MANAGEMENT REPORT & FINANCIAL REVIEW
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data): 2001 2000 1999 1998 1997
- ------------------------------------- -------- -------- -------- -------- --------
INCOME STATEMENT DATA
Net interest income $ 7,714 $ 7,169 $ 6,329 $ 5,676 $ 5,330
Provision for loan losses 479 455 300 205 275
Noninterest income 2,938 2,212 2,024 1,818 1,797
Noninterest expense 8,344 7,192 6,515 5,906 5,446
Net income 1,240 1,210 1,075 966 950
-------- -------- -------- -------- --------
PER SHARE DATA(1)
Earnings per common share $ 1.29 $ 1.21 $ 1.03 $ 0.92 $ 0.91
Diluted earnings per common share 1.22 1.20 1.03 0.92 0.91
Dividends declared per common share 0.17 0.15 0.15 0.14 0.13
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Total loans $122,219 $113,058 $ 90,637 $ 77,210 $ 71,817
Allowance for loan losses 1,498 1,323 1,055 907 794
Total assets 156,365 151,752 162,092 169,685 149,436
Total deposits 130,344 125,425 108,866 106,584 100,672
Total Long-term debt 4,005 2,000
Stockholders' equity 14,738 14,577 14,152 13,533 12,584
-------- -------- -------- -------- --------
SELECTED FINANCIAL RATIOS
Return on average assets 0.83% 0.81% 0.70% 0.64% 0.69%
Return on average equity 8.50 8.67 7.83 7.47 7.71
Dividend payout ratio 13.39 13.31 14.33 15.11 14.63
Average equity to average assets 9.74 9.29 8.86 8.54 9.01
Net interest margin (tax equivalent) 5.52 5.36 4.58 4.25 4.53
Allowance for loan losses to total loans
at the end of year 1.23 1.17 1.16 1.17 1.11
Nonperforming loans to total loans
at the end of year(2) 0.95 0.49 1.28 1.05 0.72
Net loans charged off to average total loans 0.26 0.18 0.19 0.13 0.46
======== ======== ======== ======== ========
(1) All per share amounts have been adjusted to reflect the three-for-two stock
split in July 2001.
(2) Nonperforming loans include nonaccrual, impaired and other loans 90 days or
more past due.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
GENERAL
EvergreenBancorp, Inc. ("Bancorp") is a Washington chartered bank holding
company formed in 2001 and headquartered in Seattle, Washington. Bancorp's
wholly owned subsidiary is EvergreenBank (the "Bank"), a state chartered bank in
business since 1971. Throughout this report Bancorp and the Bank are
collectively referred to as the "Company".
The following discussion should be read along with the accompanying financial
statements and notes. All share and per-share information in this annual report
has been restated to give retroactive effect to the three-for-two stock split in
July 2001. In the following discussion, unless otherwise noted, references to
increases or decreases in balances for a particular period or date refer to the
comparison with corresponding amounts for the period or date one year earlier.
FORWARD-LOOKING STATEMENTS
In addition to historical information, the following management's discussion and
analysis contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those anticipated in these forward-looking statements as a result of certain
factors discussed elsewhere in this report, including changes in interest rates,
economic conditions, competition, requirements of regulators, demand for
financial products and services in the Company's market area. These risks and
uncertainties should be considered in evaluating forward-looking statements, and
undue reliance should not be placed on such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect its financial results, is
included in the Company's filings with the Securities and Exchange Commission.
OVERVIEW
The Company's principal business is personal and business banking. Services
offered include commercial, real estate and consumer lending; savings, checking
and certificate of deposit accounts; financial planning and investment services,
and merchant credit card processing services. The Company's subsidiary is
EvergreenBank, a Washington state chartered bank. The Bank conducts business
from three locations: the main office northeast of downtown Seattle, the
Lynnwood office north of Seattle, and a new branch which opened in July 2001 in
the city of Bellevue.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
Total assets increased 3.0 percent in 2001 to $156,365,000, loans grew 8.1
percent to $122,219,000, and deposits increased 3.9 percent to $130,344,000.
