-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QsMxCHGMF7QSDMLb3aNtle8E1xKqHQQeGU9lRnb4dFeKAvOxKQSsxrSiVDvL90TX l+s3sDoZLktOh7YwwNHVEg== 0000891020-98-000021.txt : 19980116 0000891020-98-000021.hdr.sgml : 19980116 ACCESSION NUMBER: 0000891020-98-000021 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19980115 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COWLITZ BANCORPORATION CENTRAL INDEX KEY: 0000894267 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911529841 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-44355 FILM NUMBER: 98507908 BUSINESS ADDRESS: STREET 1: 927 COMMERCE AVE CITY: LONGVIEW STATE: WA ZIP: 98632 BUSINESS PHONE: 2064239800 MAIL ADDRESS: STREET 1: 927 COMMERCE AVENUE CITY: LONGVIEW STATE: WA ZIP: 98632 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COWLITZ BANCORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 6712 91-1529841 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
927 COMMERCE AVENUE, LONGVIEW, WASHINGTON 98632 (360) 423-9800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CHARLES W. JARRETT, PRESIDENT AND CHIEF OPERATING OFFICER COWLITZ BANCORPORATION 927 COMMERCE AVENUE, LONGVIEW, WASHINGTON 98632 (360) 423-9800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: DAVID R. WILSON STEPHEN M. KLEIN BERNARD L. RUSSELL MARK C. LEWINGTON FOSTER PEPPER & SHEFELMAN PLLC GRAHAM & DUNN PC 1111 THIRD AVENUE, SUITE 3400 1420 FIFTH AVENUE, SUITE 3300 SEATTLE, WASHINGTON 98101 SEATTLE, WASHINGTON 98101 (206) 447-4400 (206) 624-8300
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. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
=========================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- Common Stock, no par value............. 1,150,000 shares $13.00 $14,950,000 $4,531 ===========================================================================================================
(1) Includes 150,000 shares that may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(a). 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. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JANUARY 15, 1998 1,000,000 SHARES LOGO COWLITZ BANCORPORATION COMMON STOCK ------------------------ All of the shares of Common Stock ("Common Stock") of Cowlitz Bancorporation (the "Company") offered hereby (the "Offering") are being sold by the Company. Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share of Common Stock. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has filed an application to list the Common Stock for quotation on the Nasdaq National Market under the symbol "CWLZ." SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ====================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------ Per Share........................... $ $ $ - ------------------------------------------------------------------------------------------------------ Total(3)............................ $ $ $ ======================================================================================================
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company estimated at $300,000. (3) The Company and the Selling Shareholders have granted to the Underwriters a 30-day option to purchase up to 133,000 and 17,000 additional shares of Common Stock, respectively, on the same terms and conditions set forth above solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discount will total $ , the Proceeds to Company will total $ and the Proceeds to Selling Shareholders will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, when, as and if delivered and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that the delivery of the certificates representing such shares will be made against payment therefor at the offices of Black & Company, Inc. on or about , 1998. ------------------------ BLACK & COMPANY, INC. PACIFIC CREST SECURITIES INC. The date of this Prospectus is , 1998. 3 [PHOTOGRAPH OF COWLITZ FINANCIAL CENTER] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITY, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and notes thereto, included elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects an adjustment for all stock splits to the date of this Prospectus. Unless the context requires otherwise, references to the "Company" mean Cowlitz Bancorporation and its wholly-owned subsidiary, The Cowlitz Bank (the "Bank"). THE COMPANY With its five full-service offices, the Company has the largest market share of deposits among commercial banks in Cowlitz County, Washington, and The Cowlitz Bank is the only community bank headquartered in the county. The Company has grown from one branch with assets of $39.4 million, deposits of $31.0 million and shareholders' equity of $2.5 million at January 1, 1992 to five branches with assets of $175.7 million, deposits of $139.1 million and shareholders' equity of $13.3 million at September 30, 1997. The Company emphasizes personal service and customer relationships and believes that such emphasis is the primary reason for its rapid growth. The Bank's most recent rating under the Community Reinvestment Act was "outstanding." In 1996, the Independent Bankers Association of America listed the Bank as one of the top ten banks in the United States with assets between $150 million and $300 million based on return on shareholders' equity ("ROE"). The Company offers or makes available a broad range of financial services to its customers, primarily small and medium-sized businesses, professionals and retail customers. In addition to its normal commercial and personal banking services, which include commercial and real estate lending, consumer lending, mortgage origination and trust services, the Company has developed relationships with a securities brokerage firm and an insurance agency with an estate planner to provide its customers access to a variety of financial services which are generally not available in community banks. In 1997, the Company established a trust department to offer trust services to individuals, corporations and institutions. It is the only such trust department located in Cowlitz County. By combining its array of traditional commercial banking products with these enhanced customer services, the Company is able to provide its customers with similar banking services offered by its larger competitors while retaining the character of a community bank and the level of personal service which larger banks generally no longer provide. Based on reports of the Federal Home Loan Bank of Seattle ("FHLB"), at June 30, 1996, the Company held approximately 25% of the deposits in commercial banks in Cowlitz County, which was the largest share of deposits of any commercial bank. Since June 30, 1996, the Company has taken several steps to increase its market share in Cowlitz County. Historically, the Company operated from one location in Longview. In November 1996, the Company opened a de novo branch in neighboring Kelso, Washington. Two recent acquisitions of competitors in Cowlitz County presented the Company with additional opportunities for in-market growth. In 1996, Wells Fargo Bank acquired First Interstate Bank, which was a principal competitor of the Company. The Company successfully bid for three Wells Fargo branches in Cowlitz County and acquired those branches in July 1997. In the second half of 1997, U.S. Bank was acquired by First Bank, which has recently announced its intention to close the U.S. Bank branch in Kelso, Washington, creating additional opportunities for the Company. The Company is aggressively marketing to its new customers from the former Wells Fargo branches as well as the customers of U.S. Bank in Kelso. The Company is introducing its full array of financial products to these new customers while emphasizing personal service as a way of increasing its market share within its existing market area. Management believes that the Company's historical growth and recent successful expansion activities strongly position the Company to continue to increase its market share in Cowlitz County and to expand into other similar markets. 3 5 The Company's expansion since 1992 has been marked by the following highlights: 1992 - Arranged $2 million in long-term debt for capital infusion into Cowlitz Bank - Increased assets by 85% to $73.1 million - Initiated quarterly dividends - Began relationship with Robert Thomas Securities 1993 - Increased earnings per share by 96% over prior year 1994 - Increased loans by 35% over prior year - Established mortgage department - Sold $2.2 million of common stock in Regulation A offering 1995 - Increased loans by 40% over prior year 1996 - Opened Kelso branch - Named by Independent Bankers Association as one of the top ten banks of its size based on ROE - Remodeled and expanded main branch to become the Cowlitz Financial Center 1997 - Acquired three Wells Fargo branches - Opened trust department - Began relationship with Commerce Business and Estate Services
BUSINESS STRATEGY The Company's goal is to maintain its position as the leading community based provider of financial services in Cowlitz County and to become one of the leading community based providers of financial services in other selected areas of Washington and Oregon. The Company's growth strategy is based on providing both exceptional personal service and a wide range of financial services to its customers. The Company's strategy consists of the following: - Emphasize personal service and develop strong community ties. Based on its experience, the Company believes that providing a high level of personal service and customer attention attracts and retains customers. The Company's employees work with specific customers on an individual, personalized basis. As a result of this level of customer attention, the Company believes that it can make business decisions regarding its customers more quickly and efficiently than its competitors. The Company's philosophy is that of a true community bank -- to provide the highest level of service to its communities. The Company's "outstanding" Community Reinvestment Act ("CRA") rating is evidence of its commitment to serve all the citizens in its communities. The Company believes that its intense focus on customer service coupled with its deep community relationships serve to differentiate the Company from its competitors. - Provide a broad range of financial products and services. The Company believes that offering a wide range of financial products and services is an important competitive factor. In addition to deposit and loan products typically offered by commercial banks, the Company has developed a real estate loan division to originate mortgage loans and has established a trust department. To execute this strategy, the Company has hired experienced personnel to market and deliver these services. The Company leases space in its main financial center to a securities brokerage firm and an insurance agency in order to provide its customers with access to a wider range of financial services. This combination of products and services is designed to both increase its customer base and to enhance cross-selling opportunities to its customer base. - Increase business volume in existing market. The Company believes there is an opportunity to increase its business volume in its existing market area by promoting its complete array of financial products as well as emphasizing personal service, especially in relationships with new customers obtained in the acquisition of the Wells Fargo branches and by establishing new customer relationships as a result of the announced closure of a U.S. Bank branch in Kelso. The Company believes that additional opportunities for growth exist in Cowlitz County as a result of new business entrants such as 4 6 BHP Coated Steel, Prudential Steel and Foster Farms. The Company presently has the largest share of deposits held by commercial banks in Cowlitz County and believes that its reputation for a high level of personal service will help it attract new customers as the larger banks continue their consolidation and reduction of personal service to their customers. - Explore opportunities for regional expansion through acquisition. The Company intends to explore the acquisition of other community banks and branches of larger banks in non-metropolitan communities in Washington and Oregon. The Company intends to retain the local character of institutions which it acquires and to promote deposit and asset growth in the acquired institutions through implementation of its customer service policies and product offerings. Although the Company is not presently engaged in any acquisition discussions, it believes that such opportunities are available and that its ability to consummate such acquisitions will be enhanced by completion of this Offering and the creation of a public market for the Company's Common Stock. The Company was organized in 1991 under Washington law to become the holding company for the Bank, a Washington state chartered bank that commenced operations in 1978. The principal executive offices of the Company are located at 927 Commerce Avenue, Longview, Washington 98632, and its telephone number is (360) 423-9800. THE OFFERING Common Stock offered by the Company..................... 1,000,000 Shares Common Stock to be outstanding after the Offering....... 3,619,872 Shares Use of proceeds......................................... To repay approximately $1.1 million of outstanding indebtedness, to increase the capital of the Company and for future acquisitions. Directed Shares......................................... 100,000 shares, or 10.0% of the Offering, have been reserved for existing shareholders, employees and customers and, subject to availability, other residents of Cowlitz County, consistent with the local orientation of the Company. Proposed Nasdaq National Market symbol.................. CWLZ
5 7 RISK FACTORS This Prospectus contains certain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Prospectus. Prospective investors should carefully consider and evaluate all of the information set forth in this Prospectus, including the Risk Factors set forth below. This list of risk factors may not be exhaustive. EXPOSURE TO LOCAL ECONOMY The Company's performance is materially dependent upon and sensitive to the economy of its market area consisting of Cowlitz County and the surrounding areas in southwest Washington and northwest Oregon. Adverse economic developments may affect loan demand and the collectibility of existing loans, and have a negative effect on the Company's earnings and financial condition. Historically, the economy of Cowlitz County depended primarily on the forest products industry. Particularly in the 1980's, the Company's market area experienced high unemployment as a result of the reduction in forest products manufacturing jobs. While the forest products industry is still the leading employer in Cowlitz County, the economy is becoming more diverse as manufacturers enter the region and tourism centered around Mount St. Helens expands. Subsequent developments have reduced the dependence of the local economy on forest products manufacturing and have increased the number of non-manufacturing jobs. There can be no assurance that future economic changes will not have a significant adverse effect on the Company. See "Business -- Market Area." ABILITY TO EXPAND OPERATIONS An important element of the Company's business strategy is to expand its market area through acquisitions. The Company has not identified any specific acquisition candidates. Although the Company has not acquired any whole banks in the past, it successfully bid for and acquired three branches from Wells Fargo Bank and believes it has successfully integrated those branches into its operations. No assurance can be given that the Company will be able to enter into and consummate any acquisitions or the timing of any acquisitions that may occur. The rate of growth of the Company will be directly affected by its ability to identify and consummate acquisitions. If the Company is not able to consummate one or more acquisitions, it has no other current intended use for a substantial portion of the offering proceeds, and pending application of those proceeds, the Company's return on equity and earnings per share would be adversely affected. No assurance can be given that such funds will be effectively deployed in the future. COMPETITION In recent years, competition for deposits and loans has intensified. Two super-regional banks in the Company's market area have been acquired by even larger banks, although one has sold branches to the Company and the other has announced it is closing one of its branches in Cowlitz County. These institutions have competitive advantages over the Company in that they may have higher public visibility and are able to maintain advertising and marketing activities on a much larger scale than the Company can economically sustain. Single-borrower lending limits imposed by law are dependent on the capital of the financial institution, giving branches of larger banks an additional competitive advantage with respect to loan applications which are in excess of the Company's legal lending limits. Furthermore, competition from outside the traditional banking system from credit unions, investment banking firms, insurance companies and related industries offering bank-like products has increased the competition for deposits and loans. In the Company's primary market area, credit unions held approximately 51% of local deposits as of June 30, 1996. See "Business -- Competition." CREDIT RISK The Company, like other lenders, is subject to credit risk, which is the risk of losing principal and interest due to customers' failure to repay loans in accordance with their terms. Although the Company has established lending criteria and most loans are secured by collateral, a downturn in the economy or the real 6 8 estate market in Cowlitz County or a rapid increase in interest rates could have a negative effect on collateral values and borrowers' ability to repay. In addition, seven of the Company's eleven loan officers were hired by the Company within the last twelve months and accordingly, although these seven recent hires are experienced loan officers, the Company's experience with these loan officers' underwriting abilities is limited. At September 30, 1997, the Company's nonperforming assets were $2.0 million, an increase of $1.4 million from December 31, 1996. This increase is primarily due to management's decision to classify loans with four borrowers with an aggregate principal balance of $1.1 million as nonperforming. Although management believes that its allowance for loan losses at September 30, 1997 is adequate, no assurance can be given that an additional provision for loan losses will not be required. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Loans." INTEREST RATE RISK The Company's earnings are largely derived from net interest income, which is interest income and fees earned on loans and investment income, less interest expense paid on deposits and other borrowings. Interest rates are highly sensitive to many factors which are beyond the control of the Company's management, including general economic conditions, and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans) and liabilities (such as certificates of deposit), the effect on net interest income depends on the maturity of the asset or liability. Although the Company strives to minimize interest rate risk through asset/liability management policies, from time to time maturities are not balanced. Further, while rates have remained stable in recent periods, an unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. The Company historically used borrowings from the FHLB and, to a lesser extent, higher interest rate certificates of deposits, as a means of achieving faster asset growth than would have been possible through normal deposit growth. As a result of the acquisition of the Wells Fargo branches in July 1997, the Company at September 30, 1997 had significantly reduced its dependence on FHLB borrowings and higher interest rate certificates of deposits. The Company may increase its use of FHLB borrowings and higher interest rate certificates of deposit in the future if circumstances warrant. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." DEPENDENCE ON KEY PERSONNEL The Company's success is dependent on the services of Benjamin Namatinia, Chairman and Chief Executive Officer, and Charles W. Jarrett, President and Chief Operating Officer. The loss of services of either of these executives, or of certain other key officers, could adversely affect the Company. No assurance can be given that replacement officers of comparable abilities could be found. The Company maintains key person life insurance on these individuals. See "Management." OFFERING PRICE The price of the shares being offered hereby will be determined by negotiation between the Company and the representative of the Underwriters. There can be no assurance that the market will sustain the offering price or that the offering price necessarily indicates the fair value of the Common Stock. See "Underwriting." LIMITED MARKET FOR THE SHARES Although shares of Common Stock are traded between shareholders from time to time, there is currently no market for the Company's shares. The Company has applied for inclusion of the Common Stock in the Nasdaq National Market System, but no assurances can be made that an active public market will develop or be maintained for the shares. Moreover, the market price could be subject to significant fluctuations in response to variations in the Company's quarterly operating results, general conditions of the banking industry and other factors. In addition, the price of the shares may fluctuate substantially due to the effect of supply 7 9 and demand in a limited market. Even if an active market for the shares does develop, investors in this Offering cannot be assured of being able to resell shares purchased in the Offering at or above the offering price. REGULATION The Company is subject to extensive regulations under federal and state laws. These laws and regulations are intended primarily to protect depositors and the deposit insurance fund, rather than shareholders. The Bank is a state chartered commercial bank which is not a member of the Federal Reserve System and is subject to primary regulation and supervision by the Director of Financial Institutions of the State of Washington (the "Washington Director") and by the Federal Deposit Insurance Corporation (the "FDIC"), which also insures bank deposits. The Company is also subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Federal and state regulations place banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. Although the Company has been able to compete effectively in its market area in the past, there can be no assurance that it will be able to continue to do so. Further, future changes in federal and state banking regulations could adversely affect the Company's operating results and ability to continue to compete effectively. See "Business -- Regulation and Supervision." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS The Board of Directors has adopted an amendment to the Company's Articles of Incorporation which, if adopted by the shareholders, would give the Board of Directors the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock may be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by shareholders and may adversely affect the voting and other rights of the holders of Common Stock. The Company has no present plans to issue shares of Preferred Stock. See "Description of Capital Stock." 8 10 USE OF PROCEEDS The net proceeds to the Company from the Offering, after deducting the underwriting discount and estimated Offering expenses of $300,000, are estimated to be $10,860,000 (approximately $12,344,280 if the Underwriters' over-allotment option is exercised in full), based on the assumed initial public offering price of $12.00 per share. The net cash proceeds of the Offering will be used to repay approximately $1,000,000 of outstanding subordinated notes which bear interest at 8.5% per annum, to repay approximately $146,000 of bank debt which currently bears interest at 9.5% per annum, to increase the capital of the Company and the Bank in order to expand its existing business and for future acquisitions. The Company is not presently a party to any acquisition discussions or agreements. Initially, the Company plans to invest the proceeds in money-market accounts at the Bank, which in turn will invest the funds in short-term investment securities. In the event that the Underwriters' over-allotment option is exercised, up to 17,000 shares will be sold for the account of the Selling Shareholders. The Company will not receive any proceeds from the sale of Shares by the Selling Shareholders. DIVIDEND POLICY The Company has paid the following annual amounts on a per share basis as dividends to its shareholders since 1993:
YEAR AMOUNT ------------------------------------------------------------ ------ 1993........................................................ $.029 1994........................................................ .029 1995........................................................ .033 1996........................................................ .039 1997........................................................ .048
The Board of Directors' dividend policy is to review the Company's financial performance, capital adequacy, regulatory compliance and cash resources, and if such review is favorable, to declare and pay a cash dividend to shareholders quarterly. Although the Company anticipates payment of a regular quarterly cash dividend, future dividends are subject to these limitations and to the discretion of the Board of Directors, and could be reduced or eliminated. The Company's ability to pay cash dividends to its shareholders is dependent on earnings generated by the Bank. Washington and federal banking laws and regulations place restrictions on the payment of dividends by a bank to its shareholders. See "Business -- Regulation and Supervision." 9 11 CAPITALIZATION The following table sets forth, as of September 30, 1997, the total capitalization of the Company on an actual basis and as adjusted to give effect to the sale of Common Stock offered by the Company at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds to the Company therefrom. This table should be read in conjunction with the historical financial statements of the Company and the related notes thereto included elsewhere in this Prospectus. See "Use of Proceeds" and "Selected Historical Financial Information and Other Data."
AS OF SEPTEMBER 30, 1997 -------------------- AS ACTUAL ADJUSTED ------- -------- (DOLLARS IN THOUSANDS) Shareholders' equity: Preferred Stock, no par value; no shares authorized; no shares issued and outstanding or as adjusted...................................... $ -- $ -- Common Stock, no par value; 3,937,500 shares authorized; 2,602,215 shares issued and outstanding; 3,602,215 shares issued and outstanding as adjusted(1).......................................... 3,247 14,107 Additional paid-in capital............................................. 1,538 1,538 Net unrealized gain on available-for-sale securities................... 14 14 Retained earnings...................................................... 8,496 8,496 ------- ------- Total shareholders' equity............................................. $13,295 $ 24,155 ======= ======= Capital ratios(2): Tier 1 capital ratio (Regulatory minimum: 4.00%)............................................ 8.96% 17.24% Total risk-based capital ratio (Regulatory minimum: 8.00%)............................................ 10.69% 18.96% Leverage capital ratio (General regulatory minimum: 4.00-5.00%)............................... 7.57% 12.95%
- --------------- (1) Does not include 525,000 shares of Common Stock authorized for issuance under the Company's stock option plan. See "Management -- 1997 Stock Option Plan." (2) Minimum ratios for the Company are established by Federal Reserve regulations. See "Business -- Regulation and Supervision." 10 12 DILUTION The net tangible book value of the Company at September 30, 1997 was approximately $11.4 million, or $4.38 per share of Common Stock. Net tangible book value per share represents the Company's total tangible assets less its total liabilities, divided by the total number of outstanding shares of Common Stock. After giving effect to the sale of 1,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company at September 30, 1997 would have been approximately $22.2 million or $6.16 per share of Common Stock. This represents an immediate increase in such net tangible book value of $1.78 per share to the existing shareholders of the Company and an immediate dilution in net tangible book value of $5.84 per share to purchasers of Common Stock in the Offering. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share....................... $12.00 Net tangible book value per share before the Offering............ $4.38 Increase per share attributable to new investors................. 1.78 ----- Pro forma net tangible book value per share after the Offering........ 6.16 ------ Dilution per share to new investors................................... $ 5.84 ======
The following table sets forth, as of September 30, 1997, the number of shares of Common Stock purchased, the total consideration paid therefor and the average price paid per share by the existing shareholders of the Company and the purchasers of Common Stock in the Offering, at an assumed initial public offering price of $12.00 per share (before deducting the estimated underwriting discount and offering expenses payable by the Company). The following table does not include 133,000 shares of Common Stock which the Underwriters may purchase from the Company pursuant to their over-allotment option. See "Underwriting."
TOTAL SHARES PURCHASED CONSIDERATION AVERAGE --------------------- ----------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ------- ------- --------- Existing shareholders........................... $2,602,215 72.2% $ 4,785 28.5% $ 1.84 New investors(1)................................ 1,000,000 27.8 12,000 71.5 $ 12.00 --------- ----- ------- ----- Total......................................... $3,602,215 100.0% $16,785 100.0% $ 4.66 ========= ===== ======= =====
- --------------- (1) Purchasers of Common Stock in the Offering. 11 13 SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA The following table sets forth certain information concerning the consolidated financial condition, operating results, and key operating ratios for the Company at the dates and for the periods indicated. The data for the nine months ended September 30, 1996 and 1997 are derived from unaudited consolidated financial statements, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the data for these periods. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1997. This information does not purport to be complete, and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------------- ------------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED UNAUDITED INCOME STATEMENT DATA(1) Interest income...................... $ 4,449 $ 6,015 $ 7,492 $ 10,644 $ 13,633 $ 10,096 $ 11,135 Interest expense..................... 2,191 2,720 2,841 4,548 6,174 4,546 5,233 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income.................. 2,258 3,295 4,651 6,096 7,459 5,550 5,902 Provision for loan loss.............. 333 310 533 694 281 175 300 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan loss...................... 1,925 2,985 4,118 5,402 7,178 5,375 5,602 Non-interest income.................. 396 449 287 877 296 126 534 Non-interest expense................. 1,494 2,016 2,363 3,093 3,682 2,747 3,839 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before provision for income taxes.............................. 827 1,418 2,042 3,186 3,792 2,754 2,297 Provision for income taxes........... 332 442 697 1,088 1,295 937 781 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income........................... $ 495 $ 976 $ 1,345 $ 2,098 $ 2,497 $ 1,817 $ 1,516 ========== ========== ========== ========== ========== ========== ========== DIVIDENDS Cash................................. $ 37 $ 49 $ 49 $ 80 $ 101 $ 75 $ 93 Ratio of dividends to net income..... 7.47% 5.02% 3.64% 3.81% 4.04% 4.13% 6.13% PER SHARE DATA(2) Net income per common share.......... $ 0.26 $ 0.51 $ 0.70 $ 0.77 $ 0.90 $ 0.65 $ 0.54 Cash dividends per common share...... $ 0.02 $ 0.03 $ 0.03 $ 0.03 $ 0.04 $ 0.03 $ 0.04 Weighted average shares outstanding........................ 1,925,399 1,925,399 1,925,399 2,714,074 2,788,365 2,787,274 2,802,369 BALANCE SHEET DATA (AT PERIOD END) Investment securities................ $ 13,505 $ 6,726 $ 3,565 $ 3,263 $ 5,391 $ 5,381 $ 8,378 Trading assets....................... 1,999 3,986 2,781 2,016 -- -- -- Loans, net........................... 43,674 55,887 75,564 105,900 124,657 121,983 130,703 Total assets......................... 73,141 76,383 94,728 131,348 159,157 148,746 175,658 Total deposits....................... 59,969 64,340 81,083 106,371 123,297 116,042 139,085 Total short-term borrowings.......... 6,400 4,525 1,350 2,625 550 1,200 475 Total long-term borrowings........... 3,409 3,255 6,811 12,393 22,842 19,288 22,096 Total shareholders' equity........... 2,959 3,886 5,182 9,391 11,813 11,134 13,295 SELECTED RATIOS Return on average total assets....... 0.91% 1.26% 1.57% 1.90% 1.75% 1.74% 1.24% Return on average shareholders' equity............................. 19.02% 28.93% 30.21% 26.06% 23.93% 23.95% 16.16% Net interest margin.................. 4.63% 4.67% 5.94% 5.91% 5.56% 5.63% 5.21% Efficiency ratio(3).................. 56.29% 53.85% 47.85% 44.36% 47.48% 48.40% 59.65% ASSET QUALITY RATIOS Allowance for loan losses to: Ending total loans................. 1.27% 1.33% 1.50% 1.64% 1.50% 1.50% 1.50% Nonperforming assets(4)............ 234.73% 1,831.71% 548.57% 540.80% 328.82% 348.59% 101.12% Nonperforming assets to ending total assets............................. 0.33% 0.05% 0.22% 0.25% 0.36% 0.36% 1.12% Net loan charge-offs to average loans.............................. 0.19% 0.31% 0.20% 0.09% 0.13% 0.07% 0.16% CAPITAL RATIOS Average shareholders' equity to average assets..................... 4.80% 4.36% 5.21% 7.30% 7.31% 7.25% 7.67% Tier 1 capital ratio(5).............. 7.45% 7.80% 7.68% 9.86% 10.11% 9.93% 8.96% Total risk based capital ratio(6).... 11.23% 11.06% 10.42% 11.96% 11.88% 11.89% 10.69%
- --------------- (1) Income statement data for the year ended December 31, 1992 is unaudited. (2) Per share data has been adjusted to reflect all stock dividends and stock splits to the date of the Prospectus. The Company had a 5 for 1 stock split effective on October 17, 1997 and a 3.5 for 1 stock split effective on January 12, 1998. (3) Efficiency ratio is noninterest expense divided by the sum of net interest income plus noninterest income. (4) Nonperforming assets consist of nonaccrual loans, loans contractually past due 90 days or more and other real estate owned. (5) Tier 1 capital divided by risk-weighted assets. (6) Total risk-based capital divided by risk-weighted assets. 12 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of certain significant business trends and uncertainties as well as other forward-looking statements and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements of the Company and accompanying notes included elsewhere in this Prospectus. For a discussion of important factors that could cause actual results to differ materially from such forward-looking statements, see "Risk Factors." INTRODUCTION The Company has grown from assets of $39.4 million and deposits of $31.0 million at January 1, 1992 to assets of $175.7 million and deposits of $139.1 million at September 30, 1997. Until November 1996, the Company had only one location in Longview, Washington. The Company has operated very efficiently during this period of rapid growth, in part due to operating from one location. The Company has recently undertaken significant business changes to strengthen its position as the leading bank in Cowlitz County. Beginning in November 1996, the Company expanded its operating base by opening a branch in Kelso, Washington. In July 1997, the Company acquired three Wells Fargo Bank branches, located in Castle Rock, Kalama and Longview, Washington (the "Branch Acquisition"). In this acquisition, the Company acquired the branch sites, retained the existing employees and assumed approximately $25.2 million in deposit liabilities, but did not acquire any loans or other revenue producing assets. During 1997, the Company also established a trust department at its main office in Longview. As a result of the recent expansion of the Company and the associated increased staff costs and amortization of the core deposit premium from the Branch Acquisition, non-interest expense for the first nine months of 1997 is substantially higher as a percentage of revenue than in prior periods. Although the higher non-interest expense is partially offset by a lower cost of funds due to increased deposits resulting from the establishment and acquisition of branches, it is anticipated that net income per share will be lower for 1997 than for 1996. In addition, certain of the Company's performance ratios, such as ROE and return on assets ("ROA"), will be lower in 1997 than in prior years as a result of the investment of cash received in the Branch Acquisition in lower yielding short-term investments pending utilization of these funds by the Company, coupled with the increased noninterest expense described above. As a result of the Branch Acquisition, however, the Company's reliance on borrowings from the FHLB has decreased from 14.5% of total liabilities at December 31, 1996 to 12.8% of total liabilities at September 30, 1997. RESULTS OF OPERATIONS NET INTEREST INCOME For financial institutions, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits. Changes in net interest income result from changes in "volume," "spread" and "margin." Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin is the ratio of net interest income to total interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. For the Nine Months Ended September 30, 1997 and 1996 Net interest income for nine months ended September 30, 1997 was $5.9 million, an increase of $352,000 over the corresponding period in 1996. The increase in net interest income is primarily attributable to a $19.4 million increase in average earnings assets for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1997. Interest expense increased 15.1% to $5.2 million for the first nine months of 1997 compared to $4.5 million for the corresponding period in 1996. The increase in interest expense was primarily a result of an increase of $17.6 million in average interest bearing liabilities. The net interest spread decreased to 4.48% for the nine months ended September 30, 1997 compared to 4.86% for the comparable period in the prior year. The decrease in the spread is generally attributable to lower rates on new loans due to current market conditions and increased competition for loans in the Company's market area. 13 15 Total interest-earning assets averaged $150.9 million for the nine months ended September 30, 1997, compared to $131.5 million for the corresponding period in 1996. Most of the increase was due to a 10.4% increase in average outstanding loans. The average yield on interest earning assets, when adjusted to reflect the tax benefits on certain types of investments, decreased to 9.84% during the first nine months of 1997, compared to 10.24% for the corresponding period in 1996, as a result of lower yields on loans and investment securities. Interest bearing liabilities averaged $130.2 million and $112.6 million during the first nine months of 1997 and 1996, respectively. The average cost of these liabilities decreased slightly in the first nine months of 1997 to 5.36% from 5.38% in the first nine months of 1996. The average cost of total interest bearing liabilities and non-interest bearing deposits declined to 4.65% during the first nine months of 1997 compared to 4.71% during the first nine months of 1996. The Company did not aggressively price certain higher interest rate certificates of deposit following the Branch Acquisition. Average Balances and Average Rates Earned and Paid. The following table sets forth, for the periods indicated, information with regard to (i) average balances of assets and liabilities, (ii) the total dollar amounts of interest income on interest earning assets and interest expense on interest bearing liabilities, (iii) resulting yields or costs, (iv) net interest income and (v) net interest spread. Nonaccrual loans have been included in the tables as loans carrying a zero yield. Loan fees are recognized as income using the interest method over the life of the loan.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------ 1997 1996 ---------------------------------------- ---------------------------------------- AVERAGE AVERAGE OUTSTANDING INTEREST OUTSTANDING INTEREST BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE ----------- ---------- ----------- ----------- ---------- ----------- (DOLLARS IN THOUSANDS) ASSETS: Loans........................... $ 129,099 $ 10,131 10.46% $ 116,898 $ 9,397 10.72% Taxable securities.............. 9,974 484 6.47% 6,566 332 6.74% Nontaxable securities(1)........ -- -- -- 48 3 8.33% Trading assets.................. -- -- -- 786 35 5.94% Interest earning balances due from banks.................... 11,867 520 5.84% 7,198 330 6.11% -------- ----- -------- ----- Total interest earning assets.................... $ 150,940 $ 11,135 9.84% $ 131,496 $ 10,097 10.24% Cash and due from banks......... 7,122 5,940 Premises and equipment, net..... 4,843 2,091 Allowance for loan losses....... (1,920) (1,783) Net intangibles................. 137 -- Other assets.................... 1,957 1,715 -------- -------- Total assets................ $ 163,079 $ 139,459 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand deposits............... $ 34,622 $ 867 3.34% $ 30,820 $ 814 3.52% Certificates of deposit......... 72,917 3,288 6.01% 62,823 2,874 6.10% Long-term borrowings............ 21,708 1,045 6.42% 16,140 758 6.26% Short-term borrowings........... 982 33 4.48% 2,855 100 4.67% -------- ----- ------- -------- ----- ------ - Total interest-bearing liabilities............... $ 130,229 $ 5,233 5.36% $ 112,638 $ 4,546 5.38% Non-interest bearing deposits... 19,721 16,117 Other liabilities............... 622 587 -------- -------- Total liabilities........... 150,572 129,342 Shareholders' equity............ 12,507 10,117 -------- -------- Total liabilities & shareholders' equity...... $ 163,079 $ 139,459 ======== ======== Net interest income............. $ 5,902 $ 5,551 ===== ===== Net interest spread............. 4.48% 4.86% Average yield on earning assets........................ 9.84% 10.24% Interest expense to earning assets........................ 4.63% 4.61% Net interest income to earning assets........................ 5.21% 5.63%
- --------------- (1) Interest earned on nontaxable securities has been computed on a 34 percent tax equivalent basis. 14 16 For the Years Ended December 31, 1996, 1995 and 1994 Net interest income for the year ended December 31, 1996, was $7.5 million, an increase of $1.4 million compared to net interest income of $6.1 million in 1995, which was higher than the $4.7 million reported in 1994, due primarily to increases in the volume of loans from period to period. The overall tax-equivalent earning asset yield was 10.16% in 1996 compared to 10.31% in 1995, and 9.58% in 1994. During the same periods, average yields on loans were 10.69% in 1996, 10.86% in 1995, and 10.34% in 1994. Investment securities comprised 5.6% of average earning assets in 1996, which was down from 7.8% in 1995, and 13.2% in 1994. Tax-equivalent interest yields on investment securities have ranged from 8.33% in 1996 to 11.90% in 1995. The Company held no nontaxable securities in 1994. Interest expense as a percentage of earning assets increased to 4.60% in 1996 compared to 4.41% in 1995 and 3.63% in 1994. Local competitive pricing conditions and funding needs for the Company's investments and loans were the primary determinants of rates paid for deposits during 1996, 1995 and 1994. Average Balances and Average Rates Earned and Paid. The following table sets forth, for the periods indicated, information with regard to (i) average balances of assets and liabilities, (ii) the total dollar amounts of interest income on interest earning assets and interest expense on interest bearing liabilities, (iii) resulting yields or costs, (iv) net interest income and (v) net interest spread. Nonaccrual loans have been included in the tables as loans carrying a zero yield. Loan fees are recognized as income using the interest method over the life of the loan.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1996 1995 ------------------------------------ ------------------------------------ AVERAGE AVERAGE OUTSTANDING INTEREST OUTSTANDING INTEREST BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE ----------- ----------- ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Loans......... $ 118,957 $12,721 10.69% $ 91,616 $ 9,954 10.86% Taxable securities... 6,890 386 5.60% 5,570 269 4.83% Nontaxable securities(1). .. 36 3 8.33% 42 5 11.90% Trading assets...... 589 34 5.77% 2,454 129 5.26% Federal funds sold........ -- -- 0.00% 23 -- 0.00% Interest earning balances due from banks....... 7,777 490 6.30% 3,534 289 8.18% -------- ------- -------- ------- Total interest earning assets.... $ 134,249 $13,634 10.16% $ 103,239 $10,646 10.31% Cash and due from banks....... 6,021 5,728 Premises and equipment, net......... 2,309 1,696 Allowance for loan losses...... (1,801) (1,399) Other assets...... 1,861 1,010 -------- -------- Total assets.... $ 142,639 $ 110,274 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand deposits.... $ 30,834 $ 1,031 3.34% $ 31,215 $ 1,061 3.40% Certificates of deposit..... 64,863 3,960 6.11% 43,521 2,657 6.11% Long-term borrowings... 17,315 1,073 6.20% 9,186 653 7.11% Short-term borrowings... 2,359 110 4.66% 3,418 177 5.18% -------- ------- -------- ------- Total interest-bearing liabilities... $ 115,371 $ 6,174 5.35% $ 87,340 $ 4,548 5.21% Non-interest bearing deposits.... 16,196 14,396 Other liabilities... 639 488 -------- -------- Total liabilities... 132,206 102,224 Shareholders' equity...... 10,433 8,050 -------- -------- Total liabilities and shareholders' equity.... $ 142,639 $ 110,274 ======== ======== Net interest income...... $ 7,460 $ 6,098 ======= ======= Net interest spread...... 4.81% 5.09% Average yield on earning assets...... 10.16% 10.31% Interest expense to earning assets...... 4.60% 4.41% Net interest income to earning assets...... 5.56% 5.91%
YEAR ENDED DECEMBER 31, ------------------------------------ 1994 ------------------------------------ AVERAGE OUTSTANDING INTEREST BALANCE EARNED/PAID YIELD/RATE ----------- ----------- ---------- ASSETS: Loans......... $66,362 $ 6,862 10.34% Taxable securities... 6,939 322 4.64% Nontaxable securities(1).. -- -- 0.00% Trading assets...... 3,385 168 4.96% Federal funds sold........ -- -- 0.00% Interest earning balances due from banks....... 1,551 140 9.03% ------- ------ Total interest earning assets.... $78,237 $ 7,492 9.58% Cash and due from banks....... 5,689 Premises and equipment, net......... 1,764 Allowance for loan losses...... (928) Other assets...... 693 ------- Total assets.... $85,455 ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Savings and interest-bearing demand deposits.... $37,701 $ 1,253 3.32% Certificates of deposit..... 20,138 1,073 5.33% Long-term borrowings... 5,146 371 7.21% Short-term borrowings... 4,214 144 3.42% ------- ------ Total interest-bearing liabilities... $67,199 $ 2,841 4.23% Non-interest bearing deposits.... 13,488 Other liabilities... 316 ------- Total liabilities... 81,003 Shareholders' equity...... 4,452 ------- Total liabilities and shareholders' equity.... $85,455 ======= Net interest income...... $ 4,651 ====== Net interest spread...... 5.35% Average yield on earning assets...... 9.58% Interest expense to earning assets...... 3.63% Net interest income to earning assets...... 5.94%
- --------------- (1) Interest earned on nontaxable securities has been computed on a 34 percent tax equivalent basis. 15 17 Analysis of Changes in Interest Differential. The following table shows the dollar amount of the increase (decrease) in the Company's net interest income and expense and attributes such dollar amounts to changes in volume as well as changes in rates. Rate/volume variance have been allocated to volume changes:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1996 VERSUS 1995 1995 VERSUS 1994 ----------------------------- ----------------------------- INCREASE INCREASE (DECREASE) DUE (DECREASE) DUE TO TOTAL TO TOTAL --------------- INCREASE/ --------------- INCREASE/ VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ------ ----- ---------- ------ ---- ---------- (DOLLARS IN THOUSANDS) Interest income: Interest earning balances due from banks............................ $ 267 $ (66) $ 201 $ 162 $(13) $ 149 Trading account income.............. (108) 13 (95) (49) 10 (39) Investment security income: Taxable securities.................. 74 43 117 (66) 13 (53) Nontaxable securities(1)............ (1) (1) (2) 5 -- 5 Loans, including fees on loans...... 2,923 (156) 2,767 2,747 345 3,092 ------ ----- ------ ------ ---- ------ Total interest income(1).... 3,155 (167) 2,988 2,799 355 3,154 ------ ----- ------ ------ ---- ------ Interest expense: Savings and interest bearing demand........................... (11) (19) (30) (222) 30 (192) Certificates of deposit............. 1,303 -- 1,303 1,427 157 1,584 Short-term borrowings............... (49) (18) (67) (41) 74 33 Long-term borrowings................ 504 (84) 420 287 (5) 282 ------ ----- ------ ------ ---- ------ Total interest expense...... 1,747 (121) 1,626 1,451 256 1,707 ------ ----- ------ ------ ---- ------ Net interest spread(1)................ $1,408 $ (46) $1,362 $1,348 $ 99 $1,447 ====== ===== ====== ====== ==== ======
- --------------- (1) Interest earned on nontaxable securities has been computed on a 34 percent tax equivalent basis. PROVISION FOR LOAN LOSSES For the Nine Months Ended September 30, 1997 and 1996 The Company's allowance for loan loss was $2.0 million and $1.9 million, respectively, as of September 30, 1997 and 1996. This equates to 1.5% of total loans for both periods as management adjusts the allowance to keep pace with the growth in the Company's overall loan portfolio. Losses on loans charged to the allowance during the first nine months of 1997 and 1996 amounted to $229,000 and $87,000, respectively. Such charge-offs have been partially offset by loan recoveries of $19,000 and $7,000 for the same periods. The increase in charge-offs from 1996 to 1997 was primarily the result of increased losses on credit cards and one real estate loan. The provision for loan losses increased from $175,000 to $300,000 reflecting continued growth in the loan portfolio and the increased levels of net charge-offs and nonperforming assets in the first nine months of 1997. See "-- Financial Condition -- Loans." For the Years Ended December 31, 1996, 1995 and 1994 The loan loss provision decreased in 1996 compared to 1995 due to management's desire to maintain the allowance at an adequate level relative to total loans. Management believes the loan loss provision maintains the allowance for loan losses at an appropriate level. The allowance for loan losses was $1.9 million at December 31, 1996 as compared to $1.8 million at December 31, 1995 and $1.2 million at December 31, 1994. The Company's ratio of allowance for loan losses to total loans was 1.50% at December 31, 1996, compared to 1.64% at December 31, 1995 and 1.50% at December 31, 1994. Recoveries have been minimal over the past three-year period. Net chargeoffs for 1996 were approximately $150,000 which compares to net charge-offs of approximately $83,000 in 1995 and $132,000 in 1994. At December 31, 1996 nonaccrual loans totaled $407,000 compared to $237,000 at December 31, 1995 and $179,000 at the end of 1994. When a provision for loan losses is recorded, the amount is based on past charge-off experience, a careful analysis of the current portfolio, and evaluation of future economic trends in the 16 18 Company's market area. Management continues to closely monitor the loan quality of new and existing relationships. NON-INTEREST INCOME For the Nine Months Ended September 30, 1997 and 1996 Non-interest income, primarily consisting of service charges and related fees, increased $408,000 to $534,000 for the nine-month period ended September 30, 1997 compared to $126,000 for the nine months ended September 30, 1996. The increase was the result of a loss of $309,000 on sales of securities which occurred during the nine months ended September 30, 1996, which did not recur in 1997. In addition, increasing deposit volumes and related service fees resulted in an increase in service charges to $397,000 for the nine months ended September 30, 1997 compared to $286,000 for the nine months ended September 30, 1996. For the Years Ended December 31, 1996, 1995 and 1994 Total non-interest income over the three year period has ranged from $296,000 in 1996 and $877,000 in 1995 to $287,000 in 1994. Service charges on deposit accounts increased from $343,000 for the year ended December 31, 1994, to $367,000 in 1995, to $387,000 in 1996, as a result of increased deposit volumes. The differences in income between periods primarily reflects the results of the Company's trading account which had a loss of $211,000 in 1994, a gain of $258,000 in 1995 and a loss of $309,000 in 1996. The losses and gain were due primarily to the volatility of interest rates during these periods. NON-INTEREST EXPENSE For the Nine Months Ended September 30, 1997 and 1996 Non-interest expense consists principally of employees' salaries and benefits, occupancy costs, data processing and communication expenses, FDIC insurance premiums, professional fees, and other non-interest expenses. Non-interest expense increased 39.8% to $3.8 million for the nine months ended September 30, 1997 from $2.7 million in the corresponding period in 1996, primarily due to an increase in staffing costs, as well as increases in other operating costs such as occupancy expense and amortization of the deposit premium from the Branch Acquisition in July 1997. The Company had 87 and 61 full-time equivalent employees at September 30, 1997 and 1996, respectively. A measure of the Company's ability to contain non-interest expenses is the efficiency ratio. This statistic is derived by dividing total non-interest expenses by total net interest income and non-interest income. For the nine months ended September 30, 1997, the ratio increased to 59.7% compared to 48.4% for the corresponding period of 1996, largely as a result of the Company's expansion activities in late 1996 and in 1997. For the Years Ended December 31, 1996, 1995 and 1994 Non-interest expense increased $589,000 or 19.0% to $3.7 million for the year ended December 31, 1996 from $3.1 million for the year ended December 31, 1995. The increase is primarily attributable to an increase in staff costs due to the opening of a new branch in Kelso in November 1996 which required hiring additional employees beginning in April 1996. The Company's efficiency ratio for the years ended December 31, 1996, 1995 and 1994 was 47.48%, 44.36% and 47.85%, respectively. Salaries and benefits expense of $2.1 million in 1996 represented an increase of $428,000 from the $1.7 million reported in 1995 which was $543,000 or 46.6% higher than the $1.2 million reported in 1994. At December 31, 1996, the Company had 63 full-time equivalent employees which compares to 54 and 46 at December 31, 1995 and 1994, respectively. Net occupancy expenses consist of depreciation on premises, lease costs and equipment, maintenance and repair expenses, utilities and related expenses. The Company's net occupancy expense in 1996 of $393,000 was $83,000 or 26.8% higher than the $310,000 reported in 1995, which was $12,000 or 3.7% less than the $322,000 reported in 1994. The increase in occupancy expense in 1996 was due primarily to an expansion of the Company's main office facility in Longview and the opening of a branch in Kelso. 17 19 INCOME TAXES The provision for income taxes for the nine month period ended September 30, 1997 was $781,000 representing an effective tax rate of 34.0% compared to $937,000 or 34.3% for the nine month period ended September 30, 1996. The provision for income taxes amounted to $1.3 million, $1.1 million, and $697,000 for 1996, 1995, and 1994, respectively. The provision resulted in an effective tax rate of 34.2% in 1996 and of 34.1% in each of 1995 and 1994. LOAN LOSSES AND RECOVERIES Management recorded a provision for loan losses of $281,000 in 1996 to support loan portfolio growth. At September 30, 1997, management considered the allowance for loan losses of $2.0 million sufficient to absorb possible losses on loans which may become uncollectible based on evaluations by management. The amount of the allowance for loan losses is assessed by management on a regular basis to ensure that it is sufficient to cover potential future loan losses. Management does not specifically allocate the allowance for loan losses by loan category. The allowance balance and amount of provision charged to operations is based primarily on management's evaluation of the entire portfolio. This analysis includes review of the following factors: (a) the volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as analysis of net charge-offs experienced on previously classified loans; (b) the extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans; (c) the nature and value of the collateral securing a loan; (d) the trend in loan growth, including any rapid increase in loan volume within a relatively short period of time; (e) general and local economic conditions affecting the collectibility of the Company's loans; (f) the relationship and trend over the past several years of recoveries as a percentage of previous years' charge-offs; and (g) available outside information of a comparable nature regarding the loan portfolios of other banks, including peer group banks. 18 20 The following table shows the Company's loan loss performance for the periods indicated:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------- -------- -------- ----------------- (DOLLARS IN THOUSANDS) Loans outstanding at end of period........................ $76,261 $107,633 $126,551 $ 132,687 Average loans outstanding during the period............... $66,362 $ 91,616 $118,957 $ 129,099 Allowance for loan losses, beginning of period............ $ 751 $ 1,152 $ 1,763 $ 1,894 Loans charged off: Commercial.............................................. 106 5 36 137 Real estate............................................. -- -- 30 3 Consumer................................................ 8 9 22 23 Credit cards............................................ 60 99 70 66 ------- -------- -------- -------- Total loans charged-off.............................. 174 113 158 229 ------- -------- -------- -------- Recoveries: Commercial.............................................. 37 24 5 2 Real estate............................................. -- -- -- -- Consumer................................................ 1 2 1 17 Credit cards............................................ 4 4 2 ------- -------- -------- -------- Total recoveries..................................... 42 30 8 19 ------- -------- -------- -------- Provision for loan losses................................. 533 694 281 300 ------- -------- -------- -------- Allowance for loan losses, end of period.................. $ 1,152 $ 1,763 $ 1,894 $ 1,984 ======= ======== ======== ======== Ratio of net loans charged-off to average loans outstanding............................................. 0.26% 0.12% 0.13% 0.18% Ratio of allowance for loan losses to loans at year end... 1.50% 1.64% 1.50% 1.50%
FINANCIAL CONDITION SUMMARY BALANCE SHEETS
DECEMBER 31, INCREASE (DECREASE) ----------------------------- ----------------------------------------------- 1994 1995 1996 12/31/94-12/31/95 12/31/95-12/31/96 ------- -------- -------- --------------------- --------------------- (DOLLARS) (PERCENT) (DOLLARS) (PERCENT) (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks............... $ 8,073 $ 14,702 $ 20,905 $ 6,629 82.1% $ 6,203 42.2% Investment securities................. 3,566 3,263 5,391 (303) (8.5)% 2,128 65.2% Trading assets........................ 2,781 2,016 -- (765) (27.5)% (2,016) (100.0)% Loans, net............................ 75,564 105,900 124,657 30,336 40.1% 18,757 17.7% Other assets.......................... 4,744 5,467 8,204 723 15.2% 2,737 50.1% ------- -------- -------- ------- ------- Total assets........................ $94,728 $131,348 $159,157 $36,620 38.7% $27,809 21.2% ======= ======== ======== ======= ======= LIABILITIES Non-interest-bearing deposits............................ $15,362 $ 17,099 $ 16,821 $ 1,737 11.3% $ (278) (1.6)% Interest-bearing deposits............. 65,721 89,272 106,476 23,551 35.8% 17,204 19.3% Total deposits........................ 81,083 106,371 123,297 25,288 31.2% 16,926 15.9% Other liabilities..................... 8,463 15,586 24,047 7,123 84.2% 8,461 54.3% SHAREHOLDERS' EQUITY.................... 5,182 9,391 11,813 4,209 81.2% 2,422 25.8% ------- -------- -------- ------- ------- Total liabilities and shareholders' equity.............................. $94,728 $131,348 $159,157 $36,620 38.7% $27,809 21.2% ======= ======== ======== ======= ======= INCREASE (DECREASE) SEPTEMBER 30, --------------------- 1997 12/31/96-9/30/97 ------------- --------------------- (DOLLARS) (PERCENT) ASSETS Cash and due from banks............... $ 24,810 $ 3,905 18.7% Investment securities................. 8,378 2,987 55.4% Trading assets........................ -- -- -- Loans, net............................ 130,703 6,046 4.9% Other assets.......................... 11,767 3,563 43.4% -------- ------- Total assets........................ $ 175,658 $16,501 10.4% ======== ======= LIABILITIES Non-interest-bearing deposits............................ $ 27,051 $10,230 60.8% Interest-bearing deposits............. 112,034 5,558 5.2% Total deposits........................ 139,085 15,788 12.8% Other liabilities..................... 23,278 (769) (3.2)% SHAREHOLDERS' EQUITY.................... 13,295 1,482 12.5% -------- ------- Total liabilities and shareholders' equity.............................. $ 175,658 $16,501 10.4% ======== =======
19 21 INVESTMENT SECURITIES At September 30, 1997, the Company's portfolio of investment securities totaled $8.4 million, a 55.6% increase when compared to a securities portfolio of $5.4 million at December 31, 1996. Investment in FHLB stock was $2.6 million at September 30, 1997. Investment securities held at December 31, 1996, totaled $5.4 million representing a 63.6% increase when compared to $3.3 million at December 31, 1995. At December 31, 1995, the Company held $2.0 million of trading assets. The Company ceased its trading activities during 1996 and had no trading assets at December 31, 1996. The Company follows a financial accounting principle which requires the identification of investment securities as held-to-maturity, available-for-sale or trading assets. Securities designated as held-to-maturity are those that the Company has the intent and ability to hold until they mature or are called. Available-for-sale securities are those that management may sell if liquidity requirements dictate or alternative investment opportunities arise. Trading assets are purchased and held principally for the purpose of reselling them within a short period of time. The mix of available-for-sale and held-to-maturity investment securities is considered in the content of the Company's overall asset-liability policy and illustrates management's assessment of the relative liquidity of the Company. At September 30, 1997, the investment portfolio consisted of 47.9% available-for-sale securities and 52.1% held-to-maturity investments. At December 31, 1996, available-for-sale securities were 37.3% and held-to-maturity investments were 62.7% of the investment portfolio. At December 31, 1995, the Company had 100% held-to-maturity investments. See Note 2 to the Consolidated Financial Statements. At September 30, 1997, the Company's investment portfolio had total net unrealized gains of approximately $25,000. This compares to net unrealized gains of approximately $18,000 at December 31, 1996, and $38,000 at December 31, 1995. Unrealized gains and losses reflect changes in market conditions and do not represent the amount of actual profits or losses the Company may ultimately realize. Actual realized gains and losses occur at the time investment securities are sold or redeemed. In 1991, the Company became a member and shareholder in the Federal Home Loan Bank of Seattle. At December 31, 1996, the Bank held $2.5 million in FHLB stock. The Company's relationship and stock investment with the FHLB provides a borrowing source for meeting liquidity requirements, in addition to dividend earnings. The following table provides the book value of the Company's portfolio of investment securities as of December 31, 1996, 1995 and September 30, 1997:
DECEMBER 31, --------------------------------------- SEPTEMBER 30, 1997 1996 1995 UNAUDITED ------------------ ------------------ ------------------ AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE --------- ------ --------- ------ --------- ------ (DOLLARS IN THOUSANDS) AVAILABLE-FOR-SALE U.S. Treasury securities................ $ 2,001 $2,011 -- -- $ 4,000 $4,014 ------ ------ ------ ------ ------ ------ Total......................... $ 2,001 $2,011 -- -- $ 4,000 $4,014 ====== ====== ====== ====== ====== ====== HELD-TO-MATURITY U.S. Treasury securities................ $ 1,998 $2,006 $ 1,996 $2,034 $ 2,977 $2,987 Municipal bond.......................... -- -- 80 80 -- -- Certificates of deposit................. 1,382 1,382 1,187 1,187 1,387 1,387 ------ ------ ------ ------ ------ ------ Total......................... $ 3,380 $3,388 $ 3,263 $3,301 $ 4,364 $4,374 ====== ====== ====== ====== ====== ======
At September 30, 1997, net unrealized gains on available-for-sale securities were $14,000 representing 0.17% of the total portfolio. Management has no current plans to sell any of these securities. 20 22 The following table summarizes the contractual maturities and weighted average yields of investment securities at September 30, 1997:
AFTER 5 DUE ONE THROUGH THROUGH ONE YEAR THROUGH 10 10 OR LESS YIELD 5 YEARS YIELD YEARS YIELD YEARS YIELD TOTAL YIELD -------- ----- ------- ----- ------- ----- ------- ----- ------ ----- (DOLLARS IN THOUSANDS) U.S Treasury securities......... $1,002 5.88% $3,012 6.04% -- -- -- -- $4,014 6.00% Other securities(1)(2).......... 1,387 6.01% 2,977 6.08% -- -- -- -- 4,364 6.06% ------ ------ ------ ---- ------ ---- ------ Total.................. $2,389 5.97% $5,989 6.06% -- -- -- -- $8,378 6.01% ====== ====== ====== ==== ====== ==== ======
- --------------- (1) Does not reflect anticipated maturity from prepayments on mortgage-based and asset-based securities. Anticipated lives are shorter than contractual maturities. (2) Interest earned on nontaxable securities has been computed on a 34 percent tax equivalent yield. LOANS Outstanding loans totaled $132.7 million at September 30, 1997, representing an increase of 4.8% compared to $126.6 million at December 31, 1996. Loan commitments were $16.2 million at September 30, 1997. Loan commitments amounted to $19.7 million at December 31, 1996 and $15.7 million at September 30, 1996. The following table presents the composition of the Company's loan portfolio at the dates indicated:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED --------------------------------------------------- SEPTEMBER 30, 1997 1995 1996 ----------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Commercial.......................... $ 72,527 66.9% $ 86,161 67.7% $ 91,460 68.5% Real estate construction............ 2,998 2.8 3,584 2.8 3,833 2.9 Real estate commercial.............. 2,272 2.1 2,721 2.1 4,029 3.0 Real estate mortgage................ 24,061 22.2 28,766 22.6 28,013 21.0 Consumer and other.................. 6,241 5.7 6,016 4.7 5,983 4.5 Contracts purchased................. 325 0.3 116 0.1 83 0.1 -------- ----- -------- ----- -------- ----- 108,424 100.0% 127,364 100.0% 133,401 100.0% Deferred loan fees.................. (761) (813) (714) -------- -------- -------- Total loans................ 107,663 126,551 132,687 Allowance for loan losses........... (1,763) (1,894) (1,984) -------- -------- -------- Total loans, net........... $105,900 $124,657 $130,703 ======== ======== ========
21 23 The following table shows the maturities and sensitivity of the Company's loans to changes in interest rates at the dates indicated:
DECEMBER 31, 1996 SEPTEMBER 30, 1997 ------------------------------------------------------ ------------------------------------------------------ DUE DUE AFTER ONE AFTER ONE DUE IN ONE THROUGH 5 DUE AFTER 5 DUE IN ONE THROUGH 5 DUE AFTER 5 YEAR OR LESS YEARS YEARS TOTAL LOANS YEAR OR LESS YEARS YEARS TOTAL LOANS ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Commercial loans......... $ 34,163 $46,942 $ 5,056 $ 86,161 $ 35,614 $49,433 $ 6,413 $ 91,460 Real estate construction... 1,421 1,953 210 3,584 1,492 2,072 269 3,833 Real estate commercial.... 1,079 1,482 160 2,721 1,569 2,178 282 4,029 Real estate mortgage...... 11,406 15,672 1,688 28,766 10,908 15,141 1,964 28,013 Consumer and other......... 2,385 3,278 353 6,016 2,330 3,234 419 5,983 Contracts purchased..... 46 63 7 116 32 45 6 83 ------- ------- ------ -------- ------- ------- ------ -------- $ 50,500 $69,390 $ 7,474 $ 127,364 $ 51,945 $72,103 $ 9,353 $ 133,401 ======= ======= ====== ======== ======= ======= ====== ======== Loans with fixed interest rates......... $ 91,932 $ 97,430 Loans with floating interest rates......... 35,432 35,971 -------- -------- Total... $ 127,364 $ 133,401 ======== ========
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and in October 1996 issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition Disclosures, an amendment to SFAS No. 114." The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair market value of the collateral if the loan is collateral dependent. The Company excludes loans that are currently measured at fair value or at lower of cost or fair value, leases and certain large groups of smaller balance homogeneous loans that are collectively measured for impairment. Generally, no interest is accrued on loans when factors indicate collection of interest is doubtful or when the principal or interest payment becomes 90 days past due, unless collection of principal and interest are anticipated within a reasonable period of time and the loans are well secured. For such loans, previously accrued but uncollected interest is charged against current earnings, and income is only recognized to the extent payments are subsequently received. The Company manages the general risks inherent in the loan portfolio by following loan policies and underwriting practices designed to result in prudent lending activities. The following table presents information with respect to nonperforming assets:
DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------- ------------------ Loans on nonaccrual status................................. $ 407 $1,412 Loans past due greater than 90 days but not on nonaccrual status................................................... 169 455 Other real estate owned.................................... -- 95 ---- ------ Total nonperforming assets....................... $ 576 $1,962 ==== ====== Percentage of nonperforming assets to total assets......... 0.36% 1.12%
The increase in nonperforming loans from December 31, 1996 to September 30, 1997 is primarily the result of management's decision to classify loans with four borrowers with an aggregate principal balance of $1.1 million as nonperforming. Each of these loans is secured by real estate and management believes that in each case the value of the collateral exceeds the principal balance of the loan. Management does not believe that it will incur any loss with respect to any of these four borrowers. 22 24 DEPOSITS The following table sets forth the average balances of the Company's interest bearing liabilities, interest expense and average rates paid for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- NINE MONTHS ENDED 1995 1996 SEPTEMBER 30, 1997 ---------------------------- ---------------------------- ---------------------------- AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE -------- ------- ------- -------- ------- ------- -------- ------- ------- (DOLLARS IN THOUSANDS) Interest-bearing checking........ $ 13,897 $ 457 3.29% $ 16,209 $ 533 3.29% $ 19,923 $ 520 3.48% Savings.......................... 17,318 604 3.49% 14,625 498 3.41% 14,699 347 3.15% Certificates of deposit.......... 43,521 2,657 6.11% 64,863 3,960 6.11% 72,917 3,288 6.01% Long-term borrowings............. 9,186 653 7.11% 17,315 1,073 6.20% 21,708 1,045 6.42% Short-term borrowings............ 3,418 177 5.18% 2,359 110 4.66% 982 33 4.48% -------- ------ Total interest-bearing liabilities............ $ 87,340 $4,548 5.21% $115,371 $6,174 5.35% $130,229 $5,233 5.36% ===== ====== ====== Total noninterest-bearing liabilities.................... 14,884 16,835 20,343 -------- -------- -------- Total interest and noninterest-bearing liabilities............ $102,224 $132,206 $150,572 ======== ======== ========
Deposits grew to $139.1 million at September 30, 1997, an increase of 12.8% from December 31, 1996 primarily as a result of the Branch Acquisition in July 1997. The assumption added $25.2 million in deposits. Non-interest bearing deposits continue to be a reliable and substantial portion of the Company's deposit base, accounting for 19.4% of total deposits at September 30, 1997. The Company did not aggressively price higher interest bearing time deposits over $100,000 following the Branch Acquisition and accordingly the amount of such deposits declined in the period ended September 30, 1997. At December 31, 1996, total deposits were $123.3 million, an increase of 15.9%, from $106.4 million at December 31, 1995. Total deposits in 1995 increased by 31.2% over 1994. Deposit growth in 1996 and 1995 was due to management's decision to promote an attractive pricing strategy, increased marketing, and increased emphasis on implementing a sales culture within the Company. The growth in deposit accounts has primarily been in time deposits. Nonvolatile, non-interest bearing demand deposits, also referred to as core deposits, continued to represent a significant percentage of the Company's deposit base. To the extent that the Company is able to fund operations with non-interest bearing core deposits, net interest spread, the difference between interest income and interest expense, will improve. At December 31, 1996, these non-interest bearing demand deposits accounted for 13.6% of total deposits which was slightly down from 16.1% as of December 31, 1995. Interest bearing deposits consist of NOW, money market, savings and time certificate accounts. By their nature, interest bearing account balances will tend to grow or decline as the Company reacts to changes in competitors' pricing and interest payment strategies. At December 31, 1996, total interest bearing deposit accounts of $106.5 million increased $17.2 million or 19.3% from December 31, 1995. Deposit growth was primarily concentrated in interest bearing checking and time deposit accounts. The Company has from time to time funded its growth with higher interest rate certificates of deposit over $100,000. At September 30, 1997, time certificates of deposits in excess of $100,000 totaled $19.2 million or 28.6% of total outstanding time deposits, compared to $26.0 million or 34.3% of total outstanding time deposits at December 31, 1996, and 32.3% and 26.3% as of December 31, 1995 and 1994, respectively. The lower percentage at September 30, 1997 reflects management's decision to allow these deposits to run-off following the Branch Acquisition in July 1997. 23 25 The following table sets forth, by time remaining to maturity, all time certificates of deposit accounts outstanding at September 30, 1997:
TIME DEPOSITS OF $100,000 OR MORE(1) ALL OTHER TIME DEPOSITS(2) ---------------------- ---------------------------- (DOLLARS IN THOUSANDS) Reprice/Mature in three months or less............. $ 6,089 31.6% $ 13,292 27.7% Reprice/Mature after three months through six months........................................... 1,554 8.1 6,959 14.5 Reprice/Mature after six months through one year... 6,720 34.9 17,958 37.5 Reprice/Mature after one year through five years... 4,662 24.2 9,658 20.1 Reprice/Mature after five years.................... 220 1.2 105 0.2 ------- ------- ------- ------- Total......................................... $ 19,245 100.00% $ 47,972 100.00% ======= ======= ======= =======
- --------------- (1) Time deposits of $100,000 or more represent 13.8% of total deposits as of September 30, 1997. (2) All other time deposits represent 34.5% of total deposits as of September 30, 1997. As of September 30, 1997, other borrowings have the following times remaining to maturity:
DUE AFTER DUE IN 3 MONTHS DUE AFTER ONE DUE 3 MONTHS THROUGH YEAR THROUGH AFTER OR LESS ONE YEAR 5 YEARS 5 YEARS TOTAL -------- -------- ------------- ------- ------- (DOLLARS IN THOUSANDS) Short-term borrowings.................. $475 $ -- $ -- $ -- $ 475 Long-term borrowings................... -- 3,000 17,253 1,843 22,096 ---- ------ ------- ------ ------- Total borrowings.................. $475 $3,000 $17,253 $ 1,843 $22,571 ==== ====== ======= ====== =======
ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY The principal purpose of asset-liability management is to manage the Company's sources and uses of funds to maximize net interest income under different interest rate conditions with minimal risk. A part of asset-liability management involves interest rate sensitivity, the difference between repricing assets and repricing liabilities in a specific time period. The policy of the Company is to control the exposure of the Company's earnings to changing interest rates by generally maintaining a position within a narrow range around an "earnings neutral" or "balanced" position. The Board of Directors has established guidelines for maintaining the Company's earnings risk due to future interest rate changes. This analysis provides an indication of the Company's earnings risk due to future interest rate changes. At September 30, 1997, the analysis indicated that the earnings risk was within the Company's policy guidelines. A key component of the asset-liability management is the measurement of interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in earnings resulting from fluctuations in interest rates, variability in spread relationships, and the mismatch of repricing intervals between assets and liabilities. Interest-rate sensitivity management attempts to maximize earnings growth by minimizing the effects of changing market rates, asset and liability mix, and prepayment trends. 24 26 The following table presents interest-rate sensitivity data as of September 30, 1997. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Company's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against the prospects of short-term interest rate changes in all repricing intervals.
