FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended....................... June 30, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 0-26993
EVERTRUST FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1613658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2707 Colby Ave. Suite 600, Everett, Washington 98201
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(Address of principal executive offices and Zip code)
(425) 258-3645
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(Registrant's telephone number, including area code)
NA .
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes No X *
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class : As of June 30, 1999
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Common stock, no par value No shares *
* The registrant's Registration Statement on Form S-1 was declared
effective on August 12, 1999. The registrant has conducted no business except
the offering of the shares in connection with its conversion from mutual to
stock form.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
Table of Contents
PART 1- FINANCIAL INFORMATION
ITEM 1- Financial Statements. The Consolidated Financial Statements of
EverTrust Financial Group, Inc. filed as a part of the report are as
follows :
Consolidated Statements of Financial Condition as of
June 30, 1999 and March 31, 1999................................. 1
Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998..................................... 2
Consolidated Statements of Changes in Equity for the three
months ended June 30, 1999 and 1998.............................. 3
Consolidated Statements of Cash Flows for the three months
ended June 30, 1999 and 1998..................................... 4
Notes to Consolidated Financial Statements....................... 5
ITEM 2- Management's Discussion and Analysis of Financial Condition and
Results of Operations
General.......................................................... 6
Liquidity and Capital Resources.................................. 6
Year 2000 Disclosure............................................. 7
Comparison of Financial Condition at June 30 and March 31, 1998.. 8
Comparison of Operating Results for the three months ended
June 30, 1999 and 1998........................................... 9
ITEM 3- Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk................... 10
PART II-OTHER INFORMATION
Item 1. Legal Proceedings....................................... 13
Item 2. Changes in Securities................................... 13
Item 3. Defaults upon Senior Securities......................... 13
Item 4. Submission of Matters to Vote of Stockholders........... 13
Item 5. Other Information....................................... 14
Item 6. Exhibits and Reports on Form 8-K........................ 14
SIGNATURES .............................................................. 15
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
<PAGE>
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
EverTrust Financial Group, Inc.
Consolidated Statements of Financial Condition
June 30, 1999 and March 31, 1999
(Dollar amounts in thousands, except per share amounts)
6/30/99 3/31/99
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ASSETS (Unaudited)
Cash and cash equivalents, including interest
bearing deposits of $10,823 and $4,583 $ 16,201 $ 13,230
Securities available for sale, amortized cost of
$61,758 and $61,390 61,561 61,566
Securities held to maturity, fair value of
$13,947 and $14,317 13,653 13,866
Federal Home Loan Bank stock 4,066 3,994
Loans receivable, net 331,819 315,327
Loans held for sale 21,395 29,641
Accrued interest receivable 3,361 3,177
Premises and equipment 7,797 7,953
Prepaid expenses and other assets 4,182 3,335
--------------------------
Total Assets $464,035 $452,089
==========================
LIABILITIES AND EQUITY
Liabilities:
Deposit accounts $388,751 $375,896
Federal Home Loan Bank advances 18,936 18,949
Accounts payable and other liabilities 3,690 4,981
--------------------------
Total Liabilities 411,377 399,826
Equity:
Common stock - -
Retained earnings 52,788 52,147
Accumulated other comprehensive income (130) 116
--------------------------
Total Equity: 52,658 52,263
--------------------------
Total Liabilities and Equity $464,035 $452,089
==========================
Book value per common share (1) n/a n/a
==========================
Common shares outstanding at end of period (1) -- --
==========================
(1) No shares outstanding at June 30, 1999. Offering approval received on
August 12, 1999.
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EverTrust Financial Group, Inc.
