based lending services to companies throughout the western United States.
During 1999, Cowlitz has continued to expand its business operations. In
July and August 1999, Cowlitz acquired Bay Mortgage of Bellevue, Washington and
Bay Mortgage of Seattle, both of which are residential mortgage companies
located in the greater Seattle area. In September 1999, Cowlitz Bank opened a DE
NOVO branch in Bellevue doing business as Bay Bank and acquired Bay Escrow of
Seattle, Washington.
Cowlitz Bank has made a strategic decision to lower its cost of funds by not
aggressively repricing out of area certificates of deposit as they matured.
Cowlitz' average cost of funds has declined to 3.98% in the nine months ended
September 30, 1999 compared to 4.31% during the same period in 1998. Although
total loans increased at September 30, 1999 from December 31, 1998, average
earnings assets declined during the nine months ended September 30, 1999
compared to the comparable period in the prior year.
RESULTS OF OPERATIONS
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loans and investment securities portfolios, and interest
expense, principally on customer deposits. Changes in net interest income result
from changes in "volume," "spread" and "margin." Volume refers to the dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers
to the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to total interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET INTEREST INCOME. Net interest income for the nine months ended
September 30, 1999 was $8.3 million compared to $7.1 million at September 30,
1998. Total interest earning assets averaged $154.4 million for the nine months
ended September 30, 1999, compared to $163.6 million for the corresponding
period in 1998. The average yield on interest earning assets increased to 10.75%
during the first nine months of 1999 compared to 9.84% for the corresponding
period in 1998. This increase is
A-10
a result of investing funds in higher yielding loans at BFC, the Bank's mortgage
division and in commercial loans generated at the new branch in Bellevue,
Washington. The loans at BFC typically yield a higher rate of interest than
those loans generated by Cowlitz Bank. As shown in the table below, during the
first nine months of 1999, the average yields earned at Cowlitz Bank have
increased slightly to 9.61% for the nine months ended September 30, 1999, from
9.46% for the same period in 1998. Cowlitz Bank's average yields have increased
as a result of the addition of the two mortgage companies in the third quarter
of 1999. The Company has decreased its interest earning assets, as excess funds
invested at FHLB have declined due to the Company's decision to reduce its
higher rate, out of state certificates of deposit in the first eight months of
the year and to use its cash to pay for acquisitions during the third quarter of
1999.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
COWLITZ BANK
Interest Earned........................................... 10,987 11,591
Average interest earning assets........................... 152,482 163,365
Average yields earned..................................... 9.61% 9.46%
Interest bearing liabilities averaged $111.8 million and $125.6 million
during the first nine months of 1999 and 1998, respectively. The average cost of
these liabilities decreased in the first nine months of 1999 to 5.00% from 5.26%
in the first nine months of 1998. As discussed above, Cowlitz has allowed
certain higher rate certificates of deposit to mature and not be renewed.
ANALYSIS OF NET INTEREST INCOME. The following table presents information
regarding yields and interest earning assets, expense on interest bearing
liabilities, and net yields on interest earning assets for periods indicated on
a tax equivalent basis.
NINE MONTHS ENDED
SEPTEMBER 30,
------------------- INCREASE
1999 1998 (DECREASE) CHANGE
-------- -------- ---------- --------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Interest income(1).................................... $ 12,448 $ 12,075 $ 373 3.1%
Interest expense...................................... 4,190 4,954 (764) (15.4)%
-------- -------- --------
Net interest income................................... $ 8,258 $ 7,121 $ 1,137 16.0%
======== ======== ========
Average interest earning assets....................... $154,422 $163,630 $ (9,280) (5.6)%
Average interest bearing liabilities.................. $111,751 $125,623 $(13,377) (10.7)%
Average yields earned(2).............................. 10.75% 9.84% .91%
Average rates paid(2)................................. 5.00% 5.26% (.26)%
Net interest spread(2)................................ 5.75% 4.58% 1.17%
Net interest margin(2)................................ 7.13% 5.80% 1.33%
- ------------------------
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the nine months ended September 30, 1999 and 1998 have been
annualized.
A-11
NON-INTEREST INCOME. Total non-interest income increased to $1.2 million
for the first nine months of 1999, compared to $734,000 during the same period
of 1998. Non-interest income consists of the following components:
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Service charge on deposit accounts.......................... $ 511 $487
Credit Card income.......................................... 101 85
Fiduciary income............................................ 105 39
ATM income.................................................. 41 29
Safe deposit box fees....................................... 32 30
Gains on mortgage loans sold................................ 294 --
Underwriting fees........................................... 39 --
Other miscellaneous fees and income......................... 77 64
------ ----
Total non-interest income................................... $1,200 $734
====== ====
The increase in non-interest income is primarily a result of the expansion
in services provided by the mortgage division's of Cowlitz Bank as well as the
continued growth of the Trust Department. Gains on mortgage loans sold consist
of the release of servicing on loans sold to correspondent lenders. The mortgage
division established this correspondent lending program and has expanded this
program with the acquisitions of the two mortgage companies.
NON-INTEREST EXPENSE. For the nine months ended September 30, 1999,
non-interest expense was $7.5 million as compared to $5.0 million for the nine
months ended September 30, 1998. Salaries and benefits expense of $4.2 million
for the first nine months of 1999 represents an increase of $1.4 million from
$2.8 million for the comparable period in 1998. At September 30, 1999, Cowlitz
had 162 full-time equivalent employees compared to 104 at September 30, 1998.
The increase between the nine month period in 1999 compared to the corresponding
period in 1998 was due to the addition of employees through acquisitions as well
as salary increases for existing employees generally ranging from three to six
percent a year.
Net occupancy expenses consist of depreciation on premises, lease costs of
buildings and equipment, maintenance and repair expenses, utilities and related
expenses. Cowlitz' net occupancy expense at September 30, 1999 was $980,000 or
49.6% higher than $655,000 at September 30, 1998. The increase in occupancy
expense in 1999 was due primarily to the amortization of leasehold improvements
completed at branch locations and at the new Vancouver loan office in 1998 and
the first quarter of 1999. In addition, the Company assumed additional lease
payments in the third quarter 1999 for the acquired mortgage companies and the
new Bellevue branch.
Other operating expenses consisting of communication expenses, advertising,
and other office expenses have increased 48.9% from $1.2 million at
September 30, 1998 to $1.8 million at September 30, 1999 as the Company has
expanded its mortgage operations into Vancouver, Washington and the greater
Bellevue/Seattle area.
INCOME TAXES. The provision for income taxes amounts to $341,000 and
$876,000 at September 30, 1999 and 1998, respectively. The provision resulted in
an effective tax rate of 38.2% and 34.0%, respectively. This increase was due to
the amortization of goodwill associated with the BFC acquisition that is not
deductible for income tax purposes.
PROVISION FOR LOAN LOSSES. Provisions for loan losses recorded for the nine
months ended September 30, 1999 were $1.1 million as compared to $243,000 at
September 30, 1998. Net charge-offs
A-12
were $785,000 and $283,000 at September 30, 1999 and 1998, respectively. Total
charges offs were $895,000 at September 30, 1999 and $305,000 at September 30,
1998. During the first quarter of 1999, Cowlitz determined that approximately
$348,000 in receivables purchased by its subsidiary BFC may not be collectible.
These receivables have been charged off during the first quarter and Cowlitz has
increased it provision for loan losses accordingly. The increase in the
provision also reflects the increase in nonaccrual loans and the level of net
charge-offs during the period.
The following table shows Cowlitz Bancorp's loan loss performance for the
periods indicated:
NINE MONTHS ENDING DEC. 31,
SEPT. 30, 1999 1998
------------------ ----------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Loans outstanding at end of period.......................... $140,633 $132,046
Average loans outstanding during the period................. $129,167 $131,495
Allowance for loan losses, beginning of period.............. $ 1,814 $ 1,970
Loans charged off:
Commercial................................................ 767 618
Real Estate............................................... 42 --
Consumer.................................................. 32 22
Credit Cards.............................................. 54 87
-------- --------
Total loans charged-off................................... 895 727
-------- --------
Recoveries:
Commercial................................................ 94 --
Real Estate............................................... -- 3
Consumer.................................................. 16 4
Credit Cards.............................................. -- 10
-------- --------
Total recoveries........................................ 110 17
-------- --------
Provision for loan losses................................... 1,065 509
-------- --------
Allowance for loan losses, end of period.................... $ 2,094 $ 1,814
======== ========
Ratio of net loans charged-off to average loans
outstanding............................................... .61% .54%
Ratio of allowance for loan losses to loans at end of
period.................................................... 1.49% 1.37%
At September 30, 1999 nonperforming assets were $3.1 million or 1.7% of
total assets. Nonaccrual loans were $3.0 million at September 30, 1999 and
$2.7 million at September 30, 1998. From September 30, 1998 to September 30,
1999, nonaccrual loans increased primarily in commercial loans secured by real
estate. BFC accounted for approximately $178,000 of the total nonaccrual loans,
reflecting the more aggressive lending mix of its portfolio. It is not unusual
in the normal course of business for BFC to have loans that become more than
90 days past due and are therefore placed on nonaccrual status, although
management does not necessarily believe that losses are probable on these loans.
Approximately $2.0 million of the remaining non-accrual loans reflect loans
primarily secured by real estate. Any losses on non-accrual loans that are
considered probable have been estimated by management in its regular quarterly
assessment of the allowance for loan losses as discussed in the Loan Losses and
Recoveries disclosure. The increase in the provision for loan losses each year
is largely reflective of the increase in non-accrual loans and the level of net
charge-offs during the period. Also contributing is the growth in loans late in
the third quarter of 1999.
Other real estate owned decreased to $55,000 as of September 30, 1999
compared to $573,000 at September 30, 1998, as a result of the sale of
properties classified as other real estate owned.
A-13
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NET INTEREST INCOME. Net interest income for the year ended December 31,
1998 was $9.9 million an increase of 21.1% from $8.1 million in 1997, which was
$684,000 higher than 1996. Total interest earning assets averaged
$162.2 million for the year ended December 31, 1998, compared to $152.9 million
and $134.2 million for the corresponding periods in 1997 and 1996, respectively.
The increase in average earning assets between 1998 and 1997 was attributable to
an increase in taxable securities and interest earning balances due from banks
after Cowlitz' initial public offering in March of 1998, as well as the increase
in loans after Cowlitz' acquisition of BFC. For the year ended December 31,
1997, the increase in average earning assets was $18.6 million, the largest
component of which was an increase in the amount of loans. The overall
tax-equivalent yield on interest earning assets was 10.09% in 1998, compared to
9.87% in 1997 and 10.16% in 1996. The yield on interest-earning assets increased
in 1998 when compared to 1997 due to loans at BFC which produce higher yields
than loans at Cowlitz Bank. Interest yields also increased on investments. In
1997, yields were lower on earning assets when compared to 1996, primarily due
to lower interest rates on loans due to market conditions in Cowlitz Bank's
market area.
Interest expense as a percentage of earning assets decreased to 4.01% in
1998, compared to 4.54% in 1997 and 4.60% in 1996. The average cost of interest
bearing liabilities remained 5.30% in 1998 and 1997 compared to 5.35% in 1996.
Cowlitz' net interest spread was 4.79% in 1998, 4.57% in 1997, and 4.81% in
1996. The increase between 1998 and 1997 resulted from higher yields received on
interest earning assets. Local competitive pricing conditions and funding needs
for Cowlitz' investments and loans were the primary determinants of rates paid
for deposits during 1998, 1997 and 1996.
A-14
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID. The following table
sets forth, for the periods indicated, information with regard to (i) average
balances of assets and liabilities, (ii) the total dollar amounts of interest
income on interest earning assets and interest expense on interest bearing
liabilities, (iii) resulting yields or costs, (iv) net interest income and
(v) net interest spread. Nonaccrual loans have been included in the table as
loans carrying a zero yield. Loan fees are recognized as income using the
interest method over the life of the loan.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ OUTSTANDING EARNED/
BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE
------------- -------- ----------- ------------- -------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans........................ $131,495 $14,103 10.73% $130,362 $13,700 10.51%
Taxable Securities........... 15,071 955 6.34% 10,261 667 6.50%
Nontaxable securities(1)..... 81 4 4.94% -- -- 0.00%
Trading assets............... -- -- 0.00% -- -- 0.00%
Federal funds sold........... -- -- 0.00% -- -- 0.00%
Interest earning balances due
from Banks................. 15,512 1,305 8.41% 12,259 719 5.87%
-------- ------- ----- -------- ------- -----
Total interest earning
assets................. $162,159 $16,367 10.09% $152,882 $15,086 9.87%
Cash and due from banks...... 8,528 7,553
Premises and equipment,
net........................ 5,846 5,064
Allowance for loan losses.... (1,930) (1,935)
Net intangibles.............. 2,171 580
Other assets................. 2,045 1,846
-------- --------
Total assets............. $178,819 $165,990
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY:
Savings and interest-bearing
demand deposits............ $ 46,291 $ 1,894 4.09% $ 37,568 $ 1,253 3.34%
Certificates of deposit...... 52,682 3,048 5.79% 70,641 4,246 6.01%
Long-term borrowings......... 21,755 1,469 6.75% 21,773 1,401 6.43%
Short-term borrowings........ 1,865 90 4.83% 955 43 4.50%
-------- ------- ----- -------- ------- -----
Total interest bearing
liabilities............ $122,593 $ 6,501 5.30% $130,937 $ 6,943 5.30%
Non-interest bearing
deposits................... 28,672 21,621
Other liabilities............ 851 675
-------- --------
Total liabilities........ 152,116 153,233
Shareholders' equity......... 26,703 12,757
-------- --------
Total liabilities and
shareholders' Equity... $178,819 $165,990
======== ========
Net interest income.......... $ 9,866 $ 8,143
======= =======
Net interest spread.......... 4.79% 4.57%
Average yield on earning
assets..................... 10.09% 9.87%
Interest expense to earning
assets..................... 4.01% 4.54%
Net interest income to
earning assets............. 6.08% 5.33%
YEAR ENDED DECEMBER 31,
--------------------------------------
1996
--------------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/
BALANCE PAID YIELD/RATE
------------- -------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans........................ $118,957 $12,721 10.69%
Taxable Securities........... 6,890 386 5.60%
Nontaxable securities(1)..... 36 3 8.33%
Trading assets............... 589 34 5.77%
Federal funds sold........... -- -- 0.00%
Interest earning balances due
from Banks................. 7,777 490 6.30%
-------- ------- -----
Total interest earning
assets................. $134,249 $13,634 10.16%
Cash and due from banks...... 6,021
Premises and equipment,
net........................ 2,309
Allowance for loan losses.... (1,801)
Net intangibles.............. --
Other assets................. 1,861
--------
Total assets............. $142,639
========
LIABILITIES AND SHAREHOLDERS EQUITY:
Savings and interest-bearing
demand deposits............ $ 30,834 $ 1,031 3.34%
Certificates of deposit...... 64,863 3,960 6.11%
Long-term borrowings......... 17,315 1,073 6.20%
Short-term borrowings........ 2,359 110 4.66%
-------- ------- -----
Total interest bearing
liabilities............ $115,371 $ 6,174 5.35%
Non-interest bearing
deposits................... 16,196
Other liabilities............ 639
--------
Total liabilities........ 132,206
Shareholders' equity......... 10,433
--------
Total liabilities and
shareholders' Equity... $142,639
========
Net interest income.......... $ 7,460
=======
Net interest spread.......... 4.81%
Average yield on earning
assets..................... 10.16%
Interest expense to earning
assets..................... 4.60%
Net interest income to
earning assets............. 5.56%
- ----------------------------------
(1) Interest earned on nontaxable securities has been computed on a 34 percent
tax equivalent basis.
A-15
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table shows the
dollar amount of the increase (decrease) in Cowlitz' net interest income and
expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variance have been allocated to volume changes:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 VERSUS 1997 1997 VERSUS 1996
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL (DECREASE) DUE TO TOTAL
------------------- INCREASE/ ------------------- INCREASE/
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest Income:
Interest earning balances due From
banks.................................. $ 275 $ 311 $ 586 $ 262 $ (33) $ 229
Trading account income................. -- -- -- (34) -- (34)
Investment security income:
Taxable securities..................... 304 (16) 288 219 62 281
Nontaxable securities.................. 3 -- 3 (2) -- (2)
Loans, including fees on loans......... 116 287 403 1,193 (214) 979
------- ----- ------- ------ ----- ------
Total interest income................ 698 582 1,280 1,638 (185) 1,453
------- ----- ------- ------ ----- ------
Interest expense:
Savings and interest bearing Demand.... 359 282 641 222 -- 222
Certificates of deposit................ (1,043) (155) (1,198) 351 (65) 286
Short-term borrowings.................. 44 3 47 (63) (4) (67)
Long-term borrowings................... (2) 70 68 288 40 328
------- ----- ------- ------ ----- ------
Total interest expense............... (642) 200 (442) 798 (29) 769
------- ----- ------- ------ ----- ------
Net interest spread...................... $ 1,340 $ 382 $ 1,722 $ 840 $(156) $ 684
======= ===== ======= ====== ===== ======
PROVISION FOR LOAN LOSSES. The amount of the allowance for loan losses is
analyzed by management on a regular basis to ensure that it is adequate to
absorb losses inherent in the loan portfolio as of the reporting date. When a
provision for loan losses is recorded, the amount is based on past charge-off
experience, a careful analysis of the current loan portfolio, the level of
nonperforming and impaired loans, evaluation of future economic trends in
Cowlitz' market area, and other factors relevant to the loan portfolio. See
"Allowance for Loan Losses" for a more detailed discussion.
Cowlitz' provision for loan losses was $509,000, $375,000 and $281,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Net charge-offs
were $710,000 in 1998 compared to net charge-offs of $299,000 and $150,000 for
1997 and 1996 respectively. Total charge-offs of $727,000 in 1998 reflect losses
realized in the portfolio that Cowlitz had recognized previously through the
provision for loan losses. Management continues to closely monitor the loan
quality and existing relationships.
Nonaccrual loans were $2.7 million at December 31, 1998 and $1.9 million at
December 31, 1997. During 1998, nonaccrual loans increased primarily in
commercial loans secured by real estate. Included in the nonaccrual loans of
$2.7 million are five borrowing relationships with an aggregate total of
$1.7 million that are largely secured by real estate. Another component of this
increase is approximately $331,000 of loans at Cowlitz' subsidiary BFC. It is
not unusual in the normal course of business for BFC to have loans that become
more than 90 days past due and are therefore placed on nonaccrual status,
although management does not necessarily believe that losses are probable on
these loans. Other real estate increased $485,000 during 1998, as a result of
the reclassification of loans from nonaccrual in 1997 to other real estate owned
in 1998. Any losses on nonaccrual loans, which are considered probable, have
been estimated by management in its regular quarterly assessment of the
A-16
allowance for loan losses as discussed in the "Allowance for Loan Losses". The
increase in the provision for loan losses each year is largely reflective of the
increases in nonaccrual loans during the periods. For a more detailed discussion
see "Allowance for Loan Losses".
NON-INTEREST INCOME. Non-interest income consists of the following
components:
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Service charge on deposit accounts...................... $656 $563 $ 387
Net gains on sales of securities........................ 5 -- (309)
Credit Card income...................................... 114 100 81
Fiduciary income........................................ 57 -- --
ATM income.............................................. 40 13 --
Safe deposit box fees................................... 30 15 12
Insurance Commissions................................... 9 13 26
Data processing income.................................. -- 11 25
Other miscellaneous fees and income..................... 67 34 74
---- ---- -----
Total non-interest income............................. $978 $749 $ 296
==== ==== =====
Total non-interest income has ranged from $978,000 for 1998, to $749,000 for
1997 and $296,000 for 1996. Service charges on deposit accounts increased to
$656,000 in 1998 from $563,000 in 1997 and $387,000 in 1996 primarily because of
the increase in deposits from the acquisition of three Wells Fargo Bank branches
in July 1997. ATM income and safe deposit income have also increased after the
branch acquisition. The opening of the Trust Department added $57,000 in
non-interest income during 1998. The increase in non-interest income of $453,000
from 1996 to 1997 primarily reflects the loss in Cowlitz' trading account of
$309,000 in 1996. The loss was due primarily to the volatility of interest rates
during this period. Cowlitz did not conduct any trading activities during 1998
or 1997.
NON-INTEREST EXPENSE. Non-interest expense consists principally of
employees' salaries and benefits, occupancy costs, data processing and
communication expenses, FDIC (Federal Deposit Insurance Corporation) insurance
premiums, professional fees, and other non-interest expenses. Non-interest
expenses increased 31.1% to $6.9 million for the year ended December 31, 1998
compared to $5.3 million for the year ended December 31, 1997, which was an
increase of 43.5% compared to $3.7 million for the year ended December 31, 1996.
As discussed below, the primary reasons for this increase were increased
staffing costs, as well as an increase in other operating expense such as
occupancy expense and amortization of the deposit premium from the acquisition
of the three Wells Fargo Bank branches in July 1997 and the goodwill
amortization from the acquisition of BFC in September 1998.
A measure of Cowlitz' ability to contain non-interest expenses is the
efficiency ratio. This statistic is derived by dividing total non-interest
expenses by total net interest income and non-interest income. Cowlitz'
efficiency ratio increased to 63.89% for the year ended December 31, 1998
compared to 59.42% for the corresponding period in 1997 and 47.48% for the year
ended December 31, 1996, largely as a result of Cowlitz' expansion activities
during these periods.
Salaries and benefits expense of $3.8 million in 1998 represented an
increase of $997,000 or 36% from $2.8 million reported in 1997 which was
$641,000 or 30% higher than the $2.1 million reported in 1996. In 1997, the
salary expense reflected the addition of the employees that remained with
Cowlitz Bank after the acquisition of the Wells Fargo branches in July 1997.
During 1998, the salary and benefit expense includes the addition of
approximately 22 employees from the branches for a twelve-month period. All of
these employees were with Cowlitz at both December 31, 1997 and December 31,
1998, but only received five and one-half months salary from Cowlitz in 1997.
Also contributing to the
A-17
increase were increases in salary for existing employees generally ranging from
three to six percent a year. At December 31, 1998, Cowlitz had 105 full-time
equivalent employees compared to 99 and 63 at December 31, 1997 and 1996,
respectively.
Net occupancy expenses consist of depreciation on premises, lease costs,
equipment, maintenance and repair expenses, utilities and related expenses.
Cowlitz' net occupancy expense in 1998 of $888,000 was $164,000 or 22.7% higher
than the $724,000 reported in 1997, which was $331,000 or 84.2% higher than the
$393,000 reported in 1996. The increase in occupancy expense in these periods
was due primarily to building a new branch in Castle Rock and the remodel of the
Triangle branch, both of which occurred in 1998. Also contributing to these
increases were the expansion of Cowlitz' main office facility, the acquisition
of the Wells Fargo branches in July 1997 and the opening of a branch in Kelso in
late 1996.
Intangible assets included a deposit premium of $1.6 million and
$1.8 million, net of accumulated amortization, at December 31, 1998 and 1997,
respectively. The deposit premium is being amortized using an accelerated method
over a ten-year life. Intangible assets at December 31, 1998 also included
goodwill of $1.5 million, net of accumulated amortization, representing the
excess of acquisition costs over the fair value of net assets that arose in
connection with the acquisition of Business Finance Corporation and is being
amortized on a straight-line basis over a fifteen-year period. At December 31,
1998, expenses related to the amortization of intangibles were $309,000 compared
to $123,000 at December 31, 1997 and $0 at December 31, 1996.
Other operating expenses such as insurance, legal and accounting expenses,
service charges, postage, and other business expenses were $1.7 million at
December 31, 1998, $1.4 million at December 31, 1997, and $1.0 million at
December 31, 1996. The increases from year to year were due to Cowlitz'
continued growth and expansion.
INCOME TAXES. The provision for income taxes amounted to $1.2 million,
$1.1 million and $1.3 million for 1998, 1997, and 1996, respectively. The
provision resulted in an effective tax rate of 34.7% in 1998, 34.3% in 1997, and
34.2% in 1996.
FINANCIAL CONDITION
SUMMARY BALANCE SHEET
DECEMBER 31, INCREASE (DECREASE)
------------------------------ ------------------------------------------------
1998 1997 1996 12/31/97-12/31/98 12/31/96-12/31/97
-------- -------- -------- --------------------- ---------------------
(DOLLARS) (PERCENT) (DOLLARS) (PERCENT)
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..................... $ 22,705 $ 23,109 $ 20,905 $ (404) (1.7)% $ 2,204 10.5 %
Investment securities....................... 11,530 8,481 5,391 3,049 36.0 % 3,090 57.3 %
Loans, net.................................. 130,232 129,993 124,657 239 0.2 % 5,336 4.3 %
Other assets................................ 13,878 11,710 8,204 2,168 18.5 % 3,506 42.7 %
-------- -------- -------- -------- -------
Total assets................................ $178,345 $173,293 $159,157 $ 5,052 2.9 % $14,136 8.9 %
======== ======== ======== ======== =======
LIABILITIES
Non-interest-bearing deposits............... $ 33,062 $ 27,141 $ 16,821 $ 5,921 21.8 % $10,320 61.4 %
Interest-bearing deposits................... 89,299 109,068 106,476 (19,769) (18.1)% 2,592 2.4 %
-------- -------- -------- --------
Total deposits.............................. 122,361 136,209 123,297 (13,848) (10.2)% 12,912 10.5 %
Other liabilities........................... 25,064 23,197 24,047 1,867 8.0 % (850) (3.5)%
SHAREHOLDERS' EQUITY.......................... 30,920 13,887 11,813 17,033 122.7 % 2,074 17.6 %
-------- -------- -------- -------- -------
Total liabilities and shareholders'
equity.................................... $178,345 $173,293 $159,157 $ 5,052 2.9 % $14,136 8.9 %
======== ======== ======== ======== =======
A-18
INVESTMENT SECURITIES. At December 31, 1998, Cowlitz' portfolio of
investment securities totaled $11.5 million, a 36% increase when compared to a
securities portfolio of $8.5 million at December 31, 1997. The investment
portfolio increased during 1998 primarily as a result of the investment of the
offering proceeds in March 1998.
Cowlitz Bancorp follows a financial accounting principle which requires the
identification of investment securities as held-to-maturity, available-for-sale
or trading assets. Securities designated as held-to-maturity are those that
Cowlitz Bancorp has the intent and ability to hold until they mature or are
called. Available-for-sale securities are those that management may sell if
liquidity requirements dictate or alternative investment opportunities arise.
Trading assets are purchased and held principally for the purpose of reselling
them within a short period of time. The mix of available-for-sale and
held-to-maturity investment securities is considered in the context of Cowlitz'
overall asset-liability policy and illustrates management's assessment of the
relative liquidity of Cowlitz. At December 31, 1998, the investment portfolio
consisted of 61.3% available-for-sale securities and 38.7% held-to-maturity
investments. At December 31, 1997, available-for-sale securities were 47.4% and
held-to-maturity investments were 52.6% of the investment portfolio. Cowlitz did
not conduct any trading activities during 1998 or 1997. See Note 2 to Cowlitz'
Consolidated Financial Statements for the year ended December 31, 1998.
The following table provides the book value of Cowlitz' portfolio of
investment securities as of December 31, 1998 and 1997.
DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. Treasury securities................. $6,994 $7,065 $3,993 $4,017
------ ------ ------ ------
Total................................ $6,994 $7,065 $3,993 $4,017
====== ====== ====== ======
HELD-TO-MATURITY
U.S. Treasury securities................. $ 999 $1,021 $2,978 $3,000
Municipal bond........................... 199 199 -- --
Certificates of deposit.................. 3,267 3,267 1,486 1,486
------ ------ ------ ------
Total................................ $4,465 $4,487 $4,464 $4,486
====== ====== ====== ======
At December 31, 1998, Cowlitz' available-for-sale and held-to-maturity
investments had a total net unrealized gains of approximately $93,000. This
compares to net unrealized gains of approximately $46,000 at December 31, 1997.
Unrealized gains and losses reflect changes in market conditions and do not
represent the amount of actual profits or losses Cowlitz may ultimately realize.
Actual realized gains and losses occur at the time investment securities are
sold or redeemed.
In 1991, Cowlitz became a member and shareholder in the Federal Home Loan
Bank of Seattle. Cowlitz' relationship and stock investment with the FHLB
provides a borrowing source for meeting liquidity requirements, in addition to
dividend earnings. Investment in FHLB stock was $2.9 million at December 31,
1998 compared to $2.7 million at December 31, 1997.
At December 31, 1998, net unrealized gains on available-for-sale securities
were $47,000 representing 0.41% of the total portfolio. Management has no
current plans to sell any of these securities.
A-19
The following table summarizes the contractual maturities and weighted
average yields of investment securities at December 31, 1998:
ONE AFTER 5 DUE
ONE YEAR THROUGH THROUGH THROUGH
OR LESS YIELD 5 YEARS YIELD 10 YEARS YIELD 10 YEARS YIELD
----------- -------- --------- -------- -------- -------- -------- --------
U.S. Treasury securities............. $2,008 6.13% $6,056 5.63% $ -- -- $ -- --
Other securities..................... 3,267 5.88% 100 4.00% 99 4.10% -- --
------ ------ ---- ---- ---
Total.............................. $5,275 5.90% $6,156 5.23% $ 99 4.10% $ -- --
====== ====== ==== ==== ===
TOTAL YIELD
-------- --------
U.S. Treasury securities............. $ 8,064 5.77%
Other securities..................... 3,466 5.78%
-------
Total.............................. $11,530 5.78%
=======
LOANS
Outstanding loans totaled $140,633,000 at September 30, 1999, $132,046,000
at December 31, 1998, and $131,963,000 at December 31, 1997. Loan commitments
were $19.8 million at September 30, 1999, $24.7 million at December 31, 1998 and
$16.6 million at December 31, 1997.
The following table presents the composition of Cowlitz' loan portfolio at
the dates indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------
SEPTEMBER 30, 1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial.......................... $109,414 77.47% $103,473 78.04% $ 93,829 70.75%
Real estate construction............ 3,401 2.41% 3,206 2.42% 3,495 2.64%
Real estate commercial.............. 8,714 6.17% 7,026 5.30% 5,475 4.13%
Real estate mortgage................ 14,691 10.40% 13,774 10.39% 24,167 18.22%
Consumer and other.................. 5,007 3.55% 5,063 3.82% 5,571 4.20%
Contracts purchased................. -- -- 45 0.03% 81 0.06%
-------- ------ -------- ------ -------- ------
141,227 100.00% 132,587 100.00% 132,618 100.00%
====== ====== ======
Deferred loan fees.................. (594) (541) (655)
-------- -------- --------
Total loans......................... 140,633 132,046 131,963
Allowance for loan losses........... (2,094) (1,814) (1,970)
-------- -------- --------
Total loans, net.................. $138,539 $130,232 $129,993
======== ======== ========
The following table shows the maturities and sensitivity of Cowlitz' loans
to changes in interest rates at the dates indicated:
DECEMBER 31, 1998
--------------------------------------------------------
DUE AFTER ONE
DUE IN ONE THROUGH 5 DUE AFTER 5
YEAR OR LESS YEARS YEARS TOTAL LOANS
------------ ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Commercial Loans................ $ 40,416 $49,584 $13,473 $103,473
Real estate construction........ 1,251 1,537 418 3,206
Real estate commercial.......... 2,744 3,367 915 7,026
Real estate mortgage............ 5,380 6,601 1,793 13,774
Consumer and other.............. 1,996 2,447 620 5,063
Contracts purchased............. -- -- 45 45
-------- ------- ------- --------
$ 51,787 $63,536 $17,264 $132,587
======== ======= ======= ========
Loans with fixed interest
rates......................... $ 97,584
Loans with floating interest
rates......................... 35,003
--------
Total......................... $132,587
========
A-20
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition Disclosures, an amendment to SFAS No. 114." The adoption of SFAS
Nos. 114 and 118 did not have a material impact on the comparability of the
tables provided herein. Cowlitz, during its normal loan review procedures,
considers a loan to be impaired when it is probable that Cowlitz will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. A loan is not considered to be impaired during a period of minimal
delay (less than 90 days). Cowlitz' measures impaired loans based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair market value of the collateral if the loan is collateral dependent.
Impaired loans are charged to the allowance when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrowers financial condition is such that collection of
principal is not probable.
At December 31, 1998 and 1997, Cowlitz recorded investment in certain loans
that were considered to be impaired was $2.7 million and $2.3 million,
respectively. Of these impaired loans, $891,000 and $302,000 have related
valuation allowance of $65,000 and $199,000, while $1.8 million and
$2.0 million did not require a valuation allowance. The balance of the allowance
for loan losses in excess of these specific reserves is available to absorb
losses from all loans. The average recorded investment in impaired loans for the
years ended December 31, 1998, 1997, and 1996, was approximately $2.4 million,
$1.3 million, and $342,000, respectively. Cowlitz' policy is to disclose as
impaired loans all loans that are past due 90 days or more as to either
principal or interest, except loans that are currently measured at fair value or
the lower of cost or fair value and credit card receivables, which are
considered large groups of smaller homogeneous loans and are collectively
evaluated for impairment. Interest payments received on impaired loans are
recorded as interest income, unless collection of the remaining recorded
investment is not probable, in which case payments received are recorded as a
reduction of principal. For the years ended December 31, 1998, 1997, and 1996,
interest income recognized on impaired loans totaled $77,000, $36,000, and
$14,000, respectively, all of which was recognized on a cash basis.
Generally, no interest is accrued on loans when factors indicate collection
of interest is doubtful or when the principal or interest payment becomes
90 days past due, unless collection of principal and interest are anticipated
within a reasonable period of time and the loans are well secured. For such
loans, previously accrued but uncollected interest is charged against current
earnings, and income is only recognized to the extent payments are subsequently
received and collection of the remaining recorded principal balance is
considered probable.
Cowlitz manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. The following table presents information with respect to
nonperforming assets:
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1999 1998 1997
------------- -------- --------
Loans on nonaccrual status...................... $3,003 $2,737 $1,897
Loans past due greater than 90 days but not on
nonaccrual status............................. -- 9 432
Other real estate owned......................... 55 573 88
Troubled debt restructurings.................... -- -- --
------ ------ ------
Total nonperforming assets.................... $3,058 $3,319 $2,417
====== ====== ======
Percentage of nonperforming assets to total
assets........................................ 1.67% 1.86% 1.39%
A-21
The increase in nonperforming loans from December 31, 1997 to December 31,
1998 is reflective of 5 borrowing relationships with an aggregate principal
balance of $1.7 million primarily secured by real estate. Also included in the
increase from December 31, 1997 to September 30, 1999 is approximately $509,000
of loans at Cowlitz' subsidiary BFC. It is not unusual in the normal course of
business for BFC to have loans that become more than 90 days past due and are
therefore placed on nonaccrual status, although management does not necessarily
believe that losses are probable on these loans. As of September 30, 1999,
approximately $2.0 million of the remaining non-accrual loans reflected loans
primarily secured by real estate. Any probable losses have been considered in
management's analysis of the allowance for loan losses.
LOAN LOSSES AND RECOVERIES
The allowance for loan losses represents management's estimate of probable
losses which have occurred as of the date of the financial statements. The loan
portfolio is regularly reviewed to evaluate the adequacy of the allowance for
loan losses. In determining the level of the allowance, Cowlitz evaluates the
allowance necessary for specific non-performing loans and estimates losses
inherent in other loan exposures. An important element in determining the
adequacy of an allowance for loan losses is an analysis of loans by loan rating
categories. The risk of a credit is evaluated by Cowlitz' management at
inception of the loan using an established grading system. This grading system
currently includes ten levels of risk. Risk gradings range from "1" for the
strongest credits to "10" for the weakest; a "10" rated loan would normally
represent a loss. These gradings are reviewed annually or when indicators show
that a credit may have weakened, such as operating losses, collateral impairment
or delinquency problems.
The result is an allowance with two components:
SPECIFIC RESERVES: The amount of specific reserves are established when
there are significant conditions or circumstances related to a loan that would
indicate that a loss would be incurred. Management considers in its analysis
expected future cash flows, the value of collateral and other factors that may
impact the borrower's ability to pay.
GENERAL ALLOWANCE: The amount of the general allowance is based on loss
factors assigned to Cowlitz' loan exposures based on internal credit ratings.
These loss factors are determined on the basis of historical charge-off
experience and suggested regulatory guidelines. The general allowance is
composed of two categories. The first component is calculated based upon the
loan balances classified in the five higher risk loan categories of "management
attention", "special mention", "substandard", "doubtful" and "loss" in Cowlitz'
Watch List. Suggested regulatory loss reserve factors are then applied to each
of these categories of classified loan balances, net of the balances of the
loans already considered in management's determination of its specific reserves.
The second component is calculated by applying historical loss factors to the
outstanding loan balance less any loans that are included in Cowlitz' specific
or higher risk allowances discussed above. Three levels of charge off history
are considered by management in arriving at this component of the general
allowance. They are average five-year net charge-offs, the previous year's
actual net charge-offs and an estimated maximum charge-off factor. Each of these
amounts is combined with the first component of the general allowance yielding a
range for the total general allowance. Management selects a general allowance
somewhere within this calculated range. Factors considered by management in
making this decision include the volume and mix of the existing loan portfolio,
including the volume and severity of nonperforming loans and adversely
classified credits; analysis of net charge-offs experienced on previously
classified loans; the nature and value of collateral securing the loans; the
trend in loan growth, including any rapid increase in loan volume within a
relatively short period of time; management's subjective evaluation of general
and local economic and business conditions affecting the collectibility of
Cowlitz' loans; the relationship and trend over the past several years of
recoveries in relation to charge-offs; and available outside information of a
comparable nature regarding the loan portfolios of other banks,
A-22
including peer group banks. This decision also reflects management's attempt to
ensure that the overall allowance appropriately reflects a margin for the
imprecision necessarily inherent in estimates of expected loan losses.
The quarterly analysis of specific and general loss components of the
allowance is the principal method relied upon by management to ensure that
changes in estimated loan loss levels are adjusted on a timely basis. The
inclusion of historical loss factors in the process of determining the general
component of the allowance also acts as a self-correcting mechanism of
management's estimation process, as loss experience more remote in time is
replaced by more recent experience. In its analysis of the specific and the
general components of the allowance, management also considers the experience of
peer institutions and regulatory guidance in addition to Cowlitz' own
experience.
Loans and other extensions of credit deemed uncollectible are charged to the
allowance. Subsequent recoveries, if any, are credited to the allowance. Actual
losses may vary from current estimates and the amount of the provision may be
either greater than or less than actual net charge-offs. The related provision
for loan losses that is charged to income is the amount necessary to adjust the
allowance to the level determined through the above process. In accordance with
Cowlitz' methodology for assessing the appropriate allowance for loan losses,
the general portion of the allowance increased to $1.5 million at September 30,
1999 compared to $1.1 million at December 31, 1998. Management believes this
increase is prudent given the increase in non-accrual loans and the level of net
charge-offs during the first nine months of 1999.
At September 30, 1999 approximately $600,000 of the allowance for loan
losses was allocated based on an estimate of the amount that was necessary to
provide for potential losses related to specific loans, compared to
approximately $700,000 at December 31, 1998. Specific reserves declined as those
loans requiring specific reserves have been reduced by either principal payments
or have been charged-off.
Management's evaluation of the factors above resulted in allowances for loan
losses of $2.1 million at September 30, 1999, $1.8 million at the end of 1998
and $2.0 million at the end of 1997. The allowance as a percentage of total
loans increased to 1.49% at September 30, 1999 from 1.37% at year-end 1998 and
1.49% at year-end 1997. The decline between year-end 1997 and year-end 1998
reflects charge-offs in 1998 which were considered by management in its
determination of the adequacy of the allowance for loan losses in periods prior
to charge-off. As such, these charge-offs reflect the realization of losses in
the portfolio that were recognized previously through provisions for loan
losses. The increase between December 31, 1998 and September 30, 1999 was due
primarily to the level of nonaccrual loans and the growth in the loan portfolio
late in the third quarter of 1999.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts.
A-23
The following table shows Cowlitz' loan loss performance for the periods
indicated:
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------
1999 1998 1997 1996
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Loans outstanding at end of period................ $140,633 $132,046 $131,963 $126,551
Average loans outstanding during the period....... $129,167 $131,495 $130,362 $118,957
Allowance for loan losses, beginning of period.... $ 1,814 $ 1,970 $ 1,894 $ 1,763
Loans charged off:
Commercial...................................... 767 618 186 36
Real estate..................................... 42 -- 3 30
Consumer........................................ 32 22 23 22
Credit cards.................................... 54 87 112 70
-------- -------- -------- --------
Total loans charged-off....................... 895 727 324 158
-------- -------- -------- --------
Recoveries:
Commercial...................................... 94 -- 5 5
Real estate..................................... -- 3 -- --
Consumer........................................ 16 4 20 1
Credit cards.................................... -- 10 -- 2
-------- -------- -------- --------
Total recoveries.............................. 110 17 25 8
-------- -------- -------- --------
Provision for loan losses......................... 1,065 509 375 281
-------- -------- -------- --------
Adjustment incident to acquisition................ -- 45 -- --
-------- -------- -------- --------
Allowance for loan losses, end of period.......... $ 2,094 $ 1,814 $ 1,970 $ 1,894
======== ======== ======== ========
Ratio of net loans charged-off to average loans
outstanding..................................... 0.61% 0.54% 0.23% 0.13%
Ratio of allowance for loan losses to loans at
year end........................................ 1.49% 1.37% 1.49% 1.50%
DEPOSITS
The following table sets forth the average balances of Cowlitz' interest
bearing liabilities, interest expense and average rates paid for the period
indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing checking..... $ 28,912 $1,396 4.83% $ 21,956 $ 766 3.49% $ 16,209 $ 533 3.29%
Savings....................... 17,379 498 2.87% 15,612 487 3.12% 14,625 498 3.41%
Certificates of deposit....... 52,682 3,048 5.79% 70,641 4,246 6.01% 64,863 3,960 6.11%
Long-term borrowings.......... 21,755 1,469 6.75% 21,773 1,401 6.43% 17,315 1,073 6.20%
Short-term borrowings......... 1,865 90 4.83% 955 43 4.50% 2,359 110 4.66%
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities................. $122,593 $6,501 5.30% $130,937 $6,943 5.30% $115,371 $6,174 5.35%
====== ====== ======
Total noninterest-bearing
liabilities................. 29,523 22,296 16,835
-------- -------- --------
Total interest and
noninterest-bearing
liabilities................. $152,116 $153,233 $132,206
======== ======== ========
A-24
Deposits decreased to $122.4 million at December 31, 1998, a decrease of
10.2% from $136.2 at December 31, 1997, primarily as a result of Cowlitz
reducing pricing on certain of its higher yielding certificates after the
acquisition of deposits from the acquisitions of the Wells Fargo Bank branches
in July of 1997, intending to eliminate these higher cost certificates of
deposit at maturity. The decline in deposits has been primarily in time
deposits. Nonvolatile, non-interest bearing deposits, also referred to as core
deposits, have grown as a percentage of Cowlitz' deposit base. To the extent
that Cowlitz is able to fund operations with non-interest bearing core deposits,
net interest spread, the difference between interest income and interest
expense, will improve. At December 31, 1998, non-interest bearing demand
deposits were 27% of total deposits, compared to 19.9% of total deposits at
December 31, 1997.
Interest bearing deposits consist of NOW, money market, savings and time
certificate accounts. By their nature, interest bearing account balances will
tend to grow or decline as Cowlitz reacts to changes in competitors' pricing and
interest payment strategies. At December 31, 1998, total interest bearing
deposit accounts of $89.3 million decreased $19.8 million or 18.1% from
December 31, 1997. This decline was concentrated in certificate of deposit
accounts as discussed above.
Cowlitz has from time to time funded its growth with higher interest rate,
out of state certificates of deposit. At December 31, 1998, time certificates of
deposit over of $100,000 totaled $13.6 million or 32.5% of total outstanding
time deposits, compared to $18.6 million or 29.7% of total outstanding time
deposits at December 31, 1997. This decline in time deposits in excess of
$100,000 during 1998 and 1997 reflects management's decision to allow this type
of deposit to run-off following the Branch Acquisition in July 1997.
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 1998:
TIME DEPOSITS OF ALL OTHER TIME
$100,000 OR MORE(1) DEPOSITS(2)
------------------- -------------------
(DOLLARS IN THOUSANDS)
Reprice/Mature in three months or less.................. $ 6,796 49.89% $10,547 37.26%
Reprice/Mature after three months through six months.... 1,179 8.65% 6,898 24.37%
Reprice/Mature after six months through one year........ 2,522 18.51% 5,908 20.87%
Reprice/Mature after one year through five years........ 2,806 20.60% 4,706 16.62%
Reprice/Mature after five years......................... 320 2.35% 250 .88%
------- ------- ------- -------
Total................................................... $13,623 100.00% $28,309 100.00%
======= ======= ======= =======
- ------------------------
(1) Time deposits of $100,000 or more represent 32.5% of total time deposits at
December 31, 1998.
(2) All other time deposits represent 67.5% of total time deposits at
December 31, 1998.
At December 31, 1998, other borrowings have the following times remaining to
maturity:
DUE
DUE AFTER AFTER
DUE IN 3 3 MONTHS ONE YEAR DUE
MONTHS THROUGH THROUGH AFTER
OR LESS ONE YEAR 5 YEARS 5 YEARS TOTAL
-------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Short-term borrowings......................... $2,275 $ -- $ -- $ -- $ 2,275
Long-term borrowings.......................... -- 517 15,586 5,696 21,799
------ ---- ------- ------ -------
Total borrowings.............................. $2,275 $517 $15,586 $5,696 $24,074
====== ==== ======= ====== =======
A-25
Historically Cowlitz has utilized borrowings from the FHLB as an important
source of funding for its growth. Cowlitz has an established borrowing line with
the FHLB that permits it to borrow up to 25% of assets. Advances from the FHLB
have terms ranging from 1 through 15 years and at December 31, 1998, bear
interest at rates from 5.17% to 8.80%. At December 31, 1998, $21.7 million in
advances were outstanding from the FHLB and Cowlitz had additional borrowing
capacity for cash advances of $22.8 million. Cowlitz may increase its percentage
of borrowings from the FHLB in the future if circumstances warrant.
ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY. The principal purpose
of asset-liability management is to manage Cowlitz' sources and uses of funds to
maximize net interest income under different interest rate conditions with
minimal risk. A part of asset-liability management involves interest rate
sensitivity, the difference between repricing assets and repricing liabilities
in a specific time period. The policy of Cowlitz is to control the exposure of
Cowlitz' earnings to changing interest rates by generally maintaining a position
within a narrow range around an "earnings neutral" or "balanced" position.
Cowlitz' board of directors has established guidelines for maintaining Cowlitz'
earnings risk due to future interest rate changes. This analysis provides an
indication of Cowlitz' earnings risk due to future interest rate changes. At
December 31, 1998, the analysis indicated that the earnings risk was within
Cowlitz' policy guidelines.
A key component of the asset-liability management is the measurement of
interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in
earnings resulting from fluctuations in interest rates, variability in spread
relationships, and the mismatch of repricing intervals between assets and
liabilities. Interest-rate sensitivity management attempts to maximize earnings
growth by minimizing the effects of changing rates, asset and liability mix, and
prepayment trends.
A-26
The following table presents interest-rate sensitivity data at December 31,
1998. The interest rate gaps reported in the table arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not be reflective of
Cowlitz' interest rate view in subsequent periods. Active management dictates
that longer-term economic views are balanced against the prospects of short-term
interest rate changes in all repricing intervals.
ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1998
---------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER
MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Interest earning balances due
From banks................................. $11,816 $ -- $ -- $ -- $ -- $ 11,816
Investments available for sale(1).......... 1,002 1,006 -- 5,057 -- 7,065
Investments held to maturity............... 991 1,979 297 1,098 100 4,465
Federal Home Loan Bank Stock(1)............ 2,869 -- -- -- -- 2,869
Loans, including fees...................... 41,506 4,790 5,491 62,995 17,264 132,046
------- ------- ------- ------- ------- --------
Total interest earning assets.............. $58,184 $ 7,775 $ 5,788 $69,150 $17,364 $158,261
======= ======= ======= ======= ======= ========
Allowance for loan losses.................... (1,814)
Cash and due from banks...................... 10,889
Other assets................................. 11,009
--------
Total assets............................... $178,345
========
INTEREST BEARING LIABILITIES:
Savings and interest demand deposits....... $29,613 $ -- $ -- $ -- $17,754 $ 47,367
Certificates of deposit.................... 17,343 8,077 8,430 7,981 101 41,932
Borrowings................................. 17,026 207 127 100 6,614 24,074
------- ------- ------- ------- ------- --------
Total interest bearing liabilities......... 63,982 8,284 8,557 8,081 24,469 $113,373
======= ======= ======= ======= ======= ========
Other liabilities............................ 34,052
Shareholders' equity......................... 30,920
--------
Total liabilities & shareholders' equity... $178,345
========
Interest sensitivity gap..................... (5,798) (509) (2,769) 61,069 (7,105) $ 44,888
------- ------- ------- ------- ------- ========
Cumulative interest sensitivity gap.......... $(5,798) $(6,307) $(9,076) $51,993 $44,888
======= ======= ======= ======= =======
- ------------------------
(1) Equity investments have been placed in the 0-3 month category
The table illustrates that Cowlitz is liability sensitive in all periods except
in the 1-5 year period in which it is asset-sensitive. In an environment of
increasing interest rates, the theoretical net interest margins of Cowlitz would
be adversely affected for the 12 months following December 31, 1998, and
favorably thereafter. Conversely, in a declining interest-rate environment,
Cowlitz' theoretical net interest margins would be favorably affected for the
12 month period following December 31, 1998, and adversely thereafter.
RETURN ON EQUITY AND ASSETS. Net income for the year ended December 31,
1998, totaled $2.2 million for a return on average shareholders' equity of 8.34%
and a return on average total assets of 1.24%. These returns compare to a 16.65%
return on average equity and 1.28% return on average total assets for the
corresponding period in 1997. These declines reflect the additional common stock
issued in Cowlitz' March 1998 initial public offering and an increase in assets
for the year ended
A-27
December 31, 1998. The increase in assets is related to the increase in cash
after the March initial public offering.
Return on daily average assets and equity and certain other ratios for the
periods indicated are presented below:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Net income............................... $ 2,226 $ 2,124 $ 2,497
Average assets........................... $178,819 $165,990 $142,639
Return on average assets................. 1.24% 1.28% 1.75%
Net income............................... $ 2,226 $ 2,124 $ 2,497
Average equity........................... $ 26,703 $ 12,757 $ 10,433
Return on average equity................. 8.34% 16.65% 23.93%
Cash dividends paid per share............ $ 0.06 $ 0.05 $ 0.04
Diluted earnings per share............... $ 0.57 $ 0.78 $ 0.97
Dividend payout ratio.................... 10.53% 6.41% 4.12%
Average equity........................... $ 26,703 $ 12,757 $ 10,433
Average assets........................... $178,819 $165,990 $142,639
Average equity to asset ratio............ 14.93% 7.69% 7.31%
MARKET RISK
Interest rate and credit risks are the most significant market risks
impacting Cowlitz' performance. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of Cowlitz' business activities. Cowlitz relies on loan reviews, prudent
loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk.
Interest rate risk is managed through the monitoring of Cowlitz' gap
position (see Asset-Liability Management/Interest Rate Sensitivity) and
sensitivity to interest rate risk by subjecting Cowlitz' balance sheet to
hypothetical interest rate shocks. Cowlitz' primary objective in managing
interest rate risk is to minimize the adverse impact of changes in interest
rates on Cowlitz' net interest income and capital, while structuring Cowlitz'
asset/liability position to obtain the maximum yield-cost spread on that
structure.
Rate shock is an instantaneous and complete adjustment in market rates of
various magnitudes on a static or level balance sheet to determine the effect
such a change in rates would have on Cowlitz' net interest income for the
succeeding twelve months, and the fair values of financial instruments.
Cowlitz utilizes asset/liability-modeling software to determine the effect
of a shift in market interest rates, with scenarios of interest rates increasing
100 and 200 basis points and decreasing 100 and 200 basis points. The model
utilized to create the table presented below is based on the concept that all
rates do not move by the same amount or at the same time. Although certain
assets and liabilities may have similar maturities or periods to repricing, they
may not react correspondingly to changes in market interest rates. In addition,
interest rates on certain types of assets and liabilities may fluctuate with
changes in market interest rates, while interest rates on certain types of
assets may lag behind changes in market rates. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels would likely deviate
from those assumed in the table. The ability of certain borrowers to make
scheduled payments on the adjustable rate loans may decrease in the event of an
interest rate increase due to adjustments in the amount of the payments.
A-28
The model attempts to account for such limitations by imposing weights on
the gaps between assets and liabilities. These weights are based on the ratio
between the amount of rate change and each category of asset/liability, and the
amount of any change in the federal funds rate. Local conditions and the
strategy of Cowlitz determine the weights for loan and core deposits; the others
are set by national markets. In addition, a timing factor has been used as
(a) fixed rate instruments do not reprice immediately; (b) renewals may have
different term than original maturities; and (c) there is a timing factor
between rates on different instruments (i.e. core deposits usually reprice well
after there has been a change in the federal funds rate). Due to the various
assumptions used for this simulation analysis, no assurance can be given that
actual results will correspond with projected results.
The following table shows the estimated impact of the interest rate shock on
net interest income and the fair values of financial instruments at
December 31, 1998:
FAIR VALUES OF FINANCIAL INSTRUMENTS
---------------------------------------------------------------
NET INTEREST INCOME ASSETS LIABILITIES
------------------- ------------------- -------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
-------- -------- -------- -------- -------- --------
(ALL AMOUNTS IN THOUSANDS)
+200 basis points......... $10,008 1.5% $165,303 (3.1)% $146,366 (1.0)%
+100 basis points......... $ 9,937 0.7% $169,973 (1.4)% $147,081 (0.5)%
Static.................... $ 9,865 0.0% $170,617 0.0% $147,817 0.0%
- -100 basis points......... $ 9,793 (0.7)% $176,124 2.2% $148,603 0.5%
- -200 basis points......... $ 9,722 (1.5)% $179,438 4.1% $149,426 1.1%
Loans and certificates of deposit represent the majority of interest rate
exposure. Investments only represent 9.3% of interest earning assets and
therefore, the impact of the investments on net interest income of moving rates
would not be significant. Historically, savings and interest-bearing checking
accounts have not repriced in proportion to changes in overall market interest
rates. The change in net interest income can be attributed to the balance of
loans and certificates of deposit maturing/repricing. As a result, in an
increasing/decreasing interest rate environment net interest income would
increase/ decrease.
The change in fair values of financial assets is mainly a result of total
loans representing 83.4% of total interest-earning assets. Of these loans
$97,584 have fixed interest rates, which decline in value during a period of
rising interest rates.
As of September 30, 1999, Cowlitz has assessed these risks and feels that
there has been no material change since December 31, 1998.
While asset/liability models have become a main focus of risk management,
Cowlitz believes that statistical models alone do not provide a reliable method
of monitoring and controlling risk. The quantitative risk information provided
is limited by the parameters established in creating the related models.
Therefore, Cowlitz uses these models only as a supplement to other risk
management tools.
LIQUIDITY
Liquidity represents the ability to meet deposit withdrawals to fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. Cowlitz' primary sources of funds are customer deposits, loan
payments, sales of assets, advances from the FHLB and the use of the federal
funds market. As of September 30, 1999, approximately $5.0 million of the
securities portfolio matures within one year.
Historically Cowlitz has utilized borrowings from the FHLB as an important
source of funding for its growth. The Company has an established borrowing line
with the FHLB that permits it to borrow up to 25% of assets. Advances from the
FHLB have terms ranging from 1 through 15 years and at September 30, 1999, bear
interest at rates from 5.67% to 8.80%. At September 30, 1999, $26.3 million
A-29
in advances were outstanding from the FHLB and Cowlitz' had additional borrowing
capacity for cash advances of $18.1 million. Cowlitz may increase its percentage
of borrowings from the FHLB in the future if circumstances warrant.
CAPITAL
Cowlitz is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by banking regulators. The Company is required to
have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively. At
September 30, 1999, Cowlitz' ratios were 19.62% and 20.87%, respectively. At
December 31, 1998, Cowlitz' ratios were 22.21% and 23.46%, respectively. The
ratio of Tier 1 capital to average assets was 16.00% and 15.81% at
September 30, 1999 and December 31, 1998, respectively.
YEAR 2000
This section constitutes a Year 2000 readiness statement and contains
forward-looking statements that have been prepared on the basis of Cowlitz' best
judgments and currently available information. These forward-looking statements
are inherently subject to significant business, third party and regulatory
uncertainties and contingencies, many of which are beyond the control of
Cowlitz. In addition, these forward-looking statements are based on Cowlitz'
current assessments and remediation plans, which are based on certain
representations of third party service providers and are subject to change.
Accordingly, there can be no assurance that Cowlitz' results of operations will
not be adversely affected by difficulties or delays in Cowlitz' or third
parties' Year 2000 readiness efforts.
The Company has an active Y2K plan and committee addressing all systems
affected by the millennium issue.
