As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-35817
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
TIMBERLAND BANCORP, INC.
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(Exact name of registrant as specified in charter)
Washington 6036 91-1863696
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(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
624 Simpson Avenue
Hoquiam, Washington 98550
(360) 533-4747
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(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
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(Name and address of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please 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(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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Calculation of Registration Fee
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Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
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Common Stock, $0.01 Par Value 6,612,500 $10.00 $66,125,000 $20,038(2)
Participation interests 196,945 -- -- (3)
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(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold are subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) Previously paid.
(3) The securities of Timberland Bancorp, Inc., to be purchased by the
Timberland Savings Bank, SSB Profit Sharing Plan are included in the amount
shown for Common Stock. Accordingly, pursuant to Rule 457(h) of the
Securities Act of 1933, as amended, no separate fee is required for the
participation interests. Pursuant to such rule, the amount being registered
has been calculated on the basis of the number of shares of Common Stock
that may be purchased with the current assets of such Plan.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
1. Forepart of the Registration Forepart of the Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution The Conversion
9. Description of Securities to be Description of Capital Stock
Registered
10. Interests of Named Experts and Legal and Tax Opinions; Experts
Counsel
11. Information with Respect to the
Registrant
(a) Description of Business Business of the Holding Company;
Business of the Savings Bank
(b) Description of Property Business of the Savings Bank -- Properties
(c) Legal Proceedings Business of the Savings Bank -- Legal
Proceedings
(d) Market Price of and Dividends Outside Front Cover Page; Market for
on the Registrant's Common Equity Common Stock; Dividend Policy
and Related Stockholder Matters
(e) Financial Statements Financial Statements; Pro Forma Data
(f) Selected Financial Data Selected Financial and Other Data
(g) Supplementary Financial *
Information
(h) Management's Discussion and Management's Discussion and Analysis of
Analysis of Financial Condition Financial Condition and Results of Operations
and Results of Operations
(i) Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
(j) Directors and Executive Management of the Holding Company; Management of
Officers the Savings Bank
(k) Executive Compensation Management of the Holding Company; Management of
the Savings Bank -- Benefits -- Executive Compensation
(l) Security Ownership of Certain *
Beneficial Owners and Management
(m) Certain Relationships and Management of the Savings Bank -- Transactions with
Related Transactions the Savings Bank
12. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
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*Item is omitted because answer is negative or item inapplicable.
PROSPECTUS SUPPLEMENT
TIMBERLAND BANCORP, INC.
TIMBERLAND SAVINGS BANK, SSB PROFIT SHARING TRUST
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Timberland Savings Bank, SSB Profit Sharing Trust
("Plan" or "Profit Sharing Plan") of participation interests and shares of
Timberland Bancorp, Inc. common stock, par value $.01 per share ("Common
Stock"), as set forth herein.
In connection with the proposed conversion of Timberland Savings Bank, SSB
("Savings Bank" or "Employer") from a Washington-chartered mutual savings bank
to a Washington-chartered stock savings bank, a holding company, Timberland
Bancorp, Inc. ("Holding Company"), has been formed. The simultaneous
conversion of the Savings Bank to stock form, the issuance of the Savings Bank's
common stock to the Holding Company and the offer and sale of the Holding
Company's Common Stock to the public are herein referred to as the "Conversion."
Applicable provisions of the Profit Sharing Plan permit the investment of the
Plan assets in Common Stock of the Holding Company at the direction of a Plan
Participant. This Prospectus Supplement relates to the election of a Participant
to direct the purchase of Common Stock in connection with the Conversion.
The Prospectus, dated ____________, 1997, of the Holding Company
("Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operation and business of the Savings Bank and
the Holding Company. This Prospectus Supplement, which provides detailed
information with respect to the Plan, should be read only in conjunction with
the Prospectus. Terms not otherwise defined in this Prospectus Supplement are
defined in the Plan or the Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "-- Limitation on
Purchases of Shares" in the Prospectus.
Investment in the Common Stock is subject to certain risks, including the
risk of loss of principal value invested. For a discussion of such risks that
should be considered by each Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE WASHINGTON DEPARTMENT OF FINANCIAL
INSTITUTIONS, DIVISION OF BANKING ("DIVISION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC") OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SEC, THE DIVISION, THE FDIC OR ANY OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is _____________, 1997.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Savings Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
TABLE OF CONTENTS
PAGE
The Offering
Securities Offered .................................................. S-1
Election to Purchase Common Stock in the Conversion ................. S-1
Value of Participation Interests .................................... S-1
Method of Directing Transfer ........................................ S-1
Time for Directing Transfer ......................................... S-2
Irrevocability of Transfer Direction ................................ S-2
Direction Regarding Common Stock After the Conversion ............... S-2
Purchase Price of Common Stock ...................................... S-2
Nature of a Participant's Interest in the Common Stock .............. S-2
Voting and Tender Rights of Common Stock ............................ S-3
Description of the Plan
Introduction ........................................................ S-3
Eligibility and Participation ....................................... S-4
Contributions Under the Plan ........................................ S-4
Limitations on Contributions ........................................ S-4
Investment of Contributions ......................................... S-5
The Employer Stock Fund ............................................. S-6
Benefits Under the Plan ............................................. S-7
Withdrawals and Distributions from the Plan ......................... S-7
Administration of the Plan .......................................... S-8
Reports to Plan Participants ........................................ S-8
Plan Administrator................................................... S-9
Amendment and Termination ........................................... S-9
Merger, Consolidation or Transfer ................................... S-9
Federal Income Tax Consequences ..................................... S-9
Restrictions on Resale .............................................. S-12
Legal Opinions ........................................................... S-13
Investment Form .......................................................... S-14
i
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to 196,945 shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Savings Bank and the Holding Company is contained in the attached Prospectus.
The address of the principal executive office of the Savings Bank is 624 Simpson
Avenue, Hoquiam, Washington 98550. The Savings Bank's telephone number is (360)
533-4747.
Election to Purchase Common Stock in the Conversion
In connection with the Savings Bank's Conversion, each Participant in the
Profit Plan may direct the trustees of the Plan (collectively, the "Trustee") to
transfer up to 100% of a Participant's account balance to a newly created
Employer Stock Fund and to use such funds to purchase Common Stock issued in
connection with the Conversion. The Employer Stock Fund may consist of
investments in the Common Stock made on or after the effective date of the
Conversion. Funds not transferred to the Employer Stock Fund may be invested at
the Participant's discretion in the other investment options available under the
Plan. See "DESCRIPTION OF THE PLAN -- Investment of Contributions" below. A
Participant's ability to transfer funds to the Employer Stock Fund in the
Conversion is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion. For general information as to the
ability of the Participants to purchase shares in the Conversion, see "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" in the attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
quarterly basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals, and transfers from other plans.
Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the
S-1
Participant should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is ___________, 1997. The Investment Form should be returned to
_________ at the Savings Bank no later than the close of business on such date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction Regarding Common Stock After the Conversion
It is currently anticipated that Participants may be permitted to transfer
additional funds from their existing account balances or direct new
contributions to the Employer Stock Fund following the Conversion. If Common
Stock is sold, the proceeds will be credited to the Participant's account and
may be reinvested in the other investment options available under the Plan. In
addition, cash dividends, if any, paid on the Common Stock may be invested in
the Plan's other investment options or be used to purchase additional shares of
Common Stock. Special restrictions may apply to purchases or sales directed by
those Participants who are executive officers, directors and principal
stockholders of the Holding Company who are subject to the provisions of Section
16(b) of the Securities and Exchange Act of 1934, as amended ("Exchange Act"),
or other applicable regulations.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
Nature of a Participant's Interest in the Common Stock
The Common Stock purchased for an account of a Participant will be held in
the name of the Trustee of the Plan in the Employer Stock Fund. Any earnings,
losses or expenses with respect to the Common Stock, including dividends and
appreciation or depreciation in value, will be credited or debited to the
account and will not be credited to or borne by any other accounts.
S-2
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective _________, 1997 as an amendment
and restatement of the Savings Bank's prior defined contribution retirement
plan.
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) of the Code. The Savings Bank will adopt any
amendments to the Plan that may be necessary to ensure the qualified status of
the Plan under the Code and applicable Treasury Regulations. The Savings Bank
will apply for a determination from the Internal Revenue Service ("IRS") that
the Plan is qualified under Section 401(a) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As such,
the Plan is subject to all of the provisions of Title I (Protection of Employee
Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating
to Retirement Plans) of ERISA, except the funding requirements contained in Part
3 of Title I of ERISA, which by their terms do not apply to an individual
account plan (other than a money purchase pension plan). The Plan is not subject
to Title IV (Plan Termination Insurance) of ERISA. Neither the funding
requirements contained in Title IV of ERISA nor the plan termination insurance
provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
S-3
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
the material provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan following completion of one year of service with the
Savings Bank in which the employee completes at least 1,000 hours of service.
The Plan year is a fiscal year ending September 30 ("Plan Year"). Directors who
are not employees of the Savings Bank are not eligible to participate in the
Plan.
During 1996, approximately __ employees participated in the Plan.
Contributions Under the Plan
All contributions to the Plan are Employer contributions. The amount of the
contribution is discretionary and is determined annually by the Board of
Directors of the Savings Bank.
To receive an allocation of Employer contribution, a Participant must
complete at least one hour of service during the Plan Year if the Participant is
employed on the last day of the Plan Year. A Participant who terminated
employment during the Plan Year must complete at least 501 hours of service in
order to share in Employer contributions for the Plan Year.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount
S-4
contributed to the Plan under a salary reduction agreement or any employer
contribution to the Plan or to any other plan or deferred compensation or any
distributions from a plan of deferred compensation. In addition, annual
additions are limited to the extent necessary to prevent the limitations for the
combined plans of the Savings Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions to the Plan
with respect to a Participant, the excess must be reallocated to the remaining
Participants who are eligible for an allocation of Employer contributions for
the Plan Year.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a Top-Heavy
Plan (as defined below), then (i) the Savings Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees" generally
include any employee, who at any time during the Plan Year or any other the four
preceding Plan Years, if (1) an officer of the Savings Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interest in the
employer, (3) a 5% owner of the employer (i.e., owns directly or indirectly more
than 5% of the stock of the employer, or stock possessing more than 5% of the
total combined voting power of all stock of the employer), or (4) a 1% owner of
the employer having compensation in excess of $150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustee which is appointed by the Savings
Bank's Board of Directors. The Plan provides that a Participant may direct the
Trustee to invest all or a portion of his or her Accounts in various investment
options, as listed below. A Participant may periodically elect to change his or
her investment directions with respect to both past contributions and additions
to the Participant's accounts invested in these investment options in accordance
with rules established by the Trustee.
Under the Plan, the Accounts of a Participant held in the Trust will be
invested by the Trustee at the direction of the Participant in the following
portfolios, which are managed by the Frank Russell Investment Management Co.,
Tacoma, Washington:
Option A - Aggressive Fund
Option B - Balanced Fund
Option C - Money Market
Option D - Employer Stock Fund
S-5
For additional information regarding investment options A-C, including
information regarding the investment performance of such options, please
contact _________.
In connection with the Conversion, a Participant may elect to have prior
contributions and additions to the Participant's Account invested either in the
Employer Stock Fund or in any of the other portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in Investment Option C.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a daily basis. For purposes of
such allocation, all assets of the Trust are valued at their fair market value.
The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal election intervals.
Following the Conversion, the Savings Bank may adopt investment guidelines
governing the investment of funds in the Employer Stock Fund.
When Common Stock is sold, the cost or net proceeds are charged or credited
to the Accounts of Participants affected by the purchase or sale. A
Participant's Account will be adjusted to reflect changes in the value of shares
of Common Stock resulting from stock dividends, stock splits and similar
changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Declarations and payments of any dividends (regular and special) by
the Board of Directors will depend upon a number of factors, including the
amount of the net proceeds retained by the Holding Company, capital
requirements, regulatory limitations, the Savings Bank's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" in the Prospectus.
S-6
Benefits Under the Plan
Vesting. A Participant is 100% vested in his or her account balance after
the completion of six years of service under the Plan's graded vesting schedule
(10% vested in each of the first two years of service and 20% per year upon the
completion of each of years three through six of service).
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment may be made in the form of a lump sum cash
payment, installment payments over a specified period or in an annuity form. At
the request of the Participant, the distribution may include an in-kind
distribution of Common Stock of the Holding Company credited to the
Participant's Account. Benefits payments ordinarily shall be made not later than
60 days following the end of the Plan Year in which occurs later of the
Participant's: (i) termination of employment; (ii) attainment of age 65; or
(iii) tenth anniversary of commencement of participation in the Plan; but in no
event later than April 1 following the calendar year in which the Participant
attains age 70 1/2 (if the Participant is retired). However, if the vested
portion of the Participant's Account balances exceeds $3,500, no distribution
shall be made from the Plan prior to the Participant's attaining age 65 unless
the Participant consents to an earlier distribution. Special rules may apply to
the distribution of Common Stock of the Holding Company to those Participants
who are executive officers, directors and principal shareholders of the Holding
Company who are subject to the provisions of Section 16(b) of the Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of a
married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, or payments of benefits to
the beneficiary of a deceased Participant shall be made in the form of a lump
sum payment in cash or in Common Stock, or if the payment of his or her benefit
had commenced before his or her death, in accordance with the distribution
method if effect at death.
S-7
Distributions of Common Stock. Participants receiving a distribution from
the Plan where assets have been invested in the Employer Stock Fund may have
such assets distributed in the form of Common Stock.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustee. The Trustee with respect to Plan assets is U.S. Bank of
Washington, N.A.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom. The Trustee has
the authority to invest and reinvest the Trust and may sell or otherwise dispose
of Trust investments at any time and may hold trust funds uninvested. The
Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust in
person or by proxy; provided, however, that the Participants will direct the
Trustee as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Savings Bank.
The Trustee must render at least annual reports to the Savings Bank and to
the Participants in such form and containing information that the Trustee deems
necessary.
Reports to Plan Participants
The Plan Administrator furnishes to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
S-8
Plan Administrator
The Savings Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
S-9
The Savings Bank will apply for a determination from the IRS that it is
qualified under Sections 401(a) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's account and the investment
earnings are not subject to tax under such amounts actually distributed or
withdrawn from the Plan. Special tax treatment may apply to the taxable portion
of any distribution that includes Common Stock or qualified as a "Lump Sum
Distribution" (as described below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is
made: (i) within a single taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death or separation from service, or after the
Participant attains age 59 1/2; and (iii) consists of the balance to the credits
of the Participant under the Plan and all other profit sharing plans, if any,
maintained by the Savings Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Savings Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year
S-10
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution received by the Participant or beneficiary, provided such
amount is received on or after the Participant turns 59 1/2 and the recipient
elects to have any other Lump Sum Distribution from a qualified plan received in
the same taxable year taxed under the special averaging rule. The special five-
year averaging rule has been repealed for distributions occurring after December
31, 1999. Under a special grandfather rule, individuals who turned 50 by 1986
may elect to have their Lump Sum Distribution taxed under either the five-year
averaging rule (if available) or the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the Participant's pre-1974 participation in the Plan taxed at a
flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified Plan or
to an individual retirement account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or Partial Distribution. Effective
January 1, 1993, Participants have the right to elect to have the Trustee
transfer all or any portion of an "eligible rollover distribution" directly to
another plan qualified under Section 401(a) of the Code or to an IRA. If the
Participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan of to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal to 20% of the
taxable distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled
S-11
over or transferred, i.e., forward averaging, capital gains tax treatment and
----
the nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank or the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him or her. In
addition, Participants who are officers of the Savings Bank are advised to
consult with counsel as to the applicability of the reporting and short-swing
profit liability rules of Section 16 of the Exchange Act which may affect the
purchase and sale of the Common Stock where acquired or sold under the Plan or
otherwise.
S-12
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Conversion.
S-13
Investment Form
(Employer Stock Fund)
TIMBERLAND SAVINGS BANK, SSB
PROFIT SHARING TRUST
Name of Participant:________________________________
Social Security Number:_____________________________
1. Instructions. In connection with the proposed conversion of Timberland
Savings Bank, SSB ("Savings Bank") to a stock savings bank and the simultaneous
formation of a holding company ("Conversion"), participants in the Timberland
Savings Bank, SSB Profit Sharing Trust (the "Plan") may elect to direct the
investment of their account balances into the Employer Stock Fund ("Employer
Stock Fund"). Amounts transferred at the direction of Participants into the
Employer Stock Fund will be used to purchase shares of the common stock of
Timberland Bancorp, Inc. ("Common Stock"), the proposed holding company for the
Savings Bank. A Participant's eligibility to purchase shares of Common Stock is
subject to the Participant's general eligibility to purchase shares of Common
Stock in the Conversion and the maximum and minimum limitations set forth in the
Plan Conversion. See the Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to _________ at the Savings Bank, no later than the close of
business on ___________, 1997. The Savings Bank will keep a copy of this form
and return a copy to you. (If you need assistance in completing this form,
please contact _________).
2. Transfer Direction. I hereby direct the Plan Administrator to transfer
$__________ (in increments of $10) to the Employer Stock Fund to be applied to
the purchase of Common Stock in the Conversion. Transfer this amount from the
following funds as indicated:__________________________________________________
_______________________________________________________________________________.
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
- ----------------------------- -------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- ----------------------------- -------------------------------
Plan Administrator Date
PROSPECTUS TIMBERLAND BANCORP, INC.
Proposed Holding Company for Timberland Savings Bank, SSB
Up to 5,750,000 Shares of Common Stock (Anticipated Maximum)
$10.00 Purchase Price Per Share
Timberland Bancorp, Inc. ("Holding Company"), a Washington corporation, is
offering between 4,250,000 and 5,750,000 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of
Timberland Savings Bank, SSB ("Savings Bank") from a Washington-chartered mutual
savings bank to a Washington-chartered capital stock savings bank and the
simultaneous issuance of the Savings Bank's capital stock to the Holding
Company. The simultaneous conversion of the Savings Bank to stock form, the
issuance of the Savings Bank's capital stock to the Holding Company and the
offer and sale of the Common Stock by the Holding Company are being undertaken
pursuant to a Plan of Conversion ("Plan of Conversion"), and are referred to
herein as the "Conversion."
Nontransferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given, in order of priority, to (i) depositors with $50.00 or
more on deposit at the Savings Bank as of December 31, 1995 ("Eligible Account
Holders"), (ii) the Savings Bank's employee stock ownership plan ("ESOP"), a
tax-qualified employee benefit plan, (iii) depositors with $50.00 or more on
deposit at the Savings Bank as of September 30, 1997 ("Supplemental Eligible
Account Holders"), and (iv) depositors and borrowers of the Savings Bank as of
October 31, 1997 ("Voting Record Date") ("Other Members"), subject to the
priorities and purchase limitations set forth in the Plan of Conversion
("Subscription Offering"). Subscription Rights are non-transferable. Persons
found to be transferring Subscription Rights or attempting to purchase shares on
behalf of other persons will be subject to forfeiture of such rights and
possible further sanctions and penalties imposed by the Washington Department of
Financial Institutions, Division of Banks ("Division"). See "THE CONVERSION --
The Subscription, Direct Community and Syndicated Community Offerings" and "--
Limitations on Purchases of Shares." Concurrently, but subject to the prior
rights of holders of Subscription Rights, the Holding Company is offering the
Common Stock for sale through a direct community offering ("Direct Community
Offering") to natural persons and trusts of natural persons who are permanent
residents of Grays Harbor, Thurston, Pierce and King counties of Washington
("Local Community"), subject to the right of the Holding Company to accept or
reject these orders in whole or in part. If any shares remain available on the
Expiration Date (as hereinafter defined), the Direct Community Offering, in the
discretion of the Holding Company and the Savings Bank, may be expanded to
include other members of the general public. No orders will be accepted in the
Direct Community Offering from natural persons or trusts of natural persons
residing outside the Local Community unless the Direct Community Offering is
expanded to include such persons. The Subscription Offering and the Direct
Community Offering are referred to herein as the "Subscription and Direct
Community Offering." It is anticipated that shares of Common Stock not
subscribed for or purchased in the Subscription and Direct Community Offering
will be offered to eligible members of the general public on a best efforts
basis by a selling group of broker-dealers managed by Charles Webb & Company
("Webb"), a division of Keefe, Bruyette & Woods, Inc. ("Keefe, Bruyette"), in a
syndicated offering ("Syndicated Community Offering"). The Subscription and
Direct Community Offering and the Syndicated Community Offering are referred to
collectively as the "Offerings."
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
STOCK INFORMATION CENTER AT (360) 537-6592.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF"), THE WASHINGTON
DEPARTMENT OF FINANCIAL INSTITUTIONS, DIVISION OF BANKS ("DIVISION") OR ANY
OTHER GOVERNMENT AGENCY, NOR ARE SUCH SHARES GUARANTEED BY THE HOLDING COMPANY
OR THE SAVINGS BANK AND THERE CAN BE NO ASSURANCE THAT PURCHASERS WILL BE ABLE
TO SELL THEIR SHARES AT OR ABOVE THE PURCHASE PRICE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE DIVISION, THE FDIC OR ANY OTHER GOVERNMENT
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE DIVISION, THE
FDIC OR ANY OTHER GOVERNMENT AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
(cover continued on following page)
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is ____________ __, 1997.
- ----------------------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Expenses(2) Proceeds to Issuer(3)
- ----------------------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share................... $10.00 $0.19 $9.81
- ----------------------------------------------------------------------------------------------------------------------------
Minimum Price Per Share.................... $10.00 $0.23 $9.77
- ----------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share.................... $10.00 $0.17 $9.83
- ----------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(4).... $10.00 $0.15 $9.85
- ----------------------------------------------------------------------------------------------------------------------------
Minimum Total(5)........................... $42,500,000 $965,000 $41,535,000
- ----------------------------------------------------------------------------------------------------------------------------
Midpoint Total(6).......................... $50,000,000 $965,000 $49,035,000
- ----------------------------------------------------------------------------------------------------------------------------
Maximum Total(7)........................... $57,500,000 $965,000 $56,535,000
- ----------------------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4)(8)........... $66,125,000 $965,000 $65,160,000
- ----------------------------------------------------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") as of August 29, 1997, which states that
the estimated aggregate pro forma market value of the Holding Company and
the Savings Bank ranged from $42.5 million to $57.5 million, with a
midpoint of $50.0 million ("Estimated Valuation Range"). See "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(2) Includes estimated costs to the Holding Company and the Savings Bank
arising from the Conversion, including fees to be paid to Webb in
connection with the Offerings. Such fees may be deemed to be underwriting
fees and Webb may be deemed to be an underwriter. Actual expenses, and thus
net proceeds, may be more or less than estimated amounts. The Holding
Company and the Savings Bank have agreed to indemnify Webb against certain
liabilities, including liabilities that may arise under the Securities Act
of 1933, as amended ("Securities Act"). See "USE OF PROCEEDS" and "THE
CONVERSION -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings."
(3) Actual net proceeds may vary substantially from the estimated amounts
depending upon the relative number of shares sold in the Offerings. See
"USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold in
the Offerings due to an increase in the pro forma market value of the
Holding Company and the Savings Bank as converted up to 15% above the
maximum of the Estimated Valuation Range, without the resolicitation of
subscribers or any right of cancellation. The issuance of such additional
shares will be conditioned on a determination of RP Financial that such
issuance is compatible with its determination of the estimated pro forma
market value of the Common Stock. See "THE CONVERSION -- Stock Pricing and
Number of Shares to be Issued."
(5) Assumes the issuance of 4,250,000 shares at $10.00 per share.
(6) Assumes the issuance of 5,000,000 shares at $10.00 per share.
(7) Assumes the issuance of 5,750,000 shares at $10.00 per share.
(8) Assumes the issuance of 6,612,500 shares at $10.00 per share.
Except for the ESOP, which is expected to purchase 8% of the Common Stock
issued in the Conversion, subject to the approval of the Division, no Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member may
subscribe in their capacity as such in the Subscription Offering for shares of
Common Stock having an aggregate purchase price of more than $200,000 (20,000
shares based on a purchase price of $10.00 per share ("Purchase Price")); no
person, either alone or together with associates of or persons acting in concert
with such person, may purchase in the Direct Community Offering, if any, shares
of Common Stock having an aggregate purchase price of more than $200,000 (20,000
shares based on the Purchase Price); no person, either alone or together with
associates of or persons acting in concert with such person, may purchase in the
Syndicated Community Offering, if any, shares of Common Stock having an
aggregate purchase price of more than $200,000 (20,000 shares based on the
Purchase Price); and no person either alone or together with associates of or
persons acting in concert with such person, may purchase in the aggregate more
than the overall maximum purchase limitation of 1% of the total number of shares
of Common Stock issued in the Conversion (exclusive of any shares issued
pursuant to an increase in the Estimated Valuation Range of up to 15%). Under
certain circumstances, the maximum purchase limitation may be increased at the
sole discretion of the Savings Bank and the Holding Company. The minimum
purchase is 25 shares. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings," "--Limitations on Purchases of
Shares" and "-- Procedure for Purchasing Shares in the Subscription and Direct
Community Offering" for other purchase and sale limitations.
The Subscription Offering will expire at 5:00 p.m., Pacific Time, on
_________ __, 1997 ("Expiration Date"), unless extended by the Savings Bank and
the Holding Company for up to __ days to _______ __, 1997. Such extension may be
granted without additional notice to subscribers. The Direct Community Offering
is also expected to terminate at 5:00 p.m., Pacific Time, on ________ __, 1997
or at a date thereafter, however, in no event later than ________ __, 1998. The
Holding Company must receive at an office of the Savings Bank the accompanying
original Stock Order Form and a fully executed Certification Form (collectively,
the "Stock Order Form") (facsimile copies and photocopies will not be accepted)
along with full payment (or appropriate instructions authorizing a withdrawal
from a deposit account at the Savings Bank) of $10.00 per share ("Purchase
Price") for all shares subscribed for or ordered by the Expiration Date. Payment
for shares of Common Stock by wire transfer will not be accepted. Funds so
received will be placed in segregated accounts created for this purpose at the
Savings Bank, and interest will be paid at the Savings Bank's passbook rate
(____% per annum as of the date hereof) from the date payment is received until
the Conversion is consummated or terminated. These funds will be otherwise
unavailable to the depositor until such time. Payments authorized by withdrawals
from deposit accounts will continue to earn interest at the contractual rate
until the Conversion is consummated or terminated, although such funds will be
unavailable for withdrawal until the Conversion is consummated or terminated.
Shares of Common Stock issued in the Conversion are not deposit liabilities,
will not earn interest, and will not be insured by the FDIC, the SAIF or any
other government agency. Orders submitted are irrevocable until the consummation
or termination of the Conversion. If the Conversion is not consummated within 45
days after the last day of the Subscription and Direct Community Offering (which
date will be no later than ________ __, 1998) and the Division consents to an
extension of time to consummate the Conversion, subscribers will be notified in
writing of the time period within which the subscriber must notify the Savings
Bank of his or her intention to increase, decrease or rescind his or her
subscription. If an affirmative response to any such resolicitation is not
received by the Holding Company or the Savings Bank from subscribers, such
orders will be rescinded and all funds will be returned promptly with interest.
If such period is not extended or, in any event, if the Conversion is not
consummated by __________ __, 1997, all subscription funds will be promptly
returned, together with accrued interest, and all withdrawal authorizations
terminated.
The Savings Bank and the Holding Company have engaged Webb as their
financial advisor and to assist the Holding Company in the sale of the Common
Stock in the Offerings. Neither Webb nor any other registered broker-dealer is
obligated to take or purchase any shares of Common Stock in the Offerings. See
"THE CONVERSION -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings." Webb is a registered broker-dealer and
member of the National Association of Securities Dealers, Inc. ("NASD").
Prior to the Offerings, the Holding Company has not issued any capital
stock and accordingly there has been no market for the shares offered hereby.
There can be no assurance that an active and liquid trading market for the
Common Stock will develop or, if developed, will be maintained. See "RISK
FACTORS -- Absence of Prior Market for the Common Stock." The Holding Company
has received conditional approval to list the Common Stock on the National
Market System of the Nasdaq Stock Market under the symbol "TSBK." Keefe,
Bruyette has advised the Holding Company that it intends to act as a market
maker for the Common Stock following the Conversion. See "MARKET FOR COMMON
STOCK."
TIMBERLAND SAVINGS BANK, SSB
HOQUIAM, WASHINGTON
[Map]
THE SAVINGS BANK'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON
APPROVAL OF THE SAVINGS BANK'S PLAN OF CONVERSION BY AT LEAST A MAJORITY OF ITS
VOTING MEMBERS, THE SALE OF AT LEAST 4,250,000 SHARES OF COMMON STOCK PURSUANT
TO THE PLAN OF CONVERSION AND RECEIPT OF ALL REGULATORY APPROVALS.
------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF, THE DIVISION OR ANY OTHER
GOVERNMENT AGENCY.
------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK
FACTORS."
Timberland Bancorp, Inc.
The Holding Company is a Washington corporation organized on September 8,
1997 at the direction of the Savings Bank to acquire all of the capital stock
that the Savings Bank will issue upon its conversion from the mutual to stock
form of ownership. The Holding Company has not engaged in any significant
business to date. Upon completion of the Conversion, the Holding Company will be
regulated by the Federal Reserve. The Holding Company has filed an application
with the Federal Reserve and the Division to become a bank holding company and
for approval to acquire the Savings Bank. Immediately following the Conversion,
the only significant assets of the Holding Company will be the capital stock of
the Savings Bank, that portion of the net proceeds of the Offerings permitted by
the Division to be retained by the Holding Company and a note receivable from
the ESOP evidencing a loan from the Holding Company to fund the Savings Bank's
ESOP. See "USE OF PROCEEDS." Management believes that the holding company
structure and retention of proceeds may, should it decide to do so, facilitate
the repurchase of its stock without adverse tax consequences. There are no
present plans, arrangements, agreements, or understandings, written or oral,
regarding any such repurchases.
The office of the Holding Company is located at 624 Simpson Avenue,
Hoquiam, Washington 98550, and its telephone number is (360) 533-4747.
Timberland Savings Bank, SSB
The Savings Bank was established in 1915 as "Southwest Washington Savings
and Loan Association." In 1935, the Savings Bank converted from a state-
chartered mutual savings and loan association to a federally chartered mutual
savings and loan association, and in 1972, changed its the name to "Timberland
Federal Savings and Loan Association." In 1990, the Savings Bank converted to a
federally-chartered mutual savings bank under the name "Timberland Savings Bank,
FSB." In 1991, the Savings Bank converted to a Washington-chartered mutual
savings bank and adopted its current name. The Savings Bank's deposits are
insured by the FDIC up to applicable legal limits under the SAIF. The Savings
Bank has been a member of the Federal Home Loan Bank ("FHLB") system since 1937.
The Savings Bank is regulated by the Division and the FDIC. At June 30, 1997,
the Savings Bank had total assets of $206.2 million, total deposit accounts of
$167.1 million, and total capital of $23.9 million, on a consolidated basis.
The Savings Bank is a community oriented savings bank which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including an emphasis on
construction and land development loans, as well as the origination of multi-
family and commercial real estate loans. The Savings Bank actively originates
adjustable rate residential mortgage loans that do not qualify for sale in the
secondary market under Federal Home Loan Mortgage Corporation ("FHLMC")
guidelines. At June 30, 1997, the Savings Bank's gross loan portfolio totaled
$204.6 million, of which $100.1 million, or 48.9%, were one- to four-family
residential mortgage loans, 44.7 million, or 21.9%, were construction and
(i)
land development loans (the majority of which related to one- to four-family
residences), and $41.5 million, or 20.3%, were multi-family or commercial real
estate loans. Construction and commercial real estate loans generally involve a
greater risk of loss than one- to- four family mortgage loans. See "RISK
FACTORS -- Certain Lending Risks."
The Savings Bank also invests in short- to- intermediate term U.S. Treasury
securities and U.S. Government agency obligations and mortgage-backed securities
issued by U.S. Government agencies. At June 30, 1997, the Savings Bank's
investment and mortgage-backed securities portfolio had a carrying value of $5.7
million. See "BUSINESS OF THE SAVINGS BANK -- Investment Securities."
Deposits have been the primary source of funds for the Savings Bank's
investment and lending activities. The Savings Bank plans to continue to fund
its operations primarily with deposits, although advances from the FHLB-Seattle
have been used as a supplemental source of funds. See "BUSINESS OF THE SAVINGS
BANK -- Deposits and Other Sources of Funds."
The Savings Bank conducts its operations from its main office, seven branch
offices and a loan production office located in Western Washington State. See
"BUSINESS OF THE SAVINGS BANK -- Properties." The Savings Bank's main office is
located at 624 Simpson Avenue, Hoquiam, Washington, 98550 and its telephone
number is (360) 533-4747.
The Conversion
The Savings Bank is converting from a Washington-chartered mutual savings
bank to a Washington-chartered capital stock savings bank and, in connection
with the Conversion, has formed the Holding Company. As part of the Conversion,
the Savings Bank will issue all of its capital stock to the Holding Company in
exchange for 50% of the net proceeds from the sale of the Common Stock.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
Orders submitted are irrevocable until the completion of the Conversion. The
Conversion is subject to the approval of the Division and the non-objection of
the FDIC, as well as the approval of the Savings Bank's eligible voting members
at a special meeting to be held on December 23, 1997.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Savings Bank. RP Financial has advised the Savings Bank that in its opinion, at
August 29, 1997, the aggregate estimated pro forma market value of the Holding
Company and the Savings Bank ranged from $42.5 million to $57.5 million or from
4,250,000 shares to 5,750,000 shares, assuming a $10.00 per share Purchase
Price. The appraisal of the pro forma market value of the Holding Company and
the Savings Bank is based on a number of factors and should not be considered a
recommendation to buy shares of the Common Stock or any assurance that after the
Conversion shares of Common Stock will be able to be resold at or above the
Purchase Price. The appraisal will be updated or confirmed prior to the
completion of the Conversion.
The Board of Directors and management of the Savings Bank believe that the
stock form of organization is preferable to the mutual form, especially in light
of the competitive and heavily regulated environments within which the Savings
Bank operates. The Board of Directors and management believe that the Conversion
is in the best interests of the Savings Bank's members and its community. The
Conversion is intended to: (i) support the Savings Bank's current lending and
investment activities, (ii) support possible future expansion, merger and
diversification of operations (currently, there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
(iii) afford members of the Savings Bank and others the opportunity to become
stockholders of the Holding Company and thereby participate more directly in,
and contribute to, any future growth of the Holding Company and the Savings
Bank; and (iv) provide future access to capital markets. See "THE CONVERSION --
Purposes of Conversion."
(ii)
The Conversion will significantly increase the consolidated capital of the
Savings Bank and the newly formed Holding Company and as a result the pro forma
return on equity will be significantly less than the Savings Bank's pre-
Conversion return on equity. See "RISK FACTORS -- Return on Average Equity After
Conversion."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 5,750,000 shares of Common Stock
(subject to adjustment) at $10.00 per share to holders of Subscription Rights in
the following order of priority: (i) Eligible Account Holders; (ii) the Savings
Bank's ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other
Members. Concurrently, and subject to the prior rights of holders of
Subscription Rights, any shares of Common Stock not subscribed for in the
Subscription Offering are being offered in the Direct Community Offering to
natural persons and trusts of natural persons who are permanent residents of the
Local Community. If any shares remain available on the expiration date of the
Direct Community Offering, in the discretion of the Holding Company and the
Savings Bank, the Direct Community Offering may be expanded to include other
members of the general public. No orders will be accepted in the Direct
Community Offering from natural persons or trusts of natural persons residing
outside the Local Community unless the Direct Community Offering is expanded to
include such persons. The Savings Bank has engaged Webb to consult with and
advise the Holding Company and the Savings Bank in the Offerings, and Webb has
agreed to use its best efforts to assist the Holding Company with the
solicitation of subscriptions and purchase orders for shares of Common Stock in
the Offerings. Webb is not obligated to take or purchase any shares of Common
Stock in the Offerings. If all shares of Common Stock to be issued in the
Conversion are not sold through the Subscription and Direct Community Offering,
then the Holding Company expects to offer the remaining shares in a Syndicated
Community Offering managed by Webb, which would occur as soon as practicable
following the close of the Subscription and Direct Community Offering but may
commence during the Subscription and Direct Community Offering, subject to the
prior rights of subscribers in the Subscription and Direct Community Offering
and to the right of the Holding Company to accept or reject these orders in
whole or in part. All shares of Common Stock will be sold at the same price per
share in the Syndicated Community Offering as in the Subscription and Direct
Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." The Subscription
Offering will expire at 5:00 p.m., Pacific Time, on _________ __, 1997, unless
extended by the Savings Bank and the Holding Company for up to ___ days. The
Direct Community Offering and Syndicated Community Offering, if any, are also
expected to terminate on _________ __, 1997, and may terminate on any date
thereafter, however, in no event later than ________ __, 1998.
Subscription Rights are non-transferrable. Persons found to be transferring
Subscription Rights or attempting to purchase shares of Common Stock on behalf
of other persons will be subject to forfeiture of such rights and possible
further sanctions and penalties.
Benefits of Conversion to Management
ESOP. In connection with the Conversion, the Savings Bank will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Holding Company and the Savings Bank, which intends to purchase 8% of the shares
of Common Stock issued in the Offerings (460,000 shares of Common Stock, based
on the issuance of the maximum of the Estimated Valuation Range). In the event
that the ESOP's subscription is not filled in its entirety, the ESOP may
purchase additional shares in the open market with cash contributed to it by the
Savings Bank after the consummation of the Conversion. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan." As a result of the
adoption of the ESOP, the Holding Company will recognize compensation expense in
an amount equal to the fair market value of the ESOP shares when such shares are
committed to be released to participants' accounts. See "RISK FACTORS -- New
Expenses Associated With ESOP and MRP" and "PRO FORMA DATA."
MRP. The Holding Company expects to seek stockholder approval of the
Timberland Bancorp, Inc. Management Recognition Plan ("MRP"), which will reserve
a number of shares equal to 4% of the number of shares
(iii)
issued in the Conversion. Under current FDIC regulations, the approval of a
majority vote of the Holding Company's outstanding shares of Common Stock is
required prior to the implementation of the MRP within one year of the
consummation of the Conversion. If stockholder approval of the MRP is obtained,
it is expected that awards of up to 230,000 shares of Common Stock (based on the
issuance of the maximum of the Estimated Valuation Range) will be made to key
employees and directors of the Holding Company and the Savings Bank at no cost
to the recipient. Although no specific award determinations have been made at
this time, the Holding Company and the Savings Bank anticipate that if
stockholder approval is obtained it would provide awards to its directors,
officers and employees to the extent permitted by applicable regulations. Under
current FDIC regulations, if the MRP is implemented within one year of the
consummation of the Conversion, (i) no officer or employee could receive an
award covering in excess of 25%, (ii) no nonemployee director may receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. In
addition, all awards would be subject to vesting at a minimum rate of 20% per
year. The size of individual awards will be determined prior to submitting the
MRP for stockholder approval, and disclosure of anticipated awards will be
included in the proxy solicitation materials for such meeting. See "PRO FORMA
DATA" and "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition
Plan."
Stock Option Plan. The Holding Company expects to seek stockholder approval
of the Timberland Bancorp, Inc. 1997 Stock Option Plan ("Stock Option Plan"),
which will reserve a number of shares equal to 10% of the number of shares
issued in the Conversion. Under current FDIC regulations, the approval of a
majority vote of the Holding Company's outstanding shares of Common Stock is
required prior to the implementation of the Stock Option Plan within one year of
the consummation of the Conversion. If stockholder approval of the Stock Option
Plan is obtained, it is expected that options to acquire up to 575,000 shares of
Common Stock (based on the issuance of the maximum of the Estimated Valuation
Range) will be awarded to key employees and directors of the Holding Company and
the Savings Bank. The exercise price of such options will be 100% of the fair
market value of the Common Stock on the date the option is granted. Although no
specific award determinations have been made at this time, the Holding Company
and the Savings Bank anticipate that if stockholder approval is obtained it
would provide awards to its directors, officers and employees to the extent
permitted by applicable regulations. Under current FDIC regulations, if the
Stock Option Plan is implemented within one year of the consummation of the
Conversion, (i) no officer or employees could receive an award of options
covering in excess of 25%, (ii) no nonemployee director could receive in excess
of 5% and (iii) nonemployee directors, as a group, could not receive in excess
of 30% of the number of shares reserved for issuance under the Stock Option
Plan. In addition, all awards would be subject to vesting at a minimum rate of
20% per year. The size of individual awards will be determined prior to
submitting the Stock Option Plan for stockholder approval, and disclosure of
anticipated awards will be included in the proxy solicitation materials for such
meeting. Options are valuable only to the extent that they are exercisable and
the market price for the underlying share of Common Stock is in excess of the
exercise price. An option effectively eliminates the market risk of holding the
underlying securities since no consideration is paid for the option until it is
exercised. Therefore, the recipient may, within the limits of the term of the
option, wait to exercise the option until the market price exceeds the exercise
price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option
Plan."
Profit Sharing Bonus Plan. The Savings Bank maintains a discretionary bonus
plan which is based on the Savings Bank's net income for each fiscal year. No
assurances can be given that the Conversion will increase the Savings Bank's net
income. However, to the extent, if any, that the Conversion results in higher
net income to the Savings Bank, officers of the Savings Bank and other
participating employees would benefit. The amount of such benefit, if any, is
unquantifiable at this time because predictions of future income (or loss)
levels is impossible. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Profit
Sharing Bonus Plan."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders."
(iv)
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date, in accordance with Rule 15c2-8 under the Exchange Act,
no Prospectus will be mailed later than five days or hand delivered any later
than two days prior to the Expiration Date. Execution of the Order Form will
confirm receipt or delivery of a Prospectus in accordance with Rule 15c2-8.
Order Forms will be distributed only with a Prospectus. Neither the Holding
Company, the Savings Bank nor Webb is obligated to deliver a Prospectus and an
Order Form by any means other than the U.S. Postal Service.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts on the Order Form giving
all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. The Holding Company will not accept orders
submitted on photocopied or telecopied Stock Order Forms. Orders cannot and will
not be accepted without the execution of the Certification Form appearing on the
reverse side of the Stock Order Form. See "THE CONVERSION -- Procedure for
Purchasing Shares in the Subscription and Direct Community Offering."
Purchase Limitations
Except for the ESOP, which is expected to subscribe for 8% of the shares of
Common Stock issued in the Conversion, the Plan of Conversion provides for the
following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase in the Subscription Offering shares of Common
Stock with an aggregate purchase price of more than $200,000 (20,000 shares
based on the Purchase Price), (ii) no person, either alone or together with
associates of or persons acting in concert with such person, may purchase in the
Direct Community Offering, if any, shares of Common Stock with an aggregate
purchase price of more than $200,000 (20,000 shares based on the Purchase
Price), (iii) no person, either alone or together with associates of or persons
acting in concert with such person, may purchase in the Syndicated Community
Offering, if any, shares of Common Stock with an aggregate purchase price of
more than $200,000 (20,000 shares based on the Purchase Price), and (iv) no
person, either alone or together with associates of or persons acting in concert
with such person, may purchase in the aggregate more than the overall maximum
purchase limitation of 1% of the total number of shares of Common Stock issued
in the Conversion (exclusive of any shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%). This maximum purchase limitation may be
increased consistent with regulations of the Division in the sole discretion of
the Holding Company and the Savings Bank subject to any required regulatory
approval. The minimum purchase is 25 shares.
The term "acting in concert" is defined in the Plan of Conversion to mean:
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The Holding Company and the Savings Bank may presume that certain
persons are acting in concert based upon, among other things, joint account
relationships and the fact that such persons have filed joint Schedules 13D with
the Securities and Exchange Commission ("SEC") with respect to other companies.
The term "associate" of a person is defined in the Plan of Conversion to mean:
(i) any corporation or organization (other than the Savings Bank or a majority-
owned subsidiary of the Savings Bank) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
plans); and (iii) any relative or spouse of such
(v)
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Savings Bank or any of its parents
or subsidiaries. The Holding Company and the Savings Bank may presume that
certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
Stock orders received either through the Direct Community Offering or the
Syndicated Community Offering, if held, may be accepted or rejected, in whole or
in part, at the discretion of the Holding Company and the Savings Bank. See "THE
CONVERSION -- Limitations on Purchases of Shares." If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. In the event of an oversubscription, shares will be allocated in
accordance with the Plan of Conversion. See "THE CONVERSION -- The Subscription,
Direct Community and Syndicated Community Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform, fixed price for all
subscribers, including the Savings Bank's Board of Directors, its management and
tax-qualified employee plans, and was set by the Savings Bank's Board of
Directors. The number of shares to be offered at the Purchase Price is based
upon an independent appraisal of the aggregate pro forma market value of the
Holding Company and the Savings Bank as converted. The aggregate pro forma
market value was estimated by RP Financial to range from $42.5 million to $57.5
million as of August 29, 1997, or from 4,250,000 to 5,750,000 shares based on
the Purchase Price. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued." The appraisal of the pro forma value of the Holding Company and the
Savings Bank as converted will be updated or confirmed immediately prior to the
completion of the Offerings. The maximum of the Estimated Valuation Range may be
increased by up to 15% and the number of shares of Common Stock to be issued in
the Conversion may be increased to 6,612,500 shares due to regulatory
considerations, material changes in the financial condition or performance of
the Savings Bank, changes in market conditions or general financial and economic
conditions. No resolicitation of subscribers will be made and subscribers will
not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Common Stock are more than 15% above the maximum
of the current Estimated Valuation Range, or below the minimum of the Estimated
Valuation Range. The appraisal of the Common Stock is not intended and should
not be construed as a recommendation of any kind as to the advisability of
purchasing such stock nor can any assurance be given that purchasers of the
Common Stock in the Conversion will be able to sell such shares after the
Conversion at a price that is equal to or above the Purchase Price. Further, the
pro forma stockholders' equity is not intended to represent the fair market
value of the Common Stock and may be greater than amounts that would be
available for distribution to stockholders in the event of liquidation.
Conditions to Closing of the Offerings
Consummation of the Offerings is subject to, among other things (i)
consummation of the Conversion, which is conditioned on, among other things,
approval of the Plan of Conversion by the eligible voting members of the Savings
Bank, (ii) receipt by the Division of RP Financial's updated appraisal of the
pro forma market value of the Holding Company and the Savings Bank, and
authorization of the Division to sell the Common Stock within the estimated
valuation range set forth in such updated appraisal, (iii) the non-objection of
the FDIC to the Conversion, and (iv) Federal Reserve approval of the Holding
Company's acquisition of the Savings Bank. There can be no assurances that all
such conditions will be satisfied. See "RISK FACTORS -- Risk of Delayed
Offering" and "THE CONVERSION -- General."
