Item 1. Business - -----------------
General
EverTrust Financial Group, Inc. ("EverTrust" or the "Company"), a Washington state corporation, is the successor to Mutual Bancshares, a mutual holding company, which converted to stock form on September 30, 1999 ("Conversion"). The Company replaced Mutual Bancshares as the holding company for EverTrust Bank (formerly, Everett Mutual Bank, and referred to herein as "EverTrust Bank" or the "Bank"), a Washington chartered stock savings bank; I-Pro, Inc., a Washington corporation; and Mutual Bancshares Capital Inc., a Washington corporation. In connection with the Conversion in September 1999, the Company issued 8,596,250 shares to the public. In April 2000, the Company elected to become a financial holding company pursuant to regulations of the Board of Governors of the Federal Reserve ("Federal Reserve") issued in connection with the enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. The Federal Reserve declared this election to be effective May 12, 2000. For further information regarding the Company's financial holding company election, see "Regulation -- The Company."
At March 31, 2001, the Company had total assets of $602.4 million, total deposits of $397.6 million and total equity of $120.1 million. The Company's business activities are conducted primarily by EverTrust Bank, whose operations are enhanced by the activities and operations of the Company's other two subsidiaries: I-Pro, Inc. and Mutual Bancshares Capital, Inc. Accordingly the information regarding the Company's business set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank.
EverTrust Bank was formed as a federally chartered savings institution in 1916 and converted to a Washington chartered mutual savings bank in 1987. In 1993, the Bank became a stock entity in connection with its mutual holding company reorganization in 1993. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable legal limits under the Bank Insurance Fund ("BIF"). The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks ("Division") and the FDIC.
EverTrust Bank is a community oriented savings bank dedicated to financing residential related and commercial real estate properties and providing quality customer service. The Bank's principal business is attracting deposits from the general public and using those funds to originate residential (including multi-family) mortgage loans as well as commercial real estate and construction loans.
Bank Name Change and Merger
In December 2000, the Company announced a name change for Everett Mutual Bank. Effective January 1, 2001, Everett Mutual Bank began operating as EverTrust Bank, a change in name to establish an identity consistent with EverTrust Financial as the Company expands into new markets outside of Snohomish County. The new name is being used throughout the organization, including the Bank's new Bellevue, Washington office as well as for the recently opened commercial mortgage banking group office in Tacoma, Washington.
Also in December 2000, the Company announced that one of its subsidiaries, Commercial Bank of Everett, would merge into EverTrust Bank (then Everett Mutual Bank). The merger was effective on February 1, 2001, and the Bank's new Commercial Banking Group was established. The merger eliminated a second set of regulatory reporting, streamlined internal operations and builds on the combined strengths of each bank. In addition, the merger provides increased lending capacity, allowing EverTrust Bank to be more competitive in both commercial business and real estate lending.
Market Area
The Bank conducts the majority of its lending and deposit operations out of 12 full service offices in Snohomish County, located in Northwest Washington, and one loan production office in King County. Snohomish County is located north of King County (Seattle) and south of Skagit County along the I- 5 corridor. Snohomish County, the state's third largest county covering 2,098 square miles, has an estimated population of 583,000 for a density of 278 persons per square mile. Everett, the largest city in Snohomish County, is the county seat and serves as the county's economic and cultural center. Everett, a port city, is located approximately 30 miles north of Seattle.
In December 2000, the Company established the EverTrust Financial Center in downtown Bellevue, Washington. From this location, the Bank will serve East King County as well as Seattle and offers an expanded line of financial products and services including enhanced jumbo home loan programs, commercial real estate loans, private banking, and business banking services. The Bank's commercial mortgage banking group provides portfolio and secondary market products from commercial loan origination offices located in Tacoma, Bellevue, Seattle and Everett.
For additional information regarding the Company's and the Bank's offices, see "Item 2.
Item 2. Properties - -------------------
At March 31, 2001 EverTrust and EverTrust Bank operate 12 full-service banking facilities, seven of which are owned and five of which are leased, and one loan production office which is leased. Management believes that the premises occupied by EverTrust and EverTrust Bank are well-located and suitably equipped to serve as financial services facilities. EverTrust Bank also operates ten proprietary automated teller machines that are part of a nationwide cash exchange network, all of which are located at certain offices of EverTrust Bank. EverTrust and EverTrust Bank also occupy administrative, subsidiary and operational support facilities located in Everett, Bothell and Kent, Washington. The Bank also leases a facility in Seattle, Washington for its trust and wealth management operations. See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information related to EverTrust and EverTrust Bank's properties and other fixed assets.
Item 3.
Item 3. Legal Proceedings - --------------------------
Periodically, there have been various claims and lawsuits involving EverTrust Bank, such as claims to enforce liens, condemnation proceedings on properties in which EverTrust Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to EverTrust Bank's business. EverTrust Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of EverTrust Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2001.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - --------------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market under the symbol "EVRT". As of March 31, 2001, there were 7,258,243 shares of common stock outstanding and approximately 2,154 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers.
Dividend payments by the Company are dependent primarily on dividends received by the Company from EverTrust Bank. Under federal regulations, the dollar amount of dividends the Bank may pay is dependent upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC regulations. However, institutions that have converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the Bank's mutual to stock conversion in 1999. Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, it would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets.
On January 23, 2001, the Company announced that its Board of Directors had authorized a third stock repurchase plan for the repurchase of up to 10% (approximately 768,324 shares) of the Company's outstanding common stock. At March 31, 2001, the Company had repurchased 425,000 shares of its common stock.
The following table sets forth the market price range of the Company's common stock for the years ended March 31, 2001 and 2000. This information was provided by the Nasdaq Stock Market.
Year High Low Dividends ---- ---- --- ---------
2001 First Quarter $10.750 $ 8.875 $.075 Second Quarter 13.000 10.188 0.080 Third Quarter 13.000 11.188 0.090 Fourth Quarter 14.000 12.625 0.095
2000 First Quarter N/A N/A N/A Second Quarter N/A N/A N/A Third Quarter 10.938 9.344 N/A Fourth Quarter 9.813 8.938 0.05
Item 6.
Item 6. Selected Financial Data - --------------------------------
The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company and its subsidiaries at and for the dates indicated. Since the Company had not commenced operations prior to the Conversion in September 1999, the financial information presented for the periods prior to 1999 is that of the Company's predecessor, Mutual Bancshares, and its subsidiaries only. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiaries contained in Item 8 of this Form 10-K.
At March 31, ------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In thousands) FINANCIAL CONDITION DATA:
Total assets............$602,403 $555,212 $452,089 $421,305 $399,158 Investment securities... 71,661 108,054 75,432 59,694 52,809 Loans receivable, net... 483,117 416,116 315,327 311,951 293,134 Deposit accounts........ 397,643 382,986 375,896 350,971 329,770 Borrowings.............. 80,344 34,423 18,949 15,503 20,057 Total equity............ 120,146 133,529 52,263 51,096 46,143
Year Ended March 31, ------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In thousands) OPERATING DATA:
Interest income......... $46,472 $38,434 $33,894 $33,462 $31,049 Interest expense........ 23,048 18,832 17,837 17,899 17,010 ------- ------- ------- ------- ------- Net interest income..... 23,424 19,602 16,057 15,563 14,039 Provision for loan losses................ 1,005 810 780 420 420 ------- ------- ------- ------- ------- Net interest income after provision for loan losses........... 22,419 18,792 15,277 15,143 13,619 Other operating income.. 2,632 1,290 1,927 1,792 1,074 Other operating expenses.............. 17,403 19,696 15,532 10,287 9,796 ------- ------- ------- ------- ------- Income before income taxes................. 7,648 386 1,672 6,648 4,897 Provision for income taxes................. 2,291 (186) 261 2,114 1,387 ------- ------- ------- ------- ------- Net income.............. $ 5,357 $ 572 $ 1,411 $ 4,534 $ 3,510 ======= ======= ======= ======= =======
Year Ended March 31, ------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ----
OTHER DATA:
Number of: Loans outstanding..... 4,352 4,119 3,505 3,645 3,762 Deposit accounts...... 30,176 30,404 30,221 29,846 29,751 Full service banking offices............. 12 12 12 11 11 Cash dividends declared on Common Stock................ 2,595 448 -- -- --
At or For Year Ended March 31, ------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- KEY FINANCIAL RATIOS:
Performance Ratios: Return on assets(1)..... 0.93% 0.11% 0.33% 1.11% 0.91% Return on equity(2)(7)(8)....... 4.20 NM 2.71 9.54 8.07 Equity-to-assets ratio(3).............. 22.25 18.47 12.18 11.66 11.26 Interest rate spread (4)............ 2.96 3.08 3.20 3.27 3.12 Net interest margin(5).. 4.17 3.97 3.83 3.89 3.70 Average interest- earning assets to average interest- bearing liabilities... 129.33 123.32 114.75 113.85 113.00 Other operating expenses as a percent of average total assets.. 3.03 3.89 3.64 2.53 2.54 Efficiency ratio (6)(7)(8)....... 66.29 NM 66.74 58.64 64.07 Dividend payout ratio (9)............. 48.44 78.32 -- -- --
Capital Ratios:
Leverage................ 19.70 24.90 11.80 12.20 11.70 Tier 1 risk-based....... 22.50 27.90 13.70 14.90 14.90 Total risk-based........ 23.70 29.20 14.90 16.10 16.20
Asset Quality Ratios: Nonaccrual and 90 days or more past due loans as a percent of total loans, net............ 0.27 0.10 0.12 0.27 0.35 Nonperforming assets as a percent of total assets.......... 0.23 0.07 0.08 0.20 0.48 Allowance for losses as a percent of gross loans receivable...... 1.51 1.53 1.62 1.48 1.45 Allowance for loan losses as a percent of nonperforming loans... 572.23 1593.12 1500.53 582.28 440.33 Net charge-offs to average outstanding loans................. 0.01 -- -- 0.01 0.03
- ----------- (1) Net earnings divided by average total assets. (2) Net earnings divided by average equity. (3) Average equity divided by average total assets. (4) Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities. (5) Net interest income as a percentage of average interest-earning assets. (6) Total other operating expenses divided by total net interest income (on a tax-equivalent basis) before provision for loan losses plus total other operating income. (7) Calculations are not meaningful for the year ended March 31, 2001 given the Company went public on September 30, 1999 and the one time charitable contribution expenses of $5.2 million made during the second quarter. (8) The year ended March 31, 1999 includes a one time contribution expense of $3.2 million. (9) Dividends paid as a percentage of net income.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company and its subsidiaries. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes contained in Item 8 of this Form 10-K, as well as the other sections of this Form 10-K.
The Company's results of operations depend primarily on its net interest income, which is the difference between the income earned on its interest-earning assets, consisting of loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and primarily FHLB of Seattle borrowings. The Company's net income is also affected by, among other things, fee income, provisions for loan losses, operating expenses and income tax provisions. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the attendant actions of the regulatory authorities.
Forward-Looking Statements
This Form 10-K contains forward-looking statements which are based on assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the word "believe," "expect," "intend," "anticipate," "estimate," "project," or similar words. The Company's ability to predict results of the actual effect of future plans or strategies is uncertain. Factors which could have a material adverse effect on the Company's operations include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market areas and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.
Operating Strategy
EverTrust is the successor to Mutual Bancshares, a mutual bank holding company, which converted to stock form on September 30, 1999. The Company replaced Mutual Bancshares as the holding company for EverTrust Bank, a Washington state chartered savings bank; I-Pro, Inc., a Washington corporation, which is an item processing company; and Mutual Bancshares Capital, Inc., a Washington corporation, which is a venture capital firm.
EverTrust Bank's strategy is to operate as a community-based, retail oriented financial institution offering a wide variety of banking products, delivered and distinguished by providing a superior level of customized service to individuals. EverTrust Bank attracts retail deposits and generates real estate secured loans through its 12 full service banking offices and its one loan production office using targeted marketing, customer cross-selling, referrals and its longstanding reputation in its market area as a primary means of meeting this strategy. EverTrust Bank strives to serve a niche base of higher balance transaction account customers by offering tiered, interest-bearing products, versus a mass market strategy that seeks lower balance/no interest/high fee transaction accounts. In addition to offering one-to- four family real estate loans, The Bank focuses on construction and land development loans, as well as multi-family and commercial real estate loans. Since single family lending has become a commodity product, EverTrust Bank has sought to diversify its lending activities by emphasizing real estate construction, multi-family and commercial lending. This diversification has allowed for continued customization of its lending products in a highly competitive environment. To a lesser, but increasing extent, the Bank also originates consumer loans and intends to continue to build the consumer
lending segment of its loan portfolio through a broadened product line with an emphasis on quality service. See Item 1, "Business -- Lending Activities."
