SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 incorporation I.R.S. Employer
or organization) I.D. Number)
2707 Colby Avenue, Suite 600, Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 258-3645
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant
to Section 12(g) of the Act: Common Stock, no par value per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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. YES X NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
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As of June 1, 2000, there were issued and outstanding 8,103,637 shares of
the Registrant's Common Stock, which are listed on the Nasdaq National Market
System under the symbol "EVRT." Based on the average of the high/low price
for the Common Stock on June 1, 2000, the aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant was $80,388,079 (8,103,637
shares at $9.92 per share). For purposes of this calculation, Common Stock
held by officers and directors of the Registrant and the Registrant's Employee
Stock Ownership Plan and Trust are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders (Part III).
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I............................................................... 1
Item 1. Business................................................... 1
General.......................................................... 1
Market Area...................................................... 1
Lending Activities............................................... 1
Investment Activities............................................ 18
Deposit Activities and Other Sources of Funds.................... 21
Subsidiary Activities............................................ 26
Regulation....................................................... 30
Taxation......................................................... 38
Competition...................................................... 40
Personnel........................................................ 40
Item 2. Properties................................................. 40
Item 3. Legal Proceedings.......................................... 43
Item 4. Submission of Matters to a Vote of Security Holders........ 43
PART II.............................................................. 43
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................................... 43
Item 6. Selected Financial Data.................................... 44
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 46
General......................................................... 46
Forward-Looking Statements...................................... 46
Operating Strategy.............................................. 46
Comparison of Financial Condition at March 31, 2000 and 1999.... 47
Comparison of Operating Results for Years Ended March 31,
2000 and 1999................................................. 48
Comparison of Operating Results for Years Ended March 31,
1999 and 1998................................................. 51
Average Balances, Interest and Average Yields/Cost.............. 53
Rate/Volume Analysis............................................ 54
Yields Earned and Rates Paid.................................... 55
Asset and Liability Management and Market Risk.................. 55
Liquidity and Capital Resources................................. 58
Impact of Accounting Pronouncements and Regulatory Policies..... 59
Effect of Inflation and Changing Prices......................... 59
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................................... 60
Item 8. Financial Statements and Supplementary Data................ 60
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 96
PART III............................................................. 96
Item 10. Directors and Executive Officers of the Registrant........ 96
Item 11. Executive Compensation.................................... 97
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................... 97
Item 13. Certain Relationships and Related Transactions............ 98
PART IV.............................................................. 98
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................. 98
<PAGE>
PART I
Item 1. Business
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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 Everett Mutual Bank ("Everett Mutual" or the "Bank"), a Washington
chartered stock savings bank; Commercial Bank of Everett, a Washington
chartered commercial 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, 2000, the Company had total assets of $555.2 million, total
deposits of $383.0 million and total equity of $133.5 million. The Company's
business activities are conducted primarily by Everett Mutual, whose
operations are enhanced by the activities and operations of the Company's
other three subsidiaries: Commercial Bank of Everett, 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 Everett Mutual.
Everett Mutual 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.
Everett Mutual 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.
Market Area
The Bank conducts the majority of its lending and deposit operations out
of 11 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. See
"Item 2. Properties."
Lending Activities
General. Because Everett Mutual's lending is the most significant
business activity of the Company, this section will focus primarily on the
lending of the Bank. Historically, the principal lending activity has
consisted of the origination of loans secured by first mortgages on
owner-occupied, one- to- four family residences and loans for the construction
of one- to- four family residences. In recent years, Everett Mutual has
increased its origination of loans
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secured by multi-family properties, commercial real estate loans and
construction and land development loans. At March 31, 2000, Everett Mutual's
total loans were $398.0 million, representing approximately 96% of total
loans of $416.1 million.
The Bank's internal loan policy limits the maximum amount of loans to one
borrower to 15% of its capital. At March 31, 2000, the maximum amount which
Everett Mutual could have lent to any one borrower and the borrower's related
entities was approximately $12.9 million under its policy. At March 31, 2000,
Everett Mutual had loans to one builder/developer (including loans for
construction, land development and permanent financing) with an aggregate
committed balance in excess of this amount which were specifically approved as
policy exceptions by the Board of Directors: the borrower had $14.6 million
committed, of which $11.0 million was outstanding, representing 17.0% and
12.8% of Everett Mutual's total capital of $85.7 million, respectively. All
loans to the borrower were performing according to their terms at March 31,
2000. Loans in excess of 25% of Everett Mutual's capital are participated to
the Company on a last-in, first-out basis. There were no participations with
the Company outstanding as of March 31, 2000, since no amounts outstanding to
any one borrower exceeded 25% of Everett Mutual's capital.
Loan Portfolio Analysis. The following table sets forth the composition
of the Company's consolidated loan portfolio including loans of both Everett
Mutual and Commercial Bank of Everett by type of loan as of the dates
indicated. At March 31, 2000, Everett Mutual's and Commercial Bank of
Everett's total loans receivable were $398.0 million and $18.1 million,
respectively.
<TABLE>
At March 31,
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2000 1999 1998 1997 1996
---------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to- four
family
residential(1)... $70,042 14.73% $101,649 26.61% $ 95,305 26.73% $ 94,612 29.40% $ 93,544 29.78%
One- to- four
family construc-
tion and land
development...... 37,266 7.84 34,928 9.14 36,444 10.23 27,226 8.46 39,406 12.54
Income property:
Commercial con-
struction....... 23,871 5.02 12,491 3.27 4,620 1.30 1,624 0.50 1,895 0.60
Commercial real
estate.......... 128,892 27.10 72,573 19.00 76,121 21.36 70,042 21.76 62,596 19.93
Multi-family
construction.... 32,304 6.79 14,012 3.67 7,153 2.01 2,323 0.72 1,530 0.49
Multi-family
residential..... 136,727 28.75 115,972 30.35 111,975 31.42 109,003 33.87 101,831 32.42
Consumer
Residential
mortgages....... 5,211 1.10 4,867 1.27 4,318 1.21 4,299 1.34 4,824 1.54
Home equity and
second
mortgages....... 18,090 3.80 13,734 3.59 11,548 3.24 7,888 2.45 6,047 1.92
Credit cards..... 1,375 0.29 488 0.13 124 0.03 -- -- -- --
Automobiles...... 1,038 0.22 787 0.21 1,036 0.29 1,190 0.37 1,051 0.33
Other installment
loans........... 4,243 0.89 1,612 0.42 1,524 0.43 1,457 0.45 1,015 0.32
Business loans..... 16,494 3.47 8,949 2.34 6,226 1.75 2,181 0.68 407 0.13
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.... 475,553 100.00% 382,062 100.00% 356,394 100.00% 321,845 100.00% 314,146 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan
proceeds......... (49,460) (28,183) (22,563) (8,526) (6,784)
Deferred loan fees
and other........ (3,493) (3,239) (3,278) (3,243) (3,207)
Reserve for loan
losses........... (6,484) (5,672) (4,897) (4,509) (4,178)
-------- -------- -------- -------- --------
416,116 344,968 325,656 305,566 299,977
Loans receivable
held for sale..... -- (29,641) (13,705) (12,432) (7,744)
-------- -------- -------- -------- --------
Loans receivable,
net...............$416,116 $315,327 $311,951 $293,134 $292,233
======= ======== ======== ======== ========
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(1) Includes owner/builder construction/permanent loans of $6.0 million, $5.5 million, $8.4 million, $5.3
million and $5.4 million at March 31, 2000, 1999, 1998, 1997 and 1996, respectively.
</TABLE>
2
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Residential One- to- Four Family Lending. At March 31, 2000, $70.0
million of the Company's loan portfolio consisted of permanent loans secured
by one- to- four family residences. This amount represents 14.7% of the
Company's total loans.
Everett Mutual originates both fixed-rate loans and adjustable-rate
loans. Generally, 30 year fixed-rate loans are originated to meet the
requirements for sale in the secondary market to Federal National Mortgage
Association ("Fannie Mae"), however, from time to time, a portion of these
fixed-rate loans originated by Everett Mutual may be retained in Everett
Mutual's loan portfolio to meet Everett Mutual's asset/liability management
objectives.
At March 31, 2000, $37.1 million, or 55.2%, of the Company's one- to-
four family loan portfolio consisted of fixed rate one- to- four family
mortgage loans, both held for sale and held for investment. Everett Mutual
also offers adjustable rate mortgage loans at rates and terms competitive with
market conditions. All of Everett Mutual's adjustable rate mortgage loans are
retained in its loan portfolio and not with a view toward sale in the
secondary market.
Everett Mutual offers several adjustable rate mortgage products which
adjust annually after an initial period ranging from one to seven years.
Contractual annual adjustments generally range from 2% to unlimited, subject
to a general overall limitation of 6%. These adjustable rate mortgage
products have generally utilized the weekly average yield on one year U.S.
Treasury securities adjusted to a constant maturity of one year plus a margin
of 2.5% to 3.5%. Adjustable rate mortgage loans held in Everett Mutual's
portfolio do not permit negative amortization of principal and carry no
prepayment restrictions. Borrower demand for adjustable rate mortgage loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan.
The relative amount of fixed-rate mortgage loans and adjustable rate mortgage
loans that can be originated at any time is largely determined by the demand
for each in a competitive environment. At March 31, 2000, $30.1 million, or
44.8%, of the Company's one- to- four family loan portfolio consisted of
adjustable rate mortgage loans.
The retention of adjustable rate mortgage loans in Everett Mutual's loan
portfolio helps reduce Everett Mutual's exposure to changes in interest rates.
There are, however, credit risks resulting from the potential of increased
interest to be paid by the customer due to increases in interest rates. It is
possible that, during periods of rising interest rates, the risk of default on
adjustable rate mortgage loans may increase as a result of repricing and the
increased costs to the borrower. Furthermore, because the adjustable rate
mortgage loans originated by Everett Mutual may provide, as a marketing
incentive, for initial rates of interest below the rates which would apply
were the adjustment index used for pricing initially, these loans are subject
to increased risks of default or delinquency. Everett Mutual attempts to
reduce the potential for delinquencies and defaults on adjustable rate
mortgage loans by qualifying the borrower based on the borrower's ability to
repay the loan assuming that the maximum interest rate that could be charged
at the first adjustment period remains constant during the loan term. Another
consideration is that although adjustable rate mortgage loans allow Everett
Mutual to increase the sensitivity of its asset base due to changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, Everett Mutual has no assurance that yields on adjustable rate
mortgage loans will be sufficient to offset increases in Everett Mutual's cost
of funds.
While fixed-rate, single-family residential mortgage loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding
for substantially shorter periods. This is because borrowers often prepay
their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans
in Everett Mutual's loan portfolio contain due-on-sale clauses providing that
the Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, Everett Mutual enforces these
due-on-sale clauses to the extent permitted by law and as business judgment
dictates. Thus, average loan maturity is a function of, among other factors,
the level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
3
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The Bank requires fire and extended coverage casualty insurance to be
maintained on all of its real estate secured loans. Everett Mutual is not
able to obtain and generally does not require earthquake insurance because of
competitive market factors.
Everett Mutual's lending policies generally limit the maximum loan-
to-value ratio on mortgage loans secured by owner-occupied properties to 95%
of the lesser of the appraised value or the purchase price. However, the Bank
usually obtains private mortgage insurance on the portion of the principal
amount that exceeds 80% of the appraised value of the security property. The
maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied
properties is generally 75%, or 70% for loans originated for sale in the
secondary market to Fannie Mae.
Construction and Land Development Lending. Everett Mutual has an
established market niche as an originator of construction and land development
loans. Competition from other financial institutions has increased in recent
periods and the Bank expects that its margins on construction loans may be
reduced in the future.
The Bank currently originates two types of residential construction
loans: speculative construction loans, and owner/builder loans. To a
lesser, but increasing, extent, Everett Mutual also originates construction
loans for the development of multi-family and commercial properties. Annual
originations of construction and land development loans have been $29.5
million, $32.1 million and $42.3 million for the three years ended March 31,
2000, 1999 and 1998, respectively. Subject to market conditions, Everett
Mutual intends to continue to emphasize its construction lending activities.
At March 31, 2000, the composition of the Company's construction and land
development loan portfolio was as follows:
Outstanding Percent of
Balance Total
------- -----
(Dollars in thousands)
Speculative construction ................... $15,564 15.6%
Owner/builder construction ................. 6,040 6.1
Multi-family ............................... 32,304 32.5
Land development............................ 21,702 21.8
Commercial real estate ..................... 23,871 24.0
------- -----
Total..................................... $99,481 100.0%
======= =====
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either Everett Mutual or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to service the
debt on the speculative construction loan and finance real estate taxes and
other carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. The Bank lends
to approximately 30 builders located in its primary market area, each of which
generally have two to 25 speculative loans from the Bank during a 12 month
period, with approximately five to six loans outstanding at any one time.
Rather than originating lines of credit to home builders to construct several
homes at once, Everett Mutual generally originates and underwrites a separate
loan for each home. Speculative construction loans are originated for a term
of 12 months, with a variable interest rate tied to the prime rate as
published in The Wall Street Journal, plus a margin ranging from 0% to 2%, and
with a loan-to-value ratio of no more than 80% of the appraised estimated
value of the completed property. During this 12 month period, the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance. At March 31, 2000, speculative construction loans totaled $15.6
million, or 15.6%, of the total construction loan portfolio. At March 31,
2000, the Bank had two borrowers each with aggregate outstanding
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<PAGE>
speculative loan balances of more than $1.0 million, all of which were
performing according to their respective terms and the largest of which
amounted to $3.8 million.
Owner/builder construction loans are originated to the home owner rather
than the home builder as a single loan that automatically converts to a
permanent loan at the completion of construction. The construction phase of a
owner/builder construction loan generally lasts six to 12 months. Borrowers
have three financing options:
. they may opt for a fixed interest rate during the construction
period, with the rate on the permanent loan set at the completion of
construction based on the required net yield for Fannie Mae loans,
plus a margin;
. the rate on the construction and permanent loans will be set at the
start of construction based on the required net yield for Fannie Mae
loans, plus a margin and an additional fixed fee based on the loan
amount; or,
. the borrower may choose an adjustable rate mortgage option during
the construction and permanent phases.
Loan-to-value ratios under all three options are up to 80%, or up to 90%
with private mortgage insurance, of the appraised estimated value of the
completed property or cost, whichever is less. During the construction
period, the borrower is required to make monthly payments of accrued interest
on the outstanding loan balance. At March 31, 2000, owner/builder
construction loans totaled $6.0 million, or 6.1%, of the total construction
loan portfolio. At March 31, 2000, the largest outstanding owner/builder
construction loan had an outstanding balance of $480,000 and was performing
according to its terms.
For over 15 years, Everett Mutual has originated loans to local real
estate developers for the purpose of developing residential subdivisions,
which includes installing roads, sewers, water and other utilities for plats
generally ranging from 10 to 50 lots. At March 31, 2000, subdivision
development loans totaled $21.7 million, or 21.8% of construction and land
development loans receivable. Land development loans are secured by a lien on
the property and made for a period of one to three years with generally
variable interest rates tied to the prime rate as published in The Wall Street
Journal, plus a margin ranging from 0% to 3%, and are made with loan-to-value
ratios not exceeding 75%. Monthly interest payments are required during the
term of the loan. Land development loans are structured so that the Bank is
repaid in full upon the sale by the borrower of approximately 80% of the
subdivision lots. Substantially all of Everett Mutual's land development
loans are secured by property located in its primary market area. In
addition, in the case of a corporate borrower, Everett Mutual also obtains
personal guarantees from corporate principals and reviews their personal
financial statements. At March 31, 2000, Everett Mutual had no nonaccruing
land development loans.
Land development loans secured by land under development involve greater
risks than one- to- four family residential mortgage loans because such loans
are advanced upon the predicted future value of the developed property. If
the estimate of the future value of the developed property proves to be
inaccurate, in the event of default and foreclosure, Everett Mutual may be
confronted with a property the value of which is insufficient to assure full
repayment. The Bank attempts to minimize this risk by limiting the maximum
loan-to-value ratio on land loans to 75% of the estimated developed value of
the secured property and getting guarantees.
Everett Mutual also provides construction and construction permanent
financing for multi-family and commercial properties. At March 31, 2000, such
construction loans amounted to $56.2 million of which $51.3 million was
construction/permanent financing (i.e., loans will role into permanent
financing when certain lease-up and debt service requirements are met) at the
completion of the construction phase. These loans are typically secured by
apartment buildings, condominiums, warehouses, mini-storage facilities,
industrial use buildings, office and medical office buildings and retail
shopping centers located in the Bank's market area and typically range in
amount from $500,000 to $5.0 million. At March 31, 2000, the largest
multi-family construction loan was for $4.8 million
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<PAGE>
(representing Everett Mutual's shares of a loan participation purchased from
another lender in total loan amount of $14.6 million) secured by a 192 unit
apartment building located in Everett Mutual's market area and was performing
according to its terms. At March 31, 2000, the largest commercial construction
loan was for $9.5 million (of which $1.5 million was participated with another
lender), secured by an office building located in the Bank's market area and
was performing according to its terms. Periodically, Everett Mutual
purchases, without recourse to the seller other than for fraud, from other
lenders participation interests in multi-family and commercial construction
loans secured by properties located in Everett Mutual's market area. The Bank
underwrites such participation interests according to its own standards.
All construction loans must be approved by the Bank's Loan Committee.
See "-- Loan Solicitation and Processing." Prior to preliminary approval of
any construction loan application, Everett Mutual reviews the existing or
proposed improvements, identifies the market for the proposed project and
analyzes the pro forma data and assumptions on the project. In the case of a
speculative or custom construction loan, Everett Mutual reviews the experience
and expertise of the builder and the borrower. After preliminary approval has
been given, the application is processed, which includes obtaining credit
reports, financial statements and tax returns on the borrowers and guarantors,
an independent appraisal of the project, and any other expert reports
necessary to evaluate the proposed project. In the event of cost overruns,
the Bank requires that the borrower increase the funds available for
construction by depositing its own funds into a loans in process account.
Loan disbursements during the construction period are made to the builder
based on a line item budget, which is assessed by periodic on-site inspections
by qualified employees of Everett Mutual or an independent inspection service.
Everett Mutual believes that its internal monitoring system helps reduce many
of the risks inherent in its construction lending.
Everett Mutual originates construction loan applications through walk-in
customers, customer referrals, contacts in the business community and real
estate brokers seeking financing for their clients.
Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, Everett Mutual may be required to advance funds
beyond the amount originally committed to permit completion of the project.
If the estimate of value upon completion proves to be inaccurate, Everett
Mutual may be confronted with a project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due. Everett Mutual has sought to address these risks by adhering to
strict underwriting policies, disbursement procedures, and monitoring
practices. In addition, because the Bank's construction lending is primarily
secured by properties in its market area, changes in the local and state
economies and real estate markets could adversely affect Everett Mutual's
construction loan portfolio.
Multi-Family Lending. At March 31, 2000, $136.7 million, or 28.8% of the
Bank's total loan portfolio was secured by multi-family dwelling units, which
consist of more than four units, located primarily in its market area.
Multi-family adjustable rate mortgage loans are originated with variable
rates which generally adjust annually after an initial period ranging from one
to seven years. Contractual annual adjustments generally range from 2% to
unlimited, subject to a overall limitation of 6%. These adjustable rate
mortgage loans have generally utilized the weekly average yield on one year
U.S. Treasury securities adjusted to a constant maturity of one year plus a
margin of 2.50% to 3.50%, with principal and interest payments fully
amortizing over terms of up to 30 years. Everett Mutual
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has also originated fixed rate multi-family loans due in five and ten years,
with amortization terms of up to 30 years. Multi-family loans originated
since 1993 generally contain prepayment penalties during the first three
years. Multi-family loans typically range in principal amount from $500,000
to $5.0 million. At March 31, 2000, the largest non-construction multi-family
loan was on a 85 unit apartment building with an outstanding principal balance
of $4.4 million located in the Bank's market area. At March 31, 2000, this
loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally 75%.
Everett Mutual requires appraisals of all properties securing multi-family
real estate loans. Appraisals are performed by an independent appraiser
designated by the Bank, all of which are reviewed by Everett Mutual's review
appraiser. Everett Mutual requires its multi-family loan borrowers to submit
financial statements and rent rolls on the subject property annually. Everett
Mutual also inspects the subject property annually if the balance of the loan
exceeds $500,000. Everett Mutual generally imposes a minimum debt coverage
ratio of approximately 1.20 times for loans secured by multi-family
properties.
Multi-family mortgage lending affords Everett Mutual an opportunity to
receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by multi-
family properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks
to minimize these risks by carefully reviewing the financial condition of the
borrower, the quality of the collateral and the management of the property
securing the loan. Everett Mutual generally obtains loan guarantees from
financially capable parties based on a review of personal financial
statements, or if the borrower is a corporation, Everett Mutual also generally
obtains personal guarantees from corporate principals based on a review of
personal financial statements.
Commercial Real Estate Lending. Commercial real estate loans totaled
$128.9 million, or 27.1% of total loans receivable at March 31, 2000, and
consisted of 215 loans. Everett Mutual originates commercial real estate
loans primarily secured by warehouses, mini-storage facilities, industrial use
buildings, office and medical office buildings and retail shopping centers
located in Everett Mutual's market area. Commercial real estate loans
typically range in principal amount from $500,000 to $5.2 million. At March
31, 2000, the largest commercial real estate loan on one property had an
outstanding balance of $5.2 million and is secured by an office building and
marina located in the Bank's market area. This loan was performing according
to its terms at March 31, 2000.
Commercial adjustable rate mortgage loans are originated with variable
rates which generally adjust annually after an initial period ranging from one
to seven years. Contractual annual adjustments generally range from 2% to
unlimited, subject to an overall limitation of 6%. These adjustable rate
mortgage loans have generally utilized the weekly average yield on one year
U.S. Treasury securities adjusted to a constant maturity of one year plus a
margin of 2.75% to 3.50%, with principal and interest payments fully
amortizing over terms of up to 30 years but generally due in ten years.
Everett Mutual has also originated fixed rate commercial loans due in five
and ten years, with amortization terms of up to 30 years. Commercial loans
originated since 1993 generally contain prepayment penalties during the first
three years.
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent appraiser designated
by Everett Mutual, all of which are reviewed by the Bank's review appraiser.
Everett Mutual requires its commercial loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Bank also
inspects the subject property annually if the balance of the loan exceeds
$500,000. Everett Mutual considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the
quality of management involved with the property. Everett Mutual generally
imposes a minimum debt coverage ratio of approximately 1.30 times for
originated loans secured by income producing commercial properties. The Bank
generally obtains loan guarantees from financially capable parties based on a
review of personal
8
<PAGE>
financial statements, or if the borrower is a corporation, Everett Mutual also
generally obtains personal guarantees from corporate principals based on a
review of personal financial statements.
Commercial real estate lending affords Everett Mutual an opportunity to
receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in
the real estate market or the economy. Everett Mutual seeks to minimize these
risks by limiting the maximum loan-to-value ratio to 75% and carefully
reviewing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.
Consumer Lending. Consumer lending has traditionally been a secondary,
but recently growing part of the Bank's business. Consumer loans generally
have shorter terms to maturity and higher interest rates than mortgage loans.
Consumer loans include home equity lines of credit, home improvement loans,
second mortgage loans, lot acquisition loans, savings account loans,
automobile loans, boat loans, recreational vehicle loans and personal
unsecured loans. Consumer loans are made with both fixed and variable
interest rates and with varying terms. At March 31, 2000, consumer loans
amounted to $30.0 million, or 6.3% of the total loan portfolio.
At March 31, 2000, the largest component of the consumer loan portfolio
consisted of real estate secured loans, such as residential first mortgage
loans, second mortgages and home equity lines of credit, which totaled $18.1
million, or 3.8%, of the total loan portfolio. Home equity lines of credit
and second mortgage loans are made for purposes such as the improvement of
residential properties, debt consolidation and education expenses, among
others. The majority of these loans are made to existing customers and are
secured by a first or second mortgage on residential property. Everett Mutual
also solicits loans from non-customers. The loan-to-value ratio is typically
80% or less, when taking into account both the first and second mortgage
loans. Second mortgage loans typically carry fixed interest rates with a
fixed payment over a term between five and 15 years. Home equity lines of
credit allow for a ten year draw period, plus an additional 15 year repayment
period, and the interest rate is tied to the prime rate as published in The
Wall Street Journal, plus a margin.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans. Everett
Mutual believes that these risks are not as prevalent in the case of Everett
Mutual's consumer loan portfolio because a large percentage of the portfolio
consists of first and second mortgage loans and home equity lines of credit
for existing customers that are underwritten in a manner such that they result
in credit risk that is substantially similar to one- to- four family
residential mortgage loans. Nevertheless, second mortgage loans and home
equity lines of credit have greater credit risk than one- to- four family
residential mortgage loans because they are secured by mortgages subordinated
to the existing first mortgage on the property, which may or may not be held
by the Bank. At March 31, 2000, there were $4,000 of consumer loans
delinquent in excess of 90 days or in nonaccrual status.
Loan Maturity and Repricing. The following table sets forth information
at March 31, 2000 regarding the dollar amount of loans maturing or repricing
in the Company's portfolio based on their contractual terms to maturity or
repricing, but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated
8
<PAGE>
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loan losses.
<TABLE>
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- -------- ------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to- four family residential...... $ 17,514 $10,333 $ 3,240 $8,122 $27,934 $ 67,143
One- to- four family construction
and land development................ 24,578 881 818 -- 5 26,282
Income property:
Commercial construction............. 8,809 3,695 228 2,161 1,564 16,457
Commercial real estate.............. 47,954 23,942 33,996 19,769 3,138 128,799
Multi-family construction........... 6,125 3,884 128 4,905 -- 15,042
Multi-family residential............ 61,177 36,180 24,321 14,423 626 136,727
Consumer:
Residential mortgages................. 401 1,008 340 1,474 1,988 5,211
Home equity and second mortgages...... 3,140 74 824 3,513 6,508 14,059
Credit cards.......................... 209 -- -- -- -- 209
Automobiles........................... 66 185 538 249 -- 1,038
Other installment loans............... 1,819 282 199 154 73 2,527
Business loans......................... 9,105 1,364 857 971 302 12,599
-------- ------- ------- ------- ------- ---------
Total.................................. $180,897 $81,828 $65,489 $55,741 $42,138 $426,093
======== ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
March 31, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Real Estate:
One- to- four family residential... $37,081 $30,062
One- to- four family construction
and land development............. 788 25,494
Income property:
Commercial construction.......... 5,429 11,028
Commercial real estate........... 34,085 94,714
Multi-family construction........ 5,371 9,671
Multi-family residential......... 16,987 119,740
Consumer:
Residential mortgages.............. 5,180 31
Home equity and second mortgages... 10,922 3,137
Credit cards....................... 209 --
Automobiles........................ 998 40
Other installment loans............ 1,432 1,095
Business loans...................... 3,706 8,893
-------- --------
Total............................... $122,188 $303,905
======== ========
9
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-
sale clauses on loans generally give Everett Mutual the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates.
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, loan brokers for primarily
multi-family and commercial loans, and referrals from builders and realtors.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral generally is undertaken by an appraiser
retained by Everett Mutual and certified by the State of Washington.
Mortgage loan applications are initiated by loan officers and are
required to be approved by Everett Mutual's Management Loan Committee, which
presently consists of the President and Chief Operating Officer, the Chief
Financial Officer, the Credit Administrator and the Branch Administrator. All
loans up to and including $1.5 million may be approved by the Management Loan
Committee without Board approval; loans in excess of $1.5 million and up to
$4.0 million must be approved by the Board Loan Committee; and loans exceeding
$4.0 million, as well as loans of any size granted to a single borrower whose
aggregate lending relationship exceeds 15% of total capital, must be approved
by Everett Mutual's Board of Directors.
Loan Originations, Purchases and Sales. During the year ended March 31,
2000, the Company's total gross loan originations were $215.3 million.
Periodically, Everett Mutual purchases participation interests in construction
and land development loans and multi-family loans, secured by properties
located in the Bank's primary market area, from other lenders. Such purchases
are underwritten to Everett Mutual's underwriting guidelines and are without
recourse to the seller other than for fraud. See "-- Construction and Land
Development Lending" and "-- Multi-Family Lending."
Consistent with its asset/liability management strategy, Everett Mutual's
policy has been to retain in its portfolio all of the adjustable rate mortgage
loans and mid to shorter-term fixed rate loans. Thirty-year fixed rate loans
are originated with a view toward sale in the secondary market to Fannie Mae;
however, from time to time, a portion of fixed-rate loans may be retained in
the Bank's portfolio to meet its asset/liability objectives. Loans sold in
the secondary market are generally sold on a servicing retained basis. At
March 31, 2000, Everett Mutual's loan servicing portfolio totaled $95.3
million.
10
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
-------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Loans originated:
Real estate:
One- to- four family residential.......... $ 19,663 $ 39,034 $ 26,267
One- to- four family construction and
loan development........................ 29,537 32,063 42,274
Income property
Commercial construction................. 19,520 9,941 4,620
Commercial real estate.................. 59,972 11,095 13,100
Multi-family construction............... 26,768 11,387 4,354
Multi-family residential................ 31,795 20,892 13,299
Consumer:
Residential mortgages..................... 4,139 2,657 1,608
Home equity loans......................... 6,780 7,421 6,522
Credit cards.............................. 1,027 427 --
Automobiles............................... 780 311 526
Other installment loans................... 3,468 949 742
Business loans............................. 11,828 4,517 5,092
-------- -------- --------
Total loans originated ................. 215,277 140,694 118,404
-------- -------- --------
Loans purchased............................. 1,000 -- --
-------- -------- --------
Loans sold:
Total whole loans sold..................... 33,895 3,958 7,206
Participation loans........................ 1,500 -- --
-------- -------- --------
Total loans sold........................ 35,395 3,958 7,206
-------- -------- --------
Principal repayments........................ 91,280 113,624 82,264
Loans securitized........................... -- -- --
Transfer to real estate owned............... -- 117 102
Increase (decrease) in other items, net..... (17,642) (2,908) (8,354)
-------- -------- --------
Net increase (decrease) in loans
receivable, net and loans held for sale.... $ 71,960 $ 20,087 $ 20,478
======== ======== ========
Loan Origination and Other Fees. The Company, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by the Company's subsidiary financial
institutions range up to 1.50%. Current accounting standards require fees
received, net of certain loan origination costs, for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income at the time of prepayment. The Company had $3.5 million
of net deferred mortgage loan fees at March 31, 2000.