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $41.5 million to $56.5 million, or to $65.2 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company plans to contribute to
the Savings Bank 50% of the net proceeds of the Offerings in exchange for all of
the issued and outstanding shares of common stock of
(vi)
the Savings Bank and retain the remaining net proceeds. This will result in the
Holding Company retaining approximately $20.8 million to $28.3 million of the
net proceeds, or up to $32.6 million if the Estimated Valuation Range is
increased by 15%, and the Savings Bank receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and as a result its pro forma return on
equity will be significantly less than its pre-Conversion return on equity. See
RISK FACTORS -- Return on Equity After Conversion." The Savings Bank will use
the funds contributed to it for general corporate purposes, including,
initially, local lending, investment in short term U.S. government and agency
obligations and the possible repayment of outstanding FHLB advances. The Savings
Bank may also use a portion of the net proceeds contributed to it to acquire or
establish additional branch offices within its primary market area. Currently,
there are no specific plans, arrangements, agreements or understandings, written
or oral, regarding any additional branching activities. Shares of Common Stock
may be purchased with funds on deposit at the Savings Bank, which will reduce
deposits by the amounts of such purchases. The net amount of funds available to
the Savings Bank for investment following receipt of the Conversion proceeds
will be reduced to the extent shares are purchased with funds on deposit.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Savings Bank's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($4.0 million at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Savings Bank's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be invested primarily in certificates of deposit and
short term U.S. government and agency obligations. Such proceeds will be
available for additional contributions to the Savings Bank in the form of debt
or equity, to support possible future diversification or acquisition activities,
as a source of dividends to the stockholders of the Holding Company and for
future repurchases of Common Stock (including possible repurchases to fund the
MRP) to the extent permitted under Washington law and regulations, and as a
source of funds for the Holding Company to make tax-free distributions to
stockholders in the form of returns of capital. Currently, as discussed below
under "USE OF PROCEEDS," there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any of such activities.
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
National Market System of the Nasdaq Stock Market under the symbol "TSBK."
Keefe, Bruyette has indicated its intention to act as a market maker in the
Common Stock following the consummation of the Conversion, depending on trading
volume and subject to compliance with applicable laws and regulatory
requirements. Furthermore, Webb has agreed to use its best efforts to assist the
Holding Company in obtaining additional market makers for the Common Stock. No
assurance can be given that an active and liquid trading market for the Common
Stock will develop. Further, no assurance can be given that purchasers will be
able to sell their shares at or above the Purchase Price after the Conversion.
See "RISK FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET
FOR COMMON STOCK."
Dividends
The Board of Directors of the Holding Company will consider a dividend
policy following the consummation of the Conversion. Declarations and payments
of dividends, regular or special, by the Board of Directors will depend upon a
number of factors, including the amount of the net proceeds retained by the
Holding Company, capital requirements, regulatory limitations, the Savings
Bank's and the Holding Company's financial condition and results of operations,
tax considerations and general economic conditions. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Conversion and retained by the Holding Company,
dividends received from the Savings Bank or earnings on Holding
(vii)
Company assets. There are certain limitations on the payment of dividends from
the Savings Bank to the Holding Company. See "DIVIDEND POLICY --Current
Regulatory Restrictions" and "REGULATION -- The Savings Bank -- Dividends." No
assurances can be given that any dividends will be declared or, if declared,
what the amount of dividends will be or whether such dividends, once declared,
will continue.
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Savings Bank (18 persons) are expected to
subscribe for an aggregate of approximately $2.5 million of Common Stock, or
5.9% of the shares of Common Stock to be issued in the Conversion based on the
minimum of the Estimated Valuation Range, and $2.8 million, or 4.9% of the
shares to be issued in the Conversion based on the maximum of the Estimated
Valuation Range. See "SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO
SUBSCRIPTION RIGHTS." In addition, purchases by the ESOP, allocations under the
MRP, and the exercise of stock options issued under the Stock Option Plan, will
increase the number of shares beneficially owned by officers, directors and
employees. Allocations under the MRP will be at no cost to recipients. Stock
options are valuable only to the extent that they are exercisable and to the
extent that the market price for the underlying share of Common Stock exceeds
the exercise price. An option effectively eliminates the market risk of holding
the underlying security since the option holder pays no consideration for the
option until it is exercised. Therefore, the option holder may, within the
limits of the term of the option, wait to exercise the option until the market
price exceeds the exercise price. Assuming (i) the receipt of stockholder
approval for the MRP and the Stock Option Plan, (ii) the open market purchase of
shares on behalf of the MRP, (iii) the purchase by the ESOP of 8% of the Common
Stock sold in the Offerings, and (iv) the exercise of stock options equal to 10%
of the number of shares of Common Stock issued in the Conversion, directors,
officers and employees of the Holding Company and the Savings Bank would have
voting control, on a fully diluted basis, of 25.37% and 24.45% of the Common
Stock, based on the issuance of Common Stock at the minimum and maximum of the
Estimated Valuation Range, respectively. See "RISK FACTORS -- Anti-takeover
Considerations -- Voting Control by Insiders." The MRP and Stock Option Plan are
subject to approval by the stockholders of the Holding Company at a meeting to
be held no earlier than six months following consummation of the Stock
Conversion.
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors.
(viii)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiary at the dates and for the periods indicated. Information at
and for the nine months ended June 30, 1996 and 1997 is unaudited, but, in the
opinion of management, contains all adjustments (none of which were other than
normal recurring entries) necessary for a fair statement of the results of such
periods. This information is qualified in its entirety by reference to the
detailed information contained in the Consolidated Financial Statements and
Notes thereto presented elsewhere in this Prospectus.
At September 30,
--------------------------------------------------------- At June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(Dollars in thousands)
SELECTED FINANCIAL CONDITION
DATA:
Total assets........................ $123,889 $139,233 $151,044 $177,761 $194,357 $206,188
Loans receivable and loans held for
sale, net......................... 103,045 106,259 121,558 156,523 176,495 187,488
Investment securities
held-to-maturity................... 999 1,695 8,597 3,504 -- --
Investment securities available-for
sale............................... 1,013 1,172 1,330 1,449 1,572 1,555
Mortgage-backed securities held-
to-maturity....................... 3,411 2,268 7,402 6,352 4,951 4,172
Cash and due from financial
institutions....................... 12,002 24,122 7,360 4,860 5,055 5,833
Deposit accounts.................... 112,301 125,404 128,669 143,084 156,549 167,140
FHLB advances....................... -- -- 5,753 14,958 14,354 13,771
Total capital....................... 10,387 13,005 15,638 18,653 21,329 23,866
Nine Months
Ended
Year Ended September 30, June 30,
--------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
SELECTED OPERATING DATA:
Interest and dividend income........ $ 11,290 $ 11,220 $ 11,307 $ 14,454 $ 16,500 $ 12,154 $ 13,370
Interest expense.................... 5,769 4,938 4,715 6,360 7,629 5,682 6,237
-------- -------- -------- -------- -------- -------- --------
Net interest income................. 5,521 6,282 6,592 8,094 8,871 6,472 7,133
Provision for loan losses........... 185 175 -- -- 70 45 334
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for loan losses.... 5,336 6,107 6,592 8,094 8,801 6,427 6,799
Gains (losses) from sale of loans... 97 144 145 44 34 (52) 180
Noninterest income.................. 619 726 673 554 654 480 657
Noninterest expense................. 2,888 3,117 3,613 4,089 5,392 3,359 3,652
Income before income taxes.......... 3,164 3,860 3,797 4,603 4,097 3,496 3,984
Provision for income taxes.......... 1,042 1,241 1,163 1,603 1,419 1,216 1,434
-------- -------- -------- -------- -------- -------- --------
Net income.......................... $ 2,122 $ 2,619 $ 2,634 $ 3,000 $ 2,678 $ 2,280 $ 2,550
======== ======== ======== ======== ======== ======== ========
(ix)
At September 30,
------------------------------------------------- At June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans outstanding............. 2,560 2,366 2,344 2,535 2,512 2,681
Deposit accounts.......................... 16,943 17,276 17,552 18,681 19,994 21,119
Full-service offices...................... 5 5 6 6 7 8
At or For
Nine Months
Ended
Year Ended September 30, June 30,
------------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets(1)(2)............ 1.80% 1.99% 1.86% 1.82% 1.46% 1.67% 1.67%
Return on average equity(1)(3)............ 22.53 22.11 18.27 17.44 13.21 15.27 14.95
Interest rate spread(1)(4)................ 4.38 4.47 4.32 4.56 4.34 4.25 4.17
Net interest margin(5).................... 4.93 4.97 4.78 5.08 4.97 4.88 4.85
Average interest-earning assets
to average interest-bearing liabilities.. 110.97 113.09 113.41 113.05 114.76 114.89 115.94
Noninterest expense as a
percent of average total assets(1)....... 2.45 2.37 2.55 2.49 2.93 2.46 2.39
Efficiency ratio(6)....................... 47.72 44.68 48.76 47.04 56.82 49.00 47.83
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans as a percent
of loans receivable, net................. 1.39 0.76 0.45 0.66 0.86 0.63 4.28(7)
Nonperforming assets as a
percent of total assets.................. 1.87 0.93 0.63 0.70 0.85 0.64 4.05(7)
Allowance for losses as a
percent of loans receivable, net......... 0.94 1.07 0.92 0.71 0.64 0.67 0.78
Allowance for losses as a
percent of nonperforming loans........... 67.69 140.84 204.95 107.91 74.54 97.90 18.10(7)
Net charge-offs to average
outstanding loans........................ 0.02 0.01 0.02 -- -- 0.01 0.01
Capital Ratios:
Total equity-to-assets ratio.............. 8.38 9.34 10.35 10.49 10.97 11.18 11.57
Average equity to average assets(8)....... 7.98 9.01 10.16 10.45 11.02 10.93 11.16
- ------------------
(1) Annualized for the nine months ended June 30, 1996 and 1997.
(2) Net income divided by average total assets.
(3) Net income divided by average equity.
(4) Difference between weighted average yield on interest-earning assets
and weighted average rate on interest-bearing liabilities.
(5) Net interest income (before provision for loan losses) as a percentage
of average interest-earning assets.
(6) Other expenses (excluding federal income tax expense) divided by the
sum of net interest income and noninterest income.
(7) Includes the four loans discussed under "BUSINESS OF THE SAVINGS BANK
-- Lending Activities -- Nonperforming Assets and Delinquencies, with
aggregate outstanding balances of $5.8 million at June 30, 1997."
(8) Average total equity divided by average total assets.
(x)
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiary at the dates and for the periods indicated. Information at
June 30, 1997 and September 30, 1997, the three months ended September 30, 1996
and 1997, and the year ended September 30, 1997 are unaudited, but, in the
opinion of management, contain all adjustments (none of which were other than
normal recurring entries) necessary for a fair presentation of the results of
such periods. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
Prospectus.
At At At
September 30, June 30, September 30,
1996 1997 1997
---------------- ---------------- -----------------
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets.......................................... $194,357 $206,188 $211,553
Loans receivable and loans held for sale, net......... 176,495 187,488 187,027
Investment securities available-for-sale.............. 1,572 1,555 1,586
Mortgage-backed securities held-to-maturity........... 4,951 4,172 3,990
Cash and due from financial institutions.............. 5,055 5,833 11,446
Deposit accounts...................................... 156,549 167,140 173,003
FHLB advances......................................... 14,354 13,771 12,241
Total capital......................................... 21,329 23,866 24,645
Three Months Year Ended
Ended September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Interest and dividend income.......................... $ 4,346 $ 4,577 $16,500 $17,948
Interest expense...................................... 1,947 2,149 7,629 8,386
--------- --------- --------- ---------
Net interest income................................... 2,399 2,428 8,871 9,562
Provision for loan losses............................. 25 263 70 597
--------- --------- --------- ---------
Net interest income after
provision for loan losses............................ 2,374 2,165 8,801 8,965
Gains from sale of loans.............................. 86 159 34 339
Noninterest income.................................... 174 239 654 896
Noninterest expense................................... 2,033 1,387 5,392 5,041
--------- --------- --------- ---------
Income before income taxes............................ 601 1,176 4,097 5,159
Provision for income taxes............................ 203 397 1,419 1,830
--------- --------- --------- ---------
Net income............................................ $ 398 $ 779 $ 2,678 $ 3,329
========= ========= ========= =========
(xi)
At or For the At or For the
Three Months Years Ended
Ended September 30, September 30,
------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average
assets(1)(2)................ 0.84% 1.49% 1.46% 1.62%
Return on average
equity(1)(3)................ 7.44 12.79 13.21 14.39
Interest rate spread(1)(4)... 4.63 4.20 4.34 4.18
Net interest margin(5)....... 5.24 4.83 4.97 4.84
Average interest-earning
assets to average interest-
bearing liabilities......... 114.39 114.60 114.76 115.60
Noninterest expense as a
percent of average total
assets(1)................... 4.28 2.65 2.93 2.46
Efficiency ratio(6).......... 77.18 54.12 56.82 49.42
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of loans
receivable, net(7).......... 0.86 4.10 0.86 4.10
Nonperforming assets as a
percent of total assets(7).. 0.85 3.83 0.85 3.83
Allowance for losses as a
percent of loans
receivable, net............ 0.64 0.92 0.64 0.92
Allowance for losses as a
percent of nonperforming
loans(7)................... 74.54 22.39 74.54 22.39
Net charge-offs to average
outstanding loans........... -- -- -- 0.01
Capital Ratios:
Total equity-to-assets
ratio....................... 10.97 11.65 10.97 11.65
Average equity to average
assets(8)................... 11.27 11.65 11.02 11.28
- -------------------
(1) Annualized for the three months ended September 30, 1996 and 1997.
(2) Net income divided by average total assets.
(3) Net income divided by average equity.
(4) Difference between weighted average yield on interest-earning assets
and weighted average rate on interest-bearing liabilities.
(5) Net interest income (before provision for loan losses) as a percentage
of average interest-earning assets.
(6) Other expenses (excluding federal income tax expense) divided by the
sum of net interest income and noninterest income.
(7) Includes the four loans discussed under "BUSINESS OF THE SAVINGS BANK
-- Lending Activities -- Nonperforming Assets and Delinquencies, with
aggregate outstanding balances of $5.8 million at September 30, 1997."
(8) Average total equity divided by average total assets.
(xii)
Regulatory Capital
The table below sets forth the Savings Bank's capital position relative
to its FDIC capital requirements at September 30, 1997. The definitions of
the terms used in the table are those provided in the capital regulations
issued by the FDIC. See "REGULATION -- The Savings Bank -- Capital
Requirements."
At September 30, 1997
----------------------------
Percent of Adjusted
Amount Total Assets(1)
------- -------------------
(In Thousands)
Tier 1 (leverage) capital................. $24,645 12.01%
Tier 1 (leverage) capital requirement..... 8,205 4.00
------- -----
Excess.................................... $16,440 8.01%
======= =====
Tier 1 risk adjusted capital.............. $26,361 17.43
Tier 1 risk adjusted capital requirement.. 6,049 4.00
------- -----
Excess.................................... $20,312 13.43%
======= =====
Total risk-based capital.................. $26,361 17.43%
Total risk-based capital requirement...... 12,099 8.00
------- -----
Excess.................................... $14,262 9.43%
======= =====
- ------------------
(1) For the Tier 1 (leverage) capital and Washington regulatory capital
calculations, percent of total average assets of $205.1 million. For
the Tier 1 risk-based capital and total risk-based capital
calculations, percent of total risk-weighted assets of $151.2 million.
(2) As a Washington-chartered savings bank, the Savings Bank is subject to
the capital requirements of the FDIC and the Division. The FDIC
requires state-chartered savings banks, including the Savings Bank, to
have a minimum leverage ratio of Tier 1 capital to total assets of at
least 3%, provided, however, that all institutions, other than those
(i) receiving the highest rating during the examination process and
(ii) not anticipating any significant growth, are required to maintain
a ratio of 1% to 2% above the stated minimum, with an absolute total
capital to risk-weighted assets of at least 8%. The Savings Bank has
not been notified by the FDIC of any leverage capital requirement
specifically applicable to it.
Nonperforming Assets and Delinquencies
At September 30, 1997, the Savings Bank had $7.6 million of loans
accounted for on a non-accrual basis ($776,000 in one- to- four family
mortgage loans, $2.9 in commercial loans, $3.9 million in construction and
land development loans, and $2,000 in consumer loans) compared to $7.7
million at June 30, 1997. At September 30, 1997, the Savings Bank had
$109,000 in accruing loans which were contractually past due 90 days or
more, compared to $303,000 at June 30, 1997. At September 30, 1997, the
Savings Bank had $434,000 in real estate owned and other repossessed
assets, compared to $317,000 at June 30, 1997. At September 30, 1997, the
Savings Bank had $70,000 in restructured loans, compared to $71,000 at June
30, 1997.
The allowance for loan losses was $1.7 million at September 30, 1997.
There were no charge-offs for the three months ended September 30, 1997,
compared to $1,100 for the three months ended September 30, 1996. Charge-
offs were $19,000 for the year ended September 30, 1997, compared to $1,000
for the year ended September 30, 1996. There were no recoveries for the
three months ended September 30, 1997 and 1996. Recoveries were $8,500 for
the year ended September 30, 1997, compared to none for the year ended
September 30, 1996.
(xiii)
The following table sets forth the breakdown of the allowance for loan
losses by category at September 30, 1997.
Percent of
Loans in Each
Category to
Amount Total Loans
------ -------------
(in thousands)
Mortgage loans:
One- to- four family............... $ 311 48.76%
Multi-family....................... 149 5.93
Commercial......................... 409 14.32
Construction and land development.. 646 21.93
Land............................... 138 3.38
Non-mortgage loans:
Consumer loans..................... 50 5.34
Commercial business loans.......... 13 0.34
------ ------
Total allowance for loan losses... $1,716 100.00%
====== ======
Comparison of Financial Condition at June 30, 1997 and September 30, 1997
Total assets increased 2.6% from $206.2 million at June 30, 1997
to $211.6 million at September 30, 1997 primarily as a result of an
increase in cash and funds due from financial institutions resulting from
an increase in deposit accounts. Deposit accounts increased 3.5% from
$167.1 million to $173.0 million. Management attributes the increase in
deposits to normal growth. Total capital increased 3.3% from $23.9
million to $24.6 million as a result of retained net income.
Comparison of Operating Results for the Three Months Ended September 30,
1996 and 1997
Net Income. Net income increased 95.7% from $398,000 for the
three months ended September 30, 1996 to $779,000 for the three months
ended September 30, 1997 primarily as a result of the legislatively-
mandated, one-time assessment levied by the FDIC on all SAIF-insured
institutions to recapitalize the SAIF. Without this assessment, which
amounted to $875,000 ($571,000 after tax) and was accrued during the three
months ended September 30, 1996, net income would have been $969,000 for
the three months ended September 30, 1996.
Net Interest Income. Net interest income remained stable at $2.4
million for both the three months ended September 30, 1996 and 1997.
Total interest income increased 5.3% from $4.3 million for the
three months ended September 30, 1996 to $4.6 million for the three months
ended September 30, 1997 primarily as a result of an increase in the
average balance of loans receivable, net, from $174.8 million to $192.6
million as a result of increased loan demand. The average yield earned on
loans receivable, net, decreased from 9.66% for the three months ended
September 30, 1996 to 9.10% for the three months ended September 30, 1997
primarily because of a decline in market interest rates and an increase in
the balance of nonaccrual loans. See "-- Nonperforming Assets and
Delinquencies" and "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Nonperforming Assets and Delinquencies."
Total interest expense increased 10.4% from $1.9 million for the
three months ended September 30, 1996 to $2.1 million for the three months
ended September 30, 1997 primarily as a result of an increase in the
average balance of deposit from $150.3 million to $161.6 million.
(xiv)
Interest rate spread decreased from 4.63% for the three months
ended September 30, 1996 to 4.20% for the three months ended September 30,
1997 primarily as a result of declining market interest rates and the
effect of nonaccrual loan balances during the three months ended September
30, 1997.
Provision for Loan Losses. The provision for loan losses
increased from $25,000 for the three months ended September 30, 1996 to
$263,000 for the three months ended September 30, 1997. Management
increased the provision as a result of a change in the loan mix (as
quantified by its quarterly analysis of allowance for loan losses) to
include a larger percentage of non-residential mortgage loans, which are
inherently riskier than one-to-four family mortgage loans, as well as its
evaluation of non-performing loans at September 30, 1997.
The Savings Bank conducts a risk weighted analysis of its loan
portfolio quarterly to determine the adequacy of the allowance for loan
losses. Each loan is assigned, by type, to one of 18 categories and each
category is subdivided by classification (pass, special mention,
substandard or loss). The resulting groupings of loans are assigned a high
and low reserve factor to establish a range of reserves within which the
allowance for loan losses must reside. At September 30, 1997, the
calculated reserve range was between $774,000 and $3.0 million. General
loan loss reserves were near the desired midpoint of the range at $1.7
million at September 30, 1997 and, in management's opinion, were adequate
to provide for estimated losses based on an evaluation of known and
inherent risks in the loan portfolio at that date. Management considered
the likelihood of losses in excess of $1.7 million to be remote at
September 30, 1997.
Changes in the portfolio mix and the level of nonperforming loans
affect the calculated reserve range. Reserve factors are assigned based on
a loan's risk profile and classification level. The four nonperforming
loans described under "BUSINESS OF THE SAVINGS BANK -- Lending Activities
-- Nonperforming Assets and Delinquencies" added $188,000 and $866,000 to
the high and low ends, respectively, of the calculated reserve range at
September 30, 1997.
Management deemed the allowance for loan losses adequate at
September 30, 1997. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 37.4%
from $174,000 for the three months ended September 30, 1996 to $239,000 for
the three months ended September 30, 1997. The increase resulted primarily
from increases in automated teller machine ("ATM") transaction fees and
normal increases in other income categories.
Noninterest Expense. Total noninterest expense decreased 31.8%
from $2.0 million for the three months ended September 30, 1996 to $1.4
million for the three months ended September 30, 1997 primarily as a result
of the one-time SAIF assessment fee accrued during the three months ended
September 30, 1996. Salaries and employee benefits increased from $642,000
to $751,000 and premises and fixed assets expense increased from $133,000
to $204,000, both as a result of the opening of the South Hill and Lacey
branch offices. Noninterest expense can be expected to increase in
subsequent periods following the consummation of the Conversion as a result
of increased costs associated with operating as a public company and
increased compensation expense as a result of the adoption of the ESOP and,
if approved by the Holding Company's stockholders, the MRP. See "RISK
FACTORS -- Return on Equity After Conversion" and "-- New Expenses
Associated With ESOP and MRP."
Provision for Income Taxes. The provision for income taxes
increased from $203,000 for the three months ended September 30, 1996 to
$397,000 for the three months ended September 30, 1997 as a result of
higher income before income taxes.
Comparison of Operating Results for the Years Ended September 30, 1996 and
1997
Net Income. Net income increased 24.3% from $2.7 million for the
year ended September 30, 1996 to $3.3 million for the year ended September
30, 1997 primarily as a result of the legislatively-mandated, one-time
assessment levied by the FDIC on all SAIF-insured institutions to
recapitalize the SAIF. Without this assessment,
(xv)
which amounted to $875,000 ($571,000 after tax) and was accrued during the
year ended September 30, 1996, net income would have been $3.2 million for
the year ended September 30, 1996.
Net Interest Income. Net interest income increased from $8.9
million for the year ended September 30, 1996 to $9.6 million for the year
ended September 30, 1997 as a result of total interest income increasing
more than interest expense.
Total interest income increased 8.8% from $16.5 million for the
year ended September 30, 1996 to $17.9 million for the year ended September
30, 1997 primarily as a result of an increase in the average balance of
loans receivable, net, from $168.0 million to $188.7 million as a result of
increased loan demand. The average yield earned on loans receivable, net,
decreased from 9.45% for year ended September 30, 1996 to 9.23% for the
year ended September 30, 1997 primarily because of a decline in market
interest rates and an increase in the balance of nonaccrual loans. See "--
Nonperforming Assets and Delinquencies" and "BUSINESS OF THE SAVINGS BANK
-- Lending Activities -- Nonperforming Assets and Delinquencies."
Total interest expense increased 9.9% from $7.6 million for the
year ended September 30, 1996 to $8.4 million for the year ended September
30, 1997 primarily as a result of an increase in the average balance of
deposit accounts from $144.4 million to $154.9 million.
The interest rate spread decreased from 4.34% for the year ended
September 30, 1996 to 4.18% for the year ended September 30, 1997 primarily
as a result of declining market interest rates and the effect of deposit
account promotions associated with the opening of the South Hill and Lacey
branch offices. The Savings Bank also increased rates on deposit accounts
in response to increased competition, which also contributed to the
reduction in the interest rate spread.
Provision for Loan Losses. The provision for loan losses
increased from $70,000 for the year ended September 30, 1996 to $597,000
for the year ended September 30, 1997. Based on the previously discussed
risk weighted analysis performed quarterly by management, management
increased the provision as a result of a change in the loan mix to include
a larger percentage of non-residential mortgage loans, which are inherently
riskier than one-to-four family mortgage loans, as well as its evaluation
of nonperforming loans at September 30, 1997. Management deemed the
allowance for loan losses adequate at September 30, 1997. See "BUSINESS OF
THE SAVINGS BANK -- Lending Activities -- Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 37.0%
from $654,000 for the year ended September 30, 1996 to $896,000 for the
year ended September 30, 1997. The increase resulted primarily from the
recognition of mortgage loan servicing income in accordance with Statement
of Financial Institutions Accounting Standards ("SFAS") No. 125 beginning
in January 1997 and normal increases in other income categories. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of New Accounting Pronouncements."
Noninterest Expense. Total noninterest expense decreased 6.5%
from $5.4 million for the year ended September 30, 1996 to $5.0 million for
the year ended September 30, 1997 primarily as a result of the one-time
SAIF assessment fee accrued during fiscal 1996. Salaries and employee
benefits increased from $2.5 million to $2.9 million and premises and fixed
assets expense increased from $554,000 to $723,000, both as a result of the
opening of the South Hill and Lacey branch offices.
Provision for Income Taxes. The provision for income taxes
increased from $1.4 million for the year ended September 30, 1996 to $1.8
million for the year ended September 30, 1997 as a result of higher income
before income taxes. The effective tax rate was 34.6% in fiscal 1996 and
35.5% in fiscal 1997.
(xvi)
Subsequent Events
On October 29, 1997, the Savings Bank accepted a deed in lieu of
foreclosure for the condominium loans described under "BUSINESS OF THE
SAVINGS BANK -- Lending Activities -- Nonperforming Assets and
Delinquencies." The acceptance of the deed in lieu of foreclosure reduced
the balance of nonaccrual loans at September 30, 1997 by $2.9 million. The
Savings Bank has ordered an independent appraisal of the condominium
project to substantiate the market value of the condominium units. The
Savings Bank intends to place the condominium units for sale with a broker
specializing in the marketing of condominium properties. Sixteen of the
condominium units are in final finishing stage. Taking into account the
anticipated costs to finish these units, the Savings Bank does not expect
to incur any material losses in connection with the disposition of the
property based on a recent assessment of the property that indicated a
market value of approximately $3.6 million on a finished basis.
(xvii)
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented
below, in addition to matters discussed elsewhere in this Prospectus.
Certain Lending Risks
General. At June 30, 1997, the Savings Bank's nonperforming loans
amounted to $8.0 million, of which $5.8 million represented four loans (two
construction and land development loans and two commercial real estate
loans). See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Nonperforming Assets and Delinquencies" and "RECENT DEVELOPMENTS --
Subsequent Events."
Risks of Construction and Land Development Lending. At June 30, 1997,
construction and land development loans totalled $44.7 million, or 21.9%,
of the total loan portfolio. The majority of the construction loans were
secured by one- to four-family residences. These loans afford the Savings
Bank the opportunity to achieve higher interest rates and fees with shorter
terms to maturity than do its one- to- four family mortgage loans; however,
construction and land loans are generally considered to involve a higher
degree of risk than one- to- four family mortgage lending because of (i)
the increased difficulty at the time the loan is made of accurately
estimating total building costs and the eventual selling price of the
residence to be built, (ii) the increased difficulty and costs of
monitoring the loan, (iii) the higher degree of sensitivity to increases in
market rates of interest, and (iv) the increased difficulty of working out
problem loans. Speculative construction loans have the added risk
associated with identifying an end-purchaser for the finished home. At
June 30, 1997, nonperforming construction and land development loans were
$4.0 million compared to $771,000 at September 30, 1996. See "BUSINESS OF
THE SAVINGS BANK -- Lending Activities -- Nonperforming Assets and
Delinquencies."
Construction loans are more difficult to evaluate for potential loss
exposure than are permanent loans. At the time the loan is made, the value
of the collateral securing the loan must be estimated on the basis of a
projected selling price for the completed residence, which is typically not
established until six to 12 months later, and correlated with the estimated
building and other costs (including interest costs). Changes in the demand
for new housing in the area and higher-than-anticipated building costs may
cause actual results to vary significantly from those estimated.
Accordingly, the Savings Bank may be confronted, at the time the residence
is completed, with a loan balance exceeding the value of the collateral.
Because construction loans require active monitoring of the building
process, including cost comparisons and on-site inspections, these loans
are more difficult and costly to monitor. Increases in market rates of
interest may have a more pronounced effect on construction loans by rapidly
increasing the end-purchasers' borrowing costs, thereby reducing the
overall demand for new housing. Additionally, working out of problem
construction loans is complicated by the fact that in-process homes are
difficult to sell and typically must be completed in order to be sold
successfully. This may require the Savings Bank to advance additional funds
and contract with another builder to complete the residence.
Land development loans secured by land under development or improved
lots involve greater risks than one-to- four family residential mortgage
loans because such loans are advanced upon the predicted future value of
the developed property. If the estimate of such future value proves to be
inaccurate, in the event of default and foreclosure the Savings Bank may be
confronted with a property the value of which is insufficient to assure
full repayment.
The Savings Bank has sought to address the foregoing risks of its
construction and land development lending by developing and adhering to
underwriting policies, disbursement procedures, and monitoring practices.
Specifically, the Savings Bank (i) seeks to diversify loans among several
market areas, (ii) evaluates and documents the creditworthiness of the
borrower and the viability of the proposed project, (iii) limits loan-to-
value ratios to specified levels, (iv) controls the disbursements of
construction loan proceeds on the basis of on-site inspections by Savings
Bank personnel and independent fee inspectors and (v) monitors economic
conditions and housing inventory
1
in each market. No assurances, however, can be given that these practices
will be successful in mitigating the risks of construction and land
development lending.
Risks of Commercial Real Estate and Multi-Family Lending. At June 30,
1997, the Savings Bank's loan portfolio included commercial real estate
loans totalling $28.9 million, or 14.1% of total loans and multi-family
loans totalling $12.6 million or 6.2% of total loans. Commercial real
estate and multi-family loans are generally viewed as exposing the lender
to greater credit risk than one-to four-family residential loans and
typically involve higher loan principal amounts. Repayment of these loans
generally is dependent, in large part, on sufficient income from the
property to cover operating expense and debt service. Economic events and
government regulations, which are outside the control of the borrower or
lender, could impact the value of the security for such loans or the future
cash flow of the affected properties. Approximately $18.4 million, or
63.7%, of the Savings Bank's commercial real estate and multi-family loans
are secured by properties located in King, Pierce and Thurston Counties.
At June 30, 1997, nonperforming commercial real estate loans were $2.9
million, compared to none at September 30, 1996. See "BUSINESS OF THE
SAVINGS BANK -- Lending Activities" and "-- Nonperforming Assets and
Delinquencies."
Risks of Non-Conforming Residential Mortgage Lending. The Savings
Bank actively originates adjustable rate mortgage loans that do not conform
or satisfy the requirements for sale in the secondary market. These loans
are secured by one-to four-family properties located in the Savings
Bank's primary market area and are originated, in many instances, when the
borrower's credit profile, or some aspect of the security property, do not
meet secondary market guidelines. The Savings Bank is not able to readily
quantify the aggregate dollar amount of these loans outstanding.
Because the Savings Bank retains in its portfolio the non-conforming
loans that it originates, such loans expose the Savings Bank to additional
risk or default by the borrower because the Savings Bank cannot readily
transfer the credit risk to a third party by sale of the loan. Additional
credit risk is incurred if the reason for the non-conforming classification
is a borrower's substandard credit profile. The rates of delinquencies,
foreclosures and losses on non-conforming loans could be higher under
adverse economic conditions than on loans to conventional mortgage loan
borrowers. To offset the additional risks of non-conforming loans, the
Savings Bank may require a lower loan-to-value ratio, a co-signer and/or
other compensating factors. The Savings Bank believes that the
underwriting procedures and appraisal processes it employs enable it to
mitigate the higher risks inherent in non-conforming lending, however, no
assurance can be given that such procedures or processes will afford
adequate protection against such risks.
Potential Adverse Impact of Changes in Interest Rates
The financial condition and operations of the Savings Bank, and of
savings institutions in general, are influenced significantly by general
economic conditions, by the related monetary and fiscal policies of the
federal government and by the regulations of the Division, the FDIC and the
Federal Reserve. Deposit flows and the cost of funds are influenced by
interest rates of competing investments and general market rates of
interest. Lending activities are affected by the demand for mortgage
financing and for consumer and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and
by other factors affecting the supply of housing and the availability of
funds.
The Savings Bank's profitability is substantially dependent on its net
interest income, which is the difference between the interest income
received from its interest-earning assets and the interest expense incurred
in connection with its interest-bearing liabilities. When an institution's
interest-bearing liabilities exceed its interest-earning assets which
mature within a given period of time, material and prolonged increases in
interest rates generally would adversely affect net interest income, while
material and prolonged decreases in interest rates generally would have a
favorable effect on net interest income.
Changes in interest rates can affect the amount of loans originated by
an institution, as well as the value of its loans and other interest-
earning assets and the resultant ability to realize gains on the sale of
such assets. Changes
2
in interest rates also can result in disintermediation, which is the flow
of funds away from savings associations into direct investments, such as
U.S. Government and corporate securities, and other investment vehicles
which, because of the absence of federal insurance premiums and reserve
requirements, generally can pay higher rates of return than financial
intermediaries such as commercial banks and thrift institutions. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management and Interest Rate Risk."
Return on Average Equity After Conversion
Return on average equity (net income for a given period divided by
average equity during that period) is a ratio used by many investors to
compare the performance of a particular financial institution to its peers.
The Holding Company's post-Conversion return on equity will be less than
the return on average equity for publicly traded thrift institutions and
their holding companies. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
for numerical information regarding the Savings Bank's historical return on
equity and "CAPITALIZATION" for a discussion of the Holding Company's
estimated pro forma consolidated capitalization as a result of the
Conversion. In order for the Holding Company to achieve a return on
average equity comparable to the historical levels of the Savings Bank, the
Holding Company either would have to increase net income or reduce
stockholders' equity, or both, commensurate with the increase in equity
resulting from the Conversion. Reductions in equity could be achieved by,
among other things, the payment of regular or special cash dividends
(although no assurances can be given as to their payment or, if paid, their
amount and frequency), the repurchase of shares of Common Stock subject to
applicable regulatory restrictions, or the acquisition of branch offices,
other financial institutions or related businesses (neither the Holding
Company nor the Savings Bank has any present plans, arrangements, or
understandings, written or oral, regarding any repurchase or acquisitions).
Achievement of increased net income levels will depend on several important
factors outside management's control, such as general economic conditions,
including the level of market interest rates, competition and related
factors, among others. In addition, the expenses associated with the ESOP
and the MRP (see "-- New Expenses Associated with ESOP and MRP") are
expected to contribute initially to reduced earnings levels. Subject to
market conditions, initially the Savings Bank intends to deploy the net
proceeds of the Offerings to support its current lending and investment
activities to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity
comparable to the average for publicly traded thrift institutions and their
holding companies. This goal will likely take a number of years to achieve
and no assurances can be given that this goal can be attained.
Consequently, for the foreseeable future, investors should not expect a
return on equity which will meet or exceed the average return on equity for
publicly traded thrift institutions, many of which are not newly converted
institutions and have had time to deploy their conversion capital. See
"DIVIDEND POLICY" and "USE OF PROCEEDS."
Market Area Risk
The Savings Bank has been and intends to continue as a community
oriented financial institution, with a focus on serving customers in Grays
Harbor, Thurston, Pierce and King Counties, Washington and, to a lesser
extent, in adjoining Kitsap County. At June 30, 1997, most of the Savings
Bank's loan portfolio consisted of loans collateralized by properties
located in this market area. The Savings Bank has attempted to establish a
niche in this market area by originating owner/builder and custom
construction loans, particularly in Thurston, Pierce, King and Kitsap
Counties.
The Savings Bank considers its primary market area to include three
submarkets, each with its own risk characteristics. Grays Harbor County is
the Savings Bank's historical market area and its economy is based
primarily on the timber and fishing industries, which are subject to more
frequent and more severe recessionary periods. Secondly, Ocean Shores is a
coastal resort community in western Grays Harbor County whose economy
depends heavily on tourism and vacation home residents. A recession
typically affects a tourism and vacation based economy more significantly
than other economies. Finally, in order to diversify its market area
beyond Grays Harbor County, the Savings Bank has established branch offices
in Thurston, Pierce and King Counties and a loan production office in
Kitsap County. These counties are closer to the Olympia (Thurston County),
Tacoma (Pierce County) and Seattle
3
(King County) metropolitan areas and their economies are more diversified
with the presence of state government (Olympia is the state capital) and
the aerospace and computer industries. Workforce reductions in state
government and/or a recession in the computer and aerospace industries
would be expected to have a material adverse effect on the economies of
Thurston, Pierce, King and Kitsap Counties. See "BUSINESS OF THE SAVINGS
BANK -- Market Area."
Dependence on Key Personnel
The Holding Company's and the Savings Bank's future performance will
depend significantly upon the performance of key executive officers in
implementing future business strategy, the loss of one or more of whom
could have a material adverse effect on the Holding Company's and the
Savings Bank's operations. Mr. Hamre, President and Chief Executive Officer
of the Savings Bank since 1969, and Mr. Sand, affiliated with the Savings
Bank since 1997 and the Executive Vice President of the Savings Bank since
1986, have made significant policy decisions and have been instrumental in
implementing the policies and procedures established by the Savings Bank's
Board of Directors. Although the Board of Directors believes that other
officers of the Savings Bank are fully experienced and capable, the loss of
Messrs. Hamre's or Sand's services could have a material adverse impact on
the Holding Company and the Savings Bank. Management believes that the
future success of the Holding Company and the Savings Bank will also depend
significantly upon the ability to attract and retain qualified personnel.
There can be no assurance that the Holding Company and the Savings Bank
will be successful in attracting and retaining such personnel. See
"MANAGEMENT OF THE SAVINGS BANK."
Competition
The Savings Bank has faced, and will continue to face, strong
competition both in making loans and attracting deposits. Competition for
loans principally comes from commercial banks, thrift institutions and
mortgage banking companies. Historically, commercial banks, thrift
institutions and credit unions have been the Savings Bank's most direct
competition for deposits. The Savings Bank also competes with short-term
money market funds and with other financial institutions, such as brokerage
firms and insurance companies for deposits. In competing for loans, the
Savings Bank may be forced to offer lower loan interest rates. Conversely,
in competing for deposits, the Savings Bank may be forced to offer higher
deposit interest rates. Either case or both cases could adversely affect
net interest income. See "BUSINESS OF THE SAVINGS BANK -- Competition."
New Expenses Associated With ESOP and MRP
The Savings Bank expects to recognize additional material employee
compensation and benefit expenses associated with the implementation of the
ESOP and the MRP. The actual aggregate amount of these new expenses cannot
be currently predicted because applicable accounting practices require that
they be based on the fair market value of the shares of Common Stock when
the expenses are recognized, which would occur when shares are committed to
be released in the case of the ESOP and over the vesting period of awards
made to recipients in the case of the MRP. These expenses have been
reflected in the pro forma financial information under "PRO FORMA DATA"
assuming the Purchase Price ($10.00 per share) as fair market value.
Actual expenses, however, will be based on the fair market value of the
Common Stock at the time of recognition, which may be higher or lower than
the Purchase Price. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements
and Regulatory Policies -- Accounting for Employee Stock Ownership Plans,"
"-- Accounting for Stock-Based Compensation," "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock Ownership Plan" and "-- Benefits --
Management Recognition Plan."
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and
Washington and Federal Law. Certain provisions included in the Holding
Company's Articles of Incorporation and in the Washington Business
Corporation, as amended ("WBCA") might discourage potential proxy contests
and other potential takeover attempts,
4
particularly those that have not been negotiated with the Board of
Directors. As a result, these provisions may preclude takeover attempts
that certain stockholders may deem to be in their best interest and may
tend to perpetuate existing management. These provisions include, among
other things, a provision limiting voting rights of beneficial owners of
more than 10% of the Common Stock and supermajority voting requirements for
certain business combinations. In addition, the Articles of Incorporation
provides for the election of directors to staggered terms of three years,
eliminates cumulative voting for directors, and permits the removal of
directors without cause only upon the vote of holders of 80% of the
outstanding voting shares. Certain provisions of the Articles of
Incorporation of the Holding Company cannot be amended by stockholders
unless an 80% stockholder vote is obtained. The Articles of Incorporation
also contains provisions regarding the timing and content of stockholder
proposals and nominations and limiting the calling of special meetings. The
existence of these anti-takeover provisions could result in the Holding
Company being less attractive to a potential acquiror and in stockholders
receiving less for their shares than otherwise might be available in the
event of a takeover attempt. Furthermore, regulations prohibit for three
years after consummation of the Conversion and Reorganization the ownership
of more than 10% of the Savings Bank or the Holding Company without prior
Division approval. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
Voting Control by Insiders. Directors and officers of the Savings
Bank and the Holding Company expect to purchase 281,250 shares of Common
Stock, or 4.9% of the shares issued in the Offerings at the maximum of the
Estimated Valuation Range. Directors and officers are also expected to
indirectly control the voting of approximately 8% of the shares of Common
Stock issued in the Conversion at the maximum of the Estimated Valuation
Range, through the ESOP. Under the terms of the ESOP, the unallocated
shares will be voted by the ESOP trustees in the same proportion as the
votes cast by participants with respect to the allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company intends
to seek stockholder approval of the Holding Company's MRP, which is a non-
tax-qualified restricted stock plan for the benefit of key employees and
directors of the Holding Company and the Savings Bank. Assuming the
receipt of stockholder approval, the Holding Company expects to acquire
common stock of the Holding Company on behalf of the MRP in an amount equal
to 4% of the Common Stock issued in the Conversion, or 230,000 shares at
the maximum of the Estimated Valuation Range. These shares will be
acquired either through open market purchases or from authorized but
unissued Common Stock. Under the terms of the MRP, the MRP committee or
the MRP trustees will have the power to vote unallocated and unvested
shares. In addition, the Holding Company intends to reserve for future
issuance pursuant to the Stock Option Plan a number of authorized shares of
Common Stock equal to 10% of the Common Stock issued in the Conversion
(575,000 shares at the maximum of the Estimated Valuation Range). The
Holding Company also intends to seek approval of the Stock Option Plan at a
meeting of stockholders to be held no earlier than six months following the
consummation of the Conversion.
Assuming (i) the purchase of 281,250 shares of Common Stock by
officers and directors of the Savings Bank in the Conversion, (ii) the
receipt of stockholder approval for the MRP and the Stock Option Plan,
(iii) the open market purchase of shares on behalf of the MRP, (iv) the
purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(v) the exercise of stock options equal to 10% of the number of shares of
Common Stock issued in the Conversion (with the option shares issued from
authorized but unissued shares), directors, officers and employees of the
Holding Company and the Savings Bank would have voting control, on a fully
diluted basis, of 24.45% of the Common Stock, based on the issuance of the
maximum of the Estimated Valuation Range. Management's potential voting
control could, together with additional stockholder support, preclude or
make more difficult takeover attempts that certain stockholders deem to be
in their best interest and may tend to perpetuate existing management.
Possible Dilutive Effect of Benefit Programs
The MRP intends to acquire an amount of Common Stock of the Holding
Company equal to 4% of the shares issued in the Conversion. Such shares of
Common Stock of the Holding Company may be acquired by the
5
Holding Company either in the open market or from authorized but unissued
shares of Common Stock of the Holding Company, or a combination of both. In
the event that the MRP acquires authorized but unissued shares of Common
Stock from the Holding Company, the voting interests of existing
stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "PRO FORMA DATA" and "MANAGEMENT OF
THE SAVINGS BANK -- Benefits -- Management Recognition Plan." The MRP is
subject to approval by the Holding Company's stockholders.
The Stock Option Plan will provide for options for up to a number of
shares of Common Stock of the Holding Company equal to 10% of the shares
issued in the Conversion. Such shares may be authorized but unissued
shares of Common Stock of the Holding Company and, upon exercise of the
options, will result in the dilution of the voting interests of existing
stockholders and may decrease net income per share and stockholders' equity
per share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock
Option Plan." The Stock Option Plan is subject to approval by the Holding
Company's stockholders.
Assuming the MRP and Stock Option Plan are funded entirely with
authorized but unissued shares from the Holding Company, the voting
interests of stockholders would be diluted by 12.3% at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range, respectively. If the ESOP is not able to purchase 8% of the shares
of Common Stock issued in the Conversion as a result of an
oversubscription, FDIC policy prohibits the Holding Company from funding
the ESOP with newly issued shares. Accordingly, the ESOP would not have a
dilutive effect on the voting interests of stockholders.
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding
Company has received conditional approval to list the Common Stock on
National Market System of the Nasdaq Stock Market under the symbol "TSBK,"
there can be no assurance that an active and liquid trading market for the
Common Stock will develop, or once developed, will continue. Furthermore,
there can be no assurance that purchasers will be able to sell their shares
at or above the Purchase Price. See "MARKET FOR COMMON STOCK."
No Recommendation by Financial Adviser
The Holding Company and the Savings Bank have engaged Webb to consult
with and advise them with respect to the Conversion and to assist, on a
best-efforts basis, in the solicitation of subscriptions and purchase
orders for shares of Common Stock in the Offerings. Webb has not prepared
or delivered any opinion or recommendation with respect to the investment
suitability of the Common Stock or the appropriateness of the independent
appraisal prepared by RP Financial. Accordingly, Webb's engagement should
not be construed by prospective investors in the Common Stock as
constituting an opinion or recommendation relating to the Common Stock or
as a verification of the accuracy or completeness of the information
contained in this Prospectus.