In connection with the merger of the Company's other bank subsidiary, Commercial Bank of Everett, with and into EverTrust Bank in December 2000, the Bank established a commercial banking group primarily focused on serving the needs of the Bank's business banking customers with a high level of customer service. The commercial banking group provides banking services directly at the customer's place of business, including lending and non-cash deposit activities, to the greatest extent possible. The Bank's commercial banking group does not directly compete with the Bank's retail customer focus. Rather, the commercial banking group's focus and the Bank's retail oriented focus serve to complement each other through an organized referral network that provides the opportunity for increased business. The Bank's commercial banking group's business consists primarily of attracting non-cash deposits from business customers and, to a lesser extent, the general public, and using those funds to originate commercial loans to a wide variety of small businesses and professional service companies in the local market. As an accommodation to business customers and other contacts made during the normal course of business, the commercial banking group originates consumer loans, and refers one-to-four family residential loans, multi-family and commercial real estate loans to EverTrust Bank. See Item 1, "Lending Activities."
The operating strategy of the Company's other minor subsidiaries, I-Pro, Inc. and Mutual Bancshares Capital, Inc. is to complement and enhance the efficiencies of EverTrust Bank through cross-marketing and referral opportunities and by producing additional sources of noninterest income that are not generally subject to the same cyclical influences of the banking business. I-Pro, Inc.'s operating strategy is to provide superior quality backroom check processing and electronic imaging services for banks, with the long-term objective of supplying this technology to non-financial businesses for similar applications. The company employs state of the art check and statement imaging technology and customized services to accomplish this objective. At March 31, 2001, I-Pro, Inc.'s sole client was EverTrust Bank. The operating strategy of Mutual Bancshares Capital, Inc. is to provide, through an organizational structure more fully explained in "Business of Mutual Bancshares Capital, Inc.," management services and limited partnership venture capital investments under licensing by the Small Business Administration as a Small Business Investment Company. These management and investment opportunities are expected to result in an additional source of non-interest income to the consolidated operations of the Company and provide for potential cross-selling opportunities with the other subsidiaries of the Company as well. See Item 1, "Business -- Subsidiary Activities -- Business of I-Pro, Inc." and "-- Business of Mutual Bancshares Capital, Inc."
The Company does not presently engage in any activities outside of serving as a shell parent company for its subsidiaries. The operating strategy of the Company has been to invest dividends received from EverTrust Bank into additional operating subsidiaries, which currently consist of I-Pro, Inc. and Mutual Bancshares Capital, Inc., in an effort to expand and diversify the consolidated operations of the Company across a variety of companies that are engaged in complementary, but different, businesses and/or operating strategies. In connection with the Conversion and as a result of the additional capital that was retained by the Company, this diversification strategy is expected to continue and accelerate, although there are no specific acquisitions or new business formations planned at this time.
Comparison of Financial Condition at March 31, 2001 and March 31, 2000
Total assets increased 8.5% from $555.2 million at March 31, 2000 to $602.4 million at March 31, 2001, primarily as a result of an increase in loans receivable, net, which was funded by increased deposits and borrowings.
Cash and cash equivalents increased 190.9% from $7.7 million at March 31, 2000 to $22.4 million at March 31, 2001, primarily as a result of an increase in Federal Reserve Bank balances, overnight Fed Funds and FHLB investments that are used to fund anticipated growth in the securities available for sale and loan portfolios.
Securities available for sale decreased 51.6% from $96.0 million at March 31, 2000 to $63.3 million at March 31, 2001, as proceeds received were used to fund temporary growth in cash and cash equivalents, and loans. The growth
in cash and cash equivalents is ultimately expected to be reinvested in a combination of high quality investments that can be pledged for use in future borrowings and in loans. Management intends to place most new investment purchases in the available for sale category which allows for active management of the securities portfolio to meet liquidity and asset/liability management needs. See Item 1, "Business -- Investment Activities."
Loans receivable, net, including loans held-for-sale, increased 16.1% from $416.1 million at March 31, 2000 to $483.1 million at March 31, 2001, primarily as a result of multi-family construction and commercial real estate permanent loans which increased $69.1 million from March 31, 2000 to March 31, 2001. Business loans increased from $16.5 million at March 31, 2000 to $31.7 million at March 31, 2001, the result of increased market penetration and a growth to average loan amounts. Total loans, before deducting undisbursed loan proceeds, deferred loan fees, and reserves for loan losses, increased 17.4% from $475.6 million at March 31, 2000 to $558.3 million at March 31, 2001.
Loans held for sale on the secondary market were approximately $794,000 at March 31, 2001. The Company had no loans held for sale on the secondary market at March 31, 2000.
Premises and equipment, net, increased $465,000 from $9.1 million at March 31, 2000 to $9.5 million at March 31, 2001, as a result of equipment purchases largely related to EverTrust Bank's computer system conversion partially offset by depreciation expense. For the years ended March 31, 2000 and 2001, depreciation expense was $963,000 and $1.1 million, respectively. See Item 2, "Properties."
Deposits increased 3.8% from $383.0 million at March 31, 2000 to $397.6 million at March 31, 2001, primarily as a result of interest credited back to accounts offset in part by withdrawals by customers.
Borrowings increased 133.4% from $34.4 million at March 31, 2000 to $80.3 million at March 31, 2001, primarily to fund growth in the loan portfolio. The Company will continue to use borrowings as needed to fund loan growth. The type of borrowings, either short-term or long-term, will be based on the interest rate environment and liquidity considerations.
Total capital decreased 11.2% from $133.5 million at March 31, 2000 to $120.1 million on March 21, 2001, primarily as a result of the repurchase of shares of the Company's common stock.
Comparison of Operating Results for the Years Ended March 31, 2001 and 2000
Net Income. Net income increased from $572,000 for the year ended March 31, 2000 to $5.4 million for the year ended March 31, 2001. Net income for the year ended March 31, 2000 included $5.2 million of charitable contributions made by the Company to the EverTrust Foundation.
The following table sets forth all significant nonrecurring items affecting net income for the periods reported:
Year Ended March 31, ------------------------- 2001 2000 1999 ---- ---- ---- (In thousands)
Net income as reported.................. $5,357 $ 572 $ 1,411 Nonrecurring items (net of tax): Charitable contributions to foundations...................... -- 3,432 1,980 Termination of defined benefit plan... -- (348) -- ------ ------- ------- Net income -- core...................... $5,357 $ 3,656 $ 3,391 ====== ======= =======
Net Interest Income. Net interest income increased $3.6 million from $18.8 million for the year ended March 31, 2000 to $22.4 million for the year ended March 31, 2001. The change is due primarily to higher average balances of interest-earning assets.
Interest income increased $8.1 million from $38.4 million for the year ended March 31, 2000 to $46.5 million for the same period in 2001. During this same period, the average balance of interest-earning assets increased from $494.1 million for the twelve months ended March 30, 2000 to $562.1 million for the year ended March 31, 2001 resulting in increased income of $6.3 million. The yield on interest-earning assets increased from 7.78% for the year ended March 31, 2000 to 8.27% for the same period in 2001 increasing income $1.8 million. Increased average balances are due primarily to the overall growth of the loan portfolio. This growth was funded by a decrease in investment securities and increased borrowings. The increase in yields is due primarily to interest rate increases from period to period and a shift in assets from short-term cash and cash equivalents to higher yielding loans and investment securities
Interest expense increased $4.2 million from $18.8 million for the year ended March 31, 2000 to $23.0 million for the same period in 2001. The average balance of interest-bearing liabilities increased $34.0 million from $400.6 million for the year ended March 31, 2000 to $434.6 million for the same period in 2001. This increase resulted in higher interest expense from period to period of $2.5 million. Interest expense increased an additional $1.5 million due to an increase in the yield on interest-bearing liabilities from 4.70% for the year ended March 31, 2000 to 5.30% for the same period in 2001. The increased yield is due primarily to a change in the composition of interest-bearing liabilities. The average balance of borrowings comprised 13.5% of interest-bearing liabilities for the year ended March 31, 2001 compared to 4.8% for the same period in 2000.
Provision for Loan Losses. During the year ended March 31, 2001, the provision for loan losses was $1.0 million, compared to $810,000 for the same period in 2000, an increase of $195,000. The increase resulted from continued loan portfolio growth in the higher-risk lending categories of commercial and multi-family loans, business loans and credit card loans during the period. Net loan charge-offs for the year ended March 31, 2001 totaled $50,000 compared to $2,000, net of recoveries, for the same period in 2000, primarily the result of net losses in business and credit card loans.
The allowance for loan losses was $7.4 million, or 1.51% of total loans at March 31, 2001, compared to $6.4 million, or 1.53% of total loans at March 31, 2000.
Non-Interest Income. Non-interest income increased $1.3 million from $1.3 million for the year ended March 31, 2000 to $2.6 million for the same period in 2001. The change is due primarily to gains on the sale of mortgage loans. For the year ended March 31, 2000, the Company recognized a loss of $407,000 on loan sales compared to gain of $431,000 for the same period in 2001.
Non-interest Expense. Non-interest expense decreased $2.3 million from $19.7 million for the year ended March 31, 2000 to $17.4 million for the same period in 2000. The decrease was due primarily to a one-time charitable contribution to the EverTrust Foundation of $5.2 million during the year ended March 31, 2000. This was partially offset by the $364,000 write down of an investment made through Mutual Bancshares Capital and higher compensation costs. Salary and employee benefits increased $2.7 million from $6.7 million for the year ended March 31, 2000 to $9.4 million for the year ended March 31, 2001. Compensation expense increased as the result of the recognition of $1.3 million in costs associated with the MRP and increased staffing levels to support the Company's growth. The Company also incurred $396,000 in ESOP expense during the current period. During the same period last year, there were no ESOP costs as the plan was not yet in place. Occupancy and equipment costs decreased approximately $735,000 from $3.4 million for the year ended March 31, 2000 to $2.6 million for same period in 2001. The decrease is primarily the result of large expenditures in 2000 associated with the renovation of many of the Bank's full service offices. This decrease was partially offset by increases in information processing costs of approximately $221,000 from approximately $741,000 for the year ended March 31, 2000 to approximately $962,000 for the year ended March 31,
2001. The increase in information processing costs was primarily the result of expenses associated with the Bank's conversion to a new software platform.
Provision for Income Taxes. Federal income taxes increased from a benefit of $186,000 for the year ended March 31, 2000 to an expense of $2.3 million for the same period in 2001. The change is due to increased taxable earnings.
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
Net Income. Net income decreased 59.4% from $1.4 million for the year ended March 31, 1999 to $572,000 for the year ended March 31, 2000 primarily as a result of a $5.2 million, pre-tax, charitable contribution to the EverTrust Foundation, increased noninterest expenses for salaries and benefits, losses on the sale of mortgage loans and management consulting costs. These costs were not fully offset by increased net interest income.
Net Interest Income. Net interest income increased 21.7% from $16.1 million for the year ended March 31, 1999 to $19.6 million for the same period in 2000 as total interest income increased more than total interest expense.
Total interest income increased 13.3% from $33.9 million for the year ended March 31, 1999 to $38.4 million for the year ended March 31, 2000 primarily as a result of an increase in the average balance of loans receivable, net, investment securities, and cash and cash equivalents. The increases in the average balances more than offset a decline in the average yield. The average balances of loans receivable, net, increased $40.9 million from $334.9 million for the year ended March 31, 1999 to $375.8 million for the same period in 2000 as a result of increased loan originations of multifamily and commercial real estate loans. The average yield on loans declined from 8.62% for the year ended March 31, 1999 to 8.37% for the year ended March 31, 2000 primarily as a result of the origination of adjustable rate mortgages which usually start at a lower rates than fixed rate mortgage loans. The lower yield is also effected by prior year's refinancing activity which lowered rates on many loans which are held in the Bank's portfolio. Interest and dividends earned on investment securities increased from $5.0 million for the year ended March 31, 1999 to $7.0 million for the same period in 2000 as average balances increased from $67.8 million for the year ended March 31, 1999 to $94.7 million for the year ended March 31, 2000 as a result of investing funds received in connection with the sale of the Company's common stock. Increases in the average balances of cash and cash equivalent from $12.9 million for the year ended March 31, 1999 to $19.5 million for the year ended March 31, 2000 were due primarily to higher cash balances maintained during the subscription period prior to the closing of the initial public offering.
Total net interest expense increased 5.6% from $17.8 million for the year ended March 31, 1999 to $18.8 million for the year ended March 31, 2000 as a result of an increase in the average balance of deposits and borrowings. The average balance of total deposits increased $32.0 million from $349.2 million for the year ended March 31, 1999 to $381.2 million for the same period in 2000, however, the weighted average cost of deposits decreased 19 basis points due to shorter maturity periods on the certificate of deposits which in turn lowered their overall cost. Interest expense on FHLB advances and other borrowings increased $170,000 from $1.0 million for the year ended March 31, 1999 to $1.2 million for the year ended March 31, 2000 primarily as a result of increased average balances.