ESTIMATED MATURITY OR REPRICING AT SEPTEMBER 30, 1997 --------------------------------------------------------------------------- 0-3 MONTHS 3-6 MONTHS 6-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL ---------- ---------- ----------- --------- ------------ -------- (DOLLARS IN THOUSANDS) Interest Earning Assets: Interest earning balances due from banks................ $ 16,050 $ - $ - $ - $ - $ 16,050 Investments available-for-sale........ -- -- 1,002 3,012 -- 4,014 Investments held-to-maturity.......... 297 694 396 2,977 -- 4,364 Federal Home Loan Bank stock (1)....................... 2,605 -- -- -- -- 2,605 Loans, including fees........ 42,302 3,839 5,412 71,779 9,355 132,687 ------- ------- -------- ------- ------- -------- Total interest earning assets..... $ 61,254 $ 4,533 $ 6,810 $77,768 $ 9,355 $159,720 Allowance for loan losses...... (1,984) Cash and due from banks........ 8,760 Other assets................... 9,162 -------- Total assets......... $175,658 ======== Interest Bearing Liabilities: Savings and interest bearing demand deposits........... $ 25,976 $ -- $ -- $18,841 $ -- $ 44,817 Certificates of deposit...... 19,381 8,513 24,678 14,320 325 67,217 Borrowings................... 13,544 -- 3,000 4,184 1,843 22,571 ------- ------- -------- ------- ------- -------- Total interest bearing liabilities........ 58,901 8,513 27,678 37,345 2,168 134,605 Other liabilities.............. 27,758 Shareholders' equity........... 13,295 -------- Total liabilities & shareholders' equity............. $175,658 ======== Interest rate sensitivity gap.......................... 2,353 (3,980) (20,868) 40,423 7,187 $ 25,115 ------- ------- -------- ------- ------- -------- Cumulative interest rate sensitivity gap.............. $ 2,353 $ (1,627) $ (22,495) $17,928 $ 25,115 ======= ======= ======== ======= =======
- --------------- (1) Equity investments have been placed in the 0-3 month category The table illustrates that the Company is asset-sensitive 0-3 months, liability-sensitive from 3 months through 12 months and asset-sensitive thereafter. In an environment of increasing interest rates, the theoretical net interest margins of the Company would be adversely affected for the 12 months following September 30, 1997, and favorably affected thereafter. Conversely, in a declining interest-rate environment, the Company's theoretical net interest margins would be favorably affected for the 12 month period following September 30, 1997, and adversely thereafter. RETURN ON EQUITY AND ASSETS Net income for the nine months ended September 30, 1997, totaled $1.5 million for an annualized return on average shareholders' equity of 16.16% and an annualized return on average outstanding assets of 1.24%. 25 27 These returns compare to a 23.95% return on average equity and 1.74% return on average assets for the corresponding period in 1996. These declines reflect lower income and increased assets for the nine months ended September 30, 1997 due to the Company's expansion activities. Return on daily average assets and equity and certain other ratios for the periods indicated are presented below:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------- --------------------- 1994 1995 1996 1996 1997 ------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Net income........................... $ 1,345 $ 2,098 $ 2,497 $ 1,817 $ 1,516 Average assets....................... $85,455 $110,274 $142,639 $139,459 $163,079 Return on average assets............. 1.57% 1.90% 1.75% 1.74% 1.24% Net income........................... $ 1,345 $ 2,098 $ 2,497 $ 1,817 $ 1,516 Average equity....................... $ 4,452 $ 8,050 $ 10,433 $ 10,117 $ 12,507 Return on average equity............. 30.21% 26.06% 23.93% 23.95% 16.16% Cash dividends paid per share........ $ 0.03 $ 0.03 $ 0.04 $ 0.03 $ 0.04 Net income per share................. $ 0.70 $ 0.77 $ 0.90 $ 0.65 $ 0.54 Dividend payout ratio................ 4.29% 3.90% 4.44% 4.62% 7.41% Average equity....................... $ 4,452 $ 8,050 $ 10,433 $ 10,117 $ 12,507 Average assets....................... $85,455 $110,274 $142,639 $139,459 $163,079 Average equity to asset ratio........ 5.21% 7.30% 7.31% 7.25% 7.67%
LIQUIDITY Liquidity represents the ability to meet deposit withdrawals to fund loan demand, while retaining the flexibility to take advantage of business opportunities. The Company's primary sources of funds are customer deposits, loan payments, sales of assets, advances from the FHLB and the use of the federal funds market. As of September 30, 1997, approximately $2.4 million or 28.5% of the securities portfolio matures within one year. Historically, unlike many commercial banking institutions, the Company has utilized borrowings from the FHLB as an important source of funding for its growth. The Company has borrowing lines established with the FHLB that permit it to borrow up to 25% of qualified assets. Loans from the FHLB have terms ranging from 1 through 15 years and at September 30, 1997 bear interest at rates from 5.39% to 8.80%. At September 30, 1997, $22.7 million in advances were outstanding from the FHLB and the Company had additional borrowing capacity for cash advances of $21.3 million. One effect of the Branch Acquisition in July 1997 is that the Company was able to reduce its borrowings from the FHLB as a percentage of total liabilities. The Company may increase its percentage of borrowings from the FHLB in the future if circumstances warrant. 26 28 CAPITAL The primary source of the Company's capital has historically been from the retention of net profits. The Company's profitability has allowed it to enjoy a strong capital position and to continue to grow its asset base. In 1989, banking regulators adopted risk-based capital guidelines under which one of four risk weights is applied to balance sheet assets, each with different capital requirements based on the credit risk of the asset. The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by banking regulators. The Company is required to have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively. At September 30, 1997, the Company's ratios were 8.96% and 10.69%, respectively. Management seeks to attain a level of capital consistent with appropriate business risk and an ongoing need for financial flexibility. Adequacy of capital depends on the assessment of a number of factors such as stability of earnings, asset quality, liquidity and economic conditions. The ratio of average shareholders' equity to average assets was 7.67% at September 30, 1997. With a strong equity-to-assets ratio, the Company enjoys greater flexibility and less dependence upon its deposit base to support loan and investment activities. 27 29 BUSINESS INTRODUCTION With its five full-service offices, the Company has the largest market share of deposits among commercial banks in Cowlitz County, Washington, and The Cowlitz Bank is the only community bank headquartered in the county. The Company has grown from one branch with assets of $39.4 million, deposits of $31.0 million and shareholders' equity of $2.5 million at January 1, 1992 to five branches with assets of $175.7 million, deposits of $139.1 million and shareholders' equity of $13.3 million at September 30, 1997. The Company emphasizes personal service and customer relationships and believes that such emphasis is the primary reason for its rapid growth. The Bank's most recent rating under the Community Reinvestment Act was "outstanding." In 1996, the Independent Bankers Association of America listed the Bank as one of the top ten banks in the United States with assets between $150 million and $300 million based on return on shareholders' equity ("ROE"). The Company offers or makes available a broad range of financial services to its customers, primarily small and medium-sized businesses, professionals and retail customers. In addition to its normal commercial and personal banking services, which include commercial and real estate lending, consumer lending, mortgage origination and trust services, the Company has developed relationships with a securities brokerage firm and an insurance agency with an estate planner to provide its customers access to a variety of financial services which are generally not available in community banks. In 1997, the Company established a trust department to offer trust services to individuals, corporations and institutions. It is the only such trust department located in Cowlitz County. By combining its array of traditional commercial banking products with these enhanced customer services, the Company is able to provide its customers with similar banking services offered by its larger competitors while retaining the character of a community bank and the level of personal service which larger banks generally no longer provide. Based on reports of the FHLB, at June 30, 1996, the Company held approximately 25% of the deposits in commercial banks in Cowlitz County, which was the largest share of deposits of any commercial bank. Since June 30, 1996, the Company has taken several steps to increase its market share in Cowlitz County. Historically, the Company operated from one location in Longview. In November 1996, the Company opened a de novo branch in neighboring Kelso, Washington. Two recent acquisitions of competitors in Cowlitz County presented the Company with additional opportunities for in-market growth. In 1996, Wells Fargo Bank acquired First Interstate Bank, which was a principal competitor of the Company. The Company successfully bid for three Wells Fargo branches in Cowlitz County and acquired those branches in July 1997. In the second half of 1997, U.S. Bank was acquired by First Bank, which has recently announced its intention to close the U.S. Bank branch in Kelso, Washington, creating additional opportunities for the Company. The Company is aggressively marketing to its new customers from the former Wells Fargo branches as well as the customers of U.S. Bank in Kelso. The Company is introducing its full array of financial products to these new customers while emphasizing personal service as a way of increasing its market share within its existing market area. Management believes that the Company's historical growth and recent successful expansion activities strongly position the Company to continue to increase its market share in Cowlitz County and to expand into other similar markets. INDUSTRY OVERVIEW The commercial banking industry continues to experience increased competition, consolidation and change. Non-insured financial service companies such as mutual funds, brokerage firms, insurance companies, mortgage companies and leasing companies are offering alternative investment opportunities for customers' funds and, in many cases, alternative sources from which to borrow to meet their needs. Banks have been granted extended powers to better compete, including the limited right to sell annuities and securities products. Despite the expanded products and services offered by banks, the percentage of financial transactions handled by commercial banks has dropped steadily. In addition, although the dollar amount of bank deposits has remained steady, such deposits represent less than 20% of household financial assets compared to over 35% 25 years ago. This trend represents a continuing shift to investments in stocks, bonds, 28 30 mutual funds and retirement accounts. To improve competitiveness, commercial banks are reducing costs through operating efficiencies gained by consolidation and implementation of alternative ways of providing bank products. Although new banks continue to be organized, bank mergers substantially outnumber new bank formations. In the last dozen years, the number of commercial banks nationwide has dropped from 14,000 to 9,500. However, in recent years, relatively stable interest rates and a growing economy have permitted the remaining segments of the banking industry to improve net interest margins and returns on assets, resulting in stronger balance sheets and earnings. To deliver more effectively and efficiently their products, banks are opening branches located inside retail stores, installing more ATMs, and investing in technology to facilitate telephone, personal computer and Internet banking. While all banks are experiencing the effects of the changing environment, the manner in which banks choose to compete is increasing the differences between larger super-regional banks and community banks. The super-regional banks are striving to become regional "brands" providing a broad selection of products at low cost with advanced technology. Community banks provide most of the same products, but with a greater commitment to personal service and to maintaining local ties to the communities they serve. BUSINESS STRATEGY The Company's goal is to maintain its position as the leading community based provider of financial services in Cowlitz County and to become one of the leading community based providers of financial services in other selected areas of Washington and Oregon. The Company's growth strategy is based on providing both exceptional personal service and a wide range of financial services to its customers. The Company's strategy consists of the following: - Emphasize personal service and develop strong community ties. Based on its experience, the Company believes that providing a high level of personal service and customer attention attracts and retains customers. The Company's employees work with specific customers on an individual, personalized basis. As a result of this level of customer attention, the Company believes that it can make business decisions regarding its customers more quickly and efficiently than its competitors. The Company's philosophy is that of a true community bank -- to provide the highest level of service to its communities. The Company's "outstanding" Community Reinvestment Act ("CRA") rating is evidence of its commitment to serve all the citizens in its communities. The Company believes that its intense focus on customer service coupled with its deep community relationships serve to differentiate the Company from its competitors. - Provide a broad range of financial products and services. The Company believes that offering a wide range of financial products and services is an important competitive factor. In addition to deposit and loan products typically offered by commercial banks, the Company has developed a real estate loan division to originate mortgage loans and has established a trust department. To execute this strategy, the Company has hired experienced personnel to market and deliver these services. The Company leases space in its main financial center to a securities brokerage firm and an insurance agency in order to provide its customers with access to a wider range of financial services. This combination of products and services is designed to both increase its customer base and to enhance cross-selling opportunities to its customer base. - Increase business volume in existing market. The Company believes there is an opportunity to increase its business volume in its existing market area by promoting its complete array of financial products as well as emphasizing personal service, especially in relationships with new customers obtained in the acquisition of the Wells Fargo branches and by establishing new customer relationships as a result of the announced closure of a U.S. Bank branch in Kelso. The Company believes that additional opportunities for growth exist in Cowlitz County as a result of new business entrants such as BHP Coated Steel, Prudential Steel and Foster Farms. The Company presently has the largest share of deposits held by commercial banks in Cowlitz County and believes that its reputation for a high level of 29 31 personal service will help it attract new customers as the larger banks continue their consolidation and reduction of personal service to their customers. - Explore opportunities for regional expansion through acquisition. The Company intends to explore the acquisition of other community banks and branches of larger banks in non-metropolitan communities in Washington and Oregon. The Company intends to retain the local character of institutions which it acquires and to promote deposit and asset growth in the acquired institutions through implementation of its customer service policies and product offerings. Although the Company is not presently engaged in any acquisition discussions, it believes that such opportunities are available and that its ability to consummate such acquisitions will be enhanced by completion of this Offering and the creation of a public market for the Company's Common Stock. ACQUISITION OF WELLS FARGO BRANCHES On July 18, 1997, the Company completed the Branch Acquisition, which included branches located in Castle Rock, Kalama and Longview, Washington. In the acquisition, the Company purchased certain assets of the branches, including cash on hand, owned real property, personal property, branch and tenant leases, safe deposit agreements and records, assumed $25.2 million of deposit liabilities and recorded a core deposit premium of $2.0 million. The Company did not purchase any credit card relationships, loans or other revenue producing assets. Management believes that it has successfully integrated these branches into its operations and has begun an aggressive marketing campaign of its products and services to the new customers obtained as a result of the Branch Acquisition. Based on this success, the Company believes it is well positioned to compete effectively for other branch acquisitions should the opportunity arise. PRODUCTS AND SERVICES The Company offers a broad portfolio of products and services tailored to meet the banking requirements of targeted customers in its market area. It believes this portfolio is generally competitive with the products and services of its competitors, including major regional and national banks. These include: Deposit Products. The Company provides an array of deposit products for customers, including non-interest-bearing checking accounts, interest-bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase certain types or maturities of deposit liabilities. The Company does not pay brokerage commissions to attract deposits. It strives to establish customer relations to attract core deposits in non-interest-bearing transactional accounts and thus to reduce its cost of funds. Loan Products. The Company offers a broad array of loan products to its small to medium size business customers. The Company maintains sound loan underwriting standards with written loan policies, conservative individual and branch limits and reviews by the Loan Committee. Further, in the case of particularly large loan commitments or loan participations, loans are reviewed by the Board of Directors. Underwriting standards are designed to achieve a high-quality loan portfolio, compliance with lending regulations and the desired mix of loan maturities and industry concentrations. Management seeks to minimize credit losses by closely monitoring the financial condition of its borrowers and the value of collateral. Commercial Loans. The Company offers specialized loans for its business and commercial customers, including equipment and inventory financing operating lines of credit, and accounts receivable financing. Commercial lending is the primary focus of the Company's lending activities, and a significant portion of its loan portfolio consists of commercial loans. For regulatory reporting purposes, a substantial portion of the Company's commercial loans are designated as real estate loans, as the loans are secured by mortgages and trust deeds on real property, although the loans may be made for purposes of financing commercial activities, such as accounts receivable, equipment purchases and inventory or other working capital needs. Lending decisions are based on careful evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. Commercial loans secured by real property are 30 32 limited to 70% of the value of the collateral. In some cases, the Company may require personal guarantees and secondary sources of repayment. Real Estate Loans. Real estate loans are available for construction, purchasing and refinancing residential owner-occupied and rental properties. Borrowers can choose from a variety of fixed and adjustable rate options and terms. Real estate loans reflected in the loan portfolio also include loans made to commercial customers that are secured by real property. The Company provides customers access to long-term conventional real estate loans through its mortgage loan department which makes FNMA-conforming loans and sells them in the secondary market. The Company has been either the first or second largest mortgage originator in Cowlitz County for each of the last four years. Payments on loans are often dependent on the successful operation and management of the properties securing the loans, and are therefore strongly affected by the conditions of the local real estate market. Fluctuating land values and local economic conditions make loans secured by real property difficult to evaluate and monitor. Consumer Loans. The Company provides loans to individual borrowers for a variety of purposes, including secured and unsecured personal loans, home equity and personal lines of credit and motor vehicle loans. Consumer loans can carry significantly greater risks than other loan products, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are dependent on borrowers' continuing financial stability, and are sensitive to job loss, illness and other personal factors. The Company attempts to manage the risks inherent in consumer lending by following strict credit guidelines and conservative underwriting practices. The Company also offers Visa and Mastercard credit cards to its customers. The following table sets forth certain information about the Company's loan portfolio at September 30, 1997, classified by distribution among type of borrowers:
TOTAL PERCENT OF BORROWER CLASSIFICATION NUMBER OF LOANS LOAN BALANCE PORTFOLIO ------------------------------------- --------------- ------------ ---------- (DOLLARS IN THOUSANDS) Real Estate.......................... 309 $ 33,898 25.4 Consumer............................. 632 30,444 22.8 Services............................. 91 13,372 10.0 Construction......................... 134 12,308 9.3 Retail Trade......................... 86 7,078 5.3 Transportation & Trucking............ 66 6,707 5.0 Forest and Timber.................... 48 5,352 4.0 Restaurants.......................... 46 4,941 3.7 Health Services...................... 33 4,222 3.2 Manufacturing........................ 39 3,878 2.9 Wholesale Trades..................... 41 2,425 1.8 Finance, Insurance................... 21 2,100 1.6 Other................................ 108 6,676 5.0 ----- -------- ------ Total...................... 1,654 $133,401 100.00% ===== ======== ======
Other Banking Products and Services. In support of its focus on personalized service, the Company offers additional products and services for the convenience of its customers. These include a recently introduced debit card program, automated teller machines located at each of the Company's offices, and an automated telephone banking service with 24-hour access to accounts that also allows customers to speak directly with a customer service representative during normal banking hours or leave a message after normal banking hours. The Company does not currently charge fees for any of these services. The Company provides drive-through facilities at three of its branches. 31 33 Trust Services. The Company has recently established a trust department, which is the only one located in Cowlitz County. The trust department provides trust services to individuals, partnerships, corporations and institutions and acts as fiduciary of estates and conservatorships and as a trustee under various wills, trusts and other plans. The Company believes this service will attract additional customers to the Bank. Other Financial Services. The Company believes that providing its customers a full range of financial services is an important element of its strategy to attract and retain customers. To this end, the Company has entered into lease arrangements with Robert Thomas Securities, a securities broker affiliated with Raymond James Securities, and Commerce Business & Estate Planning Services, Inc., an insurance agency. Each of these organizations maintains an office on the main floor of the Cowlitz Financial Center where the main office of the Company is located and has access to space in the Company's other branches. Representatives of these companies meet with clients at each of the Bank's branches, thereby making these services available to all of the Company's customers. The Company has no financial interest in either of these companies. The Company believes that by making available through these relationships brokerage and insurance services, it can increase foot traffic through its branches and market more extensively its full line of core banking products and services. MARKET AREA The Company's primary market area from which it accepts deposits and makes loans is Cowlitz County, Washington, and the surrounding counties in Washington and Oregon, including the greater Portland area. As a community bank, the Company has certain competitive advantages due to its local focus, but is also more closely tied to the local economy than many of its competitors which serve a number of geographic markets. Cowlitz County has a population of approximately 92,000 people. The population is centered in the adjoining cities of Longview and Kelso, which combined contain approximately one-half of the county's population. The rural areas of Cowlitz County are growing at a somewhat faster rate than the urban areas of the county as a result of the migration of people into the area from urban areas in adjacent counties. Over the past 10 years, the employment base of Cowlitz County has undergone significant change. The forest products industry has historically been the dominant employer in the county and remains so. Weyerhauser Company and Longview Fiber Co. have major facilities in Cowlitz County. Cowlitz County has three port facilities along the Columbia River, which specialize in moving dry bulk, agricultural and forest products. The ports have also acted as centers for attracting new industry to the county. In recent years, Cowlitz County has attracted diverse industries, including Sonoco Products, BHP Coated Steel, Prudential Steel and Daybreak Industries. Foster Farms is currently constructing a processing plant in Kelso which is expected to create in excess of 500 new jobs when it opens in 1998. MANAGEMENT INFORMATION SYSTEMS The Company maintains an in-house system for processing all core banking applications, including loan servicing and deposit accounts. The system utilizes Information Technology Systems, Inc. ("ITI") software and Unisys hardware. In addition, ITI software is utilized for 24-hour telephone banking, shareholder information, accounts payable and optical disk storage. The Company also maintains a Novell network in all branches. The Company maintains a Disaster Recovery Plan and has a contract with Sungard Services to provide on-site processing after a disaster. Management is presently evaluating its systems and software for potential Year 2000 problems. Although this evaluation is not complete and no final cost estimate for compliance is available, initial indications are that the Company will not incur any extraordinary expense in addressing Year 2000 compliance issues. COMPETITION Competition in the banking industry has intensified for deposits and loans with decreased interest rates over the last one to two years. Furthermore, competition from outside the traditional banking system from 32 34 credit unions, investment banking firms, insurance companies and related industries offering bank-like products has widened the competition for deposits and loans. Based on published reports, it is estimated that credit unions held approximately 51% of deposits in the Company's market area as of June 30, 1996. The banking industry in the market area is generally characterized by well established branches of large banks with headquarters located out of the market area and in many cases, out of the state. These large multi-bank holding company branches located in the Longview-Kelso area have transferred a number of their banking functions outside the local area. There are also thrift institutions, including a branch of the country's largest thrift institution, and credit unions within the market area that are very competitive in the deposit and consumer lending areas. The major competition for commercial banking services in Cowlitz County comes from U.S. Bank, Key Bank, Bank of America (which does business in Washington as Seafirst Bank) and Columbia State Bank. None of these competitors are headquartered in Cowlitz County and many have relocated key functions (e.g., loan decisions) into regional offices outside of the area. Its local decision making and strong community ties have allowed the Company to provide a level of personal service and direct customer contact that management believes is superior to that provided by other banks. The offices of the major financial institutions have competitive advantages over the Company in that they have high public visibility, may offer a wider variety of products and are able to maintain advertising and marketing activities on a much larger scale than the Company can economically maintain. Since single borrower lending limits imposed by law are dependent on the capital of the institution, the branches of larger institutions with substantial capital bases also have an advantage with respect to loan applications which are in excess of the Company's legal lending limits. In competing for deposits, the Company is subject to certain limitations not applicable to nonbank financial institution competitors. Previous laws limiting the deposit instruments and lending activities of savings and loan associations have been substantially eliminated, thus increasing the competition from these institutions. See "Risk Factors -- Competition." REGULATION AND SUPERVISION The Company and the Bank are subject to extensive regulation under federal and state laws. These laws, together with the regulations promulgated under them, significantly affect respective activities of the Company and the Bank and the competitive environment in which they operate. The laws and regulations are primarily intended to protect depositors and the deposit insurance fund, rather than shareholders. The description of the laws and regulations applicable to the Company and the Bank set forth in this prospectus does not purport to be a complete description of the laws and regulations mentioned herein or of all such laws and regulations. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company and the Bank. The operations of the Company and the Bank may be affected by legislative and regulatory changes as well as by changes in the policies of various regulatory authorities. The Company cannot accurately predict the nature or the extent of the effects that such changes may have in the future on its business and earnings. Bank Holding Company Regulation. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA") and, as such, is subject to the regulations of the Federal Reserve. Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to 33 35 the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. The Company is prohibited by the BHCA from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Additionally, the Company is prohibited by the BHCA from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. The BHCA does not place territorial restrictions on the activities of such non-banking related activities. Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve is the federal regulatory and examining authority for bank holding companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies. These guidelines are similar to, although not identical with, the guidelines applicable to banks. See "-- Bank Capital Requirements." As of September 30, 1997, the Company's Tier 1 leverage capital ratio was 7.57%, its Tier 1 risk-based capital ratio was 8.96% and its total risk-based capital ratio was 10.69%. Bank Regulation. The Bank is organized under the laws of the State of Washington and is subject to the supervision of the Department of Financial Institutions ("DFI"), whose examiners conduct periodic examinations of state banks. The Bank is not a member of the Federal Reserve System, so its principal federal regulator is the FDIC, which also conducts periodic examinations of the Bank. The Bank's deposits are insured, to the maximum extent permitted by law, by the Bank Insurance Fund ("BIF") administered by the FDIC and are subject to the FDIC's rules and regulations respecting the insurance of deposits. See "-- Deposit Insurance." Both federal and state laws extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods. Insured state-chartered banks are prohibited under FDICIA from engaging as principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards. The Company does not believe that these restrictions will have a material adverse effect on its current operations. Bank Capital Requirements. The FDIC has adopted risk-based capital ratio guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. These guidelines divide a bank's capital into two tiers. Tier 1 includes common equity, certain noncumulative perpetual preferred stock (excluding auction rate issues) and minority interest in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary (Tier 2) capital includes, among other items, cumulative perpetual and long-term, limited-life, preferred stock, mandatory convertible securities, certain hybrid capital instruments, term-subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required 34 36 to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. In addition, the FDIC has established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. Certain regulatory capital ratios for the Company and the Bank at September 30, 1997 are set forth below:
COMPANY BANK ------- ----- Tier 1 Capital to Risk-Weighted Assets..................... 8.96% 9.09% Total-Risk Based Capital to Risk-Weighted Assets........... 10.69% 10.34% Tier 1 Leverage Ratio...................................... 7.57% 7.66%
Dividends. The principal source of the Company's cash revenues is dividends from the Bank. Under Washington law, the Bank may not pay dividends in an amount greater than its retained earnings as determined by generally accepted accounting principles. In addition, the DFI has the authority to require a state-chartered bank to suspend payment of dividends. The FDIC has the authority to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank or if it would cause a bank to become undercapitalized. Lending Limits. Under Washington law, the total loans and extensions of credit by a Washington-chartered bank to a borrower outstanding at one time may not exceed 20% of such bank's capital and surplus. However, this limitation does not apply to loans or extensions of credit which are fully secured by readily marketable collateral having market value of at least 115% of the amount of the loan or the extension of credit at all times. Branches and Affiliates. Establishment of bank branches is subject to approval of the DFI and FDIC and geographic limits established by state laws. Washington's branch banking law permits a bank having its principal place of business in the State of Washington to establish branch offices in any county in Washington without geographic restrictions. A bank may also merge with any national or state chartered bank located anywhere in the State of Washington without geographic restrictions. Under Oregon law, an out-of-state bank or bank holding company may merge with or acquire an Oregon state chartered bank or bank holding company if the Oregon bank, or in the case of a bank holding company, the subsidiary bank, has been in existence for a minimum of three years, and the law of the state in which the acquiring bank in located permits such merger. Branches may not be acquired or opened separately, but once an out-of-state bank has acquired branches in Oregon, either through a merger with or acquisition of substantially all of the assets of an Oregon bank, the bank may open additional branches. The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. FDICIA. FDICIA required, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. 35 37 The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA. Among other things, the regulations define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total, risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The Bank currently exceeds all of the ratios. FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institutions holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares and such other standards as the agency deems appropriate. Deposit Insurance. The Bank's deposits are insured up to $100,000 per insured account by the BIF. As an institution whose deposits are insured by BIF, the Bank is required to pay deposit insurance premiums to BIF. FDICIA required the FDIC to issue regulations establishing a system for setting deposit insurance premiums based upon the risks a particular bank or savings association poses to the deposit insurance funds. This system bases an institution's risk category partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of three "supervisory" categories based on reviews by regulators, statistical analysis of financial statements and other relevant information. An institution's assessment rate depends upon the capital category and supervisory category to which it is assigned. Annual assessment rates currently range from zero (subject to a statutory annual minimum assessment of $2,000), for the highest rated institution, to $0.27 per $100 of domestic deposits for an institution in the lowest category. The Bank is currently in the class of the highest rated institutions and, accordingly, pays the minimum assessment rate. Any increase in insurance assessments could have an adverse effect on the Bank's earnings. Additional Matters. In addition to the matters discussed above, the Company and the Bank are subject to additional regulation of their activities, including a variety of consumer protection regulations affecting their lending, deposit and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions, including the Company and the Bank, are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the U.S. Government and its various agencies, particularly the Federal Reserve. Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, the Washington Legislature and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or the Company and the Bank in particular would be affected thereby. PROPERTIES The Company owns its main office space at the Cowlitz Financial Center, 927 Commerce Avenue, Longview, Washington 98632. The Bank occupies approximately 27,500 square feet of this facility. The Company leases space in the Cowlitz Financial Center to Robert Thomas Securities and to Commerce Business & Estate Services, Inc., both of which provide services to the Bank's customers. The Company also owns branches in Kelso, Kalama and Castle Rock, and leases facilities for a branch in the Triangle Mall in Longview. The Company intends to sell its Castle Rock facility and move the existing branch to a leased new building which is under construction. Each branch has automated teller machines and each branch except Kalama and Castle Rock has a drive-up facility. The new building at Castle Rock will have a drive-up facility. 36 38 EMPLOYEES At December 31, 1997, the Company employed 99 full-time equivalent employees. None of the employees are parties to a collective bargaining agreement. Management considers its relations with its employees to be good. LEGAL PROCEEDINGS The Company may occasionally have pending routine litigation resulting from the collection of the secured and unsecured indebtedness as part of its business of providing financial services. In some cases, such litigation will involve counterclaims or other claims against the Company. Such proceedings against financial institutions sometimes also involve claims for punitive damages in addition to other specific relief. Currently, the Company is not a party to any litigation other than in the ordinary course of business. In the opinion of management, the ultimate outcome of all pending legal proceedings will not individually or in the aggregate have a material adverse effect on the financial condition or the operations of the Bank. 37 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company and the Bank, their respective ages and their respective positions with the Company and the Bank are listed below:
NAME AGE POSITION - ------------------------------ --- ------------------------------------------------------ Benjamin Namatinia 54 Chairman & Chief Executive Officer, Cowlitz Bancorporation; Director, Cowlitz Bank Charles W. Jarrett 56 President & Chief Operating Officer & Director, Cowlitz Bancorporation; President & Chief Executive Officer & Director, Cowlitz Bank Larry M. Larson(1)(2)(3) 58 Director, Cowlitz Bancorporation; Chairman, Cowlitz Bank Mark F. Andrews, Jr.(1)(2)(3) 65 Director, Cowlitz Bancorporation and Cowlitz Bank E. Chris Searing(1)(2) 44 Director, Cowlitz Bancorporation & Cowlitz Bank Donna P. Gardner 49 Vice President & Secretary/Treasurer, Cowlitz Bancorporation; Executive Vice President & Chief Financial Officer, Cowlitz Bank James A. Wills 56 Vice President, Cowlitz Bancorporation; Executive Vice President & Chief Operating Officer, Cowlitz Bank
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. (3) Member of the Board Development Committee. Benjamin Namatinia has served as Chairman of Cowlitz Bancorporation since its incorporation in 1991 and was appointed Chief Executive Officer effective November 1994. He has served as a director of Cowlitz Bank since 1991. Since 1990, Mr. Namatinia has been the President as well as bond trader for BMN, INC., a brokerage firm owned by Mr. Namatinia. Mr. Namatinia also owns a securities brokerage franchise of Robert Thomas Securities, which leases space from the Company in the Cowlitz Financial Center. From 1984 to 1989, he was Senior Vice President and trader for Prudential Securities. From 1989 to 1990, he was Senior Vice President and head of the investment department for Shearson Lehman. Charles W. Jarrett has served as a director of Cowlitz Bancorporation since its incorporation in 1991. He held the position of President and Chief Executive Officer of Cowlitz Bancorporation from 1992 until November 1994, at which time he became President and Chief Operating Officer. Mr. Jarrett joined Cowlitz Bank in 1986 and has served as President and Chief Executive Officer and as a director since 1989. Larry M. Larson has served as a director of Cowlitz Bancorporation since its incorporation in 1991. Mr. Larson has served as a director of Cowlitz Bank since 1984. He served as Secretary of the Board from 1987 to 1988, Vice Chairman from 1988 to 1990, and has served as Chairman since 1990. Mr. Larson's principal occupation is his position as longshoreman for the Port of Longview. He also serves in an elected position on the Port Commission for the Port of Longview. He owns the Bridgeview Tobacco Shop located in Rainier, Oregon. Mark F. Andrews, Jr. has served as a director of Cowlitz Bancorporation since its incorporation in 1991. He has served as a director of Cowlitz Bank since 1988 and as Secretary of Cowlitz Bank since 1990. Mr. Andrews' principal occupation is the management and operation of his tree farms. In addition, Mr. Andrews serves as a court commissioner for Cowlitz County and he is also a retired attorney. E. Chris Searing has served as a director of Cowlitz Bancorporation since its incorporation in 1991. Mr. Searing has served as a Director of Cowlitz Bank since 1986. He served as Secretary of the Board from 1988 to 1990 and has served as Vice Chairman since 1990. Mr. Searing owns Searing Electric & Plumbing, Inc. located in Longview, Washington. 38 40 Donna P. Gardner has served as an executive officer for Cowlitz Bancorporation since its incorporation in 1991 and currently holds the position of Vice President and Secretary/Treasurer. Mrs. Gardner joined Cowlitz Bank in 1981 and served as Cashier from 1989 to 1993, Vice President from 1993 to 1997 and is currently serving as Executive Vice President and Chief Financial Officer. James A. Wills has served as Vice President of Cowlitz Bancorporation since its incorporation in 1991. Mr. Wills joined Cowlitz Bank in 1988. He has served as an executive officer of the Bank since 1989 and currently holds the position of Executive Vice President and Chief Operating Officer. Each of the Company's directors is elected annually by the Company's shareholders. All Directors hold office until the expiration of their terms and the election and qualification of their successors. COMMITTEES OF THE BOARD The Board has established an Audit Committee, a Compensation Committee and a Board Development Committee. The Audit Committee recommends the selection of the Company's independent auditors and consults with the independent auditors on the Company's internal accounting controls. The Compensation Committee recommends to the Board salaries and bonuses for the Company's executive officers and administers the Company's Stock Option Plan and Employee Stock Purchase Plan. The Board Development Committee identifies and recommends potential candidates for both the Company's and the Bank's Boards of Directors. DIRECTOR FEES Effective January 1, 1998, directors of the Company will receive a fee of $900 per month except that Mr. Namatinia as Chairman of the Board will receive a fee of $1,000 per month. Directors of the Bank receive a fee of $600 per month and the Chairman, Mr. Larry Larson, receives a fee of $1,800 per month. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Articles of Incorporation provide that the liability of the directors of the Company for monetary damages will be eliminated in an action brought by or in the right of the Company for breach of a director's duties to the Company or its shareholders except for liability in circumstances involving (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distribution to stockholders, or (iv) any transaction from which the director derived an improper personal benefit. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director's duty of care. This provision also does not affect the director's responsibilities under any other laws, such as the federal or state securities or environmental laws. The Articles of Incorporation also provide that the Company shall indemnify, to the fullest extent permitted under Washington law, any person who has been made, or is threatened to be made, a party to an action, suit or legal proceeding by reason of the fact that the person is or was a director of the Corporation. The Company may provide similar indemnification to officers, employees and agents at the discretion of the Board. The Company intends to enter into separate indemnification agreements with each of its directors. These agreements will require the Company to indemnify its directors to the fullest extent permitted by law, including circumstances in which indemnification would otherwise be discretionary. Among other things, the agreements require the Company to indemnify directors against certain liabilities that may arise by reason of their status or service as a director and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also has insurance on behalf of it executive officers and directors for certain liabilities arising out of their actions in such capacities. The Company believes that these contractual arrangements, the provisions in its Articles of Incorporation and Bylaws and insurance coverage are necessary to attract and retain qualified persons as directors and officers. 39 41 EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth the annual compensation earned during 1997 for the Company's chief executive officer and each of the Company's other executive officers who earned in excess of $100,000 in salary and bonus during the last fiscal year (the "Named Executive Officers").
ANNUAL COMPENSATION -------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1) - ------------------------------------------ -------- ------- ------------- --------------- Benjamin Namatinia........................ $178,224 $20,000 -- $14,258 Chairman and Chief Executive Officer Charles W. Jarrett........................ $161,532 $40,975 -- $12,923 President and Chief Operating Officer James A. Wills............................ $ 98,556 $24,585 -- $ 7,884 Vice President
- --------------- (1) Company contribution to 401(k) Plan STOCK OPTIONS The following table sets forth information concerning the award of stock options to the Named Executive Officers during fiscal 1997: OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(1) OPTIONS/SARS EMPLOYEES EXERCISE OR BASE EXPIRATION ----------------------- NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($) - --------------------- ------------ ---------------- ---------------- -------- ---------- ---------- Benjamin Namatinia... 192,500 50% $ 5.71 9/30/07 $2,663,570 $4,892,370 Charles W. Jarrett... 192,500 50% $ 5.71 9/30/07 $2,663,570 $4,892,370 James A. Wills....... -- -- n/a n/a n/a n/a
- --------------- (1) Initial value of Common Stock equal to $12.00 per share, the assumed initial offering price of the Common Stock. The table below provides information on exercises of options during 1997 by the Named Executive Officers and information with respect to unexercised options held by the Named Executive Officers at December 31, 1997. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF NUMBER OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS AT FISCAL YEAR-END FISCAL YEAR-END (#) ($) SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1) - ---------------------------- ---------------- ----------------- -------------------- ------------------ Benjamin Namatinia.......... -- -- 52,500/140,000 $330,225/$880,600 Charles W. Jarrett.......... -- -- 52,500/140,000 $330,225/$880,600 James A. Wills.............. -- -- -- --
- --------------- (1) Fair market value of Common Stock equal to $12.00 per share, the assumed initial offering price of the Common Stock. 40 42 EMPLOYMENT AGREEMENTS Messrs. Namatinia and Jarrett will enter into employment agreements with the Company prior to the Offering. Under the employment agreements, both Mr. Namatinia and Mr. Jarrett will receive a base annual salary of $200,000. Mr. Jarrett will also receive an annual cash bonus equal to the sum of five percent (5%) of the Company's net profits in excess of a one percent (1%) Return on Assets of the Bank ("ROA") for the calendar year and seven and one-half percent (7.5%) of the Bank's net profits in excess of one and one-half percent (1.5%) ROA for the calendar year. Mr. Namatinia's annual cash bonus will be determined by the Company's Board of Directors based on the growth, profitability and performance of the Company, the expansion of services provided by the Company and the market value of the Company's Common Stock. The agreements will contain a covenant not to compete for a period of eighteen months in the event of termination of employment for any reason. If employment is terminated by the Company without cause or by death or disability, the employee will receive a lump sum equal to three times the employee's annual base salary for the calendar year in which such employment terminates plus the amount of cash bonus earned prior to termination. Upon termination without cause, the employee will receive such benefits to which he has become entitled under the terms of the Company's 1997 Stock Option Plan, the Supplemental Executive Retirement Plan and any other benefit plan or program. Upon a change in control of the Company, if employment is terminated by the Company without cause or by the employee for good reason within three years after such change in control, the employee will be entitled to his full base salary through the date of termination and a lump sum payment equal to three times the employee's annual base salary in effect immediately prior to the termination date. The employee will also receive such benefits to which he has become entitled under the terms of the Company's 1997 Stock Option Plan, the Supplemental Executive Retirement Plan, and any other benefit plan or program. 1997 STOCK OPTION PLAN The Board of Directors has adopted the 1997 Stock Option Plan (the "1997 Plan") which authorizes up to 525,000 shares of Common Stock for issuance thereunder. The 1997 Plan is subject to shareholder approval at the annual meeting of shareholders to be held in February 1998. The 1997 Plan is administered by the Compensation Committee. Under the 1997 Plan, options may be granted to the Company's employees, directors and consultants. Only employees may receive "incentive stock options," which are intended to qualify for certain tax treatment; both employees and nonemployees, including nonemployee directors, may receive "nonstatutory stock options," which do not qualify for such treatment. The exercise price of incentive stock options under the 1997 Plan must at least equal the fair market value of the Common Stock on the date of grant. The exercise price of the nonstatutory options may be greater than or less than the fair market value of the Common Stock on the date of grant at the discretion of the Compensation Committee. All incentive stock options granted under the 1997 Plan will expire ten years from the date of grant unless terminated sooner pursuant to the provisions of the 1997 Plan. The number of shares of Common Stock authorized under the 1997 Plan may be adjusted upon subdivision or consolidation of the Company including reclassification, stock split or reverse stock split of the Company's Common Stock. In the event of a change of control of the Company, including a merger or sale of substantially all of the Company's assets, outstanding options and stock purchase rights must be assumed by any successor corporation, or equivalent options or rights must be substituted, or they will become fully vested and exercisable. At the date hereof, options to purchase 192,500 shares have been granted under the 1997 Plan to each of Mr. Namatinia and Mr. Jarrett. Under the terms of each grant, options to purchase 52,500 shares vested at the date of grant and the remaining options vest ratably over a five year period. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Board of Directors has adopted the Cowlitz Bancorporation Supplemental Executive Retirement Plan (the "SERP"), effective January 1, 1998. Participants in the SERP are designated by the Company's Board of Directors. Currently, only Messrs. Namatinia and Jarrett are participants in the SERP. The Company has obtained a life insurance policy on the life of each of Mr. Namatinia and Mr. Jarrett. Each 41 43 policy has a $3,000,000 death benefit, payable to the Company. Upon retirement after the age of 62 and before the age of 70, the SERP provides that, at the option of the participant, the Company will transfer to the participant the life insurance policy on such participant's life or will pay the participant either a lump sum of $1,022,499 or annual payments of $130,830 for the ten year period following retirement, which payments may be funded from the cash value of the life insurance policies. Under the SERP, one-half of any death benefit payable to the Company will be paid to the estate of the participant. Each participant is also entitled to full payment of benefits under the SERP in the event his employment is terminated following a change of control of the Company as defined in the participant's employment agreement. All premiums on the life insurance are paid by the Company. EMPLOYEE STOCK PURCHASE PLAN The Board of Directors has adopted the Cowlitz Bancorporation Employee Stock Purchase Plan (the "ESPP"). Commencing on July 10, 1996 and every three months thereafter, all eligible employees are granted options to purchase shares of the Company's Common Stock that, in the aggregate, have an exercise price that does not exceed 15% of the employee's compensation during each Exercise Period (a three month period that begins on the date the option is granted and ends on the ninth day of the succeeding calendar quarter) or $10,000 in each calendar year. The exercise price is determined by the Compensation Committee of the Company's Board of Directors, but may not be less than 85% of the fair market value of the Common Stock at the date of grant. Each option not exercised during the Exercise Period expires and may not be subsequently exercised. The maximum aggregate number of shares of Stock that may be issued under the ESPP is 175,000 shares, subject to increases and adjustment by the Board of Directors. At the date hereof, 33,565 shares of Common Stock have been purchased under the ESPP. CERTAIN TRANSACTIONS At December 31, 1997, the Company had outstanding loans to officers, directors, their spouses, associates and related organizations in the principal amount of $1,856,000. All such loans were made in the ordinary course of business, have been made on substantially the same terms and conditions, including collateral required, as comparable transactions with unaffiliated parties and did not involve more than the normal risk of collectibility or present other unfavorable features. Directors and executive officers are charged the same rates of interest and loan fees as are charged to employees of the Company, which interest rates and fees are slightly lower than charged to non-employee borrowers. All such loans are presently in good standing and are being paid in accordance with their terms. 42 44 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of the Common Stock of the Company and as adjusted to reflect the sale of shares offered hereby, with respect to (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each person who is a director or Named Executive Officer of the Company and (iii) all directors and executive officers of the Company as a group. Each beneficial owner has the sole power to vote and to dispose of all shares of Common Stock owned by such beneficial owner.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THE OFFERING SHARES TO BE SOLD AFTER THE OFFERING ---------------------- IN THE ---------------------- NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERING(2) SHARES PERCENTAGE - --------------------------------------- --------- ---------- ----------------- --------- ---------- Benjamin Namatinia(1).................. 719,652 27.0% -- 719,652 19.6% Charles W. Jarrett(1).................. 264,127 9.9 -- 264,127 7.2 Mark F. Andrews, Jr.................... 37,065 1.4 -- 37,065 1.0 Larry M. Larson........................ 250,215 9.6 -- 250,215 6.9 E. Chris Searing....................... 16,467 * -- 16,467 * Donna P. Gardner....................... 44,268 1.7 -- 44,268 1.2 James A. Wills......................... 99,631 3.8 -- 99,631 2.8 All directors and executive officers as a group (7 persons).................. 1,431,425 52.5 -- 1,431,425 38.4 Harry R. Calbom, Jr.................... 122,500 4.7 8,500 114,000 3.1 Wallace C. Trotter..................... 126,105 4.8 8,500 117,605 3.2
- --------------- * Less than 1%. (1) Includes presently exercisable options to purchase 52,500 shares each of Common Stock. Does not include options to purchase 140,000 shares each of Common Stock which vest ratably over a five year period commencing December 31, 1998. (2) The Selling Shareholders have granted the Underwriters a 30-day option to purchase these shares to cover over-allotments following the closing of the Offering. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 3,619,872 shares of Common Stock outstanding. The 1,000,000 shares sold in the Offering (1,150,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable on the public market without restriction or further registration under the Securities Act, except to the extent that such shares are held by an affiliate of the Company. Of the remaining 2,619,872 outstanding shares of Common Stock, 1,757,997 shares were issued and sold by the Company in private transactions, and public sale thereof will be restricted except to the extent such shares are registered under the Securities Act or sold in accordance with an exemption from such registration. The 1,757,997 restricted shares of Common Stock will be eligible for public sale pursuant to Rule 144 under the Securities Act commencing 90 days after the date of this Prospectus. The holders of 1,681,605 shares have entered into agreements (the "Lock-Up Agreements") with the Underwriters not to offer, sell or otherwise dispose of any equity securities of the Company for 180 days after the date of this Prospectus (the "lock-up period") without the prior written consent of Black & Company. Black & Company may, in its sole discretion, at any time without notice, release all or any part of the shares subject to the Lock-Up Agreements during the lock-up period. In general, Rule 144, as currently in effect, provides that any person who has beneficially owned shares for at least one year, including an "affiliate" (as defined in Rule 144), is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) the average weekly trading volume during the four calendar weeks preceding the sale or (ii) 1% of the shares of Common Stock then outstanding. Sales under Rule 144 are subject to certain manner of sale restrictions, notice requirements and availability of 43 45 current public information concerning the Company. A person who is not an affiliate of the Company, and who has not been an affiliate within three months prior to the sale, generally may sell shares without regard to the limitations of Rule 144 provided that the person has held such shares for a period of at least two years. Any employee, director or officer of the Company holding shares purchased pursuant to a written compensatory plan or contract (including options) entered into prior to the Offering is entitled to rely on the resale provisions of Rule 701, which permit nonaffiliates to sell such shares without having to comply with the public information, holding period, volume limitations or notice requirements of Rule 144 and permit affiliates to sell their Rule 701 shares without having to comply with the holding period restrictions of Rule 144, in each case commencing 90 days after the date of this Prospectus. Prior to the Offering, there has been no public market for the Common Stock and no prediction can be made of the effect, if any, that the sale or availability for sale of shares of Common Stock will have on the market price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market could adversely affect the market price of the Common Stock. DESCRIPTION OF CAPITAL STOCK The following summary description of the Company's capital stock and of certain provisions of the Articles and Bylaws are summaries and do not purport to be complete and are subject to and qualified in their entirety by reference to the Articles and Bylaws, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. Reference is made to such exhibit for a detailed description of the provisions summarized below. The Company's authorized capital stock consists of 3,937,500 shares of Common Stock, no par value per share. The Company is seeking approval at its annual meeting of shareholders to be held in February 1998 to amend the Articles to, among other things, increase the number of authorized common shares to 25,000,000 and to create a class of 5,000,000 shares of preferred stock, no par value per share (the "Preferred Stock"). On the date of this Prospectus, there were 2,619,872 shares of Common Stock outstanding. Upon the closing of the Offering, there will be 3,619,872 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted on by the shareholders. There are no cumulative voting rights. Accordingly, the holders of a majority of the shares of Common Stock voting for the election of directors can elect all the directors if they choose to do so. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities. Holders of Common Stock have no preemptive rights and the Common Stock is neither redeemable nor convertible into any other securities. As of December 31, 1997, there were 289 record holders of the Common Stock. PREFERRED STOCK Assuming the amendment to the Articles is adopted by the shareholders, the Company will be authorized to issue "blank check" Preferred Stock, which may be issued from time to time in one or more series upon authorization by the Company's Board of Directors. The Board of Directors, without further approval of the shareholders, will be authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions and applicable to each series of the Preferred Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, among other things, could adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, discourage bids for the Company's 44 46 Common Stock at a premium to the prevailing market price or otherwise adversely affect the market price of the Common Stock. ANTITAKEOVER RESTRICTIONS STATUTORY PROVISIONS Washington law contains certain provisions that may have the effect of delaying, deterring or preventing a change in control of the Company. Chapter 23B.19 of the WBCA prohibits the Company, with certain exceptions, from engaging in certain significant business transactions with an "acquiring person" (defined as a person who acquires 10% or more of the Company's voting securities without the prior approval of the Company's Board of Directors) for a period of five years after such acquisition. The prohibited transactions include, among others, a merger with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person, or otherwise allowing the acquiring person to receive any disproportionate benefit as a shareholder. The Company may not exempt itself from coverage of this statute. These statutory provisions may have the effect of delaying, deterring or preventing a change in control of the Company. ARTICLE PROVISIONS If the amendment to the Articles is approved by the Company's shareholders, the Board of Directors will have the authority to issue up to 5,000,000 shares of Preferred Stock with such rights and preferences as the Board of Directors may determine. The issuance of such shares may have the effect of delaying, deterring or preventing a change in control of the Company. See "-- Preferred Stock." The Articles do not provide for cumulative voting in the election of directors. The Articles provide that a director may only be removed "for cause" and only with the approval of holders of at least 75% of the Company's voting stock. The Articles prohibit shareholders from calling a special meeting of shareholders. A special meeting of shareholders may be called only by a majority of the Board of Directors, the Chairman of the Board or the President. These provisions in the Articles described above make it more difficult for shareholders, including those holding a majority of the outstanding shares to effect an immediate change in a majority of the members of the Board of Directors. LIMITATION OF LIABILITY AND INDEMNIFICATION Article VII of the Articles limits the personal liability of directors to the Company or its shareholders for monetary damages for conduct as a director in circumstances involving (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distribution to stockholders, or (iv) any transaction from which the director derived an improper personal benefit. Article X of the Articles provides that the Company shall to the full extent permitted by Washington law, indemnify and advance or reimburse the reasonable expenses incurred by any person made a party to a proceeding because that person is or was a director of the Company. In addition, permits the Company's Board of Directors to indemnify the Company's officers, employees and agents to the full extent permitted by Washington law. The Company plans to enter indemnification agreements with its directors. The Company has insurance on behalf of its executive officers and directors for certain liabilities arising out of their actions in such capacities. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is . 45 47 UNDERWRITING The underwriters named below (the "Underwriters"), for which Black & Company, Inc. and Pacific Crest Securities Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names:
NUMBER OF UNDERWRITER SHARES ----------- --------- Black & Company, Inc.............................................. Pacific Crest Securities Inc...................................... ------ Total........................................................ ======
The Underwriting Agreement provides that the obligations of the Underwriters to purchase the shares of Common Stock listed above are subject to the approval of certain legal matters by counsel and various other conditions. The Underwriting Agreement also provides that the Underwriters are committed to purchase all of the shares of Common Stock offered hereby, if any are purchased (except for any shares that may be purchased through exercise of the Underwriters' over-allotment option which may be exercised by the Underwriters in whole or in part). The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. After the Offering, the public offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. Prior to this Offering, there has been only a limited public market for the Common Stock. Accordingly, the public offering price has been determined by negotiation between the Company and the Representatives. Among the factors considered in determining the public offering price were the recent bid prices quoted by market makers in the Common Stock, the Company present and historical results of operations, the Company's current financial condition, estimates of the business potential and prospects of the Company, economic conditions in the Company's market area, the experience of the Company's management, the economics of the industry in general, the general condition of the equity markets at the time of the Offering and other relevant factors. There can be no assurance that an active trading market will develop for the Common Stock, that purchasers in the Offering will be able to sell their shares at or above the Offering price, or as to the price at which the Common Stock may trade in the public market from time to time subsequent to the Offering. The Company and the Selling Shareholders have granted the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 133,000 and 17,000 additional shares of Common Stock, respectively, at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. To the extent the Underwriters exercise the option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase such number of additional shares of Common Stock as is proportionate to such Underwriter's initial commitment to purchase shares from the Company. The Underwriters may exercise such option solely to cover over-allotments, if any, incurred in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement provides that the Company (and the Selling Shareholders to the extent the Underwriters exercise the overallotment option) has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), or to contribute to payments that the Underwriters may be required to make in respect thereof. All of the executive officers and directors of the Company and the Bank have agreed, that, for a period of 180 days after the day on which the Registration Statement becomes effective by order of the Commission, they will not, without the prior written consent of Black & Company, Inc. directly or indirectly, offer for sale, 46 48 sell, contract to sell, or grant any option to sell (including, without limitation, any short sale), pledge, establish an open "put-equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or otherwise dispose of any shares of the Common Stock or securities exchangeable for or convertible into shares of the Common Stock, or any option, warrant or other right to acquire such shares, or publicly announce the intention to do any of the foregoing. During and after the offering, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock; and syndicate share positions involve the sale of the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Company in the offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the offering for their account may be reclaimed by the syndicate if such securities are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market, and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. Mr. Benjamin Namatinia, Chairman of the Board and Chief Executive Officer of the Company, is the sole shareholder of Robert Thomas Securities, which is a member of the selling group for this Offering. The Representatives have advised the Company that the Underwriters do not intend to confirm sales of Common Stock offered by this Prospectus to any accounts over which they exercise discretionary authority. The Company has applied for inclusion of the Common Stock in the Nasdaq National Market under the symbol "CWLZ." The foregoing is a brief summary of the provisions of the Underwriting Agreement and does not purport to be a complete statement of its terms and conditions. A copy of the form of Underwriting Agreement has been filed as an exhibit to the Registration Statement. EXPERTS The consolidated financial statements of the Company as of December 31, 1996 and 1995, and for each of the years in the three year period ended December 31, 1996, included in this Prospectus and in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. LEGAL MATTERS The validity of the Company's Common Stock being offered hereby will be passed upon for the Company to Foster Pepper & Shefelman PLLC, Seattle, Washington. Certain legal matters will be passed upon for the Underwriters by Graham & Dunn PC, Seattle, Washington. ADDITIONAL INFORMATION The Company has filed a registration statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") with the Commission under the Securities Act with respect to the Common Stock being offered hereby. This Prospectus is part of the Registration Statement. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. A copy of the Registration Statement may be 47 49 examined without charge at the Commission's principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission upon payment of certain fees prescribed by the Commission. Copies of such materials may also be obtained from the website that the Commission maintains at http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in such instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company intends to furnish its shareholders with annual reports containing financial statements audited by an independent public accounting firm. 48 50 INDEX TO FINANCIAL STATEMENTS COWLITZ BANCORPORATION
PAGE ---- Report of Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Income..................................................... F-4 Consolidated Statements of Shareholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Cowlitz Bancorporation: We have audited the accompanying consolidated balance sheets of Cowlitz Bancorporation (a Washington corporation) and Subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cowlitz Bancorporation and Subsidiary as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, January 16, 1997, (except with respect to the matters discussed in Note 16, as to which the date is January 12, 1998). F-2 52 COWLITZ BANCORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) ASSETS
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------- ------------ ------------ UNAUDITED ASSETS: Cash and due from banks............................ $ 24,810 $ 20,905 $ 14,702 Trading assets..................................... -- -- 2,016 Investment securities: Investments available-for-sale (at fair value, cost of $4,000, $2,001 and $0 at September 30, 1997 and December 31, 1996 and 1995, respectively)................................. 4,014 2,011 -- Investments held-to-maturity (at amortized cost, fair value of $4,374, $3,388 and $3,301 at September 30, 1997 and December 31, 1996 and 1995, respectively)........................... 4,364 3,380 3,263 -------- -------- -------- Total investment securities................ 8,378 5,391 3,263 Loans.............................................. 132,687 126,551 107,663 Allowance for loan losses.......................... (1,984) (1,894) (1,763) -------- -------- -------- Loans, net................................. 130,703 124,657 105,900 Premises & equipment, net of accumulated depreciation of $1,189, $1,073 and $1,209 at December 31, 1996, 1995 and September 30, 1997, respectively.................................... 5,745 4,437 1,831 Federal Home Loan Bank stock....................... 2,605 2,463 2,283 Intangible asset, net of accumulated amortization of $29, $0, and $0 at September 30, 1997 and December 31, 1996 and 1995, respectively........ 1,940 -- -- Other assets....................................... 1,477 1,304 1,353 -------- -------- -------- Total assets............................... $ 175,658 $159,157 $131,348 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand.......................................... $ 27,051 $ 16,821 $ 17,099 Savings and interest-bearing demand............. 44,817 30,768 31,697 Certificates of deposit......................... 67,217 75,708 57,575 -------- -------- -------- Total deposits............................. 139,085 123,297 106,371 Short-term borrowings.............................. 475 550 2,625 Other liabilities.................................. 707 655 568 Long-term borrowings............................... 22,096 22,842 12,393 -------- -------- -------- Total liabilities.......................... 162,363 147,344 121,957 -------- -------- -------- SHAREHOLDERS' EQUITY: Common stock, no par value; 3,937,500 authorized; 2,602,215, 2,590,403 and 2,585,608 shares issued and outstanding at September 30, 1997 and December 31, 1996 and 1995, respectively........ 3,247 3,195 3,176 Additional paid-in-capital......................... 1,538 1,538 1,538 Retained earnings.................................. 8,496 7,073 4,677 Net unrealized gains on investments available for sale............................................ 14 7 -- -------- -------- -------- Total shareholders' equity................. 13,295 11,813 9,391 -------- -------- -------- Total liabilities and shareholders' equity................................... $ 175,658 $159,157 $131,348 ======== ======== ========
The accompanying notes are an integral part of these statements. F-3 53 COWLITZ BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------- --------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- UNAUDITED UNAUDITED INTEREST INCOME: Interest and fees on loans.............. $ 10,131 $ 9,397 $ 12,721 $ 9,954 $ 6,862 Interest on taxable investment securities........................... 484 332 386 269 322 Interest on non-taxable investment securities........................... -- 2 2 3 -- Trading account interest................ -- 35 34 129 168 Interest from other banks............... 520 330 490 289 140 --------- --------- --------- --------- --------- Total interest income........... 11,135 10,096 13,633 10,644 7,492 --------- --------- --------- --------- --------- INTEREST EXPENSE: Savings and interest-bearing demand..... 867 814 1,031 1,061 1,253 Certificates of deposits................ 3,288 2,874 3,960 2,657 1,073 Short-term borrowings................... 33 100 110 177 144 Long-term borrowings.................... 1,045 758 1,073 653 371 --------- --------- --------- --------- --------- Total interest expense.......... 5,233 4,546 6,174 4,548 2,841 --------- --------- --------- --------- --------- Net interest income before provision for loan losses..... 5,902 5,550 7,459 6,096 4,651 PROVISION FOR LOAN LOSSES................. (300) (175) (281) (694) (533) --------- --------- --------- --------- --------- Net interest income after provision for loan losses..... 5,602 5,375 7,178 5,402 4,118 --------- --------- --------- --------- --------- NON-INTEREST INCOME: Service charges on deposit accounts..... 397 286 387 367 343 Other income............................ 137 149 218 252 155 Net gains (losses) on sales of securities........................... -- (309) (309) 258 (211) --------- --------- --------- --------- --------- Total non-interest income....... 534 126...... 296 877 287 --------- --------- --------- --------- --------- NON-INTEREST EXPENSE: Salaries and employee benefits.......... 2,060 1,612 2,137 1,709 1,166 Net occupancy and equipment expense..... 521 272 393 310 322 Other operating expense................. 1,258 863 1,152 1,074 875 --------- --------- --------- --------- --------- Total non-interest expense...... 3,839 2,747 3,682 3,093 2,363 --------- --------- --------- --------- --------- Income before income tax expense....................... 2,297 2,754 3,792 3,186 2,042 INCOME TAX EXPENSE........................ 781 937 1,295 1,088 697 --------- --------- --------- --------- --------- Net income...................... $ 1,516 $ 1,817 $ 2,497 $ 2,098 $ 1,345 ========= ========= ========= ========= ========= NET INCOME PER SHARE OF COMMON STOCK...... $ 0.54 $ 0.65 $ 0.90 $ 0.77 $ 0.70 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............................. 2,802,369 2,787,274 2,788,365 2,714,074 1,925,399