Possible Increase in Estimated Valuation Range and Number of Shares Issued
The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the
Savings Bank or changes in market conditions or general financial, economic
or regulatory conditions following the commencement of the Offerings. If
the Estimated Valuation Range is increased, it is expected that the Holding
Company would increase the Estimated Price Range so that up to 6,612,500
shares of Common Stock at the Purchase Price would be issued for an
aggregate price of up to $66.1 million. This increase in the number of
shares would decrease a subscriber's pro forma net income per share and
stockholders' equity per share, increase the Holding Company's pro forma
consolidated stockholders' equity and net income, and increase the Purchase
Price as a percentage of pro forma stockholders' equity per share and net
earnings per share. See "PRO FORMA DATA."
6
Risk of Delayed Offering
The Holding Company and the Savings Bank expect to complete the
Conversion within the time periods indicated in this Prospectus.
Nevertheless, it is possible, although not anticipated, that there could be
a significant delay in the completion of the Conversion as a result of
delays in receiving approval of the Conversion by the Division, a notice of
non-objection to the Conversion from the FDIC or the approval of the
Federal Reserve of the Holding Company's acquisition of the Savings Bank.
If the Conversion is not completed by ________ __, 1998 (45 days after the
last day of the fully extended Subscription Offering) and the Division
consents to an extension of time to complete the Conversion, subscribers
will be given the right to modify or rescind their subscriptions. In such
event, unless an affirmative indication is received from subscribers that
they wish to continue to subscribe for shares, their funds will be returned
promptly, together with interest at the Savings Bank's passbook rate, or
their withdrawal authorizations will be terminated.
Potential Operating Restrictions Associated with Regulatory Oversight
The Savings Bank is, and the Holding Company upon consummation of the
Conversion will be, subject to extensive government regulation and
oversight. Such regulation and supervision govern the activities in which
an institution can engage and is designed primarily to protect the federal
deposit insurance fund and depositors. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operation of an
institution, the classification of assets by the institution and the
determination of the adequacy of an institution's allowance for loan
losses. The Holding Company will also be subject to regulatory restrictions
governing stock repurchases and distributions to shareholders in the form
of tax-free returns of capital. See "USE OF PROCEEDS" and "REGULATION."
Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank
are deemed to have an ascertainable value, receipt of such rights may be a
taxable event (either as capital gain or ordinary income), which may be
recognizable by all or only by those Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members who exercise the Subscription
Rights (either as capital gain or ordinary income) in an amount equal to
such value. Additionally, the Savings Bank could be required to recognize
a gain for tax purposes on such distribution. Whether Subscription Rights
are considered to have ascertainable value is an inherently factual
determination. The Savings Bank has been advised by RP Financial that such
rights have no value; however, RP Financial's conclusion is not binding on
the Internal Revenue Service ("IRS"). See "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Savings Bank --
Tax Effects."
TIMBERLAND BANCORP, INC.
The Holding Company was organized as a Washington corporation at the
direction of the Savings Bank on September 8, 1997 to acquire all of the
outstanding capital stock of the Savings Bank to be issued upon its
Conversion. The Holding Company has filed an application with the Federal
Reserve and the Division to become a bank holding company and for approval
to acquire the Savings Bank. Prior to the Conversion, the Holding Company
will not engage in any significant operations. After the Conversion, the
Holding Company will be classified as a one-bank holding company subject to
regulation by the Division and the Federal Reserve, and its principal
business will be the ownership of the Savings Bank. Immediately following
the Conversion, the only significant assets of the Holding Company will be
the capital stock of the Savings Bank, that portion of the net proceeds of
the Offerings to be retained by the Holding Company and a note receivable
from the ESOP evidencing a loan from the Holding Company to fund the
Savings Bank's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
7
The holding company structure will permit the Holding Company to
expand the financial services currently offered through the Savings Bank.
Management believes that the holding company structure and retention of a
portion of the proceeds of the Offerings will, should it decide to do so,
facilitate the repurchase of its stock without adverse tax consequences.
There are no present plans, arrangements, agreements, or understandings,
written or oral, regarding any such repurchases. See "REGULATION -- The
Holding Company."
TIMBERLAND SAVINGS BANK, SSB
The Savings Bank was established in 1915 as "Southwest Washington
Savings and Loan Association." In 1935, the Savings Bank converted from a
state-chartered mutual savings and loan association to a federally
chartered mutual savings and loan association, and in 1972, changed its
name to "Timberland Federal Savings and Loan Association." In 1990, the
Savings Bank converted to a federally-chartered mutual savings bank under
the name "Timberland Savings Bank, FSB." In 1991, the Savings Bank
converted to a Washington-chartered mutual savings bank and adopted its
current name. In connection with the mutual to stock conversion, the
Savings Bank will convert to a Washington-chartered capital stock savings
bank and will become a subsidiary of the Holding Company. The Savings Bank
is regulated by the Division, its primary regulator, and the FDIC, the
insurer of its deposits. The Savings Bank's deposits are federally insured
by the FDIC under the SAIF. The Savings Bank is a member of the FHLB
System. At June 30, 1997, the Savings Bank had total assets of $206.2
million, total deposit accounts of $167.1 million and total capital of
$23.9 million, or 11.6% of total assets, on a consolidated basis.
The Savings Bank is a community oriented savings bank which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including an emphasis
on residential construction and land development loans, as well as the
origination of multi-family and commercial real estate loans. The Savings
Bank actively originates adjustable rate residential mortgage loans that do
not qualify for sale in the secondary market under FHLMC guidelines. At
June 30, 1997, the Savings Bank's gross loan portfolio totaled $204.6
million, of which $100.1 million, or 48.9%, were one- to four-family
residential mortgage loans, $44.7 million, or 21.9%, were construction and
land development loans (the majority of which related to one- to four-
family residences), and $41.5 million, or 20.3%, were multi-family or
commercial real estate loans. Construction and commercial real estate
loans generally involve a greater risk of loss than one- to- four family
mortgage loans. See "RISK FACTORS -- Certain Lending Risks."
The Savings Bank also invests in short- to- intermediate term U.S.
Treasury securities and U.S. Government agency obligations, and mortgage-
backed securities issued by U.S. Government agencies. At June 30, 1997,
the Savings Bank's investment and mortgage-backed securities portfolio had
a carrying value of $5.7 million. See "BUSINESS OF THE SAVINGS BANK --
Investment Securities."
Deposits have been the primary source of funds for the Savings Bank's
investment and lending activities. The Savings Bank plans to continue to
fund its operations primarily with deposits, although advances from the
FHLB-Seattle have been used as a supplemental source of funds. See
"BUSINESS OF THE SAVINGS BANK -- Deposits and Other Sources of Funds."
The Savings Bank's primary market area is comprised of Grays Harbor,
Thurston, Pierce and King Counties, Washington. The Savings Bank also
originates loans in adjoining Kitsap County, Washington. The Savings
Bank's main office is located at 624 Simpson Avenue, Hoquiam, Washington
98550, and its telephone number is (360) 533-4747. See "BUSINESS OF THE
SAVINGS BANK -- Market Area."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $41.5 million to $56.5 million, or up to $65.2
million if the Estimated Valuation Range is increased by 15%. See "PRO
FORMA DATA" for the assumptions used to arrive at such amounts. The
Holding Company plans to contribute to
8
the Savings Bank 50% of the net proceeds from the sale of the Common Stock
to the Savings Bank in exchange for all of the issued and outstanding
shares of common stock of the Savings Bank, and retain the remaining net
proceeds. This will result in the Holding Company retaining approximately
$20.8 million to $28.3 million of net proceeds, or up to $32.6 million if
the Estimated Valuation Range is increased by 15%, and the Savings Bank
receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of
the Savings Bank's existing business activities. The Savings Bank will use
the funds contributed to it for general corporate purposes, including,
initially, local lending, investment in short term U.S. government and
agency obligations and the possible repayment of outstanding FHLB advances.
The Savings Bank may also use a portion of the net proceeds contributed to
it to acquire or establish additional branch offices within its primary
market area. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any additional
branching activities.
In connection with the Conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to
purchase 8% of the shares sold in the Conversion. The Holding Company's
loan to fund the ESOP may range from $3.4 million to $4.6 million based on
the sale of 340,000 shares to the ESOP (at the minimum of the Estimated
Valuation Range) and 460,000 shares (at the maximum of the Estimated
Valuation Range), respectively, at $10.00 per share. If 15% above the
maximum of the Estimated Valuation Range, or 6,612,500 shares, are sold in
the Conversion, the Holding Company's loan to the ESOP would be
approximately $5.3 million. It is anticipated that the ESOP loan will have
a 10-year term with interest payable at the prime rate as published in The
Wall Street Journal on the closing date of the Conversion. The loan will be
repaid principally from the Savings Bank's contributions to the ESOP and,
if appropriate, from dividends payable on the Common Stock.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short term U.S. government and agency
obligations. Such proceeds will be available for additional contributions
to the Savings Bank in the form of debt or equity, to support possible
future diversification or acquisition activities, as a source of dividends
to the stockholders of the Holding Company and for future repurchases of
Common Stock to the extent permitted under Washington law and federal
regulations. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any such
activities.
Upon completion of the Conversion, the Board of Directors will have
the authority to adopt stock repurchase plans, subject to statutory and
regulatory requirements. Since the Holding Company has not yet issued
stock, there is currently insufficient information upon which an intention
to repurchase stock could be based. The facts and circumstances upon which
the Board of Directors may determine to repurchase stock in the future may
include but are not limited to: (i) market and economic factors such as the
price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the
book value and/or earnings per share of the remaining outstanding shares,
and the ability to improve the Holding Company's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional
shares to cover the exercise of stock options or to fund employee stock
benefit plans; and (iii) any other circumstances in which repurchases would
be in the best interests of the Holding Company and its stockholders. Any
stock repurchases will be subject to a determination by the Board of
Directors that both the Holding Company and the Savings Bank will be
capitalized in excess of all applicable regulatory requirements after any
such repurchases and that capital will be adequate, taking into account,
among other things, the level of nonperforming and other risk assets, the
Holding Company's and the Savings Bank's current and projected results of
operations and asset/liability structure, the economic environment and tax
and other regulatory considerations. See "REGULATION -- The Holding
Company -- Stock Repurchases."
The consolidated capital levels of the Holding Company will be
significant after the consummation of the Conversion as a result of the net
proceeds from the Offerings. See "RISK FACTORS -- Return on Equity after
Conversion," "CAPITALIZATION," and "HISTORICAL AND PRO FORMA CAPITAL
COMPLIANCE." In light
9
of such capital levels, the Holding Company may consider a possible post-
Conversion tax-free distribution to stockholders in the form of a return of
capital. However, there are no current plans regarding such a distribution
and the Holding Company has committed to the FDIC not to make any such
distribution within the first year following the consummation of the
Conversion.
DIVIDEND POLICY
General
The Board of Directors of the Holding Company will consider a
dividend policy following the consummation of the Conversion. Declarations
or payments of dividends, regular or special, will be subject to
determination by the Holding Company's Board of Directors, which will take
into account the amount of the net proceeds retained by the Holding
Company, the Holding Company's financial condition, results of operations,
tax considerations, capital requirements, industry standards, economic
conditions and other factors, including the regulatory restrictions which
affect the payment of dividends by the Savings Bank to the Holding Company
discussed below. No assurances can be given that any dividends will be
declared or, if declared, what the amount of dividends will be or whether
such dividends, once declared, will continue.
Current Regulatory Restrictions
Dividends from the Holding Company will depend, in part, upon receipt
of dividends from the Savings Bank because the Holding Company initially
will have no source of income other than dividends from the Savings Bank
and earnings from the investment of the net proceeds from the Conversion
retained by the Holding Company. Consequently, future declarations of cash
dividends by the Holding Company may depend upon dividend payments by the
Savings Bank to the Holding Company, which payments are subject to various
restrictions. As a converted institution, the Savings Bank also will be
subject to the regulatory restriction that it will not be permitted to
declare or pay a dividend on or repurchase any of its capital stock if the
effect thereof would be to cause its regulatory capital to be reduced below
the amount required for the liquidation account established in connection
with the Conversion. Under Washington law, the Holding Company is
prohibited from paying a dividend if, as a result of its payment, the
Holding Company would be unable to pay its debts as they become due in the
normal course of business, or if the Holding Company's total liabilities
would exceed its total assets. See "REGULATION -- The Savings Bank --
Dividends," "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Liquidation Account" and
Note 15 of Notes to the Consolidated Financial Statements included
elsewhere herein.
Tax Considerations
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax
purposes cannot be used by the Savings Bank to pay cash dividends to the
Holding Company without the payment of federal income taxes by the Savings
Bank at the then current income tax rate on the amount deemed distributed,
which would include the amount of any federal income taxes attributable to
the distribution. See "TAXATION -- Federal Taxation" and Note 11 of Notes
to the Consolidated Financial Statements included elsewhere herein. The
Holding Company does not contemplate any distribution by the Savings Bank
that would result in a recapture of the Savings Bank's bad debt reserve or
create the above-mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding
Company has received conditional approval to list the Common Stock on the
National Market System of the Nasdaq Stock Market under the symbol "TSBK,"
there can be no assurance that the Holding Company will meet Nasdaq
National Market System listing requirements, which include a minimum
10
market capitalization, at least three market makers and a minimum number of
record holders. Keefe, Bruyette has indicated its intention to act as a
market maker for the Holding Company's Common Stock following consummation
of the Conversion and will assist the Holding Company in seeking to
encourage at least two additional market makers to establish and maintain a
market in the Common Stock. Making a market involves maintaining bid and
ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities
laws and other regulatory requirements. The Holding Company anticipates
that prior to the completion of the Conversion it will be able to obtain
the commitment from at least two additional broker-dealers to act as market
maker for the Common Stock. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the
Savings Bank or any market maker. There can be no assurance that an active
and liquid trading market for the Common Stock will develop or that, if
developed, it will continue. The number of active buyers and sellers of the
Common Stock at any particular time may be limited. Under such
circumstances, investors in the Common Stock could have difficulty
disposing of their shares on short notice and should not view the Common
Stock as a short-term investment. Furthermore, there can be no assurance
that purchasers will be able to sell their shares at or above the Purchase
Price or that quotations will be available on the National Market System of
the Nasdaq Stock Market as contemplated.
11
CAPITALIZATION
The following table presents the historical deposits, borrowings and
capitalization of the Savings Bank at June 30, 1997, and the pro forma
consolidated capitalization of the Holding Company after giving effect to
the assumptions set forth under "PRO FORMA DATA," based on (i) the sale of
the number of shares of Common Stock set forth below in the Conversion at
the minimum, midpoint and maximum of the Estimated Valuation Range, and
based on (ii) the sale of 6,612,500 shares (representing the shares that
would be issued in the Conversion after giving effect to an additional 15%
increase in the maximum valuation in the Estimated Valuation Range, subject
to receipt of an updated appraisal confirming such valuation and Division
approval). A change in the number of shares to be issued in the Conversion
may materially affect pro forma consolidated capitalization.
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-----------------------------------------------------------
4,250,000 5,000,000 5,750,000 6,612,500
Shares at Shares at Shares at Shares at
Savings Bank $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
------------ -------------- -------------- -------------- --------------
(In thousands)
Deposits(3)......................... $167,140 $ 167,140 $ 167,140 $ 167,140 $ 167,140
ESOP borrowings(4).................. -- -- -- -- --
Borrowings.......................... 13,771 13,771 13,771 13,771 13,771
--------- ---------- ---------- ---------- ----------
Total deposits and borrowings....... $180,911 $ 180,911 $ 180,911 $ 180,911 $ 180,911
========= ========== ========== ========== ==========
Capital Stock:
Preferred Stock:
1,000,000 shares, $.01
par value per share,
authorized; none issued
or outstanding.................... $ -- -- -- -- --
Common Stock:
50,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5).................... -- 43 50 58 66
Additional paid-in capital......... -- 41,492 48,985 56,477 65,094
Less:
Common Stock acquired by ESOP(4).. -- (3,400) (4,000) (4,600) (5,290)
Common Stock to be
acquired by MRP(6)............... -- (1,700) (2,000) (2,300) (2,645)
Undivided profits(7)................ 23,866 23,866 23,866 23,866 23,866
--------- ---------- ---------- ---------- ----------
Total stockholders' equity.......... $ 23,866 $ 60,301 $ 66,901 $ 73,501 $ 81,091
========= ========== ========== ========== ==========
(footnotes on following page)
12
----------------------
(1) Does not reflect the possible increase in the Estimated Valuation Range
to reflect changes in market or financial conditions or the issuance of
additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding
Company in the event the aggregate number of shares of Common Stock
issued in the Conversion is 15% above the maximum of the Estimated
Valuation Range as a result of changes in market or financial
conditions. See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are
not reflected. Such withdrawals will reduce pro forma deposits by the
amounts thereof.
(4) Assumes that 8% of the Common Stock sold in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the
Holding Company. In accordance with generally accepted accounting
principles ("GAAP"), the amount of Common Stock to be purchased by the
ESOP represents unearned compensation and is, accordingly, reflected as
a reduction of capital. As shares are released to ESOP participant
accounts, a corresponding reduction in the charge against capital will
occur. Assuming shares of Common Stock appreciate in value over time,
Statement of Position ("SOP") 93-6 requires that compensation expense
be recorded based on the fair value of shares released with a
corresponding increase in paid in capital. The effect of SOP 93-6 on
net income and book value per share in future periods cannot be
predicted due to the uncertainty of the fair value of the shares of
Common Stock subsequent to their issue. Since the funds are borrowed
from the Holding Company, the borrowing would not be separately
reflected in the consolidated financial statements of the Holding
Company. On an unconsolidated basis, however, the outstanding principal
balance of the ESOP loan will be reflected as a liability on the
balance sheet of the Savings Bank, offset by a contra equity account of
equal amount representing unearned compensation. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan."
(5) The Savings Bank's authorized capital will consist solely of 1,000
shares of common stock, $1.00 par value per share, all of which will be
issued to the Holding Company.
(6) Assumes the purchase in the open market, pursuant to the proposed MRP,
of a number of shares equal to 4% of the shares of Common Stock issued
in the Conversion at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. The issuance of an additional
4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the
ownership interest of stockholders by 3.85%. The shares are reflected
as a reduction of stockholders' equity. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan." The
MRP is subject to stockholder approval and is expected to be adopted by
stockholders at a meeting to be held no earlier than six months
following consummation of the Conversion.
(7) Undivided profits are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below
the amount in the liquidation account, which will be established for
the benefit of the Savings Bank's Eligible Account Holders and
Supplemental Eligible Account Holders at the time of the Conversion and
adjusted downward thereafter. See "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank -- Liquidation Account."
13
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro
forma capital position relative to its capital requirements at June 30,
1997. The amount of capital infused into the Savings Bank for purposes of
the following table is 50% of the net proceeds from the sale of the Common
Stock. For a discussion of the assumptions underlying the pro forma
capital calculations presented below, see "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used
in the table are those provided in the capital regulations issued by the
Division. See "REGULATION -- The Savings Bank -- Capital Requirements" and
"REGULATION -- The Holding Company -- Capital Requirements."
PRO FORMA AT JUNE 30, 1997
----------------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
------------------------ -------------------------
4,250,000 Shares 5,000,000 Shares
June 30, 1997 at $10.00 Per Share at $10.00 Per Share
------------------------ ------------------------ -------------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------------------------ ------------------------- -------------------------
(Dollars in thousands)
GAAP capital............... $23,866 11.57% $34,434 15.52% $36,384 16.19%
======= ======= ======= ======= ======= =======
Tier 1 (leverage) capital.. $23,866 11.71% $34,434 15.69% $36,384 16.36%
Tier 1 (leverage) capital
requirement............... 8,152 4.00 8,729 4.00 8,893 4.00
------- ------- ------- ------- ------- -------
Excess..................... $15,714 7.71% $25,655 11.69% $27,491 12.36%
======= ======= ======= ======= ======= =======
Tier 1 risk adjusted
capital................... $23,866 15.96% $34,434 21.88% $36,384 22.91%
Tier 1 risk adjusted
capital
requirement............... 5,981 4.00 6,294 4.00 6,351 4.00
------- ------- ------- ------- ------- -------
Excess..................... $17,885 11.96% $28,140 17.88% $30,033 18.91%
======= ======= ======= ======= ======= =======
Total risk based capital... $25,320 16.93% $35,888 22.81% $37,838 23.83%
Total risk based
capital requirement....... 11,962 8.00 12,589 8.00 12,703 8.00
------- ------- ------- ------- ------- -------
Excess..................... $13,358 8.93% $23,299 14.81% $25,135 15.83%
======= ======= ======= ======= ======= =======
PRO FORMA AT JUNE 30, 1997
---------------------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
------------------------- -------------------------
5,750,000 Shares 6,612,500 Shares
at $10.00 Per Share at $10.00 Per Share
------------------------- -------------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
------- ------- ------- -------
GAAP capital............... $38,334 16.85% $40,576 17.58%
======= ======= ======= =======
Tier 1 (leverage) capital.. $38,334 17.02% $40,576 17.76%
Tier 1 (leverage) capital
requirement............... 9,007 4.00 9,139 4.00
------- ------- ------- -------
Excess..................... $29,327 13.02% $31,437 13.76%
======= ======= ======= =======
Tier 1 risk adjusted
capital................... $38,334 23.93% $40,576 25.07%
Tier 1 risk adjusted
capital
requirement............... 6,408 4.00 6,474 4.00
------- ------- ------- -------
Excess..................... $31,926 19.93% $34,102 21.07%
======= ======= ======= =======
Total risk based capital... $39,788 24.83% $42,030 25.97%
Total risk based
capital requirement....... 12,817 8.00 12,948 8.00
------- ------- ------- -------
Excess..................... $26,971 16.83% $29,082 17.97%
======= ======= ======= =======
- --------------------
(1) For the Tier 1 (leverage) capital and Washington regulatory capital
calculations, percent of total average assets of $203.8 million. For the
Tier 1 risk-based capital and total risk-based capital calculations,
percent of total risk-weighted assets of $149.5 million. Net proceeds
(after ESOP and MRP) were assumed to be invested in one- to four-family
residential mortgage loans with a weighted average risk-weight of 50%.
(2) As a Washington-chartered savings bank, the Savings Bank is subject to
the capital requirements of the FDIC and the Division. The FDIC requires
state-chartered savings banks, including the Savings Bank, to have a
minimum leverage ratio of Tier 1 capital to total assets of at least 3%,
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not anticipating
any significant growth, are required to maintain a ratio of 1% to 2% above
the stated minimum, with an absolute total capital to risk-weighted assets
of at least 8%. The Savings Bank has not been notified by the FDIC of any
leverage capital requirement specifically applicable to it. However, for
the purposes of this table, the Savings Bank has assumed that its leverage
capital requirement is 4% of total average assets.
14
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Savings Bank, based upon an independent valuation. The Estimated Valuation Range
as of August 29, 1997 is from a minimum of $42.5 million to a maximum of $57.5
million with a midpoint of $50.0 million or, at a price per share of $10.00, a
minimum number of shares of 4,250,000, a maximum number of shares of 5,750,000
and a midpoint number of shares of 5,000,000. The actual net proceeds from the
sale of the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds set forth on the following table are based upon the
following assumptions: (i) Webb will receive a management fee of $25,000; (ii)
all of the shares will be sold in the Subscription and Direct Community Offering
for which Webb will receive a fee of 1.25% (no fee will be paid for shares
purchased by the Savings Bank's directors, executive officers and members of
their immediate families, and the ESOP); (iii) Webb's management fee shall be
applied against the success fee, and the success fee shall not exceed $500,000;
and (iv) Conversion expenses, excluding fees paid to Webb, will be approximately
$465,000 at each of the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range. Actual expenses may vary from this estimate, and
the fees paid will depend upon the percentages and total number of shares sold
in the Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year
ended September 30, 1996 and for the nine months ended June 30, 1997 has been
calculated as if the Conversion had been completed at the beginning of each
period and the estimated net proceeds received by the Holding Company and the
Savings Bank had been invested at the arithmetic average of the yield earned by
the Savings Bank on its interest-earning assets and the rates paid on its
deposits. As discussed under "USE OF PROCEEDS," the Holding Company expects to
retain 50% of the net proceeds of the Offerings from which it will fund the ESOP
loan. A pro forma after-tax return of 4.64% and 4.60% is used for both the
Holding Company and the Savings Bank for the year ended September 30, 1996 and
the nine months ended June 30, 1997, respectively, after giving effect to a
federal tax rate of 34.0%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock. Per share amounts have been computed as if the Common Stock had been
outstanding at the beginning of the period or at the dates shown, but without
any adjustment of per share historical or pro forma stockholders' equity to
reflect the earnings on the estimated net proceeds.
The following tables summarize the historical net income and total equity
of the Savings Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given to (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be adopted by stockholders at
a meeting to be held no earlier than six months following consummation of the
Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
Common Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be adopted by stockholders at a
meeting to be held no earlier than six months following consummation of the
Conversion; or (iv) the establishment of a liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option Plan" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." Shares of Common
Stock may be purchased with funds on deposit at the Savings Bank, which will
reduce deposits by the amounts of such purchases. Accordingly, the net amount of
funds available for investment will be reduced to the extent shares are
purchased with funds on deposit.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of loans and other assets
and market value. Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.
15
At or For the Year Ended September 30, 1996
---------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ---------------
4,250,000 5,000,000 5,750,000 6,612,500(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
Gross proceeds................................... $ 42,500 $ 50,000 $ 57,500 $ 66,125
Less:
Estimated offering expenses...................... 965 965 965 965
--------- --------- --------- ---------
Estimated net proceeds........................... $ 41,535 $ 49,035 $ 56,535 $ 65,160
Less:
ESOP shares...................................... (3,400) (4,000) (4,600) (5,290)
MRP shares....................................... (1,700) (2,000) (2,300) (2,645)
--------- --------- --------- ---------
Estimated net cash proceeds
to the Holding Company........................ $ 36,435 $ 43,035 $ 49,635 $ 57,225
Consolidated net income:
Historical...................................... $ 2,678 $ 2,678 $ 2,678 $ 2,678
Pro forma income on net proceeds(2)............. 1,691 1,997 2,303 2,655
Pro forma ESOP adjustments(3)................... (224) (264) (304) (349)
Pro forma MRP adjustments(4).................... (224) (264) (304) (349)
--------- --------- --------- ---------
Pro forma..................................... $ 3,921 $ 4,147 $ 4,373 $ 4,635
========= ========= ========= =========
Consolidated net income per share(5)(6):
Historical...................................... $ 0.68 $ 0.58 $ 0.50 $ 0.44
Pro forma income on net proceeds................ 0.43 0.43 0.43 0.43
Pro forma ESOP adjustments(3)................... (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustments(4).................... (0.06) (0.06) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma..................................... $ 0.99 $ 0.89 $ 0.81 $ 0.75
========= ========= ========= =========
Consolidated stockholders' equity (book value)(7):
Historical...................................... $ 21,329 $ 21,329 $ 21,329 $ 21,329
Estimated net proceeds.......................... 41,535 49,035 56,535 65,160
Less:
Common Stock acquired by ESOP................... (3,400) (4,000) (4,600) (5,290)
Common Stock to be acquired by MRP(4)........... (1,700) (2,000) (2,300) (2,645)
--------- --------- --------- ---------
Pro forma(7).................................. $ 57,764 $ 64,364 $ 70,964 $ 78,554
========= ========= ========= =========
Consolidated stockholders' equity per share(6)(8):
Historical(6)................................... $ 5.02 $ 4.27 $ 3.71 $ 3.23
Estimated net proceeds.......................... 9.77 9.81 9.83 9.85
Common Stock acquired by ESOP................... (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4)........... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma(9)................................. $ 13.59 $ 12.88 $ 12.34 $ 11.88
========= ========= ========= =========
Purchase Price as a percentage of pro forma
stockholders' equity per share.................. 73.58% 77.64% 81.04% 84.18%
========= ========= ========= =========
Purchase Price as a multiple of pro forma
net income per share............................ 10.10x 11.24x 12.35x 13.33x
========= ========= ========= =========
16
At or For the Nine Months Ended June 30, 1997
---------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ---------------
4,250,000 5,000,000 5,750,000 6,612,500(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
Gross proceeds................................... $ 42,500 $ 50,000 $ 57,500 $66,125
Less:
Estimated offering expenses...................... 965 965 965 965
---------- ---------- ---------- -------
Estimated net proceeds........................... $ 41,535 $ 49,035 $ 56,535 $65,160
Less:
ESOP shares...................................... (3,400) (4,000) (4,600) (5,290)
MRP shares....................................... (1,700) (2,000) (2,300) (2,645)
---------- ---------- ---------- -------
Estimated net cash proceeds
to the Holding Company........................ $ 36,435 $ 43,035 $ 49,635 $57,225
Consolidated net income:
Historical...................................... $ 2,550 $ 2,550 $ 2,550 $ 2,550
Pro forma income on net proceeds(2)............. 1,257 1,485 1,712 1,974
Pro forma ESOP adjustments(3)................... (168) (198) (228) (262)
Pro forma MRP adjustments(4).................... (168) (198) (228) (262)
---------- ---------- ---------- -------
Pro forma..................................... $ 3,471 $ 3,639 $ 3,806 $ 4,000
========== ========== ========== =======
Consolidated net income per share(5)(6):
Historical...................................... $ 0.65 $ 0.55 $ 0.48 $ 0.42
Pro forma income on net proceeds................ 0.31 0.32 0.32 0.32
Pro forma ESOP adjustments(3)................... (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustments(4).................... (0.04) (0.04) (0.04) (0.04)
---------- ---------- ---------- -------
Pro forma..................................... $ 0.88 $ 0.79 $ 0.72 $ 0.66
========== ========== ========== =======
Consolidated stockholders' equity (book value)(7):
Historical...................................... $ 23,866 $ 23,866 $ 23,866 $23,866
Estimated net proceeds.......................... 41,535 49,035 56,535 65,160
Less:
Common Stock acquired by ESOP................... (3,400) (4,000) (4,600) (5,290)
Common Stock to be acquired by MRP(4)........... (1,700) (2,000) (2,300) (2,645)
---------- ---------- ---------- -------
Pro forma(7).................................. $ 60,301 $ 66,901 $ 73,501 $81,091
========== ========== ========== =======
Consolidated stockholders' equity per share(6)(8):
Historical(6)................................... $ 5.62 $ 4.77 $ 4.15 $ 3.61
Estimated net proceeds.......................... 9.77 9.81 9.83 9.85
Common Stock acquired by ESOP................... (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4)........... (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- -------
Pro forma(9)................................. $ 14.19 $ 13.38 $ 12.78 $ 12.26
========== ========== ========== =======
Purchase Price as a percentage of pro forma
stockholders' equity per share(10).............. 70.47% 74.74% 78.25% 81.57%
========== ========== ========== =======
Purchase Price as a multiple of pro forma
net income per share............................ 8.52x 9.49x 10.42x 11.36x
========== ========== ========== =======
17
- -------------------
(1) Gives effect to the sale of an additional 862,500 shares in the Conversion,
which may be issued to cover an increase in the appraised value of the
Common Stock or additional subscriptions, without the resolicitation of
subscribers or any right of cancellation. The issuance of such additional
shares will be conditioned on a determination of the independent appraiser
that such issuance is compatible with its determination of the estimated
pro forma market value of the Common Stock. See "THE CONVERSION-- Stock
Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Conversion, which rate is currently 8.50%), from the net proceeds from the
Conversion retained by the Holding Company. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine
estimated net Conversion proceeds. The Savings Bank intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. As the debt is paid down, stockholders'
equity will be increased. The Savings Bank's payment of the ESOP debt is
based upon equal installments of principal over a 10-year period and are
recorded as an expense (tax effected assuming a federal income tax rate of
34.0%) to the Holding Company on a consolidated basis. Interest income
earned by the Holding Company on the ESOP debt offsets the interest paid by
the Savings Bank on the ESOP loan. No reinvestment is assumed on proceeds
contributed to fund the ESOP. The ESOP expense reflects adoption of SOP 93-
6, which will require recognition of expense based upon shares committed to
be released and the exclusion of unallocated shares from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year, which,
for purposes of this calculation, was assumed to be equal to the $10.00 per
share Purchase Price. See "MANAGEMENT OF THE SAVINGS BANK --Benefits --
Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Common Stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 3.85%
and pro forma net income per share would be $0.98, $0.89, $0.81 and $0.76
and $0.86, $0.77, $0.70 and $0.64 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range for the year ended
September 30, 1996 and for the nine months ended June 30, 1997,
respectively, and pro forma stockholders' equity per share would be $13.46,
$12.76, $12.26 and $11.81 and $14.03, $13.25, $12.68 and $12.18 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range at September 30, 1996 and June 30, 1997, respectively.
Shares issued under the MRP vest 20% per year and, for purposes of this
table, compensation expense is recognized on a straight-line basis over
each vesting period. In the event the fair market value per share is
greater than $10.00 per share on the date of stockholder approval of the
MRP, total MRP expense would increase. See "RISK FACTORS -- New Expenses
Associated with ESOP and MRP." The total estimated MRP expense was
multiplied by 20% for the year ended September 30, 1996 (the total percent
of shares for which expense is recognized in the first year) and 15% for
the nine months ended June 30, 1997 resulting in pre-tax MRP expense of
$340,000, $400,000, $460,000 and $529,000, and $255,000, $300,000, $345,000
and $396,750 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range for the year ended September 30, 1996 and for
the nine months ended June 30, 1997, respectively. No effect has been
given to the shares reserved for issuance under the proposed Stock Option
Plan. If stockholders approve the Stock Option Plan following the
Conversion, the Holding Company will have reserved for issuance under the
Stock Option Plan authorized but unissued shares of Common Stock
representing an amount of shares equal to 10% of the shares sold in the
Conversion. If all of the options were to be exercised utilizing these
authorized but unissued shares rather than treasury shares which could be
acquired, the voting interests of existing stockholders would be diluted by
approximately 10%. The issuance
of authorized but unissued shares of the Common Stock assuming that all
stock options are issued and exercised on the closing date, the pro forma
net income per share would be $0.95, $0.86, $0.79 and $0.74, and $0.83,
$0.75, $0.68 and $0.63 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ending September 30,
1996 and for the nine months ending June 30, 1997, respectively. See
"MANAGEMENT OF THE SAVINGS BANK --Benefits -- 1997 Stock Option Plan" and
"--Management Recognition Plan" and "RISK FACTORS --Possible Dilutive
Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 3,927,000,
4,620,000, 5,313,000 and 6,109,950, and 3,922,750, 4,615,000, 5,307,250 and
6,103,338 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range for the year ended September 30, 1996 and for
the nine months ended June 30, 1997, respectively, which includes the
shares of Common Stock sold in the Conversion less the number of shares
assumed to be held by the ESOP not committed to be released within the
first year following the Conversion.
(6) Historical per share amounts have been computed as if the shares of
Common Stock expected to be issued in the Conversion had been outstanding
at the beginning of the period or on the date shown, but without any
adjustment of historical net income or historical retained earnings to
reflect the investment of the estimated net proceeds of the sale of shares
in the Conversion, the additional ESOP expense or the proposed MRP expense,
as described above.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Savings Bank's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 4,250,000,
5,000,000, 5,750,000 and 6,612,500 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent, nor intended to represent, possible future price
appreciation or depreciation of the Common Stock.
(10) Annualized.
19
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Savings
Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases, and, therefore, actual purchases could be more or less than indicated
below. Directors and officers of the Savings Bank and their associates may not
purchase in excess of 31% of the shares sold in the Conversion. For purposes of
the following table, it has been assumed that sufficient shares will be
available to satisfy subscriptions in all categories. Directors, officers and
employees will pay the same price for the shares for which they subscribe as the
price that will be paid by all other subscribers.
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum of Maximum of
Name and Shares to be Amount Estimated Estimated
Position Purchased(1) Purchased Valuation Range Valuation Range
-------- -------------- ----------- --------------- ----------------
Clarence E. Hamre 40,000 $ 400,000 * *
Chairman of the Board,
President, Chief Executive
Officer and Director
Michael R. Sand 20,000 200,000 * *
Executive Vice President,
Secretary and Director
Andrea M. Clinton 1,000 10,000 * *
Director
Robert Backstrom 20,000 200,000 * *
Director
Richard R. Morris, Jr. 50,000(2) 500,000(2) 1.0 1.0
Director
Alan E. Smith 13,500 135,000 * *
Director
Peter J. Majar 15,000 150,000 * *
Director
Jon C. Parker 20,000 200,000 * *
Director
James C. Mason 50,000(2) 500,000(2) 1.0 1.0
Director
Other officers (9 persons) 36,750 367,500 * *
--------- --------- --------- ---------
Total(1) 266,250 $2,662,500 5.9% 4.9%
========= ========= ========= =========
- -----------------
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. The ESOP intends to
purchase 8% of the shares of Common Stock issued in the Conversion (460,000
shares at the maximum of the Estimated Valuation Range). Subject to
approval by stockholders of the Holding Company, the MRP expects to a
number of shares of Common Stock equal to 4% of the number of shares issued
in the Conversion (230,000 shares based on the maximum of the Estimated
Valuation Range) and the Stock Option Plan intends to reserve a number of
shares equal to 10% of the number of shares issued in the Conversion
(575,000 shares at the maximum of the Estimated Valuation Range). For
additional information regarding the ESOP, MRP and Stock Option Plan, see
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership
Plan," "-- Benefits -- 1997 Stock Option Plan" and "-- Benefits --
Management Recognition Plan." Assuming purchases by management as set
forth in the above table and the implementation of the ESOP, MRP and Stock
Option Plan, directors, officers and employees of the Holding Company and
the Savings Bank would have voting control, on a fully diluted basis, of
28.08% of the Common Stock, based on the issuance of shares at the maximum
of the Estimated Valuation Range. See "RISK FACTORS -- Anti-takeover
Considerations -- Voting Control by Insiders."
(2) Based on the midpoint of the Estimated Valuation Range. The named
individual and his associates intend to subscribe for up to the maximum
purchase limitation of 1% of the total number of shares of Common Stock
issued in the Conversion.
* Less than 1%.
20
TIMBERLAND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Timberland Savings Bank,
SSB and Subsidiary for each of the three years in the period ended September 30,
1996 have been audited by Dwyer Pemberton & Coulson, P.C., independent certified
public accountants, whose report thereon appears elsewhere herein. The
Consolidated Statements of Income for the nine months ended June 30, 1996 and
1997, are unaudited but, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results of operations for those
periods. All such adjustments are of a normal recurring nature. The results of
operations for the nine months ended June 30, 1997 are not necessarily
indicative of the results of the Savings Bank which may be expected for the
entire year or any other subsequent period. These consolidated statements of
income should be read in conjunction with the Savings Bank's Consolidated
Financial Statements and related Notes included elsewhere herein.
Nine Months Ended
Year Ended September 30, June 30,
------------------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
Interest and dividend income:
Loans receivable............................ $10,168,594 $13,602,716 $15,879,506 $11,659,940 $12,974,675
Investments and mortgage-backed securities.. 427,910 666,671 396,571 322,818 215,349
Dividends................................... 109,806 98,471 126,189 96,728 84,924
Financial institutions...................... 600,528 85,461 97,283 73,853 95,159
----------- ----------- ----------- ----------- -----------
Total Interest Income................ 11,306,838 14,453,319 16,499,549 12,153,339 13,370,107
----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits.................................... 4,616,078 5,695,604 6,949,485 5,147,148 5,565,230
FHLB advances and mortgage
indebtedness............................... 99,350 663,918 679,075 534,488 671,384
----------- ----------- ----------- ----------- -----------
Total interest expense............... 4,715,428 6,359,522 7,628,560 5,681,636 6,236,614
----------- ----------- ----------- ----------- -----------
Net interest income.................. 6,591,410 8,093,797 8,870,989 6,471,703 7,133,493
Provision for loan losses..................... -- -- 70,000 45,000 334,282
----------- ----------- ----------- ----------- -----------
Net interest income
after provision for loan losses... 6,591,410 8,093,797 8,800,989 6,426,703 6,799,211
----------- ----------- ----------- ----------- -----------
Non-interest income:
Service charges on deposits................. 251,505 277,275 278,046 207,956 225,982
Gain (loss) on sale of loans (net).......... 144,971 44,512 33,908 (51,566) 179,502
Other fees.................................. 83,400 113,129 163,419 114,728 140,167
Income (loss) on operations of real
estate (net).............................. 167,297 (17,216) (999) (12) 8,677
Escrow and annuity fees..................... 112,616 111,092 132,088 98,474 78,986
Servicing income on loans sold.............. -- -- -- -- 117,642
Other....................................... 57,888 69,490 81,927 58,617 85,056
----------- ----------- ----------- ----------- -----------
Total non-interest income............ 817,677 598,282 688,389 428,197 836,012
----------- ----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits.............. 2,076,275 2,328,768 2,505,717 1,863,389 2,143,259
Premises and fixed assets................... 394,001 505,924 554,084 420,701 519,767
Deposit insurance premiums.................. 281,177 295,252 1,202,535 241,202 50,558
Advertising................................. 79,851 132,638 136,496 103,726 179,024
Other....................................... 781,172 826,828 993,435 729,970 759,098
----------- ----------- ----------- ----------- -----------
Total non-interest expenses.......... 3,612,476 4,089,410 5,392,267 3,358,988 3,651,706
----------- ----------- ----------- ----------- -----------
Income before income taxes........... 3,796,611 4,602,669 4,097,111 3,495,912 3,983,517
Provision for income taxes.................... 1,163,124 1,602,976 1,419,307 1,215,890 1,433,629
----------- ----------- ----------- ----------- -----------
Net income........................... $ 2,633,487 $ 2,999,693 $ 2,677,804 $ 2,280,022 $ 2,549,888
=========== =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
Operating Strategy
The Savings Bank is a community oriented savings bank which has
traditionally offered a wide variety of savings products to its retail customers
while concentrating its lending activities on real estate loans. The primary
elements of the Savings Bank's operating strategy include:
. Emphasize Residential Mortgage Lending and Residential Construction
Lending. The Savings Bank has attempted to establish itself as a niche
lender in its primary market area by focusing its lending activities
primarily on the origination of loans secured by one- to- four family
residential dwellings, including an emphasis on loans for the
construction of residential dwellings. In an effort to meet the credit
needs of borrowers in its primary market area, the Savings Bank
actively originates one- to- four family mortgage loans that do not
qualify for sale in the secondary market under FHLMC guidelines. See
"RISK FACTORS -- Certain Lending Risks -- Risks of Non-conforming
Residential Mortgage Lending." The Savings Bank also originates loans
secured by multi-family and commercial real estate properties and, to
a lesser extent, originates consumer loans. While the Savings Bank's
primary business has been that of a traditional thrift institution,
originating loans for portfolio in its primary market area, the
Savings Bank also has been an active participant in the secondary
market, originating residential loans for sale to the FHLMC on a
servicing retained basis. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
. Diversify Primary Market Area by Expanding Branch Office Network and
Establishing A Loan Production Office. In an effort to lessen its
dependence on the Grays Harbor County market whose economy has
historically been tied to the timber and fishing industries, since
1994 the Savings Bank has opened branch offices in Pierce, King and
Thurston Counties and a loan production office in Kitsap County.
Thurston, Pierce, King and Kitsap Counties contain the Olympia and
Seattle-Tacoma metropolitan areas and their economies are more
diversified with the presence of state government and the aerospace
and computer industries. See "RISK FACTORS -- Market Area Risk" and
"BUSINESS OF THE SAVINGS BANK -- Properties."
. Limit Exposure to Interest Rate Risk. In recent years the loans that
the Savings Bank has retained in its portfolio generally have periodic
interest rate adjustment features or have been relatively short-term
in nature. Loans originated for portfolio primarily have included ARM
loans, and short-term construction loans. Longer term fixed-rate
mortgage loans have generally been originated for sale in the
secondary market. Management believes the interest rate sensitivity of
these adjustable rate and short- term loans more appropriately matches
the interest rate sensitivity of the Savings Bank's funding sources
than do other longer duration assets with fixed interest rates.
See "-- Asset and Liability Management."
. Controlled Asset Growth and Controlling Operating Expenses. The
Savings Bank has attempted to maintain a strong capital position
through controlled asset growth and by controlling operating expenses.
The Savings Bank's GAAP capital ratio was 11.6% at June 30, 1997.
Nevertheless,
22
declining market interest rates and competition have reduced the
Savings Bank's net interest spread, which has contributed to lower
returns on average assets and on average equity in recent periods.
Deposits have been the Savings Bank's primary source of funds for its
lending and investment activities and the Savings Bank has attempted
to retain and expand its retail deposit base through competitive
pricing and services. In addition to deposits, the Savings Bank has
funded the increase in loans through the use of FHLB advances. The use
of brokered deposits has been avoided. In addition, the Savings Bank
closely monitors its operating expenses, seeking to control its
operating expense ratio while maintaining a staff consistent with
providing a high level of service to its communities and its
customers. The Savings Bank's ratio of operating (noninterest)
expenses to average assets was 2.49%, 2.46% (excluding one-time SAIF
assessment of $875,000), and 2.39% respectively for the years ended
September 30, 1995 and 1996 and the nine months ended June 30, 1997.
Comparison of Financial Condition at September 30, 1996 and June 30, 1997
Total assets increased 6.1% from $194.4 million at September 30, 1996 to
$206.2 million at June 30, 1997, primarily as a result of an increase in loans
receivable, net, which was funded by increased deposits, FHLB advances and
retained net income.
Cash and due from financial institutions increased 15.4% from $5.1 million
at September 30, 1996 to $5.8 million at June 30, 1997, primarily as a result of
an increase in public unit funds on deposit.
Investments and mortgage-backed securities held to maturity decreased 15.7%
from $5.0 million at September 30, 1996 to $4.2 million at June 30, 1997. This
decrease was attributable primarily to prepayments.
Loans receivable, including loans held for sale, net, increased 6.2% from
$176.5 million at September 30, 1996 to $187.5 million at June 30, 1997,
primarily as a result of an increase in one- to- four family mortgage loans from
$96.0 million at September 30, 1996 to $100.1 million at June 30, 1997.
Increases in commercial real estate loans (from $26.5 million to $28.9 million)
and home equity and second mortgage loans (from $6.6 million to $7.9 million)
also contributed to the increase in loans receivable, net. See "RISK FACTORS --
Certain Lending Risks." The increase in loans receivable, net, was attributable
primarily to the opening of the South Hill branch office in October 1996 and the
Lacey branch office in May 1997, both in the Pierce County market, as well as
increased local loan demand. Construction and land development loans, however,
decreased from $47.1 million at September 30, 1996 to $44.7 million at June 30,
1997 primarily as a result of construction loans being converted to permanent
mortgage loans.
Loans held for sale decreased from $6.1 million at September 30, 1996 to
$5.4 million at June 30, 1997. This 11.7% decrease resulted primarily from
increased loan sales.
Premises and fixed assets, net, increased 13.1% from $4.9 million at
September 30, 1996 to $5.5 million at June 30, 1997, primarily as a result of
construction of the Lacey branch office, which opened in May 1997. See "BUSINESS
OF THE SAVINGS BANK -- Properties."