To date, Cowlitz has not experienced any disruption of its business as a
result of Year 2000 issues, and based on its current assessments and remediation
plans, does not expect that it will suffer any material disruption of its
business as a result of Year 2000 issues in the future.
A-30
PRINCIPAL HOLDERS OF COWLITZ COMMON STOCK; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of December 28, 1999, the number and
percentage of outstanding shares of Cowlitz common stock beneficially owned by
each person known to Cowlitz to be the beneficial owner of more than five
percent of the outstanding Cowlitz common stock, by each director and executive
officer of Cowlitz, and by all directors and executive officers of Cowlitz as a
group. The number of shares beneficially owned is deemed to include shares of
Cowlitz common stock as to which the beneficial owner has either investment or
voting power. Unless otherwise indicated, and except for voting and investment
powers held jointly with a person's spouse, the persons and entities named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
SHARES(2) PERCENTAGE(2)
--------- -------------
DIRECTORS AND EXECUTIVE OFFICERS(1)
Benjamin Namatinia(3)....................................... 653,782 15.80
Charles W. Jarrett(3)....................................... 328,615 7.94
Mark F. Andrews, Jr.(4)..................................... 40,065 *
Larry M. Larson(4).......................................... 253,214 6.29
E. Chris Searing(4)......................................... 22,267 *
Donna P. Gardner(5)......................................... 49,562 1.23
Don P. Kiser(5)............................................. 4,135 *
All directors and executive officers as a group (7
persons).................................................. 1,351,640 31.67
5% BENEFICIAL OWNERS
Everest Partners, L.P.(6)................................... 235,150 5.85
Job's Peak Ranch
P.O. Box 3178
Gardnerville, Nevada 89410
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each shareholder is care of
Cowlitz Bancorporation,
927 Commerce Avenue, Longview, WA 98632.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934, as amended. Shares not outstanding that are subject to options
exercisable by the holder thereof within 60 days of December 28, 1999 are
deemed outstanding for the purposes of calculating the number and percentage
owned by such shareholder, but not deemed outstanding for the purpose of
calculating the percentage owned by each other shareholder listed. Unless
otherwise noted, all shares listed as beneficially owned by a shareholder
are actually outstanding.
(3) Includes options exercisable to purchase 115,500 shares of common stock
within 60 days of December 28, 1999.
(4) Includes options exercisable to purchase 3,000 shares of common stock within
60 days of December 28, 1999.
(5) Includes options exercisable to purchase 2,800 shares of common stock within
60 days of December 28, 1999.
(6) Information as to the number of shares owned is based solely on the
Schedule 13G filed on September 8, 1999 by Everest Partners, L.P., Everest
Partners, Inc., and Everest Managers, L.L.C. in which the filing persons
disclosed that they had shared voting and dispositive power over 235,150
shares of Cowlitz common stock. Everest Partners, Inc. is the general
partner of, and
A-31
Everest Managers, L.L.C. is the manager of, Everest Partners, L.P. David
M.W. Harvey is the sole principal of Everest Partners, Inc. and Everest
Managers, L.L.C. Everest Managers, L.L.C. and David M.W. Harvey expressly
disclaim beneficial ownership of these shares.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding Cowlitz
Bancorp's directors and executive officers.
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
Mark F. Andrews, Jr............ 66 Director, Cowlitz Bancorporation & Cowlitz Bank
Charles W. Jarrett............. 58 President & Chief Operating Officer & Director, Cowlitz
Bancorporation; President & Chief Executive Officer &
Director, Cowlitz Bank; Director, Business Finance
Corporation
Larry M. Larson................ 60 Director, Cowlitz Bancorporation; Chairman, Cowlitz Bank
Benjamin Namatinia............. 55 Chairman & Chief Executive Officer, Cowlitz Bancorporation;
Director, Cowlitz Bank; Chairman, Business Finance
Corporation
E. Chris Searing............... 45 Director, Cowlitz Bancorporation & Cowlitz Bank
Donna P. Gardner............... 51 Executive Vice President and CFO, Cowlitz Bank; Vice
President & Secretary, Tresurer, Cowlitz Bancorporation
Don P. Kiser................... 53 Senior Vice President of Cowlitz Bank; Vice President and
CFO, Cowlitz Bancorporation
Mark F. Andrews, Jr. has served as a director of Cowlitz Bank since 1988 and
as Secretary of the Board since 1990. Mr. Andrews' principal occupation is the
management and operation of his tree farms. In addition, Mr. Andrews serves as a
court commissioner for Cowlitz County and he is also a retired attorney.
Mr. Andrews is Chairman of the Audit Committee and serves on the Compensation
Committee and the Board Development Committee.
Charles W. Jarrett held the position of President and Chief Executive
Officer of Cowlitz Bancorporation from 1992 until November 1994, at which time
he became President and Chief Operating Officer. Mr. Jarrett joined Cowlitz Bank
in 1986 and has served as President and Chief Executive Officer and as a
director since 1989. He has served as a director of Business Finance Corporation
since the acquisition in 1998.
Larry M. Larson has served as a director of Cowlitz Bank since 1984. He
served as Secretary of the Board from 1987 to 1988, Vice Chairman from 1988 to
1990, and has served as Chairman since 1990. Mr. Larson owns the Bridgeview
Tobacco Shop located in Rainier, Oregon. He serves in an elected position on the
Port Commission for the Port of Longview. Mr. Larson serves on the Compensation
Committee, the Board Development Committee, and the Audit Committee.
Benjamin Namatinia has served as Chairman of Cowlitz Bancorporation since
its incorporation in 1991 and was appointed Chief Executive Officer in
November 1994. He has served as a director of Cowlitz Bank since 1991. He has
served as a director of Business Finance Corporation since the acquisition in
1998. Since 1990, Mr. Namatinia has been the President and owner of BMN, Inc., a
securities brokerage franchise of Raymond James Financial Services, Inc. From
1984 to 1989, he was Senior Vice President and head of the Bond Department in
Portland, Oregon for Shearson Lehman.
E. Chris Searing has served as a director of Cowlitz Bank since 1986. He
served as Secretary of the Board from 1988 to 1990 and has served as Vice
Chairman since 1990. Mr. Searing owns Searing Electric & Plumbing, Inc. located
in Longview, Washington. Mr. Searing serves on the Compensation Committee and
the Audit Committee.
A-32
Donna P. Gardner has served as an executive officer of Cowlitz
Bancorporation since its incorporation in 1991 and currently holds the position
of Vice President and Secretary/Treasurer. Mrs. Gardner joined Cowlitz Bank in
1981 and served as Cashier from 1989 to 1993, Vice President from 1993 to 1997
and is currently serving as Executive Vice President and Chief Financial
Officer.
Don P. Kiser was hired in September 1998 to serve as Vice President--Chief
Financial Officer of Cowlitz Bancorporation. In addition, Mr. Kiser serves as a
Senior Vice President of Cowlitz Bank. Mr. Kiser came to Cowlitz Bank with over
20 years of banking experience having previously served in positions of Chief
Financial Officer, Chief Administrative Officer, Director of Systems Management
and Corporate Planning, and V.P. Manager of Operations.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual
compensation earned during 1997 and 1998 for the Company's Chief Executive
Officer and each of the Company's other executive officers who earned in excess
of $100,000 in salary and bonus during the last three fiscal years (the "Named
Executive Officers").
STOCK
OTHER ANNUAL ALL OTHER OPTION
NAME OF PRINCIPAL AND POSITION SALARY BONUS COMPENSATION COMPENSATION(1) GRANTS
- ------------------------------ -------- -------- ------------ --------------- --------
Benjamin Namatinia................ 1999 $225,000 $ 0 -- $ 6,000 15,000
Chairman & 1998 $200,000 $75,000 -- $14,400 10,000
Chief Executive Officer 1997 $178,224 $20,000 -- $14,258 192,500
Charles W. Jarrett................ 1999 $225,597 $ 0 -- $ 6,000 15,000
President & 1998 $200,000 $52,356 -- $14,400 10,000
Chief Operating Officer 1997 $161,532 $40,975 -- $12,923 192,500
Donna P. Gardner.................. 1999 $ 87,792 $17,500 -- $ 6,000 --
Vice President & 1998 $ 76,340 $23,678 -- $ 6,108 7,000
Secretary/Treasurer 1997 $ 66,840 $21,390 -- $ 5,347 --
- ------------------------
(1) Company contribution to 401(K) plan
STOCK OPTIONS.
Awards of stock options under the Company's stock option plan are designed
to closely tie together the long term interest of the Company and its
subsidiary's directors, employees, and shareholders and to assist in the
retention of directors, officers, and key employees. The Board of Directors
selects the individuals to receive stock options and determines the number of
shares subject to each grant. The Board's determination of the size of option
grants is generally intended to reflect the individual's position with the
Company or its subsidiary and the individual's contribution. Any options granted
under the plan will have an exercise period of time, and options become
exercisable on a gradual basis as stated in each grant. The Board of Directors
reviews the stock option plan annually.
A-33
The following table sets forth information concerning the award of stock
options to the Named Executive Officers during fiscal 1999.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR
OPTIONS/SARS EMPLOYEES BASE EXPIRATION OPTION TERM(1)
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5%($)/10%($)
- ---- ------------ ------------ ------------ ---------- --------------------
Benjamin Namatinia................. 15,000 18.3% $4.94 12/31/09 $40,853/$100,624
Charles W. Jarrett................. 15,000 18.3% $4.94 12/31/09 $40,853/$100,624
Donna P. Gardner................... 0 -- -- -- --
- ------------------------
(1) These assumed rates of appreciation are provided in order to comply with the
requirements of the Securities and Exchange Commission (the "SEC") and do
not represent the Company's expectation or projections as to the actual rate
of appreciation of the Common Stock. These gains are based on assumed rates
of annual compound stock price appreciation of 5% and 10% from the date
options were granted over the full option term. The actual value of the
options will depend on the performance of the Common Stock and may be
greater or less than the amounts shown.
The table below provides information on exercises of options during 1999 by
the Named Executive Officers and information with respect to unexercised options
held by the Named Executive Officers at December 31, 1999:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FISCAL YEAR-END
FISCAL YEAR-END (#) ($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- --------------- ----------------- -------------------- ----------------
Benjamin Namatinia............ -- -- 115,500/217,500 $930/$3,720
Charles W. Jarrett............ -- -- 115,500/217,500 $930/$3,720
Donna Gardner................. -- -- 2,800/4,200 --
EMPLOYMENT AGREEMENTS
Messrs. Namatinia and Jarrett entered into employment agreements with the
Company effective January 1, 1998. Under the employment agreements, both
Mr. Namatinia and Mr. Jarrett receive a base annual salary. Mr. Jarrett also
receives an annual cash bonus equal to the sum of five percent of Cowlitz Bank's
net profits in excess of a one percent Return on Average Assets (ROAA) for the
calendar year and seven and one-half percent of the Bank's net profits in excess
of one and one-half percent ROAA for the calendar year. This formula was used by
the Board of Directors to determine Mr. Jarrett's bonus in 1996 and 1997.
Mr. Namatinia's annual cash bonus will be determined by the Company's Board of
Directors based on the growth, profitability and performance of the Company, the
expansion of services provided by the Company and the market value of the
Company's Common Stock. The agreements contain a covenant not to compete for a
period of eighteen months in the event of termination of employment for any
reason. If employment is terminated by the Company without cause or by death or
disability, the executive officer will receive a lump sum equal to three times
the employee's annual base salary for the calendar year in which such employment
terminates plus the amount of cash bonus earned prior to termination. Upon
termination without cause, the employee will
A-34
receive such benefits to which he has become entitled under the terms of the
Company's Stock Option Plan and any other benefit plan or program.
RELATED PARTY TRANSACTIONS
The Company has outstanding loans to officers, directors, their spouses,
associates, and related organizations. All such loans were made in the ordinary
course of business, have been made on substantially the same terms and
conditions; including collateral required, as comparable transactions with
unaffiliated parties and did not involve more than the normal risk of
collectibility or present other unfavorable features. Directors and executive
officers are charged the same rates of interest and loan fees as are charged to
employees of the Company, which interest rates and fees are slightly lower than
charged to non-employee borrowers. All such loans are presently in good standing
and are being paid in accordance with their terms.
A-35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Cowlitz Bancorporation:
We have audited the accompanying consolidated statements of condition of
Cowlitz Bancorporation (a Washington Corporation) and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cowlitz Bancorporation and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Portland, Oregon
January 15, 1999
A-36
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES)
FOR THE
NINE MONTHS FOR THE YEARS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
ASSETS
Cash and due from banks..................................... $ 15,173 $ 22,705 $ 23,109
Investment securities:
Investments available-for-sale (at fair value, cost of
$8,484, $6,994 and $3,993 at September 30, 1999,
December 31, 1998 and December 31, 1997,
respectively)........................................... 8,462 7,065 4,017
Investments held-to-maturity (at amortized cost, fair
value of $4,370, $4,487, and $4,486 at September 30,
1999, December 31, 1998 and December 31, 1997,
respectively)........................................... 4,564 4,465 4,464
-------- -------- --------
Total investment securities............................. 13,026 11,530 8,481
-------- -------- --------
Loans....................................................... 140,633 132,046 131,963
Allowance for loan losses................................... (2,094) (1,814) (1,970)
-------- -------- --------
Loans, net.............................................. 138,539 130,232 129,993
-------- -------- --------
Premises and equipment, net of accumulated depreciation of
$2,311 $1,837, $1,354 at September 30, 1999, December 31,
1998 and December 31, 1997, respectively.................. 6,011 5,859 5,653
Federal Home Loan Bank stock................................ 3,035 2,869 2,658
Intangible assets, net of accumulated amortization of $717,
$432 and $123 at September 30, 1999, December 31, 1998 and
December 31, 1997, respectively........................... 5,062 3,110 1,847
Other assets................................................ 1,900 2,040 1,552
-------- -------- --------
Total assets............................................ $182,746 $178,345 $173,293
======== ======== ========
LIABILITIES
Deposits:
Demand.................................................... $ 28,099 $ 33,062 $ 27,141
Savings and interest-bearing demand....................... 48,520 47,367 46,454
Certificates of deposit................................... 46,241 41,932 62,614
-------- -------- --------
Total deposits.......................................... 122,860 122,361 136,209
Short-term borrowings....................................... 600 2,275 725
Long-term borrowings........................................ 26,327 21,799 21,900
Other liabilities........................................... 1,120 990 572
-------- -------- --------
Total liabilities....................................... $150,907 $147,425 $159,406
-------- -------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares
authorized as of September 30, 1999, December 31, 1998 and
December 31, 1997, respectively; no shares issued and
outstanding at September 30, 1999, December 31, 1998 and
December 31, 1997, respectively........................... $ -- $ -- $ --
Common stock, no par value; 25,000,000 authorized as of
September 30, 1999 and December 31, 1998 respectively, and
3,937,500 shares authorized as of December 31, 1997.
4,089,570, 4,001,999 and 2,604,543 shares issued and
outstanding at September 30, 1999, December 31, 1998 and
December 31, 1997, respectively........................... 18,887 18,251 3,262
Additional paid in capital.................................. 1,538 1,538 1,538
Retained earnings........................................... 11,428 11,085 9,071
Accumulated other comprehensive income...................... (14) 46 16
-------- -------- --------
Total shareholders' equity.............................. 31,839 30,920 13,887
-------- -------- --------
Total liabilities and shareholders' equity.............. $182,746 $178,345 $173,293
======== ======== ========
The accompanying notes are an integral part of these statements.
A-37
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE NINE MONTHS FOR THE YEARS
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
------------------------- ------------------------------
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
INEREST INCOME
Interest and fees on loans.................. $11,110 $10,292 $14,103 $13,700 $12,721
Interest on taxable investment securities... 650 695 955 667 386
Interest on non-taxable investments
securities................................ 6 2 3 -- 2
Trading account interest.................... -- -- -- -- 34
Interest from other banks................... 680 1,085 1,305 719 490
------- ------- ------- ------- -------
Total interest income..................... 12,446 12,074 16,366 15,086 13,633
------- ------- ------- ------- -------
INTEREST EXPENSE
Savings and interest-bearing demand......... 1,411 1,422 1,894 1,253 1,031
Certificates of deposit..................... 1,563 2,433 3,048 4,246 3,960
Short-term borrowings....................... 68 64 90 43 110
Long-term borrowings........................ 1,148 1,035 1,469 1,401 1,073
------- ------- ------- ------- -------
Total interest expense.................... 4,190 4,954 6,501 6,943 6,174
------- ------- ------- ------- -------
Net interest income before provision for
loan losses............................. 8,256 7,120 9,865 8,143 7,459
PROVISION FOR LOAN LOSSES................... (1,065) (243) (509) (375) (281)
------- ------- ------- ------- -------
Net interest income after provision for
loan losses............................. 7,191 6,877 9,356 7,768 7,178
------- ------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts......... 511 487 656 563 387
Gains on loans sold......................... 294 -- -- -- --
Other income................................ 397 242 317 186 218
Net gains/losses on sales of available for
sale securities........................... (2) 5 5 -- (309)
------- ------- ------- ------- -------
Total noninterest income.................. 1,200 734 978 749 296
------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits.............. 4,228 2,772 3,775 2,778 2,137
Net occupancy and equipment expense......... 980 655 888 724 393
Business tax expense........................ 207 184 242 224 202
Amortization of intangibles................. 285 215 309 123 --
Other operating expense..................... 1,799 1,208 1,713 1,435 950
------- ------- ------- ------- -------
Total noninterest expense................. 7,499 5,034 6,927 5,284 3,682
------- ------- ------- ------- -------
Income before income tax expense.......... 892 2,577 3,407 3,233 3,792
INCOME TAX EXPENSE.......................... 341 876 1,181 1,109 1,295
------- ------- ------- ------- -------
Net income................................ $ 551 $ 1,701 $ 2,226 $ 2,124 $ 2,497
======= ======= ======= ======= =======
BASIC EARNINGS PER SHARE.................... $ 0.14 $ 0.47 $ 0.60 $ 0.82 $ 0.97
DILUTED EARNINGS PER SHARE.................. $ 0.13 $ 0.44 $ 0.57 $ 0.78 $ 0.97
The accompanying notes are an integral part of these statements.
A-38
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FOR THE NINE MONTHS FOR THE YEARS ENDED DECEMBER
ENDED SEPTEMBER 30, 31,
------------------------- ------------------------------
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 551 $ 1,701 $ 2,226 $ 2,124 $ 2,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 759 601 833 557 191
Provision for loan losses.......................... 1,065 243 509 375 281
Net losses (gains) on sales of trading securities.... -- -- -- -- 309
Net losses (gains) on sales of investments securities
available-for-sale................................. 2 (5) (5) -- --
Net amortization of investment security premiums and
accretion of discounts............................. (1) (4) (5) (2) (3)
(Increase) decrease in other assets.................. 278 (582) 182 (248) 49
Increase (decrease) in other liabilities............. (325) 168 (111) (83) 87
Federal Home Loan Bank stock dividends............... (166) (158) (211) (195) (180)
Purchase of trading securities....................... -- -- -- -- (64,500)
Sales of trading securities.......................... -- -- -- -- 66,204
------- -------- -------- -------- --------
Net cash provided by operating activities.......... 2,163 1,964 3,418 2,528 4,935
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity................................... 3,267 1,387 3,669 3,784 2,860
Proceeds from maturities of investment securities
available-for-sale................................. 2,000 1,000 1,000 -- --
Purchases of investment securities:
Held-to-maturity................................... (3,365) (3,565) (3,665) (1,994) (2,969)
Available-for-sale................................. (3,492) (3,996) (3,996) (4,857) (2,006)
Net (increase) decrease in loans..................... (4,600) (145) 1,065 (5,711) (19,038)
Purchases of premises and equipment.................. (510) (631) (725) (1,300) (2,797)
Proceeds from assumption of deposit liabilities...... -- -- -- 22,885 --
Acquisition of business, net of cash acquired........ (1,504) (1,575) (1,776) -- --
------- -------- -------- -------- --------
Net cash (used in) provided by investment
activities....................................... (8,204) (7,525) (4,428) 12,807 (23,950)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and
interest-bearing demand deposits................... (3,810) 229 6,834 5,536 (1,207)
Net increase (decrease) in certificates of deposit... 4,309 (17,719) (20,682) (17,841) 18,133
Dividends paid....................................... (208) (153) (212) (126) (101)
Net increase (decrease) in short-term borrowings..... (1,675) 1,225 1,550 175 (2,075)
Proceeds from long-term borrowings................... 5,000 -- 5,000 2,000 15,070
Repayment of long-term borrowings.................... (4,766) (1,213) (6,408) (2,942) (4,621)
Repurchase of common stock........................... (363) (494) (494) -- --
Issuance of common stock for cash, net of amount paid
for fractional shares and offering costs........... 22 15,019 15,018 67 19
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities....................................... (1,491) (3,106) 606 (13,131) 25,218
------- -------- -------- -------- --------
Net increase (decrease) in cash and due from
banks............................................ (7,532) (8,667) (404) 2,204 6,203
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR........... 22,705 23,109 23,109 20,905 14,702
------- -------- -------- -------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD............... $15,173 $ 14,442 $ 22,705 $ 23,109 $ 20,905
======= ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
A-39
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------ PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY INCOME
--------- ------------ ---------- -------- -------------- ------------- --------------
BALANCE AT DECEMBER 31,
1995....................... 2,585,608 $ 3,176 $1,538 $ 4,677 $ -- $ 9,391
Comprehensive Income:
Net income................. -- -- -- 2,497 -- 2,497 $2,497
Net changes in unrealized
gains on
Investments
available-for-sale, net
of deferred taxes of
$3....................... -- -- -- -- 7 7 7
------
Other comprehensive income,
net of tax............... -- -- -- -- -- -- 7
------
Comprehensive Income....... -- -- -- -- -- -- $2,504
======
Issuance of common stock for
cash....................... 4,795 19 -- -- -- 19
Cash dividend paid ($.04 per
share)..................... -- -- -- (101) -- (101)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31,
1996....................... 2,590,403 3,195 1,538 7,073 7 11,813
Comprehensive Income:
Net income................. -- -- -- 2,124 -- 2,124 $2,124
Net changes in unrealized
gains on investments
available-for-sale, net
of deferred taxes of $5.. -- -- -- -- 9 9 9
------
Other comprehensive income,
net of tax............... -- -- -- -- -- -- 9
------
Comprehensive Income....... -- -- -- -- -- -- $2,133
======
Issuance of common stock for
cash....................... 14,140 67 -- -- -- 67
Cash dividend paid ($.05 per
share)..................... -- -- -- (126) -- (126)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31,
1997....................... 2,604,543 3,262 1,538 9,071 16 13,887
Comprehensive Income:
Net income................. -- -- -- 2,226 -- 2,226 $2,226
Net changes in unrealized
gains on investments
available-for-sale, net
of deferred taxes of
$16...................... -- -- -- -- 30 30 30
------
Other comprehensive income,
net of tax............... -- -- -- -- -- -- 30
------
Comprehensive Income....... -- -- -- -- -- -- $2,256
======
Issuance of common stock
for cash................. 1,396,251 15,019 -- -- -- 15,019
Purchase of treasury
stock.................... (50,000) (494) -- -- -- (494)
Issuance of common stock
for acquisition.......... 51,282 465 -- -- -- 465
Cash dividends paid ($.06
per share)............... -- -- -- (212) -- (212)
Cash paid for fractional
shares..................... (77) (1) -- -- -- (1)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31,
1998....................... 4,001,999 18,251 1,538 11,085 46 30,920
Comprehensive Income:
Net income (unaudited)..... -- -- -- 551 -- 551 $ 551
Net changes in unrealized
gains on investments
available-for-sale, net
of deferred taxes of $33
(unaudited).............. -- -- -- -- (60) (60) (60)
Other comprehensive income,
net of tax (unaudited)... -- -- -- -- -- -- (60)
------
Comprehensive Income
(unaudited).............. -- -- -- -- -- -- $ 491
======
Issuance of common stock
for cash (unaudited)..... 3,261 22 -- -- -- 22
Purchase of treasury stock
(unaudited).............. (64,500) (363) -- -- -- (363)
Issuance of common stock
for acquisition
(unaudited).............. 148,810 977 -- -- -- 977
Cash dividends paid ($.05
per share) (unaudited)... -- -- -- (208) -- (208)
Cash paid for fractional
shares (unaudited)......... -- -- -- -- -- --
--------- ------- ------ ------- ---- -------
BALANCE AT SEPTEMBER 30,
1999....................... 4,089,570 $18,887 $1,538 $11,428 $(14) $31,839
========= ======= ====== ======= ==== =======
A-40
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Cowlitz Bancorporation (the Company) is a one-bank holding company located
in Southwest Washington. The Company's principal subsidiary, Cowlitz Bank (the
Bank), a Washington state-chartered commercial bank, is the only community bank
headquartered in Cowlitz County and offers commercial banking services primarily
to small and medium-sized businesses, professionals, and retail customers.
During the third quarter of 1998 the Company acquired Business Finance
Corporation (BFC) of Bellevue, Washington. Business Finance Corporation provides
asset based financing to companies throughout the western United States.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
INVESTMENT SECURITIES
Investment securities are classified as either trading, available-for-sale
or held-to-maturity. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. Securities
not classified as either held-to-maturity or trading are classified as
available-for-sale. Trading securities are carried at fair value. Net unrealized
gains and losses on trading securities are included in the consolidated
statements of income. Available-for-sale securities are carried at fair value
with unrealized gains and losses, net of tax effect, added to or deducted from
shareholders' equity. Held-to-maturity securities are carried at amortized cost.
LOANS
Interest income on simple interest loans is accrued daily on the principal
balance outstanding. Generally, no interest is accrued on loans when factors
indicate that collection of interest is doubtful or when principal or interest
payments become 90 days past due, unless collection of principal and interest is
anticipated within a reasonable period of time and the loans are well secured.
For such loans, previously accrued but uncollected interest is charged against
current earnings, and income is only recognized to the extent that payments are
subsequently received and collection of the remaining recorded investment is
probable. Loan fees are offset against operating expenses to the extent that
these fees cover the direct expense of originating loans. Fees in excess of
origination costs are deferred and amortized to income over the related loan
period.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires disclosure about stock-based compensation
arrangements regardless of the method used to account for them. As permitted by
SFAS No. 123, the Company has opted to continue to apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, and therefore
discloses the difference between compensation cost included in net income and
the related
A-41
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
cost measured by the fair-value-based method defined by SFAS No. 123, including
tax effects, that would have been recognized in the income statement if the
fair-value method has been used.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's estimates. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and other pertinent factors. Actual losses may
vary from the current estimates. These estimates are reviewed periodically and
are adjusted as deemed necessary. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously charged
off are added to the allowance.
A loan is impaired when, based on current information and events it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company's policy is to included
in impaired loans all loans that are past due 90 days or more as to either
principal or interest, except for loans that are currently measured at fair
value or at the lower of cost or fair value, and credit card receivables, which
are considered large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. The Company measures impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, impairment is measured
based on the loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. Impaired loans are charged to the allowance
when management believes, after considering economic and business conditions,
collection efforts, and collateral position, that the borrowers' financial
condition is such that collection of principal is not probable.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. The
provision for depreciation is computed on the straight-line method over the
estimated useful lives for the majority of the assets, which range from 3 to
39.5 years.
Improvements are capitalized and depreciated over the lesser of their
estimated useful lives or the life of the lease. When property is replaced or
otherwise disposed of, the cost of such assets and the related accumulated
depreciation are removed from their respective accounts.
INTANGIBLE ASSETS
Intangible assets include a deposit premium of $1,570 and $1,847 (net of
accumulated amortization) at December 31, 1998 and 1997, respectively. The
deposit premium is being amortized using an accelerated method over a ten-year
life. Intangible assets at December 31, 1998 also include goodwill of $1,540
(net of accumulated amortization), representing the excess of acquisition costs
over the fair value of net assets that arose in connection with the acquisition
of Business Finance Corporation and is being amortized on a straight-line basis
over a fifteen-year period.
A-42
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER BORROWINGS
Federal funds purchased generally mature within one to four days from the
transaction date. Other short-term borrowed funds mature within one year from
the transaction date. Other long-term borrowed funds extend beyond one year.
INCOME TAXES
Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates, which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the net change in the deferred
tax asset or liability from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available-for-sale. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
Earnings per share computations are computed using the weighted average
number of common and dilutive common equivalent shares (stock options) assumed
to be outstanding during the period using the treasury stock method.
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations:
WEIGHTED PER SHARE
NET INCOME AVG SHARES AMOUNT
---------- ---------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1998
Basic earnings per share..................... $2,226 3,715,901 $0.60
Stock Options................................ 178,194
Diluted earnings per share................... $2,226 3,894,095 $0.57
FOR THE YEAR ENDED DECEMBER 31, 1997
Basic earnings per share..................... $2,124 2,601,650 $0.82
Stock Options................................ 109,862
Diluted earnings per share................... $2,124 2,711,512 $0.78
FOR THE YEAR ENDED DECEMBER 31, 1996
Basic earnings per share..................... $2,497 2,586,711 $0.97
Stock Options................................ --
Diluted earnings per share................... $2,497 2,586,711 $0.97
The Company for the periods reported had no reconciling items between net
income and income available to common shareholders.
A-43
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts in the balance sheet caption "Cash
and due from banks" and include cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they become payable.
RECENTLY ISSUED ACCOUNTING STANDARDS
SAB No. 98
In February 1998, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 98 on computations of earnings per share. SAB
No. 98, which was effective upon issuance, revised the SEC's guidance on the
treatment of stock options issued shortly before an Initial Public Offering
(IPO) in earnings per share calculations. Prior to the issuance of SAB No. 98,
the SEC required that stock options issued within one year of an IPO with
exercise prices below the IPO price be treated as outstanding for all reporting
periods for purposes of calculating earnings per share. The Company followed
this guidance for the stock options granted September 30, 1997 and, accordingly
treated the options as outstanding for all periods in computing both basic and
diluted earnings per share. SAB No. 98 now requires that only "nominal
issuances" of stock or stock options be reflected in all earnings per share
calculations for all periods presented. The Company's September 30, 1997, stock
options do not meet the SEC's definition of a nominal issuance. As required by
SAB No. 98, these stock options are now included in the calculation of diluted
earnings per share only for periods subsequent to their issuance on
September 30, 1997, and are not included in the basic earnings per share
calculation.
A-44
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As required by SAB No. 98, the Company has restated its historical basic and
diluted earnings per share to conform with this new guidance. The following is a
summary of the historical and restated earnings per share amounts:
YEAR ENDED YEAR ENDED
DECEMBER 30, 1997 DECEMBER 30, 1996
------------------- -------------------
BASIC DILUTED BASIC DILUTED
-------- -------- -------- --------
Previously reported EPS................ $0.76 $0.76 $0.90 $0.90
Restated EPS........................... $0.82 $0.78 $0.97 $0.97
SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or a liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998).
The implementation of this Statement is not expected to have a material
impact on the Company's financial position or results of operation.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," effective January 1, 1998. This statement
establishes standards for the reporting and display of comprehensive income and
it's components in the financial statements. For the Company, comprehensive
income includes net income reported on the statements of income and changes in
the fair value of its available-for-sale investments reported as a component of
shareholders' equity.
A-45
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The components of comprehensive income for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
-------- -------- --------
Unrealized gain (loss) arising during the period, net of
tax................................................... $ 33 $ 9 $ 7
Reclassification adjustment for net realized gains
(losses) on securities available-for-sale included in
net income during the year, net of tax of $2, $0, and
$0.................................................... 3 -- --
---- ---- ----
Net unrealized gain included in other comprehensive
income.............................................. $ 30 $ 9 $ 7
==== ==== ====
PRIOR YEAR RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31 are shown below:
DECEMBER 31, 1998
AVAILABLE-FOR-SALE
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Government and agency securities................ $6,994 $ 71 $ -- $7,065
------ ---- ---- ------
Total.............................................. $6,994 $ 71 $ -- $7,065
====== ==== ==== ======
HELD-TO-MATURITY
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Municipal Bonds...................................... $ 199 $ -- $ -- $ 199
U.S. Government and agency securities................ 999 22 -- 1,021
Certificates of deposit.............................. 3,267 -- -- 3,267
------ ---- ---- ------
Total.............................................. $4,465 $ 22 $ -- $4,487
====== ==== ==== ======
A-46
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
2. INVESTMENT SECURITIES (Continued)
DECEMBER 31, 1997
AVAILABLE-FOR-SALE
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Government and agency securities................ $3,993 $ 24 $ -- $4,017
------ ---- ---- ------
Total.............................................. $3,993 $ 24 $ -- $4,017
====== ==== ==== ======
HELD-TO-MATURITY
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Government and agency securities................ $2,978 $ 22 $ -- $3,000
Certificates of deposit.............................. 1,486 -- -- 1,486
------ ---- ---- ------
Total.............................................. $4,464 $ 22 $ -- $4,486
====== ==== ==== ======
Gross gains of $5, $0, and $379 and gross losses of $0, $0, and $688 were
realized on sales of trading and available-for-sales securities in 1998, 1997,
and 1996, respectively. There were no sales of held-to-maturity securities.
MATURITY OF INVESTMENTS
The carrying amount and estimated fair value of debt securities by
contractual maturity at December 31, 1998, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay the obligation.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
Due in one year or less.............................. $2,002 $2,008 $3,267 $3,267
Due after one year through five years................ 4,992 5,057 1,099 1,121
Due after five years through fifteen years........... -- -- 99 99
------ ------ ------ ------
Total.............................................. $6,994 $7,065 $4,465 $4,487
====== ====== ====== ======
At December 31, 1998 and 1997 a security with a par value of $1 million was
pledged to secure the treasury, tax and loan account at the Federal Reserve.
Another security with a par value of $1 million was pledged for trust deposits
held in the Bank.
A-47
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio as of December 31 consists of the following:
1998 1997
-------- --------
Commercial loans........................................ $103,473 $ 93,829
Real estate:
Construction.......................................... 3,206 3,495
Mortgage.............................................. 13,774 24,167
Commercial............................................ 7,026 5,475
Installment and other consumer.......................... 5,063 5,571
Contracts purchased..................................... 45 81
-------- --------
132,587 132,618
Less:
Deferred loan fees.................................... (541) (655)
Allowance for loan losses............................. (1,814) (1,970)
-------- --------
Total loans, net.................................. $130,232 $129,993
======== ========
An analysis of the change in the allowance for loan losses for the years
ended December 31 is as follows:
1998 1997 1996
-------- -------- --------
Balance, beginning of year.......................... $1,970 $1,894 $1,763
Provision for loan losses......................... 509 375 281
Loans charged to the allowance.................... (727) (324) (158)
Recoveries credited to the allowance.............. 17 25 8
Adjustment incident to acquisition................ 45 -- --
------ ------ ------
Balance, end of year................................ $1,814 $1,970 $1,894
====== ====== ======
Loans on which the accrual of interest has been discontinued amounted to
approximately $2,737, $1,897, and $407 at December 31, 1998, 1997, and 1996,
respectively. Interest forgone on nonaccrual loans was approximately $297, $177,
and $41 in 1998, 1997, and 1996, respectively.
At December 31, 1998 and 1997, the Company's recorded investment in certain
loans that were considered to be impaired was $2,736 and $2,270, respectively.
Of these impaired loans, $891 and $302 have related valuation allowances of $65
and $199, while $1,845 and $1,968 did not require a valuation allowance. The
balance of the allowance for loan losses in excess of these specific reserves is
available to absorb losses from all loans. The average recorded investment in
impaired loans for the years ended December 31, 1998, 1997, and 1996, was
approximately $2,420, $1,300, and $342, respectively. Interest payments received
on impaired loans are recorded as interest income, unless collection of the
remaining recorded investment is not probable, in which case payments received
are recorded as a reduction of principal. For the years ended December 31, 1998,
1997, and 1996 interest income recognized on impaired loans totaled $77, $36,
and $14, respectively, all of which was recognized on a cash basis.
A-48
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
1998 1997
-------- --------
Land...................................................... $ 858 $ 633
Buildings and improvements................................ 4,415 4,208
Furniture and equipment................................... 2,386 2,157
Construction in process................................... 37 9
------- -------
7,696 7,007
Accumulated depreciation.................................. (1,837) (1,354)
------- -------
Total................................................... $ 5,859 $ 5,653
======= =======
Depreciation included in net occupancy and equipment expense amounted to
$524, $432, and $191 for the years ended December 31, 1998, 1997, and 1996,
respectively.
5. BORROWINGS
Short-term borrowings consist of Federal Funds purchased of $2,275 and $725
at December 31, 1998 and 1997, respectively.
1998 1997
-------- --------
Long-term borrowings consist of the following at December
31:
Notes payable to Federal Home Loan Bank; interest from
5.17 percent to 8.80 percent at December 31, 1998,
payable in monthly installments plus interest due 1999
to 2013, secured by certain investment securities and
mortgage loans.......................................... $21,738 $20,517
Note payable to a bank, due January 1999, paid in April
1998; interest at prime plus 1 percent; interest not to
fall below 8.5 percent or to exceed 14 percent
(9.25 percent at December 1997); principal payable in
annual installments; interest payable in quarterly
installments, secured by bank stock....................... -- 319
Subordinated promissory notes of the Company, due February
2000; interest at 8.5 percent; interest payable
semiannually on June 30 and December 31................... -- 1,000
Contract payable to private party; interest 9.0 percent,
payable in monthly installments plus interest through
October 2010.............................................. 61 64
------- -------
Total..................................................... $21,799 $21,900
======= =======
A-49
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
5. BORROWINGS (Continued)
The aggregate maturities of notes payable subsequent to December 31, 1998,
are as follows:
1999........................................................ $ 517
2000........................................................ 5,933
2001........................................................ 7,284
2002........................................................ 2,184
2003........................................................ 185
Thereafter.................................................. 5,696
-------
$21,799
=======
6. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 were as follows:
1998 1997 1996
-------- -------- --------
Current............................................. $1,069 $1,044 $1,274
Deferred............................................ 112 65 21
------ ------ ------
Total provision for income taxes.................. $1,181 $1,109 $1,295
====== ====== ======
The federal statutory income tax rate and effective tax rate of the
provision do not vary significantly.
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 was as follows:
1998 1997
-------- --------
Deferred tax assets:
Allowance for loan losses................................. $ 522 $ 596
Amortization of intangible assets......................... 84 23
Loan origination fees..................................... 15 31
----- -----
621 650
----- -----
Deferred tax liabilities:
Cash-basis adjustments.................................... -- (29)
Accumulated depreciation.................................. (91) (67)
Federal Home Loan Bank stock dividends.................... (469) (396)
Unrealized gains on available-for-sale securities......... (24) (8)
Other..................................................... -- (1)
----- -----
(584) (501)
----- -----
Net deferred tax............................................ $ 37 $ 149
===== =====
A-50
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
7. CERTIFICATES OF DEPOSIT:
Included in certificates of deposit are certificates in denominations of
$100 or greater totaling $13,623 and $18,633 at December 31, 1998 and 1997,
respectively. Interest expense relating to certificates of deposit in
denominations of $100 or greater was $933, $1,297, and $1,360 for the years
ended December 31, 1998, 1997, and 1996, respectively.
8. SHAREHOLDERS EQUITY AND REGULATORY CAPITAL
Dividends are paid by the Company from its retained earnings, which are
principally provided through dividends and income from its subsidiaries.
However, state agencies restrict the amount of funds the Company's subsidiaries
may transfer to the Company in the form of cash dividends, loans or advances.
Transfers are limited by the subsidiary's retained earnings, which for the Bank
were $10,159 at December 31, 1998.
The Company and the Bank are subject to various regulatory capital
requirements as established by the applicable federal or state banking
regulatory authorities. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items. The quantitative
measures for capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital to risk weighted assets
and of Tier 1 capital to average assets (leverage). The Company's capital
components, classification, risk weightings and other factors are also subject
to qualitative judgements by regulators. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements. Management
believes that as of December 31, 1998, the Company and the Bank meet all minimum
capital adequacy requirements to which they are subject. The most recent
notification from the Federal Deposit Insurance Corporation categorized the Bank
as well-capitalized under the regulatory framework for prompt corrective action.
Management believes that no events or changes in conditions have occurred
subsequent to such notification to change the Bank's category.
A-51
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
8. SHAREHOLDERS EQUITY AND REGULATORY CAPITAL (Continued)
The following table presents selected capital information for the Company
(consolidated) and the Bank as of December 31, 1998 and 1997:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
As of December 31, 1998
Total risk-based capital:
Consolidated........................... $29,330 23.46% $10,001 8.00% $12,501 10.00%
Bank................................... $16,383 13.32% $ 9,841 8.00% $12,301 10.00%
Tier 1 risk-based capital:
Consolidated........................... $27,764 22.21% $ 5,000 4.00% $ 7,501 6.00%
Bank................................... $14,842 12.07% $ 4,921 4.00% $ 7,381 6.00%
Tier 1 (leverage) capital:
Consolidated........................... $27,764 15.81% $ 7,026 4.00% $ 8,782 5.00%
Bank................................... $14,842 8.72% $ 6,806 4.00% $ 8,507 5.00%
As of December 31, 1997
Total risk-based capital:
Consolidated........................... $14,194 11.34% $10,007 8.00% $12,503 10.00%
Bank................................... $13,852 11.09% $ 9,994 8.00% $12,993 10.00%
Tier 1 risk-based capital:
Consolidated........................... $12,025 9.61% $ 5,003 4.00% $ 7,505 6.00%
Bank................................... $12,285 9.83% $ 4,997 4.00% $ 7,496 6.00%
Tier 1 (leverage) capital:
Consolidated........................... $12,025 6.94% $ 7,002 4.00% $ 8,752 5.00%
Bank................................... $12,285 7.12% $ 6,898 4.00% $ 8,623 5.00%
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
During 1997, the Company adopted the 1997 Stock Option Plan (the 1997 Plan),
which authorizes up to 525,000 shares of common stock for issuance thereunder.
Under the 1997 Plan, options may be granted to the Company's employees,
directors and consultants. The exercise price of incentive stock options under
the 1997 Plan must be at least equal to the fair value of the common stock on
the date of grant. Options granted under the 1997 Plan will generally vest over
a five-year period, at the discretion of the compensation committee. All
incentive stock options granted under the 1997 Plan will expire ten years from
the date of grant unless terminated sooner pursuant to the provisions of the
1997 Plan. At December 31, 1998 and December 31, 1997, options to purchase a
total of 446,000 and 385,000 shares, respectively, have been granted under the
1997 plan to executives and directors of the Company and the Bank.
The Company adopted an employee stock purchase plan during 1996. The Company
may sell up to 175,000 shares of common stock to its eligible employees under
the plan. During 1998, the Company
A-52
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS: (Continued)
sold 5,301 shares of stock under the plan. The employee is granted the right to
purchase the stock at a price equal to fair value at the date of grant, as
determined by the Board of Directors. These grants are made to qualified
employees each quarter and expire within the month they are granted.
A summary of option activity for the years ended December 31, 1998, 1997 and
1996 is as follows:
1998 1998 1997 1997 1996 1996
COMMON WEIGHTED COMMON WEIGHTED COMMON WEIGHTED
SHARES AVG. PRICE SHARES AVG. PRICE SHARES AVG. PRICE
-------- ---------- -------- ---------- -------- ----------
Balance, beginning of year.................. 400,208 $ 5.69 13,945 $4.29 -- $ --
Granted................................... 95,193 $ 8.02 428,732 $5.63 29,594 $4.16
Exercised................................. (16,174) $ 5.55 (13,441) $4.43 (4,795) $4.06
Forfeited................................. (18,019) $10.52 (29,028) $4.67 (10,854) $4.06
Balance, end of year........................ 461,208 $ 5.82 400,208 $5.69 13,945 $4.29
Exercisable, end of year.................... 166,200 $ 5.37 111,458 $5.64 13,945 $4.29
Fair value of options granted............... $ 1.08 $1.49 $0.06
At December 31, 1998, exercise prices for outstanding options ranged from
$5.71 to $7.94. For the options outstanding at December 31, 1998, the weighted
average contractual life is 9.1 years.
The Company accounts for both the 1997 Plan and the Employee Stock Purchase
Plan under APB Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost for these plans been determined consistently
with SFAS No. 123 and recognized over the vesting period, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
1998 1997 1996
-------- -------- --------
Net Income: As reported............................... $2,226 $2,124 $2,497
Pro Forma................................. $2,152 $2,024 $2,496
Basic earnings per share: As reported............................... $ 0.60 $ 0.82 $ 0.97
Pro Forma................................. $ 0.58 $ 0.78 $ 0.97
Diluted earnings per share: As reported............................... $ 0.57 $ 0.78 $ 0.97
Pro Forma................................. $ 0.55 $ 0.75 $ 0.97
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for grants in 1998, 1997, and 1996: risk-free
interest rate of 4.56 percent, 7 percent and 7 percent; expected dividend yield
of 0.58 percent for all years; and an expected volatility of 2.28 percent,
2.24 percent and 2.24 percent. Expected lives for options granted in 1998 and
1997 were 6 years and 0.25 year for options granted in 1996. Due to the
discretionary nature of stock option grants, the compensation cost included in
the 1998, 1997 and 1996 pro forma net income per SFAS No. 123 may not be
representative of that expected in future years.
A-53
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
10. CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF-BALANCE-SHEET RISK:
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities of the subsidiaries that arise in the
normal course of business and that involve elements of credit risk, interest
rate risk and liquidity risk. These commitments and contingent liabilities are
commitments to extend credit, credit card arrangements and standby letters of
credit. A summary of the subsidiary's undisbursed commitments and contingent
liabilities at December 31, 1998 is as follows:
Commitments to extend credit................................ $20,424
Credit card commitments..................................... 3,974
Standby letters of credit................................... 258
-------
Total..................................................... $24,656
=======
Commitments to extend credit, credit card arrangements and standby letters
of credit all include exposure to some credit loss in the event of
nonperformance of the customer. The Bank's credit policies and procedures for
credit commitments and financial guarantees are the same as those for extension
of credit that are recorded on the consolidated balance sheets. Because these
instruments have fixed maturity dates and many of them expire without being
drawn upon, they do not generally present a significant liquidity risk to the
Bank.
Most of the Bank's lending activity is with customers located in Cowlitz
County, Washington. An economic downturn in Cowlitz County would likely have a
negative impact on the Bank's results of operations, depending on the severity
of the downturn. The Bank maintains a diversified portfolio and does not have
significant on- or off- balance-sheet concentrations of credit risk in any one
industry.
11. BALANCES WITH THE FEDERAL RESERVE BANK:
The Bank is required to maintain reserves in cash or with the Federal
Reserve Bank equal to a percentage of its reservable deposits. Required reserves
were approximately $1,023, $929, and $580 as of December 31, 1998, 1997, and
1996, respectively.
12. RELATED-PARTY TRANSACTIONS:
Certain directors, executive officers and their spouses, associates and
related organizations, had banking transactions with the Bank in the ordinary
course of business. All loans and commitments to loan were made on substantially
the same terms and conditions, including collateral required as comparable
transactions with unaffiliated parties. Directors and executive officers are
charged the same rates of interest and loan fees as are charged to employees of
the Company, which interest rates and fees are slightly lower than charged to
nonemployee borrowers. The amounts of loans outstanding to
A-54
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
12. RELATED-PARTY TRANSACTIONS: (Continued)
directors, executive officers, principal shareholders, and companies with which
they are associated was as follows:
DECEMBER 31,
-------------------
1998 1997
-------- --------
Beginning balance........................................... $1,077 $1,318
Loans made.................................................. 186 704
Loan repayments made........................................ (319) (698)
Other....................................................... -- (247)
------ ------
Ending balance.............................................. $ 944 $1,077
====== ======
Certain directors at December 31, 1996 were no longer directors at
December 31, 1997. The balances outstanding to such persons are reflected in the
Other category above.
The chairman of the Company owns a securities brokerage franchise of Raymond
James Financial Services, Inc., which leases space from the Company.
13. EMPLOYEE BENEFIT PLAN:
The Company has a contributory retirement savings plan covering
substantially all full-time and part-time employees. The amount of the Company's
annual contribution is at the discretion of the Board of Directors. The Bank
contributed $164 and $115 for the years ended December 31, 1998 and 1997,
respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of financial instruments. A financial
instrument is defined as cash, evidence of ownership interest in an entity, or a
contract that conveys or imposes the contractual right or obligation to either
receive or deliver cash or another financial instrument. Examples of financial
instruments included in the Company's balance sheets are cash, federal funds
sold or purchased; debt and equity securities; loans; demand, savings and other
interest bearing deposits; notes and debentures. Examples of financial
instruments, which are not included in the Company's balance sheets, are
commitments to extend credit and standby letters of credit.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.
The statement requires the fair value of deposit liabilities with no stated
maturity, such as demand deposits, NOW and money market accounts, to equal the
carrying value of these financial instruments and does not allow for the
recognition of the inherent value of core deposit relationships when determining
fair value. While the statement does not require disclosure of the fair value of
nonfinancial instruments, such as the Company's premises and equipment, its
banking and trust franchises and its core deposit relationships, the Company
believes that these nonfinancial instruments have significant fair value.
A-55
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
- Cash and due from banks--For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
- Investment securities--For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. For other
securities, fair value equals quoted market prices, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
- Loans--For certain variable rate loans, fair value is estimated at
carrying value, as these loans reprice to market frequently. The fair
value of other types of loans is estimated by discounting the future cash
flows, using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
- Deposit Liabilities--The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit
is estimated by discounting future cash flows, using the rates currently
offered for deposits of similar remaining maturities.
- Short-term borrowing--The carrying amounts of borrowings under repurchase
agreements and short-term borrowings approximate their fair values.
- Long-term borrowing--Rates currently available to the Bank for debt with
similar terms and remaining maturities are used to estimate the fair value
of existing debt.
- Commitments to extend credit, credit card commitments and standby letters
of credit--The fair values of commitments to extend credit, credit card
commitments and standby letters of credit were not material as of
December 31, 1998 and 1997.
The estimated fair values of the Company's financial instruments at
December 31 were as follows:
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial assets:
Cash and due from banks........... $ 22,705 $ 22,705 $ 23,109 $ 23,109
Investment securities............. $ 11,530 $ 11,552 $ 8,481 $ 8,503
Loans, net of allowances for loan
losses.......................... $130,232 $133,491 $129,993 $130,093
Federal Home Loan Bank stock...... $ 2,869 $ 2,869 $ 2,658 $ 2,658
Financial liabilities:
Demand............................ $ 33,062 $ 33,062 $ 27,141 $ 27,141
Savings and interest-bearing
deposits........................ $ 47,367 $ 47,367 $ 46,454 $ 46,454
Certificates of deposit........... $ 41,932 $ 42,326 $ 62,614 $ 62,524
Short-term borrowings............. $ 2,275 $ 2,275 $ 725 $ 725
Long-term borrowings.............. $ 21,799 $ 22,787 $ 21,900 $ 21,824
A-56
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
15. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" as of
January 1, 1998. This statement establishes standards for the reporting and
display of information about operating segments in financial statements and
related disclosures.
The Company is principally engaged in community banking activities through
its five Bank branches and corporate offices. The community banking activities
include accepting deposits, providing loans and lines of credit to local
individuals, businesses and governmental entities, investing in investment
securities and money market instruments, and holding or managing assets in a
fiduciary agency capacity on behalf of its customers and their beneficiaries. In
addition, beginning in 1998 with the acquisition of Business Finance
Corporation, the Company provides asset based financing to companies throughout
the Western United States.
The community banking and asset based financing activities are monitored and
reported by Company management as separate operating segments. As permitted
under the Statement, the five separate banking offices have been aggregated into
a single reportable segment, Community Banking. The asset based financing
operating segment does not meet the prescribed aggregation or materiality
criteria and therefore is reported as Other in the following table below.
The accounting policies for the Company's segment information provided below
are the same as those described in Note 1, except that some operating expenses
are not allocated to segments.
Summarized financial information for the year ended December 31, 1998
concerning the Company's reportable segments is shown in the following table.
Prior to 1998, the Company had only one operating segment, Community Banking.
BANKING OTHER INTERSEGMENT CONSOLIDATED
-------- -------- ------------ ------------
Interest income.................... $ 15,870 $ 556 $ (60) $ 16,366
Interest expense................... 6,501 60 (60) 6,501
-------- ------ ------- --------
Net interest income.............. 9,369 496 -- 9,865
Provision for loan loss............ 509 -- -- 509
Noninterest income................. 978 -- -- 978
Noninterest expense................ 6,710 217 -- 6,927
-------- ------ --------
Income before taxes.............. 3,128 279 -- 3,407
Provision for income taxes......... 1,086 95 -- 1,181
-------- ------ --------
Net income....................... $ 2,042 $ 184 $ -- $ 2,226
======== ====== ======= ========
Depreciation and amortization...... $ 524 $ -- $ -- $ 524
======== ====== ======= ========
Assets............................. $175,410 $4,797 $(1,862) $178,345
======== ====== ======= ========
A-57
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
16. ACQUISITION
On August 31, 1998, the Company acquired Business Finance Corporation (BFC)
of Bellevue, Washington. BFC provides asset-based financing to companies
throughout the Western United States. A cash payment of approximately $1,776 was
made and 51,282 shares of Company stock with a value of $465 were issued in
connection with the acquisition. Available cash resources were used to finance
the acquisition. A future contingent issuance of the Company's common stock
valued at approximately $500 will be made if BFC achieves certain earnings goals
for the twelve-month period following the acquisition. The value of any
subsequently issued shares will be allocated to cost in excess of the fair value
of the net assets acquired.
The BFC acquisition was recorded under the purchase method of accounting;
and accordingly, the results of operations of BFC for the period from
August 31, 1998 are included in the accompanying consolidated financial
statements. The purchase price has been allocated to the assets acquired and
liabilities assumed based on fair market value at the date of acquisition. The
fair value of assets acquired and liabilities assumed is summarized as follows:
Factored receivables................. $ 2,357
Other assets......................... 273
Goodwill............................. 1,571
Liabilities assumed.................. (1,836)
Stock issued......................... (465)
-------
Cash paid for acquisition............ 1,900
Cash acquired........................ (124)
-------
Net cash paid for acquisition........ $ 1,776
=======
The following unaudited pro forma financial information for the Company
gives effect to the BFC acquisition as if it had occurred on January 1, 1997.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisition occurred on the date indicated, or which may
result in the future for the combined companies under the ownership and
management of the Company. The pro forma results include certain adjustments,
such as additional expense as a result of goodwill amortization.
PRO FORMA
-------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(UNAUDITED)
Interest income............................. $16,519 $15,180
Net income.................................. $ 2,423 $ 2,210
Diluted earnings per share.................. $ 0.62 $ 0.81
A-58
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
17. PARENT-COMPANY-ONLY FINANCIAL DATA:
The following sets forth condensed financial information of the Company on a
stand-alone basis:
STATEMENTS OF CONDITION
(UNCONSOLIDATED)
DECEMBER 31,
-------------------
1998 1997
-------- --------
Assets:
Cash and due from depository institutions............... $11,250 $ 937
Investment in bank subsidiary........................... 16,458 14,147
Investment in non-bank subsidiary....................... 2,424 --
Receivables due from non-bank subsidiary................ 579 --
Other assets............................................ 320 156
------- -------
Total assets........................................ $31,031 $15,240
======= =======
Liabilities and shareholders' equity:
Liabilities:
Long-term borrowings.................................. $ -- $ 1,319
Other liabilities..................................... 111 34
------- -------
Total liabilities................................... 111 1,353
Shareholders' equity.................................... 30,920 13,887
------- -------
Total liabilities and shareholders' equity.......... $31,031 $15,240
======= =======
A-59
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
17. PARENT-COMPANY-ONLY FINANCIAL DATA: (Continued)
STATEMENTS OF INCOME
(UNCONSOLIDATED)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Income:
Income from subsidiaries.......................... $ 495 $ 54 $ 56
------ ------ ------
Total income.................................... 495 54 56
------ ------ ------
Expenses:
Interest expense.................................. 30 116 130
Other expense..................................... 800 353 334
------ ------ ------
Total expense................................... 830 469 464
------ ------ ------
Loss before income tax benefit and equity in
undistributed earnings of subsidiaries........ (335) (415) (408)
Income tax benefit.................................. 97 135 138
------ ------ ------
Net loss before equity in undistributed earnings
of subsidiaries................................. (238) (280) (270)
Equity in undistributed earnings of subsidiaries.... 2,464 2,404 2,767
------ ------ ------
Net income........................................ $2,226 $2,124 $2,497
====== ====== ======
A-60
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
17. PARENT-COMPANY-ONLY FINANCIAL DATA: (Continued)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Cash flow from operating activities:
Net income........................................ $ 2,226 $2,124 $2,497
Adjustments to reconcile net income to net cash
(used for) operating activities:
Undistributed earnings of the subsidiaries...... (2,464) (2,404) (2,767)
Decrease (increase) in other assets............. (164) (149) 39
Increase (decrease) in other liabilities........ 77 23 (5)
------- ------ ------
Net cash used by operating activities......... (325) (406) (236)
------- ------ ------
Cash flows from investing activities:
Capital payments from bank........................ -- 500 --
Acquisition of business, net of cash acquired..... (1,776) -- --
Advances to subsidiaries.......................... (579) -- --
------- ------ ------
Net cash (used for) provided by investing
activities.................................. (2,355) 500 --
------- ------ ------
Cash flows from financing activities:
Net repayments of long-term borrowings............ (1,319) (159) (146)
Purchase of treasury stock........................ (494) -- --
Proceeds from issuance of common stock............ 15,018 67 19
Dividends paid.................................... (212) (126) (101)
------- ------ ------
Net cash provided by (used for) financing
activities.................................. 12,993 (218) (228)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents....................................... 10,313 (124) (464)
Cash and cash equivalents at beginning of year...... 937 1,061 1,525
------- ------ ------
Cash and cash equivalents at end of year............ $11,250 $ 937 $1,061
======= ====== ======
A-61
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1998
Interest income.................... $3,781 $4,189 $4,104 $4,292
Interest expense................... 1,661 1,722 1,571 1,547
------ ------ ------ ------
Net interest income.............. 2,120 2,467 2,533 2,745
Provision for loan losses.......... (106) (26) (111) (266)
Noninterest income................. 264 231 239 244
Noninterest expense................ 1,619 1,681 1,734 1,893
------ ------ ------ ------
Income before income taxes....... 659 991 927 830
Provision for income taxes......... 224 337 315 305
------ ------ ------ ------
Net income....................... $ 435 $ 654 $ 612 $ 525
====== ====== ====== ======
Basic earnings per share........... $ .15 $ .16 $ .15 $ .13
====== ====== ====== ======
Diluted earnings per share......... $ .14 $ .15 $ .15 $ .13
====== ====== ====== ======
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1997
Interest income.................... $3,594 $3,622 $3,919 $3,951
Interest expense................... 1,761 1,676 1,796 1,709
------ ------ ------ ------
Net interest income.............. 1,833 1,946 2,123 2,242
Provision for loan losses.......... (91) (98) (111) (75)
Noninterest income................. 154 161 219 215
Noninterest expense................ 1,116 1,214 1,509 1,446
------ ------ ------ ------
Income before income taxes..... 780 795 722 936
Provision for income taxes......... 265 271 245 328
------ ------ ------ ------
Net income..................... $ 515 $ 524 $ 477 $ 608
====== ====== ====== ======
Basic earnings per share........... $ .20 $ .20 $ .18 $ .23
====== ====== ====== ======
Diluted earnings per share......... $ .20 $ .20 $ .18 $ .22
====== ====== ====== ======
As discussed in Footnote 1, the Company has restated its historical basic
and diluted earnings per share to conform with SAB No. 98.