The accompanying notes are an integral part of these statements. F-4 54 COWLITZ BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
UNREALIZED GAINS (LOSSES) COMMON STOCK ADDITIONAL ON INVESTMENTS TOTAL ------------------- PAID-IN- RETAINED AVAILABLE- SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS FOR-SALE EQUITY --------- ------ ---------- -------- -------------- ------------- BALANCE AT DECEMBER 31, 1993........... 1,723,733 $ 985 $ 1,538 $1,363 $ -- $ 3,886 Net income........................... -- -- -- 1,345 -- 1,345 Cash dividends paid ($.03 per share)............................. -- -- -- (49) -- (49) -- --------- ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1994........... 1,723,733 985 1,538 2,659 -- 5,182 Issuance of common stock for cash.... 861,875 2,191 -- -- -- 2,191 Net income........................... -- -- -- 2,098 -- 2,098 Cash dividends paid ($.03 per share)............................. -- -- -- (80) -- (80) -- --------- ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1995........... 2,585,608 3,176 1,538 4,677 -- 9,391 Issuance of common stock for cash.... 4,795 19 -- -- -- 19 Net income........................... -- -- -- 2,497 -- 2,497 Cash dividends paid ($.04 per share)............................. -- -- -- (101) -- (101) Net changes in unrealized gains/(losses) on investments available-for-sale, net of deferred taxes of $3........................ -- -- -- -- 7 7 -- --------- ------ ------ ------ ------- BALANCE AT DECEMBER 31, 1996........... 2,590,403 3,195 1,538 7,073 7 11,813 Issuance of common stock for cash (unaudited).......................... 11,812 52 -- -- -- 52 Net income (unaudited)................. -- -- -- 1,516 -- 1,516 Cash dividends paid ($.04 per share) (unaudited).......................... -- -- -- (93) -- (93) Net changes in unrealized gains/(losses) on investments available-for-sale, net of deferred taxes of $3 (unaudited).............. -- -- -- -- 7 7 -- --------- ------ ------ ------ ------- BALANCE AT SEPTEMBER 30, 1997 (unaudited).......................... 2,602,215 $3,247 $ 1,538 $8,496 $ 14 $13,295 ========= ====== ====== ====== == =======
The accompanying notes are an integral part of these statements. F-5 55 COWLITZ BANCORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31, --------------------------- ---------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- -------- -------- -------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $ 1,516 $ 1,817 $ 2,497 $ 2,098 $ 1,345 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......... 316 129 191 152 180 Provision for loan losses.............. 300 175 281 694 533 Net losses (gains) on sales of securities........................... -- 309 309 (258) 211 Net amortization of investment security premiums and accretion of discounts............................ (2) (2) (3) (4) (87) Decrease (increase) in other assets.... (2,112) (866) 49 (446) (327) Increase (decrease) in other liabilities.......................... 52 111 87 266 (75) Federal Home Loan Bank stock dividends............................ (142) (131) (180) (138) (182) Purchases of trading securities........ -- (64,500) (64,500) (40,305) (5,863) Sales of trading securities............ -- 66,204 66,204 41,328 6,857 -------- -------- -------- Net cash provided by (used for) operating activities............ (72) 3,246 4,935 3,387 2,592 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities: Held-to-maturity....................... 3,487 2,567 2,860 1,970 10,262 Purchases of investment securities: Available-for-sale..................... (1,994) (2,006) (2,006) -- -- Held-to-maturity....................... (4,461) (2,672) (2,969) (1,663) (7,016) Net increase in loans..................... (6,346) (16,258) (19,038) (31,030) (20,210) Purchases of premises and equipment....... (1,635) (804) (2,797) (291) (71) -------- -------- -------- Net cash used in investing activities...................... (10,949) (19,173) (23,950) (31,014) (17,035) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand, savings and interest-bearing demand deposits... 24,279 (838) (1,207) 114 (3,422) Net increase (decrease) in certificates of deposit................................ (8,491) 10,509 18,133 25,174 20,165 Dividends paid............................ (93) (75) (101) (80) (49) Net increase (decrease) in short-term borrowings............................. (75) (1,425) (2,075) 1,275 (3,175) Net proceeds (repayment) of long-term borrowings............................. (746) 6,895 10,449 5,582 3,556 Issuance of common stock for cash......... 52 -- 19 2,191 -- -------- -------- -------- Net cash provided by financing activities...................... 14,926 15,066 25,218 34,256 17,075 -------- -------- -------- Net increase (decrease) in cash and due from banks.............. 3,905 (861) 6,203 6,629 2,632 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD.................................... 20,905 14,702 14,702 8,073 5,441 -------- -------- -------- CASH AND DUE FROM BANKS AT END OF PERIOD.... $ 24,810 $ 13,841 $ 20,905 $ 14,702 $ 8,073 ======== ======== ======== CASH PAID FOR INTEREST...................... $ 5,253 $ 4,444 $ 6,143 $ 4,533 $ 2,644 ======== ======== ======== CASH PAID FOR INCOME TAXES.................. $ 755 $ 917 $ 1,245 $ 1,138 $ 969 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-6 56 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Operations Cowlitz Bancorporation (the Company) is a single bank holding company located in southwest Washington. The Company's wholly owned subsidiary, Cowlitz Bank (the Bank), a Washington state chartered commercial bank, is the only locally owned community bank in Cowlitz County and offers commercial banking services primarily to small and medium-sized businesses, professionals and retail customers. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated. Investment Securities Investment securities are classified as either trading, available for sale or held to maturity. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Securities not classified as either held-to-maturity or trading are classified as available-for-sale. Trading securities are carried at fair value. Net unrealized gains and losses on trading securities are included in the consolidated statements of income. Trading securities consisted of certain obligations of the U.S. Treasury. Available for sale securities are carried at fair value with unrealized gains and losses, net of any tax effect, added to or deducted from shareholders' equity. Held to maturity securities are carried at amortized cost. Loans Interest income on simple interest loans is accrued daily on the principal balance outstanding. Generally, no interest is accrued on loans when factors indicate that collection of interest is doubtful or when principal or interest payments become 90 days past due, unless collection of principle and interest are anticipated within a reasonable period of time and the loans are well secured. For such loans, previously accrued but uncollected interest is charged against current earnings, and income is only recognized to the extent payments are subsequently received. Loan fees are offset against operating expense to the extent these fees cover the direct expense of originating loans. Fees in excess of origination costs are deferred and amortized to income over the related loan period. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation", requires disclosures about stock-based compensation arrangements regardless of the method used to account for them. The Company has opted to continue to apply the accounting provisions of Opinion No. 25, and therefore will disclose the difference between compensation cost included in net income and the related cost measured by the fair value based method defined by SFAS No. 123, including tax effects, that would have been recognized in the income statement if the fair value method had been used. Allowance for Loan Losses The allowance for loan losses is based on management's estimates. Management determines the adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic F-7 57 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) conditions, the risk characteristics of the various categories of loans and other pertinent factors. Actual losses may vary from the current estimates. These estimates are reviewed periodically and adjusted as deemed necessary. Loans deemed uncollectable are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted appropriately. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. The provision for depreciation is computed on the straight-line method over the estimated useful lives for the majority of the assets, which range from 3 to 39.5 years. Improvements are capitalized and depreciated over the lesser of their estimated useful lives or the life of the lease. When property is replaced or otherwise disposed of, the cost of such assets and the related accumulated depreciation are removed from their respective accounts. Other Borrowings Federal funds purchased and securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Other short-term borrowed funds mature within one year from the transaction date, other long-term borrowed funds extend beyond one year. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in the Company's income tax returns. The deferred tax provision for the year is equal to the net change in the deferred tax asset or liability from the beginning to the end of the year, less amounts applicable to the change in value related to investments available-for-sale. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Earnings per share computations are computed using the weighted average number of common and dilutive common equivalent shares (stock options) assumed to be outstanding during the period, using the treasury stock method. The Company's stock options which were granted during the twelve month period prior to its initial public offering have been considered outstanding for all periods presented. Supplemental Cash Flow Information For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts in the balance sheet caption "Cash and due from banks" and include cash on hand, amounts due from banks and federal funds sold. Federal funds sold generally mature the day following purchase. F-8 58 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Off-Balance-Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Recently Issued Accounting Standards In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which the Company is required to adopt for both interim and annual periods ending after December 15, 1997. This statement specifies the computation, presentation, and disclosure requirements of earnings per share. Management has determined the effect of the adoption of this statement on the consolidated earnings per share calculation for the Company will not be material. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which the Company is required to adopt for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. When adopted, the unrealized gain or loss on available-for-sale securities will be recognized as a component of comprehensive income. Prior Year Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. F-9 59 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) 2. INVESTMENT SECURITIES: The amortized cost and estimated fair values of investment securities at December 31 are shown below:
AVAILABLE-FOR-SALE ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1996 COST GAINS LOSSES VALUE --------------------------------------------- --------- ---------- ---------- --------- U.S. government and agency securities........ $ 2,001 $ 10 $ -- $ 2,011 -- ------ --- ------ Total.............................. $ 2,001 $ 10 $ -- $ 2,011 ====== === == ======
HELD-TO-MATURITY ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. government and agency securities........ $ 1,998 $ 8 $ -- $ 2,006 Certificates of deposit...................... 1,382 -- -- 1,382 -- -- ------ ------ Total.............................. $ 3,380 $ 8 $ -- $ 3,388 ====== == == ======
HELD-TO-MATURITY ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1995 COST GAINS LOSSES VALUE --------------------------------------------- --------- ---------- ---------- --------- U.S. government and agency securities........ $ 1,996 $ 38 $ -- $ 2,034 Municipal Bond............................... 80 -- -- 80 Certificates of deposit...................... 1,187 -- -- 1,187 -- ------ --- ------ Total.............................. $ 3,263 $ 38 $ -- $ 3,301 ====== === == ======
Gross gains of $379, $397, and $51 and gross losses of $688, $139, $262 were realized on sales of investment securities in 1996, 1995, and 1994 respectively. Maturities of Investments: The carrying amount and estimated fair value of debt securities by contractual maturity at December 31, 1996, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
AVAILABLE-FOR-SALE HELD-TO-MATURITY ------------------------ ----------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- ---------- ---------- Due in one year or less..................... $ -- $ -- $2,380 $2,388 Due after one year through five years....... 2,001 2,011 1,000 1,000 ------ ------ ------ ------ Total............................. $ 2,001 $2,011 $3,380 $3,388 ====== ====== ====== ======
At December 31, 1996 and 1995, a security with a par value of $1 million was pledged to secure the treasury, tax and loan account with the Federal Reserve. F-10 60 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) 3. LOANS AND ALLOWANCE FOR LOAN LOSSES: The loan portfolio as of December 31 consists of the following:
1996 1995 -------- -------- Commercial loans............................. $ 86,161 $ 72,527 Real estate -- construction.................. 3,584 2,998 Real estate -- mortgage...................... 28,766 24,061 Real estate -- commercial.................... 2,721 2,272 Installment and other consumer............... 6,016 6,241 Contracts purchased.......................... 116 325 -------- -------- 127,364 108,424 Less: Deferred loan fees......................... (813) (761) Allowance for loan losses.................. (1,894) (1,763) -------- -------- Total loans, net........................ $124,657 $105,900 ======== ========
An analysis of the change in the allowance for loan losses for the years ended December 31 is as follows:
1996 1995 1994 ------ ------ ------- Balance, beginning of period...................... $1,763 $1,152 $ 751 Provision for loan loss......................... 281 694 533 Loans charged to the allowance.................. (158) (114) (174) Recoveries credited to the allowance............ 8 31 42 ------ ------ ------ Balance, end of period............................ $1,894 $1,763 $ 1,152 ====== ====== ======
Loans on which the accrual of interest has been discontinued amounted to approximately $407, $237 and $179 at December 31, 1996, 1995 and 1994, respectively. Interest income foregone on non-accrual loans was approximately $41, $1 and $3 in 1996, 1995 and 1994, respectively. 4. PREMISES AND EQUIPMENT: Premises and equipment consist of the following at December 31:
1996 1995 ------- ------- Land........................................... $ 583 $ 519 Buildings and improvements..................... 3,445 1,345 Furniture and equipment........................ 1,417 1,040 Construction in process........................ 181 -- ------ ------ 5,626 2,904 Accumulated depreciation....................... (1,189) (1,073) ------ ------ Total................................ $ 4,437 $ 1,831 ====== ======
Depreciation included in net occupancy and equipment expense amounted to $191, $152, and $180 for the years ended December 31, 1996, 1995, and 1994 respectively. F-11 61 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) 5. BORROWINGS: Short-term borrowings consist of Federal Funds Purchased of $550 and $2,625 at December 31, 1996 and 1995, respectively. Long-term borrowings consist of the following at December 31:
1996 1995 ------- ------- Notes payable to Federal Home Loan Bank, interest from 4.48 percent to 8.62 percent at December 31, 1996, payable in monthly installments plus interest, due 1998 to 2009, secured by certain investment securities and mortgage loans.......... $21,297 $10,699 Note payable to a bank, due January 1999, interest at prime plus 1 percent, interest not to fall below 8.5 percent or to exceed 14 percent (9.25 percent at December 31, 1996), principal payable in annual installments from $146 to $173, interest payable in quarterly installments, secured by bank stock........................................................ 478 625 Subordinated promissory notes, due February 2000, interest at 8.5 percent, interest payable semiannually on June 30 and December 31.................................................. 1,000 1,000 Contract payable to private party, interest at 9.0 percent, payable in monthly installments plus interest through October 2010......................................................... 67 69 ------- ------- $22,842 $12,393 ======= =======
The aggregate maturities of notes payable subsequent to December 31, 1996, are as follows: 1997............................................. $ 942 1998............................................. 3,956 1999............................................. 663 2000............................................. 6,933 2001............................................. 9,284 Thereafter....................................... 1,064 ------- $22,842 =======
Provisions of the note payable to a bank require maintenance of certain operating ratios such as Tier 2 risk-based capital of not less than 2 percent above the minimum set by the banking regulators and allowance for loan losses of at least 1.1 percent of total loans. The note agreement also places limitations on the Company's indebtedness and capital expenditures. The Company was in compliance with these covenants as of December 31, 1996. The Company in whole or in part under certain circumstances may prepay the subordinated promissory notes at any time after December 15, 1997. 6. INCOME TAXES: The components of the provision for income taxes for the years ended December 31 were as follows:
1996 1995 1994 ------ ------ ------ Current............................................ $1,274 $1,158 $ 807 Deferred........................................... 21 (70) (110) ------ ------ ----- Total provision for income taxes......... $1,295 $1,088 $ 697 ====== ====== =====
F-12 62 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) The federal income tax statutory rate and financial tax rate of the provision do not vary substantially. The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 were as follows:
1996 1995 ---- ---- Deferred tax assets: Allowance for loan losses................................... $607 $550 Loan origination fees....................................... 56 94 Other....................................................... 2 4 ---- ---- 665 648 ---- ---- Deferred tax liabilities: Cash basis adjustments...................................... (58) (87) Unrealized gains on trading securities...................... 0 (4) Accumulated depreciation.................................... (53) (45) Federal Home Loan Bank stock dividends...................... (330) (269) Unrealized gains on available-for-sale securities........... (3) -- Other....................................................... (2) -- ---- ---- (446) (405) ---- ---- Net deferred tax asset.............................. $219 $243 ==== ====
7. CERTIFICATES OF DEPOSIT: Included in certificates of deposit are certificates in denominations of $100 or greater totaling $26,003 and $18,595 at December 31, 1996 and 1995, respectively. Interest expense relating to certificates of deposits in denominations of $100 or greater was $1,360, $719, and $270 for the years ended December 31, 1996, 1995, and 1994, respectively. 8. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL: Dividends are paid by the Company from its retained earnings, which are principally provided through dividends and income from its subsidiary. However, state agencies restrict the amount of funds the Company's subsidiary may transfer to the Company in the form of cash dividends, loans or advances. Transfers are limited by the subsidiary's retained earnings, which were $5,975 at December 31, 1996. The Company and the Bank are subject to various regulatory capital requirements as established by the applicable federal or state banking regulatory authorities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items. The quantitative measures for capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets and of Tier 1 capital to average assets (leverage). The Company's and Bank's capital components, classification, risk weightings and other factors are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. Management believes that as of December 31, 1996, the Company and the Bank meet all minimum capital adequacy requirements to which they are subject. The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory F-13 63 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) framework for prompt corrective action. Management believes that no events or changes in conditions have occurred subsequent to such notification to change the Bank's category. The following table presents selected capital information for the Company (consolidated) and the Bank as of December 31, 1996 and 1995:
TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ----------------- ---------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------- ----- As of December 31, 1996: Total risk-based capital: Consolidated........... $13,872 11.88% $9,345 8.00% $11,682 10.00% Bank................... 13,693 11.72 9,345 8.00 11,681 10.00 Tier 1 risk-based capital: Consolidated........... 11,806 10.11 4,673 4.00 7,009 6.00 Bank................... 12,228 10.47 4,672 4.00 7,008 6.00 Tier 1 (leverage) capital: Consolidated........... 11,806 7.75 6,097 4.00 7,621 5.00 Bank................... 12,228 8.05 6,075 4.00 7,593 5.00 As of December 31, 1995: Total risk-based capital: Consolidated........... $11,395 11.96% $7,625 8.00% $ 9,531 10.00% Bank................... 10,660 11.18 7,631 8.00 9,538 10.00 Tier 1 risk-based capital: Consolidated........... 9,397 9.86 3,812 4.00 5,719 6.00 Bank................... 9,461 9.92 3,815 4.00 5,723 6.00 Tier 1 (leverage) capital: Consolidated........... 9,397 7.48 5,025 4.00 6,281 5.00 Bank................... 9,461 7.57 5,001 4.00 6,251 5.00
9. CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF-BALANCE-SHEET RISK: The Company's consolidated financial statements do not reflect various commitments and contingent liabilities of the Bank that arise in the normal course of business and that involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements and standby letters of credit. A summary of the Bank's undisbursed commitments and contingent liabilities at December 31, 1996, is as follows: Commitments to extend credit....................... $16,497 Credit card commitments............................ 2,694 Standby letters of credit.......................... 561 ------- Total.................................... $19,752 =======
Commitments to extend credit, credit card arrangements and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank's credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded on the consolidated balance sheets. Because these instruments have fixed maturity dates and F-14 64 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank. Most of the Bank's lending activity is with customers located in Cowlitz County, Washington. An economic downturn in Cowlitz County would likely have a negative impact on the Bank's results of operations, depending on the severity of the downturn. The Bank maintains a diversified portfolio and does not have significant on- or off-balance-sheet concentrations of credit risk in any one industry. 10. BALANCES WITH THE FEDERAL RESERVE BANK: The Bank is required to maintain reserves in cash or with the Federal Reserve Bank equal to a percentage of its reservable deposits. Required reserves were approximately $580, $581, and $683 at December 31, 1996, 1995, and 1994, respectively. 11. RELATED-PARTY TRANSACTIONS: As of December 31, 1996 and 1995, the Bank had loan commitments of $2,001 and $1,833 to persons serving as directors and executive officers and their spouses, associates and related organizations, with amounts outstanding totaling $1,318 and $1,393, respectively. During 1996 and 1995, new loans to such related parties amounted to $656 and $1,445 and repayments amounted to $731 and $725, respectively. All such loans were made in the ordinary course of business and have been made on substantially the same terms and conditions, including collateral required, as comparable transactions with unaffiliated parties. Directors and executive officers are charged the same rates of interest and loan fees as are charged to employees of the Company, which interest rates and fees are slightly lower than charged to non-employee borrowers. The Chairman of the Company owns a securities brokerage franchise of Robert Thomas Securities which leases space from the Company. 12. EMPLOYEE BENEFIT PLANS: The Bank has a contributory retirement savings plan covering substantially all full-time and part-time employees. The amount of the Bank's annual contribution is at the discretion of the Board of Directors. The Bank contributed $97 and $90 to the plan for the years ended December 31, 1996 and 1995, respectively. The Company adopted an employee stock purchase plan during 1996. The Company may sell up to 175,000 shares of common stock to its eligible employees under the plan. During 1996, the Company sold 4,795 shares of stock under the plan. The Company sells shares at fair market value on the date the employee is granted the right to purchase the stock, as determined by the Board of Directors. These grants are made to qualified employees each quarter and expire after 90 days. Proforma net income and earnings per share as if compensation cost for this plan had been determined consistent with SFAS No. 123, would not differ from reported amounts in the statements of income. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of the fair value of financial instruments. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes the contractual right or obligation to either receive or deliver cash or another financial instrument. Examples of financial instruments included in the Company's balance sheet are cash, federal funds sold or purchased, debt and equity securities, loans, demand, savings and other F-15 65 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) interest-bearing deposits, notes and debentures. Examples of financial instruments, which are not included in the Company's balance sheet, are commitments to extend credit and standby letters of credit. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists. The statement requires the fair value of deposit liabilities with no stated maturity, such as demand deposits, NOW and money market accounts, to equal the carrying value of these financial instruments and does not allow for the recognition of the inherent value of core deposit relationships when determining fair value. While the statement does not require disclosure of the fair value of nonfinancial instruments, such as the Company's premises and equipment, its banking and trust franchises and its core deposit relationships, the Company believes these nonfinancial instruments have significant fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: - CASH AND DUE FROM BANKS -- For these short-term instruments, the carrying amount is a reasonable estimate of fair value. - INVESTMENT SECURITIES -- For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. - LOANS -- For certain variable rate loans, fair value is estimated at carrying value, as these loans reprice to market frequently. The fair value of other types of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. - DEPOSIT LIABILITIES -- The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity Certificates of Deposit is estimated by discounting the future cash flows, using the rates currently offered for deposits of similar remaining maturities. - SHORT-TERM BORROWINGS -- The carrying amounts of borrowings under repurchase agreements and short-term borrowings approximate their fair values. - LONG-TERM BORROWINGS -- Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. - COMMITMENTS TO EXTEND CREDIT, CREDIT CARD COMMITMENTS AND STANDBY LETTERS OF CREDIT -- The fair values of commitments to extend credit, credit card commitments and standby letters of credit were not material as of December 31, 1996 and 1995. F-16 66 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) The estimated fair values of the Bank's financial instruments at December 31 were as follows:
1996 1995 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial assets: Cash and due from banks............... $ 20,905 $ 20,905 $ 14,702 $ 14,702 Trading assets........................ -- -- 2,016 2,016 Investment securities................. 5,391 5,399 3,263 3,301 Loans, net of allowance for loan losses............................. 124,657 124,202 105,900 107,225 Federal Home Loan Bank stock.......... 2,463 2,463 2,283 2,283 Financial liabilities: Demand................................ 16,821 16,821 17,099 17,099 Savings and interest-bearing demand... 30,768 30,768 31,697 31,697 Certificates of deposit............... 75,708 76,032 57,575 57,751 Short-term borrowings................. 550 550 2,625 2,625 Long-term borrowings.................. 22,842 22,544 12,393 12,361
14. PARENT COMPANY ONLY FINANCIAL DATA: The following sets forth the condensed financial information of Cowlitz Bancorporation on a stand-alone basis: STATEMENT OF CONDITION (UNCONSOLIDATED)
DECEMBER 31, ------------------- 1996 1995 ------- ------- ASSETS: Cash and due from depository institutions.............. $ 1,061 $ 1,525 Investment in bank subsidiary.......................... 12,234 9,461 Other assets........................................... 7 46 ------- ------- Total assets................................... $13,302 $11,032 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Long-term borrowings................................... $ 1,478 $ 1,625 Other liabilities...................................... 11 16 ------- ------- Total Liabilities.............................. 1,489 1,641 Shareholders' Equity..................................... 11,813 9,391 ------- ------- Total liabilities and shareholders' equity..... $13,302 $11,032 ======= =======
F-17 67 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) STATEMENT OF INCOME (UNCONSOLIDATED)
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------ ------ ------ Income: Dividends from subsidiary...................... $ 56 $ 238 $ 299 ------ ------ ------ Total income........................... 56 238 299 Expenses: Interest expense............................... 130 148 151 Other expense.................................. 334 245 115 ------ ------ ------ Total Expense.......................... 464 393 266 Income (loss) before income taxes and equity in undistributed earnings of bank................. (408) (155) 33 Income tax benefit............................... 138 108 90 ------ ------ ------ Net income (loss) before equity in undistributed earnings of bank.............. (270) (47) 123 Equity in undistributed earnings of the bank..... 2,767 2,145 1,222 ------ ------ ------ Net Income............................. $2,497 $2,098 $1,345 ====== ====== ======
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $2,497 $2,098 $1,345 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of the bank.......... (2,767) (2,145) (1,222) Decrease in other assets.................... 39 29 24 Increase (decrease) in other liabilities.... (5) 13 53 ------ ------ ------ Net cash provided (used) by operating activities................................ (236) (5) 200 CASH FLOWS FROM INVESTING ACTIVITIES: Capital contributions to bank.................. -- (500) -- ------ ------ ------ Net cash (used for) investing activities.... -- (500) -- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on long-term borrowings........... (146) (134) (126) Proceeds from issuance of common stock......... 19 2,191 -- Dividends paid................................. (101) (80) (49) ------ ------ ------ Net cash provided by (used for) financing activities................................ (228) 1,977 (175) Net (decrease) increase in cash and due from depository institutions........................ (464) 1,472 25 Cash and due from depository institutions at beginning of year.............................. 1,525 53 28 ------ ------ ------ Cash and due from depository institutions at end of year........................................ $1,061 $1,525 $ 53 ====== ====== ======
F-18 68 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1996 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------------------------------- --------- -------- ------------- ------------ Interest income............................. $ 3,219 $3,342 $ 3,491 $3,581 Interest expense............................ 1,425 1,465 1,613 1,671 ------ ------ ------ ------ Net interest income......................... 1,794 1,877 1,878 1,910 Provision for loan losses................... (16) (77) (82) (106) Noninterest income.......................... (138) 133 141 160 Noninterest expense......................... 907 917 931 927 ------ ------ ------ ------ Income before income taxes.................. 733 1,016 1,006 1,037 Provision for income taxes.................. 249 346 342 358 ------ ------ ------ ------ Net income.................................. $ 484 $ 670 $ 664 $ 679 ====== ====== ====== ====== Earnings per common share................... $ 0.17 $ 0.25 $ 0.24 $ 0.24
1995 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------------------------------- --------- -------- ------------- ------------ Interest income............................. $ 2,290 $2,505 $ 2,767 $3,082 Interest expense............................ 929 1,063 1,191 1,365 ------ ------ ------ ------ Net interest income......................... 1,361 1,442 1,576 1,717 Provision for loan losses................... (126) (126) (236) (206) Noninterest income.......................... 223 236 182 236 Noninterest expense......................... 820 759 688 826 ------ ------ ------ ------ Income before income taxes.................. 638 793 834 921 Provision for income taxes.................. 219 263 288 318 ------ ------ ------ ------ Net income.................................. $ 419 $ 530 $ 546 $ 603 ====== ====== ====== ====== Earnings per common share................... $ 0.15 $ 0.20 $ 0.20 $ 0.22
16. SUBSEQUENT EVENTS: On September 30, 1997, the Company authorized 525,000 options and granted options to purchase a total of 385,000 shares of the Company's common stock to two executives. Currently, a total of 105,000 options are exercisable immediately with the remaining options vesting equally over the next five years. The options were granted at the fair market value on the date of grant. On October 17, 1997 the Company had a 5 for 1 stock split and subsequently on January 12, 1998 had a 3.5 for 1 stock split. All share and per share amounts have been restated to retroactively reflect the stock splits as well as all previous stock splits. On July 18, 1997 the Company purchased and assumed substantially all of the deposit liabilities of three branches from Wells Fargo Bank N.A. San Francisco. In connection with the acquisition of such deposit liabilities and related cash balances, the Company also acquired certain other assets of the branches, including real estate, furniture and fixtures. All assets constituting premises and equipment or other physical property will continue to be used in the banking business. Wells Fargo Bank retained all other revenue producing assets, including all loans, which had originated from these branches. F-19 69 COWLITZ BANCORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS) A summary of the deposit liabilities and limited assets acquired by the Company is shown below: Total deposits (liabilities) acquired...................... $25,217 Less assets acquired Cash..................................................... 716 Premises and equipment................................... 362 Less premium paid for deposits............................. 1,970 ------- Net cash received by the Company for the deposits acquired................................ $22,169 =======
The deposit premium is classified as an intangible asset in the unaudited September 30, 1997 consolidated balance sheet and is being amortized using an accelerated method over a ten year life. F-20 70 MAP OF WASHINGTON WITH COWLITZ COUNTY HIGHLIGHTED SHOWING THE LOCATION OF THE COMPANY'S BRANCHES 71 ====================================================== NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATING THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------------ TABLE OF CONTENTS
PAGE ----- Summary............................... 3 Risk Factors.......................... 6 Use of Proceeds....................... 9 Dividend Policy....................... 9 Capitalization........................ 10 Dilution.............................. 11 Selected Historical Financial Information and Other Data.......... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13 Business.............................. 28 Management............................ 38 Certain Transactions.................. 42 Principal and Selling Shareholders.... 43 Shares Eligible for Future Sale....... 43 Description of Capital Stock.......... 44 Underwriting.......................... 46 Experts............................... 47 Legal Matters......................... 47 Additional Information................ 47 Index to Financial Statements......... F-1
------------------------ UNTIL , 1998, 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. ====================================================== ====================================================== 1,000,000 SHARES LOGO COWLITZ BANCORPORATION COMMON STOCK ------------------------ PROSPECTUS ------------------------ BLACK & COMPANY, INC. PACIFIC CREST SECURITIES INC. , 1998 ====================================================== 72 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock offered hereby. Securities and Exchange Commission Registration Fee............... $ 4,531 NASD Filing Fee................................................... 1,995 Nasdaq National Market Listing Fee................................ 27,500 *Printing and Engraving Expenses.................................. 40,000 *Legal Fees and Expenses.......................................... 100,000 *Accounting Fees and Expenses..................................... 100,000 Blue Sky Fees and Expenses (including fees of counsel)............ 5,000 Transfer Agent and Registrar Fee.................................. 5,000 Miscellaneous Expenses............................................ 15,974 -------- Total................................................... $300,000 ========
- --------------- * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act authorize a court to award, or a corporation's board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article X of the Registrant's Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) provides for indemnification of the Registrant's directors to the maximum extent permitted by Washington law, and also permits the Registrant's board of directors to indemnify the Registrant's officers, employees and agents. The directors and officers of the Registrant also may be indemnified against liability they may incur for serving in such capacity pursuant to a liability insurance policy maintained by the Company for such purpose. Section 23B.08.320 of the Washington Business Corporation Act authorizes a corporation to limit a director's liability to the corporation or its Shareholders for monetary damages for acts or omissions as a director. Article VII of the Registrant's Amended and Restated Articles of Incorporation contains provisions implementing such limitations on a director's liability to the Registrant and its Shareholders, except in certain circumstances involving (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distribution to stockholders, or (iv) any transaction from which the director derived an improper personal benefit. The proposed form of Underwriting Agreement (Exhibit 1.1 hereto) contains certain provisions regarding the indemnification of officers and directors of the Registrant by the Underwriters. 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 provisions referenced in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion II-1 73 of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On January 31, 1995, the Registrant sold 49,250 shares of its Common Stock (861,875 shares post-split) to 47 individuals that were then shareholders of the Registrant. The Registrant received $2,229,547 in the offering. These sales were exempt under Regulation A of the Securities Act. Between October 9, 1996 and the date hereof, the Registrant has sold 33,565 shares post-split to 50 employees of the Registrant pursuant to the Cowlitz Bancorporation Employee Stock Purchase Plan. The Registrant has received $157,814 in this offering. The sales are exempt under Section 4(2) and Section 3(a)(11) of the Securities Act. On September 30, 1997, the Company granted to each of Benjamin Namatinia and Charles Jarrett, executive officers of the Company, options to acquire 192,500 shares of common stock of the Company at a price of $5.71 per share. The grant was exempt under Section 4(2) of the Securities Act. In December 1997, the Company sold 350 shares (post-split) each to two directors of the Bank at a price of $5.71 per share. The sales were exempt under Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS 1.1* Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the Underwriters. 3.1 Form of Restated and Amended Articles of Incorporation of Registrant. 3.2 Bylaws of Registrant. 5.1 Opinion of Foster Pepper & Shefelman PLLC. 10.1 Advances Security and Deposit Agreement dated March 29, 1991 between Federal Home Loan Bank of Seattle and Cowlitz Bank. 10.2 Federal Home Loan Bank of Seattle Form of Promissory Note (Credit Line Fixed Rate Advance). 10.3 Federal Home Loan Bank of Seattle Promissory Note No. 75494 dated May 7, 1997 (Cash Management Advance Credit Line). 10.4 Promissory Note dated January 15, 1992 between Key Bank of Washington and Cowlitz Bancorporation. 10.5 Form of 8 1/2% Subordinated Promissory Note due February 15, 2000. 10.6 Purchase and Assumption Agreement dated as of March 5, 1997 between Wells Fargo Bank, N.A. and Cowlitz Bank. 10.7 Lease Agreement dated October 7, 1963 between Twin City Development Co. and Bank of Cowlitz County. 10.8 Assignment of Lease dated March 4, 1976 between Bank of the West and Old National Bank of Washington. 10.9 Assignment of Lease dated March 30, 1979 between Old National Bank of Washington and Pacific National Bank of Washington. 10.10 Extension of Lease dated April 1, 1989 between Triangle Development Company and First Interstate Bank of Washington, N.A. 10.11 Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and Charles W. Jarrett.
II-2 74 10.12 Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and Ben Namatinia. 10.13 Cowlitz Bancorporation Supplemental Executive Retirement Plan dated January 1, 1998. 10.14 Cowlitz Bancorporation 1997 Stock Option Plan. 10.15 Form of Stock Option Agreement. 10.16 Cowlitz Bancorporation Employee Stock Purchase Plan. 11.1 Computation of Per Share Earnings. 21.1 List of all Subsidiaries of the Registrant. 23.1 Consent of Foster Pepper & Shefelman PLLC (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney from officers and directors (contained on signature page). 27 Financial Data Schedule.
- --------------- * To be filed by amendment ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 75 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Longview, State of Washington, on January 8, 1998. COWLITZ BANCORPORATION By /s/ CHARLES W. JARRETT ------------------------------------ Charles W. Jarrett, President POWER OF ATTORNEY Each person whose individual signature appears below hereby constitutes and appoints Benjamin Namatinia, and Charles W. Jarrett and each of them severally, as his true and lawful attorney-in-fact with full power of substitution to execute in the name and on behalf of such person, individually and in each capacity stated below, and to file, any and all amendments to this Registration Statement, including any and all post-effective amendments. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated below.
SIGNATURE TITLE DATE - --------------------------------------------- -------------------------------- ---------------- /s/ BENJAMIN NAMATINIA Chairman, Chief Executive January 8, 1998 - --------------------------------------------- Officer and Director Benjamin Namatinia /s/ CHARLES W. JARRETT President, Chief Operating January 8, 1998 - --------------------------------------------- Officer and Director Charles W. Jarrett /s/ DONNA P. GARDNER Vice President -- January 8, 1998 - --------------------------------------------- Secretary/Treasurer (Chief Donna P. Gardner Financial Officer and Principal Accounting Officer, /s/ MARK F. ANDREWS, JR. Director January 8, 1998 - --------------------------------------------- Mark F. Andrews, Jr. /s/ LARRY M. LARSON Director January 8, 1998 - --------------------------------------------- Larry M. Larson /s/ E. CHRIS SEARING Director January 8, 1998 - --------------------------------------------- E. Chris Searing
II-4 76 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ -------------------------------------------------------------------------- ------------ 1.1* Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the Underwriters. 3.1 Form of Restated and Amended Articles of Incorporation of Registrant. 3.2 Bylaws of Registrant. 5.1 Opinion of Foster Pepper & Shefelman PLLC. 10.1 Advances Security and Deposit Agreement dated March 29, 1991 between Federal Home Loan Bank of Seattle and Cowlitz Bank. 10.2 Federal Home Loan Bank of Seattle Form of Promissory Note (Credit Line Fixed Rate Advance). 10.3 Federal Home Loan Bank of Seattle Promissory Note No. 75494 dated May 7, 1997 (Cash Management Advance Credit Line). 10.4 Promissory Note dated January 15, 1992 between Key Bank of Washington and Cowlitz Bancorporation. 10.5 Form of 8 1/2% Subordinated Promissory Note due February 15, 2000. 10.6 Purchase and Assumption Agreement dated as of March 5, 1997 between Wells Fargo Bank, N.A. and Cowlitz Bank. 10.7 Lease Agreement dated October 7, 1963 between Twin City Development Co. and Bank of Cowlitz County. 10.8 Assignment of Lease dated March 4, 1976 between Bank of the West and Old National Bank of Washington. 10.9 Assignment of Lease dated March 30, 1979 between Old National Bank of Washington and Pacific National Bank of Washington. 10.10 Extension of Lease dated April 1, 1989 between Triangle Development Company and First Interstate Bank of Washington, N.A. 10.11 Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and Charles W. Jarrett. 10.12 Employment Agreement dated January 1, 1998 between Cowlitz Bancorporation and Ben Namatinia. 10.13 Cowlitz Bancorporation Supplemental Executive Retirement Plan dated January 1, 1998. 10.14 Cowlitz Bancorporation 1997 Stock Option Plan. 10.15 Form of Stock Option Agreement. 10.16 Cowlitz Bancorporation Employee Stock Purchase Plan. 11.1 Computation of Per Share Earnings. 21.1 List of all Subsidiaries of the Registrant. 23.1 Consent of Foster Pepper & Shefelman PLLC (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney from officers and directors (contained on signature page). 27 Financial Data Schedule.
- --------------- * To be filed by amendment EX-3.1 2 ARTICLES OF INCORPROATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF COWLITZ BANCORPORATION ARTICLE I Name The name of this corporation is Cowlitz Bancorporation (the "Corporation"). ARTICLE II Purposes and Powers The purposes for which the Corporation is organized are to engage in any lawful business, trade or activity for which a corporation may be organized under the Act, and the Corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including, but not limited to, the powers specified in the Act or which may be hereafter granted by such law. ARTICLE III Shares Section 3.1 Authorized Shares. The aggregate number of shares which the Corporation shall have the authority to issue is as follows: A. 25,000,000 shares of common stock, no par value ("Common Stock"); and B. 5,000,000 shares of preferred stock, no par value ("Preferred Stock"). Unless the context requires otherwise, the term "share" and "shareholder" shall include shares and holders of both Common Stock and Preferred Stock. Section 3.2 Voting Rights. Each outstanding Common Share shall have one vote. Holders of Common Shares shall not have the right to cumulate votes in the election of directors. 2 Section 3.3 Dividends. The holders of Common Shares shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. Nothing herein shall be construed as obligating the Board of Directors at any time to declare any dividend even though the Corporation may have assets legally available to pay such a dividend. Section 3.4 Redemption. The Corporation may repurchase its Common Shares with funds legally available therefor and to the extent permitted by the Act, subject to any provision to the contrary contained in any Amendment to these Articles. Section 3.5 Liquidation. Upon the liquidation, dissolution or winding up of the Corporation, the net assets of the Corporation after having discharged or made adequate provision for discharging all of its liabilities, shall be distributed to the holders of the Common Shares according to their interests. Section 3.6 Preemptive Rights. No holder of any Common Shares shall be entitled to any preemptive right to purchase or subscribe for any unissued or treasury shares of the Corporation. Section 3.7 Removal of Directors. Subject to the rights of holders of any series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office only for cause and only by the affirmative vote of the holders of at least 75% of the shares entitled to vote on the removal of such member of the Board of Directors. As used herein, "for cause" means either (i) conviction of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal, or (ii) adjudication for gross negligence or dishonest conduct in the performance of a director's duty to this corporation by a court of competent jurisdiction and such adjudication is no longer subject to direct appeal. Notwithstanding anything to the contrary, this Section of the Articles may be altered or eliminated only by amendment to this Section of the Articles approved by two-thirds of the votes entitled to be cast by each voting group entitled to vote on such amendment. Section 3.8 Special Meetings of Shareholders. The shareholders of this corporation shall have no right to call a special meeting of the shareholders of this corporation for any purpose or purposes. Special meetings of shareholders of this corporation may only be called by a majority of the Board of Directors, the Chairman of the Board of Directors or the President. Section 3.9 Quorum at Shareholder Meetings. For all meetings of shareholders, one-third of the votes entitled to be cast by each voting group with respect to a matter shall constitute a quorum of that voting group for action on that matter. Section 3.10 Preferred Stock. The shares of Preferred Stock may be divided into and issued in series. The Board of Directors of the corporation shall have the authority to establish series; to fix and determine the variations in the relative rights and preferences as between series 3 and as between holders of the same series; to amend the relative rights and preferences of any series that is wholly unissued; and to designate the number of shares of each series and the designation thereof. The Board of Directors of the corporation may, after the issue of shares of a series, amend the resolution establishing the series to decrease (but not below the number of shares of such series then outstanding) the number of shares of that series, and the number of shares constituting the decrease shall resume the status which they had before the adoption of the resolution establishing the series. The rights and preferences which may be established by the Board of Directors may include, without limitation: A. The right to vote, or limitations upon the right to vote, and in the absence of any such provision with respect to a particular series no shares of that series shall have any right to vote, and no right to vote as a class, for any purpose except as may be required by law; B. The right of the corporation to redeem any of such shares at a price and upon terms fixed by the resolution establishing the series, including sinking fund provisions, if any; C. The right to receive dividends including whether any such dividend is cumulative, noncumulative, or partially cumulative; D. Preference over any other class or classes of shares, or over any other series of this or any other class or classes of shares, as to the payment of dividends; E. Preference in the assets of the corporation over any other class or classes of shares, or over any other series of this or any other class or classes of shares, upon the voluntary or involuntary liquidation of the corporation; F. The Right to convert the shares into shares of any other class or into shares of any series of the same or any other class, except a class having prior or superior rights and preferences as to dividends or distribution of assets upon liquidation. Article X is hereby amended so that it reads in its entirety as follows: ARTICLE IV 4 Registered Office and Agent The name of the registered agent of the Corporation and the address of its initial registered office are as follows: James A. Wills 927 Commerce Avenue Longview, Washington 98632 ARTICLE V Amendment of Bylaws The Board of Directors is expressly authorized to make, repeal, alter, amend or rescind any or all of the Bylaws of the Corporation. The Bylaws of the Corporation shall not be made, repealed, altered, amended or rescinded by the Shareholders of the Corporation except by the vote of holders of not less than two-thirds of all outstanding shares of the Corporation entitled to vote in the election of directors, considered for purposes of this Article V as one class. ARTICLE VI Directors The Board of Directors shall consist of five directors. ARTICLE VII Limitations on Liability of Directors Section 7.1 Limitations and Exceptions. No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except that this provision shall not eliminate or limit the liability of a director for: (a) Any act or omission occurring prior to the date of adoption of this Article; (b) Any breach of the director's duty of loyalty to the Corporation or its shareholders; (c) Acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 5 (d) Any distribution to shareholders which is unlawful under the Act or successor statute; or (e) Any transaction from which the director derived an improper personal benefit. Section 7.2 Amendment or Repeal. No amendment to or repeal of this section shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions prior to such amendment or repeal. Section 7.3 Statutory Amendments. If the Act is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Act, as so amended. Any amendment to or repeal of the Article or amendment to the Act shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE VIII Incorporator The name and address of the incorporator is as follows; Larry M. Larson 927 Commerce Avenue Longview, Washington 98632 Telephone: (360) 423-9800 ARTICLE IX Transactions With Interested Shareholders The Corporation elects to be covered by the provisions of the Act concerning transactions with interested shareholders, as therein defined, whether or not the Corporation may at any time have fewer than three hundred holders of record of its shares. ARTICLE X Indemnification of Officers and Directors 6 Section 10.1 Indemnification. The corporation shall indemnify any individual made a party to a proceeding because that individual is or was a director of the corporation and shall advance or reimburse the reasonable expenses incurred by such individual in advance of final disposition of the proceeding, without regard to the limitations in RCW 23B.08.510 through 23B.08.550 of the Washington Business Corporation Act, or any other limitation which may hereafter be enacted to the extent such limitation may be disregarded if authorized by the articles of incorporation, to the full extent and under all circumstances permitted by applicable law. The corporation may indemnify any individual made a party to a proceeding because that individual is or was an officer, employee or agent of the corporation or a fiduciary with respect to any employee benefit plan of the corporation or serves or served at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and shall advance or reimburse the reasonable expenses incurred by such individual in advance of final disposition of the proceeding, without regard to the limitations in RCW 23B.08.510 through 23B.08.550 of the Washington Business Corporation Act, or any other limitation which may hereafter be enacted to the extent such limitation may be disregarded if authorized by the articles of incorporation, to the full extent and under all circumstances permitted by applicable law. Any repeal or modification of this Article by the shareholders of this corporation shall not adversely affect any right of any individual who is or was a director of the corporation which existed at the time of such repeal or modification. Section 10.2 Advancement of Expenses. Expenses incurred by a person indemnified hereunder in defending a civil, criminal, administrative or investigative action, suit or proceeding (including all appeals) or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such expenses if it shall ultimately be determined that the person is not entitled to be indemnified by the Corporation and a written affirmation of the person's good faith belief that he or she has met the applicable standard of conduct. The undertaking must be a general personal obligation of the party receiving the advances but need not be secured and may be accepted without reference to financial ability to make repayment. DATED this ___ day of January, 1998. COWLITZ BANCORPORATION By: _____________________________________ Benjamin Namatinia Chairman and Chief Executive Officer EX-3.2 3 FORM OF AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 BYLAWS OF COWLITZ BANCORPORATION ARTICLE I. Shareholders' Meetings Section 1.1 Annual Meeting. The annual meeting of the shareholders shall be held on or before May 15 of every year at the principal office of the corporation or at such other time or place as may be determined by the board of directors. At such meeting the shareholders entitled to vote shall elect a board of directors and transact such other business as may come before the meeting. Section 1.2 Special Meetings. Special meetings of the shareholders may be held at any time on request of the president or on request of the board of directors or on demand in writing by shareholders of record holding not less than 25 percent of the shares of the corporation entitled to vote; provided, however, that if the corporation becomes a public company as that term is defined by the Act, the demand in writing must be by holders of not less than a simple majority of the shares of the corporation entitled to vote. Section 1.3 Voting. Each shareholder shall be entitled to one vote, in person or by proxy, for each share entitled to vote outstanding in such shareholder's name on the books of the corporation, except as otherwise provided in the Articles of Incorporation. In order to vote by proxy at any meeting of the shareholders, the proxy must be received in the office of the secretary-treasurer of the corporation not less than the close of business on the second business day before the day specified in the notice of meeting as the date of the meeting in order to give the corporation sufficient time to validate the proxies to be voted at the meeting. Section 1.4 Quorum. Unless otherwise provided in the Articles of Incorporation, a majority of the shares entitled to vote, represented by shareholders in person or by proxies, shall constitute a quorum at any meeting of the shareholders. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Act, the Articles of Incorporation or these Bylaws. Section 1.5 Notice. Except as provided below, written or printed notice stating the place, day and hour of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the president, the secretary-treasurer, or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. The notice shall be delivered not less than 20 days nor more than 60 days before the meeting if the shareholders' meeting is called to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation. If mailed, the notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the shareholder's address as it appears on the share transfer books of the corporation, with postage prepaid. Section 1.6 Record Date. The board of directors shall fix in advance a record date in order to determine the shareholders entitled to notice of and to vote at a meeting of shareholders. The record date shall not be more than 70 days before the meeting. Section 1.7 List of Shareholders for Meeting. After fixing the record date for a meeting of shareholders, the secretary-treasurer shall prepare an alphabetical list of the names of all of the shareholders who are entitled to notice of the meeting. The list shall show the address of and number of shares held by each shareholder. The shareholders list must be available for inspection by any shareholder, beginning ten days prior to the meeting and continuing through the meeting, at the corporation's principal office or at the place identified 2 in the meeting notice in the city where the meeting will be held. The corporation shall make the shareholders list available at the meeting, and any shareholder or any agent or attorney of a shareholder shall be entitled to inspect the list at any time during the meeting or any adjournment. ARTICLE II. Board of Directors Section 2.1 Number and Term of Office. The number of directors of the corporation shall be five. The number of directors of the corporation may be changed from time to time to not less than five nor more than twenty directors by a Bylaw or amendment thereof duly adopted by the board of directors or by the shareholders acting in accordance with Article XI hereof. The terms of the initial directors shall expire at the first meeting of shareholders at which directors are elected. The terms of all other directors shall expire at the next annual meeting of shareholders following their election. Despite the expiration of a director's term, the director shall continue to serve until the director's successor is elected and qualified or until there is a decrease in the number of directors. All nominations of director shall be filed with the secretary- treasurer of the corporation at least 30 days prior to the date of the annual meeting of shareholders. Section 2.2 Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors, unless otherwise provided in the Articles of Incorporation. A director elected to fill a vacancy may be elected for the unexpired term of his predecessor in office, subject to prior death, resignation or removal. Section 2.3 Annual Meeting. There shall be an annual meeting of the board of directors which may be held without notice immediately after the adjournment of the annual meeting of the shareholders or at another time designated by the board of directors upon notice in the same manner as provided in Section 2.5. The annual meeting shall be held at the principal office of the corporation or at such other place as the board of directors may designate. Section 2.4 Regular Meetings. The board of directors may by resolution provide for regular meetings. Each director then in office shall be provided written notice of the scheduled date, hour and place of each regular meeting, personally delivered or mailed by United States mail, first class postage prepaid, addressed to each director at the director's address appearing on records of the corporation, not less than five days prior to the date of the first regular meeting held after the adoption or modification of the resolution providing for regular meetings. Section 2.5 Special Meetings. Special meetings of the board of directors may be called by the president, the chief executive officer or any three members of the board of directors. Each director shall be given notice of each special meeting which shall be actually delivered, orally or in writing, not less than 24 hours prior to the meeting or mailed by deposit in the United States mail, first class postage prepaid, addressed to the director at the director's address appearing on the records of the corporation not less than 72 hours prior to the meeting. Special meetings of the directors may also be held at any time when all members of the board of directors are present and consent to a special meeting. Special meetings of the directors shall be held at the principal office of the corporation or at any other place designated by a majority of the board of directors. Section 2.6 Quorum. A majority of the number of directors fixed by these Bylaws shall constitute a quorum for the transaction of business. Section 2.7 Voting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless otherwise provided by the Articles of Incorporation or these Bylaws. Section 2.8 Powers of Directors. The board of directors shall have sole responsibility for the management of the business of the corporation. In the management and control of the property, business and affairs of the corporation, the board of directors is vested with all of the powers possessed by the corporation itself, so far as this delegation of power is not inconsistent with the Act, the Articles of Incorporation, or these Bylaws. The 3 board of directors shall have power to determine what constitutes net earnings, profits and surplus; what amount shall be reserved for working capital and for any other purpose; and what amount shall be declared as dividends; and such determinations by the board of directors shall be final and conclusive except as otherwise provided by the Act and the Articles of Incorporation. The board of directors shall designate one or more officers of the corporation who shall have the power, to sign all deeds, leases contracts, mortgages, deeds of trust and other instruments and documents executed by and binding upon the corporation. In the absence of the designation of any other officer or officers, the chief executive officer shall be the officer so designated. Section 2.9 Executive Committee. A majority of the board of directors may designate from among its members an executive committee of two or more members. The executive committee shall have such powers and shall perform such duties as may be delegated and assigned to the executive committee by the board of directors. The executive committee shall not have the authority of the board of directors with reference to (1) amending the Articles of Incorporation; (2) declaring dividends or distributions except at a rate or in periodic amount determined by the board of directors; (3) approving or recommending to shareholders actions or proposals required by the Act to be approved by shareholders; (4) filling vacancies on the board of directors or any committee thereof; (5) amending the Bylaws; (6) authorizing or approving the reacquisition of shares unless pursuant to a general formula or method specified by the board of directors; (7) fixing the compensation of any director for serving on the board of directors or on any committee; (8) adopting a plan of merger, consolidation or exchange not requiring shareholder approval; (9) reducing earned or capital surplus; (10) appointing other committees of the board of directors or the members thereof; or (11) taking any other action prohibited by the Act. A majority of the members of the executive committee may fix its rules of procedure. All actions by the executive committee shall be by a majority of those then serving on the committee or, if taken without a meeting, by unanimous written approval. The executive committee shall keep written records of its activities and proceedings. All action by the executive committee shall be reported to the board of directors at the next meeting following the action and the board of directors may ratify or may revise or alter such action, provided that no rights or acts of third parties shall be affected by any such revision or alteration. Meetings of the executive committee shall be called, from time to time, at the direction and upon the request of any member of the committee. Notice of each meeting, unless waived, shall be given to each member of the committee and shall be actually delivered, orally or in writing, not less than 24 hours prior to the meeting or mailed by deposit in the United States mail, first class postage prepaid, addressed to the member at the member's address appearing on the records of the corporation not less than 72 hours prior to the meeting. All meetings shall be held at the principal office of the corporation or, upon consent of all members of the committee, at any other place. Section 2.10 Other Committees. The chairman of the board of directors or a majority of the board of directors may designate other committees from among its members. The committees shall have the powers and duties designated by the board of directors, except that no committee shall have any power which may not be granted to an executive committee under the terms of Section 2.10. Section 2.11 Chairman of the Board. The board of directors may elect one of its members chairman of the board of directors. The chairman shall advise and consult with the board of directors and the officers of the corporation as to the determination of policies of the corporation, shall preside at all meetings of the board of directors and of the shareholders, and shall perform such other functions and responsibilities as the board of directors shall designate from time to time. Section 2.12 Vice-Chairman of the Board. The board of directors may elect one of its members vice-chairman of the board of directors. The vice-chairman shall preside at all meetings in the absence of the chairman and shall perform such other functions and responsibilities as the board directors may designate from time to time. 4 ARTICLE III. Officers Section 3.1 Composition. The officers of this corporation shall consist of a president, one or more vice-presidents, a secretary-treasurer, each of whom shall be elected by the board of directors at the annual meeting of the board of directors. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the board of directors, and any vacancies occurring in any office of this corporation may be filled by election or appointment by the board of directors at any regular meeting or any special meeting called for that purpose. All officers shall hold their office until the next annual meeting of the board of directors and until their successors are elected and qualified, subject to prior death, resignation or removal. Any two or more offices may be held by the same person, except the offices of president and secretary-treasurer, except that if all of the issued and outstanding shares of the corporation is owned of record by one shareholder one person may hold all or any combination of offices. Section 3.2 President. At the request of the chairman of the board of directors or in the absence of the chairman and vice-chairman, the president shall preside at meetings of the board of directors and of the shareholders. The president shall sign such documents and instruments of the corporation as may be required by the Articles of Incorporation, these Bylaws or by the Act, or as may be requested by the chief executive officer, and shall perform such other duties as may be prescribed by the board of directors. Section 3.3 Vice-President. The vice-president shall have all of the powers and perform all of the duties of the president during the absence or disability of the president, and shall perform such other duties as may be prescribed by the board of directors. If there shall be more than one vice-president, the board of directors may designate the order of seniority in which the vice-presidents shall act. Section 3.4 Secretary-Treasurer. The secretary-treasurer shall keep the minutes and records of all the meetings of the shareholders and directors and other official business of the corporation. The secretary-treasurer shall give notice of meetings to the shareholders and directors and shall perform such other duties as may be prescribed by the board of directors. It shall be the duty of the secretary-treasurer to receive all moneys and funds of the corporation and to deposit the same in the name and to the account of the corporation in the bank or banks designated by the board of directors. The secretary-treasurer shall keep accurate books of account and shall make reports of financial transactions of the corporation to the board of directors and shall perform such other duties as may be prescribed by the board of directors. If the board of directors elects a vice-president of finance, the financial duties of the office of secretary-treasurer may rest in that officer. Section 3.5 Chief Executive Officer. The board of directors shall designate one of the officers of the corporation or the chairman of the board of directors to serve as the chief executive officer of the corporation. In the absence of a designation of any other officer, the president shall also be the chief executive officer of the corporation. The chief executive officer shall be responsible for implementing the policies and goals of the corporation as stated by the board of directors; shall have general supervision over the property, business and affairs of the corporation; and shall have authority to hire and fire personnel and take such other actions as are necessary and appropriate to implement the policies, goals and directions of the board of directors. Section 3.6 Removal. The directors, at any regular meeting or any special meeting called for that purpose, may remove any officer or agent from office whenever in its judgment the best interest of the corporation will be served thereby, provided, however, that no removal shall impair the contract rights, if any, of the officer removed or of this corporation or of any other person or entity. Election or appointment of an officer or agent shall not of itself create contract rights. 