During 2001, the general level of interest rates dropped substantially and the
national and regional economy entered a period of reduced economic activity and
rising levels of unemployment. Planned increases in loan totals were revised
downward to reflect generally lower demand for credit in the Company's
marketplace. Despite these dramatic changes, the Company maintained steady
profitability, with improvement in net interest income and net interest margin.
Financial results for 2001 reflect additional revenue resulting from gains on
sales of investments and other assets, offset by increased costs associated with
opening a new office location. An improved margin on merchant credit card
processing and improvements in operating expense control also affected 2001
results.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
The Company's 2001 net income was $1,240,000, representing a 2.5 percent
increase over $1,210,000 in 2000. Net income per share was $1.29 compared to
$1.21 in 2000. Return on average assets was 0.83 percent for 2001 and 0.81
percent for 2000. Return on average common equity was 8.50 percent and 8.67
percent, respectively.
2001's financial results reflect improvement in the mix of earning assets with
average loan balances as a percentage of average assets increasing to 77.2
percent from 67.9 percent in 2000. The net interest margin increased to 5.52
percent compared to 5.36 percent in 2000. Loans and deposits increased 8.0
percent and 3.9 percent, respectively, from the prior year, with loan growth
slowing appreciably in the second half of the year. Contributing to improved
earnings was a 32.8 percent increase in noninterest income, as a result of
increased revenue from merchant credit card processing, higher service charges
on deposits and net gains on sales of investments and other assets. Additional
operating cost associated with the new Bellevue office location and increased
merchant credit card processing expense also affected 2001 financial results.
The table of selected consolidated financial data, which appears on page 24,
summarizes the Company's financial performance for each of the past five years.
2000 COMPARED TO 1999
The Company's 2000 net income was $1,210,000 representing a 12.5 percent
increase over $1,075,000 in 1999. Net income per share was $1.21 compared to
$1.03 in 1999. Return on average assets was 0.81 percent for 2000 and 0.70
percent for 1999. Return on average common equity was 8.67 percent and 7.83
percent, respectively.
These improvements were in large measure the result of an improved mix of
earning assets, with average loan balances as a percentage of assets increasing
to 67.9 percent by the end of 2000 from 54.7 percent at December 31, 1999.
Non-interest income also increased 9.3 percent.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
In 2000, the Company withdrew from check clearing services and related
correspondent banking activities. The lower revenue resulting from leaving that
business was more than offset by related reduction in expenses, reduced
liquidity requirements, increases in fee income, and a higher percentage of
assets in loans.
NET INTEREST INCOME
The Company's principal source of earnings is net interest income, which is the
difference between interest income, including loan-related fee
income, and interest expense. The individual components of net interest income
and net interest margin are presented on pages 28 and 29.
2001 COMPARED TO 2000
Net interest income for 2001 was $7,714,000, compared to $7,169,000 in 2000. The
7.6 percent improvement was principally due to 15.2 percent growth in the
average loan portfolio. Improvements in the mix of earning assets also
contributed to the increase in interest income. For these reasons, the net
interest margin (which is net interest income on a tax-equivalent basis divided
by average earning assets) also improved to 5.52 percent in 2001, compared to
5.36 percent in 2000.
Total interest income was $11,749,000 in 2001, compared to $11,872,000 in 2000.
The decrease of 1.0 percent resulted from lower investment balances and lower
average rates on loans, offset by higher average loan balances.
Total interest expense was $4,035,000 in 2001, compared to $4,703,000 in 2000, a
decrease of 14.2 percent. The primary factors affecting interest expense were
lower average rates on all categories of interest-bearing deposits, a 36.9
percent increase in average balances of time deposits, and a decrease in the
average balances of federal funds purchased and securities sold under
agreements to repurchase.
2000 COMPARED TO 1999
Net interest income grew to $7,169,000 in 2000, compared to $6,329,000 in 1999.
The 2000 growth of 13.3 percent was mainly attributable to 23.8 percent growth
in the average loan portfolio and an improved mix of earning assets. The net
interest margin was 5.36 percent compared to 4.58 percent in 1999. The increase
in net interest margin was primarily due to a higher volume and mix of loans.
Total interest income was $11,872,000 in 2000, compared to $10,434,000 in 1999.
The increase of 13.8 percent was primarily due to the strong growth in loans.