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------------- ------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- -------- -------- --------
Previously reported EPS........ $.17 $.17 $.19 $.19 $.17 $.17 $.22 $.22
Restated EPS................... $.20 $.20 $.20 $.20 $.18 $.18 $.23 $.22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
A-62
APPENDIX B
INFORMATION CONCERNING NORTHERN BANK
GENERAL
Northern Bank of Commerce is an Oregon state chartered bank that has been
providing full service banking to small and medium sized businesses in the
Portland, Oregon metropolitan area since it opened in August 1994. Northern Bank
operates a full service office in downtown Portland and operates limited hour
branches in eight residential retirement communities in Multnomah, Washington
and Clackamas Counties. Nearly all of Northern Bank's competitors are
super-regional banks with out-of-state headquarters, or community banks
headquartered elsewhere in Oregon but with Portland-area branches. Northern
Bank's Portland headquarters provides more immediate access to its customers and
permits local decision making. Northern Bank provides loan, deposit and cash
management services tailored to the needs of small to middle market business
customers, and provides personal banking services to its business customers. In
addition to business banking, Northern Bank's branches provide a relatively
stable deposit base while allowing the bank to provide excellent service to
individual customers in a niche market.
Northern Bank has grown rapidly, and management believes its innovative
approach to business banking is recognized as a much-needed answer to the growth
of giant interstate financial institutions that often ignore small businesses
and individual customers. However, its growth has not been without challenges.
Just as it has helped many of the bank's customers respond to the stresses and
demands of expansion, Northern Bank has faced similar challenges. On July 19,
1999, following three successive years of asset growth at an average annual rate
of 40%, Northern Bank entered into stipulated Orders to Cease and Desist with
the Federal Deposit Insurance Corporation and the Oregon Department of Business
and Consumer Services. The two orders, which were similar in their findings and
requirements, stated that Northern Bank had engaged in specified "unsafe or
unsound banking practices." The regulators contended that Northern Bank had
failed to adhere to specified laws and regulations relating primarily to loan
administration by, among other things, operating with inadequate management,
operating with inadequate equity capital and reserves in relation to the
quantity and quality of the bank's outstanding loans, operating with a large
volume of poor quality loans, operating without an adequate reserve for loan and
lease losses, and following inadequate lending and lax collection practices.
Northern Bank has responded to this setback by shifting to a more
conservative view of its loan portfolio, increasing its allowance for loan and
lease losses from $1,634,000 to $1,882,000 during the third fiscal quarter of
this year. This move follows a restatement of earnings to increase the bank's
loan loss reserve by an additional $474,000 during the previous quarter, and
management expects that as a result of loan performance in the fourth quarter,
it will again increase reserves substantially. Moreover, management continually
examines the loan portfolio to provide an optimum loan administration process
while recognizing when a troubled loan becomes uncollectible. As a result of
these examinations, Northern Bank determined to charge off non-performing loans
totaling nearly $700,000 during the fourth quarter through November 30, 1999. Of
this amount, approximately $600,000 was covered by existing reserves. Management
has not yet determined whether additional charge-offs will be required in the
fourth quarter, but expects to maintain a conservative view of the bank's loan
portfolio throughout the foreseeable future.
Another requirement imposed by the regulatory orders described above is that
Northern Bank retain a chief executive officer with proven abilities in managing
a bank of comparable size and with experience in managing and upgrading loan
quality, improving earnings, and other matters noted as needing particular
attention. Northern Bank also is required to ensure that the Chairman of the
bank's Board of Directors is an outside director. As a part of the response to
these requirements, the board has retained James A. Wills, former Executive Vice
President and Chief Lending Officer of Cowlitz
B-1
Bank, as the bank's Acting President and Chief Lending Officer, and the Board of
Directors has elected William Spicer, a proven leader with over 30 years'
banking experience, as Chairman of the Board. Working together with Northern
Bank's outstanding team of employees, Mr. Spicer and Mr. Wills have developed
and begun to implement a multi-faceted plan intended both to respond to
regulators' concerns and to improve the overall quality of Northern Bank.
Management will continue to monitor Northern Bank's performance and to refine
its operating plans in light of safe and sound banking practices.
Additionally, Northern Bank announced on September 14, 1999 that it had
entered into an Agreement and Plan of Merger with Cowlitz Bancorp and Cowlitz
Bank. Given that Northern Bank's assets and liabilities will transfer to Cowlitz
Bank if the merger is concluded, Northern Bank plans to maximize the quality of
its assets and to protect against loan losses. Moreover, one aspect of the
proposed merger is that a portion of the purchase price will be held in escrow
for a period of two years to indemnify Cowlitz Bank for losses connected with
specific identified loans in Northern Bank's portfolio, to the extent those
losses exceed established reserves. Management believes it is in Northern Bank
shareholders' best interest to maintain a conservative view of the loan
portfolio. Although the merger is conditioned on a number of factors, including
the approval of Northern Bank's shareholders and federal and state banking
regulators, and therefore may not be concluded, management believes that it
should reserve aggressively against potential loan losses.
Notwithstanding the setbacks Northern Bank has experienced, management has
maintained a focus on the future by ensuring that it concentrates on the bank's
core strengths and goals. The primary goal is to continue building on its
position as a leading community-based business bank, and to position the
surviving entity to follow this vision if the merger is completed, by providing
exceptional personal service to the bank's customers, expanding where necessary
to meet their unique needs. The components of this strategy are outlined below.
- CONTINUE TO GROW ASSETS IN ITS CORE MARKET. Northern Bank has demonstrated
an ability to grow its assets aggressively in a well-defined business
market. With each year, asset growth has driven the bank's total revenues
higher. Management has begun to take a much more conservative view of
Northern Bank's loan portfolio and has adopted a more conservative policy
of strengthening the portfolio by reserving a considerable portion of the
bank's income against potential losses. Management anticipates that higher
revenues and increasing loan loss reserves will continue for the
foreseeable future. Therefore, the key to Northern Bank's strategy is to
generate sound asset growth in its primary market, paying special
attention to asset quality.
- ESTABLISH AND MAINTAIN HIGH ASSET QUALITY. Northern Bank seeks to improve
the quality of its assets and maintain that quality by adhering strictly
to established credit policies, and by carefully training and continuously
supervising its loan officers. Northern Bank also seeks to enhance the
quality of its loan portfolio by hiring loan officers and employees who
have exceptional banking experience and who have established ties to the
communities the bank serves. As a part of its effort to promote this
strategy, Northern Bank hired Mr. Wills as the bank's Acting President and
Chief Lending Officer. With outstanding expertise in managing a loan
portfolio in a changing market, and with his knowledge of banking
regulations and procedures, the Board of Directors expects that Mr. Wills
will provide an invaluable service in improving the quality of the bank's
assets. In addition, management will continue to examine the bank's loan
portfolio and deposit base to ensure that Northern Bank attracts and
retains quality assets, and that where necessary, the bank utilizes its
substantial loan loss reserves to offset charge-offs of non-performing
assets.
- CONTINUE TO GROW THE NICHE RETIREMENT MARKET. Northern Bank has eight
branches in retirement residences. These branches have brought a marked
growth in deposits. Moreover, the deposits at these locations tend to be
stable and are not associated with significant borrowing. This provides
B-2
funds that allow Northern Bank better to support its growing commercial
loan portfolio. Because the residents of these facilities tend to expect a
high level of personal service, they choose to bank at a place that is
willing and able to devote particular attention to their needs. These
expectations fit perfectly with Northern Bank's approach to middle market
business customers, who also demand top quality service and personal
attention.
- CONTINUE TO EXPAND THROUGH NEW PRODUCTS. Northern Bank has tailored its
services to the needs of Portland community businesses and individual
customers. As the bank has grown and has seen its customers grow,
management has recognized a number of new opportunities to expand its
services. Northern Bank will continue to examine the feasibility of
additional cash and investment management services to supplement those it
currently offers, and expects to afford significant expertise to the
surviving entity, as well as added products and services such as trust and
estate planning, if the merger is concluded.
Management has identified a number of ways to pursue the strategy outlined
above, and has begun to implement these measures, many of which also will
promote compliance with the cease and desist orders. For example, Northern Bank
focuses on:
- Providing the highest level of service to its commercial customers,
including electronic banking services.
- Hiring, training and retaining employees who have demonstrated commercial
banking skills and experience, as well as established ties to the
communities Northern Bank serves.
- Acquiring a highly skilled management team, and providing adequate
supervision for that team at all levels.
- Allowing personnel the flexibility to respond to each customer's
particular needs while remaining mindful of the bank's policies and
standards.
Northern Bank will continue to refine its strategy and to reexamine the
measures it uses to pursue that strategy. At the pinnacle of these goals is the
need to provide an exceptional value for shareholders and customers. Management
believes that optimizing the bank's performance means establishing an
outstanding base of customers and assets, and using those as building blocks to
continue to grow Northern Bank's core business in a prudent manner while looking
for opportunities to expand in a way that provides both quality customer service
and substantial value.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
As of September 30, 1999 Northern Bank's total assets were $60,987,000,
compared with total assets of $61,140,000 on December 31, 1998 and $58,031,000
on September 30, 1998. Northern Bank's net loans increased 4.55% from
$46,882,000 to $49,013,000 from September 30, 1998 to September 30, 1999, and
deposits increased 6.28% from $52,712,000 to $56,024,000 on those dates. For the
nine months ended September 30, 1999, Northern Bank reported a net loss of
$196,000 or $0.16 per diluted share. This compares to net income of $333,000 or
$0.24 per diluted share for the same period in 1998 and net income of $120,000
or $0.09 per diluted share for the year ended December 31, 1998.
Management attributes the bank's decrease in net income primarily to a
substantial increase in the bank's loan loss reserve. Northern Bank increased
the reserve primarily because management has entered into cease and desist
orders with the Oregon Department of Business and Consumer Services and the
FDIC, which contend in part that the bank previously failed to establish and
maintain an adequate allowance for loan and lease losses. Northern Bank has
moved aggressively to respond to these orders, including restating the bank's
June 30, 1999 financial statements to increase the bank's
B-3
loan loss reserves by $474,000. In the third quarter, management again increased
the reserve substantially. Management expects to continue to monitor loan
quality and performance closely to ensure that Northern Bank exceeds the
regulators' expectations and optimizes its own financial performance, and where
appropriate, Northern Bank will use its reserves to offset charge-offs as that
becomes necessary.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The primary component of earnings for banking institutions is net interest
income. Net interest income is the difference between interest income a bank
receives, primarily from loans and investment securities, and interest expense
it pays, principally on customer deposits. Net interest income for the nine
months ended September 30, 1999, was $2,743,000, an increase of $519,000, or
23.35%, over the same period in 1998. These results were due primarily to an
increase in the volume of the bank's earning assets. Loans, which generally
carry a higher yield than investment securities and other earning assets,
comprised the majority of Northern Bank's earning assets during the nine-month
periods ended September 30, 1999 and 1998. Average loan yields were 10.43% in
the first nine months of 1999 and 10.74% in the first nine months of 1998.
Northern Bank's annualized net interest margin, which is the net interest income
divided by the average earning assets, was 5.59% for the nine months ended
September 30, 1999, compared with 6.06% for the nine months ended September 30,
1998.
ANALYSIS OF NET INTEREST INCOME. The following table presents information
regarding yields and interest earning assets, expense on interest earning
liabilities, and net yields on interest earning assets for the periods
indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------- INCREASE
1999 1998 (DECREASE) CHANGE
-------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Interest income..................................... $ 4,692 $ 3,762 $ 930 24.7%
Interest expense.................................... 1,949 1,539 410 26.6%
------- ------- -------
Net interest income................................. $ 2,743 $ 2,223 $ 520 23.4%
======= ======= =======
Average interest earning assets..................... $65,612 $49,043 $16,569 33.8%
Average interest bearing liabilities................ $52,356 $38,497 $13,859 36.0%
Average yields earned(1)............................ 9.56% 10.26% (0.70)%
Average rates paid(1)............................... 4.98% 5.34% (0.36)%
Net interest spread(1).............................. 4.58% 4.91% (0.33)%
Net interest margin(1).............................. 5.59% 6.06% (0.47)%
- ------------------------
(1) Ratios for the nine months ended September 30, 1999 and 1998, have been
annualized.
B-4
The following table presents average balances and interest income or
interest expense with the resulting average yield or rates by category of
average earning asset or interest-bearing liability:
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------ ------------------------------
AVERAGE INC/EXP RATE AVERAGE INC/EXP RATE
-------- -------- -------- -------- -------- --------
Interest-earning assets:
Loans....................................... $55,088 $4,297 10.43% $44,433 $3,570 10.74%
Investment securities....................... 1,697 76 6.00% 1,260 58 6.15%
Federal Funds sold.......................... 8,827 318 4.82% 3,350 134 5.36%
------- ------ ----- ------- ------
Total interest-earning assets............... 65,612 4,692 9.56% 49,043 3,762 10.26%
------ ----- ------ -----
Cash and due from banks..................... 2,988 2,120
Fixed assets................................ 110 81
Loan loss allowance......................... (1,308) (472)
Other assets................................ 824 823
------- -------
Total assets................................ $68,226 $51,595
=======
Interest-bearing liabilities:
Interest-bearing checking and savings
accounts.................................. $24,898 772 4.15% $17,794 595 4.47%
Time deposits............................... 27,458 1,177 5.73% 20,703 944 6.09%
------- ------ ----- ------- ------ -----
Total interest-bearing liabilities.......... 52,356 1,949 4.98% 38,497 1,539 5.34%
------ ----- ------ -----
Noninterest bearing deposits................ 10,729 7,893
Other liabilities........................... 383 719
------- -------
Total liabilities........................... 63,468 47,109
Shareholders' equity........................ 4,758 4,486
------- -------
Total liabilities and shareholders'
equity.................................... $68,226 $51,595
======= =======
Net interest income......................... $2,743 $2,223
====== ======
Net interest margin......................... 5.59% 6.06%
===== =====
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table shows the
dollar amount of the increase (decrease) in Northern Bank's net interest income
and expense and attributes such dollar
B-5
amounts to changes in volume as well as changes in rates. Rate and volume
variances have been allocated proportionally between rate and volume changes:
FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 TO 1999
INCREASE (DECREASE) DUE TO
------------------------------
NET
VOLUME RATE CHANGE
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.............................................. $ 856 $(129) $ 727
Investment securities.............................. 20 (2) 18
Federal funds sold................................. 219 (35) 184
------ ----- -----
Total............................................ 1,095 (166) (929)
------ ----- -----
Interest-bearing liabilities:
Interest-bearing checking and savings accounts..... (238) 61 (177)
Time deposits...................................... (308) 74 (233)
------ ----- -----
Total............................................ (546) 135 (410)
------ ----- -----
Net increase (decrease) in net interest income....... $ 550 $ (31) $ 519
====== ===== =====
PROVISION FOR LOAN LOSSES. Provisions for loan losses recorded for the nine
months ended September 30, 1999 were $779,000 as compared to $75,000 for the
corresponding period in 1998. There were no charge-offs during the nine-month
periods ended September 30, 1999 and 1998. Recoveries of prior charge-offs were
$12,000 for the nine months ended September 30, 1998. There were no loan loss
recoveries during the first nine months of 1999. However, through November 24,
1999 management had determined that fourth quarter charge-offs of $700,000 would
be necessary, of which approximately $600,000 were covered by existing reserves.
At September 30, 1999, the allowance for loan losses was 3.69% of total
loans outstanding. This compares to corresponding loan loss reserve ratios of
2.14% at December 31, 1998 and 1.04% at September 30, 1998. At September 30,
1999, nonperforming assets were $1.75 million or 2.87% of total assets.
Nonaccrual loans were $374,000 at September 30, 1999, which include non-accrual
loans plus all loans 90 days or more past due on which collection of interest
was not then in doubt. There were no nonaccrual loans at September 30, 1998. In
the fourth quarter through November 24, 1999 management has determined to charge
off non-performing loans totaling $700,000. Of this amount, approximately
$600,000 is covered by existing reserves. Management has not yet determined
whether additional charge-offs will be required in the fourth quarter, but
expects to maintain a conservative view of the bank's loan portfolio throughout
the foreseeable future.
B-6
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
NON-INTEREST INCOME. For the nine months ended September 30, 1999, total
non-interest income was $101,000, a 59.49% increase over the $63,000 earned in
the same period of 1998. Non-interest income consists of the following
components:
NINE MONTHS
ENDED
SEPTEMBER 30
----------------------
1999 1998
-------- --------
(DOLLARS IN
THOUSANDS)
Service charges on deposit accounts......................... $ 48 $22
Other loan and fee income................................... 20 10
Other miscellaneous fees and income......................... 33 31
---- ---
Total non-interest income................................... $101 $63
==== ===
NON-INTEREST EXPENSES. For the nine-month periods ended September 30, 1999
and September 30, 1998, salary and related employee benefit expenses were
$993,000 and $731,000, respectively. Approximately $80,000 of the
$262,000 year-to-year increase was due to staffing costs at the seven
residential retirement community offices the bank has opened during the covered
period. Most of the remainder is attributable to increased staffing at the
bank's main office location, primarily due to increases in business activity and
asset size, and to additional costs associated with temporary employees who are
assisting while management locates experienced replacements for employees who
have left the bank in recent months. Additionally, the cease and desist orders
require, among other things, that the bank retain additional personnel for loan
administration and collection. Northern Bank has begun to recruit the needed
personnel, but management expects that this effort will result in additional
salary and employee benefits expenses.
Occupancy expense was $112,000 for the nine-month period ended
September 30, 1999, compared to $117,000 for the same period in 1998. Management
expects that these expenses will remain at approximately this level through the
remainder of 1999.
For the first nine months of 1999 and 1998, furniture and equipment expenses
were $74,000 and $70,000, respectively. Again, management anticipates similar
expenditures during the remainder of 1999.
Other expenses, including data processing, communications, office supplies,
marketing and promotional expenses were $1,081,000 for the nine-month period
ended September 30, 1999, compared to $822,000 for the same period in 1998. Of
this $259,000 year-to-date increase, $95,000 is attributable to increased legal,
audit and other professional fees, primarily due to capital-raising, regulatory
and merger activities. Approximately $30,000 results from additional staff
hiring costs and training expenses and $13,000 comes from increases in courier
fees between the main office and the bank's growing network of residential
retirement branches. Other expense increases were $44,000 for data processing
(including Year 2000 computer compliance issues), $40,000 for increased loan
processing and collection fees, and $35,000 from increased fraudulent check
losses.
INCOME TAXES. For the nine-month period ended September 30, 1999, the Bank
made no income tax expense provision, compared with an income tax expense of
$139,000 for the same period in 1998.
NET INCOME AFTER INCOME TAXES
During the nine month period ended September 30, 1999 Northern Bank
experienced a loss of $196,000 ($0.16 per diluted share), compared to net
earnings of $333,000 ($0.24 per diluted share) in
B-7
the corresponding period of 1998. The bank's pre-tax loss for the first nine
months of 1999 was $196,000, contrasted with pre-tax earnings of $472,000 for
the same period in 1998.
As discussed above, management attributes a large portion of Northern Bank's
net loss for the year to date, to management's plan to increase the allowance
for loan and lease losses as a response to regulatory concerns and as a part of
its strategy to take a more conservative view of its loan portfolio. Management
also believes this posture is a significant positive step for the bank and will
help shareholders receive the optimum value for their investment.
Northern Bank's annualized return on average shareholder equity (ROAE) was
(5.51%) and 9.93% for the nine-month periods ended September 30, 1999 and 1998,
respectively. For the same periods, Northern Bank had an annualized return on
average assets (ROAA) of (0.38%) and 0.86%.
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
INCREASE (DECREASE) INCREASE (DECREASE)
BALANCES 12/31/97--9/30/98 BALANCES 12/31/98--9/30/99
-------------------- ------------------- -------------------- -------------------
SEPT. 30, DEC. 31, DOLLAR SEPT. 30, DEC. 31, DOLLAR
1999 1998 AMOUNT % CHANGE 1998 1997 AMOUNT % CHANGE
--------- -------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold.... $ 2,500 $ 3,675 $(1,175) (31.97)% $ 5,300 $ 200 $ 5,100 2,500.50%
Investments........... 4,720 1,108 3,612 325.79% 1,321 2,048 (727) (35.50)%
Loans................. 49,013 50,508 (1,495) (2.96)% 46,882 40,702 6,180 15.18%
Other assets.......... 4,754 5,849 (1,095) (18.72)% 4,528 1,580 2,948 186.58%
------- ------- ------- ------ ------- ------- ------- --------
Total Assets.......... $60,987 $61,140 $ (153) (0.25)% $58,031 $44,530 $13,501 30.32%
======= ======= ======= ====== ======= ======= ======= ========
LIABILITIES
Noninterest-bearing
deposits.............. $ 9,849 $ 8,918 $ 931 10.44% $ 9,022 $ 7,698 $ 1,324 17.20%
Interest bearing
deposits.............. 46,175 47,305 (1,130) (2.39)% 43,690 32,508 11,182 34.40%
------- ------- ------- ------ ------- ------- ------- --------
Total Deposits.......... 56,024 56,223 (199) (0.35)% 52,712 40,206 12,506 31.10%
Other liabilities....... 454 182 272 149.95% 363 112 251 224.11%
------- ------- ------- ====== ------- ------- ------- --------
Total Liabilities....... 56,478 56,405 73 0.13% 53,075 40,318 12,757 31.64%
SHAREHOLDERS' EQUITY.... 4,509 4,735 (226) (4.77)% 4,956 4,212 744 17.66%
------- ------- ------- ------ ------- ------- ------- --------
Total liabilities and
shareholders'
equity................ $60,987 $61,140 $ (153) (0.25)% $58,031 $44,530 $13,501 30.32%
======= ======= ======= ====== ======= ======= ======= ========
INVESTMENT SECURITIES
The bank's total investment portfolio at September 30, 1999 was $7,220,000,
consisting of $2,500,000 in overnight Federal Funds and $4,720,000 in
available-for-sale investment securities. On December 31, 1998 the portfolio
totaled $4,783,000, and consisted of $3,675,000 in Federal Funds and $1,108,000
in available-for-sale investments. This represents a 50.95% increase in
investments over the
B-8
first nine months of 1999. The bank's investment securities on September 30,
1999 and 1998, and December 31, 1998, consisted of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------------------- ---------------------------------
APPROXIMATE APPROXIMATE
BOOK MARKET % BOOK MARKET %
VALUE VALUE YIELD VALUE VALUE YIELD
-------- ----------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
US Treasuries and Agencies
Available-for-Sale:
One year or less............ $1,198 $1,195 5.37% $ -- $ -- --
One to five years........... 2,969 2,953 5.98% 506 509 6.10%
Five to ten years........... 600 572 6.14% 601 599 6.13%
US Treasuries and Agencies
Held-to-Maturity:
One year or less............ -- -- -- -- -- --
One to five years........... -- -- -- -- -- --
Five to ten years........... -- -- -- -- -- --
------ ------ ------ ------
Total Securities.......... $4,767 $4,720 5.85% $1,107 $1,108 6.12%
====== ====== ====== ======
SEPTEMBER 30, 1998
---------------------------------
APPROXIMATE
BOOK MARKET %
VALUE VALUE YIELD
-------- ----------- --------
(DOLLARS IN THOUSANDS)
US Treasuries and Agencies
Available-for-Sale:
One year or less............ $ -- $ -- --
One to five years........... 506 511 6.10%
Five to ten years........... 511 610 6.13
US Treasuries and Agencies
Held-to-Maturity:
One year or less............
One to five years........... 200 199 5.40%
Five to ten years........... -- -- --
------ ------
Total Securities.......... $1,307 $1,320 6.01%
====== ======
LOANS AND LOAN LOSS RESERVE
Total net loans outstanding fell 2.96%, from $50,508,000 to $49,013,000
during the first nine months of 1999. There were no charge-offs during the
nine-month periods ended September 30, 1999 and 1998. The bank recorded a loan
loss provision of $779,000 during the nine months ending September 30, 1999,
compared with $75,000 for the same period in 1998. The general loan loss reserve
balance as of September 30, 1999 was $1,882,000, which equates to 3.70% of total
gross loans. This compares to corresponding loan loss reserve ratios of 2.14% at
December 31, 1998, and 1.04% at September 30, 1998. As of November 24, 1999
management also had determined to charge off non-performing assets totaling
$700,000 during the fourth quarter of 1999. Of this amount, approximately
$600,000 is covered by exisiting reserves. Management plans to continue
monitoring the bank's loan loss reserve over the coming months. Moreover,
management will continue to improve the Bank's collection and loan
administration procedures and, where necessary, will charge off non-performing
loans against the bank's strengthened reserves.
The composition of loan balances as of September 30, 1999 is summarized as
follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1998
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial......................... $34,258 69.90% $33,561 66.45% $28,495 59.00%
Real Estate........................ 15,398 31.42% 17,328 34.31% 17,795 37.47%
Consumer and other................. 1,324 2.70% 890 1.76% 1,203 2.53%
------- ------ ------- ------ ------- ------
50,980 104.02% 51,779 102.52% 47,493 101.30%
Unearned loan fee income........... (85) (0.17)% (169) (0.34)% (117) (0.25)%
Allowance for loan losses.......... (1,882) (3.85)% (1,102) (2.18)% (494) (1.05)%
------- ------ ------- ------ ------- ------
$49,103 100.00% $50,508 100.00% $46,882 100.00%
======= ====== ======= ====== ======= ======
B-9
The following table shows Northern Bank's loan loss experience for the
periods indicated:
AS OF AND FOR THE
NINE MONTHS ENDED
---------------------------------
SEPT. 30, 1999 SEPT. 30, 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
Loans outstanding at end of period, Net of unearned
loan fee income.................................. $50,895 $47,376
======= =======
Average loans outstanding for the period........... $55,088 $44,433
======= =======
Reserve for loan losses balance, beginning of
year............................................. $ 1,102 $ 407
Loans charged off:
Commercial....................................... 0 0
Real Estate...................................... 0 0
Installment...................................... 0 0
Credit cards..................................... 0 0
------- -------
Total loans charged off........................ 0 0
------- -------
Recoveries
Commercial....................................... 0 0
Real Estate...................................... 0 0
Installment...................................... 0 0
Credit Cards..................................... 0 12
------- -------
Total recoveries............................... 0 12
------- -------
Net (charge-offs) recoveries....................... 0 12
Provision charged to operations.................... 780 75
------- -------
Reserve for loan losses balance, end of period..... $ 1,882 $ 494
======= =======
Ratio of net loans charged-off (recovered) to
average loans outstanding........................ 0.00% (0.03)%
Ratio of reserve for loan losses to loans at end of
period........................................... 3.70% 1.04%
DEPOSITS
Northern Bank's deposits as of September 30, 1999, were $56,024,000 compared
with $56,223,000 on December 31, 1998, a drop of less than 1%. The aggregate
amount of time certificates of deposits in denominations of $100,000 or more at
September 30, 1999, were $6,503,000 compared with $5,583,000 on December 31,
1998. Management plans to redouble its emphasis on attracting quality deposits,
and believes this emphasis will have a pronounced positive effect on the bank's
deposit base.
AS OF AND FOR THE NINE MONTHS ENDED
---------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------ ------------------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG.
BALANCE EXPENSE % RATE BALANCE EXPENSE % RATE
-------- -------- -------- -------- -------- --------
Interest-bearing checking and savings
accounts................................. $24,898 $ 772 4.15% $17,794 $ 595 4.46%
Time deposits.............................. 27,458 1,177 5.73% 20,703 944 6.08%
------- ------ ---- ------- ------ ----
Total interest-bearing deposits............ 52,356 $1,949 4.98% 38,497 $1,539 5.33%
====== ==== ====== ====
Total noninterest-bearing deposits......... 10,729 7,890
------- -------
Total noninterest and interest-bearing
deposits................................. $63,085 $46,391
======= =======
B-10
SHAREHOLDERS' EQUITY
Shareholders' equity at September 30, 1999 totaled $4,509,000 compared with
$4,735,000 at December 31, 1998. The decrease in equity reflects the
1999 year-to-date loss of $196,000 as well as a reduction of $30,000 for
unrealized losses on the Bank's available-for-sale investment portfolio.
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
established minimum requirements for capital adequacy for member banks and bank
holding companies. The requirements address both risk-based capital and
leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a bank has previously received special attention
or has a high susceptibility to interest rate risk. The cease and desist orders
have required that the bank improve its capitalization. The following reflects
Northern Bank's various capital ratios at September 30, 1999 and 1998, as
compared to applicable regulatory minimums:
SEPTEMBER 30, SEPTEMBER 30, REGULATORY
1999 1998 MINIMUM
------------- ------------- ----------
Total Risk-Based Capital to Risk-Weighted
Assets................................. 9.63% 10.58% 8.00%
Tier 1 Capital to Risk-Weighted Assets... 8.35% 9.61% 4.00%
Tier 1 Capital to Average Assets......... 6.35% 8.75% 4.00%
Tier 1 Capital is shareholders' equity less intangible assets. Risk-weighted
assets are the allocation of both assets and off-balance-sheet transactions and
liabilities at appropriate risk percentages. For example, funds that the bank
has on deposit at the Federal Reserve Bank are weighted at 0%, because there is
not risk of loss. Conversely, most commercial loan balances that are not
government-guaranteed are given a risk-weight of 100% because there is no
certainty of repayment. Total risk-based capital consists of Tier 1 capital plus
the loan loss reserves not exceeding 1.25% of risk-weighted assets.
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Northern Bank's results of operations depend substantially on net interest
income. Interest income and interest expense are affected by general economic
conditions and by competition in the marketplace. Northern Bank's interest
income and pricing strategies are driven by its asset-liability management
analysis and by local market conditions.
Northern Bank's management seeks to manage the bank's assets and liabilities
to generate a stable level of earnings in response to changing interest rates
and to manage interest rate risk. Asset-liability management involves managing
the relationship between interest rate sensitive assets and interest rate
sensitive liabilities. If assets and liabilities do not mature or reprice
simultaneously, and in equal amounts, interest rate charges may create risk to
the bank.
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at September 30, 1999
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Northern Bank's internal data, which
varies from amounts classified in the bank's financial statements. Although the
information may be useful as a general measure of interest rate risk, the data
could be significantly affected by external factors such as prepayments of loans
or early withdrawals of deposits. Each of these may significantly
B-11
influence the timing and extent of actual repricing of interest-earning assets
and interest-bearing liabilities.
LESS THAN ONE YEAR
VARIABLE RATE ONE YEAR OR LONGER TOTAL
------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds and other
investments..................... $ 2,500 $ 1,195 $ 3,525 $ 7,220
Loans............................. 39,311 2,819 8,764 50,894
------- -------- -------- -------
Total assets.................... 41,811 4,014 12,289 58,114
------- -------- -------- -------
LIABILITIES
Core deposits..................... 6,061 21,073 22,387 49,521
Jumbo CD's........................ 0 5,912 591 6,503
------- -------- -------- -------
Total liabilities............... 6,061 26,985 22,978 56,024
------- -------- -------- -------
Net gap position.................... $35,750 $(22,971) $(10,689) $ 2,090
======= ======== ======== =======
Net cumulative gap position......... $35,750 $ 12,779 $ 2,090
======= ======== ========
Cumulative gap as a percentage of
assets............................ 58.6% 21.0% 3.4%
======= ======== ========
FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
RESULTS OF OPERATIONS
Net interest income for the year ended December 31, 1998, was $3,007,000, an
increase of $656,000 or 27.89% compared to net interest income of $2,351,000 in
1997. Net interest income for 1997 was 18.70% higher than the $1,981,000
reported in 1996. These results were primarily due to an increase in the volume
of earning assets and the growth of noninterest-bearing deposits.
Loans, which generally carry a higher yield than investment securities and
other earning assets, comprised the majority of average earning assets during
1998, 1997, and 1996. Average yields on loans were 10.62% in 1998, 10.52% in
1997, and 11.97% in 1996.
Interest cost, as a percentage of earning assets, increased to 4.19% in
1998, compared to 4.10% in 1997 and 4.34% in 1996. Local urban competitive
pricing conditions and funding needs for Northern Bank's growing investments in
loans have been the primary determinants of rates paid for deposits during these
three years.
B-12
ANALYSIS OF NET INTEREST MARGIN
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
AVERAGE INCOME/ AVERAGE INCOME/ AVERAGE INCOME/
BALANCES EXPENSE % RATE BALANCES EXPENSE % RATE BALANCES EXPENSE % RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans........................ $45,712 $4,852 10.62% $35,528 $3,736 10.52% $24,981 $2,991 11.97%
Investment securities........ 1,239 76 6.12% 2,703 164 6.07% 4,615 263 5.70%
Federal funds sold........... 4,456 230 5.17% 1,375 74 5.38% 1,431 73 5.10%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest earning
assets................... 51,407 5,158 10.03% 39,606 3,974 10.03% 31,027 3,327 10.72%
------ ----- ------ ----- ------ -----
Cash and due from banks........ 2,165 1,935 1,070
Fixed assets................... 84 81 98
Loan loss allowance............ (483) (320) (187)
Other assets................... 1,023 772 470
------- ------- -------
Total assets................... $54,196 $42,074 $32,478
======= ======= =======
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts............. $18,849 $ 835 4.43% $16,961 $ 737 4.35% $11,282 $ 497 4.41%
Time deposits................ 21,707 1,317 6.07% 14,617 886 6.06% 13,939 849 6.09%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities.............. 40,556 2,152 5.31% 31,578 1,623 5.14% 25,221 1,346 5.34%
------ ----- ------ ----- ------ -----
Noninterest bearing deposits... 8,275 6,190 3,653
Other liabilities.............. 723 359 63
------- ------- -------
Total liabilities.............. 49,554 38,127 28,937
Shareholders' equity........... 4,642 3,947 3,541
------- ------- -------
Total liabilities and
shareholders' equity......... $54,196 $42,074 $32,478
======= ======= =======
Net interest income............ $3,006 $2,351 $1,981
====== ====== ======
Net interest margin (1)........ 4.73% 4.89% 5.39%
===== ===== =====
Average yield on earning
assets....................... 10.03% 10.03% 10.72%
===== ===== =====
Interest expense to earning
assets....................... 4.19% 4.10% 4.34%
===== ===== =====
Net interest income to earning
assets....................... 5.85% 5.94% 6.38%
===== ===== =====
- --------------------------
(1) Net interest margin is computed by dividing net interest income by total
average earnings assets.
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table shows the
dollar amount of the increase (decrease) in Northern Bank's net interest income
and expense and attributes such dollar
B-13
amounts to changes in volume as well as changes in rates. Rate and volume
variances have been allocated proportionally between rate and volume changes:
AVERAGE BALANCES RATES (%)
------------------------------ -------------------
INCREASE (DECREASE) DUE TO DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------- -------------------
VOLUME RATE NET CHANGE 1998 1997 CHANGE 1998 1997 CHANGE
-------- -------- ---------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................... $1,070 $ 45 $1,116 $45,712 $35,528 $10,184 10.62% 10.52% 0.10 %
Investment securities.... (89) 1 (88) 1,239 2,703 (1,464) 6.12% 6.07% 0.05 %
Federal funds sold....... 165 (8) 157 4,456 1,375 3,081 5.17% 5.35% (0.18)%
------ ---- ------- ------- ------- ----- ----- -----
Total.................. 1,146 38 1,184 $51,407 $39,606 $11,801 10.03% 10.03% 0.00 %
------ ---- ------ ======= ======= ======= ===== ===== =====
Interest-bearing
liabilities:
Interest bearing checking
and savings accounts... (82) (16) (98) $18,849 $16,961 $ 1,888 4.43% 4.35% 0.08 %
Time deposits............ (430) (1) (431) 21,707 14,617 7,090 6.07% 6.06% 0.01 %
------ ---- ------ ------- ------- ------- ----- ----- -----
Total.................... (512) (17) (529) $40,556 $31,578 $ 8,978 5.31% 5.14% 0.17 %
------ ---- ------ ======= ======= ======= ===== ===== =====
Net increase (decrease) in
net interest income...... $ 634 $ 21 $ 655
====== ==== ======
PROVISION FOR LOAN LOSSES AND LOAN LOSS EXPERIENCE
For the years ended December 31, 1998, 1997 and 1996, Northern Bank made
provisions for loan losses of $683,000, $205,500 and $99,600, respectively. In
1998, the Bank charged no losses to the allowance for loan losses. During 1997
and 1996, the Bank charged off $29,000 and $16,000, respectively, against the
allowance for loan losses.
NON-INTEREST INCOME
Non-interest income, which represents income from fees and service charges,
gains on sales of loans and securities, and gains on sales of premises,
furnishings and equipment, as well as other fee and service charge income, grew
from $32,000 in 1996 to $229,000 in 1997, and decreased to $184,000 in 1998. The
increase from 1996 to 1997 was principally due to gain on sale of certain
government guaranteed loans. The decrease from 1997 to 1998 was primarily due to
fewer sales of loans. Service charges for 1998 were $46,000, 58.62% higher than
the $29,000 reported in 1997; 1997 service charges exceeded the 1996 reported
services charges of $20,000 by 45.00%. In 1998, gain on sale of government
guaranteed loans represented 43.80% of total non-interest income, down from
73.60% in 1997. The table below shows a breakdown of all non-interest income by
category:
YEAR ENDING
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges and fees on deposit accounts............. $ 46 $ 29 $20
Gain on sale of loans.................................... 81 169 --
Gain on sale of investments.............................. 2 1 --
Gain on sale of equipment................................ 8 -- --
Other income............................................. 47 30 12
---- ---- ---
Total non-interest income................................ $184 $229 $32
==== ==== ===
B-14
NON-INTEREST EXPENSE
Noninterest expense was $2,409,000 for the year ended December 31, 1998, an
increase from $2,067,000 for the year ended December 31, 1997, and $2,073,000
for the year ended December 31, 1996. The change was primarily due to increases
in salary and benefit expense, net occupancy expense, and data processing costs.
In 1998, the majority of the change was due to opening seven new full-service
limited hour branches in retirement residences. In 1998, Northern Bank's total
non-interest expense was 45.10% of total revenues, while in 1997 and 1996 it was
47.70% and 61.70%, respectively, of total revenues.
Salary and benefit expense was $1,004,000 in 1998, $894,000 in 1997, and
$1,066,000 in 1996. As of December 31, 1998, Northern Bank had 28 full-time
equivalent employees, which compares to 20 as of December 31, 1997, and 22 as of
December 31, 1996. The increase in this expense category is a result of opening
seven retirement residence branches and of an increase in personnel necessary to
meet the demands of our growing customer base.
Net occupancy expense consists of depreciation on equipment, maintenance and
repair expenses, utilities, and related expenses. Northern Bank's net occupancy
expense has decreased steadily over the three years most recently ended. This
expense category was $244,000 in 1998, a decrease of $91,000, or 27.10%, from
the $334,000 reported in 1997. From 1996 to 1997, net occupancy expense
decreased by $15,000, or 4.30% from $349,000 to $334,000. These decreases,
especially in 1998, reflect the first full year of benefit from the payoff of
our initial lease of equipment, furniture and computer resources. Northern Bank
continues to invest in computer systems, which have been upgraded throughout the
organization.
Other noninterest expense increases resulted from investments in technology
and data processing and in new service delivery channels to enable us to
continue our focus on efficient, personal business services. Advertising and
promotion expense increased from $95,000 in 1996 to $134,000 in 1997, an
increase of 41.05%. In 1998, expenses in this category went up an additional
42.54% to $191,000. This growth reflects expenses we incurred in opening seven
new retirement residence branches, plus the growth of our customer and account
base. Data processing expenses increased $68,000, or 40.10%, in 1998 over the
previous year.
INCOME TAXES
The Bank recorded income tax benefits of $22,000 in 1998, $120,000 in 1997,
and $195,000 in 1996. These benefits primarily resulted from adjustments the
Bank made to its deferred tax valuation allowance for the years then ended.
B-15
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
DECEMBER 31, INCREASE (DECREASE)
------------------------------ --------------------------------------------
1998 1997 1996 12/31/98--12/31/97 12/31/97--12/31/96
-------- -------- -------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds sold............... $ 3,675 $ 200 $ 2,200 $ 3,475 1,737.50 % $(2,000) (90.91)%
Investments...................... 1,108 2,048 6,224 (940) (45.90)% (4,176) (67.10)%
Loans............................ 50,508 40,702 29,063 9,806 24.09 % 11,639 40.05 %
Other assets*.................... 5,849 1,580 4,259 4,269 270.19 % (2,679) (62.90)%
------- ------- ------- ------- -------- ------- ------
Total assets..................... $61,140 $44,530 $41,746 $16,610 37.30 % $ 2,784 6.67 %
======= ======= ======= ======= ======== ======= ======
LIABILITIES
Noninterest-bearing deposits..... $ 8,918 $ 7,698 $ 7,112 $ 1,220 15.85 % $ 586 8.24 %
Interest-bearing deposits........ 47,305 32,508 30,840 14,797 45.52 % 1,668 5.41 %
------- ------- ------- ------- -------- ------- ------
Total deposits................... 56,223 40,206 37,952 16,017 39.84 % 2,254 5.94 %
Other liabilities**.............. 182 112 68 70 62.50 % 44 64.71 %
------- ------- ------- ------- -------- ------- ------
Total liabilities................ 56,405 40,318 38,020 16,087 39.90 % 2,298 6.04 %
SHAREHOLDERS' EQUITY............... 4,735 4,212 3,726 523 12.42 % 486 13.04 %
------- ------- ------- ------- -------- ------- ------
Total liabilities and
shareholders' equity........... $61,140 $44,530 $41,746 $16,610 37.30 % $ 2,784 6.67 %
======= ======= ======= ======= ======== ======= ======
- ------------------------
* Includes cash and due from banks, fixed assets, accrued interest receivable
and loans held for sale.
** Includes accrued interest payable and other liabilities.
INVESTMENTS
A year-to-year comparison shows that our investment portfolio at
December 31, 1998, totaled $4,783,000, compared to $2,248,000 at December 31,
1997, and $8,424,000 at December 31, 1996. This represents an increase of
112.80% between 1997 and 1998, and a decrease of 73.00% between 1996 and 1997.
Increases or decreases in the investment portfolio are primarily a function of
loan demand and changes in Northern Bank's deposit structure.
Northern Bank's policies require that investment securities be identified as
either held-to-maturity or available-for-sale. Held-to-maturity securities are
those that Northern Bank has the intent and ability to hold until they mature or
are called. Available-for-sale securities are those that management may sell if
liquidity requirements dictate or if alternative investment opportunities arise.
The mix of available-for-sale and held-to-maturity investment securities is
determined by management, based on Northern Bank's asset-liability policy,
management's assessment of the relative liquidity of Northern Bank, and other
factors.
At December 31, 1998, the investment portfolio consisted entirely of
available-for-sale securities, with no held-to-maturity securities. At
December 31, 1997, Northern Bank's investment portfolio consisted of 62%
available-for-sale securities and 38% held-to-maturity securities. On
December 31, 1996, available-for-sale securities were 60% of the portfolio and
held-to-maturity securities were 40% of the portfolio. The present mix provides
greater investment flexibility by placing more of the portfolio in the
available-for-sale category.
B-16
At December 31, 1998, Northern Bank's investment portfolio had total net
unrealized gains of approximately $1,000. This compares to net unrealized gains
of approximately $6,000 at December 31, 1997 and $5,000 at December 31, 1996.
Unrealized gains and losses reflect changes in market conditions and do not
represent the amount of actual profits or losses Northern Bank ultimately may
realize. Actual realized gains and losses occur at the time investment
securities are sold or redeemed.
Federal funds sold are short-term investments, which mature on a daily
basis. Northern Bank invests in these instruments to provide for additional
earnings on excess available cash balances. Because of their short maturities,
the balance of federal funds sold fluctuates dramatically on a day-to-day basis.
The balance on any one day is influenced by cash demands, customer deposit
levels, loan activity, and other investment transactions. Investments in federal
funds sold totaled $3,675,000 at December 31, 1998, compared to $200,000 at
December 31, 1997 and $2,200,000 at December 31, 1996.
Investment securities at the dates indicated consisted of the following:
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- --------------------------------- ---------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
BOOK MARKET BOOK MARKET BOOK MARKET
VALUE VALUE % YIELD VALUE VALUE % YIELD VALUE VALUE % YIELD
-------- ----------- -------- -------- ----------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
US treasuries and
agencies
available-for-sale:
One year or less..... $ -- $ -- -- $ 250 $ 250 5.51% $1,486 $1,486 5.50%
One to five years.... 506 509 6.10% 999 1,002 6.45% 2,239 2,244 6.10%
Five to ten years.... 601 599 6.13% -- -- -- -- -- --
US treasuries and
agencies held-to-
maturity:
One year or less..... -- -- -- 596 598 6.30% 1,704 1,706 5.58%
One to five years.... -- -- -- 200 197 5.40% 789 787 6.09%
Five to ten years.... -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total securities... $1,107 $1,108 6.12% $2,045 $2,047 6.17% $6,218 $6,223 5.81%
====== ====== ====== ====== ====== ======
LOANS
Northern Bank's loan policies and procedures establish the basic guidelines
governing lending operations. Generally, the guidelines address the types of
loans we seek, our target markets, underwriting and collateral requirements,
terms, interest rate and yield considerations, and compliance with laws and
regulations. All loans or credit lines are subject to approval procedures and
amount limitations. These limitations apply to the borrower's total outstanding
indebtedness to Northern Bank, including the indebtedness of any guarantor. The
policies are reviewed and approved at least annually by our Board of Directors.
We supplement our own supervision of the loan underwriting and approval process
with annual audited financial statements from experienced outside professionals.
Branch officers are charged with loan origination in compliance with
underwriting standards overseen by Northern Bank's credit administration
department and in conformity with established loan policies. On an annual basis,
the Board of Directors determines our authority and delegates lending authority
to the internal loan committee. Northern Bank's internal loan committee consists
of the President and the Vice President, Commercial Lending. Delegated authority
to the internal loan committee may include authority related to loans, letters
of credit, overdrafts, uncollected funds, and such other authority as determined
by the Board.
B-17
The Vice President, Commercial Lending, has authority as Credit
Administrator to approve loans up to a lending limit set by the Board of
Directors, which was $300,000 at December 31, 1998. All loans above the Credit
Administrator's lending limit and up to $500,000 on business loans, or up to
$750,000 on real estate loans, are approved by the Bank's internal loan
committee. Loans that exceed the pre-established lending limits must be
conditionally approved by Northern Bank's internal loan committee, and are then
subject to final approval by the Board's loan committee. Minutes from Northern
Bank's internal loan committee and the Board's loan committee meeting are
reviewed by the full Board of Directors at regularly scheduled monthly meetings.
The Board's loan committee consists of two outside directors and the President.
Northern Bank's legal lending limit as of December 31, 1998 was $710,000 for
business loans and $1,180,000 for loans secured by real estate.
Net outstanding loans totaled $50,508,000 at December 31, 1998, representing
an increase of $9,806,000, or 24.10%, compared to $40,702,000 at December 31,
1997. Loan commitments grew to $15,979,000 as of December 31, 1998, representing
an increase of $5,919,000 over year-end 1997.
Northern Bank's net loan portfolio at December 31, 1998 includes commercial
loans (64.60%), loans secured by real estate (34.31%) and other loans (1.77%).
These percentages are generally consistent with previous reporting periods.
Loans secured by real estate include loans made for purposes other than
construction loans and financing purchases of real property, while commercial
loans are made for the purposes such as accounts receivable, inventory financing
and equipment purchases. In some case, real property serves as collateral for
these loans.
This table presents the composition of Northern Bank's loan portfolio at the
dates indicated:
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial....................... $33,561 66.45 % $22,912 56.29 % $17,982 61.87 %
Real estate loans:
Commercial property............ 1,129 2.23 % 1,510 3.72 % 1,457 5.01 %
Land development............... 6,301 12.47 % 3,931 9.66 % 2,485 8.55 %
Construction................... 9,605 19.02 % 8,531 20.96 % 5,241 18.03 %
Residential.................... 293 0.58 % 2,359 5.80 % 1,718 5.92 %
------- ------ ------- ------ ------- ------
Total real estate............ 17,328 34.31 % 16,331 40.13 % 10,901 37.51 %
Consumer......................... 584 1.16 % 1,059 2.60 % 378 1.30 %
Other............................ 306 0.61 % 920 2.24 % 101 0.35 %
------- ------ ------- ------ ------- ------
Total loans.................. 51,779 102.52 % 41,222 101.26 % 29,362 101.03 %
Less deferred loan fees.......... (169) (0.34)% (113) (0.27)% (69) (0.24)%
Less reserve for loan losses..... (1,102) (2.18)% (407) (0.99)% (230) (0.79)%
------- ------ ------- ------ ------- ------
Loans receivable, net............ $50,508 100.00 % $40,702 100.00 % $29,063 100.00 %
======= ====== ======= ====== ======= ======
B-18
The following table shows the maturities and sensitivity of Northern Bank's
loans to changes in interest rates as of December 31, 1998:
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL LOANS
------------ ------------- ---------- -----------
(DOLLARS IN THOUSANDS)
Commercial loans................. $26,778 $5,760 $1,023 $33,561
Real estate loans
Commercial property............ 894 235 -- 1,129
Land development............... 5,904 163 234 6,301
Construction................... 9,605 -- -- 9,605
Residential.................... -- 190 103 293
------- ------ ------ -------
Total real estate loans...... 16,403 588 337 17,328
------- ------ ------ -------
Installment...................... 315 269 584
Other............................ 306 -- -- 306
------- ------ ------ -------
Total loans.................. $43,802 $6,617 $1,360 $51,779
======= ====== ====== =======
Fixed interest rate loans........ $10,013
=======
Variable interest rate loans..... $41,769
=======
LOAN LOSSES AND RECOVERIES
The reserve for loan losses is established by providing for loan losses as a
charge against expenses. Loans are charged against the reserve for loan losses
when management believes it is unlikely that we will collect all or part of the
principal. The reserve is an amount management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible, based on
our evaluation of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration a number of factors, including changes
in the nature and volume of our loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrower's ability to repay. Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions, collection efforts and collateral position, that the borrower's
financial condition is such that collection of interest is doubtful. In
addition, Northern Bank seeks to guard against regional financial instability
for the Portland, Oregon, metropolitan area for both the general market and our
own customer base. Finally, in 1998 we gave very special attention and
consideration to the fact that for more than four years Northern Bank has been
one of our market's fastest-growing financial institutions in a market that has
been marked by a very long period of growth and prosperity.
Even though we maintain policies, procedures and personnel dedicated to
recording and maintaining quality commercial and real estate credits, we take
into account the special risks inherent in lending to small businesses and
residential real estate developers, especially in a market that has sustained a
growth rate as significant and consistent as has the Portland market. In
reviewing our loan portfolio on December 31, 1998, we considered these factors,
specifically forecasts projecting a potential economic downturn for the Portland
metropolitan area and similar actions of competing Banks reviewing the same
economic projections, Northern Bank decided to increase its loan loss reserves
from $206,000 in 1997 to $683,000 in 1998.
B-19
Northern Bank's provision for loan losses was $683,000, $206,000, and
$100,000 as of December 31, 1998, 1997, and 1996, respectively.
The following table shows Northern Bank's loan loss experience for the
periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Loans outstanding at end of period, net of unearned loan fee
income..................................................... $ 51,610 $ 41,109 $ 29,293
========= ========= =========
Average loans outstanding for the period..................... $ 45,712 $ 35,528 $ 24,981
========= ========= =========
Reserve for loan losses balance, beginning of year........... $ 407 $ 230 $ 147
Loans charged off:
Commercial................................................. 0 0 0
Real estate................................................ 0 0 0
Installment................................................ 0 0 0
Credit cards............................................... 0 (29) (16)
--------- --------- ---------
Total loans charged off.................................. 0 (29) (16)
--------- --------- ---------
Recoveries
Commercial................................................. 0 0 0
Real estate................................................ 0 0 0
Installment................................................ 0 0 0
Credit cards............................................... 12 0 0
--------- --------- ---------
Total recoveries......................................... 12 0 0
--------- --------- ---------
Net (charge-offs) recoveries................................. 12 (29) (16)
Provision charged to operations.............................. 683 206 100
--------- --------- ---------
Reserve for loan losses balance, end of period............... $ 1,102 $ 407 $ 230
========= ========= =========
Ratio of net loans charged-off (recovered) to average loans
outstanding................................................ (0.03%) 0.08% 0.06%
Ratio of reserve for loan losses to loans at end of period... 2.14% 0.99% 0.79%
The adequacy of our reserve for loan losses should be measured in the
context of several key ratios: (1) the ratio of the reserve to total outstanding
loans; (2) the ratio of total nonperforming loans to total loans; and, (3) the
ratio of net charge-offs (recoveries) to average loans outstanding. Since 1996,
Northern Bank's ratio of the reserve for loan losses to total loans has ranged
from 0.79% to 2.14%. The amounts provided by these ratios have been sufficient
to fund Northern Bank's charge-offs, which have not historically been material,
and to provide for potential losses as the loan portfolio has grown. These
ratios have also been consistent with the level of nonperforming loans to total
loans. From December 31, 1996 through December 31, 1998, nonperforming loans to
total loans have ranged from a low of none to a high of 0.88%. This experience
tracks with changes in the ratio of the reserve for loan losses to total loans
and with the actual balances maintained in the reserve account.
Northern Bank has procedures to identify and monitor restructured loans.
Loan revisions and modifications are commonly provided to meet the credit needs
of borrowers in weakened financial condition and to enhance ultimate collection.
As of December 31, 1998, Northern Bank identified no loans that had been
classified as restructured.
B-20
At each year ended December 31, 1998, 1997, 1996, Northern Bank had no
assets in the other real estate owned ("OREO") category, which represents assets
held through loan foreclosure or recovery activities.
DEPOSITS
The following table sets forth the average balances of Northern Bank's
interest-bearing deposits, interest expense, and average rates paid for the
periods indicated:
YEARS ENDED
--------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- ----------------------------------- ----------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG. AVERAGE INTEREST
BALANCE EXPENSE % RATE BALANCE EXPENSE % RATE BALANCE EXPENSE
--------- --------- --------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Interest-bearing checking and
savings accounts.............. $ 18,849 $ 835 4.43% $ 16,961 $ 737 4.35% $ 11,282 $ 497
Time deposits................... 21,707 1,317 6.07% 14,617 886 6.06% 13,939 849
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits...................... 40,556 $ 2,152 5.31% $ 31,578 $ 1,623 5.14% $ 25,221 $ 1,346
========= ========= =========
Total noninterest-bearing
deposits...................... 8,275 6,190 3,653
--------- --------- ---------
Total noninterest and interest
bearing deposits.............. $ 48,831 $ 37,768 $ 28,874
========= ========= =========
AVG.