Consolidated Statements of Operations
For the Three Months Ended June 30, 1999 and 1998
(Dollar amounts in thousands, except per share amounts)
Three Months Ended June 30,
1999 1998
---- ----
(Unaudited)
INTEREST INCOME:
Loans receivable $ 7,489 $ 7,253
Investment securities:
Taxable interest income 1,066 1,040
Tax-exempt interest income 102 89
Dividend income 130 89
--------------------------
Total investment security income 1,298 1,218
--------------------------
Total interest income 8,787 8,471
INTEREST EXPENSE:
Deposit accounts 4,321 4,199
Federal Home Loan Bank advances 293 246
--------------------------
Total interest expense 4,614 4,445
--------------------------
Net interest income 4,173 4,026
PROVISION FOR LOAN LOSSES 275 105
--------------------------
Net interest income after provision for
loan losses 3,898 3,921
OTHER INCOME:
Loan service fees 180 219
Gain (loss) on sale of securities 170 127
Other, net (242) 206
--------------------------
Total other income 108 552
--------------------------
OTHER EXPENSES:
Salaries and employee benefits 1,638 1,311
Occupancy and equipment 648 692
Charitable contributions 1 187
Information processing costs 169 198
Other, net 701 648
--------------------------
Total other expenses 3,157 3,036
--------------------------
Earnings before federal income taxes 849 1,437
FEDERAL INCOME TAXES 208 415
--------------------------
NET INCOME $ 641 $ 1,022
==========================
Net income per common share - basic (1) n/a n/a
Net income per common share - diluted (1) n/a n/a
Weighted average shares outstanding-basic(1) - -
Weighted average shares outstanding-diluted(1) - -
(1) No shares outstanding at June 30, 1999. Offering approval received on
August 12, 1999
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<TABLE>
EverTrust Financial Group, Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended June 30, 1999 and 1998
(Dollar amounts in thousands, Unaudited)
Common Stock (1) Accum Other
Number of Retained Comprehensive
Shares Amount Earnings Income Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1998 n/a $ - $ 50,736 $ 360 $ 51,096
Net income 1,022 1,022
Net change in other
comprehensive income (167) (167)
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Balance at June 30, 1998 n/a $ - $ 51,758 $ 193 $ 51,951
==============================================================
Balance at March 31, 1999 n/a $ - $ 52,147 $ 116 $ 52,263
Net Income 641 641
Net change in other
comprehensive income (246) (246)
--------------------------------------------------------------
Balance at June 30, 1999 n/a $ - $ 52,788 $ (130) $ 52,658
==============================================================
(1) No shares outstanding at June 30, 1999. Offering approval received on August 12, 1999.
</TABLE>
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<PAGE>
EverTrust Financial Group, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 1999 and 1998
(In thousands, Unaudited)
1999 1998
-------------------
Operating Activities:
Net income $ 641 $1,022
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 215 274
Stock dividends and accretion of investment
security discounts (93) (124)
Loss (gain) on sale of premises and equipment
and real estate owned (141) (126)
Amortization of investment security premiums 78 45
Book loss on limited partnerships 29 31
Provision for loses on loans and real estate owned
and mark to market loss on saleable loans 722 105
Amortization of deferred loan fees and costs (414) (352)
Loan fees deferred 420 178
Proceeds from the sale of loans 8,996 3,958
Loans originated for sale (3,696) (6,087)
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (184) 16
Prepaid expenses and other assets (212) (39)
Accounts payable and other liabilities (1,291) (818)
Deferred taxes (537) 444
-------------------------
Net cash provided (used) by operating activities 4,533 (1,473)
-------------------------
Investing Activities:
Proceeds from maturities of securities
available for sale 3,504 5,802
Proceeds from maturities of securities held
to maturity 225 2,829
Proceeds from sale of securities available
for sale 4,195 395
Purchase of securities available for sale (8,011) (8,466)
Purchase of securities held to maturity - -
Purchase of FHLB stock - -
Loan principal prepayments 25,606 34,075
Loans originated or acquired (39,880) (20,642)
Proceeds from sales of reacquired assets
and real estate owned - -
Investment in real estate owned - (119)
Net additions to premises and equipment (43) (386)
-------------------------
Net cash provided (used) by investing
activities (14,404) 13,488
-------------------------
Financing Activities:
Net increase in deposit accounts 12,855 (3,158)
Proceeds from Federal Home Loan Bank advances - -
Repayment of Federal Home Loan Bank advances (13) (513)
-------------------------
Net cash provided (used) by financing
activities 12,842 (3,671)
-------------------------
Net increase (Decrease) in Cash and
Cash Equivalents 2,971 8,344
Cash and Cash Equivalents:
Beginning of year 13,230 19,136
-------------------------
End of quarter $ 16,201 $ 27,480
=========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest on deposits $4,309 $4,219
Federal income taxes - -
Interest on borrowings 305 258
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Real estate acquired through foreclosure $- 117
Company financing of sales of real estate owned - -
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<PAGE>
EverTrust Financial Group, Inc.