5 ARTICLE IV. Shares and Other Securities Section 4.1 Certificates. All common shares and other securities of this corporation shall be represented by certificates which shall be signed by the chairman, vice-chairman, president or a vice-president and the secretary-treasurer or an assistant secretary of the corporation, and may be sealed with the seal of the corporation or a facsimile thereof. Section 4.2 Transfer Agent and Registrar. The board of directors may from time to time appoint one or more transfer agents and one or more registrars for the shares and other securities of the corporation. The signatures of the president or a vice-president and the secretary-treasurer or an assistant secretary upon a certificate may be facsimiles if the certificate is manually signed by a transfer agent, or registered by a registrar, and the transfer agent or registrar is neither the corporation itself nor an employee of the corporation. Section 4.3 Transfer. Title to a certificate and to the interest in this corporation represented by that certificate can be transferred only: (a) by delivery of the certificate endorsed either in blank or to a specified person or (b) by delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign or transfer the same, either in blank or to a specified person, (c) in both cases signed by the person appearing by the certificate to be the owner of the interest represented thereby. Section 4.4 Necessity for Registration. Prior to presentment for registration upon the transfer books of the corporation of a transfer of shares or other securities of this corporation, the corporation or its agent for purposes of registering transfers of its securities may treat the registered owner of the security as the person exclusively entitled to vote, to receive any notices, to receive payment of any interest on a security, or of any ordinary, extraordinary, partial liquidating, final liquidating, or other dividend, or of any other distribution, whether paid in cash or in securities or in any other form, or otherwise to exercise or enjoy any or all of the rights and powers of an owner. Section 4.5 Closing Transfer Books. For the purpose of determining the registered owners of shares or other securities entitled to notice of or to vote at any meeting of the shareholders or any adjournment thereof, or to receive payment of any interest on a security, or of any ordinary, extraordinary, partial liquidating, final liquidating, or other dividend, or of any other distribution, whether paid in cash or in securities or in any other form, or otherwise to exercise or enjoy any or all of the rights and powers of an owner, or in order to make a determination of registered owners for any other proper purpose, the board of directors may provide that the transfer books shall be closed for a stated period of not more than 60 days. If the transfer books shall be closed for the purpose of determining the registered owners entitled to notice of or to vote at a meeting of the shareholders or an adjournment thereof, such books shall be closed for a stated period of not more than 60 days nor less than 10 days immediately preceding such meeting. Section 4.6 Fixing Record Date. In lieu of closing the transfer books, the board of directors may fix in advance a date as record date for any determination of registered owners for which the transfer books might have been closed as provided in Section 4.5. Section 4.7 Lost Certificates. In case of the loss or destruction of a certificate of shares or other security of this corporation, a duplicate certificate may be issued in its place upon such conditions as the board of directors shall prescribe. ARTICLE V. Waiver of Notice Whenever any notice is required to be given to any shareholder or director of the corporation by these Bylaws or the Articles of Incorporation, or by the Act, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the required notice. Attendance of a director at any meeting shall constitute a waiver of any notice required for that meeting, 6 except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VI. Action Without Meeting: Meetings by Telephone Section 6.1 Action Without Meeting. Any action required or permitted to be taken at a meeting of the shareholders, the directors or a committee of this corporation, may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the shareholders, directors, or members of the' committee entitled to vote with respect to the action to be taken. The action shall be effective as of the date on which the last signature is placed on the consent, or at such earlier time set forth in the consent. The consent shall have the same force and effect as a unanimous vote of the shareholders, directors, or committee and may be stated as such in any document. Section 6.2 Meetings by Telephone. Members of the board of directors, any committee designated by the board of directors or the shareholders may participate in a meeting of the board of directors, the committee or the shareholders by conference telephone or by similar communications equipment by means of which all of the persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. ARTICLE VII. Indemnification and Insurance Section 7.1 Definitions. As used in this section: (a) "Director" means any person who is or was a director of this corporation and any person who, while a director of the corporation, is or was serving at the request of this corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. (b) "Corporation" includes any domestic or foreign predecessor entity of a corporation in a merger, consolidation, or other transaction in which the predecessor's existence ceased upon consummation of such transaction. (c) "Expenses" includes attorneys fees. (d) "Official capacity" means: (i) When used with respect to a director, the office of director in the corporation, and (ii) when used with respect to a person other than a director as contemplated in section 7.10, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent in behalf of the corporation, but in each case does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, other enterprise, or employee benefit plan. (e) "Party" includes a person who was, is, or is threatened to be, made a named defendant or respondent in a proceeding. (f) "Proceeding" means any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative, or investigative. Section 7.2 Non-Derivative Actions. The corporation shall indemnify any person made a party to any proceeding (other than a proceeding referred to in section 7.3) by reason of the fact that he is or was a director against judgments, penalties, fines, settlements and reasonable expenses actually incurred by him in connection with such proceeding in accordance with this Article 7 if: 7 (a) He conducted himself in good faith, and: (i) In the case of conduct in his own official capacity with the corporation, he reasonably believed his conduct to be in the corporation's best interests, or (ii) in all other cases, he reasonably believed his conduct to be at least not opposed to the corporation's best interests; and (b) In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, be determinative that the person did not meet the requisite standard of conduct set forth in this section. Section 7.3 Derivative Actions. The corporation shall indemnify any person made a party to any proceeding by or in the right of the corporation by reason of the fact that he is or was a director against reasonable expenses actually incurred by him in connection with such proceeding in accordance with this Article 7 if he conducted himself in good faith, and: (a) In the case of conduct in his official capacity with the corporation, he reasonably believed his conduct to be in its best interests; or (b) In all other cases, he reasonably believed his conduct to be at least not opposed to its best interests; provided, that no indemnification shall be made pursuant to this section in respect of any proceeding in which such person shall have been adjudged to be liable to the corporation. Section 7.4 Improper Personal Benefit. A director shall not be indemnified under sections 7.2 or 7.3 of this Article in respect of any proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he shall have been adjudged to be liable on the basis that personal benefit was improperly received by him. Section 7.5 Successful Defense, Court Order. Unless otherwise limited by the Articles of Incorporation: (a) A director who has been wholly successful, on the merits or otherwise, in the defense of any proceeding referred to in sections 7.2 or 7.3 shall be indemnified against reasonable expenses incurred by him in connection with the proceeding; and (b) A court of appropriate jurisdiction, upon application of a director and such notice as the court shall require shall have authority to order indemnification in the following circumstances: (1) If the court determines a director is entitled to reimbursement under (a) of this subsection, the court shall order indemnification in which case the director shall be entitled to recover the expenses of securing such reimbursement; or (2) If the court determines that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he has met the standards of conduct set forth in sections 7.2 or 7.3 or has been adjudged liable under section 7.4, the court may order such indemnification as the court shall deem proper, except that indemnification with respect to any proceeding referred to in section 7.3 and with respect to any proceeding in which liability shall have been adjudged pursuant to section 7.4 shall be limited to expenses. A court of appropriate jurisdiction may be the same court in which the proceeding involving the director's liability took place. 8 Section 7.6 Determination of Right to Indemnification. No indemnification under section 7.2 or 7.3 shall be made by the corporation unless authorized in the specific case after a determination that indemnification of the director is permissible in the circumstances because he has met the standard of conduct set forth in the applicable subsection. Such determination shall be made: (a) By the board of directors by a majority vote of a quorum consisting of directors not at the time parties to such proceeding; or (b) If such a quorum cannot be obtained, then by a majority vote of a committee of the board, duly designated to act in the matter by a majority vote of the full board (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to such proceeding; or (c) In a written opinion by legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services within the past three years for the corporation or any party to be indemnified, selected by the board of directors or a committee thereof by vote as set forth in subsections (a) or (b) of this section 7.6, or if the requisite quorum of the full board cannot be obtained therefor and such committee cannot be established, by a majority vote of the full board (in which selection directors who are parties may participate); or (d) By the shareholders. Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by such legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made in the manner specified in subsection (c) of this section 7.6 for the selection of such counsel. Shares held by directors who are parties to the proceeding shall not be voted on the subject matter under this section. Section 7.7 Reimbursement in Advance. Reasonable expenses incurred by a director who is party to a proceeding shall be paid or reimbursed by the corporation in advance of the final disposition of such proceeding: (a) After a determination, made in the manner specified by section 7.6 that the information then known to those making the determination (without undertaking further investigation for purposes thereof) does not establish that indemnification would not be permissible under sections 7.2 or 73; and (b) Upon receipt by the corporation of: (1) A written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation as authorized in this section; and (2) A written undertaking by or on behalf of the director to repay such amount if it shall ultimately be determined that he has not met such standard of conduct. The undertaking required by subsection (b)(2) of this section 7.7 shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make the repayment. Payments under this section may be authorized in the manner specified in section 7.6. Section 7.8 No Conflict with Law or Articles. No provision for the corporation to indemnify a director who is made a party to a proceeding, whether contained in the Articles of Incorporation, the Bylaws, a resolution of shareholders or directors, an agreement, or otherwise (except as contemplated by section 7.11), shall be valid unless consistent with the Act, or, to the extent that indemnity hereunder is limited by the Articles of 9 Incorporation, consistent therewith. Nothing contained in this section shall limit the corporation's ability to reimburse expenses incurred by a director in connection with his appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent in the proceeding. Section 7.9 Employee Benefit Plans. For purposes of this section, the corporation shall be deemed to have requested a director to serve an employee benefit plan where the performance by him of his duties to the corporation also imposes duties on, or otherwise involves services by, him to the plan or participants or beneficiaries of the plan; excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law shall be deemed "fines"; and action taken or omitted by him with respect to an employee benefit plan in the performance of his duties for a purpose reasonably believed by him to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. Section 7.10 Indemnification of Officers, Employees and Agents. Unless otherwise limited by the Articles of Incorporation: (a) An officer of the corporation shall be indemnified as and to the extent provided in section 7.5 for a director and shall be entitled to seek indemnification pursuant to section 7.5 to the same extent as a director; (b) The corporation may provide indemnification including advances of expenses, to an officer, employee, or agent of the corporation to the same extent that it may indemnify directors pursuant to this Article except that section 7.12 shall not apply to any person other than a director; and (c) The corporation, in addition, shall have the power to indemnify an officer who is not a director, as well as employees and agents of the corporation who are not directors, to such further extent, not inconsistent with law, the corporation's Articles of Incorporation, nor these Bylaws, by contract or resolution approved by the board of directors. Section 7.11 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 an officer, employee or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation may indemnify him against such liability under the provisions of this Article. Section 7.12 Report Regarding Indemnification of Director. Any indemnification of a director in accordance with this Article, including any payment or reimbursement of expenses, shall be reported to the shareholders with the notice of the next shareholders' meeting or prior thereto in a written report containing a brief description of the proceedings involving the director being indemnified and the nature and extent of such indemnification. ARTICLE VIII. Corporate Seal The seal of the corporation shall be circular in form and shall have inscribed thereon the name of the corporation and the words "Washington" and "Corporate Seal". ARTICLE IX. Amendments Unless otherwise provided in the Articles of Incorporation, the Bylaws of this corporation may be altered, amended or repealed by the directors, subject to repeal or change by action of the shareholders, at any regular 10 meeting or at any special meeting called for that purpose, provided notice of the proposed change is given in the notice of the meeting or notice thereof is waived in writing. ARTICLE X. Severability If any provision of these Bylaws shall be found, in any action, suit or proceeding, to be invalid or ineffective, the validity and the effect of the remaining provisions shall not be affected. EX-5.1 4 OPINION OF FOSTER PEPPER & SCHEFELMAN PLLC. 1 EXHIBIT 5.1 January 14, 1998 Board of Directors Cowlitz Bancorporation 927 Commerce Avenue Longview, Washington 98632 Gentlemen: We have acted as counsel for Cowlitz Bancorporation (the "Company"), a Washington corporation, in connection with the (i) authorization and issuance of 1,000,000 shares of common stock of the Company, no par value per share (the "Issuer Shares"), (ii) the possible sale of an additional 133,000 shares of common stock of the Company pursuant to an over-allotment option granted to the underwriters (the "Option Shares"), (iii) the possible sale of 17,000 shares of common stock of the Company by existing shareholders pursuant to an over-allotment option granted to the underwriters ("the Selling Shareholder Shares") and (iv) the preparation of a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended. We have examined the Registration Statement, the records of the Company and such other documents as we deem necessary for the purpose of this opinion. Based on the foregoing, we are of the opinion that: 1. Upon effectiveness of the Registration Statement, due execution by the Company and the registration by the Company's registrar of the Issuer Shares and the Option Shares and the receipt by the Company of the consideration from the sale of the Issuer Shares and the Option Shares as contemplated by the Registration Statement, each of the Issuer Shares and the Option Shares will be duly authorized, validly issued, fully paid and non-assessable. 2. The Selling Stockholder Shares are validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm in the Prospectus included in the Registration Statement under the caption "Legal Matters." Very truly yours, FOSTER PEPPER & SHEFELMAN PLLC EX-10.1 5 ADVANCES SECURITY AND DEPOSIT AGREEMENT 1 EXHIBIT 10.1 FEDERAL HOME LOAN BANK OF SEATTLE SEATTLE WASHINGTON ADVANCES, SECURITY AND DEPOSIT AGREEMENT March 29, 1991 This Advances, Security and Deposit Agreement ("Agreement") is made as of the above date and is between the Federal Home Loan Bank of Seattle, including its successors ("Bank"), and Cowlitz Bank, including its successors("Member"). Except as to Members which have not signed prior Agreements, it renews, amends and restates prior contracts between the parties or their predecessors entitled "Advances Agreement, Pledge Agreement and Security Agreement" and "Deposit Account Resolution." RECITALS A. The Bank is authorized by the Federal Home Loan Bank Act, as amended, and related regulations and directives ("Act"), and by the Bank's own policies, to make loans to the Member ("Advances"). The Bank is also authorized to provide demand and time deposit accounts to the Member ("Accounts") and to perform additional services, all of which may create obligations from the Member to the Bank ("Other Obligations"). Other Obligations may include, without limitations, debts by reason of interest rate swap agreements, letters of credit, overdrafts, NOW accounts, settlements, and wire transfers. B. This Agreement, and related policies which are, from time to time, sent by the Bank to its Members, specifies the terms and conditions under which the Bank may make Advances available to the Member; open and use Accounts; and collateralize such Advances and other Obligations. AGREEMENTS 1. Prior to or at the time of the execution and delivery of this Agreement, the Member has provided the Bank with a certified copy of a resolution adopted by the Member's Board of Directors or other governing body ("Resolution") approving this Agreement and authorizing designated officers or employees of the Member to obtain Advances, open and use Accounts, and incur Other Obligations. The Bank may rely upon, and the Member is estopped from denying, the authority of the persons designated in the Resolution. 2. The Member may request Advances from the Bank by applying to the Bank in such form as it shall require. 3. Each Advance shall be evidenced by a promissory note ("Note") or by another confirming document as required by the Bank. The applicable terms and conditions of this Agreement are -1- 2 incorporated therein as well as in other agreements, if any, that relate to Other Obligations. 4. On the first day of each month or at such other times that payments of principal and/or interest are due, the Member agrees to pay, or to authorize a charge to the Member's Account for the principal and/or interest that is due on each outstanding Advance, Note or Other Obligation. Interest shall be charged at the rate set forth in the Note or other instrument evidencing the Indebtedness. Delinquent principal and/or interest may bear interest, at the option of the Bank, equal to the Bank's then-current Flexible Balance advance rate. 5. As collateral ("Security") for the payment of all Advances, Notes or Other Obligations (collectively, "Indebtedness") of the Member to the Bank, the Member hereby assigns, pledges and grants security interests to the Bank ("Security Interests") in the following: (a) its stock in the Bank; (b) its funds on deposit with the Bank; (c) its notes or other instruments representing obligations of third parties, including the proceeds thereof, and any related mortgages or deeds of trust ("Mortgages") securing any of them and/or any securities representing an interest in such Mortgages; (d) securities issued, insured or guaranteed by the United States government or by any agency thereof, (e) other real estate-related collateral; and (f) its instruments, accounts, general intangibles, inventory, equipment and other property in which a security interest can be granted by the Member to the Bank. Upon the withdrawal from membership in the Bank, and as the final part of the plan of liquidation of the Member's Indebtedness to the Bank, the stock of such Member may be redeemed and credited upon the Indebtedness of the Member, in whole or in part, for an amount equal to the par value of the stock which would otherwise be paid to the Member by the Bank. 6. The Member agrees that it holds the Security for the benefit of, and subject to the direction and control of, the Bank; including, without limitation, the following: (a) Security and Security Interests shall include and extend to after-acquired Security; (b) the Member may use, commingle or dispose of all or part of the Security or proceeds thereof if, at all times it owns and maintains Security of the types and kinds specified by the Act and as required to meet the requirements thereof, free and clear of pledges, liens or other encumbrances of third parties, in such amount of the outstanding Indebtedness as may be specified by the Bank from time to time; (c) at its expense and as soon as possible upon demand by the Bank, the Member will assemble, segregate and/or deliver such portions of the Security as are directed by the Bank at or to a location designated by it; will allow the Bank to participate in such assembly, segregation or delivery and to verify or audit such Security, including, without limitation, access to the Member's premises and records for such purposes, and will protect and promptly disclose to the Bank any material change in value of the Security so assembled, segregated or delivered; (d) the Member promptly will make, execute and deliver to the Bank such -2- 3 assignments, listings, powers or other documents as the Bank may reasonably request concerning the Security; (e) at its expense, the Member promptly will provide to the Bank such reports, audits and confirmations regarding the Security as the Bank may reasonably request; and (f) the Member shall pay to the Bank any reasonable fees associated with the processing, control, and maintenance of such Security. 7. Upon the occurrence or any one or more of the following events ("Default"), the Bank may, without notice, declare and thereby cause all Indebtedness of the Member to be due and payable immediately: (a) failure of the Member to make any payment due on any Indebtedness, or breach of or failure, to perform any other duty as provided herein or in any other agreement to which the Member and the Bank are parties; (b) any taking over of the Member or any of its assets by a supervising agency, or an application for or the appointment of a conservator, receiver, trustee or liquidator for it or any of its assets; (c) an adjudication of the Member's bankruptcy or insolvency; (d) an assignment by the Member for the benefit of creditors, a general transfer of its assets for any purpose or any other form of liquidation, merger, sale of assets or dissolution of or by the Member; (e) existence of facts indicating a representation, statement or warranty made or furnished to the Bank by or on behalf of the Member in connection with all or part of any Indebtedness or other transaction was or is false in any material respect; (f) damage, loss, sale or encumbrance of any of the Security except as permitted by this Agreement; (g) any levy, seizure, garnishment (as the debtor), execution, attachment or other process issued against the Member; (h) any event which results in acceleration of the maturity of any debt of the Member to others; (i) good faith determination by the Bank that the Member's ability to repay any Indebtedness has become impaired or that a material adverse change has occurred in the financial condition of the Member from that disclosed to the Bank at the time of creation of any Indebtedness or subsequently; (j) any increase in the creditor liabilities of the Member, other than its liabilities to the Bank, to an amount exceeding five percent (5%) of the Member's net assets; (k) termination of the Member's membership in the Bank; or (l) good faith determination by the Bank that there is a reasonable possibility that the Indebtedness would not be paid in full from the proceeds of a liquidation of the Security if the Bank did not declare a Default. 8. At any time after Default, the Member may not substitute Security without permission of the Bank,and the Bank shall have all of the rights and remedies of a secured party under the Act, the Uniform Commercial Code of the State of Washington and/or as otherwise provided by law, by this Agreement or by any other agreement between the parties ("Default Rights") including, without limitation, the Bank's right to take immediate possession of any or all Security wherever located and to dispose of the Security in accordance with applicable law. If any notice of disposition of Security is required by law, such notification shall be deemed reasonable, and properly given if mailed, postage prepaid, at least -3- 4 five calendar days before such disposition to the last address of the Member then appearing on the records of the Bank. The proceeds of any disposition of Security shall be applied in the following order to payment of: (a) all reasonable expenses incurred by or on behalf of the Bank for the collection, care, safekeeping, sale, foreclosure, delivery or other disposition of Security including, without limitation, insurance, commissions, guarantees, security valuation fees, expenses, costs and reasonable attorneys' fees incurred in connection therewith; (b) interest on all Indebtedness, whether due or accrued; (c) the principal amount of all Indebtedness; (d) any secondarily secured debt of the Member to any third party who proves its subordinate security interest in the Security to the reasonable satisfaction of the Bank; and (e) any remainder to the Member. If there is a deficiency, the Member shall be liable to the Bank therefor. No delay by the Bank in the exercise of its Default Rights shall operate as a waiver, and a waiver of any specific Default Right shall not constitute a waiver of any other Default Right not specifically waived. The Member hereby irrevocably appoints the Bank and/or its designee as its true and lawful attorney in fact to deal in any manner with the Security in the event of a Default. 9. The Member may open Accounts with the Bank subject to the Regulations of the Bank. Any Member's funds deposited in Accounts shall be subject to withdrawal or charge at any time and from time to time upon checks, wire transfers, or any other orders for the payment of money when made and drawn on behalf of the Member by a person or persons authorized by the Member on a signature card or cards. The Bank is authorized to pay any such checks, wire transfers, or other orders, provided they are in the form prescribed by it, and to charge the Member's Accounts therefor, without inquiry as to the circumstances of issue or the disposition of the proceeds, even if drawn to the individual order of an authorized person or payable to others for his account. 10. The Bank, if it acts in good faith and with ordinary care (and without liability if it does so act), can charge the Accounts with orders received by the Bank from any person acting for or purporting to act for the Member by telephone, or otherwise orally, for the transfer of funds to others, including the person giving such instructions, or payable to others for his account, or between Accounts of the Member. All authorized Bank charges and fees will be charged monthly to such Accounts. 11. Unless otherwise provided, all checks, drafts, money orders or other negotiable items or withdrawal clearing through the Accounts shall be truncated. Original items will be retained by the Bank or its designee for a period of ninety (90) days. At any time, the Member may request a photostatic copy of any item processed within the past seven years, and the Bank or its designee will furnish such copy as soon thereafter as is reasonably possible. -4- 5 12. The Member shall maintain a net positive collected balance in all of its Accounts. The Bank shall have the option of closing or restricting the use of Accounts in which positive balances are not maintained. For each day the aggregate collected balance of an Account is negative, the Member shall pay such charges as are consistent with the Bank's published schedules. 13. The Member agrees to provide to the Bank, within five days after a request, its business plans and other financial data. In connection with, and as an extension of, any other informational rights of the Bank relating to examination of the Member by a supervising agency and reports relating thereto, the Member agrees that all Security shall always be subject to audit and verification, at the Member's expense, by or on behalf of the Bank and that the Bank shall have access to the Member's premises and records for that purpose. 14. If the services of an attorney, either with or without suit, are engaged by the Bank in connection with any Default or any dispute relating to this Agreement, the Member agrees to pay the Bank's reasonable attorneys' fees, expenses and costs incurred in connection therewith. 15. This Agreement shall be construed and enforced according to the laws of the State of Washington and the Act. If any provision hereof is inconsistent with the Act, this Agreement shall be deemed amended to the end that such provision is not in conflict with the Act. In the event any such provision cannot be so amended and is found to be contrary to law, the balance of this Agreement shall remain in full force and effect if so elected by the Bank. 16. This Agreement shall continue until terminated by written notice from one party to the other, provided that this Agreement shall remain applicable to all then outstanding Indebtedness and duties of the Member and to the documents relating thereto. Cowlitz Bank - -------------------------------------- (Name of Member) By Charles W. Jarrett President and Chief Executive Officer ------------------------------------------------------------ (Name) (Title) /s/ ---------------------------------- (Signature) Its Chief Executive Officer Date: March 29, 1991 ------------------------------------ -------------- (Title) and By Donna Gardner Cashier and Operations Manager ----------------------- ------------------------------- (Name) (Title) -5- 6 /s/ --------------------------------- (Signature) Its Cashier and Operations Date: March 29, 1991 Manager -------------- --------------------------------- (Title) FEDERAL HOME LOAN BANK OF SEATTLE By -------------------------------------- (Name) (Title) - ---------------------------------------- (Signature) Its Date: , 199 ---------------------------------- ------------- -- (Title) -6- EX-10.2 6 CREDIT LINE FIXED RATE ADVANCE 1 EXHIBIT 10.2 FEDERAL HOME LOAN BANK OF SEATTLE Seattle, Washington 98101 PROMISSORY NOTE NO. 74049 Fixed Rate Advance / Special Financing Program * For purposes of this promissory note the: Issue Date shall be: August 6, 1996 Maturity Date shall be: August 6, 1998 Principal sum shall be: THREE MILLION and NO/100 DOLLARS ($3,000,000.00) Interest Rate shall be: SIX AND FOURTEEN HUNDREDTHS PER CENTUM PER ANNUN (6.14000%) calculated on the actual number of days in the year For value received, on Maturity Date, the undersigned maker ("Customer") promises to pay to the order of the FEDERAL HOME LOAN BANK OF SEATTLE ("Bank") the Principal Sum, with interest from Issue Date on the unpaid principal as follows: Interest Rate, payable at the Bank's office on the first day of each month that is a business day for the Bank. The final interest payment is payable on the last day this note is outstanding. This Note is governed by and is subject to the agreements, terms and conditions contained in an instrument entitled "Advances, Security and Deposit Agreement" between the Customer and the Bank, the provisions of which are incorporated herein by reference. Advances are to be used for sound business purposes. Non-qualified thrift Lenders use funds for activities which support housing related purposes. Any Savings Association which does not meet qualified thrift Lender requirements is to notify the Bank of its ineligibility. This Note may be prepaid in whole or in part. The Bank will charge a prepayment fee equal to the present value, at the time of such prepayment ("Prepayment Date"), of the difference between (a) the interest that would have been payable on the amount prepaid at the rate provided herein from the Prepayment Date to the maturity date of this Note ("Maturity Date") and (b) the interest that would be chargeable on an advance equal to the amount prepaid at a rate ("CO Rate") quoted by the Bank on the Prepayment Date for Federal Home Loan Bank Consolidated Obligations with similar remaining terms to maturity. In the event that the Maturity Date is not the same as the term of any consolidated obligation then offered by the Bank, the rate present value shall be computed using such CO Rate as the discount rate, compounded monthly. *Note: "CO Rate" quoted by the Bank for Special Financing Program will be based on specific costs related to the special financing and will typically be lower than Federal Home Loan Bank Consolidated Obligations with similar remaining terms to maturity. IN WITNESS WHEREOF, the Customer, by authority of its Board of Directors or other governing body, confirms its application for the Advance evidenced hereby and has caused this Note to be executed and delivered by its duly designated and authorized Officers. Cowlitz Bank, Longview, WA 09014 (Customer) By: /s/ Donna P. Gardner , its Senior Vice President and Chief Financial Officer ---------------------------- ------------------------------------------------- (Signature) (Title) Donna P. Gardner ----------------------------- (Typed name) Attest: /s/ Charles W. Jarrett , its President and Chief Executive Officer ------------------------ ------------------------------------------------- (Signature) (Title) Charles W. Jarrett ------------------------ (Typed name)
EX-10.3 7 CASH MANAGEMENT ADVANCE CREDIT LINE (NOTE #75494) 1 EXHIBIT 10.3 FEDERAL HOME LOAN BANK OF SEATTLE Seattle, Washington 98101 PROMISSORY NOTE NO. 75494 Cash Management Advance For purposes of this promissory note the: Issue Date shall be: May 7, 1987 Maturity Date shall be: May 7, 1998 Maximum Borrowing Amount shall be: FIFTEEN MILLION NINE HUNDRED FIFTEEN THOUSAND ONE HUNDRED and NO/100 DOLLARS ($15,915,100.00) Index shall be: Cash Management Advance Rate, as quoted by the Bank Interest Rate shall be: Index calculated on an actual/360 basis For value received, on each business day, the undersigned maker ("Customer") hereby promises to pay to the order of the FEDERAL HOME LOAN BANK OF SEATTLE ("Bank") the Principal Sum of the Maximum Borrowing Amount or, if less, the aggregate unpaid principal and interest amount of all Advances made by the Bank pursuant to the Cash Management Agreement Letter outstanding on the Maturity Date. The Maturity Date of the Note shall mean the earlier of the Maturity Date or the date on which the Bank demands in writing that the Customer pay the unpaid principal amount hereof. The Customer acknowledges that such demand may be made whether or not a Default has occurred. The Customer also promises to pay interest on the daily unpaid principal amount of each Advance from the date of each Advance until payment in full, payable at the Bank's office on the first day of each month that is a business day for the Bank, at a rate per annum equal to the "Cash Management Advance Rate" quoted by the Bank from time to time. Each change in interest rate will take effect simultaneously with the corresponding change in the Cash Management Advance Rate. Upon occurrence of a Default, interest and principal on each Advance shall be payable as provided in the Advances, Security, and Deposit Agreement. All Advances made by the Bank to the Customer pursuant to the Cash Management Agreement Letter and all payments on account of principal thereof shall be recorded by the Bank with reference to this Promissory Note number. This Promissory Note is the Note referred to in, and is entitled to the benefits of the Cash Management Agreement Letter as the same may be amended, modified or supplemented from time to time, between the Bank and the Customer. This Promissory Note is also governed by and is subject to the agreements, terms and conditions contained in an instrument entitled "Advances, Security, and Deposit Agreement" between the Customer and the Bank, the provisions of which are incorporated herein by reference. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Cash Management Agreement Letter and the Advances, Security and Deposit Agreement. Advances are to be used for sound business purposes. Non-qualified thrift lenders use funds for activities which support housing related purposes. Any Savings Association which does not meet qualified thrift lender requirements is to notify the Bank of its ineligibility. The Customer may repay the principal amount hereof, in whole or in part without prior day's notice to the Bank or additional fee. IN WITNESS WHEREOF, the Customer, by authority of its Board of Directors or other governing body, confirms its application for the Advance evidenced hereby and has caused this Note to be executed and delivered by its duly designated and authorized Officers. Cowlitz Bank, Longview, WA 09014 (Customer) By: /s/ Donna P. Garder , its Sr. Vice President & Chief Financial Officer -------------------------- -------------------------------------------- (Signature) (Title) Donna P. Gardner -------------------------- (Typed Name) By: /s/ Charles W. Jarrett , its President & Cheife Executive Officer --------------------------- -------------------------------------------- (Signature) (Title) Charles W. Jarrett --------------------------- (Typed Name) EX-10.4 8 PROMISSORY NOTE DATED JANUARY 15, 1992 1 EXHIBIT 10.4 PROMISSORY NOTE
============================================================================================================================== Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,000,000.00 01-15-1992 01-16-1999 9001 2A2 STK 4009577 40DXT ============================================================================================================================== References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. ==============================================================================================================================
Borrower: COWLITZ BANKCORPORATION LENDER: KEY BANK OF WASHINGTON 927 COMMERCIAL AVENUE CORPORATE BANKING LONGVIEW, WA 98632 700 FIFTH AVENUE P.O. BOX 90 SEATTLE, WA 98111-0090 - -------------------------------------------------------------------------------- Principal Amount: $1,000,000.00 Date of Note: January 15, 1992 PROMISE TO PAY. COWLITZ BANCORPORATION ("Borrower") promises to pay to KEY BANK OF WASHINGTON ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00), together with interest on the unpaid principal balance from January 16, 1992, until paid in full. The interest rate will not increase above 14.000%. PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in accordance with the following payment schedule: 28 consecutive quarterly interest payments, beginning April 16, 1992, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; 1 principal payment of $115,000.00 on January 16, 1993, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; 1 principal payment of $124,775.00 on January 16, 1994, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the Index described below; 1 principal payment of $135,380.88 on January 16, 1995, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; 1 principal payment of $146,888.25 on January 16, 1996, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; 1 principal payment of $159,373.75 on January 16, 1997, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; 1 principal payment of $172,920.52 on January 16, 1998, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below; and 1 principal payment of $145,661.60 on January 16, 1999, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the index described below. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled and that the index does not change; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, times the outstanding principal balance, times the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Lender's announced prime rate (the "Index"). The interest rate will change on the date of each announced change of the Index within Key Bank of Washington. The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, the Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day that the Index changes. The Index currently is 6.500% per annum. The interest rate or rates to be applied to the unpaid principal balance of this Note will be the rate or rates set forth in the "Payment" section. Notwithstanding any other provision of this Note, after the first payment stream, the interest rate for each subsequent payment stream will be effective as of the last payment date of the just-ending payment stream. Notwithstanding the foregoing, the variable interest rate or rates provided for in this Note will be subject to the following minimum and maximum rates. NOTICE: Under no circumstances will the interest rate on this Note be less than 8.500% per annum or more than (except for any higher default rate shown below) the lesser of 14.000% per annum or the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's payments, and (d) increase the final payment. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $50.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower's making fewer payments. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $10.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished lo Lender by Borrower or on Borrower's behalf is false or misleading in any material respect. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any of the events described in this default section occurs with respect to any guarantor of this Note. 2 01-15-1992 PROMISSORY NOTE Page 2 Loan No 9001 (Continued) - -------------------------------------------------------------------------------- LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note by 5.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of Washington. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of KING County, the State of Washington. This Note shall be governed by and construed in accordance with the laws of the State of Washington. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew, extend (repeatedly and for any length of time) or modify this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: COWLITZ BANCORPORATION By: /s/ Charles W. Jarrett By: /s/ James A. Wills ----------------------------------- ------------------------------ CHARLES W. JARRETT, PRESIDENT & CEO JAMES A. WILLS, VICE PRESIDENT EX-10.5 9 FORM OF 8 1/2% SUBORINATED PROMISSORY NOTE 1 EXHIBIT 10.5 THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. COWLITZ BANCORPORATION 8-1/2% SUBORDINATED PROMISSORY NOTE DUE FEBRUARY 15, 2000 $_________________________ Longview, Washington COWLITZ BANCORPORATION, a Washington corporation, having its principal office at 927 Commerce Avenue, Longview, Washington 98632 (the "Company"), for value received, promises to pay to the order of ________________________________________________________________ or his, her, or their assigns (the "Holder"), on or before February 15, 2000, unless redeemed earlier or accelerated after an Event of Default (as defined in Section 4 hereof), in accordance with the provisions hereof, at such place as the Holder may from time to time designate, the principal sum of ________________ THOUSAND DOLLARS ($_______________), in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, and to pay from and after the date hereof interest on the unpaid balance of the principal amount, in such coin or currency, at the rate of eight and one-half percent (8-1/2%) per annum. THIS NOTE DOES NOT CONSTITUTE OR REPRESENT A DEPOSIT OR A SAVINGS ACCOUNT WITH THE COMPANY OR ITS BANK SUBSIDIARY "THE COWLITZ BANK," AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL OR STATE AGENCY. THIS NOTE IS UNSECURED. The following is a statement of the rights of the Holder and the conditions to which this Note is subject, to which the Holder hereof, by the acceptance of this Note, agrees: 1. Payments of Interest and Principal. Interest shall accrue on the outstanding principal balance of this Note, which shall be the above-stated principal sum less the amount of any prepayments of principal made hereon by the Company in accordance with the terms of this Note. Interest shall be computed on the outstanding principal balance at the rate per annum stated above, and on the basis of a 365- or 366-day year as the case may be for the number of actual days elapsed. Interest shall not be compounded. Interest accrued on this Note shall be paid semiannually in arrears, and shall be due and payable on the last day of June and December of each year starting June 30, 1993 ("Interest Payment Date"). Interest will accrue from the most recent Interest Payment Date or, if no interest has been paid, from the date of issue. The outstanding principal balance of this Note shall be due and payable in full on February 15, 2000. -1- 2 Interest due after the occurrence of an Event of Default (as set forth in Section 4 hereof) shall be payable on demand. 2. Subordination. THE INDEBTEDNESS EVIDENCED BY THIS NOTE SHALL BE SENIOR TO THE LIQUIDATION AND OTHER SIMILAR RIGHTS OF EXISTING AND FUTURE COMMON AND PREFERRED SHAREHOLDERS OF THE COMPANY, BUT IS HEREBY EXPRESSLY SUBORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL THE COMPANY'S SENIOR INDEBTEDNESS AS HEREINAFTER DEFINED. "Senior Indebtedness" shall mean all indebtedness owed to general creditors of the Company, whether secured or unsecured now owing or hereafter incurred, including but not limited to the principal and unpaid interest, on (i) indebtedness of the Company or with respect to which the Company is a guarantor, whether outstanding on the date hereof or hereafter created, to banks, insurance companies or other financial or lending institutions, regularly engaged in the business of lending money, whether or not secured and (ii) any deferrals, renewals or extensions of any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness. Upon any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshalling of the assets and liabilities of the Company or in the event any Senior Indebtedness shall be declared due and payable upon the occurrence of an Event of Default (as defined in Section 4 hereof), (i) no amount shall be paid by the Company in respect of the principal of or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. In the instance of an event of default relating to payments of principal or interest in any amount exceeding $10,000 which has been declared in writing with respect to any senior Indebtedness then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, no payment shall be made in respect of the principal of or interest on this Note. Nothing contained in this Section 2 shall impair, as between the Company and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder hereof the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Holder, upon default under this Note, from exercising all rights powers and remedies otherwise, provided herein or by applicable law, all subject to the rights, if any, of the holders of Senior Indebtedness. -2- 3 The Company in its sole discretion may issue additional subordinated promissory notes in the future without restriction. 3. PREPAYMENT. THE COMPANY MAY, UPON RECEIPT OF ANY REQUIRED PRIOR WRITTEN APPROVAL FROM THE FEDERAL RESERVE BOARD, AT ANY TIME AFTER DECEMBER 15, 1997, AND FROM TIME TO TIME THEREAFTER, PREPAY THIS NOTE, IN WHOLE OR IN PART, IN ACCORDANCE WITH THE TERMS OF THIS SECTION 3. THE COMPANY MAY, IN ITS SOLE DISCRETION, ELECT TO PREPAY THIS NOTE IN WHOLE OR IN PART, WITHOUT BEING OBLIGATED TO PREPAY OTHER NOTES ISSUED AS PART OF THIS OFFERING. LIKEWISE, SHOULD COMPANY ELECT TO PREPAY OTHER NOTES ISSUED AS PART OF THE OFFERING, COMPANY SHALL NOT BE OBLIGATED TO PREPAY THIS NOTE ON THE SAME TERMS OFFERED THE HOLDERS OF OTHER NOTES WHICH ARE BEING PREPAID OR TO PREPAY ANY AMOUNT TO THE HOLDER OF THIS NOTE. EXCEPT IN THE EVENT OF DEFAULT AS DEFINED IN SECTION 4, HOLDER SHALL HAVE NO RIGHT TO CALL FOR PAYMENT PRIOR TO MATURITY. 3.1 Election to Prepay. (a) Partial Prepayment. All amounts prepaid by the Company on this Note shall be in increments of $1,000. (b) Prepayment Notice. In the event that the Company elects to prepay this Note, whether in whole or in part, upon receipt from the Federal Reserve Board of any required written approval of such prepayment, the Company shall, not less than 30 nor more than 60 days prior to the date fixed for prepayment (the "Prepayment Date"), provide a notice of prepayment to the Holder (the "Prepayment Notice"). The Prepayment Notice shall state: (1) the Prepayment Date; (2) the aggregate principal amount to be prepaid on this Note; (3) that on the Prepayment Date, the principal amount of the Note being prepaid, together with accrued interest thereon, shall be due to the Holder and payable by the Company, and that the interest on such principal amount prepaid shall cease to accrue on and after such date; and (4) the place or places where the Note may be surrendered for payment. 3.2 Notes Payable on Prepayment Date. The Prepayment Notice having been given as aforesaid, the amount of the Note so to be prepaid shall, on the Prepayment Date, become due and payable together with all accrued interest thereon, and on such date (unless the Company shall default on its prepayment obligations) the portion of the Note being prepaid shall cease to bear interest. If any portion of the Note called for prepayment shall not be so paid upon surrender thereof for such prepayment, the principal shall, until paid, bear interest from the Prepayment date in accordance with the terms of Section 1 hereof. -3- 4 3.3 Note Prepaid in Part. If the Note is to be prepaid only in part, it shall be surrendered by the Holder in the manner specified in the Prepayment Notice and the Company shall execute and deliver to the Holder a new Note with a principal amount equal to the portion of the Note which is not prepaid by the Company. 4. Events of Default. If any of the following events shall occur (herein individually referred to as an "Event of Default"), the Holder may declare the entire unpaid principal and accrued interest on the Note immediately due and payable, by a notice in writing to the Company: 4.1 Default for at least 30 days in the payment of interest on the Note; default in payment of the principal on the Note when due and payable at maturity, acceleration or otherwise and such default continues for at least 30 days; or 4.2 The institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the Federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee, or other similar official, of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due or the taking of corporate action by the Company in furtherance of any such action; or 4.3 If, within 60 days after the commencement of an action against the Company seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within 60 days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated. Holder shall have no other right to call for payment prior to maturity. A default under the provisions of this Note shall not constitute a default under the provisions of other Notes which were issued as part of this offering. Likewise, a default under the provisions of other Notes which were issued as part of this offering shall not constitute a default under the provisions of this Note. 5. Transfer and Registration. This is a registered Note. In order to properly transfer this Note on the books of the Company, the Holder must surrender this Note together with (a) an opinion of counsel to the Purchaser, in form and substance reasonably acceptable, to the Company, to the effect that the proposed transfer of the Note is not in violation of the Securities Act of 1933; and (b) a notice to the Company, which shall be notarized and which shall state the name and address of the person or entity to whom the Note is being assigned. -4- 5 The Company shall then execute and deliver to the assignee, a new Note in accordance with the instructions in such notice. The Holder may only assign the Note in its entirety and may not assign a portion thereof. The Company may deem and treat the person or entity in whose name this Note shall be registered as the absolute owner of such Note for the purpose of receiving payments of principal and interest and for all other purposes and the Company shall not be affected by any notice not in the form specified in this Section 5. 6. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Holder. 7. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally, by registered first-class mail, postage prepaid, by telex, by telecopier or by overnight courier, addressed to the Company or the Holder, as the case may be, at such party's address set forth below, or at such other address as to which such party shall have notified the other party as provided herein. All such notices and other communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being sent by registered mail, return receipt requested, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to a courier guaranteeing overnight delivery. Notice shall be sent to the following addresses: To The Company: Charles W. Jarrett, President Cowlitz Bancorporation P.O. Box 1518 927 Commerce Avenue Longview, Washington 98632 Telex: 1-206-423-1821 To The Holder: ______________________________ ______________________________ ______________________________ 8. Governing Law. This Note shall be governed by and construed in accordance with Washington law, without regard to principles of conflict of laws. 9. Attorney's Fees. If this Note is not paid in accordance with its terms and is placed in the hands of an attorney for collection, or if suit be instituted hereon, the Company shall pay to the Holder, in addition to principal and unpaid accrued interest, all costs of collection of the principal and such unpaid accrued interest, including, without limitation, reasonable attorney's fees for the enforcement of payment of this Note. 10. Waivers. The Company hereby expressly waives presentment, protest, and demand, notice of protest, demand, dishonor and nonpayment of this Note, and all other notices of any kind. -5- 6 11. Use as Collateral. This Note may not be used its collateral for any loan made to Holder by either the Company or by The Cowlitz Bank. 12. Security for Note. This Note is unsecured. IT WITNESS WHEREOF, the Company has caused this Note to be signed on its behalf by the undersigned, thereunto duly authorized, as of the date and year first above written. COWLITZ BANCORPORATION, a Washington corporation By:_______________________________ Charles W. Jarrett, President -6- EX-10.6 10 PURCHASE AND ASSUMPTION AGREEMENT MARCH 5, 1997 1 EXHIBIT 10.6 PURCHASE AND ASSUMPTION AGREEMENT dated as of March 5, 1997 between WELLS FARGO BANK, N.A. and COWLITZ BANK 2 List of Schedules SCHEDULE 1.1(a) Assumed Severance Obligations SCHEDULE 1.1(b) Branches/Real Properties SCHEDULE 3.6(a) Form of Deed SCHEDULE 3.6(b) Form of Bill of Sale SCHEDULE 3.6(c) Form of Assignment and Assumption Agreement SCHEDULE 3.6(d) Form of Assignment of Lease and Assumption SCHEDULE 3.6(e) Form of Landlord Consent SCHEDULE 3.6(g) Form of Certificate of Officer Wells Fargo Bank, National Associations SCHEDULE 3.7(d) Form of Certificate of Officer [Purchaser] SCHEDULE 4.11 Compensation to Seller for Certain Post Closing Services SCHEDULE 5.4 Tenant Leases SCHEDULE 5.6 Litigation and Undisclosed Liabilities SCHEDULE 5.16 Environmental Matters SCHEDULE 8.1 Outstanding Tax Liabilities 3 This PURCHASE AND ASSUMPTION AGREEMENT, dated as of this 5th day of March, 1997 (this "Agreement"), is by and between Wells Fargo Bank, N.A. ("Seller") and Cowlitz Bank ("Purchaser"). RECITALS A. Seller. As of the date hereof, Seller is a national banking association, organized under the laws of the United States, with its principal office located in San Francisco, California. B. Purchaser. Purchaser is a corporation, organized under the laws of Washington State, with its principal office located in Longview, Washington. C. Purchaser desires to acquire from Seller, and Seller desires to transfer to Purchaser, certain banking premises and certain deposits associated therewith, located in the State of Washington, all in accordance with and subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and obligations set forth herein, the parties agree as follows: ARTICLE 1 CERTAIN DEFINITIONS 1.1 Certain Definitions. The terms set forth below are used in this Agreement with the following meanings: "Accrued Interest" means, as of any date, with respect to a Deposit, interest which is accrued on such Deposit to but excluding such date and not yet posted to the relevant deposit account "ACH Direct Deposit Cut-Off Date" has the meaning set forth in Section 4.3. "Adjusted Payment Amount" has the meaning set forth in Section 3.3 "Adjustment Date" has the meaning set forth in Section 3.3. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling, controlled by or under common control with such person. "Agreement" means this Purchase and Assumption Agreement, including all schedules, exhibits and addenda, each as amended from time to time in accordance with the terms hereof. "Allocation Statement" has the meaning set forth in Section 3.4(a). -1- 4 "Asbestos Hazard" means the presence of asbestos in a parcel of Owned Real Property or the improvements thereon as of the date hereof which, under applicable laws, must be immediately remediated in order to allow continuation of the current operation of the Branch within such Owned Real Property using the current improvements thereon and the cost of such remediation, as reasonably determined by the Environmental Consultant, shall be more than One Hundred Thousand Dollars ($100,000). "Assets" has the meaning set forth in Section 2.1(a). "Assignment and Assumption Agreement" has the meaning set forth in Section 3.6(c). "Assumed Severance Obligations" means those duties, responsibilities, obligations and liabilities of Seller or of its Affiliates under the severance and similar plans described in Schedule 1.1(a) to pay severance and provide benefits to any Branch Employee or Transferred Employee. "Branch Employees" means, the employees of the Seller working at the Branches on the Closing Date (including, without limitation, those employees who on the Closing Date are on family and medical leave, military leave or personal or pregnancy leave and who are eligible to return to work under Seller's policies), subject to any transfers permitted pursuant to Section 7.1 and replacement in the ordinary course of business of employees who may leave Seller's employ between the date hereof and the Closing Date. "Branch Leases" means the leases under which Seller leases land and/or buildings used as Branches, including without limitation ground leases. "Branches" means each of the branch banking offices of Seller at the locations identified on Schedule 1.1(b) hereto. "Burdensome Condition" has the meaning set forth in Section 9.1(a). "Business Day" means a day on which banks are generally open for business and which is not a Saturday or Sunday. "Cash on Hand" means, as of any date, all petty cash, vault cash, teller cash, ATM cash, prepaid postage and cash equivalents held at a Branch. "Closing" and "Closing Date" refer to the closing of the P&A Transaction, which is to be held at such time and date as provided in Article 3 hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Deeds" has the meaning set forth in Section 3.6(a). "Deposit(s)" means deposit liabilities with respect to deposit accounts booked by Seller at the Branches, as of the close of business of the day prior to the Closing Date, which -2- 5 constitute "deposits" for purposes of the Federal Deposit Insurance Act. 12 U.S.C. Section 1813, including collected and uncollected deposits and Accrued Interest, BUT EXCLUDING: (a) all Excluded Deposits; (b) deposit liabilities with respect to accounts registered in the name of a trust for which Seller serves as trustee (other than non-excluded IRA and SEP accounts); (c) deposit liabilities with respect to accounts booked by Seller at any Branch for which Seller serves as guardian or custodian (other than non-excluded IRA and SEP accounts); (d) all Keogh Accounts; (e) any IRA and SEP accounts which hold investments in non-deposit instruments; (f) any deposit account associated with any merchant card banking relationship; (g) any deposit account which serves as security for a loan or which serves as security for any credit card or overdraft protection; (h) any remittance account; and (i) any deposit account which has an automatic sweep to a third party. "Draft Closing Statement" means a draft closing statement, prepared by Seller, as of the close of business of the third (3rd) business day preceding the Closing Date setting forth an estimated calculation of both the Purchase Price and the Estimated Payment Amount. "Encumbrances" means all mortgages, claims, charges, liens, encumbrances, easements, limitations, restrictions, commitments and security interests, except for statutory liens securing tax and/or other payments not yet due, liens incurred in the ordinary course of business, including without limitation liens in favor of mechanics or materialmen, and such other liens, charges, security interests or encumbrances as do not materially detract from the value or materially and adversely affect the use of the properties or assets subject thereto or affected thereby or which otherwise do not materially impair the value of or business operations at such properties and except for obligations pursuant to escheat and unclaimed property laws relating to the Escheat Deposits. "Environmental Consultant" has the meaning specified in Section 10.1(b). "Environmental Hazard" means the presence of any Hazardous Substance in violation of, and reasonably likely to require material remediation costs under, applicable Environmental Laws; provided, however, that the definition of Environmental Hazard shall not include asbestos and asbestos-containing materials, unless, with respect to any single parcel of Owned Real Property, the cost of remediation, as reasonably determined by the Environmental Consultant, shall be more than One Hundred Thousand Dollars ($100,000). Any such determination shall be based upon a "risk-based approach" of what would be necessary to obtain the equivalent of a "no further action letter" from the applicable regulatory agency or agencies with no deed restrictions which would adversely affect the commercial use of the parcel of Owned Real Property. "Environmental Law" means any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any Federal or state governmental authority, (x) relating to the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of -3- 6 hazardous substances, in each case as amended and now in effect. Environmental Laws include, without limitation, the Clean Air Act (42 U.S.C. Section 7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Sections 9601 et seq.); the Resource Conservation and Recovery Act (42 U.S.C. Section 96901 et seq.); the Federal Water Pollution Control Act (33 U.S.C. Sections 1251 et seq.); the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.); provided, however, that the definition of "Environmental Law" shall not include any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any governmental authority relating to asbestos or asbestos-containing materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escheat Deposits" means, as of any date, Deposits and safe deposit box contents, in each case held on such date at the Branches which become subject to escheat, in the calendar year in which the Closing occurs, pursuant to applicable escheat and unclaimed property laws. "Estimated Payment Amount" has the meaning set forth in Section 3.2(a). "Estimated Purchase Price" means the Purchase Price as set forth on the Draft Closing Statement. "Excluded IRA/Keogh Account Deposits" has the meaning set forth in Section 2.4(c). "Excluded Deposits" means: (i) all wholesale commercial deposits (i.e., with account analysis or cash management services); and (ii) certain business related deposit liabilities excluded by Seller. "FDIA" means the Federal Deposit Insurance Act, as amended. "FDIC" means the Federal Deposit Insurance Corporation. "Federal Funds Rate" on any day means the per annum rate of interest (rounded upward to the nearest 1/100 of 1%) which is the weighted average of the rates on overnight federal funds transactions arranged on such day or, if such day is not a Business Day, the previous Business Day, by federal funds brokers computed and released by the Federal Reserve Bank of New York (or any successor) in substantially the same manner as such Federal Reserve Bank currently computes and releases the weighted average it refers to as the "Federal Funds Effective Rate" at the date of this Agreement. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "FedWire Direct Deposit Cut-off Date" has the meaning set forth in Section 4.3. "Final Closing Statement" means a final closing statement, prepared by Seller, as of the ninetieth (90th) day following the Closing Date setting forth both the Purchase Price and the Adjusted Payment Amount. -4- 7 "Hazardous Substance" means any substance, whether liquid, solid or gas (a) listed, identified or designated as hazardous or toxic to a level which requires remediation under any Environmental Law; (b) which, applying criteria specified in any Environmental Law, is hazardous or toxic; or (c) the use or disposal of which is regulated under Environmental Law. "IRA" means an "individual retirement account" or similar account created by a trust for the exclusive benefit of an individual or his beneficiaries in accordance with the provisions of Section 408 of the Code. "IRS" means the Internal Revenue Service. "Keogh Account" means an account created by a trust for the benefit of employees (some or all of whom are owner-employees) and that complies with the provisions of Section 401 of the Code. No Keogh Accounts are being sold. "Landlord Consents" has the meaning set forth in Section 3.6(e). "Lease Agreement" means a lease entered into pursuant to Section 10.1(c) upon such specific terms and conditions as contemplated by such Section and such other commercially reasonable terms and conditions as are customary in a "triple net" lease of a bank branch facility. "Lease Assignment" has the meaning set forth in Section 3.6(d). "Liabilities" has the meaning set forth in Section 2.2. "Loss" means the amount of losses, liabilities, damages (including forgiveness or cancellation of obligations) and expenses (including reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) incurred or suffered by the indemnified party or its Affiliates in connection with the matters described in Section 12.1, less the amount of the economic benefit (if any) to the indemnified party or its Affiliates occurring or reasonably anticipated to occur in connection with any such damage, loss, liability or expense (including Tax benefits obtainable under applicable law, amounts recovered under insurance policies net of deductibles, recovery by setoffs or counterclaims, and other economic benefits). "Material Adverse Effect" means (a) with respect to Seller, a material adverse effect on the business or direct economic results of operations of the Branches, taken as a whole, or on the ability of Seller timely to consummate the P&A Transaction as contemplated by this Agreement, and (b) with respect to Purchaser, a material adverse effect on the ability of Purchaser to perform any of its financial or other obligations under this Agreement, including the ability of Purchaser timely to consummate the P&A Transaction contemplated by this Agreement. In determining whether there has occurred a Material Adverse Effect there shall be excluded the effect of any change in Federal or state banking laws or regulations, any change in GAAP or regulatory accounting principles, any adverse change in general economic -5- 8 conditions, including without limitation the interest rate environment, or in the depository institution industry generally. "OCC" means the Office of the Comptroller of the Currency. "Order" has the meaning set forth in Section 9.1(b). "Owned Real Property" means Real Property where Seller owns both the real property and improvements thereon that are used for Branches. "P&A Transaction" means the purchase and sale of Assets and the assumption of Liabilities described in Sections 2.1 and 2.2. "Personal Property" means the personal property of Seller, located in the Branches, which is defined on the personal property and fixed assets list previously provided to Purchaser; PROVIDED, HOWEVER, NONE OF THE FOLLOWING ARE BEING SOLD: (1) teller terminals, Teller Vision and related equipment; (2) phone equipment and related equipment; and (3) personal property or equipment subject to Personal Property Lease, each of which such Personal Property Lease shall be terminated as of the Closing. In addition, all ATM's at the Branches may be replaced, at the option of Seller, with IBM (Model Number 3624-12) or similar machine prior to Closing. Such replacement ATM's ("Replacement ATM's") will be sold at a fixed price per ATM unit of $10,000.00. If, prior to the Closing Date, an item of Personal Property is stolen, destroyed or otherwise lost, such item shall be excluded from the P&A Transaction, and the term "Personal Property" as used herein shall exclude such item. If, prior to the Closing Date, an item of Personal Property is damaged by fire or other casualty, such item, if reasonably repairable shall be sold to Purchaser (in accordance with the provisions hereof) and the insurance proceeds relating to such item shall be assigned to Purchaser, it being understood that if such item is not reasonably repairable or is underinsured or uninsured, it shall be excluded from the P&A Transaction. Personal Property, for purposes of what is being sold hereunder, does not include any personal property of Seller located in the Real Property which is not in the branch banking office and is not necessary to the operation of the branch banking office (e.g., personal property associated with non-branch banking offices of Seller which may be located in the Real Property). "Personal Property Leases" means the leases under which Seller leases certain Personal Property in the Branch. Seller shall cancel all such Personal Property Leases as of the Closing. "Purchase Price" has the meaning set forth in Section 2.3. "Real Property" means the parcels of real property on which the Branches listed on Schedule 1.1(b) are located, including any improvements and tenant improvements and trade fixtures thereon, which Schedule indicates whether or not such real property is Owned Real Property. "Records" means all paper records and original documents, or where reasonable and appropriate copies thereof, in Seller's possession that pertain to and are utilized by Seller to -6- 9 administer, reflect, monitor, evidence or record information respecting the business or conduct of the Branches (including transaction tickets through the Closing Date and all records for closed accounts located in Branches and excluding any other transaction tickets and records for closed accounts) and all such records and original documents, or where reasonable and appropriate copies thereof, regarding the Assets, or the Deposits, or to comply with applicable laws and governmental regulations to which the Deposits are subject, including but not limited to unclaimed property and escheat laws. Notwithstanding the above, Seller may provide copies of all Records. Seller is not required to deliver any data processing or electronic/image type records commingled with other records of Seller unrelated to the Branches and Seller is not required to deliver any account history which is prior to forty-five (45) days prior to Closing. In addition, Seller is not required to deliver any risk-management information regarding customers, including without limitation credit-scoring formulas, daylight over draft limits, stop payment or overdraft history more than forty-five (45) days prior to Closing. "Regulatory Approvals" means all approvals, authorizations, waivers or consents of or notices to any governmental agencies or authorities required for or in connection with consummation of the P&A Transaction. "Safe Deposit Agreements" means the agreements relating to safe deposit boxes located in the Branches. "Seller's Knowledge" or other similar phrases means information that is actually known to any officer of Seller who holds the title of Senior Vice President or above and has responsibility with respect to management of operations conducted at the Branches. "Tax Returns" means any return or other report required to be filed with respect to any Tax, including declaration of estimated tax and information returns. "Taxes" means any federal, state, local, or foreign taxes, including but not limited to taxes on or measured by income, estimated income, franchise, capital stock, employee's withholding, non-resident alien withholding, backup withholding, social security, occupation, unemployment, disability, value added taxes, taxes on services, real property, personal property, sales, use, excise, transfer, gross receipts, inventory and merchandise, business privilege, and other taxes or governmental fees or charges or amounts required to be withheld and paid over to any government in respect of any tax or governmental fee or charge, including any interest, penalties, or additions to tax on the foregoing whether or not disputed. "Tenant Leases" means leases or subleases between Seller and tenants, if any, listed on Schedule 5.4. "Title Company" has the meaning set forth in Section 3.10(a). "Title Policy" has the meaning set forth in Section 3.1O(b). "Title Reports" has the meaning set forth in Section 3.1O(a). -7- 10 "Transaction Account" means any account at a Branch in respect of which deposits therein are withdrawable in practice upon demand or upon which third party drafts may be drawn by the depositor, including checking account, negotiable order of withdrawal accounts and money market deposit accounts. "Transferred Employees" means Branch Employees employed by Purchaser on and after the Closing Date. 1.2 Accounting Terms. All accounting terms not otherwise defined herein shall have the respective meanings assigned to them in accordance with consistently applied generally accepted accounting principles as in effect from time to time in the United States of America ("GAAP"). 1.3 Interpretation. The captions or headings in this Agreement are for convenience of reference only and in no way define, limit or describe the scope or intent of any provisions or Sections of this Agreement. All references in this Agreement to particular Articles or Sections are references to the Articles or Sections of this Agreement, unless some other reference is clearly indicated. In this Agreement, unless the context otherwise requires, (i) words describing the singular number shall include the plural and vice versa, (ii) words denoting any gender shall include all genders and (iii) the word "including" shall mean "including without limitation." The rule of construction against the draftsman shall not be applied in interpreting and construing this Agreement. ARTICLE 2 THE P&A TRANSACTION 2.1 Purchase and Sale of Assets. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Seller shall grant, sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest, as of the Closing Date, in and to the following (collectively, the "Assets"): (i) Cash on Hand; (ii) the Owned Real Property; (iii) the Personal Property; (iv) the Branch Leases and Tenant Leases; (v) the Safe Deposit Agreements; and (vi) the Records (b) Purchaser understands and agrees that it is purchasing only the Assets (and assuming only the Liabilities) specified in this Agreement and, except as may be expressly provided for in this Agreement, Purchaser has no interest in or right to any other business relationship which Seller may have with any customer of the Branches, including without limitation: (i) any deposit account or other service of Seller at any other office of Seller which may be linked to the Deposits; (ii) any deposit account which sweeps from the Branch to a third party; (iii) any merchant card banking business or any deposit account associated with -8- 11 any merchant card banking relationship; and/or (iv) any cash management service (e.g., sweep accounts, cash concentrator accounts, controlled disbursement accounts) which Seller may provide to any customer of the Branches. No credit card relationships are being sold. No loans are being sold. No right to the use of any name, trade name, trademark or service mark, if any, of Seller, Wells Fargo & Company (parent of Seller) or any of their respective Affiliates is being sold. 2.2 Assumption of Liabilities. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Purchaser shall assume, pay, perform and discharge all duties, responsibilities, obligations or liabilities of Seller (whether accrued, contingent or otherwise) to be discharged, performed, satisfied or paid on or after the Closing Date, with respect to the following (collectively, the "Liabilities"): (i) the Deposits, including the IRA and SEP accounts (except those IRA and SEP accounts which are excluded under the definition of Deposits) to the extent contemplated by Section 2.4; (ii) the Branch Leases, and Tenant Leases; (iii) the Safe Deposit Agreements; and (iv) the Assumed Severance Obligations. (b) Notwithstanding anything to the contrary in this Agreement, Purchaser shall not assume or be bound by any duties, responsibilities, obligations or liabilities of Seller, or of any of Seller's Affiliates, of any kind or nature, known, unknown, contingent or otherwise, other than the Liabilities. 2.3 Purchase Price. The purchase price ("Purchase Price") for the Assets shall be the sum of: (a) An amount equal to 7.50% of the average daily balance (including Accrued Interest) of the Deposits for the period commencing thirty (30) days prior to and inclusive of the day prior to the Closing Date and ending on the day prior to the Closing Date; (b) The aggregate amount of Cash on Hand as of the Closing Date; (c) The aggregate net book value of all the Assets, other than Cash on Hand, as reflected on the books of Seller as of the close of business of the month-end day most recently preceding the Closing Date; (d) The sum of $10,000.00 for each Replacement ATM; and (e) If, through no material fault of the Seller, the Closing has not occurred by September 18, 1997, the sum of $75,000.00 per Branch. Purchaser has, concurrently with Seller's execution of this Agreement, made a good faith deposit to Seller, as consideration for entering into this Agreement, in the amount of Seventy-Five Thousand Dollars ($75,000) per branch for each Branch which is the subject of this -9- 12 Agreement. Such good faith deposit shall be applied against the Purchase Price upon Closing unless, through no material fault of the Seller, the Closing does not occur on or before July 18, 1997, in which case, Seller shall retain such deposit. Such good faith deposit shall be returned to Purchaser if this agreement is terminated for a reason other than the default of Purchaser. Such good faith deposit is consideration for entering into this Agreement, is not intended as liquidated damages and shall not in any way limit Seller's remedies is a default by Purchaser hereunder. No interest shall be paid on such good-faith deposit. 2.4 Assumption of IRA Account Deposits. (a) With respect to Deposits in IRAs and SEPs (except those IRA and SEP accounts which are excluded under the definition of Deposits), Seller will use reasonable efforts and will cooperate with Purchaser in taking any action reasonably necessary to accomplish either the appointment of Purchaser as successor custodian or the delegation to Purchaser (or an Affiliate of Purchaser) of Seller's authority and responsibility as custodian of all such IRA deposits except self-directed IRA deposits, including, but not limited to, sending to the depositors thereof appropriate notices, cooperating with Purchaser (or such Affiliate) in soliciting consents from such depositors, and filing any appropriate applications with applicable regulatory authorities. If any such delegation is made to Purchaser (or such Affiliates), Purchaser (or such Affiliate) will perform all of the duties so delegated and comply with the terms of Seller's agreement with the depositor of the IRA deposits affected thereby. (b) If, notwithstanding the foregoing, as of the Closing Date, Purchaser shall be unable to retain deposit liabilities in respect of an IRA Account, such deposit liabilities shall be excluded from Deposits for purposes of this Agreement and shall constitute "Excluded IRA Account Deposits." No Keogh Accounts are being sold. ARTICLE 3 CLOSING PROCEDURE; ADJUSTMENTS 3.1 Closing. (a) The Closing will be held at the offices of Seller at 420 Montgomery Street, San Francisco or such place as may be agreed to by the parties. (b) The Closing Date shall be July 18, 1997, or, if the Closing cannot occur on such date, on a date and time as soon thereafter as practicable, which shall be no later than thirty (30) Business Days after receipt of all Regulatory Approvals. 3.2 Payment at Closing. (a) At Closing, Seller shall pay to Purchaser the amount by which the aggregate balance (including Accrued Interest) of the Deposits exceeds the Estimated Purchase Price (the "Estimated Payment Amount") or, Purchaser shall pay to Seller the amount by which the Estimated Purchase Price exceeds the aggregate balance (including Accrued Interest) of the Deposits, each as set forth on the Draft Closing Statement as agreed upon between Seller and Purchaser. (b) All payments to be made hereunder by one party to the other shall be made by wire transfer of immediately available funds (in all cases to an account specified in writing by -10- 13 Seller or Purchaser, as the case may be, to the other not later than the third (3rd) Business Day prior to the Closing Date) on or before 11:00 A.M. local time on the date of payment. If any payment to be made hereunder on the Closing Date (or any other date) shall not be made on or before 11:00 A.M. local time on such date, and the amount thereof shall have been agreed to in writing by the parties at the Closing Date (or such other payment date), the party responsible therefor may make such payment on or before 11:00 A.M. local time on the next Business Day together with interest thereon at the Federal Funds Rate applicable from the Closing Date (or such other payment date) to the date such payment is actually made, which in no event shall be later than the fifth (5th) business day after such payment was due. (c) If any instrument of transfer contemplated herein shall be recorded in any public record before the Closing and thereafter the Closing is not completed, then at the request of such transferring party the other party will deliver (or execute and deliver) such instruments and take such other action as such transferring party shall reasonably request to revoke such purported transfer. 