% RATE
-----------
Interest-bearing checking and
savings accounts.............. 4.41%
Time deposits................... 6.09%
Total interest-bearing
deposits...................... 5.34%
Total noninterest-bearing
deposits......................
Total noninterest and interest
bearing deposits..............
Deposits increased from December 31, 1997, to December 31, 1998, by
$16,017,000, or 39.84% to $56,223,000. Management attributes this increase to
Northern Bank's ongoing marketing efforts, the opening of our retirement
residence branches, and to continued customer dissatisfaction with customers of
super-regional banks as a result of the perceived declining service levels. We
experienced increases in all three deposit categories: non-interest-bearing
deposits (15.90% increase), interest-bearing demand deposits and other (19.10%
increase), and time deposits (80.10% increase).
At December 31, 1997, total deposits were $40,206,000, an increase of
$2,254,000 or 5.94%, from total deposits of $37,952,000 at December 31, 1996.
Our deposit growth in 1997 resulted from a combination of pricing strategies and
increased marketing.
The growth in deposit accounts was primarily in interest-bearing and
noninterest-bearing demand accounts. Non-interest-bearing demand deposits, also
called "core deposits," continued to be an important portion of Northern Bank's
deposit base. To the extent we can fund operations with core deposits, our net
interest spread, which is the difference between interest income and interest
expense, will improve. At December 31, 1998, core deposits accounted for 15.90%
of total deposits, down slightly from 19.10% as of December 31, 1997 and 18.70%
as of December 31, 1996.
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as we adjust our pricing and product strategies based on market conditions,
including competing deposit products. At December 31, 1998, total interest-
bearing deposit accounts were $47,305,000, an increase of $14,797,000, or
45.50%, from December 31, 1997. From December 31, 1996 interest-bearing deposits
increased by $1,668,000 or 5.40% to $32,508,000 as of December 31, 1997.
Increases were strong in all interest-bearing deposit categories, including
money market accounts, and time deposits. Interest-bearing demand accounts
increased $3,513,000, or 19.10%, from December 31, 1997 to 1998, and $2,066,000,
or 12.60%, from 1996 to 1997. The growth in these deposits has, in management's
opinion, been helped by continued customer perceptions of declining service
levels provided by super-regional bank competitors together with opening seven
retirement residence branches.
B-21
Northern Bank has brokered deposits and high-priced time deposits, but does
not actively seek new brokered deposits. At December 31, 1998, time certificates
of deposits of $100,000 or more totaled $5,583,000, or 9.90% of total
outstanding deposits, compared to $5,352,000, or 13.30%, of total outstanding
deposits at December 31, 1997 and $5,809,000, or 15.30%, of total outstanding
deposits at December 31, 1996.
The following table sets forth, by year of maturity, all time certificates
of deposit accounts outstanding at December 31, 1998 (in thousands):
YEAR OF MATURITY AMOUNT MATURING
- ------------------------------------------------------------------ ----------------
1999.............................................................. $ 17,072
2000.............................................................. 6,784
2001.............................................................. 1,016
2002.............................................................. 493
----------
Total............................................................. $ 25,365
==========
SHORT-TERM BORROWINGS. Northern Bank has no short-term borrowings.
SHAREHOLDERS' EQUITY. Shareholders' equity increased $523,000 during 1998.
Shareholders' equity at December 31, 1998, was $4,735,000 compared to $4,212,000
at December 31, 1997. This increase reflects net income and an increase due to
exercise of stock options.
During 1998 an 11 1/2-for-10 stock split was declared and became effective
April 20, 1998. There have been no other material changes to Northern Bank's
capitalization since December 31, 1994.
ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY
The following table sets forth the dollar amount of maturing
interest-earning assets and interest-bearing liabilities at December 31, 1998,
and the difference between them for the maturing or repricing periods indicated.
The amounts in the table are derived from Northern Bank's internal data, which
varies from amounts classified in our financial statements. Although the
information may be useful as a general measure of interest rate risk, the data
could be significantly affected by external factors such as prepayments of loans
or early withdrawals of deposits. Each of these may significantly influence the
timing and extent of actual repricing of interest-earning assets and
interest-bearing liabilities.
LESS THAN ONE YEAR
IMMEDIATE ONE YEAR OR LONGER TOTAL
----------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Federal funds and other investments.............................. $ 3,675 $ -- $ 1,108 $ 4,783
Loans.............................................................. 41,766 2,036 7,977 51,779
--------- ---------- ---------- ---------
Total assets..................................................... 45,441 2,036 9,085 56,562
LIABILITIES
Core deposits.................................................... 6,172 19,178 25,290 50,640
Jumbo CD's....................................................... -- 4,067 1,516 5,583
--------- ---------- ---------- ---------
Total liabilities.............................................. 6,172 23,245 26,806 56,223
--------- ---------- ---------- ---------
$ 39,269 $ (21,209) $ (17,721) $ 339
========= ========== ========== =========
Net cumulative position............................................ $ 39,269 $ 18,060 $ 339
========= ========== ==========
Cumulative gap as a percentage of assets........................... 64.2% 29.5% 0.6%
========= ========== ==========
B-22
Northern Bank's sensitivity to increases or decreases in future interest
income and expense due to hypothetical increases or increases in interest rates
is as follows at December 31, 1998:
Increase (Decrease) Financial Impact on
In Interest Rates Net Interest Margin
- ------------------------------------------ ------------------------------------------
+2% $ (2,000)
+1% (24,000)
-1% (48,000)
-2% (50,000)
LIQUIDITY
Northern Bank has implemented procedures and policies to maintain a
relatively liquid position to enable us to respond to changes in the financial
environment and to ensure sufficient funds are available to meet customers'
needs for borrowing and deposit withdrawals. Generally, Northern Bank's major
sources of liquidity are customer deposits, sales and maturities of investment
securities, the use of federal funds markets, and net cash provided by operating
activities. Scheduled loan repayments are a very stable source of funds. Deposit
inflows and unscheduled loan prepayments, which are influenced by general
interest rate levels, interest rates available on other investments,
competition, economic conditions, and other factors, are not. Liquid asset
balances include cash, amounts due from other Banks, federal funds sold, and
nonpledged securities available-for-sale. At December 31, 1998, these liquid
assets totaled $8,325,000 or 13.60% of total assets as compared to $2,169,000 or
4.90% of our total assets at December 31, 1997.
Cash from operating activities included net income of $120,000 in 1998, and
is adjusted for noncash items and increases or decreases in cash due to changes
in certain assets and liabilities. Investing activities consist primarily of
proceeds from sales and expenditures for purchases of securities, as well as the
impact of the net growth in loans. Financing activities present the cash flows
associated with deposit accounts and the exercise of stock options.
At December 31, 1998, Northern Bank had outstanding loan commitments of
$15,979,000. Nearly all of these commitments represented unused portions of
credit lines available to presold construction loans, and to business credit
facilities and revolving loans. Many of these credit lines will not be fully
drawn upon and, accordingly, the aggregate commitments do not necessarily
represent future cash requirements. Management believes that Northern Bank's
sources of liquidity are more than adequate to meet likely calls on outstanding
commitments; however, there can be no assurance in this regard.
CAPITAL
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
established minimum requirements for capital adequacy for Bank holding companies
and member Banks. The requirements address both risk-based capital and leveraged
capital. The regulatory agencies may establish higher minimum requirements if,
for example, a Bank has previously received special attention or has a high
susceptibility to interest rate risk.
B-23
The following reflects Northern Bank's various capital ratios at
December 31, 1998, 1997 and 1996, as compared to regulatory minimums:
DECEMBER 31,
------------------------------- REGULATORY
1998 1997 1996 MINIMUM
--------- --------- --------- -------------
Total risk-based capital to risk-weighted assets............................. 9.60% 11.26% 13.11% 8.00%
Tier 1 capital to risk-weighted assets....................................... 8.34% 10.23% 12.29% 4.00%
Tier 1 capital to average assets............................................. 7.57% 8.95% 8.88% 4.00%
THE YEAR 2000 ISSUE
NORTHERN BANK'S STATE OF READINESS. Management completed an assessment of
the Bank's automated systems during 1999 to minimize the likelihood of potential
"Year 2000" problems, and implemented a plan to resolve those issues, including
purchasing appropriate computer technology where necessary. Northern Bank's Year
2000 Plan had five phases: awareness, assessment, renovation, testing and
implementation. Northern Bank did not experience any significant Year 2000
problems, but will continue to monitor all areas and systems for compliance
throughout the coming months.
PRINCIPAL HOLDERS OF NORTHERN BANK COMMON STOCK; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of September 30, 1999, the number and
percentage of outstanding shares of Northern Bank common stock beneficially
owned by each person known to Northern Bank to be the beneficial owner of more
than five percent of the outstanding Northern Bank common stock, by each
director and executive officer of Northern Bank, and by all directors and
executive officers of Northern Bank as a group. The number of shares
beneficially owned is deemed to include shares of Northern Bank common stock as
to which the beneficial owner has either investment or voting power. Unless
otherwise indicated, and except for voting and investment powers held jointly
with a person's spouse, the persons and entities named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.
SHARES PERCENTAGE
--------- -----------
James A. Wills......................................................... 0 *
John H. Holloway, Jr.(3)............................................... 2,185 *
William V. Spicer(4)................................................... 2,185 *
John Walrod(4)......................................................... 6,800 *
Christopher Brown(4)................................................... 5,750 *
Kurt Wollenberg(5)..................................................... 575 *
Reliable Credit Association(6)......................................... 138,000 11.26
All directors and executive officers as a group (6 persons)(7)......... 17,495 1.03
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each shareholder is care of
Northern Bank of Commerce, 1001 S.W. Fifth Avenue, Suite 250, Portland, OR
97204.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934, as amended. Shares not outstanding that are subject to options
exercisable by the holder thereof within 60 days of September 30, 1999 are
deemed outstanding for the purposes of calculating the number and percentage
owned by such shareholder, but not deemed outstanding for the purpose of
calculating
B-24
the percentage owned by each other shareholder listed. Unless otherwise
noted, all shares listed as beneficially owned by a shareholder are actually
outstanding.
(3) Does not include options exercisable to purchase 213,589 shares of common
stock within 60 days of September 30, 1999.
(4) Does not include options exercisable to purchase 37,904 shares of common
stock within 60 days of September 30, 1999.
(5) Does not include options exercisable to purchase 30,581 shares of common
stock within 60 days of September 30, 1999.
(6) Address is 1195 S.E. Powell Blvd., Portland, Oregon 97202.
(7) Does not include options exercisable to purchase 357,882 shares of common
stock within 60 days of September 30, 1999.
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this joint proxy statement, including
statements regarding the anticipated development of the Northern Bank's business
and performance of certain of its holdings, as well as the intent, belief, or
current expectations of Northern Bank and the bank's management with respect to
operating performance and holdings, are intended to provide a reference as to
management's anticipations regarding future events. Because risk and
uncertainties accompany those statements, actual results will differ from
Northern Bank's expectations, and those variations may be material and adverse.
Factors that could cause actual results to differ materially and adversely from
those expressed or implied in those forward-looking statements include, but are
not limited to, the issues discussed in "Risk Factors," above, as well as the
risk factors discussed in the bank's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998, its Quarterly Report on Form 10-QSB on and for the
period ended September 30, 1999, and in other filings made by the bank with the
Federal Deposit Insurance Corporation ("FDIC") and the NASDAQ Stock Market.
B-25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Northern Bank of Commerce
We have audited the accompanying balance sheets of Northern Bank of Commerce
as of December 31, 1998 and 1997, and the related statements of income and
comprehensive income, changes in shareholders' equity, and cash flows for the
years ended December 31, 1998, 1997, and 1996. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northern Bank of Commerce as
of December 31, 1998 and 1997, and the results of its operations and cash flows
for the years ended December 31, 1998, 1997, and 1996, in conformity with
generally accepted accounting principles.
Portland, Oregon
January 15, 1999
B-26
NORTHERN BANK OF COMMERCE
BALANCE SHEETS
ASSETS
DECEMBER 31,
SEPTEMBER 30, ----------------------------
1999 1998 1997
------------- ------------- -------------
(UNAUDITED)
Cash and due from banks............................................. $ 3,704,403 $ 3,541,558 $ 717,158
Federal funds sold.................................................. 2,500,000 3,675,000 200,000
------------- ------------- -------------
Total cash and cash equivalents................................... 6,204,403 7,216,558 917,158
Investment securities held-to-maturity.............................. -- -- 795,619
Investment securities, available-for-sale........................... 4,719,886 1,108,376 1,252,145
Receivable from loan participation.................................. -- 1,379,200 --
Loans, net of unearned income and allowance for loan losses......... 49,012,395 50,507,773 40,701,796
Premises, furniture, and equipment, net............................. 106,711 91,233 68,295
Accrued interest receivable and other assets........................ 943,122 815,866 743,148
Organizational costs, net of amortization........................... -- 20,704 51,761
------------- ------------- -------------
Total assets...................................................... $ 60,986,517 $ 61,139,710 $ 44,529,922
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
SEPTEMBER 30,
1999 1998 1997
------------- ------------- -------------
(UNAUDITED)
LIABILITIES
Demand deposits................................................... $ 9,849,488 $ 8,918,052 $ 7,697,695
Money market and other interest-bearing accounts.................. 21,557,899 21,940,355 18,427,395
Time deposits..................................................... 24,616,831 25,364,831 14,080,767
------------- ------------- -------------
Total deposits.................................................. 56,024,218 56,223,238 40,205,857
Accrued interest payable and other liabilities.................... 453,596 181,606 112,544
------------- ------------- -------------
Total liabilities............................................... 56,477,814 56,404,844 40,318,401
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 11,500,000 shares authorized,
1,225,597, 1,225,597, and 1,009,674 shares issued and
outstanding at September 30, 1999, and December 31, 1998 and
1997, respectively.............................................. 1,225,597 1,225,597 1,009,674
Surplus........................................................... 2,960,902 2,960,902 2,736,522
Undivided profits................................................. 351,425 547,420 462,013
Accumulated other comprehensive income, net of taxes.............. (29,221) 947 3,312
------------- ------------- -------------
Total shareholders' equity...................................... 4,508,703 4,734,866 4,211,521
------------- ------------- -------------
Total liabilities and shareholders' equity...................... $ 60,986,517 $ 61,139,710 $ 44,529,922
============= ============= =============
See accompanying notes.
B-27
NORTHERN BANK OF COMMERCE
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
INTEREST INCOME
Interest and fees on loans............... $ 4,297,178 $ 3,570,148 $ 4,852,400 $ 3,736,262 $ 2,991,060
Interest on held-to-maturity investment
securities............................. -- -- 33,612 75,602 140,085
Interest on available-for-sale investment
securities............................. 76,196 58,000 42,210 88,349 123,120
Interest on federal funds sold........... 318,218 134,235 230,151 73,642 73,187
------------ ------------ ------------ ------------ ------------
Total interest income.................. 4,691,592 3,762,383 5,158,373 3,973,855 3,327,452
INTEREST EXPENSE
Interest on deposits..................... 1,948,898 1,538,812 2,151,670 1,622,882 1,346,781
------------ ------------ ------------ ------------ ------------
Net interest income.................... 2,742,694 2,223,571 3,006,703 2,350,973 1,980,671
PROVISION FOR LOAN LOSSES.................. 779,186 75,000 683,000 205,500 99,600
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses.......................... 1,963,508 2,148,571 2,323,703 2,145,473 1,881,071
NONINTEREST INCOME
Gain on sale of loans.................... -- -- 80,466 168,626 --
Service charges and fees................. 48,109 21,628 46,070 28,758 20,052
Gain (loss) on sale of available-for-
sale investment securities............. -- -- 1,921 1,529 (130)
Gain on sale of premises, furniture, and
equipment.............................. -- -- 8,432 -- --
Other income............................. 52,457 41,427 46,714 29,988 11,674
------------ ------------ ------------ ------------ ------------
Total noninterest income............... 100,566 63,055 183,603 228,901 31,596
NONINTEREST EXPENSES
Salaries and related
payroll expenses....................... 993,317 731,158 1,004,437 893,964 1,065,769
Net occupancy............................ 186,020 186,602 243,936 334,467 349,471
Data processing.......................... 215,834 160,525 237,364 169,446 150,366
Advertising and promotional.............. 105,312 133,299 190,845 134,316 94,845
Communications........................... 78,202 51,325 74,704 53,569 46,924
Professional fees........................ -- 35,979 46,391 41,835 40,593
Supplies................................. 46,325 55,755 76,857 33,014 34,216
Other expenses........................... 635,059 385,234 534,943 406,152 290,821
------------ ------------ ------------ ------------ ------------
Total noninterest expenses............. 2,260,069 1,739,877 2,409,477 2,066,763 2,073,005
INCOME (LOSS) BEFORE INCOME TAXES.......... (195,995) 471,749 97,829 307,611 (160,338)
INCOME TAX BENEFIT......................... -- 138,538 22,240 119,740 195,000
------------ ------------ ------------ ------------ ------------
NET INCOME................................. (195,995) 333,211 120,069 427,351 34,662
------------ ------------ ------------ ------------ ------------
B-28
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- -------------------------------
1999 1998 1998 1997 1996
---------- --------- --------- --------- ---------
(UNAUDITED)
OTHER COMPREHENSIVE INCOME (LOSS), net of taxes
Unrealized (losses) gains arising during period, net
taxes................................................. $ (30,168) $ 7,558 $ (4,286) $ (3,626) $ 5,539
Less: reclassification adjustment for gains (losses)
included in net income................................ -- 1,920 1,921 1,529 (130)
---------- --------- --------- --------- ---------
Other comprehensive income............................ (30,168) 5,638 (2,365) (2,097) 5,409
---------- --------- --------- --------- ---------
COMPREHENSIVE INCOME...................................... $ (226,163) $ 338,849 $ 117,704 $ 425,254 $ 40,071
========== ========= ========= ========= =========
BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE..... $ 0.16 $ 0.28 $ 0.10 $ 0.37 $ 0.03
========== ========= ========= ========= =========
DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE... $ 0.16 $ 0.24 $ 0.09 $ 0.32 $ 0.03
========== ========= ========= ========= =========
See accompanying notes.
B-29
NORTHERN BANK OF COMMERCE
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------ UNDIVIDED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SURPLUS PROFITS INCOME EQUITY
----------- ----------- ----------- ------------ ------------------ -----------------
BALANCE, December 31,
1996..................... 1,000,584 $ 1,000,584 $ 2,685,618 $ 34,662 $ 5,409 $ 3,726,273
Stock options exercised.... 9,090 9,090 50,904 -- -- 59,994
Net income and other
comprehensive income..... -- -- -- 427,351 (2,097) 425,254
----------- ----------- ----------- ---------- ---------- -----------
BALANCE, December 31,
1997..................... 1,009,674 1,009,674 2,736,522 462,013 3,312 4,211,521
11.5 for 10 stock split.... 151,441 151,441 (151,441) -- -- --
Stock options exercised.... 64,482 64,482 305,652 -- -- 370,134
Income tax benefit from
exercise of stock
options.................. -- -- 35,507 -- -- 35,507
Transfer from undivided
profits to surplus....... -- -- 34,662 (34,662) -- --
Net income and other
comprehensive income..... -- -- -- 120,069 (2,365) 117,704
----------- ----------- ----------- ---------- ---------- -----------
BALANCE, December 31,
1998..................... 1,225,597 1,225,597 2,960,902 547,420 947 4,734,866
Net income and other
comprehensive income,
September 30, 1999,
(unaudited).............. -- -- -- (195,995) (30,168) (226,163)
----------- ----------- ----------- ---------- ---------- -----------
BALANCE, September 30,
1999..................... 1,225,597 $ 1,225,597 $ 2,960,902 $ 351,425 $ (29,221) $ 4,508,703
=========== =========== =========== ========== ========== ===========
See accompanying notes.
B-30
NORTHERN BANK OF COMMERCE
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ------------- ------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $ (195,995) $ 333,211 $ 120,069 $ 427,351 $ 34,662
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization.............. 61,178 54,270 72,269 109,197 71,623
(Gain) loss on sale of investment
securities............................... -- (1,920) (1,921) (1,529) 130
Gain on sale of premises, furniture, and
equipment................................ -- -- (8,432) -- --
Gain on sale of loans...................... -- -- (80,466) (168,626) --
Provision for loan losses.................. 779,186 75,000 683,000 205,500 99,600
Deferred taxes............................. -- (69,177) (62,127) (124,750) (195,000)
Proceeds from sales of loans
held-for-sale............................ -- -- 4,205,862 1,433,410 --
Originations and purchases of loans held-
for-sale................................. -- -- (4,125,396) (1,331,374) --
Increase (decrease) in cash due to changes
in certain assets and liabilities:
Receivable from loan participation....... -- -- (1,379,200) -- --
Accrued interest receivable and other
assets................................. 1,270,392 (7,402) (10,591) 29,541 (136,197)
Accrued interest payable and other
liabilities............................ 271,990 156,971 104,569 44,435 (10,467)
----------- ----------- ------------- ------------- -------------
Net cash from operating activities..... 2,186,751 540,953 (482,364) 623,155 (135,649)
----------- ----------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of held-to-maturity investment
securities................................. -- -- -- -- (203,666)
Purchases of available-for-sale investment
securities................................. (3,659,551) (1,106,934) (1,111,984) (505,138) (4,495,486)
Proceeds from maturities of held-to-maturity
investment securities...................... -- 600,000 800,000 1,700,000 1,500,000
Proceeds from the sale of available-for-sale
investment securities...................... -- 1,250,938 1,250,938 2,980,938 770,000
Net decrease (increase) in loans............. 716,192 (6,254,628) (10,488,977) (10,278,884) (12,692,227)
Payments made for purchase of premises,
furniture, and equipment................... (56,537) (62,329) (69,484) (39,236) (67,689)
Proceeds from sale of premises, furniture,
and equipment.............................. -- 8,257 13,756 -- --
----------- ----------- ------------- ------------- -------------
Net cash from investing activities......... (2,999,896) (5,564,696) (9,605,751) (6,142,320) (15,189,068)
----------- ----------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts.. (199,020) 12,506,630 16,017,381 2,253,792 17,867,463
Cash received from the exercise of stock
options.................................... -- 370,125 370,134 59,994 --
----------- ----------- ------------- ------------- -------------
Net cash from financing activities......... (199,020) 12,876,755 16,387,515 2,313,786 17,867,463
----------- ----------- ------------- ------------- -------------
B-31
NORTHERN BANK OF COMMERCE
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- -----------------------------------------
1998 1997 1998 1997 1996
------------- ------------ ------------ ------------- ------------
(UNAUDITED)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. $ (1,012,155) $ 7,853,012 $ 6,299,400 $ (3,205,379) $ 2,542,746
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 7,216,558 917,158 917,158 4,122,537 1,579,791
------------- ------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of period....... $ 6,204,403 $ 8,770,170 $ 7,216,558 $ 917,158 $ 4,122,537
============= ============ ============ ============= ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest....................... $ 1,920,792 $ 1,535,599 $ 2,138,123 $ 1,612,498 $ 1,336,079
============= ============ ============ ============= ============
SCHEDULE OF NONCASH ACTIVITIES
Unrealized (loss) gain on
available-for-sale investment
securities, net of taxes................... $ (30,168) $ 5,638 $ (2,365) $ (2,097) $ 5,409
============= ============ ============ ============= ============
Income tax benefit from exercise of stock
options...................................... $ -- $ 35,507 $ 35,507 $ -- $ --
============= ============ ============ ============= ============
See accompanying notes.
B-32
NOTE 1--NATURE OF OPERATIONS
Northern Bank of Commerce (the Bank) is a state-chartered institution
authorized to provide banking services in the State of Oregon. The Bank, which
operates from its headquarters in Portland, Oregon, provides commercial banking
services to small businesses and individuals located primarily in the Portland
metropolitan area. The Bank also operates seven limited-service branches in
residential retirement communities in Portland and surrounding areas. The Bank
is subject to the regulations of certain federal and state agencies and will
undergo periodic examinations by those regulatory authorities.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS--In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, and commitments as of the date of
the balance sheet and revenues and expenses for the periods. Actual results
could differ significantly from those estimates.
INVESTMENT SECURITIES--The Bank identifies its investment securities as
either "held-to-maturity" or "available-for-sale" at the time they are acquired.
Securities classified as "held-to-maturity" or "available-for-sale" conform to
the following accounting policies:
SECURITIES HELD-TO-MATURITY--Bonds, notes, and debentures for which the Bank
has the intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.
SECURITIES AVAILABLE-FOR-SALE--Available-for-sale securities consist of
bonds, notes, debentures, and certain equity securities not classified as
held-to-maturity securities. Securities are generally classified as
available-for-sale if the instrument may be sold in response to such factors as:
(1) changes in market interest rates and related changes in the security's
prepayment risk, (2) needs for liquidity, (3) changes in the availability of and
the yield on alternative instruments, and (4) changes in funding sources and
terms. Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of equity until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses.
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME--Loans are
stated at the amount of unpaid principal, reduced by an allowance for loan
losses and unearned income. Interest on loans is calculated by using the
simple-interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's reserve for loan losses.
Such agencies may require the Bank to recognize additions to the reserve based
on their judgment of information available to them at the time of their
examinations.
B-33
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate, the loans market price
or the fair value of the collateral if the loan is collateral dependent. Accrual
of interest is discontinued on impaired loans when management believes, after
considering economic and business conditions, collection efforts, and collateral
position, that the borrower's financial condition is such that collection of
interest is doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment to the yield of the related loan.
PREMISES, FURNITURE, AND EQUIPMENT--Premises, furniture, and equipment are
stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed principally by the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
ORGANIZATIONAL COSTS--Organizational costs are comprised of costs associated
with the establishment of the Bank. These costs are amortized over a 60-month
period.
INCOME TAXES--Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
CASH AND CASH EQUIVALENTS--Cash equivalents are generally all short-term
investments with a maturity of three months or less at the time of purchase.
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold. Generally, federal funds are purchased and sold for one day
periods.
FACTORED RECEIVABLES--The Bank offers customers an arrangement by which the
Bank purchases customer receivables, on a full recourse basis, through the
Business Manager factoring program. Under the program, the Bank discounts
qualified accounts receivable by 1.50% to 4.55%, submits invoices to customers,
and collects, and retains cash collections on accounts. In addition, the Bank
retains 10%, 25%, or 100% (dependent on the aging of the receivable) of all
outstanding factored receivables in a cash reserve account to provide for
potential charge-offs or other adjustments. As of December 31, 1998 and 1997,
outstanding balances were $7,745,935 and $1,625,375 with cash reserve balances
of $54,960 and $19,868, respectively, and are included in loans (see Note 4).
PREMIUMS FROM SALE OF SBA GUARANTEED LOANS--From time-to-time the Bank sells
the guaranteed portion of government guaranteed loans to third parties. The Bank
realizes a premium from the sale of such participations, plus a negotiated
annual servicing fee. The Bank recognizes the financial effects of these
transactions according to Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets."
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS--The Bank holds no derivative
financial instruments. However, in the ordinary course of business, the Bank
enters into off-balance-sheet financial instruments consisting of commitments to
extend credit as well as commercial letters of credit and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
GUARANTY FUND--State regulations required the Bank to maintain a guaranty
fund to absorb the Bank's accumulated losses until operations became profitable.
The guaranty fund was established at the
B-34
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bank's inception. Losses were charged to the guaranty fund through 1996 until
the balance remaining of $763,308 was transferred to surplus and the guaranty
fund was closed.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following methods and assumptions
were used by the Bank in estimating fair values of financial instruments as
disclosed herein:
CASH AND CASH EQUIVALENTS--The carrying amounts of cash and short-term
instruments approximate their fair value.
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES--Fair values for
investment securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity securities
approximate fair values.
LOANS RECEIVABLE--For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
DEPOSIT LIABILITIES--The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
ACCRUED INTEREST--The carrying amounts of accrued interest approximate their
fair values.
OFF-BALANCE-SHEET INSTRUMENTS--The Bank's off-balance-sheet instruments
include unfunded commitments to extend credit and standby letters of credit. The
fair value of these instruments is not considered practicable to estimate
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
ADVERTISING--Advertising costs are charged to expense during the year in
which they are incurred.
STOCK OPTIONS--Effective December 31, 1995, the Bank adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," but has
determined that it will continue to measure its director and employee
stock-based compensation arrangements under the provisions of Accounting
Principles Board (APB) Opinion No. 25. Accordingly, no compensation cost has
been recognized for its stock option plans.
UNAUDITED INTERIM FINANCIAL DATA--The interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments, including
normal recurring accruals necessary for fair presentation of results of
operations for the interim periods included herein, have been made. The results
of operations for the nine months ended September 30, 1999, are not necessarily
indicative of results to be anticipated for the year ending December 31, 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income."
This statement establishes standards
B-35
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for reporting comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of financial statements. This Statement, which
requires that the Bank recognize the unrealized gain or loss on
available-for-sale securities as a component of comprehensive income, is
effective for the year ended December 31, 1998.
Other issued but not yet required FASB statements are not currently
applicable to the Bank's operations. Management believes these pronouncements
will have no material effect upon its financial position or results of
operations.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1997 and
1996 financial statements to conform with current year presentations.
NOTE 3--INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt
securities at December 31, 1998 and 1997, are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
DECEMBER 31, 1998
Available-for-sale investment securities:
U.S. Treasuries and agencies........... $ 1,106,838 $ 2,941 $ (1,403) $ 1,108,376
============ ========= ========= ============
DECEMBER 31, 1997
Held-to-maturity investment securities:
U.S. agencies.......................... $ 795,619 $ 2,221 $ (3,000) $ 794,840
============ ========= ========= ============
Available-for-sale investment securities:
U.S. Treasuries and agencies........... $ 1,248,833 $ 3,329 $ (17) $ 1,252,145
============ ========= ========= ============
The amortized cost and estimated market value of available-for-sale debt
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
could have the right to call or prepay obligations with or without call or
prepayment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
Due from one year to five years................................... $ 505,998 $ 508,940
Due after five years through ten years............................ 600,840 599,436
------------ ------------
$ 1,106,838 $ 1,108,376
============ ============
At December 31, 1998 and 1997, investment securities with an amortized cost
of $1,106,838 and $690,832, respectively, were pledged to secure deposits of
public funds.
B-36
NOTE 4--LOANS, NET OF UNEARNED INCOME AND ALLOWANCE FOR LOAN LOSSES
The composition of loan balances is summarized as follows:
1998 1997
------------- -------------
Real estate.................................................... $ 17,327,927 $ 16,331,315
Commercial..................................................... 25,224,964 21,286,535
Business manager............................................... 7,745,935 1,625,375
Consumer....................................................... 1,480,018 1,979,174
------------- -------------
51,778,844 41,222,399
Unearned loan fee income....................................... (168,676) (113,208)
Allowance for loan losses...................................... (1,102,395) (407,395)
------------- -------------
$ 50,507,773 $ 40,701,796
============= =============
The following is an analysis of the changes in the reserve for possible loan
losses:
1998 1997 1996
------------ ---------- ----------
Beginning balance...................................... $ 407,395 $ 230,515 $ 146,700
Provision for possible loan losses..................... 683,000 205,500 99,600
Recoveries............................................. 12,000 -- --
Losses................................................. -- (28,620) (15,785)
------------ ---------- ----------
Ending balance......................................... $ 1,102,395 $ 407,395 $ 230,515
============ ========== ==========
Impaired loans having recorded balances of $455,552 on December 31, 1998,
have been recognized in conformity with SFAS No. 114, as amended by SFAS
No. 118. The total allowance for loan losses related to these loans was $198,285
on December 31, 1998. No interest income was recognized for cash payments
received in 1998. Had the impaired loans performed according to their original
terms, additional interest income of $28,772 would have been recognized during
1998.
There were no material impaired loans or loans on nonaccrual status at
December 31, 1997.
NOTE 5--PREMISES, FURNITURE, AND EQUIPMENT
The composition of premises, furniture, and equipment is as follows:
1998 1997
----------- -----------
Leasehold improvements.............................................. $ 45,477 $ 33,039
Furniture and fixtures.............................................. 129,228 114,428
Vehicles............................................................ 56,676 53,114
Software............................................................ -- 14,723
----------- -----------
231,381 215,304
Accumulated depreciation and amortization........................... (140,149) (147,009)
----------- -----------
$ 91,232 $ 68,295
=========== ===========
B-37
NOTE 6--ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest and other assets consisted of the following:
1998 1997
---------- ----------
Accrued interest receivable........................................... $ 330,906 $ 372,254
Prepaid expenses and deposits......................................... 66,256 50,919
Net deferred tax asset................................................ 381,877 319,750
Other................................................................. 36,827 225
---------- ----------
$ 815,866 $ 743,148
========== ==========
NOTE 7--TIME DEPOSITS
Time certificates of deposit of $100,000 and over were $5,582,803 and
$5,351,949 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities for all time deposits is as
follows:
1999........................................................... $17,072,425
2000........................................................... 6,784,148
2001........................................................... 1,015,513
2002........................................................... 492,745
----------
$25,364,831
==========
NOTE 8--INCOME TAXES
As of December 31, 1998, the Bank had a net operating loss available to
offset future taxable income of approximately $179,000. This carryforward will
expire in various years beginning in 2010 unless utilized in earlier tax years.
Deferred income taxes represent the tax effect of differences in timing
between financial income and taxable income. The net deferred tax assets,
included in other assets in the accompanying balance sheets, includes the
following components:
1998 1997
----------- -----------
Deferred tax assets:
Loan loss reserve................................................. $ 419,540 $ 145,749
Net operating loss carryforward................................... 68,800 339,252
Accumulated depreciation.......................................... 17,637 19,951
Other............................................................. 4,243 3,257
----------- -----------
510,220 508,209
Valuation allowance............................................... -- (69,177)
----------- -----------
510,220 439,032
Deferred tax liabilities:
Accrual to cash adjustment........................................ (128,343) (119,282)
----------- -----------
Net deferred tax assets......................................... $ 381,877 $ 319,750
=========== ===========
The valuation allowance was provided in 1997 since it was uncertain in prior
years if the Bank would be able to utilize all existing net operating loss
carryforwards in future periods. However,
B-38
NOTE 8--INCOME TAXES (CONTINUED)
management believes, based upon the Bank's current performance, that net
deferred tax assets will be realized in the normal course of operations and,
accordingly, management has not reduced net deferred tax assets by a valuation
allowance.
The income tax benefit is as follows:
1998 1997 1996
---------- ----------- -----------
Current................................................. $ 39,887 $ 5,010 $ --
Deferred................................................ (62,127) (124,750) (195,000)
---------- ----------- -----------
Income tax benefit...................................... $ (22,240) $ (119,740) $ (195,000)
========== =========== ===========
Deferred income taxes represent the tax effect of differences in timing
between financial income and taxable income. Deferred income taxes, according to
the timing differences which caused, them, were as follows:
1998 1997 1996
----------- ----------- -----------
Accounting loan loss provision in excess of tax
provision............................................ $ (273,792) $ (77,671) $ (29,701)
Accounting depreciation in excess of (less than) tax
depreciation......................................... 2,313 (10,592) (2,033)
Net operating loss carryforward........................ 201,719 (36,014) (230,285)
Cash to accrual adjustment............................. 9,063 (473) 67,019
Other differences...................................... (1,430) -- --
----------- ----------- -----------
$ (62,127) $ (124,750) $ (195,000)
=========== =========== ===========
A reconciliation between the statutory federal income tax rate and the effective
tax rate is as follows:
1998 1997 1996
---------- ----------- -----------
Federal income taxes at statutory rate.................. $ 21,512 $ 104,588 $ --
State income taxes, net of federal income tax benefit... 4,261 7,735 --
Change in deferred tax valuation allowance.............. (69,177) (225,010) (195,000)
Other................................................... 21,164 (7,053) --
---------- ----------- -----------
Income tax benefit...................................... $ (22,240) $ (119,740) $ (195,000)
========== =========== ===========
NOTE 9--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve elements
of credit and interest-rate risk similar to the amounts recognized in the
balance sheets. The contract or notional amounts of those instruments reflect
the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Bank
B-39
NOTE 9--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank's experience has been that a
significant amount of loan commitments are drawn upon by customers. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if it is deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include cash, accounts receivable, inventory,
property, equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third-party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary.
The Bank has not been required to perform on any financial guarantees during
1998, 1997, or 1996 nor has it incurred any losses on its commitments during
these periods. A summary of the notional amounts of the Bank's financial
instruments with off-balance-sheet risk at December 31, 1998 and 1997, follows:
1998 1997
------------- -------------
Commitments to extend credit................................... $ 15,979,360 $ 10,060,090
Commercial and standby letters of credit....................... $ 538,272 $ 129,030
B-40
NOTE 10--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying values of
the Bank's financial instruments at December 31, 1998 and 1997:
1998 1997
---------------------------- ----------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
Financial assets:
Cash and due from banks........................... $ 3,541,558 $ 3,541,558 $ 717,158 $ 717,158
Federal funds sold................................ $ 3,675,000 $ 3,675,000 $ 200,000 $ 200,000
Investment securities held-to-maturity............ $ -- $ -- $ 795,619 $ 794,840
Investment securities available-for-sale.......... $ 1,108,376 $ 1,108,376 $ 1,252,145 $ 1,252,145
Loans, net of unearned income and allowance for
loan losses..................................... $ 50,507,773 $ 50,102,128 $ 40,701,796 $ 40,557,926
Accrued interest receivable and other assets...... $ 815,866 $ 815,866 $ 743,148 $ 743,148
Financial liabilities:
Demand deposits................................... $ 8,918,052 $ 8,918,052 $ 7,697,695 $ 7,697,695
Money market and other interest-bearing
accounts........................................ $ 21,940,355 $ 21,940,355 $ 18,427,395 $ 18,427,395
Time deposits..................................... $ 25,364,831 $ 25,532,241 $ 14,080,767 $ 14,147,310
Accrued interest payable and other liabilities.... $ 181,606 $ 181,606 $ 112,544 $ 112,544
While estimates of fair value are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of such items at December 31, 1998, the estimated fair values would necessarily
have been achieved at that date, since market values may differ depending on
various circumstances. The estimated fair values at December 31, 1998, should
not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Bank that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill, and
similar items.
NOTE 11--CONCENTRATIONS OF CREDIT
The Bank has made loans and commitments totaling $5,750,836 to customers
located outside the Bank's market area. The concentrations of credit by type of
loan are set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. The Bank's loan policy does
not allow the extension of credit to any single borrower or group of related
borrowers without approval from the Loan Committee.
B-41
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS--As of December 31, 1998, the Bank leased office equipment under
noncancellable operating leases. The Bank also leases office space in Portland.
Future minimum lease payments for all noncancellable operating leases are as
follows:
Years Ending December 31,
1999.............................................................. $ 154,862
2000.............................................................. 71,844
2001.............................................................. 12,204
---------
$ 238,910
=========
For the years ending December 31, 1998, 1997, and 1996, rent expense was
$164,804, $239,446, and $302,488, respectively.
LAWSUIT CONTINGENCIES--In the ordinary course of business, the Bank becomes
involved in various litigation arising from normal banking activities. In the
opinion of management, the ultimate disposition of these actions will not have a
material adverse effect on the financial position or results of operations.
YEAR 2000 CONTINGENCY--The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Bank's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. In addition, certain hardware components may not function properly as the
Year 2000 approaches. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Management has completed a review of the Bank's computer
software programs, hardware components, and other systems, and estimates that
approximately $250,000 will be incurred to ensure its systems are Year 2000
compliant. These costs will be expensed as incurred.
NOTE 13--EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with its president and
former executive vice president. These agreements, which expire on December 31,
2000, but may be terminated earlier for cause, provide for aggregate base
monthly salaries of $17,360, as well as other customary benefits.
Included in the employment agreements are provisions for payments to the
executives under certain circumstances in which they become terminated or there
is a change in shareholder control of the Bank. Under these provisions, the
executives will each receive additional payments equal to three years'
compensation if termination or change in shareholders control occurs in the
first year of the agreements, two years' compensation in the second year, and
one year's compensation in the final year.
NOTE 14--EMPLOYEE BENEFIT PLAN
The Bank has established a 401(k) profit sharing plan for the benefit of all
full-time employees over the age of 18 that have provided six months of service.
The plan allows employees to make voluntary salary deferral contributions up to
15% of compensation subject to Internal Revenue Code Sec. 415 limitations. The
Bank makes discretionary matching contributions of $.50 for each $1 of deferred
salary contributed by the employee up to 6% of base compensation or commissions.
All
B-42
NOTE 14--EMPLOYEE BENEFIT PLAN (CONTINUED)
employees are vested immediately as to their own contributions and vested as
follows as to the Bank's matching contribution:
YEARS OF SERVICE PERCENTAGE
- ------------------------------------------------------------------------------ -----------------
Less than 2 years............................................................. 0%
2 but less than 3............................................................. 20%
3 but less than 4............................................................. 40%
4 but less than 5............................................................. 60%
5 but less than 6............................................................. 80%
More than 6 years............................................................. 100%
This vesting schedule applies only to those employees hired after March 1,
1996. Employees hired on or before March 1, 1996, are 100% vested in the regular
matching contribution account. The Bank contributed $17,903, $16,597, and
$18,004 to the plan during the years ended December 31, 1998, 1997, and 1996,
respectively.
NOTE 15--SHAREHOLDER'S EQUITY AND STOCK OPTION PLANS
STOCK SPLIT--During March 1998, the Bank effected an 11.5 for 10 stock
split. Share and per share data for all periods presented herein have been
adjusted to give effect to the split.
STOCK OPTION PLANS--On August 22, 1994, the Bank granted nonqualified stock
options to various investment bankers associated with the Bank's retail stock
offering. These stock options vested one year from the date of grant and expire
August 22, 1999.
The Bank has also granted stock options to officers and directors of the
Bank. These stock options expire ten years from the date of grant. Incentive
stock options (ISO's) to officers and directors under the plan vest over a
three-year period. Non-qualified Stock Options (NQSO's) granted to officers and
directors under the plan vest when (i) certain performance criteria have been
met, (ii) immediately at the date of grant, or (iii) after three years from the
date of grant.
During the year ended December 31, 1997, the Bank amended the stock option
plan to include an additional 345,000 options. Stock options granted in 1997
were granted at an exercise price equal to 120% of the closing price of the
Bank's common stock at September 26, 1997, or $8.35 per share. Therefore,
consistent with the provision of SFAS No. 123, no compensation expense was
recorded.
Subsequent to December 31, 1998, the Bank granted an additional 79,270 stock
options to employees at an exercise price of $5.875 per share.
B-43
NOTE 15--SHAREHOLDER'S EQUITY AND STOCK OPTION PLANS (CONTINUED)
The following summarizes the options outstanding as of December 31, 1998,
after the effect of the current year's stock split:
OFFICERS AND
INVESTMENT BANKERS DIRECTORS
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE COMBINED
SHARES PRICE SHARES PRICE PLANS
---------- ------------- --------- ------------- ------------
Options under grant,
December 31, 1995 and 1996............................. 105,317 $ 5.74 523,033 $ 5.74 628,350
========== ========= ==========
Options exercisable, December 31, 1996................... 105,317 $ 5.74 92,536 $ 5.74 197,853
========== ========= ==========
Options granted in 1997.................................. -- $ -- 115,000 $ 8.35 115,000
Options exercised in 1997................................ (10,453) $ 5.74 -- $ -- (10,453)
========== ========= ==========
Options under grant, December 31, 1997................... 94,864 $ 5.74 638,033 $ 6.21 732,897
========== ========= ==========
Options exercisable, December 31, 1997................... 94,864 $ 5.74 314,181 $ 6.70 409,045
========== ========= ==========
Options exercised in 1998................................ (22,300) $ 5.74 (42,182) $ 5.74 (64,482)
========== ========= ==========
Options under grant, December 31, 1998................... 72,564 $ 5.74 595,851 $ 6.24 668,415
========== ========= ==========
Options exercisable, December 31, 1998................... 72,564 $ 5.74 350,199 $ 6.60 422,763
========== ========= ==========
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.74-$8.35 and
7.20 years, respectively.
B-44
NOTE 16--EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is effective
for financial statements issued for periods ending after December 15, 1997. SFAS
No. 128 replaced standards for computing and presenting earnings per share and
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share reflect the potential
dilution that could occur if common shares were issued pursuant to the exercise
of options under the Bank's stock option plans. Comparative earnings per share
data for the years ended December 31, 1998, 1997, and 1996, have been restated
to conform with the current year presentation. The following table illustrates
the computations of basic and diluted earnings per share for the years ended
December 31, 1998, 1997, and 1996:
INCOME SHARES PER SHARE
1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------- ------------ ------------- -----------
Basic earnings per share
Income available to common shareholders................................ $ 120,069 1,194,517 $ 0.10
=========
Effect of dilutive securities
Outstanding common stock options....................................... -- 131,000
---------- -----------
Diluted earnings per share
Income available to common shareholders plus assumed conversions....... $ 120,069 1,325,517 $ 0.09
========== =========== =========
1997
- -------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders................................ $ 427,351 1,152,820 $ 0.37
=========
Effect of dilutive securities
Outstanding common stock options....................................... -- 200,593
---------- -----------
Diluted earnings per share
Income available to common shareholders plus assumed conversions....... $ 427,351 1,353,413 $ 0.32
========== =========== =========
1996
- -----------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders.............................. $ 34,662 1,150,672 $ 0.03
=========
Effect of dilutive securities
Outstanding common stock options..................................... -- --
---------- -----------
Diluted earnings per share
Income available to common shareholders plus assumed conversions..... $ 34,662 1,150,672 $ 0.03
========== =========== =========
Options to purchase 628,350 shares of common stock at $5.74 per share were
outstanding during 1997 and 1996 but were not included in the computation of
diluted earnings per share because the option's exercise price was greater than
the average market price of the common shares.
NOTE 17--REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly
B-45
NOTE 17--REGULATORY MATTERS (CONTINUED)
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notification from the
State of Oregon and the Federal Deposit Insurance Corporation categorized the
Bank as adequately capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as
set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ------------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ----------- ----------- ----------- ---------
AS OF DECEMBER 31, 1998:
Total capital to risk-weighted assets..... $ 5,367,000 9.6% $ 4,472,500 >8.0% $ 5,590,600 >10.0%
Tier 1 capital to risk-weighted assets.... $ 4,663,000 8.34% $ 2,236,400 >4.0% $ 3,354,600 >6.0%
Tier 1 capital to average assets.......... $ 4,663,000 7.57% $ 2,464,000 >4.0% $ 3,080,000 >5.0%
AS OF DECEMBER 31, 1997:
Total capital to risk-weighted assets..... $ 4,483,000 11.26% $ 3,185,000 >8.0% $ 3,981,300 >10.0%
Tier 1 capital to risk-weighted assets.... $ 4,076,000 10.23% $ 1,594,000 >4.0% $ 2,390,600 >6.0%
Tier 1 capital to average assets.......... $ 4,076,000 8.95% $ 1,821,000 >4.0% $ 2,277,000 >5.0%
B-46
APPENDIX C
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
COWLITZ BANCORPORATION,
COWLITZ BANK
AND
NORTHERN BANK OF COMMERCE
DATED AS OF SEPTEMBER 14, 1999
1. DEFINITIONS.............................................. C-1
1.1 Defined Terms..................................... C-1
1.2 Other Definitional Provisions..................... C-3
2. THE MERGER............................................... C-3
2.1 The Merger........................................ C-3
2.2 Effective Time.................................... C-3
2.3 Effects of the Merger............................. C-3
2.4 Closing of the Merger............................. C-3
2.5 Conversion of Northern Common Stock............... C-4
2.6 Merger Consideration.............................. C-5
2.7 Cowlitz Stock; Cowlitz Bank Stock................. C-7
2.8 Options........................................... C-7
2.9 Charter........................................... C-7
2.10 Bylaws........................................... C-7
2.11 Board of Directors............................... C-7
2.12 Officers......................................... C-7
2.13 Offices.......................................... C-7
2.14 Stock Option Agreement........................... C-7
2.15 Tax Consequences................................. C-8
3. EXCHANGE OF SHARES....................................... C-8
3.1 Cowlitz to Make Shares Available.................. C-8
3.2 Exchange of Certificates.......................... C-8
4. REPRESENTATIONS AND WARRANTIES OF NORTHERN............... C-12
4.1 Corporate Organization............................ C-12
4.2 Capitalization.................................... C-12
4.3 Authority; No Violation........................... C-13
4.4 Consents and Approvals............................ C-13
4.5 Reports........................................... C-14
4.6 Financial Statements.............................. C-14
4.7 Broker's Fees..................................... C-15
4.8 Absence of Certain Changes or Events.............. C-15
4.9 Legal Proceedings................................. C-15
4.10 Taxes............................................ C-15
4.11 Employees; Employee Benefit Plans................ C-16
4.12 FDIC Reports..................................... C-18
4.13 Compliance with Applicable Law................... C-18
4.14 Certain Contracts................................ C-18
4.15 Agreements with Regulatory Agencies.............. C-19
4.16 Undisclosed Liabilities.......................... C-19
4.17 Anti-takeover Provisions......................... C-19
4.18 Northern Information............................. C-19
4.19 Title to Property................................ C-19
4.20 Insurance........................................ C-20
4.21 Environmental Liability.......................... C-20
4.22 Opinion of Financial Advisor..................... C-21
4.23 Patents, Trademarks, Etc......................... C-21
4.24 Loan Matters..................................... C-21
4.25 Powers of Attorney............................... C-22
4.26 Benefit Plans Invested in Common Stock........... C-22
4.27 Community Reinvestment Act Compliance............ C-22
C-i
4.28 Year 2000 Compliance............................. C-22
4.29 Labor Matters.................................... C-22
5. REPRESENTATIONS AND WARRANTIES OF COWLITZ................ C-23
5.1 Corporate Organization............................ C-23
5.2 Capitalization.................................... C-23
5.3 Authority; No Violation........................... C-24
5.4 Consents and Approvals............................ C-25
5.5 Reports........................................... C-25
5.6 Financial Statements.............................. C-25
5.7 Broker's Fees..................................... C-26
5.8 Absence of Certain Changes or Events.............. C-26
5.9 Legal Proceedings................................. C-26
5.10 SEC Reports...................................... C-26
5.11 Compliance with Applicable Law................... C-26
5.12 Agreements with Regulatory Agencies.............. C-27
5.13 Cowlitz Information.............................. C-27
5.14 Year 2000 Compliance............................. C-27
5.15 Opinion of Financial Advisor..................... C-27
6. COVENANTS RELATING TO CONDUCT OF BUSINESS................ C-27
6.1 Conduct of Businesses Prior to the Effective
Time................................................. C-27
6.2 Northern Forbearances............................. C-28
6.3 No Fundamental Cowlitz Changes.................... C-30
7. ADDITIONAL AGREEMENTS.................................... C-31
7.1 Regulatory Matters................................ C-31
7.2 Access to Information............................. C-31
7.3 Stockholder Approval.............................. C-32
7.4 Legal Conditions to Merger........................ C-32
7.5 Affiliates........................................ C-32
7.6 Stock Listing..................................... C-33
7.7 Employees; Employee Benefit Plans................. C-33
7.8 Indemnification; Directors' and Officers'
Insurance............................................ C-33
7.9 Additional Agreements............................. C-33
7.10 Advice of Changes................................ C-34
7.11 Subsequent Interim and Annual Financial
Statements........................................... C-34
7.12 Disclosure Supplements........................... C-34
8. CONDITIONS PRECEDENT..................................... C-35
8.1 Conditions to Each Party's Obligation to Effect
the Merger........................................... C-35
8.2 Conditions to Obligations of Cowlitz.............. C-35
8.3 Conditions to Obligations of Northern............. C-37
9. TERMINATION AND AMENDMENT................................ C-37
9.1 Termination....................................... C-37
9.2 Effect of Termination............................. C-39
9.3 Amendment......................................... C-40
9.4 Extension; Waiver................................. C-40
C-ii
10. GENERAL PROVISIONS...................................... C-40
10.1 Nonsurvival of Representations, Warranties and
Agreements........................................... C-40
10.2 Expenses......................................... C-40
10.3 Notices.......................................... C-40
10.4 Interpretation................................... C-41
10.5 Counterparts..................................... C-42
10.6 Entire Agreement................................. C-42
10.7 Governing Law.................................... C-42
10.8 Severability..................................... C-42
10.9 Publicity........................................ C-42
10.10 Assignment; Third Party Beneficiaries........... C-42
EXHIBITS
Exhibit 2.14--Stock Option Agreement
Exhibit 3.2--Escrow Agreement
ANNEXES
Annex 2.6(d)--Loan Classifications
Annex 2.7--Surviving Bank's Capital
Annex 2.11--Surviving Bank's Directors
Annex 2.12--Surviving Bank's Officers
Annex 2.13--Surviving Bank's Offices
Annex 8.2(e)--Employment Agreement under
Section 8.2(e)
Annex 8.2(f)--Noncompetition and Option Agreements
under Section 8.2(f)
C-iii
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of September 14, 1999 (as
amended, supplemented or otherwise modified from time to time, this
"Agreement"), is entered into by and among COWLITZ BANCORPORATION, a Washington
corporation ("Cowlitz"), COWLITZ BANK, a corporation chartered under the banking
laws of the State of Washington ("Cowlitz Bank"), and NORTHERN BANK OF COMMERCE,
a corporation chartered under the banking laws of the State of Oregon
("Northern").
The respective Boards of Directors of each of Cowlitz, Cowlitz Bank and
Northern have determined that it is in the best interests of their respective
companies and the stockholders to consummate the business combination
transaction provided for herein and have approved and adopted this Agreement. It
is the intention of the parties to this Agreement that the business combination
contemplated hereby be treated, if it so qualifies, as a "reorganization" and
that this Agreement be treated as a "plan of reorganization" within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
1. DEFINITIONS
1.1 DEFINED TERMS. The following terms shall have the meanings defined for
such terms in the Sections set forth below:
TERM SECTION
- ---- ---------
Agreement................................................... Preamble
Aggregate Cash Consideration................................ 3.1
Articles of Merger.......................................... 2.2
Base Value.................................................. 2.6(e)
BIF......................................................... 4.1
Business Day................................................ 2.4
Cash Consideration.......................................... 2.6(a)
Capitalization Adjustment Fraction.......................... 2.6(b)
Change of Control........................................... 9.1(h)
Closing..................................................... 2.4
Closing Date................................................ 2.4
Closing Escrow Amount....................................... 3.2(b)
Code........................................................ Preamble
Committee................................................... 3.2(b)
Common Certificates......................................... 2.5(b)
Confidentiality Agreement................................... 7.2(b)
Cowlitz..................................................... Preamble
Cowlitz Bank................................................ Preamble
Cowlitz Common Stock........................................ 2.5(c)
Cowlitz Disclosure Schedule................................. 5.2
Cowlitz Bank Members........................................ 3.2(b)
Cowlitz Preferred Stock..................................... 5.2
Cowlitz Reports............................................. 5.10
Cowlitz Y2K Plan............................................ 5.14
CRA......................................................... 4.27
Dissenting Shares........................................... 2.5(d)
DPC Shares.................................................. 2.5(c)
C-1
TERM SECTION
- ---- ---------
Effective Date.............................................. 2.2
Effective Time.............................................. 2.2
Environmental Laws.......................................... 4.21
Equity Adjustment Amount.................................... 2.6(b)
ERISA....................................................... 4.11(a)
ERISA Affiliate............................................. 4.11(a)
Escrow...................................................... 3.2(b)
Escrow Agent................................................ 3.2(b)
Escrow Agreement............................................ 3.2(b)
Escrow Expiration Date...................................... 3.2(b)
Escrowed Funds.............................................. 3.2(b)
Exchange Act................................................ 4.6
Exchange Agent.............................................. 3.1
FDIC........................................................ 4.1
GAAP........................................................ 2.6(d)
Governmental Entity......................................... 4.4
Identified Loans............................................ 2.6(a)
Injunction.................................................. 8.1(e)
Liens....................................................... 4.3(b)
Loan Adjustment Factor...................................... 3.2(b)
Loan File................................................... 4.24(d)
Loans....................................................... 4.24(a)
Material Adverse Effect (Northern).......................... 4.1
Material Adverse Effect (Cowlitz)........................... 5.1(a)
Merger...................................................... 2.1
Merger Consideration........................................ 2.6(a)
Nasdaq...................................................... 4.4
Northern.................................................... Preamble
Northern Automated Systems.................................. 4.28
Northern Common Stock....................................... 2.5(a)
Northern Contract........................................... 4.14(a)
Northern Disclosure Schedule................................ 4.2(a)
Northern Members............................................ 3.2(b)
Northern Reports............................................ 4.12
Northern Stock Option Plan.................................. 2.8
Northern Y2K Plan........................................... 4.28
Orders...................................................... 6.2(o)
Oregon Articles of Merger................................... 2.2
Oregon Director............................................. 2.2
PBGC........................................................ 4.11(c)
Plans....................................................... 4.11(a)
Proxy Statement/Prospectus.................................. 4.4
Regulatory Agreement........................................ 4.15
Reimbursable Losses......................................... 3.2(b)
REO......................................................... 4.19(a)
Representatives............................................. 6.2(f)
Requisite Regulatory Approvals.............................. 8.1(c)
S-4......................................................... 4.4
SEC......................................................... 4.4
Securities Act.............................................. 4.12
C-2
TERM SECTION
- ---- ---------
Stock Consideration......................................... 2.6(a)
Stock Exchange Fund......................................... 3.1
Stock Option Agreement...................................... 2.12
Subsidiary.................................................. 2.5(a)
Superior Proposal........................................... 9.1(h)
Surviving Bank.............................................. 2.1
Takeover Proposal........................................... 6.2(f)
Tax Returns................................................. 4.10(c)
Taxes....................................................... 4.10(b)
Threshold Amount............................................ 3.2(d)
Title 30.................................................... 2.1
Title 53.................................................... 2.1
Total Stockholders' Equity.................................. 2.6(b)
Trust Account Shares........................................ 2.5(c)
Washington Articles of Merger............................... 2.2
Washington Director......................................... 2.2
Washington Secretary........................................ 2.2
Year 2000 Problem........................................... 4.28
1.2 OTHER DEFINITIONAL PROVISIONS. The meanings given to terms defined
herein shall be equally applicable to both the singular and plural forms of such
terms.