Deposits increased 6.8% from $156.5 million at September 30, 1996 to $167.1
million at June 30, 1997, primarily as a result of promotions associated with
the opening of the South Hill and Lacey branch offices. The Savings Bank offered
certificates of deposit with premium interest rates during a one month period
after the opening of each branch office as an incentive to attract depositors in
light of increased competition in the Pierce County market.
Total capital increased 11.9% from $21.3 million at September 30, 1996 to
$23.9 million at June 30, 1997, primarily as a result of retained net income for
the nine months ended June 30, 1997.
23
Comparison of Financial Condition at September 30, 1995 and 1996
Total assets increased 9.3% from $177.8 million at September 30, 1995 to
$194.4 million at September 30, 1996, primarily as a result of an increase in
loans receivable, net, which was funded primarily by increased deposits,
proceeds from the maturity of investment securities and prepayment of mortgage-
backed securities held to maturity, FHLB advances, and retained net income.
Cash and due from financial institutions increased 4.0% from $4.9 million
at September 31, 1995 to $5.1 million at September 30, 1996, primarily as a
result of the opening of three automated teller machines and an increase in
deposits in transit.
Investments and mortgage-backed securities held to maturity decreased 49.8%
from $9.9 million at September 30, 1995 to $5.0 million at September 30, 1996.
This decrease was attributable primarily to prepayments of mortgage-backed
securities and maturities of U.S. Treasury securities.
Loans receivable, including loans for sale, net, increased 12.8% from
$156.5 million at September 30, 1995 to $176.5 million at September 30, 1996,
primarily as a result of an increase in commercial real estate loans from $15.6
million at September 30, 1995 to $26.5 million at September 30, 1996 as a result
of loan demand in the primary market area, primarily in Ocean Shores and Port
Orchard. Increases in one- to- four family mortgage loans (from $93.6 million to
$96.0 million), multi-family loans (from $11.0 to $12.6 million), construction
and land development loans (from $42.8 million to $47.1 million) and home equity
and second mortgage loans (from $5.2 million to $6.6 million) also contributed
to the increase in loans receivable, net. See "RISK FACTORS -- Certain Lending
Risks."
Premises and fixed assets, net, increased 34.6% from $3.6 million at
September 30, 1995 to $4.9 million at September 30, 1996, primarily as a result
of the purchase of property for the South Hill branch office and the
construction of the Lacey branch office. The South Hill branch office was opened
in September 1996 and the Lacey branch office was opened in May 1997. See
"BUSINESS OF THE SAVINGS BANK -- Properties."
Deposits increased 9.4% from $143.1 million at September 30, 1995 to $156.5
million at September 30, 1996, primarily as a result of the opening of the
Auburn branch office in September 1994 and the incorporation of the town of
Edgewood and the deposit of town funds at the Savings Bank.
Total capital increased 14.4% from $18.7 million at September 30, 1995 to
$21.3 million at September 30, 1996, primarily as a result of retained net
income for the fiscal year ended September 30, 1996.
Comparison of Operating Results for the Nine Months Ended June 30, 1996 and 1997
Net Income. Net income increased 11.8% from $2.3 million for the nine
months ended June 30, 1996 to $2.5 million for the nine months ended June 30,
1997 primarily as a result of higher net interest income and higher noninterest
income, partially offset by higher noninterest expense and an increase in the
provision for loan losses.
Net Interest Income. Net interest income increased 10.2% from $6.5 million
for the nine months ended June 30, 1996 to $7.1 million for the same period in
1997 as total interest income increased more than total interest expense.
Total interest income increased 10.0% from $12.2 million for the nine
months ended June 30, 1996 to $13.4 million for the nine months ended June 30,
1997 primarily as a result of an increase in the average balance of loans
receivable, net, which more than offset a decline in the average yield. The
average balance of loans receivable, net, increased from $165.8 million for the
nine months ended June 30, 1996 to $187.4 million for the nine months ended June
30, 1997 as a result of increased loan demand and a decrease in loans-in-
process. The average yield earned declined from 9.38% for the nine months ended
June 30, 1996 to 9.23% for the nine months ended June 30, 1997
24
primarily as a result of loan refinancings and new loan originations at lower
market interest rates. Interest earned on investment and mortgage-backed
securities decreased from $323,000 for the nine months ended June 30, 1996 to
$215,000 for the nine months ended June 30, 1997 as average balances decreased
from $7.2 million for the nine months ended June 30, 1996 to $4.6 million for
the nine months ended June 30, 1997 as a result of prepayments and the
reinvestment of proceeds in loans receivable, net. Interest earned from
financial institutions on interest-earning deposits increased from $74,000 for
the nine months ended June 30, 1996 to $95,000 for the nine months ended June
30, 1997 as a result of an increase in average balances from $2.1 million for
the nine months ended June 30, 1996 to $2.7 million for the nine months ended
June 30, 1997, coupled with an increase in the average rate earned from 4.60%
for the nine months ended June 30, 1996 to 4.71% for the nine months ended June
30, 1997.
Total interest expense increased 9.8% from $5.7 million for the nine months
ended June 30, 1996 to $6.2 million for the nine months ended June 30, 1997
primarily as a result of an increase in the average balance of certificates of
deposit from $87.3 million for the nine months ended June 30, 1996 to $97.5
million for the nine months ended June 30, 1997 as a result of the promotion of
certificates of deposit associated with new branch office openings and an
increase in the average balance of FHLB advances from $11.4 million for the nine
months ended June 30, 1996 to $13.7 million for the nine months ended June 30,
1997 to fund loan demand.
The Savings Bank's interest rate spread was 4.25% for the nine months ended
June 30, 1996 and 4.17% for the same period in 1997.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the allowance for loan losses to a level that management
considers adequate to provide for estimated losses inherent in the loan
portfolio. In evaluating the adequacy of the allowance for loan losses,
management considers loan loss experience, prevailing market conditions, current
portfolio performance and a quarterly risk weighting of the loan portfolio.
The Savings Bank conducts a risk weighted analysis of its loan portfolio
quarterly to determine the adequacy of the allowance for loan losses. Each loan
is assigned, by type, to one of 18 categories and each category is subdivided by
classification (pass, special mention, substandard or loss). The resulting
groupings of loans are assigned a high and low reserve factor to establish a
range of reserves within which the allowance for loan losses must reside. At
June 30, 1997, the calculated reserve range was between $791,000 and $3.0
million. General loan loss reserves were $1.5 million at June 30, 1997 and, in
management's opinion, were adequate to provide for estimated losses based on an
evaluation of known and inherent risks in the loan portfolio at that date.
Management considered the likelihood of losses in excess of $1.5 million to be
remote at June 30, 1997.
Changes in the portfolio mix and the level of nonperforming loans affect
the calculated reserve range. Reserve factors are based on a loan's risk profile
and classification level. The four nonperforming loans described under "BUSINESS
OF THE SAVINGS BANK -- Lending Activities -- Nonperforming Assets and
Delinquencies" added $188,000 and $866,000 to the high and low ends,
respectively, of the calculated reserve range at June 30, 1997. See "BUSINESS OF
THE SAVINGS BANK -- Lending Activities -- Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 95.2% from $428,000
for the nine months ended June 30, 1996 to $836,000 for the nine months ended
June 30, 1997. This increase resulted primarily from gain on sale of loans of
$180,000 in 1997, compared to a loss of $52,000 in 1996, and servicing income on
loans sold of $118,000 in 1997, compared to no such income in 1996 because of
the adoption of SFAS No. 125 effective January 1, 1997. See "-- Impact of New
Accounting Pronouncements." The loss on sale of loans in 1996 resulted from the
write down of loans held for sale to market value.
Noninterest Expense. Total noninterest expense increased 8.7% from $3.4
million for the nine months ended June 30, 1996 to $3.7 million for the nine
months ended June 30, 1997 primarily as a result of increases in salaries and
employee benefits and premises and fixed assets, offset by a decrease in deposit
insurance premiums. Salaries and employee benefits increased from $1.9 million
for the nine months ended June 30, 1996 to $2.1 million for the nine months
ended June 30, 1997 as a result of the opening of the Lacey branch office in May
1997, the hiring of a sales marketing employee in May 1997, the
25
hiring of a management trainee at the Auburn branch office in February 1997, and
the implementation a dental insurance plan on January 1, 1997. Premises and
fixed assets expense increased from $421,000 for the nine months ended June 30,
1996 to $520,000 for the nine months ended June 30, 1997 because of expenses
associated with the opening of the South Hill branch office in September 1996.
Deposit insurance premiums decreased from $241,000 for the nine months ended
June 30, 1996 to $51,000 for the nine months ended June 30, 1997 as a result of
lower premium rates implemented as a result of the SAIF recapitalization.
Noninterest expense can be expected to increase in subsequent periods following
the consummation of the Conversion as a result of increased costs associated
with operating as a public company and increased compensation expense as a
result of the adoption of the ESOP and, if approved by the Holding Company's
stockholders, the MRP. See "RISK FACTORS -- Return on Equity After Conversion"
and "-- New Expenses Associated With ESOP and MRP."
Provision for Income Taxes. The provision for income taxes increased from
$1.2 million for the nine months ended June 30, 1996 to $1.4 million for the
nine months ended June 30, 1997 as a result of higher income before income
taxes. The effective tax rate was 34.8% for the nine months ended June 30, 1996
and 36.0% for the nine months ended June 30, 1997.
Comparison of Operating Results for the Years Ended September 30, 1995 and 1996
Net Income. Net income decreased 10.7% from $3.0 million in fiscal 1995 to
$2.7 million in fiscal 1996 primarily as a result of the legislatively-mandated,
one-time assessment levied by the FDIC on all SAIF-insured institutions to
recapitalize the SAIF. Without this assessment, which amounted to $875,000
($571,000 after tax), fiscal 1996 net income would have been $3.2 million.
Net Interest Income. Net interest income increased 9.6% from $8.1 million
in fiscal 1995 to $8.9 million in fiscal 1996 as total interest income increased
more than total interest expense.
Total interest income increased 14.2% from $14.5 million in fiscal 1995 to
$16.5 million in fiscal 1996 primarily as a result of an increase in the average
balance of loans receivable, net, from $143.1 million in fiscal 1995 to $168.1
million in fiscal 1996 as a result of increased loan demand. The average yield
earned on loans receivable, net, decreased from 9.51% in fiscal 1995 to 9.45% in
fiscal 1996 primarily because of a decline in market interest rates. Interest
earned on investment and mortgage-backed securities decreased from $667,000 in
fiscal 1995 to $397,000 in fiscal 1996 as average balances decreased from $12.7
million in fiscal 1995 to $6.7 million in fiscal 1996 as a result of prepayments
of mortgage-backed securities and the maturity of U.S. Treasury securities.
Dividend income from FHLB-Seattle and Financial Institution Insurance Group
("FIIG") stock increased from $98,000 in fiscal 1995 to $126,000 in fiscal 1996
primarily because of higher dividend rates. Interest earned from financial
institutions on interest-earning deposits increased from $85,000 in fiscal 1995
to $97,000 in fiscal 1996 as a result of an increase in the average rate paid
from 4.11% in fiscal 1995 to 4.68% in fiscal 1996.
Total interest expense increased 20.0% from $6.4 million in fiscal 1995 to
$7.6 million in fiscal 1996 primarily as a result of an increase in the average
balance of certificates of deposit from $73.6 million in fiscal 1995 to $89.0
million in fiscal 1996, coupled with an increase in the average rate paid from
5.41% in fiscal 1995 to 5.92% in fiscal 1996, as a result of promotions
associated with the opening of the South Hill branch office.
Interest rate spread decreased from 4.56% in fiscal 1995 to 4.34% in fiscal
1996. This decrease is primarily attributable to higher interest expense on
certificates of deposit associated with new branch office promotions.
Provision for Loan Losses. There was no provision for loan losses in fiscal
1995 compared to $70,000 in fiscal 1996. Management increased the provision in
fiscal 1996 as a result of a larger loan portfolio and a change in the loan mix
(as quantified by the quarterly reserve analysis described previously) to
include a larger percentage of non-residential mortgage loans, which are
inherently riskier than one-to-four family mortgage loans.
26
As a result of management's quarterly reserve analysis discussed
previously, the calculated reserve range was between $589,000 and $2.2 million
at September 30, 1996. The four nonperforming loans described under "BUSINESS OF
THE SAVINGS BANK--Lending Activities --Nonperforming Assets and Delinquencies"
added $33,000 and $141,000 to the high and low ends, respectively, of the
calculated reserve range at September 30, 1996. General loan loss reserves were
$1.1 million at September 30, 1996 and, in management's opinion, were adequate
to provide for estimated losses based on an evaluation of known and inherent
risks in the loan portfolio at that date. Management considered the likelihood
of losses in excess of $1.1 million to be remote at September 30, 1996. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities--Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 15.1% from $598,000
in fiscal 1995 to $688,000 in fiscal 1996. The increase resulted primarily from
an increase in other fees from $113,000 in fiscal 1995 to $163,000 in fiscal
1996 as a result of an increased number of automated teller machines ("ATM's"),
together with increased escrow and annuity fees from $111,000 in fiscal 1995 to
$132,000 in fiscal 1996 as a result of establishing a second escrow company
division within the Savings Bank's service corporation subsidiary to service the
Puget Sound area. This increase was partially offset by a decrease in gains on
sales of loan from $45,000 in fiscal 1995 to $34,000 in fiscal 1996 because of
lower sales volume resulting from higher market interest rates.
Noninterest Expense. Total noninterest expense increased 31.9% from $4.1
million in fiscal 1995 to $5.4 million in fiscal 1996 primarily as a result of
an increase in deposit insurance premiums from $295,000 in fiscal 1995 to $1.2
million in fiscal 1996 attributable to the SAIF assessment. Prior to the SAIF
recapitalization, the Savings Bank's total annual deposit insurance premiums
amounted to 0.23% of assessable deposits. Effective January 1, 1997, the rate
decreased to 0.065% of assessable deposits. See "REGULATION -- Federal
Regulation of the Saving Bank -- Federal Deposit Insurance Corporation."
Salaries and employee benefits increased from $2.3 million in fiscal 1995 to
$2.5 million in fiscal 1996 as a result of adding and training of staff to
operate the newly opened South Hill branch office. Premises and fixed assets
expense increased from $506,000 in fiscal 1995 to $554,000 in fiscal 1996, also
because of the opening of the South Hill branch office. Noninterest expense can
be expected to increase in subsequent periods following the consummation of the
Conversion as a result of increased costs associated with operating as a public
company and increased compensation expense as a result of the adoption of the
ESOP and, if approved by the Holding Company's stockholders, the MRP. See "RISK
FACTORS -- Return on Equity After Conversion" and "-- New Expenses Associated
With ESOP and MRP."
Provision for Income Taxes. The provision for income taxes decreased from
$1.6 million in fiscal 1995 to $1.4 million in fiscal 1996 as a result of lower
income before income taxes. The effective tax rate was 34.8% in fiscal 1995 and
34.6% in fiscal 1996.
Comparison of Operating Results for the Years Ended September 30, 1994 and 1995
Net Income. Net income increased 13.9% from $2.6 million in fiscal 1994 to
$3.0 million in fiscal 1995 primarily as a result of higher net interest income,
partially offset by lower noninterest income and higher noninterest expense.
Net Interest Income. Net interest income increased 22.8% from $6.6 million
in fiscal 1994 to $8.1 million in fiscal 1995 as total interest income increased
more than total interest expense.
Total interest income increased 27.8% from $11.3 million in fiscal 1994 to
$14.5 million in fiscal 1995 primarily as a result of increases in the average
balance of, and the average yield on, loans receivable, net. The average balance
of loans receivable, net, increased from $112.0 million in fiscal 1994 to $143.1
million in fiscal 1995 as a result of a decrease in the amount of loans sold and
an increased in the purchase of loan participation interests. The average yield
earned increased from 9.08% in fiscal 1994 to 9.51% in fiscal 1995 primarily
because of an increased proportion of higher yielding construction and land
development, commercial real estate and multi-family loans, relative to one-to-
four family mortgage loans. Interest earned on investment and mortgage-backed
securities increased from $428,000 in fiscal 1994 to $667,000 in fiscal 1995 as
average balances increased from $7.3 million
27
in fiscal 1994 to $12.7 million in fiscal 1995 as a result of the purchase of
mortgage-backed securities and U.S. Treasury securities. Interest earned from
financial institutions decreased from $601,000 in fiscal 1994 to $85,000 in
fiscal 1995 as a result of the investment of proceeds from maturing certificates
of deposit in mortgage loans.
Total interest expense increased 34.9% from $4.7 million in fiscal 1994 to
$6.4 million in fiscal 1995 primarily as a result of an increase in the average
balance of certificates of deposit from $61.8 million in fiscal 1994 to $73.6
million in fiscal 1995, coupled with an increase in the average rate paid from
4.62% in fiscal 1994 to 5.41% in fiscal 1995, as a result of promotions
associated with the opening of the Auburn branch office. The average balance of
FHLB advances and other borrowed money increased from $1.5 million in fiscal
1994 to $10.5 million in fiscal 1995 primarily because of increased loan demand
and decreased proceeds from the sale of loans.
The Savings Bank's interest rate spread increased from 4.32% in fiscal 1994
to 4.56% in fiscal 1995. This increase is primarily attributable to the higher
proportion of construction and land development, commercial real estate and
multi-family loans in portfolio, which generally carry higher interest rates
than one- to- four family mortgage loans to compensate for the higher credit
risk.
Provision for Loan Losses. In light of the composition of the loan
portfolio and the low level of loss experience, and considering the results of
management's quarterly loan loss analysis discussed previously, there was no
provision for loan losses in either fiscal 1994 or fiscal 1995.
As a result of management's quarterly reserve analysis discussed
previously, the calculated reserve range was between $500,000 and $1.8 million
at September 30, 1995. One of the four nonperforming loans described under
"BUSINESS OF THE SAVINGS BANK -- Lending Activities --Nonperforming Assets and
Delinquencies" had been originated by September 30, 1995, and was performing at
that date. Such loan added $23,000 and $93,000 to the high and low ends,
respectively, of the calculated reserve range at September 30, 1995. General
loan loss reserves were $1.1 million at September 30, 1995 and, in management's
opinion, were adequate to provide for estimated losses based on an evaluation of
known and inherent risks in the loan portfolio at that date. Management
considered the likelihood of losses in excess of $1.1 million to be remote at
September 30, 1995. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Allowance for Loan Losses."
Noninterest Income. Total noninterest income decreased 26.8% from $818,000
in fiscal 1994 to $598,000 in fiscal 1995. Service charges on deposit accounts
increased from $252,000 in fiscal 1994 to $277,000 in fiscal 1995 as a result of
an increased number of checking accounts. Other fees increased from $83,000 in
fiscal 1994 to $113,000 in fiscal 1995 as a result of the establishment of the
Savings Bank's initial ATMs. Offsetting these increases were decreases in gain
on sale of loans and in net income on operations of real estate. Gains on sale
of loans decreased from $145,000 in fiscal 1994 to $45,000 in fiscal 1995
because of lower sales volume resulting from increasing market interest rates
that decreased customer preference for fixed-rate residential mortgage loans.
Net income on operations of real estate declined from $167,000 in fiscal 1994 to
a net loss of $17,000 in fiscal 1995 as a result of the recognition of a
$165,000 deferred gain on sale of real estate in fiscal 1994.
Noninterest Expense. Total noninterest expense increased 13.2% from $3.6
million in fiscal 1994 to $4.1 million in fiscal 1995 primarily as a result of
increases in salaries and employee benefits, premises and fixed assets and
advertising. Salaries and employee benefits increased from $2.1 million in
fiscal 1994 to $2.3 million in fiscal 1995 as a result of adding and training
staff at the newly opened Auburn branch office. Premises and fixed assets
expense increased from $394,000 in fiscal 1994 to $506,000 in fiscal 1995 also
because of the opening of the Auburn branch office. Advertising expense
increased from $80,000 in fiscal 1994 to $133,000 in fiscal 1995 primarily
because of increased advertising on regional television stations.
Provision for Income Taxes. The provision for income taxes increased from
$1.2 million in fiscal 1994 to $1.6 million in fiscal 1995 as a result of higher
income before income taxes. The effective tax rate was 30.6% in fiscal 1994 and
34.8% in fiscal 1995.
28
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average weekly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
weekly balances. Management does not believe that the use of weekly balances
instead of daily balances has caused any material difference in the information
presented.
29
Year Ended September 30,
-------------------------------------------------------------------------------------------
1994 1995 1996
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)(2)............. $111,979 $10,168 9.08% $143,103 $13,603 9.51% $168,060 $15,880 9.45%
Mortgage-backed &
investment securities............. 7,263 428 5.89 12,676 667 5.26 6,689 397 5.94
FHLB stock & equity
securities........................ 1,270 110 8.66 1,370 99 7.15 1,499 126 8.41
Interest Bearing Deposits.......... 17,299 601 3.47 2,069 85 4.11 2,072 97 4.68
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.......................... $137,811 $11,307 8.20 $159,218 $14,454 9.08 $178,320 $16,500 9.25
Non-interest-earning assets......... 4,097 5,294 5,674
-------- -------- --------
Total assets..................... $141,908 $164,512 $183,994
======== ======== ========
Interest-bearing liabilities:
Passbook accounts.................. $ 28,291 $ 955 3.38 $ 27,512 $ 821 2.98 $ 24,800 $ 738 2.98
Money market accounts.............. 12,376 379 3.06 10,115 469 4.64 13,182 520 3.94
NOW accounts....................... 17,554 428 2.44 19,078 425 2.23 17,377 421 2.42
Certificates of deposit............ 61,809 2,854 4.62 73,596 3,981 5.41 89,024 5,271 5.92
FHLB advances-other
borrowed money.................... 1,491 99 6.64 10,539 664 6.30 11,005 679 6.17
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities..................... 121,521 4,715 3.88 140,840 $ 6,360 4.52 $155,388 $ 7,629 4.91
Non-interest bearing
liabilities....................... 5,973 6,474 8,330
-------- --------
Total liabilities................ $127,494 $147,314 $163,718
Retained earnings................... 14,414 17,198 20,276
-------- -------- --------
Total liabilities and
retained earnings............... $141,908 $164,512 $183,994
======== ======== ========
Net interest income................. $ 6,592 $ 8,094 $ 8,871
Interest rate spread................ 4.32% 4.56% 4.34%
Net interest margin(3).............. 4.78% 5.08% 4.97%
Ratio of interest-earning
assets to average interest-bearing
liabilities........................ 113.41% 113.05% 114.76%
Nine Months Ended
June 30,
------------------------------------------------------------
1996 1997
----------------------------- -----------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
-------- ---------- ------- -------- ---------- -------
Interest-earning assets:
Loans receivable(1)(2)............. $165,827 $11,660 9.38% $187,435 $12,975 9.23%
Mortgage-backed &
investment securities............. 7,233 323 5.95 4,613 215 6.21
FHLB stock & equity
securities........................ 1,483 97 8.72 1,549 85 7.32
Interest Bearing Deposits. 2,145 74 4.60 2,690 95 4.71
-------- ------- -------- -------
Total interest-earning
assets.......................... $176,688 $12,154 9.17 $196,287 $13,370 9.08
Non-interest-earning assets......... 5,352 7,504
-------- --------
Total assets..................... $182,040 $203,791
======== ========
Interest-bearing
liabilities:.......................
Passbook accounts.................. $ 24,699 $ 550 2.97 $ 24,769 $ 556 2.99
Money market accounts.............. 13,205 393 3.97 12,695 378 3.97
NOW accounts....................... 17,181 311 2.41 17,707 330 2.48
Certificates of deposit............ 87,333 3,893 5.94 97,472 4,302 5.88
FHLB advances-other
borrowed money.................... 11,372 535 6.27 16,657 671 5.37
-------- ------- -------- -------
Total interest bearing
liabilities..................... $153,790 $ 5,682 4.92 $169,300 $ 6,237 4.91
Non-interest bearing
liabilities....................... 8,345 11,749
Total liabilities................ $162,135 $181,049
Retained earnings................... 19,905 22,742
-------- --------
Total liabilities and
retained earnings............... $182,040 $203,791
======== ========
Net interest income................. $ 6,472 $ 7,133
Interest rate spread................ 4.25% 4.17%
Net interest margin(3).............. 4.88% 4.85%
Ratio of interest-earning assets to
average interest-bearing
liabilities........................ 114.89% 115.94%
- --------------------------------------------------------------------------------
(1) Does not include interest on loans 90 days or more past due. Includes loans
originated for sale.
(2) Average balance includes nonaccrual loans.
(3) Net interest income divided by total interest earning assets.
30
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the dates indicated, the weighted average yields earned on the Savings
Bank's assets, the weighted average interest rates paid on the Savings Bank's
liabilities, together with the net yield on interest-earning assets.
Nine Months Ended
Year Ended September 30, June 30, At
------------------------------- ------------------- June 30,
1994 1995 1996 1996 1997 1997
---- ---- ---- ---- ---- ----
Weighted average yield on:
Loans receivable(1)........................... 9.08% 9.51% 9.45% 9.38% 9.23% 8.80%
Mortgage-backed securities and
investment securities....................... 5.89 5.26 5.94 5.95 6.21 6.37
FHLB stock and equity securities.............. 8.66 7.15 8.41 8.72 7.32 7.50
Interest-bearing deposits..................... 3.47 4.11 4.68 4.60 4.71 4.88
All interest-earning assets................... 8.20 9.08 9.25 9.17 9.08 8.72
Weighted average rate paid on:
Passbook savings accounts..................... 3.38 2.98 2.98 2.97 2.99 2.98
Money market accounts......................... 3.06 4.64 3.94 3.97 3.97 3.92
NOW accounts.................................. 2.44 2.23 2.42 2.41 2.48 2.50
Certificate accounts.......................... 4.62 5.41 5.92 5.94 5.88 5.75
FHLB advances and other borrowed
money........................................ 6.64 6.30 6.17 6.27 5.37 5.60
All interest-bearing liabilities.............. 3.88 4.52 4.91 4.93 4.91 4.87
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities).......................... 4.32 4.56 4.34 4.25 4.17 3.85
Net interest margin (net interest income
as a percentage of average
interest-earning assets)...................... 4.78 5.08 4.97 4.88 4.85 N/A
- ------------------
(1) Weighted average rate at June 30, 1997 excludes loan fees.
31
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Savings Bank. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change (sum of the prior columns).
Year Ended September 30, Year Ended September 30,
1995 Compared to Year 1996 Compared to Year
Ended September 30, 1994 Ended September 30, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- ---------------------------------
Rate/ Net Rate/ Net
Rate Volume Volume Change Rate Volume Volume Change
------ ------- ------- ------- ------ ------- ------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)(2)......... $ 482 $2,820 $134 $3,436 $ (86) $2,377 $ (15) $2,276
Mortgage-backed securities and
investment securities......... (46) 319 (34) 239 86 (315) (41) (270)
FHLB stock and equity
securities..................... (19) 9 (2) (12) 17 9 2 28
Interest-bearing deposits....... 111 (528) (99) (516) 12 -- -- 12
----- ------ ---- ------ ----- ------ ----- ------
Total net change in income
on interest-earning assets...... 528 2,620 (1) 3,147 29 2,071 (54) 2,046
Interest-bearing liabilities:
Passbook accounts............... (104) (27) (3) (134) -- (83) -- (83)
NOW accounts.................... (37) 37 (3) (3) 36 (37) (3) (4)
Money market accounts........... 195 (69) (36) 90 (71) 144 (22) 51
Certificate accounts............ 489 545 93 1,127 375 836 79 1,290
FHLB advances and other
borrowed money................ (5) 601 (31) 565 (14) 30 (1) 15
----- ------ ---- ------ ----- ------ ----- ------
Total net change in expense
on interest-bearing
liabilities.................... 538 1,087 20 1,645 326 890 53 1,269
----- ------ ---- ------ ----- ------ ----- ------
Net change in net interest
income.......................... $ (10) $1,533 $(21) $1,502 $(297) $1,181 $(107) $ 777
===== ====== ==== ====== ===== ====== ===== ======
Nine Months Ended June 30,
1997 Compared to Nine Months
Ended June 30, 1996
Increase (Decrease)
Due to
------------------------------------
Rate/ Net
Rate Volume Volume Change
------ ------- ------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)(2)......... $(187) $1,526 $(24) $1,315
Mortgage-backed securities and
investment securities......... 14 (117) (5) (108)
FHLB stock and equity
securities..................... (15) 4 (1) (12)
Interest-bearing deposits....... 2 19 -- 21
----- ------ ---- ------
Total net change in income
on interest-earning assets...... (186) 1,432 (30) 1,216
Interest-bearing liabilities:
Passbook accounts............... 4 2 -- 6
NOW accounts.................... 9 9 1 19
Money market accounts........... -- (15) -- (15)
Certificate accounts............ (39) 453 (5) 409
FHLB advances and other
borrowed money................ (77) 249 (36) 136
----- ------ ---- ------
Total net change in expense
on interest-bearing
liabilities.................... (103) 698 (40) 555
----- ------ ---- ------
Net change in net interest
income.......................... $ (83) $ 734 $ 10 $ 661
===== ====== ==== ======
- ---------------
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
(2) Net change in interest income on loans includes loan fees of $164,000,
$229,000 and $320,000 for the years ended September 30, 1995 and 1996 and
the nine months ended June 30, 1997, respectively.
32
Asset and Liability Management and Interest Rate Risk
The Savings Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Savings Bank has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal element in achieving
this objective is to increase the interest-rate sensitivity of the Savings
Bank's interest-earning assets by retaining for its portfolio loans with
interest rates subject to periodic adjustment to market conditions and selling
fixed-rate one- to four-family mortgage loans. The Savings Bank relies on
retail deposits as its primary source of funds. Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds. As
part of its interest rate risk management strategy, the Savings Bank promotes
transaction accounts and certificates of deposit with terms up to six years.
The Savings Bank has adopted a strategy that is designed to maintain or
improve the interest rate sensitivity of assets relative to its liabilities.
The primary elements of this strategy involve the origination of ARM loans for
its portfolio; maintaining residential construction loans as a portion of total
net loans receivable because of their generally shorter terms and higher yields
than other one- to four-family residential mortgage loans; matching asset and
liability maturities; investing in short term securities; and the origination of
fixed-rate loans for sale in the secondary market and the retention of the
related loan servicing rights.
Sharp decreases in interest rates may adversely affect the Savings Bank's
earnings while increases in interest rates may beneficially affect the Savings
Bank's earnings because a larger portion of the Savings Bank's interest rate
sensitive assets than interest rate sensitive liabilities would reprice within a
one year period. Management has sought to sustain the match between asset and
liability maturities and rates, while maintaining an acceptable interest rate
spread. Pursuant to this strategy, the Savings Bank actively originates
adjustable rate loans for retention in its loan portfolio. Fixed-rate mortgage
loans generally are originated for the intended purpose of resale in the
secondary mortgage market. At June 30, 1997, adjustable rate loans and
adjustable rate mortgage-backed securities constituted $131.9 million, or 63.2%,
of the Savings Bank's total combined mortgage loan and mortgage-backed
securities portfolio. Although the Savings Bank has sought to originate ARM
loans, the ability to originate such loans depends to a great extent on market
interest rates and borrowers' preferences. Particularly in lower interest rate
environments, borrowers often prefer to obtain fixed rate loans.
Consumer loans and construction and land development loans typically have
shorter terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Savings Bank's exposure to fluctuations in interest
rates. At June 30, 1997, the construction and land development and consumer
loan portfolios amounted to $44.7 million and $10.7 million, or 21.9% and 5.2%
of total loans receivable, respectively. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Construction Lending" and "-- Lending Activities --
Consumer Lending."
The Savings Bank also invests in short-term to medium-term U.S.
Government securities as well as mortgage-backed securities issued or guaranteed
by U.S. Government agencies. See "BUSINESS OF THE SAVINGS BANK --Investment
Activities."
33
The following table presents the Savings Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1997.
First Year Repricing Later Repricing
--------------------------- -----------------------------------------------
0-3 4-6 7-12 1-3 3-5 5-10 10-20 Over 20
TOTAL Months Months Months Years Years Years Years Years
-------- ------ ------ ------ ----- ----- ----- ----- -----
(Dollars in Thousands)
LOANS(1)
ARMs.............................. $ 92,980 $28,339 $23,885 $ 18,818 $20,350 $ 1,588 $ -- -- $ --
Fixed rate mortgages.............. 19,418 1,178 1,047 1,940 5,830 3,576 3,942 1,656 249
Home equity/security mortgage..... 7,847 2,737 627 994 2,035 833 538 83 --
Consumer.......................... 1,745 1,032 189 204 227 55 30 8 --
Automobile........................ 1,041 135 114 199 443 114 30 6 --
Construction...................... 31,484 15,405 6,227 4,140 5,712 -- -- -- --
Nonresidential mortgage
(adjustable)..................... 21,696 3,614 4,923 4,954 8,205 -- -- -- --
Nonresidential mortgage (fixed)... 13,780 1,560 1,211 2,161 5,407 2,094 1,179 167 1
Commercial variable............... 9 9 -- -- -- -- -- -- --
Commercial fixed.................. 709 132 50 95 309 120 3 -- --
INVESTMENTS
Investment securities............. 2,312 2,312 -- -- -- -- -- -- --
Mortgage securities............... 4,172 1,155 1,684 1,236 69 23 4 1 --
-------- ------- ------- -------- ------- -------- ------- ------- -------
Total rate sensitive assets........ $197,193 $57,608 $39,957 $ 34,741 $48,587 $ 8,403 $ 5,726 $ 1,921 $ 250
======== ======= ======= ======== ======= ======== ======= ======= =======
LIABILITIES
Money market deposits............. $ 13,667 $ 4,527 $ 3,028 $ 3,379 $ 2,624 $ 105 $ 4 $ -- $ --
Certificates of deposit........... 104,007 25,074 16,254 35,770 24,156 2,343 360 50 --
Passbook accounts................. 25,130 2,144 1,961 3,434 8,971 4,396 3,514 690 20
NOW accounts...................... 17,515 1,494 1,366 2,394 6,253 3,064 2,449 481 14
BORROWINGS
FHLB advances..................... 13,771 1,500 -- -- 500 10,456 1,315 -- --
-------- ------- ------- -------- ------- -------- ------- ------- -------
Total rate sensitive liabilities... $174,090 $34,739 $22,609 $ 44,977 $42,504 $ 20,364 $ 7,642 $ 1,221 $ 34
======== ======= ======= ======== ======= ======== ======= ======= =======
PERIODIC GAP....................... -- $22,869 $17,348 $(10,236) $ 6,083 $(11,961) $(1,916) $ 700 $ 216
Gap ratio......................... -- 1.66 1.77 0.77 1.14 0.41 0.75 1.57 7.34
Gap percentage total.............. -- 11.09% 8.41% (4.96)% 2.95% (5.80)% (0.93)% 0.34% 0.10%
CUMULATIVE GAP..................... -- $22,869 $40,218 $ 29,982 $36,065 $ 24,105 $22,189 $22,889 $23,105
Gap ratio......................... -- 1.66 1.70 1.29 1.25 1.15 1.13 1.13 1.13
Gap percentage total.............. -- 11.09% 19.50% 14.54% 17.49% 11.69% 10.76% 11.10% 11.20%
- --------------------
(1) Net of loans in process.
34
The Savings Bank's analysis of its interest-rate sensitivity, as
illustrated in the preceding table, incorporates certain assumptions regarding
the amortization of loans and other interest-earning assets and the withdrawal
of deposits. The Savings Bank's interest-rate sensitivity analysis, as
illustrated in the foregoing table, could vary substantially if different
assumptions were used or if actual experience differs from the assumptions used.
The assumptions used in preparing the table are based on market loan prepayment
rates and market deposit decay rates observed by the FHLB-Seattle on or about
June 30, 1997. The Savings Bank believes that the FHLB-Seattle assumptions are
a realistic representation of its own portfolio.
Net Portfolio Value and Net Interest Income Analysis. In addition to the
interest rate gap analysis as discussed above, management monitors the Savings
Bank's interest rate sensitivity through the use of a model which estimates the
change in NPV (net portfolio value) and net interest income in response to a
range of assumed changes in market interest rates. The model first estimates
the level of the Savings Bank's NPV (market value of assets, less market value
of liabilities, plus or minus the market value of any off-balance sheet items)
under the current rate environment. In general, market values are estimated by
discounting the estimated cash flows of each instrument by appropriate discount
rates. The model then recalculates the Savings Bank's NPV under different
interest rate scenarios. The change in NPV under the different interest rate
scenarios provides a measure of the Savings Bank's exposure to interest rate
risk. The following information is presented as of June 30, 1997.
Net Interest Income Current Market Value
Projected ------------------------------- -------------------------------
Interest Rate Estimated $ Change % Change Estimated $ Change % Change
Scenario Value from Base from Base Value from Base from Base
- -------- ----- --------- --------- ----- --------- ---------
(Dollars in thousands)
400 $8,860 $ 96 1.10% $22,437 $(2,213) (8.98)%
300 9,042 278 3.17 23,811 (838) (3.40)
200 9,211 447 5.10 24,996 346 1.40
100 9,090 326 3.71 25,273 624 2.53
BASE 8,764 -- -- 24,649 -- --
(100) 8,368 (396) (4.52) 23,402 (1,247) (5.06)
(200) 7,925 (839) (9.58) 21,866 (2,783) (11.29)
(300) 7,592 (1,172) (13.37) 20,836 (3,813) (15.47)
(400) 7,324 (1,440) (15.43) 20,645 (4,004) (16.24)
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan repayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
In the event of a 200 basis point decrease in interest rates, the Savings
Bank would be expected to experience an 11.3% decrease in NPV and a 9.6%
decrease in net interest income. In the event of a 200 basis point increase in
interest rates, a 1.4% increase in NPV and a 5.1% increase in net interest
income would be expected. Based upon the modelling described above, the Savings
Bank's asset and liability structure results in decreases in NPV and decreases
in net interest income in a declining interest rate scenario and increases in
NPV and increases in net interest income in a rising interest rate scenario.
However, the amount of change in value of specific assets and liabilities due to
changes in rates is not the same in a rising rate environment as in a falling
rate environment.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
35
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are customer deposits, proceeds
from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At June 30,
1997, the Savings Bank's regulatory liquidity ratio (net cash, and short term
and marketable assets, as a percentage of net deposits and short term
liabilities) was 8.8%. At June 30, 1997, the Savings Bank also maintained an
uncommitted credit facility with the FHLB-Seattle that provided for immediately
available advances up to an aggregate amount of $41.2 million, under which $13.8
million was outstanding.
Liquidity management is both a short- and long-term responsibility of the
Savings Bank's management. The Savings Bank adjusts its investments in liquid
assets based upon management's assessment of (i) expected loan demand, (ii)
projected loan sales, (iii) expected deposit flows, and (iv) yields available on
interest-bearing deposits. Excess liquidity is invested generally in interest-
bearing overnight deposits and other short-term government and agency
obligations. If the Savings Bank requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the FHLB and
collateral for repurchase agreements.
The Savings Bank's primary investing activity is the origination of one- to
four-family mortgage loans and construction and land development loans. During
the years ended September 30, 1994, 1995 and 1996 and the nine months ended June
30, 1997, the Savings Bank originated $28.3 million, $26.9 million, $24.5
million and $18.3 million of one- to- four family mortgage loans and $39.2
million, $33.2 million, $29.7 million and $26.2 million of construction and land
development loans, respectively. At June 30, 1997, the Savings Bank had
mortgage loan commitments totalling $4.7 million and undisbursed loans in
process totalling $13.9 million. The Savings Bank anticipates that it will have
sufficient funds available to meet current loan commitments. Certificates of
deposit that are scheduled to mature in less than one year from June 30, 1997
totalled $77.1 million. Historically, the Savings Bank has been able to retain
a significant amount of its deposits as they mature.
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured state-
chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital
to total assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated
banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0%
and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. At
June 30, 1997, the Savings Bank was in compliance with all applicable capital
requirements. For a detailed discussion of regulatory capital requirements, see
"REGULATION -- The Savings Bank -- Capital Requirements." See also "HISTORICAL
AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
Impact of New Accounting Pronouncements
Accounting for Employee Stock Ownership Plans. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share in
future periods cannot be predicted due to the uncertainty of the fair value of
the shares at the time they will be committed to be released. See "PRO FORMA
DATA."
36
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. See Note 1 of Notes to the Consolidated
Financial Statements for a discussion of Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," and of SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125. SFAS No. 127 defers the
effective date of the application of certain portions of SFAS No. 125 until
January 1, 1998. Following the adoption of SFAS No. 125 on January 1, 1997, the
Savings Bank recorded servicing income on loans sold of $118,000.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement. SFAS No. 128 is effective for the financial
statements for the periods ending after December 15, 1997. SFAS No. 128
requires restatement of all prior period EPS data presented. The impact of its
adoption is not expected to be material to the Savings Bank.
Disclosure of Information About Capital Structure. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board ("APB") Opinions No. 10, "Omnibus Opinion - 1966," and No. 15, "Earnings
Per Share," and SFAS No. 47, "Disclosure of Long-Term Obligations," for entities
that were subject to those standards. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 contains no
change in disclosure requirements for entities that were previously subject to
the requirements of APB Opinions Nos. 10 and 15 and SFAS No. 47. The adoption
of the provisions of SFAS No. 129 is not expected to have a material impact on
the Savings Bank.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presenting of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
Disclosure About Segments. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," issued in June 1997, establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS No. 131 becomes effective for the
Savings Bank's fiscal year ending September 30, 1999, and requires that
comparative information from earlier years be restated to conform to its
requirements. The adoption of the provisions of SFAS No. 131 is not expected to
have a material impact on the Savings Bank.
Disclosures About Fair Value of Financial Instruments. See Notes 1 and 14
of Notes to the Consolidated Financial Statements for a discussion of Statement
of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair
Value of Financial Instruments." The Savings Bank adopted SFAS No. 107 for the
year ended September 30, 1996.
37
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting method are required to disclose in a
footnote to the financial statements pro forma net income and, if presented,
earnings per share, as if this statement had been adopted. The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995; however, companies are required
to disclose information for awards granted in their first fiscal year beginning
after December 15, 1994. Management expects to use the intrinsic value method
upon consummation of the Conversion and the adoption of stock based benefit
plans.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars,
without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Savings Bank's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services. See "RISK
FACTORS -- Potential Adverse Impact of Changes in Interest Rates."
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Washington business corporation at
the direction of the Savings Bank on September 8, 1997 for the purpose of
becoming a holding company for the Savings Bank upon completion of the
Conversion. Upon completion of the Conversion, the Savings Bank will be a
wholly-owned subsidiary of the Holding Company.
Business
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon completion of the Conversion, the Holding
Company's sole business activity will be the ownership of all of the outstanding
capital stock of the Savings Bank. In the future, the Holding Company may
acquire or organize other operating subsidiaries, although there are no current
plans, arrangements, agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Savings Bank with
the payment of appropriate rental fees, as required by applicable law.
As the holding company for the Savings Bank, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Savings Bank. See "BUSINESS OF THE SAVINGS BANK -- Competition."
38
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank operates as a community oriented financial institution
dedicated to serving the needs of its customers in its market area. The Savings
Bank's business consists primarily of attracting deposits from the general
public and using those funds to originate residential real estate loans and
loans secured by multi-family, land development and commercial properties.
Market Area
The Savings Bank considers Grays Harbor, Thurston, Pierce and King Counties
and, to a lesser extent, adjoining Kitsap County as its primary market area.
The Savings Bank conducts operations from its main office in Hoquiam (Grays
Harbor County), three branch offices in Grays Harbor County (Aberdeen, Montesano
and Ocean Shores), a branch office in King County (Auburn, opened in 1994), two
branch offices in Pierce County (Edgewood, opened in 1980, and Puyallup, opened
in 1996), a branch office in Thurston County (Lacey, opened in 1997) and a loan
production office in Kitsap County (Port Orchard, opened in 1995). See"--
Properties."
Hoquiam, population approximately 9,000, is located in Grays Harbor County
which is situated along Washington State's central Pacific coast. Hoquiam is
located approximately 110 miles southwest of Seattle and 145 miles northwest of
Portland, Oregon.
The Savings Bank considers its primary market area to include three
submarkets -- primarily rural Grays Harbor County with its historical dependence
on the timber and fishing industries; Ocean Shores with its dependence on
tourism and vacation home residents; and Pierce, King, Thurston and Kitsap
Counties with their dependence on state government in Olympia, the state
capital, and the aerospace and computer industries in the Seattle-Tacoma
metropolitan area. Each of these markets present operating risks to the Savings
Bank. See "RISK FACTORS -- Market Area Risk." The Savings Bank's recent
expansion into Thurston, King and Kitsap Counties and recent opening of a second
branch office in Pierce County represents the Savings Bank's attempt to
diversify its primary market area to become less reliant on the economy of Grays
Harbor County.
Economic conditions vary in the three submarkets. Grays Harbor County,
which includes the town of Ocean Shores, exhibits the weakest economic
conditions with a population growth rate, median household income and per capita
income levels all below the national and Washington State averages and
unemployment above the national and Washington State averages according to
recent published statistics. The economic conditions in Pierce, King, Thurston
and Kitsap Counties are generally more favorable according to recent published
statistics. Pierce County compares favorably to the national and Washington
State averages in all categories except for population growth where it only lags
the Washington State average and per capita income where it lags both the
national and Washington State averages. King County compares favorably to the
national and Washington State averages in all categories except for population
growth where it only lags the Washington State average. Thurston County
compares favorably to the national and Washington State averages in all
categories except for per capita income where it lags both the national and
Washington State averages. Kitsap County compares favorably to the national and
Washington State averages in all categories except for median household income
where it lags only the national average and per capita income where it lags both
the national and Washington State averages.
Lending Activities
General. Historically, the principal lending activity of the Savings Bank
has consisted of the origination of loans secured by first mortgages on owner-
occupied, one- to four-family residences and loans for the construction of one-
to four-family residences. In recent years, the Savings Bank has increased its
origination of loans secured by multi-family properties, construction and land
development loans, land loans and commercial real estate loans.
39
The Savings Bank's net loans receivable totalled approximately $187.5 million at
June 30, 1997, representing approximately 90.9% of consolidated total assets and
at that date construction and land development loans, land loans and loans
secured by commercial and multi-family properties were 93.1 million, or 45.5%,
of total loans.