3.3 Adjustment of Purchase Price. (a) On or before 12:00 noon on the sixtieth (60th) day following the Closing Date (the "Adjustment Date"), Seller shall deliver to Purchaser the Final Closing Statement and shall make available such work papers, schedules and other supporting data as may be reasonably requested by Purchaser to enable it to verify the amounts set forth in the Final Closing Statement. The Final Closing Statement shall also set forth the amount (the "Adjusted Payment Amount") by which the aggregate amount of Deposits (including Accrued Interest) shown on the Final Closing Statement differs from the Estimated Purchase Price. (b) The determination of the Adjusted Payment Amount shall be final and binding on the parties hereto unless within thirty (30) days after receipt by Purchaser of the Final Closing Statement, Purchaser shall notify the Seller in writing of its disagreement with any amount included therein or omitted therefrom, in which case, if the parties are unable to resolve the disputed items within ten (10) Business Days of the receipt by Seller of notice of such disagreement, such items shall be determined by an independent accounting firm selected by mutual agreement between Seller and Purchaser; provided, however, that in the event the fees of such firm as estimated by such firm would exceed fifty percent (50%) of the net amount in dispute, the parties agree that such firm will not be engaged by either party and that such net amount in dispute will be equally apportioned between Seller and Purchaser. Such accounting firm shall be instructed to resolve the disputed items within ten (10) Business Days of engagement, to the extent reasonably practicable. The determination of such accounting firm shall be final and binding on the parties hereto. The fees of any such accounting firm shall be divided equally between Seller and Purchaser. (c) On or before 12:00 Noon on the tenth (10th) Business Day after the Adjustment Date or, in the case of a dispute, the date of the resolution of the dispute pursuant to subsection 3.3 (b) above, Seller shall pay to Purchaser an amount equal to the amount by which the Adjusted Payment Amount exceeds the Estimated Payment Amount, plus interest on such excess amount from the Closing Date to but excluding the payment date, at the Federal Funds Rate or, if the Estimated Payment Amount exceeds the Adjusted Payment Amount, Purchaser -11- 14 shall pay to Seller an amount equal to such excess, plus interest from the Closing Date to but excluding the payment date, at the Federal Funds Rate. Any payments required by Section 3.5 shall be made contemporaneously with the foregoing payment. 3.4 Allocation of Purchase Price. (a) Purchaser and Seller agree that upon final determination of the Purchase Price, the Purchase Price shall be allocated in a manner as determined by Purchaser subject to Seller's consent (which consent shall not be unreasonably withheld or delayed), after taking into account any applicable Treasury Regulations and the fair market value of such items and to be set forth in a statement, dated the Adjustment Date (the "Allocation Statement") prepared by Purchaser. (b) Purchaser and Seller shall report the transaction contemplated by this Agreement (including income tax reporting requirements imposed pursuant to Section 1060 of the Code) in accordance with the allocation specified in the Allocation Statement. In the event any party hereto receives notice of an audit in respect of the allocation of the Purchase Price specified herein, such party shall immediately notify the other party in writing as to the date and subject of such audit. (c) If any Tax Return filed by Purchaser or Seller relating to the transactions contemplated hereby is challenged by the taxing authority with which such Tax Return was filed on the basis of the allocation set forth in the Allocation Statement, as finally adjusted, the filing party shall assert and maintain in good faith the validity and correctness of such allocation during the audit thereof until the issuance by the taxing authority of a "30 Day Letter", or a determination of liability equivalent thereto, to such party; provided, however, that at any time such party shall, in its sole discretion, have the right to pay, compromise, settle, dispute or otherwise deal with its alleged tax liability. If such a Tax Return is challenged as herein described, the party filing such Tax Return shall keep the other party apprised of its decisions and the current status and progress of all administrative and judicial proceedings, if any, that are undertaken at the election of such party. 3.5 Proration: Other Closing Date Adjustments. (a) Except as otherwise specifically provided in this Agreement, it is the intention of the parties that Seller will operate the Branches for its own account until 11:59 P.M., California time, the day prior to the Closing Date, and that Purchaser shall operate the Branches, hold the Assets and assume the Liabilities for its own account on and after the Closing Date. Thus, except as otherwise specifically provided in this Agreement, items of income and expense, as defined herein, shall be prorated as of 11:59 P.M., California time, the day prior to the Closing Date, and settled between Seller and Purchaser on the Closing Date, whether or not such adjustment would normally be made as of such time. Items of proration will be handled at Closing as an adjustment to the Purchase Price unless otherwise agreed by the parties hereto. (b) For purposes of this Agreement, items of proration and other adjustments shall include, without limitation: (i) rental payments and security deposits under the Branch Leases and the Tenant Leases; (ii) sales and use taxes and personal and real property taxes and assessments; (iii) FDIC: deposit insurance assessments; (iv) wages, salaries and employee benefits and expenses; (v) trustee or custodian fees on IRA Accounts; (vi) adjustments -12- 15 reflecting exclusions from the Personal Property as provided for in the definition thereof; and (vii) other prepaid expenses and items and accrued but unpaid liabilities, as of the close of business on the day prior to the Closing Date. Safe deposit rental payments previously received by Seller shall not be prorated. 3.6 Seller Deliveries. At the Closing, Seller shall deliver to Purchaser: (a) Deeds in substantially the form of Schedule 3.6(a) (except as otherwise required by local state law), pursuant to which the Owned Real Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults (the "Grant Deeds"); (b) A bill of sale in substantially the form of Schedule 3.6(b) (except as otherwise required by local state law), pursuant to which the Personal Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults; (c) An assignment and assumption agreement in substantially the form of Schedule 3.6(c) (except as otherwise required by local state law), with respect to the Liabilities (the "Assignment and Assumption Agreement"); (d) Lease assignment and assumption agreements in substantially the form of Schedule 3.6(d) (except as otherwise required by local state law) with respect to each of the Branch Leases (the "Lease Assignments"); (e) Subject to the provisions of Section 7.4, such consents of landlords under the Branch Leases, as shall be required pursuant to the terms of such Branch Leases, to the assignment of the Branch Leases to Purchaser in substantially the form of Schedule 3.6(e) (except as otherwise required by local state law), (the "Landlord Consents"); (f) Subject to the provisions of Section 7.4, such consents as shall be required pursuant to the terms of the Tenant Leases and the Personal Property Leases in connection with the assignments thereof to Purchaser; (g) An Officer's Certificate in substantially the form of Schedule 3.6(g); (h) An opinion of Seller's in-house counsel, dated the Closing Date, in form and substance reasonably satisfactory to Purchaser substantially to the effect that: (i) Seller is a national banking association, duly organized and validly existing under the laws of the United States, with all requisite corporate power and authority to execute, deliver and perform this Agreement; (ii) all Regulatory Approvals required to have been obtained by Seller or its Affiliates have been obtained and are in full force and effect; and (iii) this Agreement has been duly authorized, executed and delivered by Seller and (assuming due authorization, execution and delivery by Purchaser) is a valid -13- 16 and legally binding obligation of Seller enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfers, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (i) The Draft Closing Statement; (j) Seller's resignation as trustee or custodian, as applicable, with respect to each IRA Account included in the Deposits and designation of Purchaser as successor trustee or custodian with respect thereto as contemplated by Section 2.4; (k) All documentation required to exempt Seller from the withholding requirement of Section 1445 of the Code, consisting of an affidavit from Seller to Purchaser under penalty of perjury that Seller is not a foreign person and providing Seller's U.S. taxpayer identification number; and (l) Such other documents as the parties determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 3.7 Purchaser Deliveries. Al the Closing, Purchaser shall deliver to Seller: (a) The Assignment and Assumption Agreement; (b) Purchaser's acceptance of its appointment as successor trustee or custodian, as applicable, of the IRA Accounts included in the Deposits and assumption of the fiduciary, obligations of the trustee or custodian with respect thereto, as contemplated by Section 2.4; (c) The Lease Assignments and, as contemplated by Section 7.4, such other instruments and documents as any landlord under a Branch Lease may reasonably require as necessary or desirable for providing for the assumption by Purchaser of a Branch Lease, each such instrument and document in the form and substance reasonably satisfactory to the parties and dated as of the Closing Date; (d) An Officer's Certificate in the form of Schedule 3.7(d) attached hereto; (e) An opinion of Purchaser's in-house or outside counsel, dated the Closing Date, in form and substance reasonably satisfactory to Seller, substantially to the effect that: (i) Purchaser is a corporation, duly organized and validly existing under the laws of Washington State, with all requisite corporate power and authority to execute, deliver and perform this Agreement; (ii) all Regulatory Approvals required to have been obtained by Purchaser or its Affiliates have been obtained and are in full force and effect; and -14- 17 (iii) this Agreement has been duly authorized, executed and delivered by Purchaser and (assuming due authorization, execution and delivery by Seller) is a valid and legally binding obligation of Purchaser enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; and (f) Such other documents as the polls determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 3.8 [intentionally left blank] 3.9 Owned Real Property Filings. On or prior to the Closing Date, Seller shall file or record, or cause to be filed or recorded, any and all documents (including, without limitation, deeds) necessary in order that the legal and equitable title to Owned Real Property shall be duly vested in Purchaser as of the Closing Date. Any expenses or documentary transfer taxes with respect to such filings and all escrow closing costs shall be borne by Purchaser. 3.10 Title Policies. (a) Purchaser has previously been provided by Seller, at its own expense, a preliminary title report (the "Title Reports") for all the Owned Real Property issued by Chicago Title Company (the "Title Company"), Purchaser has had an opportunity to review such Title Reports and Purchaser hereby approves the condition of title with respect to all the Owned Real Property being purchased hereunder. (b) Purchaser shall, at its own expense, obtain as of the Closing Date an ALTA (standard coverage) title insurance policy (i.e., the equivalent of a CLTA owner's title policy) from the Title Company (a "Title Policy") with respect to all the Owned Real Property. Seller will cooperate with Purchaser in assisting Purchaser to obtain (at Purchaser's expense) such Title Policies, including without limitation only such endorsements as may be reasonably necessary to insure that such Owned Real Property is free and clear of any Encumbrance not shown on the Title Reports which would materially and adversely affect the value or marketability of title thereto. ARTICLE 4 TRANSITIONAL MATTERS 4.1 Transitional Arrangements. Seller and Purchaser agree to cooperate and to proceed as follows to effect the transfer of account record responsibility for the Branches: (a) Not later than thirty (30) days after the signing of this Agreement, Seller will meet with Purchaser to investigate, confirm and agree upon mutually acceptable transaction settlement procedures and specifications, files, procedures and schedules, for the transfer of account record responsibility; provided, however it being understood and agreed that Seller is not obligated under this Agreement to provide Purchaser any system conversion files regarding -15- 18 the Deposits other than a standard format IBM compatible standard label tape conversion tape (i.e., not one which is specifically formatted for Purchaser's systems specifications); and provided, further, that Seller is not obligated to provide Purchaser with any information regarding Seller's relationship with the customers outside of the Branch (e.g., other customer products, householding information). (b) [intentionally left blank] 4.2 Customers. (a) Not later than thirty (30) days prior to the Closing Date (unless earlier required by law). (i) Seller will notify the holders of Deposits to be transferred on the Closing Date that, subject to the terms and conditions of this Agreement, Purchaser will be assuming liability for such Deposits; (ii) each of Seller and Purchaser shall provide, or join in providing where appropriate, all notices to customers of the Branches and other persons that Seller or Purchaser, as the case may be, is required to give under applicable law or the terms of any other agreement between Seller and any customer in connection with the transactions contemplated hereby; and (iii) following or concurrently with the notice referred to in clause (i) above, Purchaser may communicate with and deliver information, brochures, bulletins and other communications to depositors and other customers of the Branches concerning the P&A Transaction and the business of Purchaser. A party proposing to send or publish any notice or communication pursuant to any paragraph of this Section 4.2 shall furnish to the other party a copy of the proposed form of such notice or communication at least five (5) days in advance of the proposed date of the first mailing, posting, or other dissemination thereof to customers, and shall not unreasonably refuse to amend such notice to incorporate any changes that the other such party proposes as necessary to comply with applicable law. All costs and expenses of any notice or communication sent or published by Purchaser or Seller shall be the responsibility of the party sending such notice or communication and all costs and expenses of any joint notice or communication shall be shared equally by Seller and Purchaser. As soon as reasonably practicable and in any event within forty-five (45) days of the date hereof, Seller shall provide to Purchaser a report of the names and addresses of the owners of the Deposits and the lessees of the safe deposit boxes in connection with the mailing of such materials, which report shall be current as of the date hereof. (b) Following the giving of any notice described in paragraph (a) above, Purchaser and Seller shall deliver to each new customer at any of the Branches such notice or notices as may be reasonably necessary to notify such new customers of Purchaser's pending assumption of liability for the Deposits and to comply with applicable law. The cost of such notices shall be paid by Purchaser. As soon as practicable after the execution of this Agreement, Seller will provide Purchaser with account information, including complete mailing addresses for each of the depositors of the Deposits as of a recent date, and upon reasonable request shall provide -16- 19 an updated version of such records; provided, however, that Seller shall not be obligated to provide such updated records more than twice. (c) Notwithstanding the provisions of Section 7.6, neither Purchaser nor Seller shall object to the use, by depositors of the Deposits, of payment orders issued to or ordered by such depositors on or prior to the Closing Date, which payment orders bear the name, or any logo, trademark, service mark, trade name or the proprietary mark of Wells Fargo Bank or any of its Affiliates. 4.3 Direct Deposits. Seller will use all reasonable efforts to transfer to Purchaser On the Closing Date all of those automated clearing house and FedWire direct deposit arrangements related (by agreement or other standing arrangement) to Deposits. On each Business Day for a period of four (4) months following the Closing, in the case of automated clearing house direct deposits to accounts containing Deposits (the final Business Day of such period being the "ACH Direct Deposit Cut-Off Date"), Seller shall transfer to Purchaser all received ACH Direct Deposits three times each Business Day at: 6:30 a.m., 2:30 p.m. and midnight, Pacific Standard Time. Such transfers shall contain Direct Deposits effective for that Business Day only. On each Business Day, for a period of thirty (30) days following the Closing Date (the final Business Day of such period being the "FedWire Direct Deposit Cut-Off Date"), FedWires received by Seller shall be returned (as soon as is possible after receipt) to the originator with an indication of Purchaser's correct Wire Room contact information and an instruction that such wire should be sent to Purchaser. Compensation for ACH direct deposits or FedWire direct deposits not forwarded to Purchaser on the same Business Day as that on which Seller has received such deposits will be handled in accordance with the rules established by the United States Council on International Banking. After the applicable Direct Deposit Cut-Off Date, Seller may discontinue accepting and forwarding automated clearing house and FedWire entries and funds and return such direct deposits to the originators marked "Account Closed." Seller shall not be liable for any overdrafts that may thereby be created. Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct deposit arrangements related to the Branches. At the time of each Direct Deposit Cut-off Date, Purchaser will provide automated clearing housing originators with account numbers relating to Deposits. 4.4 Direct Debit. As soon as practicable after execution of this Agreement, and after the notice provided in Section 4.2(a), Purchaser will send appropriate notice to all customers having accounts constituting Deposits the terms of which provide for direct debit of such accounts by third parties, instructing such customers concerning transfer of customer direct debit authorizations from Seller to Purchaser. Seller shall cooperate in soliciting the transfer of such authorizations. Such notice shall be in a form agreed to by the parties. For a period of four (4) months following the Closing Date, Seller shall transfer to Purchaser all received direct debits on accounts constituting Deposits three times each Business Day: at 6:30 am; 2:30 p.m.; and midnight, Pacific Standard Time. Such transfers shall contain direct debits effective for that Business Day only. Thereafter, Seller may discontinue forwarding such entries and return them to the originators marked "Account Closed." Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct debit arrangements related to the Branches. On the Closing Date, -17- 20 Purchaser will provide automated clearing house originators of such direct debits with account numbers. 4.5 Escheat Deposits. After Closing no currently escheated deposits are being sold. Purchaser shall be solely responsible for the proper reporting and transmission to the appropriate of such Escheat Deposits. 4.6 Maintenance of Records. Through the Closing Date, Seller will maintain the Records relating to the Assets and Liabilities in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. Purchaser may, at its own expense, make such copies of and excerpts from the Records as it may deem desirable. All Records, whether held by Purchaser or Seller, shall be maintained for such periods as are required by law, unless the parties shall, applicable law permitting, agree in writing to a different period. From and after the Closing Date, each of the parties shall permit the other reasonable access to any applicable Records in its possession relating to matters arising on or before the Closing Date and reasonably necessary in connection with any claim, action, litigation or other proceeding involving the party requesting access to such Records or in connection with any legal obligation owed by such party to any present or former depositor or other customer. 4.7 Interest Reporting and Withholding. (a) Seller will report to applicable taxing authorities and holders of Deposits, with respect to the period from January 1 of the year in which the Closing occurs through the Closing Date, all interest (including for purposes hereof dividends and other distributions with respect to money market accounts) credited to, withheld from and any early withdrawal penalties imposed upon the Deposits. Purchaser will report to the applicable taxing authorities and holders of Deposits, with respect to all periods from the day after the Closing Date, all such interest credited to, withheld from and early withdrawal penalties imposed upon such Deposits. Any amounts required by any governmental agencies to be withheld from any of the Deposits through the Closing Date will be withheld by Seller in accordance with applicable law or appropriate notice from any governmental agency and will be remitted by Seller to the appropriate agency on or prior to the applicable due date. Any such withholding required to be made subsequent to the Closing Date shall be withheld by Purchaser in accordance with applicable law or the appropriate notice from any governmental agency and will be remitted by Purchaser to the appropriate agency on or prior to the applicable due date. Promptly after the Closing Date, but in no event later than the date Purchaser is obligated to remit such amounts to the applicable governmental agency, Seller will pay to Purchaser that portion of any sums theretofore withheld by Seller from any Deposits which are required to be remitted by Purchaser pursuant to the foregoing and shall directly remit to the applicable governmental agency that portion of any such sums which are required to be remitted by Seller. (b) Seller shall be responsible for delivering to payees all IRS notices with respect to information reporting and tax identification numbers required to be delivered through the Closing Date with respect to the Deposits, and Purchaser shall be responsible for delivering to payees all such notices required to be delivered following the Closing Date with respect to the Deposits. Purchaser and Seller shall, prior to the Closing Date, consult and Seller shall take -18- 21 reasonable actions as are necessary to permit Purchaser timely to deliver such IRS notices required to be delivered following the Closing Date. 4.8 Negotiable Instruments. Seller will remove any supply of Seller's money orders, official checks, gift checks, travelers' checks or any other negotiable instruments located at each of the Branches on the Closing Date. 4.9 ATM/Debit Cards; POS Cards. Seller will provide Purchaser with a list of ATM access/debit cards and Point-of-Sale ("POS") cards issued by Seller to depositors of any Deposits, and a record thereof in a format reasonably agreed to by the parties containing all addresses therefor, as soon as practicable after execution of this Agreement. At or promptly after the Closing, Seller will provide Purchaser with a revised record through the Closing. In instances where a depositor of a Deposit made an assertion of error regarding an account constituting Deposits pursuant to the Electronic Funds Transfer Act and Federal Reserve Board Regulation E, and Seller, prior to the Closing, recredited the disputed amount to the relevant account during the conduct of the error investigation, Purchaser agrees to comply with a written request from Seller to debit such account in a stated amount and remit such amount to Seller, to the extent of the balance of funds available in the accounts. Seller agrees to indemnify Purchaser for any claims or losses that Purchaser may incur as a result of complying with such request from Seller. Seller will not be required to disclose to Purchaser customers' PINs or algorithms or logic used to generate PINs. Purchaser shall reissue ATM access/debit cards to depositors of any Deposits prior to the Closing Date, which cards shall be effective as of the Closing Date. Purchaser and Seller agree to settle any and all ATM transactions and POS transactions effected on or before the Closing Date, but processed after the Closing Date, as soon as practicable. In addition, Purchaser assumes responsibility for and agrees to pay on presentation all POS transactions initiated before or after the Closing with Visa Gold Check Cards and MasterMoney Cards issued by Seller to access Transaction Accounts. 4.10 Leasing of Personal Property. Seller shall cancel or terminate any Personal Property Leases as of the Closing Date. 4.11 Handling of Certain Items. (a) As soon as practicable after the Closing Date, Purchaser shall mail to each depositor in respect of a Transaction Account (i) a letter approved by Seller requesting that such depositor promptly cease writing Seller's drafts against such Transaction Account and (ii) new drafts which such depositor may draw upon Purchaser for the purpose of effecting transactions with respect to such Transaction Accounts. The parties hereto shall use their best efforts to develop procedures which cause Seller's drafts against Transaction Accounts which are received after the Closing Date to be cleared through Purchaser's then-current clearing procedures. During the ninety (90) day period after the Closing Date, if it is not possible to clear Transaction Account drafts through Purchaser's then- current clearing procedures, Seller shall forward to Purchaser as soon as practicable but in no event more than three (3) Business Days after receipt all Transaction Account drafts drawn against Transaction Accounts. Seller shall have no obligation to pay such forwarded Transaction Account drafts. Upon the expiration of such ninety (90) day period, Seller shall cease forwarding drafts against Transaction Accounts. Seller shall be compensated for its -19- 22 processing of the drafts during the ninety (90) day period following the Closing Date in accordance with Schedule 4.11 hereto. (b) Any items that were credited for deposit to or cashed against a Deposit prior to the Closing and are returned unpaid on or within sixty (60) days after the Closing Date ("Returned Items") will be handled as set forth herein. If Seller's bank account is charged for the Returned Item, Seller shall forward such Returned Item to Purchaser. If upon Purchaser's receipt of such Returned Item there are sufficient funds in the Deposit to which such Returned Item was credited or any other Deposit transferred at the Closing standing in the name of the party liable for such Returned Item, Purchaser will debit any or all of such Deposits an amount equal in the aggregate to the Returned Item, and shall repay that amount to Seller. If there are not sufficient funds in the Deposit because of Purchaser's failure to honor holds placed on such Deposit, Purchaser shall repay the amount of the Returned Item to Seller. Any items that were credited for deposit to or cashed against an account at the Branches to be transferred at the Closing prior to the Closing and are returned unpaid more than sixty (60) days after the Closing will be the responsibility of Purchaser, except that for a period of eighteen (18) months after the Closing checks drawn on the United States Treasury, checks issued by state governments and municipalities and checks returned for endorsement irregularities will be the responsibility of Seller. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Purchaser as follows: 5.1 Corporate Organization and Authority. As of the date hereof, Seller is a national banking association, duly organized and validly existing in good standing under the laws of the United States of America and has the requisite power and authority to conduct the business now being conducted at the Branches. Seller has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Seller enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.2 No Conflicts. The execution, delivery and performance of this Agreement by Seller does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental agency to which Seller is subject or under any agreement or instrument of Seller, or to which Seller is subject or by which Seller is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect (assuming the receipt of any required consents of lessors under the Branch Leases and Personal Property Leases). Seller has all material licenses, franchises, permits, certificates of public convenience, orders -20- 23 and other authorizations of all federal, state and local governments and governmental authorities necessary for the lawful conduct of its business at each of the Branches as now conducted and all such licenses, franchises, permits, certificates of public convenience, orders and other authorizations, are valid and in good standing and, to Sellers' knowledge, are not subject to any suspension, modification or revocation or proceedings related thereto. 5.3 Approvals and Consents. Other than the Regulatory Approvals or as otherwise disclosed in writing to Purchaser by Seller prior to the date hereof, no notices, reports or other filings are required to be made by Seller with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Seller from, any governmental or regulatory authorities of the United States or the several States in connection with the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby by Seller, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 5.4 Tenants. Except for the tenants listed on Schedule 5.4 attached hereto, there are no tenants or other occupants of the Real Property. 5.5 Leases. Each Branch Lease and each Personal Property Lease is the valid and binding obligation of Seller and, to Seller's knowledge, of each other party thereto; and there does not exist with respect to Seller's obligations thereunder, or, to Seller's knowledge, with respect to the obligations of the lessor thereof, any material default, or event or condition which constitutes, or, after notice or passage of time or both, would constitute a material default on the part of Seller or the lessor under any such Branch Lease or Personal Property Lease. As used in the immediately preceding sentence, the term "lessor" includes any sub-lessor of the property to Seller. Each Branch Lease and each material Personal Property Lease is current and all rents, expenses and charges payable by Seller thereunder have been paid or accrued pursuant to the terms thereof (except for any payments not yet delinquent or as to which the obligation to make such payment is being contested in good faith). Accurate copies of each Branch Lease have heretofore been made available to Purchaser. 5.6 Litigation and Undisclosed Liabilities. Except as set forth in Schedule 5.6, there are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Seller's knowledge, threatened against Seller or any of the Branches, or obligations or liabilities (whether or not accrued, contingent or otherwise) or to Seller's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Seller that, individually or in the aggregate, would have a Material Adverse Effect. 5.7 Regulatory Matters. (a) Except as previously disclosed in writing to Purchaser, there are no pending, or to Seller's knowledge threatened, disputes or controversies between Seller and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Seller is not a party to any written order, decree, agreement or memorandum or understanding with, or commitment letter or similar submission to, any federal or state -21- 24 governmental agency or authority charged with the supervision or regulation of depository institutions, nor has Seller been advised by any such agency or authority that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter of submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. 5.8 Compliance With Laws. The banking business of the Branches has been conducted in compliance with all federal, state and local laws, regulations and ordinances applicable thereto, except for any failures to comply that would not, individually or in the aggregate, result in a Material Adverse Effect. 5.9 [intentionally omitted] 5.10 Financial and Deposit Data. To Seller's knowledge, all written financial and Deposit information regarding the Assets and Liabilities provided to Purchaser by Seller was accurate in all material respects as of the date thereof. 5.11 Records. The Records respecting the operations of the Branches and the Assets and Liabilities accurately reflect in all material respects the net book value of the Assets and Liabilities being transferred to Purchaser hereunder. The Records include all information reasonably necessary to service the Deposits on an ongoing basis. 5.12 Title to Assets. Subject to the terms and conditions of this Agreement, on the Closing Date Purchaser will acquire, good and marketable title to all of the material Assets, free and clear of any Encumbrances; provided, however, that this representation does not cover Owned Real Property (with respect to which Seller has provided a Title Report and Purchaser is to obtain its own Title Policy pursuant to Section 3.10), Branch Leases or Tenant Leases. 5.13 Branch Leases. The Branch Leases give Seller the right to occupy the building and land comprising the related Branch. Accurate copies of all Branch Leases and all attachments, amendments and addenda thereto have heretofore been made available to Purchaser. To Seller's knowledge, the Branch Leases constitute valid and legally binding leasehold interests of Seller. Except as described on Schedule 5.4, there are no leases, subleases, occupancies, tenancies or rights of first refusal relating to any Branch created or suffered to exist by Seller or, to Seller's knowledge, created or suffered to exist by any other person. 5.14 Deposits. All of the Deposit accounts have been administered and, to Seller's knowledge, originated, compliance with the documents governing the relevant type of Deposit account and all applicable laws. The Deposit accounts are insured by the Bank Insurance Fund of the FDIC up to the current applicable maximum limits, and no action is pending or, to Seller's knowledge, threatened by the FDIC with respect to the termination of such insurance. -22- 25 5.15 Environmental Laws: Hazardous Substances. To Seller's knowledge, except as disclosed on Schedule 5.16, or as would not, individually or in the aggregate, have a Material Adverse Effect, each parcel of Real Property: (a) has been operated by Seller in compliance with all applicable Environmental Laws; (b) is not the subject of any pending written notice from any governmental authority alleging the violation of any applicable Environmental Laws; (c) is not currently subject to any court order, administrative order or decree arising under any Environmental Law; (d) has not been used during the period of Seller's ownership or occupancy of such Real Property for the disposal of Hazardous Substances and is not contaminated with any Hazardous Substances requiring remediation under any applicable Environmental Law; and (e) has not, during the period of Seller's ownership or occupancy of such Real Property, had any release of Hazardous Substances except as permitted under applicable Environmental Laws. For purposes of this Section 5.16, with respect to the parcels which are subject to Branch Leases and Tenant Leases, "Seller's knowledge" shall mean that an officer of Seller who holds the title of Senior Vice President or above and has responsibility with respect to management of operations conducted at the Branches on such parcels has received actual written notice from the landlord that any one of the representations in (a) through (e) above is not correct. 5.16 Broker's Fees. Except for Montgomery Securities, no broker has been employed by or on behalf of Seller in connection with the transactions contemplated by this Agreement. Seller will pay the fees of Montgomery Securities. 5.17 Limitations on Representations and Warranties. Notwithstanding anything to the contrary contained herein Seller makes no representations or warranties to Purchaser in this Agreement or in any agreement, instrument or other document executed in connection with any of the transactions contemplated hereby or provided or prepared pursuant hereto or in connection with any of the transactions contemplated hereby: (a) As to title to Owned Real Property or as to the physical condition (including, without limitation, ability to withstand seismic events) of the Branches or Personal Property, all of which are being sold "AS IS", "WHERE IS" and with all faults at the Closing Date; or (b) As to whether, or the length of time during which, any accounts will be maintained by the depositors at the Branches after the Closing Date. -23- 26 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: 6.1 Corporate Organization and Authority. Purchaser is Cowlitz Bank, duly organized and validly existing under the laws of Washington State and has the requisite power and authority to conduct the business conducted at the Branches substantially as currently conducted by Seller. Purchaser has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Purchaser enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.2 No Conflicts. The execution, delivery and performance of this Agreement by Purchaser does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental agency to which Purchaser is subject or under any agreement or instrument of Purchaser, or to which Purchaser is subject or by which Purchaser is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect. 6.3 Approvals and Consents. Other than the Regulatory Approvals or as otherwise disclosed in writing to Seller by Purchaser prior to the date hereof, no notices, reports or other filings are required to be made by Purchaser with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Purchaser from any governmental or regulatory authorities of the United States, the several States or any foreign jurisdictions in connection with the execution and delivery of this Agreement by Purchaser and the consummation of the transactions contemplated hereby by Purchaser, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 6.4 Regulatory Matters. (a) Except as previously disclosed in writing to Seller, there are no pending, or to Purchaser's knowledge threatened, disputes or controversies between Purchaser and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Purchaser is not a party to any written order, decree, agreement or memorandum of understanding with, or commitment letter or similar submission to, any federal or state governmental agency or authority charged with the supervision or regulation of depository institutions, nor has Purchaser been advised by any such agency or authority that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order decree, agreement, memorandum of understanding, commitment -24- 27 letter or submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. (c) Purchaser is, and on a pro forma basis giving effect to the P&A Transaction will be, (i) at least "adequately capitalized", as defined for purposes of the FDIA, and (ii) in compliance with all capital requirements, standards and ratios required by each state or federal bank regulator with jurisdiction over Purchaser, including, without limitation, any such higher requirements, standard or ratio as shall apply to institutions engaging in the acquisition of insured institution deposits, assets or branches, and no such regulator is likely to, or has indicated that it will, condition any of the Regulatory Approvals upon an increase in Purchaser's capital or compliance with any capital requirements, standard or ratio. (d) Purchaser has no knowledge that it will be required to divest deposit liabilities, branches, loans or any business or line of business as a condition to the receipt of any of the Regulatory Approvals. (e) Each of the subsidiaries or Affiliates of Purchaser that is an insured depository institution was rated "Satisfactory" or "Outstanding" following its most recent Community Reinvestment Act examination by the regulatory agency responsible for its supervision. Purchaser has received no notice of and has no knowledge of any planned or threatened objection by any community group to the transactions contemplated hereby. 6.5 Litigation and Undisclosed Liabilities. There are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Purchaser's knowledge, threatened against Purchaser, or obligations or liabilities (whether or not accrued, contingent or otherwise) or, to Purchaser's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Purchaser that, individually or in the aggregate, would have a Material Adverse Effect. 6.6 Financing Available. Purchaser's ability to consummate the transactions contemplated by this Agreement is not contingent on raising any equity capital, obtaining specific financing thereof, consent of any lender or any other matter. 6.7 Broker's Fees. Purchaser has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement, except for fees and commissions for which Purchaser shall be solely liable. ARTICLE 7 COVENANTS OF THE PARTIES 7.1 Activity in the Ordinary Course. Until the Closing Date, (a) Seller shall conduct the business of the Branches (including, without limitation, filling open positions at the Branches and job-posting in the Branches for open positions at other offices of Seller) in the ordinary and usual course of business consistent with past practice and giving effect to the fact -25- 28 that Seller is engaged in certain systems conversions and office closings arising out of its recent merger with First Interstate Bank, and (b) Seller shall not, without the prior written consent of Purchaser: (i) Increase or agree to increase the salary, remuneration or compensation of any Branch Employee (or make any material increase or decrease in the number of such persons, or transfer such persons to or from any Branch) other than in accordance with Seller's existing customary policies generally applicable to employees having similar rank or duties, or pay or agree to pay any uncommitted bonus to any Branch Employee other than regular bonuses granted in the ordinary course of Seller's business (which bonuses, in any event, shall be the responsibility of Seller); or, except at the request of such Branch Employee, transfer any Branch Employee to another branch or office, of Seller or any of its Affiliates; (ii) Offer interest rates or terms on any category of deposits at a Branch except as determined in a manner consistent with Seller's practice with respect to its branches which are not being sold; (iii) Transfer to or from any Branch to or from any of Seller's other operations or branches any material Assets or any Deposits, except (A) in the ordinary course of business or as contemplated in this Agreement, or (B) upon the unsolicited request of a depositor or customer; (iv) Sell, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to sell, transfer, assign, encumber or dispose of any of the Assets existing on the date hereof, except in the ordinary course of business and in an immaterial aggregate amount; provided, however, that in any event, Seller shall not knowingly take any action that would create any Encumbrance on any of the Real Property or the Branch Leases; (v) Make or agree to make any material improvements to the Owned Real Property, except with respect to commitments for such made on or before the date of this Agreement (and heretofore disclosed in writing to Purchaser) and normal maintenance, repair or refurbishing purchased or made in the ordinary course of business; (vi) File any application or give any notice to relocate or close any Branch or relocate or close any Branch; (vii) Amend, terminate or extend in any material respect any Branch Lease, Tenant Lease or Personal Property Lease; provided, however, Seller may extend any Branch Lease, Tenant Lease or Personal Property Lease, in its reasonable business judgment (including without limitation pursuant to the terms and conditions of any contractual option to extend in any Branch Lease, Tenant Lease or Personal Property Lease) if Seller determines such extension is necessary to deliver the Branch on the Closing Date as a fully operative branch banking operation. -26- 29 7.2 Access and Confidentiality. (a) Until the Closing Date, Seller shall afford to Purchaser and its officers and authorized agents and representatives reasonable access to the properties, books, records, contracts, documents, files and other information of or relating to the Assets and Liabilities. Purchaser and Seller each will identify to the other, within ten (10) days after the date hereof, a selected group of their respective salaried personnel that shall constitute a "transition group" who will be available to Seller and Purchaser, respectively, at reasonable times (limited to normal operating hours) to provide information and assistance in connection with Purchaser's investigation of matters relating to the Assets and Liabilities. Seller shall cause other personnel to be reasonably available during normal business hours, to an extent not disruptive of ongoing operations, for the same purposes. Any investigation pursuant to this Section 7.2 shall be conducted in such manner as not to interfere unreasonably with the conduct of the Seller's business. Notwithstanding the foregoing, Seller shall not be required to provide access to or disclose information where such access or disclosure would impose an unreasonable burden on Seller, or any employee of Seller or would violate or prejudice the rights of customers, jeopardize any attorney-client privilege or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto shall make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) EACH PARTY TO THIS AGREEMENT SHALL HOLD, AND SHALL CAUSE ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, CONSULTANTS AND ADVISORS TO HOLD, IN STRICT CONFIDENCE, UNLESS DISCLOSURE TO A BANK REGULATORY AUTHORITY IS NECESSARY OR DESIRABLE IN CONNECTION WITH ANY REGULATORY APPROVAL OR UNLESS COMPELLED TO DISCLOSE BY JUDICIAL OR ADMINISTRATIVE PROCESS OR, IN THE WRITTEN OPINION OF ITS COUNSEL, BY OTHER REQUIREMENTS OF LAW OR THE APPLICABLE REQUIREMENTS OF ANY REGULATORY AGENCY OR RELEVANT STOCK EXCHANGE, ALL NON-PUBLIC RECORDS, BOOKS, CONTRACTS, INSTRUMENTS, COMPUTER DATA AND OTHER DATA AND INFORMATION (COLLECTIVELY, "INFORMATION") CONCERNING THE OTHER PARTY (OR, IF REQUIRED UNDER A CONTRACT WITH A THIRD PARTY, SUCH THIRD PARTY) FURNISHED IT BY SUCH OTHER PARTY OR ITS REPRESENTATIVES PURSUANT TO THIS AGREEMENT (EXCEPT TO THE EXTENT THAT SUCH INFORMATION CAN BE SHOWN TO HAVE BEEN (i) PREVIOUSLY KNOWN BY SUCH PARTY ON A NON-CONFIDENTIAL BASIS, (ii) IN THE PUBLIC DOMAIN THROUGH NO FAULT OF SUCH PARTY OR (iii) LATER LAWFULLY ACQUIRED FROM OTHER SOURCES BY THE PARTY TO WHICH IT WAS FURNISHED), AND NEITHER PARTY SHALL RELEASE OR DISCLOSE SUCH INFORMATION TO ANY OTHER PERSON, EXCEPT ITS AUDITORS, ATTORNEYS, FINANCIAL ADVISORS, BANKERS, OTHER CONSULTANTS AND ADVISORS AND, TO THE EXTENT PERMITTED ABOVE, TO BANK REGULATORY AUTHORITIES. 7.3 Regulatory Approvals. As soon as practicable after the date of this Agreement. Purchaser shall prepare and file any applications, notices and filings required in order to obtain the Regulatory Approvals. Purchaser shall use all reasonable efforts to obtain each such -27- 30 approval as promptly as reasonably practicable and, to the extent possible, in order to permit the Closing to occur not later than July 18, 1997. Seller will cooperate in connection therewith (including the furnishing of any information and any reasonable undertaking or commitments which may be required to obtain the Regulatory Approvals). Each party will provide the other with copies of any applications and all correspondence relating thereto prior to filing, other than material filed in connection therewith under a claim of confidentiality. 7.4 Consents. Seller agrees to use reasonable commercial efforts (such efforts not to include making payments to third parties) to obtain from lessors and any other parties to any Branch Leases or Personal Property Leases any required consents to the assignment of the Branch Leases and Personal Property Leases to Purchaser on the Closing Date; provided, however, Seller shall not be obligated to incur any monetary obligations or expenditures to the parties whose consent is required in connection with the utilization of its reasonable efforts to obtain any such required consents. If any such required consent cannot be obtained, notwithstanding any other provision hereof, the Assets and Liabilities associated with the subject Branch, other than any such Branch Lease or any Personal Property Lease or as to which consent cannot be obtained, shall nevertheless be transferred to Purchaser at the Closing and the parties shall negotiate in good faith and Seller and Purchaser shall use reasonable efforts (such efforts not to include making payments to third parties) to make alternative arrangements reasonably satisfactory to Seller and Purchaser. In the event Seller does not obtain consent from the lessors and any other parties to any Branch Lease or Personal Property Lease, Seller shall not be obligated to deliver physical possession of the subject Branch or the personal property subject to such Personal Property Lease to Purchaser at the Closing. 7.5 Efforts to Consummate; Further Assurances. (a) Purchaser and Seller agree to use all reasonable efforts to satisfy or cause to be satisfied as soon as practicable their respective obligations hereunder and the conditions precedent to the Closing. (b) Seller will duly execute and deliver such assignments, bills of sale, deeds, acknowledgments and other instruments of conveyance and transfer as shall at any time be necessary or appropriate to vest in Purchaser the full legal and equitable title to the Assets. (c) On and after the Closing Date, each party will promptly deliver to the other all mail and other communications properly addressable or deliverable to the other as a consequence of the P&A Transaction; and without limitation of the foregoing, on and after the Closing Date, Seller shall promptly forward any mail, communications or other material relating to the Deposits or the Assets transferred on the Closing Date, including, but not limited to, that portion of any IRS "B" tapes that relates to such Deposits, to such employees of Purchaser at such addresses as may from time to time be specified by Purchaser in writing. (d) The costs incurred by a party in performing its obligations to the other (x) under Sections 7.5(a) and (c) shall be borne by the initial recipient and (y) otherwise under this Section 7.5 shall be bona by Purchaser. Seller will cooperate with Purchaser to minimize the costs referred to in clause (y). -28- 31 7.6 Solicitation. (a) Until the Closing Date and for an additional six (6) months following the Closing Date, Seller agrees that it will not solicit deposits (but may solicit loans, mutual fund purchases or other investment products, or other business) from or to persons or entities who were depositors at the Branches on the date hereof by personal contact, by telephone, by facsimile, by mail or other similar solicitation, or in any other way except for general solicitations and solicitations that are not directed primarily to persons or entities who were depositors of the Branches on the date hereof provided, however, (i) Seller may, prior to Closing, solicit those customers whose accounts are not domiciled in the Branches, but who regularly use the Branches for their deposit and withdrawal transactions, to move their Deposit accounts into the Branches prior to Closing, (ii) Seller may solicit depositors who as of the date of this Agreement have existing accounts originating at branches or other offices of Seller or its Affiliates other than the Branches pursuant to solicitations which arise from their status as a customer at such other branches or offices; and (iii) Seller may solicit major or statewide depositors (such as, for example, a company with more than one location or the state government or any agency or instrumentality thereof without restriction hereunder. (b) Prior to the Closing Date, Purchaser agrees that it will not attempt to solicit Branch customers through advertising nor transact its business in a way which would induce such Branch customers to close any account and open accounts directly with Purchaser or would otherwise result in a transfer of all or a portion of an existing account from Seller to Purchaser or to any other financial institution. Notwithstanding the foregoing sentence, Purchaser and its Affiliates shall be permitted to: (i) engage in advertising, solicitations or marketing campaigns not primarily directed to or targeted at such Branch customers; (ii) engage in lending, deposit, safe deposit, trust or other financial services relationships existing as of the date hereof which such Branch customers through other branch offices of Purchaser; (iii) respond to unsolicited inquiries by such Branch customers with respect to banking or other financial services; and (iv) provide notices or communications relating to the transactions contemplated hereby in accordance with the provisions hereof. 7.7 Insurance. Seller will maintain in effect until the Closing Date all casualty and public liabilities policies relating to the Branches and maintained by Seller on the date hereof or procure comparable replacement policies and maintain such replacement policies in effect until the Closing Date. Purchaser shall provide all casualty and public liability insurance for the Branches subsequent to the Closing Date. 7.8 No Servicing and Maintenance Contracts. No existing contracts of Seller with respect to the service, maintenance and physical operation of the Branches will be assumed at the Closing by Purchaser. All such service and maintenance shall be provided by Purchaser, subsequent to the Closing, pursuant to its own contracts. 7.9 Signage. Purchaser shall, at its own expense, remove and dispose of all Wells Fargo Bank signage as soon as practicable after the Closing. -29- 32 ARTICLE 8 TAXES AND EMPLOYEE BENEFITS 8.1 Tax Representations. Seller represents and warrants to Purchaser as follows: (a) Except as set forth in Schedule 8.1, all Tax Returns with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof or the operation of the Branches, that are required to be filed (taking into account any extension of time within which to file) before the Closing Date, have been or will be duly filed, and all Taxes shown to be due on such Tax Returns have been or will be paid in full. (b) With respect to the Deposits, Seller is in compliance with the Code and regulations thereunder relative to obtaining form depositors of the Deposits executed IRS Forms W-8 and W-9. With respect to the Deposits opened after December 31, 1983, Seller has either obtained a properly completed Form W-8 or W-9 (or a substitute form meeting applicable requirements) or is back-up withholding on such account. 8.2 Proration of Taxes. Except as otherwise agreed to by the parties, whenever it is necessary to determine the liability for Taxes for a portion of a taxable year or period that begins before and ends on or after the Closing Date, the determination of the Taxes for the portion of the year or period ending on, and the portion of the year or period beginning on or after, the Closing Date shall be determined by assuming that the taxable year or period ended at 11:59 P.M. California time on the day prior to the Closing Date. 8.3 Sales and Transfer Taxes. Except as set forth in Section 3.9, all excise, sales, use and transfer taxes that are payable or that arise as a result of the consummation of the purchase and sale contemplated by this Agreement shall be paid by Purchaser and Purchaser shall indemnify and hold Seller harmless from and against any such taxes. 8.4 Information Returns. At the Closing or as soon thereafter as is practicable, Seller shall provide Purchaser with a list of all Deposits for which Seller has not received a properly completed Form W-8 and W-9 (or a substitute form meeting applicable requirements) or on which Seller is back-up withholding as of the Closing Date. Seller agrees to indemnify Purchaser in an amount equal to any penalty and interest imposed upon Purchaser by the IRS which Purchaser is thereafter required to, and does, pay to the IRS where such penalty and interest arises out of actions taken or omitted to be taken by Purchaser in reasonable reliance upon information provided under this Section 8.4 and such penalty and interest does not result from an act or omission of Purchaser not made in reasonable reliance upon such information. The term "interest" for purposes of this Section 8.4 means interest accrued prior to the receipt by Purchaser of a notice of Penalty from the IRS regarding Forms W-8 or W-9 for the Deposits. Purchaser shall timely notify Seller of such penalty notice prior to Purchaser's payment of any penalty or interest. Seller has the right, at its own expense, to protest such penalty and interest. Purchaser shall cooperate fully with respect to Seller's protest, including furnishing all relevant information, records, and documents. -30- 33 8.5 Payment of Amount Due Under Article 8. Any payment by Seller to Purchaser, or to Seller from Purchaser, under this Article 8 (other than payments required by Section 8.3) to the extent due at the Closing may be offset against any payment due the other party at the Closing. All subsequent payments under this Article 8 shall be made as soon as determinable and shall be made and bear interest from the date due to the date of payment as provided in Section 3.2(b). 8.6 Assistance and Cooperation. After the Closing Date, each of Seller and Purchaser shall: (a) Make available to the other and to any taxing authority as reasonably requested all relevant information, records, and documents relating to Taxes with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches; (b) Provide timely notice to the other in writing of any pending or proposed Tax audits (with copies of all relevant correspondence received from any Taxing authority in connection with any Tax audit or information request) or Tax assessments with respect to the Assets or the income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches for taxable periods for which the other may have a liability under this Article 8; and (c) The party requesting assistance or cooperation shall bear the other party's out-of-pocket expenses in complying with such request to the extent that those expenses are attributable to fees and other costs of unaffiliated third party service providers. 8.7 Employees. (a) As soon as reasonably practicable and in any event within thirty (30) days of the date hereof, Seller shall deliver to Purchaser a true and complete list of all Branch Employees by name, date of hire and position, as of the date hereof, together with their most recent performance evaluations, current salaries and other compensation arrangements; provided, however, that Seller shall not release a performance evaluation without having first obtained the written consent of the respective Branch Employee. Purchaser may, at its discretion, interview any and all Branch Employees. Purchaser shall make employment available to all Branch Employees on the Closing Date upon the terms and conditions described below. Seller shall promptly inform Purchaser of any Branch Employee who resigns prior to the Closing Date. On and after the Closing Date, Branch Employees employed by Purchaser shall be defined as Transferred Employees for all purposes hereof. Subject to the provisions of this Section 8.7, Transferred Employees shall be subject to the employment terms, conditions and rules applicable to other employees of Purchaser. Nothing contained in this Agreement shall be construed as an employment contract between Purchaser and any Branch Employee or Transferred Employee. (b) Purchaser may interview Branch Employees during normal working hours. Purchaser shall be solely responsible for any activity in connection with interviewing Branch Employees. Purchaser indemnifies and holds Seller harmless from and against any claim, -31- 34 liability, losses, costs or expenses, including reasonable attorneys' fees, resulting or arising from Purchaser's acts or omissions in connection with said interviews. (c) Purchaser shall be responsible for the Assumed Severance Obligations with respect to all Branch Employees. (d) Each Transferred Employee shall be provided employment subject to the following terms and conditions: (i) Base salary rate shall be at least equivalent to the rate of base salary paid by Seller to such Transferred Employee as of the close of business on the day prior to the Closing Date. (ii) Except as specifically provided herein, Transferred Employees shall be provided employee benefits that are no less favorable in the aggregate than those provided to similarly situated employees of Purchaser. Purchaser shall provide such Transferred Employee with credit for the Transferred Employee's period of service with Seller (including any service credited from First Interstate Bank as a predecessor entity to Seller) towards the calculation of eligibility for such purposes as vacation, severance and other benefits and participation and vesting in Purchaser's qualified pension or profit sharing plan, as such plans may exist (but, except as set forth in (v) below and for vacation, not for purpose of benefit accruals, including without limitation, funding of accrued pension or profit sharing plans for such Transferred Employee with respect to any period prior to the Closing Date). (iii) Each Transferred Employee shall be eligible to participate in the medical, dental or other welfare plans of Purchaser, as such plans may exist, effective as of the Closing Date and any pre-existing conditions provisions of such plans shall be waived with respect to such Transferred Employee; provided, however, that if Purchaser's relevant health or disability insurance policy or plan has a pre-existing condition limitation and a Transferred Employee's condition is being excluded (as a pre-existing condition) under Seller's plan as of the Closing Date, Purchaser may treat such condition as a pre-existing condition for the period such condition would have been treated as a preexisting condition under Seller's plan under which such Transferred Employee would have been covered. (iv) With respect to any Transferred Employee on a short-term disability or temporary leave of absence, upon conclusion of his or her short-term disability or temporary leave of absence, subject to the terms and conditions of the Purchaser's plans and policies and applicable law, each Transferred Employee on such leave shall receive the salary and vacation benefits in effect when he or she went on leave, shall otherwise be treated as a Transferred Employee and, to the extent practicable, shall be offered by Purchaser the same or a substantially equivalent position to his or her position with Seller prior to having gone on leave. -32- 35 (v) Until April 1, 1998, each Transferred Employee shall be eligible for benefits under the severance and similar plans referred to in Schedule 1.1(a) copies of which have been provided to Purchaser (the "Assumed Severance Obligations"). After April 1, 1998, each Transferred Employee, who is continuously employed by Purchaser as of the Closing Date, shall be eligible for benefits under any severance or similar plans maintained by Purchaser with credit for the period of years of credited service with Seller towards the calculation of benefits. (e) Except as provided herein, Seller shall pay, discharge and be responsible for (i) all salary and wages, arising out of or relating to the employment of the Branch Employees before the Closing Date and (ii) any employee benefits (including, but not limited to, accrued vacation) arising under Seller's employee benefit plans and employee programs prior to the Closing Date (but not including any future retiree medical benefits), including benefits with respect to claims incurred prior to the Closing Date but reported after the Closing Date. From and after the Closing Date, Purchaser shall pay, discharge and be responsible for all salary, wages and benefits arising out of or relating to the employment of the Transferred Employees by Purchaser on and after the Closing Date, including, without limitation, all claims for welfare benefit plans incurred on or after the Closing Date. Claims are incurred as of the date services are provided or disability payments are accrued, notwithstanding when the injury or illness may have occurred. (f) To the extent permitted under Purchaser's 401(k) plan, Seller and Purchaser shall cooperate in arranging for the transfer to Purchaser's 401(k) plan, as soon as practicable after the Closing Date and in a manner that satisfies sections 414(l) and 411(d)(6) of the Code, of those accounts held under Seller's 401(k) plan on behalf of Transferred Employees. (g) For a period of twelve (12) months following the Closing Date, Seller shall not solicit any Transferred Employee hired by Purchaser as of the Closing Date to again become an employee of Seller or any of its Affiliates; provided, however, that Seller shall not be prohibited from hiring a Transferred Employee if such Transferred Employee contacts Seller to seek such hiring or retention, whether in response to general advertising or otherwise. For purposes of this Section 8.7, the term "Seller" shall include Wells Fargo & Company, a Delaware corporation and their Affiliates. 8.8 Branch Employee Representations. (a) Seller represents and warrants to Purchaser, to Seller's knowledge, as follows: (i) none of the Branch Employees is a member of any labor union; (ii) Seller is not a party to any individual contract written or oral, express or implied, for the employment of any Branch Employee, and Seller is not subject to any collective bargaining arrangement with respect to any Branch Employee; (iii) Seller's 401(k) Plan is in compliance in all material respects with applicable law; -33- 36 (iv) no liabilities exist or are reasonably expected to exist under any employee benefit plan of Seller that, individually or in the aggregate, would have a Material Adverse Effect; and (v) Seller has not entered into any individual agreement or otherwise made any individual commitment to any Branch Employee with respect to continued employment by Purchaser. (b) Seller shall indemnify and hold Purchaser harmless from and against any claims, losses, damages or expenses (including attorney's fee) suffered as a result of any failure to give any notice to its Branch Employees required by the Worker Adjustment and Retraining Notification Act (the "WARN Act"), provided such notice is required as a result of action by Seller prior to the Closing Date. ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to Obligations of Purchaser. Unless waived in writing by Purchaser, the obligation of Purchaser to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consent, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated; provided, however, that no Regulatory Approval shall have imposed any condition or requirement (a "Burdensome Condition") that would (i) result in any Material Adverse Effect or (ii) require Purchaser to effect any divestiture that would constitute a substantial portion of the business or properties of the Branches, taken as a whole. (b) Orders. No court or governmental authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) (any of the foregoing, an "Order") which is in effect and prohibits or makes illegal the consummation of the P&A Transaction or would otherwise result in a Material Adverse Effect. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Seller contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties relating to Assets and Liabilities transferred at the Closing Date shall only be made, and need only be true in all material respects, on and as of the Closing Date). Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed -34- 37 by the President or any Executive Vice President of Seller. Each of the covenants and agreements of Seller to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Seller. Notwithstanding any other provision of this Agreement, if there shall be a failure of any condition specified in this Section 9.1 to the obligations of Purchaser in respect of the acquisition of any specific Branch or Branches the aggregate Deposits of which as of the date hereof shall constitute less than 25% of the Deposits in all of the Branches subject to this Agreement as of the date hereof, Purchaser nevertheless shall be obligated to consummate the P&A Transaction but may, upon written notice to Seller, exclude from the transaction the Branch or Branches in respect of which the failure of condition shall exist, in which case, appropriate adjustment shall be made in the schedules hereto and the other documents to be delivered pursuant hereto so as to duly reflect the deletion of such Branch or Branches from the transactions contemplated hereby (and, consequently, to the calculation of the Estimated Purchase Price, Estimated Payment Amount, Purchase Price and Adjusted Payment Amount). If any Branch is excluded from this Agreement or if Purchaser nevertheless elects to purchase any Branch which would otherwise be so excluded and such Branch is transferred to Purchaser at the Closing (subject to Purchaser's rights under Section 12.1(a)), any event that would otherwise constitute a breach of warranty or failure of condition in respect of such Branch arising solely from or relating to the operation of this paragraph shall not constitute a breach of warranty or failure of condition. 9.2 Conditions to Obligations of Seller. Unless waived in writing by Seller, the obligation of Seller to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consents, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all statutory waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated. (b) Orders. No Order shall be in effect that prohibits or makes illegal the consummation of the P&A Transaction. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Purchaser contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties that we made as of a specific date need be true in all material respects only as of such date). Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. -35- 38 Each of the covenants and agreements of Purchaser to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. ARTICLE 10 ENVIRONMENTAL MATTERS 10.1 Environmental Matters. (a) Seller has provided to Purchaser and Purchaser hereby acknowledges receipt of copies of Phase I environmental site assessments for all Owned Real Property and asbestos reports with respect to all the Real Property, except for Real Property where the improvements have been completed after December 31, 1978. Such Phase I environmental site assessments for all Owned Real Property have been dated (or supplemented) on or after January 1, 1996. (b) If such Phase I site assessments and asbestos reports reasonably indicate the necessity or desirability of further investigation to determine whether or not an Environmental Hazard or an Asbestos Hazard exists at such Real Property, Purchaser may elect, not later than thirty (30) days after the signing of this Agreement, to have Clayton Environmental or Building Analytics (the "Environmental Consultant"), to the extent reasonable and appropriate, conduct Phase II environmental site assessments and additional asbestos investigations, the cost of which shall be shared equally by the parties. Any such further investigation or testing shall be conducted in such a manner so as not to interfere with the normal operation of the Branch(s) involved. All such Phase II environmental site assessments and additional asbestos reports shall be treated as information subject to Section 7.2(b) and shall be completed not less than ninety (90) days after the signing of this Agreement. (c) In the event that the Environmental Consultant has discovered an Environmental Hazard, and/or Asbestos Hazard, during any such Phase II environmental site assessment at any single parcel of Owned Real Property, the remediation of which, in the reasonable judgment of the Environmental Consultant, is or would be the responsibility of Seller, or Purchaser should it acquire such Owned Real Property, and will cost $100,000 or more for such single parcel of Owned Real Property, Purchaser shall lease from Seller such single parcel of Owned Real Property pursuant to a Lease Agreement that shall provide as follows: (i) Such Lease Agreement shall be for a term of two (2) years, with no obligation or right to renew (it being the intention of Seller that Purchaser locate an alternative branch site during such two years), at a rental equal to a fair market rental value; (ii) Seller may sell such Owned Real Property to any person, subject to such Lease Agreement, for any price; (iii) During the term of such Lease Agreement, in the event that Seller shall deliver to Purchaser a report of a qualified environmental engineer or consultant -36- 39 certifying that the Environmental Hazard, and/or Asbestos Hazard, at or on any such leased parcel of Owned Real Property has been remediated to the extent required under applicable Environmental Laws, Purchaser shall be required to purchase such parcel of Owned Real Property at the net book value as of the close of business of the month-end day most recently preceding the Closing Date; and (iv) Other terms and conditions of the Lease Agreement shall be typical to such branch leases in the market as negotiated between Seller and Purchaser. If the remediation cost is less than $100,000 for any single parcel of Owned Real Property, Purchaser shall acquire such parcel and such cost shall be borne by Purchaser without indemnity or price adjustment under this Agreement. (d) Purchaser agrees that it and its Environmental Consultant shall conduct any Phase II environmental site assessments or other investigations pursuant to this Section with reasonable care and subject to customary practices among environmental consultants and engineers, including, without limitation, following completion thereof, the restoration of any site to the extent practicable to its condition prior to such site assessment or investigation and the removal of all monitoring wells. (e) Any lease of a parcel of Owned Real Property under Section 10.1(c) shall in no way affect the transfer of any Assets or Liabilities, other than such parcel of Owned Real Property, to the Purchaser at the Closing. ARTICLE 11 TERMINATION 11.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) By the mutual Written agreement of Purchaser and Seller; (b) By Seller or Purchaser, in the event of a material breach by the other of any representation, warranty or agreement contained herein which is not cured or cannot be cured within thirty (30) days after written notice of such termination has been delivered to the breaching party; provided, however, that termination pursuant to this Section 11.1(b) shall not relieve the breaching party of liability arising out of or related to such breach; (c) By Seller or Purchaser, in the event that the Closing has not occurred by November 30, 1997 unless the failure to so consummate by such time is due to a breach of this Agreement by the party seeking to terminate; (d) By Seller or Purchaser at any time after the denial or revocation of any Regulatory Approval or by Purchaser if any such approval has been obtained which contains a Burdensome Condition; or -37- 40 (e) By Seller if, at any time prior to the Closing Date, an appropriate official of any governmental agency or authority whose consent, approval or authorization is required in order for Purchaser to consummate the transactions contemplated hereby shall have advised that such authority will not grant such consent, approval or authorization or will grant the same only subject to a Burdensome Condition (unless Purchaser shall have waived the condition provided for in the proviso to Section 9.1(a)), or where there shall be in effect any Order, or if there shall exist any proceeding which, in Seller's reasonable judgment, would result in an Order; provided, however, that Purchaser shall have fifteen (15) days following receipt of notice from Seller to remedy any such situation or to provide assurances reasonably acceptable to Seller that such situation will be remedied by the Closing Date. 11.2 Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby pursuant to Section 11.1, no party hereto (or any of its directors, officers, employees, agents or Affiliates) shall have any liability or further obligation to any other party, except as provided in Section 7.2(b) and except that nothing herein will relieve any party from liability for any breach of this Agreement. ARTICLE 12 INDEMNIFICATION AND OTHER REMEDIES 12.1 Indemnification. (a) Subject to Section 13.1, Seller shall indemnify and hold harmless Purchaser and any person directly or indirectly controlling Purchaser from and against any and all Losses which Purchaser may suffer, incur or sustain arising out of or attributable to (i) any breach of any representation or warranty made by Seller in this Agreement, (ii) any material breach of any covenant or agreement to be performed by Seller pursuant to this Agreement, (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Seller or conditions existing prior to the Closing Date, relating in any such case to the operation of the Branches, the Assets or the Liabilities; or (iv) any liability, obligation or duty of Seller that is not a Liability. (b) Subject to Section 13.1, Purchaser shall indemnify and hold harmless Seller and any person directly or indirectly controlling Seller from and against any and all Losses which Seller may suffer, incur or sustain arising out of (i) any breach of any representation or warranty made by Purchaser in this Agreement, (ii) any material breach of any covenant or agreement to be performed by Purchaser pursuant to this Agreement, including, without limitation, the covenants contained in Section 10.2 above, or (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Purchaser on or after the Closing Date, relating in any such case to the operation of the Branches or the Assets, or (iv) the Liabilities. (c) To exercise its indemnification rights under this Section 12.1 as a result of the assertion against it of any claim or potential liability for which indemnification is provided, the indemnified party shall promptly notify the indemnifying party of the assertion of such claim, discovery of any such potential liability or the commencement of any action or proceeding in respect of which indemnity may be sought hereunder; PROVIDED, HOWEVER, in no event -38- 41 shall notice of original claim for indemnification under this Agreement be given later than the expiration of one (1) year from the Closing Date (excluding only claims related to the covenants in Section 10.2 above). The indemnified party shall advise the indemnifying party of all facts relating to such assertion within the knowledge of the indemnified party, and shall afford the indemnifying party the opportunity, at the indemnifying party's sole cost and expense, to defend against such claims for liability. In any such action or proceeding, the indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at its own expense unless (i) the indemnifying party and the indemnified party mutually agree to the retention of such counsel or (ii) the named parties to any such suit, action, or proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party, and in the reasonable judgment of the indemnified party, representation of the indemnifying party and the indemnified party by the same counsel would be inadvisable due to actual or potential differing defenses or conflicts of interests between them. (d) The indemnified party shall have the right to settle or compromise any claim or liability subject to indemnification under this Section, and to be indemnified from and against all Losses resulting therefrom, unless the indemnifying party, within sixty (60) calendar days after receiving written notice of the claim or liability in accordance with Section 12.1 (c) above, notifies the indemnified party that it intends to defend against such claim or liability and undertakes such defense, or, if required in a shorter time than sixty (60) calendar days, the indemnifying party makes the requisite response to such claim or liability asserted. (e) Notwithstanding anything to the contrary contained in this Agreement, an indemnifying party shall not be liable under this Section 12.1 for any Losses sustained by the indemnified party unless and until the aggregate amount of all indemnifyable Losses sustained by the indemnified party shall exceed Twenty-Five Thousand Dollars ($25,000) times the number of Branches being purchased hereunder, in which event the indemnifying party shall provide indemnification hereunder in respect of all such indemnifiable Losses in excess of Twenty-Five Thousand Dollars ($25,000) times the number of Branches being purchased hereunder, provided, however, that the aggregate amount of indemnification payments payable pursuant to this Section 12.1, shall in no event exceed the amount of the Purchase Price. An indemnifying party shall not be liable under this Section 12.1 for any settlement effected, without its consent, of any claim or liability or proceeding for which indemnity may be sought hereunder except in the case of a settlement in an amount which does not exceed Twenty-Five Thousand Dollars ($25,000) times the number of Branches being purchased hereunder; provided, however, the provisions of this Section 12.1(e) shall not apply to Purchaser's obligation to indemnify Seller for a breach of Purchaser's covenants contained in Section 10.2 above. In no event shall either party hereto be entitled to consequential or punitive damages or damages for lost profits in any action relating to the subject matter of this Agreement. 12.2 Purchase Price Adjustment. Any amount paid by Seller or Purchaser under this Article 12 will be treated as an adjustment to the Purchase Price unless and to the extent that a "determination" (as defined in Section 1313(a) of the Code) causes any such amount not to constitute an adjustment to the Purchase Price for federal Tax purposes. -39- 42 12.3 Exclusivity. After the Closing, Article 12 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement or other claim arising out of this Agreement or the transactions contemplated hereby. 12.4 AS-IS Sale; Waiver of Warranties. Except as otherwise expressly set forth in this Agreement, Purchaser acknowledges that the Assets and Liabilities are being sold and accepted on an "AS-IS-WHERE-IS" basis, and are being accepted without any representation or warranty. As part of Purchaser's agreement to purchase and accept the Assets and Liabilities AS-IS-WHERE-IS, and not as a limitation on such agreement, TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER HEREBY DISCLAIMS AND PURCHASER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES AND RELEASES ANY AND ALL ACTUAL OR POTENTIAL RIGHTS PURCHASER MIGHT HAVE AGAINST SELLER OR ANY PERSON DIRECTLY OR INDIRECTLY CONTROLLING SELLER REGARDING ANY FORM OF WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND OR TYPE, RELATING TO THE ASSETS AND LIABILITIES EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8. SUCH WAIVER AND RELEASE IS, TO THE FULLEST EXTENT PERMITTED BY LAW, ABSOLUTE, COMPLETE, TOTAL AND UNLIMITED IN EVERY WAY. SUCH WAIVER AND RELEASE INCLUDES TO THE FULLEST EXTENT PERMITTED BY LAW, BUT IS NOT LIMITED TO, A WAIVER AND RELEASE OF EXPRESS WARRANTIES (EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8), IMPLIED WARRANTIES, WARRANTIES OF FITNESS FOR A PARTICULAR USE, WARRANTIES OF MERCHANTABILITY, WARRANTIES OF HABITABILITY, STRICT LIABILITY RIGHTS AND CLAIMS OF EVERY KIND AND TYPE, INCLUDING BUT NOT LIMITED TO CLAIMS REGARDING DEFECTS WHICH WERE NOT OR ARE NOT DISCOVERABLE, ALL OTHER EXTANT OR LATER CREATED OR CONCEIVED OF STRICT LIABILITY OR STRICT LIABILITY TYPE CLAIMS AND RIGHTS. ARTICLE 13 MISCELLANEOUS 13.1 Survival. (a) The parties' respective representations and warranties contained in this Agreement shall survive until the first anniversary of the Closing Date, and thereafter neither party may claim any Loss in relation to a breach thereof. The agreements and covenants contained in this Agreement shall not survive the Closing except to the extent expressly set forth herein. (b) No claim based on any breach of any representation or warranty shall be valid or made unless written notice with respect thereto is given to Seller in accordance with this Agreement on or before the date specified in Section 12.1(c); provided, however, that the provisions of this Section shall not apply to claims based on Purchaser's breach of Section 10.2 above. 13.2 Assignment. Neither this Agreement nor any of the rights, interests or obligations of ether party may be assigned by either of the parties hereto without the prior -40- 43 written consent of the other party, and any purported assignment in contravention of this Section 13.2 shall be void. 13.3 Binding Effect. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 13.4 Public Notice. Prior to the Closing Date, neither Purchaser nor Seller shall directly or indirectly make or cause to be made any press release for general circulation, public announcement or disclosure or issue any notice or general communication to employees with respect to any of the transactions contemplated hereby without the prior written consent of the other party (which consent shall not be unreasonably withheld or delayed). Purchaser agrees that, without Seller's prior written consent, it shall not release or disclose any of the terms or conditions of the transactions contemplated herein to any other person. Notwithstanding the foregoing, each party may make such public disclosure as, in the opinion of its counsel, may be required by law or as necessary to obtain the Regulatory Approvals. 13.5 Notices. All notices, requests, demands, consents and other communications given or required to be given under this Agreement and under the related documents shall be in writing and delivered to the applicable party at the address indicated below: If to Seller, to: Wells Fargo Bank, National Association 420 Montgomery Street San Francisco, CA 94104 Attention: Guy Rounsaville, Jr., Esq. Executive Vice President, Chief Counsel & Secretary Fax: (415) 975-7151 If to Purchaser, to: Cowlitz Bank 927 Commerce Avenue Longview, WA 98632 Attention: Charles W. Jarrett or, as to each party at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. Any notices shall be in writing, including telegraphic or facsimile communication, and may be sent by registered or certified mail, return receipt requested, postage prepaid, or by fax, or by overnight delivery service. Notice shall be effective upon actual receipt thereof 13.6 Expenses Except as expressly provided otherwise in this Agreement, each party shall bear any and all costs and expenses which it incurs, or which may be incurred on its behalf, in connection with the preparation of this Agreement and consummation of the transactions described herein, and the expenses, fees, and costs necessary for any approvals of the appropriate regulatory authorities. -41- 44 13.7 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. 13.8 Entire Agreement; Amendments. (a) This Agreement contains the entire understanding of and all agreements between the parties hereto with in respect to the subject matter hereof and supersedes any prior or contemporaneous agreement or understanding, oral or written, pertaining to any such matters which agreements or understandings shall be of no force or effect for any purpose; provided, however, that the terms of any confidentiality agreement between the parties hereto previously entered into, to the extent not inconsistent with any provisions of this Agreement, shall continue to apply. (b) This Agreement may not be amended or supplemented in any manner except by mutual agreement of the parties and as set forth in a writing signed by the parties hereto or their respective successors in interest. The waiver of any breach of any provision under this Agreement by any party shall not be deemed to be a waiver of any preceding or subsequent breach under this Agreement. No such waiver shall be effective unless in writing. 13.9 Third Party Beneficiaries. This Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than Seller and Purchaser. 13.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.11 Headings. The headings used in this Agreement are inserted for purposes of convenience of reference only and shall not limit or define the meaning of any provisions of this Agreement. 13.12 Consent to Jurisdiction; Waiver of Jury Trial. (a) EACH PARTY HERETO HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF SUCH PARTY'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OF THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS CONTEMPLATED HEREBY, AND, TO THE EXTENT IT LAWFULLY MAY DO SO, EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS. (b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY CONCERNED WITH THIS AGREEMENT OR ANY OF THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS CONTEMPLATED HEREBY. NO PARTY HERETO, NOR ANY ASSIGNEE OR SUCCESSOR OF A PARTY HERETO, SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER -42- 45 LITIGATION PROCEDURE BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OF THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS CONTEMPLATED HEREBY. NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OR THIS SECTION HAVE BEEN FULLY CONSIDERED BY THE PARTIES HERETO, AND THE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 13.13 Severability. If any provision of this Agreement, as applied to any party or circumstance, shall be judged by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way effect any other provision of this Agreement, the application of any such provision and any other circumstances or the validity or enforceability of the other provisions of this Agreement. 13.14 Legal Action. If either Seller or Purchaser shall institute any legal action to enforce this Agreement or any provision hereof, it is agreed that the prevailing party shall be entitled to collect reasonable attorneys fees and costs incurred in connection therewith. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date and year first above written. WELLS FARGO BANK, NATIONAL ASSOCIATION By: ______________________________ Name:_________________________ Title:________________________ By: ______________________________ Name:_________________________ Title:________________________ -43- 46 PURCHASER COWLITZ BANK By:____________________________________ Name: Charles W. Jarrett Title: President & CEO By:____________________________________ Name: Donna P. Gardner Title: Senior Vice President & CEO -44- 47 SCHEDULE 1.1(a) Assumed Severance Obligations 1. First Interstate Bancorp Broad-Based Change in Control Severance Pay Plan. 2. First Interstate Bancorp Middle Management Change in Control Severance pay Plan. 3. Wells Fargo & Company Separation Pay Plan, as amended. 48 SCHEDULE 1.1(b) Branches/Real Properties