Nonperforming Assets and Delinquencies. Everett Mutual generally
assesses late fees or penalty charges on delinquent loans of 5% of the monthly
loan payment amount. Substantially all fixed-rate and adjustable rate
mortgage loan payments are due on the first day of the month; however, the
borrower is given a 15 day grace period to make the loan payment. When a
mortgage loan borrower fails to make a required payment when due, Everett
Mutual institutes collection procedures. The first notice is mailed to the
borrower on the 16th day requesting payment
11
<PAGE>
and assessing a late charge. Attempts to contact the borrower by telephone
generally begin upon the 30th day of delinquency. If a satisfactory response
is not obtained, continuous follow-up contacts are attempted until the loan
has been brought current. Before the 90th day of delinquency, attempts to
interview the borrower are made to establish the cause of the delinquency,
whether the cause is temporary, the attitude of the borrower toward the debt,
and a mutually satisfactory arrangement for curing the default.
If the borrower is chronically delinquent and all reasonable means of
obtaining payment on time have been exhausted, foreclosure is initiated
according to the terms of the security instrument and applicable law.
Interest income on loans is reduced by the full amount of accrued and
uncollected interest (i.e., placed on nonaccrual status).
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, Everett Mutual institutes the same
collection procedures as for its mortgage loan borrowers.
Everett Mutual's Board of Directors is informed monthly as to the status
of all mortgage and consumer loans that are delinquent by more than 90 days or
nonaccruing, the status on all loans currently in foreclosure, and the status
of all foreclosed and repossessed property owned by Everett Mutual.
The following table sets forth information with respect to the Company's
non-performing assets and restructured loans within the meaning of Statement
of Financial Accounting Standards No. 15 for the periods indicated.
12
<PAGE>
<TABLE>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to- four family residential........ $ 402 $ -- $ 517 $ 657 $ 489
Commercial real estate.................. -- 364 293 313 352
Consumer:
Home equity and second mortgages....... -- -- 27 47 --
Automobiles............................ 4 7 4 6 3
Other installment loans................ -- 7 -- -- 5
------- ------ ------- ------- -------
Total.............................. 406 378 841 1,023 849
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
One- to- four family construction and
land development................... -- -- -- -- 419
Income property:
Multi-family residential................ -- -- -- -- --
------- ------ ------- ------- -------
Total.............................. -- -- -- -- 419
Total of nonaccrual and 90 days
past due loans............................. 406 378 841 1,023 1,268
Real estate owned acquired in satisfaction
of debts previously contracted............ -- -- -- 876 998
Total nonperforming assets......... 406 378 841 1,899 2,266
Restructured loans .......................... -- -- -- -- --
Nonaccrual and 90 days or more past due
loans as a percentage of loans
receivable, net.......................... 0.10% 0.12% 0.27% 0.35% 0.43%
Nonaccrual and 90 days or more past due
loans as a percentage of total assets.... 0.07% 0.08% 0.20% 0.26% 0.33%
Nonperforming assets as a percentage of
total assets............................. 0.07% 0.08% 0.20% 0.48% 0.59%
</TABLE>
Additional interest income, which would have been recorded for the year
ended March 31, 2000 had nonaccruing loans been current in accordance with
their original terms, amounted to approximately $7,200. The amount of
interest included in interest income on such loans for the year ended March
31, 2000 was approximately $42,000.
Real Estate Owned. Real estate acquired by Everett Mutual as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value. Subsequent to foreclosure, the
property is carried at the lower of the foreclosed amount or fair value, less
estimated selling costs. At March 31, 2000, Everett Mutual did not have any
real estate owned.
Restructured Loans. Under generally accepted accounting principles,
Everett Mutual is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if Everett Mutual for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that
the Bank would not otherwise consider.
13
<PAGE>
Debt restructures or loan modifications for a borrower do not necessarily
always constitute troubled debt restructures, however, and troubled debt
restructures do not necessarily result in nonaccrual loans. Everett Mutual
had no restructured loans as of March 31, 2000.
Asset Classification. Applicable regulations require that each insured
institution review and classify its assets on a regular basis. In addition,
in connection with examinations of insured institutions, regulatory examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted. When an insured institution classifies
problem assets as either substandard or doubtful, it is required to establish
general allowances for loan losses in an amount deemed prudent by management.
These allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities and the risks
associated with particular problem assets. When an insured institution
classifies problem assets as loss, it charges off the balances of the asset.
Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated as special mention. Everett
Mutual's determination as to the classification of its assets and the amount
of its valuation allowances is subject to review by the FDIC and the Division
which can order the establishment of additional loss allowances.
Allowance for Loan Losses. Everett Mutual has established a systematic
methodology for the determination of provisions for loan losses that takes
into consideration the need for an overall general valuation allowance.
In originating loans, Everett Mutual recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower, general
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. Management recognizes that these losses will occur
over the life of the loan and may not necessarily result in current impairment
of the loan balance. Management also believes that certain loans may
currently be impaired that are not yet evident in the loan's performance. The
general valuation allowance for loan losses is maintained to cover these
losses inherent in the loan portfolio but not yet apparent. Management
reviews the adequacy of the allowance at least quarterly, as computed by a
consistently applied formula-based methodology, supplemented by management's
assessment of current economic conditions, past loss and collection
experience, and risk characteristics of the loan portfolio. At March 31,
2000, the Company had a general allowance for loan losses of $6.5 million,
representing 1.53% of total loans, compared to $5.7 million, or 1.62% of total
loans at March 31, 1999.
The Company recorded a $810,000 provision for loan losses for the year
ended March 31, 2000, compared to $780,000 and $420,000 for the years ended
March 31, 1999 and 1998, respectively. 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 risks in the loan
portfolio, including 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 from which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.
The Company's charge-offs as a percentage of average loans outstanding
reflected in the following table has been consistent over the past several
years, largely the result of extremely favorable economic conditions in the
market area. The level of non-performing assets has fluctuated from month to
month, and the allowance for loan losses as a percentage of nonperforming
loans of 1,593.12% at March 31, 2000 is considered an anomaly not being
indicative of potential loss inherent in the portfolio. The extremely low
amount of nonperforming loans at March 31, 2000 cannot
14
<PAGE>
reasonably be relied upon to reflect the current level of risk inherent in the
loan portfolio, especially given the dollar amount of loans in higher-risk
lending categories, including construction, land development, multi-family and
commercial loans at March 31, 2000.
Although allocated, the entire allowance for loan losses is available for
the entire portfolio. The following table reflects the allowance allocated to
each respective loan category using a consistently applied formula-based
approach. Reserve percentages are applied against outstanding loans and
certain commitments as follows: single family loans, 0.80%; two- to- four
family loans, 1.00%; permanent multi-family loans, 1.25%; permanent commercial
loans, 1.50%; construction and land development loans, 2.00%; consumer loans,
1.00% to 2.00% based on collateral type; business loans generally, 1.00% to
2.00% based on credit grade. These reserve factors have been developed based
on management's understanding of the relative credit risk which could indicate
it is probable that current impairment has occurred in the portfolio, and to a
lesser extent, the factors that peers are applying to similar loan categories.
The management loan committee reviews the reserve factors in conjunction
with the quarterly loan loss allowance analysis and may be adjusted in future
periods to reflect changes in delinquency percentages and loss experience.
The unallocated portion of the reserve, if any, represents the amount
management deems necessary to account for estimation risk in the formula
method, and to incorporate other critical factors impacting credit quality,
such as 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, and the economic
conditions described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained herein.
Management believes that the amount maintained in the allowances will be
adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Company believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principals, there
can be no assurance that regulators, in reviewing the Company's loan
portfolio, will not request the Company, or one of its subsidiaries, to
increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Company's financial condition and results of operations.
15
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses at the dates and for the periods indicated.
Year Ended March 31,
-----------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period.. $5,672 $4,897 $4,509 $4,178 $3,757
Provision for loan losses......... 810 780 420 420 458
Charge-offs:
Mortgage loans:
One- to- four family
residential................ -- -- -- 43 --
One- to- four family
construction and land
development................ -- -- -- 38 --
Income property:
Commercial real estate....... -- -- 112 -- 33
Consumer:
Home equity and second
mortgages.................. -- -- -- 5 --
Automobiles.................. -- 2 -- 4 5
Other installment loans...... 12 3 -- -- 16
Business loans............... 4 -- -- -- --
------ ------ ------ ------ ------
Total charge-offs.......... 16 5 112 90 54
Recoveries:
Income property:
Commercial construction...... -- -- 79 -- --
Consumer:
Home equity and second
mortgages.................. 18 -- -- -- --
Automobiles.................. -- -- 1 -- 5
Other installment loans...... -- -- -- 1 12
------ ------ ------ ------ ------
Total recoveries........... 18 -- 80 1 17
------ ------ ------ ------ ------
Net charge-offs................ (2) 5 32 89 37
------ ------ ------ ------ ------
Balance at end of period...... $6,484 $5,672 $4,897 $4,509 $4,178
====== ====== ====== ====== ======
Allowance for loan losses as a
percentage of total loans
outstanding at the end of
the period ..................... 1.53% 1.62% 1.48% 1.45% 1.37%
Net charge-offs as a percentage of
average loans outstanding during
the period...................... --% --% 0.01% 0.03% 0.01%
Allowance for loan losses as a
percentage of nonperforming
loans at end of period..........1593.12% 1500.53% 582.28% 440.33% 329.59%
16
<PAGE>
<TABLE>
The following table sets forth the breakdown of the Company's allowance for loan losses by loan
category for the periods indicated.
At March 31,
----------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans
of in of in of in
Loan Loan Category Loan Loan Category Loan Loan Category
Loss Amount to Loss Amount to Loss Amount to
Allow- by Total Allow- by Total Allow- by Total
ance Category Loans ance Category Loans ance Category Loans
---- -------- ----- ---- -------- ----- ---- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to- four family
residential........... $ 481 $ 70,042 14.73% $ 784 $101,649 26.61% $ 320 $ 95,305 26.73%
One- to- four family
construction and
land development...... 775 37,266 7.84 838 34,928 9.14 1,008 36,444 10.23
Income property:
Commercial
construction......... 583 23,871 5.02 271 12,491 3.27 71 4,620 1.30
Commercial real
estate............... 1,729 128,892 27.10 1,073 72,573 19.00 1,142 76,121 21.36
Multi-family
construction......... 536 32,304 6.79 267 14,012 3.67 138 7,153 2.01
Multi-family
residential.......... 1,591 136,727 28.75 1,450 115,972 30.35 1,399 111,975 31.42
Consumer:
Residential mortgages. 138 5,211 1.10 134 4,867 1.27 121 4,318 1.21
Home equity and second
mortgages............ 250 18,090 3.80 207 13,734 3.59 186 11,548 3.24
Credit cards.......... 12 1,375 0.29 16 488 0.13 6 124 0.03
Automobiles........... 19 1,038 0.22 16 787 0.21 22 1,036 0.29
Other installment
loans................ 60 4,243 0.89 43 1,612 0.42 31 1,524 0.43
Business loans.......... 310 16,494 3.47 196 8,949 2.34 125 6,226 1.75
Total allocated..... 6,484 -- -- 5,295 -- -- 4,568 -- --
Unallocated............. -- -- -- 377 -- -- 329 -- --
------ -------- ------ ------- -------- ------ ------- -------- ------
Total............... $6,484 $475,553 100.00% $ 5,672 $382,062 100.00% $ 4,897 $356,394 100.00%
====== ======== ====== ======= ======== ====== ======= ======== ======
</TABLE>
<TABLE>
At March 31,
------------------------------------------------------
1997 1996
-------------------------- --------------------------
Percent Percent
Amount of Loans Amount of Loans
of in of in
Loan Loan Category Loan Loan Category
Loss Amount to Loss Amount to
Allow- by Total Allow- by Total
ance Category Loans ance Category Loans
---- -------- ----- ---- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to- four family
residential........... $ 334 $ 94,612 29.40% $ 324 $ 93,544 29.78%
One- to- four family
construction and
land development...... 778 27,226 8.46 838 39,406 12.54
Income property:
Commercial
construction......... 42 1,624 0.50 35 1,895 0.60
Commercial real
estate............... 1,051 70,042 21.76 949 62,596 19.93
Multi-family
construction......... 4 2,323 0.72 24 1,530 0.49
Multi-family
residential.......... 1,377 109,003 33.87 1,273 101,831 32.42
Consumer:
Residential mortgages. 102 4,299 1.34 92 4,824 1.54
Home equity and second
mortgages............ 137 7,888 2.45 107 6,047 1.92
Credit cards.......... -- -- -- -- -- --
Automobiles........... 22 1,190 0.37 21 1,051 0.33
Other installment
loans................ 33 1,457 0.45 99 1,015 0.32
Business loans 11 2,181 0.68 8 407 0.13
Total allocated..... 3,891 -- -- 3,770 -- --
Unallocated............. 618 -- -- 408 -- --
------- -------- ------ ------- -------- ------
Total...................$ 4,509 $321,845 100.00% $ 4,178 $314,146 100.00%
======= ======== ====== ======= ======== ======
</TABLE>
17
<PAGE>
Investment Activities
The investment policies of the Company, Everett Mutual and Commercial
Bank of Everett are substantially the same with the exception of the dollar
limitations of individual investments. Under Washington law, banks are
permitted to invest in various types of marketable securities. Authorized
securities include but are not limited to U.S. Treasury obligations,
securities of various federal agencies, mortgage-backed securities, certain
certificates of deposit of insured banks and savings institutions, banker's
acceptances, repurchase agreements, federal funds, commercial paper, corporate
debt and equity securities and obligations of states and their political
sub-divisions. The investment policies of the Company are designed to provide
and maintain adequate liquidity and to generate favorable rates of return
without incurring undue interest rate or credit risk. The Company's policies
generally limit investments to U.S. Government and agency securities,
municipal bonds, certificates of deposit, marketable corporate debt
obligations, mortgage-backed securities and equity securities. Investment in
mortgage-backed securities includes those issued or guaranteed by Federal Home
Loan Mortgage Corporation ("Freddie Mac"), Fannie Mae and Government National
Mortgage Association ("GNMA").
At March 31, 2000, the Company's consolidated investment portfolio
totaled $112.3 million and consisted principally of U.S. Government and agency
obligations, municipal bonds, mortgage-backed securities, corporate debt
obligations, equity securities, mutual funds, and Federal Home Loan Bank
("FHLB") stock. From time to time, investment levels may be increased or
decreased depending upon yields available on investment alternatives, and
management's projections as to the demand for funds to be used in the
Company's loan originations, deposits and other activities.
Mortgage-Backed Securities. The Company's mortgage-backed securities,
which at March 31, 2000, totaled $27.3 million at estimated fair value, was
comprised of Fannie Mae, Freddie Mac and GNMA mortgage-backed securities.
State and Municipal Bonds. The Company's tax exempt and taxable
municipal bond portfolio, which at March 31, 2000, totaled $11.5 million at
estimated fair value, or $11.7 million at amortized cost, was comprised of
general obligation bonds (i.e., backed by the general credit of the issuer)
and revenue bonds (i.e., backed by revenues from the specific project being
financed) issued by various housing authorities, hospitals, schools, water and
sanitation districts and other authorities located in the State of Washington.
At March 31, 2000, general obligation bonds and revenue bonds had total
estimated fair values of $3.3 million and $8.2 million, respectively. Most of
the municipal bonds are not rated by a nationally recognized credit rating
agency such as Moody's or Standard and Poor's. Non-rated municipal bonds held
in portfolio are generally comprised of housing bonds issued by various local
housing authorities in the Company's market area. At March 31, 2000, the
Company's municipal bond portfolio had a weighted average maturity of
approximately 9.2 years and a weighted average coupon rate of 5.5%.
Corporate Bonds. The Company's corporate bond portfolio, which totaled
$42.2 million at fair value ($42.8 million at amortized cost) at March 31,
2000, was comprised of short to intermediate-term fixed-rate securities from
issuers generally rated Baa by Moody's or BBB by Standard and Poor's, or
better with the exception of one security with an amortized cost of $501,000
which had a rating of Ba2 from Moody's and BB+ from Standard and Poor's, which
matures on October 1, 2000. A high credit rating indicates only that the
rating agency believes there is a low risk of loss or default. However, all of
the Company's investment securities, including those that have high credit
ratings, are subject to market risk and credit risk in so far as a change in
market rates of interest or other conditions may cause a change in an
investment's market value. In addition, credit ratings are also subject to
change at the discretion of the rating agencies, which could also impact the
market value of the investment. At March 31, 2000, the portfolio had a
weighted average maturity of 1.4 years and a weighted average coupon rate of
6.4%. The longest term bond has an amortized cost of $502,000 and a term to
maturity of 3.8 years.
At March 31, 2000, the holdings of the largest single issuer totaled $3.2
million at amortized cost or 7.6% of the total portfolio and issuers in the
financial sector comprised 58.8% of the total portfolio.
18
<PAGE>
Equity Securities. The Company's equity investments totaled $11.8
million at fair value, or $12.2 million at cost, at March 31, 2000. The equity
portfolio consists primarily of trust preferred stocks, common stocks of
companies included in the Dow Jones Industrial Average and has typically
included other mid to large cap companies, and mutual funds.
U.S. Government and Agency Obligations. The Company's portfolio of U.S.
Government and agency obligations had a fair value of $14.7 million, or $14.7
million at amortized cost, at March 31, 2000. The longest term bond has an
amortized cost of $1.0 million and a term to maturity of 4.9 years.
Off Balance Sheet Derivatives. Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate
or index. Such derivatives include "forwards," "futures," "options" or
"swaps." The Company generally has not invested in "off balance sheet"
derivative instruments, although investment policies authorize such
investments to hedge the saleable loan pipeline of Everett Mutual. On March
31, 2000, the Company had no off balance sheet derivatives and no outstanding
commitments to purchase or sell securities.
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
At March 31,
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury obligations ...... $ -- $ -- $ -- $ -- $ 2,085 $ 2,093
U.S. Government Agency
obligations .................. 12,198 12,119 3,751 3,749 8,846 8,866
Corporate obligations........... 41,359 40,650 45,875 45,841 23,650 23,787
Municipal obligations........... 5,661 5,537 5,097 5,080 800 798
Equity securities............... 12,223 11,821 5,978 6,203 2,498 2,880
Certificates of deposit......... 185 185 175 175 -- --
Mortgage-backed securities....... 26,084 25,676 514 518 520 520
-------- -------- -------- -------- -------- -------
Total available for sale...... $ 97,710 $ 95,988 $ 61,390 $ 61,566 $ 38,399 $38,944
======== ======== ======== ======== ======== =======
Held to maturity:
Investment securities:
U.S. Treasury obligations....... $ -- $ -- $ -- $ -- $ 4,026 $ 4,191
U.S. Government Agency
obligations................... 2,514 2,538 2,520 2,684 -- --
Corporate obligations........... 1,486 1,505 1,965 2,048 4,438 4,572
Municipal obligations........... 5,996 6,003 6,773 6,876 7,057 7,196
Certificates of deposit......... 481 481 455 455 872 950
Mortgage-backed securities....... 1,589 1,609 2,153 2,254 4,357 4,561
-------- -------- -------- -------- -------- -------
Total held to maturity......... $ 12,066 $ 12,136 $ 13,866 $ 14,317 $ 20,750 $21,470
======== ======== ======== ======== ======== =======
Total....................... $109,776 $108,124 $ 75,256 $ 75,883 $ 59,149 $60,414
======== ======== ======== ======== ======== =======
</TABLE>
20
<PAGE>
<TABLE>
The table below sets forth information regarding the carrying value, weighted average yields and
maturities or periods to repricing of the Company's investment portfolio at March 31, 2000.
At March 31, 2000
Amount Due or Repricing within:
----------------------------------------------------------------------------
One Year or Over One to Over Five to
Or Less Five Years Ten Years Over Ten Years Totals
-------------- -------------- -------------- -------------- -------------
Car- Weighted Car- Weighted Car- Weighted Car- Weighted Car- Weighted
rying Average rying Average rying Average rying Average rying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Government Agency
obligations.............. $ 5,749 5.36% $ 6,449 5.90% $ -- --% $ -- --% $12,198 5.65%
Corporate obligations...... 19,587 6.30 21,772 6.48 -- -- -- -- 41,359 6.39
Municipal obligations...... 165 4.50 3,344 5.02 431 4.00 1,721 5.83 5,661 5.17
Equity securities.......... 9,750 4.35 -- -- -- -- 2,473 8.10 12,223 5.11
Certificates of deposit.... -- -- 185 5.20 -- -- -- -- 185 5.20
Mortgage-backed securities. -- -- 10,749 6.48 7,541 6.82 7,794 6.81 26,084 6.68
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total available for sale. $32,251 5.60% $42,499 6.27% $ 7,972 6.67% $11,988 6.94% $97,710 6.14%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Held to maturity:
Investment securities:
U.S. Government Agency
obligations............... $ -- --% $ 2,514 7.66% $ -- --% $ -- --% $ 2,514 7.66%
Corporate obligations...... 500 5.38 986 7.69 -- -- -- -- 1,486 6.91
Municipal obligations...... 465 6.58 2,094 5.26 650 5.38 2,787 6.16 5,996 5.79
Certificates of deposit.... 481 5.79 -- -- -- -- -- -- 481 5.79
Mortgage-backed securities.. -- -- 3 6.50 -- -- 1,586 8.12 1,589 8.12
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total held to maturity... $ 1,446 5.90% $ 5,597 6.77% $ 650 5.38% $ 4,373 6.87% $12,066 6.63%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Total.................... $36,697 5.61% $48,096 6.33% $ 8,622 6.57% $16,361 6.92% $109,776 6.20%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>
20
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of Everett
Mutual 's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB of Seattle or
Fed Funds lines may be used to compensate for reductions in the availability
of funds from other sources.
Everett Mutual's deposit composition reflects a deposit mixture with
certificates of deposit accounting for approximately one-half of total
deposits and negotiable order of withdrawal/checking accounts comprising a
relatively modest portion of total deposits. On the other hand, Commercial
Bank of Everett's community bank operating strategy with a focus on small
business lending and relationship banking has resulted in a deposit structure
that is heavily weighted towards checking and negotiable order of withdrawal
accounts while certificates of deposit comprise approximately one-fourth of
the total deposit base. Many of Commercial Bank of Everett's deposits are
tied to lending relationships. Thus, as Commercial Bank of Everett continues
to build the loan portfolio and number of commercial account relationships it
is anticipated that deposit balances will also increase.
Deposit Accounts. Substantially all of Everett Mutual's depositors are
residents of Washington. Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments,
including checking accounts, money market deposit accounts, savings accounts
and certificates of deposit. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, Everett Mutual considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. See Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," contained herein.
At March 31, 2000, the Company had $46.7 million of jumbo certificates of
deposit, including $2.3 million in public unit funds which represents 0.5% of
total deposits at March 31, 2000. Everett Mutual is also authorized to
utilize brokered deposits as a funding source, but has not done so to date.
Management believes that its jumbo certificates of deposit and the use of
brokered deposits present similar interest rate risk to its other deposit
products.
21
<PAGE>
The following table sets forth information concerning the Company's time
deposits and other non-interest and interest-bearing deposits at March 31,
2000.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
--% N/A Non-interest bearing $ 7,902 $ -- 2.1%
accounts
2.8 N/A Savings accounts 10,523 300 2.7
2.6 N/A Checking accounts 36,712 300 9.6
4.3 N/A Money market deposit 129,522 1,000 33.8
accounts
Certificates of Deposit
-----------------------
5.4 1-11 months Fixed-term, fixed-rate 32,200 500 8.4
5.5 12-23 months Fixed-term, fixed-rate 77,273 500 20.2
5.5 24-35 months Fixed-term, fixed-rate 22,827 500 6.0
5.7 36-59 months Fixed-term, fixed-rate 17,899 500 4.7
6.1 60-84 months Fixed-term, fixed rate 48,128 500 12.5
-------- -----
TOTAL $382,986 100.0%
======== =====
The following table indicates the amount of the Company's jumbo
certificates of deposit by time remaining until maturity as of March 31, 2000.
Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Three months or less................... $10,221
Over three through six months ......... 7,652
Over six through twelve months......... 13,907
Over twelve months..................... 14,967
-------
Total.............................. $46,747
=======
22
<PAGE>
<TABLE>
Deposit Flow. The following table sets forth the balances of savings deposits in the various types of
savings accounts offered by the Company at the dates indicated.
At March 31,
----------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts............. $10,523 2.75% $(1,275) $ 11,798 3.14% $1,288 $ 10,510 2.99%
Demand deposit accounts...... 44,614 11.65 3,177 41,437 11.02 4,015 37,422 10.66
Money market deposit
accounts................... 129,522 33.82 (4,226) 133,748 35.58 10,779 122,969 35.05
Fixed-rate certificates
which mature in the year
ending:
Within 1 year............ 132,410 34.57 6,487 125,923 33.50 13,633 112,290 31.99
After 1 year, but
within 2 years......... 24,102 6.29 (4,084) 28,186 7.50 (5,695) 33,881 9.65
After 2 years, but
within 5 years......... 39,787 10.39 7,546 32,241 8.58 472 31,769 9.05
Certificates maturing
thereafter............. 2,028 0.53 (535) 2,563 0.68 433 2,130 0.61
-------- ------ -------- -------- ------ ------- -------- ------
Total.................$382,986 100.00% $ 7,090 $375,896 100.00% $24,925 $350,971 100.00%
======== ====== ======== ======== ====== ======= ======== ======
</TABLE>
23
<PAGE>
Deposit Accounts. Deposit accounts consisted of the following at March
31:
Weighted
Average Rate 2000 1999
at March 31, --------------- ---------------
2000 Amount % Amount %
---- ------ ----- ------ -----
(Dollars in thousands)
Noninterest-bearing
accounts.............. --% $ 7,902 2.1% $ 7,782 2.1%
Savings accounts....... 2.8 10,523 2.7 11,798 3.1
Checking accounts...... 2.6 36,712 9.6 33,655 9.0
Money market accounts . 4.3 129,522 33.8 133,748 35.6
Time deposits:
1 to 11 months....... 5.4 32,200 8.4 32,660 8.7
12 to 23 months...... 5.5 77,273 20.2 62,536 16.6
24 to 35 months...... 5.5 22,827 6.0 23,767 6.3
36 to 59 months...... 5.7 17,899 4.7 19,461 5.2
60 to 84 months...... 6.1 48,128 12.5 50,489 13.4
--- -------- ----- -------- -----
5.6 198,327 51.8 188,913 50.2
--- -------- ----- -------- -----
4.7% $382,986 100.0% $375,896 100.0%
=== ======== ===== ======== =====
Time Deposits by Rates. The following table sets forth the time deposits
of the Company classified by rates for the periods indicated.
Year Ended March 31,
----------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
0.00 - 0.99%....................... $ 200 $ 273 $ --
1.00 - 1.99%....................... 85 1 --
2.00 - 2.99%....................... 118 374 123
3.00 - 3.99%....................... 100 79 111
4.00 - 4.99%....................... 8,158 44,666 109
5.00 - 5.99%....................... 130,296 106,603 135,244
6.00 - 6.99%....................... 58,553 33,282 40,272
7.00 - 7.99%....................... 817 3,621 4,198
8.00 - 8.99%....................... -- 14 13
-------- -------- --------
Total......................... $198,327 $188,913 $180,070
======== ======== ========
24
<PAGE>
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at March 31, 2000.
Amount Due
-----------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In thousands)
0.00 - 0.99%......... $ 100 $ -- $ -- $ -- $ 100 $ 200
1.00 - 1.99%......... 85 -- -- -- -- 85
2.00 - 2.99%......... 118 -- -- -- -- 118
3.00 - 3.99%......... 100 -- -- -- -- 100
4.00 - 4.99%......... 7,715 413 7 23 -- 8,158
5.00 - 5.99%......... 94,687 15,191 7,883 6,420 6,115 130,296
6.00 - 6.99%......... 29,412 8,498 6,964 2,115 11,564 58,553
7.00 - 7.99%......... 193 -- -- -- 624 817
-------- ------- ------- ------- ------- --------
Total........... $132,410 $24,102 $14,854 $ 8,558 $18,403 $198,327
======== ======= ======= ======= ======= ========
Deposit Activities. The following table sets forth the savings activities
of the Company for the periods indicated.
Year Ended March 31,
--------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Beginning balance.................... $375,896 $350,971 $329,770
Net deposits (withdrawals) before
interest credited................. (10,234) 8,170 4,720
Interest credited.................... 17,324 16,755 16,481
-------- -------- --------
Net increase in deposits............. 7,090 24,925 21,201
-------- -------- --------
Ending balance....................... $382,986 $375,896 $350,971
======== ======== ========
Borrowings. Savings deposits are the primary source of funds for Everett
Mutual's lending and investment activities and for general business purposes.
Everett Mutual has the ability to use advances from the FHLB of Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Seattle functions as a central reserve bank
providing credit for savings and loan associations and certain other member
financial institutions. As a member of the FHLB of Seattle, Everett Mutual is
required to own capital stock in the FHLB of Seattle and is authorized to
apply for advances on the security of such stock and certain of its mortgage
loans and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different
credit programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances
are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At March 31, 2000, the
Bank maintained a committed credit facility with the FHLB of Seattle that
provided for immediately available advances up to an aggregate of 20% of total
assets, or $99.7 million, of which $28.4 million was outstanding. In
addition, Everett Mutual has a $10 million unsecured Fed Funds line from a
commercial bank at March 31, 2000, of which none was outstanding and a $5
million repurchase agreement with a securities dealer.