Notes to Consolidated Financial Statements
Three Months Ended June 30, 1999
(Unaudited)
Note 1 Basis of Presentation
- ------------------------------
The unaudited consolidated financial statements of EverTrust Financial Group,
Inc. and its subsidiaries reflect all adjustments which are, in the opinion of
management, necessary to present fairly the statement of financial position
and results of operations for the interim periods presented. All such
adjustments are of a normal recurring nature. The consolidated financial
statements include EverTrust Financial Group, Inc.'s wholly owned
subsidiaries, Everett Mutual Bank (EMB), Commercial Bank of Everett (CBE),
I-Pro, Inc. (I-Pro), and Mutual Bancshares Capital (MB Cap). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The balance sheet date as of March 31, 1999 was derived from audited financial
statements, but does not include all disclosures which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) rules pertaining to the presentation of interim financial
statements. It is suggested that these consolidated financial statements and
notes be read in conjunction with the consolidated financial statements and
notes included in EverTrust Financial Group's prospectus dated August 12,
1999.
Note 2 Recent Developments
- ----------------------------
EverTrust Financial Group, Inc. has received approval from the Washington
Division of Banks and the non-objection of the Federal Deposit Insurance
Corporation for its plan of conversion. The plan of conversion provides for
the conversion of Mutual Bancshares from a Washington-chartered mutual holding
company to a Washington-chartered capital stock holding company to be known as
EverTrust Financial Group, Inc. The plan of conversion will be voted on at a
special meeting of members to be held on September 28, 1999. If approved, the
amount of common stock offered by EverTrust Financial Group, Inc. will be in
the range of $55,250,000 to $74,750,000. The prospectus dated August 12, 1999
should be read concerning additional information about the plan of conversion
and the offering of shares of stock.
Note 3 Earnings per share
- ---------------------------
Basic and diluted earning per share calculations are not applicable as
EverTrust Financial Group, Inc. had no outstanding stock at June 30, 1999.
Note 4 Segment Reporting
- --------------------------
EverTrust Financial Group, Inc. is managed by legal entities. The entities
are Everett Mutual Bank, Commercial Bank of Everett, Mutual Bancshares
Capital, Inc. and I-Pro, Inc. Mutual Bancshares Capital, Inc., I-Pro, Inc.
and the holding company have been included in all others as their operating
results are not significant when taken on an individual basis.
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<PAGE>
Financial highlights by lines of business are as follows:
Three Months Ended June 30, 1999
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EMB CBE Other Eliminations Total
--- --- ----- ------------ -----
(In thousands)
Condensed income statement:
Net interest income after
Provision for loan loss $3,644 $ 181 $ 73 $ -- $3,898
Other income 103 32 862 (889) 108
Other expense 2,481 236 531 (91) 3,157
------ ----- ----- ------ ------
Income before income taxes 1,266 (23) (404) (798) 849
Income taxes 351 (8) (135) - 208
------ ----- ----- ------ ------
Net income (loss) $ 915 $ (15) $ 539 $ (798) $ (641)
====== ====== ===== ====== ======
June 30, 1999
-------------------------------------------
EMB CBE Other Eliminations Total
--- --- ----- ------------ -----
(In thousands)
Total Assets $436,405 $20,899 $57,397 $(50,666) $464,035
======== ======= ======= ======== ========
Three Months Ended June 30, 1998
-------------------------------------------
EMB CBE Other Eliminations Total
--- --- ----- ------------ -----
(In thousands)
Condensed income statement:
Net interest income after
provision for loan loss $3,701 $ 121 $ 99 $ -- $3,921
Other income 559 16 1,274 (1,297) 552
Other expense 2,378 212 531 (85) 3,036
------ ----- ------ ------- ------
Income before income taxes 1,882 (75) 842 (1,212) 1,437
Income taxes 565 (25) (125) -- 415
------ ----- ------ ------- ------
Net income (loss) $1,317 $ (50) $ 967 $(1,212) $1,022
====== ===== ====== ======= ======
June 30, 1998
--------------------------------------------
EMB CBE Other Eliminations Total
--- --- ----- ------------ -----
(In thousands)
Total Assets $339,320 $11,068 $53,373 $(46,092) $417,669
======== ======= ======= ======== ========
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
EverTrust Financial Group, Inc. (EVRT), a Washington corporation, is primarily
engaged in the business of planning, directing and coordinating the business
of its wholly owned subsidiaries, Everett Mutual Bank (EMB), Commercial Bank
of Everett (CBE), I-Pro, Inc. (I-Pro) and Mutual Bancshares Capital, Inc. (MB
Cap). EMB conducts business through its 11 full service offices located
throughout Snohomish County, Washington. EMB considers the communities in
Snohomish County, Washington as its primary market area for making loans and
attracting deposits. EMB also makes loans in King and Pierce Counties and, to
a much lesser extent, other counties in Western Washington. EMB's principal
business is attracting deposits from the general public and using those funds
to originate residential mortgage loans as well as multi-family, commercial
real estate and construction loans. CBE offers business loans and deposit
services to individuals and local businesses through its office located in
Everett, Washington. I-Pro is located in Kent, Washington and provides
backroom banking services for Everett Mutual Bank and Commercial Bank of
Everett. MB Cap is a start-up venture capital company located in Bothell,
Washington. It was organized to provide equity to regionally-based
high-technology companies and companies that make medical instruments at the
beginning or early stages of development.