Total interest expense was $4,703,000 in 2000 compared to $4,105,000 in 1999.
This category reflected a 27.0 percent increase in average interest-bearing
deposits.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
ANALYSIS OF AVERAGE BALANCES, NET INTEREST INCOME, AND NET INTEREST MARGIN
YEARS ENDED DECEMBER 31 (in thousands): 2001 2000 2001 OVER 2000
- -------------------------------------- ------------------------------ ------------------------------- ------------------------
AVERAGE YIELD AVERAGE YIELD CHANGE IN INCOME DUE TO
BALANCE INTEREST RATE BALANCE INTEREST RATE VOLUME RATE
--------- -------- ---- --------- -------- ----- -----------------------
ASSETS
Loans:
Commercial and financial $ 54,132 $ 4,980 9.20% $ 46,506 $ 4,881 10.50% $ 401 $(302)
Real estate 41,758 3,643 8.73 34,327 2,993 8.72 646 4
Consumer and other 21,524 2,092 9.72 21,088 1,976 9.37 41 75
--------- ------- --------- ------- ------- -----
Total loans 117,414 10,715 9.13 101,921 9,850 9.66 1,088 (223)
Federal funds sold 12,060 435 3.61 10,495 687 6.55 126 (378)
Interest-bearing deposits
in financial institutions 1,275 37 2.91 2,026 89 4.39 (22) (30)
Investment securities 11,649 702 6.03 24,610 1,525 6.20 (782) (41)
--------- ------- --------- ------- ------- -----
Total earning assets 142,398 11,889 8.35 139,052 12,151 8.74 410 (672)
------- -----
Cash and due from banks 6,513 9,820
Premises and equipment 1,452 820
Other real estate owned 0 5
Accrued interest and other assets 1,509 1,595
Allowance for loan losses (1,486) (1,200)
--------- ------- ---- --------- ------- ----- ------- -----
Total assets 150,386 150,092
========= ======= ==== ========= ======= ===== ======= =====
LIABILITIES
Interest-bearing deposits:
Demand deposits 10,225 54 0.53 9,615 92 0.96 7 (45)
Savings deposits 35,114 1,057 3.01 34,239 1,319 3.85 34 (296)
Time deposits 46,705 2,482 5.31 34,093 1,974 5.79 653 (145)
--------- ------- --------- ------- ------- -----
Total interest-bearing deposits 92,044 3,593 3.90 77,947 3,385 4.34 694 (486)
Federal funds purchased and
securities sold under agreements
to repurchase 6,527 235 3.60 15,866 903 5.69 (412) (256)
Federal Home Loan Bank advances 3,459 207 5.98 6,308 415 6.57 (173) (35)
--------- ------- --------- ------- ------- -----
Total interest-bearing liabilities 102,030 4,035 3.95 100,121 4,703 4.70 109 (777)
Noninterest-bearing deposits 31,938 34,509
Accrued interest and other liabilities 1,743 1,508
--------- ------- ---- --------- ------- ----- ------- -----
Total liabilities 135,711 136,138
Stockholders' equity 14,675 13,954
--------- ------- ---- --------- ------- ----- ------- -----
Total liabilities and
stockholders' equity $ 150,386 $ 150,092
--------- ------- ---- --------- ------- ----- ------- -----
Interest revenue as a percentage
of average earning assets 8.35% 8.74%
Interest expense as a percentage
of average earning assets 2.83% 3.38%
--------- ------- ---- --------- ------- ----- ------- -----
Net interest income on a
taxable-equivalent basis
and net interest margin $ 7,854 5.52% $ 7,448 5.36%
========= ======= ==== ========= ======= ===== ======= =====
Changes in income and expense which are not due solely to rate or volume have
been allocated proportionately. Average loan balances include nonaccrual loans.