The following table sets forth information regarding FHLB advances by
Everett Mutual and Commercial Bank of Everett at the end of and during the
periods indicated. The table includes both short-term and long-term
borrowings unless noted otherwise.
25
<PAGE>
For the Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end........... $34,423 $20,954 $20,052
Approximate average borrowings
outstanding............................ $19,417 $16,215 $18,003
Approximate weighted average rate paid.. 6.13% 6.30% 6.32%
At March 31,
--------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Balance outstanding at end of period.... $34,423 $18,949 $15,503
Weighted average rate paid.............. 6.25% 6.19% 6.37%
Subsidiary Activities
Subsidiaries of the Company. The Company owns four subsidiaries: Everett
Mutual, Commercial Bank of Everett, I-Pro, Inc. and Mutual Bancshares Capital,
Inc. The following is a discussion of the business of Commercial Bank of
Everett, I-Pro, Inc. and Mutual Bancshares Capital, Inc.
Business of Commercial Bank of Everett.
--------------------------------------
Commercial Bank of Everett's strategy is to operate as a community-based
financial institution primarily focused on serving the needs of business
banking customers with a high level of customer service. This strategy is
accomplished by providing banking services directly at the customer's place of
business, including lending and non-cash deposit activities, to the greatest
extent possible. Inasmuch, Commercial Bank of Everett does not directly
compete with Everett Mutual's retail customer focus. Rather, Commercial Bank
of Everett and Everett Mutual serve to complement each other through an
organized referral network that provides both banks with the opportunity for
increased business.
Commercial Bank of Everett's lending operations are focused on commercial
loans which are generally made to a wide variety of small businesses and
professionals in the local market. To a lesser extent, Commercial Bank of
Everett has also brokered commercial, multi-family and residential mortgage
loans to Everett Mutual. Commercial Bank of Everett also purchases
participation interests in commercial, multi-family and residential mortgage
loans from Everett Mutual under the same underwriting policies and conditions
as Everett Mutual. To a lesser extent, Commercial Bank of Everett originates
consumer loans for real estate, automobiles, secured and unsecured personal
lines of credit and credit cards.
Business Lending. Commercial Bank of Everett originates business loans to
small and medium sized businesses in its primary market area. Business loans
are generally made to finance the purchase of seasonal inventory needs, new or
used equipment, and for short-term working capital. Such loans are generally
secured by equipment, accounts receivable and inventory, although business
loans are sometimes granted on an unsecured basis. Such loans are made for
terms of seven years or less, depending on the purpose of the loan and the
collateral, with loans to finance operating expenses made for one year or
less, with interest rates that adjust at least annually at a rate equal to the
prime rate, as published in The Wall Street Journal, plus a margin ranging
from 0% to 3.50%. At March 31, 2000, the
26
<PAGE>
business loans amounted to $11.7 million, or 49.3%, of Commercial Bank of
Everett's total loans and 2.5% of the total loans of the Company.
At March 31, 2000, the largest outstanding business loan was a $3.5
million accounts receivable/inventory line of credit to a lumber broker. Such
loan was performing according to its terms at March 31, 2000.
Commercial Bank of Everett underwrites its business loans on the basis of
the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of underlying collateral value, and Commercial Bank of
Everett seeks to structure such loans to have more than one source of
repayment. The borrower is required to provide Commercial Bank of Everett with
sufficient information to allow Commercial Bank of Everett to make its lending
determination. In most instances, this information consists of at least three
years of financialstatements, tax returns, a statement of projected cash
flows, current financial information on any guarantor and any additional
information on the collateral. Generally, for loans with balances exceeding
$100,000, Commercial Bank of Everett requires that borrowers and guarantors
provide updated financial information at least annually.
Commercial Bank of Everett's business loans may be structured as term
loans or as lines of credit. Business term loans are generally made to finance
the purchase of long-lived assets and have maturities of five years or less.
Business lines of credit are typically made for the purpose of providing
working capital and are usually approved with a term of between six months and
one year.
Commercial Bank of Everett provides borrowers with secured standby
letters of credit based on the same underwriting requirements and conditions
as described above. The letters of credit are backed by signed notes payable
to Commercial Bank of Everett for like terms of the letter of credit. At
March 31, 2000, Commercial Bank of Everett had no outstanding letters of
credit. International letters of credit are offered through a correspondent
bank that assumes credit and payment risk on the instrument. Commercial Bank
of Everett receives a fee from the borrower and the correspondent bank for
arranging the international letters of credit.
Business loans may involve greater risk than other types of lending.
Because payments on such loans are often dependent on successful operation of
the business involved, repayment of such loans may be subject to a greater
extent to adverse conditions in the economy. Commercial Bank of Everett seeks
to minimize these risks through its underwriting guidelines, which require
that the loan be supported by adequate cash flow of the borrower,
profitability of the business, collateral and personal guarantees of the
individuals in the business. In addition, Commercial Bank of Everett limits
this type of lending to its market area.
Commercial and Multi-Family Mortgage Loans. Commercial Bank of Everett
acts as a broker of commercial and multi-family mortgage loans to Everett
Mutual for which Commercial Bank of Everett receives a portion of the loan fee
as compensation for the processing and referral of the loan. From time to
time, Commercial Bank of Everett also purchases participation interests in
commercial and multi-family loans from Everett Mutual to hold in its own
portfolio for investment. Such purchases are made under the same general
underwriting policies and conditions as Everett Mutual. See " -- Lending
Activities -- Multi-Family Lending" and "-- Commercial Real Estate Lending."
Financing of commercial and multi-family properties provides loan
diversification for Commercial Bank of Everett from a collateral and
asset/liability perspective. As such, the financing of these types of loans
is expected, subject to market conditions, to continue to remain a part of
Commercial Bank of Everett's loan portfolio. As of March 31, 2000, commercial
and multi-family mortgage loans totaled $5.9 million and $726,000,
respectively, and together equaled 27.8% of total loans. The majority of
loans are for either commercial or mixed-use structures and many are owner
occupied. Commercial and multi-family loans are generally extended for up to
a 75% loan to value ratio and require a debt service coverage of at least 1.30
and 1.20 times, respectively.
Residential Mortgage Loans. Residential mortgage loans are primarily
offered to Commercial Bank of Everett's business and consumer customers as an
accommodation, and may frequently have a business related purpose (i.e.,
working capital for a sole proprietor is one example). Commercial Bank of
Everett also acts a broker of residential mortgage loans to Everett Mutual for
which Commercial Bank of Everett receives a portion of the fee as
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compensation for processing and referral of the loan. From time to time,
Commercial Bank of Everett may also purchase participation interests in
residential loans from Everett Mutual to hold in its own portfolio for
investment. Such purchases are made under the same general underwriting
policies and conditions as Everett Mutual. See " -- Lending Activities --
Residential One- to Four-Family Lending." Financing of residential mortgage
loans provides loan diversification for Commercial Bank of Everett from a
collateral and asset/liability management perspective. As such, subject to
market conditions, the financing of this type is expected to continue to
remain a part of Commercial Bank of Everett's loan portfolio The residential
mortgage portfolio consists of equal amounts of home equity lines of
credit/second mortgage loans and first mortgage loans. Lines of credit
equaled $1.2 million or 5.2% of total loans at March 31, 2000, while permanent
residential mortgage loans totaled $1.6 million or 6.6% of total loans.
Consumer Loans. Consumer loans consist of installment loans for boats,
automobiles and other purposes and include a balance of credit card loans.
Consumer loans (other than credit card loans) are underwritten using the same
guidelines as Everett Mutual. See " -- Lending Activities -- Consumer
Lending." As of March 31, 2000, consumer loans, excluding credit card loans,
totaled $1.1 million or 4.5% of total loans.
Credit card loans are underwritten using suggested Independent Community
Bankers Association guidelines, credit scoring and financial statement
analysis. Credit cards are issued to Commercial Bank of Everett's business
customers and retail customers referred by Everett Mutual branches. At March
31, 2000, the credit card portfolio consisted of business credit lines of
$437,000 and personal credit card lines of $999,000 for a total of $1.4
million or 6.0% of total loans. Credit card loans entail greater risk than do
other loans especially given their unsecured status. Commercial Bank of
Everett attempts to limit this risk by adhering to sound underwriting and
collection practices, although there can be no assurances that these will
prevent credit card losses. At March 31, 2000, no credit card loans were 90
days or more past due or in nonaccrual status.
Nonperforming Assets and Delinquencies. Commercial Bank of Everett
generally assesses late fees or penalty charges on delinquent loans of 5% of
the payment amount. Substantially all business loan payments are due 30 days
from disbursement and each 30 days thereafter; however, the borrower is given
a 10 day grace period to make the loan payment. Delinquent business loans are
monitored on a weekly basis until the delinquency is resolved to management's
satisfaction. When a consumer loan borrower fails to make a required payment
on a consumer loan by the payment due date, Commercial Bank of Everett
generally institutes the same collection procedures as for its business loan
borrowers.
Commercial Bank of Everett's Board of Directors is informed monthly as to
the status of all loans that are delinquent by more than 90 days or on
nonaccrual, the status on all loans currently in foreclosure or repossession,
and the status of all foreclosed and repossessed property owned by Commercial
Bank of Everett.
Deposit Accounts. Commercial Bank of Everett's deposit base is primarily
comprised of relatively even percentages of non-interest bearing business
deposits, money market deposit accounts and time deposits. As the Commercial
Bank of Everett's operating tenure lengthens, business deposits are
anticipated to make up a greater overall portion of the deposit mix, although
this cannot be assured. Commercial Bank of Everett also offers its business
customers the option to sweep excess account balances in non-interest bearing
accounts into non-FDIC insured money market funds which allows the customer to
earn interest on invested balances. Commercial Bank of Everett receives a
12b-1 fee from the mutual fund company for providing this service. Deposits
are solicited from within Commercial Bank of Everett's market area through
existing customers and limited outside advertising. While not intending to
compete directly with Everett Mutual for time deposit accounts, customers of
Everett Mutual may be referred to Commercial Bank of Everett in those cases
were the customer desires a greater amount of FDIC deposit insurance coverage
for their funds since both Commercial Bank of Everett and Everett Mutual are
separately insured by the FDIC.
Borrowings. Deposits are the primary source of funds for Commercial Bank
of Everett's lending and investment activities and for general business
purposes. Commercial Bank of Everett has the ability to use advances from the
FHLB of Seattle to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The FHLB of Seattle functions as a central
reserve bank providing credit for savings and loan associations and certain
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other member financial institutions. As a member of the FHLB of Seattle,
Commercial Bank of Everett is required to own capital stock in the FHLB of
Seattle and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the U.S. Government) provided
certain creditworthiness standards have been met. Advances are made pursuant
to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit.
Commercial Bank of Everett's use of borrowings has been relatively
limited and primarily for the purpose of supplementing deposit flows and loan
fundings. Commercial Bank of Everett maintains a funding line at the FHLB of
Seattle equal to 5% of total assets or $1.3 million, $1.0 million of which was
outstanding at March 31, 2000. Commercial Bank of Everett also has available
an unsecured letter of credit line of $250,000 and an unsecured federal funds
lines of credit of $550,000 from a commercial bank in addition to a $2.5
million unsecured federal funds line of credit from Everett Mutual.
Business of I-Pro, Inc.
-----------------------
I-Pro was formed in April 1997 to provide check processing and deposit
and loan account statement printing and mailing services to banking and
nonbanking companies. I-Pro's objective is to provide these services for
Everett Mutual and Commercial Bank of Everett, and to other financial
institutions who are seeking to provide a high level of service to their
customers in response to requests for copies of checks, account statements and
other similar records. I-Pro utilizes electronic imaging technology, versus a
traditional paper-based processing and retrieval system, to deliver account
research, check processing, and customized account statements to its clients
and their customers. I-Pro's focus is to provide customized service and
personal attention thereby providing the benefits of an in-house system while:
(1) eliminating a portion of the burden of providing administrative oversight
of an in-house system; and (2) spreading the expense of such a system over a
larger base.
Business of Mutual Bancshares Capital, Inc.
-------------------------------------------
Overview. Mutual Bancshares Capital, Inc. was formed in October 1998.
Mutual Bancshares Capital, Inc. is a member of Bancshares Capital Management,
LLC, which serves as General Partner to Bancshares Capital, L.P., an early
stage venture fund providing equity to regionally based high technology and
health related companies. Bancshares Capital, L.P. will be licensed by the
U.S. Small Business Administration as a small business investment company
(SBIC). Bancshares Capital, L.P. anticipates a fund size of $5.0 million to
$6.0 million, $2.3 million of which will be invested by Mutual Bancshares
Capital, Inc. A number of directors and officers of Mutual Bancshares
Capital, Inc. are also limited partners. A second fund is expected to be
formed in the future.
There are limitations on the amount the Company, Everett Mutual and
Commercial Bank of Everett may invest in SBIC activities. Federal regulations
permit each bank to invest up to 5% of its capital and surplus in SBICs. The
Company's investments in SBICs may not exceed 5% of its proportionate interest
in the capital and surplus of the bank having an investment in a SBIC, less
the bank's investment in stock of SBICs. Also, the Company may not acquire
control of 50% or more of the shares of any class of equity securities of an
SBIC that have voting rights.
Investment Strategy. Bancshares Capital, L.P. will provide equity to
regionally based high technology companies in the seed, start-up and early
stages of development. Bancshares Capital, L.P. will closely monitor and, if
possible, add value to those investments, with successful ventures returning
cash to the fund over an anticipated three to seven year time frame. It is
anticipated that liquidity of the investment will result from acquisition of
securities by a strategic partner, merger or acquisition of the subject
investment, or by sale of the subject investment in the public markets
following an initial public offering. It is anticipated that the investment
in any single company will be in the range of $100,000 to $1.0 million and
Bancshares Capital, L.P. may co-invest with other entrepreneurs or venture
funds as needed or desired.
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At March 31, 2000, Mutual Bancshares Capital, Inc. had invested $500,000
in HEALTHradius, an eHealth ASP records company, and $500,000 in ACADIO, an
Internet aggregator of continuing education content and services.
Targeted Market. Bancshares Capital, L.P. will be seeking to deploy its
venture funds primarily in the Technology Corridor in the Seattle Metropolitan
Area although opportunities within the Pacific Northwest may be examined on a
limited basis. The corridor that encompasses I-405 and I-5 from Bellevue to
Everett is home to over 300 technology companies, has outstanding support
services, is within close proximity to university and other research
institutions and has been the location of many high technology and medical
instrumentation companies start-ups. While there will be no specific bias
toward any one industry, Bancshares Capital, L.P. expects to invest in
companies whose technologies involve software and digital media, environmental
science, medical devices, telecommunications and Internet-related technologies
among others.
Structure of the Partnership Investments. Mutual Bancshares Capital,
Inc. has formed Bancshares Capital, L.P., which will act as general partner.
Bancshares Capital, L.P. will sell limited partnership interests in the
venture fund. In its role as general partner, Mutual Bancshares Capital, Inc.
will receive a 2% management fee plus 20% of the carried interest (i.e., 3% of
the profits of the fund). Mutual Bancshares Capital, Inc. will contribute 31%
of the capital and have a 31% equity interest in Bancshares Capital, L.P.
while the balance of funds and ownership will be derived from and distributed
to the outside limited partners.
Anticipated Timing of Investments. In addition to the $1.0 million in
the first year, Bancshares Capital, L.P. is targeting to make investments of
approximately $2.4 million each in the second and third years of operation.
As discussed above, Mutual Bancshares Capital, Inc.'s capital contribution
will be at least 31% of the above amounts.
Subsidiaries of Everett Mutual. Sound Financial, Inc. is a
wholly-owned subsidiary of Everett Mutual. Sound Financial, Inc. has two
principal activities: it owns the Arlington Branch and leases the facility
back to Everett Mutual; and through a turnkey contract with Invest Financial
Services, it sells annuities, equity securities and mutual funds. Sound
Financial, Inc. currently operates with two full time and one part-time
registered investment representatives.
Commercial Bank of Everett and I-Pro do not have any active subsidiaries
and none are contemplated at the present time.
Charitable Foundations
The Everett Mutual Foundation is a charitable organization established in
1990 and funded by Everett Mutual and the Company. At March 31, 2000, The
Everett Mutual Foundation had $3.1 million in assets. The assets,
liabilities, income and expenses of the foundation are not included in the
Consolidated Financial Statements contained herein as they are not part of the
Company.
The EverTrust Foundation also is a charitable organization which was
established in 1999 in connection with the Conversion. The EverTrust
Foundation was initially funded by the Company with cash and stock from the
Conversion. At March 31, 2000, The EverTrust Foundation had $5.0 million in
assets. The assets, liabilities, income and expenses of the foundation are
not included in the Consolidated Financial Statements contained herein as they
are not part of the Company.
REGULATION
Everett Mutual and Commercial Bank of Everett
General. As state-chartered, federally insured financial institutions,
Everett Mutual and Commercial Bank of Everett are subject to extensive
regulation. Lending activities and other investments must comply with various
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statutory and regulatory requirements, including prescribed minimum capital
standards. Everett Mutual and Commercial Bank of Everett are regularly
examined by the FDIC and their state banking regulators and file periodic
reports concerning their activities and financial condition with their
regulators. Everett Mutual and Commercial Bank of Everett's relationship with
depositors and borrowers also is regulated to a great extent by both federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of Everett Mutual and Commercial Bank of Everett, including
reserves, loans, mortgages, capital, issuance of securities, payment of
dividends and establishment of branches. Federal and state bank regulatory
agencies also have the general authority to limit the dividends paid by
insured banks and bank holding companies if such payments should be deemed to
constitute an unsafe and unsound practice. The respective primary federal
regulators of the Company, Everett Mutual and Commercial Bank of Everett have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision. As a state-chartered savings bank,
Everett Mutual is subject to applicable provisions of Washington law and
regulations. As a state-chartered commercial bank, Commercial Bank of Everett
is also subject to applicable provisions of Washington law and regulations.
State law and regulations govern Everett Mutual's and Commercial Bank of
Everett's ability to take deposits and pay interest thereon, to make loans on
or invest in residential and other real estate, to make consumer loans, to
invest in securities, to offer various banking services to its customers, and
to establish branch offices. Under state law, savings banks in Washington
also generally have all of the powers that federal mutual savings banks have
under federal laws and regulations. Everett Mutual and Commercial Bank of
Everett are subject to periodic examination and reporting requirements by and
of their state banking regulators.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of depository
institutions. The FDIC currently maintains two separate insurance funds: the
Bank Insurance Fund and the Savings Association Insurance Fund. Everett
Mutual's and Commercial Bank of Everett's accounts are each insured by the
Bank Insurance Fund to the maximum extent permitted by law. As insurer of
Everett Mutual and Commercial Bank of Everett's deposits, the FDIC has
examination, supervisory and enforcement authority over Everett Mutual and
Commercial Bank of Everett.
The FDIC has established a risk-based system for setting deposit
insurance assessments. Under the risk-based assessment system, an
institution's insurance assessment varies according to the level of capital
the institution holds and the degree to which it is the subject of supervisory
concern. In addition, regardless of the potential risk to the insurance fund,
federal law requires the ratio of reserves to insured deposits at $1.25 per
$100. Both funds currently meet this reserve ratio. During 1999, the
assessment rate for both SAIF and BIF deposits ranged from zero to 0.27% of
covered deposits. As well capitalized banks, Everett Mutual and Commercial
Bank of Everett each qualified for the lowest rate on its deposits for 1999.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("FICO") to service FICO debt incurred in the 1980s to help fund
the thrift industry cleanup. The FICO assessment rate is adjusted quarterly.
Prior to 2000, the FICO assessment rate for BIF-insured deposits was
one-fifth the rate applicable to deposits insured by the SAIF. Beginning in
2000, SAIF- and BIF-insured deposits will be assessed at the same rate by
FICO. As a result, BIF FICO assessments will be higher than in previous
periods while SAIF FICO assessments will be lower. For the first quarter of
2000, the annualized rate was 2.1 cents per $100 of insured deposits. Because
the Banks are insured under the BIF fund, the FICO assessments have increased
for 2000 as compared to prior years.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
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condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of Everett Mutual and
Commercial Bank of Everett.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991, each federal banking agency was required
to implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be: "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, has a Tier I risk-based
capital ratio of 4.0% or more, has a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is
less than 4.0% or has a Tier I leverage capital ratio that is less than 4.0%
(3.0% under certain circumstances); "significantly undercapitalized" if it
has a total risk-based capital ratio that is less than 6.0%, has a Tier I
risk-based capital ratio that is less than 3.0% or has a Tier I leverage
capital ratio that is less than 3.0%; and "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 2000, Everett Mutual and Commercial Bank of Everett were
categorized as "well capitalized" under the prompt corrective action
regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to: internal controls, information systems and internal
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; asset quality; earnings and compensation, fees and
benefits. The guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the FDIC
determines that either Everett Mutual or Commercial Bank of Everett fails to
meet any standard prescribed by the guidelines, the agency may require the
Bank to submit to the agency an acceptable plan to achieve compliance with the
standard. FDIC regulations establish deadlines for the submission and review
of such safety and soundness compliance plans.
Capital Requirements. FDIC regulations recognize two types or tiers of
capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock, less most intangible assets. Tier 2 capital, which
is limited to 100 percent of Tier 1 capital,
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includes such items as qualifying general loan loss reserves, cumulative
perpetual preferred stock, mandatory convertible debt, term subordinated debt
and limited life preferred stock; however, the amount of term subordinated
debt and intermediate term preferred stock (original maturity of at least five
years but less than 20 years) that may be included in Tier 2 capital is
limited to 50 percent of Tier 1 capital.
The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average
total assets. Most banks are required to maintain a minimum leverage ratio of
at least 4% to 5% of total assets. The FDIC retains the right to require a
particular institution to maintain a higher capital level based on an
institution's particular risk profile. Everett Mutual and Commercial Bank of
Everett calculated their leverage ratio to be 17.5% and 21.2%, respectively,
as of March 31, 2000.
FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in
one of four categories and given a percentage weight -- 0%, 20%, 50% or 100%
-- based on the relative risk of that category. In addition, certain
off-balance-sheet items are converted to balance-sheet credit equivalent
amounts, and each amount is then assigned to one of the four categories.
Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2
capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1
capital to risk-weighted assets must be at least 4%. Everett Mutual and
Commercial Bank of Everett have calculated their total risk-based ratio to be
21.2% and 24.3%, respectively, as of March 31, 2000, and their Tier 1
risk-based capital ratio to be 20.0% and 23.1%, respectively. In evaluating
the adequacy of a bank's capital, the FDIC may also consider other factors
that may affect a bank's financial condition. Such factors may include
interest rate risk exposure, liquidity, funding and market risks, the quality
and level of earnings, concentration of credit risk, risks arising from
nontraditional activities, loan and investment quality, the effectiveness of
loan and investment policies, and management's ability to monitor and control
financial operating risks.
Federal statutes establish a supervisory framework based on five capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An
institution's category depends upon where its capital levels are in relation
to relevant capital measure, which include a risk-based capital measure, a
leverage ratio capital measure, and certain other factors. The federal
banking agencies have adopted regulations that implement this statutory
framework. Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10% or
more, its ratio of core capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets is 5% or more, and it is not
subject to any federal supervisory order or directive to meet a specific
capital level. In order to be adequately capitalized, an institution must
have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based
capital ratio of not less than 4%, and a leverage ratio of not less than 4%.
Any institution which is neither well capitalized nor adequately capitalized
will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure
by the Bank to comply with applicable capital requirements would, if
unremedied, result in restrictions on its activities and lead to enforcement
actions including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels. Banking regulators will
take prompt corrective action with respect to depository institutions that do
not meet minimum capital requirements. Additionally, approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC may
determine that the minimum adequate amount of capital for that bank is greater
than the minimum standards established in the regulation.
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The tables below set forth Everett Mutual's and Commercial Bank of
Everett's capital position relative to the FDIC capital requirements at March
31, 2000. The definitions of the terms used in the table are those provided
in the capital regulations issued by the FDIC.
At March 31, 2000
----------------------
Percent of Adjusted
Amount Total Assets(1)
------ ---------------
(In thousands)
Everett Mutual Bank:
Tier 1 (leverage) capital............... $86,192 17.52%
Tier 1 (leverage) capital requirement... 19,675 4.00
------- -----
Excess.................................. $66,517 13.52%
======= =====
Tier 1 risk adjusted capital............ $86,192 19.98%
Tier 1 risk adjusted capital
requirement........................... 17,254 4.00
------- -----
Excess.................................. $68,938 15.98%
======= =====
Total risk-based capital................ $91,594 21.23%
Total risk-based capital requirement.... 34,508 8.00
------- -----
Excess.................................. $57,086 13.23%
======= =====
Commercial Bank of Everett:
Tier 1 (leverage) capital............... $ 5,192 21.15%
Tier 1 (leverage) capital requirement... 982 4.00
------- -----
Excess.................................. $ 4,210 17.15%
======= =====
Tier 1 risk adjusted capital............ $ 5,192 23.10%
Tier 1 risk adjusted capital
requirement........................... 899 4.00
------- -----
Excess.................................. $ 4,293 19.10%
======= =====
Total risk-based capital................ $ 5,453 24.26%
Total risk-based capital requirement.... 1,798 8.00
------- -----
Excess.................................. $ 3,655 16.26%
======= =====
-----------
(1) For the Tier 1 (leverage) capital and regulatory capital calculations,
percent of total average assets of $491.9 million and $24.5 million for
Everett Mutual and Commercial Bank of Everett, respectively. For the
Tier 1 risk-based capital and total risk-based capital calculations,
percent of total risk-weighted assets of $431.4 million and $22.5
million for Everett Mutual and Commercial Bank of Everett,
respectively.
The Company believes that, under the current regulations, Everett Mutual
and Commercial Bank of Everett will continue to meet their minimum capital
requirements in the foreseeable future. However, events beyond the control of
Everett Mutual and Commercial Bank of Everett, such as a downturn in the
economy in areas where Everett Mutual and Commercial Bank of Everett have most
of their loans, could adversely affect future earnings and, consequently, the
ability of Everett Mutual and Commercial Bank of Everett to meet their capital
requirements.
Activities and Investments of Insured State-Chartered Banks. Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, acquiring or
retaining a majority interest in a subsidiary, investing
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as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of
a qualified housing project, provided that such limited partnership
investments may not exceed 2% of the bank's total assets, acquiring up to 10%
of the voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and acquiring or
retaining the voting shares of a depository institution if certain
requirements are met.
Federal law provides that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.
Federal Home Loan Bank System. The FHLB of Seattle serves as a reserve
or central bank for the member institutions within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLBs. It makes loans (i.e., advances) to members in
accordance with policies and procedures established by the Federal Housing
Finance Board and the Board of Directors of the FHLB of Seattle. As a member,
Everett Mutual is required to purchase and hold stock in the FHLB of Seattle
in an amount equal to the greater of 1% of their aggregate unpaid home loan
balances at the beginning of the year or an amount equal to 5% of FHLB
advances outstanding. As of March 31, 2000, Everett Mutual held stock in the
FHLB of Seattle in the amount of $4.2 million and had advances totaling $28.4
million, which mature in 2000 through 2020 at interest rates ranging from
5.39% to 8.19%. See "Business -- Deposit Activities and Other Sources of
Funds -- Borrowings."
Federal Reserve System. The Federal Reserve Board requires under
Regulation D that all depository institutions, including savings banks,
maintain reserves on transaction accounts or non-personal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. Negotiable order of withdrawal
accounts and other types of accounts that permit payments or transfers to
third parties fall within the definition of transaction accounts and are
subject to Regulation D reserve requirements, as are any non-personal time
deposits at a savings bank. Under Regulation D, a bank must maintain reserves
against net transaction accounts in the amount of 3% on amounts of $44.3
million or less, plus 10% on amounts in excess of $44.3 million. In addition,
a bank may designate and exempt $5.0 million of certain reservable liabilities
from these reserve requirements. These amounts and percentages are subject to
adjustment by the Federal Reserve. The reserve requirement on non-personal
time deposits with original maturities of less than 1.5 years is 0%. As of
March 31, 2000, Everett Mutual's and Commercial Bank of Everett's deposit with
the Federal Reserve Bank and vault cash exceeded their respective reserve
requirements.
Affiliate Transactions. The Company, Everett Mutual, Commercial Bank of
Everett, I-Pro, Inc. and Mutual Bancshares Capital, Inc. are legal entities
separate and distinct. Various legal limitations restrict Everett Mutual and
Commercial Bank of Everett from lending or otherwise supplying funds to the
Company, which is an affiliate of these two financial institution
subsidiaries. These restrictions generally limit such transactions with the
affiliate to 10% of the bank's capital and surplus and limiting all such
transactions to 20% of the bank's capital and surplus. Such transactions,
including extensions of credit, sales of securities or assets and provision of
services, also must be on terms and conditions consistent with safe and sound
banking practices, including credit standards, that are substantially the same
or at least as favorable to Everett Mutual and Commercial Bank of Everett as
those prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
35
<PAGE>
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends. Dividends from Everett Mutual constitute the major source of
funds for dividends which are paid by the Company. The amount of dividends
payable by Everett Mutual to the Company will depend upon Everett Mutual's
earnings and capital position, and is limited by federal and state laws,
regulations and policies.