The Savings Bank's internal loan policy limits the maximum amount of loans
to one borrower to 25% of its capital. At June 30, 1997, the maximum amount
which the Savings Bank could have lent to any one borrower and the borrower's
related entities was approximately $6.0 million under its policy. At June 30,
1997, the Savings Bank had no loans with an aggregate outstanding balance in
excess of this amount. At that date, the Savings Bank had 18 borrowers or
related borrowers with total loans outstanding in excess of $1.0 million. The
largest amount outstanding to any one borrower and the borrower's related
entities was approximately $2.9 million to developers for a condominium project,
which was not performing according to its terms at June 30, 1997. See "--
Nonperforming Assets and Delinquencies."
40
Loan Portfolio Analysis. The following table sets forth the composition of
the Savings Bank's loan portfolio by type of loan as of the dates indicated.
At September 30,
-------------------------------------------------------------
1992 1993 1994
------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- --------- -------- --------
(Dollars in thousands)
Mortgage Loans:
One- to four-family(1)(2)........ $ 67,872 59.43% $ 73,989 62.87% $ 73,754 52.94%
Multi-family..................... 6,270 5.49 2,374 2.02 4,806 3.45
Commercial....................... 11,767 10.30 11,242 9.55 11,784 8.46
Construction and land development 21,296 18.65 23,202 19.72 40,113 28.79
Land(2).......................... 2,181 1.91 2,277 1.94 4,118 2.96
-------- ------ -------- -------- -------- ------
Total mortgage loans............ 109,386 95.78 113,034 96.10 134,575 96.60
Consumer Loans:...................
Home equity and second mortgage.. 2,891 2.53 2,596 2.21 2,853 2.05
Other............................ 1,572 1.38 1,627 1.38 1,623 1.16
-------- ------ -------- -------- -------- ------
4,463 3.91 4,223 3.59 4,476 3.21
Commercial business loans......... 353 0.31 366 0.31 268 0.19
-------- ------ -------- -------- -------- ------
Total loans................... 114,202 100.00% 117,673 100.00% 139,319 100.00%
-------- ====== -------- ======== -------- ======
Less:
Undisbursed portion of loans
in process...................... (9,260) (9,370) (15,316)
Unearned income.................. (925) (906) (1,299)
Allowance for loan losses........ (972) (1,138) (1,120)
Market value adjustment of loans
held for sale.................. -- -- (26)
-------- -------- --------
Total loans receivable, net..... $103,045 $106,259 $121,558
======== ======== ========
At September 30,
--------------------------------------
1995 1996 At June 30, 1997
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage Loans:
One- to four-family(1)(2)........ $ 93,582 53.03% $ 95,978 48.51% $100,085 48.92%
Multi-family..................... 10,965 6.21 12,569 6.35 12,644 6.18
Commercial....................... 15,592 8.83 26,529 13.41 28,867 14.11
Construction and land development 42,752 24.23 47,140 23.83 44,744 21.86
Land(2).......................... 6,118 3.47 6,115 3.09 6,855 3.35
-------- ------ -------- ------ -------- ------
Total mortgage loans............ 169,009 95.77 188,331 95.19 193,195 94.42
Consumer Loans:...................
Home equity and second mortgage.. 5,201 2.95 6,576 3.32 7,898 3.86
Other............................ 2,019 1.15 2,476 1.25 2,785 1.37
-------- ------ -------- ------ -------- ------
7,220 4.10 9,052 4.57 10,683 5.23
Commercial business loans......... 232 0.13 476 0.24 718 0.35
-------- ------ -------- ------ -------- ------
Total loans................... 176,461 100.00% 197,859 100.00% 204,596 100.00%
-------- ====== -------- ====== -------- ======
Less:
Undisbursed portion of loans
in process...................... (17,262) (18,434) (13,887)
Unearned income.................. (1,554) (1,708) (1,704)
Allowance for loan losses........ (1,119) (1,133) (1,454)
Market value adjustment of loans
held for sale.................. (3) (89) (63)
-------- -------- --------
Total loans receivable, net..... $156,523 $176,495 $187,488
======== ======== ========
- --------------
(1) Includes loans held-for-sale.
(2) Includes real estate contracts totalling $1.4 million at June 30, 1997.
See " -- Real Estate Contracts."
41
Residential One- to Four-Family Lending. At June 30, 1997, 100.1 million,
or 48.9% of the Savings Bank's loan portfolio consisted of loans secured by one-
to four-family residences.
The Savings Bank originates both fixed-rate loans and adjustable-rate
loans. Generally, 15- and 30-year fixed-rate loans are originated to meet the
requirements for sale in the secondary market to the FHLMC, however, from time
to time, a portion of these fixed-rate loans originated by the Savings Bank may
be retained in the Savings Bank's loan portfolio to meet the Savings Bank's
asset/liability management objectives. The Savings Bank has recently begun to
utilize an automated underwriting program, which preliminarily qualifies a loan
as conforming to FHLMC underwriting standards when the loan is originated. At
June 30, 1997, $14.1 million, or 14.1% of the Savings Bank's one- to- four
family loan portfolio consisted of fixed rate one- to- four family mortgage
loans.
The Savings Bank also offers ARM loans at rates and terms competitive with
market conditions. All of the Savings Bank's ARM loans are retained in its loan
portfolio and not with a view toward sale in the secondary market.
The Savings Bank offers several ARM products which adjust annually after an
initial period ranging from one to five years subject to a limitation on the
annual increase of 2% and an overall limitation of 6%. These ARM products have
utilized the weekly average yield on one-year U.S. Treasury securities adjusted
to a constant maturity of one year plus a margin of 2.875% to 3.50%. ARM loans
held in the Savings Bank's portfolio do not permit negative amortization of
principal and carry no prepayment restrictions. Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment. At June 30, 1997, $86.0 million, or 85.9%, of the
Savings Bank's one- to- four family loan portfolio consisted of ARM loans.
The material portion of the Savings Bank's ARM loans are "non-conforming"
because they do not satisfy minimum loan amount requirements, acreage limits, or
various other requirements imposed by the FHLMC. Some of these loans are also
originated to meet the needs of borrowers who cannot otherwise satisfy the FHLMC
credit requirements because of personal and financial reasons (i.e., divorce,
bankruptcy, length of time employed, etc.), and other aspects, which do not
conform to the FHLMC's guidelines. Many of these borrowers have higher debt to
income ratios, or the loans are secured by unique properties in rural markets
for which there are no comparable sales of comparable properties to support
value according to secondary market requirements. These loans are known as non-
conforming loans and the Savings Bank may require additional collateral or lower
loan to value ratios prior to the origination of the loan. The Savings Bank has
historically found that its origination of these types of ARM loans has not
resulted in a higher amount of nonperforming loans. Management of the Savings
Bank attributes this low delinquency rate to its familiarity with its customers
and its knowledge of its primary market area. In addition, the Savings Bank
believes that these loans satisfy a need in its local market area. As a result,
subject to market conditions, the Savings Bank intends to continue to originate
such loans. See "RISK FACTORS -- Certain Lending Risks -- Risks Associated With
Non-conforming Residential Mortgage Lending."
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
interest to be paid by the customer due to increases in interest rates. It is
possible that, during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Savings Bank
generally provide, as a marketing incentive, for initial rates of interest below
the rates which would apply were the adjustment index used for pricing
initially, these loans are subject to increased risks of default or delinquency.
The Savings Bank attempts to reduce the potential for delinquencies and defaults
on ARM loans by qualifying the borrower based on the borrower's ability to repay
the ARM loan assuming that the maximum interest rate that could be charged at
the first adjustment period remains constant during the loan term. See "RISK
FACTORS -- Interest Rate Risk." Another consideration is that although ARM loans
allow the Savings Bank to increase the sensitivity of its asset base due to
changes in the interest rates, the extent of this interest sensitivity is
limited by the periodic and lifetime interest rate adjustment limits.
42
Because of these considerations, the Savings Bank has no assurance that yields
on ARM loans will be sufficient to offset increases in the Savings Bank's cost
of funds.
While fixed-rate, single-family residential mortgage loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Savings
Bank's loan portfolio contain due-on-sale clauses providing that the Savings
Bank may declare the unpaid amount due and payable upon the sale of the property
securing the loan. Typically, the Savings Bank enforces these due-on-sale
clauses to the extent permitted by law and as business judgment dictates. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
The Savings Bank requires fire and extended coverage casualty insurance
(and on loans originated since 1994, if appropriate, generally requires flood
insurance) be maintained on all of its real estate secured loans.
The Savings Bank's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price. However, the Savings Bank
usually obtains private mortgage insurance ("PMI") on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property. The maximum loan-to-value ratio on mortgage loans secured by
non-owner-occupied properties is generally 75% (70% for loans originated for
sale in the secondary market to the FHLMC).
Construction and Land Development Lending. Prompted by unfavorable economic
conditions in its primary market area in 1980, the Savings Bank sought to
establish a market niche and as a result initiated the origination of
construction lending. In recent periods, construction lending activities have
been primarily in the Pierce County and King County markets. Competition from
other financial institutions has increased in recent periods and the Savings
Bank expects that its margins on construction loans may be reduced in the
future.
The Savings Bank currently originates three types of residential
construction loans: (i) speculative construction loans, (ii) custom construction
loans and (iii) owner/builder loans. The Savings Bank initiated its construction
lending with the origination of speculative construction loans. As a result, the
Savings Bank began to establish contacts with the building community and
increased the origination of custom construction and land development loans in
rural market areas. The Savings Bank believes that its in-house computer system
has enabled it to establish processing and disbursement procedures to meet the
needs of these borrowers. To a lesser extent, the Savings Bank also originates
construction loans for the development of multi-family and commercial
properties. Annual originations of construction loans have been $39.2 million,
$33.2 million and $29.7 million for the three years ended September 30, 1996 and
$26.3 million for the nine months ended June 30, 1997. Subject to market
conditions, the Savings Bank intends to continue to emphasize its residential
construction lending activities. See "RISK FACTORS -- Certain Lending Risks."
At June 30, 1997, the composition of the Savings Bank's construction loan
portfolio was as follows:
Outstanding Percent of
Balance Total
------- -----
(In thousands)
Speculative construction.......................... $15,938 35.6%
Custom and owner/builder construction............. 11,604 25.9
Multi-family...................................... 11,033 24.7
Land development.................................. 4,972 11.1
Commercial real estate............................ 1,197 2.7
------- ------
Total........................................... $44,744 100.00%
======= ======
43
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Savings Bank or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the completion
of construction until the home buyer is identified. The Savings Bank lends to
approximately 75 builders located in the Savings Bank's primary market area,
each of which generally have three or four speculative loans outstanding from
the Savings Bank during a twelve month period. Rather than originating lines of
credit to home builders to construct several homes at once, the Savings Bank
originates and underwrites a separate loan for each home. Speculative
construction loans are originated for a term of 12 months, with fixed interest
rates ranging from 9.5% to 10.0%, and with a loan-to-value ratio of no more than
80% of the appraised estimated value of the completed property. During this 12
month period, the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. At June 30, 1997 speculative
construction loans totalled $15.9 million, or 35.6%, of the total construction
loan portfolio. At June 30, 1997, the Savings Bank had six borrowers each with
aggregate outstanding speculative loan balances of more than $500,000, all of
which were performing according to their respective terms and the largest of
which amounted to $320,000.
Unlike speculative construction loans, custom construction loans are made
to home builders who, at the time of construction, have a signed contract with a
home buyer who has a commitment for permanent financing for the finished home
with the Savings Bank or another lender. Custom construction loans are generally
originated for a term of 12 months, with fixed interest rates ranging from 9.0%
to 9.5%, and with loan-to-value ratios of 80% of the appraised estimated value
of the completed property or cost, whichever is less. During this 12 month
period, the borrower is required to make monthly payments of accrued interest on
the outstanding loan balance.
Owner/builder construction loans are originated to the home owner rather
than the home builder as a single loan that automatically converts to a
permanent loan at the completion of construction. The construction phase of a
owner/builder construction loan generally lasts six to nine months with fixed or
adjustable interest rates ranging from 9.0% to 9.5%, and with loan-to-value
ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the
completed property or cost, whichever is less. During this 12 month period, the
borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. At the completion of construction, the loan converts
automatically to either a fixed-rate mortgage loan, which conforms to secondary
market standards, or an ARM loan for retention in the Savings Bank's portfolio.
At June 30, 1997, custom and owner/builder construction loans totalled $11.6
million, or 25.9%, of the total construction loan portfolio. At June 30, 1997,
the largest outstanding custom construction loan had an outstanding balance of
$310,000 and was performing according to its terms.
The Savings Bank originates loans to local real estate developers with whom
it has established relationships for the purpose of developing residential
subdivisions (i.e., installing roads, sewers, water and other utilities)
----
(generally with 10 to 50 lots). At June 30, 1997, subdivision development loans
totalled $5.0 million, or 11.1% of construction and land development loans
receivable. Land development loans are secured by a lien on the property and
made for a period of two to five years with generally fixed interest rates, and
are made with loan-to-value ratios not exceeding 75%. Monthly interest payments
are required during the term of the loan. Land development loans are structured
so that the Savings Bank is repaid in full upon the sale by the borrower of
approximately 80% of the subdivision lots. Substantially all of the Savings
Bank's land development loans are secured by property located in its primary
market area. In addition, in the case of a corporate borrower, the Savings Bank
also generally obtains personal guarantees from corporate principals and reviews
of their personal financial statements. At June 30, 1997, the Savings Bank had
no nonaccruing land development loans.
Land development loans secured by land under development involve greater
risks than one- to- four family residential mortgage loans because such loans
are advanced upon the predicted future value of the developed property. If the
estimate of such future value proves to be inaccurate, in the event of default
and foreclosure the Savings Bank may be confronted with a property the value of
which is insufficient to assure full repayment. The
44
Savings Bank attempts to minimize this risk by limiting the maximum loan-to-
value ratio on land loans to 75% of the estimated developed value of the secured
property.
To a lesser extent, the Savings Bank also provides construction financing
for multi-family and commercial properties. At June 30, 1997, such construction
loans amounted to $12.2 million. These loans are secured by motels, apartment
buildings, condominiums, office buildings and retail rental space located in the
Savings Bank's primary market area and typically range in amount from $300,000
to $600,000. At June 30, 1997, the largest commercial construction loan was for
$600,000, secured by retail space located in Lacey, Washington, and was
performing according to its terms. Periodically, the Savings Bank purchases
(without recourse to the seller other than for fraud) from other lenders
participation interests in multi-family and commercial construction loans
secured by properties located in the Savings Bank's primary market area. The
Savings Bank underwrites such participation interests according to its own
standards. At June 30, 1997, the largest participation interest had an
outstanding balance of $2.6 million, which represented a 50% interest in a
construction loan secured by a multi-family property located in Bremerton,
Washington. The loan was performing according to its terms at June 30, 1997.
All construction loans must be approved by the Savings Bank's Loan
Committee. See "-- Loan Solicitation and Processing." Prior to preliminary
approval of any construction loan application, an independent fee appraiser
inspects the site and the Savings Bank reviews the existing or proposed
improvements, identifies the market for the proposed project and analyzes the
pro forma data and assumptions on the project. In the case of a speculative or
custom construction loan, the Savings Bank reviews the experience and expertise
of the builder. After preliminary approval has been given, the application is
processed, which includes obtaining credit reports, financial statements and tax
returns on the borrowers and guarantors, an independent appraisal of the
project, and any other expert reports necessary to evaluate the proposed
project. In the event of cost overruns, the Savings Bank requires that the
borrower increase the funds available for construction by depositing its own
funds into a loans in process account.
Loan disbursements during the construction period are made to the builder
based on a line item budget, which is assessed by periodic on-site inspections
by qualified Savings Bank employees. For most builders, the Savings Bank
disburses loan funds by providing vouchers to suppliers, which when used by the
builder to purchase supplies are submitted by the supplier to the Savings Bank
for payment.
The Savings Bank regularly monitors the construction loan disbursements
using an internal computer program. Property inspections are performed by
Savings Bank personnel for properties located within the Savings Bank's primary
market area and by independent inspectors for properties outside the primary
market area. The Savings Bank believes that its internal monitoring system helps
reduce many of the risks inherent in its construction lending.
The Savings Bank originates construction loan applications through customer
referrals, contacts in the business community and real estate brokers seeking
financing for their clients.
Construction lending affords the Savings Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Savings Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value upon completion proves to be inaccurate, the Savings Bank may be
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan depends on the builder's ability to sell the
property prior to the time that the construction loan is due. The Savings Bank
has sought to address these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices. In addition, because the
Savings Bank's
45
construction lending is primarily secured by properties in its primary market
area changes in the local and state economies and real estate markets could
adversely affect the Savings Bank's construction loan portfolio.
Real Estate Contracts. The Savings Bank purchases real estate contracts and
deeds of trust from individuals who have privately sold their homes or property.
These contracts are generally secured by one- to four-family properties,
building lots and undeveloped land and range in principal amount from $10,000 to
$200,000, but typically are in amounts between $20,000 and $40,000. Real estate
contracts purchased by the Savings Bank are generally located within its primary
market area. Prior to purchasing the real estate contract, the Savings Bank
reviews the contract and analyzes and assesses the collateral for the loan, the
downpayment made by the borrower and the credit history on the loan. As of June
30, 1997, the Savings Bank had outstanding $1.4 million of real estate
contracts.
Multi-Family Lending. At June 30, 1997, the Savings Bank had $12.6 million,
or 6.2% of the Savings Bank's total loan portfolio, secured by multi-family
dwelling units (more than four units) located primarily in the Savings Bank's
primary market area. Subject to market conditions, the Savings Bank intends to
become a more active originator of multi-family loans within its primary market
area. At June 30, 1997, approximately 40% of the Savings Bank's multi-family
loans represent participation interests in loans, secured by properties located
in the Savings Bank's primary market area, purchased from other lenders. Such
participation interests are purchased without recourse to the seller other than
for fraud. The Savings Bank underwrites such participation interests according
to its own standards.
Multi-family loans are generally originated with variable rates of interest
equal to 3.25% over the one-year constant maturity U.S. Treasury Bill Index,
with principal and interest payments fully amortizing over terms of up to 30
years. Multi-family loans generally range in principal balance from $300,000 to
$3.6 million. At June 30, 1997, the largest multi-family loan was a purchased
participation interest with an outstanding principal balance of $1.5 million and
was secured by an apartment building located in the Savings Bank's primary
market area. At June 30, 1997, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally 75%.
The Savings Bank requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Savings Bank
also inspects the subject property annually. The Savings Bank generally imposes
a minimum debt coverage ratio of approximately 1.10 for loans secured by multi-
family properties.
Multi-family mortgage lending affords the Savings Bank an opportunity to
receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Savings Bank seeks to minimize these
risks by strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the loan.
If the borrower is a corporation, the Savings Bank also generally obtains
personal guarantees from corporate principals based on a review of personal
financial statements. See "RISK FACTORS -- Certain Lending Risks -- Risks of
Commercial Real Estate and Multi-Family Lending."
Commercial Real Estate Lending. Commercial real estate loans totalled $28.9
million, or 14.1% of total loans receivable at June 30, 1997 and consisted of
122 loans. The Savings Bank originates commercial real estate loans generally at
variable interest rates and secured by properties, such as restaurants, motels,
office buildings and retail/wholesale facilities, located in its primary market
area. The principal balance of an average commercial real estate loan generally
ranges between $100,000 and $1.0 million. At June 30, 1997, the largest
commercial real estate loan had an outstanding balance of $2.1 million and is
secured by a motel located in the Savings Bank's primary market area. This loan
was performing according to its terms at June 30, 1997, however, at June 30,
1997, $2.9
46
million of commercial real estate loans were not performing according to terms.
See "--Nonperforming Assets and Delinquencies."
The Savings Bank requires appraisals of all properties securing commercial
real estate loans. Appraisals are performed by an independent appraiser
designated by the Savings Bank, all of which are reviewed by management. The
Savings Bank considers the quality and location of the real estate, the credit
of the borrower, the cash flow of the project and the quality of management
involved with the property. The Savings Bank generally imposes a minimum debt
coverage ratio of approximately 1.10 for originated loans secured by income
producing commercial properties. Loan-to-value ratios on commercial real estate
loans are generally limited to 75%. The Savings Bank generally obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
Commercial real estate lending affords the Savings Bank an opportunity to
receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Savings Bank seeks to minimize these
risks by limiting the maximum loan-to-value ratio to 75% and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.
Land Lending. The Savings Bank occasionally originates loans for the
acquisition of land upon which the purchaser can then build or make improvements
necessary to build or to sell as improved lots. At June 30, 1997, the Savings
Bank's land loan portfolio totalled $6.9 million and consisted of 160 loans.
Land loans originated by the Savings Bank are generally fixed-rate loans and
have maturities of five to ten years. Land loans generally range in principal
amount from $40,000 to $60,000. The largest land loan had an outstanding balance
of $298,000 at June 30, 1997 and was performing according to its terms.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, in the
event of default and foreclosure the Savings Bank may be confronted with a
property the value of which is insufficient to assure full repayment. The
Savings Bank attempts to minimize this risk by limiting the maximum loan-to-
value ratio on land loans to 75%.
Consumer Lending. Consumer lending has traditionally been a small part of
the Savings Bank's business. Consumer loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. Consumer loans include
home equity lines of credit, Title I home improvement loans, second mortgage
loans, savings account loans, automobile loans, boat loans, motorcycle loans,
recreational vehicle loans and unsecured loans. Consumer loans are made with
both fixed and variable interest rates and with varying terms. At June 30, 1997,
consumer loans amounted to $10.7 million, or 5.2% of the total loan portfolio.
At June 30, 1997, the largest component of the consumer loan portfolio
consisted of second mortgage loans and home equity lines of credit, which
totalled $7.9 million, or 3.9% of the total loan portfolio. Home equity lines of
credit and second mortgage loans are made for purposes such as the improvement
of residential properties, debt consolidation and education expenses, among
others. The majority of these loans are made to existing customers and are
secured by a first or second mortgage on residential property. The Savings Bank
occasionally solicits these loans. The loan-to-value ratio is typically 80% or
less, when taking into account both the first and second mortgage loans. Second
mortgage loans typically carry fixed interest rates with a fixed payment over a
term between five and 20 years. Home equity lines of credit are generally for a
one year term and the interest rate is tied to the 26 week Treasury Bill plus
4.0%.
47
Subsequent to June 30, 1997, the Savings Bank began issuing VISA credit
cards to its existing customers. The Savings Bank does not engage in direct
mailings of pre-approved credit cards.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans. The Savings Bank believes that these risks are not as prevalent in
the case of the Savings Bank's consumer loan portfolio because a large
percentage of the portfolio consists of second mortgage loans and home equity
lines of credit that are underwritten in a manner such that they result in
credit risk that is substantially similar to one- to- four family residential
mortgage loans. Nevertheless, second mortgage loans and home equity lines of
credit have greater credit risk than one- to- four family residential mortgage
loans because they are secured by mortgages subordinated to the existing first
mortgage on the property, which may or may not be held by the Savings Bank. At
June 30, 1997, there were $1,000 of consumer loans delinquent in excess of 90
days.
48
Loan Maturity
The following table sets forth certain information at June 30, 1997
regarding the dollar amount of loans maturing in the Savings Bank's portfolio
based on their contractual terms to maturity, but does not include scheduled
payments or potential prepayments. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
Within One Year After 3 Years After 5 Years After
One Year Through 3 Years Through 5 Years Through 10 Years 10 Years Total
-------- --------------- --------------- ---------------- -------- -----
(Dollars in thousands)
Mortgage loans:
One-to four-family....................... $ 522 $ 781 $1,265 $ 3,763 $ 93,754 $100,085
Multi-family............................. -- 2 208 7,254 5,180 12,644
Commercial............................... 600 259 528 9,729 17,751 28,867
Construction and land development(1)..... 20,694 10,268 18 814 12,950 44,744
Land..................................... 435 1,706 4,248 323 143 6,855
Consumer loans:
Home equity and second mortgage.......... 2,275 545 1,360 1,656 2,062 7,898
Other.................................... 1,190 583 650 167 195 2,785
Commercial business loans................. 81 22 600 15 -- 718
------- ------- ------ ------- -------- --------
Total.................................. $25,797 $14,166 $8,877 $23,721 $132,035 $204,596
======= ======= ====== ======= ========
Less:
Undisbursed portion of loans in process.. (13,887)
Unearned income.......................... (1,704)
Allowance for loan losses................ (1,454)
Market value adjustment on loans
held for sale........................... (63)
--------
Loans receivable, net.................. $187,488
========
- -------------
(1) Includes construction/permanent that convert to a permanent mortgage
loan once construction is completed.
49
The following table sets forth the dollar amount of all loans due after
June 30, 1997, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
(In thousands)
Mortgage loans:
One-to four-family................... $14,072 $ 86,013 $100,085
Multi-family......................... 5,411 7,233 12,644
Commercial........................... 7,030 21,837 28,867
Construction and land development.... 32,545 12,199 44,744
Land................................. 6,835 20 6,855
Consumer loans:
Home equity and second mortgage...... 5,888 2,010 7,898
Other................................ 2,690 95 2,785
------- -------- --------
8,578 2,150 10,683
------- -------- --------
Commercial business loans............. 709 9 718
------- -------- --------
Total.............................. $75,180 $129,416 $204,596
======= ======== ========
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Savings Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, and referrals from builders and
realtors. Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate offered as collateral generally is undertaken by an
appraiser retained by the Savings Bank and certified by the State of Washington.
Mortgage loan applications are initiated by loan officers and are required
to be approved by the Savings Bank's Loan Committee, which consists of the
Savings Bank's President, Executive Vice President and Vice President. All loans
up to and including $300,000 may be approved by any two of the Savings Bank's
President, Executive Vice President or Vice President, without Board approval.
Loans in excess of $300,000, as well as loans of any size granted to a single
borrower whose aggregate lending relationship exceeds $300,000, must be approved
by the Savings Bank's Board of Directors.
Loan Originations, Purchases and Sales. During the year ended September 30,
1996 and the nine months ended June 30, 1997, the Savings Bank's total gross
loan originations were $76.5 million and $55.5 million, respectively.
Periodically, the Savings Bank purchases participation interests in construction
and land development loans and multi-family loans, secured by properties located
in the Savings Bank's primary market area, from other lenders. Such purchases
are underwritten to the Savings Bank's underwriting guidelines and are without
recourse to the seller other than for fraud. See "-- Construction and Land
Development Lending" and "-- Multi-Family Lending."
Consistent with its asset/liability management strategy, the Savings Bank's
policy has been to retain in its portfolio all of the ARM loans and generally
originates fixed rate loans with a view toward sale in the secondary market to
FHLMC; however, from time to time, a portion of fixed-rate loans may be retained
in the Savings Bank's
50
portfolio to meet its asset-liability objectives. Loans sold in the secondary
market are generally sold on a servicing retained basis. At June 30, 1997, the
Savings Bank's loan servicing portfolio totalled $54.0 million.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
Nine Months Ended
Year Ended September 30, June 30,
-------------------------------- ------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Loans originated:
Mortgage loans:
One-to four family..................... $ 28,317 $ 26,883 $ 24,512 $ 19,852 $ 18,309
Multi-family........................... 1,058 518 3,946 3,793 1,267
Commercial............................. 921 2,798 10,100 8,880 2,066
Construction and land development...... 39,207 33,240 29,662 20,202 26,260
Land................................... 3,507 2,876 2,590 1,725 1,951
Consumer................................ 2,996 6,091 5,358 4,257 5,300
Commercial business loans............... 129 89 348 355 413
-------- -------- -------- -------- --------
Total loans originated................. 76,135 72,495 76,516 59,064 55,506
Loans purchased:.........................
Mortgage loans:.........................
One-to four family..................... -- 704 367 297 64
Multi-family........................... 1,500 3,318 1,163 1,163 --
Commercial............................. -- 1,091 -- -- 546
Construction........................... 1,500 3,050 4,300 1,675 --
Land................................... -- 802 83 59 131
-------- -------- -------- -------- --------
Total loans purchased................. 3,000 8,965 5,913 3,194 741
-------- -------- -------- -------- --------
Total loans originated and purchased.. 79,135 81,460 82,429 62,258 56,247
Loans sold:
Total whole loans sold................. (22,154) (4,200) (9,153) (5,723) (11,256)
Participation loans.................... (725) -- (3,229) -- --
-------- -------- -------- -------- --------
Total loans sold....................... (22,879) (4,200) (12,382) (5,723) (11,256)
Mortgage loan principal repayments....... (34,610) (40,118) (48,649) (40,693) (38,254)
Increase (decrease) in other items, net.. (6,347) (2,177) (1,426) (3,251) 4,256
-------- -------- -------- -------- --------
Net increase in loans receivable, net.... $ 15,299 $ 34,965 $ 19,972 $ 12,591 $ 10,993
======== ======== ======== ======== ========
Loan Origination and Other Fees. The Savings Bank, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by the Savings Bank is generally 1.0% to 2.0%.
Current accounting standards require fees received (net of certain loan
origination costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net deferred fees or
costs associated with loans that are prepaid are recognized as income at the
time of prepayment. The Savings Bank had $1.6 million of net deferred mortgage
loan fees at June 30, 1997.
Nonperforming Assets and Delinquencies. The Savings Bank assesses
late fees or penalty charges on delinquent loans of approximately 5% of the
monthly loan payment amount. Substantially all fixed-rate and ARM
51
loan payments are due on the first day of the month; however, the borrower is
given a 15 day grace period to make the loan payment. When a mortgage loan
borrower fails to make a required payment when due, the Savings Bank institutes
collection procedures. The first notice is mailed to the borrower eight days
after the date the payment is due and, if necessary, a second written notice is
sent on the 16th day giving the borrower 15 days to respond and correct the
delinquency. Attempts to contact the borrower by telephone generally begin upon
the thirtieth day of delinquency. If a satisfactory response is not obtained,
continuous follow-up contacts are attempted until the loan has been brought
current. Before the 90th day of delinquency, attempts to interview the
borrower, preferably in person, are made to establish (i) the cause of the
delinquency, (ii) whether the cause is temporary, (iii) the attitude of the
borrower toward the debt, and (iv) a mutually satisfactory arrangement for
curing the default.
If the borrower is chronically delinquent and all reasonable means of
obtaining payment on time have been exhausted, foreclosure is initiated
according to the terms of the security instrument and applicable law. Interest
income on loans is reduced by the full amount of accrued and uncollected
interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Savings Bank institutes the same
collection procedures as for its mortgage loan borrowers.
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent by more than 30
days, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated.
At September 30,
--------------------------------------------------- At June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to four-family........................ $ 469 $ 612 $ 392 $ 646 $ 735 $ 841
Commercial................................ -- -- -- -- -- 2,886(1)
Construction and land development......... 966 196 125 391 771 3,991(2)
Consumer loans............................ 1 -- 30 -- 14 1
Commercial business loans................. -- -- -- -- -- 11
------ ----- ----- ------ ------ ------
Total.................................. 1,436 808 547 1,037 1,520 7,730
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Construction and land development......... -- -- -- -- -- 303
------ ----- ----- ------ ------ ------
Total................................. -- -- -- -- -- 303
------ ----- ----- ------ ------ ------
Total of nonaccrual and
90 days past due loans..................... $1,436 808 $ 547 $1,037 $1,520 $8,033
Real estate owned and other
repossessed assets......................... 879 484 407 209 125 317
------ ----- ----- ------ ------ ------
Total nonperforming assets............. 2,315 1,292 954 1,246 1,645 8,350
Restructured loans.......................... -- 11 29 207 158 71
(table continued, and footnotes located, on following page)
52
At September 30,
-------------------------------------------------------- At June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net................ 1.39% 0.76% 0.45% 0.66% 0.86% 4.28%(3)
Nonaccrual and 90 days or more past due
loans as a percentage of total assets... 1.16% 0.58% 0.36% 0.58% 0.78% 3.90%(3)
Nonperforming assets as a
percentage of total assets.............. 1.87% 0.93% 0.63% 0.70% 0.85% 4.05%(3)
Loans receivable, net.................... $103,045 $106,259 $121,558 $156,523 $176,495 $187,488
======== ======== ======== ======== ======== ========
Total assets............................. $123,889 $139,233 $151,044 $177,761 $194,357 $206,188
======== ======== ======== ======== ======== ========
- --------------
(1) Includes two loans each with a balance of $1.4 million at June 30,
1997, as discussed below.
(2) Includes two loans with balances of $1.9 million and $1.0 million at
June 30, 1997, as discussed below.
(3) Includes the loans described in footnotes 1 and 2.
Additional interest income, which would have been recorded for the
year ended September 30, 1996 and the nine months ended June 30, 1997 had
nonaccruing loans been current in accordance with their original terms, amounted
to approximately $42,000 and $214,000, respectively. No interest income was
included in the results of operations on such loans for the year ended September
30, 1996 and the nine months ended June 30, 1997.
The following is a discussion of the Savings Bank's major problem
assets included in commercial and construction and land development loans at
June 30, 1997:
Convenience store/retail space and mini-storage, Kitsap County,
---------------------------------------------------------------
Washington. The Savings Bank has two loans that were originated in 1996 on two
- -----------
separate properties: a convenience store combined with retail space and a 436
unit mini storage facility. The original loan amounts (before additional
advances) were $1.4 million for the convenience store and retail space and $1.2
million for the mini-storage facility. The convenience store is being operated
by the borrowers with the retail space currently in the lease up stage, with two
of the six spaces occupied. The mini-storage facility is in the lease up stage
with approximately 140 units leased. These loans are delinquent primarily
because of a dispute between the two borrowers. The Savings Bank does not
expect to incur any material losses from these loans based on a recent
assessment of the real estate collateral that indicated a market value of
approximately $4.0 million. At June 30, 1997, the loans were classified
"special mention" by the Savings Bank. See "-- Asset Classification."
Condominium loan, Southern King County, Washington. The Savings Bank
---------------------------------------------------
has two loans for the construction and sale of a 61-unit condominium complex.
The original loan amounts were $3.9 million and $1.7 million, respectively, and
were originated in 1994 and 1996. At June 30, 1997, 30 units had been sold, 15
units were available for sale, and 16 units were in various stages of
completion. The Savings Bank does not expect to incur any material losses from
these loans based on a recent assessment of the real estate collateral that
indicated a market value of approximately $3.6 million on a finished basis. At
June 30, 1997, the loans were classified "substandard" by the Savings Bank. See
"-- Asset Classification" and "RECENT DEVELOPMENTS -- Subsequent Events."
Real Estate Owned. Real estate acquired by the Savings Bank as a
result of foreclosure or by deed-in-lieu of foreclosure is classified as real
estate owned until sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value.
53
Subsequent to foreclosure, the property is carried at the lower of the
foreclosed amount or fair value, less estimated selling costs. At June 30, 1997,
the Savings Bank had $317,000 in real estate owned consisting primarily of one-
to- four family properties.
Restructured Loans. Under GAAP, the Savings Bank is required to
account for certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Savings Bank for economic or
legal reasons related to the borrower's financial difficulties grants a
concession to the borrowers that the Savings Bank would not otherwise consider.
Debt restructurings or loan modifications for a borrower do not necessarily
always constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans. The Savings Bank
had $71,000 of restructured loans as of June 30, 1997, which consisted of two
one- to- four family mortgage loans and one consumer loan.
Asset Classification. Applicable regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, regulatory
examiners have authority to identify problem assets and, if appropriate, require
them to be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. When an insured institution classifies problem
assets as either substandard or doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by management. These
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities and the risks associated
with particular problem assets. When an insured institution classifies problem
assets as loss, it charges off the balances of the asset. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated as special mention. The Savings Bank's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the FDIC and the Division which can
order the establishment of additional loss allowances.
The aggregate amounts of the Savings Bank's classified assets (as determined
by the Savings Bank), and of the Savings Bank's general loss allowances at the
dates indicated, were as follows:
At September 30,
---------------------- At June 30,
1995 1996 1997
---- ---- -------------
(In thousands)
Loss..................... $ -- $ -- $ --
Doubtful................. -- -- --
Substandard assets....... 1,371 2,061 5,510(1)
Special mention.......... -- 97 2,886(1)
General loss allowances.. 1,119 1,133 1,454
- ------------------
(1) For further information concerning the increase in classified assets, see
"-- Nonperforming Assets and Delinquencies."
Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for the determination of provisions for loan losses that takes into
consideration the need for an overall general valuation allowance.
54
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Savings Bank increases its allowance
for loan losses by charging provisions for loan losses against the Savings
Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management reviews the adequacy of the allowance at least
quarterly based on management's assessment of current economic conditions, past
loss and collection experience, and risk characteristics of the loan portfolio.
A provision for losses is charged against income monthly to maintain the
allowances.
At June 30, 1997, the Savings Bank had a general allowance for loan losses
of $1.5 million. Management believes that the amount maintained in the
allowances will be adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Savings Bank's loan portfolio, will not request the
Savings Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Savings Bank's financial condition and results of operations.
55
The following table sets forth an analysis of the Savings Bank's gross
allowance for possible loan losses for the periods indicated.
Nine Months
Ended
Year Ended September 30, June 30,
------------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period....... $ 799 $ 972 $ 1,138 $ 1,120 $1,119 $1,119 $1,133
Provision for loan losses.............. 188 175 -- -- 70 45 334
Recoveries:............................
Consumer loans:.......................
Automobile........................... -- 8 -- -- -- -- --
Other................................ -- -- -- -- -- -- 9
------ ------- ------- ------- ------ ------ ------
Total recoveries.................... -- 8 -- -- -- -- 9
Charge-offs:...........................
Mortgage loans:.......................
One-to four-family................... -- 10 -- -- -- -- 19
Home equity and second mortgage...... 15 6 18 -- -- -- --
Other................................ -- 1 -- 1 1 -- --
------ ------- ------- ------- ------ ------ ------
Total charge-offs................... 15 17 18 1 1 -- 19
Net charge-offs..................... 15 9 18 1 1 -- 10
Transfers........................... -- -- -- -- 55 19 3
------ ------- ------- ------- ------ ------ ------
Balance at end of period.......... $ 972 $ 1,138 $ 1,120 $ 1,119 $1,133 $1,145 $1,454
====== ======= ======= ======= ====== ====== ======
Allowance for loan losses as a
percentage of total loans (net)
outstanding at the end of the period.. 0.94% 1.07% 0.92% 0.71% 0.64% 0.67% 0.78%
Net charge-offs as a percentage
of average loans outstanding
during the period..................... 0.02% 0.01% 0.02% --% --% 0.01% 0.01%
Allowance for loan losses as
a percentage of nonperforming
loans at end of period................ 67.69% 140.84% 204.75% 107.91% 74.54% 97.90% 18.10%(1)
- ---------------
(1) This ratio would be 63.22% excluding the loans discussed under
" -- Nonperforming Assets and Delinquencies."
56
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
At September 30,
----------------------------------------------------------------------------------------------
1992 1993 1994
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Mortgage loans:
One- to four-family....... $ -- 59.43% $ -- 62.88% $ 333 52.94%
Multi-family.............. -- 5.49 -- 2.02 77 3.45
Commercial................ -- 10.30 -- 9.55 266 8.46
Construction.............. -- 18.65 -- 19.72 240 28.79
Land...................... -- 1.91 -- 1.94 158 2.96
Non-mortgage loans:
Consumer loans............ -- 3.91 -- 3.58 39 3.21
Commercial business loans. -- 0.31 -- 0.31 7 0.19
Unallocated................ 972 N/A 1,138 N/A -- N/A
--------- --------- --------- --------- --------- ---------
Total allowance
for loan losses...... $ 972 100.00% $1,138 100.00% $ 1,120 100.00%
========= ========= ========= ========= ========= =========
At September 30, At
------------------------------------------------------------ June 30,
1995 1996 1997
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Mortgage loans:
One- to four-family....... $ 278 53.03% $ 261 48.51% $ 253 48.92%
Multi-family.............. 81 6.21 83 6.35 130 6.18
Commercial................ 271 8.84 317 13.41 363 14.11
Construction.............. 337 24.23 316 23.83 510 21.86
Land...................... 98 3.47 102 3.09 136 3.35
Non-mortgage loans:
Consumer loans............ 44 4.09 46 4.57 50 5.23
Commercial business loans. 10 0.13 8 0.24 50 0.35
Unallocated................ -- N/A -- N/A -- N/A
--------- --------- --------- --------- --------- ---------
Total allowance
for loan losses...... $ 1,119 100.00% $ 1,133 100.00% $ 1,454 100.00%
========= ========= ========= ========= ========= =========
57
Investment Activities
Under Washington law, savings banks are permitted to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, banker's acceptances, repurchase agreements, federal
funds, commercial paper, investment grade corporate debt securities and
obligations of States and their political sub-divisions.
As of June 30, 1997, the Savings Bank's investment securities portfolio
consisted entirely of mortgage-backed securities and FHLB-Seattle stock. At
June 30, 1997, the Savings Bank's investment in FHLB-Seattle stock totalled $1.6
million. The market value of the Savings Bank's investment securities portfolio
amounted to $11.2 million, $6.4 million and $5.7 million at September 30, 1995
and 1996 and June 30, 1997, respectively.
The Holding Company and the Savings Bank may invest a portion of the net
proceeds from the Offerings in short term U.S. government and agency
obligations. See "USE OF PROCEEDS."
58
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated.
At September 30,
---------------------------------------------------------------------- At June 30,
1994 1995 1996 1997
---------------------- --------------------- --------------------- ---------------------
Amortized Percent of Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Total Cost(1) Total Cost(1) Total Cost(1) Total
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(In thousands)
Held to Maturity
(at amortized cost):
Debt Securities:
U.S. Treasury obligations.. $ 6,998 40.38% $ 2,504 22.15% $ -- --% $ -- --%
U.S. Government agency
obligations............... 1,000 5.77 1,000 8.84 -- -- -- --
Mortgage-backed securities... 7,402 42.71 6,352 56.19 4,951 75.91 4,172 72.85
Investment certificates of
deposit..................... 599 3.46 -- -- -- -- -- --
------- ------ ------- ------ ------ ------ ------ ------
Total held to maturity
securities.................. 15,999 92.32 9,856 87.18 4,951 75.91 4,172 72.85
Available for Sale (at
market value):
Mortgage-backed securities... -- -- -- -- -- -- -- --
FHLB stock................... 1,280 7.39% 1,363 12.06% 1,470 22.54% 1,555 27.15%
Other........................ 50 0.29 86 0.76 102 1.55 -- --
------- ------ ------- ------ ------ ------ ------ ------
Total available for sale
securities................ 1,330 7.68 1,449 12.82 1,572 24.09 1,555 27.15
------- ------ ------- ------ ------ ------ ------ ------
Total portfolio.............. $17,329 100.00% $11,305 100.00% $6,522 100.00% $5,727 100.00%
======= ====== ======= ====== ====== ====== ====== ======
- ------------------
(1) The market value of the Savings Bank's investment portfolio amounted to
$5.7 million as of June 30, 1997, $6.4 million as of September 30, 1996,
$11.2 million as of September 30, 1995 and $16.9 million as of September
30, 1994. At June 30, 1997, the market values of the principal components
of the Savings Bank's investment portfolio were: $4.1 million in mortgage-
backed securities and $1.2 million in FHLB stock.
59
The following table sets forth the maturities and weighted average yields
of the debt and mortgage-backed securities in the Savings Bank's investment
securities portfolio at June 30, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
----------------- --------------- -------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Held to Maturity:
Mortgage-backed securities........... $ -- --% $997 5.95% $ -- --% $ 3,175 6.50%
-------- ------- ------ -------
Total held to maturity securities.... $ -- -- 997 5.95 $ -- -- 3,175 6.50
======== ======= ====== =======
Available for Sale:
FHLB Stock........................... 1,555 7.50 -- -- -- -- -- --
Other................................ -- -- -- -- -- -- -- --
-------- ------- ------ -------
Total available for sale securities.. 1,555 7.50 -- -- -- -- -- --
-------- ------- ------ -------
Total portfolio...................... $ 1,555 7.50 $997 5.95 $ -- -- $ 3,175 6.50
======== ======= ====== =======
60
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the Savings
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle may be
used to compensate for reductions in the availability of funds from other
sources. Presently, the Savings Bank has no other borrowing arrangements.
Deposit Accounts. Substantially all of the Savings Bank's depositors are
residents of Washington. Deposits are attracted from within the Savings Bank's
market area through the offering of a broad selection of deposit instruments,
including money market deposit accounts, regular savings accounts and
certificates of deposit. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Savings Bank considers current market interest rates,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. In recent periods, the Savings Bank has used
deposit interest rate promotions in connection with the opening of new branch
offices. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
The Savings Bank has recently adopted a strategy to extend the term of its
liabilities in the form of longer term certificate accounts and maintain
adequate liquidity levels to address its interest rate risk exposure. The
implementation of such strategy, however, is not reflected in the Savings Bank's
recent financial data as most of its liabilities are still in the form of short
term certificate accounts. See "RISK FACTORS -- Potential Adverse Impact of
Changes in Interest Rates."
At June 30, 1997 the Savings Bank had $22.8 million of jumbo certificates
of deposit, which includes $8.0 million in public unit funds.. The Savings Bank
does not solicit brokered deposits and believes that its jumbo certificates of
deposit, which represented 13.6% of total deposits at June 30, 1997, present
similar interest rate risk to its other deposit products.
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, as the sole stockholder of the
Savings Bank. See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Liquidation Rights."
61
The following table sets forth information concerning the Savings Bank's time
deposits and other interest-bearing deposits at June 30, 1997.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- ----------
(In thousands)
--% Non-Interest Bearing $ 4,601 2.75%
2.50 NOW Checking 17,515 10.48
2.98 Passbook Savings 25,130 15.04
3.92 Money Market Accounts 13,667 8.18
Certificates of Deposit(1)
--------------------------
5.65 Maturing within 1 year 77,096 46.13
5.95 Maturing after 1 year but within 2 years 19,100 11.43
6.24 Maturing after 2 years but within 5 years 7,393 4.42
6.53 Maturing after 5 years 418 0.25
-------- --------
104,007 62.23
-------- --------
Other Deposits 2,220 1.32
-------- --------
4.61 TOTAL $167,140 100.00%
======== ========
- -----------------
(1)Based on remaining maturity of certificates.
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of June 30, 1997.
Jumbo certificates of deposit have principal balances of $100,000 or more and
the rates paid on such accounts are generally negotiable.