Branch Name Branch Address City Lease/Own ----------- -------------- ---- --------- Castle Rock 20 Cowlitz St. W. Castle Rock Owned Kalama 195 NE 1st Street Kalama Owned Longview 800 Triangle Mall Longview Leased
49 SCHEDULE 1.1(c) (DELETED) 50 SCHEDULE 1.1(d) (DELETED) 51 SCHEDULE 3.6(a) Form of Deed Recording Requested by: When Recorded Mail to: DOCUMENTARY TRANSFER TAX $____________ ( ) COMPUTED ON FULL VALUE OF PROPERTY CONVEYED, OR () COMPUTED ON FULL VALUE LESS LIENS AND ENCUMBRANCES REMAINING THEREON AT TIME OF SALE. Signature of declarant or agent determining tax - Firm Name ( ) Unincorporated Area ( ) City of _____________ Assessor's parcel No. __________________ WELLS FARGO BANK, NATIONAL ASSOCIATION with its principal office located in San Francisco, California, the undersigned grantor, for a valuable consideration, receipt of which is hereby acknowledged, does hereby remise, release and forever grant to [NAME OF GRANTEE(S)] a ___________________, with its principal office located in ______________, all of the real property in the City of __________________, County of __________________, State of _____________________, described in Attachment A hereto. Date: __________________________ WELLS FARGO BANK, NATIONAL ASSOCIATION By:____________________________________ Name: Title: MAIL TAX STATEMENTS TO GRANTEE AT ADDRESS ABOVE 52 Attachment A Property 53 SCHEDULE 3.6(b) Form of Bill of Sale BILL OF SALE, dated as of ____________________, 1997 by WELLS FARGO BANK, NATIONAL ASSOCIATION, with its principal office located in San Francisco, California ("Seller"), to ________________________, with its principal office located in _________________________, ("Purchaser"). Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Purchase and Assumption Agreement, dated as of _____________________, 1997 (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to transfer to Purchaser the Assets; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller does hereby convey, grant, bargain, sell, transfer, set over, assign, alienate, remise, release, deliver and confirm unto Purchaser, its successors and assigns, forever, all of Seller's right, title, interest and claim in and to the Personal Property (including without limitation, the items described in Attachment A hereto), as of 11:59 P.M., California time, the day prior to the date hereof. TO HAVE AND TO HOLD all and singular of the foregoing (the "Transferred Properties") unto Purchaser, its successors and assigns, to its and their own use and enjoyment forever. SELLER FURTHER COVENANTS AND AGREES AS FOLLOWS: 1. This instrument shall not constitute an assignment of any covenant, obligation, liability contract agreement, license, lease or commitment pertaining to the Transferred Properties if an attempted assignment thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment with respect thereto would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors and assigns, shall act as Purchaser's agent in order to obtain for Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 2. The Transferred Properties are being delivered "AS IS", "WHERE IS" and with all faults. 54 3. From time to time, Seller, its successor and assigns, shall execute and deliver all such further bills of sale, assignments or other instruments of conveyance and transfer as Purchaser, its successors or assigns, may reasonably request more effectively to transfer to and vest in Purchaser all of Seller's interest in the Transferred Properties. 4. This Bill of Sale is made pursuant to the provisions of the P&A Agreement, and, except as herein otherwise provided, the transfer of property hereunder is made subject to the terms and provisions of the P&A Agreement. 5. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, Seller has duly executed and delivered this Bill of Sale as of the day and year first above written. WELLS FARGO BANK, NATIONAL ASSOCIATION By:____________________________________ Name: Title: PURCHASER: By:____________________________________ Name: Title: 55 Attachment A Personal Property [To be provided] 56 SCHEDULE 3.6(c) Form of Assignment and Assumption Agreement ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of ______________, 1997 (this "Agreement"), between WELLS FARGO BANK, NATIONAL ASSOCIATION, organized under the laws of the United States, with its principal office located in San Francisco, California ("Seller"), and ________________________, with its principal office located in ___________________________, ("Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase and Assumption Agreement, dated as of __________________________, (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to assign, and Purchaser has agreed to assume, the Liabilities; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Seller hereby sells, assigns, conveys, transfers and delivers, and Purchaser assumes, without warranty or representation, express or implied, or recourse to, Seller, except as expressly provided in the P&A Agreement, the Liabilities, other than the Branch Leases, as set forth in the P&A Agreement. 2. Seller hereby (a) resigns as the trustee or custodian of each Deposit in an IRA of which it is the trustee or custodian, and (b) the extent permitted by the documentation governing such IRA, appoints Purchaser as successor trustee or custodian of each such IRA, and Purchaser hereby accepts each such trusteeship or custodianship and assumes all fiduciary obligations with respect thereto. 3. This Agreement shall not constitute an assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability if an attempted assignment or assumption thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors and assigns shall act as Purchaser's agent in order to obtain for 57 Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 4. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and permitted assigns; provided, that neither this Agreement nor any of the rights, interests or obligations of either party may be assigned by either party hereto without the prior written consent of the other party, and any purported assignment in contradiction of this Section 4 shall be void. 5. This Agreement is made pursuant to the provisions of the P&A Agreement and except as herein otherwise provided, the assignment and assumption of any other Liabilities hereunder are made subject to the terms and provisions of the P&A Agreement. 6. Except as otherwise provided herein, all of the transactions provided for herein shall be effective as of 11:59 p.m., California time, the day prior to the date hereof. 7. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written. WELLS FARGO BANK, NATIONAL ASSOCIATION By:____________________________________ Name: Title: [PURCHASER]: By:____________________________________ Name: Title: 58 SCHEDULE 3.6(d) Form of Assignment of Lease and Assumption KNOW THAT WELLS FARGO BANK, NATIONAL ASSOCIATION, a national bank, organized under the laws of the United States, having its principal office in San Francisco, California ("Assignor"), in consideration of One Dollar ($1.00) and other good and valuable consideration paid by _______________________, with its principal office located in ___________________________, ("Assignee"), hereby assigns unto the Assignee all of Assignor's right, title and interest as tenant under a certain lease more particularly described on Attachment A hereto, covering premises described on such attachment and in such Lease (the "Lease"). TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after 11:59 P.M., California time, the day prior to the date hereof (the "Effective Time"), subject to the terms, covenants, conditions and provisions set forth in the Lease. ASSIGNEE hereby assumes, effective as of the Effective Time, the performance of all terms, covenants and obligations of the Lease on the part of Assignor to be performed under the Lease. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement as of the ____ day of ________________________, 1997. WELLS FARGO BANK, NATIONAL ASSOCIATION By:____________________________________ Name: Title: [ASSIGNEE]: By:____________________________________ Name: Title: 59 Attachment A Lease 60 SCHEDULE 3.6(e) Form of Landlord Consent CONSENT, dated as of _________________, 1997 of ______________________, with its principal office located in _______________________ ("landlord"), in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION organized under the laws of the United States, with its principal office located in San Francisco, California ("Seller"). W I T N E S S E T H: WHEREAS, Landlord is the owner of certain premises and a party to a certain lease, each described on Attachment A hereto (the "Lease"); and WHEREAS, Seller desires to assign its entire interest (including, without limitation. renewal rights, if any) in the Lease to _________________________________, with its principal office located in __________________________________, ("Purchaser"); and WHEREAS, Seller has requested Landlord's consent to said assignment and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease and Landlord desires to consent to the same for all purposes required under the Lease. NOW, THEREFORE, 1. Subject to the limitations set forth below, Landlord hereby consents to the assignment of the Lease by Seller to Purchaser and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease; provided that Purchaser shall agree to assume all of the obligations of Seller arising under the Lease from and after the effective date of the assignment. 2. Except for the aforementioned assignment by Seller to Purchaser, nothing contained herein shall constitute a waiver of the obligation, if any, of the holder of the leasehold interest created under the Lease to obtain Landlord's consent to future assignments of the Lease or a sublease of the premises demised thereunder. 3. Nothing contained herein shall be construed to obligate Seller to assign the Lease to Purchaser, it being understood and acknowledged by Landlord that the execution and delivery of this Consent is in anticipation of said assignment, which may or may not be effected. If said assignment shall be effected, Seller or Purchaser shall promptly provide to Landlord a fully executed counterpart of said assignment and notify Landlord of the effective date thereof. 61 4. Landlord acknowledges and certifies that except for the conditions contained herein, all conditions set forth in the Lease, if any to the effectiveness of the aforementioned assignment or to the consent of Landlord contained herein have been either waived by Landlord or satisfied. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this instrument as of the day and year first above written. [LANDLORD] By:____________________________________ Name: Title: 62 Attachment A Lease 63 SCHEDULE 3.6(g) Form of Certificate of Officer Wells Fargo Bank, National Associations The undersigned, the [title of officer] of WELLS FARGO BANK, NATIONAL ASSOCIATION, a bank, organized under the laws of the United States of America, with its principal office located in San Francisco, California ("Seller") hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Seller in the Purchase and Assumption Agreement, dated as of ____________________, 1997, (the "P&A Agreement"), between Seller and _________________________________, with its principal office located in _______________________________________, California, are true in all material respects, as of the date hereof. 2. Each of the covenants and agreements of Seller to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Seller's Board of Directors, dated as of ____________________________, 1997, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and, as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this ____ day of _______________________, 1997. WELLS FARGO BANK, NATIONAL ASSOCIATION By:____________________________________ Name: Title: 64 SCHEDULE 3.7(d) Form of Certificate of Officer [Purchaser] The undersigned, the [title of officer] of ______________________, with its principal office located in __________________________, ("Purchaser"), hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Purchaser in the Purchase and Assumption Agreement, dated as of ________________________, 1997 (the "P&A Agreement"), between Purchaser and Wells Fargo Bank, National Association, organized under the laws of the United States, with its principal office located in Los Angeles, California, are true in all material respects, as of the date hereof (except for representations and warranties that are made as of a specific date). 2. Each of the covenants and agreements of Purchaser to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Purchaser's Board of Directors, dated as of ____________________________, 1997, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this ____ day of __________________, 1997. [PURCHASER]: By:____________________________________ Name: Title: 65 SCHEDULE 4.11 Compensation to Seller for Certain Post Closing Services 66 SCHEDULE 5.4 Tenant Leases
PROP. # PROPERTY NAME SUB-TENANT NAME SQ. FT. LEASE EXPIRES - ------- ------------- --------------- ------- -------------
67 SCHEDULE 5.6 Litigation and Undisclosed Liabilities 68 SCHEDULE 5.10(a)(ix) (DELETED) 69 SCHEDULE 5.10(f)(i) (DELETED) 70 SCHEDULE 5.16 Environmental Matters See asbestos reports and Phase I Reports (as updated) previously provided to Purchaser. 71 SCHEDULE 8.1 Outstanding Tax Liabilities None. EX-10.7 11 LEASE AGREEMENT DATED OCTOBER 7, 1963 1 EXHIBIT 10.7 L E A S E THIS LEASE, made this 7th day of October, 1963, by and between TWIN CITY DEVELOPMENT CO., a Washington corporation, hereinafter designated as the "Landlord", and BANK OF COWLITZ COUNTY, a Washington corporation, hereinafter designated as "Tenant", W I T N E S S E T H 1. PREMISES. The Landlord hereby leases to the Tenant, and the Tenant hereby leases from the Landlord, area in the development known as TRIANGLE SHOPPING CENTER. A plan of the Shopping Center is hereto annexed as Exhibit "A", which shows the location of the demised premises. A legal description of the lands comprising the Shopping Center is hereto annexed as Exhibit "B". In addition to the premises mentioned herein, this Lease includes the nonexclusive right to Tenant and its agents, employees, invitees, customers, suppliers, and patrons to use and enjoy throughout the term of this Lease the "common areas" of the Shopping Center and other features and facilities provided for the general uses and purposes of the Shopping Center. 2. TERM. The term of this Lease shall commence on Noon of the first day the building is completed and ready for occupancy as certified by the architect but no later than April 1, 1964, and shall continue for twenty-five (25) years. (A) The Tenant may, by written notice to Landlord given one hundred eighty (180) or more days before the end of the original term of twenty-five (25) years, extend the term for ten (10) years from the end of such original term upon the same terms and conditions as herein set forth except as to rental, which shall be fixed as hereinafter provided. (B) If Tenant has exercised the foregoing option to extend the term, it may, by written notice to Landlord, given one hundred eighty (180) or more days before the end of the term is extended by the ten (10) year period referred to in Section 2(A), further extend the term to September 30, 2006, upon the same terms and conditions, except as to rental, which shall be fixed as hereinafter provided. (C) If Tenant exercises the respective options granted in (A) and (B) above, the rental shall be mutually agreed upon. In the event the parties are unable to agree as to rental, they shall each choose an arbitrator, and the two so appointed shall select a third, and the decision of a majority of said arbitrators shall be binding upon the parties. The arbitrators shall be charged with arriving at a fair market rental as of date each option becomes operative, based upon the economic value of the land herein leased. Each party shall pay the costs of the arbitrator selected by him and shall share equally the costs of the third. 3. RENTAL. Tenant covenants and agrees to pay to the Landlord an annual rental of Two Thousand Four Hundred and No/100 ($2,400.00) Dollars, payable in equal monthly installments with a -1- 2 proportional share thereof for any partial month, which rental shall be paid in advance on the 1st day of each and every calendar month during the term or any extensions hereof. The annual Cowlitz County Real Property Taxes, diking assessment, and periodic fire insurance premiums shall be payable by Tenant, and evidence of payment before delinquency furnished to Landlord. It is understood that the parties will cause the Cowlitz County Assessor to segregate the assessments so that the tax assessed and payable on the improved premises occupied by Tenant is determined for payment by Tenant. It is understood that Landlord is to pay Real Estate Property Taxes and Diking Assessment on the land only and that the balance will be paid by Tenant. 4. CONSTRUCTION. Tenant shall, with all reasonable expedition, proceed to erect upon the demised premises a building on the space herein leased in accordance with the plans and specifications to be approved by Landlord, which approval shall not be unreasonably withheld. 5. UTILITIES. Tenant shall pay the monthly or periodic charges for all of its requirements for utilities such as gas, water, and electricity and sewer charges imposed by governmental authorities if based on water consumed, and shall pay for heating and air conditioning of areas occupied solely by Tenant. 6. USE OF PREMISES. The premises shall at all times be used and occupied only for a bank and all purposes incidental thereto and for no other purpose or purposes without Landlord's consent, it being further understood that Landlord has entered into leases with other Tenants and this Lease is subject to such lease or leases. 7. SIGNS. Tenant may provide and maintain, subject to the approval of the Landlord, which approval shall not be arbitrarily withheld, a proper identifying sign or signs. 8. ASSIGNMENT AND SUBLETTING. Tenant covenants and agrees that it will not assign this Lease or sub-let the whole or any part of the demised premises without, in each instance, having first received the express written consent of the Landlord; however, any such assignment shall not relieve Tenant of its obligation hereunder, and Tenant shall continue to be liable to Landlord with respect thereto as fully as though such assignment had not been made. 9. REPAIRS, MAINTENANCE AND ALTERATIONS. The Tenant agrees to construct the building upon the property described herein in a good and workmanlike manner and permit no liens to attach to the premises as a result of its work. Alterations made by the Tenant shall be at its sole expense after approval of Landlord, which approval shall not be arbitrarily withheld, and Tenant shall be responsible for any damage or cost incurred to the Leased premises because of making such alterations. The Tenant agrees to conform to and comply with all rules, laws, ordinances, and regulations of Federal, State, County, and Municipal authority in the use and -2- 3 occupation or alteration and repair of the demised premises as related to its particular occupancy. Tenant agrees to maintain the entire premises during the term of this Lease and any extensions hereof. Tenant shall have the right to place or install on said leased premises such fixtures and equipment including modernization and replacement, as it shall deem desirable for the conduct of its business therein. At the termination of this Lease or any extension or renewal thereof, Tenant may remove from said leased premises all personal property and fixtures placed by it on said premises at its own expense, and Tenant agrees to repair any damage to the premises caused by the removal of its personal property and fixtures. 10. INSURANCE. Tenant agrees to indemnify and save harmless Landlord from and against all claims of whatever nature, except those resulting from the negligence of Landlord or its agents, arising from any act, omission or negligence of Tenant or Tenant's contractors, agents, servants, or employees, or arising from any accident, injury or damage whatsoever caused to any person or to the property of any person occurring during the term hereof in or about the Tenant's demised premises but within the Shopping Center development of which the demised premises are a part, where such accident, damage, or injury results or is claimed to have resulted from an act or omission of the Tenant or his agents or employees. This indemnity and hold-harmless agreement shall include indemnity against all costs, expenses, and liabilities in, or in connection with, any such claim or proceeding brought thereon and the defense thereof. Tenant agrees to maintain in full force during the term hereof a policy of public liability insurance; the minimum limits of liability of such insurance shall be $100,000.00 for injury (or death) to any one person and $300,000.00 for any injury (or death) to more than one person. Tenant agrees to use and occupy the demised premises and to use all other portions of the common areas in the Shopping Center at its own risk; and the Landlord shall have no responsibility or liability for any loss of or damage to fixtures or other personal property of Tenant. The provisions of this section shall apply during the whole of the term hereof. It is understood and agreed that Tenant assumes all risk of damage to its own property arising from any cause whatsoever, including, without limitation, loss by theft or otherwise. Tenant covenants and agrees that it will not do or permit anything to be done in or upon the demised premises or bring in anything or keep anything therein which shall increase the rate of insurance on the Shopping Center area, and further agrees that, in the event it shall do any of the foregoing, it will promptly pay to the Landlord upon demand, any such increase resulting therefrom, which shall be due and payable as additional rental hereunder. 11. DESTRUCTION OF PREMISES. In the event of a partial or total destruction of the premises during the lease term or any extensions from any cause, Tenant shall forthwith repair the same, providing such repairs can be made under the laws and regulations -3- 4 of Federal, State, County, and Municipal authorities. Such destruction shall in no wise annul or void this Lease. If such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of either party. 12. DEFAULT AND RE-ENTRY. It is expressly agreed between the parties hereto that, if default be made in the payment of the rent above reserved or any part thereof, or in any of the covenants and agreements herein contained to be kept by the Tenant, after thirty (30) days' notice to Tenant of such alleged breach, (except five [5] days written notice for nonpayment of rental), it shall be lawful for the Landlord or assigns at any time after the expiration of said notice, if said default is not cured, at the election of the Landlord or assigns, to re-enter said demised premises or any part thereof, either with or without process of law, and to expel, remove and put out the Tenant or any other person or persons occupying the same, using such force as may be necessary so to do, and the said premises again to repossess and enjoy, as before this demise, without prejudice or any remedies which might otherwise be used for arrears of rent or preceding breach of covenants. In case of such termination, re-entry, or dispossession by summary proceedings or otherwise, the Tenant will also pay to Landlord all expenses which Landlord may then or thereafter incur for legal expenses, reasonable attorney fees, brokerage commissions, and all other reasonable costs paid or incurred by Landlord for restoring the demised premises to good order and condition and for altering or otherwise preparing the same for re-letting, and title to all Tenant's improvements shall revert to Landlord. 13. NOTICES. Whenever, by the terms of this Lease, notice shall or may be given either to Landlord or to Tenant, such notice shall be in writing and shall be sent by registered mail, postage prepaid. If intended for Landlord, addressed to it at the address then designated for the payment of rent, which is presently No. 7, Triangle Shopping Center, c/o Longview Mortgage Co., Longview, Washington. If intended for Tenant, addressed to it at 1347 - 14th Avenue, Longview, Washington. 14. QUIET ENJOYMENT. Tenant, subject to the terms and provisions of this Lease, on payment of the rental and observing, keeping, and performing all of the terms and provisions of this Lease on its part to be observed, kept, and performed, shall lawfully, peaceably, and quietly have, hold and enjoy the demised premises during the term hereof without hindrance or interference by any persons lawfully claiming unto the Landlord. 15. TENANT'S ASSOCIATION. Tenant agrees to join and remain a member in good standing with other tenants of said Shopping Center in the formation of a Tenants' Association, which said Tenants' Association shall pay the cost of operating, lighting, cleaning, removing snow, policing, insuring against casualties, -4- 5 injuries and damage which may occur in such public areas and otherwise lawfully maintaining, operating, and repairing the parking area, walks, and other areas common to all tenants. Tenant agrees to pay a sum equal to one cent per square foot per month of the gross building area herein leased. For the good and welfare of all tenants in the Shopping Center, their employees, agents, customers, and invitees, Landlord expressly reserves the right to promulgate reasonable rules and regulations relating to the use of all common areas. Said rules and regulations shall be binding upon Tenant ten days after the mailing of a copy thereof to Tenant at the demised premises. For the enforcement of all provisions of this clause, Landlord shall have available to it all the remedies in this Lease provided for a breach thereof and all legal remedies, whether or not provided for in this Lease, at law or in equity. The Landlord will, upon request of the Tenant's Association, exercise the enforcement provisions set forth in this Lease as to any tenant who fails to cooperate or participate with said Tenant's Association. 16. MISCELLANEOUS. Landlord shall have the right to enter upon the demised premises at all reasonable hours for the purpose of inspecting the same. For a period commencing one hundred twenty (120) days prior to the termination of this Lease, Landlord may have reasonable access to the premises herein demised for the purpose of exhibiting the same to prospective tenants. Landlord shall pay, or cause to be paid, before the same become delinquent, all general and special taxes which may be lawfully charged, assessed or imposed upon the demised land only. Landlord shall in no event be in default for the performance of any of its obligations hereunder unless and until Landlord shall have failed to perform such obligations within thirty (30) days or such additional time as is reasonably required to correct any such default after notice by Tenant to Landlord properly specifying wherein Landlord has failed to perform any such obligation. This Lease shall be subject and subordinate to any first mortgage on the demised premises placed with an insurance company or other lending institution authorized to lend money; however, the Tenant's rights under this Lease shall not be impaired so long as Tenant is not in default. The failure of either party to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of breach of any covenant of this Lease shall not be deemed a waiver of such breach. No provision of this Lease shall be deemed to have been waived by a party hereto unless such waiver be in writing signed by such party. At the expiration of this Lease, Tenant shall surrender the demised premises in good condition and broom clean, reasonable wear and tear and damage by fire or casualty excepted. -5- 6 17. LEASE BINDING ON SUCCESSORS. Except as herein otherwise expressly provided, the terms hereof shall be binding upon and shall inure to the benefit of the successors and assigns, respectively, of Landlord and Tenant. -6- 7 IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease Agreement to be executed in their respective corporate names and their respective corporate seals to be hereunto affixed and signed and attested by their respective officers thereunto duly authorized, all as of the day and year first above written. TWIN CITY DEVELOPMENT CO. By /s/ H. R. Calbom ---------------------------------- ATTEST: /s/ F. L. Eaton - --------------------------------- Landlord BANK OF COWLITZ COUNTY By /s/ Woodrow C. Button President ------------------------------------ President ATTEST: /s/ Earl C. Page - ----------------------------------- Vice President and Cashier -7- 8 STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this 7th day of October, 1963, before me, the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared H. R. CALBOM and F. L. EATON, to me known to be the President and Secretary, respectively, of TWIN CITY DEVELOPMENT CO., the corporation that executed the foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the corporate seal of said corporation. WITNESS my hand and official seal hereto affixed the day and year first above written. /s/ ------------------------------------- Notary Public in and for the State of Washington, residing at Longview STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this 9th day of October, 1963, before me, the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared WOODROW C. BUTTON and EARL C. PAGE, to me known to be the President and Cashier, respectively, of the BANK OF COWLITZ COUNTY, the corporation that executed the foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the corporate seal of said corporation. WITNESS my hand and official seal hereto affixed the day and year first above written. /s/ -------------------------------------- Notary Public in and for the State of Washington, residing at Longview -8- 9 [THIS PAGE INTENTIONALLY KEPT BLANK FOR MAP INSERTION] -9- 10 EXHIBIT "B" Commencing at the Northwesterly corner of Tract No. 1 (which is the initial point of Assessor's Plat No. 17) of Assessor's Plat No. 17, as recorded in Volume 8 of Plats, page 39, Records of Cowlitz County, Washington; thence South 15 degrees 02' West a distance of 227.71 feet to the true point of beginning of this description; thence North 88 degrees 50' 30" East a distance of 181.50 feet; thence North 15 degrees 02' East a distance of 10.41 feet; thence North 88 degrees 50' 39" East a distance of 797.32 feet; thence South 15 degrees 02' West a distance of 84.55 feet; thence South 74 degrees 58' East a distance of 40.00 feet; thence South 15 degrees 02' West a distance of 228.51 feet; thence South 74 degrees 58' East a distance of 2.72 feet; thence South 32 degrees 21' 29" East a distance of 292.00 feet; thence South 57 degrees 38' 31" West a distance of 1,540.00 feet; thence North 32 degrees 21' 29" West a distance of 160.00 feet; thence South 57 degrees 38' 31" West a distance of 55.13 feet; thence North 15 degrees 02' East a distance of 1,293.12 feet to the true point of beginning, situate in Cowlitz County, Washington, EXCEPTING that portion of Tract 29, Assessors Plat No. 17 conveyed to the City of Longview for street purposes by deed recorded under Auditor's file No. 537358, records of the auditor of said county. -10- EX-10.8 12 ASSIGNMENT OF LEASE DATED MARCH 4, 1976 1 EXHIBIT 10.8 ASSIGNMENT OF LEASE For value received, the undersigned does hereby assign, transfer and set over, and convey unto the OLD NATIONAL BANK OF WASHINGTON, a National Banking Association, all of its right, title and interest in and to that certain Lease dated October 7, 1963, between TWIN CITY DEVELOPMENT CO., as Lessor, and BANK OF COWLITZ COUNTY, as Lessee, which Lease provides for the lease of that certain real property situated in Cowlitz County, State of Washington, more particularly described as follows: A portion of Tract 46, Assessor's Plat No. 17, according to the plat thereof recorded in Volume 8, page 39, records of Cowlitz County, Washington, described as follows: Beginning at the corner common to Tract 46, 47, 48 and 49, Assessor's Plat No. 17, according to the plat thereof recorded in Volume 8 of Plats, page 39, records of said County; thence North 32(degree)21'29" West 10 feet; thence South 57(degree)38'31" West 40 feet to the true point of beginning thence continuing South 57(degree)38'31" West 150 feet; thence North 32"21'29" West 150 feet; thence North 57(degree)38'31" East 150 feet; thence South 32(degree)21'29" East 150 feet to the true point of beginning. DATED at Bellevue, Washington, this 4th day of March, 1976. BANK OF THE WEST, formerly BANK OF COWLITZ COUNTY By /s/ W.C. Button ------------------------------------ President Attest: /s/ B.D. Collier ------------------------------- Cashier STATE OF WASHINGTON ) ) ss. County of King ) On this 4th day of March, 1976, before me a Notary Public in and for the above county and state, personally appeared W. C. BUTTON and B. D. COLLIER, to me known to be the President and Cashier, respectively, of BANK OF THE WEST, the corporation that executed the within and foregoing instrument; and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and each on oath stated that he was authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. -1- 2 IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Dollie M. Duncan --------------------------------------- NOTARY PUBLIC in and for the State of Washington, residing at Bellevue OLD NATIONAL BANK OF WASHINGTON and W. C. BUTTON, as liquidating agents of BANK OF THE WEST, do hereby join in and confirm the above and foregoing assignment of lease. OLD NATIONAL BANK OF WASHINGTON, as a liquidating agent of BANK OF THE WEST By: /s/ B.C. Gineau ----------------------------------- Attest: /s/ T.M. Palmer -------------------------------- /s/ W.C. Button --------------------------------------- W. C. BUTTON, as liquidating agent of BANK OF THE WEST STATE OF WASHINGTON ) ) ss. County of King ) On this 4th day of March, 1976, before me personally appeared B.C. GINEAU and T.M. PALMER to me known to be the______________________________ and ___________________ of OLD NATIONAL BANK OF WASHINGTON, as a liquidating agent of BANK OF THE WEST, the corporation that executed the within and foregoing instrument and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and each on oath stated that he is authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ Dollie M. Duncan --------------------------------------- NOTARY PUBLIC in and for the State of Washington, residing at Bellevue -2- 3 STATE OF WASHINGTON ) ) ss. County of King ) On this 4th day of March, 1976, before me personally appeared W. C. BUTTON, as a liquidating agent of BANK OF THE WEST, to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that he signed the same as his free and voluntary act and deed, for the uses and purposes therein mentioned. GIVEN under my hand and official seal the day and year last above written. /s/ Dollie M. Duncan ---------------------------------------- NOTARY PUBLIC in and for the State of Washington, residing at Bellevue -3- 4 ACCEPTANCE OF ASSIGNMENT OLD NATIONAL BANK OF WASHINGTON, the Assignee of the foregoing Assignment of Lease, does hereby accept said Assignment and does hereby agree to be bound by and perform all of the terms, covenants, conditions and obligations of the Lessee as provided in the lease described in the foregoing Assignment of Lease. IN WITNESS WHEREOF, the Assignee has caused this Acceptance to be executed by its duly authorized officers this 4th day of March, 1976. OLD NATIONAL BANK OF WASHINGTON By: /s/ B.C. Ghineau --------------------------------- Attest: /s/ T.M. Palmer ----------------------------- CONSENT TO ASSIGNMENT The undersigned, the Lessor of the lease described in the foregoing Assignment of Lease, does hereby consent to the assignment of the Lessee's interest under said lease to OLD NATIONAL BANK OF WASHINGTON, as more particularly set forth in the foregoing Assignment of Lease. IN WITNESS WHEREOF the undersigned has caused this Consent to Assignment to be executed this 7th day of April, 1976. TWIN CITY DEVELOPMENT CO. By: /s/ --------------------------------- -4- EX-10.9 13 ASSIGNMENT OF LEASE DATED MARCH 30, 1979 1 EXHIBIT 10.9 ASSIGNMENT OF LEASE FOR VALUE RECEIVED, the undersigned does hereby assign, transfer, set over, and convey unto the PACIFIC NATIONAL BANK OF WASHINGTON, a national banking association, all of its right, title and interest in and to that certain Lease dated October 7, 1963, between TRAINGLE DEVELOPMENT COMPANY, a Washington corporation, as Lessor, and the OLD NATIONAL BANK OF WASHINGTON, a national banking association, as Lessee, which Lease provides for the lease of that certain real property situated in Cowlitz County, State of Washington, more particularly described as follows: A portion of Tract 46, Assessor's Plat No. 17, according to the plat thereof recorded in Volume 8, page 39, records of Cowlitz County, Washington, described as follows: Beginning at the corner common to Tract 46, 47, 48 and 49, Assessor's Plat No. 17, according to the plat thereof recorded in Volume 8 of Plats, page 39, records of said County; thence North 32#21'29" West 10 feet; thence South 57#38'31" West 40 feet to the true point of beginning thence continuing South 57#38'31" West 150 feet; thence North 57#38'31" East 150 feet; thence South 32#21'29" East 150 feet to the true point of beginning. DATED this 30th day of March, 1979. OLD NATIONAL BANK OF WASHINGTON By:/s/____________________________ Attest: /s/_______________________ 2 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 30th day of March, 1979, before me the undersigned Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared Gordon Brand and M. H. Fotheringill, to me know to be the Sr. Vice President and Vice President, of the OLD NATIONAL BANK OF WASHINGTON, the corporation that executed the foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute the said instrument and that the seal affixed is the corporate seal of said corporation. WITNESS my hand and official seal hereto affixed the day and year first above written. /s/___________________________ NOTARY PUBLIC in and for the State of Washington, residing at Spokane ACCEPTANCE OF ASSIGNMENT PACIFIC NATIONAL BANK OF WASHINGTON, the Assignee of the foregoing Assignment of Lease, does hereby accept said assignment and does hereby agree to be bound by and perform all of the terms, covenants, conditions and obligations of the Lessee all as provided in the lease described in the foregoing Assignment of Lease. IN WITNESS WHEREOF, the Assignee has caused this acceptance to be executed by its duly authorized officers this 30th day of March, 1979. PACIFIC NATIONAL BANK OF WASHINGTON By: /s/__________________________ Attest: /s/_______________________ 3 CONSENT TO ASSIGNMENT THE UNDERSIGNED, the Lessor of the lease described in the foregoing Assignment of Lease, does hereby consent to the assignment of the Lessee's interest under said lease to the Pacific National Bank of Washington, as more particularly set forth in the foregoing Assignment of Lease. IN WITNESS WHEREOF, the undersigned has caused this consent to be executed by its duly authorized officers this _____ day of March, 1979. TRAINGLE DEVELOPMENT COMPANY By: /s/___________________________ EX-10.10 14 EXTENSION OF LEASE DATED APRIL 1, 1989 1 EXHIBIT 10.10 EXTENSION OF LEASE THIS AGREEMENT of Extension of Lease, entered into as of the 1st day of April, 1989, by and between TRIANGLE DEVELOPMENT COMPANY, a partnership organized and existing under the laws of the State of Washington, herein referred to as "Landlord", and FIRST INTERSTATE BANK OF WASHINGTON, N.A., a banking institution organized under the laws of the United States, doing business in Cowlitz County, Washington, herein referred to as "Tenant". R E C I T A L S 1. By Lease dated October 7, 1963, TWIN CITY DEVELOPMENT CO., to the interest of which Landlord is a successor and BANK OF COWLITZ COUNTY, to the interest of which Tenant is a successor, entered into a lease for premises in the Triangle Shopping Center ("the Property") for a period of 25 years. 2. Pursuant to the terms of the October 7, 1963 Lease, Tenant had the right to extend the term thereof for an additional 10 year period, which Tenant desires to exercise. 3. The parties desire to reduce to writing those specific ways in which the previous Lease will be modified during the 10 year extension period. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. The October 7, 1963 Lease above identified is extended for a period of 10 years commencing April 1, 1989 and ending March 31, 1999. -1- 2 2. The Tenant covenants and agrees to pay to the Landlord an annual rental of $13,500.00, payable in equal monthly installments of $1,125.00 payable on the first day of each month of the Lease term. The annual rental shall be revised on each and every third year anniversary date, i.e. April 1, 1992, April 1, 1995, and April 1, 1998, in relation to the relative changes in the cost of living. Effective on each of the three dates set forth above, the annual rental provided in this Extension Agreement shall be adjusted by multiplying $13,500.00 times a fraction, the numerator of which shall be the Consumer Price Index for U.S. Average, general summary and groups, sub-groups and selected items for city wage earners and clerical workers "all items" published by the United States Department of Labor, Bureau of Labor Statistics for the November immediately proceeding the effective date of the adjustment and the denominator shall be the same Consumer Price Index for November, 1988. If the Bureau of Labor Statistics changes the form or the basis of calculating the Consumer Price Index, the parties agree to use whatever successor Index is available and if none, the most nearly compatible available Index. The Tenant's obligation to pay any Cowlitz County real property taxes, diking assessment and periodic fire insurance premiums as provided in the second paragraph of Section 2 of the October 7, 1963 Lease shall remain in full force and effect. In addition, Tenant shall provide Landlord with an annual Certificate of Insurance showing adequate fire and liability insurance coverage on the building. Tenant shall pay a pro-rata share of the common area maintenance and mall promotional fees, said payments to be made monthly in the minimum amounts of $50.00 per month for the common area maintenance and $25.00 per month for mall promotional fees. 3. Except as specifically modified in this Extension Agreement, the terms and provisions of the October 7, 1963 Lease shall remain in full force and effect. -2- 3 IN WITNESS WHEREOF, the parties have set their hand this 13th day of April, 1989. TRIANGLE DEVELOPMENT CO. By: /s/ ---------------------------------- Its: General Partner ---------------------------------- FIRST INTERSTATE BANK OF WASHINGTON, N.A. By: /s/ ---------------------------------- Its: Vice President --------------------------------- By: /s/ ---------------------------------- Its: Assistant Vice President --------------------------------- -3- EX-10.11 15 EMPLOYMENT AGREEMENT BETWEEN COWLITZ AND JARRETT 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Agreement ("Agreement") is made and entered into as of January 1, 1998, by and between Cowlitz Bancorporation, ("Employer"), Cowlitz Bank ("Bank"), and Charles W. Jarrett ("Employee"). As of the date of this Agreement, the Employer's sole operating unit is its wholly owned subsidiary, Cowlitz Bank (the "Bank"). In consideration of mutual promises of Employer, Bank and Employee set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT. Employer agrees to elect and employ Employee as its President and Chief Operating Officer, and Employee agrees to serve Employer in those capacities and, if elected by the shareholders of Employer, to serve on the Board of Directors. In addition, Employee shall serve as President and Chief Executive Officer of the Bank. Bank shall compensate Employee and bonuses shall be based on Bank's financial results. Employee agrees to perform such services as set forth in Employer's and Bank's Bylaws and as may be customary to such offices at the direction of their respective Boards of Directors. 2. SALARY. Bank agrees to pay Employee not less than $200,000 per year during the term of this Agreement, in equal monthly installments, subject to usual required withholding. From time to time, and no less frequently than annually, the Board of Directors shall review the performance and responsibilities of Employee and may, in its sole discretion, increase such salary by such additional amount as may be appropriate. In particular, the expanded duties of Employee arising from the Employer's acquisition of other operating units shall be considered in determining salary increases. 3. CASH BONUSES. In addition to salary under Section 2, Employee shall be entitled to annual cash bonuses, determined as follows: a. FOLLOWING YEARS. For each calendar year during the term of this Agreement, Employee shall be entitled to a bonus equal to the sum of five percent (5%) of the Bank's net profits in excess of a one percent (1%) Return on Assets of the Bank ("ROA") for the calendar year and seven and one-half percent (7.5%) of the Bank's net profits in excess of one and one-half percent (1.5%) ROA for the calendar year. If the Bank's ROA for a year is less than one percent (1%), no bonus shall be paid under this Section 3.a. b. ADDITIONAL MERIT BONUSES. In addition to the bonuses, if any, which Employee may be entitled to, under Section 3.a the Board of Directors of the Employer in connection with the Employee's annual salary review shall determine whether Employee's total compensation for the previous year was appropriate in light of his responsibilities and accomplishments. The Board of Directors may authorize such additional bonus amount as they consider reasonable and appropriate in the circumstances. c. PAYMENT OF BONUSES. The bonuses under this Section 3 shall be paid after the end of each calendar year, promptly after the annual financial results of the Employer and Bank are determined. The Board of Directors shall retain the authority to adjust the annual performance goal in order to reflect extraordinary or nonrecurring events. 4. STOCK OPTIONS. As part of this Agreement Employee may also receive additional consideration in the form of stock options. All options granted under this Agreement are subject to the Cowlitz Bancorporation, 1997 Long-term Incentive Plan and the rights and restrictions contained therein. 5. DEFERRED COMPENSATION PLAN. As part of this Agreement Employee may also receive additional consideration in the form of deferred compensation. All deferred compensation paid subsequent to this Agreement is subject to the Cowlitz Bancorporation, Supplemental Executive Retirement Plan and the rights and restrictions contained therein. 2 6. DURATION OF THIS AGREEMENT. Employment under this Agreement shall commence on this date and terminate on the date 36 months after this date, provided that for each day from and after the date hereof the duration of the agreement will automatically be extended for an additional day, unless earlier terminated by any of the following: a. upon the death of Employee; b. due to the inability of Employee, as determined by the Board of Directors, in its discretion, based on competent medical advice, to perform his duties hereunder, whether by reason of injury or illness (physical or mental) incapacitating Employee for a continuous period exceeding 365 days; c. upon the discharge of Employee by the Board of Directors of Employer pursuant to Section 7 or 8 hereof; D. upon Employee voluntarily terminating employment pursuant to Section 9; or E. upon retirement of Employee. 7. TERMINATION FOR CAUSE. For cause shall mean that the Employer or Bank has terminated Employee's employment for any of the following reasons: a. The commission by Employee of an act of fraud or embezzlement against Employer or of an act which he knew to be in gross violation of his duties to Employer or Bank (including the unauthorized disclosure of confidential information); b. A felony conviction of Employee; or c. The material failure of Employee to carry out reasonable written directions of the Board of Directors appropriate to Employee's executive status. 8. TERMINATION. Employee shall be entitled to the benefits of this Agreement unless this Agreement terminates early as follows: a. EARLY TERMINATION. In the event of early termination of this Agreement for cause as specified in Section 7, Bank shall no longer be obligated to make any salary payments of any kind whatsoever to Employee or his estate. Employee or his designees or, if there is no such designee, the Employee's estate shall be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. In addition, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. b. TERMINATION WITHOUT CAUSE. Employer's or Bank's Board of Directors may terminate employee at any time in its sole discretion. In the event such termination is without cause, or caused by the death or disability of Employee, then Employee shall be entitled to receive, within five business days after the effective date of such termination, from Employer or Bank a lump sum equal to three times the Employee's annual base salary under this Agreement for the calendar year in which such employment terminates. Additionally, Employee shall be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. In addition, if Employer or Bank discharges Employee for any reason other than for cause, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. Employment Contract -- Page 2 3 9. TERMINATION OF EMPLOYMENT BY NOTICE. Employee may terminate employment upon 30 days written notice to the Employer and Bank. Employee will be required to perform all duties and will be paid his annual base salary pursuant to Section 2 and the fringe benefits pursuant to Section 10 accrued, in each case, through the date of termination. Employee or his designees or, if there is no such designee, the Employee's estate shall also be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. 10. EMPLOYEE BENEFITS. In addition, during the term of this Agreement Employer or Bank shall provide Employee: a. all employee benefits, including retirement, vacation and health, life and disability insurance benefits, as modified from time to time, as a generally available to officers of Employer and the Bank; b. reimbursement of travel and entertainment expenses incurred for Employer; c. an automobile, insurance, maintenance, and all costs of operations; d. the initiation fee, monthly dues and assessments for one social or athletic club, to be selected from time to time by Employee. 11. CHANGE IN CONTROL OF THE EMPLOYER. No benefits shall be payable under Section 13 unless there has been a Change in Control of the Employer, as set forth below. Such a Change in Control shall be deemed to have occurred if any of the following occurs: a. The acquisition of ownership, directly, or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date of this Agreement), other than Employer, a Subsidiary or any employee benefit plan of Employer or its Subsidiaries, of shares representing more than 50% of (1) the common stock of Employer, (2) the aggregate voting power of Employer's voting securities or (3) the total market value of Employer's voting securities; b. During any period of 25 consecutive calendar months, a majority of the Board of Directors of Employer (the "Board") ceasing to be composed of individuals (1) who were members of the Board on the first day of such period, (2) whose election or nomination to the Board was approved by individuals referred to in clause (1) above constituting at the time of such election or nomination at least a majority of the Board or (3) whose election or nomination to the Board was approved by individuals referred to in clauses (1) and (2) above constituting at the time of such election or nomination at least a majority of the Board; c. The good-faith determination by the Board that any Person or group (other than a Subsidiary or any employee benefit plan of Employer or its Subsidiaries) has acquired direct or indirect possession of the power to direct or cause to direct the management or policies of Employer or Bank, whether through the ability to exercise voting power, by contract or otherwise; d. The merger, consolidation, share exchange or similar transaction between Employer or Bank and another Person (other than a Subsidiary) other than a merger or share exchange in which Employer is the surviving or acquiring corporation; or e. The sale or transfer (in one transaction or a series of related transactions) of all or substantially all of Employer's or Bank's assets to another Person (other than a Subsidiary) whether assisted or unassisted, voluntary or involuntary. Employment Contract -- Page 3 4 For purposes of the above definition of Change in Control: f. "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof); and g. "Subsidiary" shall mean a corporation that is wholly owned by Employer, either directly or through one or more corporations which are wholly owned by Employer. 12. TERMINATION FOLLOWING A CHANGE IN CONTROL OF THE EMPLOYER. If any of the events described in Section 11 constituting a Change in Control of the Employer occur, the Employee shall be entitled to the benefits provided in Section 13 hereof immediately upon a termination of his employment which occurs within three years after such Change in Control, if such termination is for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without the Employee's express written consent, the occurrence after a Change in Control of the Employer of any (1) or more of the following: a. The assignment to the Employee of duties, responsibilities or status inconsistent with his present duties, responsibilities and status as the President and Chief Executive Officer of the Bank and President and Chief Operating Officer of the Employer and or a reduction or alteration in the nature or status of the Employee's duties and responsibilities from those in effect as of the date hereof; b. A reduction of the Employee's base salary which was in effect on the date of this agreement or as the same has been increased from time to time; c. The Employer's requiring the Employee to be based at an office location other than in or around Longview or Kelso, Washington; d. The failure by the Employer to continue in effect the Employer's insurance, disability, deferred compensation plans or any other of the Employer's employee benefit plans, policies, practices or arrangements in which the Employee participates, or the failure by the Employer to continue the Employee's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of the Employee's participation relative to other participants, as existed as of the date hereon; e. The failure of the Employer to obtain a satisfactory agreement from any successor to the Employer to assume and agree to perform this Agreement; and f. Any purported termination by the Employer of the Employee's employment that is not effected pursuant to a Notice of Termination satisfying the notice requirements of Section 21 below and, for purposes of this Agreement, no such purported termination shall be effective. 13. COMPENSATION UPON TERMINATION FOR CHANGE OF CONTROL. Following a Change in Control of the Employer, as defined in Section 11 hereof, upon termination of the Employee's employment by Employer (or its successor) without cause within three years after a Change in Control of the Employer or by the Employee for Good Reason within three years after a Change in Control of the Employer the Employee shall be entitled to the following benefits ("Change in Control Benefits") as benefits and as compensation for the Covenant Not to Compete set forth in Section 16 hereof: a. The Employer shall pay the Employee his full Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, or the Date of Termination where no Notice of Termination is required hereunder; b. The Employer shall pay as Change in Control Benefits, and as compensation for the Covenant Not to Compete to the Employee, not later than the tenth day following the Date of Termination, a lump sum Employment Contract -- Page 4 5 payment equal to three times the Employee's annual base salary in effect immediately prior to the occurrence of the circumstances giving rise to such termination. In addition, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. c. BENEFITS CONTINUATION If already participating in the Employer's or Bank's medical, dental, and/or life insurance plans, the Employee will be entitled to continued medical/dental benefits coverage for a period of 18 months under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The Employer or Bank will assist the Employee by paying 50 percent of the premiums for coverage in effect before his termination during the first 12 months and 25 percent of the premiums during the remaining six months. If the Employee qualifies for a continuation of COBRA benefits after 18 months then the Employee will be responsible for paying their entire premiums. The purpose of providing continued benefits coverage is to assist the Employee with his career transition. Should the Employee accept an employment opportunity during the 18 months after his termination, his benefits coverage under COBRA may continue should the Employee have a need for continuing benefits coverage. However, the Employer or Bank will not assist with paying his insurance premiums and the Employee will be responsible for paying his own premiums in its entirety. d. Limitation on Change in Control Payments. Subject to Section 13(e) below, the aggregate of all payments, benefits or distributions (or combination thereof) by the Employer or Bank or one or more trusts established by the Employer or Bank for the benefit of its employees, to or for the benefit of Employee pursuant to this Agreement (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, or under the terms of any other plans, program agreement or arrangement) (" Change in Control Payments") shall not exceed the maximum Change in Control Payments which Employee may receive without being subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, hereinafter collectively referred to as the "Excise Tax"). e. GROSS UP. (i). In the event that it is determined that the aggregate of all Change in Control Payments to which Employee would be entitled to receive without regard to Section 13(d) is greater than the sum of (i) the maximum Change in Control Payments which Employee may receive without being subject to the Excise Tax plus (ii) Fifty Thousand Dollars ($50,000.00), then Section 13(d) shall not apply and Employee shall be entitled to receive (i) all Change in Control Payments to which Employee is otherwise entitled to receive without regard to Section 13(d) and (ii) an additional payment (a "Gross-Up Payment") in an amount such that the net amount of Change in Control Payments received by Employee, after the calculation and deduction of any Excise Tax on the Change in Control Payments and any federal, state and local income taxes, employment taxes and excise taxes on the Gross-Up Payment provided for in this Section 13(e), shall be equal to the Change in Control Payments. In determining this amount, the amount of the Gross-Up Payment attributable to federal income taxes shall be reduced by the Gross-Up Payment attributable to state and local income taxes. Finally, the Gross-Up Payment shall be reduced by income or excise tax withholding payments made by the Employer or Bank to any federal, state or local taxing authority with respect to the Gross-Up Payment that was not deducted from compensation payable to Employee. Employment Contract -- Page 5 6 (ii). Subject to the provisions of Section 13.e.(i), all determinations required to be made under Section 13, including, without limitation, whether Section 13(d) is applicable or inapplicable and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arrive at such determination, shall be made by a certified public accounting firm designated by Employee which shall provide detailed supporting calculations both to the Employer or Bank and to Employee within fifteen (15) business days of the receipt of notice from Employer or Bank that there has been a Change in Control Payment, or such earlier time as is requested by the Employer or Bank. This calculations prepared by such firm shall be reviewed on behalf of the Employer or Bank by the Employer's or Bank's independent auditors. In the event of a dispute between the firm designated by Employee and the Employer's or Bank's independent auditors, such firms shall jointly select a third nationally recognized certified public accounting firm (the "Accounting Firm") to resolve the dispute and the decision of such third firm shall be final, binding and conclusive upon Employee and the Employer and the Bank. All reasonable fees and expenses of the accounting firms shall be borne solely by the Employer or Bank. Any Gross-Up Payment shall be paid by the Employer or Bank to Employee within five (5) business days after the receipt of the Accounting Firm's determination. f. The Change in Control Payments to be paid pursuant to this agreement are not intended as stipulated or liquidated damages for breach of any promise of a term of employment, no such promise being made herein, but are payments which shall be fully earned as of the Date of Termination and shall be compensation for the Employee's continued services rendered to the Employer or Bank after the date hereof and prior to such Date of Termination; for the covenant Not To Compete provision of Section 16 hereof; the foregoing of other, possibly more secure employment; consequential losses which may result from such termination, including, but not limited to, permanent injury to reputation, loss of career development opportunities, and emotional stress; and actual losses which may result from such termination, including, but not limited to, lost wages and expenses of securing other employment. g. The Employer or Bank shall have no obligation to provide or cause to be provided to the Employee the benefits described in this Agreement, other than those provided in Section 8(a) above, if the Employer, Bank, or the Employee shall terminate the Employee's employment prior to a Change in Control. 14. SUCCESSORS: BINDING AGREEMENT. a. The Employer or Bank shall require any successor employing the Employee to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer or Bank would be required to perform it if no such succession had taken place. Failure of the Employer or Bank to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Employer or Bank in the same amount and on the same terms as the Employee would be entitled to if the Employee terminated his employment for Good Reason, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrator, successors and heirs. If the Employee should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's designees or, if there is no such designee, to the Employee's estate. Employment Contract -- Page 6 7 15. CONFIDENTIALITY. Employee acknowledges that during the course of his employment by Employer and Bank, he will be exposed to, have disclosed to him and may develop information that is proprietary to Employer and Bank (the "Confidential Information"). The Confidential Information includes, but is not limited to, financial data, trade secrets, information concerning the operation, design and marketing of products and processes, business plans and procedures, customer lists, file and profiles, needs analyses, calculations, data, manuals, specifications, performance standards, instructions and any other material or information related to Employer and Bank, its business or operations, and the ideas or information relating thereto. Employee will at no time use or permit any other person or entity to examine, use or derive benefit from the Confidential Information, shall maintain the Confidential Information in the strictest confidence, and shall take all necessary precautions needed to preserve its confidentiality. All documents and materials evidencing the Confidential Information, and copies thereof, shall at all times remain the property of Employer. Upon demand, Employee will deliver to Employer or Bank all documents and other materials which contain or pertain to the Confidential Information. 16. NOT TO COMPETE/NO HIRE COVENANT During the employment period and for eighteen months after termination of employment with the Employer or Bank for any reason, the Employee shall not compete, directly or indirectly, with the Employer or Bank or its affiliates within 40 miles of any geographic area in which the Employer or Bank or its affiliates conduct business at the time of termination of the employment period. As used herein, "compete" shall include without limitation, working for or serving any bank, saving association, credit union, mortgage broker or similar company, or any affiliate thereof, as an employee, officer, director, consultant or advisor. If it is judicially determined that this agreement not to compete, or any portion thereof, is non-enforceable under applicable law(s) (statute, common law or otherwise), then it is hereby agreed by the Employee and the Employer and the Bank that the non-enforceable portion of the agreement not to compete shall be and hereby are redrafted to conform with those applicable laws, while leaving the remaining portions of the agreement not to compete intact. By agreeing to this contractual modification prospectively at this time, the parties intend to make this agreement not to compete legal under the law(s) of all applicable states so that the entire agreement not to compete and/or the entire Agreement as prospectively modified shall remain in full force and effect and shall not be rendered void or non-enforceable. Such modifications shall not affect the payments made to Employee under this agreement. The Employee acknowledges that his skills are such that he can be gainfully employed in non-competitive employment and that the agreement not to compete will in no way prevent him from earning a living. While employed by the Employer or Bank and for a eighteen month period immediately following the Date Of Termination of such employment, the Employee shall not, in any capacity for anyone other than the Employer or Bank, recruit, hire, or assist others in recruiting or hiring, any person who is, or within the preceding eighteen month period was, an employee of or consultant for the Employer or Bank. 17. INJUNCTIVE RELIEF. Employee acknowledges that the breach or threatened breach of Employee's covenants in Section 15 or 16 will give rise to irreparable injury to Employer and Bank and its affiliates, which injury would be inadequately compensable in money damages. Accordingly, Employer or Bank may seek and obtain a restraining order and/or temporary injunction prohibiting the breach or threatened breach of any such covenants, in addition to and not limitation of any other legal remedies that may be available. 18. ASSIGNMENT. This agreement is a personal contract and, except as specifically set forth herein, the rights and interests of Employee herein may not be sold, transferred, assigned, pledged or hypothecated. The rights and obligations of Employer and Bank hereunder shall be binding upon and run in favor of the successors and assigns of Employer. In the event of any attempted assignment or transfer of rights hereunder contrary to the provisions hereof, Employer and Bank shall have no further liability for payments hereunder. Employment Contract -- Page 7 8 19. REIMBURSEMENT FOR CONTRACT NEGOTIATION EXPENSES. The Employer or Bank shall pay all of the Employee's reasonable legal, accounting and investment services fees related to the negotiation of this Agreement. In the event of any litigation or judicial proceeding arising out of this agreement, the losing party agrees to pay the prevailing party's reasonable attorney's fees and costs including those incurred on appeal. 