Liquidity and Capital Resources
- -------------------------------
EverTrust Financial Group's primary source of funds are deposits and proceeds
from principal and interest payments on loans and securities, and Federal Home
Loan Bank 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 EverTrust Financial Group is the origination
of one- to- four family loans and commercial and multifamily loans. A
secondary, but increasing activity of the Company is the origination of
business loans. Other investing activities include the purchase of investment
securities to provide liquidity and yield.
EverTrust Financial Group 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 source of funds include deposits and principal
and interest payments from loans and investments and Federal Home Loan Bank of
Seattle advances.
At June 30, 1999, the total book value of investment securities was $75.2
million compared to a market value of $75.5 million, resulting in an
unrealized gain of $300,000. On March 31, 1999, the book value of investment
securities was $75.4 million compared to a market value of $75.9 million
resulting in an unrealized gain of $500,000. The primary reason for the
change in the unrealized gain at June 30, 1999 compared to March 31, 1999 was
the overall higher level of interest rates which in turn decreased the market
valuation of the investment portfolio.
The management of EverTrust Financial Group believes it has adequate resources
to fund all loan commitments by deposits and, if necessary, Federal Home Loan
Bank of Seattle advances and the sale of mortgage loans. It can also adjust
the offering rates of deposit accounts to retain deposits in changing interest
rate environments.
At June 30, 1999, EverTrust Financial Group's Tier 1 and total risked-based
capital ratios under the Federal Reserve Board's risk-based capital guidelines
were 13.25% and 14.53%, respectively. The Federal Reserve Board's minimum
risk-based capital ratio guidelines for Tier 1 and total capital are 4% and
8%, respectively.
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<PAGE>
Year 2000 Disclosure
- --------------------
EverTrust Financial Group, Inc. and its subsidiaries are users of computer,
computer software and equipment utilizing embedded microprocessors that will
be effected by the year 2000 issue. The year 2000 issue exists because many
computer systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause erroneous
results, ranging from system malfunctions to incorrect or incomplete
processing.
The Company's Y2K Task Force has developed and is implementing a comprehensive
plan to make all information and non-information technology assets years 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and concerns.
This phase is complete.
2. Assessment - Develop a plan, identify and evaluate all vital systems
of the Company. This phase was completed as of June 30, 1999.
3. Renovation - Upgrade or replace any critical system that is non-year
2000 compliant. This phase was substantially completed as of December
31, 1998.
4. Validation - Testing all critical systems and third-party vendors for
year 2000 compliance. The validation phase was completed as of June
30, 1999. EverTrust Financial Group, Inc. and its subsidiaries have
upgraded or replaced all in-house equipment, such as teller station
equipment, etc., with year 2000 compliant equipment. A third-party
service bureau processes all customer transactions and has completed
upgrades to its systems to be year 2000 compliant. EverTrust
Financial Group, Inc.'s subsidiaries, Everett Mutual Bank,
Commercial Bank of Everett and I-Pro, Inc., are relying on the results
of proxy testing by its third-party service bureau for certain date
sensitive testing. The proxy testing, which involved use of test
client data, tested the results of transaction at various test dates
before and after the year 2000 date change and covered all of the
applications used by Everett Mutual Bank, Commercial Bank of Everett
and I-Pro, Inc. This proxy testing was completed as of June 30, 1999.