Everett Mutual and Commercial Bank of Everett are both subject to
restrictions imposed by Federal law. Federal law provides that no insured
depository institution may make any capital distribution, which would include
a cash dividend, if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
The Company
General. The Company is a bank holding company registered with the
Federal Reserve. Bank holding companies are subject to comprehensive
regulation by the Federal Reserve under the Bank Holding Company Act of 1956,
as amended, and the regulations of the Federal Reserve. The Company is
required to file with the Federal Reserve quarterly reports and such
additional information as the Federal Reserve may require and is subject to
regular examinations by the Federal Reserve. The Federal Reserve also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries, including its bank subsidiaries. In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
New Legislation. On November 12, 1999, President Clinton signed into law
the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLB
Act"), federal legislation intended to modernize the financial services
industry by establishing a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms and other
financial service providers. Generally, the GLB Act:
(1) repeals the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
(2) provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
(3) broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
(4) provides an enhanced framework for protecting the privacy of
consumer information;
(5) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the FHLB system;
(6) modifies the laws governing the implementation of the Community
Reinvestment Act; and
36
<PAGE>
(7) addresses a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
The enactment of the GLB Act expanded the structural options available to
bank holding companies, such as the Company, and other financial institutions,
to permit them to engage in banking and other financial activities.
Specifically, the GLB Act provides for the establishment of a new financial
holding company.
The GLB Act permits qualifying companies that own a bank, "financial
holding companies," to also own companies that engage in securities
underwriting and dealing, insurance agency and underwriting, merchant banking
or venture capital activities, the distribution of mutual funds, and
securities lending. Financial holding companies may hold any type of
deposit-taking subsidiary, including a national bank, a state chartered bank,
or a thrift or savings bank. To qualify as a financial holding company,
however, each of the company's deposit-taking subsidiaries must be well
capitalized, well managed and have at least a "satisfactory" rating under the
Community Reinvestment Act.
In April 2000, the Company notified the Federal Reserve of its election
to become a financial holding company. The Federal Reserve declared this
election to be effective May 12, 2000.
Acquisitions. Under the Bank Holding Company Act, a bank holding company
must obtain Federal Reserve approval before: acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than
5% of such shares, unless it already owns or controls the majority of such
shares; acquiring all or substantially all of the assets of another bank or
bank holding company; or merging or consolidating with another bank holding
company.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services
for its subsidiaries. The principal exceptions to these prohibitions involve
certain nonbank activities which, by statute or by Federal Reserve regulation
or order, have been identified as activities closely related to the business
of banking or managing or controlling banks. The list of activities permitted
by the Federal Reserve includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.
Interstate Banking and Branching. The Federal Reserve must approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve may not approve the acquisition of a bank that
has not been in existence for the minimum time period, not exceeding five
years, specified by the statutory law of the host state. Nor may the Federal
Reserve approve an application if the applicant, and its depository
institution affiliates, controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Federal law does not affect the authority of states to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also
waive the 30% state-wide concentration limit contained in the federal law.
The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions
37
<PAGE>
involving out-of-state banks. Interstate acquisitions of branches will be
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers and branch acquisitions will also be
subject to the nationwide and statewide insured deposit concentration amounts
described above.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the
Federal Reserve's view that a bank holding company should pay cash dividends
only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends.
Stock Repurchases. Bank holding companies, except for certain
"well-capitalized" and highly rated bank holding companies, are required to
give the Federal Reserve prior written notice of any purchase or redemption of
its outstanding equity securities if the gross consideration for the purchase
or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding 12 months, is equal to 10% or
more of their consolidated net worth. The Federal Reserve may disapprove such
a purchase or redemption if it determines that the proposal would constitute
an unsafe or unsound practice or would violate any law, regulation, Federal
Reserve order, or any condition imposed by, or written agreement with, the
Federal Reserve.
On January 27, 2000, the Company announced that its Board of Directors
had authorized the repurchase of up to 5% (approximately 449,313 shares) of
the Company's outstanding common stock. On March 20, 2000, the Board of
Directors approved an additional 5% repurchase (approximately 426,847 shares)
of the Company's outstanding common stock. On May 22, 2000, the Board of
Directors amended the March 20, 2000 stock repurchase plan, increasing the
number of shares authorized for repurchase to 10% (approximately 853,694
shares). At March 31, 2000, the Company had repurchased 449,313 shares of
its common stock.
Capital Requirements. The Federal Reserve has established capital
adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the FDIC for Everett Mutual and Commercial Bank of
Everett. The Federal Reserve regulations provide that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
$150 million or more in total consolidated assets.
The Company's total risk based capital must equal 8% of risk-weighted
assets and one half of the 8%, or 4%, must consist of Tier 1 (core) capital.
As of March 31, 2000, the Company's total risk based capital was 29.2% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
27.9% of risk-weighted assets.
TAXATION
Federal Taxation
General. The Company and its subsidiaries report their income on a
fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly Everett Mutual's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to Everett Mutual or the Company.
Bad Debt Reserve. Historically, savings institutions such as Everett
Mutual which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. Everett Mutual's
deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on Everett Mutual's actual loss experience, or a
percentage equal to 8% of Everett Mutual's taxable income, computed with
certain modifications and reduced by
38
<PAGE>
the amount of any permitted additions to the non-qualifying reserve. Due to
Everett Mutual's loss experience, Everett Mutual generally recognized a bad
debt deduction equal to 8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also require that all institutions recapture all or a
portion of their bad debt reserves added since the base year, which is the
last taxable year beginning before January 1, 1988. Everett Mutual has
previously recorded a deferred tax liability equal to the bad debt recapture
and as such the new rules will have no effect on the net income or federal
income tax expense. For taxable years beginning after December 31, 1995,
Everett Mutual's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years or, if Everett Mutual is a "large" association, with assets in excess of
$500 million, on the basis of net charge-offs during the taxable year. The
new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years
is equal to or greater than the institutions average mortgage lending activity
for the six taxable years preceding 1996 adjusted for inflation. For this
purpose, only home purchase or home improvement loans are included and the
institution can elect to have the tax years with the highest and lowest
lending activity removed from the average calculation. If an institution is
permitted to postpone the reserve recapture, it must begin its six year
recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that Everett Mutual makes "nondividend
distributions" to The Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987, or a lesser amount if Everett Mutual's loan portfolio decreased since
December 31, 1987, and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in Everett Mutual's taxable income. Nondividend distributions
include distributions in excess of Everett Mutual's current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of Everett
Mutual's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from Everett Mutual's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if Everett Mutual makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate, exclusive of state and local taxes. See
"Regulation -- The Banks -- Dividends" for limits on the payment of dividends
by Everett Mutual. Everett Mutual does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
tax on alternative minimum taxable income at a rate of 20%. In addition, only
90% of alternative minimum taxable income can be offset by net operating loss
carryovers. Alternative minimum taxable income is increased by an amount
equal to 75% of the amount by which Everett Mutual's adjusted current earnings
exceeds its alternative minimum taxable income, which is determined without
regard to this preference and prior to reduction for net operating losses.
For taxable years beginning after December 31, 1986, and before January 1,
1996, an environmental tax of 0.12% of the excess of alternative minimum
taxable income, with certain modification, over $2.0 million is imposed on
corporations, including Everett Mutual, whether or not an alternative minimum
tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from its subsidiaries as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company
39
<PAGE>
and its subsidiaries will not file a consolidated tax return, except that if
the Company or its subsidiaries owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company's federal income tax returns have not been audited
during the past five years.
Washington Taxation
The Company is subject to a business and occupation tax imposed under
Washington law at the rate of 1.50% of gross receipts. Interest received on
loans secured by mortgages or deeds of trust on residential properties and
certain investment securities are exempt from such tax.
Competition
Everett Mutual operates in an intensely competitive market for the
attraction of savings deposits, which is its primary source of funds, and in
the origination of loans. Historically, its most direct competition for
savings deposits has come from credit unions, mutual funds and, to a lesser
extent, community banks, large commercial banks and thrift institutions in its
primary market area. Particularly in times of extremely low or extremely high
interest rates, Everett Mutual has faced additional significant competition
for investors' funds from short-term money market securities and other
corporate and government securities. The Bank's competition for loans comes
principally from mortgage bankers, commercial banks, other thrift institutions
and insurance companies. Such competition for deposits and the origination of
loans may limit the Bank's future growth and earnings prospects.
Personnel
At March 31, 2000, the Company had four employees and Everett Mutual had
103 employees. On that date, Commercial Bank of Everett, Sound Financial,
Inc., I-Pro, Inc. and Mutual Bancshares Capital, Inc. had 10, two, six and
three employees, respectively. The employees are not represented by a
collective bargaining unit and all companies believe that the relationship
with their employees is good.
Item 2. Properties
-------------------
Everett Mutual operates 11 full-service facilities and one loan
production office, and Commercial Bank of Everett operates one full-service
facility. The following table sets forth certain information regarding the
Company's and its subsidiaries' offices at March 31, 2000.
<TABLE>
Net Book Value
of Property
Leased Date of Total or Leasehold Total Deposits
or Year Lease Approximate Improvement at at
Location Owned Opened Expiration Square Footage March 31, 2000 March 31, 2000
-------- ----- ------ ---------- -------------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
EverTrust Financial Group
Administration Office Leased 1999 2009 2,699(3) $ 418 $ --
2707 Colby Avenue
Suite 600
Everett, WA 98201
Training/Operations Center Leased 1999 2004 5,023 -- --
Wetmore Building
2731 Wetmore Avenue
Everett, WA 98201
(table continued on following page)
</TABLE>
40
<PAGE>
<TABLE>
Net Book Value
of Property
Leased Date of Total or Leasehold Total Deposits
or Year Lease Approximate Improvement at at
Location Owned Opened Expiration Square Footage March 31, 2000 March 31, 2000
-------- ----- ------ ---------- -------------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Everett Mutual Bank
Administration Office Leased 1994 12/31/14 27,000(1) 603 2,450
2707 Colby Avenue
Suite 600
Everett, WA 98201
Henry Cogswell College Leased 1991 7/31/11 6,351 -- --
Building Annex
Storage Facility
2801 Wetmore Ave.
Everett, WA 98201
Branch Offices:
Main Branch Leased 1994 12/31/14 6,000 - Office 389 69,785
2707 Colby Avenue 4,000 - Drive-thru
Suite A
Everett, WA 98201
Silver Lake Branch Owned 1972 N/A 2,916 1,134 45,195
1902 110th SE
Everett, WA 982008
Monroe Branch Owned 1973 N/A 1,917 231 39,920
214 East Main Street
Monroe, WA 98272
Stanwood Branch Owned 1998 N/A 3,000 1,373 8,093
26606 72nd Avenue NW
Stanwood, WA 98292
Madison Branch Owned 1976 N/A 2,708 581 45,429
6726 Evergreen Way
Everett, WA 98203
Marysville Branch Owned 1977 N/A 2,916 671 41,679
1300 State Avenue
Marysville, WA 98270
Snohomish Branch Leased 1990 6/30/15 2,788 673 33,064
1325 Avenue D
Snohomish, WA 98290
(table continued on following page)
</TABLE>
41
<PAGE>
<TABLE>
Net Book Value
of Property
Leased Date of Total or Leasehold Total Deposits
or Year Lease Approximate Improvement at at
Location Owned Opened Expiration Square Footage March 31, 2000 March 31, 2000
-------- ----- ------ ---------- -------------- -------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Arlington Branch Leased(2) 1981 1/1/06 2,883 235 19,942
535 North Olympic
Arlington, WA 98223
Arlington Branch Leased 1991 Month-to N/A
Parking stalls (seven) month
adjacent to branch
535 North Olympic
Arlington, WA 98223
Lake Stevens Branch Leased 1989 8/27/09 2,685 221 32,379
633 Highway 9
Lake Stevens, WA 98258
North Creek Branch Leased 1989 5/31/03 1,863 120 16,552
18001 Bothell/Everett Highway
Bothell, WA 98012
Smokey Point Branch Owned 1994 N/A 2,916 866 10,261
17021 Smokey Point Blvd.
Arlington, WA 98223
Eastside Loan Production Leased 1999 9/30/00 285 -- --
Office
14205 E. 36th Street
Suite 100
Bellevue, WA 98006
Commercial Bank of Everett
2707 Colby Avenue Leased 1996 12/31/04 4,271(3) 264 18,237
Suite 715
Everett, WA 98201
I-Pro, Inc.
6838 S. 220th Street Leased 1997 6/30/02 4,398 342 --
Kent, WA 98032
Mutual Bancshares Capital, Inc.
22020 17th Avenue, SE Leased 1998 10/31/03 1,413 17 --
Suite 200
Bothell, WA 98021
</TABLE>
-------------
(1) 27,000 square feet, of which 4,271 square feet is subleased by
Commercial Bank of Everett, 2,699 square feet is subleased
by the Company, and 5,625 square feet is subleased by a third party.
(2) Leased from Sound Financial, Inc., a subsidiary of Everett Mutual.
(3) Subleased from Everett Mutual.
42
<PAGE>
The net book value of property includes land, building and leasehold
improvements and furniture, fixtures and equipment.
Everett Mutual also operates nine proprietary automated teller machines
that are part of a nationwide cash exchange network, all of which are located
at certain offices of Everett Mutual.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving
Everett Mutual, such as claims to enforce liens, condemnation proceedings on
properties in which Everett Mutual holds security interests, claims involving
the making and servicing of real property loans and other issues incident to
Everett Mutual's business. Everett Mutual 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 Everett Mutual.
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, 2000.
PART II
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, 2000, there were 8,536,937 shares of
common stock outstanding and approximately 2,416 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 Everett Mutual. 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 27, 2000, the Company announced that its Board of Directors
had authorized the repurchase of up to 5% (approximately 449,313 shares) of
the Company's outstanding common stock. On March 20, 2000, the Board of
Directors approved an additional 5% repurchase (approximately 426,847 shares)
of the Company's outstanding common stock. On May 22, 2000, the Board of
Directors amended the March 20, 2000 stock repurchase plan, increasing the
number of shares authorized for repurchase to 10% (approximately 853,694
shares). At March 31, 2000, the Company had repurchased 449,313 shares of its
common stock.
43
<PAGE>
The following table sets forth the market price range of the Company's
common stock for the year ended March 31, 2000. This information was provided
by the Nasdaq Stock Market.
Year High Low Dividends
---- ---- --- ---------
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. 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,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets............... $555,212 $452,089 $421,305 $399,158 $384,364
Investment securities ..... 108,054 75,432 59,694 52,809 41,144
Loans receivable, net...... 416,116 315,327 311,951 293,134 292,233
Deposit accounts........... 382,986 375,896 350,971 329,770 314,648
Borrowings................. 34,423 18,949 15,503 20,057 24,111
Total equity............... 133,529 52,263 51,096 46,143 42,694
Year Ended March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income............ $38,434 $33,894 $33,462 $31,049 $30,207
Interest expense........... 18,832 17,837 17,899 17,010 16,781
------- ------- ------- ------- -------
Net interest income........ 19,602 16,057 15,563 14,039 13,426
Provision for loan losses.. 810 780 420 420 458
------- ------- ------- ------- -------
Net interest income after
provision for loan losses. 18,792 15,277 15,143 13,619 12,968
Other operating income..... 1,290 1,927 1,792 1,074 1,512
Other operating expenses... 19,696 15,532 10,287 9,796 9,026
------- ------- ------- ------- -------
Income before income taxes. 386 1,672 6,648 4,897 5,454
Provision for income taxes. (186) 261 2,114 1,387 1,561
------- ------- ------- ------- -------
Net income................. $ 572 $ 1,411 $ 4,534 $ 3,510 $ 3,893
======= ======= ======= ======= =======
44
<PAGE>
At March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Loans outstanding......... 4,119 3,505 3,645 3,762 3,875
Deposit accounts ......... 30,404 30,221 29,846 29,751 29,593
Full service banking
offices . . ............ 12 12 11 11 10
At or For
Year Ended March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on assets(1)....... 0.11% 0.33% 1.11% 0.91% 1.06%
Return on equity(2)(7)(8). NM 2.71 9.54 8.07 9.53
Equity-to-assets ratio(3). 18.47 12.18 11.66 11.26 11.13
Interest rate spread (4).. 3.08 3.20 3.27 3.12 3.20
Net interest margin(5).... 3.97 3.83 3.89 3.70 3.75
Average interest-earning
assets to average
interest-bearing
liabilities ............ 123.32 114.75 113.85 113.00 111.62
Other operating expenses
as a percent of average
total assets............ 3.89 3.64 2.53 2.54 2.46
Efficiency ratio(6)(7)(8). NM 66.74 58.64 64.07 59.81
Capital Ratios:
Leverage.................. 24.90 11.80 12.20 11.70 11.30
Tier 1 risk-based......... 27.90 13.70 14.90 14.90 14.40
Total risk-based.......... 29.20 14.90 16.10 16.20 15.70
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of total loans,
net. ................... 0.10 0.12 0.27 0.35 0.43
Nonperforming assets as a
percent of total assets. 0.07 0.08 0.20 0.48 0.59
Allowance for losses as a
percent of gross loans
receivable.............. 1.53 1.62 1.48 1.45 1.37
Allowance for loan losses
as a percent of non-
performing loans........1593.12 1500.53 582.28 440.33 329.59
Net charge-offs to
average outstanding
loans .................. -- -- 0.01 0.03 0.01
--------------
(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, 2000 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.
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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 Everett Mutual, a
Washington state chartered savings bank; Commercial Bank of Everett, a
Washington state chartered commercial 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.
Everett Mutual'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. Everett Mutual attracts retail deposits and generates
real estate secured loans through its 11 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. Everett Mutual 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, Everett
Mutual 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
46
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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."
Commercial Bank of Everett's strategy is to operate as a community-based
financial institution primarily focused on serving the needs of business
banking customers with a high level of customer service. This strategy is
accomplished by providing banking services directly at the customer's place of
business, including lending and non-cash deposit activities, to the greatest
extent possible. Commercial Bank of Everett does not directly compete with
Everett Mutual's retail customer focus. Rather, Commercial Bank of Everett
and Everett Mutual serve to complement each other through an organized
referral network that provides both banks with the opportunity for increased
business. Commercial Bank of Everett was formed as a start-up bank under a
separate banking charter in order to foster and preserve a true commercial
banking culture which is diverse from the historical operating strategy of
Everett Mutual. Commercial Bank of Everett'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 its business customers and other
contacts made during the normal course of business, Commercial Bank of Everett
originates consumer loans, and acts as a broker to Everett Mutual on one- to-
four family residential loans, multi-family and commercial real estate loans.
See Item 1, "Subsidiaries -- Business of Commercial Bank of Everett."
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 Everett Mutual and Commercial Bank of Everett 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, 2000, I-Pro, Inc.'s sole
clients included Everett Mutual and Commercial Bank of Everett. 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 Everett
Mutual into additional operating subsidiaries, which currently consist of
Commercial Bank of Everett, 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, 2000 and March 31, 1999
Total assets increased 22.8% from $452.1 million at March 31, 1999 to
$555.2 million at March 31, 2000, primarily as a result of an increase in
loans receivable, net, which was funded by increased deposits, borrowings and
the capital raised through the initial public offering of the Company's common
stock.
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<PAGE>
Cash and cash equivalents decreased 41.7% from $13.2 million at March 31,
1999 to $7.7 million at March 31, 2000, primarily as a result of a decrease in
Federal Reserve Bank balances, overnight Fed Funds and FHLB investments that
were used to fund growths in the securities available for sale and loan
portfolios.
Securities available for sale increased 55.8% from $61.6 million at March
31, 1999 to $96.0 million at March 31, 2000, as proceeds received from the
sale of the Company's common stock were used to fund growth primarily in U.S.
agency securities and mortgage-backed securities. These investments provide
greater liquidity, higher credit quality and provide the Company the ability
to pledge them for use in future borrowings. 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 17.1%
from $345.0 million at March 31, 1999 to $416.1 million at March 31, 2000,
primarily as a result of multi-family and commercial real estate permanent
loans which increased $77.1 million from March 31, 1999 to March 31, 2000.
Total loans, before deducting undisbursed loan proceeds, deferred loan fees,
and reserves for loan losses, increased 24.5% from $382.1 million at March 31,
1999 to $475.6 million at March 31, 2000. The growth was the result of
increased levels of multi-family and commercial real estate construction and
permanent loan originations. Total originations of these loan types for the
year ended March 31, 2000 was $138.1 million. Total one- to- four family
loans decreased $31.6 million from March 31, 1999 to March 31, 2000, as the
Company sold all loans held for sale and refinancing activity slowed due to
increases in mortgage interest rates throughout the year.
Loans held for sale on the secondary market decreased from $29.6 million
at March 31, 1999 to $0 at March 31, 2000. This decrease resulted primarily
from the sale of loans which in turn were used to fund higher yielding loan
products such as multi-family and commercial real estate loans. Increased
loan sales throughout the year were designed to reduce the Company's exposure
to the risk of rising interest rates.
Premises and equipment, net, increased $100,000 from $8.0 million at
March 31, 1999 to $8.1 million at March 31, 2000, as a result of equipment
purchases partially offset by depreciation expense. For the years ended March
31, 1999 and 2000, depreciation expense was $1.5 million and $963,000,
respectively. See Item 2, "Properties."
Deposits increased 1.9% from $375.9 million at March 31, 1999 to $383.0
million at March 31, 2000, primarily as a result of interest credited back to
accounts offset in part by withdrawals by customers to fund stock purchases in
the Company's initial public offering.
Borrowings increased 82.0% from $18.9 million at March 31, 1999 to $34.4
million at March 31, 2000, 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 increased 155.3% from $52.3 million at March 31, 1999 to
$133.5 million at March 31, 2000, primarily as a result of the sale of common
stock in the Company's initial public offering.
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.
The following table sets forth all significant nonrecurring items
affecting net income for the periods reported:
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<PAGE>
Year Ended March 31,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Net income as reported............................ $ 572 $ 1,411 $ 4,534
Nonrecurring items (net of tax):
Charitable contributions to foundations......... 3,432 1,980 --
Termination of defined benefit plan............. (348) -- --
------- ------- -------
Net income -- core................................ $ 3,656 $ 3,391 $ 4,534
======= ======= =======
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 Company'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 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.
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<PAGE>
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 Company's allowance for loan losses. Such agencies
may require the Company 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 Company'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.
Noninterest Income. Total noninterest 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.
Noninterest Expense. Total noninterest 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
noninterest 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 is anticipated to be 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 is
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.
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Comparison of Operating Results for the Years Ended March 31, 1999 and 1998
Net Income. Net income decreased 68.9% from $4.5 million for the year
ended March 31, 1998 to $1.4 million for the year ended March 31, 1999
primarily as a result of $3.4 million, pre-tax, in charitable contributions
(primarily to The Everett Mutual Foundation), higher loan loss provisions and
increased noninterest expenses for salaries and benefits and occupancy that
were not fully offset by higher net interest income and higher noninterest
income.
Net Interest Income. Net interest income increased 3.2% from $15.6
million for the year ended March 31, 1998 to $16.1 million for the same period
in 1999 as total interest income increased more than total interest expense.
Total interest income increased 1.3% from $33.5 million for the year
ended March 31, 1998 to $33.9 million for the year ended March 31, 1999
primarily as a result of an increase in the average balance of loans
receivable, net, which more than offset a decline in the average yield. The
average balance of loans receivable, net, increased from $322.8 million for
the year ended March 31, 1998 to $334.9 million for the year ended March 31,
1999 as a result of increased loan demand. The average yield earned on loans
declined from 8.87% for the year ended March 31, 1998 to 8.62% for the year
ended March 31, 1999 primarily as a result of loan refinancings and new loan
originations at lower market interest rates. Interest and dividends earned on
investment and mortgage-backed securities increased from $4.8 million for the
year ended March 31, 1998 to $5.0 million for the year ended March 31, 1999 as
average balances increased from $64.0 million for the year ended March 31,
1998 to $71.6 million for the year ended March 31, 1999 as a result of
investing cash from deposit increases.
Total interest expense remained virtually unchanged from $17.9 million
for the year ended March 31, 1998 to $17.8 million for the year ended March
31, 1999. The average balance of total deposits increased $15.5 million but
the weighted average cost of deposits decreased 20 basis points due to a
general decline in market interest rates. The average balance of certificates
of deposit increased from $177.9 million for the year ended March 31, 1998 to
$182.0 million for the year ended March 31, 1999 as a result of interest
credited to accounts and deposit increases at the new Stanwood branch office.
Interest expense on FHLB advances decreased $100,000 from $1.1 million at
March 31, 1998 to $1.0 million at March 31, 1999 primarily as a result of a
decrease in average balances.
The Company's interest rate spread was 3.27% for the year ended March 31,
1998 and 3.20% for the same period in 1999. The net interest margin declined
from 3.89% for the year ended March 31, 1998 to 3.83% for the same period in
1999 as the yield on interest-earning assets decreased more than the cost of
interest-bearing liabilities. It is anticipated that the net interest margin
may be subject to decline as a result of intense pricing competition for both
loans and deposits in the market area.
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 risks 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 full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans. See
Item 1, "Business -- Lending Activities -- Nonperforming Assets and
Delinquencies" and Note 1 of the Notes to Consolidated Financial Statements
contained in Item of this Form 10-K.
The provision for loan losses was $780,000 for the year ended March 31,
1999 compared to $420,000 for the year ended March 31, 1998. 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. The allowance for loan
losses was $5.7 million, or 1.62% of total loans at March 31, 1999,
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<PAGE>
compared to $4.9 million or 1.48% of total loans at March 31, 1998. The
unallocated portion of the allowance for loan losses was $377,000 and $329,000
at March 31, 1999 and March 31, 1998, respectively. The increased allowance
level resulted from continued loan portfolio growth in the higher-risk lending
categories of commercial and multi-family construction/permanent loans,
business loans and credit card loans during the period, which comprised $224.5
million, or 58.8% of the portfolio at March 31, 1999, versus $206.2 million,
or 57.9% of the portfolio at March 31, 1998. The allocated portion of the
allowance for loan losses for these loan types was $3.3 million at March 31,
1999 and $2.9 million at March 31, 1998. In addition, commercial and
multi-family loans have larger individual loan amounts, which have a greater
single impact on the total portfolio quality in the event of delinquency or
default. There have been significant negative changes in the economic
environment and governmental regulations from March 31, 1998. In particular,
The Boeing Company has announced company-wide layoffs of 48,000, with 31,000
of the layoffs expected to occur in the State of Washington. As home to the
largest Boeing assembly plant in the state, Snohomish County is particularly
affected by the layoffs since 20% of jobs in the County are in the aerospace
industry, including parts manufacturers and other suppliers to Boeing. As a
result of the foregoing, the level of reserves allocated to one- to- four
family loans increased to $784,000 at March 31, 1999 from $320,000 at March
31, 1998. In addition, the listing of chinook salmon as an endangered species
and the resulting impact that designation has on the ability of Everett
Mutual's commercial construction and speculative construction borrowers'
abilities to complete projects, warranted higher reserve levels.
Noninterest Income. Total noninterest income increased 7.5% from $1.8
million for the year ended March 31, 1998 to $1.9 million for the year ended
March 31, 1999. This increase resulted primarily from the gain on sale of
equity securities and, to a lesser extent, increased earnings on automated
teller machine operations as a result of the expanded network of owned
machines. The increases were partially offset by lower earnings on the sale
of other real estate owned and residential mortgage loans.
Noninterest Expense. Total noninterest expense increased 51.0% from
$10.3 million for the year ended March 31, 1998 to $15.5 million for the year
ended March 31, 1999 primarily as a result of $3.4 million of charitable
contributions, primarily to The Everett Mutual Foundation, as compared to a
$106,000 during fiscal 1998. Management expects that the $3.4 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 the 10% of taxable income
limitation. As a result, a deferred tax asset of $883,000 relating to the
charitable contribution carry over is included in other assets in the
financial statements at March 31, 1999. Also contributing to the increase in
noninterest expenses were increases in salaries and employee benefits,
occupancy and fixed assets, and Y2K preparation and testing costs. Salaries
and employee benefits increased from $4.8 million for the year ended March 31,
1998 to $5.4 million for the year ended March 31, 1999 as a result of
increased staffing levels, general salary increases and related payroll tax
cost. Occupancy and equipment expense increased from $2.4 million for the
year ended March 31, 1998 to $3.1 million for the year ended March 31, 1999
primarily as a result of expenses associated with accelerated depreciation on
electronic equipment. Noninterest expense can be expected to increase in
subsequent periods as a result of increased costs associated with operating as
a public company and increased compensation expense as a result of the
adoption of the employee stock ownership plan and, if approved by the
Company's stockholders, the management recognition and development plan.
After the contribution made to The EverTrust Foundation as part of the
Conversion, the Company does not intend to make significant contributions to
The Everett Mutual Foundation in the future.
Provision for Income Taxes. The provision for income taxes decreased
from $2.1 million for the year ended March 31, 1998 to $261,000 for the year
ended March 31, 1999 as a result of lower income before income taxes. The
effective tax rate was 31.8% for the year ended March 31, 1998 and 15.6% for
the year ended March 31, 1999. The effective tax rate was lower primarily as
a result of tax-exempt interest and federal low income housing tax credits.
For the year ended March 31, 1998, tax-exempt interest and federal low income
housing tax credits lowered the effective tax rate 160 basis points and 320
basis points, respectively. For the year ended March 31, 1999, these same
items lowered the effective tax rate 770 basis points and 1,290 basis points,
respectively.
52
<PAGE>
The deferred portion of the provision for income taxes was ($437,000) for
the year ended March 31, 1998 and ($1.7) million for the year ended March 31,
1999. The change in the deferred portion is primarily attributable to
expenses for bad debts, depreciation and charitable contributions, that were
not fully deductible in the current tax year, offset by income deferred into
future years which was comprised primarily of FHLB stock dividends.
Average Balances, Interest and Average Yields/Cost
The earnings of Everett Mutual and Commercial Bank of Everett 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 Everett Mutual's and Commercial Bank of Everett'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.