The Company's interest rate spread was 3.20% for the year ended March 31, 1999 and 3.08% for the same period in 2000. The net interest margin increased from 3.83% for the year ended March 31, 1999 to 3.97% for the same period in 2000 as funds received from the public offering were invested in interest-earning assets.
Provision for Loan Losses. Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management as adequate to provide for known and inherent risk in the loan portfolio, based on management's continuing analysis of factors underlying the quality of the loan portfolio. These factors include changes in portfolio size and composition, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loan. See Item 1, "Business -- Lending Activities --
Nonperforming Assets and Delinquencies" and Note 1 to Consolidated Financial Statements in Item 8 of this Form 10-K.
The provision for loan losses was $810,000 for the year ended March 31, 2000 compared to $780,000 for the year ended March 31, 1999. This resulted from management's ongoing consistent application of its formula analysis methodology which measures changes in loan portfolio composition by collateral categories, including loan commitments and classified loans. The formula analysis is supplemented by management's ongoing assessment of overall credit quality of the portfolio, including loan delinquencies and peer group analysis, adjusted for current economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to provide additions to the allowance based on judgement different from that of management. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Bank's control. The allowance for loan losses was $6.5 million, or 1.53% of total loans at March 31, 2000, compared to $5.7 million, or 1.62% of total loans at March 31, 1999.
Non-interest Income. Total non-interest income decreased 31.6% from $1.9 million for the year ended March 31, 1999 to $1.3 million for the year ended March 31, 2000. The decrease resulted primarily from $623,000 in losses incurred on the sale of $33.9 million in one-to-four family mortgage loans.
Non-interest Expense. Total non-interest expense increased 27.1% from $15.5 million for the year ended March 31, 1999 to $19.7 million for the ended March 31, 2000 primarily as a result of $5.2 million of charitable contributions to the EverTrust Foundation, as compared to $3.4 million during fiscal year 1999. Management expects that the $5.2 million contribution will be fully tax deductible for income tax purposes under Internal Revenue Service provisions allowing corporations to carry over to the five succeeding tax years contributions that exceed 10% of taxable income limitation. As a result, a deferred tax asset of $2.5 million relating to current and prior year charitable contributions carry over is included in other assets in the financial statements at March 31, 2000. Also contributing to the increase in non-interest expense were increases in salaries and employee benefits, occupancy and equipment expense, and professional services costs. Salaries and employee benefits increased from $5.4 million for the year ended March 31, 1999 to $6.7 million for the year ended March 31, 2000 as a result of increased staffing levels and general salary increases. Increased staffing levels reflect the Company's continued process of building the infrastructure for future growth. Also during this period, as part of EverTrust's conversion from mutual to stock form, the Company terminated its defined pension plan, which resulted in the reversal of accrued benefit costs of $547,000. This was partially offset by compensation expense of $329,000 related to the new ESOP. The ESOP expense will be ongoing for the next four years and result in additional compensation expense (dependent on the average price of common stock throughout each period) each quarter. Occupancy and equipment expense increased from $3.1 million for the year ended March 31, 1999 to $3.4 million for the same period in 2000 as a result of a company wide computer upgrade resulting in additional costs of $347,000. It is the Company's policy to expense all computer equipment (with the exception of servers) when purchased. Other non-interest expense increased $900,000 from $2.8 million for the year ended March 31, 1999 to $3.7 million for the same period in 2000 primarily as the result of professional services costs incurred related to the Company's upcoming computer conversion which was completed during the third quarter of the fiscal year ending March 31, 2001 and transition from a private to public company.
Provision for Income Taxes. The provision for income taxes decreased from $261,000 for the year ended March 31, 1999 to a tax benefit of $186,000 for the year ended March 31, 2000. The change in the effective tax rate was primarily the result of the effect of tax-exempt interest and federal low income housing tax credits. For the year ended March 31, 1999, tax-exempt interest and federal low income housing tax credits lowered the effective tax rate 770 basis points and 1,290 basis points, respectively. For the year ended March 31, 2000, these same items lowered the effective tax rate 3,030 basis points and 5,600 basis points, respectively.
The deferred portion of the provision for income taxes was ($1.7) million for the year ended March 31, 1999 and ($2.1) million for the year ended March 31, 2000. The change in the deferred portion is primarily attributable to
expenses for bad debts, depreciation, equipment expense and charitable contributions, that were not fully deductible in the current tax year, offset by income deferred into future years comprised primarily of FHLB stock dividends.
Average Balances, Interest and Average Yields/Cost
The earnings of EverTrust Bank depend largely on the spread between the yield on interest-earning assets, which consist primarily of loans and investments, and the cost of interest-bearing liabilities, which consist primarily of deposit accounts and borrowings, as well as the relative size of EverTrust Bank's interest-earning assets and interest-bearing liabilities.
The following table sets forth, on a consolidated basis for the Company for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using the average of daily balances during the period.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to effects on interest income attributable to changes in volume, which are changes in volume multiplied by prior rate; effects on interest income attributable to changes in rate, which are changes in rate multiplied by prior volume; and changes in rate/volume, which are changes in rate multiplied by change in volume.
Year Ended March 31, Year Ended March 31, 2001 Compared to Year 2000 Compared to Year Ended March 31, 2000 Ended March 31, 1999 Increase (Decrease) Increase (Decrease) Due to Due to --------------------------- -------------------------- Rate/ Rate/ Rate Volume Volume Total Rate Volume Volume Total ---- ------ ------ ----- ---- ------ ------ ----- (In thousands)
Interest-earning assets: Loans receivable, net (1)..........$1,217 $7,213 $279 $7,492 $(813) $3,524 $ (99) $2,612 Investment securities....... 236 (186) (8) (194) 5 1,609 2 1,616 Federal Home Loan Bank stock....... (23) 24 (2) 22 (23) 24 (2) (1) Interest-bearing deposits......... 368 (793) (290) (1,083) (28) 356 (15) 313 ------ ------ ---- ------ ----- ------ ----- ------ Total net change in income on interest-earning assets..........$1,798 $6,258 $ (21) 6,237 $(859) $5,513 $(114) 4,540 ====== ====== ==== ------ ===== ====== ===== ------
Interest-bearing liabilities: Savings accounts..$ 14 $ (203)$ (6) (209) $ 1 $ 165 $ 1 167 NOW accounts...... (23) 23 (1) 22 (7) 70 (1) 62 Money market deposit accounts. 303 (616) (33) (649) (127) 522 (12) 383 Certificates of deposit.......... 1,117 861 91 952 (403) 641 (25) 213 ------ ------ ---- ------ ----- ------ ----- ------ Total average deposits....... 1,411 65 51 116 (536) 1,398 (37) 825 Borrowings......... 95 2,400 192 2,592 (26) 201 (5) 170 ------ ------ ---- ------ ----- ------ ----- ------ Total net change in expense on interest-bearing liabilities....$1,506 $2,465 $242 2,708 $(562) $1,599 $ (42) 995 ====== ====== ==== ------ ===== ====== ===== ------ Net change in net interest income... $3,529 $3,545 ====== ====== - ------------ (1) Average loans includes non-performing loans and loans held for sale. Interest income does not include interest on loans 90 days or more past due.
Yields Earned and Rates Paid
The following table sets forth, on a consolidated basis, for the periods and at the date indicated, the weighted average yields earned on the Company's assets and the weighted average interest rates paid on the Company's liabilities, together with the net yield on interest-earning assets.
For the Year Ended March 31, At March 31, --------------------- 2001 2001 2000 1999 ---- ---- ---- ---- Weighted average yield on Loans receivable, net (1)............. 8.10% 8.70% 8.37% 8.62% Investment securities................. 7.98 6.24 5.99 5.99 Federal Home Loan Bank stock.......... 6.23 6.52 7.06 7.68 Cash and cash equivalents............. 1.94 7.04 5.26 5.38 Total interest-earning assets...... 7.91 8.27 7.78 8.08
Weighted average rate paid on: Savings accounts...................... 2.76 2.85 2.77 2.76 NOW accounts.......................... 2.23 2.53 2.60 2.62 Money market deposit accounts......... 4.33 4.46 4.23 4.34 Certificates of deposit............... 6.07 6.02 5.44 5.66 Total average deposits............. 4.90 5.10 4.63 4.82 Federal Home Loan Bank advances ...... 4.83 6.62 6.13 6.30 Total interest-bearing liabilities. 4.92 5.30 4.70 4.88
Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities)......... 3.00 2.96 3.08 3.20
Net interest margin (net interest income (expense) as a percentage of average interest-earning assets)... 3.99 4.17 3.97 3.83 - ---------- (1) Weighted average rate earned on loans does not include earnings from deferred loan fees at March 31, 2001. Earnings from the amortization of loan fees was included in the weighted average rate calculations for the years ended March 31, 2001, 2000 and 1999.
Asset and Liability Management and Market Risk
Risks When Interest Rates Change. The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowings. Net income is further affected by gains and losses on loans held for sale, which can be affected by changes in interest rates. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's profitability is also affected by the level of non-interest income and expenses. Non-interest income includes loan service fees, service charges and fees on accounts and gains on sale of investments and loans. Non-interest expenses primarily include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums and information processing expenses. The Company's results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates, government legislation and regulation and monetary and fiscal policies.
The following table sets forth at March 31, 2001, the estimated percentage change in EverTrust Bank's net interest income over a four-quarter period and market value of portfolio equity based on the indicated changes in interest rates.
Estimated Change in --------------------------------------- Change (In Basis Points ("bp")) Net Interest Income Economic Value of in Interest Rates (1) (next four quarters) Portfolio Equity ------------------------------- -------------------- ----------------
400 bp 4.7% (26.5)% 300 3.2 (21.9) 200 1.5 (16.7) 100 (0.4) (11.2) 0 -- -- (100) 1.2 11.4 (200) 1.2 18.2 (300) (0.4) 20.3 (400) (3.1) 19.6 - ------------- (1) Assumes an instantaneous uniform change in interest rates at all maturities.
The assumptions used by management to evaluate the vulnerability of EverTrust Bank's income and capital to changes in interest rates in the preceding table are described below. Although management believes these assumptions are reasonable, the interest rate sensitivity of EverTrust Bank's assets and liabilities and the estimated effects of changes in interest rates on EverTrust Bank's (and hence the Company's) net interest income and market value of portfolio equity indicated in the preceding table could vary substantially if different assumptions were used or actual experience differs from such assumptions. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturity horizons will also affect the results presented. In addition, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in calculating the table.
The assumptions used by management were based upon proprietary data and are reflective of historical results or current market conditions. These assumptions relate to interest rates, prepayments, and the market value of certain assets under the various interest rate scenarios.
Prepayments for mortgage loans and consumer loans were based on management's evaluation of its current loan portfolio. Prepayments are assumed to increase when market rates decline and decrease as market rates increase. EverTrust Bank's loans are the only assets or liabilities which management assumed possess optionality for the purpose of determining market value changes.
Management assumed the non-maturity deposits could be maintained with rate adjustments not directly proportionate to the change in market interest rate. These assumptions are based upon management's analysis of its customer base, competitive factors and historical review of EverTrust Bank's deposit mix.
The net interest income and net market value table presented above is predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net value is calculated based upon the present value of discounted cash flows. The net interest income table is based upon a cash flow simulation of EverTrust Bank's existing assets and liabilities. It was also assumed that delinquency rates would not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that EverTrust Bank's assets and liabilities would perform as set forth above. Also, changes in market rates in the designated amounts accompanied by a change in the shape of the yield curve would cause changes to the net market value and net interest income other than those indicated above.
How the Company Manages Its Risk of Interest Rate Changes. The Company does not maintain a trading account for any class of financial instrument nor does it purchase high-risk derivative instruments. EverTrust Bank is authorized to engage in limited hedging activities for its saleable loan pipeline, however, no such hedges were in place at March 31, 2001. Furthermore, the Company has no commodity price risk, and only a limited amount of foreign currency exchange rate risk as a result of holding Canadian currency in the normal course of business. For information regarding the sensitivity to interest rate risk of the Company's interest-earning assets and interest-bearing liabilities, see the tables under Item 1, "Business -- Lending Activities -- Loan Maturity and Repricing," "-- Investment Activities" and "-- Deposit Activities and Other Sources of Funds -- Deposit Accounts -- Time Deposits by Maturities."
The Company has sought to reduce the exposure of its earnings to changes in market interest rates by emphasizing the origination of loans with interest rates that adjust periodically with changes in market interest rates. The Company also buys FHLB borrowings with terms that match the terms of its loan portfolio to manage exposure to interest rates. The Company relies on retail deposits as its primary source of funds, supplemented by FHLB borrowings. Other approved funding sources include brokered deposits and repurchase agreements.
The only hedging activity currently authorized by the Board of EverTrust Bank is related to the hedging of loans originated for resale to the secondary market. EverTrust Bank's hedging policy permits the forward sale of loans and investments with a high correlation factor to the asset being hedged. EverTrust Bank does not currently have any open hedges as secondary market loan sale activity has been limited. However, EverTrust Bank may use hedges in the future if loan sale activity accelerates.