5. Implementation - Placement of renovated systems on-line. EverTrust
Financial Group, Inc. has already implemented all necessary remedial
actions and verified the year 2000 compliance of its computer hardware
and other equipment containing embedded microprocessors.
EverTrust Financial Group, Inc. has developed a Y2K Contingency Master Plan to
minimize disruption of service and risk of loss from safety and soundness,
profitability and customer confidence concerns for all subsidiaries. The
Contingency Master Plan is further defined in two specific types of
contingency plans: the Business Resumption Plan and the Remediation
Contingency Plan.
The Business Resumption Contingency Plan addresses the actions EverTrust
Financial Group, Inc. and its subsidiaries would take if core business
processes, such as paying and receiving, cannot be carried out in the normal
manner through the century date change due to system or vendor failure. The
Company's Business Resumption Contingency Plan follows an industry-recognized
four phase approach:
1. Organization Planning
2. Business Impact Analysis
3. Contingency Planning
4. Validation
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<PAGE>
Based on its current assessments, and remediation plans, which are based in
part on certain representations of third-party service providers, EverTrust
Financial Group, Inc. does not expect that it will experience a significant
disruption of its operation as result of the change to the new millennium.
Although EverTrust Financial Group, Inc. has no reason to conclude that a
failure will occur, the most reasonably likely worst-case year 2000 scenario
would entail a disruption or failure of its power supply or voice and data
transmission suppliers, a third-party service provider, or a facility. If
such a failure were to occur, EverTrust Financial Group, Inc. would implement
its contingency plans, which are expected to be substantially completed and
validated by August 31, 1999, including back-up solutions for mission-critical
operations and business continuation plans for significant vendors and other
business partners. For example, EverTrust Financial Group, Inc. has reserve
power supplies at three of its branch sites, and will have back-up account
data and alternative manual processes for certain business line functions.
The Company has also developed a liquidity management plan to address
potential increased funding needs that may arise as the millennium approaches.
The first three phases are complete and the validation phases will be complete
by September 30, 1999. The Continuity Planning Workgroup of EverTrust
Financial Group, Inc., which is comprised of members of the Y2K Task Force and
the existing Disaster Recovery Team of EverTrust, has identified the
interdependency between all critical systems and core business processes, and
has completed a risk assessment of possible failure scenarios. An individual
business resumption plan has been drafted for each core business process under
every failure scenario rated medium or high risk.
A Remediation Contingency Plan is in place and will be implemented in the
event that a critical system will not meet regulatory deadlines for
renovation, validation or implementation. Management of EverTrust is
confident that the Remediation Contingency Plan will not need to be
implemented, as all critical systems have been renovated, validated and
implemented within required time frames.
There can be no assurances that EverTrust Financial Group, Inc.'s year 2000
plan will effectively address the year 2000 issue, that its estimates of the
timing and costs of completing the plan will ultimately be accurate or that
the impact of any failure of EverTrust Financial Group, Inc. or its
third-party vendors and service providers to be year 2000 compliant will not
have a material adverse effect on EverTrust Financial Group, Inc.'s business,
financial condition or results of operations. However, management of
EverTrust Financial Group, Inc. is confident of its ability to complete the
transition into the next century with minimal disruption of normal service
levels.
Comparison of Financial Condition at June 30 and March 31, 1999
- ---------------------------------------------------------------
Total assets at June 30, 1999 were $464.0 million compared to $452.1 million
at March 31, 1999, an increase of $11.9 million. The primary factor in this
increase was a $12.9 million increase in deposits which were used to fund a
$16.5 million increase in loans and a $3.0 million increase in cash and cash
equivalents. These increases were partially offset by a $8.2 million decrease
in loans held for sale. Loans held for sale decreased from $29.6 million at
March 31, 1999 to $21.4 million at June 30, 1999 as a result of $9.0 million
in loan sales and a mark-to-market adjustment of $448,000.
At June 30, 1999, EverTrust Financial Group, Inc. had $476,000 in loans
accounted for on a non-accrual basis ($467,000 in commercial real estate loans
and $9,000 in consumer loans) compared to $378,000 at March 31, 1999. At June
30, 1999, EverTrust Financial Group, Inc. had $104,000 in accruing loans which
were contractually past due 90 days or more, compared to none at March 31,
1999.