<TABLE>
Year Ended March 31,
-----------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1)..... $375,804 $ 31,464 8.37% $334,896 $28,852 8.62% $322,811 $28,625 8.87%
Investment securities. ...... 94,651 5,674 5.99 67,771 4,058 5.99 60,493 3,807 6.29
Federal Home Loan Bank stock. 4,105 290 7.06 3,787 291 7.68 3,488 273 7.83
Cash and cash equivalents.... 19,513 1,006 5.26 12,892 693 5.38 13,699 757 5.53
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets.................... 494,073 38,434 7.78 419,346 33,894 8.08 400,491 33,462 8.36
------- ---- ------- ---- ------- ----
Noninterest-earning assets.... 12,593 7,580 6,493
-------- -------- --------
Total average assets........ $506,666 $426,926 $406,984
======== ======== ========
Interest-bearing liabilities:
Savings accounts. ........... $ 17,445 483 2.77 $ 11,454 316 2.76 $ 10,373 309 2.98
NOW accounts ................ 34,942 907 2.60 32,227 845 2.62 29,992 839 2.80
Money market deposit
accounts................... 135,503 5,737 4.23 123,469 5,354 4.34 115,514 5,264 4.56
Certificates of deposit...... 193,342 10,514 5.44 182,016 10,301 5.66 177,877 10,350 5.82
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits.............. 381,232 17,641 4.63 349,216 16,816 4.82 333,756 16,762 5.02
Borrowings .................. 19,417 1,191 6.13 16,215 1,021 6.30 18,003 1,137 6.32
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities............... 400,649 18,832 4.70 365,431 17,837 4.88 351,759 17,899 5.09
------- ---- ------- ---- ------- ----
Noninterest-bearing
liabilities................ 12,412 9,449 7,713
-------- -------- --------
Total average liabilities... 413,061 374,880 359,472
Average equity................ 93,605 52,046 47,512
-------- -------- --------
Total liabilities and
equity.................... $506,666 $426,926 $406,984
======== ======== ========
Net interest income............ $ 19,602 $ 16,057 $ 15,563
======== ======== ========
Interest rate spread .......... 3.08% 3.20% 3.27%
===== ===== =====
Net interest margin. .......... 3.97% 3.83% 3.89%
===== ===== =====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities.................. 123.32% 114.75% 113.85%
====== ====== ======
--------------
(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.
</TABLE>
53
<PAGE>
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.
<TABLE>
Year Ended March 31, Year Ended March 31,
2000 Compared to Year 1999 Compared to Year
Ended March 31, 1999 Ended March 31, 1998
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ------ ---- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net ............ $(813) $3,524 $ (99) 2,612 $ (814) $1,072 $ (30) $ 228
Investment securities ............ 5 1,609 2 1,616 (185) 458 (22) 251
Federal Home Loan Bank stock ..... (23) 24 (2) (1) (5) 23 -- 18
Interest-bearing deposits......... (28) 356 (15) 313 (21) (45) 1 (65)
----- ------ ----- ------ ------- ------ ------ -----
Total net change in income on
interest-earning assets...... $(859) $5,513 $(114) 4,540 $(1,025) $1,508 $ (51) 432
===== ====== ===== ====== ======= ====== ====== =====
Interest-bearing liabilities:
Savings accounts.................. $ 1 $ 165 $ 1 167 $ (23) $ 32 $ (2) 7
NOW accounts...................... (7) 70 (1) 62 (54) 64 (4) 6
Money market deposit..............
accounts........................ (127) 522 (12) 383 (255) 363 (18) 90
Certificates of deposit .......... (403) 641 (25) 213 (283) 241 (7) (49)
----- ------ ----- ------ ------- ------ ------ -----
Total average deposits........ (536) 1,398 (37) 825 (615) 700 (31) 54
Borrowings ........................ (26) 201 (5) 170 (3) (113) -- (116)
----- ------ ----- ------ ------- ------ ------ -----
Total net change in expense
on interest-bearing
liabilities................. $(562) $1,599 $ (42) 995 $ (618) $ 587 $ (31) (62)
===== ====== ===== ====== ======= ====== ====== =====
Net change in net interest income .. $3,545 $494
====== =====
</TABLE>
54
<PAGE>
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, --------------------
2000 2000 1999 1998
------------ ---- ---- ----
Weighted average yield on:
Loans receivable, net (1)................. 8.11% 8.37% 8.62% 8.87%
Investment securities..................... 6.14 5.99 5.99 6.29
Federal Home Loan Bank stock.............. 6.50 7.06 7.68 7.83
Cash and cash equivalents................. 6.26 5.16 5.38 5.53
Total interest-earning assets.......... 7.70 7.78 8.08 8.36
Weighted average rate paid on:
Savings accounts ......................... 2.75 2.77 2.76 2.98
NOW accounts ............................. 2.61 2.60 2.62 2.80
Money market deposit accounts ............ 4.25 4.23 4.34 4.56
Certificates of deposit. ................. 5.64 5.44 5.66 5.82
Total average deposits................. 4.78 4.63 4.82 5.02
Federal Home Loan Bank advances .......... 6.25 6.13 6.30 6.32
Total interest-bearing liabilities..... 4.91 4.70 4.88 5.09
Interest rate spread (spread between weighted
average rate on all interest-earning assets
and all interest-bearing liabilities).... 2.79 3.08 3.20 3.70
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets) ............... -- 3.70 3.83 3.89
------------
(1) Weighted average rate earned on loans does not include earnings from
deferred loan fees at March 31, 2000. Earnings from the amortization
of loan fees was included in the weighted average rate calculations
for the years ended March 31, 2000, 1999 and 1998.
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 service
charges and fees on accounts and gains on sale of investments. Non-interest
expenses primarily include compensation and benefits, occupancy and equipment
expenses, deposit insurance premiums and data 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.
55
<PAGE>
The following table sets forth at March 31, 2000, the estimated
percentage change in Everett Mutual'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 (5.8)% (13.4)%
300 (8.4) (9.4)
200 (10.2) (6.0)
100 (5.6) (2.9)
0 -- --
(100) 4.4 2.7
(200) 1.9 5.3
(300) (4.3) 7.8
(400) (13.8) 10.1
-----------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of
Everett Mutual'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 Everett Mutual's
assets and liabilities and the estimated effects of changes in interest rates
on Everett Mutual'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, 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 are assumed to increase when market
rates decline and decrease as market rates increase. Everett Mutual'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 Everett Mutual'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 Everett Mutual's existing assets and
liabilities. It was also assumed that delinquency rates would not change as a
result of changes in
56
<PAGE>
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'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.
The following table sets forth at March 31, 2000 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.
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 19.1% (8.4)%
300 14.4 (6.4)
200 9.8 (4.2)
100 5.0 (2.1)
0 -- --
(100) (5.1) 1.9
(200) (10.2) 3.2
(300) (15.9) 3.4
(400) (22.1) 3.7
-----------
(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 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 current market prepayment expectations. 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 could be
maintained with adjustments not directly proportionate to the change in market
interest rate. These assumptions are based on an assessment of the expected
product rate changes in the rate scenarios shown in the table.
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
value of discounted 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, 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. Everett Mutual is
authorized to engage in limited hedging activities for its saleable loan
pipeline, however, no such hedges were in place at March 31, 2000.
Furthermore, the Company has no commodity price risk, and only a limited
amount of
57
<PAGE>
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 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 Everett
Mutual is related to the hedging of loans originated for resale to the
secondary market. Everett Mutual's hedging policy permits the forward sale of
loans and investments with a high correlation factor to the asset being
hedged. Everett Mutual does not currently have any open hedges as secondary
market loan sale activity has been limited. However, Everett Mutual may use
hedges in the future if loan sale activity accelerates.
Commercial Bank of Everett does not currently nor does it plan to use
instruments with hedging characteristics.
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, 1999 and 2000, the Company originated $124.4 million
and $187.3 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, 1999 and 2000, the
Company originated $4.5 million and $11.8 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."
Everett Mutual and Commercial Bank of Everett 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 1999 and 2000, Everett Mutual
and Commercial Bank of Everett used these sources of funds primarily to fund
loan commitments and to pay maturing savings certificates and deposit
withdrawals. At March 31, 2000, Everett Mutual and Commercial Bank of Everett
had combined loan commitments, excluding loans in process, of $9.6 million.
58
<PAGE>
At March 31, 2000, the Company had $1.7 million of unrealized loss on
securities classified as available for sale, which amount represented 17.6% of
the amortized cost basis, or $97.7 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, 2000, certificates of deposit amounted to $198.3 million, or
51.8%, of the Company's total deposits, including $132.4 million which were
scheduled to mature by March 31, 2001. Historically, the Company has been able
to retain a significant amount of its deposits as they mature. Management of
the Company 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, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998, standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under Statement of Financial
Accounting Standards No. 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains and losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reasons for holding it.
If certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows or
foreign currencies. See Note 1 of the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K for further information.
Statement of Financial Accounting Standards No. 133 is effective for financial
statements issued for periods beginning after June 15, 1999, although earlier
adoption is permitted. The Company will implement this statement April 1,
2001. The impact of the adoption of the provisions of this statement on the
results of operations or financial condition of the Company has not been
determined. In June 1999, Statement of Financial Accounting Standards No. 137
was issued amending Statement of Financial Accounting Standards No. 133 to
extend the implementation by one year.
Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise. Statement of Financial Accounting Standards No. 134, "Accounting
for Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," issued in October 1998,
amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities," and Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," for years beginning after December 15, 1998. Statement of
Financial Accounting Standards No. 134 requires that when a mortgage banking
company securitizes mortgage loans held for sale, that the security be
classified as either trading, available for sale, or held to maturity
according to the company's intent, unless the company has already committed to
sell the security before or during the securitization process. This statement
was adopted by the Company on April 1, 1999 and does not affect the results of
operations or financial condition of the Company.
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
59
<PAGE>
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. 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. Financial Statements and Supplementary Data
---------------------------------------------------
EVERTRUST FINANCIAL GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors Report..................................... 61
Consolidated Statements of Financial Condition
as of March 31, 1999 and 2000 ............................... 62
Consolidated Statements of Operations For the
Years Ended March 31, 2000, 1999 and 1998..................... 63
Consolidated Statements of Comprehensive Income
For the Years Ended March 31, 2000, 1999 and 1998............. 65
Consolidated Statements of Equity For the
Years Ended March 31, 2000, 1999 and 1998 ................... 66
Consolidated Statements of Cash Flows For the Years Ended
March 31, 2000, 1999 and 1998 ............................... 67
Notes to Consolidated Financial Statements ..................... 69
60
<PAGE>
[Deloitte & Touche Letterhead]
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, 2000 and 1999, and the related consolidated statements of
operations, comprehensive income, equity, and cash flows for each of the three
years in the period ended March 31, 2000. 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP
May 1, 2000
61
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except share
amounts)
MARCH 31, 2000 AND 1999
------------------------------------------------------------------------------
ASSETS 2000 1999
---- ----
Cash and cash equivalents, including
interest-bearing deposits of $1,790 and $4,583 $ 7,652 $ 13,230
Securities available for sale, amortized
cost of $97,710 and $61,390 95,988 61,566
Securities held to maturity, fair value of
$12,136 and $14,317 12,066 13,866
Federal home loan bank stock, at cost 4,288 3,994
Loans receivable, net 416,116 315,327
Loans held for sale, fair value of $-0- and $29,767 29,641
Accrued interest receivable 3,653 3,177
Premises and equipment, net 8,138 7,953
Prepaid expenses and other assets 7,311 3,335
-------- --------
Total $555,212 $452,089
======== ========
LIABILITIES AND EQUITY
Liabilities:
Deposit accounts $382,986 $375,896
Federal Home Loan Bank advances and other
borrowings 34,423 18,949
Accounts payable and other liabilities 4,274 4,981
-------- --------
Total liabilities 421,683 399,826
Commitments and contingencies
Equity:
Common stock, no par value - Authorized, 49,000,000
shares; outstanding, 8,536,937 and -0- shares 83,978
Employee Stock Ownership Plan debt (1,584)
Retained earnings 52,271 52,147
Accumulated other comprehensive income (loss) (1,136) 116
-------- --------
Total equity 133,529 52,263
-------- --------
Total $555,212 $452,089
======== ========
See notes to consolidated financial statements.
62
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
2000 1999 1998
------ ------ ------
INTEREST INCOME:
Loans receivable $31,464 $28,852 $28,625
Investment securities:
Taxable interest income 5,994 4,204 4,151
Tax-exempt interest income 402 376 367
Dividend income 574 462 319
------- ------- -------
Total investment securities income 6,970 5,042 4,837
------- ------- -------
Total interest income 38,434 33,894 33,462
INTEREST EXPENSE:
Deposit accounts 17,641 16,816 16,762
Federal Home Loan Bank advances and
other borrowings 1,191 1,021 1,137
------- ------- -------
Total interest expense 18,832 17,837 17,899
------- ------- -------
Net interest income 19,602 16,057 15,563
PROVISION FOR LOAN LOSSES 810 780 420
------- ------- -------
Net interest income after provision
for loan losses 18,792 15,277 15,143
OTHER INCOME:
Loan service fees 636 781 854
Gain (loss) on sale of securities
and loans (407) 313 114
Other, net 1,061 833 824
------- ------- -------
Total other income 1,290 1,927 1,792
OTHER EXPENSES:
Salaries and employee benefits 6,666 5,442 4,761
Occupancy and equipment 3,379 3,134 2,388
Charitable contributions 5,201 3,426 106
Information processing costs 715 777 653
Other, net 3,735 2,753 2,379
------- ------- -------
Total other expenses 19,696 15,532 10,287
------- ------- -------
BALANCE, earnings before federal income
taxes, carried forward 386 1,672 6,648
63
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (continued)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
2000 1999 1998
------ ------ ------
BALANCE, earnings before federal income
taxes, brought forward $ 386 $ 1,672 $ 6,648
FEDERAL INCOME TAXES:
Current 1,914 1,944 2,551
Deferred (2,100) (1,683) (437)
------- ------- ------
Total federal income taxes (186) 261 2,114
------- ------- ------
NET INCOME $ 572 $ 1,411 $4,534
======= ======= ======
Net income per common share - Basic nm (1) n/a n/a
Net income per common share - Diluted nm (1) n/a n/a
Weighted average shares outstanding - Basic nm (1) n/a n/a
Weighted average shares outstanding - Diluted nm (1) n/a n/a
(1) Earnings-per-share calculations are not meaningful as the Company
converted from a mutual to public company on September 30, 1999.
64
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
2000 1999 1998
------ ------ ------
NET INCOME $ 572 $1,411 $4,534
OTHER COMPREHENSIVE INCOME, 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 $(571), $(54),
and $216 (1,108) (104) 419
Less adjustment of gains included in net
income, net of income tax of $(74),
$(72), and $-0- (144) (140)
------ ------ ------
Other comprehensive income (loss) (1,252) (244) 419
------ ------ ------
COMPREHENSIVE INCOME (LOSS) $ (680) $1,167 $4,953
====== ====== ======
65
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (in thousands, except share amounts)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
<TABLE>
Common stock (1) Accumulated
---------------- other
Number of Debt related Retained comprehensive
shares Amount to ESOP earnings income (loss) Total
-------- ------ ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1997 - $ - $ - $ 46,202 $ (59) $ 46,143
Net income 4,534 4,534
Other comprehensive income,
net of income taxes 419 419
-------- -------- --------
BALANCE, March 31, 1998 50,736 360 51,096
Net income 1,411 1,411
Other comprehensive loss,
net of income taxes (244) (244)
-------- -------- --------
BALANCE, March 31, 1999 52,147 116 52,263
Common stock issued 8,986,250 88,213 88,213
Common stock repurchased (449,313) (4,167) (4,167)
Loan to ESOP (1,980) (1,980)
Repayment of ESOP debt 396 396
ESOP activity - Change in value of
shares committed to be released (68) (68)
Net income 572 572
Dividends paid (448) (448)
Other comprehensive loss, net of
income taxes (1,252) (1,252)
--------- ------- -------- -------- -------- --------
BALANCE, March 31, 2000 8,536,937 $83,978 $(1,584) $ 52,271 $ (1,136) $133,529
========= ======= ======== ======== ======== ========
(1) Stock offering completed on September 30, 1999.
</TABLE>
66
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
2000 1999 1998
------ ------ ------
OPERATING ACTIVITIES:
Net income $ 572 $ 1,411 $ 4,534
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization of premises
and equipment 963 1,474 1,081
Dividends on FHLB stock and accretion of
investment security discounts (450) (457) (654)
Loss (gain) on sale of premises and equipment
and real estate owned (16) (7) (100)
Amortization of investment security premiums 301 244 96
Loss on limited partnership 107 125 120
Provision for losses on loans and real
estate owned 810 780 420
Amortization of deferred loan fees and costs (1,412) (1,184) (1,049)
Loan fees deferred 1,666 1,145 1,197
Proceeds from sale of loans 33,895 3,958 7,206
Loans originated for sale (9,142) (34,485) (12,821)
Deferred taxes (1,353) (1,683) (235)
Stock contributed to charitable foundation 3,900
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (476) (147) (225)
Prepaid expenses and other assets (1,275) (283) 719
Accounts payable and other liabilities (707) 1,255 554
--------- ------- -------
Net cash provided (used) by operating
activities 27,383 (27,854) 843
INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 67,876 19,952 32,628
Proceeds from maturities of securities held to
maturity 1,843 7,106 3,860
Proceeds from sale of securities available
for sale 2,502 3,561 1,333
Purchases of securities available for sale (106,882) (46,647) (43,109)
Purchases of securities held to maturity (157) (675)
Purchases of Federal Home Loan Bank stock (4) (44)
Loan principal payments 92,780 113,624 82,264
Loans originated or acquired (189,745)(103,275) (97,408)
Proceeds from sales of reacquired assets and
real estate owned 130 1,114
Investment in real estate owned (9) (42)
Investment in limited partnership (809)
Net additions to premises and equipment (1,132) (664) (2,719)
--------- ------- -------
Net cash used by investing activities (133,571) (6,423) (22,754)
--------- ------- -------
BALANCE, carried forward (106,188) (34,277) (21,911)
67
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (continued)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
BALANCE, brought forward $(106,188) $(34,277) $(21,911)
FINANCING ACTIVITIES:
Net increase in deposit accounts 7,090 24,925 21,201
Proceeds from the sale of common stock 84,245
Repurchase shares of common stock (4,167)
Dividends paid on common stock (448)
Loan to Employee Stock Ownership Plan (1,980)
Repayment of loan to Employee Stock
Ownership Plan 396
Proceeds from other borrowings 6,500
Repayment of other borrowings (1,500)
Proceeds from Federal Home Loan Bank advances 50,708 16,000
Repayments of Federal Home Loan Bank advances (40,234) (12,554) (4,554)
--------- -------- --------
Net cash provided by financing activities 100,610 28,371 16,647
--------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,578) (5,906) (5,264)
CASH AND CASH EQUIVALENTS:
Beginning of year 13,230 19,136 24,400
--------- -------- --------
End of year $ 7,652 $ 13,230 $ 19,136
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 17,618 $ 16,807 $ 16,381
Federal income taxes 1,200 2,337 2,352
Interest on borrowings 1,200 1,000 1,160
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure $ - $ 117 $ 102
Company financing of sales of real 502
estate owned
68
See notes to consolidated financial statements.
<PAGE>
EVERTRUST FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999, AND 1998
------------------------------------------------------------------------------
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),
Commercial Bank of Everett (CBE), Everett Mutual Bank (EMB), and EMB's wholly
owned subsidiary, Sound Financial, Inc. 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 EMB and subsidiaries.
The Company is subject to regulation by the Federal Reserve Board (FRB) and
the Federal Deposit Insurance Corporation (FDIC). On September 1, 1996
(inception), CBE was formed as a wholly owned subsidiary of the Company. 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 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 subsidiaries, EMB and CBE (collectively, the
Banks), the Company is primarily engaged in attracting deposits from the
general public through its 12 offices in Snohomish 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 another subsidiary, Sound Financial, Inc. The
Company also is engaged in providing loans to customers, who are predominately
local businesses and individuals through CBE's one branch 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
will provide equity to high technology businesses in the seed, startup, and
early stage of development.
Cash and cash equivalents: For purposes of the statements of cash flows, cash
and cash equivalents include 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.
Federal Reserve Board regulations require depository institutions to maintain
certain minimum reserve balances. Included in cash were balances maintained
at the Federal Reserve Bank of San Francisco of $956,000 and $925,000 at March
31, 2000 and 1999, respectively.
69
<PAGE>
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. The allowance also incorporates the
results of measuring impaired loans as provided in Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of
a Loan, as amended by SFAS No. 118, Accounting by Creditor for Impairment of a
Loan - Income Recognition and Disclosures. These accounting standards
prescribe the measurement methods, income recognition, and disclosures related
to impaired loans. 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
70
<PAGE>
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. Impairment is recognized by
adjusting an allocation of the existing allowance for loan losses.
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 is comprised of 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 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 Banks use
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 Banks assess 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) 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
71
<PAGE>
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 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's policy is to expense computers, with the exception of server
equipment, in the period costs are 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.
Employee Stock Ownership Plan: The Bank sponsors a leveraged Employee Stock
Ownership Plan (ESOP). Under SOP No. 93-6, Employers' Accounting for Employee
Stock Ownership Plans, 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.
Interest rate risk management: In order to reduce the risk of significant
mortgage interest rate fluctuations, EMB is authorized to utilize financial
futures contracts, option contracts, and forward commitments to hedge certain
mortgage loans held for sale and loan origination commitments. Gains and
losses on open futures contracts, option contracts, and forward commitments
are included in lower of cost or market computations for mortgage loans held
for sale or matched against loan origination commitments. There were no open
forward commitments to hedge against interest rate fluctuations at March 31,
2000 and 1999, respectively. Gains and losses on closed futures contracts,
option contracts, and forward commitments are recognized as part of the net
gain on sale of the related hedged mortgage loans.
72
<PAGE>
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 Banks use 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:
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, was issued in October 1998. Prior to issuance of SFAS No. 134,
when a mortgage banking company securitized mortgage loans held for sale but
did not sell the security in the secondary market, the security was classified
as trading. SFAS No. 134 requires that the security be classified either
trading, available for sale, or held to maturity according to the Company's
intent, unless the Company has already committed to sell the security before
or during the securitization process. This statement does not affect the
results of operations or financial condition of the Company. SFAS No. 134 was
adopted by the Company on April 1, 1999.
Recently issued accounting standards not yet adopted: SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued in
June 1998 and establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The impact of the adoption of the
provisions of this statement on the results of operations or financial
condition of the Company has not yet been determined. In June 1999, SFAS No.
137, Deferral of the Effective Date of FASB Statement No. 133, was issued
amending SFAS No. 133 to extend the implementation by one year. The Company
will implement this statement on April 1, 2001.
Reclassifications: Certain reclassifications have been made in the 1999 and
1998 consolidated financial statements to conform with the classifications
used in 2000.
73
<PAGE>
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 Fair
cost gains losses value
---- ----- ------ -----
2000:
Debt securities:
U.S. government agency
securities due:
Within one year $ 5,749 $ - $ (29) $ 5,720
After one but within five years 6,449 1 (51) 6,399
-------- -------- -------- --------
12,198 1 (80) 12,119
Municipal obligations due:
Within one year 165 165
After one but within five years 3,344 (93) 3,251
After five but within 10 years 431 (23) 408
After 10 years 1,721 (8) 1,713
-------- -------- --------
5,661 (124) 5,537
Obligations of corporations due:
Within one year 19,587 (165) 19,422
After one but within five years 21,772 4 (548) 21,228
-------- -------- -------- --------
41,359 4 (713) 40,650
Mortgage-backed securities due:
After one but within five years 10,749 (181) 10,568
After five but within 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 but within
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
======== ======== ======== ========
74
<PAGE>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
1999:
Debt securities:
U.S. government agency
securities due:
Within one year $ 1,141 $ 6 $ - $ 1,147
After one but within five
years 2,610 2 (10) 2,602
-------- -------- -------- --------
3,751 8 (10) 3,749
Municipal obligations due:
Within one year 80 80
After one but within five years 1,796 6 (18) 1,784
After five but within 10 years 966 2 (6) 962
After 10 years 2,255 (1) 2,254
-------- -------- -------- --------
5,097 8 (25) 5,080
Obligations of corporations due:
Within one year 11,372 43 (15) 11,400
After one but within five years 34,503 141 (203) 34,441
-------- -------- -------- --------
45,875 184 (218) 45,841
Mortgage-backed securities due:
After five but within 10 years 468 1 469
After 10 years 46 3 49
-------- -------- --------
514 4 518
Certificates of deposit due:
After one year but within five years 175 175
Equity securities:
Mutual funds 2,221 2,221
Other stock 3,757 225 3,982
-------- -------- --------
5,978 225 6,203
-------- -------- -------- --------
$ 61,390 $ 429 $ (253) $ 61,566
======== ======== ======== ========
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
$220,639, $322,535, and $13,309 for the years ended March 31, 2000, 1999, and
1998, respectively. Gross realized losses on the sale of securities available
for sale were $2,796, $7,282, and $13,764 for the years ended March 31, 2000,
1999, and 1998, respectively.
75
<PAGE>
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 Fair
cost gains losses value
---- ----- ------ -----
2000:
Debt securities:
U.S. government agency securities
due:
After one but within five years $ 2,514 $ 24 $ - $ 2,538
Municipal obligations due:
Within one year 465 465
After one but within five years 2,094 2 (9) 2,087
After five but within 10 years 650 (1) 649
After 10 years 2,787 15 2,802
-------- -------- -------- --------
5,996 17 (10) 6,003
Obligations of corporations due:
Within one year 500 500
After one but within five years 986 19 1,005
-------- -------- --------
1,486 19 1,505
Mortgage-backed securities due:
After one but within 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
======== ======== ======== ========
76
<PAGE>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
1999:
Debt securities:
U.S. government agency securities
due:
After one but within five years $ 1,514 $ 70 $ - $ 1,584
After five but within 10 years 1,006 94 1,100
-------- -------- --------
2,520 164 2,684
Municipal obligations due:
Within one year 735 3 738
After one but within five years 1,839 49 1,888
After five but within 10 years 1,372 36 1,408
After 10 years 2,827 15 2,842
-------- -------- --------
6,773 103 6,876
Obligations of corporations due:
Within one year 498 6 504
After one but within five years 1,467 77 1,544
-------- -------- --------
1,965 83 2,048
Mortgage-backed securities due:
After five but within 10 years 6 6
After 10 years 2,147 101 2,248
-------- -------- --------
2,153 101 2,254
Certificates of deposit due:
After one but within five years 455 455
-------- -------- -------- --------
$ 13,866 $ 451 $ - $ 14,317
======== ======== ======== ========
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 $2,350,000 and $2,100,000 and a
market value of $2,353,154 and $2,130,427 were pledged to secure public
deposits at March 31, 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.
77
<PAGE>
NOTE 4: LOANS RECEIVABLE
Loans receivable consisted of the following at March 31 (in thousands):
2000 1999
------ ------
Real estate:
One to four family residential $ 70,042 $101,649
One to four family construction and
land development 37,266 34,928
Income property:
Commercial construction 23,871 12,491
Commercial real estate 128,892 72,573
Multifamily construction 32,304 14,012
Multifamily residential 136,727 115,972
Consumer:
Residential mortgages 5,211 4,867
Home equity and second mortgages 18,090 13,734
Credit cards 1,375 488
Automobiles 1,038 787
Other installment loans 4,243 1,612
Business loans 16,494 8,949
-------- --------
475,553 382,062
Less:
Undisbursed loan proceeds (49,460) (28,183)
Deferred loan fees and other (3,493) (3,239)
Reserve for loan losses (6,484) (5,672)
-------- --------
416,116 344,968
Loans receivable held for sale (29,641)
-------- --------
Loans receivable, net $416,116 $315,327
======== ========
A substantial portion of the Company's revenues are derived from the
origination of loans in the Puget Sound region of Washington State. The
customers' ability to honor their commitments to repay such loans is dependent
upon the region's economy.
Single-family residential, permanent, and construction loans are primarily
secured by collateral located in western Washington. Income property loans,
by county or state in which the property resides, are as follows at March 31,
2000 (in thousands):
Snohomish King Pierce
County County County Other Total
------ ------ ------ ----- -------
Income property:
Commercial construction $ 6,896 $ 11,700 $ 4,935 $ 340 $ 23,871
Commercial real estate 52,511 60,240 4,634 11,507 128,892
Multifamily construction 5,070 18,356 5,596 3,282 32,304
Multifamily residential 53,567 58,952 9,292 14,916 136,727
-------- -------- ------- ------- --------
$118,044 $149,248 $24,457 $30,045 $321,794
======== ======== ======= ======= ========
Outstanding commitments to borrowers for loans totalled $9,631,100 and
$12,111,452 at March 31, 2000 and 1999, respectively.
78
<PAGE>
The Banks serviced loans for others totalling $95,349,775 and $72,637,330, as
of March 31, 2000 and 1999, respectively.
The activity in the reserve for loan losses was as follows for the years ended
March 31 (in thousands):
2000 1999 1998
------ ------ ------
Balance, beginning of year $5,672 $4,897 $4,509
Provision for loan losses 810 780 420
Reserves charged off, net of recoveries 2 (5) (32)
------ ------ ------
Balance, end of year $6,484 $5,672 $4,897
====== ====== ======
The Banks originate both adjustable and fixed interest rate loans. At March
31, 2000, the composition of those gross portfolio loans was as follows (in
thousands):
Fixed Adjustable
Term to maturity or rate adjustment rate rate Total
----------------------------------- ---- ---- -----
Due within one year $ 11,189 $195,789 $206,978
After one year but within three years 9,432 81,188 90,620
After three years but within five years 20,578 48,157 68,735
After five years but within 15 years 76,621 14,143 90,764
After 15 years 18,456 18,456
-------- -------- --------
$136,276 $339,277 $475,553
======== ======== ========
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 Banks
pay on the short-term deposits and Federal Home Loan Bank of Seattle (FHLB)
advances that have been primarily utilized to fund these loans.