Taxable-equivalent adjustments relate to tax-exempt investment securities.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
ANALYSIS OF AVERAGE BALANCES, NET INTEREST INCOME, AND NET INTEREST MARGIN
YEARS ENDED DECEMBER 31 (in thousands): 2000 1999 2000 OVER 1999
-------------------------------- ------------------------------- -----------------------
AVERAGE YIELD AVERAGE YIELD CHANGE IN INCOME DUE TO
BALANCE INTEREST RATE BALANCE INTEREST RATE VOLUME RATE
--------- -------- ----- --------- ------- ---- ------- -------
ASSETS
Loans:
Commercial and financial $ 46,506 $ 4,881 10.50% $ 39,588 $ 3,791 9.58% $ 704 $ 386
Real estate 34,327 2,993 8.72 24,244 2,027 8.36 876 90
Consumer and other 21,088 1,976 9.37 20,897 1,548 7.41 15 413
--------- ------- --------- ------- ------- -------
Total loans 101,921 9,850 9.66 84,729 7,366 8.69 1,595 889
Federal funds sold 10,495 687 6.55 22,496 1,111 4.94 (1,089) 665
Interest-bearing deposits
in financial institutions 2,026 89 4.39 49 2 4.10 190 (103)
Investment securities 24,610 1,525 6.20 33,160 2,054 6.19 (530) 1
--------- ------- --------- ------- ------- -------
Total earning assets 139,052 12,151 8.74 140,434 10,533 7.50 166 1,452
Cash and due from banks 9,820 12,953
Premises and equipment 820 774
Other real estate owned 5 0
Accrued interest and other assets 1,595 1,901
Allowance for loan losses (1,200) (1,045)
--------- ------- ----- --------- ------- ---- ------- -------
Total assets 150,092 155,017
========= ======= ===== ========= ======= ==== ======= =======
LIABILITIES
Interest-bearing deposits:
Demand deposits 9,615 92 0.96 8,949 100 1.12 8 (16)
Savings deposits 34,239 1,319 3.85 32,123 1,128 3.51 77 114
Time deposits 34,093 1,974 5.79 25,963 1,288 4.96 447 239
--------- ------- --------- ------- ------- -------
Total interest-bearing deposits 77,947 3,385 4.34 67,035 2,516 3.75 532 337
Federal funds purchased and
securities sold under agreements
to repurchase 15,866 903 5.69 34,247 1,589 4.64 (1,189) 503
Federal Home Loan Bank advances 6,308 415 6.57 415
--------- ------- --------- ------- ------- -------
Total interest-bearing liabilities 100,121 4,703 4.70 101,282 4,105 4.05 (242) 840
------- -------
Noninterest-bearing deposits 34,509 38,242
Accrued interest and other liabilities 1,508 1,774
--------- ------- ----- --------- ------- ---- ------- -------
Total liabilities 136,138 141,298
Stockholders' equity 13,954 13,719
--------- ------- ----- --------- ------- ------- -------
Total liabilities and
stockholders' equity $ 150,092 $ 155,017
--------- ------- ----- --------- ------- ---- ------- -------
Interest revenue as a percentage
of average earning assets 8.74% 7.50%
Interest expense as a percentage
of average earning assets 3.38% 2.92%
Net interest income on a
taxable-equivalent basis
and net interest margin $ 7,448 5.36% $ 6,428 4.58%
========= ======== ===== ========= ======= ==== ======= =======
Changes in income and expense which are not due solely to rate or volume have
been allocated proportionately. Average loan balances include nonaccrual loans.
Taxable-equivalent adjustments relate to tax-exempt investment securities.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
NONINTEREST INCOME
Noninterest income in 2001, 2000 and 1999 totaled $2,938,000, $2,212,000, and
$2,024,000, respectively. The increase of 32.8 percent in 2001 was principally
due to growth in merchant credit card processing revenue. Increased service
charges on deposits and gains on sales of investments and other assets also
contributed to the growth in noninterest income.
The increase of 9.3 percent in 2000 compared to 1999 was principally due to
increased service charges on deposit accounts, increased merchant credit card
processing revenue, offset by the lower revenues resulting from the Bank's
withdrawal in 2000 from the check clearing business. Gross income from check
clearing in 2001, 2000, and 1999 was $0, $242,000, and $587,000, respectively.