Should the Company deem it necessary to engage in additional hedging activities, management would authorize the development of necessary in-house expertise and/or engage qualified outside consultants to implement appropriate Board-approved policies and procedures, which would comply with all relevant regulations.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from principal and interest payments on loans and securities, and FHLB of Seattle advances. While maturities and scheduled amortization of loans and securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The primary investing activity of the Company is the origination of one- to- four family loans and commercial and multi-family mortgage loans. During the years ended March 31, 2000 and 2001, the Company originated $187.3 million and $166.2 million of these loans, respectively.
A secondary, but increasing activity of the Company is the origination of business loans. During the years ended March 31, 2000 and 2001, the Company originated $11.8 million and $33.4 million of these loans, respectively. Other investing activities during these periods include the purchase of investment securities to provide liquidity and yield. These activities were funded primarily by principal repayments on loans and deposits.
In addition, another investing activity of the Company has been the repurchase of stock. For information regarding the Company's repurchase of it outstanding common stock, see "Regulation -- the Company -- Stock Repurchases."
EverTrust Bank must maintain adequate levels of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The sources of funds include deposits and principal and interest payments from loans and investments and FHLB of Seattle advances. During fiscal years 2000 and 2001, EverTrust Bank used these sources of funds primarily to fund loan commitments and to pay maturing savings certificates and deposit withdrawals. At March 31, 2001, EverTrust Bank had loan commitments, excluding loans in process, of $13.8 million.
At March 31, 2001, the Company had $598,000 of unrealized gain on securities classified as available for sale, which amount represented 1.0% of the amortized cost basis, or $62.7 million, of the related securities. Movements in market interest rates will affect the unrealized gains and losses in these securities. However, assuming that the securities are held to their individual dates of maturity, even in periods of increasing market interest rates, as the securities approach their dates of maturity, the unrealized gain or loss will begin to decrease and eventually be eliminated.
At March 31, 2001, certificates of deposit amounted to $213.4 million, or 53.7%, of the Bank's total deposits, including $140.7 million which were scheduled to mature by March 31, 2002. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management of the Bank believes it has adequate resources to fund all loan commitments by deposits and, if necessary, FHLB of Seattle advances and sale of mortgage loans and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting For Derivative Instruments And Hedging Activities. Statement of Financial Accounting Standards No. 133 ("SFAS"), "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have a material impact on its financial position of the Company.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued September 2000 and replaces SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this statement by the Company is not expected to materially affect the results of operations or financial condition of the Company.
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented in Item 8 of this Form 10-K have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
The information contained under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset and Liability Management and Market Risk" of this Form 10-K is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page ----
Independent Auditors Report......................................... 54 Consolidated Statements of Financial Condition as of March 31, 2001 and 2000.......................................... 55 Consolidated Statements of Operations For the Years Ended March 31, 2001, 2000 and 1999.................................... 56 Consolidated Statements of Comprehensive Income For the Years Ended March 31, 2001, 2000 and 1999........................ 58 Consolidated Statements of Equity For the Years Ended March 31, 2001, 2000 and 1999........................ 59 Consolidated Statements of Cash Flows For the Years Ended March 31, 2001, 2000 and 1999.................................... 60
Notes to Consolidated Financial Statements.......................... 62
[Letterhead of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT
Board of Directors EverTrust Financial Group, Inc. Everett, Washington
We have audited the accompanying consolidated statements of financial condition of EverTrust Financial Group, Inc. and subsidiaries (the Company) as of March 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended March 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche
April 27, 2001
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except share amounts) MARCH 31, 2001 AND 2000 - -----------------------------------------------------------------------------
ASSETS 2001 2000 - ------ ---- ---- ASSETS: Cash and cash equivalents, including interest- bearing deposits of $14,993 and $1,790 $ 22,383 $ 7,652 Securities available for sale, amortized cost of $62,701 and $97,710 63,299 95,988 Securities held to maturity, fair value of $8,613 and $12,136 8,362 12,066 Federal Home Loan Bank stock, at cost 4,652 4,288 Loans receivable, net 483,117 416,116 Loans held for sale, fair value of $800 and $-0- 794 Accrued interest receivable 3,847 3,653 Premises and equipment, net 9,542 9,077 Prepaid expenses and other assets 6,407 6,372 ---------- ---------- TOTAL $ 602,403 $ 555,212 ========== ========== LIABILITIES AND EQUITY - ----------------------
LIABILITIES: Deposit accounts $ 397,643 $ 382,986 Federal Home Loan Bank advances and other borrowings 80,344 34,423 Accounts payable and other liabilities 4,270 4,274 ---------- ---------- Total liabilities 482,257 421,683
COMMITMENTS AND CONTINGENCIES
EQUITY: Common stock, no par value - Authorized, 49,000,000 shares; outstanding, 7,258,243 and 8,536,937 shares 68,940 83,978 Employee Stock Ownership Plan (ESOP) debt (1,188) (1,584) Retained earnings 55,033 52,271 Shares held in trust for stock-related compensation plans (3,034) Accumulated other comprehensive income (loss) 395 (1,136) ---------- ---------- Total equity 120,146 133,529 ---------- ---------- TOTAL $ 602,403 $ 555,212 ========== ==========
See notes to consolidated financial statements 55
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share amounts) YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
2001 2000 1999 ---- ---- ----
INTEREST INCOME: Loans receivable $ 40,173 $ 31,464 $ 28,852 Investment securities: Taxable interest income 5,279 5,994 4,204 Tax-exempt interest income 381 402 376 Dividend income 639 574 462 ---------- --------- --------- Total investment securities income 6,299 6,970 5,042 ---------- --------- ---------
Total interest income 46,472 38,434 33,894
INTEREST EXPENSE: Deposit accounts 19,169 17,641 16,816 Federal Home Loan Bank advances and other borrowings 3,879 1,191 1,021 ---------- --------- --------- Total interest expense 23,048 18,832 17,837 ---------- --------- --------- Net interest income before provision of loan losses 23,424 19,602 16,057
PROVISION FOR LOAN LOSSES 1,005 810 780 ---------- --------- ---------
Net interest income after provision for loan losses 22,419 18,792 15,277
NONINTEREST INCOME: Loan service fees 742 636 781 Gain (loss) on sale of securities and loans 431 (407) 313 Other, net 1,459 1,061 833 ---------- --------- ---------
Total noninterest income 2,632 1,290 1,927
NONINTEREST EXPENSES: Salaries and employee benefits 9,391 6,666 5,442 Occupancy and equipment 2,618 3,353 3,134 Charitable contributions 5,201 3,426 Information processing costs 962 741 777 Other, net 4,432 3,735 2,753 ---------- --------- --------- Total noninterest expenses 17,403 19,696 15,532 ---------- --------- ---------
BALANCE, earnings before federal income taxes, carried forward 7,648 386 1,672
See notes to consolidated financial statements 56
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share amounts) (continued) YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
2001 2000 1999 ---- ---- ----
BALANCE, earnings before federal income taxes, brought forward $ 7,648 $ 386 $ 1,672
FEDERAL INCOME TAXES: Current 2,502 1,914 1,944 Deferred (211) (2,100) (1,683) ---------- --------- --------- Total federal income taxes 2,291 (186) 261 ---------- --------- --------- NET INCOME $ 5,357 $ 572 $ 1,411 ========== ========= =========
NET INCOME PER COMMON SHARE - BASIC $ 0.70 nm (1) n/a ==========
NET INCOME PER COMMON SHARE - DILUTED $ 0.70 nm (1) n/a ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,614,167 nm (1) n/a ==========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 7,666,870 nm (1) n/a ==========
(1) Earnings-per-share calculations are not meaningful as the Company converted from a mutual to a public company on September 30, 1999.
See notes to consolidated financial statements 57
EVERTRUST FINANCIAL GROUP, Inc. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
2001 2000 1999 ---- ---- ----
NET INCOME $ 5,357 $ 572 $ 1,411
OTHER COMPREHENSIVE INCOME (LOSS), net of income taxes Gross unrealized gain (loss) on securities: Unrealized holding gain (loss) during the period, net of deferred income tax expense (benefit) of $809, $(571), and $(54) 1,556 (1,108) (104) Less adjustment of gains included in net income, net of income tax benefit of $(13), $(74), and $(72) (25) (144) (140) ------- ------- ------- Other comprehensive income (loss) 1,531 (1,252) (244) ------- ------- ------- COMPREHENSIVE INCOME (LOSS) $ 6,888 $ (680) $ 1,167 ======= ======= =======
See notes to consolidated financial statements. 58
See notes to consolidated financial statements.
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
2001 2000 1999 ---- ---- ----
OPERATING ACTIVITIES: Net income $ 5,357 $ 572 $ 1,411 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization of premises and equipment 1,116 963 1,474 Dividends on Federal Home Loan Bank stock and accretion of investment security discounts (505) (450) (457) Gain on sale of premises and equipment and real estate owned (16) (7) Loss on permanent impairment of investment security 214 Amortization of investment security premiums 172 301 244 Loss on limited partnership 108 107 125 Provision for losses on loans 1,005 810 780 Amortization of deferred loan fees and costs (1,290) (1,412) (1,184) Loan fees deferred 1,672 1,666 1,145 Proceeds from sale of loans 24,501 33,895 3,958 Loans originated for sale (24,529) (9,142) (34,485) Deferred taxes (211) (2,100) (1,683) Stock contributed to charitable foundation 3,900 Amortization of compensation related to MRP 1,301 Cash provided (used) by changes in operating assets and liabilities: Accrued interest receivable (194) (476) (147) Prepaid expenses and other assets 580 (528) (283) Accounts payable and other liabilities (4) (707) 1,255 --------- --------- --------- Net cash provided (used) by operating activities 9,293 27,383 (27,854)
INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 34,477 67,876 19,952 Proceeds from maturities of securities held to maturity 3,723 1,843 7,106 Proceeds from sale of securities available for sale 11,184 2,502 3,561 Purchases of securities available for sale (10,841) (106,882) (46,647) Purchases of securities held to maturity (157) Purchases of Federal Home Loan Bank stock (75) (4) (44) Loan principal payments 123,545 92,780 113,624 Loans originated or acquired (192,784) (189,745) (103,275) Proceeds from sales of reacquired assets and real estate owned 130 Investment in real estate owned (9) Investment in limited partnership (277) (809) Net additions to premises and equipment (2,520) (1,132) (664) --------- --------- --------- Net cash used by investing activities (33,568) (133,571) (6,423) --------- --------- --------- BALANCE, carried forward (24,275) (106,188) (34,277)
See notes to consolidated financial statements 60
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (continued) YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
2001 2000 1999 ---- ---- ----
BALANCE, brought forward $ (24,275) $(106,188) $ (34,277)
FINANCING ACTIVITIES: Net increase in deposit accounts 14,657 7,090 24,925 Proceeds from the sale of common stock 84,245 Repurchase shares of common stock (19,373) (4,167) Dividends paid on common stock (2,595) (448) Loan to ESOP (1,980) Repayment of loan to ESOP 396 396 Proceeds from other borrowings 22,502 6,500 Repayment of other borrowings (12,950) (1,500) Proceeds from Federal Home Loan Bank advances 173,107 50,708 16,000 Repayments of Federal Home Loan Bank advances (136,738) (40,234) (12,554) --------- --------- ---------
Net cash provided by financing activities 39,006 100,610 28,371 --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,731 (5,578) (5,906)
CASH AND CASH EQUIVALENTS: Beginning of year 7,652 13,230 19,136 --------- --------- --------- End of year $ 22,383 $ 7,652 $ 13,230 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest on deposits $ 19,027 $ 17,618 $ 16,807 Federal income taxes 2,690 1,200 2,337 Interest on borrowings 3,699 1,200 1,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Real estate acquired through foreclosure $ 85 $ -- $ 117
See notes to consolidated financial statements 61
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2001, 2000, AND 1999 - -----------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of presentation: The consolidated financial statements include EverTrust Financial Group, Inc. and subsidiaries (the Company), Mutual Bancshares Capital (MB Cap), I-Pro Inc. (I-Pro), EverTrust Bank (the Bank), formerly known as Everett Mutual Bank (EMB), and the Bank's wholly owned subsidiary, Sound Financial, Inc. On September 1, 1996 (inception), Commercial Bank of Everett (CBE) was formed as a wholly owned subsidiary of the Company. Effective February 1, 2001, CBE merged into EverTrust Bank. All significant intercompany transactions and balances have been eliminated.
Holding company formation: In September 1993, Mutual Bancshares, a bank holding company, was formed as the parent company for the Bank and subsidiaries. The Company is subject to regulation by the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC). On April 2, 1997, I-Pro was formed as a wholly owned subsidiary of the Company. On October 29, 1998, MB Cap was formed as a wholly owned subsidiary of the Company. The Company changed its name to EverTrust Financial Group, Inc. in its conversion from mutual to stock form.