The average balance of impaired loans during 2000, 1999, and 1998, was
$2,954,000, $3,137,000, and $3,670,000, and the Company recognized $251,000,
$283,000, and $331,000 of related interest income, 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):
2000 1999
------ ------
Loans with allocated reserves of $175 and $164 $2,590 $2,644
Loans without allocated reserves 407 378
------ ------
$2,997 $3,022
====== ======
Loans on non accrual status $ 315 $ 378
Loans under foreclosure 92
Performing loans judged to be impaired 2,590 2,644
------ ------
$2,997 $3,022
====== ======
79
<PAGE>
NOTE 5: ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at March 31 (in
thousands):
2000 1999
------ ------
Investment securities $1,158 $1,020
Loans 2,495 2,157
------ ------
$3,653 $3,177
====== ======
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31 (in thousands):
2000 1999
------ ------
Land $1,491 $1,491
Buildings (including leasehold improvements) 7,025 6,771
Furniture, fixtures, and automobiles 6,493 5,661
------ ------
15,009 13,923
Less accumulated depreciation and amortization (6,871) (5,970)
------ ------
$8,138 $7,953
====== ======
The Company has noncancellable operating leases for office facilities,
branches, and equipment. Future minimum rental commitments for all
noncancellable leases are as follows (in thousands):
2001 $ 784
2002 788
2003 762
2004 719
2005 658
Thereafter 5,812
------
$9,523
======
Rent expense for the years ended March 31, 2000, 1999, and 1998, totalled
$794,000, $710,000, and $660,000, respectively.
80
<PAGE>
NOTE 7: DEPOSIT ACCOUNTS
Deposit accounts, with respective interest rate ranges, consisted of the
following at March 31 (in thousands):
2000 1999
------------------------- -------------------------
Weighted Weighted
average average
rate Amount % rate Amount %
---- ------ --- ---- ------ ---
Non interest-bearing
accounts - % $ 7,902 2.1% - % $ 7,782 2.1%
Savings accounts 2.8 10,523 2.7 2.8 11,798 3.1
Checking accounts 2.6 36,712 9.6 2.6 33,655 9.0
Money market
accounts 4.3 129,522 33.8 4.2 133,748 35.6
Time deposits by
original term:
1 to 11 months 5.4 32,200 8.4 4.8 32,660 8.7
12 to 23 months 5.5 77,273 20.2 5.2 62,536 16.6
24 to 35 months 5.5 22,827 6.0 5.5 23,767 6.3
36 to 59 months 5.7 17,899 4.7 5.7 19,461 5.2
60 to 84 months 6.1 48,128 12.5 6.2 50,489 13.4
---- -------- ----- ---- -------- -----
5.6 198,327 51.8 5.5 188,913 50.2
---- -------- ----- ---- -------- -----
4.7% $382,986 100.0% 4.6% $375,896 100.0%
==== ======== ===== ==== ======== =====
Time deposits are scheduled to mature as follows (in thousands):
Year ending March 31,
---------------------
2001 $132,410
2002 24,102
2003 14,854
2004 8,558
2005 16,375
Thereafter 2,028
--------
$198,327
========
Included in deposits are time deposits greater than or equal to $100,000 of
$46,747,000 and $40,433,000 at March 31, 2000 and 1999, respectively.
Interest on time deposits greater than or equal to $100,000 totalled
$2,439,000, $2,157,000, and $1,915,000 for the years ended March 31, 2000,
1999, and 1998, respectively.
81
<PAGE>
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):
2000 1999
--------------------- ---------------------
Interest rate Interest rate
Amount ranges Amount ranges
------ ------ ------ ------
Nonamortizing:
Due within 1 year $20,028 5.98 - 6.51% $ 1,000 5.91%
1 year - 2 years 1,000 6.03 3,500 6.05 - 6.35
2 years - 3 years 3,000 6.31 1,000 6.03
3 years - 5 years 3,600 5.39 - 6.40 4,600 6.12 - 6.40
5 years - 10 years 4,600 5.48 - 6.69 6,500 5.39 - 6.67
Over 10 years 1,400 6.70 - 6.93 1,500 6.69 - 6.93
Amortizing:
Over 10 years 795 8.19 849 8.19
------- -------
$34,423 $18,949
======= =======
Advances and other borrowings are collateralized by securities and mortgage
pool securities of the U.S. government and agencies thereof.
At March 31, 2000 and 1999, EMB had available unsecured lines of credit with
commercial banks totalling $10,000,000 and a revolving line of credit with the
FHLB of up to 20% of total assets. There were no advances outstanding as of
March 31, 2000 and 1999, respectively, on the lines of credit with the
commercial bank.
At March 31, 2000, EMB had outstanding a repurchase agreement with a
securities dealer in the amount of $5,000,000, maturing April 2000.
At March 31, 2000, CBE had available an unsecured letter of credit line and a
federal funds line with a commercial bank in the amount of $250,000 and
$550,000, respectively, maturing on April 1, 2000, and a revolving line of
credit with the FHLB of up to 5% of total assets. At March 31, 1999, CBE had
available an unsecured letter of credit line and a federal funds line with a
commercial bank in the amount of $250,000 and $500,000, respectively, maturing
on April 1, 1999, and a revolving line of credit with the FHLB of up to 5% of
total assets. As of March 31, 2000 and 1999, there were no outstanding
borrowings on the line of credit.
NOTE 9: FEDERAL TAXES ON INCOME
Under prior law, EMB 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, EMB is
required to use the experience method of accounting for tax basis bad debts
for 1997 and later years. In addition, EMB is
82
<PAGE>
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, 2000, 1999, and 1998, 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 bad debt reserve is used for
purposes other than to absorb bad debts or if legislation is enacted requiring
recapture of all tax bad debt reserves, EMB will incur a federal tax liability
at the then prevailing corporate tax rate.
A reconciliation of the tax provision based on the statutory corporate rate on
pretax income and the provisions as shown in the accompanying consolidated
statements of operations is as follows for the years ended March 31 (in
thousands):
2000 1999 1998
---- ---- ----
Income tax expense at statutory rate $ 131 $ 568 $2,260
Income tax effect of:
Tax-exempt interest (117) (128) (107)
Low income housing tax credit (216) (216) (216)
Other, net 16 37 177
------ ------ ------
$ (186) $ 261 $2,114
====== ====== ======
The net deferred tax asset (liability), which is included in the accompanying
consolidated statements of financial condition, consists of the following at
March 31 (in thousands):
2000 1999
---- ----
Deferred tax liabilities:
Loan origination fees and costs $ (43) $ (83)
Prepaid expenses (81) (40)
FHLB dividends (477) (379)
Other, net (149) (131)
Unrealized gain on securities (63)
------ ------
(750) (696)
Deferred tax assets:
Deferred compensation 456 266
Bad debt deduction 1,809 1,314
Accrued vacation 75 74
Pension 165
Depreciation 313 201
Charitable contribution 2,468 883
Unrealized loss on securities 645
------ ------
5,766 2,903
------ ------
$5,016 $2,207
====== ======
83
<PAGE>
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan. On April 1, 1999, an Employee Stock
Ownership Plan (ESOP) was established and became effective. With the
establishment of the ESOP, the Company's noncontributory defined benefit plan
was terminated effective December 31, 1999. 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
salaries to the plan. The Company matches 100% of the first 2% and 50% of the
next 4% of the employee's 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 $122,674, $94,010 and $78,028 for 2000, 1999, and 1998.
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, 1999,
1998 and 1997.
Weighted average assumptions used in accounting for the defined benefit
pension plan were as follows for the years ended December 31:
1999 1998 1997
---- ---- ----
Assumed discount rate 6.9% 6.9% 7.5%
Rate of compensation increase 6.0 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):
1999 1998
---- ----
Benefit obligation, beginning of year $1,869 $1,448
Actuarial loss 43 258
Interest cost 125 107
Service cost 146 105
Benefits paid (133) (39)
Expenses (10) (10)
Curtailment gain (547)
------ ------
Benefit obligation, end of year $1,493 $1,869
====== ======
84
<PAGE>
Changes in defined benefit pension plan assets were as follows for the years
ended December 31 (in thousands):
1999 1998
---- ----
Fair value of assets, beginning of year $1,555 $1,538
Actual return on assets 165 66
Benefits paid (133) (39)
Expenses (10) (10)
Contribution 38
------ ------
Fair value of assets, end of year $1,615 $1,555
====== ======
Reconciliations of funded status were as follows as of December 31 (in
thousands):
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):
1999 1998 1997
---- ---- ----
Interest cost $ 125 $ 107 $ 119
Service cost 146 105 115
Expected return on assets (122) (121) (131)
Amortization of gains or losses (41) (26)
----- ----- -----
Net periodic expense $ 149 $ 50 $ 77
===== ===== =====
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 at March 31, 2000, was
$1,583,829.
85
<PAGE>
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 $10.88-$11.06 $11.02
Nonallocated 146,281
---------
179,725
=========
Contributions to the ESOP, recorded as compensation expense for the years
ended March 31, 2000, were $328,691.
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, 2000, 1999, and 1998, the liability
for accumulated deferred compensation was $1,340,000, $1,277,000, and
$970,000, respectively, and is included in the consolidated statements of
financial condition. Annual expense for the Company related to this plan
totalled $120,000, $148,000, and $111,000, in 2000, 1999, and 1998,
respectively.
NOTE 11: INTEREST RATE RISK
EMB 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 EMB 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, 2000 and 1999. Forward commitments have little
credit risk because established exchanges are the counterparties.
EMB also originates adjustable and fixed rate home mortgages which are held
for investment. Adjustable loans have various interest rate adjustment
limitations and are generally indexed to U.S. Treasury rates. As of March 31,
2000 and 1999, adjustable rate mortgages held for investment totalled
$325,314,000 and $248,904,000, respectively. Fixed rate mortgages held for
investment totalled $126,525,000 and $90,116,000, at March 31, 2000 and 1999,
respectively.
EMB 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.
EMB's adjustable and fixed rate home mortgages and residential and commercial
construction loans are funded by short-term deposits and FHLB advances.
EMB manages interest rate risk by matching assets and liabilities within
reasonable limits. This has been accomplished through short-term maturities
and variable rates, and where appropriate, hedging techniques are employed
through the use of financial futures contracts, option contracts, and forward
commitments.
86
<PAGE>
CBE originates 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.
At March 31, 2000, the Company had interest-earning assets of $540,346,000
having a weighted average effective yield of 7.70%, and interest-bearing
liabilities of $409,507,000 having a weighted average effective interest rate
of 4.91%. The Company's one-year interest rate sensitivity gap was a negative
10.96% at March 31, 2000. The gap position reflects the shorter duration of
the interest-sensitive liabilities.
NOTE 12: REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks 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 Banks 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 Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks 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, 2000, that
the Company and the Banks meet all capital adequacy requirements to which they
are subject.
As of March 31, 2000 and 1999, the most recent notifications from the Federal
Deposit Insurance Corporation (FDIC) categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Banks 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 institutions' categories.
87
<PAGE>
Actual capital amounts and ratios for the Company and the Banks are also
presented in the table below:
<TABLE>
To be categorized
as well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provision
-------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000 (in thousands):
Total capital (to risk-weighted assets):
The Company $140,327 29.2% > $38,460 > 8.0% > $48,075 > 10.0%
EMB 91,594 21.2 - 34,508 - 8.0 - 43,136 - 10.0
CBE 5,453 24.3 1,798 8.0 2,247 10.0
Tier I capital (to risk-weighted assets):
The Company 134,312 27.9 > 19,230 > 4.0 > N.A. > N.A.
EMB 86,192 20.0 - 17,254 - 4.0 - 28,882 - 6.0
CBE 5,192 23.1 899 4.0 1,348 6.0
Tier I capital (to average assets):
The Company 134,312 24.9 > 21,569 > 4.0 > N.A. > N.A.
EMB 86,192 17.5 - 19,675 - 4.0 - 24,593 - 5.0
CBE 5,192 21.2 982 4.0 1,227 5.0
As of March 31, 1999 (in thousands):
Total capital (to risk-weighted assets):
The Company $ 56,995 15.0 > $ 30,491 > 8.0 > N.A. > N.A.
EMB 46,004 12.8 - 28,713 - 8.0 - 35,897 - 10.0
CBE 3,022 19.4 1,249 8.0 1,561 10.0
Tier I capital (to risk-weighted assets):
The Company 52,119 13.7 > 15,245 > 4.0 > N.A. > N.A.
EMB 41,404 11.8 - 14,359 4.0 - 21,538 - 6.0
CBE 2,832 18.1 624 4.0 937 6.0
Tier I capital (to average assets):
The Company 52,119 11.8 > 17,673 > 4.0 > N.A. > N.A.
EMB 41,404 9.9 - 16,748 4.0 - 20,935 - 5.0
CBE 2,832 17.9 634 4.0 793 5.0
</TABLE>
NOTE 13: 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.
88
<PAGE>
The fair values of financial instruments were as follows at March 31 (in
thousands):
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount value Amount value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 7,652 $ 7,652 $ 13,230 $ 13,230
Securities available for sale 95,988 95,988 61,566 61,566
Securities held to maturity 12,066 12,136 13,866 14,317
Loans held for sale 29,641 29,767 12,432 12,432
Loans receivable 416,116 410,571 315,327 317,531
Federal Home Loan Bank stock 4,288 4,288 3,994 3,994
-------- -------- -------- --------
536,110 530,635 437,624 440,405
Financial liabilities:
Deposit accounts 382,986 382,652 375,896 378,849
Federal Home Loan Bank advances
and other borrowings 34,423 33,786 18,949 19,236
-------- -------- -------- --------
417,409 416,438 394,845 398,085
-------- -------- -------- --------
Net financial instruments $118,701 $114,197 $ 42,779 $ 42,320
======== ======== ======== ========
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument as of March 31, 2000 and 1999:
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.
Deposits: 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.
89
<PAGE>
NOTE 14: EVERTRUST FINANCIAL GROUP, INC. (PARENT COMPANY ONLY)
Summary financial information as of March 31 is as follows (in thousands):
STATEMENTS OF FINANCIAL CONDITION
ASSETS 2000 1999
------ ---- ----
Cash and cash equivalents, including interest
bearing deposits of $10,707 and $-0- $ 10,755 $ 499
Securities available for sale, amortized cost
of $24,472 and $4,741 24,623 4,746
Accrued interest receivable 268 24
Premises and equipment, net 418
Investment in subsidiaries 94,478 47,581
Prepaid expenses and other assets 4,719 1,714
-------- -------
Total $135,261 $54,564
======== =======
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other liabilities $ 1,732 $ 2,301
Equity:
Common stock 83,978
Employee Stock Ownership Plan debt (1,584)
Retained earnings 52,271 52,147
Accumulated other comprehensive income (loss) (1,136) 116
-------- -------
Total equity 133,529 52,263
-------- -------
Total $135,261 $54,564
======== =======
STATEMENTS OF OPERATIONS
2000 1999 1998
---- ---- ----
INCOME:
Income from equity investment in subsidiaries $ 4,882 $ 3,849 $ 4,726
Interest from investment securities available
for sale 1,084 417 250
Other income 9
------- ------- -------
Total income 5,966 4,275 4,976
OTHER EXPENSE:
Salary and employee benefits 1,197 349 291
Occupancy and equipment 196 8 1
Information processing costs 23 111 2
Contributions 5,200 3,255 35
Other, net 1,002 393 180
------- ------- -------
7,618 4,116 509
------- ------- -------
Income (loss) before federal income taxes (1,652) 159 4,467
FEDERAL INCOME TAXES (2,224) (1,252) (67)
------- ------- -------
NET INCOME $ 572 $ 1,411 $ 4,534
======= ======= =======
90
<PAGE>
STATEMENTS OF CASH FLOWS
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 572 $ 1,411 $ 4,534
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Accretion of investment security discounts (75) (38) (112)
Amortization of investment security premiums 30 53 20
Depreciation and amortization of premises
and equipment 74
Equity in undistributed income of
subsidiaries (2,841) 408 (376)
Common stock contributed to charitable
foundation 3,900
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable (244) 73 (79)
Prepaid expenses and other assets (2,952) (1,145) (494)
Accounts payable and other liabilities (569) 1,747 154
-------- ------- -------
Net cash provided (used) by operating
activities (2,105) 2,509 3,647
INVESTING ACTIVITIES:
Proceeds from maturities of securities held
to maturity 51
Proceeds from maturities of securities available
for sale 27,731 6,525 11,326
Proceeds from sale of securities available
for sale 1,000 4,116
Purchases of securities held to maturity (100)
Purchases of securities available for sale (48,718) (9,547) (14,382)
Contribution to Mutual Bancshares Capital (3,250)
Contribution to I-Pro Inc. (750) (500)
Contribution to Everett Mutual Bank (42,156)
Contribution to Commercial Bank of Everett (2,300)
Net additions to premises and equipment (492)
-------- ------- -------
Net cash used by investing activities (65,685) (2,156) (3,605)
FINANCING ACTIVITIES:
Proceeds from the sale of common stock 84,245
Repurchase shares of common stock (4,167)
Dividends paid on common stock (448)
Loan to Employee Stock Ownership Plan (1,980)
Repayment of loan to Employee Stock
Ownership Plan 396
Proceeds from other borrowings 1,000
Repayment of other borrowings (1,000)
--------
78,046
-------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,256 353 42
CASH AND CASH EQUIVALENTS:
Beginning of year 499 146 104
-------- ------- -------
End of year $ 10,755 $ 499 $ 146
======== ======= =======
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<PAGE>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for
federal income taxes $ 112 $ 135 $ 79
NOTE 15: 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,
2000.
NOTE 16: LINES OF BUSINESS
The Company is managed by legal entities. The entities are EMB, CBE, 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 is 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):
2000
------
Elimin-
EMB CBE 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
======== ======== ======== ========= ========
92
<PAGE>
[TABLE CONTINUED]
1999
Elimin-
EMB CBE 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
======== ======== ======== ========= ========
1998
------
Elimin-
EMB CBE Other ations Total
--- --- ----- ------ -----
Condensed income statement:
Net interest income
after provision for
loan losses $ 14,486 $ 412 $ 245 $ - $ 15,143
Other income 1,801 60 4,852 (4,921) 1,792
Other expense 8,946 733 802 (194) 10,287
-------- -------- -------- --------- --------
Income before income
taxes 7,341 (261) 4,295 (4,727) 6,648
Income taxes 2,328 (88) (126) 2,114
-------- -------- -------- --------- --------
Net income 5,013 (173) 4,421 (4,727) 4,534
======== ======== ======== ========= ========
Total assets $404,448 $ 10,285 $ 52,510 $ (45,938) $421,305
======== ======== ======== ========= ========
93
<PAGE>
NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Results of operations on a quarterly basis were as follows for the years ended
March 31 (in thousands):
2000
------
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 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 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 $ 0.18 $ 0.17
94
<PAGE>
1999
------
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 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 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)
======= ======= ======= =======
1998
------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $ 8,311 $ 8,328 $ 8,388 $ 8,435
Interest expense 4,420 4,518 4,541 4,420
------- ------- ------- -------
Net interest income 3,891 3,810 3,847 4,015
Provision for loan losses 120 120 60 120
------- ------- ------- -------
Net interest income
after provision for
loan losses 3,771 3,690 3,787 3,895
Noninterest income 470 413 430 479
Noninterest expense 2,509 2,479 2,582 2,717
------- ------- ------- -------
Income before provision
for income taxes 1,732 1,624 1,635 1,657
Provision for income taxes 557 536 471 550
------- ------- ------- -------
Net income $ 1,175 $ 1,088 $ 1,164 $ 1,107
======= ======= ======= =======
NOTE 18: SUBSEQUENT EVENTS
In April 2000, the Company elected to become a financial holding company
pursuant to regulations of the Board of Governors of the Federal Reserve
issued in connection with the enactment of the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999.
95
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
-----------------------------------------------------------------------------
Not applicable.
PART III
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, Everett Mutual and Commercial Bank of
Everett.
Position
Age at ---------------------------------------------
March 31, Commercial Bank
Name 2000 EverTrust Everett Mutual of Everett
---- ---- --------- -------------- ---------------
Michael B. Hansen 58 Chairman of the Chairman of the Chairman of the
Board, President Board, Chief Board, Chief
and Chief Executive Executive
Executive Officer Officer Officer
Michael R. Deller 49 Executive Vice President and Director
President Chief Operating
Officer
Jeffrey R. Mitchell 41 Senior Vice Senior Vice Senior Vice
President, Chief President, President,
Financial Officer Chief Financial Chief Financial
Officer Officer
Dale A. Lyski 62 President and
Chief Operating
Officer
Lorelei Christenson 46 Senior Vice Senior Vice Senior Vice
President and President, President,Chief
Corporate Chief Information
Secretary Information Officer and
Officer and Corporate
Corporate Secretary
Secretary
Terry Cullom 57 Vice President Vice President
and Credit and credit
Administrator Administrator
John E. Thoresen 49 *
Philip Mitterling 42 Treasurer and Treasurer and Treasurer and
Portfolio Portfolio Portfolio
Manager Manager Manager
Robert L. Nall 44 Vice President,
Branch
Administrator
-----------------
* President of the Company's subsidiary, Mutual Bancshares Capital, Inc.
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 Everett Mutual and Commercial Bank of Everett. Mr. Hansen has been
employed by Everett Mutual for over 20 years.
Michael R. Deller has been President and Chief Operating Officer of
Everett Mutual since April 2000. From 1997 until April 2000 he was Executive
Vice President and Chief Operating Officer of Everett Mutual. He is
96
<PAGE>
responsible for branch administration, marketing and sales of Everett Mutual.
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, Everett Mutual and Commercial Bank of Everett. He has held
this position with Everett Mutual since joining Everett Mutual in 1988.
Dale A. Lyski is President and Chief Operating Officer of Commercial Bank
of Everett, positions he has held since 1996. Prior to that, Mr. Lyski was
Executive Vice President of Everett Mutual from 1989 to 1996. Mr. Lyski has
served Everett Mutual 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 Everett Mutual and Commercial Bank of Everett. She has held this
position with Everett Mutual since 1984. Ms. Christenson has served Everett
Mutual in various capacities since 1973.
Terry L. Cullom has been Vice President and Credit Administrator of
Everett Mutual since 1992. Mr. Cullom has over 30 years of experience in
lending.
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 Everett
Mutual, a position he has held since November 1999. From 1995 to 1999 he
served as a branch manager of Everett Mutual.
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. 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.
97
<PAGE>
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. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
10.1 401(k) Employee Savings and Profit Sharing Plan and Trust*
10.2 Employee Severance Compensation Plan
10.3 Employee Stock Ownership Plan*
10.4 Employment Agreement with Michael B. Hansen
10.5 Employment Agreement with Michael R. Deller
10.6 Employment Agreement with Jeffrey R. Mitchell
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
------------
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (333-81125).
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on February 3, 2000 in connection with the Company's
initial stock repurchase.
98
<PAGE>
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 6, 2000 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 6, 2000
Michael B. Hansen Chief Executive Officer and
Director (Principal Executive
Officer)
/s/Jeffrey R. Mitchell
---------------------- Senior Vice President, Chief Financial June 6, 2000
Jeffrey R. Mitchell Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/Margaret B. Bavasi
---------------------- Director June 6, 2000
Margaret B. Bavasi
/s/Thomas R. Collins
---------------------- Director June 6, 2000
Thomas R. Collins
/s/Michael R. Deller
---------------------- Director June 6, 2000
Michael R. Deller
/s/Thomas J. Gaffney
---------------------- Director June 6, 2000
Thomas J. Gaffney
/s/R. Michael Kight
---------------------- Director June 6, 2000
R. Michael Kight
/s/Robert A. Leach, Jr.
---------------------- Director June 6, 2000
Robert A. Leach, Jr.
99
<PAGE>
/s/George S. Newland
---------------------- Director June 6, 2000
George S. Newland
/s/William J. Rucker
---------------------- Director June 6, 2000
William J. Rucker
100
<PAGE>
Exhibit 10.2
Employee Severance Compensation Plan
<PAGE>
EVERETT MUTUAL BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of Everett Mutual Bank Employee Severance Compensation Plan
(the "Plan") is to assure for Everett Mutual Bank (the "Bank") the services of
the Employees in the event of a Change in Control of EverTrust Financial
Group, Inc. (the "Holding Company") or the Bank. The benefits contemplated by
the Plan recognize the value to the Bank of the services and contributions of
the eligible Employees and the effect upon the Bank resulting from
uncertainties relating to continued employment, reduced employee benefits,
management changes and employee relations that may arise if a Change in
Control occurs or is threatened. The Bank's and the Holding Company's Boards
of Directors believe that it is in the best interests of the Bank and the
Holding Company to provide eligible Employees with such benefits in order to
defray the costs and changes in employee status that could follow a Change in
Control. The Boards of Directors believe that the Plan will also aid the Bank
in attracting and retaining highly qualified individuals who are essential to
its success and that the Plan's assurance of fair treatment of the Bank's
employees will reduce the distractions and other adverse effects on Employees'
performance if a Change in Control occurs or is threatened.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date, the Bank hereby establishes a severance
compensation plan to be known as the "Everett Mutual Bank Employee Severance
Compensation Plan." The purposes of the Plan are as set forth above.
1.2 Applicability of Plan
---------------------
The benefits provided by this Plan shall be available to all Employees,
who, at or after the Effective Date, meet the eligibility requirements of
Article III. The Plan shall not apply to any Employee whose employment was
terminated prior to the Effective Date.
1.3 Contractual Right to Benefits
-----------------------------
This Plan establishes and vests in each Participant a contractual right
to the benefits to which each Participant is entitled hereunder, enforceable
by the Participant against the Employer.
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings
set forth below.
(a) "Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and incentive compensation (other than stock based
compensation), paid (including accrued amounts) by an Employer as
consideration for the Participant's services during the 12 months ended the
date as of which Annual Compensation is to be determined, which are or would
be includable in the gross income of the Participant receiving the same for
federal income tax purposes.
(b) "Bank" means Everett Mutual Bank or any successor as provided for in
Article VII hereof.
(c) "Change in Control" means (1) an offeror other than the Company
purchases shares of stock of the Company or the Bank pursuant to a tender or
exchange offer for such shares (2) an event of a nature that results in the
acquisition of control of the Company or the Bank within the meaning of the
Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841 (or
any successor statute or regulation) or requires the filing of a notice with
the Federal Deposit Insurance Corporation under 12 U.S.C. Section 1817(j) (or
any successor statute or regulation); (3) an event that would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); (4) any person (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly of securities of the Company or the Bank representing
25% or more of the combined voting power of the Company's or the Bank's
outstanding securities; (5) individuals who are members of the board of
directors of the Company immediately following the Effective Date or who are
members of the board of directors of the Bank immediately following the
Effective Date (in each case, the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequently whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Company's or the Bank's stockholders was
approved by the nominating committee serving under an Incumbent Board, shall
be considered a member of the Incumbent Board; or (6) consummation of a plan
of reorganization, merger, consolidation, sale of all or substantially all of
the assets of the Company or a similar transaction in which the Company is not
the resulting entity, or a transaction at the completion of which the former
stockholders of the acquired corporation become the holders of more than 40%
of the outstanding common stock of the Company and the Company is the
resulting entity of such transaction; provided that the term "Change
2
<PAGE>
in Control" shall not include an acquisition of securities by an employee
benefit plan of the Bank or the Company.
(d) "Continuous Employment" means the absence of any interruption or
termination of service as an Employee of the Bank or an affiliate. Service
shall not be considered interrupted in the case of sick leave, military leave
or any other leave of absence approved by the Bank or in the case of transfers
between payroll locations of the Bank or between the Bank, its Parent, its
Subsidiary or its successor.
(e) "Effective Date," as to Employees of an Employer, means the date the
Plan is approved by the Board of Directors of the Bank, or such other date as
the Board shall designate in its resolution approving the Plan.
(f) "Employee" means an officer employed by the Employer on a full-time
basis, excluding any executive officer of the Employer who is covered by an
employment contract or a change in control severance agreement with the
Employer.
(g) "Employer" means the Bank or a Subsidiary or a Parent which has
adopted the Plan pursuant to Article VI hereof.
(h) "Expiration Date" means the date fifteen (15) years from the
Effective Date unless earlier terminated pursuant to Section 8.2 or extended
pursuant to Section 8.1.
(i) "Holding Company" means EverTrust Financial Group, Inc., the Parent
of the Bank.
(j) "Just Cause," with respect to termination of employment, means an act
or acts of personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order. In
determining incompetence, acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
(k) "Parent" means any corporation which holds a majority of the voting
power of the outstanding shares of the Bank's common stock.
(l) "Participant" means an Employee who meets the eligibility
requirements of Article III.
(m) "Payment" means the payment of severance compensation as provided in
Article IV hereof.
(n) "Plan" means the Everett Mutual Bank Employee Severance Compensation
Plan.
3
<PAGE>
(o) "Subsidiary" means any corporation in which the Bank, directly or
indirectly, holds a majority of the voting power of its outstanding shares of
capital stock.
2.2 Applicable Law
--------------
To the extent not preempted by the laws of the United States as now or
hereafter in effect, the laws of the State of Washington shall be the
controlling law in all matters relating to the Plan.
The Plan neither requires nor establishes an ongoing administrative
system for its effect or operation. Payments under the Plan are precipitated
by a single event, a Change in Control, which event is the sole focus of the
Plan. Consequently, it is intended that the Plan shall not be covered by or
be subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid
provision had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
Each Employee who has completed at least one year of Continuous
Employment as of the Effective Date and who is selected as a Participant by
the Board of Directors of the Bank shall become a Participant on the Effective
Date. Thereafter, each Employee shall become a Participant on the later of
the day on which (a) he or she completes one year of Continuous Employment or
(b) is selected as a Participant by the Board of Directors of the Bank.
Notwithstanding the foregoing, persons who are not officers of the Employer
and persons who have entered into and continue to be covered by an employment
or change in control severance agreement with the Employer shall not be
entitled to participate in the Plan.