2. THE MERGER
2.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with Title 30 of the Revised Code of Washington ("TITLE 30") and
Title 53 of the Oregon Revised Statutes ("TITLE 53") at the Effective Time (as
defined in Section 2.2 hereof), Northern shall merge (the "MERGER") with and
into Cowlitz Bank. Cowlitz Bank shall be the surviving bank (hereinafter
sometimes called the "SURVIVING BANK") in the Merger, and shall continue its
corporate existence under the laws of the State of Washington. The name of the
Surviving Bank shall be Cowlitz Bank. Upon consummation of the Merger, the
separate corporate existence of Northern shall terminate.
2.2 EFFECTIVE TIME. The Merger shall become effective as set forth in the
articles of merger (the "WASHINGTON ARTICLES OF MERGER") which shall be filed
with the Director of Financial Institutions of the State of Washington (the
"WASHINGTON DIRECTOR") and the Secretary of State of the State of Washington
(the "WASHINGTON SECRETARY") and in the articles of merger (the "OREGON ARTICLES
OF MERGER") which shall be filed with the Director of the Department of Consumer
and Business Services of the State of Oregon (the "OREGON DIRECTOR"), on the
Closing Date (as defined in Section 2.4(b) hereof). The term "EFFECTIVE TIME"
shall mean the date (the "EFFECTIVE DATE") and time when the Merger becomes
effective, as set forth in the Articles of Merger. The term "Articles of Merger"
shall mean the "WASHINGTON ARTICLES OF MERGER" and the "OREGON ARTICLES OF
MERGER". The filed Articles of Merger shall include this Agreement.
2.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in Chapter 49 of Title 30 and Chapter 711 of
Title 53.
2.4 CLOSING OF THE MERGER. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "CLOSING") will take place at
10:00 a.m. Pacific time, on a date to be specified by the parties, which shall
be the first Business Day following the later of (i) the date which is at least
five Business Days after the satisfaction or waiver (subject to applicable law)
of the latest to occur of the conditions set forth in Section 8 hereof, other
than conditions which by their terms are to be satisfied at Closing or (ii) in
the case that holders of more than 5% of the outstanding shares of Northern
C-3
Common Stock have sent or delivered a notice of dissent or voted against the
Merger, 35 days following the meeting of the Northern Stockholders to be held
pursuant to Section 7.3, or such other date or time as the parties may mutually
agree (the "CLOSING DATE"). For purposes of this Agreement, a "BUSINESS DAY"
shall mean any day that is not a Saturday, a Sunday or other day on which the
office of the Washington Director, the Washington Secretary or the Oregon
Director is closed.
2.5 CONVERSION OF NORTHERN COMMON STOCK. At the Effective Time, without
any action on the part of Cowlitz, Cowlitz Bank, Northern or the holder of any
of the shares of common stock of Northern, the Merger shall be effected in
accordance with the following terms:
(a) Subject to Section 2.5(d), each share of the common stock, par value
$1.00 per share, of Northern (the "Northern Common Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
Northern Common Stock held (x) in Northern's treasury or (y) directly or
indirectly by Cowlitz or any of its Subsidiaries (as defined below) (except
for Trust Account Shares and DPC Shares, as such terms are defined below)),
shall be converted into the right to receive the Merger Consideration as
provided below, without interest thereon. For purposes of this Agreement,
"Subsidiary" means, with respect to any person, any corporation,
partnership, joint venture, limited liability company or other entity
controlled by such person directly or indirectly through one or more
intermediaries.
(b) All of the shares of Northern Common Stock converted into the right
to receive the Merger Consideration pursuant to this Section 2 shall no
longer be outstanding and shall automatically be canceled and shall cease to
exist as of the Effective Time, and each certificate (each a "COMMON
CERTIFICATE") previously representing any such shares shall thereafter
represent solely the right to receive the Merger Consideration. Common
Certificates previously representing shares of Northern Common Stock shall
be exchanged for the Merger Consideration upon the surrender of such Common
Certificates in accordance with Section 3.2 hereof, without any interest
thereon.
(c) At the Effective Time, all shares of Northern Common Stock that are
owned by Northern as treasury stock and all shares of Northern Common Stock
that are owned directly or indirectly by Cowlitz, Northern or a Subsidiary
of Cowlitz (other than shares of Northern Common Stock held directly or
indirectly in trust accounts, managed accounts and the like or otherwise
held in a fiduciary or nominee capacity that are beneficially owned by third
parties (any such shares, and shares of common stock, no par value per
share, of Cowlitz ("COWLITZ COMMON STOCK") which are similarly held, whether
held directly or indirectly by Cowlitz, Northern or a Subsidiary of Cowlitz,
as the case may be, being referred to herein as "TRUST ACCOUNT SHARES") and
other than any shares of Northern Common Stock held by Cowlitz, Northern or
any a Subsidiary of Cowlitz in respect of a debt previously contracted (any
such shares of Northern Common Stock, and shares of Cowlitz Common Stock
which are similarly held, whether held directly or indirectly by Cowlitz,
Northern or any a Subsidiary of Cowlitz, being referred to herein as "DPC
SHARES")) shall be canceled and shall cease to exist and no Merger
Consideration shall be delivered in exchange therefor.
(d) Notwithstanding anything in this Agreement to the contrary, shares
of Northern Common Stock issued and outstanding immediately prior to the
Effective Time held by holders (if any) who have voted against the Merger or
sent or delivered notices of dissent and who are eligible to and who have
demanded appraisal rights with respect thereto in accordance with Sections
711.175-.185 of Title 53 and, as of the Effective Time, shall not have
failed to perfect or shall not have effectively withdrawn or lost their
rights to appraisal and payment under Sections 711.175-.185 of Title 53 (the
"DISSENTING SHARES") shall not be converted into the right to receive the
Merger Consideration as described in Section 2.5(a), but holders of such
shares shall instead be entitled to receive payment of the fair value of
such Dissenting Shares in accordance with the provisions of Sections
711.175-.185 of Title 53, except that any Dissenting Shares held by a holder
which shall
C-4
have failed to perfect or shall have effectively withdrawn or lost its right
to appraisal and payment under Sections 711.175-.185 of Title 53 shall
thereupon be deemed to have been converted into the right to receive the
Merger Consideration as described in Section 2.5(a), without interest
thereon. Northern shall give Cowlitz (i) prompt notice of any written
demands for appraisal of any shares, attempted withdrawals of such demands,
and any other instruments served pursuant to Sections 711.175-.185 of Title
53 received by Northern relating to stockholders' rights of appraisal and
(ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under Sections 711.175-.185 of Title 53. Northern
shall not, except with the prior written consent of Cowlitz, voluntarily
make any payment with respect to any demands for appraisals of capital stock
of Northern, offer to settle or settle any such demands or approve any
withdrawal of any such demands.
2.6 MERGER CONSIDERATION.
(a) For purposes of this Agreement and subject to the provisions hereof,
the "MERGER CONSIDERATION" shall be $7.05 per share of Northern Common Stock
and shall consist of two components: the Stock Consideration and the Cash
Consideration. The "STOCK CONSIDERATION" shall be $5.42 per share of
Northern Common Stock and shall consist of Cowlitz Common Stock valued at
$6.563. The "CASH CONSIDERATION" shall be $1.63 per share of Northern Common
Stock, but shall be subject to certain loss indemnification provisions
described in Section 3.2(b). In addition, the Merger Consideration, the
Stock Consideration and the Cash Consideration are subject to possible
adjustment at the Effective Time pursuant to this Section 2.6.
(b) If the Base Value of Northern, as calculated in accordance with
Section 2.6(e) is less than $4,707,139 but at least $1,150,000, then the
Merger Consideration and Stock Consideration shall be adjusted as of the
Effective Time as follows:
(i) the Merger Consideration shall be reduced by an amount (the
"Equity Adjustment Amount") equal to the product of (A) 1.75 and (B) a
fraction the numerator of which is the difference between $4,707,139 and
the Base Value and the denominator of which is the number of issued and
outstanding shares of Northern Common Stock as of the date of this
Agreement; and
(ii) the Stock Consideration shall be reduced by the Equity
Adjustment Amount.
In such event, there shall be no adjustment made to the Cash Consideration.
(c) If the total number of issued and outstanding shares of Northern
Common Stock as of the Effective Time is greater than the total number of
issued and outstanding shares of Northern Common Stock as of the date of
this Agreement, then the Merger Consideration, Stock Consideration and Cash
Consideration (after making any adjustments required under (b) above, if
applicable) shall be adjusted as of the Effective Time as follows:
(i) the Merger Consideration shall be the amount per share equal to
the amount calculated pursuant to 2.6(a) and (b) multiplied by a fraction
(the "CAPITALIZATION ADJUSTMENT FRACTION"), the numerator of which is
equal to the total number of issued and outstanding shares of Northern
Common Stock as of the date of this Agreement and the denominator of
which is equal to the total number of issued and outstanding shares of
Northern Common Stock as of the Effective Time;
(ii) the Stock Consideration shall be the amount per share equal to
the amount calculated pursuant to 2.6(a) and (b) multiplied by the
Capitalization Adjustment Fraction; and
(iii) the Cash Consideration shall be the amount per share equal to
$1.63 per share multiplied by the Capitalization Adjustment Fraction.
C-5
(d) No later than the date which Cowlitz, Cowlitz Bank and Northern in
good faith estimate to be forty-five (45) days prior to the Effective Time.
Cowlitz and Cowlitz Bank shall, at their expense, engage a Loan Examiner to
identify in writing the loans of Northern which in such Loan Examiner's
good-faith judgment should under standard commercial banking practice be
classified as Special Mention, Substandard, Doubtful or Loss (each as
defined on Annex 2.6(d) hereto). The identification and classification of
such loans (the "Identified Loans") shall be delivered by such Loan Examiner
to Cowlitz, Cowlitz Bank and Northern no later than fifteen (15) business
days after his engagement. If Northern does not deliver written notice to
Cowlitz of Northern's objection to such identification and classification of
Identified Loans within three (3) business days after receipt thereof, then
such identification and classification shall be deemed final and binding on
the parties. If Northern timely delivers written notice of its objection,
then Northern, Cowlitz and Cowlitz Bank shall negotiate in good faith for up
to three (3) business days thereafter to resolve such dispute. If such
dispute remains unresolved after such period, Northern, Cowlitz and Cowlitz
Bank shall promptly agree on another Loan Examiner to resolve such dispute.
The decision of such other Loan Examiner shall be final and binding on the
parties. The loans established as classified loans pursuant to this
Section 2.6(d) are sometimes herein referred to as the "Identified Loans."
As used herein, Loan Examiner shall mean Fred Singer or any loan examiner,
loan reviewer or loan auditor (other than a current employee, officer or
director of Cowlitz, Cowlitz Bank or Northern) with at least ten (10) years
experience in commercial lending, banking and/or bank examining, including
at least two (2) years as a loan examiner, loan reviewer or loan auditor.
Northern agrees to provide access for the Loan Examiners as provided in
Section 7.2(a) hereof. To the extent permitted by United States generally
accepted accounting principles ("GAAP"), Northern agrees that it will have
provided on its books prior to the Effective Time a reserve for each
Identified Loan at least equal to (A) 5% of the principal amount of each
Identified Loan classified as Special Mention, (B) 15% of the principal
amount of each Identified Loan classified as Substandard, (C) 50% of the
principal amount of each Identified Loan classified as Doubtful and
(D) 100% of each Identified Loan classified as Loss, as well as a general
reserve equal to 1 1/2% of the aggregate principal amounts of all
outstanding loans (including without limitation all Identified Loans).
Nothing in the immediately preceding sentence shall be deemed to preclude
Northern from establishing, to the extent permitted by GAAP, reserves
allocated to specific loans in amounts greater than set forth in such
preceding sentence.
(e) As used in this Agreement, "Base Value" shall mean difference
between (i) total stockholders' equity of Northern immediately prior to the
Effective Time as calculated in accordance with GAAP applied on a consistent
basis and (ii) an amount equal to the after-tax reduction in such equity
that would be necessary to reflect additional losses or reserves (to the
extent not taken by Northern prior to the Effective Time) so that, for each
Identified Loan, Northern would have a reserve at the Effective Time equal
to (A) 5% of the principal amount of each Identified Loan classified as
Special Mention, (B) 15% of the principal amount of each Identified Loan
classified as Substandard, (C) 50% of the principal amount of each
Identified Loan classified as Doubtful and (D) 100% of the principal amount
of each Identified Loan classified as Loss, as well as a general reserve of
1 1/2% equal to the aggregate principal amounts of all outstanding loans
(including without limitation all Identified Loans).
(f) If prior to the Effective Time the outstanding shares of Northern
Common Stock shall, with the prior written consent of Cowlitz required by
Section 6.2, have been increased, decreased, changed into or exchanged for a
different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in Northern Common
Stock's capitalization, then an appropriate and proportionate adjustment
shall be made to the Merger Consideration.
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2.7 COWLITZ STOCK; COWLITZ BANK STOCK. At and after the Effective Time,
each share of Cowlitz Common Stock and each share of any preferred stock of
Cowlitz issued and outstanding immediately prior to the Effective Time shall
remain an issued and outstanding share of common stock or preferred stock, as
the case may be, of Cowlitz and shall not be affected by the Merger. Each of the
issued and outstanding shares of common stock of Cowlitz Bank immediately prior
to the Effective Time shall remain issued and outstanding after the Merger as
shares of the Surviving Bank, which shall thereafter constitute all of the
issued and outstanding shares of common stock of the Surviving Bank. No capital
stock of Cowlitz Bank will be issued or used in the Merger. The amount of
capital of the Surviving Bank, the number of shares of the Surviving Bank's
capital stock and the par value thereof are set forth on Annex 2.7.
2.8 OPTIONS. The parties acknowledge and agree that Section 7.1.1 of the
Northern 1994 Stock Option Plan (the "NORTHERN STOCK OPTION PLAN") governs with
respect to the effect of the Merger on each option granted thereunder by
Northern to purchase shares of Northern Common Stock. In accordance with the
Northern Stock Option Plan, holders of such options shall have the right
immediately prior to the Effective Time to exercise such option to the extent
the vesting requirements set forth in the option agreement with respect to such
option have been satisfied. At the Effective Time, each option (vested or
unvested) granted by Northern to purchase shares of Northern Common Stock,
whether under the Northern Stock Option Plan or otherwise, which is outstanding
and unexercised immediately prior thereto shall cease to represent a right to
acquire shares of Northern Common Stock, shall automatically terminate and no
Merger Consideration or any other consideration shall be delivered in exchange
therefor.
2.9 CHARTER. At the Effective Time, the Charter of Cowlitz Bank, as in
effect at the Effective Time, shall be the Charter of the Surviving Bank, until
thereafter amended in accordance with applicable law.
2.10 BYLAWS. At the Effective Time, the Bylaws of Cowlitz Bank, as in
effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Bank until thereafter amended in accordance with applicable law.
2.11 BOARD OF DIRECTORS. At the Effective Time, Cowlitz and Cowlitz Bank
shall take all action necessary to appoint William Spicer to the Surviving
Bank's Board of Directors. Except for such appointment, the directors of Cowlitz
Bank immediately prior to the Effective Time shall continue to be the directors
of the Surviving Bank, each to hold office in accordance with the Charter and
Bylaws of the Surviving Bank, until their respective successors are duly elected
or appointed (as the case may be) and qualified. The names and addresses of the
directors of Cowlitz Bank, as well as the address of Mr. Spicer, are set forth
on Annex 2.11
2.12 OFFICERS. The officers of Cowlitz Bank immediately prior to the
Effective Time shall continue to be officers of the Surviving Bank, each to hold
office in accordance with the Charter and Bylaws of the Surviving Bank and the
terms of their appointment by the Board of Directors. The names and addresses of
the senior officers of Cowlitz Bank are set forth on Annex 2.12.
2.13 OFFICES. The name and location of each office of Cowlitz Bank and
Northern are set forth on Annex 2.13. These will become offices of the Surviving
Bank at the Effective Time. The principal office of Cowlitz Bank will be the
principal office of the Surviving Bank.
2.14 STOCK OPTION AGREEMENT. As an inducement to Cowlitz to continue to
pursue the transactions contemplated by this Agreement, Northern will grant to
Cowlitz an option pursuant to the Stock Option Agreement, substantially in the
form of Exhibit 2.14 hereto (the "STOCK OPTION AGREEMENT")
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2.15 TAX CONSEQUENCES. It is intended that, to the extent they so qualify,
the Merger shall constitute a reorganization within the meaning of
Section 368(a) of the Code and this Agreement shall constitute a "plan of
reorganization" as that term is used in Section 354 of the Code.
3. EXCHANGE OF SHARES
3.1 COWLITZ TO MAKE SHARES AVAILABLE. At or prior to the Effective Time,
Cowlitz shall deposit, or shall cause to be deposited, with a bank or trust
company of recognized standing, or Cowlitz's transfer agent (the "EXCHANGE
AGENT"), for the benefit of the holders of Common Certificates, for exchange in
accordance with this Section 3, (i) certificates representing the shares of
Cowlitz Common Stock and an estimated amount of cash that may be payable in lieu
of any fractional shares (such cash, and certificates for shares of Cowlitz
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "STOCK EXCHANGE FUND") to be issued
pursuant to Section 2.5 and paid pursuant to Section 3.2(a) in exchange for
outstanding shares of Northern Common Stock and (ii) cash in an amount (the
"AGGREGATE CASH CONSIDERATION") equal to the product of the Cash Consideration
and the number of shares of Northern Common Stock outstanding at the Effective
Time to be paid pursuant to and in the manner set forth in Section 3.2(b) in
exchange for outstanding shares of Northern Common Stock.
3.2 EXCHANGE OF CERTIFICATES.
(a) As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a Common Certificate or Certificates
a form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Common Certificates shall pass,
only upon delivery of the Common Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Common Certificates
in exchange for the Merger Consideration, into which the shares of Northern
Common Stock represented by such Common Certificate or Certificates shall
have been converted pursuant to this Agreement. Subject to Section 2.5(d),
upon proper surrender of a Common Certificate for exchange and cancellation
to the Exchange Agent, together with such properly completed letter of
transmittal, duly executed, the holder of such Common Certificate shall be
entitled to receive in exchange therefor, as applicable, (i) a certificate
representing that number of shares of Cowlitz Common Stock to which such
holder of Northern Common Stock shall have become entitled pursuant to the
provisions of Section 2 hereof, and (ii) a check representing the amount of
cash payable in lieu of fractional shares of Cowlitz Common Stock, if any,
which such holder has the right to receive in respect of the Common
Certificate surrendered pursuant to the provisions of this Section 3, and
the Common Certificate so surrendered shall forthwith be canceled. No
interest will be paid or accrued on the cash payable in lieu of fractional
shares.
(b) ESCROW.
(i) In order to ensure that Cowlitz Bank shall be properly reimbursed
for certain losses, the Exchange Agent shall, promptly upon receipt of
the Aggregate Cash Consideration, deliver an amount (the "ESCROWED
FUNDS") equal to the product of (A) the Cash Consideration and (B) the
total number of issued and outstanding shares of Northern Common Stock as
of the Effective Time (excluding all Dissenting Shares), to an escrow
agent (the "ESCROW AGENT") to be held in escrow (the "ESCROW") pursuant
to an escrow agreement in substantially the form attached hereto as
Exhibit 3.2, with such changes as may be reasonably requested by the
Escrow Agent and subject to the addition of Schedule 2 to the Escrow
Agreement in accordance with this Section 3.2(b) (the "ESCROW
AGREEMENT"). The Escrow Agent shall be a bank, trust company or other
entity mutually agreed upon by Cowlitz and Northern.
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(ii) A committee (the "COMMITTEE") shall be appointed by Northern and
Cowlitz Bank to deliver instructions to the Escrow Agent with respect to
the disbursement of the Escrowed Funds. Northern hereby appoints John
Walrod and Kurt Wollenberg to serve on the Committee as representatives
of the holders of Northern Common Stock (the "NORTHERN MEMBERS") and
Cowlitz Bank hereby appoints Charles Jarrett and Larry Ellis to serve on
the Committee as representatives of Cowlitz Bank (the "COWLITZ BANK
MEMBERS"). Cowlitz Bank shall have the right, from time to time and in
its sole discretion, to appoint a substitute Cowlitz Bank Member upon
written notice to the Escrow Agent and the Northern Members. If a
Northern Member should prior to the Effective Time become unable or
unwilling to serve on the Committee, such Northern Member shall give
Northern and Cowlitz prompt prior written notice thereof, and Northern
shall have the right, in its sole discretion, to appoint a substitute
Northern Member no later than the earlier of (A) the Effective Time or
(B) five (5) business days after delivery of such notice. If a Northern
Member should after the Effective Time become unable or unwilling to
continue to serve on the Committee after the Effective Time, such
Northern Member shall give Cowlitz Bank prior written notice thereof, and
within five (5) business days after delivery of such notice, the
remaining Northern Member shall have the right, in his or her sole
discretion, to appoint a substitute Northern Member; PROVIDED, that such
Substitute Northern Member (x) must have been a Stockholder at the
Effective Time, (y) (1) must have been a director or officer of Northern
at the Effective Time or (2) in the remaining Northern Member's
reasonable judgment, must be a sophisticated financial investor and
(z) is not a director, officer or employee of Cowlitz or Cowlitz Bank.
The parties agree that no Northern Member or Cowlitz Bank Member shall
have any liability to any party hereto or any holder of Northern Common
Stock with respect to acts or omissions in his or her capacity as a
member of the Committee, unless it is established in a final judicial
determination by clear and convincing evidence that any decision or
action was undertaken with deliberate intent to injure the holders of
Northern Common Stock or with reckless disregard for the best interest of
such holders, and in any event, the liability shall be limited to actual,
proximate, quantifiable damages.
(iii) The purpose of the Escrow shall be to ensure that Cowlitz Bank
is reimbursed for losses relating to the Identified Loans. Schedule 2 to
the Escrow Agreement shall be completed prior to the Effective Time by
listing thereon each Identified Loan (as determined pursuant to
Section 2.6(d)) and the Threshold Amount for each Identified Loan. Except
as provided in the immediately succeeding sentence, the "Threshold
Amount" shall mean for each Identified Loan the lesser of (A) the
difference between (i) the reserve for such Identified Loan on the books
of Northern immediately prior to the Effective Time (excluding any
portion of the general reserve for all oustanding loans) and (ii) the
Loan Adjustment Factor and (B) (i) 5% of the outstanding principal amount
if the Identified Loan is classified as Special Mention pursuant to the
procedure set forth in Section 2.6(d), less the Loan Adjustment Factor,
(ii) 15% of the principal amount if the Identified Loan is classified as
Substandard, less the Loan Adjustment Factor, (iii) 50% of the principal
amount if the Identified Loan is classified as Doubtful, less the Loan
Adjustment Factor, and (iv) 100% of the principal amount if the
Identified Loan is classified as Loss, less the Loan Adjustment Factor.
Notwithstanding the preceding sentence, if the Base Value exceeds
$4,707,139 and the amount determined pursuant to clause (A) of the
preceding sentence for an Identified Loan exceeds the amount determined
pursuant to clause (B) for such Identified Loan, then the Threshold
Amount for such Identified Loan shall equal the amount determined
pursuant to clause (A) above. "Loan Adjustment Factor" will be $0 if
Northern has on its books immediately prior to the Effective Time a
general reserve equal to at least 1 1/2% of the aggregate principal
amounts of all outstanding loans (including without limitation all
Identified Loans). If such general reserve is less than 1 1/2%, then the
Loan Adjustment Factor will equal
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the different between (i) 1 1/2% and (ii) the percentage of the remaining
general reserve that would be applicable to the Identified Loans after
moving sufficient general reserves to the non-Identified Loans so that
all non-Identified Loans would have a general reserve of 1 1/2%.
(iv) Reimbursements shall be made only for such losses identified
during the period from the Effective Date to the date (the "ESCROW
EXPIRATION DATE") which is 24 months after the Effective Date. Cowlitz
Bank shall be entitled to be reimbursed for any loss on an Identified
Loan to the extent that such loss exceeds the Threshold Amount for such
Identified Loan ("REIMBURSABLE LOSSES"); PROVIDED, HOWEVER, that the
aggregate of all of such reimbursements shall not exceed the Escrowed
Funds. The amount of Reimbursable Losses shall be calculated in the
manner set forth in the Escrow Agreement. Interest earned on the
Aggregate Cash Consideration while held in the Escrow shall remain in the
Escrow and shall not be available to reimburse Cowlitz Bank for
Reimbursable Losses. Fees and any other amounts owed to the Escrow Agent
shall be paid, first, out of the interest earned on the Escrowed Funds
and, second, out of the Escrowed Funds.
(v) The Escrow shall terminate upon the later to occur of (x) the
Escrow Expiration Date and (y) the proper reimbursement to Cowlitz Bank
of the Reimbursable Losses. Upon termination of the Escrow, the Escrow
Agent shall deliver all amounts then in Escrow (after deduction for
expenses and costs) to the Exchange Agent (the "CLOSING ESCROW AMOUNT").
Subject to Section 2.5(d), the Exchange Agent shall promptly pay, to each
holder of record of a Common Certificate who has properly surrendered
such Common Certificate as provided in Section 3.2(a), an amount for each
share of Northern Common Stock represented by such Common Certificate
equal to (A) the Closing Escrow Amount divided by (B) the number of
shares of Northern Common Stock outstanding at the Effective Time
(vi) The Cowlitz Members shall not have any duty to represent the
interests of stockholders of Northern and shall have no liability
whatsoever to such stockholders. The Northern Members will represent the
interests of stockholders of Northern, but no Northern Member shall have
any liability to any holder of Northern Common Stock with respect to his
or her capacity as a member of the Committee, unless it is established in
a final judicial determination by clear and convincing evidence that any
decision or action was undertaken with deliberate intent to injure the
holders of Northern Common Stock or with reckless disregard for the best
interests of such holders, and in any event, the liability shall be
limited to actual, proximate, quantifiable damages.
(c) No dividends or other distributions with a record date after the
Effective Time with respect to Cowlitz Common Stock shall be paid to the
holder of any unsurrendered Common Certificate entitled to receive shares of
Cowlitz Common Stock hereunder until the holder thereof shall surrender such
Common Certificate in accordance with this Section 3. After the surrender of
a Common Certificate in accordance with this Section 3, the record holder
thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Cowlitz Common Stock represented by such
Common Certificate.
(d) If any certificate representing shares of Cowlitz Common Stock is to
be issued in the name of or cash is to be paid to a person other than the
registered holder of the Common Certificate surrendered in exchange
therefor, it shall be a condition of the issuance thereof that the Common
Certificate so surrendered shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the
Exchange Agent in advance any transfer or other taxes required by reason of
the issuance of a certificate representing shares of Cowlitz Common Stock in
the name of and payment of cash to any person other than the registered
holder of the Common
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Certificate surrendered, or required for any other reason, or shall
establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(e) At or after the Effective Time, there shall be no transfers on the
stock transfer books of Northern of the shares of Northern Common Stock
which were issued and outstanding immediately prior to the Effective Time.
If, after the Effective Time, Common Certificates representing such shares
are presented for transfer to the Exchange Agent, they shall be canceled and
exchanged for certificates representing shares of Cowlitz Common Stock and
payment of cash as provided in this Section 3.
(f) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Cowlitz Common Stock
shall be issued upon the surrender for exchange of Common Certificates, no
dividend or distribution with respect to Cowlitz Common Stock shall be
payable on or with respect to any fractional share, and such fractional
share interests shall not entitle the owner thereof to vote or to any other
rights of a stockholder of Cowlitz. In lieu of the issuance of any such
fractional share, Cowlitz shall pay to each former holder of Northern Common
Stock who otherwise would be entitled to receive such fractional share an
amount in cash determined by multiplying (i) the Market Value of Cowlitz
Common Stock as of the Effective Date by (ii) the fraction of a share of
Cowlitz Common Stock to which such holder would otherwise be entitled to
receive pursuant to Section 2.5 hereto. For purposes of determining any such
fractional share interests, all shares of Northern Common Stock owned by any
Northern stockholder shall be combined so as to calculate the maximum number
of shares of Cowlitz Common Stock issuable to such holder of Northern Common
Stock and no such holder shall receive cash in an amount equal to or greater
than the Stock Consideration per share.
(g) Any portion of the Stock Exchange Fund that remains unclaimed by the
stockholders of Northern for twelve months after the Effective Time shall be
paid, at the request of Cowlitz, to Cowlitz. Any stockholders of Northern
who have not theretofore complied with this Section 3 shall thereafter look
only to Cowlitz for payment of the shares of Cowlitz Common Stock, cash in
lieu of any fractional shares and unpaid dividends and distributions on the
Cowlitz Common Stock deliverable in respect of each share of Northern Common
Stock held by such stockholder at the Effective Time as determined pursuant
to this Agreement, in each case, without any interest thereon. After the
Exchange Agent has received the Closing Escrow Amount and made the payments
to former holders of Northern Common Stock as required by Section 3(b), any
unpaid amounts shall promptly be delivered by the Exchange Agent to Cowlitz.
Any holders of Northern Common Stock who have not theretofore complied with
this Section 3 shall thereafter look only to Cowlitz for payment of the Cash
Consideration (as adjusted by the amounts paid to Cowlitz Bank from the
Escrow with respect to Reimbursable Losses) to which they are entitled
pursuant to this Agreement, without any additional interest thereon.
Notwithstanding anything to the contrary contained herein, none of Cowlitz,
Northern, the Exchange Agent or any other person shall be liable to any
former holder of shares of Northern Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(h) In the event any Common Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Common Certificate to be lost, stolen or destroyed and, if
required by Cowlitz, the posting by such person of a bond in such amount as
Cowlitz may determine is reasonably necessary as indemnity against any claim
that may be made against it with respect to such Common Stock Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Common Certificate the shares of Cowlitz Common Stock and cash (including
cash in lieu of fractional shares) deliverable in respect thereof pursuant
to this Agreement.
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4. REPRESENTATIONS AND WARRANTIES OF NORTHERN
Northern hereby represents and warrants to Cowlitz and Cowlitz Bank as
follows:
4.1 CORPORATE ORGANIZATION. Northern is a banking corporation duly
organized and validly existing under the laws of the State of Oregon. Northern
has the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is duly
licensed or qualified to do business in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have nor
reasonably be expected to have a Material Adverse Effect (as defined below) on
Northern. As used in this Agreement, the term "MATERIAL ADVERSE EFFECT" means,
with respect to Northern, a material adverse effect on the business, results of
operations, financial condition or prospects of Northern or a material adverse
effect on Northern's ability to consummate the transactions contemplated hereby
on a timely basis; PROVIDED, HOWEVER, that a Material Adverse Effect on Northern
shall not be deemed to have occurred as a result of (i) any changes in laws,
regulations or GAAP or (ii) any changes in general economic conditions affecting
commercial banking businesses generally. The deposits of Northern are insured by
the Federal Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund (the "BIF") to the fullest extent permitted by law. The copies of
the Charter and Bylaws of Northern which have previously been made available to
Cowlitz are true, complete and correct copies of such documents as in effect as
of the date of this Agreement. Northern has no Subsidiaries.
4.2 CAPITALIZATION.
(a) The authorized capital stock of Northern consists of 10,000,000
shares of Northern Common Stock and no shares of preferred stock. At the
close of business on August 31, 1999, there were 1,225.597 shares of
Northern Common Stock outstanding and no shares of Northern Common Stock
held in Northern's treasury. As of September 13, 1999, no shares of Northern
Common Stock were reserved for issuance, except for 868,032 shares of
Northern Common Stock reserved for issuance upon the exercise of stock
options pursuant to the Northern Stock Option Plan, 738,211 shares of
Northern Common Stock reserved for issuance upon exercise of the stock
options set forth in Section 4.2(a) of the disclosure schedule of Northern
delivered to Cowlitz concurrently herewith (the "NORTHERN DISCLOSURE
SCHEDULE"), and 243,893 shares of Northern Common Stock reserved for
issuance upon exercise of the Option (as defined in the Stock Option
Agreement). All of the issued and outstanding shares of Northern Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. As of the date of this Agreement, except
(i) as set forth in Section 4.2(a) of the Northern Disclosure Schedule,
(ii) the Option and (iii) as set forth elsewhere in this Section 4.2(a),
Northern does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling
for the purchase or issuance of any shares of Northern Common Stock or
Northern Preferred Stock or any other equity securities of Northern or any
securities representing the right to purchase or otherwise receive any
shares of Northern Common Stock or Northern Preferred Stock. Except as set
forth in Section 4.2(a) of the Northern Disclosure Schedule, since
August 31, 1999, Northern has not issued any shares of its capital stock or
any securities convertible into or exercisable for any shares of its capital
stock, other than the exercise of employee stock options granted prior to
such date and as disclosed in Section 4.2(a) of the Northern Disclosure
Schedule. Northern has no stockholder rights plan, anti-takeover plan,
"poison pill" or other similar plan.
(b) Except as disclosed in Section 4.2(b) of the Northern Disclosure
Schedule, Northern does not beneficially own or control, directly or
indirectly, any shares of stock or other equity interest in
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any depository institution (as defined in 12 U.S.C. Section1813(c)),
corporation, firm, partnership, joint venture or other entity.
4.3 AUTHORITY; NO VIOLATION.
(a) Northern has full corporate power and authority to execute and
deliver this Agreement and the Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of Northern. The Board of Directors of
Northern has directed that this Agreement and the Merger be submitted to
Northern's stockholders for approval at a meeting of such stockholders and,
except for the approval of this Agreement and the Merger by the affirmative
vote of the holders of two-thirds of the voting power represented by the
outstanding shares of Northern Common Stock, no other corporate proceedings
on the part of Northern are necessary to approve this Agreement or the Stock
Option Agreement or to consummate the transactions contemplated hereby and
thereby. This Agreement and the Stock Option Agreement have been duly and
validly executed and delivered by Northern and (assuming due authorization,
execution and delivery by Cowlitz and Cowlitz Bank) each constitutes a valid
and binding obligation of Northern, enforceable against Northern in
accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity
and by bankruptcy, insolvency, fraudulent transfer, receivership, or
conservatorship and similar laws affecting creditors' rights and remedies
generally.
(b) Except as set forth in Section 4.3(b) of the Northern Disclosure
Schedule, neither the execution and delivery of this Agreement or the Stock
Option Agreement by Northern nor the consummation by Northern of the
transactions contemplated hereby or thereby, nor compliance by Northern with
any of the terms or provisions hereof or thereof, will (i) violate any
provision of the Charter or Bylaws of Northern or (ii) assuming that the
consents and approvals referred to in Section 4.4 are duly obtained,
(x) violate any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to Northern or any of its properties
or assets, or (y) violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of or a right of termination or
cancellation under, accelerate the performance required by, or result in the
creation of any liens, charges, pledges, encumbrances, mortgages, adverse
rights or claims, or security interests whatsoever ("LIENS") upon any of the
properties or assets of Northern under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Northern is a
party, or by which Northern or any of its properties or assets may be bound
or affected, except (in the case of clause (y) above) for such violations,
conflicts, breaches or defaults which, either individually or in the
aggregate, will not have and would not reasonably be expected to have a
Material Adverse Effect on Northern.
4.4 CONSENTS AND APPROVALS. Except for (i) the approval of this Agreement
and the Merger by the FDIC, the Washington Director and the Oregon Director,
(ii) approval of the listing of Cowlitz Common Stock to be issued in the Merger
on The Nasdaq National Market ("NASDAQ"), (iii) the filing with the Securities
and Exchange Commission (the "SEC") and the FDIC of a proxy statement in
definitive form relating to the meetings of Northern's and Cowlitz's
stockholders to be held to vote on approval of this Agreement and the Merger
(the "PROXY STATEMENT/PROSPECTUS") and the filing and declaration of
effectiveness of the registration statement on Form S-4 (the "S-4") in which the
Proxy Statement/Prospectus will be included as a prospectus and any filings or
approvals under applicable state securities laws, (iv) the filing of the
Articles of Merger with the Washington Director, the Washington Secretary and
the Oregon Director, (v) the approval of this Agreement and the Merger by the
requisite votes of the stockholders of Northern, the approval of the issuance of
the shares of
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Cowlitz Common Stock in the Merger by the stockholders of Cowlitz and the
approval of this Agreement and the Merger by the sole stockholder of Cowlitz
Bank, (vi) the consents and approvals set forth in Section 4.4 of the Northern
Disclosure Schedule, and (vii) the consents and approvals of third parties which
are not Governmental Entities (as defined below), the failure of which to obtain
will not have and would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect, no consents or approvals of, or
filings or registrations with, any court, administrative agency or commission or
other governmental authority or instrumentality or self-regulatory organization
(each a "GOVERNMENTAL ENTITY") or with any third party are necessary in
connection with (A) the execution and delivery by Northern of this Agreement and
(B) the consummation by Northern of the Merger and the other transactions
contemplated hereby.
4.5 REPORTS. Northern has timely filed all material reports, registrations
and statements, together with any amendments required to be made with respect
thereto, that they were required to file since January 1, 1996 with any
Governmental Entity and have paid all fees and assessments due and payable in
connection therewith. Except for normal examinations conducted by a Governmental
Entity in the regular course of the business of Northern or as set forth in
Section 4.5 of the Northern Disclosure Schedule, no Governmental Entity has
initiated any proceeding or, to the best knowledge of Northern, threatened an
investigation into the business or operations of Northern since January 1, 1996.
Except as set forth in Section 4.5 of the Northern Disclosure Schedule, there is
no material unresolved violation, criticism or exception by any Governmental
Entity with respect to any report or statement relating to any examinations of
Northern.
4.6 FINANCIAL STATEMENTS. Northern has previously made available to
Cowlitz copies of (a) the balance sheets of Northern, as of December 31, for the
fiscal years 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the fiscal years 1996 through 1998,
inclusive, as reported in Northern's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998 filed with the FDIC under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), in each case accompanied by the
audit report of Moss Adams LLP, independent auditors with respect to Northern,
(b) the unaudited balance sheets of Northern as of June 30, 1998 and June 30,
1999 and the related unaudited statements of operations, stockholders, equity
and cash flows for the three-month periods then ended, as reported in Northern's
Quarterly Report on Form 10-QSB for the period ended June 30, 1999 filed with
the FDIC under the Exchange Act and (c) the amended and restated financial
statements on and for the period ended June 30, 1999 as reported in Northern's
Amended Quarterly Report on Form 10-QSB/A filed with the FDIC under the Exchange
Act. Each of the financial statements referred to in this Section 4.6 (including
the related notes, where applicable) fairly present, and the financial
statements referred to in Section 7.11 hereof (including the related notes,
where applicable) will fairly present (subject, in the case of the unaudited
statements, to normal recurring adjustments, none of which are expected to be
material in nature or amount), the results of the operations and changes in
stockholders' equity and financial position of Northern for the respective
fiscal periods or as of the respective dates therein set forth. Each of such
financial statements (including the related notes, where applicable) complies,
and the financial statements referred to in Section 7.11 hereof (including the
related notes, where applicable) will comply, in all material respects with
applicable accounting requirements and with the published rules and regulations
of the FDIC with respect thereto and each of such financial statements
(including the related notes, where applicable) has been, and the financial
statements referred to in Section 7.11 (including the related notes, where
applicable) will be, prepared in accordance with GAAP consistently applied
during the periods involved, except in each case as indicated in such statements
or in the notes thereto or, in the case of unaudited statements, as permitted by
Form 10-QSB. The books and records of Northern have been, and are being,
maintained in all material respects in accordance with GAAP and any other
applicable legal and accounting requirements and reflect only actual
transactions.
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4.7 BROKER'S FEES. Except as set forth in Section 4.7 of the Northern
Disclosure Schedule, neither Northern nor any of its officers or directors has
employed any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement. Copies of all agreements with each broker or
finder listed in Section 4.7 of the Northern Disclosure Schedule have previously
been furnished to Cowlitz.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in the Northern Reports (as defined in
Section 4.12) filed prior to the date hereof, or as set forth in
Section 4.8(a) of the Northern Disclosure Schedule, since December 31, 1998,
no event has occurred which has had or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Northern.
(b) Except as publicly disclosed in the Northern Reports filed prior to
the date hereof, or as set forth in Section 4.8(b) of the Northern
Disclosure Schedule, since December 31, 1998, Northern has carried on its
business in all material respects in the ordinary course of business, and
Northern has not (i) except for normal increases in the ordinary course of
business consistent with past practice and except as required by applicable
law, increased the wages, salaries, compensation, pension or other fringe
benefits or perquisites payable to any officer or director, other than
persons newly hired for or promoted to such position, from the amount
thereof in effect as of December 31, 1998, or granted any severance or
termination pay, entered into any contract to make or grant any severance or
termination pay, or paid any bonus, in each case to any such officer or
director, other than pursuant to preexisting agreements, arrangements or
bonus plans, or (ii) suffered any strike, work stoppage, slow-down or other
labor disturbance.
4.9 LEGAL PROCEEDINGS.
(a) Except as set forth in Section 4.9(a) of the Northern Disclosure
Schedule, Northern is not a party to any, and there are no pending or, to
the best of Northern's knowledge, threatened legal, administrative, arbitral
or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Northern or challenging the validity or
propriety of the transactions contemplated by this Agreement as to which
there is a significant possibility of an adverse determination and which, if
adversely determined, would, individually or in the aggregate, have or
reasonably be expected to have a Material Adverse Effect on Northern.
(b) Except as set forth in Section 4.9(b) of the Northern Disclosure
Schedule, there is no injunction, order, judgment, decree or regulatory
restriction specifically imposed upon Northern or its assets which has had,
or would reasonably be expected to have, a Material Adverse Effect on
Northern or the Surviving Bank.
4.10 TAXES.
(a) Except as set forth in Section 4.10(a) of the Northern Disclosure
Schedule: (i) Northern has (A) duly and timely filed (including pursuant to
applicable extensions granted without penalty) all Tax Returns (as
hereinafter defined) required to be filed at or prior to the Effective Time,
and such Tax Returns are true, correct and complete, and (B) paid in full on
a timely basis, or established an adequate reserve (excluding reserves for
deferred taxes) in the financial statements of Northern (in accordance with
GAAP) for all Taxes (as hereinafter defined) with respect to items or
periods covered by such Tax Returns (whether or not shown or reportable on
such Tax Returns); (ii) no deficiencies for any Taxes (as hereinafter
defined) have been proposed, asserted or assessed against or with respect to
Northern and no audit by any taxing authority is in process, pending or
threatened; (iii) there are no liens for Taxes upon the assets of Northern
except for statutory liens for current Taxes not yet due; (iv) Northern is
not and has never been a party to any tax sharing agreement; (v) Northern
has not waived any statute of limitations with respect to any Taxes or Tax
Returns or agreed to any extension of time with respect to the assessment of
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Taxes or deficiencies; (vi) Northern has withheld and paid over all Taxes
required to have been withheld and paid over and complied with all
information reporting and backup withholding requirements, including
maintenance of required records with respect thereto, in connection with
amounts paid or owing to any employee, creditor, independent contractor or
other third party; and (vii) Northern has never been a member of an
"affiliated group" within the meaning of Section 1504 of the Code filing a
consolidated federal income Tax Return (other than a group the common parent
of which was Northern) or has any liability for the Taxes of any other
person (other than Northern) under Treasury Regulations Section 1.1502-6 (or
any similar provision of state, local or foreign law) as a transferee or
successor, by contract or otherwise.
(b) For purposes of this Agreement, "TAXES" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any
federal, state, local or foreign taxing authority, including, but not
limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other similar taxes, including any interest
or penalties, additions to tax or additional amounts attributable thereto.
(c) For purposes of this Agreement, "TAX RETURN" shall mean any return,
report, information return or other document (including any related or
supporting information) with respect to Taxes, including without limitation
all information returns or reports with respect to backup withholding and
other payments to third parties.
(d) Northern has not filed a consent to the application of
Section 341(f) of the Code.
(e) Northern has made available to Cowlitz true and complete copies of
all income tax audit reports and closing or other agreements related to
Taxes and all federal and state income or franchise tax returns Northern has
filed since its inception.
(f) Northern does not do business in or derive income from any state,
local, territorial or foreign taxing jurisdiction other than those for which
all Tax Returns have been furnished.
(g) Northern is not and has never been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code.
(h) Northern has not entered into any agreement that would require it to
make any payment that is not deductible pursuant to Section 280G, 404 or 162
of the Code.
(i) Northern has not executed a power of attorney with respect to Taxes.
(j) Northern has not agreed, and is not required to make, any adjustment
under Section 481 of the Code by reason of a change in accounting method.
4.11 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Section 4.11(a) of the Northern Disclosure Schedule sets forth a
true and complete list of each material employee benefit plan, arrangement
or agreement and any amendments or modifications thereof (including, without
limitation, all stock purchase, stock option, severance, employment,
change-in-control, health/welfare and Code Section 125 plans, fringe
benefit, bonus, incentive, deferred compensation and other agreements,
programs, policies and arrangements, whether or not subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) that is
maintained as of the date of this Agreement (the "PLANS") by Northern or by
any trade or business, whether or not incorporated (an "ERISA AFFILIATE"),
all of which together with Northern would be deemed a "single employer'
within the meaning of Section 4001 of ERISA.
(b) Northern has previously made available to Cowlitz true and complete
copies of each of the Plans and all related documents, including but not
limited to (i) the actuarial reports for each
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Plan (if applicable) for each of the last two years, and (ii) the most
recent determination letter from the Internal Revenue Service (if
applicable) for each Plan.
(c) Except as set forth in Section 4.11(c) of the Northern Disclosure
Schedule, (i) each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not
limited to ERISA and the Code, (ii) each of the Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code has been
determined to be so qualified by the Internal Revenue Service or will be
submitted for such determination within the applicable remedial amendment
period, (iii) with respect to each Plan which is subject to Title IV of
ERISA, the present value of accrued benefits under such Plan, based upon the
actuarial assumptions used for funding purposes in the most recent actuarial
report prepared by such Plan's actuary with respect to such Plan, did not,
as of its latest valuation date, exceed the then current value of the assets
of such Plan allocable to such accrued benefits, (iv) no Plan provides
benefits, including without limitation death or medical benefits (whether or
not insured), with respect to current or former employees of Northern or any
ERISA Affiliate beyond their retirement or other termination of service,
other than (w) coverage mandated by applicable law, (x) death benefits or
retirement benefits under any "employee pension plan," as that term is
defined in Section 3(2) of ERISA, (y) deferred compensation benefits accrued
as liabilities on the books of Northern or any ERISA Affiliates or
(z) benefits the full cost of which is borne by the current or former
employee (or his beneficiary), (v) to the best knowledge of Northern no
liability under Title IV of ERISA has been incurred by Northern or any ERISA
Affiliate that has not been satisfied in full (other than payment of
premiums not yet due to the Pension Benefit Guaranty Corporation (the
"PBGC")), and no condition exists that presents a material risk to Northern
or any ERISA Affiliate of incurring a material liability thereunder,
(vi) no Plan is a "multi-employer pension plan," as such term is defined in
Section 3(37) of ERISA, (vii) to the best knowledge of Northern all
contributions or other amounts payable by Northern as of the Effective Time
with respect to each Plan in respect of current or prior plan years have
been paid or accrued in accordance with GAAP and Section 412 of the Code,
(viii) to the best knowledge of Northern neither Northern nor any ERISA
Affiliate has engaged in a transaction in connection with which Northern or
any ERISA Affiliate could be subject to either a material civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a material tax
imposed pursuant to Section 4975 or 4976 of the Code, and (ix) to the best
knowledge of Northern there are no pending, threatened or anticipated claims
(other than routine claims for benefits) by, on behalf of or against any of
the Plans or any trusts related thereto which would, individually or in the
aggregate, have or be reasonably expected to have a Material Adverse Effect
on Northern.
(d) Except as set forth in Section 4.11(d) of the Northern Disclosure
Schedule, no Plan exists which provides for or could result in the payment
to any Northern employee of any money or other property or rights or
accelerate the vesting or payment of such amounts or rights to any Northern
employee as a result of the transactions contemplated by this Agreement,
including the Merger, whether or not such payment or acceleration would
constitute a parachute payment within the meaning of Code Section 280G.
Except as set forth in Section 4.11(d) of the Northern Disclosure Schedule,
since December 31, 1998, Northern has not taken any action that would result
in the payment of any amounts, or the accelerated vesting of any rights or
benefits, under any Plan set forth in Section 4.11(d) of the Northern
Disclosure Schedule.
(e) To the best knowledge of Northern, except as set forth in
Section 4.11(e) of the Northern Disclosure Schedule, Northern is not a party
to and is not bound by any contract, arrangement or understanding (whether
written or oral) (i) with any consultants receiving in excess of $50,000
annually or (ii) with respect to the term of employment or compensation of
any employees. To the best knowledge of Northern, except as provided under
the Plans set forth in Sections 4.11(d) and (e) of the Northern Disclosure
Schedule and other agreements or arrangements set forth in
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Sections 4.11(d) and (e) of the Northern Disclosure Schedule, consummation
of the transactions contemplated by this Agreement will not (either alone or
upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from Northern to any
officer or employee thereof. Northern has previously delivered or made
available to Cowlitz true and complete copies of all consulting agreements
calling for payments in excess of $50,000 annually and employment and
deferred compensation agreements (or forms thereof) that are in writing to
which Northern is a party.
(f) Except as set forth in Section 4.11(f) of the Northern Disclosure
Schedule, no current employee of Northern received aggregate remuneration
(bonus, salary and commission) in excess of $100,000 for 1998 or would
reasonably be expected to receive aggregate remuneration (excluding
severance or other payments which, pursuant to an agreement or arrangement
set forth in Section 4.11(e) of the Northern Disclosure Schedule, are made
as a result of consummation of the transactions contemplated by this
Agreement, either alone or upon the occurrence of any additional acts or
events) in excess of $100,000 in 1999.
4.12 FDIC REPORTS. Northern has previously made available to Cowlitz an
accurate and complete copy of each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since January 1, 1996 and
prior to the date hereof by Northern or any of its Subsidiaries with the FDIC
pursuant to the Securities Act of 1933, as amended (the "SECURITIES ACT"), or
the Exchange Act (the "NORTHERN REPORTS"), and no such registration statement,
offer circular, prospectus, report, schedule or proxy statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
Northern has timely filed all Northern Reports and other documents required to
be filed by them under the Securities Act and the Exchange Act, and, as of their
respective dates, all Northern Reports complied in all material respects with
the published rules and regulations of the FDIC with respect thereto.
4.13 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section 4.13
of the Northern Disclosure Schedule, Northern holds, and has at all times held,
all licenses, franchises, permits and authorizations necessary for the lawful
conduct of its business under and pursuant to all, and has complied with and is
not in violation in any material respect under any, applicable law, statute,
order, rule, regulation, policy and/or guideline of any Governmental Entity
relating to Northern, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or violation would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect on Northern, and Northern does not know of, and has not
received notice of, any violations of any of the above which, individually or in
the aggregate, would have or would reasonably be expected to have a Material
Adverse Effect on Northern.
4.14 CERTAIN CONTRACTS.
(a) Except as publicly disclosed in the Northern Reports filed prior to
the date hereof or as set forth in Section 4.14(a) of the Northern
Disclosure Schedule, Northern is not a party to or bound by any contract,
arrangement, commitment or understanding (whether written or oral)
(i) which is a material contract (as defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this Agreement,
(ii) which limits the freedom of Northern to compete in any line of
business, in any geographic area or with any person, or (iii) with or to a
labor union or guild (including any collective bargaining agreement). Each
contract, arrangement, commitment or understanding of the type described in
this Section 4.14(a), whether or not publicly disclosed in the Northern
Reports filed prior to the date hereof or set forth in Section 4.14(a) of
the Northern Disclosure Schedule, is referred to herein as a "NORTHERN
CONTRACT," and Northern does not know of, and has not received notice of,
any violation of the above by any of the other parties thereto which,
individually or in the aggregate, would have or would reasonably be
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expected to have a Material Adverse Effect on Northern. Northern has made
available all contracts which involved payments by Northern in fiscal year
1998 of more than $100,000 or which could reasonably be expected to involve
payments during fiscal year 1999 of more than $100,000.
(b) Except as set forth in Section 4.14(b) of the Northern Disclosure
Schedule, each Northern Contract is valid and binding and in full force and
effect, (ii) Northern has in all material respects performed all obligations
required to be performed by it to date under each Northern Contract, and
(iii) no event or condition exists which constitutes or, after notice or
lapse of time or both, would constitute a material default on the part of
Northern under any such Northern Contract, except, in each case, where such
invalidity, failure to be binding, failure to so perform or default,
individually or in the aggregate, would not have or reasonably be expected
to have a Material Adverse Effect on Northern.
4.15 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in
Section 4.15 of the Northern Disclosure Schedule, Northern is not subject to any
cease-and-desist or other order issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has adopted any board resolutions at the request of (each,
whether or not set forth in Section 4.15 of the Northern Disclosure Schedule, a
"REGULATORY AGREEMENT"), any Governmental Entity that restricts the conduct of
its business or that in any manner relates to its capital adequacy, its credit
policies, its management or its business, nor has Northern been advised by any
Governmental Entity that it is considering issuing or requesting any Regulatory
Agreement.
4.16 UNDISCLOSED LIABILITIES. Except (i) for those liabilities that are
fully reflected or reserved against on the balance sheet of Northern included in
the Northern Form 10-KSB for the year ended December 31, 1998, (ii) for
liabilities incurred in the ordinary course of business consistent with past
practice since December 31, 1998, or (iii) for those liabilities set forth in
Section 4.16 of the Northern Disclosure Schedule, Northern has not incurred any
liability of any nature whatsoever (whether absolute, accrued or contingent or
otherwise and whether due or to become due) that, either alone or when combined
with all the liabilities not described in clause (i), (ii) or (iii), has had, or
would be reasonably expected to have, a Material Adverse Effect on Northern.
4.17 ANTI-TAKEOVER PROVISIONS. The Board of Directors of Northern has
taken all necessary action so that any applicable provisions of the takeover
laws of any state do not and will not apply to this Agreement, the Merger or the
transactions contemplated hereby, the Stock Option Agreement or the exercise of
the Option, including without limitation, the adoption by the Board of Directors
of Northern of resolutions specifically approving this Agreement, the Merger and
the transactions contemplated hereby, the Stock Option Agreement and the
exercise of the Option.
4.18 NORTHERN INFORMATION. The information relating to Northern and its
Subsidiaries to be provided by Northern for inclusion in the Proxy
Statement/Prospectus and the S-4, or in any other document filed with any other
Governmental Entity in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The Proxy Statement/Prospectus (except for such portions thereof
as relate only to Cowlitz or any of its Subsidiaries) will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
4.19 TITLE TO PROPERTY.
(a) REAL PROPERTY. Section 4.19(a) of the Northern Disclosure Schedule
contains a description of all interests in real property (other than real
property security interests received in the ordinary course of business or
real property acquired through foreclosure or deed in lieu thereof or other
realization proceedings ("REO")), whether owned, leased or otherwise
claimed, including a list of
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all leases of real property, in which Northern thereof has or claims in
interest as of the date of this Agreement and any guarantees of any such
leases by any of such parties. True and complete copies of such leases have
previously been delivered or made available to Cowlitz, together with all
amendments, modifications, agreements or other writings related thereto
which are in the possession of Northern. Except as disclosed on
Section 4.19(a) of the Northern Disclosure Schedule, to the best knowledge
of Northern, each such lease is valid and binding as between Northern and
the other party or parties thereto, and the occupant is a tenant or
possessor in good standing thereunder, free of any default or breach
whatsoever (except as otherwise disclosed on Section 4.19(a) of the Northern
Disclosure Schedule) and quietly enjoys the premises provided for therein.