Maturity Period Amount
- --------------- --------------
(In thousands)
Three months or less............ $10,547
Over three through six months... 2,392
Over six through twelve months.. 5,913
Over twelve months.............. 3,937
-------
Total....................... $22,789
=======
62
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
At September 30,
-------------------------------------------------------------------------------
1994 1995 1996
------------------ ---------------------------- ----------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Non-interest-bearing....... $ 2,408 1.87% $ 3,116 2.18% $ 708 $ 3,571 2.28% $ 455
NOW checking............... 17,391 13.52 17,525 12.25 134 18,003 11.50 478
Passbook savings accounts.. 30,319 23.56 25,553 17.86 (4,766) 25,400 16.22 (153)
Money market deposit....... 11,948 9.29 12,734 8.90 786 13,364 8.54 630
Certificates of deposit
which mature in the year
ending:
Within 1 year.............. 43,087 33.49 52,658 36.80 9,571 64,202 41.01 11,544
After 1 year, but within 2
years..................... 13,959 10.85 19,434 13.58 5,475 18,737 11.97 (697)
After 2 years, but within
5 years................... 5,962 4.63 8,911 6.23 2,949 9,814 6.27 903
Certificates maturing
thereafter................ 951 0.74 844 0.59 (107) 579 0.37 (265)
Other...................... 2,644 2.05 2,309 1.61 (335) 2,879 1.84 570
-------- ------ -------- ------ ------- -------- ------ -------
Total................. $128,669 100.00% $143,084 100.00% $14,415 $156,549 100.00% $13,465
======== ====== ======== ====== ======= ======== ====== =======
At June 30,
1997
-----------------------------
Percent
of Increase
Amount Total (Decrease)
------ ----- ----------
(Dollars in thousands)
Non-interest-bearing....... $ 4,601 2.75% $ 1,030
NOW checking............... 17,515 10.48 (488)
Passbook savings accounts.. 25,130 15.04 (270)
Money market deposit....... 13,667 8.18 303
Certificates of deposit
which mature in the year
ending:
Within 1 year.............. 77,096 46.13 12,894
After 1 year, but within 2
years..................... 19,100 11.43 363
After 2 years, but within
5 years................... 7,393 4.42 (2,421)
Certificates maturing
thereafter................ 418 0.25 (161)
Other...................... 2,220 1.32 (659)
-------- ------ -------
Total................. $167,140 100.00% $10,591
======== ====== =======
63
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates as of the dates indicated.
At September 30, At
------------------------------------ June 30,
1994 1995 1996 1997
---- ---- ---- ------
(Dollars in thousands)
2.00 - 3.99%....................................... $ 12,641 $ 346 $ 171 $ 158
4.00 - 4.99%....................................... 23,797 3,220 6,802 --
5.00 - 5.99%....................................... 24,003 39,921 53,278 83,766
6.00 - 6.99%....................................... 1,589 31,473 26,914 14,941
7.00% and over..................................... 1,929 6,887 6,167 5,142
-------- -------- -------- --------
Total.............................................. $ 63,959 $ 81,847 $ 93,332 $104,007
======== ======== ======== ========
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits at
June 30, 1997.
Amount Due
--------------------------------------------
After
One to Two to
Less Than Two Five After
One Year Years Years Five Years Total
--------- ----- ----- ---------- -----
(Dollars in thousands)
2.00 - 3.99%.......................... $ 158 $ -- $ -- $ -- $ 158
4.00 - 4.99%.......................... -- -- -- -- --
5.00 - 5.99%.......................... 65,641 14,228 3,577 320 83,766
6.00 - 6.99%.......................... 10,843 1,902 2,195 1 14,941
7.00% and over........................ 454 2,970 1,621 97 5,142
-------- -------- -------- -------- --------
Total................................. $ 77,096 $ 19,100 $ 7,393 $ 418 $104,007
======== ======== ======== ======== ========
Deposit Activities
The following table sets forth the savings activities of the Savings Bank for
the periods indicated.
Nine Months Ended
Year Ended September 30, June 30,
-------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(In thousands)
Beginning balance.................................. $125,402 $128,669 $143,084 $143,084 $156,549
Net deposits (withdrawals) before
interest credited................................. (1,349) 8,719 6,516 7,276 5,026
Interest credited.................................. 4,616 5,696 6,949 5,147 5,565
-------- -------- -------- -------- --------
Net increase in deposits........................... 3,267 14,415 13,465 12,423 10,591
-------- -------- -------- -------- --------
Ending balance..................................... $128,669 $143,084 $156,549 $155,507 $167,140
======== ======== ======== ======== ========
64
Borrowings
Savings deposits are the primary source of funds for the Savings Bank's
lending and investment activities and for general business purposes. The
Savings Bank has the ability to use advances from the FHLB-Seattle to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Seattle functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member of the FHLB-Seattle, the Savings Bank is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the U.S. Government) provided
certain creditworthiness standards have been met. Advances are made pursuant to
several different credit programs. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
June 30, 1997, the Savings Bank maintained an uncommitted credit facility with
the FHLB-Seattle that provided for immediately available advances up to an
aggregate amount of $41.2 million, under which $13.8 million was outstanding.
The following table sets forth certain information regarding short-term
borrowings by the Savings Bank at the end of and during the periods indicated
using monthly average balance:
At or For the
Nine Months
At or For the Ended
Year Ended September 30, June 30,
------------------------ -------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(In thousands)
Maximum amount of short-term
FHLB advances at any month end........... $3,200 $12,500 $13,000 $13,000 $16,500
Approximate average short-term FHLB
advances outstanding.................... 267 8,992 9,500 9,444 5,333
Approximate weighted average rate
paid on short-term FHLB advances......... 5.41% 6.16% 5.57% 5.64% 5.48%
Total short-term FHLB advances at
end of period............................ 3,200 12,500 12,000 7,000 2,000
Competition
The Savings Bank operates in an intensely competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from large commercial banks, thrift institutions and credit
unions in its primary market area. Particularly in times of high interest
rates, the Savings Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Savings Bank's competition for loans comes
principally from mortgage bankers, commercial banks and other thrift
institutions. Such competition for deposits and the origination of loans may
limit the Savings Bank's future growth and earnings prospects.
65
Subsidiary Activities
The Savings Bank has one wholly-owned subsidiary, Timberland Service
Corporation ("Timberland Service"), whose primary function is to act as the
Savings Bank's escrow department. Additionally, Timberland Service's employees
sell annuities through the Savings Bank.
Properties
The Savings Bank operates eight full-service facilities. The Savings Bank
owns its all of its offices except for the Port Orchard Loan Center, which is
leased. The lease expires in July 1998.
The following table sets forth certain information regarding the Savings
Bank's offices at June 30, 1997, all of which are owned except for the loan
center, which is leased.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
Main Office:
624 Simpson Avenue 1966 7,700 $55,986
Hoquiam, Washington 98550
Branch Offices:
300 N. Boone Street 1974 3,400 22,986
Aberdeen, Washington 98520
314 Main South 1975 2,800 23,251
Montesano, Washington 98563
361 Damon Road 1977 2,100 19,231
Ocean Shores, Washington 98569
2418 Meridian East 1980 2,400 31,895
Edgewood, Washington 98371
12814 Meridian East (South Hill) 1996 4,200 4,485
Puyallup, Washington 98373
202 Auburn Way South 1994 4,200 8,545
Auburn, Washington 98002
1201 Marvin Road, N.E. 1997 4,400 761
Lacey, Washington 98516
Loan Center:
Port Orchard Loan Center 1995 444 N/A
700 Prospect Street, Suite #102
Port Orchard, Washington 98366
66
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
Data Center:
422 6th Street 1990 2,700 N/A
Hoquiam, Washington 98550
The Savings Bank also operates 10 proprietary ATMs that are part of a
nationwide cash exchange network.
Personnel
As of June 30, 1997, the Savings Bank had 77 full-time employees and 17
part-time employees. The employees are not represented by a collective
bargaining unit and the Savings Bank believes its relationship with its
employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of nine persons divided into
three classes, each of which contains one third of the Board. One class,
consisting of Messrs. Richard R. Morris, Jon C. Parker and James C. Mason, has a
term of office expiring at the first annual meeting of stockholders; a second
class, consisting of Messrs. Clarence E. Hamre, Robert Backstrom and Ms. Andrea
Clinton, has a term of office expiring at the second annual meeting of
stockholders; and a third class, consisting of Messrs. Michael R. Sand, Alan E.
Smith and Peter J. Majar, has a term of office expiring at the third annual
meeting of stockholders.
The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position With Holding Company
---- -----------------------------
Clarence E. Hamre Chairman of the Board, President and Chief Executive
Officer
Michael R. Sand Executive Vice President and Secretary
Paul G. MacLeod Treasurer
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Holding Company during the past five years is
set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical Information."
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MANAGEMENT OF THE SAVINGS BANK
Directors and Executive Officers
The Board of Directors of the Savings Bank is presently composed of nine
members, who are elected for terms of three years, one third of whom are elected
annually in accordance with the Bylaws of the Savings Bank. The executive
officers of the Savings Bank are elected annually by the Board of Directors and
serve at the Board's discretion. The following table sets forth information
with respect to the Directors and executive officers of the Savings Bank.
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ---- ------- -------------------------- -------- -------
Clarence E. Hamre 63 Chairman of the Board, President, 1969 1999
Chief Executive Officer and
Director
Michael R. Sand 42 Executive Vice President,
Secretary and Director 1993 2000
Andrea M. Clinton 40 Director 1996 1999
Robert Backstrom 68 Director 1992 1999
Richard R. Morris, Jr. 59 Director 1992 1998
Alan E. Smith 65 Director 1992 2000
Peter J. Majar 69 Director 1987 2000
Jon C. Parker 48 Director 1992 1998
James C. Mason 42 Director 1993 1998
- -------------------------
(1) As of June 30, 1997.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. All Directors and executive officers reside in Hoquiam, Washington,
unless otherwise indicated. There are no family relationships among or between
the directors or executive officers.
Clarence E. Hamre has served as the Savings Bank's President and Chief
Executive Officer since 1969. Mr. Hamre is President of the 7th Street Theater
Rehabilitation Group and is a member of the Building Committee of the Saron
Lutheran Church. He also serves on the Board of Directors of the Hoquiam
Development Association and is past Chairman of the Board and a Board member of
the Washington Savings League.
Michael R. Sand is the Savings Bank's Executive Vice President. Mr.
Sand is the President of the Aberdeen Neighborhood Housing Services, the former
President of the Grays Harbor Chamber of Commerce and a member of the Hoquiam
Lion's Club.
Andrea M. Clinton is an interior designer and the owner of AMC
Interiors. Ms. Clinton is a volunteer for the Olympia School District, the
Black Hills Bambino Baseball League and the Christman Forest Auction. She
resides in Olympia, Washington.
Robert Backstrom is retired after serving as owner of Price & Price
Real Estate and Insurance, Montesano, Washington for 31 years. He is a past
President of the Montesano Chamber of Commerce and Montesano Little League. He
resides in Montesano, Washington.
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Richard R. Morris, Jr. is the owner of Dick's Food Centers, Inc., a
retail grocery. Mr. Morris serves on the Boards of Directors of the Washington
Food Industry and the Economic Development Council of Gray Harbor County. He is
also a member of the Hoquiam Rotary Club. He resides in Ocean Shores,
Washington.
Alan E. Smith is the former owner of Harbor Drug, Inc., a retail
pharmacy. Mr. Smith is past President of the Hoquiam Development Association
and the Hoquiam Retail Trade Board and is a member of the Board of Directors of
the Washington State Pharmaceutical Association.
Peter J. Majar is retired as General Manager of Hoquiam Plywood Co.,
Inc., a plywood manufacturer, President of the Plywood Marketing Association and
President of PMA Transportation Company, Vancouver, Washington. Mr. Majar is a
member of the Aberdeen Lion's Club and is involved in various church, fraternal
and mission activities. He was a long time member of the Board of Directors of
Goodwill Industries when it was located in Grays Harbor, Washington. He resides
in Aberdeen, Washington.
Jon C. Parker is a member of the law firm of Parker, Johnson & Parker
P.S., Hoquiam, Washington. Parker, Johnson & Parker P.S. serves as general
counsel to the Savings Bank. Mr. Parker was admitted to practice in 1974 and is
a member in good standing of the American, Washington State and Grays Harbor Bar
Associations. Mr. Parker is also involved in charitable and civic organizations
in Hoquiam and Grays Harbor County, Washington.
James C. Mason is the President and owner of Mason Timber Co. Mr.
Mason is past President of the Aberdeen YMCA and serves as a member of the
Aberdeen School Board, the Grays Harbor Community Hospital Foundation Board, the
Bishop Foundation Board, and the Aberdeen Rotary Club. He resides in Aberdeen,
Washington.
Meetings and Committees of the Board of Directors
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended September 30, 1996, the Board of Directors held 24 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such director served. The Holding Company's Audit Committee
also consists of Directors Backstrom, Majar, Smith, Hamre and Sand.
The Audit Committee, consisting of Directors Backstrom, Majar, Smith,
Hamre and Sand, is responsible for meeting with the Savings Bank's internal and
external auditors to discuss the results of the annual audit and any related
matters. The Audit Committee is also responsible for the Savings Bank's
employee compliance issues. The Board also receives and reviews the reports and
findings and other information presented to them by the Savings Bank's outside
auditor. The Audit Committee meets as needed and met once during the nine
months ended June 30, 1997.
The Loan Committee, consisting of all of the Directors, meets bi-
monthly and is responsible for reviewing and approving the Savings Bank's loans.
The Loan Committee met 18 times during the nine months ended June 30, 1997.
The Salary Committee, consisting of Directors Mason and Morris, makes
recommendations to the full Board of Directors concerning employee compensation.
The Salary Committee meets as needed and met once during the nine months ended
June 30, 1997.
The Nominating Committee, consisting of Directors Majar, Parker and
Morris, meets as needed and is responsible for selecting qualified individuals
to fill openings on the Board of Directors. The Nominating Committee met once
during the nine months ended June 30, 1997.
69
The Savings Bank also maintains standing Community Reinvestment Act
("CRA") and Budget Committees.
Directors' Compensation
Board Fees. Except for the Messrs. Hamre and Sand, Directors are paid
$500 per month and $250 for each regular Board meeting that they attend.
Directors also receive $200 for each special Board meeting or committee meeting
that they attend. Director fees totalled $59,985 for the year ended September
30, 1996. It is currently anticipated that, after completion of the Conversion,
directors' fees will be paid by the Holding Company and no separate fees will be
paid for service on the Board of Directors of the Savings Bank.
Deferred Compensation Plan. The Savings Bank maintains a deferred
compensation plan for the benefit of directors who may elect to defer receipt of
all or a portion of their fees until retirement or termination of service. At
the director's election, benefits are distributed in a lump sum or installment
payments. At June 30, 1997, none of the Savings Bank's directors had elected to
participate in the plan.
Executive Compensation
Summary Compensation Table. The following information is furnished
for Mr. Hamre. No other executive officer of Savings Bank received salaries and
bonuses in excess of $100,000 during the year ended September 30, 1996.
Annual Compensation
-----------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(1) Compensation(2)
- -------- ---- ------ ----- --------------- ---------------
Clarence E. Hamre 1996 $146,588 $29,997 -- $59,148
President and Chief
Executive Officer
- -------------------
(1) Includes perquisites and other personal benefits, unless the aggregate
amount of such compensation is the lesser of either $50,000 or 10% or
total annual salary and bonus.
(2) Includes amounts paid in connection with (i) any contract or
arrangement with the Savings Bank, (ii) dollar value of amounts earned
on long-term incentive plans; (iii) contributions made by the Savings
Bank on behalf of the officer to vested and unvested defined
contribution plans;
Deferred Compensation Agreement. The Savings Bank has entered into a
deferred compensation agreement with Mr. Hamre which provides that, commencing
upon his retirement at or after age 65, Mr. Hamre will receive $2,000 per month
for life. The monthly benefit is reduced to $1,600 per month in the event of
Mr. Hamre's retirement prior to age 65. At Mr. Hamre's death, the monthly
benefit would be payable to his surviving spouse until the earlier to occur of
her death or 60 months. At June 30, 1997, the Savings Bank had accrued $166,000
in compensation expense with respect to its obligation to Mr. Hamre under the
agreement.
Benefits
General. The Savings Bank currently pays 100% of the premiums for
medical, life and disability insurance benefits for full-time employees, subject
to certain deductibles.
Employee Severance Compensation Plan. In connection with the
Conversion, the Board of Directors of the Savings Bank intends to adopt an
Employee Severance Compensation Plan (the "Severance Plan") to provide benefits
to eligible employees in the event of a change in control of the Holding Company
or the Savings Bank (as defined in the Severance Plan). In general, all
employees with two or more years of service will be eligible to participate in
the Severance Plan. Under the Severance Plan, in the event of a change in
control of the Holding
70
Company or the Savings Bank, eligible employees who are terminated or who
terminate employment (but only upon the occurrence of events specified in the
Severance Plan) within 12 months of the effective date of a change in control
will be entitled to a payment based on years of service with the Savings Bank.
The maximum payment for any eligible employee would be equal to 24 months of
their current compensation. Assuming that a change in control had occurred at
June 30, 1997 and the termination of all eligible employees, the maximum
aggregate payment due under the Severance Plan would have been approximately
$3.3 million.
Profit Sharing Plan. The Savings Bank maintains a tax-qualified profit
sharing plan (the "Plan") for the benefit of employees with one year of service
who have attained age 21. Eligible employees who are employed on the last day
of the Plan year must complete at least 501 hours of service during the Plan
year in order to share in the Savings Bank's annual discretionary contribution.
Employees who terminate employment during the Plan year must complete at least
501 hours of service in order to share in the annual contribution. The Savings
Bank's annual contribution is 10% of their individual compensation. For this
purpose, "compensation" includes a participant's wages, salary, overtime, bonus,
and commissions. However, under the Code only the first $160,000 (indexed) of
compensation is taken into account in determining the contribution on behalf of
each participant. The Savings Bank's contributions vest over a six-year period
with 10 percent vested upon the completion of each of the first two years of
service and an additional 20 percent vested for each additional year of service.
A participant is fully vested at retirement, upon death or disability, or upon
termination of the Plan. Distributions under the Plan are available, at the
participant's option, in a lump sum or in annual installments over a period not
exceeding the joint life expectancy of the participant and his or her designated
beneficiary.
Generally, the investment of Plan assets is directed by plan participants.
In connection with the Conversion, the investment options available to
participants will be expanded to include the opportunity to direct the
investment of their Plan account balance to purchase shares of the Common Stock.
A participant in the Plan who elects to purchase Common Stock in the Conversion
through the Plan will receive the same subscription priority and be subject to
the same individual purchase limitations as if the participant had elected to
make such a purchase using other funds. See "THE CONVERSION -- Limitations on
Purchases of Shares."
During the year ended September 30, 1996, the Savings Bank contributed
approximately $178,000 to the Plan.
Profit Sharing Bonus Plan. The Savings Bank maintains a discretionary
bonus plan which is based on the Savings Bank's net income for each fiscal year.
Under the Plan, Mr. Hamre receives 1% of the Savings Bank's net income and the
remaining employees of the Savings Bank receive a total of 3.00% of net income,
divided up based upon each employee's salary to total employees' salaries.
During the year ended September 30, 1996, Mr. Hamre received $30,000 under the
Plan. The Savings Bank's Board of Directors has not determined whether or not
to continue this plan following the consummation of the Conversion. However, if
continued, it is anticipated that any bonus payments will be determined based on
the Savings Bank's net income only. See "PROSPECTUS SUMMARY -- Benefits of
Conversion to Management -- Profit Sharing Bonus Plan."
Employee Stock Ownership Plan. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the completion of the Conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Employees of the Holding Company and the Savings Bank who have been credited
with at least six months of service will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the Common Stock. The loan to the ESOP will be repaid principally from the
Savings Bank's contributions to the ESOP and dividends payable on Common Stock
held by the ESOP over the anticipated
71
10 year term of the loan. The interest rate for the ESOP loan is expected to be
the prime rate as published in The Wall Street Journal on the closing date of
the Conversion. See "PRO FORMA DATA." To the extent that the ESOP is unable to
acquire 8% of the Common Stock issued in the Conversion, it is anticipated that
such additional shares will be acquired following the Conversion through open
market purchases.
In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of two years of participation. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Savings Bank's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
It is anticipated that Messrs. ___________ and ______________ of the
Savings Bank will be appointed by the Board of Directors of the Savings Bank to
serve as trustees of the ESOP. Under the ESOP, the trustees must vote all
allocated shares held in the ESOP in accordance with the instructions of plan
participants and unallocated shares and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Comparison of Operating Results for the Nine Months Ended June 30,
1996 and 1997."
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Savings Bank
intends to request a determination letter from the IRS regarding the tax-
qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Savings Bank expects that a
favorable determination letter will be received by the ESOP.
1997 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Conversion. The approval of a majority vote of
the Holding Company's outstanding shares is required prior to the implementation
of the Stock Option Plan within one year of the consummation of the Conversion.
The Stock Option Plan will comply with all applicable regulatory requirements.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Savings Bank, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the
72
grant of incentive stock options ("ISOs") intended to comply with the
requirements of Section 422 of the Code and for nonqualified stock options
("NQOs"). Upon receipt of stockholder approval of the Stock Option Plan, stock
options may be granted to key employees of the Holding Company and its
subsidiaries, including the Savings Bank. Unless sooner terminated, the Stock
Option Plan will continue in effect for a period of ten years from the date the
Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Conversion will be reserved
for future issuance under the Stock Option Plan (575,000 shares based on the
issuance of 5,750,000 shares at the maximum of the Estimated Valuation Range).
Shares acquired upon exercise of options will be authorized but unissued shares
or treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, the number of shares of Common Stock under the Stock
Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted by the Board to reflect the
increase or decrease in the total number of shares of Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by the Board of
Directors. The Board will determine which nonemployee directors, officers and
key employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current regulations, if the Stock Option Plan is implemented within
one year of the consummation of the Conversion, (i) no officer or employees
could receive an award of options covering in excess of 25%, (ii) no nonemployee
director could receive in excess of 5% and (iii) nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under current regulations,
if the Stock Option plan is implemented within the first year following
consummation of the Conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Savings Bank to the extent authorized or not prohibited
by applicable law or regulations. Regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable
73
to the optionee at ordinary income tax rates. A federal income tax deduction
generally will not be available to the Holding Company as a result of the grant
or exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations. The
size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Savings
Bank, subject to shareholder approval. The MRP will enable the Holding Company
and the Savings Bank to provide participants with a proprietary interest in the
Holding Company as an incentive to contribute to the success of the Holding
Company and the Savings Bank. The MRP will comply with all applicable
regulatory requirements. Under current regulations, the approval of a majority
vote of the Holding Company's outstanding shares is required prior to the
implementation of the MRP within one year of the consummation of the Conversion.
The MRP expects to acquire a number of shares of Common Stock equal to 4%
of the Common Stock issued in connection with the Conversion (230,000 shares
based on the issuance of 5,750,000 shares in the Conversion at the maximum of
the Estimated Valuation Range). Such shares will be acquired on the open
market, if available, with funds contributed by the Holding Company or the
Savings Bank to a trust which the Holding Company may establish in conjunction
with the MRP ("MRP Trust") or from authorized but unissued shares or treasury
shares of the Holding Company.
The Board of Directors of the Holding Company will administer the MRP,
members of which will also serve as trustees of the MRP Trust, if formed. The
trustees will be responsible for the investment of all funds contributed by the
Holding Company or the Savings Bank to the MRP Trust. The Board of Directors of
the Holding Company may terminate the MRP at any time and, upon termination, all
unallocated shares of Common Stock will revert to the Holding Company.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under current regulations,
if the MRP is implemented within the first year following consummation of the
Conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Savings Bank to the extent authorized or not
prohibited by applicable law or regulations. Regulations currently provide
that, if the MRP is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the
74
Holding Company will be entitled to a deduction in such year and in the same
amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations.
Under current regulations, if the MRP is implemented within one year of the
consummation of the Conversion, (i) no officer or employees could receive an
award covering in excess of 25%, (ii) no nonemployee director could receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. The
size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
Transactions with the Savings Bank
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Savings Bank's policy is not to make any new
loans or extensions of credit to the Savings Bank's executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to such person and his
related interests, are in excess of the greater of $25,000 or 5% of the Savings
Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
See "REGULATION -- Federal Regulation of Savings Banks -- Transactions with
Affiliates." The aggregate amount of loans by the Savings Bank to its executive
officers and directors was $807,000 at June 30, 1997, or approximately 1.1% of
pro forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range).
Jon C. Parker, a director of the Holding Company and the Savings Bank, is a
member of the law firm of Parker, Johnson & Parker, P.S., Hoquiam, Washington,
which serves as general counsel to the Savings Bank. The Savings Bank pays an
annual retainer of $11,090. During the year ended September 30, 1996, the
Savings Bank paid legal fees of approximately $12,200 to the firm.
REGULATION
The Savings Bank
General. As a state-chartered, federally insured savings bank, the Savings
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Savings Bank is regularly
examined by the FDIC and the Division and files periodic reports concerning the
Savings Bank's activities and financial condition with its regulators. The
Savings Bank's relationship with depositors and borrowers also is regulated to a
great extent by both federal law and the laws of Washington, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Savings Bank, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Holding Company and the Savings
Bank have authority
75
to impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
State Regulation and Supervision. As a state-chartered savings bank, the
Savings Bank is subject to applicable provisions of Washington law and the
regulations of the Division adopted thereunder. Washington law and regulations
govern the Savings Bank's ability to take deposits and pay interest thereon, to
make loans on or invest in residential and other real estate, to make consumer
loans, to invest in securities, to offer various banking services to its
customers, and to establish branch offices. Under state law, savings banks in
Washington also generally have all of the powers that federal mutual savings
banks have under federal laws and regulations. The Savings Bank is subject to
periodic examination and reporting requirements by and of the Division.
Deposit Insurance. The FDIC insures deposits at the Savings Bank to the
maximum extent permitted by law. The Savings Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which are
based solely on the level of an institution's capital --"well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system
under the Federal Deposit Insurance Act ("FDIA"), as discussed below. The FDIC
is authorized to raise assessment rates in certain circumstances. The Savings
Bank's assessments expensed for the year ended September 30, 1996, equaled $1.2
million (including the FDIC SAIF assessment of $875,000).
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980's to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which could result in termination of the
deposit insurance of the Savings Bank.
Prompt Corrective Action. The FDIA requires each federal banking agency to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be: (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has
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a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
The FDIA also provides that a federal banking agency may, after notice and
an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. (The FDIC may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to the provisions of Section 38 of the FDIA,
which sets forth various mandatory and discretionary restrictions on its
operations.
At June 30, 1997, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required by the FDIA.
The Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The agencies also proposed asset
quality and earnings standards which, if adopted in final, would be added to the
Guidelines. Under the final regulations, if the FDIC determines that the
Savings Bank fails to meet any standard prescribed by the Guidelines, the agency
may require the Savings Bank to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDIA. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100-200 basis points above
the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio
of not less than 4% for banks that are not the most highly rated or are
anticipating or experiencing significant growth.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained. Any insured bank with a Tier 1 capital to total assets ratio of
less than 2% is deemed to be operating
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in an unsafe and unsound condition pursuant to Section 8(a) of the FDIA unless
the insured bank enters into a written agreement, to which the FDIC is a party,
to correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower than
the prescribed minimum capital levels generally will not receive approval of
applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC deems
necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of Tier 1 capital. The FDIC includes in its evaluation of a bank's
capital adequacy an assessment of the exposure to declines in the economic value
of the bank's capital due to changes in interest rates. However, no measurement
framework for assessing the level of a bank's interest rate risk exposure has
been codified. In the future, the FDIC will issue a proposed rule that would
establish an explicit minimum capital charge for interest rate risk, based on
the level of a bank's measured interest rate risk exposure.
An undercapitalized, significantly undercapitalized, or critically
undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against the
institution and (iv) the types and levels of activities in which the institution
will engage. The banking agency may not accept a capital restoration plan
unless the agency determines, among other things, that the plan "is based on
realistic assumptions, and is likely to succeed in restoring the institution's
capital" and "would not appreciably increase the risk...to which the institution
is exposed." Under the FDIA, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
certain limitations. The obligation of a controlling bank holding company under
the FDIA to fund a capital restoration plan is limited to the lesser of 5.0% of
an undercapitalized subsidiary's assets and the amount required to meet
regulatory capital requirements.
The FDIA provides that the appropriate federal regulatory agency must
require an insured depository institution that is significantly undercapitalized
or is undercapitalized and either fails to submit an acceptable capital
restoration plan within the time period allowed or fails in any material respect
to implement a capital restoration plan accepted by the appropriate federal
banking agency to take one or more of the following actions: (i) sell enough
shares, including voting shares, to become adequately capitalized; (ii) merge
with (or be sold to) another institution (or holding company), but only if
grounds exist for appointing a conservator or receiver; (iii) restrict certain
transactions with banking affiliates as if the "sister bank" requirements of
Section 23A of the Federal Reserve Act ("FRA") did not exist; (iv) otherwise
restrict transactions with bank or non-bank affiliates; (v) restrict interest
rates that the institution pays on deposits to "prevailing rates" in the
institution's region; (vi) restrict asset growth or reduce total assets; (vii)
alter, reduce or terminate activities; (viii) hold a new election of directors;
(ix) dismiss any director or senior executive officer who held office for more
than 180 days immediately before the institution became undercapitalized; (x)
employ "qualified" senior executive officers; (xi) cease accepting deposits from
correspondent depository institutions; (xii) divest certain non-depository
affiliates which pose a danger to the institution; (xiii) be divested by a
parent holding company; and (xiv) take any other action which the agency
determines would better carry out the purposes of the Prompt Corrective Action
provisions. See "-- Prompt Corrective Action."
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The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At June 30, 1997, the Savings Bank had a Tier
1 leverage capital ratio of 11.7% and net worth of 11.6% of total assets. For a
complete description of the Savings Bank's required and actual capital levels on
June 30, 1997, see "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Specifically, the agencies
determined that net unrealized holding gains or losses on available for sale
debt and equity securities should not be included when calculating core and
risk-based capital ratios.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
The Savings Bank's management believes that, under the current regulations,
the Savings Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Savings Bank,
such as a downturn in the economy in areas where the Savings Bank has most of
its loans, could adversely affect future earnings and, consequently, the ability
of the Savings Bank to meet its capital requirements.
Activities and Investments of Insured State-Chartered Banks. Section 24 of
the FDIA, as amended by the FDICIA, generally limits the activities and equity
investments of FDIC-insured, state-chartered banks to those that are permissible
for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain
any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary, (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees' and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions, and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.
Subject to certain regulatory exceptions, FDIC regulations provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank directly or indirectly engaged in any activity that is not permitted for a
national bank or for which the FDIC has granted and exception must cease the
impermissible activity.
Environmental Issues Associated With Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
a federal statute, generally imposes strict liability on, among other things,
all prior and present "owners and operators" of hazardous waste sites. However,
the U.S. Congress created a safe harbor provision for secured creditors by
providing that the term "owner and operator" excludes a person who, without
participating in the management of the site, holds indicia of ownership
primarily to protect its security interest in the site. Since the enactment of
the CERCLA, this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.
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In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency ("EPA"), an agency
within the Executive Branch of the government, promulgated a regulation
clarifying when and how secured creditors could be liable for cleanup costs
under the CERCLA. Generally, the regulation protected a secured creditor that
acquired full title to collateral property through foreclosure as long as the
creditor did not participate in the property's management before foreclosure and
undertook certain due diligence efforts to divest itself of the property.
However, in February 1994, the U.S. Court of Appeals for the District of
Columbia Circuit held that the EPA lacked authority to promulgate such
regulation on the grounds that Congress meant for decisions on liability under
the CERCLA to be made by the courts and not the Executive Branch. In January
1995, the U.S. Supreme Court denied to review the U.S. Court of Appeal's
decision. In light of this adverse court ruling, in October 1995 the EPA issued
a statement entitled "Policy on CERCLA Enforcement Against Lenders and
Government Entities that Acquire Property Involuntarily" explaining that as an
enforcement policy, the EPA intended to apply as guidance the provisions of the
EPA lender liability rule promulgated in 1992.
To the extent that legal uncertainty exists in this area, all creditors,
including the Savings Bank, that have made loans secured by properties with
potential hazardous waste contamination (such as petroleum contamination) could
be subject to liability for cleanup costs, which costs often substantially
exceed the value of the collateral property.
Federal Reserve System. In 1980, Congress enacted legislation which imposed
Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits with
the regional Federal Reserve Bank. NOW accounts and other types of accounts
that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3% of the first $49.3 million of transaction
accounts and for amounts greater than $49.3 million, the reserve requirement is
10% of that portion of total transaction accounts in excess of $49.3 million.
The first $4.4 million of otherwise reservable balances are exempt from reserve
requirements. The reserve requirement on nonpersonal time deposits with original
maturities of less than 1-1/2 years is 0%. As of June 30, 1997, the Savings
Bank met its reserve requirements.
Affiliate Transactions. The Holding Company and the Savings Bank will be
legal entities separate and distinct. Various legal limitations restrict the
Savings Bank from lending or otherwise supplying funds to the Holding Company
(an "affiliate"), generally limiting such transactions with the affiliate to 10%
of the bank's capital and surplus and limiting all such transactions to 20% of
the bank's capital and surplus. Such transactions, including extensions of
credit, sales of securities or assets and provision of services, also must be on
terms and conditions consistent with safe and sound banking practices, including
credit standards, that are substantially the same or at least as favorable to
the bank as those prevailing at the time for transactions with unaffiliated
companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or other
affiliates, on investments in the stock or other securities of affiliates and on
the taking of such stock or securities as collateral from any borrower. In
addition, such banks are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit or the providing of any property or
service.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept deposits,
relocate an existing office or merge or consolidate with, or acquire the assets
or assume the liabilities of, a federally regulated financial institution. The
Savings Bank received a "satisfactory" rating during its most recent CRA
examination.
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Dividends. Dividends from the Savings Bank will constitute the major
source of funds for dividends which may be paid by the Holding Company. The
amount of dividends payable by the Savings Bank to the Holding Company will
depend upon the Savings Bank's earnings and capital position, and is limited by
federal and state laws, regulations and policies. According to Washington law,
the Savings Bank may not declare or pay a cash dividend on its capital stock if
it would cause its net worth to be reduced below (i) the amount required for
liquidation accounts or (ii) the net worth requirements, if any, imposed by the
Director of the Division. Dividends on the Savings Bank's capital stock may not
be paid in an aggregate amount greater than the aggregate retained earnings of
the Savings Bank, without the approval of the Director of the Division.
The amount of dividends actually paid during any one period will be
strongly affected by the Savings Bank's management policy of maintaining a
strong capital position. Federal law further provides that no insured
depository institution may make any capital distribution (which would include a
cash dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
The Holding Company
General. The Holding Company, as the sole shareholder of the Savings Bank,
will become a bank holding company and will register as such with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under the Bank Holding Company Act of 1956, as amended ("BHCA")
and the regulations of the Federal Reserve. As a bank holding company, the
Holding Company will be required to file with the Federal Reserve annual reports
and such additional information as the Federal Reserve may require and will be
subject to regular examinations by the Federal Reserve. The Federal Reserve
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. Most
states have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute. Washington law permits out-of-state bank holding companies
to acquire banks or bank holding companies located in Washington so long as the
laws of the state in which the acquiring bank holding company is located permit
bank holding companies located in Washington to acquire banks or bank holding
companies in the acquiror's state and the Washington bank sought to be acquired
has been in existence for at least three years. Beginning September 30, 1995,
federal law permits well capitalized and well managed bank holding companies to
acquire control of an existing bank in any state.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries.
Under the BHCA, the Federal Reserve is authorized to approve the
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ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to the
business of banking or managing or controlling banks as to be a proper incident
thereto. The list of activities determined by regulation to be closely related
to banking within the meaning of the BHCA includes, among other things:
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and U.S. Savings Bonds; real estate and personal property appraising; providing
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
Interstate Banking. In September 1994, Congress passed the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking
Act"). The Interstate Banking Act permits adequately capitalized bank and
savings bank holding companies to acquire control of banks and savings banks in
any state beginning on September 29, 1995, one year after the effectiveness of
the Interstate Banking Act. Washington adopted nationwide reciprocal interstate
acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time, but not for more than five years. In addition, no
bank or savings bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps and, at present, 18 states have deposit caps
lower than 30%.
The Interstate Banking Act also provides for interstate branching. The
McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching. The Interstate Banking
Act withdraws these barriers, effective June 1, 1997, allowing interstate
branching in all states, provided that a particular state has not specifically
prohibited interstate branching by legislation prior to such time. Unlike
interstate acquisitions, a state may prohibit interstate branching if it
specifically elects to do so by June 1, 1997. States may choose to allow
interstate branching prior to June 1, 1997 by opting-in to a group of states
that permits these transactions. These states generally allow interstate
branching via a merger of an out-of-state bank with an in-state bank, or on a de
novo basis. Washington has enacted legislation permitting interstate branching
transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the market in which the Holding Company and the Savings Bank operate,
although the extent to which such competition will increase in such market or
the timing of such increase cannot be predicted. In addition, there can be no
assurance as to whether, or in what form, legislation may be enacted in
Washington in reaction to the Interstate Banking Act or what impact such
legislation or the Interstate Banking Act might have upon the Holding Company
and the Savings Bank.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized" under the prompt corrective
action regulations.
Stock Repurchases. Bank holding companies, except for certain "well-
capitalized" and highly rated bank holding companies, are required to give the
Federal Reserve prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of their
consolidated net worth. The Federal Reserve may disapprove such a purchase or
redemption if it
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determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
Capital Requirements. The Federal Reserve has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Savings Bank. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets. For bank holding companies with less than $150 million in consolidated
assets the guidelines are applied on a bank-only basis unless the parent bank
holding company (i) is engaged in nonbank activity involving significant
leverage or (ii) has a significant amount of outstanding debt that is held by
the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
regulations. Under these regulations, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is
required to be Tier 1 capital, principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less certain goodwill items. The
remainder, Tier II capital, may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier I (leverage) capital ratio, under which a bank holding company must
maintain a minimum level of Tier 1 capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a Tier 1
(leverage) capital ratio of at least 1% to 2% above the state minimum.
Federal Securities Laws
The Holding Company has filed a registration statement on Form S-1
("Registration Statement") with the SEC under the Securities Act for the
registration of the Common Stock to be issued in the Conversion. See
"ADDITIONAL INFORMATION." Upon completion of the Conversion, the Common Stock
will be registered with the SEC under the Exchange Act and generally may not be
deregistered for at least three years thereafter. The Holding Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock to be issued
in the Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Holding Company
may be resold without registration. Shares purchased by an affiliate of the
Holding Company may comply with the resale restrictions of Rule 144 under the
Securities Act. If the Holding Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Provision may be made in the future by the Holding Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Holding Company, at some future time, determines to
issue additional shares from its authorized but unissued shares, the Holding
Company might offer registration rights to certain of its affiliates who want to
sell their shares.
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TAXATION
Federal Taxation
General. The Holding Company and the Savings Bank will report their
income on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Savings Bank or the Holding Company.
Bad Debt Reserve. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings Bank's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Savings Bank's actual loss experience, or a percentage equal
to 8% of the Savings Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Savings Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on the net income or federal income tax expense. For
taxable years beginning after December 31, 1995, the Savings Bank's bad debt
deduction will be determined under the experience method using a formula based
on actual bad debt experience over a period of years or, if the Savings Bank is
a "large" association (assets in excess of $500 million) on the basis of net
charge-offs during the taxable year. The new rules allow an institution to
suspend bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institutions average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase or
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Savings Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess Distributions
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Savings Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not be considered to result in a
distribution from the Savings Bank's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Savings Bank makes a
"nondividend distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and local
taxes). See
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"REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the
Savings Bank. The Savings Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. In addition, only
90% of AMTI can be offset by net operating loss carryovers. AMTI is increased
by an amount equal to 75% of the amount by which the Savings Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
0.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Holding Company may exclude from
its income 100% of dividends received from the Savings Bank as a member of the
same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Savings Bank will not file a
consolidated tax return, except that if the Holding Company or the Savings Bank
owns more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns are being
audited through September 30, 1996. The Savings Bank does not anticipate any
material increase in tax liability as a result of the audit.
Washington Taxation
The Savings Bank is subject to a business and occupation tax imposed
under Washington law at the rate of 1.60% of gross receipts. Interest received
on loans secured by mortgages or deeds of trust on residential properties is not
subject to such tax.
85
THE CONVERSION
The Board of Directors has adopted and the Division has given approval to
the Plan of Conversion subject to its approval by the members of the Savings
Bank entitled to vote on the matter and subject to the satisfaction of certain
other conditions imposed by the Division in its approval. Approval by the
Division does not constitute a recommendation or endorsement of the Plan of
Conversion by the Division.
General
On July 10, 1997, the Board of Directors of the Savings Bank unanimously
adopted and on September 11, 1997 and October 23, 1997, unanimously amended, the
Plan of Conversion, pursuant to which the Savings Bank will be converted from a
Washington-chartered mutual savings bank to a Washington-chartered stock savings
bank to be held as a wholly-owned subsidiary of the Holding Company, a newly
formed Washington corporation.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
to the Savings Bank's Proxy Statement and is available from the Savings Bank
upon request. By letter dated __________ __, 1997, the Division has approved
the Plan of Conversion, subject to its approval by the members of the Savings
Bank entitled to vote on the matter at a special meeting called for that purpose
to be held on December 23, 1997, and subject to the satisfaction of certain
other conditions imposed by the Division in its approval. Consummation of the
Conversion is contingent also upon receipt of the approvals of the Federal
Reserve and the Division for the Holding Company to acquire the Savings Bank.
Finally, consummation of the Conversion is contingent upon receipt from the FDIC
of a final non-objection letter with respect to the transaction.
If the Board of Directors of the Savings Bank decides for any reason, such
as possible delays resulting from overlapping regulatory processing or policies
or conditions which could adversely affect the Savings Bank's or the Holding
Company's ability to consummate the Conversion and transact its business as
contemplated herein and in accordance with the Savings Bank's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's Registration Statement from the SEC and
will take all steps necessary to complete the Conversion and proceed with a new
offering without the Holding Company, including filing any necessary documents
with the Division. In such event, and provided there is no regulatory action,
directive or other consideration upon which basis the Savings Bank determines
not to complete the Conversion, the Savings Bank will issue and sell the common
stock of the Savings Bank. There can be no assurance that the Division would
approve the Conversion if the Savings Bank decided to proceed without the
Holding Company. The following description of the Plan of Conversion assumes
that a holding company form of organization will be utilized in the Conversion.
In the event that a holding company form of organization is not utilized, all
other pertinent terms of the Plan of Conversion as described below will apply to
the Conversion of the Savings Bank from mutual to stock form of organization and
the sale of the Savings Bank's common stock.
The Conversion will be accomplished through adoption of Amended Articles of
Incorporation and Bylaws to authorize the issuance of capital stock by the
Savings Bank. Under the Plan of Conversion, 4,250,000 to 5,750,000 shares of
Common Stock are being offered for sale by the Holding Company at the Purchase
Price of $10.00 per share. As part of the Conversion, the Savings Bank will
issue all of its newly issued common stock (1,000 shares) to the Holding Company
in exchange for 50% of the net proceeds from the sale of Common Stock by the
Holding Company.
The Plan of Conversion provides generally that (i) the Savings Bank will
convert from a Washington-chartered mutual savings bank to a Washington-
chartered stock savings bank; (ii) the Common Stock will be offered by the
Holding Company in the Subscription Offering to persons having Subscription
Rights and in the Direct
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Community Offering to certain members of the general public, with preference
given to natural persons and trusts of natural persons residing in the Local
Community; (iii) if necessary, shares of Common Stock not subscribed for in the
Subscription and Direct Community Offering will be offered to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers pursuant to selected dealers agreements; and (iv) the
Holding Company will purchase all of the capital stock of the Savings Bank to be
issued in connection with the Conversion. The Conversion will be effected only
upon completion of the sale of at least $42.5 million of Common Stock to be
issued pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of December 31, 1995); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of September 30, 1997); and (iv) Other Members (depositors and borrowers of
the Savings Bank as of October 31, 1997). Concurrent with the Subscription
Offering and subject to the prior rights of holders of Subscription Rights, the
Holding Company is offering the Common Stock for sale to certain members of the
general public through a Direct Community Offering.
Shares of Common Stock not subscribed in the Subscription and Direct
Community Offering may be offered for sale in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the Subscription Offering unless extended by the
Savings Bank or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Savings Bank will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the special
meeting that will be required to complete the Director Community or the
Syndicated Community Offerings or other sale of the Common Stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Savings Bank, as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the Common Stock. In the event the Conversion is terminated, the
Savings Bank would be required to charge all Conversion expenses against current
income.
Orders for shares of Common Stock will not be filled until at least
4,250,000 shares of Common Stock have been subscribed for or sold and the
Division approves and the FDIC does not object to the final valuation and the
Conversion closes. If the Conversion is not completed by _________ __, 1997 (45
days after the last day of the Subscription Offering) and the Division consents
to an extension of time to complete the Conversion, subscribers will be given
the right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at the Savings Bank's passbook rate (3.0% per annum as of the
date hereof) from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or in any event, if the
conversion is completed, all withdrawal authorizations will be terminated and
all funds held will be promptly returned together with accrued interest at the
Savings Bank's passbook rate from the date payment is received until the
Conversion is terminated.
87
Purposes of Conversion
The Board of Directors and management believe that the Conversion is in the
best interests of the Savings Bank, its members and the communities it serves.
The Savings Bank's Board of Directors has formed the Holding Company to serve as
a holding company, with the Savings Bank as its subsidiary, upon the
consummation of the Conversion. By converting to the stock form of
organization, the Holding Company and the Savings Bank will be structured in the
form used by holding companies of commercial banks and by a growing number of
savings institutions. Management of the Savings Bank believes that the
Conversion offers a number of advantages which will be important to the future
growth and performance of the Savings Bank. The capital raised in the
Conversion is intended to support the Savings Bank's current lending and
investment activities and may also support possible future expansion and
diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Savings Bank's
members and others the opportunity to become stockholders of the Holding Company
and participate more directly in, and contribute to, any future growth of the
Holding Company and the Savings Bank. The Conversion will also enable the
Holding Company and the Savings Bank to raise additional capital in the public
equity or debt markets should the need arise, although there are no current
specific plans, arrangements or understandings, written or oral, regarding any
such financing activities.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
General. Upon the Savings Bank's conversion to stock form, its Articles of
Incorporation will be amended to authorize the issuance of capital stock to
represent the ownership of the Savings Bank, including its net worth. The
capital stock will be separate and apart from deposit accounts and will not be
insured by the FDIC or any other governmental authority. Certificates will be
issued to evidence ownership of the capital stock. All of the outstanding
capital stock of the Savings Bank will be acquired by the Holding Company, which
in turn will issue its Common Stock to purchasers in the Conversion. The stock
certificates issued by the Holding Company will be transferable and, therefore,
subject to applicable law, the stock could be sold or traded if a purchaser is
available with no effect on any deposit account the seller may hold at the
Savings Bank.