Evertrust Financial Group, Inc.'s conversion from a Washington-chartered mutual holding company to a Washington-chartered capital stock holding company was approved at a special meeting of members held on September 28, 1999. On September 30, 1999, the initial public offering of the Company's stock was completed with the sale of 8,596,250 shares and the issuance of 390,000 shares to EverTrust Foundation. The stock began trading on the NASDAQ stock market under the trading symbol of EVRT on October 4, 1999.
Nature of business: Through its bank subsidiary, EverTrust Bank, the Company is primarily engaged in attracting deposits from the general public through its 12 offices in Snohomish County and one office in King County and using those funds, together with borrowings, to originate loans secured by real estate and to purchase investment securities. The Company sells nonproprietary mutual funds and annuities through Sound Financial, Inc., a subsidiary of EverTrust Bank. The Company also is engaged in providing loans to customers, who are predominately local businesses and individuals, through its commercial banking group office in Everett. Through its subsidiary, I-Pro, the Company is engaged in providing item processing and statement rendering services. Through its subsidiary, MB Cap, the Company provides equity to high technology businesses in the seed, start-up, and early stage of development.
Cash and cash equivalents: For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and in banks, overnight investments, and highly liquid debt instruments with maturities at the time of purchase of three months or less. For those short-term investments, the carrying value is a reasonable estimate of fair value.
FRB regulations require depository institutions to maintain certain minimum reserve balances. Included in cash were balances required to be maintained under Federal Reserve Bank of San Francisco reserve calculations of $1,040,000 and $956,000 at March 31, 2001 and 2000, respectively.
Investment securities:
Securities available for sale: Securities available for sale are carried at fair value. Unrealized holding gains and losses are excluded from earnings and reported net of tax in other comprehensive income. Gains and losses on the sale of investment securities are computed under the specific identification method.
Securities held to maturity: Securities held to maturity are stated at cost and are adjusted for amortization of premiums and accretion of discounts using the level yield method. Securities held to maturity are designated as such at the date of purchase based on management's positive intent and ability to hold such investments to maturity. Unrealized losses resulting from market valuation differences deemed other than temporary are included in earnings.
Loans: Loans held for investment are reported at the principal amount outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over the loan term using a method that generally produces a level yield on the unpaid loan balance. Interest is accrued primarily on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest, or such loans have become contractually past due 90 days with respect to principal or interest.
When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current period interest income. All subsequent payments received are first applied to unpaid principal and then to unpaid interest. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loans are considered to be fully collectible. However, Company policy also allows management to continue the recognition of interest income on certain loans designated as nonaccrual. This policy applies only to loans that are well secured and in management's judgment are considered to be fully collectible. Although the accrual of interest income is suspended, any payments received may be applied to the loan according to its contractual terms and interest income recognized when cash is received.
Loans held for sale: Loans originated and held for sale are carried at the lower of cost or market value on an aggregate basis. Nonrefundable fees and direct loan origination costs related to loans held for sale are deferred and recognized when the loans are sold.
Reserve for loan losses: The Company maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of chargeoffs, net of recoveries.
The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowance, and the unallocated allowance. A loan is considered impaired when, based on current information, management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest and net deferred loan fees or costs) and the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. The amount by which the recorded investment in the loan exceeds either the present value of expected future cash flows or the value of the impaired loan's collateral, when applicable, would be a
specifically allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off.
The formula allowance is calculated by applying a loss percentage factor to the various loan pool types based on past due ratios, historical loss experience, the regulatory and internal credit grading and classification system, and general economic, business, and regulatory conditions which could affect the collectibility of the portfolio. These factors may be adjusted for events that are significant in management's judgment, as of the evaluation date. The Company derives the loss percentage factors for problem graded loans using regulatory guidelines, and, for pass graded loans, by using estimated credit losses over the upcoming 12 months based on the annual rate of chargeoffs experienced over the previous three years on similar loans, adjusted for current conditions and trends.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred.
The unallocated allowance comprises two components. The first component recognizes the estimation risk associated with the formula and specific allowances. The second component is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions evaluated in connection with the unallocated allowance may include loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, governmental regulatory actions, recent loss experience in particular segments of the portfolio, and the duration of the current business cycle.
Mortgage servicing rights: Originated servicing rights, reported within prepaid expenses and other assets, are recorded when mortgage loans are originated and subsequently sold or securitized (and held as available-for-sale securities) with the servicing rights retained. The total costs of the mortgage loans are allocated between servicing rights and the loans (without the servicing rights) based on their relative fair values. The cost relating to the mortgage servicing rights is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. Amounts capitalized are recorded at cost, net of accumulated amortization and valuation allowance.
In order to determine the fair market value of servicing rights, the Bank uses a valuation model that evaluates the estimated discounted future cash flows of the servicing rights. Assumptions used in the valuation model include the cost of servicing the loan, discount rate, and anticipated prepayment speeds.
The Bank assesses impairment of the capitalized mortgage servicing rights based on recalculation of the current market price of servicing rights discounted for changes in actual prepayment speeds of the loans. Impairment is assessed on a pool-by-pool basis with any impairment recognized through a valuation allowance for the combined pools. The pools are combined as they all have similar interest rates, terms, and risk characteristics.
Real estate owned: Real estate owned (REO), reported within prepaid expenses and other assets, includes properties acquired through foreclosure that are transferred to REO. These properties are initially recorded at the lower of cost or fair value. Write-downs that result from the ongoing periodic valuation of the foreclosed properties are charged to other expenses in the period in which they are identified. Gains or losses at the time the property is sold are charged or credited to other income in the period in which they are realized. The amounts the Company will ultimately recover from real estate owned may differ substantially from the carrying value of the assets because of future market factors beyond the control of the Company or because of changes in the Company's strategy for recovering its investments.
Real estate held for investment: Real estate held for investment, reported within prepaid expenses and other assets, represents the Company's investment in two real estate partnerships of which the principal activity is the development of low income housing. The Company's investment has been recorded using the equity method of accounting. The Company earns low-income housing tax credits on these real estate partnerships which reduce the Company's federal income tax provision and liability.
Premises and equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The depreciation and amortization are computed on the straight-line method. Estimated useful lives are as follows:
Buildings and improvements Up to 27.5 years Furniture, fixtures, and automobiles 3 - 15 years
The Company capitalizes expenditures for betterments and major renewals, and charges ordinary maintenance and repairs to operations as incurred.
The Company periodically reviews buildings and improvements for impairment. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
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 change in the deferred tax liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company reports income and expenses using the accrual method of accounting and files a consolidated tax return that includes all of its subsidiaries.
Earnings per share: Earnings per share (EPS) is computed using the weighted average number of common and diluted shares outstanding during the period. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only reconciling items affecting the calculation of EPS are the inclusion of stock options and restricted stock awards, which increase the shares outstanding in diluted EPS by 52,702 for the year ended March 31, 2001.
Employee Stock Ownership Plan: The Company sponsors a leveraged Employee Stock Ownership Plan (ESOP). As shares are released from collateral, compensation expense is recorded equal to the then current market price of the shares, and the shares become outstanding for purposes of earnings- per-share calculations. Stock and cash dividends on allocated shares are recorded as a reduction of retained earnings and paid directly to plan participants or distributed directly to participants' accounts. Cash dividends on unallocated shares are recorded as a reduction of debt and accrued interest.
Use of estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements. The Company uses significant estimates in determining reported reserves and allowances for loan losses, tax liabilities, and other contingencies.
Recently issued accounting standards adopted in these financial statements: On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The Company adopted the guidance in SAB No. 101 effective December 31, 2000. The adoption of SAB No. 101 did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows.
Recently issued accounting standards not yet adopted: Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS No. 133 did not have a material impact on its financial position as the Company did not have any derivative instruments as of March 31, 2000.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued September 2000 and replaces SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this statement by the Company is not expected to materially affect the results of operations or financial condition of the Company.
Reclassifications: Certain reclassifications have been made in the 2000 and 1999 consolidated financial statements to conform with the classifications used in 2001.
NOTE 2: SECURITIES AVAILABLE FOR SALE
Securities available for sale classified by type and contractual maturity date consisted of the following at March 31 (in thousands):
Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---- ----- ------ ---------- 2001: Debt securities: U.S. government agency securities due: Within one year $ 2,498 $ 25 $ -- $ 2,523 After one year through five years 2,487 114 2,601 ------- ------ ------- 4,985 139 5,124 Municipal obligations due: Within one year 794 794 After one year through five years 2,501 24 2,525 After 10 years 1,941 1,941 ------- ------ ------- 5,236 24 5,260
Obligations of corpor- ations due: Within one year 9,540 26 (12) 9,554 After one year through five years 10,632 124 (4) 10,752 After 10 years 500 (5) 495 ------- ------ ------- ------- 20,672 150 (21) 20,801
Mortgage-backed securities due: After one year through five years 8,537 165 8,702 After five years through 10 years 8,781 229 9,010 After 10 years 7,645 150 7,795 ------- ------ ------- 24,963 544 25,507 Certificates of deposit due: Within one year 195 5 200
Equity securities: Mutual funds 2,874 2,874 Other stock 3,776 17 (260) 3,533 ------- ------ ------- ------- 6,650 17 (260) 6,407 ------- ------ ------- ------- $62,701 $ 879 $ (281) $63,299 ======= ====== ======= =======
Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---- ----- ------ ---------- 2000: Debt securities: U.S. government agency securities due: Within one year $ 5,749 $ $ (29) $ 5,720 After one year through five years 6,449 1 (51) 6,399 ------- ------- ------- ------- 12,198 1 (80) 12,119 Municipal obligations due: Within one year 165 165 After one year through five years 3,344 (93) 3,251 After five years through 10 years 431 (23) 408 After 10 years 1,721 (8) 1,713 ------- ------- ------- 5,661 (124) 5,537 Obligations of corpor- ations due: Within one year 19,587 (165) 19,422 After one year through five years 21,772 4 (548) 21,228 ------- ------- ------- ------- 41,359 4 (713) 40,650 Mortgage-backed securities due: After one year through five years 10,749 (181) 10,568 After five years through 10 years 7,541 (136) 7,405 After 10 years 7,794 7 (98) 7,703 ------- ------- ------- ------- 26,084 7 (415) 25,676
Certificates of deposit due: After one year through five years 185 185
Equity securities: Mutual funds 6,653 6,653 Other stock 5,570 49 (451) 5,168 ------- ------- ------- ------- 12,223 49 (451) 11,821 ------- ------- ------- ------- $97,710 $ 61 $(1,783) $95,988 ======= ======= ======= =======
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.
Gross realized gains on the sale of securities available for sale were $252,801, $220,639, and $322,535 for the years ended March 31, 2001, 2000, and 1999, respectively. Gross realized losses on the sale of securities available for sale were $214,375 and $2,796, and $7,282 for the years ended March 31, 2001, 2000, and 1999, respectively.
The expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties.
NOTE 3: SECURITIES HELD TO MATURITY
Securities held to maturity classified by type and contractual maturity date consisted of the following at March 31 (in thousands):
Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---- ----- ------ ---------- 2001: Debt securities: U.S. government agency securities due: Within one year $ 1,503 $ 23 $ -- $ 1,526 After one year through five years 1,004 81 1,085 ------- ------- ------- 2,507 104 2,611 Municipal obligations due: Within one year 546 5 551 After one year through five years 1,447 44 1,491 After five years through 10 years 650 7 657 After 10 years 991 19 1,010 ------- ------- ------- 3,634 75 3,709
Obligations of corpor- ations due: Within one year 500 11 511 After one year through five years 492 21 513 ------- ------- ------- 992 32 1,024
Mortgage-backed securities due: Within one year 1 1 After 10 years 1,228 40 1,268 ------- ------- ------- 1,229 40 1,269 ------- ------- ------- ------- $ 8,362 $ 251 $ -- $ 8,613 ======= ======= ======= =======
Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---- ----- ------ ---------- 2000: Debt securities: U.S. government agency securities due: After one year through five years $ 2,514 $ 24 $ -- $ 2,538
Municipal obligations due: Within one year 465 465 After one year through five years 2,094 2 (9) 2,087 After five years through 10 years 650 (1) 649 After 10 years 2,787 15 2,802 ------- ------- ------- ------- 5,996 17 (10) 6,003
Obligations of corpor- ations due: Within one year 500 500 After one year through five years 986 19 1,005 ------- ------- ------- 1,486 19 1,505
Mortgage-backed securities due: After one year through five years 3 3 After 10 years 1,586 20 1,606 ------- ------- ------- 1,589 20 1,609
Certificates of deposit due: Within one year 481 481 ------- ------- ------- ------- $12,066 $ 80 $ (10) $12,136 ======= ======= ======= =======
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.
Investment securities with a par value of $2,705,000 and $2,350,000 and a market value of $2,765,400 and $2,353,154 were pledged to secure public deposits at March 31, 2001 and 2000, respectively.
The expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties.
NOTE 4: LOANS RECEIVABLE
Loans receivable consisted of the following at March 31 (in thousands):
2001 2000 ---- ---- Real estate: One to four family residential $ 66,911 $ 70,042 One to four family construction and land development 40,729 37,266 Income property: Commercial construction 25,475 23,871 Commercial real estate 168,199 128,892 Multifamily construction 62,055 32,304 Multifamily residential 128,846 136,727 Consumer: Home equity and second mortgages 25,756 23,301 Credit cards 2,426 1,375 Other installment loans 6,219 5,281 Business loans 31,707 16,494 -------- -------- 558,323 475,553
Less: Undisbursed loan proceeds (63,888) (49,460) Deferred loan fees and other (3,879) (3,493) Reserve for loan losses (7,439) (6,484) -------- -------- (75,206) (59,437) -------- -------- Loans receivable, net $483,117 $416,116 ======== ======== Loans held for sale $ 794 $ -- ======== ========
The Bank originates commercial, real estate mortgage, construction and land development, and installment loans primarily in Snohomish and King counties, and to a lesser extent, in Skagit, Island, Jefferson, Clallam, Kitsap, Whatcom, and Pierce counties. Although the Bank has a geographically diversified loan portfolio, economic conditions in the market area may affect borrowers' ability to meet the stated repayment terms. Collateral for each loan is based on a credit evaluation of the customer, and such collateral may, depending on the loan, include accounts receivable, inventory, equipment, real estate, or other collateral.
The Bank originates both adjustable and fixed interest rate loans. At March 31, 2001, the composition of the loan portfolio was as follows (in thousands):
Fixed Adjustable Term to maturity or rate adjustment rate rate Total ----------------------------------- ---- ---- -----
Due within one year $ 8,164 $257,979 $266,143 After one year through three years 29,246 50,226 79,472 After three years through five years 16,872 40,705 57,577 After five years through 15 years 64,398 11,145 75,645 After 15 years 15,597 102 15,597 -------- -------- -------- $134,277 $360,157 $494,434 ======== ======== ========
The adjustable rate loans have various interest rate adjustment limitations and are generally indexed to U.S. Treasury rates. Future market factors may affect the correlation of the interest rate adjustment with the rate the Bank pays on the short-term deposits and Federal Home Loan Bank of Seattle (FHLB) advances that have been primarily utilized to fund these loans.
Outstanding commitments to borrowers for loans totaled $13,752,900 and $9,631,100 at March 31, 2001 and 2000, respectively.
The Bank serviced loans for others totaling $104,543,253 and $95,349,775 as of March 31, 2001 and 2000, respectively.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses was as follows for the years ended March 31 (in thousands):
2001 2000 1999 ---- ---- ----
Balance, beginning of year $ 6,484 $ 5,672 $ 4,897 Provision for loan losses 1,005 810 780 Loans charged off, net of recoveries of $20, $18, and $-0- (50) 2 (5) ------- ------- ------- Balance, end of year $ 7,439 $ 6,484 $ 5,672 ======= ======= =======
The average balance of impaired loans during 2001, 2000, and 1999 was $2,926,000, $2,954,000, and $3,137,000, respectively, and the Company recognized $421,000, $251,000, and $283,000 of related interest income during 2001, 2000, and 1999, respectively. Interest income is normally recognized on the accrual basis; however, if the impaired loan is nonperforming, interest income is recorded on the receipt of cash.
Impaired loans consist of the following at March 31 (in thousands):
2001 2000 ---- ----
Loans with allocated reserves of $-0- and $175 $ $ 2,590 Loans without allocated reserves 1,300 407 ------- ------- $ 1,300 $ 2,997 ======= ======= Loans on nonaccrual status $ 1,300 $ 315 Loans under foreclosure 92 Performing loans judged to be impaired 2,590 ------- ------- $ 1,300 $ 2,997 ======= =======
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31 (in thousands):
2001 2000 ---- ----
Land $ 1,491 $ 1,491 Buildings (including leasehold improvements) 7,366 7,025 Furniture, fixtures, and automobiles 8,398 7,432 ------- ------- 17,255 15,948 Less accumulated depreciation and amortization (7,713) (6,871) ------- ------- $ 9,542 $ 9,077 ======= =======
The Company has noncancellable operating leases for office facilities, branches, and equipment. Future inimum rental commitments for all noncancellable leases are as follows (in thousands):
2002 $ 989 2003 968 2004 930 2005 827 2006 816 Thereafter 5,179 ------ $9,709 ======
Rent expense for the years ended March 31, 2001, 2000, and 1999, totaled $842,000, $794,000, and $710,000, respectively.
NOTE 7: DEPOSIT ACCOUNTS
Deposit accounts, with respective interest rate ranges, consisted of the following at March 31 (in thousands):
2001 2000 ------------------------ ----------------------- Weighted Weighted average average rate Amount % rate Amount % ---- ------ ---- ---- ------ ----
Noninterest-bearing accounts --% $ 8,462 2.1 % --% $ 7,902 2.1% Savings accounts 2.8 10,867 2.7 2.8 10,523 2.7 Checking accounts 2.2 37,942 9.5 2.6 36,712 9.6 Money market accounts 4.3 127,010 31.9 4.3 129,522 33.8 Time deposits by original term: One to 11 months 5.7 36,041 9.1 5.4 32,200 8.4 12 to 23 months 6.2 83,641 21.1 5.5 77,273 20.2 24 to 35 months 5.9 23,601 5.9 5.5 22,827 6.0 36 to 59 months 5.9 17,500 4.4 5.7 17,899 4.7 60 to 84 months 6.3 52,579 13.3 6.1 48,128 12.5 -------- ----- -------- ----- 6.1 213,362 53.8 5.6 198,327 51.8 -------- ----- -------- ----- 4.9% $397,643 100.0% 4.7% $382,986 100.0% === ======== ===== === ======== =====
Time deposits are scheduled to mature as follows (in thousands):
Year ending March 31, --------------------- 2002 $140,734 2003 26,500 2004 13,695 2005 16,328 2006 6,633 Thereafter 9,472 -------- $213,362 ========
Included in deposits are time deposits greater than or equal to $100,000 of $60,652,000 and $46,747,000 at March 31, 2001 and 2000, respectively. Interest on time deposits greater than or equal to $100,000 totaled $2,576,000, $2,439,000, and $2,157,000 for the years ended March 31, 2001, 2000, and 1999, respectively.
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Scheduled maturities of advances from the FHLB and other borrowings were as follows at March 31 (in thousands):
2001 2000 --------------------- --------------------- Interest rate Interest rate Amount ranges Amount ranges ------ ------ ------ ------ Nonamortizing: Due within 1 year $35,002 4.57 - 7.05% $20,028 5.98 - 6.51% After 1 year through 2 years 10,000 4.67 - 6.92 1,000 6.03 After 2 years through 3 years 5,650 5.00 - 7.26 3,000 6.31 After 3 years through 5 years 11,650 5.03 - 7.27 3,600 5.39 - 6.40 After 5 years through 10 years 13,000 5.46 - 7.39 4,600 5.48 - 6.69 After 10 years 4,300 6.14 - 6.93 1,400 6.70 - 6.93 Amortizing: After 10 years 742 8.19 795 8.19 ------- ------- $80,344 $34,423 ======= =======
Advances and other borrowings are collateralized by securities and mortgage pool securities of the U.S. government and agencies thereof.
At March 31, 2001 and 2000, the Bank had available unsecured lines of credit with commercial banks totaling $25,000,000 and $10,550,000, respectively, and a revolving line of credit with the FHLB of up to 35% and 20%, respectively, of total assets. There were no advances outstanding as of March 31, 2001 on the lines of credit with the commercial banks.
At March 31, 2001, the Bank had outstanding a repurchase agreement, reported within Federal Home Loan Bank advances and other borrowings, with a securities dealer in the amount of $13,052,000, maturing April 2001. At March 31, 2000, the Bank had outstanding a repurchase agreement with a securities dealer in the amount of $5,000,000, maturing April 2000.
NOTE 9: FEDERAL TAXES ON INCOME
Under prior law, the Bank qualified under a provision of the Internal Revenue Code to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deduction or based on the experience method. The experience method provided financial institutions the ability to add to the reserve for losses on loans the greater of two computational alternates: (1) the base-year amount, or (2) the six-year moving average amount.
In August 1996, the President of the United States signed the Small Business Job Protection Act of 1996 (the Act). Under the Act, the percentage taxable income method of accounting for tax-basis bad debts is no longer available effective for the years ended after December 31, 1995. As a result, the Bank is required to use the experience method of accounting for tax-basis bad debts for 1997 and later years. In addition, the Bank is also required to recapture its post-1987 additions to its bad debt reserves made pursuant to the percentage taxable income method. As of March 31, 1996, these additions were $3,766,000 which, pursuant to the Act, are being included in taxable income ratably over a six-taxable-year period beginning with the year ended March 31, 1997. The recapture of the post-1987 additions to tax-basis bad debt reserves does not result in a charge to earnings as these amounts are included in the deferred tax liability at March 31, 1997.
Retained earnings at March 31, 2001, 2000, and 1999, includes approximately $3,691,000 in tax-basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax-basis bad debt reserve is used for purposes other than to absorb bad debts or if legislation is enacted requiring recapture of all tax-basis bad debt reserves, the Bank will incur a federal tax liability at the then prevailing corporate tax rate.
A reconciliation of the statutory federal income tax to the effective income tax follows:
2001 2000 1999 ---- ---- ----
Income tax expense at statutory rate $ 2,600 $ 131 $ 568 Income tax effect of: Tax-exempt interest (103) (117) (128) Low income housing tax credit (216) (216) (216) Other, net 10 16 37 ------- ------- ------- Income tax expense (benefit) at effective rate $ 2,291 $ (186) $ 261 ======= ======= =======
The net deferred tax asset (liability), reported within prepaid expenses and other assets, consists of the following at March 31 (in thousands):
2001 2000 ---- ---- Deferred tax liabilities: Loan origination fees and costs $ (41) $ (43) Prepaid expenses (103) (81) FHLB dividends (576) (477) Other, net (169) (149) Unrealized gain on securities (203) (1,092) (750)
Deferred tax assets: Deferred compensation 448 456 Bad debt deduction 2,355 1,809 Accrued vacation 84 75 Depreciation 413 313 Charitable contribution 2,171 2,468 Unrealized loss on securities 645 5,471 5,766 ------- ------- $ 4,379 $ 5,016 ======= =======
NOTE 10: EMPLOYEE BENEFIT PLANS
401(k) plan: The Company maintains a 401(k) plan. All employees of the Company are eligible to participate in the 401(k) plan once certain service and age requirements are achieved. Employees may contribute up to 15% of their salary to the plan. The Company matches 100% of the first 2% and 50% of the next 4% of the employees' contributions. Participants will vest in the employer-matched 401(k) contributions at the rate of 20% per year, beginning upon the completion of two years of service. The
Company's cost for the 401(k) plan was $152,771, $122,674, and $94,010 for 2001, 2000, and 1999, respectively.
Defined benefit plan: With the establishment of the ESOP, the Company's noncontributory defined benefit plan was terminated effective December 31, 1999. As a result of terminating the Company's noncontributory defined benefit plan, the unused portion of the pension liability was reversed against compensation expense resulting in a curtailment gain of $547,000. Prior to termination on December 31, 1999, the Company's funding policy was to contribute amounts to its pension plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The actuarial cost method used to compute the pension contribution is the projected unit cost method. Information presented below reflects a measurement date of December 31, 2000, 1999, and 1998.
Weighted average assumptions used in accounting for the defined benefit pension plan were as follows for the years ended December 31:
2000 1999 1998 ---- ---- ----
Assumed discount rate 8.0% 6.9% 6.9%
Rate of compensation increase N/A 6.0 6.0
Expected return on assets 8.0 8.0 8.0
Changes in the benefit obligation were as follows for the years ended December 31 (in thousands):
2000 1999 1998 ---- ---- ----
Benefit obligation, beginning of year $1,493 $1,869 $1,448 Actuarial loss 51 43 258 Interest cost 129 125 107 Service cost 146 105 Benefits paid (15) (133) (39) Expenses (8) (10) (10) Curtailment gain (547) ------ ------ ------ Benefit obligation, end of year $1,650 $1,493 $1,869 ====== ====== ====== Changes in defined benefit pension plan assets were as follows for the years ended December 31 (in thousands):
2000 1999 1998 ---- ---- ----
Fair value of assets, beginning of year $1,615 $1,555 $1,538 Actual return on assets 58 165 66 Benefits paid (15) (133) (39) Expenses (8) (10) (10) Contribution 38 ------ ------ ------ Fair value of assets, end of year $1,650 $1,615 $1,555 ====== ====== ======
Reconciliations of funded status were as follows as of December 31 (in thousands):
2000 1999 1998 ---- ---- ----
Funded status $ -- $ (425) $ (314) Unrecognized net loss (122) (122) Curtailment gain recognized 547 ------ ------ ------ Accrued benefit cost $ -- $ -- $ (436) ====== ====== ======
Net periodic expense for the defined benefit pension plan was as follows for the years ended December 31 (in thousands):
2000 1999 1998 ---- ---- ----
Interest cost $ 129 $ 125 $ 107 Service cost 146 105 Expected return on assets (129) (122) (121) Amortization of gains or losses (41) ------ ------ ------ Net periodic expense $ -- $ 149 $ 50 ====== ====== ======
Subsequent to March 31, 2001, the Company's noncontributory defined benefit plan was settled.