Except as disclosed on Section 4.19(a) of the Northern Disclosure Schedule,
Northern has owner's policies of title insurance insuring it to be the owner
of all real property owned by it on the date of this Agreement, free and
clear of all Liens, except Liens for current taxes not yet due and payable
and other standard exceptions commonly found in title policies in the
jurisdiction where such real property is located, and such encumbrances and
imperfections of title, if any, as do not materially detract from the value
of the properties and do not materially interfere with the present or
proposed use of such properties or otherwise materially impair such
operations. All real property and fixtures material to the business,
operations of financial condition of Northern are in substantially good
condition and repair.
(b) PERSONAL PROPERTY. Northern has good, valid and marketable title to
all tangible personal property owned by it on the date hereof, free and
clear of all Liens, except as publicly disclosed in the Northern Reports
filed prior to the date hereof or as disclosed on Section 4.19(b) of the
Northern Disclosure Schedule. With respect to personal property used in the
business of Northern which is leased rather than owned, Northern is not in
default under the terms of any such lease the loss of which would have a
Material Adverse Effect on Northern.
4.20 INSURANCE. Section 4.20 of the Northern Disclosure Schedule contains
a true and complete list and a brief description (including name of insurer,
agent, coverage, premium and expiration date) of all insurance policies in force
on the date hereof with respect to the business and assets of the Northern
(other than insurance policies under which Northern thereof is named as a loss
payee, insured or additional insured as a result of its position as a secured
lender on specific Loans and mortgage insurance policies on specific Loans).
Northern is in compliance with all of the material provisions of their insurance
policies and are not in default under any of the material terms thereof. Each
such policy is outstanding and in full force and effect and, except as set forth
on Section 4.20 of the Northern Disclosure Schedule, Northern is the sole
beneficiary of such policies. All premiums and other payments due under any such
policy have been paid.
4.21 ENVIRONMENTAL LIABILITY. Except as set forth in Section 4.21 of the
Northern Disclosure Schedule, there are no legal, administrative, arbitral or
other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose, or that reasonably could be expected to result in the
imposition of, on Northern any liability or obligation arising under common law
standards relating to environmental protection, human health or safety, or
arising under any local, state or federal environmental statute, regulation or
ordinance, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (collectively, the
"ENVIRONMENTAL LAWS"), pending or, to the knowledge of Northern, threatened
against Northern, which liability or obligation would have or would reasonably
be expected to have a Material Adverse Effect on Northern. To the knowledge of
Northern, there is no reasonable basis for any such proceeding, claim, action or
governmental investigation that would impose any liability or obligation that
would have or would reasonably be expected to have a Material Adverse Effect on
Northern. To the knowledge of Northern, during or prior to the period of
(i) its ownership or operation of any of their respective current properties,
(ii) its participation in the management of any property, or (iii) its holding
of a security interest or other
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interest in any property, there were no releases or threatened releases of
hazardous, toxic, radioactive or dangerous materials or other materials
regulated under Environmental Laws in, on, under or affecting any such property
which would reasonably be expected to have a Material Adverse Effect on
Northern. Northern is not subject to any agreement, order, judgment, decree,
letter or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any material liability or obligation pursuant to
or under any Environmental Law that would have or would reasonably be expected
to have a Material Adverse Effect on Northern.
4.22 OPINION OF FINANCIAL ADVISOR. Northern has received the opinion of
D.A. Davidson & Co., dated September 10, 1999, to the effect that, as of such
date, the Merger Consideration is fair from a financial point of view to the
holders of Northern Common Stock. A true and complete copy of such opinion has
been delivered to Cowlitz on or prior to the date of this Agreement.
4.23 PATENTS, TRADEMARKS, ETC. Northern owns or possesses all legal rights
to use all proprietary rights, including without limitation all trademarks,
trade names, service marks and copyrights, that are material to the conduct of
its existing business. Except for the agreements listed on Section 4.23 of the
Northern Disclosure Schedule, Northern is not bound by or a party to any
options, licenses or agreements of any kind with respect to any trademarks,
service marks or trade names which it claims to own. Northern has not received
any communications alleging that it has violated or would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity.
4.24 LOAN MATTERS.
(a) All evidences of indebtedness ("LOANS") reflected as assets on the
books and records of Northern were, as of June 30, 1999 and will be as of
the Closing Date, in all respects legal, valid and binding obligations of
the respective obligors named therein and no such indebtedness is subject to
any defenses which have been or may be asserted, except for defenses arising
from applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights generally and general principles of equity.
(b) Except as disclosed in Section 4.24(b) of the Northern Disclosure
Schedule, each Loan outstanding at any time since January 1, 1996 and each
commitment to extend credit has been solicited and originated and is
administered and serviced in all material respects in accordance with the
relevant loan documents, Northern's underwriting standards and in material
compliance with all applicable requirements of federal, state and local
laws, regulations and rules.
(c) Except as disclosed in Section 4.24(c) of the Northern Disclosure
Schedule, no loan, all or any part of which is an asset of Northern was, as
of June 30, 1999, more than 30 days delinquent as to principal or interest.
(d) Except as disclosed in Section 4.24(d) of the Northern Disclosure
Schedule, to the knowledge of Northern, the documentation for each loan (the
"LOAN FILE") is correct and complete to the extent that all Loan Files
contain those documents necessary for Northern to enforce the loans and
realize upon the security, if any, therefor, including but not limited to
properly executed notes or credit agreements and security documents. In
addition, Except as disclosed in Section 4.24(d) of the Northern Disclosure
Schedule, the Loan Files for all loans secured primarily by real property
also contain evidence of property casualty insurance (or are covered by a
mortgage protection policy) and, where required by the FDIC or other
governmental regulators, appraisals, policies of title insurance (or, in the
case of loans closed within the past three months, commitments therefor) and
policies of flood insurance.
(e) Except as disclosed on Section 4.24(e) of the Northern Disclosure
Schedule, none of the loans Northern has sold or in which Northern has sold
participation interests has any buy-back or guarantee obligations. The
percentage of interest retained by Northern in any sold participation
interest is not subordinated to the percentage of interest sold.
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(f) There are no employee, officer, director or other affiliate loans on
which the borrower is paying a rate other than that reflected on the note or
the relevant credit agreement.
(g) With respect to loans secured by commercial real estate, Northern
has a Phase I environmental study in its files in those instances where
prudent lending practice would require a lender to have such a study, and
each such Phase I environmental study shows the property to be free of any
underground storage tanks, asbestos, ureaformaldehyde, uncontained
polychlorinated biphenyls, or releases of hazardous substances as such terms
are defined by any applicable federal, state or local environmental
protection laws and regulations, or if such Phase I environmental study
shows the property to contain any underground storage tanks, asbestos,
ureaformaldehyde, uncontained polychlorinated biphenyls, or releases of
hazardous substances, then such Phase I environmental study affirmatively
recommends that no Phase II environmental study or further investigation is
necessary.
(h) To Northern's knowledge, there are no loans outstanding to
individuals who are not residents of the United States except for loans
secured by collateral located in the United States with a current fair
market value equal to 100 percent of the loan amount. There are no loans
outstanding to corporations or other entities headquartered outside of the
United States except for loans that are either (a) guaranteed by individuals
who are residents of the United States, or (b) secured by collateral located
in the United Sates with a current fair market value equal to 100 percent of
the loan amount. To Northern's knowledge, there are no commitments
outstanding to nonresident individuals or entities to make loans or advances
which, when made, would not be in compliance with the preceding two
sentences.
4.25 POWERS OF ATTORNEY. Northern has no powers of attorney outstanding
other than those issued pursuant to the requirements of regulatory authority or
in the ordinary course of business with respect to routine matters.
4.26 BENEFIT PLANS INVESTED IN COMMON STOCK. No shares of Northern Common
Stock are available to individuals, directly or indirectly, through any Benefit
Plan, and no Benefit Plan is invested in Northern Common Stock.
4.27 COMMUNITY REINVESTMENT ACT COMPLIANCE. Northern is in substantial
compliance with the applicable provisions of the Community Reinvestment Act of
1977 and the regulations promulgated thereunder (collectively, "CRA"). Northern
has not been advised of the existence of any fact or circumstance or set of
facts or circumstances which, if true, would cause Northern to fail to be in
substantial compliance with such provisions or to have its current rating
lowered. Any change in the current rating which would prohibit the Merger from
being consummated shall be a Material Adverse Effect on Northern.
4.28 YEAR 2000 COMPLIANCE. Northern has completed an assessment of
Northern's computerized application programs, files, databases and computer and
computer communication services (collectively, the "NORTHERN AUTOMATED
SYSTEMS"), and has implemented a plan to resolve issues arising or expected to
arise in connection with the deficient processing by the Northern Automated
Systems of date-related information containing dates on, during and after
January 1, 2000 (each such deficiency, a "YEAR 2000 PROBLEM"). Northern's Year
2000 plan (the "NORTHERN Y2K PLAN") consists of assessing, testing for, and
implementing all steps necessary to preclude material Year 2000 Problems. As of
the date of this Agreement, Northern has substantially completed the necessary
assessment and testing processes and is conducting follow-up activities as a
result of Year 2000 Problems identified as of such date. Northern has no reason
to believe that any Year 2000 Problem, individually or in the aggregate, would
have or would reasonably be expected to have a Material Adverse Effect on
Northern.
4.29 LABOR MATTERS. Northern is not a party to and is not bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor
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is Northern the subject of a proceeding asserting that it has committed an
unfair labor practice (within the meaning of the National Labor Relations Act)
or seeking to compel Northern to bargain with any labor organization as to wages
or conditions of employment, nor is there any strike or other material labor
dispute or disputes involving it pending, or to Northern's knowledge,
threatened, nor is Northern aware of any activity involving its employees
seeking to certify a collective bargaining unit or engaging in other
organizational activity.
5. REPRESENTATIONS AND WARRANTIES OF COWLITZ
Cowlitz hereby represents and warrants to Northern as follows:
5.1 CORPORATE ORGANIZATION.
(a) Cowlitz is a corporation duly organized and validly existing under
the laws of the State of Washington. Cowlitz has the corporate power and
authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted, and is duly licensed or qualified
to do business in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets
owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have or
reasonably be expected to have a Material Adverse Effect (as defined below)
on Cowlitz. As used in this Agreement, the term "MATERIAL ADVERSE EFFECT"
means, with respect to Cowlitz, a material adverse effect on the business,
results of operations, financial condition or prospects of Cowlitz and its
Subsidiaries taken as a whole or a material adverse effect on Cowlitz's
ability to consummate the transactions contemplated hereby on a timely
basis; PROVIDED, HOWEVER, that a Material Adverse Effect on Cowlitz shall
not be deemed to have occurred as a result of (i) any changes in laws,
regulations or GAAP or (ii) any changes in general economic conditions
affecting banks, savings associations or their holding companies generally.
Cowlitz is duly registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended. The copies of the Articles of Incorporation
and Bylaws of Cowlitz which have previously been made available to Northern
are true, complete and correct copies of such documents as in effect as of
the date of this Agreement. Cowlitz's only Subsidiaries are Cowlitz Bank and
Business Finance Corporation.
(b) Cowlitz Bank is a bank duly chartered and validly existing under the
laws of the State of Washington. All of the issued and outstanding capital
stock of Cowlitz Bank is owned free and clear of all liens by Cowlitz.
Deposits in Cowlitz Bank are insured by the FDIC through the BIF to the
fullest extent permitted by law. Cowlitz Bank has no Subsidiaries.
5.2 CAPITALIZATION. The authorized capital stock of Cowlitz consists of
25,000,000 shares of Cowlitz Common Stock and 5,000,000 shares of preferred
stock, no par value ("COWLITZ PREFERRED STOCK"). At the close of business on
July 30, 1999, there were 4,154,070 shares of Cowlitz Common Stock outstanding
and no shares of Cowlitz Preferred Stock outstanding. As of August 1, 1999,
783,829 shares of Cowlitz Common Stock or Cowlitz Preferred Stock were reserved
for issuance. All of the issued and outstanding shares of Cowlitz Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof. As of the date of this Agreement, except (i) as set forth in
Section 5.2(a) of the disclosure schedule of Cowlitz delivered to Northern
concurrently herewith (the "COWLITZ DISCLOSURE SCHEDULE"), and (ii) as set forth
elsewhere in this Section 5.2(a), Cowlitz does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of Cowlitz
Common Stock or Cowlitz Preferred Stock or any other equity securities of
Cowlitz or any securities representing the right to purchase or otherwise
receive any shares of Cowlitz Common Stock or Cowlitz Preferred Stock. The
shares of Cowlitz Common Stock to be issued pursuant to the Merger will be duly
authorized and
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validly issued and, at the Effective Time, all such shares will be fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof.
5.3 AUTHORITY; NO VIOLATION.
(a) Cowlitz has full corporate power and authority to execute and
deliver this Agreement and the Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Stock Option Agreement and the consummation of the
transactions contemplated hereby (including the issuance of the Cowlitz
Common Stock constituting Merger Consideration) and thereby have been duly
and validly approved by the Board of Directors of Cowlitz. The Board of
Directors of Cowlitz will direct that the issuance of shares of Cowlitz
Common Stock in the Merger be submitted to Cowlitz's stockholders for
approval at a meeting of such stockholders and, except for the approval of
such issuance by the affirmative vote of a majority of the votes cast at
such a meeting, no other corporate proceedings on the part of Cowlitz are
necessary to approve this Agreement or the Stock Option Agreement or to
consummate the transactions contemplated hereby and thereby. This Agreement
and the Stock Option Agreement have been duly and validly executed and
delivered by Cowlitz and (assuming due authorization, execution and delivery
by Northern) each constitutes a valid and binding obligation of Cowlitz,
enforceable against Cowlitz in accordance with its terms, except as
enforcement may be limited by general principles of equity whether applied
in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(b) Cowlitz Bank has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby has been duly and validly approved by
the Board of Directors of Cowlitz Bank and will be duly and validly approved
by the sole stockholder of Cowlitz Bank, and, upon such approval, no other
corporate proceeding on the part of Cowlitz Bank will be necessary to
consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Cowlitz Bank and (assuming
due authorization, execution and delivery by Northern) constitutes a valid
and binding obligation of Cowlitz Bank, enforceable against Cowlitz Bank in
accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity
and by bankruptcy, insolvency, fraudulent transfer, receivership,
conservatorship and similar laws affecting creditors' rights and remedies
generally.
(c) Except as set forth in Section 5.3(c) of the Cowlitz Disclosure
Schedule, neither the execution and delivery of this Agreement or the Stock
Option Agreement by Cowlitz or Cowlitz Bank, nor the consummation by Cowlitz
or Cowlitz Bank of the transactions contemplated hereby or thereby, nor
compliance by Cowlitz or Cowlitz Bank with any of the terms or provisions
hereof or thereof, will (i) violate any provision of the Articles of
Incorporation or Bylaws of Cowlitz or any of the similar governing documents
of any of its Subsidiaries or (ii) assuming that the consents and approvals
referred to in Section 5.4 are duly obtained, (x) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Cowlitz or any of its Subsidiaries or any of their respective
properties or assets, or (y) violate, conflict with, result in a breach of
any provision of or the loss of any benefit under, constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, result in the termination of or a right of termination or
cancellation under, accelerate the performance required by, or result in the
creation of any Lien upon any of the respective properties or assets of
Cowlitz or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Cowlitz or any
of its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected, except (in the case of
clause (y) above) for such violations,
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conflicts, breaches or defaults which either individually or in the
aggregate will not have and would not reasonably be expected to have a
Material Adverse Effect on Cowlitz.
5.4 CONSENTS AND APPROVALS. Except for (i) the approval of this Agreement
and the Merger by the FDIC, the Washington Director and the Oregon Director,
(ii) approval of the listing of the Cowlitz Common Stock to be issued in the
Merger on Nasdaq, (iii) the filing with the FDIC and the SEC of the Proxy
Statement/Prospectus and the filing and declaration of effectiveness of the S-4,
(iv) the filing of the Articles of Merger with the Washington Secretary, the
Washington Director and the Oregon Director, (v) the approval of this Agreement
and the Merger by the requisite votes of the stockholders of Northern, the
approval of the issuance of shares of Cowlitz Common Stock in the Merger by
stockholders of Cowlitz and the approval of this Agreement and the Merger by the
sole stockholder of Cowlitz Bank, (vi) the consents and approvals set forth in
Section 5.4 of the Cowlitz Disclosure Schedule, and (vii) the consents and
approvals of third parties which are not Governmental Entities, the failure of
which to obtain will not have and would not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect, no consents or
approvals of, or filings or registrations with, any Governmental Entity or any
third party are necessary in connection with (A) the execution and delivery by
Cowlitz of this Agreement and (B) the consummation by Cowlitz of the Merger and
the other transactions contemplated hereby.
5.5 REPORTS. Cowlitz and each of its Subsidiaries have timely filed all
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
January 1, 1997 with any Governmental Entities, and have paid all fees and
assessments due and payable in connection therewith. Except as set forth in
Section 5.5 of the Cowlitz Disclosure Schedule and except for normal
examinations conducted by a Governmental Entity in the regular course of the
business of Cowlitz and its Subsidiaries, no Governmental Entity has initiated
any proceeding or, to the best knowledge of Cowlitz, investigation into the
business or operations of Cowlitz or any of its Subsidiaries since January 1,
1997. There is no material unresolved violation, criticism, or exception by any
Government Entity with respect to any report or statement relating to any
examinations of Cowlitz or any of its Subsidiaries.
5.6 FINANCIAL STATEMENTS. Cowlitz has previously made available to
Northern copies of (a) the consolidated balance sheets of Cowlitz and its
Subsidiaries, as of December 31, for the fiscal years 1997 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1996 through 1998, inclusive, as reported in
Cowlitz's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
filed with the SEC under the Exchange Act, in each case accompanied by the audit
report of Arthur Andersen LLP, independent public accountants with respect to
Cowlitz, and (b) the unaudited consolidated balance sheets of Cowlitz and its
Subsidiaries as of June 30, 1998 and June 30, 1999 and the related unaudited
consolidated statements of income, cash flows and changes in stockholders'
equity for the three-month periods then ended, as reported in Cowlitz's
Quarterly Report on Form 10-Q for the period ended June 30, 1999 filed with the
SEC under the Exchange Act. Each of the financial statements referred to in this
Section 5.6 (including the related notes, where applicable) fairly present, and
the financial statements referred to in Section 7.11 hereof (including the
related notes, where applicable) will fairly present (subject, in the case of
the unaudited statements, to normal recurring adjustments, none of which are
expected to be material in nature and amount), the results of the consolidated
operations and changes in stockholders' equity and consolidated financial
position of Cowlitz and its Subsidiaries for the respective fiscal periods or as
of the respective dates therein set forth. Each of such financial statements
(including the related notes, where applicable) complies, and the financial
statements referred to in Section 7.11 hereof (including the related notes,
where applicable) will comply, in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto; and each of such financial statements (including the
related notes, where applicable) has been, and the financial statements referred
to in Section 7.11 (including the related notes, where
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applicable) will be, prepared in accordance with GAAP consistently applied
during the periods involved, except in each case as indicated in such statements
or in the notes thereto or, in the case of unaudited statements, as permitted by
Form 10-Q. The books and records of Cowlitz and its Subsidiaries have been, and
are being, maintained in all material respects in accordance with GAAP and any
other applicable legal and accounting requirements and reflect only actual
transactions.
5.7 BROKER'S FEES. Except as set forth in Section 5.7 of the Cowlitz
Disclosure Schedule, neither Cowlitz nor any Subsidiary thereof nor any of their
respective officers or directors has employed any broker or finder or incurred
any liability for any broker's fees, commissions or finder's fees in connection
with any of the transactions contemplated by this Agreement.
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as publicly disclosed in
Cowlitz Reports (as defined in Section 5.10) filed prior to the date hereof or
as set forth in Section 5.8 of the Cowlitz Disclosure Schedule, since June 30,
1999, no event has occurred which has had or would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Cowlitz.
5.9 LEGAL PROCEEDINGS.
(a) Neither Cowlitz nor any of its Subsidiaries is a party to any, and
there are no pending or, to the best of Cowlitz's knowledge, threatened
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Cowlitz or
any of its Subsidiaries or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a
significant possibility of an adverse determination and which, if adversely
determined, would, individually or in the aggregate, have or reasonably be
expected to have a Material Adverse Effect on Cowlitz.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Cowlitz, any of its Subsidiaries or the assets of
Cowlitz or any of its Subsidiaries which has had, or would reasonably be
expected to have, a Material Adverse Effect on Cowlitz or the Surviving
Bank.
5.10 SEC REPORTS. Cowlitz has previously made available to Northern an
accurate and complete copy of each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since January 1, 1998 and
prior to the date hereof by Cowlitz with the SEC pursuant to the Securities Act
or the Exchange Act (the "COWLITZ REPORTS"), and no such registration statement,
prospectus, report, schedule or proxy statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading. Cowlitz has timely filed
all Cowlitz Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act, and, as of their respective dates, all
Cowlitz Reports complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
5.11 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section 5.11
of the Cowlitz Disclosure Schedule, Cowlitz and each of its Subsidiaries hold,
and have at all times held, all material licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
under and pursuant to all, and have complied with and are not in default in any
material respect under any, applicable law, statute, order, rule, regulation,
policy and/or guideline of any Governmental Entity relating to Cowlitz or any of
its Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not, individually
or in the aggregate, have or reasonably be expected to have a Material Adverse
Effect on Cowlitz, and neither Cowlitz nor any of its Subsidiaries knows of, or
has received notice of, any material violations of any of the above which,
individually or in the aggregate, would have or reasonably be expected to have a
Material Adverse Effect on Cowlitz.
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5.12 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in
Section 5.12 of the Cowlitz Disclosure Schedule, neither Cowlitz nor any of its
Subsidiaries is subject to any Regulatory Agreement that restricts the conduct
of its business or that in any manner relates to its capital adequacy, its
credit policies, its management or its business, nor has Cowlitz or any of its
Subsidiaries been advised by any Governmental Entity that it is considering
issuing or requesting any Regulatory Agreement.
5.13 COWLITZ INFORMATION. The information relating to Cowlitz and its
Subsidiaries to be provided by Cowlitz to be contained in the Proxy
Statement/Prospectus and the S-4, or in any other document filed with any other
Governmental Entity in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The Proxy Statement/Prospectus (except for such portions thereof
that relate only to Northern) will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder. The S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
5.14 YEAR 2000 COMPLIANCE. Cowlitz has completed an assessment of
Cowlitz's computerized application programs, files, databases and computer and
computer communication services, and has implemented a plan (the "COWLITZ Y2K
PLAN") to resolve issues arising or expected to arise in connection with any
Year 2000 Problems. The Cowlitz Y2K Plan consists of assessing, renovating,
validating and implementing all steps necessary to preclude material Year 2000
Problems. As of the date of this Agreement, Cowlitz has completed the
assessment, renovation and validation phases and is currently in the
implementation phase of the Cowlitz Y2K Plan. Cowlitz has no reason to believe
that any Year 2000 Problem, individually or in the aggregate, would have or
would reasonably be expected to have a Material Adverse Effect on Cowlitz.
5.15 OPINION OF FINANCIAL ADVISOR. Cowlitz has received the opinion of
Sage Capital LLC, dated September 14, 1999, to the effect that, as of such date,
the Merger Consideration is fair from a financial point of view to the holders
of Cowlitz Common Stock. A true and complete copy of such opinion has been
delivered to Northern on or prior to the date of this Agreement
6. COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME.
(a) Except as set forth in Section 6.1 or 6.2 of the Northern Disclosure
Schedule, as expressly contemplated or permitted by this Agreement, or as
required by applicable law, rule or regulation, during the period from the
date of this Agreement to the Effective Time, Northern shall (i) conduct its
business in the usual, regular and ordinary course consistent with past
practice, (ii) use reasonable best efforts to maintain and preserve intact
its business organization, employees and advantageous business relationships
and retain the services of its officers and key employees and (iii) take no
action which would reasonably be expected to adversely affect or delay its
ability to obtain any approvals of any Governmental Entity required to
consummate the transactions contemplated hereby or to consummate the
transactions contemplated hereby.
(b) Northern shall file (or cause to be filed) at its own expense, on or
before the due date thereof, all Tax Returns required to be filed for all
Tax periods ending on or before the Effective Time provided, however, that
Northern shall not file any such Tax Return, or other returns, elections,
claims for refund or information statements with respect to any liabilities
for Taxes (other than federal, state or local sales, use, property,
withholding or employment Tax Returns) for any Tax period until Cowlitz has
had a reasonable opportunity to review such Tax Returns. Northern shall
provide Cowlitz with a copy of appropriate workpapers, schedules, drafts and
final copies of each federal and state income tax return of Northern
(including returns of all Plans) at
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least ten (10) days before filing such Tax Return and shall reasonably
cooperate with any request by Cowlitz in connection therewith.
(c) Northern shall use its reasonable best efforts to sell all or part
of its obligations under its accounts receivable financing program under the
name of Business Manager prior to the Effective Time.
(d) Northern hereby agrees to obtain Cowlitz's prior written approval
with respect to those matters set forth in Sections 6.1 and 6.2 of the
Northern Disclosure Schedule that expressly require Cowlitz's prior written
approval
(e) In the event that Northern's dispute with Fiserv Solutions, Inc.
described in Section 4.9(a) of the Northern Disclosure Schedule has not been
resolved prior to the Effective Time, Northern agrees to establish prior to
the Effective Time a reasonable reserve for such dispute. In the event that
Northern's dispute with Albina State Bank described in Section 4.9(a) of the
Northern Disclosure Schedule has not been resolved prior to the Effective
Time, Northern agrees to establish prior to the Effective Time a reasonable
reserve for such dispute.
6.2 NORTHERN FORBEARANCES. Except as set forth in Section 6.2 of the
Northern Disclosure Schedule, as expressly contemplated or permitted by this
Agreement, or as required by applicable law, rule or regulation, during the
period from the date of this Agreement to the Effective Time, Northern shall not
without the prior written consent of Cowlitz:
(a) adjust, split, combine or reclassify any capital stock; set any
record or payment dates for the payment of any dividends or distributions on
its capital stock except in the ordinary and usual course of business
consistent with past practice; make, declare or pay any dividend or make any
other distribution on, or directly or indirectly redeem, purchase or
otherwise acquire, any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its capital
stock, or except as otherwise permitted by this paragraph (a) grant any
stock appreciation rights or grant any individual, corporation, joint
venture or other entity any right to acquire any shares of its capital
stock; or issue any additional shares of capital stock except pursuant to
the exercise of stock options outstanding as of the date hereof;
(b) incur any indebtedness for borrowed money, other than deposit
liabilities and short-term borrowings pursuant to credit facilities in
effect on the date of this Agreement or any replacement facilities with
commercially reasonable terms as credit facilities existing as of the date
hereof, or sell, transfer, mortgage, encumber or otherwise dispose of any of
its assets or properties to any individual, corporation or other entity, or
cancel, release or assign any indebtedness to any such person or any claims
held by any such person, in each case that is material to such party, except
(i) in the ordinary course of business consistent with past practice or
(ii) as expressly required by the terms of any contracts or agreements in
force at the date of this Agreement and set out in Section 6.2 of the
Northern Disclosure Schedule;
(c) form any Subsidiary, or make any acquisition or investment, whether
by purchase or other acquisition of stock or other equity interests, by
merger, consolidation or other business combination, or by contributions to
capital, or make any property transfers or material purchases of any
property or assets, in or from any other individual, corporation, joint
venture or other entity;
(d) enter into, renew or terminate any contract or agreement, other than
loans made in the ordinary course of business, that calls for aggregate
annual payments of $50,000 and which is not either (i) terminable at will on
60 days or less notice without payment of a penalty in excess of $20,000 or
(ii) has a term of less than one year; or make any material change in any of
its leases or contracts, other than renewals of contracts or leases for a
term of one year or less without material adverse changes to the terms
thereof;
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(e) other than general salary increases consistent with past practices
for employees other than executive officers, increase in any material
respect the compensation or fringe benefits of any of its employees or pay
any pension or retirement allowance not required by any existing plan or
agreement to any such employees or become a party to, amend (other than
amendments required by law) or commit itself to any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement
with or for the benefit of any employee or accelerate the vesting of any
stock options or other stock-based compensation;
(f) authorize or permit any of its officers, directors, employees,
representatives or agents (collectively, "REPRESENTATIVES") to directly or
indirectly solicit, initiate or encourage any inquiries relating to or that
may reasonably be expected to lead to, or the making of any proposal which
constitutes, a Takeover Proposal (as defined below), or recommend or endorse
any Takeover Proposal, or participate in any discussions or negotiations, or
provide third parties with any nonpublic information, relating to any such
Takeover Proposal or otherwise facilitate any effort or attempt to make or
implement a Takeover Proposal; PROVIDED, HOWEVER, that, at any time prior to
the time its stockholders shall have voted to approve this Agreement and the
Merger, Northern may, and may authorize and permit its Representatives to,
provide third parties with nonpublic information and participate in
discussions and negotiations with any third party in response to a Takeover
Proposal which was not solicited subsequent to the date hereof, if
Northern's Board of Directors, based on the advice of its financial advisors
and outside counsel, has determined in its reasonable good faith judgment
that the failure to do so would constitute a breach of its fiduciary duties.
Northern shall (i) advise Cowlitz orally (within one day) and in writing (as
promptly as practicable) of the receipt after the date hereof of any
Takeover Proposal by it or any of its Representatives and (ii) unless its
Board of Directors, based on the advice of its financial advisors and
outside counsel, has determined in its reasonable good faith judgment that
such action would constitute a breach of its fiduciary duties, inform
Cowlitz orally and in writing, as promptly as practicable after the receipt
thereof, of the material terms and conditions of any such Takeover Proposal
(including the identity of the party making such inquiry or proposal) and
shall keep Cowlitz informed of the status (including any changes in the
material terms and conditions) thereof. Northern shall not furnish any
nonpublic information to any other party pursuant to this Section 6.2(f)
except pursuant to the terms of a confidentiality agreement containing terms
substantially identical to the terms contained in the Confidentiality
Agreement (as defined in Section 7.2(b) hereof). Northern will immediately
cease and cause to be terminated any activities, discussions or negotiations
conducted prior to the date of this Agreement with any parties other than
Cowlitz with respect to any Takeover Proposal and require the return (or if
permitted by the terms of the applicable confidentiality agreement, the
certified destruction) of all confidential information previously provided
to such parties. As used in this Agreement, "TAKEOVER PROPOSAL" shall mean
any inquiry, proposal or offer relating to any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
Northern or the acquisition in any manner of 25% or more of the voting stock
or equity, or a substantial portion of the assets, of Northern, other than
the transactions contemplated by this Agreement;
(g) make any capital expenditures in excess of (A) $50,000 per project
or related series of projects or (B) $50,000 in the aggregate, other than
expenditures necessary to maintain existing assets in good repair;
(h) except in the ordinary course of business, make application for the
opening, relocation or closing of any, or open, relocate or close any,
branch, office or loan production or servicing facility;
(i) make or acquire any loan or issue a commitment for any loan except
for loans and commitments that are made in the ordinary course of business
consistent with past practice at rates not less than the prevailing market
rates, or issue or agree to issue any letters of credit or
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otherwise guarantee or agree to guarantee the obligations of any other
persons except for letters of credit issued in the ordinary course of
business consistent with past practice;
(j) except as otherwise expressly permitted elsewhere in this
Section 6.2, engage or participate in any material transaction or incur or
sustain any material obligation not in the ordinary course of business;
(k) except as otherwise expressly permitted hereby, foreclose upon or
otherwise acquire (whether by deed in lieu of foreclosure or otherwise) any
real property (other than 1-to-4 family residential properties in the
ordinary course of business);
(l) settle any claim, action or proceeding involving monetary damages,
except in the ordinary course of business consistent with past practice, or
agree or consent to the issuance of any injunction, decree, order or
judgment restricting its business or operations;
(m) amend its charter, bylaws or similar governing documents;
(n) except in the ordinary course of business consistent with past
practice, materially change its investment securities portfolio policy, or
the manner in which the portfolio is classified or reported;
(o) except as expressly required to comply with the Consent to Entry of
Order to Cease and Desist and Order to Cease and Desist between the FDIC and
Northern dated July 19, 1999, and the Order to Cease and Desist between the
Oregon Department of Financial Institutions and Northern dated July 19, 1999
(collectively, the "ORDERS"), make any material changes in its policies and
practices with respect to (i) underwriting, pricing, originating, acquiring,
selling, servicing, or buying or selling rights to service loans,
(ii) hedging its loan positions or commitments or (iii) any other material
banking policies;
(p) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at any time prior
to the Effective Time, or in any of the conditions to the Merger set forth
in Section 8 not being satisfied or in a violation of any provision of this
Agreement, except, in every case, as may be required by applicable law;
(q) take any action (other than permitted herein) that would prevent the
Merger from qualifying as a "reorganization" within the meaning of
Section 368(a) of the Code, make any changes in its accounting methods,
practices or policies, except as may be required under law, rule, regulation
or GAAP, in each case as concurred in by Northern's independent public
accountants;
(r) except as expressly required to comply with the Orders, increase the
number of full-time equivalent employees of Northern from the number as of
June 30, 1999; or
(s) except as expressly required to comply with the Orders, agree to, or
make any commitment to, take any of the actions prohibited by this
Section 6.2.
6.3 NO FUNDAMENTAL COWLITZ CHANGES. Except as expressly contemplated or
permitted by this Agreement, or as required by applicable law, rule or
regulation, during the period from the date of this Agreement to the Effective
Time, Cowlitz shall not, without the prior written consent of Northern, amend
its articles of incorporation or bylaws in a manner that would materially and
adversely affect the economic benefits of the Merger to the holders of Northern
Common Stock, or agree to, or make any commitment to, take any such action.
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7. ADDITIONAL AGREEMENTS
7.1 REGULATORY MATTERS.
(a) Cowlitz and Northern shall promptly prepare and file with the FDIC
and SEC the Proxy Statement/Prospectus and the S-4, in which the Proxy
Statement/Prospectus will be included as a prospectus. Each of Cowlitz and
Northern shall use all reasonable efforts to have the S-4 declared effective
under the Securities Act as promptly as practicable after such filing, and
Northern and Cowlitz shall thereafter mail the Proxy Statement/Prospectus to
their respective stockholders.
(b) Subject to the other provisions of this Agreement, the parties
hereto shall cooperate with each other and use reasonable best efforts to
promptly prepare and file all necessary documentation, to effect all
applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to
consummate the transactions contemplated by this Agreement (including
without limitation the Merger) and to comply with the terms and conditions
of all such permits, consents, approvals and authorizations of all such
third parties and Governmental Entities.
(c) Cowlitz and Northern shall, upon request, furnish each other with
all information concerning themselves, their respective Subsidiaries,
directors, officers and stockholders and such other matters as may be
reasonably necessary or advisable in connection with the Proxy Statement/
Prospectus, the S-4 or any other statement, filing, notice or application
made by or on behalf of Cowlitz, Northern or any of their respective
Subsidiaries to any Governmental Entity in connection with the merger and
the other transactions contemplated by this Agreement.
(d) Cowlitz and Northern shall promptly advise each other upon receiving
any communication from any Governmental Entity whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood
that any Requisite Regulatory Approval (as defined in Section 8.1(c) below)
will not be obtained or that the receipt of any such approval will be
materially delayed.
7.2 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, Northern shall afford access to the officers,
employees, accountants, counsel and other Representatives of Cowlitz and any
Loan Examiners appointed pursuant to Section 2.6(d), during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records, and to its officers, employees,
accountants, counsel and other representatives and, during such period,
Northern shall make available to Cowlitz (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of Federal securities laws
or Federal or state banking, mortgage lending, real estate or consumer
finance or protection laws (other than reports or documents which Northern
is not permitted to disclose under applicable law) and (ii) all other
information concerning its business, properties and personnel as such other
party may reasonably request. Northern shall not be required to provide
access to or to disclose information where such access or disclosure would
violate or prejudice the rights of its customers, jeopardize the attorney-
client privilege of the institution in possession or control of such
information or contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior to the date
of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) Cowlitz shall hold all information furnished by Northern or any of
its Representatives pursuant to Section 7.2(a) in confidence to the extent
required by, and in accordance with, the
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provisions of the Confidentiality Agreement dated May 13, 1999, between
Cowlitz and Northern (the "CONFIDENTIALITY AGREEMENT").
(c) No investigation by Cowlitz or its Representatives shall affect the
representations, warranties, covenants or agreements of Northern set forth
herein.
(d) No investigation by Northern or its Representatives shall affect the
representations, warranties, covenants or agreements of Cowlitz set forth
herein.
7.3 SHAREHOLDER APPROVAL. Each of Northern and Cowlitz shall duly call,
give notice of, convene and hold a meeting of its stockholders to be held as
soon as practicable following the date hereof for the purpose of obtaining the
requisite stockholder approval required in connection with this Agreement and
the Merger. Northern shall, through its Board of Directors, recommend to its
stockholders approval of the Merger and Cowlitz shall, through its Board of
Directors, recommend to its stockholders approval of the issuance of the shares
of Cowlitz Common Stock in the Merger as required by Nasdaq; PROVIDED, HOWEVER,
that this Section 7.3 shall not prohibit accurate disclosure by Northern of
information that is required in the Proxy Statement/Prospectus or any other
document required to be filed with the SEC (including without limitation a
disclosure statement on Schedule 14D-9) or otherwise required by applicable law
or regulation or the rules of Nasdaq to be publicly disclosed.
7.4 LEGAL CONDITIONS TO MERGER.
(a) Subject to the terms and conditions of this Agreement, each of
Cowlitz and Northern shall, and shall cause its Subsidiaries to, use their
reasonable best efforts (i) to take, or cause to be taken, all actions
necessary, proper or advisable to comply promptly with all legal
requirements which may be imposed on such party or its Subsidiaries with
respect to the Merger and, subject to the conditions set forth in Section 8
hereof, to consummate the transactions contemplated by this Agreement and
(ii) to obtain (and to cooperate with the other party to obtain) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other third party which is required to be
obtained by Northern or Cowlitz or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
(b) Subject to the terms and conditions of this Agreement, each of
Cowlitz and Northern agrees to use reasonable best efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated
hereby, including, without limitation, using reasonable best efforts to
(i) modify or amend any contracts, plans or arrangements to which Cowlitz or
Northern is a party (to the extent permitted by the terms thereof) if
necessary in order to satisfy the conditions to closing set forth in
Section 8 hereof, (ii) lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate
the transactions contemplated hereby, and (iii) defend any litigation
seeking to enjoin, prevent or delay the consummation of the transactions
contemplated hereby or seeking material damages.
7.5 AFFILIATES. Northern shall use its reasonable best efforts to cause
each director, executive officer and other person who is an "affiliate" (for
purposes of Rule 145 under the Securities Act) of Northern to deliver to
Cowlitz, as soon as practicable after the date of this Agreement, and in any
event prior to the date of the stockholders meeting called by Northern pursuant
to Section 7.3 hereof, a written agreement, in the form and substance reasonably
satisfactory to Cowlitz, relating to required transfer restrictions on the
Cowlitz Common Stock received by them in the Merger.
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7.6 STOCK LISTING. Cowlitz shall use its best efforts to cause the shares
of Cowlitz Common Stock to be issued in the Merger to be approved for listing on
Nasdaq, subject to official notice of issuance, prior to the Effective Time.
7.7 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Cowlitz shall, from and after the Effective Time, (i) comply with
the Plans in accordance with their terms, (ii) provide former employees of
Northern who remain as employees of Cowlitz or its Subsidiaries credit for
years of service with Northern prior to the Effective Time for the purpose
of eligibility and vesting and (iii) cause any and all pre-existing
condition limitations (to the extent such limitations did not apply to a
pre-existing condition under comparable Plans) and eligibility waiting
periods under group health plans of Cowlitz to be waived with respect to
former employees of Northern who remain as employees of Cowlitz or its
Subsidiaries (and their eligible dependents) and who become participants in
such group health plans. Nothing in this Section 7.7 shall be interpreted as
preventing Cowlitz or its Subsidiaries from amending, modifying or
terminating any Plans or other contracts, arrangements, commitments or
understandings, in a manner consistent with their terms and applicable law.
(b) Northern agrees to amend its 401(k) plan prior to the Effective Time
so that participant loans are no longer available.
(c) If in the reasonable opinion of Cowlitz's outside counsel it is
necessary under the SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, SEC No-Action
Letter, Fed. Sec. L. Rep. (CCH) PARA 77,515 (Jan. 12, 1999), for Cowlitz's
Board of Directors to approve the Merger to permit the acquisition of
Cowlitz Common Stock and options to purchase Cowlitz Common Stock by
directors, officers or employees of Northern who become directors or
officers of Cowlitz following the Effective Time to be exempt from
Section 16(b) of the Exchange Act pursuant to Rule 16b-3(d), then Cowlitz's
Board of Directors shall adopt appropriate resolutions prior to the
Effective Time.
7.8 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. Cowlitz shall
cooperate with the persons serving as officers and officers and directors of
Northern so that such persons are, to the extent available, covered by the
directors' and officers' liability insurance policy maintained by Northern (or a
replacement policy therefor) that serves to reimburse such officers and
directors with respect to claims against such officers and directors from facts
or events occurring at or prior to the Effective Time, which insurance shall
contain at least substantially the same coverage and amounts, and contain terms
and conditions substantially no less advantageous, as that coverage currently
provided by Northern; PROVIDED, HOWEVER, that in no event will Cowlitz be
required to expend in any one year an amount in excess of 100% of the annual
premiums currently paid by Northern for such insurance as set forth in
Section 4.20 of the Northern Disclosure Schedule (the "INSURANCE AMOUNT") to
maintain or procure such coverage or pay for premiums with respect to any period
more than three years after the Effective Time unless, in either case, a policy
providing lifetime coverage is available for an amount not to exceed $20,000;
PROVIDED FURTHER, that if the parties are unable to maintain or obtain the
insurance called for by this Section 7.8, they shall use its reasonable best
efforts to obtain as much comparable insurance as is available for the Insurance
Amount; PROVIDED FURTHER, that such officers and directors of Northern may be
required to make application and provide customary representations and
warranties to Cowlitz's insurance carrier for the purpose of obtaining such
insurance. Neither Cowlitz nor Cowlitz Bank shall have an obligation to
indemnify any of such officers and directors except to the extent of such
insurance coverage.
7.9 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement (including, without limitation, any merger between a Subsidiary of
Cowlitz and Northern) or to vest the Surviving Bank with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by Cowlitz.
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7.10 ADVICE OF CHANGES. Cowlitz and Northern shall promptly advise the
other party of any change or event which, individually or in the aggregate with
other such changes or events, has a Material Adverse Effect on it or which it
believes would or would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants contained herein.
7.11 SUBSEQUENT INTERIM AND ANNUAL FINANCIAL STATEMENTS.
(a) As soon as reasonably available, but in no event more than 45 days
after the end of each fiscal quarter (other than the fourth quarter of a
fiscal year) or 90 days after the end of each fiscal year ending after the
date of this Agreement, each party will deliver to the other party its
Quarterly Report on Form 10-QSB or Form 10-Q or its Annual Report on
Form 10-KSB or Form 10-K, as the case may be, as filed with the FDIC or the
SEC under the Exchange Act.
(b) As soon as reasonably practicable and as soon as they are available,
but in no event more than 30 days, after the end of each calendar month
ending after the date of this Agreement, Northern shall furnish to Cowlitz
(i) financial statements (including balance sheet, statement of operations
and stockholders' equity) of Northern as of and for such month then ended,
(ii) servicing reports regarding cash flows, delinquencies and foreclosures
on asset pools serviced or master serviced by Northern, and (iii) any
internal management reports relating to the foregoing. All information
furnished by Northern to Cowlitz pursuant to this Section 7.11(b) shall be
held in confidence by Cowlitz to the extent required by, and in accordance
with, the provisions of the Confidentiality Agreement.
7.12 DISCLOSURE SUPPLEMENTS.
(a) On the date five (5) business days prior to the Effective Date,
Northern shall supplement or amend the Northern Disclosure Schedule with
respect to any matter existing or known to Northern which (i) if existing,
occurring or known at the date of this Agreement would have been required to
be set forth or described in the Northern Disclosure Schedule or (ii) is
necessary to correct any information therein which has been rendered
inaccurate thereby so that the Northern Disclosure Schedule is accurately
supplemented or amended as of the Effective Date. For the purpose of this
Section 7.12(a), each reference to the date of this Agreement or an earlier
date, as the case may be, in the representations and warranties of Northern
contained in this Agreement shall be deemed to refer to the Effective Date.
Notwithstanding this provision, no supplement or amendment to the Northern
Disclosure Schedule shall be deemed to modify any representation or warranty
for the purpose of determining satisfaction of the conditions set forth in
Sections 8.2(a) and (b).
(b) On the date five (5) business days prior to the Effective Date,
Cowlitz shall supplement or amend the Cowlitz Disclosure Schedule with
respect to any matter existing or known to Cowlitz which (i) if existing,
occurring or known at the date of this Agreement would have been required to
be set forth or described in the Cowlitz Disclosure Schedule or (ii) is
necessary to correct any information therein which has been rendered
inaccurate thereby so that the Cowlitz Disclosure Schedule is accurately
supplemented or amended as of the Effective Date. For the purpose of this
Section 7.12(b), each reference to the date of this Agreement or an earlier
date, as the case may be, in the representations and warranties of Cowlitz
contained in this Agreement shall be deemed to refer to the Effective Date.
Notwithstanding this provision, no supplement or amendment to the Cowlitz
Disclosure Schedule shall be deemed to modify any representation or warranty
for the purpose of determining satisfaction of the conditions set forth in
Section 8.3(a).
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8. CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) SHAREHOLDER APPROVALS. The Merger and this Agreement shall have
been approved and adopted by the requisite affirmative vote of the
stockholders of Northern entitled to vote thereon. The issuance of the
shares of Cowlitz Common Stock in the Merger shall have been approved by the
requisite affirmative vote of the stockholders of Cowlitz entitled to vote
thereon. The Merger and this Agreement shall have been approved by the sole
stockholder of Cowlitz Bank.
(b) NASDAQ LISTING. The shares of Cowlitz Common Stock which shall be
issued to the stockholders of Northern upon consummation of the Merger shall
have been authorized for listing on Nasdaq, subject to official notice of
issuance.
(c) OTHER APPROVALS. All regulatory approvals required to consummate
the transactions contemplated hereby shall have been obtained and shall
remain in full force and effect and all statutory waiting periods in respect
thereof, shall have expired or been terminated (all such approvals and the
expiration or termination of all such waiting periods being referred to
herein as the "REQUISITE REGULATORY APPROVALS").
(d) S-4 EFFECTIVENESS. The S-4 shall have become effective under the
Securities Act, no stop order suspending the effectiveness of the S-4 shall
have been issued and no proceedings for that purpose shall have been
initiated or threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition (an "INJUNCTION") preventing the consummation
of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any Governmental Entity which prohibits or makes illegal the
consummation of the Merger.
8.2 CONDITIONS TO OBLIGATIONS OF COWLITZ. The obligations of Cowlitz to
effect the Merger are also subject to the satisfaction or waiver by Cowlitz at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Northern set forth in this Agreement shall be true and correct in all
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; PROVIDED,
HOWEVER, that for purposes of determining the satisfaction of this
condition, no effect shall be given to any exception in such representations
and warranties relating to materiality or a Material Adverse Effect, and
PROVIDED, FURTHER, that, for purposes of this condition, such
representations and warranties (other than the representations and
warranties contained in Section 4.2(a), which shall be true and correct in
all material respects) shall be deemed to be true and correct in all
respects unless the failure or failures of such representations and
warranties to be so true and correct, individually or in the aggregate,
results or would reasonably be expected to result in a Material Adverse
Effect on Northern. Cowlitz shall have received a certificate signed on
behalf of Northern by the Chief Executive Officer and Chief Financial
Officer of Northern to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF NORTHERN. Northern shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Cowlitz
shall have received a certificate signed on behalf of Northern by the Chief
Executive Officer and the Chief Financial Officer of Northern to such
effect.
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(c) BURDENSOME CONDITION. There shall not be any action taken, or any
statute, rule, regulation, order, directive, memorandum of understanding or
similar restriction enacted, entered, enforced or deemed applicable to
Northern or the transactions contemplated by this Agreement, by any
Governmental Entity, in connection with the grant of a Requisite Regulatory
Approval or otherwise, which imposes any restriction or condition which
would be reasonably likely to have or result in a Material Adverse Effect on
the Surviving Bank or Cowlitz or prevent the Surviving Bank or Cowlitz from
realizing substantially all of the contemplated benefits of the transactions
contemplated by this Agreement.
(d) DIRECTOR RESIGNATIONS. Cowlitz shall have received resignations
from each director of Northern, except to the extent otherwise requested by
Cowlitz.
(e) EMPLOYMENT AGREEMENT. The employment agreement entered into at the
date of this Agreement between Cowlitz Bank and the Northern executive set
forth on Annex 8.2(e) shall be in full force and effect and there shall have
been no default by such employee thereunder.
(f) NONCOMPETITION AGREEMENTS; OPTION AGREEMENTS. Each of the
noncompetition agreements and option agreements entered into at the date of
this Agreement between Cowlitz and the Northern directors set forth on Annex
8.2(f) shall be in full force and effect and there shall have been no
default by any employee thereunder.
(g) DISSENTERS. The number of shares of Northern Common Stock with
respect to which dissenters' rights have been perfected and not withdrawn
shall not exceed 5% of the total outstanding shares of Northern Common
Stock.
(h) LEGAL PROCEEDINGS. There shall not be any pending or threatened
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Northern,
Cowlitz or any Subsidiary of Cowlitz or challenging the validity or
propriety of the transactions contemplated by this Agreement as to which
there is a significant possibility of an adverse determination and which, if
adversely determined, would, individually or in the aggregate, have or
reasonably be expected to have a Material Adverse Effect on Northern,
Cowlitz or the Surviving Bank.
(i) ORDERS. Cowlitz or Cowlitz Bank shall have received oral or written
assurances, in form and substance reasonably satisfactory to Cowlitz, from
the FDIC and/or the Oregon Director that the Orders shall not be applicable
to the Surviving Bank.
(j) YEAR 2000 PROBLEMS. Northern shall have addressed all Year 2000
Problems identified in the Northern Y2K Plan on or before December 31, 1999
and as of the Closing Date, no Year 2000 Problem shall have occurred which,
individually or in the aggregate, have or would reasonably be expected to
have a Material Adverse Effect on Northern.
(k) DEPOSITS. At the Effective Time, Northern shall have total deposits
in an amount no less than 80% of the total deposits as of June 30, 1999, and
such deposits shall bear substantially the same interest rates and be in
substantially the same mix as the deposits as of June 30, 1999, other than
such changes in the interest rates and/or mix that reflect changes affecting
commercial banking businesses generally.
(l) STOCKHOLDERS' EQUITY. The Total Stockholders' Equity of Northern as
of the Effective Time is at least $1,150,000.
(m) AUDITOR'S OPINION. Cowlitz shall have received an opinion of Arthur
Andersen LLP, dated as of the Effective Date, in a form and substance
reasonably satisfactory to Cowlitz, to the effect that amounts received by
Cowlitz Bank from the Escrow with respect to Reimbursable Losses will be
treated as income which would offset the relevant loss applicable to such
Reimbursable Losses.
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(n) DIRECTORS' AND OFFICERS' INSURANCE. Cowlitz shall have received, in
a form and substance reasonably satisfactory to Cowlitz, the written
agreement of each of the persons serving as officers and directors of Polar
Beach immediately prior to the Effective Time to the terms and conditions
set forth in Section 7.8.
8.3 CONDITIONS TO OBLIGATIONS OF NORTHERN. The obligation of Northern to
effect the Merger is also subject to the satisfaction or waiver by Northern at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Cowlitz set forth in this Agreement shall be true and correct in all
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; PROVIDED,
HOWEVER, that for purposes of determining the satisfaction of this
condition, no effect shall be given to any exception in such representations
and warranties relating to materiality or a Material Adverse Effect, and
PROVIDED, FURTHER, that, for purposes of this condition, such
representations and warranties shall be deemed to be true and correct in all
respects unless the failure or failures of such representations and
warranties to be so true and correct, individually or in the aggregate,
results or would reasonably be expected to result in a Material Adverse
Effect on Cowlitz and its Subsidiaries taken as a whole. Northern shall have
received a certificate signed on behalf of Cowlitz by the Chief Executive
Officer and the Chief Financial Officer of Cowlitz to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF COWLITZ. Cowlitz shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Northern shall
have received a certificate signed on behalf of Cowlitz by the Chief
Executive Officer and the Chief Financial Officer of Cowlitz to such effect.
(c) LEGAL PROCEEDINGS. There shall not be any pending or threatened
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Cowlitz or
any Subsidiary of Cowlitz or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a
significant possibility of an adverse determination and which, if adversely
determined, would, individually or in the aggregate, have or reasonably be
expected to have a Material Adverse Effect on Cowlitz or the Surviving Bank.
9. TERMINATION AND AMENDMENT
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual consent of Cowlitz and Northern in a written instrument,
if the Board of Directors of each so determines;
(b) by either Cowlitz or Northern if (i) any Governmental Entity which
must grant a Requisite Regulatory Approval has denied approval of the Merger
and such denial has become final and nonappealable or (ii) any Governmental
Entity of competent jurisdiction shall have issued a final nonappealable
order enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement;
(c) by either Cowlitz or Northern if the Effective Time shall not have
occurred on or before March 31, 2000, unless the failure of the Effective
Time to occur by such date shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein; PROVIDED, HOWEVER, if the failure
of the Effective Time to occur by March 31, 2000 is solely due to the
failure to satisfy the condition set forth in Section 8.1(c), then the
termination right set forth in this Section 9.1(c) shall not be exercisable
until June 30, 2000;
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(d) by either Cowlitz or Northern (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained herein) if the other party shall have breached
(i) any of the covenants or agreements made by such other party herein or
(ii) any of the representations or warranties made by such other party
herein, and in either case, such breach (x) is not cured within 30 days
following written notice to the party committing such breach, or which
breach, by its nature, cannot be cured prior to the Closing and (y) would
entitle the non-breaching party not to consummate the transactions
contemplated hereby under Section 8 hereof;
(e) by either Cowlitz or Northern if any approval of the stockholders of
Northern contemplated by this Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a duly held meeting of
stockholders or at any adjournment or postponement thereof;
(f) by the Board of Directors of Cowlitz, if the Board of Directors of
Northern shall have withdrawn, modified or changed in a manner adverse to
Cowlitz its approval or recommendation of this Agreement and the
transactions contemplated hereby or if a Change of Control (as defined
below) of Northern shall have occurred;
(g) by either Cowlitz or Northern if any approval of the stockholders of
Cowlitz contemplated by this Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a duly held meeting of
stockholders or at any adjournment or postponement thereof;
(h) by the Board of Directors of Northern, if the Board of Directors of
Cowlitz shall have withdrawn, modified or changed in a manner adverse to
Northern its approval or recommendation of the issuance of Cowlitz Common
Stock in the Merger
(i) by the Board of Directors of Cowlitz if a tender offer or exchange
offer for 25% or more of the outstanding shares of Northern Common Stock is
commenced (other than by Cowlitz or a Subsidiary thereof), and the Board of
Directors of Northern recommends that the stockholders of Northern tender
their shares in such tender or exchange offer or otherwise fails to
recommend that such stockholders reject such tender offer or exchange offer
within 10 Business Days after the commencement thereof (which, in the case
of an exchange offer, shall be the effective date of the registration
statement relating to such exchange offer);
(j) by the Board of Directors of Northern prior to the date on which the
stockholders of Northern shall have voted to approve this Agreement and the
Merger, if (i) any person or entity shall have made (and shall not have
withdrawn) a Takeover Proposal that is determined by the Northern Board of
Directors to constitute a Superior Proposal (as defined below), and
(ii) the Northern Board of Directors determines in its good faith reasonable
judgment, after consultation with outside counsel, that failure to terminate
this Agreement in order to accept the Superior Proposal would constitute a
breach of fiduciary duty; PROVIDED, HOWEVER, that Northern may not terminate
this Agreement pursuant to this Section 9.1(j) unless it has given Cowlitz
10 Business Days prior written notice of its intention to so terminate this
Agreement (which notice must specify all material terms and conditions of
such Superior Proposal and the identity of the person or persons (or entity
or entities, as the case may be) making such Superior Proposal and must be
accompanied by a copy of the agreements setting forth such Superior
Proposal) and has offered Cowlitz the opportunity to amend the terms and
conditions of this Agreement so that the failure of the Northern Board of
Directors to terminate this Agreement, as so amended, in order to accept the
Superior Proposal would not constitute a breach of fiduciary duty; and
PROVIDED, FURTHER, that the Northern Board of Directors may not terminate
this Agreement pursuant to this Section 9.1(j) unless simultaneously with
such termination Northern pays to Cowlitz the amounts specified in
Section 9.2(b) and enters into a definitive acquisition, merger or similar
agreement to
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effect and consummate such Superior Proposal with the person or entity
making such Superior Proposal.