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank and the
holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or
88
loss will be recognized to account holders upon the receipt or exercise of
Subscription Rights in the Conversion, except to the extent Subscription Rights
are deemed to have value as discussed below. Unlike a private letter ruling
issued by the IRS, an opinion of counsel is not binding on the IRS and the IRS
could disagree with the conclusions reached therein. In the event of such
disagreement, no assurance can be given that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Savings Bank, whose findings are not binding on the IRS, has indicated that the
Subscription Rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
Common Stock at a price equal to its estimated fair market value, which will be
the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Savings Bank could also
recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisers as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Dwyer, Pemberton &
Coulson, P.C., Tacoma, Washington, that, assuming the Conversion does not result
in any federal income tax liability to the Savings Bank, its account holders, or
the Holding Company, implementation of the Plan of Conversion will not result in
any Washington income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Dwyer, Pemberton & Coulson, P.C. and
the letter from RP Financial are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Conversion when the Savings Bank is in stock form, holders of
withdrawable deposit(s) in the Savings Bank, including certificates of deposit
("Savings Account(s)"), shall not be entitled to share in any residual assets in
the event of liquidation of the Savings Bank except in connection with the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders. The Savings Bank shall, at
the time of the Conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein. The liquidation account shall be a memorandum
account on the records of the Savings Bank and there shall be no segregation of
assets of the Savings Bank related to it.
The liquidation account shall be maintained by the Savings Bank subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Savings Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
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The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Savings Bank subsequent to December 31, 1995 or September 30,
1997 is less than the lesser of (i) the deposit balance in such Savings Account
at the close of business on any other annual closing date subsequent to December
31, 1995 or September 30, 1997 or (ii) the amount of the "qualifying deposit" in
such Savings Account on December 31, 1995 or September 30, 1997, then the
subaccount balance for such Savings Account shall be adjusted by reducing such
subaccount balance in an amount proportionate to the reduction in such deposit
balance. In the event of a downward adjustment, such subaccount balance shall
not be subsequently increased, notwithstanding any increase in the deposit
balance of the related Savings Account. If any such Savings Account is closed,
the related subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Savings Bank (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Savings Bank is not the surviving institution shall be considered
to be a complete liquidation. In any such transaction the liquidation account
shall be assumed by the surviving institution.
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Savings
Bank.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to persons and entities entitled to purchase the Common Stock in the
Subscription Offering. The amount of the Common Stock which these parties may
purchase will be subject to the availability of the Common Stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Common Stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Savings Bank as of December 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$200,000 of Common Stock, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders. If the exercise of
Subscription Rights in this category results in an oversubscription, shares of
Common Stock will be allocated among subscribing Eligible Account Holders so as
to permit each Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make such person's total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Eligible
Account Holders proportionately, based on the amount of their respective
qualifying deposits as compared to total qualifying deposits of all Eligible
Account Holders. Subscription Rights received by officers and directors in this
category based on their increased deposits in the Savings Bank in the one year
period preceding December 31, 1995 are subordinated to the Subscription Rights
of other Eligible Account Holders.
90
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of
the shares of Common Stock issued in the Conversion.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of September 30, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $200,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the number of shares actually subscribed for,
whichever is less. Thereafter, unallocated shares will be allocated among
subscribing Supplemental Eligible Account Holders proportionately, based on the
amount of their respective qualifying deposits as compared to total qualifying
deposits of all Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Savings Bank as of the
Voting Record Date (October 31, 1997) will receive nontransferable Subscription
Rights to purchase up to $200,000 of Common Stock in the Conversion to the
extent shares are available following subscriptions by Eligible Account Holders,
the Savings Bank's ESOP and Supplemental Eligible Account Holders. In the event
of an oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the Division or another agency of the U.S. Government.
Each person exercising Subscription Rights will be required to certify that he
or she is purchasing such shares solely for his or her own account and that he
or she has no agreement or understanding with any other person for the sale or
transfer of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Holding Company and the Savings Bank will make reasonable attempts to
provide a Prospectus and related offering materials to holders of Subscription
Rights. However, the Subscription Offering and all Subscription Rights under
the Plan of Conversion will expire at 5:00 p.m., Pacific Time, on the Expiration
Date, whether or not the Savings Bank has been able to locate each person
entitled to such Subscription Rights. Orders for Common Stock in the
Subscription Offering received in hand by the Savings Bank after the Expiration
Date will not be accepted. The Subscription Offering may be extended by the
Holding Company and the Savings Bank up to ______ __ , 1997 without the
Division's approval. Regulations of the Division require that the Holding
Company complete the sale of Common Stock within 45 days after the close of the
Subscription Offering. If the Direct Community Offering and the Syndicated
Community Offerings are not completed by _____ __, 1997 (or ______ __, 1997, if
the Subscription Offering is fully extended), all funds received will be
promptly returned with interest at the Savings Bank's passbook rate (3.0% per
annum as of the date hereof) and all withdrawal authorizations will be canceled
or, if regulatory approval of an extension of the time period has been granted,
all subscribers and purchasers will be given the right to increase, decrease or
rescind their orders. If an extension of time is obtained, all subscribers will
be notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
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Direct Community Offering. Concurrently with the Subscription Offering,
the Holding Company is offering shares of the Common Stock to certain members of
the general public in a Direct Community Offering, with preference given to
natural persons and trusts of natural persons residing in the Local Community.
Purchasers in the Direct Community Offering are eligible to purchase up to
$200,000 of Common Stock in the Conversion. In the event an insufficient number
of shares are available to fill orders in the Direct Community Offering, the
available shares will be allocated on a pro rata basis determined by the amount
of the respective orders. Orders for the Common Stock in the Direct Community
Offering will be filled to the extent such shares remain available after the
satisfaction of all orders received in the Subscription Offering. The Direct
Community Offering may terminate on or at any time subsequent to the Expiration
Date, but no later than 45 days after the close of the Subscription Offering,
unless extended by the Holding Company and the Savings Bank, with approval of
the Division. Any extensions beyond 45 days after the close of the fully
extended Subscription Offering would require a resolicitation of orders, wherein
subscribers for the maximum numbers of shares of Common Stock would be, and
certain other large Subscribers in the discretion of the Holding Company and the
Savings Bank may be, given the opportunity to continue their orders, in which
case they will need to reconfirm affirmatively their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Savings Bank's passbook rate, or be
permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Savings Bank to accept or reject such purchases in whole
or in part. If an order is rejected in part, the purchaser does not have the
right to cancel the remainder of the order. The Holding Company presently
intends to terminate the Direct Community Offering as soon as it has received
orders for all shares available for purchase in the Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
Syndicated Community Offering. The Plan provides that shares of Common
Stock not purchased in the Subscription and Direct Community Offering, if any,
may be offered for sale to certain members of the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
managed by Webb acting as agent of the Holding Company. The Holding Company and
the Savings Bank have the right to reject orders, in whole or part, in their
sole discretion in the Syndicated Community Offering. If an order is rejected
in part, the purchaser does not have the right to cancel the remainder of the
order. Neither Webb nor any registered broker-dealer shall have any obligation
to take or purchase any shares of the Common Stock in the Syndicated Community
Offering; however, Webb has agreed to use its best efforts in the sale of shares
in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the $10.00
Purchase Price, the same price as all other shares in the Offerings. See "--
Stock Pricing and Number of Shares to be Issued." No person, together with any
associate or group of persons acting in concert, will be permitted to subscribe
in the Syndicated Community Offering for shares of Common Stock with an
aggregate purchase price of more than $200,000. See "-- Plan of Distribution
for the Subscription, Direct Community and Syndicated Community Offerings" for a
description of the commission to be paid to any selected dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the sale
of shares in the Syndicated Community Offering. During the Syndicated Community
Offering, selected dealers may only solicit indications of interest from their
customers to place orders with the Holding Company as of a certain date ("Order
Date") for the purchase of shares of Conversion Stock. When and if Webb and the
Holding Company believe that enough indications of interest and orders have been
received in the Subscription Offering, the Direct Community Offering and the
Syndicated Community Offering to consummate the Conversion, Webb will request,
as of the Order Date, selected dealers to submit orders to purchase shares for
which they have received indications of interest from their customers. Selected
dealers will send confirmations to such customers on the next business day after
the Order Date. Selected dealers may debit the accounts of their customers on a
date which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
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required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit. After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Savings Bank's
passbook rate (3.0% per annum as of the date hereof) until the completion of the
Offerings. At the consummation of the Conversion the funds received in the
Offerings will be used to purchase the shares of Common Stock ordered. The
shares of Common Stock issued in the Conversion cannot and will not be insured
by the FDIC or any other government agency. In the event the Conversion is not
consummated as described above, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering may close as early as 5:00 p.m., Pacific
Time, on ________ __, 1997, the Expiration Date, or any date thereafter at the
discretion of the Holding Company. The Syndicated Community Offering will
terminate no more than 45 days following the Expiration Date, unless extended by
the Holding Company with any required regulatory approval, but in no case later
than ______ __, 1997. The Syndicated Community Offering may run concurrent to
the Subscription and Direct Community Offering or subsequent thereto.
In the event the Savings Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the Division. The Division may
grant one or more extensions of the offering period, provided that (i) no single
extension exceeds 90 days, (ii) subscribers are given the right to increase,
decrease or rescind their subscriptions during the extension period, and (iii)
the extensions do not go more than two years beyond the date on which the
members approved the Plan. If the Conversion is not consummated by ___________,
1997 (or, if the Offerings are fully extended, by ___________, 1997), either all
funds received will be returned with interest (and withdrawal authorizations
canceled) or, if the Division has granted an extension of such period, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions at any time prior to 20 days before the end of the extension
period. If an extension of time is obtained, all subscribers will be notified
of such extension and of their rights to modify their orders. If an affirmative
response to any resolicitation is not received by the Holding Company from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest (or withdrawal authorizations will be
canceled). No single extension can exceed 90 days.
Persons in Non-Qualified States. The Holding Company and the Savings Bank
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan of Conversion reside. However, the Holding Company and the Savings
Bank are not required to offer stock in the Subscription Offering to any person
who resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state or (ii) the Holding Company or
the Savings Bank determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request or requirement that the Holding Company and the Savings
Bank or their officers, directors or trustees register as a broker, dealer,
salesman or selling agent, under the securities laws of such state, or a request
or requirement to register or otherwise qualify the Subscription Rights or
Common Stock for sale or submit any filing with respect thereto in such state.
Where the number of persons eligible to subscribe for shares in one state is
small, the Holding Company and the Savings Bank will base their decision as to
whether or not to offer the Common Stock in such state on a number of factors,
including the size of accounts held by account holders in the state, the cost of
reviewing the registration and qualification requirements of the state (and of
actually registering or qualifying the shares) or the need to register the
Holding Company, its officers, directors or employees as brokers, dealers or
salesmen.
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Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Holding Company and the Savings Bank have retained Webb to consult with
and to advise the Savings Bank and the Holding Company, and to assist the
Holding Company on a best efforts basis, in the distribution of the shares of
Common Stock in the Subscription and Community Offering. The services that Webb
will provide include, but are not limited to (i) training the employees of the
Savings Bank who will perform certain ministerial functions in the Subscription
and Community Offering regarding the mechanics and regulatory requirements of
the stock offering process, (ii) managing the Stock Information Center by
assisting interested stock subscribers and by keeping records of all stock
orders, (iii) preparing marketing materials, and (iv) assisting in the
solicitation of proxies from the Savings Bank's members for use at the Special
Meeting. For its services, Webb will receive a management fee of $25,000 and a
success fee of 1.25% of the aggregate Purchase Price of the shares of Common
Stock sold in the Subscription and Direct Community Offerings, excluding shares
purchased by the ESOP and officers and directors of the Savings Bank. Webb's
management fee shall be applied to its success fee, and the success fee shall
not exceed $500,000. In the event that selected dealers are used to assist in
the sale of shares of Common Stock in the Community Offering, such dealers will
be paid a fee of up to 5.5% of the aggregate Purchase Price of the shares sold
by such dealers. The Holding Company and the Savings Bank have agreed to
reimburse Webb for its out-of-pocket expenses, and its legal fees up to a total
of $35,000, and to indemnify Webb against certain claims or liabilities,
including certain liabilities under the Securities Act, and will contribute to
payments Webb may be required to make in connection with any such claims or
liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb.
A Stock Information Center will be established at the main office of the Savings
Bank. The Holding Company will rely on Rule 3a4-1 of the Exchange Act and sales
of Common Stock will be conducted within the requirements of such Rule, so as to
permit officers, directors and employees to participate in the sale of the
Common Stock in those states where the law so permits. No officer, director or
employee of the Holding Company or the Savings Bank will be compensated directly
or indirectly by the payment of commissions or other remuneration in connection
with his or her participation in the sale of Common Stock.
Description of Sales Activities
The Common Stock will be offered in the Subscription and Direct Community
Offering principally by the distribution of this Prospectus and through
activities conducted at the Savings Bank's Stock Information Center at its
office facility. The Stock Information Center is expected to operate during
normal business hours throughout the Subscription and Direct Community Offering.
It is expected that at any particular time, one or more Webb employees will be
working at the Stock Information Center. Such employees of Webb will be
responsible for mailing materials relating to the Subscription and Direct
Community Offering, responding to questions regarding the Conversion and the
Subscription and Direct Community Offering and processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with Webb or by the selected dealers managed by Webb. The management and
employees of the Savings Bank may participate in the Offerings in clerical
capacities, providing administrative support in effecting sales transactions or,
when permitted by state securities laws, answering questions of a mechanical
nature relating to the proper execution of the Order Form. Management of the
Savings Bank may answer questions regarding the business of the Savings Bank
when permitted by state securities laws. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. The management and
employees of the Savings Bank have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
No officer, director or employee of the Savings Bank or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the Conversion.
94
None of the Savings Bank's personnel participating in the Subscription and
Direct Community Offering is registered or licensed as a broker or dealer or an
agent of a broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Order
Form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus. The Savings Bank will accept
for processing only orders submitted on Order Forms.
To purchase shares in the Subscription and Direct Community Offering, an
executed Order Form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the subscriber's deposit
account with the Savings Bank (which may be given by completing the appropriate
blanks in the Order Form), must be received by the Savings Bank by 5:00 p.m.,
Pacific Time, on the Expiration Date. Order Forms which are not received by
such time or are executed defectively or are received without full payment (or
appropriate withdrawal instructions) are not required to be accepted. In
addition, the Savings Bank is not obligated to accept orders submitted on
photocopied or telecopied Order Forms. The Holding Company and the Savings Bank
have the right to waive or permit the correction of incomplete or improperly
executed Order Forms, but do not represent that they will do so. Pursuant to
the Plan of Conversion, the interpretation by the Holding Company and the
Savings Bank of the terms and conditions of the Plan of Conversion and of the
Order Form will be final. Once received, an executed Order Form may not be
modified, amended or rescinded without the consent of the Savings Bank unless
the Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995) and/or the Supplemental Eligibility Record Date (September 30, 1997)
and/or the Voting Record Date (October 31, 1997) must list all accounts on the
Order Form giving all names in each account, the account number and the
approximate account balance as of such date.
Payment for subscriptions may be made (i) in cash if delivered in person at
the Savings Bank, (ii) by check, bank draft, or money order, or (iii) by
authorization of withdrawal from deposit accounts maintained with the Savings
Bank. Appropriate means by which such withdrawals may be authorized are
provided on the Order Form. No wire transfers will be accepted. Interest will
be paid on payments made by cash, check, bank draft or money order at the
Savings Bank's passbook rate (3.0% per annum as of the date hereof) from the
date payment is received until the completion or termination of the Conversion.
Such interest checks will be mailed at the completion of the Conversion in
payment of interest earned on subscription funds. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion (unless the
certificate matures after the date of receipt of the Order Form but prior to
closing, in which case funds will earn interest at the passbook rate from the
date of maturity until consummation of the Conversion), but a hold will be
placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion. At the completion of the
95
Conversion the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. The shares issued in the Conversion cannot and
will not be insured by the FDIC or any other government agency. In the event
that the Conversion is not consummated for any reason, all funds submitted will
be promptly refunded with interest as described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of the
Purchase Price from his deposit account, the Savings Bank will do so as of the
effective date of Conversion. The Savings Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Savings
Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
IRAs maintained in the Savings Bank do not permit investment in the Common
Stock. A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Savings Bank does not
offer such accounts, it will allow such a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Common Stock in the
Offerings. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Savings Bank now holds the depositor's IRA
funds. An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in an Savings Bank IRA to purchase Common
Stock should contact the Stock Information Center at the Savings Bank as soon as
possible so that the necessary forms may be forwarded for execution and returned
prior to the Expiration Date. In addition, the provisions of ERISA and IRS
regulations require that officers, directors and 10% shareholders who use self-
directed IRA funds to purchase shares of Common Stock in the Subscription and
Direct Community Offering make such purchases for the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms to or the last address of such persons appearing
on the records of the Savings Bank as soon as practicable following consummation
of the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers and
purchasers, subscribers and purchasers may not be able to sell the shares of
Common Stock for which they subscribed or purchased.
Stock Pricing and Number of Shares to be Issued
The Purchase Price of shares of the Common Stock sold in the Subscription
Offering, Community Offering and Syndicated Community Offering was determined by
the Boards of Directors of the Holding Company and the Savings Bank in
consultation with the Savings Bank's financial advisor and sales agent, Webb,
and was based upon a number of factors, including the market price per share of
the stock of other financial institutions. The Washington regulations governing
conversion of Washington-chartered mutual savings banks to stock form require
that the aggregate purchase price of the shares of Common Stock of the Holding
Company sold in connection with the Conversion be equal to not less than the
minimum, nor more than the maximum, of the Estimated Valuation Range which is
established by an independent appraisal in the Conversion and is described
below; provided however, that with the consent of the Division and the FDIC, the
aggregate purchase price of the Common Stock sold may be increased to up to 15%
above the maximum of the Estimated Valuation Range, without a resolicitation of
subscribers
96
or any right to cancel, rescind or change subscription orders, to reflect
changes in market and financial conditions following commencement of the
Subscription Offering.
FDIC rules with respect to the appraisal require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the conversion pursuant to its business plan.
The Savings Bank and the Holding Company have retained RP Financial to
prepare an appraisal of the pro forma market value of the common stock of the
Holding Company to be issued in connection with the Conversion, as well as a
business plan. RP Financial will receive a fee expected to total approximately
$27,500 for its appraisal services and preparation of a business plan, plus
reasonable out-of-pocket expenses incurred in connection with the appraisal. The
Savings Bank has agreed to indemnify RP Financial under certain circumstances
against liabilities and expenses (including legal fees) arising out of, related
to, or based upon the Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Savings Bank as converted taking into account the formation of the
Holding Company as the holding company for the Savings Bank. For its analysis,
RP Financial undertook substantial investigations to learn about the Savings
Bank's business and operations. Management supplied financial information,
including annual financial statements, information on the composition of assets
and liabilities, and other financial schedules. In addition to this information,
RP Financial reviewed the Savings Bank's Application to Convert a Mutual Savings
Bank to a Stock Owned Savings Bank and the Holding Company's Form S-1
Registration Statement. Further, RP Financial visited the Savings Bank's
facilities and had discussions with the Savings Bank's management and its
special conversion legal counsel, Breyer & Aguggia. No detailed individual
analysis of the separate components of the Holding Company's or the Savings
Bank's assets and liabilities was performed in connection with the evaluation.
In estimating the pro forma market value of the Holding Company's Common
Stock, as required by applicable regulatory guidelines, RP Financial's analysis
utilized three selected valuation procedures, the Price/Book ("P/B") method, the
Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all of which are
described in its report. RP Financial placed the greatest emphasis on the P/E
and P/B methods in estimating pro forma market value. In applying these
procedures, RP Financial reviewed among other factors, the economic make-up of
the Savings Bank's primary market area, the Savings Bank's financial performance
and condition in relation to publicly-traded institutions that RP Financial
deemed comparable to the Savings Bank, the specific terms of the offering of the
Holding Company's Common Stock, the pro forma impact of the additional capital
raised in the Conversion, conditions of securities markets in general, and the
market for thrift institution common stock in particular. RP Financial's
analysis provides an approximation of the pro forma market value of the Holding
Company's Common Stock based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses of $965,000 at the midpoint of the Estimated
Valuation Range, an assumed after-tax rate of return on the net conversion
proceeds of 4.64% for the year ended September 30, 1996 and 4.60% for the nine
months ended June 30, 1997, purchases by the ESOP of 8% of the Common Stock sold
in the Conversion and purchases in the open market by the MRP of a number of
shares equal to 4% of the Common Stock sold in the Conversion at the Purchase
Price. See "PRO FORMA DATA" for additional information concerning these
assumptions. The use of different assumptions may yield somewhat different
results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Savings Bank that, in its opinion, as of August 29, 1997, the aggregate
estimated pro forma market value of the Holding Company and, therefore, the
Common Stock was within the valuation range of $42.5 million to $57.5 million
with a midpoint of $50.0 million. After reviewing the methodology and the
assumptions used by RP Financial in the preparation of the
97
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $42.5 million to $57.5 million with a
midpoint of $50.0 million. Assuming that the shares are sold at $10.00 per share
in the Conversion, the estimated number of shares would be between 4,250,000 and
5,750,000 with a midpoint of 5,000,000 shares. The Purchase Price of $10.00 was
determined by discussion among the Boards of Directors of the Savings Bank and
the Holding Company and Webb, taking into account, among other factors (i) the
requirement under Washington regulations that the Common Stock be offered in a
manner that will achieve the widest distribution of the stock and (ii) desired
liquidity in the Common Stock subsequent to the Conversion. Since the outcome of
the Offerings relate in large measure to market conditions at the time of sale,
it is not possible to determine the exact number of shares that will be issued
by the Holding Company at this time. The Estimated Valuation Range may be
amended, with the approval of the Division, if necessitated by developments
following the date of such appraisal in, among other things, market conditions,
the financial condition or operating results of the Savings Bank, regulatory
guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. A copy of the appraisal is also available for inspection at the
Savings Bank. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering, at
least the minimum number of shares are subscribed for, RP Financial, after
taking into account factors similar to those involved in its prior appraisal,
will determine its estimate of the pro forma market value of the Savings Bank
and the Holding Company upon Conversion, as of the close of the Subscription and
Direct Community Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the Division and the FDIC that, to the best of RP Financial's
knowledge and judgment, nothing of a material nature has occurred which would
cause it to conclude that the actual total purchase price on an aggregate basis
was incompatible with its estimate of the total pro forma market value of the
Holding Company and the Savings Bank as converted at the time of the sale. If,
however, the facts do not justify such a statement, the Subscription, Direct
Community and Syndicated Community Offerings or other sale may be canceled, a
new Estimated Valuation Range and price per share set and new Subscription,
Direct Community and Syndicated Community Offerings held. Under such
circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the event
the total amount of shares issued is less than 4,250,000 or more than 6,612,500
(15% above the maximum of the Estimated Valuation Range), for aggregate gross
proceeds of less than $42.5 million or more than $66.1 million, subscription
funds will be returned promptly with interest to each subscriber unless he
indicates otherwise. In the event a new valuation range is established by RP
Financial, such new range will be subject to approval by the Division.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Savings Bank and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the Division
and may provide for purchases for investment purposes by directors, officers,
their associates and other persons in excess of the limitations provided in the
Plan of Conversion and in excess of the proposed director purchases set forth
herein, although no such purchases are currently intended. If such other
purchase arrangements cannot be made, the Plan of Conversion will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Savings Bank furnished it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of such information
and did not independently verify the financial statements and other data
provided by the Savings Bank and the
98
Holding Company or independently value the assets or liabilities of the Holding
Company and the Savings Bank. The appraisal by RP Financial is not intended to
be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. Moreover, because the appraisal is necessarily based on many
factors which change from time to time, there is no assurance that persons who
purchase such shares in the Conversion will later be able to sell shares
thereafter at prices at or above the Purchase Price.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With the
exception of the ESOP, which is expected to subscribe for 8% of the shares of
Common Stock issued in the Conversion, the Plan of Conversion provides for the
following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase shares of Common Stock with an aggregate purchase
price of more than $200,000 (20,000 shares based on the Purchase Price), (ii) no
person, either alone or together with associates of or persons acting in concert
with such person, may purchase in the Direct Community Offering, if any, shares
of Common Stock with an aggregate purchase price of more than $200,000 (20,000
shares based on the Purchase Price), (iii) no person, either alone or together
with associates of or persons acting in concert with such person, may purchase
in the Syndicated Community Offering, if any, shares of Common Stock with an
aggregate purchase price of more than $200,000 (20,000 shares based on the
Purchase Price), and (iv) no person, either alone or together with associates of
or persons acting in concert with such person, may purchase in the aggregate
more than the overall maximum purchase limitation of 1% of the total number of
shares of Common Stock issued in the Conversion (exclusive of any shares issued
pursuant to an increase in the Estimated Valuation Range of up to 15%). For
purposes of the Plan of Conversion, the directors are not deemed to be acting in
concert solely by reason of their Board membership. Pro rata reductions within
each Subscription Rights category will be made in allocating shares to the
extent that the maximum purchase limitations are exceeded.
The Savings Bank's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation, all persons who
subscribed for the maximum number of shares will be given the opportunity to
increase their subscriptions accordingly, subject to the rights and preferences
of any person who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank, or the Holding Company) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity
(excluding tax-qualified employee plans); and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Savings Bank, its subsidiary,
or the Holding
99
Company. For example, a corporation of which a person serves as an officer would
be an associate of such person, and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Savings Bank, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, the Secretary and Treasurer as well as
any other person performing similar functions.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and by NASD members. See "--Restrictions on
Transferability by Directors and Officers and NASD Members."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased by directors and officers of the Holding
Company may not be sold for a period of one year following completion of the
Conversion, except in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Holding Company. Shares of Common Stock received by directors or officers upon
exercise of options issued pursuant to the Stock Option Plan are not subject to
this restriction. Accordingly, shares of Common Stock issued by the Holding
Company to directors and officers shall bear a legend giving appropriate notice
of the restriction, and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted Common Stock shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Division. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a Registration Statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
100
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Washington corporate law, as well as the Articles of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
Change of Control Regulations
The Change in Bank Control Act, together with Washington regulations,
require that the consent of the Division and the Federal Reserve be obtained
prior to any person or company acquiring "control" of a Washington-chartered
savings bank or a Washington-chartered savings bank holding company. Upon
acquiring control, such acquiror will be deemed to be a bank holding company.
Control is conclusively presumed to exist if, among other things, an individual
or company acquires the power, directly or indirectly, to direct the management
or policies of the Holding Company or the Savings Bank or to vote 25% or more of
any class of voting stock. Control is rebuttably presumed to exist under the
Change in Bank Control Act if, among other things, a person acquires more than
10% of any class of voting stock, and the issuer's securities are registered
under Section 12 of the Exchange Act or the person would be the single largest
stockholder. Restrictions applicable to the operations of bank holding companies
and conditions imposed by the Federal Reserve in connection with its approval of
such acquisitions may deter potential acquirors from seeking to obtain control
of the Holding Company. See "REGULATION -- The Holding Company."
Anti-takeover Provisions in the Holding Company's Articles of Incorporation and
Bylaws
The Articles of Incorporation and Bylaws of the Holding Company contain
certain provisions that are intended to encourage a potential acquiror to
negotiate any proposed acquisition of the Holding Company directly with the
Holding Company's Board of Directors. An unsolicited non-negotiated takeover
proposal can seriously disrupt the business and management of a corporation and
cause it great expense. Accordingly, the Board of Directors believes it is in
the best interests of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with management. The Board of
Directors believes that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the Board of Directors' view
that these provisions should not discourage persons from proposing a merger or
transaction at prices reflective of the true value of the Holding Company and
that otherwise is in the best interests of all stockholders. However, these
provisions may have the effect of discouraging offers to purchase the Holding
Company or its securities which are not approved by the Board of Directors but
which certain of the Holding Company's stockholders may deem to be in their best
interests or pursuant to which stockholders would receive a substantial premium
for their shares over the current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors and management more difficult. The Boards of Directors of the Savings
Bank and the Holding Company believe these provisions are in the best interests
of the stockholders because they will assist the Holding Company's Board of
Directors in managing the affairs of the Holding Company in the manner they
believe to be in the best interests of stockholders generally and because a
company's board of directors is often best able in terms of knowledge regarding
the company's business and prospects, as well as resources, to negotiate the
best transaction for its stockholders as a whole.
The following description of certain of the provisions of the Articles of
Incorporation and Bylaws of the Holding Company is necessarily general and
reference should be made in each instance to such Articles of Incorporation and
Bylaws. See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these
documents.
101
Board of Directors. The Articles of Incorporation provide that the number
of directors shall not be less than five nor more than 15. The initial number of
directors is nine, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Holding Company to gain majority representation on the Board of
Directors in a relatively short period of time. The Holding Company believes
these provisions to be important to continuity in the composition and policies
of the Board of Directors.
The Articles of Incorporation provide that there will be staggered
elections of directors so that the directors will each be initially elected to
one, two or three-year terms, and thereafter all directors will be elected to
terms of three years each. This provision also has the effect of making it more
difficult for a person seeking to acquire control of the Holding Company to gain
majority representation on the Board of Directors.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting in an election of directors. Cumulative voting in election of
directors entitles a stockholder to cast a total number of votes equal to the
number of directors to be elected multiplied by the number of his or her shares
and to distribute that number of votes among such number of nominees as the
stockholder chooses. The absence of cumulative voting for directors limits the
ability of a minority stockholder to elect directors. Because the holder of less
than a majority of the Holding Company's shares cannot be assured representation
on the Board of Directors, the absence of cumulative voting may discourage
accumulations of the Holding Company's shares or proxy contests that would
result in changes in the Holding Company's management. The Board of Directors
believes that (i) elimination of cumulative voting will help to assure
continuity and stability of management and policies; (ii) directors should be
elected by a majority of the stockholders to represent the interests of the
stockholders as a whole rather than be the special representatives of particular
minority interests; and (iii) efforts to elect directors representing specific
minority interests are potentially divisive and could impair the operations of
the Holding Company.
Special Meetings. The Articles of Incorporation of the Holding Company
provide that special meetings of stockholders of the Holding Company may be
called by the President or by the Board of Directors. If a special meeting is
not called by such person or entity, stockholder proposals cannot be presented
to the stockholders for action until the next annual meeting. Stockholders are
not permitted to call special meetings under the Holding Company's Articles of
Incorporation.
Authorized Capital Stock. The Articles of Incorporation of the Holding
Company authorize the issuance of 50,000,000 shares of common stock and
1,000,000 shares of preferred stock. The shares of Common Stock and Preferred
Stock were authorized in an amount greater than that to be issued in the
Conversion to provide the Holding Company's Board of Directors with flexibility
to effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Holding Company. The Board
of Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Holding Company's Board currently has no
plan for the issuance of additional shares, other than the issuance of
additional shares pursuant to stock benefit plans.
Director Nominations. The Articles of Incorporation of the Holding Company
require a stockholder who intends to nominate a candidate for election to the
Board of Directors at a stockholders' meeting to give written notice to the
Secretary of the Holding Company at least 30 days (but not more than 60 days) in
advance of the date of the meeting at which such nominations will be made. The
nomination notice is also required to include specified information concerning
the nominee and the proposing stockholder. The Board of Directors of the Holding
Company believes that it is in the best interests of the Holding Company and its
stockholders to provide sufficient time for the
102
Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
Supermajority Voting Provisions. The Holding Company's Articles of
Incorporation require the affirmative vote of 80% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 80% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on the Holding Company's Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of the Holding Company.
This provision could tend to make the acquisition of the Holding Company more
difficult to accomplish without the cooperation or favorable recommendation of
the Holding Company's Board of Directors.
Amendment of Articles of Incorporation and Bylaws. The Holding Company's
Articles of Incorporation may be amended by the vote of the holders of a
majority of the outstanding shares of Holding Company Common Stock, except that
the provisions of the Articles of Incorporation governing (i) the duration of
the corporation, (ii) the purpose and powers of the corporation, (iii)
authorized capital stock, (iv) denial of preemptive rights, (v) the number and
staggered terms of directors, (vi) removal of directors, (vii) approval of
certain business combinations, (viii) the evaluation of certain business
combinations, (ix) elimination of directors' liability, (x) indemnification of
officers and directors, (xi) calling of special meetings of shareholders, (xii)
the authority to repurchase shares and (xiii) the manner of amending the
Articles of Incorporation may not be repealed, altered, amended or rescinded
except by the vote of the holders of at least 80% of the outstanding shares of
the Holding Company. This provision is intended to prevent the holders of a
lesser percentage of the outstanding stock of the Holding Company from
circumventing any of the foregoing provisions by amending the Articles of
Incorporation to delete or modify one of such provisions.
The Holding Company's Bylaws may only be amended by a majority vote of the
Board of Directors of the Holding Company or by the holders of at least 80% of
the outstanding stock by the Holding Company.
Purpose and Takeover Defensive Effects of the Holding Company's Articles of
Incorporation and Bylaws. The Board of Directors believes that the provisions
described above are prudent and will reduce the Holding Company's vulnerability
to takeover attempts and certain other transactions that have not been
negotiated with and approved by its Board of Directors. These provisions will
also assist in the orderly deployment of the Conversion proceeds into productive
assets during the initial period after the Conversion. The Board of Directors
believes these provisions are in the best interest of the Savings Bank and the
Holding Company and its stockholders. In the judgment of the Board of Directors,
the Holding Company's Board will be in the best position to determine the true
value of the Holding Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interest of the Holding Company and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of the Holding Company and that is in the best interest of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
103
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Articles
of Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by the Holding
Company's Board, but pursuant to which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of the
Holding Company's Board of Directors and of management more difficult. The Board
of Directors of the Savings Bank and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Following the Conversion, pursuant to applicable law and, if required,
following the approval by stockholders, the Holding Company may adopt additional
anti-takeover charter provisions or other devices regarding the acquisition of
its equity securities that would be permitted for a Washington business
corporation.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws of the Holding
Company and in Federal and Washington law may be to discourage potential
takeover attempts and perpetuate incumbent management, even though certain
stockholders of the Holding Company may deem a potential acquisition to be in
their best interests, or deem existing management not to be acting in their best
interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 50,000,000 shares of Common
Stock having a par value of $.01 per share and 1,000,000 shares of preferred
stock having a par value of $.01 per share. The Holding Company currently
expects to issue up to 5,750,000 shares of Common Stock (subject to adjustment
up to 6,612,500 shares) and no shares of preferred stock in the Conversion. Each
share of the Holding Company's Common Stock will have the same relative rights
as, and will be identical in all respects with, each other share of Common
Stock. Upon payment of the Purchase Price for the Common Stock, in accordance
with the Plan of Conversion, all such stock will be duly authorized, fully paid
and nonassessable.
The Common Stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally
104
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. Federal Reserve regulations place certain limitations on
the repurchase of the Holding Company's capital stock. See "REGULATION -- The
Holding Company -- Stock Repurchases" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Washington law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a state mutual savings bank, corporate powers and control of the Savings
Bank are vested in its Board of Directors, who elect the officers of the Savings
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Subsequent to the Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Savings Bank,
all of which will be owned by the Holding Company, and voted at the direction of
the Holding Company's Board of Directors. Consequently, the holders of the
Common Stock will not have direct control of the Savings Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (including all deposit accounts
and accrued interest thereon) and after distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION"), all assets of the Savings Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Holding Company, the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Holding Company available for
distribution. If Holding Company preferred stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Articles of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
105
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion and will
not deregister its Common Stock for a period of at least three years following
the completion of the Conversion. Upon such registration the proxy and tender
offer rules, insider trading reporting requirements and restrictions, annual and
periodic reporting and other requirements of the Exchange Act will be applicable
to the Holding Company.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the Washington tax
consequences of the Offerings have been opined upon by Dwyer Pemberton and
Coulson, P.C., Tacoma, Washington. Breyer & Aguggia and Dwyer Pemberton &
Coulson, P.C. have consented to the references herein to their opinions. Certain
legal matters will be passed upon for Webb by Muldoon, Murphy & Faucette,
Washington, D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of September
30, 1995 and 1996, and for each of the years in the three year period ended
September 30, 1996 included in this Prospectus have been so included in reliance
upon the report of Dwyer Pemberton & Coulson, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
letter to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank and to the use of
its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-35817) under the Securities Act with respect to the Common
Stock offered in the Conversion.The Registration Statement may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; 500 West Madison Street, Suite 1400, Room
1100, Chicago, Illinois 60661; and 75 Park Place, New York, New York 10007.
Copies may be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration
Statement is also available through the SEC's World Wide Web site on the
Internet (www.sec.gov)
The Savings Bank has filed with the Division an Application to Convert a
Mutual Savings Bank to a Stock Owned Savings Bank. The Application, which
contains a copy of RP Financial's appraisal report, may be inspected at the
office of the Division, Department of Financial Institutions, General
Administration Building, 3rd Floor, Room 300, 210 11th Avenue, Olympia,
Washington 98504. The Savings Bank has also filed a copy of such Application
with the FDIC. Copies of the Plan of Conversion, which includes a copy of the
Savings Bank's proposed Amended Articles of Incorporation and Stock Bylaws, and
copies of the Holding Company's Articles of Incorporation and Bylaws are
available for inspection at any of the Savings Bank's offices and may be
obtained by writing to the Savings Bank at 624 Simpson Avenue, Hoquiam,
Washington 98550; Attention: Clarence E. Hamre, Chief Executive Officer, or by
telephoning the Savings Bank at (360) 533-4747. A copy of RP Financial's
independent appraisal report is also available for inspection at any of the
Savings Bank's offices.
106
Index To Consolidated Financial Statements
Timberland Savings Bank, SSB and Subsidiary
Page
Independent Accountant's Report............................................ F-1
Consolidated Balance Sheets as of September 30, 1995 and 1996
and June 30, 1997 (unaudited)............................................. F-2
Consolidated Statements of Income for the Years Ended September
30, 1994, 1995 and 1996 and for the Nine Months Ended
June 30, 1996 and 1997 (unaudited)........................................ 21
Consolidated Statements of Capital for the Years Ended September
30, 1994, 1995 and 1996 and for the Nine Months Ended
June 30, 1997 (unaudited)................................................. F-3
Consolidated Statements of Cash Flows for the Years Ended September
30, 1994, 1995 and 1996 and for the Nine Months Ended
June 30, 1996 and 1997 (unaudited)........................................ F-4
Notes to Consolidated Financial Statements................................. F-5
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the Holding Company have not been
included since it will not engage in material transactions, if any, until after
the Conversion. The Holding Company, which has only engaged in organizational
activities to date, has no significant assets, liabilities (contingent or
otherwise), revenues or expenses.
107
[LETTERHEAD OF DWYER PEMBERTON AND COULSON, P.C.]
Board of Trustees
Timberland Savings Bank, S.S.B.
We have audited the accompanying consolidated balance sheets of Timberland
Savings Bank, S.S.B. and subsidiary as of September 30, 1995 and 1996, and the
related consolidated statements of income, capital, and cash flows for each of
the three years in the period ended September 30, 1996. These consolidated
financial statements are the responsibility of the Savings Bank's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Timberland Savings
Bank, S.S.B. and subsidiary as of September 30, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Savings
Bank adopted Statement of Financial Accounting Standards No. 115, Accounting For
Certain Investments in Debt and Equity Securities, as of October 1, 1994, and
adopted Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, as of September 30, 1996.
/s/ Dwyer Pemberton and Coulson, P.C.
- ---------------------------------------
Dwyer Pemberton and Coulson, P.C.
November 22, 1996
Tacoma, Washington
F-1
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED BALANCE SHEETS
September 30, 1995, and 1996
and June 30, 1997 (Unaudited)
===================================================================================================
ASSETS
SEPTEMBER 30
--------------------------- JUNE 30
1995 1996 1997
--------------------------- ------------
Cash and due from financial institutions:
Noninterest bearing deposits $ 3,913,209 $ 3,930,641 $ 5,076,349
Interest bearing deposits 947,111 1,124,684 756,569
--------------------------- ------------
4,860,320 5,055,325 5,832,918
--------------------------- ------------
Investments and mortgage-backed securities:
Held to maturity, market value: 1995 - $9,761,569;
1996 - $4,865,614; 1997 - $4,147,656 9,855,642 4,950,794 4,171,739
Available for sale, cost: 1995 - $1,427,380;
1996 - $1,551,540 - 1997 - $1,555,100 1,449,100 1,571,676 1,555,100
--------------------------- ------------
11,304,742 6,522,470 5,726,839
--------------------------- ------------
Loans receivable - net 150,999,204 170,368,073 182,077,908
Loans held for sale - at market value 5,523,736 6,126,870 5,409,767
--------------------------- ------------
156,522,940 176,494,943 187,487,675
--------------------------- ------------
Accrued interest receivable 1,019,918 1,056,885 973,057
Premises and fixed assets - net 3,608,003 4,856,347 5,492,102
Other real estate owned - net 209,029 124,533 317,407
Other assets 235,972 246,301 357,552
--------------------------- ------------
TOTAL ASSETS $177,760,924 $194,356,804 $206,187,550
=========================== ============
LIABILITIES AND CAPITAL
LIABILITIES
Deposits $143,084,223 $156,549,417 $167,140,412
Federal Home Loan Bank advances 14,958,128 14,354,380 13,770,579
Other liabilities and accrued expenses 1,066,030 2,123,705 1,410,681
--------------------------- ------------
TOTAL LIABILITIES 159,108,381 173,027,502 182,321,672
--------------------------- ------------
CAPITAL
Undivided profits 18,638,186 21,315,990 23,865,878
Net unrealized appreciation in equity investments,
net of deferred federal income taxes of $6,824
in 1996 and $7,363 in 1995 14,357 13,312 -0-
--------------------------- ------------
TOTAL CAPITAL 18,652,543 21,329,302 23,865,878
--------------------------- ------------
TOTAL LIABILITIES AND CAPITAL $177,760,924 $194,356,804 $206,187,550
=========================== ============
See accompanying notes.
F-2
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED STATEMENTS OF CAPITAL
For the years ended September 30, 1994, 1995 and 1996
and for the nine months ended June 30, 1997 (Unaudited)
================================================================================
NET
UNREALIZED
APPRECIATION
UNDIVIDED IN EQUITY TOTAL
PROFITS INVESTMENTS CAPITAL
-----------------------------------------
BALANCE, October 1, 1993 $13,005,006 $ -0- $13,005,006
Net income 2,633,487 2,633,487
-----------------------------------------
BALANCE, September 30, 1994 15,638,493 15,638,493
Net income 2,999,693 2,999,693
Unrealized appreciation in available-for-sale
investments, net of deferred income taxes
of $7,363 14,357 14,357
-----------------------------------------
BALANCE, September 30, 1995 18,638,186 14,357 18,652,543
Net income 2,677,804 2,677,804
Unrealized depreciation in available-for-sale
investments, net of deferred income taxes
of $539 (1,045) (1,045)
-----------------------------------------
BALANCE, September 30, 1996 21,315,990 13,312 21,329,302
Net income (unaudited) 2,549,888 2,549,888
Realized gain on sale of investments, net
of deferred income taxes of $6,824 (13,312) (13,312)
-----------------------------------------
BALANCE, June 30, 1997 (unaudited) $23,865,878 $ -0- $23,865,878
=========================================
See accompanying notes.
F-3
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1994, 1995 and 1996
and for the nine months ended June 30, 1996 and 1997 (Unaudited)
======================================================================================================================
SEPTEMBER 30 JUNE 30
--------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
--------------------------------------------- -----------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 2,633,487 $ 2,999,693 $ 2,677,804 $ 2,280,021 $ 2,549,888
-------------------------------------------- ----------------------------
Noncash revenues, expenses,
gains and losses included in
income:
Depreciation 164,857 223,346 243,291 171,269 210,320
Deferred federal income
taxes 76,000 180,000 (188,000) 20,000 118,000
Federal Home Loan Bank
stock dividends (108,500) (82,900) (107,000) (78,000) (84,800)
Market value adjustment -
loans held for sale 26,082 (23,502) 86,793 117,801 (26,631)
Loss (gain) on sale of other
real estate owned, net (168,324) 20,591 (28) (28) (12,358)
FIIG stock dividends -0- (14,080) (17,160) (17,160) -0-
Provision for loan and other
real estate owned losses -0- -0- 72,000 45,000 334,282
Net (increase) decrease in loans
originated for sale 6,996,855 (2,294,988) (689,927) (1,750,904) 743,734
Increase in other assets, net (90,453) (288,707) (47,296) (60,736) (27,423)
Increase (decrease) in other
liabilities and accrued
expenses, net 246,254 (104,412) 1,245,675 349,006 (831,024)
-------------------------------------------- ----------------------------
7,142,771 (2,384,652) 598,348 (1,203,752) 424,100
-------------------------------------------- ----------------------------
NET CASH PROVIDED
BY OPERATING
ACTIVITIES 9,776,258 615,041 3,276,152 1,076,269 2,973,988
-------------------------------------------- ----------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of held-to-maturity
investments andmortgage-
backed securities (13,822,695) (2,552,775) -0- -0- -0-
Sales of held-to-maturity
investments and principal
repayments on mortgage-
backed securities 1,787,106 8,695,567 4,905,387 4,702,684 765,743
Sale of available-for-sale
investments -0- -0- -0- -0- 101,376
Increase in loans receivable,
net (22,340,198) (32,646,646) (19,438,869) (10,960,248) (12,044,117)
Additions to premises and fixed
assets, net (1,211,200) (370,912) (1,491,635) (591,593) (846,075)
Additions to other real estate
owned (48,064) (14,830) (98,759) (60,767) (450,998)
Dispositions of other real estate
owned 128,606 191,726 181,283 145,221 270,482
Investment in limited partner-
ship (45,398) (36,898) -0- -0- -0-
-------------------------------------------- ----------------------------
NET CASH USED BY
INVESTING ACTIVITIES (35,551,843) (26,734,768) (15,942,593) (6,764,703) (12,203,589)
-------------------------------------------- ----------------------------
F-4
SEPTEMBER 30 JUNE 30
------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------------------------------------- ---------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in certificates of
deposit, net 3,233,385 17,888,549 11,485,062 12,892,996 10,674,853
Increase (decrease) in other
deposits, net 33,363 (3,473,501) 1,980,132 (468,938) (83,858)
Increase (decrease) in Federal
Home Loan Bank advances,
net 5,753,318 9,204,810 (603,748) (5,576,888) (583,801)
------------------------------------------ --------------------------
NET CASH PROVIDED
BY FINANCING
ACTIVITIES 9,020,066 23,619,858 12,861,446 6,847,170 10,007,194
------------------------------------------ --------------------------
NET INCREASE
(DECREASE) IN CASH (16,755,519) (2,499,869) 195,005 1,158,736 777,593
CASH AND DUE FROM FINAN-
CIAL INSTITUTIONS, Beginning 24,115,708 7,360,189 4,860,320 4,860,320 5,055,325
------------------------------------------ --------------------------
CASH AND DUE FROM FINAN-
CIAL INSTITUTIONS, Ending $ 7,360,189 $ 4,860,320 $ 5,055,325 $ 6,019,056 $ 5,832,918
========================================== ==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 1,075,095 $ 1,450,000 $ 1,545,000 $ 1,095,000 $ 1,303,367
Interest paid $ 4,689,237 $ 6,255,112 $ 7,628,336 $ 5,127,058 $ 6,232,147
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Market value adjustment of
investments held for sale $ -0- $ 21,720 $ (1,584) $ (3,960) $ (20,136)
Deferred federal income taxes
on market value adjustment of
investments held for sale $ -0- $ (7,363) $ 539 $ 1,347 $ 6,824
Loans transferred to other real
estate owned $ 273,653 $ -0- $ 85,253 $ 66,309 $ 390,838
See accompanying notes.