Employee Stock Ownership Plan: On April 1, 1999, an ESOP was established and became effective. In 1999, the Company established an ESOP to provide benefits to all employees who have been credited with at least 1,000 hours of service during the year and who have attained age 18. Participants will vest in their accrued benefits under the ESOP at the rate of 20% per year, beginning upon the completion of two years of service. The plan is noncontributory on the part of the participants. The benefits are distributable upon a participant's normal retirement, early retirement, death, disability, or termination of employment. The Company loaned the ESOP's trustee $1,979,786 for purchase of the Company's common stock in the open market. Shares of stock are allocated to employees as the loan is repaid. The outstanding loan balance was $1,187,872 and $1,583,829 at March 31, 2001 and 2000, respectively.
Shares held by the ESOP at March 31, 2001, were as follows:
Average Number Price range price of shares per share per share --------- --------- ---------
Allocated: Vested 59,299 $ -- $ -- Nonvested 14,158 -------- 73,457 Nonallocated 105,959 10.88 - 11.06 11.02 -------- 179,416 ========
Shares held by the ESOP at March 31, 2000, were as follows: Average Number Price range price of shares per share per share --------- --------- ---------
Allocated: Vested 24,640 $ -- $ -- Nonvested 8,804 -------- 33,444 Nonallocated 146,281 10.88 11.06 11.02 -------- 179,725 ========
Shares held by the ESOP decreased by 309 as a result of employment terminations. Contributions to the ESOP, recorded as compensation expense for the years ended March 31, 2001 and 2000, were $429,228 and $328,000 respectively.
Deferred Compensation Plan: The Company also maintains a nonqualified deferred compensation plan for certain key management personnel, for which the cost is accrued but unfunded. Participants may elect to defer all or a specific portion of their compensation. The Company does not provide a matching contribution on amounts deferred. However, the Company does provide interest quarterly on amounts contributed by participants. At March 31, 2001 and 2000, the liability for accumulated deferred compensation was $1,316,000 and $1,340,000, respectively, and is included in the consolidated statements of financial condition. Annual expense for the Company related to this plan totaled $82,000, $120,000, and $148,000 in 2001, 2000, and 1999, respectively.
Management Recognition Plan: In July 2000, the shareholders approved the 2000 Management Recognition Plan (MRP). The purpose of the plan is to promote the long-term interests of the Company and its shareholders by providing restricted stock as a means for attracting and retaining directors and certain employees. The Company granted restricted stock awards of 359,450 to its directors and certain employees in August 2000. The fair value of the restricted stock awards are amortized over a five-year period. Amortization expense was approximately $1,301,000 for the year ended March 31, 2001.
NOTE 11: STOCK OPTION PLAN
In July 2000, the shareholders approved the 2000 Stock Option Plan (the Plan). On August 29, 2000, the Compensation Committee granted nonqualified stock options (NQSO) and incentive stock options (ISO) to certain employees and directors of the Company or of an affiliate, totaling 698,566 shares of the capital stock of the Company. The Company implemented the Plan to promote the best interests of the Company, its subsidiaries, and its shareholders by providing an incentive to those key employees who contribute to the operating success of the Company. The maximum number of shares that may be issued under the Plan is 898,625 common shares of the Company. Options issued and outstanding are adjusted to reflect any future common stock dividends, splits, recapitalization, or reorganization. The Board of Directors make available sufficient shares for each option granted, subject to the remaining number of shares. Options are granted at the then fair market value and vest over five years. Options expire 10 years from the date of grant and are subject to certain restrictions and limitations.
The following represents the stock option activity and option price information:
Weighted Weighted Number of average price average issue option shares of option shares date fair value ---------------- ------------- ---------------
Balance at Plan inception -- $ -- $ -- Granted 698,566 12.06 12.06 Exercised Canceled -------- ------- Balance at March 31, 2001 698,566 $ 12.06 ======== =======
Options exercisable at March 31, 2001 139,713 $ 12.06 ======== =======
Financial data pertaining to outstanding stock options was as follows:
Weighted average Weighted Weighted exercise average exercise Number of price Ranges of Number of remaining price of exercisable exercisable exercise option contractural option option option prices shares life Shares Shares Shares ------ ------ ---- ------ ------ ------
$ 12.06 698,566 9.9 years $ 12.06 139,713 $ 12.06
At March 31, 2001, the Company had an aggregate of 200,059 shares of common stock available for future issuance under its stock option plan.
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan since the exercise price of all options has been equal to the fair value of the Company's stock at the grant date. Had compensation costs for the Company's compensation plan been determined consistent with SFAS No. 123, the Company's net income attributable to common stock would have been reduced by $1,738,000 for 2001. Net income per share would have decreased by $.22 per share in 2001.
The fair value of options granted under the Company's stock option plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: annual dividend yield of 2.98% for 2001; expected volatility of 29% for 2001; risk-free interest rate of 4.86% for 2001; and an expected life of seven years.
Had compensation cost for the Company's stock option plan been determined based on the fair value at the option grant dates, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands):
Net income: As reported $ 5,357 Pro forma 3,619
Diluted earnings per share: As reported 0.70 Pro forma 0.48
NOTE 12: INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage permanent and construction loans for both residential and commercial property. Thirty-year, fixed rate residential home mortgages are originated primarily for sale in the secondary market, and the Bank is authorized to hedge against interest rate fluctuations with financial futures contracts, option contracts, and forward commitments. There were no open forward commitments to hedge interest rate fluctuations at March 31, 2001 and 2000. Forward commitments have little credit risk because established exchanges are the counterparties.
The Bank also originates adjustable and fixed rate residential and commercial property home mortgages, which are held for investment, and commercial loans that are adjustable to the prime lending rate index to customers who are predominately local businesses and individuals, funded through short-term deposits and borrowings. Adjustable loans have various interest rate adjustment limitations and are generally indexed to U.S. Treasury rates. As of March 31, 2001 and 2000, adjustable rate mortgages held for investment totaled $360,157,000 and $293,757,757, respectively. Fixed rate mortgages held for investment totaled $134,277,000 and $113,947,320 at March 31, 2001 and 2000, respectively.
The Bank originates both fixed and variable rate residential and commercial property construction loans. Variable rate adjustments are tied to the prime interest rate. The maturities on these loans range from six to 18 months.
The Bank's adjustable and fixed rate home mortgages and residential and commercial construction loans are funded by short-term deposits and FHLB advances.
The Bank manages interest rate risk by matching assets and liabilities within reasonable limits. This has been accomplished through producing primarily variable rate loans, and if appropriate, hedging techniques can be employed through the use of financial futures contracts, option contracts, interest rate swaps, and forward commitments. There were none outstanding during 2001, 2000, and 1999.
NOTE 13: REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. 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 their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2001, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of March 31, 2001 and 2000, the most recent notifications from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's categories.
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The fair values of financial instruments were as follows at March 31 (in thousands):
2001 2000 --------------------- --------------------- Carrying Carrying amount Fair value amount Fair value ------ ---------- ------ ---------- Financial assets: Cash and cash equivalents $ 22,383 $ 22,383 $ 7,652 $ 7,652 Securities available for sale 63,299 63,299 95,988 95,988 Securities held to maturity 8,362 8,613 12,066 12,136 Loans held for sale 794 800 Loans receivable 483,117 493,644 416,116 410,571 Federal Home Loan Bank stock 4,652 4,652 4,288 4,288 -------- -------- -------- -------- 582,607 593,391 536,110 530,635 Financial liabilities: Deposit accounts 397,643 401,372 382,986 382,652 Federal Home Loan Bank advances and other borrowings 80,344 83,000 34,423 33,786 -------- -------- -------- -------- 477,987 484,372 417,409 416,438 -------- -------- -------- -------- Net financial instruments $104,620 $109,019 $118,701 $114,197 ======== ======== ======== ========
Commitments to extend credit represent the principal categories of off-balance-sheet financial instruments (Note 4). The fair value of these commitments is not material since they are for a short period of time and are subject to customary credit terms.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of March 31, 2001 and 2000:
Cash and cash equivalents: The carrying amount represented fair value.
Securities available for sale and held to maturity: Fair values were based on quoted market prices, if available. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities.
Loans held for sale: Fair values were based on quoted market prices.
Loans receivable: Loans were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products.
Federal Home Loan Bank stock: The fair value is based upon the redemption value of the stock which equates to its carrying value.
Deposit accounts: The fair value of checking accounts, savings accounts, and money market accounts was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.
Federal Home Loan Bank advances: Borrowings were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products.
NOTE 15: EVERTRUST FINANCIAL GROUP, INC. (PARENT COMPANY ONLY)
Summary financial information as of March 31 is as follows (in thousands):
STATEMENTS OF FINANCIAL CONDITION - ---------------------------------
ASSETS 2001 2000 ------ ---- ----
ASSETS: Cash and cash equivalents, including interest bearing deposits of $24,314 and $10,707 $ 24,676 $ 10,755 Securities available for sale, amortized cost of $9,549 and $24,472 9,686 24,623 Accrued interest receivable 102 268 Premises and equipment, net 90 418 Investment in subsidiaries: Bank subsidiary 80,487 90,822 Other subsidiaries 3,164 3,656 Prepaid expenses and other assets 3,647 4,719 --------- --------- TOTAL $ 121,852 $ 135,261 ========= ========= LIABILITIES AND EQUITY ----------------------
LIABILITIES: Accounts payable and other liabilities $ 1,706 $ 1,732
EQUITY: Common stock 68,940 83,978 ESOP debt (1,188) (1,584) Retained earnings 55,033 52,271 Shares held in trust for stock-related compensation plans (3,034) Accumulated other comprehensive income (loss) 395 (1,136) --------- --------- Total equity 120,146 133,529 --------- --------- TOTAL $ 121,852 $ 135,261 ========= =========
STATEMENTS OF OPERATIONS - ------------------------ 2001 2000 1999 ---- ---- ---- INCOME: Interest from investment securities $ 2,313 $ 1,084 $ 417 Dividend from bank subsidiary 18,106 2,041 4,257 Other income 184 9 -------- -------- -------- Total income 20,603 3,125 4,683
OTHER EXPENSE: Salary and employee benefits 2,390 1,197 349 Occupancy and equipment 205 196 8 Charitable contributions 5,200 3,255 Information processing costs 52 23 111 Other, net 727 1,002 393 -------- -------- -------- 3,374 7,618 4,116 -------- -------- -------- Income (loss) before federal income taxes and equity in undistributed net income in undistributed net income of subsidiary 17,229 (4,493) 567
FEDERAL INCOME TAXES (296) (2,224) (1,252) -------- -------- -------- Income (loss) before equity in undistributed net income of subsidiary 17,525 (2,269) 1,819
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY (12,168) 2,841 (408) -------- -------- -------- NET INCOME $ 5,357 $ 572 $ 1,411 ======== ======== ========
STATEMENTS OF CASH FLOWS - ------------------------ 2001 2000 1999 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 5,357 $ 572 $ 1,411 Adjustments to reconcile net income to net cash provided (used) by operating activities: Accretion of investment security discounts (77) (75) (38) Amortization of investment security premiums 49 30 53 Depreciation and amortization of premises and equipment 112 74 Equity in undistributed income of subsidiaries 12,168 (2,841) 408 Common stock contributed to charitable foundation 3,900 Amortization of compensation related to MRP 1,301 Cash provided (used) by changes in operating assets and liabilities: Accrued interest receivable 166 (244) 73 Prepaid expenses and other assets 1,029 (2,952) (1,145) Accounts payable and other liabilities (25) (569) 1,747 -------- -------- -------- Net cash provided (used) by operating activities 20,080 (2,105) 2,509
INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 17,199 27,731 6,525 Proceeds from sale of securities available for sale 1,941 1,000 4,116 Purchases of securities available for sale (3,886) (48,718) (9,547) Contribution from (to) MB Cap (6) (3,250) Contribution from (to) I-Pro (1) (750) Contribution from (to) EverTrust Bank (50) (44,456) Net additions to premises and equipment 216 (492) -------- -------- -------- Net cash provided (used) by investing activities 15,413 (65,685) (2,156)
FINANCING ACTIVITIES: Proceeds from the sale of common stock 84,245 Repurchase shares of common stock (19,373) (4,167) Dividends paid on common stock (2,595) (448) Loan to ESOP (1,980) Repayment of loan to ESOP 396 396 Proceeds from other borrowings 1,000 Repayment of other borrowings (1,000) -------- -------- Net cash provided (used) by financing activities (21,572) 78,046 -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,921 10,256 353
CASH AND CASH EQUIVALENTS: Beginning of year 10,755 499 146 -------- -------- -------- End of year $ 24,676 $ 10,755 $ 499 ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for federal income taxes $ 27 $ 112 $ 135
The amount of dividends payable by the Bank to the Company is limited by federal and state laws, regulations, and policies.