For purposes of this Agreement, (A) a "SUPERIOR PROPOSAL" shall mean any
BONA FIDE Takeover Proposal made by an unaffiliated third party that the
Northern Board of Directors determines in its good faith reasonable judgment
(based on the advice of an independent financial advisor) represents
superior value to the holders of Northern Common Stock than the transactions
contemplated by this Agreement and for which any required financing is
either committed or is, in the good faith reasonable judgment of Northern's
Board of Directors (based on the advice of such independent financial
advisor), reasonably capable of being obtained on a timely basis by the
person making such Takeover Proposal; and (B) a "CHANGE OF CONTROL" shall
mean the acquisition, directly or indirectly, by any person or entity,
together with its affiliates (as defined in Rule 12b-2 under the Exchange
Act), or any other group (as defined in Section 13(d) of the Exchange Act),
including through the formation of any such group or the affiliation of any
such persons or entities, of, or of the right to acquire or direct the
exercise of, 30% or more of the voting power of the capital stock of
Northern entitled to approve this Agreement and the Merger or to elect
directors of Northern; or
(k) by Cowlitz if a Subsequent Triggering Event (as defined in the Stock
Option Agreement) has occurred.
9.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement by either Cowlitz or
Northern as provided in Section 9.1, this Agreement shall forthwith become
void and have no effect, and none of Cowlitz, Northern, any of their
respective Subsidiaries or any of the officers or directors of any of them
shall have any liability of any nature whatsoever hereunder, or in
connection with the transactions contemplated hereby, except that
(i) Sections 7.2(b), 9.2, and 10.2 shall survive any termination of this
Agreement and (ii) notwithstanding anything to the contrary contained in
this Agreement, neither Cowlitz nor Northern shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
(b) If this Agreement is terminated (i) by Cowlitz pursuant to
Section 9.1(f) or (i), (ii) by Cowlitz or Northern pursuant to
Section 9.1(e) because of a failure to obtain the required approval of the
stockholders of Northern after a Takeover Proposal for Northern shall have
been publicly disclosed, or any person or entity shall have publicly
disclosed an intention (whether or not conditional) to make a Takeover
Proposal, (iii) by Northern pursuant to Section 9.1(j), (iv) by Cowlitz
pursuant to Section 9.1(k) or (v) by Cowlitz pursuant to Section 9.1(d) if
the breach giving rise to such termination was willful and, at or prior to
such termination, a Takeover Proposal shall have been made known to Northern
or shall have been publicly disclosed to Northern's stockholders, or any
person or entity shall have made known to Northern or otherwise publicly
disclosed an intention (whether or not conditional) to make a Takeover
Proposal, and regardless of whether such Takeover Proposal shall have been
rejected by Northern or withdrawn prior to the time of such termination,
then in any such case Northern shall (A) pay to Cowlitz a termination fee of
$425,000 and (B) in addition to such termination fee, reimburse Cowlitz and
Cowlitz Bank for their documented and reasonable out-of-pocket expenses
incurred by each of them in connection with this Agreement and the
transactions contemplated hereby (including without limitation, filing fees,
printing costs and fees and expenses of legal, accounting and financial
advisors). In the event Cowlitz has exercised all or any part of the Option,
then Cowlitz shall not be entitled to the termination fee set forth in
(A) above, but Northern shall nonetheless pay any reimbursement amounts due
to Cowlitz and Cowlitz Bank in accordance with (B) above.
(c) Any termination fee and/or reimbursement amount that becomes payable
pursuant to Section 9.2(b) shall be paid by wire transfer of immediately
available funds to an account
C-39
designated by Cowlitz within one Business Day following the termination of
this Agreement, except that any termination fee or reimbursement amount that
is payable as a result of the termination of this Agreement pursuant to
Section 9.1(i) or Section 9.1(j) shall be paid simultaneously with such
termination. Notwithstanding the foregoing, in no event shall Northern be
obligated to pay any such fees to Cowlitz if immediately prior to the
termination hereof Northern was entitled to terminate this Agreement
pursuant to Section 9.1(d).
(d) Northern and Cowlitz agree that the agreements contained in
paragraphs (b) and (c) above are an integral part of the transactions
contemplated by this Agreement, that without such agreements Cowlitz would
not have entered into this Agreement, and that such amounts do not
constitute a penalty. If Northern fails to pay Cowlitz the amounts due under
paragraph (b) above within the time periods specified in paragraph (c)
above, Northern shall pay the costs and expenses (including legal fees and
expenses) incurred by Cowlitz in connection with any action, including the
filing of any lawsuit, taken to collect payment of such amounts, together
with interest on the amount of any such unpaid amounts at the publicly
announced prime rate of The Chase Manhattan Bank from the date such amounts
were required to be paid.
9.3 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of Northern;
PROVIDED, HOWEVER, that after any approval of the transactions contemplated by
this Agreement by Northern's stockholders, there may not be, without further
approval of such stockholders, any amendment of this Agreement which reduces the
amount or changes the form of the consideration to be delivered to the Northern
stockholders hereunder other than as contemplated by this Agreement. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
10. GENERAL PROVISIONS
10.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply in whole or in part after the Effective Time.
10.2 EXPENSES. Except as provided in Section 9.2 hereof, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense; PROVIDED,
HOWEVER, that notwithstanding anything to the contrary contained in this
Agreement, neither Cowlitz nor Northern shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provision of
this Agreement.
10.3 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified
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mail (return receipt requested) or delivered by an express courier (with
confirmation) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Cowlitz or Cowlitz Bank, to:
Cowlitz Bancorporation
927 Commerce Avenue
Longview, Washington 98632
Fax: (360) 423-5461
Attn: Charles W. Jarrett, President & COO
and:
Cowlitz Bank
927 Commerce Avenue
Longview, Washington 98632
Fax: (360) 423-5461
Attn: Charles W. Jarrett, President & CEO
with a copy to:
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104
Fax: (206) 447-0849
Attn: Bernard L. Russell
(b) if to Northern, to:
Northern Bank of Commerce
1001 Southwest Fifth Avenue
Suite 250
Portland, Oregon 97204
Fax: (503) 306-5407
Attn: William Spicer, Chairman
with a copy to:
Davis Wright Tremaine LLP
Suite 2300
1300 SW Fifth Avenue
Portland, OR 97201
Fax (503) 778-5299
Attn: David C. Baca
10.4 INTERPRETATION. The words "hereof," "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
Article and Section references are to this Agreement unless otherwise specified.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. No provision of this Agreement shall be
construed to require Northern, Cowlitz or any of their respective Subsidiaries
or affiliates to take any action which would violate or conflict with any
applicable law (whether statutory or common), rule or regulation.
C-41
10.5 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
10.6 ENTIRE AGREEMENT. This Agreement (together with the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, other than the
Confidentiality Agreement.
10.7 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Washington, without regard to any
applicable conflicts of law.
10.8 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.9 PUBLICITY. Cowlitz and Northern shall consult with each other before
issuing any press release with respect to the Merger or this Agreement and shall
not issue any such press release or make any such public statement without the
prior consent of the other party, which shall not be unreasonably withheld;
PROVIDED, HOWEVER, that a party may, without the prior consent of the other
party (but after prior consultation, to the extent practicable in the
circumstances) issue such press release or make such public statement as may
upon the advice of outside counsel be required by law or the rules and
regulations of Nasdaq. Without limiting the reach of the preceding sentence,
Cowlitz and Northern shall cooperate to develop all public announcement
materials and make appropriate management available at presentations related to
the transactions contemplated by this Agreement as reasonably requested by the
other party. In addition, Northern and its Subsidiaries shall (a) consult with
Cowlitz regarding communications with customers, stockholders, prospective
investors and employees related to the transactions contemplated hereby,
(b) provide Cowlitz with stockholder lists of Northern and (c) allow and
facilitate Cowlitz contact with stockholders of Northern and other prospective
investors.
10.10 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor
any of the rights, interests or obligations of any party hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and permitted
assigns. Except as otherwise specifically provided in Section 7.8 hereof, this
Agreement (including the documents and instruments referred to herein) is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
C-42
IN WITNESS WHEREOF, Cowlitz, Cowlitz Bank and Northern have caused this
Agreement to be executed by their respective officers hereunto duly authorized
as of the date first above written.
COWLITZ BANCORPORATION
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
-----------------------------------
Title: President and Chief Operating Officer
-----------------------------------
COWLITZ BANK
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
-----------------------------------
Title: President and Chief Executive Officer
-----------------------------------
NORTHERN BANK OF COMMERCE
By: /s/ John H. Holloway, Jr.
---------------------------------------
Name: John H. Holloway, Jr.
-----------------------------------
Title: President and Chief Executive Officer
-----------------------------------
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ANNEX 2.6(d)
CLASSIFICATION DESCRIPTION
- -------------- -----------
Special Mention...................... Marginally acceptable business credit; some potential
weakness. Generally undesirable business constituting an
undue and unwarranted credit risk but not to the point of
justifying a Substandard classification. While the asset is
currently protected, it is potentially weak. No loss of
principal or interest is envisioned. Potential weaknesses
might include a weakening financial condition, an
unrealistic repayment program, inadequate sources of funds,
or lack of adequate collateral, credit information, or
documentation. Company is undistinguished and mediocre.
Substandard.......................... Unacceptable business credit, normal repayment in jeopardy.
While no loss of principal or interest is envisioned, there
is a positive and well-defined weakness which jeopardizes
collection of debt. The asset is inadequately protected by
the current sound net worth and paying capacity of the
obligor or pledged collateral. There may already have been a
partial loss of interest.
Doubtful............................. Full payment questionable. Serious problems exist to the
point where a partial loss of principal is likely.
Weaknesses are so pronounced that on the basis of current
information, conditions and values, collection is highly
improbable.
Loss................................. Expected total loss. An uncollectible asset or one of such
little value it does not warrant classification as an active
asset. Such an asset may, however, have recovery or salvage
value, but not to the point where a write-off should be
deferred, even though a partial recovery may occur in the
future.
C-44
ANNEX 8.2(e)
EMPLOYMENT AGREEMENT UNDER SECTION 8.2(e)
John Holloway, Jr.
C-45
ANNEX 8.2(f)
NONCOMPETITION AND OPTION AGREEMENTS UNDER SECTION 8.2(f)
John Holloway, Jr.
William Spicer
Chris Brown
John Walrod
Kurt Wollenberg
C-46
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1, dated November , 1999, amends the Agreement and Plan
of Merger (the "Agreement") originally made and entered into as of the 14th day
of September, 1999, by and among COWLITZ BANCORPORATION, a Washington
corporation ("Cowlitz"), COWLITZ BANK, a corporation chartered under the banking
laws of the State of Washington ("Cowlitz Bank"), and NORTHERN BANK OF COMMERCE,
a corporation chartered under the banking laws of the State of Oregon
("Northern").
1. Each capitalized term used but not defined in this Amendment No. 1 shall
have the meaning provided for such term in the Agreement.
2. Sections 2.6(b), 2.6(b)(i) and 3.2(b)(iii) of the Agreement are each
amended by replacing the amount "$4,707,139" with the amount "$4,718,841".
3. Except as specifically amended by this Amendment No. 1, the Agreement
shall remain in full force and effect.
4. This Amendment No. 1 may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and the executed
counterparts taken together shall be deemed to be one originally executed
document.
5. This Amendment No. 1 shall be governed and construed in accordance with
the laws of the State of Washington, without regard to any applicable conflicts
of law.
IN WITNESS WHEREOF, Cowlitz, Cowlitz Bank and Northern have caused this
Amendment No. 1 to be executed by their respective officers hereunto duly
authorized as of the date first above written.
COWLITZ BANCORPORATION
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
------------------------------------
Title: President and Chief Operating Officer
-------------------------------------
COWLITZ BANK
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
NORTHERN BANK OF COMMERCE
By: /s/ James A. Wills
---------------------------------------
Name: James A. Wills
------------------------------------
Title: President
-------------------------------------
C-47
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 2, dated January 10, 2000, amends the Agreement and Plan
of Merger originally made and entered into as of the 14th day of September,
1999, by and among COWLITZ BANCORPORATION, a Washington corporation ("Cowlitz"),
COWLITZ BANK, a corporation chartered under the banking laws of the State of
Washington ("Cowlitz Bank"), and NORTHERN BANK OF COMMERCE, a corporation
chartered under the banking laws of the State of Oregon ("Northern"), as amended
by Amendment No. 1 dated November 29, 1999 (as amended, the "Agreement").
1. Each capitalized term used but not defined in this Amendment No. 2 shall
have the meaning provided for such term in the Agreement.
2. Sections 2.6(d) of the Agreement, is amended by adding the following
between the seventh and eighth sentences thereof:
In addition, Northern and Cowlitz Bank may at any time prior to the
Closing agree to designate and classify any additional Northern loan as
an Identified Loan and such loan shall be deemed so classified and
designated by the Loan Examiner pursuant to the preceding sentences. Any
Identified Loan in which a loan participation was sold to Cowlitz Bank on
or after September 14, 1999 will be treated for the purposes of this
section and the Escrow as if Northern retained sole ownership of the
whole loan.
3. Except as specifically amended by this Amendment No. 2, the Agreement
shall remain in full force and effect.
4. This Amendment No. 2 may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and the executed
counterparts taken together shall be deemed to be one originally executed
document.
5. This Amendment No. 2 shall be governed and construed in accordance with
the laws of the State of Washington, without regard to any applicable conflicts
of law.
IN WITNESS WHEREOF, Cowlitz, Cowlitz Bank and Northern have caused this
Amendment No. 2 to be executed by their respective officers hereunto duly
authorized as of the date first above written.
COWLITZ BANCORPORATION
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
------------------------------------
Title: President and Chief Operating Officer
-------------------------------------
COWLITZ BANK
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
NORTHERN BANK OF COMMERCE
By: /s/ William V. Spicer
---------------------------------------
Name: William V. Spicer
------------------------------------
Title: Chairman
-------------------------------------
C-48
APPENDIX D
September 10, 1999
Board of Directors
Northern Bank of Commerce
1001 S.W. 5th Avenue, Suite 250
Portland, OR 97204
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Northern Bank of Commerce ("NBOC") of the
consideration to be delivered to such shareholders by Cowlitz Bancorporation
("Cowlitz"), in connection with the proposed acquisition (the "Acquisition") of
NBOC by Cowlitz.
We have assumed that the terms of the Acquisition are as set forth in the
draft Agreement and Plan of Merger (the "Agreement") between NBOC and Cowlitz
that you previously provided for our review. We understand that each share of
common stock of NBOC will have the right to receive approximately 0.8258 shares
of Cowlitz common stock upon closing of the Acquisition and the right to receive
up to $1.63 in cash two years after closing of the Acquisition.
In arriving at our opinion, we have reviewed various financial and operating
information relating to NBOC and Cowlitz, including without limitation
historical financial reports of NBOC and Cowlitz, reports filed with bank
regulatory agencies, internal operating reports and analyses, asset quality
evaluations, and related information. We have also examined economic analyses of
and forecasts for NBOC and Cowlitz's market area and publicly available
information regarding other banking institutions operating in such market area.
We have also held discussions with NBOC's and Cowlitz's management regarding the
business, recent operating results, and future prospects for NBOC and Cowlitz.
We have also considered financial and stock market data for NBOC and
Cowlitz, as well as, the views of management concerning the financial,
operational and strategic benefits and implications of the Acquisition. We have
additionally examined and considered financial and stock market data for similar
public companies, the publicly available financial terms of certain other
similar business combinations, and other analyses and considerations which we
deemed relevant.
In conducting our review and arriving at our opinion, we have relied,
without independent investigation, upon the accuracy and completeness of all
financial and other information publicly available or provided to us by NBOC and
Cowlitz. We have also assumed the reasonableness of and relied upon the
estimates and judgements of management of NBOC and Cowlitz as to the future
business and financial prospects. We have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of NBOC or
Cowlitz, nor have we been furnished with any such evaluations or appraisals. Our
opinion is necessarily based upon economic, market, financial and other
conditions as they exist and can be evaluated on the date hereof and the
information provided to us through the date hereof.
D.A. Davidson & Co. is engaged in the valuation of companies and their
securities in the course of its business as an investment firm. In the ordinary
course of our business, we publish investment research regarding NBOC and make a
market in its common stock. For our services in connection with the Acquisition,
including rendering this opinion, we will receive a fee from NBOC.
It is understood that this letter is intended solely for the benefit and use
of the Board of Directors of NBOC in its consideration of the Acquisition and is
not intended to be and does not constitute a
D-1
Board of Directors
September 10, 1999
Page Two
recommendation to any shareholder as to how such shareholder should vote with
respect to the Acquisition.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be delivered to the shareholders of NBOC in
connection with the Acquisition is fair, from a financial point of view, to such
shareholders.
Very truly yours,
D.A. Davidson & Co.
/s/ DAREN J. SHAW
-----------------------------------------
Daren J. Shaw
Managing Director
By:
D-2
APPENDIX E
September 14, 1999
The Board of Directors
Cowlitz Bancorporation
927 Commerce Avenue
Longview, Washington 98632
Gentlemen:
It is Sage Capital LLC's ("Sage") understanding that Cowlitz Bancorporation
("Cowlitz") entered into a transaction as described in an Acquisition Agreement
dated September 14, 1999 with Northern Bank of Commerce ("Northern"). Under the
terms of the Acquisition Agreement, Northern shall be merged into Cowlitz (the
"Acquisition"). Cowlitz will issue to Northern shareholders a combination of
stock and cash in exchange for their shares. In accordance with the Acquisition
Agreement, the cash component will be held in escrow for twenty-four
(24) months, to be held in reserve against certain events. At the end of the
twenty-four month period, the remaining value of the escrow account if any, will
be distributed to Northern shareholders. The stock component of the Transaction
will be based on formulas as specified within the Acquisition Agreement. The
specific, terms and conditions of the Acquisition are set forth more fully in
the Acquisition Agreement.
Sage was asked to render an opinion to the Board of Directors of Cowlitz as
to whether the Aggregate Consideration to be paid by Cowlitz pursuant to the
Acquisition Agreement (the "Acquisition Consideration") was fair to the
shareholders of Cowlitz from a financial point of view (the "Opinion"). Cowlitz
has agreed to reimburse Sage for reasonable out-of-pocket expenses and to
indemnify Sage against certain liabilities relating to or arising out of
services performed by Sage. Sage's principals, while employed at another firm,
managed the underwriting process or the public sale of Cowlitz shares in March
of 1998.
In arriving at its Opinion, Sage, among other things, (i) reviewed the
Acquisition Agreement between Cowlitz and Northern; (ii) reviewed certain other
documents relating to the Acquisition Agreement, including drafts of the Escrow
Agreement; (iii) reviewed publicly available information concerning Cowlitz and
Northern; (iv) held discussions with members of senior management of Cowlitz
concerning the business prospects of Northern, including managements views as to
the organization of and strategies with respect to the acquisition of Cowlitz
and Northern; (v) reviewed certain operating and financial reports prepared by
the managements of Cowlitz and Northern; (vi) reviewed certain other relevant
information made available to Sage from the internal records of Cowlitz and
Northern; (vii) reviewed the recent reported prices and trading activity for the
common stock of certain other companies engaged in businesses Sage considered
comparable to those of Cowlitz and compared certain publicly available financial
data for those comparable companies to similar data for Cowlitz;
(viii) reviewed the financial terms of certain other merger and acquisition
transactions that Sage deemed generally relevant; and (ix) performed and
considered such other studies, analyses, inquiries and investigations as Sage
deemed appropriate.
In connection with Sage's review and for purposes of its Opinion, Sage did
not independently verify any of the foregoing information and assumed (i) all
such information is complete and accurate in all material respects, (ii) there
have been no material changes in the assets, financial condition, results of
operations, business or prospects of Cowlitz and Northern since the respective
dates of the last financial statements made available to Sage and all material
liabilities (contingent or otherwise, known or unknown) of Cowlitz and Northern
are as set forth in the respective financial statements, and (iii) no
adjustments will be made to the material terms of the Acquisition Agreement from
those set forth in the copies of the Acquisition Agreement delivered to Sage
prior to this date. With respect to
E-1
the financial information of Cowlitz and Northern provided to Sage by the
management of Cowlitz, Sage has assumed for purposes of the Opinion that such
information has been reasonably prepared on bases reflecting the best currently
available estimates and judgments of such management, at the time of
preparation, of the operating and financial performance of Cowlitz and Northern.
Sage did not prepare or obtain any independent evaluation or appraisal of any of
the assets or liabilities of Cowlitz or Northern, nor did Sage conduct a
physical inspection of the properties and facilities of Cowlitz or Northern in
connection with its Opinion. Sage's Opinion is necessarily based upon market,
economic, financial and other conditions as of the date of the Opinion and any
subsequent change in such conditions would require a reevaluation of this
Opinion.
In rendering its Opinion, Sage does not express any opinion or make my
determination as to what specific consideration should be paid by Cowlitz in
connection with the Acquisition Agreement. The Opinion rendered by Sage is
limited to the evaluation and determination of whether the consideration to be
paid by Cowlitz according to the Acquisition Agreement is fair, from a financial
point of view, to the shareholders of Cowlitz and does not address the
underlying business decision of Cowlitz and Northern to engage in the
Acquisition Agreement. Sage is not expressing any opinion as to what the value
of Cowlitz common stock will be when issued pursuant to the Acquisition
Agreement or the price at which Cowlitz common stock will trade at any time.
Sage's Opinion does nor constitute a recommendation to any shareholders of
Cowlitz as to how such shareholder should vote on the proposed Acquisition
Agreement.
This letter and the Opinion expressed herein are provided at the request and
for the information of the Board of Directors of Cowlitz and may not be quoted
or referred to or used for any other purpose without our prior written consent,
except that this letter may be disclosed in connection with any registration
statement on Form S-4 or proxy statement used in connection with the Acquisition
Agreement so long as this letter is quoted in full in such registration
statement on Form S-4 or proxy statement.
Based upon and subject to the foregoing, it is Sage's opinion that, as of
the date hereof, the consideration to be paid by Cowlitz according to the
Acquisition Agreement is fair to the shareholders of Cowlitz from a financial
point of view.
Best regards,
SAGE CAPITAL, LLC
/s/ BRUCE J. ALEXANDER /s/ LAURA A. BLACK
---------------------------------------- ----------------------------------------
Bruce J. Alexander Laura A. Black
Managing Partner Managing Partner
By: By:
E-2
APPENDIX F
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("AGREEMENT") is made and entered into as of the day
of , , by and among COWLITZ BANCORPORATION, a Washington
corporation ("COWLITZ"), COWLITZ BANK, a corporation chartered under the banking
laws of the State of Washington ("COWLITZ BANK"), NORTHERN BANK OF COMMERCE, a
corporation chartered under the banking laws of the State of Oregon
("NORTHERN"), and , as escrow agent (the "ESCROW AGENT").
RECITALS
WHEREAS, Cowlitz, Cowlitz Bank and Northern have entered into an Agreement
and Plan of Merger dated as of September 14, 1999 (the "MERGER AGREEMENT"),
pursuant to which Northern has agreed to merge with and into Cowlitz Bank with
Cowlitz Bank being the surviving entity (the "MERGER");
WHEREAS, Section 3.2.(b) of the Merger Agreement provides that an amount
equal to the product of (1) the Cash Consideration (as defined in the Merger
Agreement) and (2) the Initial Nondissenting Shares (as defined below), or
Dollars ($ ) (the "ESCROWED FUNDS"), to be paid by
Cowlitz to the holders of Northern Shares other than holders of Final Dissenting
Shares (as defined below) (the "ESCROW STOCKHOLDERS") shall be delivered to
(the "EXCHANGE AGENT") at the Effective Time;
WHEREAS, the Exchange Agent shall be instructed to deliver the Escrowed
Funds to the Escrow Agent to be held in escrow to ensure that Cowlitz Bank shall
be properly reimbursed for certain losses;
WHEREAS, pursuant to Section 3.2.(b) of the Merger Agreement,
and have been appointed by Northern as representatives of the Escrow
Stockholders (the "NORTHERN MEMBERS"), and and have been
appointed by Cowlitz Bank as representatives of Cowlitz Bank (the "COWLITZ BANK
MEMBERS," and together with the Northern Members, the "COMMITTEE"), to take all
actions called for by Section 3.2.(b) of the Merger Agreement on behalf of the
Committee; and
WHEREAS, Cowlitz, Cowlitz Bank, Northern and the Escrow Agent desire to
enter into this Agreement to establish the terms and conditions under which the
Escrow Agent will hold and disburse the Escrowed Funds;
NOW, THEREFORE, in consideration of the mutual covenants, conditions and
agreements contained in this Agreement, and for other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Cowlitz, Cowlitz
Bank, Northern and the Escrow Agent agree as follows:
1. DEFINITIONS.
a. "ADDITIONAL ESCROWED FUNDS" has the meaning given in Section 3.(c).
b. "ADDITIONAL EXPENSES" has the meaning giving in Section 5.(c).
c. "ADDITIONAL NONDISSENTING SHARES" means the total number of Northern
Shares outstanding as of the Effective Time less the sum of (i) the Initial
Nondissenting Shares and (ii) the Final Dissenting Shares.
d. "AGGREGATE UNUSED FINAL THRESHOLD AMOUNT" has the meaning given in
Section 7.(b).
e. "COMMITTEE" has the meaning given in the Recitals.
f. "COMMITTEE MEMBER" means a Northern Member or Cowlitz Bank Member.
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g. "COURT ORDER" means a final order of a court of competent jurisdiction
resolving a dispute hereunder and directing disposition of a portion of the
Escrowed Funds, from which no appeal is or can be taken.
h. "COWLITZ" has the meaning given in the Introduction.
i. "COWLITZ BANK" has the meaning given in the Introduction.
j. "COWLITZ BANK MEMBERS" has the meaning given in the Recitals.
k. "DOUBTFUL" with respect to an Identified Loan has the meaning assigned
to such term in Schedule 1 attached.
l. "EFFECTIVE TIME" means the date and time when the Merger becomes
effective.
m. "ESCROW AGENT" has the meaning given in the Introduction.
n. "ESCROW EXPIRATION DATE" has the meaning given in Section 5.(a).
o. "ESCROW PERIOD" has the meaning given in Section 5.(a).
p. "ESCROW STOCKHOLDERS" has the meaning given in the Recitals.
q. "ESCROWED FUNDS" has the meaning given in the Recitals.
r. "EXCHANGE AGENT" has the meaning given in the Recitals.
s. "FINAL APPOINTED EXAMINER" has the meaning given in Section 7.(e).
t. "FINAL DISPUTE NOTICE" has the meaning given in Section 7.(e).
u. "FINAL DISSENTING SHARES" means all Northern Shares held by Northern
stockholders who shall have finally perfected their rights to appraisal and
payment under Sections 711.175-.185 of Title 53 of the Oregon Revised Statutes
and received payment for such Northern Shares in accordance therewith after the
Effective Time.
v. "FINAL MEETING" has the meaning given in Section 7.(c).
w. "FINAL MEETING DEADLINE DATE" has the meaning given in Section 7.(c).
x. "FINAL MEETING NOTICE" has the meaning given in Section 7.(c).
y. "FINAL SETTLEMENT STATEMENT" has the meaning given in Section 7.(a).
z. "GAAP" means generally accepted accounting principles.
aa. "IDENTIFIED LOANS" means the loans set forth on Schedule 2 attached.
bb. "INITIAL NONDISSENTING SHARES" means the total number of Northern Shares
outstanding as of the Effective Time, excluding all Northern Shares held by
Stockholders who, as of the Effective Time, (i) voted against the Merger or sent
or delivered notices of dissent, (ii) are eligible to and have demanded
appraisal rights with respect thereto in accordance with Sections 711.175-.185
of Title 53 of the Oregon Revised Statutes and (iii) as of the Effective Time,
shall not have effectively withdrawn or lost their rights to appraisal and
payment under Sections 711.175-.185 of Title 53 of the Oregon Revised Statutes.
cc. "INTEREST" has the meaning given in Section 3.(a).
dd. "INTERIM APPOINTED EXAMINER" has the meaning given in Section 5.(f).
ee. "INTERIM COMMITTEE MEETING" has the meaning given in Section 5.(d).
ff. "INTERIM MEETING DEADLINE DATE" has the meaning given in
Section 5.(d).
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gg. "INTERIM MEETING NOTICE" has the meaning given in Section 5.(d).
hh. "JOINT INSTRUCTIONS" means written instructions executed by (i) a
majority of the Committee Members regarding delivery of a portion of the
Escrowed Funds (except as otherwise provided in Sections 5.(d) and 7.(c)) or
(ii) in the case of written instructions delivered by the Committee under
Section 5.(f) or 7.(e), the Interim Appointed Examiner or Final Appointed
Examiner, as the case may be, and two (2) Committee Members.
ii. "LOAN EXAMINER" means a person or entity that is a loan examiner, loan
reviewer or loan auditor (other than a current employee, officer or director of
Cowlitz or Cowlitz Bank) with at least ten (10) years experience in commercial
lending, banking and/or bank examining, including at least two (2) years
experience as a loan examiner, loan reviewer or loan auditor.
jj. "LOSS" with respect to an Identified Loan has the meaning assigned to
such term in Schedule 1 attached.
kk. "LOSS AMOUNT" has the meaning given in Section 5.(b).
ll. "MEETING EXPENSES" has the meaning given in Section 2.(c).
mm. "MERGER" has the meaning given in the Recitals.
nn. "MERGER AGREEMENT" has the meaning given in the Recitals.
oo. "NORTHERN" has the meaning given in the Introduction.
pp. "NORTHERN MEMBERS" has the meaning given in the Recitals.
qq. "NORTHERN SHARES" means the shares of Northern common stock, par value
per share $1.00.
rr. "RECOVERED AMOUNT" has the meaning given in Section 6.(a).
ss. "REIMBURSABLE LOSS" has the meaning given in Section 5.(a).
tt. "SPECIAL MENTION" with respect to an Identified Loan has the meaning
assigned to such term in Schedule 1 attached.
uu. "STANDARDS" with respect to a decision or action taken by a Loan
Examiner or Committee Member hereunder relating to an Identified Loan, means a
decision (i) made in good faith and (ii) (A) in accordance with Cowlitz Bank's
internal loan policies as in effect from time to time or (B) in accordance with
a determination by any applicable state or federal banking regulatory agency
that a loss should be taken with respect to such Identified Loan.
vv. "SUBSTANDARD" with respect to an Identified Loan has the meaning
assigned to such term in Schedule 1 attached.
ww. "THRESHOLD AMOUNT" means, with respect to an Identified Loan, the
threshold amount, if any, allocated to such Identified Loan as set forth in
Schedule 2 attached as such amount may be adjusted pursuant to this Agreement.
xx. "UNUSED FINAL THRESHOLD AMOUNT" has the meaning given in Section 7.(b).
2. APPOINTMENT OF ESCROW AGENT; ACTIONS OF THE COMMITTEE.
a. Northern, Cowlitz and Cowlitz Bank hereby appoint the Escrow Agent
to serve in accordance with the terms of this Agreement, and the Escrow
Agent hereby accepts such appointment and agrees to act in such capacity
upon the express terms, conditions and provisions hereinafter set forth in
this Agreement.
b. Three (3) Committee Members shall constitute a quorum in order to
take any actions called for by this Agreement, except as otherwise provided
in Sections 5.(d) and 7.(c). When a
F-3
quorum exists, actions may be taken by the Committee by an affirmative vote
of at least three (3) of the Committee Members present (except as otherwise
provided in Sections 5.(d) and 7.(c)), and such approval shall be evidenced
in writing signed by at least two Committee Members on behalf of the
Committee. Committee Members may participate in meetings of the Committee in
person or by telephone conference call. All notices to be sent to the
Committee shall be sent to each of the Committee Members.
c. Cowlitz Bank shall have the right, from time to time and in its sole
discretion, to appoint a substitute Cowlitz Bank Member upon written notice
to the Escrow Agent and the Northern Members. If a Northern Member should
prior to the Effective Time become unable or unwilling to serve on the
Committee, such Northern Member shall give Northern and Cowlitz prompt prior
written notice thereof, and Northern shall have the right, in its sole
discretion, to appoint a substitute Northern Member no later than the
earlier of (A) the Effective Time or (B) five (5) business days after
delivery of such notice. If a Northern Member should become after the
Effective time unable or unwilling to continue to serve on the Committee,
such Northern Member shall give Cowlitz Bank, the remaining Northern Member
and the Escrow Agent prior written notice thereof, and within five
(5) business days after delivery of such notice, the remaining Northern
Member shall have the right, in his or her sole discretion, to appoint a
substitute Northern Member; PROVIDED, that such substitute Northern Member
(i) must have been a Shareholder at the Effective Time, (ii) (A) must have
been a director or officer of Northern at the Effective Time or (B) in the
remaining Northern Member's reasonable judgment, must be a sophisticated
financial investor, and (iii) is not an employee, director or officer of
Cowlitz or Cowlitz Bank.
d. Each Northern Member shall receive compensation for his or her
service on the Committee in the amount of $1,000 for each 12-month period
during the term of this Agreement, payable within thirty (30) days of the
first and second anniversaries of the Effective Time; PROVIDED, HOWEVER,
that if such Northern Member is not serving on the Committee at the first
anniversary date or Escrow Expiration Date, as the case may be, then no fee
shall be due or payable to him or her. Such fee shall be payable from the
Interest, if any, remaining at the first anniversary date or Escrow
Expiration Date, as the case may be; PROVIDED, HOWEVER, that such fee shall
be paid if and only to the extent there is sufficient Interest therefor. In
addition, the reasonable out-of-pocket expenses, if any, incurred by a
Northern Member in participating in Committee meetings hereunder ("MEETING
EXPENSES") may be reimbursed from the Interest at the Escrow Expiration Date
in accordance with Section 7.(d) or (f), as the case may be, but in no event
shall any such reimbursement exceed the Interest remaining at such date. If
at any time the Interest is insufficient to make any payments due and
payable to the Northern Members in accordance with this Agreement, the
amount available from the Interest to make such payments at such time shall
be divided equally between the Northern Members entitled to payment.
e. No Northern Member or Cowlitz Bank Member shall have any liability
to any party hereto (except the Escrow Agent). The Cowlitz Bank Members
shall not have any duty to represent the interest of holders of Northern
Common Stock and shall have no liability whatsoever to such holders. The
Northern Members have been appointed to represent the interests of the
holders of Northern Common Stock, but no Northern Member shall have any
liability to any holder of Northern Common Stock with respect to acts or
omissions in his or her capacity as a member of the Committee, unless it is
established in a final judicial determination by clear and convincing
evidence that any decision or action was undertaken with deliberate intent
to injure the holders of Northern Common Stock or with reckless disregard
for the best interest of such holders, and in any event, the liability shall
be limited to actual, proximate, quantifiable damages.
F-4
3. DELIVERY INTO ESCROW.
a. The Exchange Agent shall be instructed by Cowlitz to deliver to the
Escrow Agent the Escrowed Funds. The Escrow Agent agrees to hold the
Escrowed Funds, including any interest or other income received on such
investment or reinvestment of the Escrowed Funds ("INTEREST"), in escrow as
agent for the Exchange Agent on behalf of the Escrow Stockholders, and to
distribute the Escrowed Funds as provided herein. For purposes of this
Agreement, the Escrowed Funds shall not be deemed to include the Interest.
The Interest shall be separately accounted for and may only be used (i) for
final distribution to the Exchange Agent and (ii) to pay those fees and
expenses specified herein as payable from the Interest. The Escrowed Funds
shall be invested by the Escrow Agent in (A) direct obligations of, or
obligations fully guaranteed by, the United States of America with
maturities no greater than three (3) months, (B) insured certificates of
deposit, or time deposits, issued by commercial banks having a combined
capital and surplus of not less than $500,000,000, with maturities no
greater than three (3) months, and (C) money market mutual funds authorized
solely to invest in direct obligations of, or obligations fully guaranteed
by, the United States of America; PROVIDED, HOWEVER, that at all times
during the term of this Agreement, at least the greater of (x) twenty
percent (20%) of the Escrowed Funds or (y) $100,000 shall be invested in
(C) above, unless the Escrowed Funds total less than $100,000, in which case
all remaining Escrowed Funds shall be invested in (C) above.
b. The Escrow Agent shall have no duty or right to invest the Escrowed
Funds until it receives written investment instructions from the Northern
Members in accordance with Section 3.(a). The Escrow Agent shall not be
liable for any loss from said investments. The Escrow Agent is authorized to
redeem any such investments as necessary to make any payments or
disbursements required hereunder and shall be held harmless by the Northern
Members and Cowlitz Bank, jointly and severally, with respect to any losses
or penalties incurred thereby. The Escrow Agent shall, at least ten
(10) days prior to the maturity of any investment, notify the Northern
Members of such impending maturity.
c. As soon as reasonably practicable after Cowlitz has determined the
number of Final Dissenting Shares, if any, Cowlitz shall deliver to the
Exchange Agent an amount equal to the product of the Cash Consideration (as
defined in the Merger Agreement) and the Additional Nondissenting Shares
(the "ADDITIONAL ESCROWED FUNDS"), plus interest thereon from the period
starting on the Effective Time through the date of delivery of the
Additional Escrowed Funds into escrow hereunder, to be held in escrow as
part of the Escrowed Funds hereunder (it being understood and agreed that
such interest shall be deemed to be part of the Interest held in escrow
hereunder). The interest rate applicable to the Additional Escrowed Funds
shall be equal to the average interest rate in effect with respect to the
Escrowed Funds during such period. The Exchange Agent shall be instructed to
deliver the Additional Escrowed Funds and the interest thereon to the Escrow
Agent hereunder to be held in escrow as part of the Escrowed Funds and the
Interest, respectively, in accordance with the terms and conditions of this
Agreement. In the event that the number of Additional Nondissenting Shares
is zero, Cowlitz shall not be required to deliver any Additional Escrowed
Funds hereunder.
4. TAX MATTERS. The Exchange Agent shall be instructed by Cowlitz to
deliver to the Escrow Agent any necessary tax forms or other necessary documents
from each Shareholder no later than [10] days after the Effective Time. Cowlitz
Bank and the Northern Members shall cooperate in obtaining such tax forms to the
extent they are not in the possession of the Exchange Agent, and Cowlitz Bank
shall use its reasonable best efforts to obtain the cooperation of the Exchange
Agent, if necessary. The Escrow Agent will treat the Escrow Stockholders as
beneficial owners of the Escrowed Funds and the Interest for tax purposes and
will report annually to the Escrow Stockholders and the relevant tax authorities
each Escrow Shareholder's share of the Interest received by the Escrow Agent in
accordance with such Escrow Shareholder's proportionate share of the total
number of Northern
F-5
Shares held by the Escrow Stockholders as of such time relative to the number of
Northern Shares held by such Escrow Shareholder as of the Effective Time.
5. PURPOSE; INTERIM COMMITTEE MEETINGS; REIMBURSEMENT.
a. Cowlitz Bank shall be entitled to be reimbursed from the Escrowed
Funds for (x) any loss incurred by it during the period (the "ESCROW
PERIOD") beginning on the date hereof and ending on the 24-month anniversary
of such date (the "ESCROW EXPIRATION DATE") relating to an Identified Loan
in the manner provided in this Section 5 and (y) any loss expected to be
incurred by it after the Escrow Expiration Date relating to an Identified
Loan in the manner provided in Section 7 (each, a "REIMBURSABLE LOSS");
PROVIDED, HOWEVER, that in no event shall the aggregate of such
reimbursements exceed the Escrowed Funds. A loss incurred by Cowlitz Bank
during the Escrow Period related to an Identified Loan shall be from time to
time deemed to occur and to be a Reimbursable Loss if (i) Cowlitz Bank, in
accordance with the Standards, determines that a specific reserve is
necessary for such Identified Loan in excess of the then Threshold Amount
for such Identified Loan (regardless of whether such Identified Loan is in
default); (ii) Cowlitz Bank, in accordance with the Standards, determines
that the value of such Identified Loan should be written down on the books
of Cowlitz Bank (regardless of whether such Identified Loan is in default);
(iii) Cowlitz Bank suffers a loss as a result of a good faith sale, other
disposition or payoff of such Identified Loan; or (iv) such Identified Loan
is in default for 90 days or more and after using commercially reasonable
efforts to obtain payment on such Identified Loan, Cowlitz Bank, in
accordance with the Standards, determines that such Identified Loan is
classified as Special Mention, Substandard, Doubtful or Loss. A Reimbursable
Loss shall include, without limitation, a loss incurred by Cowlitz Bank
relating to an Identified Loan to the extent the net amount actually
received by Cowlitz Bank upon the sale of the collateral securing such
Identified Loan is less than the amount previously estimated by the
Committee in its determination of an earlier Reimbursable Loss with respect
to such Identified Loan.
b. The amount (the "LOSS AMOUNT") required to reimburse Cowlitz Bank
for a Reimbursable Loss shall be estimated by Cowlitz Bank in good faith,
and the Loss Amount generally shall include, without limitation, (x) the
amount of any additional reserve described in clause (i) of Section 5.(a) or
clause (i) of Section 7.(b); (y) the amount of any write-down or loss
described in clause (ii) or (iii) of Section 5.(a) or clause (ii) or
(iii) of Section 7.(b) in excess of the Identified Loan's then Threshold
Amount and (z) in the case of loans described in clause (iv) of
Section 5.(a) or clause (iv) or (v) of Section 7.(b), the amount of loss
expected by Cowlitz in excess of the then Threshold Amount the unpaid
principal and interest on such Identified Loan (less the net amount actually
received, if any, by Cowlitz Bank upon the sale of any collateral securing
such Identified Loan) and Cowlitz Bank's out-of-pocket expenses incurred in
its attempts to obtain payment on such Identified Loan, including without
limitation, reasonable attorneys' fees, which expenses shall be incurred
consistently with Cowlitz Bank's customary collection practices.
c. From time to time during the term of this Agreement, Cowlitz Bank
may incur certain expenses in its attempts to (i) obtain payment with
respect to an Identified Loan in order to prevent such Identified Loan from
becoming a Reimbursable Loss and/or (ii) prevent a loss from becoming larger
or to reduce the size of a potential Reimbursable Loss. To the extent any of
such expenses have not previously been reimbursed to Cowlitz Bank as a
Reimbursable Loss from the Escrowed Funds ("ADDITIONAL EXPENSES"), Cowlitz
Bank shall be entitled to be reimbursed for such Additional Expenses from
the Escrowed Funds by including such Additional Expenses in the Final
Settlement Statement provided such expenses have been incurred consistently
with Cowlitz Bank's customary collection practices. Additional Expenses may
include, without limitation, reasonable attorneys' fees, outside collateral
appraisals and court fees and costs. The Loss Amount with respect to
Additional Expenses shall be equal to Cowlitz Bank's estimate in good faith
of such Additional Expenses.
F-6
d. If at any time during the Escrow Period Cowlitz Bank has a good
faith belief that a Reimbursable Loss has occurred, Cowlitz Bank shall give
written notice (an "INTERIM MEETING NOTICE") to the Committee setting forth
in reasonable detail Cowlitz Bank's basis for such Reimbursable Loss and the
estimated Loss Amount, and of its desire to convene a meeting of the
Committee Members (an "INTERIM COMMITTEE MEETING") on a date no earlier than
five (5) business days after the date of such Interim Meeting Notice. After
receipt of such Interim Meeting Notice, each Committee Member shall promptly
communicate to Cowlitz Bank such Committee Member's availability on the
meeting date specified in such Interim Meeting Notice and his or her
availability during the seven (7) calendar days following such meeting date.
Upon Cowlitz Bank's determination of a time, date and location for such
Interim Committee Meeting which is acceptable to all four (4) Committee
Members, Cowlitz Bank shall promptly give written confirmation thereof to
each Committee Member; PROVIDED, HOWEVER, that if such date is beyond the
seventh (7th) calendar day (the "INTERIM MEETING DEADLINE DATE") following
the initial meeting date specified in the Interim Meeting Notice, then if
Cowlitz Bank determines that there is a date on or prior to the Interim
Meeting Deadline Date on which three (3) Committee Members are able to
participate, Cowlitz Bank shall have the right to set such Interim Committee
Meeting on such earlier date, even though all Committee Members may be
unable to participate on such date. Notwithstanding the foregoing, if at the
Interim Committee Meeting, neither Northern Committee Member is present,
then the Committee shall adjourn and Cowlitz Bank shall set a second Interim
Committee Meeting date as soon as possible after the adjourned meeting using
the procedure set forth in the preceding sentence; PROVIDED, HOWEVER, that
if neither Northern Committee Member is present at such second Interim
Committee Meeting, then two (2) Committee Members shall constitute a quorum
for purposes of such Interim Committee Meeting, action may be taken at such
meeting by an affirmative vote of the two (2) Committee Members present and
Joint Instructions may be executed by the two (2) Committee Members present.
e. At such Interim Committee Meeting, the Committee shall determine, in
accordance with the Standards, the applicable Loss Amount for such
Reimbursable Loss, if any, and upon such determination, the Committee shall
deliver Joint Instructions to the Escrow Agent with respect thereto. In
making its determination, the Committee shall have the discretion to
determine, in accordance with the Standards, the applicable classification
of the Identified Loan and the estimated net amount anticipated to be
received by Cowlitz Bank upon the sale of any collateral securing such
Identified Loan. The Escrow Agent shall, immediately after receipt of the
Joint Instructions, deliver to Cowlitz Bank from the Escrowed Funds cash in
the amount specified therein.
f. If the Committee is unable to make such determination after meeting
for one (1) day, the Committee shall appoint a Loan Examiner to resolve such
dispute. If after one (1) day, the Committee is unable to agree on a Loan
Examiner, then (i) the Northern Members shall jointly appoint a Loan
Examiner, (ii) the Cowlitz Bank Members shall jointly appoint a Loan
Examiner, and (iii) such appointed Loan Examiners shall jointly appoint a
third Loan Examiner to resolve such dispute. The Loan Examiner appointed in
accordance with this Section 5.(f) (the "INTERIM APPOINTED EXAMINER") shall
make his or her decision in accordance with the Standards. The decision of
the Interim Appointed Examiner shall be final and binding on Cowlitz Bank
and the Committee. The fees of the Interim Appointed Examiner (and the fees,
if any, of the Loan Examiners appointed pursuant to (i) and (ii) above)
shall be paid one-half by Cowlitz Bank, from its own funds, and the
remaining one-half shall be paid, first, from the Interest and second, from
the Escrowed Funds. Upon resolution of the dispute, the Committee shall
deliver Joint Instructions to the Escrow Agent with respect thereto, after
which the Escrow Agent shall immediately pay such portion of the Escrowed
Funds which related to such dispute in accordance with the Joint
Instructions.
F-7
g. If at any time prior to the Escrow Expiration Date the Escrowed
Funds shall be insufficient to comply with a Joint Instruction or Court
Order, the Escrow Agent shall: (i) pay to the Exchange Agent the Interest
(after payment of all expenses payable out of the Interest in accordance
with this Agreement), for distribution by the Exchange Agent to the Escrow
Stockholders in accordance with Section 3.2.(b) of the Merger Agreement;
(ii) pay the entire Escrowed Funds to Cowlitz Bank; and (iii) advise Cowlitz
Bank and the Committee in writing of the amount of such payments.
h. The Threshold Amount of an Identified Loan shall be subject to
adjustment from time to time. In the event that Cowlitz Bank suffers with
respect to an Identified Loan any loss described in clauses (ii) or
(iii) in Section 5.(a) or in clauses (ii), (iii) or (iv) in Section 7.(b),
then the Threshold Amount for such Identified Loan will be reduced by the
amount of such loss but in no event will the Threshold Amount be less than
$0. By way of example, if an Identified Loan has a Threshold Amount of
$1,000 and such Identified Loan is then written down by $600, Cowlitz Bank
would be entitled to no payment out of the Escrow Fund because the amount of
the write-down did not exceed the Threshold Amount. However, as a result of
the write-down, the Threshold Amount would be adjusted to $400. If Cowlitz
Bank subsequently took another write-down of $700 on such Identified Loan,
Cowlitz Bank would be entitled to receive $300 out of the Escrow and the
Threshold Amount would be adjusted to $0.
6. RECOVERY BY COWLITZ BANK.
a. If at any time prior to the Escrow Expiration Date, Cowlitz Bank
recovers any payment with respect to a Reimbursable Loss for which Cowlitz
Bank had previously received payment therefor from the Escrowed Funds (a
"RECOVERED AMOUNT"), then within ten (10) business days after receipt of
such Recovered Amount, Cowlitz Bank shall deliver to the Escrow Agent an
amount in cash equal to such Recovered Amount, plus interest thereon from
the period starting on the date Cowlitz Bank had previously received the
original payment from the Escrowed Funds with respect to such Reimbursable
Loss through the date such Recovered Amount was received by it, to be held
in escrow as part of the Escrowed Funds hereunder (it being understood and
agreed that such interest shall be deemed to be part of the Interest held in
escrow hereunder). The interest rate applicable to a Recovered Amount shall
be equal to the average interest rate in effect with respect to the Escrowed
Funds during such period.
b. If at any time after the Escrow Expiration Date, Cowlitz Bank
receives any Recovered Amount, then such Recovered Amount shall be the sole
property of Cowlitz Bank, the Northern Members shall have no claim or right
to such Recovered Amount and Cowlitz Bank shall have no obligations
whatsoever to the Exchange Agent, Northern Members or Escrow Stockholders
with respect to such Recovered Amount, including without limitation, any
obligation to deliver such Recovered Amount to the Escrow Agent hereunder.
7. FINAL RELEASE OF THE ESCROWED FUNDS. The Escrowed Funds and the
Interest will be released as of the Escrow Expiration Date as follows:
a. No later than thirty (30) days prior to the Escrow Expiration Date,
Cowlitz Bank shall prepare and deliver to the Committee and the Escrow Agent
a statement (the "FINAL SETTLEMENT STATEMENT") setting forth all outstanding
Identified Loans which, as determined by Cowlitz Bank, in accordance with
the Standards, are classified as Special Mention, Substandard, Doubtful or
Loss as of the Escrow Expiration Date. The Final Settlement Statement shall
also set forth Cowlitz Bank's good faith estimate of the Final Loss Amount
and the Additional Expenses which have not been previously reimbursed to
Cowlitz Bank from the Escrowed Funds as of the Escrow Expiration Date, if
any. The "FINAL LOSS AMOUNT" shall be equal to (i) the aggregate Loss
Amounts for the Identified Loans that Cowlitz Bank (A) has incurred which
have not been previously reimbursed to
F-8
Cowlitz Bank from the Escrowed Funds or (B) reasonably expects to incur
through and after the Escrow Expiration Date, less (ii) the Aggregate Unused
Final Threshold Amount.
b. For purposes of the Final Settlement Statement, a Reimbursable Loss
related to an Identified Loan shall be deemed to occur if, as of the Escrow
Expiration Date: (i) Cowlitz Bank, in accordance with the Standards,
determines that an additional specific reserve is necessary for such
Identified Loan (regardless of whether such Identified Loan is in default);
(ii) Cowlitz Bank, in accordance with the Standards, determines that the
value of such Identified Loan should be written down on the books of Cowlitz
Bank (regardless of whether such Identified Loan is in default);
(iii) Cowlitz Bank suffers a loss as a result of a good faith sale, other
disposition or payoff of such Identified Loan; (iv) such Identified Loan is
in default and Cowlitz Bank, in its reasonable judgment, determines that the
collateral securing such Identified Loan is inadequate; or (v) such
Identified Loan is in default for 90 days or more and after using
commercially reasonable efforts to obtain payment on such Identified Loan,
Cowlitz Bank, in accordance with the Standards, determines that such
Identified Loan is classified as Special Mention, Substandard, Doubtful or
Loss. The Final Settlement Statement shall also include Cowlitz Bank's
calculation of the Aggregate Unused Final Threshold Amount. The "Unused
Final Threshold Amount" for an Identified Loan shall mean (i) the Threshold
Amount (after being adjusted as provided herein) in the case of an
Identified Loan which has been paid off, has been sold or otherwise has been
disposed of and (ii) the excess of the Threshold Amount (after being
adjusted as provided herein) over the specific reserve of the Identified
Loan. "Aggregate Unused Final Threshold Amount" shall mean the sum of the
Unused Final Threshold Amount for all Identified Loans (whether or not such
loans are on the books of Cowlitz Bank as of the Escrow Expiration Date). By
way of example, assume there are four Identified Loans (Loan A, Loan B, Loan
C and Loan D, respectively), each with an initial threshold Amount of $1000.
Loan A has been disposed of with a loss of $1500. Its Threshold Amount is $0
and Cowlitz Bank has been reimbursed $500 out of the Escrow Fund. Loan B has
been disposed of with a loss of $500. Its Threshold Amount has been adjusted
to $500 and Cowlitz Bank received no reimbursement from the Escrow Fund.
Loan C has a specific reserve of $1000, but Cowlitz Bank determines that an
addition of $1200 to the reserve is required. Loan D has a specific reserve
of $1000, but Cowlitz Bank determines that a specific reserve of $600 is
sufficient. Loan A has an Unused Final Threshold Amount of $0; Loan B has an
Unused Final Threshold Amount of $500; Loan C has an Unused Final Threshold
Amount of $0; and Loan D has an Unused Final Threshold Amount of $400. The
Final Settlement Statement would indicate a Loss Amount of $1200 for Loan C.
The Aggregate Unused Final Threshold Amount would be $900. Accordingly, the
Final Loss Amount would equal $300 (the sum of the Loss Amounts less the
Aggregate Unused Final Threshold Amount).
c. Concurrently with delivery of the Final Settlement Statement,
Cowlitz Bank shall also deliver written notice (the "FINAL MEETING NOTICE")
to convene a meeting of the Committee to discuss the Final Settlement
Statement (the "FINAL MEETING") on a date no earlier than five (5) business
days after the date of such Final Meeting Notice. After receipt of the Final
Meeting Notice, each Committee Member shall promptly communicate to Cowlitz
Bank such Committee Member's availability on the meeting date specified in
the Final Meeting Notice and his or her availability during the seven
(7) calendar days following such meeting date. Upon Cowlitz Bank's
determination of a time, date and location for such Final Committee Meeting
which is acceptable to all four (4) Committee Members, Cowlitz Bank shall
promptly give written confirmation thereof to each Committee Member;
PROVIDED, HOWEVER, that if such date is beyond the seventh (7th) calendar
day (the "FINAL MEETING DEADLINE DATE") following the initial meeting date
specified in the Final Meeting Notice, then if Cowlitz Bank determines that
there is a date on or prior to the Final Meeting Deadline Date on which
three (3) Committee Members are able to participate, Cowlitz Bank shall have
the right to set such Final Committee Meeting on such earlier date, even
though all Committee Members may be unable to participate on such date.
Notwithstanding the foregoing,
F-9
if at the Final Committee Meeting, neither Northern Committee Member is
present, then the Committee shall adjourn and Cowlitz Bank shall set a
second Final Committee Meeting date as soon as possible after the adjourned
meeting using the procedure set forth in the preceding sentence; PROVIDED,
HOWEVER, that if neither Northern Committee Member is present at such second
Final Committee Meeting, then two (2) Committee Members shall constitute a
quorum for purposes of the Final Committee Meeting, action may be taken at
such meeting by an affirmative vote of the two (2) Committee Members present
and Joint Instructions may be executed by the two (2) Committee Members
present.
d. At the Final Meeting, the Committee shall determine, in accordance
with the Standards, the Final Loss Amount and upon such determination, the
Committee shall deliver Joint Instructions to the Escrow Agent with respect
thereto. In making its determination of the Final Loss Amount, the Committee
shall have the discretion to determine, in accordance with the Standards,
the applicable classification of each Identified Loan and the estimated net
amount anticipated to be received by Cowlitz Bank upon the sale of any
collateral securing such Identified Loan. The Escrow Agent shall,
immediately upon receipt of such Joint Instructions:
(i) retain for its own account an amount equal to the accrued and
unpaid fees of the Escrow Agent through the Termination Date, first, from
the Interest and second, from the Escrowed Funds;
(ii) deliver $1,000 from the remaining Interest, if any, to each
Northern Member as compensation for his or her service on the Committee
for the year ending on the Escrow Expiration Date, PROVIDED that such
Northern Member is serving on the Committee on such date, and PROVIDED
FURTHER that if the remaining Interest is not sufficient to make such
payment, the amount available from the remaining Interest shall be
divided equally between the Northern Members entitled to payment;
(iii) deliver a portion of the remaining Interest, if any, to each
Northern Member equal to the Meeting Expenses, if any, incurred by such
Northern Member;
(iv) deliver a portion of the Escrowed Funds to Cowlitz Bank equal to
the Final Loss Amount as set forth in such Joint Instructions; and
(v) deliver to the Exchange Agent the remaining balance of the
Escrowed Funds and the Interest (after (i) through (iv) above have been
deducted or retained therefrom), if any, for distribution by the Exchange
Agent to the Escrow Stockholders in accordance with Section 3.2.(b) of
the Merger Agreement.
e. If the Committee is unable to make such determination after meeting
for one (1) day, the Committee shall (i) deliver written notice (the "FINAL
DISPUTE NOTICE") of the disputed Final Loss Amount (as set forth in the
Meeting Notice for the Final Meeting) to the Escrow Agent and (ii) appoint a
Loan Examiner to resolve such dispute. If after one (1) day, the Committee
is unable to agree on a Loan Examiner, then (A) the Northern Members shall
jointly appoint a Loan Examiner, (B) the Cowlitz Bank Members shall jointly
appoint a Loan Examiner, and (C) such appointed Loan Examiners shall jointly
appoint a third Loan Examiner to resolve such dispute. The Loan Examiner
appointed in accordance with this Section 7.(e) (the "FINAL APPOINTED
EXAMINER") shall make his or decision in accordance with the Standards. The
decision of the Final Appointed Examiner shall be final and binding on
Cowlitz Bank and the Committee. The fees of the Final Appointed Examiner
(and the fees, if any, of the Loan Examiners appointed pursuant to (A) and
(B) above) shall be paid one-half by Cowlitz Bank, from its own funds, and
the remaining one-half shall be paid, first, from the Interest and second,
from the Escrowed Funds. Upon resolution of the dispute, the Committee shall
deliver Joint Instructions to the Escrow Agent.