Total deposits of EverTrust Financial Group, Inc. increased by $12.9 million
from $375.9 million at March 31, 1999 to $388.8 million at June 30, 1999. The
increase included interest credited to accounts of $3.6 million.
-9-
<PAGE>
Total equity at June 30, 1999 was $52.7 million compared to $52.3 million at
March 31, 1999. This is an increase of $395,000 or 0.8%. Net earnings of
$641,000 for the three months ended June 30, 1999 were offset by a $246,000
decrease in unrealized gains in securities available for sale, net of deferred
income taxes.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
- -----------------------------------------------------------------------------
1998
- ----
General. Net income decreased 37.2% from $1.0 million for the three months
ended June 30, 1998 to $641,000 for the three months ended June 30, 1999
primarily as a result of $448,000, pre-tax, mark-to-market expense of the
loans held for sale and an increase of $327,000 in personnel costs.
Net Interest Income. Net interest income increased 3.7% from $4.0 million for
the three months ended June 30, 1998 to $4.2 million for the three months
ended June 30, 1999. In comparing the two periods, both interest income and
interest expense were higher in 1999 due to higher average balances of both
interest- earning assets and interest-bearing liabilities. The average
balance of interest-earning assets increased from $407.8 million for the three
months ended June 30, 1998 to $446.7 million for the three months ended June
30, 1999. The average balance of interest-bearing liabilities increased from
$340.3 million for the three months end June 30, 1998 to $374.0 million for
the same period in 1999. This increase was partially offset by lower average
yields on both interest-earning assets and interest-bearing liabilities due to
lower interest rate levels in general.
Provision for Loan Losses. The provision for loan losses increased from
$105,000 for the three months ended June 30, 1998 to $275,000 for the same
period in 1999. This increase resulted from continued loan portfolio growth
in the higher-risk lending categories of commercial and multifamily
construction/permanent loans, business loans and credit card loans during the
period.
Noninterest Income. Noninterest income declined 80.4% to $108,000 for the
three months ended June 30, 1999 compared with $552,000 for the three months
ended June 30, 1998. The decline resulted primarily from a $448,000
mark-to-market of the loans held for sale. The decline in the value of the
loans held for sale was due primarily to the sharp increase in mortgage rates
during June 1999.
Noninterest Expense. Noninterest expense increased 4.0% from $3.0 million for
the three months ended June 30, 1998 compared with $3.2 million for the same
period in 1999. The increase in compensation expense (24.9%) is partially
offset by lower charitable contributions. Compensation expense increased as
the result of increased staffing levels and general salary increases.
Charitable contributions decreased due to the large contribution made during
the fourth quarter of the fiscal year ended March 31, 1999.
Provision for Income Taxes. Federal income taxes decreased from $415,000 for
the three months ended June 30, 1998 to $208,000 for the three months ended
June 30, 1999 due to the reduction in taxable earnings.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management and Market Risk
- ----------------------------------------------
EverTrust Financial Group, Inc.'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. EverTrust
Financial Group, Inc.'s profitability is also affected by the level of
non-interest income and expenses. Non-interest income includes service
charges and fees on accounts and gains on sale of investments. Non-interest
expenses primarily include compensation and benefits, occupancy and equipment
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<PAGE>
expenses, deposit insurance premiums and data processing expenses. EverTrust
Financial Group, Inc.'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 June 30, 1999, the estimated percentage
change in Everett Mutual Bank's net interest income over a four-quarter period
and market value of portfolio equity based on the indicated changes in
interest rates. Management of EverTrust Financial Group, Inc. believes that
analysis of interest rate sensitivity set forth below for Everett Mutual Bank
would not be materially different for EverTrust Financial Group, Inc.'s on a
consolidated basis.
Change (In Basis Points ("bp")) Net Interest Income Market Value of
In Interest Rates (1) (next four quarters) Portfolio Equity
-------------------- -------------------- ----------------
400 bp 3.60% (25.28)%
300 (2.14) (17.84)
200 (7.36) (10.96)
100 (6.15) (5.40)
0 -- --
(100) 5.32 4.25
(200) 0.92 7.76
(300) (10.81) 10.59
(400) (22.84) 12.77
- --------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of Everett
Mutual Bank's operations to changes in interest rates in the preceding table
are described below. Although management believes these assumptions are
reasonable, the interest rate sensitivity of Everett Mutual Bank's assets and
liabilities and the estimated effects of changes in interest rates on Everett
Mutual Bank's (and hence EverTrust Financial Group, Inc.'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, deposit decay rates, and
the market value of certain assets under the various interest rate scenarios.