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer or is otherwise determined
by the Board of Directors of the Bank no longer to be a Participant in the
Plan, unless such Participant is entitled to a Payment as provided in the
Plan. Furthermore, an Employee shall cease to be a Participant upon ceasing
to be an officer of the Employer or upon entering into an employment or change
in control severance agreement with
4
<PAGE>
the Employer. A Participant entitled to receipt of a Payment shall remain a
Participant in this Plan until the full amount of such Payment has been paid
to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his respective Employer a
Payment in the amount provided in Section 4.3 if there has been a Change in
Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for
any reason specified in Section 4.2, whether the termination is voluntary or
involuntary. A Participant shall not be entitled to a Payment if termination
occurs by reason of death, voluntary retirement, voluntary termination other
than for reasons specified in Section 4.2, total and permanent disability, or
for Just Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a
Payment if his employment with an Employer is terminated, voluntarily or
involuntarily, within one year following such Change in Control, for any one
or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as
the same may have been increased thereafter.
(b) The Employer requires the Participant to change the location of the
Participant's job or office, so that such Participant will be based at a
location more than fifteen miles from the location of the Participant's job or
office immediately prior to the Change in Control, provided that such new
location is not closer to Participant's home.
(c) The Employer materially reduces the benefits and perquisites, taken
as a whole, available to the Participant immediately prior to the Change in
Control; provided, however, that a material reduction on a nondiscriminatory
basis in the benefits and perquisites generally provided to all employees of
the Bank that does not reduce a Participant's Annual Compensation shall not
trigger a Payment.
(d) A successor bank or company fails or refuses to assume the Bank's
obligations under this Plan, as required by Article VII.
(e) The Bank or any successor company breaches any other provisions of
the Plan.
5
<PAGE>
(f) The Employer terminates the employment of a Participant at or after
a Change in Control other than for Just Cause.
4.3 Amount of Payment
-----------------
Each Participant entitled to a Payment under the Plan shall receive from
the Bank a lump sum cash payment, in an amount determined as follows:
(a) The Participant's cash payment shall equal the product of 3.846% of
his or her Annual Compensation paid or accrued during each of his or her years
of Continuous Employment prior to the Change in Control times the number of
full or substantially completed (nine months or more) years of Continuous
Employment with the Employer, provided that no Participant shall receive a
cash payment hereunder in an aggregate amount of more than one hundred percent
(100%) of his or her Annual Compensation.
(b) Notwithstanding the provisions of (a) above, if a Payment to a
Participant who is a "disqualified individual" shall be in an amount which
includes an "excess parachute payment," the payment hereunder to that
Participant shall be reduced to the maximum amount which does not include an
"excess parachute payment." The terms "disqualified individual" and "excess
parachute payment" shall have the same meaning as defined in Section 280G of
the Internal Revenue Code of 1986, as amended, or any successor section of
similar import.
The Participant shall not be required to mitigate damages on the amount
of the Payment by seeking other employment or otherwise, nor shall the amount
of such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment with an Employer.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty-five (25) business days after the termination of
the Participant's employment. If any Participant should die after termination
of employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's surviving spouse, or if none, to the
Participant's named beneficiary, if living, otherwise to the personal
representative on behalf of or for the benefit of the Participant's estate.
6
<PAGE>
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of the Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock
bonus, stock ownership or any employment agreement or other plan or
arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
Upon approval by the Board of Directors of the Bank, this Plan may be
adopted by any Subsidiary or Parent of the Bank. Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent.
ARTICLE VII
SUCCESSOR TO THE BANK
The Bank shall require any successor to or assignee of, whether direct or
indirect, by purchase, merger, consolidation or otherwise, all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under
the Plan.
7
<PAGE>
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, the Plan shall expire fifteen
(15) years from the Effective Date, unless sooner terminated as provided in
Section 8.2, or unless extended for an additional period or periods by
resolution adopted by the Board of Directors of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs, the Plan
shall continue in full force and effect, and shall not terminate or expire
until such date as all Participants who become entitled to Payments hereunder
shall have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution
adopted by a majority of the Board of Directors of the Bank, unless (i) a
Change in Control has previously occurred, (ii) the Bank shall have in the
previous year received an offer, which was not subsequently withdrawn, from a
third party to engage in a transaction which would involve a Change in Control
or (iii) a third party shall have disclosed in a filing with the Securities
and Exchange Commission ("SEC") its intent to engage in a transaction which
would result in a Change in Control and has not subsequently indicated in
another SEC filing that it no longer had such intention. For so long as any
of the events listed in paragraphs (i), (ii) and (iii) persist, the Plan shall
not be subject to amendment, change, substitution, deletion, revocation or
termination in any respect whatsoever unless any acquiror of the Bank shall
agree in writing to provide benefits to covered employees which are at least
as substantial as those set forth herein if such employees are terminated
without cause within one year of a Change in Control of the Bank.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by the duly authorized officer or officers of the
Bank, certifying that the amendment or termination has been approved by the
Board of Directors. A proper amendment of the Plan automatically shall effect
a corresponding amendment to all Participant's rights hereunder, regardless of
whether the Participants receive notice of such action. A proper termination
of the Plan automatically shall effect a termination of all Participants'
rights and benefits hereunder, regardless of whether the Participants receive
notice of such action.
8
<PAGE>
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 Subject to the notice provision in section 9.2 hereof, the Bank
shall pay all legal fees, costs of litigation, and other expenses incurred by
each Participant as a result of the Bank's refusal to make the Payment to
which the Participant becomes entitled under this Plan, or as a result of the
Bank's unsuccessfully contesting the validity, enforceability or
interpretation of the Plan.
9.2 A Participant must provide the Bank with 10 (ten) business days
notice of a complaint of entitlement under the Plan before the Bank shall be
liable for the payment of any legal fees, costs of litigation or other
expenses referred to in section 9.1 hereof.
ARTICLE X
ARBITRATION
Any dispute or controversy arising under or in connection with the Plan
shall be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by the Participant within fifty
(50) miles from the location of the Bank, in accordance with rules of the
American Arbitration Association then in effect. Judgment may be entered on
the award of the arbitrator in any court having jurisdiction.
9
<PAGE>
Exhibit 10.4
Employment Agreement with Michael B. Hansen
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 30th day of September, 1999 by and between EverTrust Financial Group,
Inc. (the "Company"), and its wholly owned subsidiary, Everett Mutual Bank
(the "Bank"), and Michael B. Hansen (the "Employee").
WHEREAS, the Employee is currently serving as the President and Chief
Executive Officer of the Company and of the Bank;
WHEREAS, the Employee has made and will continue to make a major
contribution to the success of the Company and the Bank in the position of
President and Chief Executive Officer;
WHEREAS, the board of directors of the Company and the board of directors
of the Bank (collectively, the "Board of Directors") recognize that the
possibility of a change in control of the Bank or the Company may exist and
that such possibility, and the uncertainty and questions which may arise among
management, may result in the departure or distraction of key management to
the detriment of the Company, the Bank and their respective stockholders;
WHEREAS, the Board of Directors believes that it is in the best interests
of the Company and the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Company and its subsidiaries;
and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
------------
(a) The term "Change in Control" means (1) an offeror other than
the Company purchases shares of stock of the Company or the Bank pursuant to a
tender or exchange offer for such shares (2) an event of a nature that results
in the acquisition of control of the Company or the Bank within the meaning of
the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841
(or any successor statute or regulation) or requires the filing of a notice
with the Federal Deposit Insurance Corporation under 12 U.S.C. Section 1817(j)
(or any successor statute or regulation); (3) an event that would be required
to be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); (4) any person (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly of securities of the Company or the Bank representing
25% or more of the combined voting power of the Company's or the Bank's
outstanding securities; (5) individuals who are members of the board of
directors of the Company immediately
<PAGE>
following the Effective Date or who are members of the board of directors of
the Bank immediately following the Effective Date (in each case, the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequently whose
election was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board, or whose nomination for election by the
Company's or the Bank's stockholders was approved by the nominating committee
serving under an Incumbent Board, shall be considered a member of the
Incumbent Board; or (6) consummation of a plan of reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Company
or a similar transaction in which the Company is not the resulting entity, or
a transaction at the completion of which the former stockholders of the
acquired corporation become the holders of more than 40% of the outstanding
common stock of the Company and the Company is the resulting entity of such
transaction; provided that the term "Change in Control" shall not include an
acquisition of securities by an employee benefit plan of the Bank or the
Company.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
affiliated group (as defined in Section 1504 of the Internal Revenue Code of
1986, as amended (the "Code"), without regard to subsection (b) thereof) that
includes the Bank, including but not limited to the Company.
(c) The term "Date of Termination" means the date upon which the
Employee's employment with the Company or the Bank or both ceases, as
specified in a notice of termination pursuant to Section 8 of this Agreement.
(d) The term "Effective Date" means the date of this Agreement.
(e) The term "Involuntary Termination" means the termination of
the employment of Employee (i) by either the Company or the Bank or both
without his express written consent; or (ii) by the Employee by reason of a
material diminution of or interference with his duties, responsibilities or
benefits, including (without limitation) any of the following actions unless
consented to in writing by the Employee: (1) a requirement that the Employee
be based at any place other than Everett Washington, or within a radius of 35
miles from the location of the Company's administrative offices as of the date
of this Agreement, except for reasonable travel on Company or Bank business;
(2) a material demotion of the Employee; (3) a material reduction in the
number or seniority of personnel reporting to the Employee or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the Employee, other than as
part of a Bank- or Company-wide reduction in staff; (4) a reduction in the
Employee's salary or a material adverse change in the Employee's perquisites,
benefits, contingent benefits or vacation, other than as part of an overall
program applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Company; (5) a material permanent
increase in the required hours of work or the workload of the Employee; or (6)
the failure of the board of directors of the Company (or a board of directors
of a successor of the Company) to elect him as President and Chief Executive
Officer of the Company (or a successor of the Company) or any action by the
board of directors of the Company (or a board of directors of a successor of
the Company) removing him from such office, or the failure of the board of
directors of the Bank (or any successor of the Bank) to elect him as President
and Chief Executive Officer of the Bank (or any successor of the Bank) or any
action by
2
<PAGE>
such board (or a board of a successor of the Bank) removing him from such
office. The term "Involuntary Termination" does not include Termination for
Cause, termination of employment due to death or permanent disability pursuant
to Section 7(f) of this Agreement, retirement or suspension or temporary or
permanent prohibition from participation in the conduct of the Bank's affairs
under Section 8 of the Federal Deposit Insurance Act.
(f) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with either the Company or
the Bank, as the case may be, because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or (except as provided
below) material breach of any provision of this Agreement. No act or failure
to act by the Employee shall be considered willful unless the Employee acted
or failed to act with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company or
the Bank. The Employee shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority
of the entire membership of the Board of Directors at a meeting of the Board
duly called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel, to
be heard before the Board), stating that in the good faith opinion of the
Board of Directors the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
commencing on the Effective Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Effective Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (i)
neither the Employee nor the Company has given notice to the other in writing
at least 90 days prior to such anniversary that the term of this Agreement
shall not be extended further; and (ii) prior to such anniversary, the Board
of Directors explicitly reviews and approves the extension. Reference herein
to the term of this Agreement shall refer to both such initial term and such
extended terms.
3. Employment. The Employee shall be employed as the President and
Chief Executive Officer of the Company and as the President and Chief
Executive Officer of the Bank. As such, the Employee shall render all
services as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties as the Board of
Directors may prescribe from time to time. The Employee shall also render
services to any subsidiary or subsidiaries of the Company or the Bank as
requested by the Company or the Bank from time to time consistent with his
executive position. The Employee shall devote his best efforts and reasonable
time and attention to the business and affairs of the Company and the Bank to
the extent necessary to discharge his responsibilities hereunder. The
Employee may (i) serve on charitable boards or committees and, in addition, on
such corporate boards as are approved in a resolution adopted by a majority of
the Board of Directors, which approval shall not be withheld unreasonably and
(ii) manage personal investments, so long as such activities do not interfere
materially with performance of his responsibilities hereunder.
3
<PAGE>
4. Cash Compensation.
------------------
(a) Salary. The Company and the Bank jointly agree to pay the
Employee during the term of this Agreement a base salary (the "Salary") the
annualized amount of which shall be not less than the annualized aggregate
amount of the Employee's base salary from the Company and any Consolidated
Subsidiaries in effect at the Effective Date; provided that any amounts of
salary actually paid to the Employee by any Consolidated Subsidiaries shall
reduce the amount to be paid by the Company and the Bank to the Employee. The
Salary shall be paid no less frequently than monthly and shall be subject to
customary tax withholding. The amount of the Employee's Salary shall be
increased (but shall not be decreased) from time to time in accordance with
the amounts of salary approved by the Board of Directors or the board of
directors of any of the Consolidated Subsidiaries after the Effective Date.
The amount of the Salary shall be reviewed by the Board of Directors at least
annually during the term of this Agreement.
(b) Bonuses. The Employee shall be entitled to participate in
an equitable manner with all other executive officers of the Company and the
Bank in such performance-based and discretionary bonuses, if any, as are
authorized and declared by the Board of Directors for executive officers.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and the Bank,
provided that the Employee accounts for such expenses as required under such
policies and procedures.
5. Benefits.
---------
(a) Participation in Benefit Plans. The Employee shall be
entitled to participate, to the same extent as executive officers of the
Company and the Bank generally, in all plans of the Company and the Bank
relating to pension, retirement, thrift, profit-sharing, savings, group or
other life insurance, hospitalization, medical and dental coverage, travel and
accident insurance, education, cash bonuses, and other retirement or employee
benefits or combinations thereof. In addition, the Employee shall be entitled
to be considered for benefits under all of the stock and stock option related
plans in which the Company's or the Bank's executive officers are eligible or
become eligible to participate.
(b) Fringe Benefits. The Employee shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans or
perquisites which are or may become generally available to the Company's or
the Bank's executive officers, including but not limited to supplemental
retirement, incentive compensation, supplemental medical or life insurance
plans, company cars, club dues, physical examinations, financial planning and
tax preparation services.
4
<PAGE>
6. Vacations; Leave. The Employee shall be entitled (i) to annual paid
vacation in accordance with the policies established by the Board of Directors
for executive officers, and (ii) to voluntary leaves of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors may determine in its discretion.
7. Termination of Employment.
--------------------------
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. In
the event of Involuntary Termination other than after a Change in Control
which occurs during the term of this Agreement, the Company and the Bank
jointly shall (i) pay to the Employee during the remaining term of this
Agreement the Salary at the rate in effect immediately prior to the Date of
Termination, payable in such manner and at such times as the Salary would have
been payable to the Employee under Section 4(a) if the Employee had continued
to be employed by the Company and the Bank, and (ii) provide to the Employee
during the remaining term of this Agreement substantially the same group life
insurance, hospitalization, medical, dental, prescription drug and other
health benefits, and long-term disability insurance (if any) for the benefit
of the Employee and his dependents and beneficiaries who would have been
eligible for such benefits if the Employee had not suffered Involuntary
Termination, on terms substantially as favorable to the Employee, including
amounts of coverage and deductibles and other costs to him, as if he had not
suffered Involuntary Termination.
(b) Termination for Cause. In the event of Termination for
Cause, the Company and the Bank shall pay to the Employee the Salary and
provide benefits under this Agreement only through the Date of Termination,
and shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written
notice to the Company and the Bank or such shorter period as may be agreed
upon between the Employee and the Board of Directors. In the event of such
voluntary termination, the Company and the Bank shall be obligated jointly to
continue to pay to the Employee the Salary and provide benefits under this
Agreement only through the Date of Termination, at the time such payments are
due, and shall have no further obligation to the Employee under this
Agreement.
(d) Change in Control. In the event of Involuntary Termination
after a Change in Control which occurs at any time following the Effective
Date while the Employee is employed under this Agreement, the Company and the
Bank jointly shall (i) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to 299% of the
Employee's "base amount" as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"); and (ii) provide to the Employee during
the remaining term of this Agreement substantially the same group life
insurance, hospitalization, medical, dental, prescription drug and other
health benefits, and long-term disability insurance (if any) for the benefit
of the Employee and his dependents and beneficiaries who would have been
eligible for such benefits if the Employee had not suffered
5
<PAGE>
Involuntary Termination, on terms substantially as favorable to the Employee,
including amounts of coverage and deductibles and other costs to him, as if he
had not suffered Involuntary Termination.
(e) Death. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment, the
Company and the Bank jointly shall pay to the Employee's estate, or such
person as the Employee may have previously designated in writing, the Salary
which was not previously paid to the Employee and which he would have earned
if he had continued to be employed under this Agreement through the last day
of the calendar month in which the Employee died, together with the benefits
provided hereunder through such date.
(f) Disability. If the Employee becomes entitled to benefits
under the terms of the then-current disability plan, if any, of the Company or
the Bank (the "Disability Plan") or becomes otherwise unable to fulfill his
duties under this Agreement, he shall be entitled to receive such group and
other disability benefits, if any, as are then provided by the Company or the
Bank for executive employees. In the event of such disability, this Agreement
shall not be suspended, except that (i) the obligation to pay the Salary to
the Employee shall be reduced in accordance with the amount of disability
income benefits received by the Employee, if any, pursuant to this paragraph
such that, on an after-tax basis, the Employee shall realize from the sum of
disability income benefits and the Salary the same amount as he would realize
on an after-tax basis from the Salary if the obligation to pay the Salary were
not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted
by a majority of the disinterested members of the Board of Directors, the
Company and the Bank may discontinue payment of the Salary beginning six
months following a determination that the Employee has become entitled to
benefits under the Disability Plan or otherwise unable to fulfill his duties
under this Agreement.
(g) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (1) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of its obligations which were suspended.
(h) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. Section 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(i) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(j) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the
6
<PAGE>
continued operation of the Bank: (1) at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (2) by the FDIC, at the time it approves a supervisory merger to resolve
problems related to operation of the Bank. Any rights of the parties that
have already vested, however, shall not be affected by any such action.
(k) Reductions of Benefits. Notwithstanding any other provision
of this Agreement, if payments and the value of benefits received or to be
received under this Agreement, together with any other amounts and the value
of benefits received or to be received by the Employee, would cause any amount
to be nondeductible by the Company or any of the Consolidated Subsidiaries for
federal income tax purposes pursuant to or by reason of Section 280G of the
Code, then payments and benefits under this Agreement shall be reduced (not
less than zero) to the extent necessary so as to maximize amounts and the
value of benefits to be received by the Employee without causing any amount to
become nondeductible pursuant to or by reason of Section 280G of the Code.
The Employee shall determine the allocation of such reduction among payments
and benefits to the Employee.
(l) Further Reductions. Any payments made to the Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 U.S.C. 1828(k) and any regulations promulgated
thereunder.
8. Notice of Termination. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Employee during the term of
this Agreement, the Company or the Bank, or both, shall deliver to the
Employee a written notice of termination, stating whether such termination
constitutes Termination for Cause or Involuntary Termination, setting forth in
reasonable detail the facts and circumstances that are the basis for the
termination, and specifying the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, except in the case of Termination for Cause. In the event that the
Employee determines in good faith that he has experienced an Involuntary
Termination of his employment, he shall send a written notice to the Company
and the Bank stating the circumstances that constitute such Involuntary
Termination and the date upon which his employment shall have ceased due to
such Involuntary Termination. In the event that the Employee desires to
effect a Voluntary Termination, he shall deliver a written notice to the
Company and the Bank, stating the date upon which employment shall terminate,
which date shall be at least 90 days after the date upon which the notice is
delivered, unless the parties agree to a date sooner.
9. Non-Competition.
----------------
(a) Upon any termination of Employee's employment hereunder except
pursuant to Section 7(d) hereof, Employee agrees not to compete with the Bank
and/or the Company for a period of one (1) year following such termination in
Snohomish or King County, Washington. Employee agrees that during such period
and within such area, Employee shall not work for or advise, consult or
otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities
of the Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Bank and/or the Company, its business
and
7
<PAGE>
property in the event of Employee's breach of this Subsection 9(a) agree that
in the event of any such breach by Employee, the Bank and/or the Company will
be entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Employee, Employee's partners,
agents, servants, employers, employees and all persons acting for or with
Employee. Employee represents and admits that in the event of the termination
of his employment pursuant to Sections 7(a), (b) and (c) hereof, Employee's
experience and capabilities are such that Employee can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Employee from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Employee.
(b) Employee recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Employee will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Employee may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Bank. In the event of a breach or threatened breach by
Employee of the provisions of this Section, the Bank will be entitled to an
injunction restraining Employee from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of
the Bank or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available
to the Bank for such breach or threatened breach, including the recovery of
damages from Employee.
10. Attorneys' Fees. The Company and the Bank jointly shall pay all
legal fees and related expenses (including the costs of experts, evidence and
counsel) incurred by the Employee as a result of (i) the Employee's contesting
or disputing any termination of employment, or (ii) the Employee's seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company or the Bank (or a
successor) or the Consolidated Subsidiaries under which the Employee is or may
be entitled to receive benefits; provided that the Company's and the Bank's
obligation to pay such fees and expenses is subject to the Employee's
prevailing with respect to the matters in dispute in any action initiated by
the Employee or the Employee's having been determined to have acted reasonably
and in good faith with respect to any action initiated by the Company or the
Bank.
11. No Assignments.
---------------
(a) This Agreement is personal to each of the parties hereto, and
no party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other parties; provided,
however, that the Company and the Bank shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
by an assumption
8
<PAGE>
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company and/or the Bank would be required to perform it if no
such succession or assignment had taken place. Failure to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee
to compensation and benefits from the Company and the Bank in the same amount
and on the same terms as the compensation pursuant to Section 7(d) of this
Agreement. For purposes of implementing the provisions of this Section 11(a),
the date on which any such succession becomes effective shall be deemed the
Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company and Bank at
their home offices, to the attention of the Board of Directors with a copy to
the Secretary of the Company and the Secretary of the Bank, or, if to the
Employee, to such home or other address as the Employee has most recently
provided in writing to the Company or the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.
14. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
18. Deferral of Non-Deductible Compensation. In the event that the
Employee's aggregate compensation (including compensatory benefits which are
deemed remuneration for purposes of Section 162(m) of the Code) from the
Company and the Consolidated Subsidiaries for any calendar year exceeds the
maximum amount of compensation deductible by the Company or any of the
Consolidated Subsidiaries in any calendar year under Section 162(m) of the
Code (the "maximum allowable amount"), then any such amount in excess of the
maximum allowable amount shall be
9
<PAGE>
mandatorily deferred with interest thereon at 8% per annum to a calendar year
such that the amount to be paid to the Employee in such calendar year,
including deferred amounts and interest thereon, does not exceed the maximum
allowable amount. Subject to the foregoing, deferred amounts including
interest thereon shall be payable at the earliest time permissible.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: EVERTRUST FINANCIAL GROUP, INC.
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Attest:
EVERETT MUTUAL BANK
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Employee
/s/Michael B. Hansen
-----------------------------------
Michael B. Hansen
10
<PAGE>
Exhibit 10.5
Employment Agreement with Michael R. Deller
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 30th day of September, 1999 by and between EverTrust Financial Group,
Inc. (the "Company"), and its wholly owned subsidiary, Everett Mutual Bank
(the "Bank"), and Michael R. Deller (the "Employee").
WHEREAS, the Employee is currently serving as the Executive President of
the Company and of the Bank;
WHEREAS, the Employee has made and will continue to make a major
contribution to the success of the Company and the Bank in the position of
Executive Vice President;
WHEREAS, the board of directors of the Company and the board of directors
of the Bank (collectively, the "Board of Directors") recognize that the
possibility of a change in control of the Bank or the Company may exist and
that such possibility, and the uncertainty and questions which may arise among
management, may result in the departure or distraction of key management to
the detriment of the Company, the Bank and their respective stockholders;
WHEREAS, the Board of Directors believes that it is in the best interests
of the Company and the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Company and its subsidiaries;
and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
------------
(a) The term "Change in Control" means (1) an offeror other than
the Company purchases shares of stock of the Company or the Bank pursuant to a
tender or exchange offer for such shares (2) an event of a nature that results
in the acquisition of control of the Company or the Bank within the meaning of
the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841
(or any successor statute or regulation) or requires the filing of a notice
with the Federal Deposit Insurance Corporation under 12 U.S.C. Section 1817(j)
(or any successor statute or regulation); (3) an event that would be required
to be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); (4) any person (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly of securities of the Company or the Bank representing
25% or more of the combined voting power of the Company's or the Bank's
outstanding securities; (5) individuals who are members of the board of
directors of the Company immediately
<PAGE>
following the Effective Date or who are members of the board of directors of
the Bank immediately following the Effective Date (in each case, the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequently whose
election was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board, or whose nomination for election by the
Company's or the Bank's stockholders was approved by the nominating committee
serving under an Incumbent Board, shall be considered a member of the
Incumbent Board; or (6) consummation of a plan of reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Company
or a similar transaction in which the Company is not the resulting entity, or
a transaction at the completion of which the former stockholders of the
acquired corporation become the holders of more than 40% of the outstanding
common stock of the Company and the Company is the resulting entity of such
transaction; provided that the term "Change in Control" shall not include an
acquisition of securities by an employee benefit plan of the Bank or the
Company.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
affiliated group (as defined in Section 1504 of the Internal Revenue Code of
1986, as amended (the "Code"), without regard to subsection (b) thereof) that
includes the Bank, including but not limited to the Company.
(c) The term "Date of Termination" means the date upon which the
Employee's employment with the Company or the Bank or both ceases, as
specified in a notice of termination pursuant to Section 8 of this Agreement.
(d) The term "Effective Date" means the date of this Agreement.
(e) The term "Involuntary Termination" means the termination of
the employment of Employee (i) by either the Company or the Bank or both
without his express written consent; or (ii) by the Employee by reason of a
material diminution of or interference with his duties, responsibilities or
benefits, including (without limitation) any of the following actions unless
consented to in writing by the Employee: (1) a requirement that the Employee
be based at any place other than Everett Washington, or within a radius of 35
miles from the location of the Company's administrative offices as of the date
of this Agreement, except for reasonable travel on Company or Bank business;
(2) a material demotion of the Employee; (3) a material reduction in the
number or seniority of personnel reporting to the Employee or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which such personnel are to report to the Employee, other than as
part of a Bank- or Company-wide reduction in staff; (4) a reduction in the
Employee's salary or a material adverse change in the Employee's perquisites,
benefits, contingent benefits or vacation, other than as part of an overall
program applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Company; (5) a material permanent
increase in the required hours of work or the workload of the Employee; or (6)
the failure of the board of directors of the Company (or a board of directors
of a successor of the Company) to elect him as Executive Vice President of the
Company (or a successor of the Company) or any action by the board of
directors of the Company (or a board of directors of a successor of the
Company) removing him from such office, or the failure of the board of
directors of the Bank (or any successor of the Bank) to elect him as Executive
Vice President of the Bank (or any successor of the Bank) or any action by
such board (or
2
<PAGE>
a board of a successor of the Bank) removing him from such office. The term
"Involuntary Termination" does not include Termination for Cause, termination
of employment due to death or permanent disability pursuant to Section 7(f) of
this Agreement, retirement or suspension or temporary or permanent prohibition
from participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act.
(f) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with either the Company or
the Bank, as the case may be, because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or (except as provided
below) material breach of any provision of this Agreement. No act or failure
to act by the Employee shall be considered willful unless the Employee acted
or failed to act with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company or
the Bank. The Employee shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority
of the entire membership of the Board of Directors at a meeting of the Board
duly called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel, to
be heard before the Board), stating that in the good faith opinion of the
Board of Directors the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
commencing on the Effective Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Effective Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (i)
neither the Employee nor the Company has given notice to the other in writing
at least 90 days prior to such anniversary that the term of this Agreement
shall not be extended further; and (ii) prior to such anniversary, the Board
of Directors explicitly reviews and approves the extension. Reference herein
to the term of this Agreement shall refer to both such initial term and such
extended terms.
3. Employment. The Employee shall be employed as the Executive Vice
President of the Company and as the Executive Vice President of the Bank. As
such, the Employee shall render all services as are customarily performed by
persons situated in similar executive capacities, and shall have such other
powers and duties as the Board of Directors may prescribe from time to time.
The Employee shall also render services to any subsidiary or subsidiaries of
the Company or the Bank as requested by the Company or the Bank from time to
time consistent with his executive position. The Employee shall devote his
best efforts and reasonable time and attention to the business and affairs of
the Company and the Bank to the extent necessary to discharge his
responsibilities hereunder. The Employee may (i) serve on charitable boards
or committees and, in addition, on such corporate boards as are approved in a
resolution adopted by a majority of the Board of Directors, which approval
shall not be withheld unreasonably and (ii) manage personal investments, so
long as such activities do not interfere materially with performance of his
responsibilities hereunder.
3
<PAGE>
4. Cash Compensation.
------------------
(a) Salary. The Company and the Bank jointly agree to pay the
Employee during the term of this Agreement a base salary (the "Salary") the
annualized amount of which shall be not less than the annualized aggregate
amount of the Employee's base salary from the Company and any Consolidated
Subsidiaries in effect at the Effective Date; provided that any amounts of
salary actually paid to the Employee by any Consolidated Subsidiaries shall
reduce the amount to be paid by the Company and the Bank to the Employee. The
Salary shall be paid no less frequently than monthly and shall be subject to
customary tax withholding. The amount of the Employee's Salary shall be
increased (but shall not be decreased) from time to time in accordance with
the amounts of salary approved by the Board of Directors or the board of
directors of any of the Consolidated Subsidiaries after the Effective Date.
The amount of the Salary shall be reviewed by the Board of Directors at least
annually during the term of this Agreement.
(b) Bonuses. The Employee shall be entitled to participate in an
equitable manner with all other executive officers of the Company and the Bank
in such performance-based and discretionary bonuses, if any, as are authorized
and declared by the Board of Directors for executive officers.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and the Bank,
provided that the Employee accounts for such expenses as required under such
policies and procedures.
5. Benefits.
---------
(a) Participation in Benefit Plans. The Employee shall be entitled
to participate, to the same extent as executive officers of the Company and
the Bank generally, in all plans of the Company and the Bank relating to
pension, retirement, thrift, profit-sharing, savings, group or other life
insurance, hospitalization, medical and dental coverage, travel and accident
insurance, education, cash bonuses, and other retirement or employee benefits
or combinations thereof. In addition, the Employee shall be entitled to be
considered for benefits under all of the stock and stock option related plans
in which the Company's or the Bank's executive officers are eligible or become
eligible to participate.