NONINTEREST EXPENSE
The Company's total noninterest expense for 2001, 2000, and 1999 was $8,344,000,
$7,192,000, and $6,515,000, respectively. The increase of 16.0 percent in 2001
was principally due to an increase in merchant credit card processing expense
and the increased cost of opening the Bellevue office location. Merchant credit
card processing expense for 2001, 2000, and 1999 was $1,131,000, $625,000, and
$390,000, respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company's provision for loan losses in 2001 was $479,000, compared to
$455,000 in 2000. The ratio of the allowance for loan losses to total loans
outstanding at year end was 1.23 in 2001 and 1.17 in 2000. Total nonaccrual
loans were $553,000 at December 31, 2001, compared with $277,000 at December 31,
2000. Nonperforming loans (nonaccrual loans and loans over 90 days past due),
excluding the portion guaranteed by the U.S. Small Business Administration,
comprised .37 percent of loans at December 31, 2001, as compared to .25 percent
at December 31, 2000.
The allowance for loan losses is maintained at a level considered adequate by
management to absorb estimated losses over the life of the portfolio. Management
periodically evaluates the adequacy of the allowance based upon a number of
factors, including the volume and composition of the loan portfolio, potential
impairment of individual loans and concentrations of credit, estimated value of
underlying collateral, past loss experience, current economic conditions, loan
commitments outstanding and other factors.
The Company considers the allowance for loan losses of $1,498,000 at December
31, 2001 adequate to cover losses inherent in the loan portfolio, however, no
assurance can be given that actual losses will not exceed estimated amounts. In
addition, changes in factors such as regional economic conditions and the
financial strength of individual
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
borrowers may require changes in the level of the allowance, and in turn cause
fluctuations in reported earnings and provisions for loss.
An analysis of the changes in the allowance for loan losses, including
provisions, recoveries, and loans charged-off is presented in Note 5 to the
consolidated financial statements.
ASSET AND LIABILITY MANAGEMENT
The principal objectives of asset/liability management are to manage changes in
net interest income and earnings due to changes in interest rates, maintain
adequate liquidity, and manage capital adequacy. Asset/liability management
encompasses structuring the mix of assets, deposits and borrowings to limit
exposure to interest-rate risk and enhance long-term profitability.
The following discussion and analysis addresses managing liquidity, interest
rate risk, and capital resources. These elements provide the framework for the
Company's asset/liability management policy. The asset/liability committee
consists of the senior management of the Bank and meets at least quarterly to
implement policy guidelines.
LIQUIDITY
Liquidity is defined as the ability to provide sufficient cash to fund
operations and meet obligations and commitments on a timely basis. Through asset
and liability management, the Company controls its liquidity position to ensure
that sufficient funds are available to meet the needs of depositors, borrowers,
and creditors.
In addition to cash and cash equivalents, asset liquidity is provided by the
available-for-sale securities portfolio. Eighty-three percent of the investment
balances within this portfolio will mature within one year. Liquidity is further
enhanced by deposit growth, federal funds purchased and securities sold under
agreements to repurchase, borrowings, and planned maturities and sales of
investments and loans.
In 2001, the Company restructured the investment portfolio to bolster liquidity
and reduce interest rate risk. Specifically, the Company reduced levels of
intermediate term (two to five years) investment securities and increased short
term (one year or less) liquidity investments. By shortening the duration of
interest earning assets, the Company expects to improve the stability of net
interest income as interest rates change. With a higher proportion of
available-for-sale investments in short term maturities, more liquidity is
available for additional lending and other business purposes.
During 2000, as a result of leaving the check clearing business, the Company
restructured the balance sheet to reduce cash, federal funds sold and investment
balances. This was largely offset by corresponding reductions in liabilities,
including federal funds purchased and securities sold under agreements to
repurchase. The restructuring also generated additional funds for loan growth.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
INTEREST RATE RISK
The Company's profitability depends largely upon its net interest income, which
is the difference between interest earned on assets, such as loans and
investments, and the interest expense incurred on its liabilities, such as
deposits and borrowings. Interest rate risk is the variation in bank perform-
ance introduced by changes in interest rates over time. The Company's objective
in managing interest rate risk is to minimize the impact on net income due to
significant changes in interest rates.
The Company monitors interest rate risk by monthly reports that highlight the
level, trend and composition of net interest income and net interest margin,
quarterly reports matching rate-sensitive assets to rate-sensitive liabilities,
and by reports of interest rate sensitivity through net interest income
analysis.