Prepayments for mortgage loans were based on management's evaluation of its
current loan portfolio. Prepayments were estimated to double from the base at
the -400bp rate shock and to decrease to 10% of the base at the +400bp rate
shock. Everett Mutual Bank's loans are the only assets or liabilities which
management assumed possess optionality for the purpose of determining market
value changes.
-11-
<PAGE>
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 Everett Mutual 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 market value is based upon the present
value of discounted cash flows using management's estimates of current
replacement rates to discount the cash flows. The net interest income table
is based upon a cash flow simulation of Everett Mutual 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 Everett Mutual Bank's assets and
liabilities would perform as set forth above. Also, a change in the U.S.
Treasury rates in the designated amounts accompanied by a change in the shape
of the Treasury yield curve would cause changes to the net market value and
net interest income other than those indicated above.
The following table sets forth at June 30, 1999 the estimated percentage
change in Commercial Bank of Everett's net interest income over a four-quarter
period and market value of portfolio equity based on the indicated changes in
interest rates.
Change (In Basis Points ("bp")) Net Interest Income Market Value of
In Interest Rates (1) (next four quarters) Portfolio Equity
-------------------- -------------------- ----------------
400 bp 15.89% (13.20)%
300 12.18 (9.99)
200 8.46 (6.50)
100 4.41 (3.15)
0 -- --
(100) (4.53) 2.54
(200) (8.73) 4.60
(300) (13.36) 5.89
(400) (18.43) 7.44
- --------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
Certain assumptions utilized by management in assessing the interest rate risk
of Commercial Bank of Everett were employed in preparing data included in the
preceding table. These assumptions were based upon proprietary data selected
by management and are reflective of historical results or current market
conditions. These assumptions relate to interest rates, repayment rates,
deposit decay rates, and the market value of certain assets under the various
interest rate scenarios.
Prepayment assumptions for mortgage-backed securities and the loan portfolio
were based upon industry standards for prepayments. Commercial Bank of
Everett's mortgage-backed securities and loan portfolio are the only assets or
liabilities which management assumed possess optionality for purposes of
determining market value changes.
Management assumed that the majority of non-maturity deposits had estimated
lives ranging from zero to five years, while only 2.0% of non-maturity
deposits had estimated lives ranging from five to 20 years. These assumptions
are based upon management's analysis of its customer base and competitive
factors.
The net interest income and 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 market value is based upon the present
-12-
<PAGE>
value of discounted cash flows using management's estimates of current
replacement rates to discount the cash flows. The net interest income table
is based upon a cash flow simulation of Commercial Bank of Everett'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 Commercial Bank of
Everett's assets and liabilities would perform as set forth above. Also, a
change in the U.S. Treasury rates in the designated amounts accompanied by a
change in the shape of the Treasury yield curve would cause changes to the net
market value and net interest income other than those indicated above.
EverTrust Financial Group, Inc. does not maintain a trading account for any
class of financial instrument nor does it purchase high-risk derivative
instruments. Everett Mutual Bank is authorized to engage in limited hedging
activities for its saleable loan pipeline, however, no such hedges were in
place at June 30, 1999. Furthermore, EverTrust Financial Group, Inc. 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.
Forward-looking Statements
Certain matters discussed in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may therefore
involve risks and uncertainties. The Company's actual results, performance, or
achievements may differ materially from those suggested, expressed, or implied
by forward looking statements due to a wide range of factors including, but
not limited to, non-bank financial services providers, regulatory changes,
Year 2000 issues and other risks detailed in the Company's reports filed with
the Securities and Exchange Commission.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
From time to time the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are considered
to have a material impact on the Company's financial position or results of
operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Shareholders
Not applicable.
-13-
<PAGE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None.
b) Reports on form 8-K
None.
-14-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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
October 6, 1999 -------------------------------------
Michael B. Hansen
President and Chief Executive Officer
(Principal Executive Officer)
/s/Jeffrey R. Mitchell
October 6, 1999 -------------------------------------
Jeffrey R. Mitchell
Chief Financial Officer
(Principal Financial and Accounting Officer)
-15-
<PAGE>
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0
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