(b) Fringe Benefits. The Employee shall be eligible to participate
in, and receive benefits under, any other fringe benefit plans or perquisites
which are or may become generally available to the Company's or the Bank's
executive officers, including but not limited to supplemental retirement,
incentive compensation, supplemental medical or life insurance plans, company
cars, club dues, physical examinations, financial planning and tax preparation
services.
4
<PAGE>
6. Vacations; Leave. The Employee shall be entitled (i) to annual paid
vacation in accordance with the policies established by the Board of Directors
for executive officers, and (ii) to voluntary leaves of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors may determine in its discretion.
7. Termination of Employment.
--------------------------
(a) Involuntary Termination. The Board of Directors may terminate
the Employee's employment at any time, but, except in the case of Termination
for Cause, termination of employment shall not prejudice the Employee's right
to compensation or other benefits under this Agreement. In the event of
Involuntary Termination other than after a Change in Control which occurs
during the term of this Agreement, the Company and the Bank jointly shall (i)
pay to the Employee during the remaining term of this Agreement the Salary at
the rate in effect immediately prior to the Date of Termination, payable in
such manner and at such times as the Salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by
the Company and the Bank, and (ii) provide to the Employee during the
remaining term of this Agreement substantially the same group life insurance,
hospitalization, medical, dental, prescription drug and other health benefits,
and long-term disability insurance (if any) for the benefit of the Employee
and his dependents and beneficiaries who would have been eligible for such
benefits if the Employee had not suffered Involuntary Termination, on terms
substantially as favorable to the Employee, including amounts of coverage and
deductibles and other costs to him, as if he had not suffered Involuntary
Termination.
(b) Termination for Cause. In the event of Termination for
Cause, the Company and the Bank shall pay to the Employee the Salary and
provide benefits under this Agreement only through the Date of Termination,
and shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written
notice to the Company and the Bank or such shorter period as may be agreed
upon between the Employee and the Board of Directors. In the event of such
voluntary termination, the Company and the Bank shall be obligated jointly to
continue to pay to the Employee the Salary and provide benefits under this
Agreement only through the Date of Termination, at the time such payments are
due, and shall have no further obligation to the Employee under this
Agreement.
(d) Change in Control. In the event of Involuntary Termination
after a Change in Control which occurs at any time following the Effective
Date while the Employee is employed under this Agreement, the Company and the
Bank jointly shall (i) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to 299% of the
Employee's "base amount" as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"); and (ii) provide to the Employee during
the remaining term of this Agreement substantially the same group life
insurance, hospitalization, medical, dental, prescription drug and other
health benefits, and long-term disability insurance (if any) for the benefit
of the Employee and his dependents and beneficiaries who would have been
eligible for such benefits if the Employee had not suffered
5
<PAGE>
Involuntary Termination, on terms substantially as favorable to the Employee,
including amounts of coverage and deductibles and other costs to him, as if he
had not suffered Involuntary Termination.
(e) Death. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment, the
Company and the Bank jointly shall pay to the Employee's estate, or such
person as the Employee may have previously designated in writing, the Salary
which was not previously paid to the Employee and which he would have earned
if he had continued to be employed under this Agreement through the last day
of the calendar month in which the Employee died, together with the benefits
provided hereunder through such date.
(f) Disability. If the Employee becomes entitled to benefits under
the terms of the then-current disability plan, if any, of the Company or the
Bank (the "Disability Plan") or becomes otherwise unable to fulfill his duties
under this Agreement, he shall be entitled to receive such group and other
disability benefits, if any, as are then provided by the Company or the Bank
for executive employees. In the event of such disability, this Agreement
shall not be suspended, except that (i) the obligation to pay the Salary to
the Employee shall be reduced in accordance with the amount of disability
income benefits received by the Employee, if any, pursuant to this paragraph
such that, on an after-tax basis, the Employee shall realize from the sum of
disability income benefits and the Salary the same amount as he would realize
on an after-tax basis from the Salary if the obligation to pay the Salary were
not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted
by a majority of the disinterested members of the Board of Directors, the
Company and the Bank may discontinue payment of the Salary beginning six
months following a determination that the Employee has become entitled to
benefits under the Disability Plan or otherwise unable to fulfill his duties
under this Agreement.
(g) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (1) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of its obligations which were suspended.
(h) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. Section 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(i) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(j) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the
6
<PAGE>
continued operation of the Bank: (1) at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (2) by the FDIC, at the time it approves a supervisory merger to resolve
problems related to operation of the Bank. Any rights of the parties that
have already vested, however, shall not be affected by any such action.
(k) Reductions of Benefits. Notwithstanding any other provision
of this Agreement, if payments and the value of benefits received or to be
received under this Agreement, together with any other amounts and the value
of benefits received or to be received by the Employee, would cause any amount
to be nondeductible by the Company or any of the Consolidated Subsidiaries for
federal income tax purposes pursuant to or by reason of Section 280G of the
Code, then payments and benefits under this Agreement shall be reduced (not
less than zero) to the extent necessary so as to maximize amounts and the
value of benefits to be received by the Employee without causing any amount to
become nondeductible pursuant to or by reason of Section 280G of the Code.
The Employee shall determine the allocation of such reduction among payments
and benefits to the Employee.
(l) Further Reductions. Any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
8. Notice of Termination. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Employee during the term of
this Agreement, the Company or the Bank, or both, shall deliver to the
Employee a written notice of termination, stating whether such termination
constitutes Termination for Cause or Involuntary Termination, setting forth in
reasonable detail the facts and circumstances that are the basis for the
termination, and specifying the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, except in the case of Termination for Cause. In the event that the
Employee determines in good faith that he has experienced an Involuntary
Termination of his employment, he shall send a written notice to the Company
and the Bank stating the circumstances that constitute such Involuntary
Termination and the date upon which his employment shall have ceased due to
such Involuntary Termination. In the event that the Employee desires to
effect a Voluntary Termination, he shall deliver a written notice to the
Company and the Bank, stating the date upon which employment shall terminate,
which date shall be at least 90 days after the date upon which the notice is
delivered, unless the parties agree to a date sooner.
9. Non-Competition.
----------------
(a) Upon any termination of Employee's employment hereunder except
pursuant to Section 7(d) hereof, Employee agrees not to compete with the Bank
and/or the Company for a period of one (1) year following such termination in
Snohomish or King County, Washington. Employee agrees that during such period
and within such area, Employee shall not work for or advise, consult or
otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities
of the Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Bank and/or the Company, its business
and
7
<PAGE>
property in the event of Employee's breach of this Subsection 9(a) agree that
in the event of any such breach by Employee, the Bank and/or the Company will
be entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Employee, Employee's partners,
agents, servants, employers, employees and all persons acting for or with
Employee. Employee represents and admits that in the event of the termination
of his employment pursuant to Sections 7(a), (b) and (c) hereof, Employee's
experience and capabilities are such that Employee can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Employee from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Employee.
(b) Employee recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Employee will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Employee may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Bank. In the event of a breach or threatened breach by
Employee of the provisions of this Section, the Bank will be entitled to an
injunction restraining Employee from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of
the Bank or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available
to the Bank for such breach or threatened breach, including the recovery of
damages from Employee.
10. Attorneys' Fees. The Company and the Bank jointly shall pay all
legal fees and related expenses (including the costs of experts, evidence and
counsel) incurred by the Employee as a result of (i) the Employee's contesting
or disputing any termination of employment, or (ii) the Employee's seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company or the Bank (or a
successor) or the Consolidated Subsidiaries under which the Employee is or may
be entitled to receive benefits; provided that the Company's and the Bank's
obligation to pay such fees and expenses is subject to the Employee's
prevailing with respect to the matters in dispute in any action initiated by
the Employee or the Employee's having been determined to have acted reasonably
and in good faith with respect to any action initiated by the Company or the
Bank.
11. No Assignments.
---------------
(a) This Agreement is personal to each of the parties hereto, and
no party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other parties; provided,
however, that the Company and the Bank shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
by an assumption
8
<PAGE>
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company and/or the Bank would be required to perform it if no
such succession or assignment had taken place. Failure to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee
to compensation and benefits from the Company and the Bank in the same amount
and on the same terms as the compensation pursuant to Section 7(d) of this
Agreement. For purposes of implementing the provisions of this Section 11(a),
the date on which any such succession becomes effective shall be deemed the
Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company and Bank at
their home offices, to the attention of the Board of Directors with a copy to
the Secretary of the Company and the Secretary of the Bank, or, if to the
Employee, to such home or other address as the Employee has most recently
provided in writing to the Company or the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.
14. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
18. Deferral of Non-Deductible Compensation. In the event that the
Employee's aggregate compensation (including compensatory benefits which are
deemed remuneration for purposes of Section 162(m) of the Code) from the
Company and the Consolidated Subsidiaries for any calendar year exceeds the
maximum amount of compensation deductible by the Company or any of the
Consolidated Subsidiaries in any calendar year under Section 162(m) of the
Code (the "maximum allowable amount"), then any such amount in excess of the
maximum allowable amount shall be
9
<PAGE>
mandatorily deferred with interest thereon at 8% per annum to a calendar year
such that the amount to be paid to the Employee in such calendar year,
including deferred amounts and interest thereon, does not exceed the maximum
allowable amount. Subject to the foregoing, deferred amounts including
interest thereon shall be payable at the earliest time permissible.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: EVERTRUST FINANCIAL GROUP, INC.
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Attest:
EVERETT MUTUAL BANK
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Employee
/s/Michael R. Deller
---------------------------------
Michael R. Deller
10
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Exhibit 10.6
Employment Agreement with Jeffrey R. Mitchell
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 30th day of September, 1999 by and between EverTrust Financial Group,
Inc. (the "Company"), and its wholly owned subsidiary, Everett Mutual Bank
(the "Bank"), and Jeffrey R. Mitchell (the "Employee").
WHEREAS, the Employee is currently serving as the Senior Vice President
and Chief Financial Officer of the Company and of the Bank;
WHEREAS, the Employee has made and will continue to make a major
contribution to the success of the Company and the Bank in the position of
Senior Vice President and Chief Financial Officer;
WHEREAS, the board of directors of the Company and the board of directors
of the Bank (collectively, the "Board of Directors") recognize that the
possibility of a change in control of the Bank or the Company may exist and
that such possibility, and the uncertainty and questions which may arise among
management, may result in the departure or distraction of key management to
the detriment of the Company, the Bank and their respective stockholders;
WHEREAS, the Board of Directors believes that it is in the best interests
of the Company and the Bank to enter into this Agreement with the Employee in
order to assure continuity of management of the Company and its subsidiaries;
and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
------------
(a) The term "Change in Control" means (1) an offeror other than
the Company purchases shares of stock of the Company or the Bank pursuant to a
tender or exchange offer for such shares (2) an event of a nature that results
in the acquisition of control of the Company or the Bank within the meaning of
the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841
(or any successor statute or regulation) or requires the filing of a notice
with the Federal Deposit Insurance Corporation under 12 U.S.C. Section 1817(j)
(or any successor statute or regulation); (3) an event that would be required
to be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); (4) any person (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly of securities of the Company or the Bank representing
25% or more of the combined voting power of the Company's or the Bank's
outstanding
<PAGE>
securities; (5) individuals who are members of the board of directors of the
Company immediately following the Effective Date or who are members of the
board of directors of the Bank immediately following the Effective Date (in
each case, the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequently
whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's or the Bank's stockholders was approved by the nominating
committee serving under an Incumbent Board, shall be considered a member of
the Incumbent Board; or (6) consummation of a plan of reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Company
or a similar transaction in which the Company is not the resulting entity, or
a transaction at the completion of which the former stockholders of the
acquired corporation become the holders of more than 40% of the outstanding
common stock of the Company and the Company is the resulting entity of such
transaction; provided that the term "Change in Control" shall not include an
acquisition of securities by an employee benefit plan of the Bank or the
Company.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
affiliated group (as defined in Section 1504 of the Internal Revenue Code of
1986, as amended (the "Code"), without regard to subsection (b) thereof) that
includes the Bank, including but not limited to the Company.
(c) The term "Date of Termination" means the date upon which the
Employee's employment with the Company or the Bank or both ceases, as
specified in a notice of termination pursuant to Section 8 of this Agreement.
(d) The term "Effective Date" means the date of this Agreement.
(e) The term "Involuntary Termination" means the termination of the
employment of Employee (i) by either the Company or the Bank or both without
his express written consent; or (ii) by the Employee by reason of a material
diminution of or interference with his duties, responsibilities or benefits,
including (without limitation) any of the following actions unless consented
to in writing by the Employee: (1) a requirement that the Employee be based
at any place other than Everett Washington, or within a radius of 35 miles
from the location of the Company's administrative offices as of the date of
this Agreement, except for reasonable travel on Company or Bank business; (2)
a material demotion of the Employee; (3) a material reduction in the number or
seniority of personnel reporting to the Employee or a material reduction in
the frequency with which, or in the nature of the matters with respect to
which such personnel are to report to the Employee, other than as partof a
Bank- or Company-wide reduction in staff; (4) a reduction in the Employee's
salary or a material adverse change in the Employee's perquisites, benefits,
contingent benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Company; (5) a material permanent increase in
the required hours of work or the workload of the Employee; or (6) the failure
of the board of directors of the Company (or a board of directors of a
successor of the Company) to elect him as Senior Vice President and Chief
Financial Officer of the Company (or a successor of the Company) or any action
by the board of directors of the Company (or a board of directors of a
successor of the Company) removing him from such office, or the failure of the
board of directors of the Bank (or any successor of the Bank)
2
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to elect him as Senior Vice President and Chief Financial Officer of the Bank
(or any successor of the Bank) or any action by such board (or a board of a
successor of the Bank) removing him from such office. The term "Involuntary
Termination" does not include Termination for Cause, termination of employment
due to death or permanent disability pursuant to Section 7(f) of this
Agreement, retirement or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act.
(f) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with either the Company or
the Bank, as the case may be, because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or (except as provided
below) material breach of any provision of this Agreement. No act or failure
to act by the Employee shall be considered willful unless the Employee acted
or failed to act with an absence of good faith and without a reasonable belief
that his action or failure to act was in the best interest of the Company or
the Bank. The Employee shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority
of the entire membership of the Board of Directors at a meeting of the Board
duly called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel, to
be heard before the Board), stating that in the good faith opinion of the
Board of Directors the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
commencing on the Effective Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Effective Date, and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one year in addition to the then-remaining term, provided that (i)
neither the Employee nor the Company has given notice to the other in writing
at least 90 days prior to such anniversary that the term of this Agreement
shall not be extended further; and (ii) prior to such anniversary, the Board
of Directors explicitly reviews and approves the extension. Reference herein
to the term of this Agreement shall refer to both such initial term and such
extended terms.
3. Employment. The Employee shall be employed as the Senior Vice
President and Chief Financial Officer of the Company and as the Senior Vice
President and Chief Financial Officer of the Bank. As such, the Employee
shall render all services as are customarily performed by persons situated in
similar executive capacities, and shall have such other powers and duties as
the Board of Directors may prescribe from time to time. The Employee shall
also render services to any subsidiary or subsidiaries of the Company or the
Bank as requested by the Company or the Bank from time to time consistent with
his executive position. The Employee shall devote his best efforts and
reasonable time and attention to the business and affairs of the Company and
the Bank to the extent necessary to discharge his responsibilities hereunder.
The Employee may (i) serve on charitable boards or committees and, in
addition, on such corporate boards as are approved in a resolution adopted by
a majority of the Board of Directors, which approval shall not be withheld
unreasonably and (ii) manage
3
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personal investments, so long as such activities do not interfere materially
with performance of his responsibilities hereunder.
4. Cash Compensation.
------------------
(a) Salary. The Company and the Bank jointly agree to pay the
Employee during the term of this Agreement a base salary (the "Salary") the
annualized amount of which shall be not less than the annualized aggregate
amount of the Employee's base salary from the Company and any Consolidated
Subsidiaries in effect at the Effective Date; provided that any amounts of
salary actually paid to the Employee by any Consolidated Subsidiaries shall
reduce the amount to be paid by the Company and the Bank to the Employee. The
Salary shall be paid no less frequently than monthly and shall be subject to
customary tax withholding. The amount of the Employee's Salary shall be
increased (but shall not be decreased) from time to time in accordance with
the amounts of salary approved by the Board of Directors or the board of
directors of any of the Consolidated Subsidiaries after the Effective Date.
The amount of the Salary shall be reviewed by the Board of Directors at least
annually during the term of this Agreement.
(b) Bonuses. The Employee shall be entitled to participate in an
equitable manner with all other executive officers of the Company and the Bank
in such performance-based and discretionary bonuses, if any, as are authorized
and declared by the Board of Directors for executive officers.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and the Bank,
provided that the Employee accounts for such expenses as required under such
policies and procedures.
5. Benefits.
---------
(a) Participation in Benefit Plans. The Employee shall be entitled
to participate, to the same extent as executive officers of the Company and
the Bank generally, in all plans of the Company and the Bank relating to
pension, retirement, thrift, profit-sharing, savings, group or other life
insurance, hospitalization, medical and dental coverage, travel and accident
insurance, education, cash bonuses, and other retirement or employee benefits
or combinations thereof. In addition, the Employee shall be entitled to be
considered for benefits under all of the stock and stock option related plans
in which the Company's or the Bank's executive officers are eligible or become
eligible to participate.
(b) Fringe Benefits. The Employee shall be eligible to participate
in, and receive benefits under, any other fringe benefit plans or perquisites
which are or may become generally available to the Company's or the Bank's
executive officers, including but not limited to supplemental retirement,
incentive compensation, supplemental medical or life insurance plans, company
cars, club dues, physical examinations, financial planning and tax preparation
services.
4
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6. Vacations; Leave. The Employee shall be entitled (i) to annual paid
vacation in accordance with the policies established by the Board of Directors
for executive officers, and (ii) to voluntary leaves of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors may determine in its discretion.
7. Termination of Employment.
--------------------------
(a) Involuntary Termination. The Board of Directors may terminate
the Employee's employment at any time, but, except in the case of Termination
for Cause, termination of employment shall not prejudice the Employee's right
to compensation or other benefits under this Agreement. In the event of
Involuntary Termination other than after a Change in Control which occurs
during the term of this Agreement, the Company and the Bank jointly shall (i)
pay to the Employee during the remaining term of this Agreement the Salary at
the rate in effect immediately prior to the Date of Termination, payable in
such manner and at such times as the Salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by
the Company and the Bank, and (ii) provide to the Employee during the
remaining term of this Agreement substantially the same group life insurance,
hospitalization, medical, dental, prescription drug and other health benefits,
and long-term disability insurance (if any) for the benefit of the Employee
and his dependents and beneficiaries who would have been eligible for such
benefits if the Employee had not suffered Involuntary Termination, on terms
substantially as favorable to the Employee, including amounts of coverage and
deductibles and other costs to him, as if he had not suffered Involuntary
Termination.
(b) Termination for Cause. In the event of Termination for
Cause, the Company and the Bank shall pay to the Employee the Salary and
provide benefits under this Agreement only through the Date of Termination,
and shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written
notice to the Company and the Bank or such shorter period as may be agreed
upon between the Employee and the Board of Directors. In the event of such
voluntary termination, the Company and the Bank shall be obligated jointly to
continue to pay to the Employee the Salary and provide benefits under this
Agreement only through the Date of Termination, at the time such payments are
due, and shall have no further obligation to the Employee under this
Agreement.
(d) Change in Control. In the event of Involuntary Termination
after a Change in Control which occurs at any time following the Effective
Date while the Employee is employed under this Agreement, the Company and the
Bank jointly shall (i) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to 299% of the
Employee's "base amount" as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"); and (ii) provide to the Employee during
the remaining term of this Agreement substantially the same group life
insurance, hospitalization, medical, dental, prescription drug and other
health benefits, and long-term disability insurance (if any) for the benefit
of the Employee and his dependents and beneficiaries who would have been
eligible for such benefits if the Employee had not suffered
5
<PAGE>
Involuntary Termination, on terms substantially as favorable to the Employee,
including amounts of coverage and deductibles and other costs to him, as if he
had not suffered Involuntary Termination.
(e) Death. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment, the
Company and the Bank jointly shall pay to the Employee's estate, or such
person as the Employee may have previously designated in writing, the Salary
which was not previously paid to the Employee and which he would have earned
if he had continued to be employed under this Agreement through the last day
of the calendar month in which the Employee died, together with the benefits
provided hereunder through such date.
(f) Disability. If the Employee becomes entitled to benefits under
the terms of the then-current disability plan, if any, of the Company or the
Bank (the "Disability Plan") or becomes otherwise unable to fulfill his duties
under this Agreement, he shall be entitled to receive such group and other
disability benefits, if any, as are then provided by the Company or the Bank
for executive employees. In the event of such disability, this Agreement
shall not be suspended, except that (i) the obligation to pay the Salary to
the Employee shall be reduced in accordance with the amount of disability
income benefits received by the Employee, if any, pursuant to this paragraph
such that, on an after-tax basis, the Employee shall realize from the sum of
disability income benefits and the Salary the same amount as he would realize
on an after-tax basis from the Salary if the obligation to pay the Salary were
not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted
by a majority of the disinterested members of the Board of Directors, the
Company and the Bank may discontinue payment of the Salary beginning six
months following a determination that the Employee has become entitled to
benefits under the Disability Plan or otherwise unable to fulfill his duties
under this Agreement.
(g) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (1) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of its obligations which were suspended.
(h) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. Section 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(i) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(j) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the
6
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continued operation of the Bank: (1) at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (2) by the FDIC, at the time it approves a supervisory merger to resolve
problems related to operation of the Bank. Any rights of the parties that
have already vested, however, shall not be affected by any such action.
(k) Reductions of Benefits. Notwithstanding any other provision
of this Agreement, if payments and the value of benefits received or to be
received under this Agreement, together with any other amounts and the value
of benefits received or to be received by the Employee, would cause any amount
to be nondeductible by the Company or any of the Consolidated Subsidiaries for
federal income tax purposes pursuant to or by reason of Section 280G of the
Code, then payments and benefits under this Agreement shall be reduced (not
less than zero) to the extent necessary so as to maximize amounts and the
value of benefits to be received by the Employee without causing any amount to
become nondeductible pursuant to or by reason of Section 280G of the Code.
The Employee shall determine the allocation of such reduction among payments
and benefits to the Employee.
(l) Further Reductions. Any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
8. Notice of Termination. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Employee during the term of
this Agreement, the Company or the Bank, or both, shall deliver to the
Employee a written notice of termination, stating whether such termination
constitutes Termination for Cause or Involuntary Termination, setting forth in
reasonable detail the facts and circumstances that are the basis for the
termination, and specifying the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, except in the case of Termination for Cause. In the event that the
Employee determines in good faith that he has experienced an Involuntary
Termination of his employment, he shall send a written notice to the Company
and the Bank stating the circumstances that constitute such Involuntary
Termination and the date upon which his employment shall have ceased due to
such Involuntary Termination. In the event that the Employee desires to
effect a Voluntary Termination, he shall deliver a written notice to the
Company and the Bank, stating the date upon which employment shall terminate,
which date shall be at least 90 days after the date upon which the notice is
delivered, unless the parties agree to a date sooner.
9. Non-Competition.
----------------
(a) Upon any termination of Employee's employment hereunder except
pursuant to Section 7(d) hereof, Employee agrees not to compete with the Bank
and/or the Company for a period of one (1) year following such termination in
Snohomish or King County, Washington. Employee agrees that during such period
and within such area, Employee shall not work for or advise, consult or
otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities
of the Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Bank and/or the Company, its business
and
7
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property in the event of Employee's breach of this Subsection 9(a) agree that
in the event of any such breach by Employee, the Bank and/or the Company will
be entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Employee, Employee's partners,
agents, servants, employers, employees and all persons acting for or with
Employee. Employee represents and admits that in the event of the termination
of his employment pursuant to Sections 7(a), (b) and (c) hereof, Employee's
experience and capabilities are such that Employee can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Employee from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Employee.
(b) Employee recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Employee will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Employee may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Bank. In the event of a breach or threatened breach by
Employee of the provisions of this Section, the Bank will be entitled to an
injunction restraining Employee from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of
the Bank or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part,
has been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available
to the Bank for such breach or threatened breach, including the recovery of
damages from Employee.
10. Attorneys' Fees. The Company and the Bank jointly shall pay all
legal fees and related expenses (including the costs of experts, evidence and
counsel) incurred by the Employee as a result of (i) the Employee's contesting
or disputing any termination of employment, or (ii) the Employee's seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company or the Bank (or a
successor) or the Consolidated Subsidiaries under which the Employee is or may
be entitled to receive benefits; provided that the Company's and the Bank's
obligation to pay such fees and expenses is subject to the Employee's
prevailing with respect to the matters in dispute in any action initiated by
the Employee or the Employee's having been determined to have acted reasonably
and in good faith with respect to any action initiated by the Company or the
Bank.
11. No Assignments.
---------------
(a) This Agreement is personal to each of the parties hereto, and
no party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other parties; provided,
however, that the Company and the Bank shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
by an assumption
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agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company and/or the Bank would be required to perform it if no
such succession or assignment had taken place. Failure to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee
to compensation and benefits from the Company and the Bank in the same amount
and on the same terms as the compensation pursuant to Section 7(d) of this
Agreement. For purposes of implementing the provisions of this Section 11(a),
the date on which any such succession becomes effective shall be deemed the
Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company and Bank at
their home offices, to the attention of the Board of Directors with a copy to
the Secretary of the Company and the Secretary of the Bank, or, if to the
Employee, to such home or other address as the Employee has most recently
provided in writing to the Company or the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.
14. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
18. Deferral of Non-Deductible Compensation. In the event that the
Employee's aggregate compensation (including compensatory benefits which are
deemed remuneration for purposes of Section 162(m) of the Code) from the
Company and the Consolidated Subsidiaries for any calendar year exceeds the
maximum amount of compensation deductible by the Company or any of the
Consolidated Subsidiaries in any calendar year under Section 162(m) of the
Code (the "maximum allowable amount"), then any such amount in excess of the
maximum allowable amount shall be
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mandatorily deferred with interest thereon at 8% per annum to a calendar year
such that the amount to be paid to the Employee in such calendar year,
including deferred amounts and interest thereon, does not exceed the maximum
allowable amount. Subject to the foregoing, deferred amounts including
interest thereon shall be payable at the earliest time permissible.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: EVERTRUST FINANCIAL GROUP, INC.
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Attest:
EVERETT MUTUAL BANK
/s/Lorelei Christenson /s/Robert A. Leach, Jr.
-------------------------------------- -----------------------------------
Lorelei Christenson, Corporate By: Robert A. Leach, Jr.
Secretary Its: Chairman of the Compensation
Committee
Employee
/s/Jeffrey R. Mitchell
-------------------------------
Jeffrey R. Mitchell
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Exhibit 21
Subsidiaries of the Registrant
Parent
------
EverTrust Financial Group, Inc.
Percentage Jurisdiction or
Subsidiaries of Ownership State of Incorporation
------------ ------------ ----------------------
Everett Mutual Bank 100% Washington
Commercial Bank of Everett 100% Washington
I-Pro, Inc. 100% Washington
Mutual Bancshares Capital, Inc. 100% Washington
Sound Financial, Inc. (1) 100% Washington
------------
(1) This corporation is a wholly owned subsidiary of Everett Mutual Bank.
<PAGE>
Exhibit 27
Financial Data Schedule (in thousands)
This schedule contains financial information extracted from the consolidated
financial statements of EverTrust Financial Group for the year ended March 31,
2000 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for the year
Item Number ended March 31, 2000 Item Description
----------- --------------------- ----------------
9-03 (1) 5,862 Cash and Due from Banks
9-03 (2) 1,790 Interest - bearing deposits
9-03 (3) 1,330 Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 95,988 Investment and mortgage backed
securities held for sale
9-03 (6) 12,066 Investment and mortgage backed
securities held to maturity - carrying
value
9-03 (6) 12,136 Investment and mortgage backed
securities held to maturity - market
value
9-03 (7) 416,116 Loans
9-03 (7)(2) 6,484 Allowance for loan losses
9-03 (11) 555,212 Total assets
9-03 (12) 382,986 Deposits
9-03 (13) 20,028 Short - term borrowings
9-03 (15) 4,274 Other liabilities
9-03 (16) 14,395 Long - term debt
9-03 (19) -- Preferred stock - mandatory redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 83,978 Common stocks
9-03 (22) 49,551 Other stockholders' equity
9-03 (23) 555,212 Total liabilities and stockholders'
equity
9-04 (1) 31,464 Interest and fees on loans
9-04 (2) 6,970 Interest and dividends on investments
9-04 (4) -- Other interest income
9-04 (5) 38,434 Total interest income
9-04 (6) 17,641 Interest on deposits
9-04 (9) 18,832 Total interest expense
9-04 (10) 19,602 Net interest income
9-04 (11) 810 Provision for loan losses
9-04 (13)(h) 218 Investment securities gains/(losses)
9-04 (14) 19,696 Other expenses
9-04 (15) 386 Income/loss before income tax
9-04 (17) 386 Income/loss before extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 572 Net income or loss
9-04 (21) -- Earnings per share - primary
9-04 (21) -- Earnings per share - fully diluted
I.B. 5 3.97 Net yield - interest earnings - actual
III.C.1. (a) 406 Loans on non - accrual
III.C.1. (b) -- Accruing loans past due 90 days or more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 323 Potential problem loans
IV.A.1 5,672 Allowance for loan loss - beginning of
period
IV.A.2 16 Total chargeoffs and transfers
IV.A.3 18 Total recoveries
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IV.A.4 6,484 Allowance for loan loss - end of period
IV.B.1 6,484 Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to foreign
loans
IV.B.3 -- Loan loss allowance - unallocated
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