NOTE 16: CONTINGENCIES
In the normal course of business, the Company has various legal claims and other contingent matters outstanding. The Company believes that any liability ultimately arising from these actions would not have a material adverse effect on its results of operations or consolidated financial position at March 31, 2001.
NOTE 17: LINES OF BUSINESS
The Company is managed by legal entities. The entities are the Bank's retail division, the Bank's commercial banking group, MB Cap, and I-Pro. MB Cap, I-Pro, and the holding company, which includes earnings from subsidiaries and investment in subsidiaries, have been included in all others as their operating results are not significant when taken on an individual basis.
The principal activities of each legal entity are described in Note 1. Each entity is managed by an executive team responsible for sales, marketing, operations, and certain administrative functions. Back office support is provided to each entity for credit administration, information systems, finance, and human resources.
The costs of these functions are allocated based on actual time spent conducting business for each entity.
Financial highlights by lines of business are as follows as of and for the years ended March 31 (in thousands):
-------------------------------------------------- The Bank's The Bank's commercial retail banking Elimin- division group(1) Other ations Total -------- -------- ----- ------ -----
Condensed income statement: Net interest income after provision for loan losses $ 18,880 $ 1,110 $ 2,428 $ 1 $ 22,419 Other income 2,222 245 6,675 (6,510) 2,632 Other expense 11,895 1,292 4,787 (571) 17,403 -------- -------- -------- --------- -------- Income before income taxes 9,207 63 4,316 (5,938) 7,648 Income taxes 2,815 25 (549) 2,291 -------- -------- -------- --------- -------- Net income $ 6,392 $ 38 $ 4,865 $ (5,938) $ 5,357 ======== ======== ======== ========= ======== Total assets $546,059 $ 39,781 $125,197 $(108,634) $602,403 ======== ======== ======== ========= ========
(1) Formerly Commercial Bank of Everett
-------------------------------------------------- The Bank's The Bank's commercial retail banking Elimin- division group(1) Other ations Total -------- -------- ----- ------ -----
Condensed income statement: Net interest income after provision for loan losses $ 16,637 $ 950 $ 1,205 $ -- $ 18,792 Other income 1,250 168 5,169 (5,297) 1,290 Other expense 10,568 1,024 8,518 (414) 19,696 -------- -------- -------- --------- -------- Income before income taxes 7,319 94 (2,144) (4,883) 386 Income taxes 2,172 33 (2,391) -- (186) -------- -------- -------- --------- -------- Net income $ 5,147 $ 61 $ 247 $ (4,883) $ 572 ======== ======== ======== ========= ======== Total assets $496,681 $ 25,290 $139,307 $(106,066) $555,212 ======== ======== ======== ========= ========
(1) Formerly Commercial Bank of Everett
-------------------------------------------------- The Bank's The Bank's commercial retail banking Elimin- division group(1) Other ations Total -------- -------- ----- ------ -----
Condensed income statement: Net interest income after provision for loan losses $ 14,317 $ 530 $ 430 $ -- $ 15,277 Other income 1,916 91 4,104 (4,184) 1,927 Other expense 9,953 928 4,986 (335) 15,532 -------- -------- -------- --------- -------- Income before income taxes 6,280 (307) (452) (3,849) 1,672 Income taxes 1,823 (103) (1,459) 261 -------- -------- -------- --------- -------- Net income $ 4,457 $ (204) $ 1,007 $ (3,849) $ 1,411 ======== ======== ======== ========= ========
Total assets $426,538 $ 19,806 $ 56,900 $ (51,155) $452,089 ======== ======== ======== ========= ========
(1) Formerly Commercial Bank of Everett
NOTE 18: SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Results of operations on a quarterly basis were as follows for the years ended March 31(in thousands):
-------------------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- -------- -------
Interest income $ 10,864 $ 11,820 $ 11,809 $ 11,980 Interest expense 5,229 5,985 5,981 5,853 -------- -------- -------- -------- Net interest income before provision for loan losses 5,635 5,835 5,828 6,127
Provision for loan losses 300 375 120 210 -------- -------- -------- -------- Net interest income after provision for loans losses 5,335 5,460 5,708 5,917
Noninterest income 638 718 588 687 Noninterest expense 3,821 4,728 4,330 4,523 -------- -------- -------- -------- Income before provision for income taxes 2,152 1,450 1,966 2,081
Provision for income taxes 654 414 593 630 -------- -------- -------- -------- Net income $ 1,498 $ 1,036 $ 1,373 $ 1,451 ======== ======== ======== ======== Basic earnings per share $ 0.18 $ 0.13 $ 0.19 $ 0.20 ======== ======== ======== ========
-------------------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- -------- -------
Interest income $ 8,787 $ 9,408 $ 9,970 $ 10,269 Interest expense 4,614 4,948 4,623 4,647 -------- -------- -------- -------- Net interest income before provision for loan losses 4,173 4,460 5,347 5,622
Provision for loan losses 275 135 243 157 -------- -------- -------- -------- Net interest income after provision for loans losses 3,898 4,325 5,104 5,465
Noninterest income 108 240 472 470 Noninterest expense 3,157 9,315 (1) 3,354 3,870 -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes 849 (4,750) 2,222 2,065
Provision (benefit) for income taxes 208 (1,695) 673 628 -------- -------- -------- --------
Net income (loss) $ 641 $ (3,055) $ 1,549 $ 1,437 ======== ======== ======== ========
Earnings per share n/a n/a $ .18 $ .17 ======== ========
(1) The second quarter increase in noninterest expense is due primarily to $5,200,000 in charitable contributions provided to the EverTrust Foundation.
-------------------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- -------- -------
Interest income $ 8,471 $ 8,367 $ 8,496 $ 8,560 Interest expense 4,445 4,517 4,478 4,397 -------- -------- -------- --------
Net interest income before provision for loan losses 4,026 3,850 4,018 4,163
Provision for loan losses 105 105 120 450 -------- -------- -------- --------
Net interest income after provision for loan losses 3,921 3,745 3,898 3,713
Noninterest income 552 435 471 469 Noninterest expense 3,036 2,648 2,785 7,063 -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,437 1,532 1,584 (2,881)
Provision (benefit) for income taxes 415 442 462 (1,058) -------- -------- -------- --------
Net income (loss) $ 1,022 $ 1,090 $ 1,122 $ (1,823) ======== ======== ======== ========
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders ("Proxy Statement") and is incorporated herein by reference.
The following table sets forth certain information with respect to the executive officers of the Company and EverTrust Bank.
Biographical Information
Michael B. Hansen is Chairman of the Board, President and Chief Executive Officer of the Company and Chairman of the Board and Chief Executive Officer of EverTrust Bank. Mr. Hansen has been employed by EverTrust Bank for over 21 years.
Michael R. Deller has been President and Chief Operating Officer of EverTrust Bank since April 2000. From 1997 until April 2000 he was Executive Vice President and Chief Operating Officer of EverTrust Bank. From 1994 to 1997, Mr. Deller was the Executive Director of the Port of Everett. Mr. Deller is the brother-in-law of Director Thomas R. Collins.
Jeffrey R. Mitchell is Senior Vice President and Chief Financial Officer of the Company and EverTrust Bank. He has held this position with EverTrust Bank since joining EverTrust Bank in 1988.
Dale A. Lyski is President of the Bank's commercial banking group established in connection with the merger of Commercial Bank of Everett with and into EverTrust Bank in December 2000. Prior to that he was President and Chief Operating Officer of Commercial Bank of Everett, positions he has held since 1996. From 1989 to 1986, Mr. Lyski was Executive Vice President of EverTrust Bank. Mr. Lyski has served EverTrust Bank in various capacities since 1986.
Lorelei Christenson is Senior Vice President and Corporate Secretary of the Company and Senior Vice President, Chief Information Officer and Corporate Secretary of EverTrust Bank. She has held this position with EverTrust Bank since 1984. Ms. Christenson has served EverTrust Bank in various capacities since 1973.
Terry L. Cullom has been Vice President and Credit Administrator of EverTrust Bank since 1992. Mr. Cullom has over 30 years of experience in lending and credit administration.
John E. Thoresen is President of Mutual Bancshares Capital, Inc., a position he has held since September 1998. From 1986 to September 1998, Mr. Thoresen was employed by the Economic Development Council of Snohomish County, Inc., a regional nonprofit business development organization.
Philip Mitterling joined the Company as Treasurer and Portfolio Manager in October 1999. Prior to joining the Company he was with Bank of America from 1986 to 1999, most recently as Vice President and Senior Manager of the Seattle office for Corporate Treasury.
Robert L. Nall is Vice President and Branch Administrator of EverTrust Bank, a position he has held since November 1999. From 1995 to 1999 he served as a branch manager of EverTrust Bank.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security Ownership of Certain Beneficial Owners and Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and are incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors -- Transactions with Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant(1) 3.2 Bylaws of the Registrant(1) 10.1 401(k) Employee Savings and Profit Sharing Plan and Trust(1) 10.2 Employee Severance Compensation Plan(2) 10.3 Employee Stock Ownership Plan(1) 10.4 2000 Stock Option Plan (3) 10.5 2000 Management Recognition Plan (3) 10.6 Employment Agreement with Michael B. Hansen(2) 10.7 Employment Agreement with Michael R. Deller(2) 10.8 Employment Agreement with Jeffrey R. Mitchell(2) (21) Subsidiaries of the Registrant (23) Consent of Auditors
- ------------- (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-81125). (2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2000. (3) Filed as an exhibit to the Registrant's annual meeting proxy statement dated June 19, 2000.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVERTRUST FINANCIAL GROUP, INC.
/s/Michael B. Hansen Date: June 25, 2001 By:---------------------------------------- Michael B. Hansen Chairman of the Board, President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ---------- ----- ----
/s/Michael B. Hansen - ---------------------- Chairman of the Board, President, June 25, 2001 Michael B. Hansen Chief Executive Officer and Director (Principal Executive Officer)
/s/Jeffrey R. Mitchell - ---------------------- Senior Vice President, Chief Financial June 25, 2001 Jeffrey R. Mitchell Officer and Treasurer (Principal Financial and Accounting Officer)
/s/Margaret B. Bavasi - ---------------------- Director June 25, 2001 Margaret B. Bavasi
/s/Thomas R. Collins - ---------------------- Director June 25, 2001 Thomas R. Collins
/s/Michael R. Deller - ---------------------- Director June 25, 2001 Michael R. Deller
/s/Thomas J. Gaffney - ---------------------- Director June 25, 2001 Thomas J. Gaffney
/s/R. Michael Kight - ---------------------- Director June 25, 2001 R. Michael Kight
/s/Robert A. Leach, Jr. - ---------------------- Director June 25, 2001 Robert A. Leach, Jr.
/s/George S. Newland - ---------------------- Director June 25, 2001 George S. Newland
/s/William J. Rucker - ---------------------- Director June 25, 2001 William J. Rucker
Exhibit 21
Subsidiaries of the Registrant
Parent - ------
EverTrust Financial Group, Inc.
Percentage Jurisdiction or Subsidiaries of Ownership State of Incorporation - ------------ ------------ ----------------------
EverTrust Bank 100% Washington
Commercial Bank of Everett(1) 100% Washington
EverTrust Asset Management(2) 100% Washington
I-Pro, Inc. 100% Washington
Mutual Bancshares Capital, Inc. 100% Washington
Sound Financial, Inc. (3) 100% Washington
- ------------ (1) Merged into EverTrust Bank effective February 1, 2001. (2) This corporation is a wholly owned subsidiary of EverTrust Bank. Articles of Incorporation were filed with the Secretary of State on March 23, 2001, and capitalization of EverTrust Asset Management occurred effective May 1, 2001. (3) This corporation is a wholly owned subsidiary of EverTrust Bank.
Exhibit 23 Independent Auditors Consent
INDEPENDENT AUDITORS' CONSENT ==============================================================================
We consent to the incorporation by reference in Registration Statements No. 333-89285 and 333-48884 of EverTrust Financial Group, Inc. on Forms S-8 of our report dated April 27, 2001, incorporated by reference in the Annual Report on Form 10-K of EverTrust Financial Group, Inc. for the year ended March 31, 2001.
/s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP
Seattle, Washington June 21, 2001