F-5
TIMBERLAND SAVINGS BANK, S.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 1995 and 1996
and for the nine months ended June 30, 1996 and 1997 (Unaudited)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Timberland Savings Bank, S.S.B. (the Savings Bank) was established in
1915 and provides financial services to borrowers and depositors
located primarily in Western Washington.
The accounting principles followed by the Savings Bank and its wholly-
owned subsidiary, Timberland Service Corp., and the methods of applying
them conform with generally accepted accounting principles and with
general industry practice. The more significant accounting policies are
summarized below.
Principles of Consolidation:
All significant intercompany balances and transactions between the
Savings Bank and its subsidiary have been eliminated in consolidation.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Financial Instruments:
For the year ended September 30, 1996, the Savings Bank has adopted
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments. Under SFAS No. 107, the fair
value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties
(Note 14).
Investments and Mortgage-Backed Securities:
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the
Savings Bank has classified its investments and mortgage-backed
securities as follows:
Held-to-Maturity: Debt securities that management has the positive
----------------
intent and ability to hold until maturity are classified as held-to-
maturity and are stated at their remaining unpaid principal balance,
net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the interest method.
Available-for-Sale: Debt and equity securities that will be held for
------------------
indefinite periods of time, including securities that may be sold in
response to changes in market interest rates, prepayment rates, need
for liquidity, and changes in the availability of and the yield of
alternative investments are classified as available-for-sale. These
assets are stated at market value. Market value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and reported as a separate component
of capital until realized.
Trading Securities: Debt and equity securities that are bought and held
------------------
principally for the purpose of selling them in the near term are
classified as trading securities and stated at market value with
unrealized gains and losses included in earnings. The Savings Bank has
no investments or mortgage-backed securities classified for trading
purposes.
F-6
NOTE 1. (CONTINUED)
Gains or losses upon disposition of securities, regardless of
classification, are based on the net proceeds and the adjusted stated
amount of the securities sold, using the specific-identification
method.
Loans Receivable:
----------------
Loans receivable are reported at the principal amount outstanding, net
of loans in process of completion, unearned income, an allowance for
loans losses and participating interests sold.
Allowance for Losses:
Allowances for losses on specific problem loans and other real estate
owned are charged to earnings when it is determined that the value of
these loans and properties, in the judgment of management, is impaired.
In addition to specific reserves, the Savings Bank also maintains
general provisions for loan losses based on evaluating known and
inherent risks in the loan portfolio, including management's continuing
analysis of the factors and trends underlying the quality of the loan
portfolio. These factors include changes in the size and composition of
the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans
for which full collectibility may not be assured, and determination of
the existence and realizable value of the collateral and guarantees
securing the loans. The ultimate recovery of loans is susceptible to
future market factors beyond the Savings Bank's control, which may
result in losses or recoveries differing significantly from those
provided in the consolidated financial statements.
The Savings Bank accounts for impaired loans in accordance with SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures. These statements address the
disclosure requirements and allocations of the allowance for loan
losses for certain impaired loans. A loan within the scope of these
statements is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. The Savings Bank
excludes smaller balance homogeneous loans, including single family
residential and consumer loans from the scope of this statement.
When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it
is determined that the sole source of repayment for the loan is the
operation or liquidation of the underlying collateral. In such case,
impairment is measured at current fair value of the collateral, reduced
by estimated selling costs. When the measurement of the impaired loan
is less than the recorded investment in the loan (including accrued
interest and net deferred loan fees or costs), loan impairment is
recognized by establishing or adjusting an allocation of the allowance
for loan losses. SFAS No. 114, as amended, does not change the timing
of charge-offs of loans to reflect the amount ultimately expected to be
collected. At September 30, 1995 and 1996, and at June 30, 1997,
respectively, the Savings Bank had no loans deemed to be impaired as
defined by SFAS No. 114.
Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market
are stated at the lower of cost or estimated market value in the
aggregate. Gains or losses on sales of loans are recognized at the time
of sale and include adjustments to record such loans at the lower of
cost or market. The gain or loss is determined by the difference
between the net sales proceeds and the recorded value of the loans,
including any remaining deferred loan fees.
F-7
NOTE 1. (CONTINUED)
Premises and Fixed Assets:
Premises and fixed assets are recorded at cost. Depreciation is
computed on the straight-line method over the following estimated
useful lives: buildings - thirty to forty years; furniture and
equipment - three to five years; automobile - five years. The cost of
maintenance and repairs is charged to expense as incurred.
Other Real Estate Owned:
Other real estate owned consists of properties acquired through loan
foreclosure and are initially recorded at fair value at the date of
foreclosure. Costs relating to development and improvement of property
are capitalized, whereas costs relating to holding property are
expensed.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the recorded
value of a property exceeds its estimated net realizable value.
Interest on Loans and Loan Fees:
Interest on loans is recorded as income as borrowers' monthly payments
become due. Allowances are established for uncollected interest on
loans for which the interest is determined to be uncollectible. All
loans past due three or more payments are placed on nonaccrual status
and internally classified as substandard. Any interest income recorded
in the current reporting period is fully reserved. Subsequent
collections are applied proportionately to past due principal and
interest. Loans are removed from nonaccrual status only when the loan
is deemed current, and collectibility of principal and interest is no
longer doubtful.
The Savings Bank charges fees for originating and servicing loans.
These fees are for inspection of property and other miscellaneous
services. That portion of loan fees exceeding the estimated cost of
initiating and closing loans is deferred and amortized to income, on
the level-yield basis, over the loan term. If the loan is repaid prior
to maturity, the remaining balance is credited to income at the time of
repayment.
Loan Servicing Fees:
Fees earned for servicing loans for the Federal Home Loan Mortgage
Corporation ("FHLMC") are reported as income when the related mortgage
loan payments are collected. Loan servicing costs are charged to
expense as incurred.
Income Taxes:
The Savings Bank files a consolidated federal income tax return with
its subsidiary. The Savings Bank qualifies under provisions of the
Internal Revenue Code which permit, as a deduction from taxable income,
an allowance for bad debts based on a percentage of taxable income. The
percentage method bad debt deduction available was 8 percent for the
years ended September 30, 1994, 1995 and 1996.
Due to the passage of the Small Business Job Protection Act, effective
October 1, 1996, the percentage-of-income bad debt deduction for
federal tax purposes was eliminated. In addition, federal tax bad debt
reserves which have been accumulated since October 1, 1988, that exceed
the reserves which would have been accumulated based on actual
experience, are subject to recapture over a six-year recapture period
effective for tax years beginning October 1, 1996. However, the six-
year recapture period may be postponed for up to two years provided the
Savings Bank satisfies a mortgage origination test. As of September 30,
1996, the Savings Bank's federal tax bad debt reserves subject to
recapture approximated $1,700,000.
F-8
NOTE 1. (CONTINUED)
Deferred federal income taxes result from temporary differences between
the tax basis of assets and liabilities and their reported amounts on
the financial statements. These will result in differences between
income for tax purposes and income for financial statement purposes in
future years (Note 11).
Advertising:
The Savings Bank expenses all advertising costs as incurred. Direct-
response advertising costs incurred will be capitalized and amortized
over the estimated period to be benefited.
Statement of Cash Flows:
Cash and due from financial institutions include cash, funds due from
financial institutions, and certificates of deposit with maturities of
ninety days or less.
Recently Adopted Accounting Standards:
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
This Statement amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76,
77 and 122 and provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. It requires that liabilities and derivatives incurred or
obtained by transferors as part of financial assets be initially
measured at fair value, if practicable. It also requires that servicing
assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative
fair values at the date of the transfer. Servicing assets and
liabilities must be subsequently measured by amortization in proportion
to and over the period of estimated net servicing income or loss and
assessment for asset impairment or increased obligation based on their
fair values. This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, the FASB issued SFAS No. 127,
Deferral of the Effective Date of Certain Provision of FASB Statement
No. 125. This Statement defers the effective date of application of
certain transfer and collateral provisions of SFAS No. 125 until
January 1, 1998.
The adoption of the provisions of SFAS Nos. 125 and 127 on January 1,
1997, is not expected to have a significant impact on the Savings
Bank's financial position or results of operations.
Unaudited Financial Information:
Information as of June 30, 1997 and for the nine-month periods ended
June 30, 1996 and 1997 is unaudited. The unaudited information
furnished reflects all adjustments, which consist solely or normal
recurring accruals, which are , in the opinion of management, necessary
for a fair presentation of the financial position at June 30, 1997, and
the results of operations and cash flows for the nine-month periods
ended June 30, 1996 and 1997. The results of the nine-month periods are
not necessarily indicative of the results of the Savings Bank which may
be expected for the entire year.
Reclassifications:
Certain September 30, 1994, 1995 and 1996 amounts have been
reclassified to conform to the June 30, 1997 presentation.
F-9
NOTE 2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The following tables summarize the amortized cost, gross unrealized
gains and losses, and the estimated market value of the Bank's
investments and mortgage-backed securities at September 30, 1995 and
1996, and at June 30, 1997:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1995 COST GAINS LOSSES VALUE
---- --------------------------------------------------
HELD-TO-MATURITY
U.S. Government and
agencies $3,503,549 $ -0- $ (9,644) $3,493,905
Mortgage-backed securities:
FHLMC 2,505,635 2,860 (42,732) 2,465,763
FNMA 2,019,508 2,091 (47,591) 1,974,008
GNMA 1,826,950 3,283 (2,340) 1,827,893
--------------------------------------------------
TOTAL HELD-TO-
MATURITY $9,855,642 $ 8,234 $(102,307) $9,761,569
==================================================
AVAILABLE-FOR-SALE
FHLB stock $1,363,300 $ -0- $ -0- $1,363,300
FIIG stock 64,080 21,720 85,800
--------------------------------------------------
TOTAL AVAILABLE-
FOR-SALE $1,427,380 $21,720 $ -0- $1,449,100
==================================================
1996
----
HELD-TO-MATURITY
Mortgage-backed securities:
FHLMC $1,848,550 $ 2,356 $ (28,472) $1,822,434
FNMA 1,536,235 5,095 (58,637) 1,482,693
GNMA 1,566,009 -0- (5,522) 1,560,487
--------------------------------------------------
TOTAL HELD-TO-
MATURITY $4,950,794 $ 7,451 $ (92,631) $4,865,614
==================================================
AVAILABLE-FOR-SALE
FHLB stock $1,470,300 $ -0- $ -0- $1,470,300
FIIG stock 81,240 20,136 101,376
--------------------------------------------------
TOTAL AVAILABLE-FOR-
SALE $1,551,540 $20,136 $ -0- $1,571,676
==================================================
1997 (Unaudited)
----------------
HELD-TO-MATURITY
Mortgage-backed securities:
FHLMC $1,457,816 $ 6,327 $ (15,973) $1,448,170
FNMA 1,307,476 9,754 (47,937) 1,269,293
GNMA 1,406,447 23,746 -0- 1,430,193
--------------------------------------------------
TOTAL HELD-TO-
MATURITY $4,171,739 $39,827 $ (63,910) $4,147,656
==================================================
AVAILABLE-FOR-SALE
FHLB stock $1,555,100 $ -0- $ -0- $1,555,100
==================================================
The FHLB stock has a par value of $100 per share and is recorded at
cost. Stock owned in excess of required amounts can only be redeemed by
the Federal Home Loan Bank of Seattle.
Mortgage-backed securities pledged as collateral for public fund
deposits totaled $1,320,000, $1,161,000 and $1,747,000 at September 30,
1995 and 1996, and at June 30, 1997, respectively.
F-10
NOTE 2. (CONTINUED)
The contractual maturity of investments and mortgage-backed securities
at June 30, 1997 follows. Expected maturities may differ from
contractual maturities due to the prepayment of principal or call
provision.
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------
Held-To-Maturity:
----------------
Due after 1 year through 5 years $ 997,155 $ 584 $ (15,973) $ 981,766
Due after 10 years 3,174,584 39,243 (47,937) 3,165,890
---------------------------------------------------------------------
4,171,739 39,827 (63,910) 4,147,656
---------------------------------------------------------------------
Available-For-Sale:
------------------
FHLB stock 1,555,100 1,555,100
---------------------------------------------------------------------
TOTAL $ 5,726,839 $ 39,827 $ (63,910) $ 5,702,756
=====================================================================
NOTE 3. LOANS RECEIVABLE - NET AND LOANS HELD FOR SALE
Loans receivable including loans held for sale consisted of the
following:
September 30 June 30, 1997
----------------------------
1995 1996 (Unaudited)
---------------------------- ------------
Mortgage loans:
One-to-four family $ 88,055,913 $ 89,761,659 $ 94,611,583
Multi-family 10,964,753 12,569,371 12,644,422
Commercial 15,591,521 26,529,011 28,867,220
Construction and land development 42,751,879 47,140,084 44,744,044
Land 6,117,622 6,115,264 6,854,959
---------------------------- ------------
TOTAL MORTGAGE LOANS 163,481,688 182,115,389 187,722,228
---------------------------- ------------
Consumer loans:
Home equity and second mortgage 5,201,378 6,576,284 7,897,564
Other 2,020,050 2,474,958 2,784,813
---------------------------- ------------
TOTAL CONSUMER LOANS 7,221,428 9,051,242 10,682,377
---------------------------- ------------
Commercial business loans 231,050 475,731 718,184
---------------------------- ------------
TOTAL LOANS RECEIVABLE 170,934,166 191,642,362 199,122,789
---------------------------- ------------
Less:
Undisbursed portion of loans in
process 17,261,784 18,433,608 13,887,111
Unearned income 1,554,019 1,707,718 1,704,160
Allowance for loan losses 1,119,159 1,132,963 1,453,610
---------------------------- ------------
19,934,962 21,274,289 17,044,881
---------------------------- ------------
LOANS RECEIVABLE - NET 150,999,204 170,368,073 182,077,908
------------ ------------ ------------
Loans held for sale (one-to-four family) 5,526,316 6,216,243 5,472,509
Market-value adjustment (2,580) (89,373) (62,742)
------------ ------------ ------------
LOANS HELD FOR SALE - NET 5,523,736 6,126,870 5,409,767
------------ ------------ ------------
LOANS RECEIVABLE AND
LOANS HELD FOR SALE - NET $156,522,940 $176,494,943 $187,487,675
============ ============ ============
F-11
NOTE 3. (CONTINUED)
The composition of loans receivable including loans held for sale by
interest rate type at June 30, 1997(unaudited), is as follows:
FIXED ADJUSTABLE
RATE RATE TOTAL
-----------------------------------------
Mortgage loans:
One-to-four family $14,071,305 $ 86,012,787 $100,084,092
Multi-family 5,411,504 7,232,918 12,644,422
Commercial 7,630,452 21,236,768 28,867,220
Construction and land development 32,544,567 12,199,477 44,744,044
Land 6,835,272 19,687 6,854,959
-----------------------------------------
TOTAL MORTGAGE LOANS 66,493,100 126,701,637 193,194,737
-----------------------------------------
Consumer loans:
Home equity and second mortgage 5,887,285 2,010,279 7,897,564
Other 2,689,433 95,380 2,784,813
-----------------------------------------
TOTAL CONSUMER LOANS 8,576,718 2,105,659 10,682,377
-----------------------------------------
Commercial business loans 709,072 9,112 718,184
----------- ------------ ------------
TOTAL LOANS $75,778,890 $128,816,408 204,595,298
========================== ------------
Less:
Undisbursed portion of loans in process 13,887,111
Unearned income 1,704,160
Allowance for loan losses 1,453,610
Market-value adjustment - loans held for sale 62,742
------------
17,107,623
------------
LOANS RECEIVABLE AND LOANS HELD FOR SALE - NET $187,487,675
============
F-12
NOTE 3. (CONTINUED)
The contractual maturity of loans receivable including loans held for
sale at June 30, 1997 (unaudited), is as follows:
ONE YEAR THREE YEARS FIVE YEARS
WITHIN TO TO TO AFTER
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------------------------------------------------------------------------------
Mortgage loans:
One-to-four
family $ 521,972 $ 780,830 $ 1,264,477 $ 3,763,292 $ 93,753,521 $100,084,092
Multi-family 58 2,088 207,564 7,254,424 5,180,288 12,644,422
Commercial 600,174 259,388 527,524 9,729,003 17,751,131 28,867,220
Construction
and land
development 20,694,392 10,268,007 17,883 814,000 12,949,762 44,744,044
Land 434,727 1,706,356 4,248,317 322,429 143,130 6,854,959
----------- ----------- ------------ ----------- ------------ ------------
TOTAL MORT-
GAGE LOANS 22,251,323 13,016,669 6,265,765 21,883,148 129,777,832 193,194,737
----------- ----------- ------------ ----------- ------------ ------------
Consumer loans:
Home equity and
second mortgage 2,274,615 545,389 1,359,752 1,656,378 2,061,430 7,897,564
Other 1,190,040 583,301 649,050 167,775 194,647 2,784,813
----------- ----------- ------------ ----------- ------------ ------------
TOTAL CON-
SUMER LOANS 3,464,655 1,128,690 2,008,802 1,824,153 2,256,077 10,682,377
----------- ----------- ------------ ----------- ------------ ------------
Commercial business
loans 80,634 22,625 599,919 15,006 -0- 718,184
----------- ----------- ------------ ----------- ------------ ------------
TOTAL LOANS $25,796,612 $14,167,984 $ 8,874,486 $23,722,307 $132,033,909 204,595,298
=========== =========== ============ =========== ============ ------------
Less:
Undisbursed portion of loans in process 13,887,111
Unearned income 1,704,160
Allowance for loan losses 1,453,610
Market-value adjustment - loans held for sale 62,742
------------
17,107,623
------------
LOANS RECEIVABLE AND LOANS HELD FOR SALE - NET $187,487,675
============
The weighted average interest rate on all loans at September 30, 1995
and 1996, and at June 30, 1997, was 8.60 percent, 8.77 percent and 8.80
percent respectively.
Loans serviced for the Federal Home Loan Mortgage Corporation and
others at September 30, 1995 and 1996, and at June 30, 1997, totaled
$43,531,000, $45,859,000 and $53,968,000 respectively.
At September 30, 1995 and 1996, and at June 30, 1997, the Savings Bank
had commitments outstanding to originate mortgage loans at current
market rates totaling $8,000,000, $2,642,000 and $4,731,000
respectively.
At September 30, 1995 and 1996, and at June 30, 1997, the Savings Bank
had commitments outstanding for nonmortgage loans totaling $1,396,000,
$1,621,000 and $1,869,000 respectively.
Officers, employees and trustees of the Savings Bank have outstanding
loans which were made in the ordinary course of business. At September
30, 1995 and 1996, and at June 30, 1997, such loans approximated
$1,606,000, $1,862,000 and $1,883,000 respectively.
An analysis of loans outstanding to executive officers and trustees,
net of percentage sold, follows:
September 30 June 30, 1997
-----------------------
1995 1996 (Unaudited)
---------------------- --------------
BALANCE, Beginning of period $ 499,786 $ 702,392 $845,444
New loans 381,190 377,150 17,500
Repayments/sales (178,584) (234,098) (56,027)
---------------------- --------
BALANCE, End of period $ 702,392 $ 845,444 $806,917
====================== ========
F-13
NOTE 3. (CONTINUED)
At September 30, 1995 and 1996, and at June 30, 1997, the Savings Bank
had non-accruing loans totaling approximately $1,037,000, $1,520,000
and $7,730,000 respectively. At June 30, 1997, approximately $303,000
of loans were past due ninety days or more and still accruing.
Unrecorded interest on the non-accrual loans totaled approximately
$214,000 at June 30, 1997. No interest income was recorded on non-
accrual loans for the nine months ended June 30, 1997.
An analysis of the allowance for loan losses follows:
Nine months ended
------------------------------
Year ended September 30 June 30, 1996 June 30, 1997
---------------------------------------
1994 1995 1996 (Unaudited) (Unaudited)
--------------------------------------- ------------------------------
BALANCE, Beginning of period $1,137,983 $1,120,108 $1,119,159 $1,119,159 $1,132,963
Provision for loan losses 70,000 45,000 334,282
Transfers (54,718) (18,656) (3,000)
Loans charged off (17,875) (949) (1,478) (422) (19,160)
Recoveries 8,525
--------------------------------------- ------------------------------
BALANCE, End of period $1,120,108 $1,119,159 $1,132,963 $1,145,081 $1,453,610
====================================== ===========================
Mortgage servicing rights totaling $117,642 were capitalized subsequent
to the adoption of SFAS Nos. 125 and 127 on January 1, 1997.
Amortization of these rights was $3,616 for the period ended June 30,
1997. The balance of $114,026 is included in "other assets" in the
consolidated balance sheet.
NOTE 4. PREMISES AND FIXED ASSETS
Premises and fixed assets consisted of the following:
September 30 June 30, 1997
-----------------------
1995 1996 (Unaudited)
----------------------- -------------
Land $1,130,286 $1,130,286 $1,426,586
Office buildings and improvements 3,035,138 3,073,018 3,566,258
Furniture and equipment 1,578,558 1,680,731 1,705,723
Automobiles 35,181 21,883 21,883
Property held for future expansion 20,584 20,584 20,584
Construction and purchases in progress 14,931 1,230,679 1,237,765
---------------------------------------
5,814,678 7,157,181 7,978,799
Less accumulated depreciation 2,206,675 2,300,834 2,486,697
---------------------------------------
TOTAL $3,608,003 $4,856,347 $5,492,102
=======================================
The construction and purchases in progress account includes the
expenditures for the South Hill and Lacey branch offices which are
substantially completed at June 30, 1997.
NOTE 5. OTHER REAL ESTATE OWNED
Other real estate owned consisted of the following:
September 30 June 30, 1997
--------------------
1995 1996 (Unaudited)
-------------------- -------------
Real estate acquired through foreclosure $222,543 $194,765 $349,577
Allowance for possible losses (13,514) (70,232) (32,170)
-------- -------- --------
TOTAL $209,029 $124,533 $317,407
======== ======== ========
F-14
NOTE 5. (CONTINUED)
An analysis of the allowance for possible losses follows:
Nine months ended
-----------------------------
Year ended September 30 June 30, 1996 June 30, 1997
----------------------------------------- -----------------------------
1994 1995 1996 (Unaudited) (Unaudited)
----------------------------------------- -----------------------------
BALANCE, Beginning of
period $ 24,147 $ 13,514 $ 13,514 $ 13,514 $ 70,232
Provision for additional losses 105 17,550 2,000
Transfers 54,718 18,656 3,000
Charged off (10,738) (17,550) (41,062)
--------------------------------------------------------------------------
BALANCE, End of period $ 13,514 $ 13,514 $ 70,232 $ 32,170 $ 32,170
========================================= =============================
NOTE 6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
September 30 June 30, 1997
--------------------------
1995 1996 (Unaudited)
-------------------------- ------------
Loans receivable $ 939,752 $ 1,102,107 $ 1,226,698
Less reserve for uncollected interest 31,852 84,204 291,485
-------------------------- ------------
907,900 1,017,903 935,213
Interest bearing deposits and securities 112,018 38,982 37,844
-------------------------- ------------
TOTAL $1,019,918 $ 1,056,885 $ 973,057
========================== ============
NOTE 7. DEPOSITS
Deposits consisted of the following:
September 30 June 30, 1997
----------------------------
1995 1996 (Unaudited)
---------------------------- ------------
Noninterest bearing $ 3,116,078 $ 3,571,060 $ 4,601,368
N.O.W. checking 17,524,549 18,002,534 17,514,549
Passbook savings 25,552,625 25,400,165 25,130,455
Money market accounts 12,734,336 13,364,304 13,666,733
Certificates of deposit 81,847,159 93,332,220 104,007,073
Other 2,309,476 2,879,134 2,220,234
---------------------------- ------------
TOTAL $143,084,223 $156,549,417 $167,140,412
============================ ============
The weighted-average interest rate on all deposits at September 30,
1995 and 1996, and at June 30, 1997, was 4.60 percent, 4.55 percent and
4.61 percent respectively.
Officers, employees and trustees of the Savings Bank have deposits
totaling $1,083,650, $1,089,823 and $1,024,895 at September 30, 1995
and 1996, and at June 30, 1997 respectively.
Deposits of $100,000 or greater totaled $14,771,000, $17,721,000 and
$24,577,000 at September 30, 1995 and 1996, and at June 30, 1997
respectively.
F-15
NOTE 7. (CONTINUED)
Scheduled maturities of certificates of deposit accounts are as
follows:
September 30
------------------------- June 30, 1997
1995 1996 (Unaudited)
------------------------- ------------
Within one year $52,658,051 $64,201,806 $ 77,096,398
One to two years 19,434,194 18,737,200 19,100,079
Two to five years 8,911,170 9,814,221 7,392,986
After five years 843,744 578,993 417,610
------------------------- ------------
TOTAL $81,847,159 $93,332,220 $104,007,073
========================= ============
Certificates of deposit by scheduled maturity and interest rate at June
30, 1997 (unaudited), are as follows:
WITHIN ONE TO TWO TO OVER FIVE
INTEREST RATE RANGE ONE YEAR TWO YEARS FIVE YEARS YEARS TOTAL
------------------- -------------------------------------------------------------------------
2.00 - 3.99% $ 158,181 $ -0- $ -0- $ -0- $ 158,181
5.00 - 5.99% 65,640,923 14,228,048 3,576,988 319,414 83,765,373
6.00 - 6.99% 10,843,217 1,901,576 2,195,512 1,095 14,941,400
7.00 and over 454,077 2,970,455 1,620,486 97,101 5,142,119
-------------------------------------------------------------------------
TOTAL $77,096,398 $19,100,079 $7,392,986 $417,610 $104,007,073
=========================================================================
Interest expense, by account type, is as follows:
Nine months ended
-----------------------------
Year ended September 30 June 30, 1996 June 30, 1997
-----------------------------------------
1994 1995 1996 (Unaudited) (Unaudited)
---------- ---------- ---------- ---------- ----------
Certificates of deposit $2,854,986 $3,980,879 $5,270,398 $3,892,999 $4,302,246
Money market accounts 379,040 468,575 520,235 392,546 377,370
Passbook savings 954,096 820,657 737,665 550,266 555,880
N.O.W. checking 427,956 425,493 421,187 311,337 329,734
---------- ---------- ---------- ---------- ----------
TOTAL $4,616,078 $5,695,604 $6,949,485 $5,147,148 $5,565,230
========== ========== ========== ========== ==========
NOTE 8. FEDERAL HOME LOAN BANK ADVANCES
The Savings Bank has been approved for participation in the Federal
Home Loan Bank of Seattle Cash Management Advance Program, maturing
September 19, 1997, with a maximum facility of $9,244,000. Advances
requested under this program are payable on demand or, if no demand is
made, in one year from the date of advance and bear interest at the
rate in effect at that time. Advances are subject to the existing
Advances, Security and Deposit Agreement and are granted at the sole
discretion of the Federal Home Loan Bank of Seattle. There were no
advances outstanding under the Cash Management Advance Program at
September 30, 1995 and 1996, or at June 30, 1997.
Under the Advances, Security and Deposit Agreement which, including the
Cash Management Advance Program, is maintained at 20 percent of total
assets, the Savings Bank had advances at June 30, 1997, as follows:
Balance
Borrowing Interest Rate Maturity Date (Unaudited)
------------- ------------- ------------- ------------
Fixed rate 5.60% 07/25/97 $ 1,500,000
Fixed rate 6.70% 04/28/98 500,000
Fixed rate (monthly amortization) 6.11% 02/22/02 455,318
Fixed rate callable 5.39% 06/03/02 10,000,000
Fixed rate (monthly amortization) 6.55% 02/22/06 1,315,261
-----------
$13,770,579
===========
The weighted average rate for all advances at June 30, 1997 was 5.60
percent.
Under the Advances, Security and Deposit Agreement, virtually all of
the Savings Bank's assets, not otherwise encumbered, are pledged as
collateral for advances.
At June 30, 1997, annual repayments of FHLB advances, through June 30,
2002, and thereafter, totaled $2,120,601; $131,455; $143,274; $156,157;
$10,310,407; and $908,676 respectively.
F-16
NOTE 9. OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses consisted of the following:
September 30 June 30, 1997
-----------------------
1995 1996 (Unaudited)
----------------------- -------------
S.A.I.F. special assessment $ -0- $ 874,917 $ -0-
Federal income taxes 363,967 237,735 361,173
Accrued pension and profit sharing 208,284 417,137 411,403
Accrued interest on deposits and FHLB advances 138,022 138,246 142,714
Accounts payable and accrued expenses - other 355,757 455,670 495,391
----------------------- ----------
TOTAL $1,066,030 $2,123,705 $1,410,681
======================= ==========
NOTE 10. CAPITAL
The Savings Bank is required to maintain minimum risk-based capital of
8 percent of its adjusted total assets. At September 30, 1995 and 1996,
and at June 30, 1997, the Savings Bank's capital to risk weighted
assets was 17.0 percent, 16.8 percent and 16.9 percent respectively.
The Savings Bank's total capital to total assets at September 30, 1995
and 1996, and at June 30, 1997, was 10.5 percent, 11.0 percent and 11.6
percent respectively, compared to a minimum requirement of 6.0 percent.
NOTE 11. FEDERAL INCOME TAXES
The Savings Bank has qualified under provisions of the Internal Revenue
Code that permit federal income taxes to be computed after deduction of
additions to bad debt reserves. Accordingly, capital includes
approximately $2,100,000 for which no provision for federal income
taxes has been made. If in the future capital is used for any purpose
other than to absorb bad debt losses, federal income taxes at the
current applicable rates would be imposed.
The components of the provision for income taxes are as follows:
September 30 June 30, 1997
--------------------------------------
1994 1995 1996 (Unaudited)
---------- ----------- ----------- --------------
Current $1,087,124 $1,422,976 $1,607,307 $1,315,629
Deferred (credit) 76,000 180,000 (188,000) 118,000
---------- ---------- ---------- -------------
TOTAL $1,163,124 $1,602,976 $1,419,307 $1,433,629
========== ========== ========== =============
The components of federal income taxes are as follows:
September 30 June 30, 1997
------------------------
1995 1996 (Unaudited)
---------- ---------- ---------
Current (receivable) $ (13,396) $ 48,911 $ 61,173
Deferred 370,000 182,000 300,000
Deferred, available-for-sale securities 7,363 6,824 -0-
---------- ---------- ---------
TOTAL $ 363,967 $ 237,735 $ 361,173
========== ========== =========
F-17
NOTE 11. (CONTINUED)
The components of the Bank's deferred tax assets and liabilities are as
follows:
September 30 June 30, 1997
--------------------
1995 1996 (Unaudited)
------- ---------- -------------
Deferred tax assets:
S.A.I.F. special assessment -0 $ 297,472 $ -0-
Depreciation 20,723 22,620 32,450
Accrued vacation 16,046 18,112 24,806
Deferred compensation 15,010 30,021 41,278
Loans held for sale market value adjustment 877 30,387 21,332
------ ---------- ----------
TOTAL DEFERRED TAX ASSETS 52,656 398,612 119,866
------ ---------- ----------
Deferred tax liabilities:
FHLB and FIIG stock dividends 35,477 277,692 295,902
Federal income tax bad debt deduction 53,644 269,274 85,361
Real estate sale, installment basis 33,535 33,212 32,872
Unrealized securities gains 7,363 6,824 -0-
Other -0- 434 5,731
------ ---------- ----------
TOTAL DEFERRED TAX LIABILITIES 430,019 587,436 419,866
------ ---------- ----------
DEFERRED TAX LIABILITY - NET $377,363 $188,824 $ 300,000
====================== ==========
The provision for federal income taxes differs from that computed at
the statutory corporate tax rate as follows:
Year Ended September 30 June 30, 1997
----------------------------------------
1994 1995 1996 (Unaudited)
---------------------------------------- ----------
Tax provision at
statutory rate $1,290,848 $1,564,907 $1,393,018 $1,354,396
Bad debt deduction (51,381)
Gain on sale of other
real estate owned (32,744)
Nondeductible losses/
expenses - net (1,799) 10,021 27,659 12,372
Other - net (45,398) 28,048 (1,370) 66,861
---------- ---------- ---------- ----------
TOTAL TAX EXPENSE $1,163,124 $1,602,976 $1,419,307 $1,433,629
========== ========== ========== ==========
NOTE 12. PROFIT SHARING PLANS
The Savings Bank maintains a tax-qualified profit sharing plan for the
benefit of all eligible employees who are at least twenty-one years of
age and work a minimum of 501 hours. The Savings Bank contributed
$133,750, $148,976 and $177,581 to the plan in 1994, 1995 and 1996
respectively. Contributions are made on a discretionary basis.
In addition, the Savings Bank has an employee bonus plan based on net
income. Bonuses accrued for the years ended September 30, 1994, 1995
and 1996, totaled $105,336, $119,988 and $107,112 respectively.
NOTE 13. DEFERRED COMPENSATION/NONCOMPETITION AGREEMENT
The Savings Bank has a deferred compensation/noncompetition arrangement
with its chief executive officer which will provide monthly payments of
$1,600 per month if retirement occurs at age sixty-two or $2,000 per
month if retirement occurs at age sixty-five. Once payments have
commenced they will continue until his death, at which time payments
will continue to his surviving spouse until her death or for sixty
months. The present value of the payments based upon the life
expectancy of the chief executive officer are being accrued based on a
retirement age of sixty-five and are included in other liabilities in
the consolidated financial statements. As of September 30, 1995 and
1996, and at June 30, 1997, $88,296, $132,444 and $165,555
respectively, has been accrued under the agreement.
F-18
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Savings Bank has adopted Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial
Instruments, which requires disclosure of estimated fair values for
financial instruments. Such estimates are subjective in nature and
significant judgment is required regarding the risk characteristics of
various financial instruments at a discrete point in time. Therefore,
such estimates could vary significantly if assumptions regarding
uncertain factors were to change. Major assumptions, methods, and fair
value estimates for the Savings Bank's significant financial
instruments are set forth below.
Cash and Due from Financial Institutions: The recorded amount is a
reasonable estimate of fair value.
Investments and Mortgage-backed Securities and Loans Held for Sale: The
fair value of investments and mortgage-backed securities and loans held
for sale have been based upon quoted market prices or dealer quotes.
Loans Receivable - Net: Fair values for loans are estimated for
portfolios of loans with similar financial characteristics. Fair value
is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers for the same
remaining maturities. Prepayments are based upon the historical
experience of the Savings Bank.
Other Assets, Other Liabilities and Accrued Expenses: The recorded
amount is a reasonable estimate of fair value because of the short-term
nature of these items.
Deposits: The fair value of deposits with no stated maturity date are
included at the amount payable on demand. The fair value of fixed-
maturity certificates of deposit is estimated by discounting future
cash flows using the rates currently offered by the Savings Bank for
deposits of similar remaining maturities.
Federal Home Loan Bank Advances: The fair value of borrowed funds is
estimated by discounting the future cash flows of the borrowings at a
rate which approximates the current offering rate of the borrowings
with a comparable remaining life.
The estimated fair values of financial instruments at September 30,
1996, are as follows:
RECORDED FAIR
AMOUNT VALUE
------------ ------------
Financial assets:
Cash and due from financial institutions $ 5,055,325 $ 5,055,000
Investments and mortgage-backed securities 6,522,470 6,437,000
Loans receivable - net and loans held for sale 176,494,943 179,491,000
Other assets 1,226,469 1,226,000
Financial liabilities:
Deposits 156,549,309 157,126,000
Federal Home Loan Bank advances 14,354,380 14,412,000
Other liabilities and accrued expenses 2,123,705 2,124,000
F-19
NOTE 15. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (UNAUDITED):
Subsequent to the issuance of the auditors' report on November 22,
1996, the Board of Trustees of the Savings Bank adopted a Plan of
Conversion on July 10, 1997, to convert from a Washington-chartered
mutual savings bank to a Washington-chartered capital stock savings
bank with the concurrent formation of a holding company, subject to
approval by the regulatory authorities and members of the Savings Bank.
The conversion is expected to be accomplished through amendment of the
Savings Bank's Washington charter and the sale of the holding company's
common stock in an amount equal to the consolidated proforma market
value of the holding company and the Savings Bank after giving effect
to the conversion. The shares of common stock will be offered initially
to the Savings Bank's depositors, employee benefit plans and to certain
other eligible subscribers in a subscription offering. It is
anticipated that any shares not purchased in the subscription offering
will be offered in a direct community offering, and then any remaining
shares offered to the general public in a syndicated community
offering.
At the time of the conversion, the Savings Bank will establish a
liquidation account in an amount equal to its capital as of the last
date of the consolidated statement of financial condition appearing in
the final prospectus. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at the Savings Bank after conversion. The liquidation account
will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation of the Savings Bank, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held.
Under Washington law, the holding company is prohibited from paying a
dividend if, as a result of its payment, the holding company would be
unable to pay its debts as they become due in the normal course of
business, or if the Holding Company's total liabilities would exceed
its total assets. As a converted institution, the Savings Bank also
will be subject to the regulatory restriction that it will not be
permitted to declare or pay a dividend on or repurchase any of its
capital stock if the effect thereof would be to cause its regulatory
capital to be reduced below the amount required for the liquidation
account established in connection with the conversion.
Conversion costs will be deferred and reduce the proceeds from the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged as an expense. Conversion costs incurred for the
nine months ended June 30, 1997, were immaterial.
F-20
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or Webb. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person or in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Holding Company, or the Savings Bank since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents Page
----------------- ----
Prospectus Summary..............................................
Selected Consolidated Financial Information.....................
Recent Developments.............................................
Risk Factors....................................................
Timberland Bancorp, Inc.........................................
Timberland Savings Bank, SSB....................................
Use of Proceeds.................................................
Dividend Policy.................................................
Market for Common Stock.........................................
Capitalization..................................................
Historical and Pro Forma Capital Compliance.....................
Pro Forma Data..................................................
Timberland Savings Bank, SSB and Subsidiary.....................
Consolidated Statements of Income...............................
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................
Business of the Holding Company.................................
Business of the Savings Bank....................................
Management of the Holding Company...............................
Management of the Savings Bank..................................
Regulation......................................................
Taxation........................................................
The Conversion..................................................
Restrictions on Acquisition of the Holding Company..............
Description of Capital Stock of the Holding Company.............
Registration Requirements.......................................
Legal and Tax Opinions..........................................
Experts.........................................................
Additional Information .........................................
Index to Consolidated Financial Statements......................
Until the later of ___________ __, 1997, or 25 days after commencement of the
Syndicated Community Offering of Common Stock, if any, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
TIMBERLAND BANCORP, INC.
[Logo]
(Proposed Holding Company for Timberland
Savings Bank, SSB)
4,250,000 to 5,750,000 Shares of
Common Stock
----------------
Prospectus
----------------
CHARLES WEBB AND COMPANY,
a division of Keefe, Bruyette & Woods, Inc.
_________ __, 1997
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
Legal fees and expenses........................ $150,000
Securities Marketing Firm legal fees........... 35,000
EDGAR, printing, postage, copying and mailing.. 100,000
Appraisal/business plan fees................... 27,500
Accounting fees................................ 85,000
Securities marketing fees...................... 500,000(1)
Data processing fees and expenses.............. 7,500
SEC filing fee................................. 20,000
Washington filing fee.......................... 2,000
Blue sky legal fees and expenses............... 5,000
Other.......................................... 33,000
--------
Total........................................ $965,000
========
- ----------
(1) Equal to 1.25% of the aggregate dollar amount of stock sold (excluding
shares sold to officers, directors, their associates and the ESOP), not to
exceed $500,000.
Item 14. Indemnification of Officers and Directors
In accordance with the Washington Business Corporation Law, RCW
(S)23B.08.570, Article XIII of the Registrant's Articles of Incorporation
provides as follows:
"ARTICLE XIII. Indemnification. The corporation shall indemnify and
advance expenses to its directors, officers, agents and employees as follows:
A. Directors and Officers. In all circumstances and to the full extent
----------------------
permitted by the Washington Business Corporation Act now or hereafter in force,
the corporation shall indemnify any person who is or was a director, officer or
agent of the corporation and who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and whether formal or
informal (including an action by or in the right of the corporation), by reason
of the fact that he is or was an agent of the corporation, against expenses,
judgments, fines, and amounts paid in settlement and incurred by him in
connection with such action, suit or proceeding. However, such indemnity shall
not apply on account of: (a) acts or omissions of the director and officer
finally adjudged to be in violation of law; (b) conduct of the director and
officer finally adjudged to be in violation of RCW 23B.08.310, or (c) any
transaction with respect to which it was finally adjudged that such director and
officer personally received a benefit in money, property, or services to which
the director was not legally entitled. The corporation shall advance expenses
incurred in a proceeding for such persons pursuant to the terms set forth in a
separate directors' resolution or contract.
B. Implementation. The Board of Directors may take such action as is
--------------
necessary to carry out these indemnification and expense advancement provisions.
It is expressly empowered to adopt, approve and amend from time to time such
Bylaws, resolutions, contracts or further indemnification and expense
advancement arrangements as may be permitted by law, implementing these
provisions. Such Bylaws, resolutions, contracts, or further arrangements shall
include, but not be limited to, implementing the manner in which determinations
as to any indemnity or advancement of expenses shall be made.
C. Survival of Indemnification Rights. No amendment or repeal of this
----------------------------------
Article shall apply to or have any effect on any right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
II-1
D. Service for Other Entities. The indemnification and advancement of
--------------------------
expenses provided under this Article shall apply to directors, officers,
employees, or agents of the corporation for both (a) service in such capacities
for the corporation, and (b) service at the corporations's request as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A person is considered to be serving an employee benefit
plan at the corporation's request if such person's duties to the corporation
also impose duties on, or otherwise involve services by, the director to the
plan or to participants in or beneficiaries of the plan.
E. Insurance. The corporation may purchase and maintain insurance on
---------
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise against liability asserted
against him and incurred by him in such capacity or arising out of his status as
such, whether or not the corporation would have had the power to indemnify him
against such liability under the provisions of this bylaw and Washington law.
F. Other Rights. The indemnification provided by this section shall
------------
not be deemed exclusive of any other right to which those indemnified may be
entitled under any other bylaw, agreement, vote of stockholders, or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such an office, and
shall continue as to a person who has ceased to be a director, trustee, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such person."
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Timberland Bancorp, Inc.,
Timberland Savings Bank, SSB and Charles Webb & Co. (a)
1.2 -- Engagement Letter between Timberland Savings Bank, SSB and Charles Webb
& Co. (a)
2 -- Plan of Conversion of Timberland Savings Bank, SSB (attached as an
exhibit to the Proxy Statementincluded herein as Exhibit 99.5) (a)
3.1 -- Articles of Incorporation of Timberland Bancorp, Inc. (a)
3.2 -- Bylaws of Timberland Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- State Tax Opinion of Dwyer Pemberton and Coulson, P.C. (a)
8.3 -- Opinion of RP Financial, LP as to the value of subscription rights (a)
II-2
10.1 -- Proposed Form of Employee Stock Ownership Plan (a)
10.2 -- Timberland Savings Bank, SSB 401(k) Plan (a)
10.3 -- Proposed Form of Timberland Savings Bank, SSB Employee Severance
Compensation Plan (a)
21 -- Subsidiaries of Timberland Bancorp, Inc. (a)
23.1 -- Consent of Dwyer Pemberton and Coulson, P.C.
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5) (a)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion (contained
in opinion included as Exhibit 8.1) (a)
23.4 -- Consent of Dwyer Pemberton and Coulson, P.C. as to its State Tax
Opinion (contained in opinion included in Exhibit 8.2) (a)
23.5 -- Consent of RP Financial, LC. (a)
24 -- Power of Attorney (contained in signature page to the Registration
Statement) (a)
99.1 -- Order and Certification Form (contained in the marketing materials
included as Exhibit 99.2) (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with RP Financial, LC. (a)
99.4 -- Appraisal Report of RP Financial L.C. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Timberland
Savings Bank, SSB (a)
- ---------------------
(a) Previously filed.
II-3
Financial Statements and Schedules
Timberland Savings Bank, SSB and Subsidiary
Pages
Independent Auditors' Report - Dwyer Pemberton and Coulson, P.C... F-1
Consolidated Balance Sheets as of June 30, 1997
and September 30, 1996........................................... F-2
Consolidated Statements of Income for the
Nine Months Ended June 30, 1997
and the Years Ended September 30, 1996 and 1995.................. 21
Consolidated Statements of Equity for the
Nine Months Ended June 30, 1997 and for the
Years Ended September 30, 1996 and 1995.......................... F-3
Consolidated Statements of Cash Flows for
the Nine Months Ended June 30, 1997
and the Years Ended September 30, 1996 and 1995.................. F-4
Notes to Consolidated Financial Statements........................ F-5
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective 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.
II-4
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions 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-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Hoquiam, Washington
on the 12th day of November 1997.
TIMBERLAND BANCORP, INC.
By: /s/ Clarence E. Hamre
---------------------------------------------
Clarence E. Hamre
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amended Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Clarence E. Hamre Chairman of the Board, President November 12, 1997
- ------------------------------------ and Chief Executive Officer
Clarence E. Hamre (Principal Executive Officer)
/s/ Michael R. Sand* Executive Vice President, November 12, 1997
- ------------------------------------ Secretary, and Director
Michael R. Sand (Principal Financial and
Accounting Officer)
/s/ Andrea M. Clinton* Director November 12, 1997
- ------------------------------------
Andrea M. Clinton
/s/Robert Backstrom* Director November 12, 1997
- ------------------------------------
Robert Backstrom
/s/ Richard R. Morris* Director November 12, 1997
- -------------------------------------
Richard R. Morris
/s/ Alan E. Smith* Director November 12, 1997
- -------------------------------------
Alan E. Smith
/s/ Peter J. Majar* Director November 12, 1997
- ---------------------------------------
Peter J. Majar
/s/ Jon C. Parker* Director November 12, 1997
- --------------------------------------
Jon C. Parker
/s/ James C. Mason* Director November 12, 1997
- ------------------------------------
James C. Mason
- -----------------
* By power of attorney dated September 17, 1997.