20. INDEMNITY. Employer and Bank agree, to the extent permitted by applicable law, to indemnify and hold Employee harmless from and against any claims, suits or proceedings and government investigations in which the Employee is involved due to his duties while serving Employer or Bank. This commitment is only applicable if the Employee in good faith and in a manner he reasonably believed to be in the best interests of the Employer or Bank. 21. NOTICES. Any notice given by either party hereunder shall be in writing and sent by registered or certified mail. Notice to Employer or Bank shall be addressed to it at is principle office, 927 Commerce Avenue, Longview, Washington 98632-7912, Attention: Secretary, and to Employee at his last known residence address. 22. MISCELLANEOUS. This Agreement contains the entire agreement between the parties and shall be governed by the law of the State of Washington. It may not be changed orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Paragraph headings are for convenience of reference only and shall be considered a part of this Agreement. IN WITNESS WHEREOF, this Agreement has been signed by Employer Bank and Employee on the dates shown below. EMPLOYER: Longview, Washington COWLITZ BANCORPORATION , 1998 By: ________________________ Title: _______________________ EMPLOYEE: Longview, Washington _______________________________ , 1998 Charles W. Jarrett Employment Contract -- Page 8 EX-10.12 16 EMPLOYMENT AGREEMENT BETWEEN COWLITZ AND NAMITINIA 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT This Agreement ("Agreement") is made and entered into as of January 1, 1998, by and between Cowlitz Bancorporation, ("Employer") and Ben Namatinia ("Employee"). As of the date of this Agreement, the Employer's sole operating unit is its wholly-owned subsidiary, Cowlitz Bank (the "Bank"). In consideration of mutual promises of Employer and Employee set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT. Employer agrees to elect and employ Employee as its Chairman and Chief Executive Officer, and Employee agrees to serve Employer in those capacities and, if elected by the shareholders of Employer, to serve on the Board of Directors. Employee agrees to perform such services as set forth in Employer's and Bank's Bylaws and as may be customary to such offices at the direction of their respective Boards of Directors. 2. SALARY. Employer agrees to pay Employee not less than $200,000 per year during the term of this Agreement, in equal monthly installments, subject to usual required withholding. From time to time, and no less frequently than annually, the Board of Directors shall review the performance and responsibilities of Employee and may, in its sole discretion, increase such salary by such additional amount as may be appropriate. In particular, the expanded duties of Employee arising from the Employer's acquisition of other operating units shall be considered in determining salary increases. 3. CASH BONUSES. In addition to salary under Section 2, Employee shall be entitled to annual cash bonuses, determined as follows: a. FOLLOWING YEARS. For each calendar year during the term of this Agreement, the Employee's annual bonus shall be determined by the Employer's Board of Directors at its discretion. b. ADDITIONAL MERIT BONUSES. In addition to the bonuses, if any, which Employee may be entitled to, under Section 3.a the Board of Directors of the Employer in connection with the Employee's annual salary review shall determine whether Employee's total compensation for the previous year was appropriate in light of his responsibilities and accomplishments. The Board of Directors may authorize such additional bonus amount as they consider reasonable and appropriate in the circumstances. c. PAYMENT OF BONUSES. The bonuses under this Section 3 shall be paid after the end of each calendar year, promptly after the annual financial results of the Employer and Bank are determined. The Board of Directors shall retain the authority to adjust the annual performance goal in order to reflect extraordinary or nonrecurring events. 4. STOCK OPTIONS. As part of this Agreement Employee may also receive additional consideration in the form of stock options. All options granted under this Agreement are subject to the Cowlitz Bancorporation, 1997 Long-term Incentive Plan and the rights and restrictions contained therein. 5. DEFERRED COMPENSATION PLAN. As part of this Agreement Employee may also receive additional consideration in the form of deferred compensation. All deferred compensation paid subsequent to this Agreement is subject to the Cowlitz Bancorporation, Supplemental Executive Retirement Plan and the rights and restrictions contained therein. 6. DURATION OF THIS AGREEMENT. Employment under this Agreement shall commence on this date and terminate on the date 36 months after this date, provided that for each day from and after the date hereof the duration of the agreement will automatically be extended for an additional day, unless earlier terminated by any of the following: a. upon the death of Employee; 2 b. due to the inability of Employee, as determined by the Board of Directors, in its discretion, based on competent medical advice, to perform his duties hereunder, whether by reason of injury or illness (physical or mental) incapacitating Employee for a continuous period exceeding 365 days; c. upon the discharge of Employee by the Board of Directors of Employer pursuant to Section 7 or 8 hereof; d. upon Employee voluntarily terminating employment pursuant to Section 9; or e. upon retirement of Employee. 7. TERMINATION FOR CAUSE. For cause shall mean that the Employer has terminated Employee's employment for any of the following reasons: a. The commission by Employee of an act of fraud or embezzlement against Employer or of an act which he knew to be in gross violation of his duties to Employer (including the unauthorized disclosure of confidential information); b. A felony conviction of Employee, involving moral turpitude; or c. The material failure of Employee to carry out reasonable written directions of the Board of Directors appropriate to Employee's executive status. 8. TERMINATION. Employee shall be entitled to the benefits of this Agreement unless this Agreement terminates early as follows: a. EARLY TERMINATION. In the event of early termination of this Agreement for cause as specified in Section 7, Employer shall no longer be obligated to make any salary payments of any kind whatsoever to Employee or his estate. Employee or his designees or, if there is no such designee, the Employee's estate shall be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. . In addition, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. b. TERMINATION WITHOUT CAUSE. Employer's Board of Directors may terminate employee at any time in its sole discretion. In the event such termination is without cause, then Employee shall be entitled to receive, within five business days after the effective date of such termination, from Employer a lump sum equal to three times the Employee's annual base salary under this Agreement for the calendar year in which such employment terminates. Additionally, Employee shall be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. Employee shall be fully vested in all stock options as of the date of such termination, and shall have the right to fully exercise all stock options for not less than 180 days after such a termination. In addition, if Employer discharges Employee for any reason other than for cause, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. Employment Contract--Page 2 3 9. TERMINATION OF EMPLOYMENT BY NOTICE. Employee may terminate employment upon 30 days written notice to the Employer. Employee will be required to perform all duties and will be paid his annual base salary pursuant to Section 2 and the fringe benefits pursuant to Section 10 accrued, in each case, through the date of termination. Employee or his designees or, if there is no such designee, the Employee's estate shall also be entitled to a cash bonus for the calendar year in which such employment terminates, based on results for the entire year, but prorated for the partial year prior to the date of termination. 10. EMPLOYEE BENEFITS. In addition, during the term of this Agreement Employer shall provide Employee: a. all employee benefits, including retirement, vacation and health, life and disability insurance benefits, as modified from time to time, as a generally available to officers of Employer and the Bank; b. reimbursement of travel and entertainment expenses incurred for Employer; c. an automobile, insurance, maintenance, and all costs of operations; d. the initiation fee, monthly dues and assessments for one social or athletic club, to be selected from time to time by Employee. 11. CHANGE IN CONTROL OF THE EMPLOYER. No benefits shall be payable under Section 13 unless there has been a Change in Control of the Employer, as set forth below. Such a Change in Control shall be deemed to have occurred if any of the following occurs: a. The acquisition of ownership, directly, or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date of this Agreement), other than Employer, a Subsidiary or any employee benefit plan of Employer or its Subsidiaries, of shares representing more than 50% of (1) the common stock of Employer, (2) the aggregate voting power of Employer's voting securities or (3) the total market value of Employer's voting securities; b. During any period of 25 consecutive calendar months, a majority of the Board of Directors of Employer (the "Board") ceasing to be composed of individuals (1) who were members of the Board on the first day of such period, (2) whose election or nomination to the Board was approved by individuals referred to in clause (1) above constituting at the time of such election or nomination at least a majority of the Board or (3) whose election or nomination to the Board was approved by individuals referred to in clauses (1) and (2) above constituting at the time of such election or nomination at least a majority of the Board; c. The good-faith determination by the Board that any Person or group (other than a Subsidiary or any employee benefit plan of Employer or its Subsidiaries) has acquired direct or indirect possession of the power to direct or cause to direct the management or policies of Employer, whether through the ability to exercise voting power, by contract or otherwise; d. The merger, consolidation, share exchange or similar transaction between Employer and another Person (other than a Subsidiary) other than a merger or share exchange in which Employer is the surviving or acquiring corporation; or e. The sale or transfer (in one transaction or a series of related transactions) of all or substantially all of Employer's assets to another Person (other than a Subsidiary) whether assisted or unassisted, voluntary or involuntary. Employment Contract--Page 3 4 For purposes of the above definition of Change in Control: f. "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof); and g. "Subsidiary" shall mean a corporation that is wholly owned by Employer, either directly or through one or more corporations which are wholly owned by Employer. 12. TERMINATION FOLLOWING A CHANGE IN CONTROL OF THE EMPLOYER. If any of the events described in Section 11 constituting a Change in Control of the Employer occur, the Employee shall be entitled to the benefits provided in Section 13 hereof immediately upon a termination of his employment which occurs within three years after such Change in Control, if such termination is for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without the Employee's express written consent, the occurrence after a Change in Control of the Employer of any (1) or more of the following: a. The assignment to the Employee of duties, responsibilities or status inconsistent with his present duties, responsibilities and status as the Chairman and Chief Executive Officer of the Employer and or a reduction or alteration in the nature or status of the Employee's duties and responsibilities from those in effect as of the date hereof; b. A reduction of the Employee's base salary which was in effect on the date of this agreement or as the same has been increased from time to time; c. The Employer's requiring the Employee to be based at an office location other than in or around Longview or Kelso, Washington ; d. The failure by the Employer to continue in effect the Employer's insurance, disability, deferred compensation plans or any other of the Employer's employee benefit plans, policies, practices or arrangements in which the Employee participates, or the failure by the Employer to continue the Employee's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of the Employee's participation relative to other participants, as existed as of the date hereon; e. The failure of the Employer to obtain a satisfactory agreement from any successor to the Employer to assume and agree to perform this Agreement; and f. Any purported termination by the Employer of the Employee's employment that is not effected pursuant to a Notice of Termination satisfying the notice requirements of Section 21 below and, for purposes of this Agreement, no such purported termination shall be effective. 13. COMPENSATION UPON TERMINATION FOR CHANGE OF CONTROL. Following a Change in Control of the Employer, as defined in Section 11 hereof, upon termination of the Employee's employment by Employer (or its successor) without cause within three years after a Change in Control of the Employer or by the Employee for Good Reason within three years after a Change in Control of the Employer the Employee shall be entitled to the following benefits ("Change in Control Benefits") as benefits and as compensation for the Covenant Not to Compete set forth in Section 16 hereof: a. The Employer shall pay the Employee his full Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, or the Date of Termination where no Notice of Termination is required hereunder; Employment Contract--Page 4 5 b. The Employer shall pay as Change in Control Benefits, and as compensation for the Covenant Not to Compete to the Employee, not later than the tenth day following the Date of Termination, a lump sum severance payment equal to three times the Employee's annual base salary in effect immediately prior to the occurrence of the circumstances giving rise to such termination. . In addition, Employee shall receive such benefits to which he has become entitled under the terms of the Cowlitz Bancorporation, 1997 Long-term Incentive Plan, Supplemental Executive Retirement Plan, and any benefit plan or program. c. BENEFITS CONTINUATION If already participating in the Employer's medical, dental, and/or life insurance plans, the Employee will be entitled to continued medical/dental benefits coverage for a period of 18 months under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The Employer will assist the Employee by paying 50 percent of the premiums for coverage in effect before his termination during the first 12 months and 25 percent of the premiums during the remaining six months. If the Employee qualifies for a continuation of COBRA benefits after 18 months then the Employee will be responsible for paying their entire premiums. The purpose of providing continued benefits coverage is to assist the Employee with his career transition. Should the Employee accept an employment opportunity during the 18 months after his termination, his benefits coverage under COBRA may continue should the Employee have a need for continuing benefits coverage. However, the Employer will not assist with paying his insurance premiums and the Employee will be responsible for paying his own premiums in its entirety. d. Limitation on Change in Control Payments. Subject to Section 13(e) below, the aggregate of all payments, benefits or distributions (or combination thereof) by the Employer or one or more trusts established by the Employer for the benefit of its employees, to or for the benefit of Employee pursuant to this Agreement (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, or under the terms of any other plans, program agreement or arrangement) (" Change in Control Payments") shall not exceed the maximum Change in Control Payments which Employee may receive without being subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, hereinafter collectively referred to as the "Excise Tax"). e. GROSS UP. (i). In the event that it is determined that the aggregate of all Change in Control Payments to which Employee would be entitled to receive without regard to Section 13(d) is greater than the sum of (i) the maximum Change in Control Payments which Employee may receive without being subject to the Excise Tax plus (ii) Fifty Thousand Dollars ($50,000.00), then Section 13(d) shall not apply and Employee shall be entitled to receive (i) all Change in Control Payments to which Employee is otherwise entitled to receive without regard to Section 13(d) and (ii) an additional payment (a "Gross-Up Payment") in an amount such that the net amount of Change in Control Payments received by Employee, after the calculation and deduction of any Excise Tax on the Change in Control Payments and any federal, state and local income taxes, employment taxes and excise taxes on the Gross-Up Payment provided for in this Section 13(e), shall be equal to the Change in Control Payments. In determining this amount, the amount of the Gross-Up Payment attributable to federal income taxes shall be reduced by the Gross-Up Payment attributable to state and local income taxes. Finally, the Gross-Up Payment shall be reduced by income or excise tax withholding payments made by the Employer to any federal, state or local taxing authority with respect to the Gross-Up Payment that was not deducted from compensation payable to Employee. Employment Contract--Page 5 6 (ii). Subject to the provisions of Section 13.e.(i), all determinations required to be made under Section 13, including, without limitation, whether Section 13(d) is applicable or inapplicable and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arrive at such determination, shall be made by a certified public accounting firm designated by Employee which shall provide detailed supporting calculations both to the Employer and to Employee within fifteen (15) business days of the receipt of notice from Employer that there has been a Change in Control Payment, or such earlier time as is requested by the Employer. This calculations prepared by such firm shall be reviewed on behalf of the Employer by the Employer's independent auditors. In the event of a dispute between the firm designated by Employee and the Employer's independent auditors, such firms shall jointly select a third nationally recognized certified public accounting firm (the "Accounting Firm") to resolve the dispute and the decision of such third firm shall be final, binding and conclusive upon Employee and the Employer. All fees and expenses of the accounting firms shall be borne solely by the Employer. Any Gross-Up Payment shall be paid by the Employer to Employee within five (5) business days after the receipt of the Accounting Firm's determination. f. The Change in Control Payments to be paid pursuant to this agreement are not intended as stipulated or liquidated damages for breach of any promise of a term of employment, no such promise being made herein, but are payments which shall be fully earned as of the Date of Termination and shall be compensation for the Employee's continued services rendered to the Employer after the date hereof and prior to such Date of Termination; for the covenant Not To Compete provision of Section 16 hereof; the foregoing of other, possibly more secure employment; consequential losses which may result from such termination, including, but not limited to, permanent injury to reputation, loss of career development opportunities, and emotional stress; and actual losses which may result from such termination, including, but not limited to, lost wages and expenses of securing other employment. g. The Employer shall have no obligation to provide or cause to be provided to the Employee the benefits described in this Agreement, other than those provided in Section 8(a) above, if the Employer or the Employee shall terminate the Employee's employment prior to a Change in Control. 14. SUCCESSORS: BINDING AGREEMENT. a. The Employer shall require any successor employing the Employee to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Employer in the same amount and on the same terms as the Employee would be entitled to if the Employee terminated his employment for Good Reason, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. b. This agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrator, successors and heirs. If the Employee should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's designees or, if there is no such designee, to the Employee's estate. Employment Contract--Page 6 7 15. CONFIDENTIALITY. Employee acknowledges that during the course of his employment by Employer, he will be exposed to, have disclosed to him and may develop information that is proprietary to Employer (the "Confidential Information"). The Confidential Information includes, but is not limited to, financial data, trade secrets, information concerning the operation, design and marketing of products and processes, business plans and procedures, customer lists, file and profiles, needs analyses, calculations, data, manuals, specifications, performance standards, instructions and any other material or information related to Employer, its business or operations, and the ideas or information relating thereto. Employee will at no time use or permit any other person or entity to examine, use or derive benefit from the Confidential Information, shall maintain the Confidential Information in the strictest confidence, and shall take all necessary precautions needed to preserve its confidentiality. All documents and materials evidencing the Confidential Information, and copies thereof, shall at all times remain the property of Employer. Upon demand, Employee will deliver to Employer all documents and other materials which contain or pertain to the Confidential Information. 16. NOT TO COMPETE/NO HIRE COVENANT During the employment period and for eighteen months after termination of employment with the Employer for any reason, the Employee shall not compete, directly or indirectly, with the Employer or its affiliates within 40 miles of any geographic area in which the Employer or its affiliates conduct business at the time of termination of the employment period. As used herein, "compete" shall include without limitation, working for or serving any bank, saving association, credit union , mortgage broker or similar company, or any affiliate thereof, as an employee, officer, director, consultant or advisor. If it is judicially determined that this agreement not to compete, or any portion thereof, is non-enforceable under applicable law(s) (statute, common law or otherwise), then it is hereby agreed by the Employee and the Employer that the non-enforceable portion of the agreement not to compete shall be and hereby are redrafted to conform with those applicable laws, while leaving the remaining portions of the agreement not to compete intact. By agreeing to this contractual modification prospectively at this time, the parties intend to make this agreement not to compete legal under the law(s) of all applicable states so that the entire agreement not to compete and/or the entire Agreement as prospectively modified shall remain in full force and effect and shall not be rendered void or non-enforceable. Such modifications shall not affect the payments made to Employee under this agreement. The Employee acknowledges that his skills are such that he can be gainfully employed in non-competitive employment and that the agreement not to compete will in no way prevent him from earning a living. While employed by the Employer and for a eighteen month period immediately following the Date Of Termination of such employment, the Employee shall not, in any capacity for anyone other than the Employer, recruit, hire, or assist others in recruiting or hiring, any person who is, or within the preceding eighteen month period was, an employee of or consultant for the Employer. 17. INJUNCTIVE RELIEF. Employee acknowledges that the breach or threatened breach of Employee's covenants in Section 15 or 16 will give rise to irreparable injury to Employer and its affiliates, which injury would be inadequately compensable in money damages. Accordingly, Employer may seek and obtain a restraining order and/or temporary injunction prohibiting the breach or threatened breach of any such covenants, in addition to and not limitation of any other legal remedies that may be available. 18. ASSIGNMENT. This agreement is a personal contract and, except as specifically set forth herein, the rights and interests of Employee herein may not be sold, transferred, assigned, pledged or hypothecated. The rights and obligations of Employer hereunder shall be binding upon and run in favor of the successors and assigns of Employer. In the event of any attempted assignment or transfer of rights hereunder contrary to the provisions hereof, Employer shall have no further liability for payments hereunder. Employment Contract--Page 7 8 19. REIMBURSEMENT FOR CONTRACT NEGOTIATION EXPENSES. The Employer shall pay all of the Employee's reasonable legal, accounting and investment services fees related to the negotiation of this Agreement. In the event of any litigation or judicial proceeding arising out of this agreement, the losing party agrees to pay the prevailing party's reasonable attorney's fees and costs including those incurred on appeal. 20. INDEMNITY. Employer agrees, to the extent permitted by applicable law, to indemnify and hold Employee harmless from and against any claims, suits or proceedings and government investigations in which the Employee is involved due to his duties while serving Employer. This commitment is only applicable if the Employee in good faith and in a manner he reasonably believed to be in the best interests of the Employer. 21. NOTICES. Any notice given by either party hereunder shall be in writing and sent by registered or certified mail. Notice to Employer shall be addressed to it at is principle office, 927 Commerce Avenue, Longview, Washington 98632-7912, Attention: Secretary, and to Employee at his last known residence address. 22. MISCELLANEOUS. This Agreement contains the entire agreement between the parties and shall be governed by the law of the State of Washington. It may not be changed orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Paragraph headings are for convenience of reference only and shall be considered a part of this Agreement. IN WITNESS WHEREOF, this Agreement has been signed by Employer and Employee on the dates shown below. EMPLOYER: Longview, Washington COWLITZ BANCORPORATION , 1998 By: ________________________ Title: _____________________ EMPLOYEE: Longview, Washington ____________________________ , 1998 Ben Namatinia Employment Contract -- Page 8 EX-10.13 17 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.13 COWLITZ BANCORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (EFFECTIVE JANUARY 1, 1998) PREAMBLE Cowlitz Bancorporation has adopted this Supplemental Executive Retirement Plan, effective January 1, 1998, for Ben Namatinia and Charles W. Jarrett to ensure that the Company's executive compensation program is effective and appropriately compensates the individuals. SECTION I DEFINITIONS When used herein, the following words shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Basic Retirement Plan" (Please insert the name of the currently existing qualified plan) as amended from time to time or any successor thereto. 1.2 "Company" means Cowlitz Bancorporation 1.3 "Participant" means any employee of the Company who meets the eligibility requirements of Section II and is designated and approved as set forth in Section II. 1.4 "Plan" means the Cowlitz Bancorporation Supplemental Executive Retirement Plan. 1.5 "Board of Directors" means the Board of Directors of the Company. 1.6 "Retirement Committee" means the Retirement Committee as defined in the Basic Retirement Plan. 1.7 "Retirement Benefit" means the benefit payable in accordance with this Plan. 1.8 "Surviving Beneficiary" means the Beneficiary of a Participant who is designated by the Participant to receive the Retirement Benefit. Page 1 of 7 2 SECTION II ELIGIBILITY TO PARTICIPATE The Company has designed the Plan specifically for Ben Namatinia and Charles W. Jarrett and any other top management employee that the Board of Directors in its discretion may designate as a Participant. To be considered a Participant, an employee must be designated as such by the Board of Directors. Once an employee becomes a Participant, he shall remain a Participant until his termination of employment with the Company and thereafter until all benefits to which he or his Surviving Beneficiaries are entitled under the Plan have been paid. SECTION III ELIGIBILITY FOR AN AMOUNT OF BENEFITS 3.1. Eligibility. Each Participant, under the age of 70, is eligible to retire from the Company and receive a benefit under the Plan beginning on one of the following dates: a. "Normal Retirement Date," which is the first day of any month coincident with or next following the Participant's 62nd birthday; b. "Postponed Retirement Date," which is the first day of the month coincident with or next following the Participant's termination of employment with the Company after his Normal Retirement Date and prior to his 70th birthday. 3.2. Retirement Benefit. The Retirement Benefit of a Participant who attains his Normal Retirement Date or Postponed Retirement Date shall be distributed benefits under this agreement in one of the following manners as provided in Section 4.1 and as determined by the Employee upon attaining his Normal or Postponed Retirement Date: a. The Company agrees to transfer ownership of a policy currently held by the Company to the Participant upon the Participants Normal or Postponed Retirement. b. The Company agrees to pay the Participant a lump sum amount of $1,022,499 upon his Normal or Postponed Retirement Date. c. The Company agrees to pay the Participant $130,830 per annum for the ten year period following the Participants Normal or Postponed Retirement. 3.3. Death Prior to Retirement. If a Participant dies prior to his 70th birthday and his employment with Employer had not been previously terminated, the Surviving Beneficiary will receive a $1,500,000 lump sum payment in lieu of the Retirement Benefit set forth in paragraph 3.2. Page 2 of 7 3 3.4. Disability Prior to Retirement. If a Participant is disabled prior to his 70th birthday and his employment with Employer had not been previously terminated, the Participant shall receive a payment in lieu of the Retirement Benefit set forth in paragraph 3.2. The payment shall be made under one of the methods set forth under paragraph 3.2 as selected by the Participant, or the Participants legal representative. For the purposes of this paragraph "disabled" shall mean a condition resulting from bodily injury or disease or mental disorder such that Participant is prevented from performing the principal duties of his employment for period exceeding 365 consecutive days. The Board of Director's, in its discretion, based on competent medical advise, shall determine whether Participant is and continues to be disabled for the purposes of this paragraph. 3.5. Death After Retirement But Prior to Payment of Retirement Benefit. If a Participant dies after a Retirement Benefit distribution has begun, under paragraph 3.2 (c) above, but has not been paid in its entirety, the Surviving Beneficiary will be entitled to a lump sum payment equivalent to the balance of the outstanding Retirement Benefit payable to the Participant. 3.6. Termination Upon Change in Control. If a Participant's employment is terminated after a "change in control", as defined by the employment agreement, the Participant shall be entitled to the Retirement Benefit he would have received if he had continued to work for the Company until reaching his Normal Retirement Date. The Participant will be eligible to elect the form of Retirement Benefit as specified under paragraph 3.2. For the purposes of this paragraph the payments shall commence on the first day of the month coincident with or next following the Participant's termination. 3.7. Termination of Employment. If a Participant's employment with the Company is terminated and neither the Participant nor his Surviving Beneficiaries qualify for benefits under the preceding paragraphs of Section III, neither the Participant nor his Surviving Beneficiaries nor any other person shall have a right to any benefit from the Plan with respect to such Participant. SECTION IV COMMENCEMENT OF BENEFITS 4.1. Commencement of Benefits. A Retirement Benefit payable to a Participant pursuant to paragraph 3.2 will commence on the first day of the month coincident with or next following the later to occur of the date of Retirement or Postponed Retirement. A Retirement Benefit payable to a Surviving Beneficiary pursuant to paragraph 3.3 or a Death Benefit payable to a Surviving Beneficiary pursuant to paragraph 3.5 will commence on the first day of the month coincident with or next following the Participant's death. A disability payment payable pursuant to paragraph 3.4 shall commence on the first day of the month coincident with or next following the date of disability as determined by the board of Directors under paragraph 3.4. Page 3 of 7 4 SECTION V AMENDMENT AND TERMINATION 5.1. Amendment or Termination. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board of Directors of the Company and shall be effective as of the date of such resolution. No amendment or termination of the Plan shall directly or indirectly deprive any Participant of Surviving Beneficiary of all or any portion of any Retirement Benefit payment of which has commenced prior to the effective date of the resolution amending or terminating the Plan. 5.2 Termination Benefit. In the case of a Plan termination, each actively employed or disabled Participant on the termination date shall become vested in his accrued Retirement Benefit as of the termination date. Such accrued Retirement Benefit shall be calculated as set forth in paragraph 3.2 above. Payment of a Participant's accrued Retirement Benefit shall not be dependent upon his continuation of employment with the Company following the Plan termination date, and such Benefit shall become payable at the date for commencement of payment of a Retirement Benefit pursuant to the terms of paragraph 4.1 above. 5.3 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporate or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of paragraphs 5.1 and 5.2. Page 4 of 7 5 SECTION VI MISCELLANEOUS 6.1 Forfeitures of Benefits. Notwithstanding any other provision of the Plan, future payment of a Retirement Benefit hereunder to a Participant or a Surviving Beneficiary will, at the discretion of the Board of Directors, be discontinued and forfeited, and the Company will have no further obligation hereunder to such Participant or Surviving Beneficiary, if any of the following circumstances occur: a. The Participant is discharged from employment with the Company for cause, as defined by the Employment Agreement; b. The Participant engages in competition with the Company in violation of the Covenant not to Compete contained in the Employment Agreement; or c. The Participant performs acts of willful malfeasance or gross negligence in a matter of material importance to the Company, and such acts are discovered by the Company at any time prior to the date of death of the Participant. The Board of Directors of the Company shall have sole and uncontrolled discretion with respect to the application of the provisions of this paragraph and such exercise of discretion shall be conclusive and binding upon the Participant, his Surviving Beneficiary and all other persons. d. The Participant continues to work for the Company after his 70th birthday. 6.2 No Effect on Employment Rights. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with Participants without regard to the existence of the Plan. 6.3 Funding. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, Surviving Beneficiary or any other person shall have any interest in any particular assets of the Company by a reason of the right to receive a benefit under the Plan and any such Participant, Surviving Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 6.4 Spendthrift Provision. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Plan. Page 5 of 7 6 6.5 Administration. The Retirement Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. All provisions set forth in the Basic Retirement Plan with respect to the administrative powers and duties of the Retirement Committee, expenses of administration and procedures for filing claims shall also be applicable with respect to the Plan. The Retirement Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 6.6 Disclosure. Each Participant shall receive a copy of the Plan and the Retirement Committee will make available for inspection by any Participant or Surviving Beneficiary a copy of the rules and regulations used by the Retirement Committee in administering the Plan. 6.7 State Law. The Plan is established under and will be construed according to the laws of the State of Washington, to the extent that such laws are not preempted by the Employee Retirement Income Security Act and valid regulations published thereunder. 6.8 Incapacity of Recipient. In the event a Participant or Surviving Beneficiary is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Plan to which such Participant or Surviving Beneficiary is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Retirement Committee in its sole discretion, determines that a Participant or Surviving Beneficiary is unable to manage his financial affairs, the Retirement Committee may direct the Company to make distributions to any person for the benefit of such Participant or Surviving Beneficiary. 6.9 Unclaimed Benefit. Each Participant shall keep the Retirement Committee informed of his current address and the current address of his Beneficiary. The Retirement Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Retirement Committee within three (3) years after the date on which any payment of the Participant's Retirement Benefit may be made, payment may be made as though the Participant had died at the end of the three-year period. If within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Retirement Committee is unable to locate any Surviving Beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Beneficiary or any other person and such benefit shall be irrevocably forfeited. 6.10 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company or as a member of the Retirement Committee shall be liable to any Participant, former Participant, Surviving Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan. Page 6 of 7 7 The Company has caused this Agreement to be signed by its duly authorized Officer, and attested by its Secretary on this ______ day of ___________, 19____. ATTEST: ORGANIZATION: ___________________ By _____________________________ Title __________________________ Page 7 of 7 EX-10.14 18 COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 1 EXHIBIT 10.14 COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN SCOPE AND PURPOSE OF PLAN Cowlitz Bancorporation, a Washington corporation (the "Corporation"), has adopted this 1997 Stock Option Plan (the "Plan") to provide for the granting of: (a) Incentive Options (hereafter defined) to certain Key Employees (hereafter defined); and (b) Nonstatutory Options (hereafter defined) to certain Key Employees, Non-employee Directors (hereafter defined), and other persons. The purpose of the Plan is to provide an incentive for Key Employees, directors, and certain consultants, independent contractors and advisors of the Corporation or its Subsidiaries (hereafter defined) to remain in the service of the Corporation or its Subsidiaries, to extend to them the opportunity to acquire a proprietary interest in the Corporation so that they will apply their best efforts for the benefit of the Corporation, and to aid the Corporation in attracting able persons to enter the service of the Corporation and its Subsidiaries. SECTION 1. DEFINITIONS 1.1 "Acquiring Person" means any Person other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of Stock of the Corporation, or any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of a Subsidiary of the Corporation or of a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of Stock of the Corporation. 1.2 "Affiliate" means (a) any Person who is directly or indirectly the beneficial owner of at least 10% of the voting power of the Voting Securities or (b) any Person controlling, controlled by, or under common control with the Company or any Person contemplated in clause (a) of this Subsection 1.2. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 1 2 1.3 "Award" means the grant of any form of Option granted to a Holder pursuant to the terms, conditions, and limitations that the Committee may establish in order to fulfill the objectives of the Plan. 1.4 "Award Agreement" means the written agreement between the Corporation and a Holder evidencing the terms, conditions, and limitations of the Award granted to that Holder. 1.5 "Board of Directors" means the board of directors of the Corporation. 1.6 "Business Day" means any day other than a Saturday, a Sunday, or a day on which banking institutions in the state of Washington are authorized or obligated by law or executive order to close. 1.7 "Change in Control" means the event that is deemed to have occurred if: (a) The acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date of this Agreement), other than the Corporation, a Subsidiary or any employee benefit plan of the Corporation or of a Subsidiary, of shares representing more than 50% of (i) the common stock of the Corporation, (ii) the aggregate voting power of the Corporation's Voting Securities or (iii) the total market value of the Corporation's Voting Securities; (b) A majority of the Board of Directors ceasing to be composed of individuals (i) who were members of the Board of Directors on the Effective Date, (ii) whose election or nomination to the Board of Directors was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of the Board of Directors or (iii) whose election or nomination to the Board of Directors was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of the Board of Directors; (c) The good-faith determination by the Board of Directors that any Person or group (other than a Subsidiary or any employee benefit plan of the Corporation or of a Subsidiary) has acquired direct or indirect possession of the power to direct or cause to direct the management or policies of the Corporation, whether through the ability to exercise voting power, by contract or otherwise; (d) The merger, consolidation, share exchange or similar transaction between the Corporation and another Person (other than a Subsidiary) other than a merger or share exchange in which the Corporation is the surviving or acquiring corporation; or (e) The sale or transfer (in one transaction or a series of related transactions) of all or substantially all of the Corporation's assets to another Person (other than a Subsidiary) whether assisted or unassisted, voluntary or involuntary. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 2 3 1.8 "Code" means the Internal Revenue Code of 1986, as amended. 1.9 "Committee" means the committee appointed pursuant to Section 3 by the Board of Directors to administer this Plan. 1.10 "Convertible Securities" means evidences of indebtedness, shares of capital stock, or other securities that are convertible into or exchangeable for shares of Stock, either immediately or upon the arrival of a specified date or the happening of a specified event. 1.11 "Corporation" means Cowlitz Bancorporation, a Washington corporation. 1.12 "Date of Grant" has the meaning given it in Subsection 4.3. 1.13 "Disability" has the meaning given it in Subsection 8.5. 1.14 [Intentionally Omitted.] 1.15 "Effective Date" means the earlier of (a) the date the Plan is adopted by the Board of Directors and (b) the date the Plan is approved by the stockholders of the Corporation. 1.16 "Eligible Individuals" means (a) Key Employees, (b) Non-employee Directors but only for purposes of Nonstatutory Options pursuant to Section 5, and (c) any other Person that the Committee designates as eligible for an Award (other than for Incentive Options) because the Person performs, or has performed, bona fide consulting or advisory services for the Corporation or any of its Subsidiaries (other than services in connection with the offer or sale of securities in a capital-raising transaction) and the Committee determines that the Person has a direct and significant effect on the financial development of the Corporation or any of its Subsidiaries. 1.17 "Employee" means any employee of the Corporation or of any of its Subsidiaries, including officers and directors of the Corporation who are also employees of the Corporation or of any of its Subsidiaries. 1.18 "Exchange Act" means the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, or any successor law, as it may be amended from time to time. 1.19 "Exercise Notice" has the meaning given it in Subsection 5.5. 1.20 "Exercise Price" has the meaning given it in Subsection 5.4. 1.21 "Fair Market Value" means, for a particular day: COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 3 4 (a) If shares of Stock of the same class are listed or admitted to unlisted trading privileges on any national or regional securities exchange at the date of determining the Fair Market Value, then the last reported sale price, regular way, on the composite tape of that exchange on the last Business Day before the date in question or, if no such sale takes place on that Business Day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to unlisted trading privileges on that securities exchange; or (b) If shares of Stock of the same class are not listed or admitted to unlisted trading privileges as provided in Subsection 1.21(a) and sales prices for shares of Stock of the same class in the over-the-counter market are reported by the National Association of Securities Dealers, Inc. Automated Quotations, Inc. ("NASDAQ") National Market System (or such other system then in use) at the date of determining the Fair Market Value, then the last reported sales price so reported on the last Business Day before the date in question or, if no such sale takes place on that Business Day, the average of the high bid and low asked prices so reported; or (c) If shares of Stock of the same class are not listed or admitted to unlisted trading privileges as provided in Subsection 1.21(a) and sales prices for shares of Stock of the same class are not reported by the NASDAQ National Market System (or a similar system then in use) as provided in Subsection 1.21(b), and if bid and asked prices for shares of Stock of the same class in the over-the-counter market are reported by NASDAQ (or, if not so reported, by the National Quotation Bureau Incorporated) at the date of determining the Fair Market Value, then the average of the high bid and low asked prices on the last Business Day before the date in question; or (d) If shares of Stock of the same class are not listed or admitted to unlisted trading privileges as provided in Subsection 1.21(a) and sales prices or bid and asked prices therefor are not reported by NASDAQ (or the National Quotation Bureau Incorporated) as provided in Subsection 1.21(b) or Subsection 1.21(c) at the date of determining the Fair Market Value, then the book value of the Stock as of the end of the immediately preceding calendar quarter as determined in good faith by the Committee, which determination shall be conclusive for all purposes; or (e) If shares of Stock of the same class are listed or admitted to unlisted trading privileges as provided in Subsection 1.21(a) or sales prices or bid and asked prices therefor are reported by NASDAQ (or the National Quotation Bureau Incorporated) as provided in Subsection 1.21(b) or Subsection 1.21(c) at the date of determining the Fair Market Value, but the volume of trading is so low that the Board of Directors determines in good faith that such prices are not indicative of the fair value of the Stock, then the book value of the Stock as of the end of the immediately preceding calendar quarter as determined in good faith by the Committee, which determination shall COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 4 5 be conclusive for all purposes notwithstanding the provisions of Subsections 1.21(a), (b), or (c). For purposes of valuing Incentive Options, the Fair Market Value of Stock shall be determined without regard to any restriction other than one that, by its terms, will never lapse. For purposes of the redemption provided for in Subsection 7.3(b)(iii), Fair Market Value shall have the meaning and shall be determined as set forth above; provided, however, that the Committee, with respect to any such redemption, shall have the right to determine that the Fair Market Value for purposes of the redemption should be an amount measured by the value of the shares of Stock, other securities, cash, or property otherwise being received by holders of shares of Stock in connection with the Reorganization and upon that determination the Committee shall have the power and authority to determine Fair Market Value for purposes of the redemption based upon the value of such shares of stock, other securities, cash, or property. Any such determination by the Committee, as evidenced by a resolution of the Committee, shall be conclusive for all purposes. 1.22 "Fair Value" means such value as is determined by a majority of the "disinterested" directors of the Corporation, as evidenced by a resolution of such disinterested directors, even if the disinterested directors of the Corporation constitute less than a quorum. If the Corporation does not have any disinterested directors, the Fair Value shall be such value as is determined by a nationally recognized investment banking firm selected by the Corporation, the expenses of which shall be borne by the Corporation. 1.23 "Holder" means an Eligible Individual to whom an outstanding Award has been granted. 1.24 [Intentionally Omitted] 1.25 "Incentive Option" means an incentive stock option as defined under Section 422 of the Code and regulations thereunder. 1.26 "Key Employee" means any Employee whom the Committee identifies as having a direct and significant effect on the performance of the Corporation or any of its Subsidiaries. 1.27 "Non-Employee Director" means a director of the Corporation who while a director is not an Employee. 1.28 "Nonstatutory Option" means a stock option that does not satisfy the requirements of Section 422 of the Code or that is designated at the Date of Grant or in the applicable Award Agreement to be an option other than an Incentive Option. 1.29 "Non-Surviving Event" means an event of Reorganization as described in either Subsection 1.34(b) or Subsection 1.34(c). COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 5 6 1.30 "Normal Retirement" means the separation of Holder from employment with the Corporation and its Subsidiaries with the right to receive an immediate benefit under a retirement plan approved by the Corporation. 1.31 "Option" means either an Incentive Option or a Nonstatutory Option, or both. 1.32 "Person" means any person or entity of any nature whatsoever, specifically including (but not limited to) an individual, a firm, a company, a corporation, a partnership, a trust, limited liability company, government (or any agency, instrumentality or political subdivision thereof), or other entity. 1.33 "Plan" means the Corporation's 1997 Stock Option Plan, as it may be amended from time to time. 1.34 "Reorganization" means the occurrence of any one or more of the following (except for any of the following that occur as part of the Reorganization): (a) The merger, consolidation, share exchange or similar transaction between the Corporation and any other Person, whether effected as a single transaction or a series of related transactions, with the Corporation remaining the continuing or surviving entity of that merger or consolidation and the Stock remaining outstanding and not changed into or exchanged for stock or other securities of any other Person or of the Corporation, cash, or other property; (b) The merger, consolidation, share exchange or similar transaction between the Corporation and any other Person, whether effected as a single transaction or a series of related transactions, with (i) the Corporation not being the continuing or surviving entity of that transaction or (ii) the Corporation remaining the continuing or surviving entity of that transaction but all or a part of the outstanding shares of Stock are changed into or exchanged for stock or other securities of any other Person or the Corporation, cash, or other property; or (c) The transfer, directly or indirectly, of all or substantially all of the assets of the Corporation (whether by sale, merger, consolidation, liquidation, or otherwise) to any Person, whether effected as a single transaction or a series of related transactions. 1.35 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act, as it may be amended from time to time, or any successor rule. 1.36 "Securities Act" means the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any successor law, as it may be amended from time to time. 1.37 "Stock" means the Corporation's authorized common stock, no par value per share, or any other securities that are substituted for the Stock as provided in Section 7. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 6 7 1.38 "Subsidiary" means a corporation of which all of the Voting Securities are owned, directly or indirectly, by the Corporation. 1.39 "Total Shares" has the meaning given it in Subsection 7.2. 1.40 "Voting Securities" means any securities that are entitled to vote generally in the election of directors, in the admission of general partners or in the selection of any other similar governing body. SECTION 2. SHARES OF STOCK SUBJECT TO THE PLAN 2.1 Maximum Number of Shares. Subject to the provisions of Subsections 2.2 and 2.5 and Section 7 and to any subsequent amendment hereof, the aggregate number of shares of Stock that may be issued or transferred pursuant to Awards under the Plan shall be 525,000. 2.2 Limitation of Shares. For purposes of the limitations specified in Subsection 2.1, the following principles shall apply: (a) Shares of Stock subject to outstanding Options shall count against and decrease the number of shares of Stock that may be issued for purposes of Subsection 2.1; (b) Shares of Stock with respect to which Options expire, are cancelled, or otherwise terminate without being exercised, converted, or vested, as applicable, shall be added back to the number of shares of Stock that may be issued for purposes of Subsection 2.1. (c) Shares of Stock that are transferred by a Holder of an Award (or withheld by the Corporation) as full or partial payment to the Corporation of the purchase price of shares of Stock subject to an Option or the Corporation's or any Subsidiary's tax withholding obligations shall not be added back to the number of shares of Stock that may be issued for purposes of Subsection 2.1 and shall not again be subject to Awards; and (d) If the number of shares of Stock counted against the number of shares that may be issued for purposes of Subsection 2.1 is based upon an estimate made by the Corporation or the Committee as provided in clause (a) above and the actual number of shares of Stock issued pursuant to the applicable Award is greater or less than the estimated number, then, upon such issuance, the number of shares of Stock that may be issued pursuant to Subsection 2.1 shall be further reduced by the excess issuance or increased by the shortfall, as applicable. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 7 8 Notwithstanding the provisions of this Subsection 2.2, no Stock shall be treated as issuable under the Plan to Eligible Individuals subject to Section 16 of the Exchange Act if otherwise prohibited from issuance under Rule 16b-3. 2.3 Description of Shares. The shares to be delivered under the Plan shall be made available from (a) authorized but unissued shares of Stock, (b) Stock held in the treasury of the Corporation, or (c) previously issued shares of Stock reacquired by the Corporation, including shares purchased on the open market, in each situation as the Board of Directors or the Committee may determine from time to time at its sole option. 2.4 Registration and Listing of Shares. From time to time, the Board of Directors and appropriate officers of the Corporation shall and are authorized to take whatever actions are necessary to file required documents with governmental authorities, stock exchanges, and other appropriate Persons to make shares of Stock available for issuance pursuant to the exercise of Awards. 2.5 Reduction in Outstanding Shares of Stock. Nothing in this Section 2 shall impair the right of the Corporation to reduce the number of outstanding shares of Stock pursuant to repurchases, redemptions, or otherwise; provided, however, that no reduction in the number of outstanding shares of Stock shall (a) impair the validity of any outstanding Award, whether or not that Award is fully exercisable or fully vested, or (b) impair the status of any shares of Stock previously issued pursuant to the exercise of an Award or thereafter issued pursuant to a then-outstanding Award as duly authorized, validly issued, fully paid, and nonassessable shares. SECTION 3. ADMINISTRATION OF THE PLAN 3.1 Committee. The Board of Directors may administer the Plan with respect to all Eligible Individuals or may delegate all or part of that duty to the Committee, except that the Committee shall not have the power to appoint members of the Committee or to terminate, modify or amend the Plan. Except for references in Subsections 3.1, 3.2, and 3.3, and unless the context otherwise requires, references herein to the Committee shall also refer to the Board of Directors as administrator of the Plan. The number of Persons that shall constitute the Committee shall be determined from time to time by a majority of all the members of the Board of Directors and, unless that majority of the Board of Directors determines otherwise or Rule 16b-3 is amended to require otherwise, shall be no less than two Persons. The Board of Directors may designate the Compensation Committee of the Board of Directors to serve as the Committee hereunder, provided that the membership of such Compensation Committee satisfies the requirements of the immediately preceding sentence. 3.2 Duration, Removal, Etc. The members of the Committee shall serve at the discretion of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from or add members to the Committee. Removal from the Committee may be with or without cause. Any individual serving as a member of the Committee shall have the right to resign from membership in the Committee by at least three COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 8 9 days' written notice to the Board of Directors. The Board of Directors, and not the remaining members of the Committee, shall have the power and authority to fill all vacancies on the Committee. The Board of Directors may, and if Eligible Individuals are subject to Section 16(b) of the Exchange Act the Board of Directors shall, promptly fill any vacancy that causes the number of members of the Committee to be below two or any other number that Rule 16b-3 may require from time to time. 3.3 Meetings and Actions of Committee. The Board of Directors shall designate which of the Committee members shall be the chairman of the Committee. If the Board of Directors fails to designate a Committee chairman, the members of the Committee shall elect one of the Committee members as chairman, who shall act as chairman until he ceases to be a member of the Committee or until the Board of Directors elects a new chairman. The Committee shall hold its meetings at those times and places as the chairman of the Committee may determine. At all meetings of the Committee, a quorum for the transaction of business shall be required and a quorum shall be deemed present if at least a majority of the members of the Committee are present. At any meeting of the Committee, each member shall have one vote. All decisions and determinations of the Committee shall be made by the majority vote or majority decision of all of its members present at a meeting at which a quorum is present; provided, however, that any decision or determination reduced to writing and signed by all of the members of the Committee shall be as fully effective as if it had been made at a meeting that was duly called and held. The Committee may make any rules and regulations for the conduct of its business that are not inconsistent with the provisions of the Plan, the Certificate of Incorporation of the Corporation, the by-laws of the Corporation, and Rule 16b-3 so long as it is applicable, as the Committee may deem advisable. 3.4 Committee's Powers. Subject to the express provisions of the Plan and Rule 16b-3, the Committee shall have the authority, in its sole and absolute discretion, to (a) adopt, amend, and rescind administrative and interpretive rules and regulations relating to the Plan; (b) determine the Eligible Individuals to whom, and the time or times at which, Awards shall be granted; (c) determine the amount of cash and the number of shares of Stock that shall be the subject of each Award; (d) determine the terms and provisions of each Award Agreement (which need not be identical), including provisions defining or otherwise relating to (i) the term and the period or periods and extent of exercisability of the Options, (ii) the extent to which the transferability of shares of Stock issued or transferred pursuant to any Award is restricted, (iii) the effect of termination of employment of Holder on the Award, and (iv) the effect of approved leaves of absence (consistent with any applicable regulations of the Internal Revenue Service); (e) accelerate, pursuant to Section 7, the time of exercisability of any Option that has been granted; (f) construe the respective Award Agreements and the Plan; (g) make determinations of the Fair Market Value of the Stock pursuant to the Plan; (h) delegate its duties under the Plan to such agents as it may appoint from time to time, provided that the Committee may not delegate its duties with respect to making Awards to, or otherwise with respect to Awards granted to, Eligible Individuals who are subject to Section 16(b) of the Exchange Act; and (i) make all other determinations, perform all other acts, and exercise all other powers and authority necessary or advisable for administering the Plan, including the delegation of those COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 9 10 ministerial acts and responsibilities as the Committee deems appropriate. Subject to Rule 16b-3, the Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, in any Award, or in any Award Agreement in the manner and to the extent it deems necessary or desirable to carry the Plan into effect, and the Committee shall be the sole and final judge of that necessity or desirability. The determinations of the Committee on the matters referred to in this Subsection 3.4 shall be final and conclusive. SECTION 4. ELIGIBILITY AND PARTICIPATION 4.1 Eligible Individuals. Awards may be granted pursuant to the Plan only to persons who are Eligible Individuals at the time of the grant thereof. 4.2 Grant of Awards. Subject to the express provisions of the Plan, the Committee shall determine which Eligible Individuals shall be granted Awards from time to time. In making grants, the Committee shall take into consideration the contribution the potential Holder has made or may make to the success of the Corporation or its Subsidiaries and such other considerations as the Board of Directors may from time to time specify. The Committee shall also determine the number of shares subject to each of the Awards and shall authorize and cause the Corporation to grant Awards in accordance with those determinations. 4.3 Date of Grant. Subject to the last sentence of this Section 4.3, the date on which the Committee completes all action resolving to offer an Award to an individual, including the specification of the number of shares of Stock to be subject to the Award, shall be the date on which the Award covered by an Award Agreement is granted (the "Date of Grant"), even though certain terms of the Award Agreement may not be determined at that time and even though the Award Agreement may not be executed until a later time. In no event shall a Holder gain any rights in addition to those specified by the Committee in its grant, regardless of the time that may pass between the grant of the Award and the actual execution of the Award Agreement by the Corporation and Holder. 4.4 Award Agreements. Each Award granted under the Plan shall be evidenced by an Award Agreement that is executed by the Corporation and the Eligible Individual to whom the Award is granted and incorporating those terms that the Committee shall deem necessary or desirable. More than one Award may be granted under the Plan to the same Eligible Individual and be outstanding concurrently. In the event an Eligible Individual is granted both one or more Incentive Options and one or more Nonstatutory Options, those grants shall be evidenced by separate Award Agreements, one for each of the Incentive Option grants and one for each of the Nonstatutory Option grants. 4.5 Limitation for Incentive Options. Notwithstanding any provision contained herein to the contrary, (a) a person shall not be eligible to receive an Incentive Option unless he is an Employee of the Corporation or a corporate Subsidiary (but not a partnership Subsidiary) and (b) a person shall not be eligible to receive an Incentive Option if, immediately before the time the Option is granted, that person owns (within the meaning of Sections 422 and 424(d) of the COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 10 11 Code) stock possessing more than ten percent of the total combined voting power or value of all classes of outstanding stock of the Corporation or a Subsidiary. Nevertheless, Subsection 4.5(b) shall not apply if, at the time the Incentive Option is granted, the Exercise Price of the Incentive Option is at least one hundred ten percent of Fair Market Value and the Incentive Option is not, by its terms, exercisable after the expiration of five years from the Date of Grant. 4.6 No Right to Award. The adoption of the Plan shall not be deemed to give any Person a right to be granted an Award. SECTION 5. TERMS AND CONDITIONS OF OPTIONS All Options granted under the Plan shall comply with, and the related Award Agreements shall be deemed to include and be subject to, the terms and conditions set forth in this Section 5 (to the extent each term and condition applies to the form of Option) and also to the terms and conditions set forth in Sections 7 and 8; provided, however, that the Committee may authorize an Award Agreement that expressly contains terms and provisions that differ from the terms and provisions set forth in Subsections 7.2, 7.3, and 7.4 and any of the terms and provisions of Section 8 (other than Subsections 8.10 and 8.11). 5.1 Number of Shares. Each Award Agreement shall state the total number of shares of Stock to which it relates. 5.2 Vesting. Each Award Agreement shall state the time or periods in which, or the conditions upon satisfaction of which, the right to exercise the Option or a portion thereof shall vest and the number of shares of Stock for which the right to exercise the Option shall vest at each such time, period, or fulfillment of condition. Without limiting the generality of the foregoing, the right to exercise the Option or a portion thereof shall not vest unless and until the Person receiving the Award shall have made any and all required filings with, and received any and all required approvals from, applicable federal and state regulators with respect to the Option or such portion thereof relating to change in control of the Corporation or a Subsidiary. 5.3 Expiration of Options. Options may be exercised during the term determined by the Committee and set forth in the Award Agreement; provided that no Incentive Option shall be exercised after the expiration of a period of ten years commencing on the Date of Grant of the Incentive Option. 5.4 Exercise Price. Each Award Agreement shall state the exercise price per share of Stock (the "Exercise Price"); provided, however, that the exercise price per share of Stock subject to an Incentive Option shall not be less than 100% of the Fair Market Value per share of the Stock on the Date of Grant of the Option. The exercise price per share of Stock subject to a Nonstatutory Option may be more or less than the Fair Market Value of a share of the Stock on the Date of Grant. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 11 12 5.5 Method of Exercise. The Option shall be exercisable only by written notice of exercise (the "Exercise Notice") delivered to the Corporation during the term of the Option, which notice shall (a) state the number of shares of Stock with respect to which the Option is being exercised, (b) be signed by Holder of the Option or, if Holder is dead or becomes affected by a Disability, by the person authorized to exercise the Option pursuant to Subsections 8.3 and 8.5, (c) be accompanied by the Exercise Price for all shares of Stock for which the Option is being exercised, and (d) include such other information, instruments, and documents as may be required to satisfy any other condition to exercise contained in the Award Agreement. The Option shall not be deemed to have been exercised unless all of the requirements of the preceding provisions of this Subsection 5.5 have been satisfied. 5.6 Incentive Option Exercises. Except as otherwise provided in Section 8.5, during Holder's lifetime, only Holder may exercise an Incentive Option. 5.7 Medium and Time of Payment. The Exercise Price of an Option shall be payable in full upon the exercise of the Option (a) in cash or by an equivalent means acceptable to the Committee, (b) if permitted by the Award Agreement and by applicable laws and regulations (including but not limited to federal tax and securities laws), with shares of Stock owned by Holder (including shares received upon exercise of the Option or restricted shares already held by Holder) and having a Fair Market Value at least equal to the aggregate Exercise Price payable in connection with such exercise, or (c) by any combination of clauses (a) and (b). If the Committee elects to accept shares of Stock in payment of all or any portion of the Exercise Price, then (for purposes of payment of the Exercise Price) those shares of Stock shall be deemed to have a cash value equal to their aggregate Fair Market Value determined as of the date the certificate for such shares is delivered to the Corporation. If the Committee elects to accept shares of restricted Stock in payment of all or any portion of the Exercise Price, then an equal number of shares issued pursuant to the exercise shall be restricted on the same terms and for the restriction period remaining on the shares used for payment. 5.8 Payment with Sale Proceeds. In addition, at the request of Holder and if permitted by the Award Agreement and by applicable laws and regulations (including but not limited to federal tax and securities laws), the Committee may (but shall not be required to) approve arrangements with a brokerage firm under which that brokerage firm, on behalf of Holder, shall pay to the Corporation the Exercise Price of the Option being exercised and the Corporation shall promptly deliver the exercised shares of Stock to the brokerage firm. To accomplish this transaction, Holder must deliver to the Corporation an Exercise Notice containing irrevocable instructions from Holder to the Corporation to deliver the Stock certificates representing the shares of Stock directly to the broker. Upon receiving a copy of the Exercise Notice acknowledged by the Corporation, the broker shall sell that number of shares of Stock or loan Holder an amount sufficient to pay the Exercise Price and any withholding obligations due. The broker then shall deliver to the Corporation that portion of the sale or loan proceeds necessary to cover the Exercise Price and any withholding obligations due. The Committee shall not approve any transaction of this nature if the Committee believes COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 12 13 that the transaction would give rise to Holder's liability for short-swing profits under Section 16(b) of the Exchange Act. 5.9 Payment of Taxes. The Committee may, in its discretion, require a Holder to pay to the Corporation (or the Corporation's Subsidiary if Holder is an employee of a Subsidiary of the Corporation), at the time of the exercise of an Option or thereafter, the amount that the Committee deems necessary to satisfy the Corporation's or its Subsidiary's current or future obligation to withhold federal, state, or local income or other taxes that Holder incurs by exercising an Option. In connection with the exercise of an Option requiring tax withholding, the Committee may permit a Holder, in lieu of delivering cash, to direct the Corporation to withhold from the shares of Stock to be issued to Holder the number of shares necessary to satisfy the Corporation's obligation to withhold taxes, that determination to be based on the shares' Fair Market Value as of the date of exercise or to deliver to the Corporation sufficient shares of Stock (based upon the Fair Market Value as of the date of such delivery) to satisfy the Corporation's tax withholding obligation, which tax withholding obligation is based on the shares' Fair Market Value as of the later of the date of exercise; or the date as of which the shares of Stock issued in connection with such exercise become includible in the income of Holder. The Committee may, at its sole option, deny any Holder's request to satisfy withholding obligations through Stock instead of cash. In the event the Committee subsequently determines that the aggregate Fair Market Value (as determined above) of any shares of Stock withheld or delivered as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then Holder shall pay to the Corporation, immediately upon the Committee's request, the amount of that deficiency in the form of payment requested by the Committee. 5.10 Limitation on Aggregate Value of Shares That May Become First Exercisable During Any Calendar Year Under an Incentive Option. Except as is otherwise provided in Subsection 7.3, with respect to any Incentive Option granted under this Plan, the aggregate Fair Market Value of shares of Stock subject to an Incentive Option and the aggregate Fair Market Value of shares of Stock or stock of any Subsidiary (or a predecessor of the Corporation or a Subsidiary) subject to any other incentive stock option (within the meaning of Section 422 of the Code) of the Corporation or its Subsidiaries (or a predecessor corporation of any such corporation) that first become purchasable by a Holder in any calendar year may not (with respect to that Holder) exceed $100,000, or such other amount as may be prescribed under Section 422 of the Code or applicable regulations or rulings from time to time. As used in the previous sentence, Fair Market Value shall be determined as of the Date of Grant of the Incentive Option. For purposes of this Subsection 5.10, "predecessor corporation" means (a) a corporation that was a party to a transaction described in Section 424(a) of the Code (or which would be so described if a substitution or assumption under that Section had been effected) with the Corporation, (b) a corporation which, at the time the new incentive stock option (within the meaning of Section 422 of the Code) is granted, is a Subsidiary of the Corporation or a predecessor corporation of any such corporations, or (c) a predecessor corporation of any such corporations. Failure to comply with this provision shall not impair the enforceability or COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 13 14 exercisability of any Option, but shall cause the excess amount of shares to be reclassified in accordance with the Code. 5.11 No Fractional Shares. The Corporation shall not in any case be required to sell, issue, or deliver a fractional share with respect to any Option. In lieu of the issuance of any fractional share of Stock, the Corporation shall pay to Holder an amount in cash equal to the same fraction (as the fractional Stock) of the Fair Market Value of a share of Stock determined as of the date of the applicable Exercise Notice. 5.12 Modification, Extension, and Renewal of Options. Subject to the terms and conditions of and within the limitations of the Plan, Rule 16b-3, and any consent required by the last sentence of this Subsection 5.12, the Committee may (a) modify, extend, or renew outstanding Options granted under the Plan, (b) accept the surrender of Options outstanding hereunder (to the extent not previously exercised) and authorize the granting of new Options in substitution for outstanding Options (to the extent not previously exercised), and (c) amend the terms of an Incentive Option at any time to include provisions that have the effect of changing the Incentive Option to a Nonstatutory Option. Nevertheless, without the consent of Holder, the Committee may not modify any outstanding Options so as to specify a higher or lower Exercise Price or accept the surrender of outstanding Incentive Options and authorize the granting of new Options in substitution therefor specifying a higher or lower Exercise Price. In addition, no modification of an Option granted hereunder shall, without the consent of Holder, alter or impair any rights or obligations under any Option theretofore granted to such Holder under the Plan except, with respect to Incentive Options, as may be necessary to satisfy the requirements of Section 422 of the Code or as permitted in clause (c) of this Subsection 5.12. 5.13 Other Agreement Provisions. The Award Agreements authorized under the Plan shall contain such provisions in addition to those required by the Plan (including without limitation restrictions or the removal of restrictions upon the exercise of the Option and the retention or transfer of shares thereby acquired) as the Committee may deem advisable. Each Award Agreement shall identify the Option evidenced thereby as an Incentive Option or Nonstatutory Option, as the case may be, and no Award Agreement shall cover both an Incentive Option and a Nonstatutory Option. Each Award Agreement relating to an Incentive Option granted hereunder shall contain such limitations and restrictions upon the exercise of the Incentive Option to which it relates as shall be necessary for the Incentive Option to which such Award Agreement relates to constitute an incentive stock option, as defined in Section 422 of the Code. SECTION 6. AWARDS TO NON-EMPLOYEE DIRECTORS 6.1 Ineligibility for Other Awards. Non-employee Directors shall not be eligible to receive any Awards under the Plan other than Nonstatutory Options. The Board of Directors must decide what Awards, if any, may be granted to Non-employee Directors and the method by which such Awards will be distributed. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 14 15 SECTION 7. ADJUSTMENT PROVISIONS 7.1 Adjustment of Awards and Authorized Stock. The terms of an Award and the number of shares of Stock authorized pursuant to Section 2.1 for issuance under the Plan shall be subject to adjustment from time to time, in accordance with the following provisions: (a) If at any time, or from time to time, the Corporation shall subdivide as a whole (by reclassification, by a Stock split, by the issuance of a distribution on Stock payable in Stock, or otherwise) the number of shares of Stock then outstanding into a greater number of shares of Stock, then (i) the maximum number of shares of Stock available for the Plan as provided in Section 2.1 shall be increased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (ii) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any Award shall be increased proportionately, and (iii) the price (including Exercise Price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be reduced proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions. (b) If at any time, or from time to time, the Corporation shall consolidate as a whole (by reclassification, reverse Stock split, or otherwise) the number of shares of Stock then outstanding into a lesser number of shares of Stock, (i) the maximum number of shares of Stock available for the Plan as provided in Section 2.1 shall be decreased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (ii) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any Award shall be decreased proportionately, and (iii) the price (including Exercise Price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be increased proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions. (c) Whenever the number of shares of Stock subject to outstanding Awards and the price for each share of Stock subject to outstanding Awards are required to be adjusted as provided in this Subsection 7.1, the Committee shall promptly prepare a notice setting forth, in reasonable detail, the event requiring adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the change in price and the number of shares of Stock, other securities, cash, or property purchasable subject to each Award after giving effect to the adjustments. The Committee shall promptly give each Holder such a notice. (d) Adjustments under Subsections 7(a) and (b) shall be made by the Committee, and its determination as to what adjustments shall be made and the extent thereof shall be final, binding, and conclusive. No fractional interest shall be issued under the Plan on account of any such adjustments. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 15 16 7.2 Changes in Control. Any Award Agreement may provide that, upon the occurrence of a Change in Control all outstanding Options shall immediately become fully vested and exercisable in full, including that portion of any Option that pursuant to the terms and provisions of the applicable Award Agreement had not yet become exercisable (the total number of shares of Stock as to which an Option is exercisable upon the occurrence of a change in Control is referred to herein as the "Total Shares"). If a Change in Control involves a Reorganization or occurs in connection with a series of related transactions involving a Reorganization and if such Reorganization is in the form of a Non-Surviving Event and as a part of such Reorganization shares of Stock, other securities, cash, or property shall be issuable or deliverable in exchange for Stock, then Holder of an Award shall be entitled to purchase or receive (in lieu of the Total Shares that Holder would otherwise be entitled to purchase or receive), as appropriate for the form of Award, the number of shares of Stock, other securities, cash, or property to which that number of Total Shares would have been entitled in connection with such Reorganization (and, for Options, at an aggregate exercise price equal to the Exercise Price that would have been payable if that number of Total Shares had been purchased on the exercise of the Option immediately before the consummation of the Reorganization). Nothing in this Subsection 7.2 shall impose on a Holder the obligation to exercise any Award immediately before or upon the Change of Control or cause Holder to forfeit the right to exercise the Award during the remainder of the original term of the Award because of a Change in Control. 7.3 Reorganization Without Change in Control. In the event a Reorganization shall occur at any time while there is any outstanding Award hereunder and that Reorganization does not occur in connection with a Change in Control or a series of related transactions involving a Change in Control, then: (a) no outstanding Option shall immediately become fully vested and exercisable in full merely because of the occurrence of the Reorganization; and (b) at the option of the Committee, the Committee may (but shall not be required to) cause the Corporation to take any one or more of the following actions: (i) accelerate in whole or in part the time of the vesting and exercisability of any one or more of the outstanding Options so as to provide that those Options shall be exercisable before, upon, or after the consummation of the Reorganization; (ii) if the Reorganization is in the form of a Non-Surviving Event, cause the surviving entity to assume in whole or in part any one or more of the outstanding Awards upon such terms and provisions as the Committee deems desirable; or (iii) redeem in whole or in part any one or more of the outstanding Options in consideration of a cash payment, as such payment may be reduced for COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 16 17 tax withholding obligations as contemplated in Subsections 5.9, in an amount equal to the excess of (A) the Fair Market Value, determined as of the date immediately preceding the consummation of the Reorganization, of the aggregate number of shares of Stock subject to the Award and as to which the Award is being redeemed over (B) the Exercise Price for that number of shares of Stock; The Corporation shall promptly notify each Holder of any election or action taken by the Corporation under this Subsection 7.3. In the event of any election or action taken by the Corporation pursuant to this Subsection 7.3 that requires the amendment or cancellation of any Award Agreement as may be specified in any notice to Holder thereof, that Holder shall promptly deliver that Award Agreement to the Corporation in order for that amendment or cancellation to be implemented by the Corporation and the Committee. The failure of Holder to deliver any such Award Agreement to the Corporation as provided in the preceding sentence shall not in any manner affect the validity or enforceability of any action taken by the Corporation and the Committee under this Subsection 7.3, including without limitation any redemption of an Award as of the consummation of a Reorganization. Any cash payment to be made by the Corporation pursuant to this Subsection 7.3 in connection with the redemption of any outstanding Awards shall be paid to Holder thereof currently with the delivery to the Corporation of the Award Agreement evidencing that Award; provided, however, that any such redemption shall be effective upon the consummation of the Reorganization notwithstanding that the payment of the redemption price may occur subsequent to the consummation. If all or any portion of an outstanding Award is to be exercised or accelerated upon or after the consummation of a Reorganization that does not occur in connection with a Change in Control and is in the form of a Non-Surviving Event, and as a part of that Reorganization shares of stock, other securities, cash, or property shall be issuable or deliverable in exchange for Stock, then Holder of the Award shall thereafter be entitled to purchase or receive (in lieu of the number of shares of Stock that Holder would otherwise be entitled to purchase or receive) the number of shares of Stock, other securities, cash, or property to which such number of shares of Stock would have been entitled in connection with the Reorganization (and, for Options, upon payment of the aggregate exercise price equal to the Exercise Price that would have been payable if that number of Total Shares had been purchased on the exercise of the Option immediately before the consummation of the Reorganization) and such Award Agreement shall be subject to adjustments that shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 7. 7.4 Notice of Reorganization. The Corporation shall attempt to keep all Holders informed with respect to any Reorganization or of any potential Reorganization to the same extent that the Corporation's stockholders are informed by the Corporation of any such event or potential event. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 17 18 SECTION 8. ADDITIONAL PROVISIONS The following provisions shall be applicable to any Award, except that the Committee may authorize an Award Agreement that expressly contains terms and provisions that differ from terms and provisions of this Section 8 (other than Subsections 8.10 and 8.11): 8.1 Termination of Employment. If a Holder is an Eligible Individual because Holder is an Employee and if that employment relationship is terminated for any reason other than (a) Normal Retirement, (b) that Holder's death, (c) that Holder's Disability (hereafter defined), (d) by the Corporation without "cause" (hereafter defined), or (e) by Holder for "good reason" (hereafter defined), then any and all Awards held by that Holder in Holder's capacity as an Employee as of the date of the termination that are not yet exercisable shall become null and void as of the date of such termination; provided, however, that the portion, if any, of such Awards that are exercisable as of the date of termination shall be exercisable for a period of the lesser of (a) the remainder of the term of the Award or (b) the date which is 180 days after the date of termination. If a Holder is an Eligible Individual because such Holder is an Employee and if that employment relationship is terminated by the Corporation without "cause" or by Holder for "good reason", then any and all Awards held by such Holder in such Holder's capacity as an Employee as of the date of the termination that are not yet exercisable shall become null and void as of the date of such termination; provided, however, that the portion, if any, of such Awards that are exercisable as of the date of termination shall be exercisable for a period of the lesser of (a) the remainder of the term of the Award or (b) the date which is 180 days after the date of termination. Any portion of an Award not exercised upon the expiration of the lesser of the periods specified in (a) or (b) of the preceding two sentences shall be null and void. "Cause" and "good reason" shall have the meanings given such terms in the employment agreement of Holder (if any) with the Corporation or a Subsidiary of the Corporation; provided, however, that if that Holder has no employment agreement, "cause" shall mean, as determined by the Board of Directors in the sole discretion exercised in good faith of the Board of Directors, (a) the breach by Holder of any nondisclosure, noncompetition, or other agreement to which Holder and the Corporation are parties, (b) the commission by Holder of a misdemeanor involving moral turpitude or of a felony, (c) the participation by Holder in any fraud, (d) dishonesty by Holder that is detrimental to the best interest of the Corporation, or (e) the willful and continued failure by Holder to substantially perform his duties to the Corporation (other than any such failure resulting from Holder's incapacity due to physical or mental illness) after written demand for substantial performance is delivered by the Corporation specifically identifying the manner in which the Corporation believes Holder has not substantially performed his duties, or (f) the willful engaging by Holder in misconduct which is materially injurious to the Corporation, monetarily or otherwise. Notwithstanding any other provision of this Subsection 8.1, if a Holder has no employment agreement, "good reason" shall have no meaning. 8.2 Other Loss of Eligibility. If a Holder is an Eligible Individual because Holder is serving in a capacity other than as an Employee and if that capacity is terminated for any reason other than Holder's death, then that portion, if any, of any and all Awards held by COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 18 19 Holder that were granted because of that capacity which are not yet exercisable as of the date of the termination shall become null and void as of the date of the termination; provided, however, that the portion, if any, of any and all Awards held by Holder that are then exercisable as of the date of the termination shall survive the termination be exercisable for a period of the lesser of (a) the remainder of the term of the Award or (b) 180 days following the date such capacity terminated. Any portion of an Award not exercised upon the expiration of the lesser of the periods specified in (a) or (b) above shall be null and void unless Holder dies during such period, in which case the provisions of Subsection 8.3 shall govern. 8.3 Death. Upon the death of a Holder, any and all Awards held by Holder that are not yet exercisable as of the date of Holder's death shall become null and void as of the date of death; provided, however, that the portion, if any, of any and all Awards held by Holder that are exercisable as of the date of death shall be exercisable by that Holder's legal representatives, heirs, legatees, or distributees for a period of the lesser of (a) the remainder of the term of the Award or (b) 180 days following the date of Holder's death. Any portion of an Award not exercised upon the expiration of the lesser of the periods specified in (a) or (b) above shall be null and void. Except as expressly provided in this Subsection 8.3, no Award held by a Holder shall be exercisable after the death of that Holder. An Award Agreement may, but is not required to, provide that all or part of the restrictions applicable to the Award lapse upon the death of Holder. 8.4 Retirement. If a Holder is an Eligible Individual because Holder is an Employee and if that employment relationship is terminated by reason of Holder's Normal Retirement, then the portion, if any, of any and all Awards held by Holder that are not yet exercisable as of the date of that retirement shall become null and void as of the date of retirement; provided, however, that the portion, if any, of any and all Awards held by Holder that are exercisable as of the date of that retirement shall be exercisable for a period of the lesser of (a) the remainder of the term of the Award or (b) 180 days following the date of retirement. Any portion of an Award not exercised upon the expiration of the lesser of the periods specified in (a) or (b) above shall be null and void unless Holder dies during such period, in which case the provisions of Subsection 8.3 shall govern. 8.5 Disability. If a Holder is an Eligible Individual because Holder is an Employee and if that employment relationship is terminated by reason of Holder's Disability, then the portion, if any, of any and all Awards held by Holder that are not yet exercisable as of the date of that termination for Disability shall become null and void as of the date of termination; provided, however, that the portion, if any, of any and all Awards held by Holder that are exercisable as of the date of that termination shall be exercisable by Holder, his guardian or his legal representative for a period of the lesser of (a) the remainder of the term of the Award or (b) 180 days following the date of termination. Any portion of an Award not exercised upon the expiration of the lesser of the periods specified in (a) or (b) above shall be null and void unless Holder dies during such period, then the provisions of Subsection 8.3 shall govern. "Disability" shall have the meaning given it in the employment agreement of Holder; provided, however, that if that Holder has no employment agreement, "Disability" shall mean, as COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 19 20 determined by the Board of Directors in the sole discretion exercised in good faith of the Board of Directors, a physical or mental impairment of sufficient severity that either Holder is unable to continue performing the duties he performed before such impairment or Holder's condition entitles him to disability benefits under any insurance or employee benefit plan of the Corporation or its Subsidiaries and that impairment or condition is cited by the Corporation as the reason for termination of Holder's employment. 8.6 Leave of Absence. With respect to an Award, the Committee may, in its sole discretion, determine that any Holder who is on leave of absence for any reason will be considered to still be in the employ of the Corporation, provided that rights to that Award during a leave of absence will be limited to the extent to which those rights were earned, vested, or exercisable when the leave of absence began. 8.7 Transferability of Awards. In addition to such other terms and conditions as may be included in a particular Award Agreement, an Award requiring exercise shall be exercisable during a Holder's lifetime only by that Holder or by that Holder's guardian or legal representative. An Award requiring exercise shall not be transferrable other than by will or the laws of descent and distribution. 8.8 Forfeiture and Restrictions on Transfer. Each Award Agreement may contain or otherwise provide for conditions giving rise to the forfeiture of the Stock acquired pursuant to an Award or otherwise and may also provide for those restrictions on the transferability of shares of the Stock acquired pursuant to an Award or otherwise that the Committee in its sole and absolute discretion may deem proper or advisable. The conditions giving rise to forfeiture may include, but need not be limited to, the requirement that Holder render substantial services to the Corporation or its Subsidiaries for a specified period of time. The restrictions on transferability may include, but need not be limited to, options and rights of first refusal in favor of the Corporation and stockholders of the Corporation other than Holder of such shares of Stock who is a party to the particular Award Agreement or a subsequent holder of the shares of Stock who is bound by that Award Agreement. 8.9 Delivery of Certificates of Stock. Subject to Subsection 8.10, the Corporation shall promptly issue and deliver a certificate representing the number of shares of Stock as to which an Option has been exercised after the Corporation receives an Exercise Notice and upon receipt by the Corporation of the Exercise Price and any tax withholding as may be requested. The value of the shares of Stock or cash transferable because of an Award under the Plan shall not bear any interest owing to the passage of time, except as may be otherwise provided in an Award Agreement. If a Holder is entitled to receive certificates representing Stock received for more than one form of Award under the Plan, separate Stock certificates shall be issued with respect to Incentive Options and Nonstatutory Options. 8.10 Conditions to Delivery of Stock. Nothing herein or in any Award granted hereunder or any Award Agreement shall require the Corporation to issue any shares with respect to any Award if that issuance would, in the opinion of counsel for the Corporation, COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 20 21 constitute a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable statute or regulation, or the rules of any applicable securities exchange or securities association, as then in effect. At the time of any exercise of an Option, the Corporation may, as a condition precedent to the exercise of such Option, require from Holder of the Award (or in the event of his death, his legal representatives, heirs, legatees, or distributees) such written representations, if any, concerning Holder's intentions with regard to the retention or disposition of the shares of Stock being acquired pursuant to the Award and such written covenants and agreements, if any, as to the manner of disposal of such shares as, in the opinion of counsel to the Corporation, may be necessary to ensure that any disposition by that Holder (or in the event of Holder's death, his legal representatives, heirs, legatees, or distributees) will not involve a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable state or federal statute or regulation, or any rule of any applicable securities exchange or securities association, as then in effect. 8.11 Certain Directors and Officers. With respect to Holders who are directors or officers of the Corporation or any of its Subsidiaries and who are subject to Section 16(b) of the Exchange Act, Awards and all rights under the Plan shall be exercisable during Holder's lifetime only by Holder or Holder's guardian or legal representative, but not for at least six months after grant, unless (a) (and to the extent that) the Board of Directors expressly authorizes that an Award shall be exercisable before the expiration of the six-month period or (b) the death or disability of Holder occurs before the expiration of the six-month period. In addition, no such officer or director shall have shares of Stock withheld to pay tax withholding obligations within the first six months of the term of an Award. Any election by any such officer or director to have tax withholding obligations satisfied by the withholding of shares of Stock shall be irrevocable and shall be communicated to the Committee during the period beginning on the third day following the date of release of quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date or by an irrevocable election communicated to the Committee at least six months before the date of exercise of the Award for which such withholding is desired. 8.12 Legends. Certificates for shares of Stock, when issued, may have placed on them such restrictive legends, or other statements of applicable restrictions, as authorized by the Board of Directors or the Committee. 8.13 Rights as a Stockholder. A Holder shall have no right as a stockholder with respect to any shares covered by his Award until a certificate representing those shares is issued in his name. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash or other property) or distributions or other rights for which the record date is before the date that certificate is issued, except as contemplated by Section 7 hereof. Nevertheless, dividends, dividend equivalent rights and voting rights may be extended to and made part of any Award denominated in Stock or units of Stock, subject to such terms, conditions and restrictions as the Committee may establish. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payment denominated in Stock or units of Stock. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 21 22 8.14 Furnish Information. Each Holder shall furnish to the Corporation all information requested by the Corporation to enable it to comply with any reporting or other requirement imposed upon the Corporation by or under any applicable statute or regulation. 8.15 Obligation to Exercise. The granting of an Award hereunder shall impose no obligation upon Holder to exercise the same or any part thereof. 8.16 Adjustments to Awards. Subject to the general limitations set forth in Sections 5, 6, and 7, the Committee may make any adjustment in the exercise price of, the number of shares subject to, or the terms of a Nonstatutory Option by cancelling an outstanding Nonstatutory Option and regranting a Nonstatutory Option. Such adjustment shall be made by amending, substituting, or regranting an outstanding Nonstatutory Option. Such amendment, substitution, or regrant may result in terms and conditions that differ from the terms and conditions of the original Nonstatutory Option. The Committee may not, however, impair the rights of any Holder of previously granted Nonstatutory Options without that Holder's consent. If such action is effected by amendment, such amendment shall be deemed effective as of the Date of Grant of the amended Award. 8.17 Information Confidential. As partial consideration for the granting of each Award hereunder, Holder shall agree with the Corporation that he will keep confidential all information and knowledge that he has relating to the manner and amount of his participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to Holder's spouse, tax or financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan. In the event any breach of this promise comes to the attention of the Committee, it shall take into consideration that breach in determining whether to recommend the grant of any future Award to that Holder, as a factor mitigating against the advisability of granting any such future Award to that Person. SECTION 9. DURATION AND AMENDMENT OF PLAN 9.1 Duration. No Awards may be granted hereunder after the date that is ten years from the earlier of (a) the date the Plan is adopted by the Board of Directors and (b) the date the Plan is approved by the stockholders of the Corporation. 9.2 Amendment. The Board of Directors may, insofar as permitted by law, with respect to any shares which, at the time, are not subject to Awards, suspend or discontinue the Plan or revise or amend it in any respect whatsoever and may amend any provision of the Plan or any Award Agreement to make the Plan or the Award Agreement, or both, comply with Section 16(b) of the Exchange Act and the exemptions from that Section in the regulations thereunder. The Board of Directors may also amend, modify, suspend, or terminate the Plan for the purpose of meeting or addressing any changes in other legal requirements applicable to the Corporation or the Plan or for any other purpose permitted by law. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 22 23 SECTION 10. GENERAL 10.1 Application of Funds. The proceeds received by the Corporation from the sale of shares pursuant to Awards may be used for any general corporate purpose. 10.2 Right of the Corporation and Subsidiaries to Terminate Employment. Nothing contained in the Plan, or in any Award Agreement, shall confer upon any Holder the right to continue in the employ of the Corporation or any Subsidiary or interfere in any way with the rights of the Corporation or any Subsidiary to terminate Holder's employment at any time. 10.3 No Liability for Good Faith Determinations. Neither the members of the Board of Directors nor any member of the Committee shall be liable for any act, omission or determination taken or made in good faith with respect to the Plan or any Award granted under it; and members of the Board of Directors and the Committee shall be entitled to indemnification and reimbursement by the Corporation in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Corporation, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising therefrom to the full extent permitted by law and under any directors' and officers' liability or similar insurance coverage that may from time to time be in effect. This right to indemnification shall be in addition to, and not a limitation on, any other indemnification rights any member of the Board of Directors or the Committee may have. 10.4 Other Benefits. Participation in the Plan shall not preclude Holder from eligibility in any other stock or stock option plan of the Corporation or any Subsidiary or any old age benefit, insurance, pension, profit sharing retirement, bonus, or other extra compensation plans that the Corporation or any Subsidiary has adopted, or may, at any time, adopt for the benefit of its Employees. Neither the adoption of the Plan by the Board of Directors nor the submission of the Plan to the stockholders of the Corporation for approval shall be construed as creating any limitations on the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan and such arrangements may be either generally applicable or applicable only in specific cases. 10.5 Exclusion From Pension and Profit-Sharing Compensation. By acceptance of an Award (regardless of form), as applicable, each Holder shall be deemed to have agreed that the Award is special incentive compensation that will not be taken into account in any manner as salary, compensation, or bonus in determining the amount of any payment under any pension, retirement, or other employee benefit plan of the Corporation or any Subsidiary. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that the Award will not affect the amount of any life insurance coverage, if any, provided by the Corporation or a Subsidiary on the life of Holder that is payable to the beneficiary under any life insurance plan covering employees of the Corporation or any Subsidiary. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 23 24 10.6 Execution of Receipts and Releases. Any payment of cash or any issuance or transfer of shares of Stock to Holder, or to his legal representative, heir, legatee, or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Committee may require any Holder, legal representative, heir, legatee, or distributee, as a condition precedent to such payment, to execute a release and receipt therefor in such form as it shall determine. 10.7 Unfunded Plan. Insofar as it provides for Awards of cash and Stock, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Holders who are entitled to cash, Stock, or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. The Corporation shall not be required to segregate any assets that may at any time be represented by cash, Stock, or rights thereto, nor shall the Plan be construed as providing for such segregation, nor shall the Corporation nor the Board of Directors nor the Committee be deemed to be a trustee of any cash, Stock, or rights thereto to be granted under the Plan. Any liability of the Corporation to any Holder with respect to a grant of cash, Stock, or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and any Award Agreement; no such obligation of the Corporation shall be deemed to be secured by any pledge or other encumbrance on any property of the Corporation. Neither the Corporation nor the Board of Directors nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by the Plan. 10.8 No Guarantee of Interests. Neither the Committee nor the Corporation guarantees the Stock of the Corporation from loss or depreciation. 10.9 Payment of Expenses. All expenses incident to the administration, termination, or protection of the Plan, including, but not limited to, legal and accounting fees, shall be paid by the Corporation or its Subsidiaries; provided, however, the Corporation or a Subsidiary may recover any and all damages, fees, expenses, and costs arising out of any actions taken by the Corporation to enforce its right to purchase Stock under this Plan. 10.10 Corporation Records. Records of the Corporation or its Subsidiaries regarding Holder's period of employment, termination of employment and the reason therefor, leaves of absence, re-employment, and other matters shall be conclusive for all purposes hereunder, unless determined by the Committee to be incorrect. 10.11 Information. The Corporation and its Subsidiaries shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished all of the information or documentation which is necessary or required by the Committee to perform its duties and functions under the Plan. 10.12 No Liability of Corporation. The Corporation assumes no obligation or responsibility to Holder or his legal representatives, heirs, legatees, or distributees for any act of, or failure to act on the part of, the Committee. COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 24 25 10.13 Corporation Action. Any action required of the Corporation shall be by resolution of its Board of Directors or by a person authorized to act by resolution of the Board of Directors. 10.14 Severability. In the event that any provision of this Plan, or the application hereof to any Person or circumstance, is held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect under present or future laws effective during the effective term of any such provision, such invalid, illegal, or unenforceable provision shall be fully severable; and this Plan shall then be construed and enforced as if such invalid, illegal, or unenforceable provision had not been contained in this Plan; and the remaining provisions of this Plan shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Plan. Furthermore, in lieu of each such illegal, invalid, or unenforceable provision, there shall be added automatically as part of this Plan a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. If any of the terms or provisions of this Plan conflict with the requirements of Rule 16b-3 (as those terms or provisions are applied to Eligible Individuals who are subject to Section 16(b) of the Exchange Act), then those conflicting terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Rule 16b-3 and, in lieu of such conflicting provision, there shall be added automatically as part of this Plan a provision as similar in terms to such conflicting provision as may be possible and not conflict with the requirements of Rule 16b-3. If any of the terms or provisions of this Plan conflict with the requirements of Section 422 of the Code (with respect to Incentive Options), then those conflicting terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of Section 422 of the Code and, in lieu of such conflicting provision, there shall be added automatically as part of this Plan a provision as similar in terms to such conflicting provision as may be possible and not conflict with the requirements of Section 422 of the Code. With respect to Incentive Options, if this Plan does not contain any provision required to be included herein under Section 422 of the Code, that provision shall be deemed to be incorporated herein with the same force and effect as if that provision had been set out at length herein; provided, however, that, to the extent any Option that is intended to qualify as an Incentive Option cannot so qualify, that Option (to that extent) shall be deemed a Nonstatutory Option for all purposes of the Plan. 10.15 Notices. Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date on which it is personally delivered or, whether actually received or not, on the third Business Day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Corporation or a Holder may change, at any time and from time to time, by written notice to the other, the address which it or he had previously specified for receiving notices. Until changed in accordance herewith, the Corporation and each Holder shall specify as its and his address for receiving notices the address set forth in the COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 25 26 Award Agreement pertaining to the shares to which such notice relates. Any person entitled to notice hereunder may waive such notice. 10.16 Successors. The Plan shall be binding upon Holder, his legal representatives, heirs, legatees, and distributees, upon the Corporation, its successors and assigns and upon the Committee and its successors. 10.17 Headings. The titles and headings of Sections and Subsections are included for convenience of reference only and are not to be considered in construction of the provisions hereof. 10.18 Governing Law. All questions arising with respect to the provisions of the Plan shall be determined by application of the laws of the State of Washington, without giving effect to any conflict of law provisions thereof, except to the extent Washington law is preempted by federal law. Questions arising with respect to the provisions of an Award Agreement that are matters of contract law shall be governed by the laws of the State of Washington unless the laws of another state are specified in the Award Agreement. The obligation of the Corporation to sell and deliver Stock hereunder is subject to applicable federal and state laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Stock. 10.19 Word Usage. Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Plan dictates, the plural shall be read as the singular and the singular as the plural. IN WITNESS WHEREOF, Cowlitz Bancorporation, acting by and through its officer hereunto duly authorized, has executed this instrument as of the ___ day of September, 1997. COWLITZ BANCORPORATION By: _____________________________________ Name: ___________________________________ Title: __________________________________ COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN 26 EX-10.15 19 FORM NONSTATUTORY OPTION AWARD AGREEMENT 1 EXHIBIT 10.15 COWLITZ BANCORPORATION 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT This Nonstatutory Option Award Agreement ("Award Agreement") is made and entered into by and between Cowlitz Bancorporation, a Washington corporation (the "Corporation"), and Charles W. Jarrett (the "Optionee"), as of the 30th day of September, 1997 (the "Date of Grant"), pursuant to the Cowlitz Bancorporation 1997 Stock Option Plan (the "Plan"). In consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the Corporation and the Optionee agree as follows: 1. Grant of the Option. The Corporation hereby grants to the Optionee the right and option (the "Option") to purchase an aggregate of 11,000 shares (such number being subject to adjustment as provided in the Plan) of Stock (the "Shares") on the terms and conditions herein set forth. The Option awarded hereunder may be exercised in whole or in part and from time to time as hereinafter provided. The Option granted under this Award Agreement is not intended to qualify as an "incentive stock option" under section 422 of the Code and shall be not so construed. 2. Exercise Price. The price at which the Optionee shall be entitled to purchase the Shares covered by the Option shall be One Hundred Dollars ($100.00) per Share, subject to adjustment as provided in paragraph 10 below. 3. Term of the Option. (i) The unexercised portion of the Option, if any, will automatically and without notice terminate upon the earlier of (A) ten years following the Date of Grant or (B) the date determined pursuant to paragraph 8 hereof. (ii) The Option will cease to be exercisable with respect to a Share when the Optionee purchases the Share. 4. Vesting. (i) Except as otherwise provided in paragraph 8 hereof, the Option granted hereunder shall vest and become exercisable with respect to Shares as follows: 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 1 2
Number Vesting Date of the Shares ------------ ------------- Date of Grant 3,000 December 31, 1998 1,600 December 31, 1999 1,600 December 31, 2000 1,600 December 31, 2001 1,600 December 31, 2002 1,600 Date as of Which a Change of Control All Shares as to Which the Vesting Date Occurs Had Not Occurred Previously
Shares as to which the Vesting Date has occurred shall be referred to as "Vested Shares." Shares as to which the Vesting Date has not occurred shall be referred to as "Nonvested Shares." In general, Shares shall become Vested Shares only if the Optionee has been continuously employed as a full-time employee of the Corporation or any Subsidiary from the Date of Grant to and including the respective Vesting Date. In addition, Shares may become Vested Shares in accordance with death, Disability, Normal Retirement or pursuant to Section 9 of the Plan. Notwithstanding the foregoing, no Shares shall be Vested Shares unless and until the Optionee shall have made any and all required filings with and received any and all required approvals from applicable Federal and state regulators with respect to such shares relating to change in control of the Corporation or any subsidiary. 5. Method of Exercising Option. (i) The Optionee may exercise the Option at any time prior to the termination of the Option with respect to all or any part of the Vested Shares. Subject to the terms and conditions of this Award Agreement, the Option may be exercised by timely delivery to the Secretary of the Corporation of an Exercise Notice, which notice shall be effective, subject to the requirements herein, on the date received by the Corporation. (ii) The Exercise Notice shall state the Optionee's election to exercise the Option, the number of Vested Shares in respect of which an election to exercise has been made, the method of payment elected and the exact name or names in which the Vested Shares then being purchased will be registered. (iii) The Exercise Notice must be signed by the Optionee and must be accompanied by payment of the aggregate Exercise Price of the Vested Shares then being purchased. 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 2 3 (iv) In the event the Option must be exercised by a person or persons other than the Optionee pursuant to paragraph 8 below, the Exercise Notice must be signed by such other person or persons and must be accompanied by proof acceptable to the Committee of the legal right of such person or persons to exercise the Option and the Shares issued upon such exercise shall be subject to the limitations applicable to such Shares in the hands of the Optionee. 6. Method of Payment for Options. The Exercise Price of an Option shall be payable in full upon the exercise of the Option (a) in cash or by an equivalent means acceptable to the Committee, (b) if permitted by applicable laws and regulations (including but not limited to federal tax and securities laws), with shares of Stock owned by Optionee (including shares received upon exercise of the Option or restricted shares already held by Optionee) and having a Fair Market Value at least equal to the aggregate Exercise Price payable in connection with such exercise, or (c) by any combination of clauses (a) and (b). If shares of Stock are used in payment of all or any portion of the Exercise Price, then (for purposes of payment of the Exercise Price) those shares of Stock shall be deemed to have a cash value equal to their aggregate Fair Market Value determined as of the date the certificate for such shares is delivered to the Corporation. If shares of restricted Stock are used in payment of all or any portion of the Exercise Price, then an equal number of shares issued pursuant to the exercise shall be restricted on the same terms and for the restriction period remaining on the shares used for payment. In addition, at the request of Optionee and if permitted by applicable laws and regulations (including but not limited to federal tax and securities laws), the Committee may (but shall not be required to) approve arrangements with a brokerage firm under which that brokerage firm, on behalf of Optionee, shall pay to the Corporation the Exercise Price of the Option being exercised and the Corporation shall promptly deliver the exercised shares of Stock to the brokerage firm. To accomplish this transaction, Optionee must deliver to the Corporation an Exercise Notice containing irrevocable instructions from Optionee to the Corporation to deliver the Stock certificates representing the shares of Stock directly to the broker. Upon receiving a copy of the Exercise Notice acknowledged by the Corporation, the broker shall sell that number of shares of Stock or loan Optionee an amount sufficient to pay the Exercise Price and any withholding obligations due. The broker then shall deliver to the Corporation that portion of the sale or loan proceeds necessary to cover the Exercise Price and any withholding obligations due. The Committee shall not approve any transaction of this nature if the Committee believes that the transaction would give rise to Optionee's liability for short-swing profits under Section 16(b) of the Exchange Act. The Optionee shall pay to the Corporation (or the Corporation's Subsidiary if Optionee is an employee of a Subsidiary of the Corporation), at the time of the exercise of an Option, the amount that the Committee deems necessary to satisfy the Corporation's or its Subsidiary's current or future obligation to withhold federal, state, or local income or other taxes that Optionee incurs by exercising an Option. In connection with the exercise of an Option requiring tax withholding, a Optionee may (a) direct the Corporation to withhold from the shares of Stock to be issued to Optionee the number of shares necessary to satisfy the Corporation's obligation to withhold taxes, that determination to be based on the shares' Fair Market Value as of the date 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 3 4 of exercise; (b) deliver to the Corporation sufficient shares of Stock (based upon the Fair Market Value as of the date of such delivery) to satisfy the Corporation's tax withholding obligation, which tax withholding obligation is based on the shares' Fair Market Value as of the later of the date of exercise; or the date as of which the shares of Stock issued in connection with such exercise become includible in the income of Optionee; (c) deliver sufficient cash to the Corporation to satisfy its tax withholding obligations. If Optionee elects to use such a stock withholding feature, Optionee must make the election at the time and in the manner that the Committee prescribes. In the event the Committee subsequently determines that the aggregate Fair Market Value (as determined above) of any shares of Stock withheld or delivered as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then Optionee shall pay to the Corporation, immediately upon the Committee's request, the amount of that deficiency in the form of payment requested by the Committee. 7. Delivery of Shares. No Shares shall be delivered to the Optionee upon exercise of the Option until (i) the Exercise Price for such Shares being purchased is paid in full in the manner herein provided; (ii) all the applicable taxes required to be withheld have been paid or withheld in full; (iii) approval of any governmental authority required in connection with the Option, or the issuance of such Shares thereunder, has been received by the Corporation; and (iv) if required by the Committee, the Optionee has delivered to the Committee an "Investment Letter" in form and content satisfactory to the Corporation as provided in paragraph 11 below. 8. Termination of Employment. In the event of the Optionee's termination of employment for reasons other than Normal Retirement, Disability or death, the Optionee's right to exercise the Option will be limited to Shares that are Vested Shares on the date of such termination and, subject to earlier termination in accordance with paragraph 3(i) hereof, will expire as to such Vested Shares on the date which is 180 calendar days following the date of such termination. In the event of the Optionee's termination of employment for reasons of Normal Retirement, Disability or death, then all Shares as to which the Option is unexercised as of the date of such termination shall become Vested Shares as of such date, and, subject to earlier termination in accordance with paragraph 3(i) hereof, the Option will expire as to all Vested Shares on the date which is 180 calendar days following the date of such Normal Retirement, Disability or death. Upon the Disability or death of a Optionee, any and all Vested Shares may be exercised by the Optionee or his guardian, legal representative, legatees, distributees or heirs for the periods prescribed herein. The Committee has the right to require whatever evidence it deems necessary to establish the rights of any person or persons seeking to exercise the Option in the event of a Optionee's Disability or death. 9. Nontransferability. Except as provided in paragraph 8 above, the Option granted by this Award Agreement shall be exercisable only by the Optionee during his or her lifetime and while an employee of the Corporation. No Option granted by this Award Agreement is transferable by the Optionee other than by will or pursuant to applicable laws of descent and distribution. The Option, and any rights and privileges in connection therewith, cannot be transferred, assigned, pledged or hypothecated by the Optionee, or by any other person or persons, in any way, whether by operation of law, or otherwise, and may not be 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 4 5 subject to execution, attachment, garnishment or similar process. In the event of any such occurrence, this Award Agreement will automatically terminate and will thereafter be null and void. 10. Adjustments. If there is any change in the capital structure of the Corporation through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or combination of shares, each remaining Share subject to this Option or the Exercise Price with respect to such Share shall be proportionately adjusted to prevent dilution or enlargement of the Shares subject to the Option or of the Exercise Price, as provided in Section 9 of the Plan. 11. Securities Act. The Corporation will not be required to deliver any Shares pursuant to the exercise of all or any part of the Option if, in the opinion of counsel for the Corporation, such issuance would violate the Securities Act or any other applicable federal or state securities laws or regulations. The Committee may require that the Optionee, prior to the issuance of any such Shares pursuant to exercise of the Option, sign and deliver to the Corporation a written statement ("Investment Letter") stating that (i) the Optionee is purchasing the Shares for his or her own account and not with a view to, or for sale in connection with, any distribution thereof, he or she has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof and he or she does not currently have any reason to anticipate a change in the foregoing; (ii) the Optionee understands that the Shares have not been registered under the Securities Act or any applicable state securities laws or regulations and, therefore, cannot be offered or resold unless the Shares are so registered or an applicable exemption from registration is available; and (iii) agrees that the certificates representing the Shares may bear a legend to the effect set forth in clause (ii) above. Such Investment Letter must be in form and substance acceptable to the Committee in its sole discretion. 12. Section 16(b) Matters. If Optionee is a director or officer of the Corporation or any of its Subsidiaries who is subject to Section 16(b) of the Exchange Act, Awards shall be exercisable during Optionee's lifetime only by Optionee or Optionee's guardian or legal representative, but not for at least six months after grant, unless (a) (and to the extent that) the Board of Directors expressly authorizes that an Award shall be exercisable before the expiration of the six-month period or (b) the death or disability of Optionee occurs before the expiration of the six-month period. In addition, if Optionee is such an officer or director, Optionee may not have shares of Stock withheld to pay tax withholding obligations within the first six months of the term of an Award and any election by Optionee to have tax withholding obligations satisfied by the withholding of shares of Stock shall be irrevocable and shall be communicated to the Committee during the period beginning on the third day following the date of release of quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date or by an irrevocable election communicated to the Committee at least six months before the date of exercise of the Award for which such withholding is desired. 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 5 6 13. Notice. All notices required or permitted under this Award Agreement, including an Exercise Notice, must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which it is actually received by the Corporation properly addressed to the person who is to receive it. An Exercise Notice shall be effective when actually received by the Corporation, in writing and in conformance with this Award Agreement and the Plan. Until changed in accordance herewith, the Corporation and the Optionee specify their respective addresses as set forth below: Corporation: Cowlitz Bancorporation 927 Commerce Avenue Longview, Washington 98632 Attention: Chairman of Board of Directors Optionee: As indicated on the signature page hereto. 14. Information Confidential. As partial consideration for the granting of this Option, the Optionee agrees that he or she will keep confidential all information and knowledge that he or she has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Optionee's spouse, tax and financial advisors, or a financial institution to the extent that such information is necessary to obtain a loan. 15. Definitions; Copy of Plan. To the extent not specifically provided herein or otherwise required by context, all capitalized terms used in this Award Agreement but not defined herein shall have the same meanings ascribed to them in the Plan. However, any reference herein to the "Committee" shall refer to the Committee or the Plan Administrator, as appropriate. By the execution of this Award Agreement, the Optionee acknowledges that he or she has received and reviewed a copy of the Plan. 16. Administration. This Award Agreement is subject to the terms and conditions of the Plan. The Plan will be administered by the Committee in accordance with its terms. The Committee has sole and complete discretion with respect to all matters reserved to it by the Plan, and decisions of the Committee with respect to the Plan and to this Award Agreement shall be final and binding upon the Optionee and the Corporation. In the event of any conflict between the terms and conditions of this Award Agreement and the Plan, the provisions of the Plan shall control. 17. Continuation of Employment. This Award Agreement shall not be construed to confer upon the Optionee any right to continue in the employ of the Corporation or its Subsidiaries and shall not limit the right of the Corporation or its Subsidiaries, in their sole discretion, to terminate the employment of the Optionee at any time. 18. Amendments. This Award Agreement may be amended only by a written agreement executed by the Corporation and the Optionee. 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 6 7 19. Termination. The Corporation may terminate the Plan at any time; however, such termination will not modify the terms and conditions of the Option awarded under this Agreement without the Optionee's consent. 20. Shareholder Approval. Notwithstanding any provisions of the Award Agreement, no Option may be exercised before the date ("Approval Date") the stockholders of the Corporation, at a meeting at which a quorum is present, shall have approved the Plan by the affirmative vote of a majority of the shares of the Corporation's common voting thereon. In the event of the occurrence of any event described in paragraph 8 hereof prior to the Approval Date, the 180 day-period referred to in paragraph 8 hereof applicable to Vested Shares shall be tolled until the Approval Date. IN WITNESS WHEREOF, the partners hereto have caused this Agreement to be duly executed as of the day and year first above written. COWLITZ BANCORPORATION By: _____________________________________ Its: ________________________________ OPTIONEE _________________________________________ Address: _________________________________________ _________________________________________ 1997 STOCK OPTION PLAN NONSTATUTORY OPTION AWARD AGREEMENT 7 EX-10.16 20 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.16 COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN EFFECTIVE JULY 10, 1996 2 COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN TABLE OF CONTENTS
Page PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1. PURPOSE OF PLAN . . . . . . . . . . . . . . . . . . . . 1 --------------- ARTICLE 2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 1 ----------- 2.1 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 --------- 2.2 Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ----- 2.3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ---- 2.4 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 --------- 2.5 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ------- 2.6 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ------------ 2.7 Eligible Employee . . . . . . . . . . . . . . . . . . . . . . . . 1 ----------------- 2.8 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ------------ 2.9 Exercise Period . . . . . . . . . . . . . . . . . . . . . . . . . 2 --------------- 2.10 Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . 2 ----------------- 2.11 Grant Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ---------- 2.12 Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ------ 2.13 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ----------- 2.14 Payroll Account . . . . . . . . . . . . . . . . . . . . . . . . . 3 --------------- 2.15 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ---- 2.16 Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ----- 2.17 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ------------ ARTICLE 3. GRANT AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . 3 ----------------------------- 3.1 General Conditions . . . . . . . . . . . . . . . . . . . . . . . . 3 ------------------ 3.2 Right to Exercise . . . . . . . . . . . . . . . . . . . . . . . . 4 ----------------- 3.3 Method of Exercise . . . . . . . . . . . . . . . . . . . . . . . . 4 ------------------ 3.4 Payment of Exercise Price . . . . . . . . . . . . . . . . . . . . 4 ------------------------- 3.5 Issuance of Stock . . . . . . . . . . . . . . . . . . . . . . . . 5 ----------------- 3.6 Nontransferability . . . . . . . . . . . . . . . . . . . . . . . . 5 ------------------ 3.7 Shareholder Rights . . . . . . . . . . . . . . . . . . . . . . . . 5 ------------------ 3.8 Issuance and Delivery of Shares . . . . . . . . . . . . . . . . . 5 -------------------------------
COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN i 3 ARTICLE 4. STOCK SUBJECT TO PLAN . . . . . . . . . . . . . . . . . . 6 --------------------- 4.1 Authorized of Shares . . . . . . . . . . . . . . . . . . . . . . . 6 -------------------- 4.2 Maximum Number of Shares . . . . . . . . . . . . . . . . . . . . . 6 ------------------------ 4.3 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ----------- ARTICLE 5. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . 6 -------------------------- 5.1 General Authority . . . . . . . . . . . . . . . . . . . . . . . . 6 ----------------- 5.2 Persons Subject to Section 16(b) . . . . . . . . . . . . . . . . . 6 -------------------------------- ARTICLE 6. ADJUSTMENT UPON CORPORATE CHANGES . . . . . . . . . . . . . . 7 --------------------------------- 6.1 Adjustments to Shares . . . . . . . . . . . . . . . . . . . . . . 7 --------------------- 6.2 Substitution of Options on Merger or Acquisition . . . . . . . . . 7 ------------------------------------------------ 6.3 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . 7 ----------------- ARTICLE 7. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES . . . . . .. . . . . 7 ----------------------------------------------------- 7.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ------- 7.2 Stock Legends . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ------------- 7.3 Representations by Participants . . . . . . . . . . . . . . . . . 8 ------------------------------- ARTICLE 8. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 8 ------------------ 8.1 Effect on Employment . . . . . . . . . . . . . . . . . . . . . . . 8 -------------------- 8.2 Liability Under the Plan . . . . . . . . . . . . . . . . . . . . . 8 ------------------------ 8.3 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . 8 --------------------- 8.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ------------- 8.5 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 --------- 8.6 Effective Date of Plan . . . . . . . . . . . . . . . . . . . . . . 9 ---------------------- 8.7 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . 9 --------------------
COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN ii 4 COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN PREAMBLE Cowlitz Bancorporation (the "Company") desires to establish a plan through which employees of the Company and its subsidiaries may purchase from the Company shares of its common stock. The Company hereby establishes the Cowlitz Bancorporation Employee Stock Purchase Plan (the "Plan"), effective July 10, 1996: ARTICLE 1. PURPOSE OF PLAN The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of the Company's common stock by present and future employees of the Company and its Subsidiaries. ARTICLE 2. DEFINITIONS 2.1 Agreement. An agreement between a Participant and the Company or a Subsidiary through which the Participant elects to exercise the Options granted to him hereunder and authorizes payment of the Option exercise price. 2.2 Board. The board of directors of the Company. 2.3 Code. The Internal Revenue Code of 1986, as amended. 2.4 Committee. A committee with at least two (2) members of the Board who are designated by the Board to administer the Plan. No Committee member may be an employee of the Company or its affiliates. 2.5 Company. Cowlitz Bancorporation and its successors and assigns. 2.6 Compensation. An employee's rate of compensation earned from employment with the Company or one of its Subsidiaries, including regular earnings, overtime, bonuses, commissions, incentives, and amounts elected under a salary reduction agreement pursuant to a plan described in section 125 of the Code or a deferred compensation plan. 2.7 Eligible Employee. An employee of the Company or a Subsidiary, except for the following: COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 1 5 (a) An employee who has been employed less than one year. (b) An employee whose customary employment is 20 hours or less per week. (c) An employee whose customary employment is for five months or less in a calendar year. 2.8 Exchange Act. The Securities Exchange Act of 1934, as amended. 2.9 Exercise Period. The period during which an Eligible Employee may elect to exercise an Option and make payment through payroll deduction or by check, pursuant to Article 3. The initial Exercise Period shall be the period that begins on the initial Grant Date hereunder and expires on the ninth day of the next succeeding calendar quarter. Thereafter, the Exercise Period shall begin with each successive Grant Date and expire on the ninth day of the next succeeding calendar quarter. 2.10 Fair Market Value. On any given date, Fair Market Value shall be the applicable description below (unless, where appropriate, the Committee or Board determines in good faith the fair market value of the Stock to be otherwise): (a) If the Stock is not publicly traded, Fair Market Value shall be the value determined in good faith by the Committee or the Board. Such determination shall occur quarterly and at such other times as the Committee or the Board may deem appropriate. (b) If the Stock is traded on the New York Stock Exchange or the American Stock Exchange, the average of the closing prices of the Stock on such exchange on which such Stock is traded on the trading day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding day period on which such Stock is traded if no Stock was traded on such trading day. (c) If the Stock is not traded on the New York Stock Exchange or the American Stock Exchange, but is reported on the NASDAQ National Market System or another NASDAQ Automated Quotation System, and market information is published on a regular basis, then Fair Market Value shall be the closing price of the Stock, as so published, on the trading day immediately preceding the date as of which Fair Market Value is being determined, or the closing price on the next preceding trading day on which such prices were published if no Stock was traded on such trading day. (d) If market information is not so published on a regular basis, then Fair Market Value shall be the average of the high bid and low asked prices of the Stock in the over-the-counter market on the trading day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding trading COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 2 6 day on which such high bid and low asked prices were recorded, as reported by a generally accepted reporting service. 2.11 Grant Date. The initial Grant Date shall be July 10, 1996. Thereafter, the Grant Date shall be the tenth day of each successive calendar quarter (i.e., October 10, January 10, and April 10, and July 10) of each year. 2.12 Option. The right that is granted hereunder to a Participant to purchase from the Company a stated number of shares of Stock at the Fair Market Value on or before the last day of each respective Exercise Period. 2.13 Participant. An Eligible Employee who has elected to exercise an Option and participate in the Plan in accordance with Article 3. 2.14 Payroll Account. A bookkeeping account to which is added the amounts withheld on behalf of each Participant under regular payroll deductions authorized by Participants hereunder, and reduced by amounts due to the Company to pay the exercise price of Options exercised hereunder. 2.15 Plan. The Cowlitz Bancorporation Employee Stock Purchase Plan. 2.16 Stock. The common stock of the Company, no par value. 2.17 Subsidiaries. A "subsidiary corporation," means any corporation (other than the Company), at the time of granting the Option, that has fifty percent or more of its total combined voting power of all classes of its stock owned, directly or indirectly, by the Company. ARTICLE 3. GRANT AND EXERCISE OF OPTIONS 3.1 General Conditions. On each Grant Date, each employee who is an Eligible Employee on such date shall, without further action of the Committee, be granted an Option to purchase up to a number of whole shares of Stock that, in the aggregate, have an exercise price (described in Section 3.1(a)) that is not more than 15% of his Compensation during each Exercise Period, provided that the Option is limited to a maximum exercise price of $10,000 in each calendar year. The limits described in the immediately preceding sentence shall be prorated for any partial Exercise Period or calendar year. Each Option grant is subject to the following terms and conditions: (a) The exercise price of each Option shall be one hundred percent (100%) of Fair Market Value on the date of grant. (b) Each Option, or portion thereof, that is not exercised during an Exercise Period shall expire at the end of the Exercise Period in which the Option was granted. COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 3 7 (c) Each Option shall expire ten days after the date the Eligible Employee terminates employment with the Company or any of its Subsidiaries, unless it expires sooner pursuant to Section 3.1(b). (d) A right to purchase Stock which has accrued under one Option granted hereunder may not be carried over to any other Option. 3.2 Right to Exercise. An Option shall be exercisable up to the last day of the Exercise Period that includes the Grant Date on which the Option was granted. An Eligible Employee must exercise an Option while he is an employee of the Company or a Subsidiary or within the periods that are specified herein after termination of employment. 3.3 Method of Exercise. To exercise an Option, an Eligible Employee shall notify the Company in writing of his election to so exercise and execute an Agreement in the form and manner prescribed by the Committee. Unless an Eligible Employee pays the exercise price by check, an Eligible Employee may revoke his election by giving written notification of such revocation to the Committee in a timely manner and at least five (5) business days prior to the last day of the applicable Exercise Period. 3.4 Payment of Exercise Price. An Eligible Employee who desires to exercise an Option must timely execute an Agreement in the form and manner prescribed by the Committee prior to or during the applicable Exercise Period. The Agreement shall provide for authorization of deductions from the Eligible Employee's regular payroll that is credited to a Payroll Account. In the alternative, the Eligible Employee may pay the exercise price by check payable to Company prior to the last day of the Exercise Period. Amounts credited to a Participant's Payroll Account shall be accumulated and reserved for payment of the exercise price of Options granted hereunder. (a) A Participant may modify his election to participate in the Plan at any time by timely providing the Committee written notice in the form prescribed by the Committee. Such modification shall be effective on the first payroll date that occurs five (5) business days following receipt of such written notice or, if later, the date specified in the notice. (b) An Agreement to begin or modify participation in the Plan must be executed by the Participant within the time prescribed by the Committee at least five (5) business days prior to the last payroll date in the Exercise Period for which it is to be effective. If the Agreement is not timely executed, it shall take effect upon the next following Exercise Period. (c) Each Participant's election specified under an Agreement shall remain in effect for successive Exercise Periods until modified or revoked by the Participant in accordance with Section 3.4. COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 4 8 3.5 Issuance of Stock. The Company shall issue whole shares of Stock to a Participant, unless the Participant timely revoked an election to exercise the Option pursuant to Section 3.3, as follows: (a) The Company shall determine the number of whole shares of Stock to be issued to each Participant for each Exercise Period by dividing the balance of such Participant's Payroll Account by the applicable exercise price of the Option. (b) The Company shall deduct from a Participant's Payroll Account the amount necessary to purchase the greatest number of whole shares of Stock that can be acquired under the applicable Option. (c) Any amounts remaining in the Payroll Account after deducting the exercise price for whole shares of Stock shall generally be held for use in a subsequent Exercise Period. However, a Participant who has made contributions to a Payroll Account and has revoked his election to exercise an Option under the terms of Section 3.3 may obtain payment of the amounts held in his Payroll Account from the Company by requesting such payment in writing to the Committee in the time and manner specified by the Committee. A Participant who has terminated employment shall be paid any amounts remaining in his Payroll Account after the expiration of all Options hereunder. (d) If the Participant pays by check, the number of whole shares of Stock to be issued shall be determined by dividing the amount of the check by the applicable exercise price. 3.6 Nontransferability. Any Option granted under this Plan shall not be transferable except by will or by the laws of descent and distribution. Only the Participant to whom an Option is granted may exercise such Option, unless he is deceased. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation or liability of such Participant. 3.7 Shareholder Rights. No Participant shall have any rights as a stockholder with respect to shares subject to his Option prior to the time that such Option is exercised. 3.8 Issuance and Delivery of Shares. Shares of Stock issued pursuant to the exercise of Options hereunder shall be delivered to Participants by the Company as soon as administratively feasible after a Participant exercises an Option hereunder and executes an agreement described in Section 3.9 that the Company requires at the time of exercise. COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 5 9 ARTICLE 4. STOCK SUBJECT TO PLAN 4.1 Authorized of Shares. Upon the exercise of an Option, the Company shall deliver to the Participant authorized but unissued shares of Stock. 4.2 Maximum Number of Shares. The maximum aggregate number of shares of Stock that may be issued pursuant to the exercise of Options is 10,000 subject to increases and adjustments as provided in this Article and Article 6. 4.3 Forfeitures. If an Option is terminated, in whole or in part, the number of shares of Stock allocated to such Option or portion thereof may be reallocated to other Options to be granted under this Plan. ARTICLE 5. ADMINISTRATION OF THE PLAN 5.1 General Authority. The Plan shall be administered by the Committee. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. No member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement or Option. The Company shall bear all expenses of Plan administration. The interpretation and construction by the Committee of any terms or provisions of this Plan or of any rule or regulation promulgated in connection herewith, shall be conclusive and binding on all persons. In addition to all other authority vested with the Committee under the Plan, the Committee shall have complete authority to: (a) Interpret all provisions of this Plan; (b) Prescribe the form of any Agreement and notice and manner for executing or giving the same; (c) Adopt, amend, and rescind rules for Plan administration; and (d) Make all determinations it deems advisable for the administration of this Plan. 5.2 Persons Subject to Section 16(b). Notwithstanding anything in the Plan to the contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are members of the Committee subject to Section 16(b) of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 6 10 ARTICLE 6. ADJUSTMENT UPON CORPORATE CHANGES 6.1 Adjustments to Shares. The maximum number and kind of shares of stock with respect to which Options hereunder may be granted and which are the subject of outstanding Options shall be adjusted by way of increase or decrease as the Committee determines (in its sole discretion) to be appropriate, in the event that: (a) the Company effects one or more stock dividends, stock splits, reverse stock splits, subdivisions, consolidations or other similar events; or (b) there occurs any other event which in the judgment of the Committee necessitates such action. Provided, however, that if an event described in paragraph (a) or (b) occurs, the Committee shall make adjustments to the limits on Options and on the award of Options specified hereunder that are proportionate to the modifications of the Stock that are on account of such corporate changes. 6.2 Substitution of Options on Merger or Acquisition. The Committee may grant Options in substitution for stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes an employee of the Company or a Subsidiary in connection with a merger or acquisition of another entity. The terms of such substituted Options shall be determined by the Committee in its sole discretion, subject only to the limitations of Article 4. 6.3 Fractional Shares. Only whole shares of Stock may be acquired through the exercise of an Option. The Company will return to each Participant's Payroll Account, or directly to the Participant if payment is by check, any amount tendered in the exercise of an Option remaining after the maximum number of whole shares have been purchased, subject to Section 3.5(c). ARTICLE 7. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES 7.1 General. No Option shall be exercisable, no Stock shall be issued, no certificates for shares of Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all federal and state laws and regulations (including, without limitation, withholding tax requirements), federal and state securities laws and regulations and the rules of all national securities exchanges or self-regulatory organizations on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. No Option shall be exercisable, no Stock shall be issued, no certificate for shares shall be delivered and no payment shall be made under this Plan until the Company has obtained COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 7 11 such consent or approval as the Committee may deem advisable from any regulatory bodies having jurisdiction over such matters. 7.2 Stock Legends. Any certificate issued to evidence shares of Stock for which an Option is exercised may bear such legends and statements as the Company or Committee may deem advisable to assure compliance with federal and state laws and regulations. 7.3 Representations by Participants. As a condition to the exercise of an Option, the Company may require a Participant to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such representation is required by any relevant provision of the laws referred to in Section 7.1. At the option of the Company, a stop transfer order against any shares of stock may be placed on the official stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel was provided (concurred in by counsel for the Company) and stating that such transfer is not in violation of any applicable law or regulation may be stamped on the stock certificate in order to assure exemption from registration. The Committee may also require such other action or agreement by the Participants as may from time to time be necessary to comply with the federal and state securities laws. This provision shall not obligate the Company or any Subsidiary to undertake registration of options or stock hereunder. ARTICLE 8. GENERAL PROVISIONS 8.1 Effect on Employment. Neither the adoption of this Plan, its operation, nor any documents describing or referring to this Plan (or any part thereof) shall confer upon any employee any right to continue in the employ of the Company or a Subsidiary or in any way affect any right and power of the Company or a Subsidiary to terminate the employment of any employee at any time with or without assigning a reason therefor. 8.2 Liability Under the Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon contractual obligations that may be created hereunder. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 8.3 Rules of Construction. Headings are given to the articles and sections of this Plan solely as a convenience to facilitate reference. The masculine gender when used herein refers to both masculine and feminine. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. 8.4 Governing Law. The laws of the State of Washington shall apply to all matters arising under this Plan, to the extent that federal law does not apply. COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 8 12 8.5 Amendment. The Board may amend or terminate this Plan at any time; provided, however, an amendment that would have a material adverse effect on the rights of a Participant under an outstanding Option is not valid with respect to such Option without the Participant's consent. 8.6 Effective Date of Plan. Upon adoptions of this Plan by the Board, Options may be granted under this Plan beginning on July 10, 1996. 8.7 Shareholder Approval. The Company will submit the Plan for approval at a meeting of the Company's shareholders within twelve (12) months of the effective date of the Plan. If a majority of the shareholders of the Company represented at such meeting, in person or by proxy, do not approve the Plan, then the Company will discontinue the Plan as soon as reasonably practicable. IN WITNESS WHEREOF, the undersigned officer has executed this Plan on this _____ day of ______________, 1996. COWLITZ BANCORPORATION By: ____________________________________ Its: ____________________________________ COWLITZ BANCORPORATION EMPLOYEE STOCK PURCHASE PLAN 9 EX-11.1 21 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE (all amounts in thousands, except for share and per share amounts)
September 30, September 30, December 31, December 31, December 31, 1997 1996 1996 1995 1994 ------------- ------------- ------------ ------------ ------------ PRIMARY EARNINGS PER SHARE: Dilutive common stock equivalents 2,600,702 2,585,607 2,586,698 2,512,407 1,723,732 Dilutive common equivalent shares 201,667 201,667 201,667 201,667 201,667 --------- --------- --------- --------- --------- Total Common Stock 2,802,369 2,787,274 2,788,365 2,714,074 1,925,399 ========= ========= ========= ========= ========= Net Income $1,516 $1,817 $2,497 $2,098 $1,345 ========= ========= ========= ========= ========= Primary Earnings Per Share $0.54 $0.65 $0.90 $0.77 $0.70 ========= ========= ========= ========= ========= FULLY DILUTIVE EARNINGS PER SHARE: Dilutive common stock equivalents 2,600,702 2,585,607 2,586,698 2,512,407 1,723,732 Dilutive common equivalent shares 201,667 201,667 201,667 201,667 201,667 --------- --------- --------- --------- --------- Total Common Stock 2,802,369 2,787,274 2,788,365 2,714,074 1,924,399 ========= ========= ========= ========= ========= Net Income $1,516 $1,817 $2,497 $2,098 $1,345 ========= ========= ========= ========= ========= Fully Dilutive Earnings Per Share $0.54 $0.65 $0.90 $0.77 $0.70 ========= ========= ========= ========= =========
EX-21.1 22 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
State of Name Under Which Name Incorporation Subsidiary Does Business - ---- ------------- ------------------------ Cowlitz Bank Washington Cowlitz Bank
EX-23.2 23 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Portland, Oregon January 15, 1998 EX-27 24 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS OF COWLITZ BANCORPORATION AND SUBSIDIARY AS OF DECEMBER 31, 1996 AND 1995 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 $20,905 0 0 0 2,011 3,380 3,388 126,551 1,894 159,157 123,297 550 655 22,842 0 0 3,195 8,618 159,157 12,721 388 524 13,633 4,991 6,174 7,459 281 (309) 3,682 3,792 3,792 0 0 2,497 0.90 0.90 10.16 407 169 0 0 1,763 158 8 1,894 1,894 0 0
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