F-10
f. In the event the Escrow Agent receives a Final Dispute Notice from
the Committee, then the Escrow Agent shall retain custody of a portion of
the Escrowed Funds equal to the Final Loss Amount as set forth in the Final
Dispute Notice until the first to occur of the following:
(i) receipt by the Escrow Agent of Joint Instructions resolving such
dispute; or
(ii) receipt by the Escrow Agent of a Court Order resolving such
dispute and directing disposition of such portion of the Escrowed Funds;
after which the Escrow Agent shall immediately:
(iii) retain for its own account an amount equal to the accrued and
unpaid fees of the Escrow Agent through the Termination Date, first, from
the Interest and second, from the Escrowed Funds;
(iv) deliver $1,000 from the remaining Interest, if any, to each
Northern Member as compensation for his or her service on the Committee
for the year ending on the Escrow Expiration Date, PROVIDED that such
Northern Member is serving on the Committee on such date, and PROVIDED
FURTHER that if the remaining Interest is not sufficient to make such
payment, the amount available from the remaining Interest shall be
divided equally between the Northern Members entitled to payment;
(v) deliver a portion of the remaining Interest, if any, to each
Northern Member equal to the Meeting Expenses, if any, incurred by such
Northern Member;
(vi) deliver a portion of the Escrowed Funds to Cowlitz Bank equal to
the Final Loss Amount as set forth in such Joint Instructions or Court
Order, as the case may be; and
(vii) deliver to the Exchange Agent the remaining balance of the
Escrowed Funds and the Interest (after (iii) through (vi) above have been
deducted or retained therefrom), if any, for distribution by the Exchange
Agent to the Escrow Stockholders in accordance with Section 3.2.(b) of
the Merger Agreement.
g. If at the Escrow Expiration Date, the Escrowed Funds shall be
insufficient to comply with such Joint Instructions or Court Order, as the
case may be, the Escrow Agent shall make payments in the order set forth in
(d) or (f) above, as the case may be, to the extent such payments can be
made in accordance therewith, and advise Cowlitz Bank and the Committee in
writing of the amounts of each such payment made.
8. TERMINATION. This Agreement will terminate upon the later to occur of
(i) the Escrow Expiration Date or (ii) release of all of the Escrowed Funds and
the Interest by the Escrow Agent as provided in this Agreement (the "TERMINATION
DATE").
9. DUTY AND LIABILITY OF THE ESCROW AGENT.
a. The sole duty of the Escrow Agent, other than as herein specified,
shall be to receive the Escrowed Funds and hold them subject to release in
accordance with the terms of this Agreement. The Escrow Agent's rights,
duties and obligations are strictly limited to those expressly set forth in
this Agreement and the Escrow Agent shall be under no implied obligations
nor subject to take notice of any defaults or any other matter, nor be bound
nor required to give notice on demand, nor required to take any action
whatever except as herein expressly provided. The Escrow Agent shall not be
liable for any loss or damage unless caused by its own gross negligence, bad
faith or willful misconduct.
b. The Escrow Agent may conclusively rely upon and shall be protected
in acting upon any statement, certificate, notice, request, consent, order
or other document believed by it to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent
F-11
shall have no duty or liability to verify any such statement, certificate,
notice, request, consent, order or other document and its sole
responsibility shall be to act only as expressly set forth in this
Agreement. The Escrow Agent shall be under no obligation to institute or
defend any action, suit or proceeding in connection with this Agreement. The
Escrow Agent may consult counsel in respect of any question arising under
this Agreement, and the Escrow Agent shall not be liable for any action
taken or omitted in good faith upon advice of such counsel.
c. The Northern Members and Cowlitz Bank jointly and severally agree to
indemnify and hold harmless the Escrow Agent from loss, damage or any loss
made against the Escrow Agent arising out of or relating to this Agreement,
such indemnification to include all costs and expenses incurred by the
Escrow Agent, including but not limited to reasonable attorneys' fees;
PROVIDED, HOWEVER, that such indemnification shall not include losses
against the Escrow Agent which are occasioned by gross negligence, bad faith
or willful misconduct; PROVIDED, FURTHER, that the indemnification
obligations of the Northern Members hereunder shall be limited to the
Interest and the Escrowed Funds.
d. The Escrow Agent may conclusively rely on Joint Instructions as to
the disposition of funds, assets, documents, or other property held in
escrow.
10. ESCROW AGENT'S FEE AND EXPENSES.
a. The fees of the Escrow Agent, which are set forth in Schedule 3
attached hereto, shall be paid first, from the Interest and, second, from
the Escrowed Funds. The fee for services rendered hereunder is intended as
full compensation for the Escrow Agent's services as contemplated by this
Agreement. In addition, Cowlitz Bank, out if its own funds, agrees to pay
one-half of the Escrow Agent's reasonable expenses and disbursements,
including, but not limited to, the actual cost of legal services should the
Escrow Agent deem it necessary to retain an attorney, and the remaining
one-half shall be paid, first, from the Interest and, second, from the
Escrowed Funds. Should litigation instituted by or against any of the
parties require additional duties of the Escrow Agent or appearance in
court, the Escrow Agent shall be reimbursed by the nonprevailing party for
its services and for its expenses incurred therein, or in the event such
litigation is settled, as agreed among the parties.
b. If any controversy arises between the parties hereto or with any
third person, the Escrow Agent shall not be required to resolve the same or
to take any action to do so but may, at its discretion, institute such
interpleader or other proceedings as it deems proper. Any costs and
expenses, including reasonable counsel fees incurred by the Escrow Agent in
connection with such dispute, shall be paid by the nonprevailing party or as
otherwise agreed by the parties.
11. BINDING AGREEMENT AND SUBSTITUTION OF ESCROW AGENT. The terms and
conditions of this Agreement shall be binding on the heirs, executors and
assigns, creditors, transferees, or successors in interest of the parties
hereto, regardless of whether such interest is obtained by operation of law or
otherwise, including without limitation by consolidation, transfer, assignment
or merger. Any corporation into which the Escrow Agent may merge, sell, or
transfer its escrow business shall automatically be and become successor Escrow
Agent hereunder, vested with all powers as was its predecessor without the
execution or filing of any instruments, or any further act, deed, or conveyance
on the part of the parties hereto. If, for any reason, the Escrow Agent named
herein should be unable or unwilling to continue to serve as such Escrow Agent,
the Escrow Agent shall give the Northern Members and Cowlitz Bank thirty
(30) days prior written notice thereof. Upon the effective date of such
resignation, the Escrow Agent shall have no further duties or obligations
hereunder. The Northern Members and Cowlitz Bank shall within that thirty
(30) days appoint another escrow agent by a writing signed by the Northern
Members and Cowlitz Bank, a copy of which shall be delivered to the withdrawing
Escrow Agent. If the Escrow Agent is not notified within thirty (30) days of a
successor Escrow Agent then the Escrow Agent shall be entitled to transfer all
of the Escrowed Funds to a court
F-12
of competent jurisdiction with a request to have a successor appointed. The
Escrow Agent shall promptly thereafter execute all documents necessary to
transfer the Escrowed Funds to the substitute escrow agent.
12. GENERAL.
a. MODIFICATION. No waiver or modification of this Agreement shall be
valid unless in writing and duly executed by all parties hereto. No evidence
of any waiver or modification shall be offered or received in evidence in
any proceedings, arbitration, or litigation between any of the parties
arising out of or affecting this Agreement, or the rights or obligations of
the parties hereunder, unless such waiver or modification is in writing and
duly executed by all parties hereto. The parties further agree that the
provisions of this Section 12.(a) may not be waived except as set forth
herein.
b. NO WAIVER. Failure or delay on the part of any party in exercising
any rights, power or privileges under this Agreement shall not be deemed a
waiver of any exercise of any right, power or privilege of such party.
c. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns.
d. NOTICES. All notices, demands and other communications called for
or required by this Agreement shall be in writing and shall be addressed to
the parties at their respective addresses stated below or to such other
address as a party may subsequently designate by ten days' advance written
notice to the other parties. Communications hereunder shall be deemed to
have been received (i) upon delivery in person, (ii) five days after mailing
it by certified mail, return receipt requested and postage prepaid,
(iii) the second business day after depositing it with a commercial
overnight carrier which provides written verification of delivery or
(iv) the day of transmission by telefacsimile if sent before 2:00 p.m.
recipient's time (or if the day of transmittal is not a business day for the
recipient, the next business day), provided that a copy of such notice is
sent on the same day by certified mail, return receipt requested and postage
prepaid, with an indication that the original was sent by facsimile and the
date of its transmittal.
To Cowlitz or Cowlitz Bank: Cowlitz Bancorporation
Attention: President
927 Commerce Avenue
Longview, WA 98632
Phone: (360) 423-9800
Fax: (360) 423-5461
To the Cowlitz Bank Members: Cowlitz Bancorporation
Attention: and
927 Commerce Avenue
Longview, WA 98632
Phone: (360) 423-9800
Fax: (360) 423-5461
in each case with a copy to: Heller Ehrman White & McAuliffe
Attention: Bernard L. Russell
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104
Phone: (206) 447-0900
Fax: (206) 447-0849
F-13
To the Northern Members: ------------------- -------------------
------------------- -------------------
------------------- -------------------
Phone: ------------- Phone: -------------
Fax: --------------- Fax: ---------------
with a copy to: Davis Wright Tremaine LLP
Attention: David C. Baca
Suite 2300
1300 SW Fifth Avenue
Portland, OR 97201
Phone: (503) 778-5306
Fax: (503) 778-5299
To the Escrow Agent: -------------------
-------------------
-------------------
Phone: -------------
Fax: ---------------
e. FULL UNDERSTANDING. In executing this Agreement, each party fully,
completely, and unconditionally acknowledges and agrees that it (a) has had
an equal opportunity to participate in drafting this Agreement, (b) has
consulted with, and had the advice and counsel of a duly licensed and
competent attorney and that it has executed this Agreement after independent
investigation, voluntarily and without fraud, duress, or undue influence,
(c) expressly consents that this Agreement be given full force and effect
according to each and every of its express terms and provisions and
(d) agrees that no ambiguity shall be construed against any party based upon
a claim that such party drafted the applicable language.
f. ENTIRE AGREEMENT. This Agreement and the Merger Agreement contain
all of the terms and conditions agreed upon by the parties relating to the
subject matter hereof and supersede and cancel all other prior agreements,
negotiations, correspondence, undertakings, communications and
understandings of the parties, whether written or oral, respecting that
subject matter.
g. CAPTIONS AND CONSTRUCTION. Captions in this Agreement are for the
convenience of the reader and are not to be considered in the interpretation
of the terms.
h. SEVERABILITY. If any one or more of the provisions of this
Agreement, or the applicability of any such provision to a specific
situation, shall be held invalid or unenforceable, such provision shall be
modified to the minimum extent necessary to make it or its application valid
and enforceable, and the validity and enforceability of all other provisions
of this Agreement and all other applications of any such provision shall not
be affected thereby.
i. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of , without regard to its conflicts of law principles.
j. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each of the parties and either original or facsimile counterparts
have been delivered to the other party.
F-14
IN WITNESS WHEREOF, the parties hereto have entered into and signed this
Agreement as of the date and year first written above.
--------------------------------------,
as Escrow Agent
By
--------------------------------------
Its
--------------------------------------
COWLITZ BANCORPORATION
By
--------------------------------------
Its
--------------------------------------
COWLITZ BANK
By
--------------------------------------
Its
--------------------------------------
NORTHERN BANK OF COMMERCE
By
--------------------------------------
Its
--------------------------------------
F-15
SCHEDULE 1
CLASSIFICATIONS
CLASSIFICATION DESCRIPTION
- -------------- -----------
Special Mention...................... Marginally acceptable business credit; some potential
weakness. Generally undesirable business constituting an
undue and unwarranted credit risk but not to the point of
justifying a Substandard classification. While the asset is
currently protected, it is potentially weak. No loss of
principal or interest is envisioned. Potential weaknesses
might include a weakening financial condition, an
unrealistic repayment program, inadequate sources of funds,
or lack of adequate collateral, credit information, or
documentation. Company is undistinguished and mediocre.
Substandard.......................... Unacceptable business credit, normal repayment in jeopardy.
While no loss of principal or interest is envisioned, there
is a positive and well-defined weakness which jeopardizes
collection of debt. The asset is inadequately protected by
the current sound net worth and paying capacity of the
obligor or pledged collateral. There may already have been a
partial loss of interest.
Doubtful............................. Full payment questionable. Serious problems exist to the
point where a partial loss of principal is likely.
Weaknesses are so pronounced that on the basis of current
information, conditions and values, collection is highly
improbable.
Loss................................. Expected total loss. An uncollectible asset or one of such
little value it does not warrant classification as an active
asset. Such an asset may, however, have recovery or salvage
value, but not to the point where a write-off should be
deferred, even though a partial recovery may occur in the
future.
F-16
APPENDIX G
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS
CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated September 14, 1999, between Northern Bank of
Commerce, a corporation chartered under the banking laws of the State of Oregon
("ISSUER"), and Cowlitz Bancorporation, a Washington corporation ("GRANTEE").
WITNESSETH:
WHEREAS, Grantee, Issuer and Cowlitz Bank have entered into an Agreement and
Plan of Merger of even date herewith (the "MERGER AGREEMENT"), which agreement
has been executed by the parties hereto immediately prior to this Stock Option
Agreement (this "AGREEMENT"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. GRANT OF OPTION.
(a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "OPTION") to purchase, subject to the terms hereof, up to an aggregate
of 243,893 fully paid and nonassessable shares of Issuer's Common Stock, par
value $1.00 per share ("COMMON STOCK"), at a price of $4.625 per share (the
"OPTION PRICE"); provided, however, that in no event shall the number of
shares of Common Stock for which this Option is exercisable exceed 19.9% of
the Issuer's issued and outstanding shares of Common Stock without giving
effect to any shares subject to or issued pursuant to the Option. The number
of shares of Common Stock that may be received upon the exercise of the
Option and the Option Price are subject to adjustment as herein set forth.
(b) In the event that any shares of Common Stock are either (i) issued
or otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5 hereof) or (ii) redeemed, repurchased, retired or otherwise cease
to be outstanding after the date of this Agreement, the number of shares of
Common Stock subject to the Option shall be increased or decreased, as
appropriate, so that, after such issuance or such redemption, repurchase,
retirement or other action, such number equals 19.9% of the number of shares
of Common Stock then issued and outstanding without giving effect to any
shares subject to or issued pursuant to the Option. Nothing contained in
this Section 1(b) or elsewhere in this Agreement shall be deemed to
authorize Issuer or Grantee to issue, redeem, repurchase or retire shares in
breach of any provision of the Merger Agreement.
2. EXERCISE OF OPTION.
(a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if both an Initial Triggering Event
(as hereinafter defined) and a Subsequent Triggering Event (as hereinafter
defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined); provided, that the Holder shall
have sent written notice of such exercise (as provided in subsection (e) of
this Section 2) within 90 days following such Subsequent Triggering Event
(or such longer period as provided in Section 10); provided further,
however, that if the Option cannot be exercised on any day because of any
injunction, order or similar restraint issued by a court of competent
jurisdiction, the period during which the Option may be exercised shall be
extended so that the Option shall expire no earlier than on the tenth
business day after such injunction, order or restraint shall have been
dissolved or
G-1
when such injunction, order or restraint shall have become permanent and no
longer subject to appeal, as the case may be. Each of the following shall be
an "EXERCISE TERMINATION EVENT": (i) the Effective Time (as defined in the
Merger Agreement); (ii) termination of the Merger Agreement in accordance
with the provisions thereof if such termination occurs prior to the
occurrence of an Initial Triggering Event, except a termination by Grantee
pursuant to Section 9.1(d) of the Merger Agreement (unless the breach by
Issuer giving rise to such right of termination is non-volitional);
(iii) the passage of 12 months after termination of the Merger Agreement if
such termination follows the occurrence of an Initial Triggering Event or is
a termination by Grantee pursuant to Section 9.1(d) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is
non-volitional); provided, that if the Initial Triggering Event continues or
occurs beyond such termination and prior to the passage of such 12-month
period, the Exercise Termination Event shall be 12 months from the
expiration of the Last Triggering Event (as hereinafter defined) but in no
event more than 18 months after such termination; or (iv) delivery of a
written request for payment of termination fees pursuant to Section 9.2 of
the Merger Agreement (provided that no such Exercise Termination Event shall
be deemed to have occurred unless such termination fees and any
reimbursement amounts are paid in accordance with such Section 9.2). For
purposes of this Agreement, (A) "HOLDER" shall mean the holder or holders of
the Option and (B) "Last Triggering Event" shall mean the last Initial
Triggering Event to expire. Notwithstanding anything to the contrary herein,
(i) the Option may not be exercised at any time when Grantee shall be in
breach of any of its representations, warranties, covenants or agreements
contained in the Merger Agreement such that Issuer would be entitled to
terminate the Merger Agreement pursuant to Section 9.1(d) thereof and
(ii) this Agreement shall automatically terminate upon the termination of
the Merger Agreement pursuant to Section 9.1(d) thereof as a result of the
breach by Grantee of its representations, warranties, covenants or
agreements contained in the Merger Agreement.
(b) The term "INITIAL TRIGGERING EVENT" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its Significant Subsidiaries, as defined in
Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (each an "ISSUER SUBSIDIARY"), without having received
Grantee's prior written consent, shall have entered into an agreement to
engage in an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 ACT"), and the
rules and regulations thereunder) other than Grantee or any of its
Subsidiaries (each a "GRANTEE SUBSIDIARY") or the Board of Directors of
Issuer shall have recommended that the stockholders of Issuer approve or
accept any Acquisition Transaction with any person other than Grantee or
a Subsidiary of Grantee. For purposes of this Agreement, "ACQUISITION
TRANSACTION" shall mean (x) a merger or consolidation, or any similar
transaction, involving Issuer or any Issuer Subsidiary, (y) a purchase,
lease or other acquisition or assumption of all or a substantial portion
of the assets or deposits of Issuer or any Issuer Subsidiary, or (z) a
purchase or other acquisition (including by way of merger, consolidation,
share exchange or otherwise) of securities representing 10% or more of
the voting power of Issuer; provided, however, that in no event shall any
merger, consolidation, purchase or similar transaction involving only
Issuer and one or more of Issuer Subsidiaries or involving only two or
more of Issuer Subsidiaries, be deemed to be an Acquisition Transaction,
provided that any such transaction is not entered into in violation of
the terms of the Merger Agreement;
(ii) (A) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, to engage in an Acquisition Transaction with any person
G-2
other than Grantee or a Grantee Subsidiary, or (B) the Board of Directors
of Issuer shall have failed to make its recommendation that the
stockholders of Issuer approve the transactions contemplated by the
Merger Agreement, or (C) the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement;
(iii) Any person, other than Grantee, any Grantee Subsidiary or any
Issuer Subsidiary acting in a fiduciary capacity in the ordinary course
of its business, shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of
Common Stock, except that the beneficial ownership by Irwin Holtzman and
his affiliates of up to 15% of the outstanding shares of Common Stock
shall be excluded from this clause (iii) (the term "BENEFICIAL OWNERSHIP"
for purposes of this Agreement having the meaning assigned thereto in
Section 13(d) of the 1934 Act, and the rules and regulations thereunder);
(iv) After any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the
subject of public disclosure to engage in an Acquisition Transaction, the
approval of Issuer's stockholders required by Section 8.1(a) of the
Merger Agreement is not obtained;
(v) After an overture is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction (whether such
overture becomes the subject of public disclosure or not), Issuer shall
have willfully breached any covenant or obligation contained in the
Merger Agreement or willfully breached any representation or warranty
contained in the Merger Agreement and such breach (x) would entitle
Grantee to terminate the Merger Agreement and (y) shall not have been
cured prior to the Notice Date (as defined below);
(vi) Any person other than Grantee or any Grantee Subsidiary, other
than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve
Board, or other federal or state bank regulatory authority, which
application or notice has been accepted for processing, for approval to
engage in an Acquisition Transaction; or
(vii) Any person other than Grantee or any Grantee Subsidiary
commences or publicly announces its intention to commence a tender offer
or exchange offer for securities representing 10% or more of the voting
power of Issuer.
(c) The term "SUBSEQUENT TRIGGERING EVENT" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 25% or
more of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
Section 2(b)(i) hereof, except that the percentage referred to in
subsection (z) thereof shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event of which it has
notice, it being understood that the giving of such notice by Issuer shall
not be a condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being
herein referred to as the "NOTICE DATE") specifying (i) the total number of
shares it will purchase pursuant to such exercise and (ii) a place and date
not earlier than three business days nor later than 60 business days from
the Notice Date for the
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closing of such purchase (the "CLOSING DATE"); provided that if prior
notification to or approval of any regulatory or antitrust agency is
required in connection with such purchase, the Holder shall promptly file
the required notice or application for approval, shall promptly notify
Issuer of such filing and shall expeditiously process the same and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer
shall deliver to the Holder a certificate or certificates representing the
number of shares of Common Stock purchased by the Holder and, if the Option
should be exercised in part only, a new Agreement for an Option evidencing
the rights of the Holder thereof to purchase the balance of the shares
purchasable hereunder, and the Holder shall deliver to Issuer this Agreement
and a letter agreeing that the Holder will not offer to sell or otherwise
dispose of such shares in violation of applicable law or the provisions of
this Agreement.
(h) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2
and the tender of the applicable purchase price in immediately available
funds, the Holder shall be deemed to be the holder of record of the shares
of Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually
delivered to the Holder. Issuer shall pay all expenses, and any and all
United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its assignee,
transferee or designee.
3. CERTAIN ISSUER ACTIONS. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock so that the Option may be exercised without
additional authorization of Common Stock after giving effect to all other
options, warrants, convertible securities and other rights to purchase Common
Stock; (ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under any federal or state law or
regulation, prior approval of or notice to any regulatory authority is necessary
before the Option may be exercised, cooperating fully with the Holder in
preparing such applications or notices and providing such information to such
regulatory authority as they may require) in order to permit the Holder to
exercise the Option and Issuer duly and effectively to issue shares of Common
Stock pursuant hereto; and (iv) promptly to take all action provided herein to
protect the rights of the Holder against dilution.
4. EXCHANGE. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations
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entitling the holder thereof to purchase, on the same terms and subject to the
same conditions as are set forth herein, in the aggregate the same number of
shares of Common Stock purchasable hereunder. The terms "AGREEMENT" and "OPTION"
as used herein include any Stock Option Agreements and related Options for which
this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Agreement, and (in the case of loss, theft or destruction)
of reasonably satisfactory indemnification, and upon surrender and cancellation
of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
5. ADJUSTMENT OF SHARES. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option pursuant
to Section 1 of this Agreement, the number of shares of Common Stock purchasable
upon the exercise of the Option and the Option Price shall be subject to
adjustment from time to time as provided in this Section 5. In the event of any
change in, or distributions in respect of, the Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares, distributions on or in respect of the Common
Stock that would be prohibited under the terms of the Merger Agreement, or the
like, the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such manner as
shall fully preserve the economic benefits provided hereunder and proper
provision shall be made in any agreement governing any such transaction to
provide for such proper adjustment and the full satisfaction of Issuer's
obligations hereunder.
6. REGISTRATION RIGHTS. If the Option Shares (as hereinafter defined) are
not exempt from the registration requirements of the Securities Act of 1933, as
amended (the "1933 ACT"), upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the request
of Grantee (whether on its own behalf or on behalf of any subsequent holder of
this Option (or part thereof) or any of the shares of Common Stock issued
pursuant hereto) deliver within six months of such Subsequent Triggering Event
(or such longer period as provided in Section 10), promptly prepare, file and
keep current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and shall use
its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("OPTION SHARES") in accordance with any plan of disposition
requested by Grantee, unless, in the written opinion of securities counsel to
Issuer, addressed to Grantee or any transferee, registration under the 1933 Act
or any other applicable federal or state securities laws is not otherwise
required for the sale and distribution of such Option Shares. Issuer will use
its reasonable best efforts to cause such registration statement first to become
effective and thereafter to remain effective for such period not in excess of
180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
foregoing notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is in
registration with respect to an underwritten public offering of shares of Common
Stock, and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Option or Option Shares would interfere with the
successful marketing of the shares of Common Stock offered by Issuer, the number
of Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; provided, however, that after any such
required reduction the number of Option Shares to be included in such offering
for the account of the Holder shall constitute at least 25% of the total number
of shares to be sold by the Holder and Issuer in the aggregate; and provided
further, however, that if such reduction occurs, then Issuer shall file a
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registration statement for the balance as promptly as practicable and no
reduction shall thereafter occur. Each such Holder shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in secondary offering underwriting agreements for Issuer.
Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be entitled
to registration rights under this Section 6, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than two registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. REPURCHASE RIGHT.
(a) (i) Following the occurrence of a Repurchase Event (as defined
below), and following a request of the Holder delivered prior to an Exercise
Termination Event, Issuer (or any successor thereto) shall repurchase the
Option from the Holder at a price (the "OPTION REPURCHASE PRICE") equal to
the amount by which (A) the Market/Offer Price (as defined below) exceeds
(B) the Option Price, multiplied by the number of shares for which this
Option may then be exercised; and (ii) at the request of the owner of Option
Shares from time to time (the "OWNER"), delivered within 90 days of such
occurrence (or such longer period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner
shall designate at a price (the "OPTION SHARE REPURCHASE PRICE") equal to
the Market/Offer Price multiplied by the number of Option Shares so
designated.
The term "MARKET/OFFER PRICE" shall mean the highest of (i) the price per
share of Common Stock at which a tender offer or exchange offer therefor has
been made, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer, (iii) the highest closing price for
shares of Common Stock within the six-month period immediately preceding the
date the Holder gives notice of the required repurchase of the Option or the
Owner gives notice of the required repurchase of Option Shares, as the case
maybe, or (iv) in the event of a sale of all or a substantial portion of
Issuer's assets, the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the Market/Offer Price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
selected by the Holder or the Owner, as the case may be, and reasonably
acceptable to Issuer.
(b) The Holder or the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the
Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this
Section 7. As promptly as practicable, and in any event within five business
days after the surrender of the Option and/or certificates representing
Option Shares and the receipt of such notice or notices relating thereto,
Issuer shall deliver or cause to be delivered to the Holder the Option
Repurchase Price and/or to the Owner the Option Share Repurchase Price
therefor or the portion thereof that Issuer is not then prohibited under
applicable law and regulation from so delivering.
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(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full,
Issuer shall immediately so notify the Holder and/or the Owner and
thereafter deliver or cause to be delivered, from time to time, to the
Holder and/or the Owner, as appropriate, the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that
it is no longer prohibited from delivering, within five business days after
the date on which Issuer is no longer so prohibited; provided, however, that
if Issuer at anytime after delivery of a notice of repurchase pursuant to
subsection (b) of this Section 7 is prohibited under applicable law or
regulation or through commencement of regulatory enforcement action from
delivering to the Holder and/or the Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required notices as
promptly as practicable in order to accomplish such repurchase), the Holder
or the Owner may revoke its notice of repurchase of the Option or the Option
Shares either in whole or to the extent of the prohibition, whereupon, in
the latter case, Issuer shall promptly (i) deliver to the Holder and/or the
Owner, as appropriate, that portion of the Option Repurchase Price or the
Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to the Holder, a new Agreement
evidencing the right of the Holder to purchase that number of shares of
Common Stock obtained by multiplying the number of shares of Common Stock
for which the surrendered Agreement was exercisable at the time of delivery
of the notice of repurchase by a fraction, the numerator of which is the
Option Repurchase Price less the portion thereof theretofore delivered to
the Holder and the denominator of which is the Option Repurchase Price, or
(B) to the Owner, a certificate for the Option Shares it is then so
prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed
to have occurred (i) upon the consummation of any merger, consolidation or
similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other
than any such transaction which would not constitute an Acquisition
Transaction pursuant to the provisos to the final sentence of
Section 2(b)(i) hereof or (ii) upon the acquisition by any person of
beneficial ownership of 50% or more of the then outstanding shares of Common
Stock, provided that no such event shall constitute a Repurchase Event
unless a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event.
8. SUBSTITUTE OPTION.
(a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or one of its Subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger,
(ii) to permit any person, other than Grantee or one of its Subsidiaries, to
merge into Issuer and Issuer shall be the continuing or surviving
corporation, but, in connection with such merger, the then outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other person or cash or any other property or the then
outstanding shares of Common Stock shall after such merger represent less
than 50% of the outstanding voting shares and voting share equivalents of
the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of
its Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set
forth herein, be converted into, or exchanged for, an option (the
"SUBSTITUTE OPTION"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
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(b) The following terms have the meanings indicated:
(1) "ACQUIRING CORPORATION" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing
or surviving person, or (iii) the transferee of all or substantially all
of Issuer's assets.
(2) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued by
the issuer of the Substitute Option upon exercise of the Substitute
Option.
(3) "ASSIGNED VALUE" shall mean the Market/Offer Price, as defined in
Section 7.
(4) "AVERAGE PRICE" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person,
as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to the Holder. The issuer of the
Substitute Option shall also enter into an agreement with the then Holder or
Holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purpose to the provisions of
Section 9), which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock as is equal to the Assigned Value multiplied by
the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the
Substitute Option per share of Substitute Common Stock shall then be equal
to the Option Price multiplied by a fraction, the numerator of which shall
be the number of shares of Common Stock for which the Option is then
exercisable and the denominator of which shall be the number of shares of
Substitute Common Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing subsections, shall the
Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute
Option.
In the event that the Substitute Option would be exercisable for more than
19.9% of the shares of Substitute Common Stock outstanding prior to exercise but
for this subsection (e), the issuer of the Substitute Option (the "SUBSTITUTE
OPTION ISSUER") shall make a cash payment to the Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the limitation
in this subsection (e) over (ii) the value of the Substitute Option after giving
effect to the limitation in this subsection (e). This difference in value shall
be determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. REPURCHASE OF SUBSTITUTE OPTION.
(a) At the request of the holder of the Substitute Option (the
"SUBSTITUTE OPTION HOLDER") delivered prior to an Exercise Termination
Event, the Substitute Option Issuer shall repurchase the
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Substitute Option from the Substitute Option Holder at a price (the
"SUBSTITUTE OPTION REPURCHASE PRICE") equal to the amount by which (i) the
Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise
price of the Substitute Option, multiplied by the number of shares of
Substitute Common Stock for which the Substitute Option may then be
exercised, and at the request of the owner (the "SUBSTITUTE SHARE OWNER") of
shares of Substitute Common Stock (the "SUBSTITUTE SHARES"), the Substitute
Option Issuer shall repurchase the Substitute Shares at a price (the
"SUBSTITUTE SHARE REPURCHASE PRICE") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term
"HIGHEST CLOSING PRICE" shall mean the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding
the date the Substitute Option Holder gives notice of the required
repurchase of the Substitute Option or the Substitute Share Owner gives
notice of the required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder or the Substitute Share Owner, or both,
as the case may be, may exercise its respective right to require the
Substitute Option Issuer to repurchase the Substitute Option or the
Substitute Shares, as applicable, pursuant to this Section 9 by surrendering
for such purpose to the Substitute Option Issuer, at its principal office,
the agreement for such Substitute Option (or, in the absence of such an
agreement, a copy of this Agreement) and/or certificates for Substitute
Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of
this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or
certificates representing Substitute Shares and the receipt of such notice
or notices relating thereto, the Substitute Option Issuer shall deliver or
cause to be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute Share
Repurchase Price therefor or, in either case, the portion thereof which the
Substitute Option Issuer is not then prohibited under applicable law and
regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation or through commencement of regulatory
enforcement action from repurchasing the Substitute Option and/or the
Substitute Shares in part or in full, the Substitute Option Issuer following
a request for repurchase pursuant to this Section 9 shall immediately so
notify the Substitute Option Holder and/or the Substitute Share Owner and
thereafter deliver or cause to be delivered, from time to time, to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
the portion of the Substitute Option Repurchase Price and Substitute Share
Repurchase Price, respectively, which it is no longer prohibited from
delivering, within five business days after the date on which the Substitute
Option Issuer is no longer so prohibited; provided, however, that if the
Substitute Option Issuer is at any time after delivery of a notice of
repurchase pursuant to subsection (b) of this Section 9 prohibited under
applicable law or regulation or through commencement of regulatory
enforcement action from delivering to the Substitute Option Holder and/or
the Substitute Share Owner, as appropriate, the Substitute Option Repurchase
Price and the Substitute Share Repurchase Price, respectively, in full (and
the Substitute Option Issuer shall use its best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order
to accomplish such repurchase), the Substitute Option Holder or the
Substitute Share Owner may revoke its notice of repurchase of the Substitute
Option or the Substitute Shares either in whole or to the extent of the
prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or the Substitute
Share Owner, as appropriate, that portion of the Substitute Option
Repurchase Price or the Substitute Share Repurchase Price that the
Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a
new Substitute Option evidencing the right of the Substitute Option
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Holder to purchase that number of shares of the Substitute Common Stock
obtained by multiplying the number of shares of the Substitute Common Stock
for which the surrendered Substitute Option was exercisable at the time of
delivery of the notice of repurchase by a fraction, the numerator of which
is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute
Share Owner, a certificate for the Substitute Shares it is then so
prohibited from repurchasing.
10. EXTENSION OF CERTAIN PERIODS. The 90-day or six-month period, as the
case may be, for exercise of certain rights under each of Sections 2, 6, 7 and
14 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights (for so long as the Holder, Owner,
Substitute Option Holder or Substitute Share Owner, as the case may be, is using
its reasonable best efforts to obtain such regulatory approval) and for the
expiration of all statutory waiting periods; and (ii) to the extent necessary to
avoid liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. ISSUER REPRESENTATIONS AND WARRANTIES. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Issuer and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common Stock
at any time and from time to time issuable hereunder, and all such shares,
upon issuance pursuant hereto, will be duly authorized, validly issued,
fully paid, nonassessable, and will be delivered free and clear of all
claims, liens, encumbrance and security interests and not subject to any
preemptive rights.
(c) Issuer has taken all action (including, if required, redeeming all
of the Rights or amending or terminating the Polar Bear Rights Agreement) so
that the entering into of this Agreement, the acquisition of shares of
Common Stock hereunder and the other transactions contemplated hereby do not
and will not result in the grant of any rights to any person under the Polar
Bear Rights Agreement or enable or require the Polar Bear Rights to be
exercised, distributed or triggered.
12. GRANTEE REPRESENTATIONS AND WARRANTIES. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Grantee. This Agreement has been duly executed and
delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the 1933 Act.
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13. LIMITATION ON TOTAL PROFIT.
(a) Notwithstanding anything to the contrary contained herein, in no
event shall Grantee's Total Profit (as defined in subsection (c) of this
Section 13) exceed $425,000.
(b) Notwithstanding anything to the contrary contained herein, the
Option may not be exercised for a number of shares as would, as of the date
of exercise, result in a Notional Total Profit (as defined in subsection
(d) of this Section 13) of more than $425,000.
(c) As used herein, the term "TOTAL PROFIT" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof)
pursuant to Section 7 hereof, (ii) (x) the amount received by Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 7
hereof, less (y) Grantee's purchase price for such Option Shares,
(iii) (x) the net cash amounts received by Grantee pursuant to the sale of
Option Shares (or any other securities into which such Option Shares shall
be converted or exchanged) to any unaffiliated party, less (y) Grantee's
purchase price for such Option Shares, (iv) any amounts received by Grantee
on the transfer of the Option (or any portion thereof) to any unaffiliated
party, (v) any equivalent amount with respect to the Substitute Option,
including pursuant to Section 8(e); and (vi) the amount of any termination
fee (which is exclusive of any reimbursement amounts) actually received by
Grantee pursuant to Section 9.2 of the Merger Agreement. For purposes of
this Section 13, references to Grantee shall be deemed to include references
to any affiliate of the Grantee.
(d) As used herein, the term "NOTIONAL TOTAL PROFIT" with respect to any
number of shares as to which Grantee may propose to exercise the Option
shall be the Total Profit determined as of the date of such proposed
exercise assuming that the Option were exercised on such date for such
number of shares and assuming that such shares, together with all other
Option Shares held by Grantee and its affiliates as of such date, were sold
for cash at the closing market price for the Common Stock as of the close of
business on the preceding trading day (less customary brokerage
commissions).
14. ASSIGNMENT. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within 90 days
following such Subsequent Triggering Event (or such longer period as provided in
Section 10); provided, however, that until the date 15 days following the date
on which the Federal Reserve Board, the FDIC, and/or any other federal or state
bank regulatory authority, as applicable, approves an application by Grantee to
acquire the shares of Common Stock subject to the Option (if such approval is
required by law), Grantee may not assign its rights under the Option except in
(i) a widely dispersed public distribution, (ii) a private placement in which no
one person acquires the right to purchase in excess of 2% of the voting shares
of Issuer, (iii) an assignment to a single person (e.g., a broker or investment
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf, or (iv) any other manner approved by the Federal Reserve
Board, the FDIC, and/or any other federal or state bank regulatory authority, as
applicable.
15. FILINGS. Each of Grantee and Issuer will use its best efforts to make
all filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the Nasdaq Stock Market upon
official notice of issuance and applying to the Federal Reserve Board, the FDIC,
and/or any other federal or state bank regulatory authority, as applicable, for
approval to acquire the shares issuable hereunder, but Grantee
G-11
shall not be obligated to apply to state banking authorities for approval to
acquire the shares of Common Stock issuable hereunder until such time, if ever,
as it deems appropriate to do so.
16. EQUITABLE REMEDIES. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Agreement by either party hereto
and that the obligations of the parties hereto shall be enforceable by either
party hereto through injunctive or other equitable relief.
17. VALIDITY. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
18. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by cable, telegram, telecopy or telex, or by registered or certified
mail (postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
20. COUNTERPARTS. This Agreement may be executed in two counterparts, each
of which shall be deemed to be an original, but all of which shall constitute
one and the same agreement.
21. EXPENSES. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
22. ENTIRE AGREEMENT. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereof, written or oral.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective successors
and permitted assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, except as expressly provided herein.
23. CAPITALIZED TERMS. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger Agreement.
G-12
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
NORTHERN BANK OF COMMERCE
By: /s/ John H. Holloway, Jr.
---------------------------------------
Name: John H. Holloway, Jr.
-----------------------------------
Title: President and Chief Executive Officer
-----------------------------------
COWLITZ BANCORPORATION
By: /s/ Charles W. Jarrett
---------------------------------------
Name: Charles W. Jarrett
-----------------------------------
Title: President and Chief Operating Officer
-----------------------------------
G-13
ORS 711.175. STOCKHOLDER'S RIGHT TO DISSENT TO MERGER, SHARE EXCHANGE OR
TRANSFER OF ASSETS OR LIABILITIES.
(1) A stockholder of an Oregon stock bank may dissent from the following:
(a) A plan of merger pursuant to which the Oregon stock bank is not the
resulting insured institution;
(b) A plan of merger pursuant to which the Oregon stock bank is the
resulting insured stock institution and the number of its voting shares
outstanding immediately after the merger, plus the number of shares issuable
as a result of the merger, either by the conversion of securities issued
pursuant to the merger or the exercise of rights and warrants issued
pursuant to the merger, will exceed by more than 20 percent the total number
of voting shares of the resulting insured stock institution outstanding
immediately before the merger;
(c) A plan of share exchange pursuant to which the Oregon stock bank in
which the stockholder owns shares is acquired; and
(d) An acquisition transaction requiring such stockholder's approval
pursuant to ORS 711.170(5).
(2) To perfect a stockholder's right to dissent to a transaction described
in subsection (1) of this section, the stockholder must send or deliver a notice
of dissent to the Oregon stock bank prior to or at the meeting of the
stockholders at which the transaction is submitted to a vote, or the stockholder
must vote against such transaction.
(3) A stockholder shall not dissent as to less than all the shares
registered in the name of the stockholder, except a stockholder holding, as a
fiduciary or nominee, shares registered in the stockholder's name for the
benefit of more than one beneficiary, may dissent as to less than all of the
shares registered in the fiduciary or nominee's name if any dissent as to the
shares held for a beneficiary is made as to all the shares held by the fiduciary
for that beneficiary or nominee. The fiduciary's rights shall be determined as
if the shares to which the fiduciary has dissented and the other shares are
registered in the names of different stockholders.
ORS 711.180 RIGHTS OF STOCKHOLDER DISSENTING TO MERGER, SHARE EXCHANGE OR
TRANSFER OF ASSETS OR LIABILITIES; DEMAND REQUIRED; NOTICE AND OFFER TO PAY FOR
SHARES; COSTS OF APPRAISAL OF SHARES; WHEN RIGHTS NOT APPLICABLE.
(1) Any stockholder of an Oregon stock bank who dissented to a transaction
listed under ORS 711.175(1) and who desires to receive the value in cash of
those shares, shall make written demand upon the Oregon stock bank or its
successor and accompany the demand with the surrender of the share certificates,
properly indorsed within 30 days after the stockholders' meeting at which a vote
to approve such transaction involving an Oregon stock bank was taken. Any
stockholder failing to make written demand within the 30-day period shall be
bound by the terms of the proposed plan of merger, plan of share exchange or
acquisition transaction agreement.
(2) Within 30 days after a transaction listed under ORS 711.175(1) is
effected, the Oregon stock bank or its successor shall give written notice
thereof to each dissenting stockholder who has made demand under this section at
the address of the stockholder on the stock record books of the Oregon stock
bank, and shall make a written offer to each such stockholder to pay for the
shares at a specified price in cash determined by the Oregon stock bank or its
successor to be the fair value of the shares as of the effective date of the
transaction. The notice and offer shall be accompanied by a statement of
condition of the Oregon stock bank, the shares of which the dissenting
stockholder held, as of the latest available date and not more than four months
prior to the consummation of the transaction, and a statement of income of the
Oregon stock bank for the period ending on the date of the statement of
condition.
H-1
(3) Any stockholder who accepts the offer of the Oregon stock bank or its
successor within 30 days following the date on which notice of the offer was
mailed or delivered to dissenting stockholders shall be paid the price per share
offered, in cash, within 30 days following the date on which the stockholder
communicates acceptance in writing to the Oregon stock bank or its successor.
Upon payment, the dissenting stockholder shall cease to have any interest in the
shares previously held by the stockholder.
(4) If, within 30 days after notice of the offer, one or more dissenting
stockholders do not accept the offer of the Oregon stock bank or its successor
or if no offer is made, then the value of the shares of the dissenting
stockholders who have not accept the offer shall be ascertained, as of the
effective date of the transaction, by an independent, qualified appraiser chosen
by the Director of the Department of Consumer and Business Services. The
valuation determined by the appraiser shall govern and the appraiser's valuation
of such shares shall not be appealable except for one or more of the reasons set
forth in ORS 36.355(1). Any such appeal must be made within 30 days after the
date of the appraiser's valuation and is subject to ORS 183.415 to 183.500. The
Oregon stock bank or its successor shall pay the dissenting shareholders the
appraised value of the shares within 30 days after the date the appraiser sends
the Oregon stock bank or its successor written notice of the appraiser's
valuation.
(5) The director shall assess the reasonable costs and expenses of the
appraisal proceeding equally to the Oregon stock bank or its successor and to
the dissenting shareholders, as a group, if the amount offered by the Oregon
stock bank or its successor is between 85 percent and 115 percent of the
appraised value of the shares. The director shall assess the reasonable costs
and expenses of the appraisal proceeding and the reasonable costs and expenses,
including attorney fees and costs, of the Oregon stock bank or its successor to
the dissenting stockholders, as a group, if the amount offered by the Oregon
stock bank or its successor is 115 percent or more of the appraised value of the
shares. The director shall assess the reasonable costs and expenses of the
appraisal proceeding and the reasonable costs and expenses, including attorney
fees and costs, of the dissenting shareholders, as a group, to the Oregon stock
bank or its successor if the amount offered by the Oregon stock bank or its
successor is 85 percent or less of the appraised value of the shares. The
director's decision regarding assessment of fees and costs may be appealed as
provided in ORS 183.415 to 183.500.
(6) Amounts required to be paid by the Oregon stock bank or its successors,
or the dissenting shareholders under this section shall be paid within 30 days
after the director's assessment of any fees or costs becomes final or, if the
director's decision is appealed, within 30 days after a final determination of
such fees and costs is made.
(7) The director may require, as a condition of approving a transaction
listed in ORS 711.175(1), the replacement of all or a portion of the
stockholders' equity of an Oregon stock bank expended in payment to dissenting
stockholders under this section.
(8) A stockholder may not receive the fair value of the stockholder's shares
under this section:
(a) If the plan of merger provides that all stockholders of the
resulting insured stock institution receive common stock of a holding
company pursuant to a merger with an interim Oregon stock bank chartered
under ORS 707.025, and the stockholder's Oregon stock bank and the interim
Oregon stock bank are the only parties to the merger; or
(b) If the shares held by the dissenting stockholder immediately before
the effective date of a transaction listed in ORS 711.175(1) are listed on
any national securities exchange or are included on the list of
over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System.
H-2
ORS 711.185 STOCKHOLDER WITHDRAWAL OF DEMAND FOR PAYMENT FOR SHARES MADE
UNDER ORS 711.180(1).
(1) A dissenting stockholder making a demand under ORS 711.180 may withdraw
the demand if:
(a) The Oregon stock bank or its successor consents to the withdrawal;
or
(b) The dissenting stockholder pays such stockholder's pro rata share of
the appraisal costs and the Oregon stock bank's reasonable costs and
expenses, including attorney fees and costs.
(2) When a dissenting stockholder withdraws the demand under subsection (1)
of this section, the stockholder's status as a stockholder shall be restored,
without prejudice to any corporate proceedings taking place in the interim.
H-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), Article X of Cowlitz Bancorp's Restated Articles of
Incorporation (Exhibit 3.1 hereto) provides for indemnification of Cowlitz
Bancorp's directors to the maximum extent permitted by Washington law, and also
permits Cowlitz Bancorp's board of directors to indemnify Cowlitz officers,
employees and agents. The directors and officers of Cowlitz Bancorp also may be
indemnified against liability they may incur for serving in such capacity
pursuant to a liability insurance policy maintained by Cowlitz Bancorp for such
a purpose.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director.
Article VIII of Cowlitz Bancorp's Restated Articles of Incorporation contains
provisions implementing such limitations on a director's liability to Cowlitz
Bancorp and its shareholders, except in certain circumstances involving (i) any
breach of the director's duty of loyalty to Cowlitz Bancorp or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) any unlawful distribution to shareholders,
or (iv) any transaction from which the director derived an improper personal
benefit.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Cowlitz
Bancorp pursuant to the provisions referenced in this Item 20 of this
Registration Statement, or otherwise, Cowlitz Bancorp 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 Cowlitz Bancorp of expenses incurred or
paid by a director, officer or controlling person of Cowlitz Bancorp 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, Cowlitz Bancorp 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-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger by and among the Registrant,
Cowlitz Bank and Northern Bank of Commerce, dated September
14, 1999. (Incorporated by reference to Appendix C of the
joint proxy statement included in this Registration
Statement.) Registrant agrees to furnish supplementally to
the Commission upon request a copy of any omitted schedule.
3.1 Restated Articles of Incorporation of the Registrant
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, File No. 333-44355).
3.2 Bylaws of the Registrant (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No.
333-44355).
5.1* Opinion of Heller Ehrman White & McAuliffe.
8.1* Tax Opinion of Heller Ehrman White & McAuliffe.
10.1* Employment Agreement, dated September 14, 1999, between the
Registrant and John Holloway, Jr.
10.2* Option Agreement, dated September 14, 1999 between the
Registrant and John Holloway, Jr.
10.3* Form of Option Agreement between the Registrant and Northern
Bank executives dated September 14, 1999.
10.4* Form of Shareholder's Non-Competition and Indemnification
Limitation Agreement dated September 14, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Moss Adams.
23.3 Consent of Heller Ehrman White & McAuliffe (included in its
Opinions filed as Exhibits 5.1 and 8.1).
23.4 Consent of Sage Capital LLC (included in its opinion filed
as Appendix E of the joint proxy statement included in this
Registration Statement).
23.5* Consent of D.A. Davidson & Co.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
99.1 Cease and Desist Order issued against Northern Bank of
Commerce by the FDIC (Incorporated by reference to the
Northern Bank of Commerce Quarterly Report on Form 10-QSB
for the period ended June 30, 1999).
99.2 Cease and Desist Order issued against Northern Bank of
Commerce by the State of Oregon (Incorporated by reference
to the Northern Bank of Commerce Quarterly Report on
Form 10-QSB for the period ended June 30, 1999).
99.3 Form of Proxy Card of Cowlitz Bancorp.
99.4 Form of Proxy Card of Northern Bank.
99.5 Form of Escrow Agreement to be entered into by Registrant,
Cowlitz Bank, Northern Bank, and as Escrow Agent
(Incorporated by reference to Appendix F of the joint proxy
statement included in this Registration Statement).
99.6 Stock Option Agreement between the Registrant and Northern
Bank, dated September 14, 1999 (Incorporated by reference to
Appendix G of the joint proxy statement included in this
Registration Statement).
- ------------------------
* previously filed
II-2
ITEM 22. 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;
(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 not 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 of 1933, 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 deemed to 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
of 1933 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 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
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 Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act
II-3
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, 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 deemed to be the initial BONA FIDE offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant 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 Seattle, State of Washington on January 7, 2000.
COWLITZ BANCORPORATION
By: /s/ CHARLES W. JARRETT
----------------------------------------
Charles W. Jarrett
Title: PRESIDENT AND CHIEF OPERATING OFFICER
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated below on the 7th day of January, 2000.
/s/ BENJAMIN NAMATINIA* /s/ DON P. KISER*
---------------------------------------- ----------------------------------------
Benjamin Namatinia Don P. Kiser
CHAIRMAN, VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER; DIRECTOR AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER) (PRINCIPAL EXECUTIVE OFFICER)
/s/ DONNA P. GARDNER*
----------------------------------------
Donna P. Gardner
VICE PRESIDENT/SECRETARY-TREASURER
(PRINCIPAL ACCOUNTING OFFICER)
/s/ MARK F. ANDREWS, JR.* /s/ CHARLES W. JARRETT
---------------------------------------- ----------------------------------------
Mark F. Andrews, Jr. Charles W. Jarrett
DIRECTOR DIRECTOR
/s/ LARRY M. LARSON* /s/ E. CHRIS SEARING*
---------------------------------------- ----------------------------------------
Larry M. Larson E. Chris Searing
DIRECTOR DIRECTOR
*By /s/ CHARLES W. JARRETT
--------------------------------------
Charles W. Jarrett
ATTORNEY-IN-FACT
II-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger by and among the Registrant,
Cowlitz Bank and Northern Bank of Commerce, dated
September 14, 1999. (Incorporated by reference to
Appendix C of the joint proxy statement included in this
Registration Statement.) Registrant agrees to furnish
supplementally to the Commission upon request a copy of
any omitted schedule.
3.1 Restated Articles of Incorporation of the Registrant
(Incorporated by reference to the Registrant's
Registration Statement on Form S-1, File No. 333-44355).
3.2 Bylaws of the Registrant (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File
No. 333-44355).
5.1* Opinion of Heller Ehrman White & McAuliffe.
8.1* Tax Opinion of Heller Ehrman White & McAuliffe.
10.1* Employment Agreement, dated September 14, 1999, between the
Registrant and John Holloway, Jr.
10.2* Option Agreement, dated September 14, 1999 between the
Registrant and John Holloway, Jr.
10.3* Form of Option Agreement between the Registrant and Northern
Bank executives dated September 14, 1999.
10.4* Form of Shareholder's Non-Competition and Indemnification
Limitation Agreement dated September 14, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Moss Adams.
23.3 Consent of Heller Ehrman White & McAuliffe (included in its
Opinions filed as Exhibits 5.1 and 8.1).
23.4 Consent of Sage Capital LLC (included in its opinion filed
as Appendix E of the joint proxy statement included in
this Registration Statement).
23.5* Consent of D.A. Davidson & Co.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
99.1 Cease and Desist Order issued against Northern Bank of
Commerce by the FDIC (Incorporated by reference to the
Northern Bank of Commerce Quarterly Report on Form 10-QSB
for the period ended June 30, 1999).
99.2 Cease and Desist Order issued against Northern Bank of
Commerce by the State of Oregon (Incorporated by reference
to the Northern Bank of Commerce Quarterly Report on
Form 10-QSB for the period ended June 30, 1999).
99.3 Form of Proxy Card of Cowlitz Bancorp.
99.4 Form of Proxy Card of Northern Bank.
99.5 Form of Escrow Agreement to be entered into by Registrant,
Cowlitz Bank, Northern Bank, and as Escrow
Agent (Incorporated by reference to Appendix F of the
joint proxy statement included in this Registration
Statement).
99.6 Stock Option Agreement between the Registrant and Northern
Bank, dated September 14, 1999 (Incorporated by reference
to Appendix G of the joint proxy statement included in
this Registration Statement).
- ------------------------
* previously filed
II-6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COWLITZ BANCORPORATION
(Exact name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
COWLITZ BANCORPORATION
PROXY FOR THE FEBRUARY 17, 2000 SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
OF COWLITZ BANCORPORATION
The undersigned shareholder(s) of Cowlitz Bancorporation ("Cowlitz"), hereby appoints Charles W. Jarrett and Benjamin
Namatinia, and each of them, as proxies, each with the power of substitution to represent and to vote, as designated below, all
the shares of Common Stock of Cowlitz held of record by the undersigned on December 28, 1999, at the Special Meeting of
Shareholders to be held on February 17, 2000, and at any and all postponements, adjournments or reschedulings thereof.
Shares represented by all properly completed, dated and executed proxies will be voted in accordance with instructions
appearing on the proxy and in the discretion of the proxy holders as to any other matter that may properly come before the
Special Meeting of Shareholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS,
PROXIES WILL BE VOTED FOR ITEM 1 AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE
THE SPECIAL MEETING OF SHAREHOLDERS.
- -----------------------------------------------------------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
- -----------------------------------------------------------------------------------------------------------------------------------
Please mark
your votes as
indicated in /X/
this example
FOR AGAINST ABSTAIN
1. Approval of the issuance of shares of common stock / / / / / /
pursuant to the Agreement and Plan for Merger, dated as of
September 14, 1999 between Cowlitz, Cowlitz Bank and
Northern Bank of Commerce, pursuant to which Northern Bank
of Commerce will merge with and into Cowlitz Bank.
WILL WILL NOT
ATTEND ATTEND
/ / / /
2. Special meeting R.S.V.P: I/We________
(enter number of people attending).
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
AND THE RELATED JOINT PROXY STATEMENT DATED, IN EACH CASE, , 1999.
PLEASE SIGN YOUR NAME BELOW EXACTLY AS IT APPEARS HEREON. WHEN SIGNING
AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
Date _________________________________, 1999/2000 Signature (if held jointly): _________________________________
Signature: ______________________________________ Title: _______________________________________________________
Title:___________________________________________ Please sign, date and return this proxy card promptly.
- -----------------------------------------------------------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
PROXY NORTHERN BANK OF COMMERCE PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD FEBRUARY 17, 2000.
The undersigned hereby appoints James A. Wills and John B. Ellsworth, or
either of them (with full power to act alone), as proxies with full power of
substitution, to represent and to vote all of the Common Stock of NORTHERN
BANK OF COMMERCE, held of record by the undersigned at the close of business
on December 28, 1999 at the special meeting of shareholders of NORTHERN BANK
OF COMMERCE on Thursday, February 17, 2000, and at any adjournments thereof,
as set forth below. Either or both of the above named proxies may vote the
shares of the undersigned in accordance with their discretion on any other
matters which may properly come before the meeting or any adjournments
thereof.
(Continued, and to be marked, dated and signed, on the other side)
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The Board of Directors recommends a vote FOR the Please mark your /X/
proposals: vote as indicated
in the example
ITEM 1. Proposal to approve the merger between Cowlitz Bancorp and Cowlitz
Bank with Northern Bank of Commerce.
FOR AGAINST ABSTAIN
/ / / / / /
ITEM 2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
PLEASE SIGN EXACTLY AS SHARES ARE
REGISTERED. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
AS A CORPORATION, PLEASE SIGN IN FULL
CORPORATE NAME, PRESIDENT, OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME, BY AUTHORIZED
PERSON.
Signature____________ Signature if jointly held proxy____________ Dated________
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- FOLD AND DETACH HERE -
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.