The following tables present a "gap" analysis based on maturities and repricing
characteristics of various assets and liabilities at December 31, 2001 and 2000.
ASSET/LIABILITY MATURITY REPRICING SCHEDULE
DECEMBER 31, 2001(in thousands):
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ------- ------ --------
Interest-bearing deposits
in financial institutions $ 1,547 $ 1,547
Federal funds sold 6,300 6,300
SECURITIES
Available for sale 12,606 $ 2,479 $ 129 15,214
Held to maturity
LOANS 59,988 57,400 4,277 121,665
-------- ------- ------ --------
Total earning assets 80,441 59,879 4,406 144,726
DEPOSITS
Interest-bearing demand 9,924 9,924
Savings 36,946 39,946
Time deposits 43,044 2,197 45,241
Federal funds purchased and securities
sold under agreements to repurchase 5,597 5,597
Long term borrowings 4,005 4,005
-------- ------- ------ --------
Total interest-bearing liabilities 95,511 6,202 101,713
NET INTEREST RATE SENSITIVITY GAP $(15,070) $53,677 $4,406 $ 43,013
======== ======= ====== ========
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
ASSET/LIABILITY MATURITY REPRICING SCHEDULE
DECEMBER 31, 2000(in thousands):
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- --------- ---------- --------
Interest-bearing deposits
in financial institutions $ 1,118 $ 1,118
Federal funds sold 9,700 9,700
SECURITIES
Available for sale 7,158 $ 2,857 $ 1,728 11,743
Held to maturity 530 2,775 3,305
LOANS 46,073 62,916 3,792 112,781
-------- ------- ------- --------
Total earning assets 64,579 68,548 5,520 138,647
DEPOSITS
Interest-bearing demand 9,991 9,991
Savings 33,203 33,203
Time deposits 38,784 5,521 44,305
Federal funds purchased and securities
sold under agreements to repurchase 7,986 7,986
Long term borrowings 2,000 2,000
-------- ------- ------- --------
Total interest-bearing liabilities 89,964 7,521 97,485
NET INTEREST RATE SENSITIVITY GAP $(25,385) $61,027 $ 5,520 $ 41,162
======== ======= ======= ========
This analysis provides a general measure of interest rate risk but does not
address complexities such as prepayment risk and customers' responses to
interest rate changes. The table shows that the Company's interest rate
sensitivity gap is negative within one year. This means that for interest rate
changes that affect assets and liabilities equally, falling rates would tend to
increase the Company's net interest margin and rising rates would decrease the
margin.Actual results may vary as management may not adjust rates equally as
general levels of interest rates rise or fall. In addition, interest rates for
the Company's assets and liabilities can change rapidly as a result of market
conditions and customer patterns.
Management also considers overall interest rate sensitivity through net interest
income analysis. This method of analysis assesses the risk of change in net
interest income in the event of sudden and sustained increases and decreases in
market interest rates. The following table presents potential changes in net
interest income over a one year time horizon resulting from immediate and
sustained changes in market interest rates.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
2001 NET INTEREST INCOME ANALYSIS
DECEMBER 31, 2001 (in thousands); rate changes in basis points (bp) = 1/100 of
1%.
IMMEDIATE RATE CHANGE DOLLAR CHANGE PERCENT CHANGE
- --------------------- ------------- --------------
+100bp $ 181 2.1%
+50bp 90 1.1
- -50bp (199) (2.3)
- -100bp (389) (4.5)
The table above indicates that, at December 31, 2001, the effect of an immediate
100 basis point increase in interest rates would increase the Company's net
interest income by 2.1 percent or approximately $181,000. An immediate 100 basis
point decrease in rates indicates a potential reduction of net interest income
by 4.5 percent or approximately $389,000.
While net interest income or "rate shock" analysis is a useful tool to assess
interest rate risk, the methodology has inherent limitations. For example,
certain assets and liabilities may have similar maturities or periods to
repricing, but may react in different degrees to changes in market interest
rates. Prepayment and early withdrawal levels could vary significantly from
assumptions made in calculating the tables. In addition, the ability of
borrowers to service their debt may decrease in the event of significant
interest rate increases. Finally, actual results may vary as management may not
adjust rates equally as general levels of interest rates rise or fall.
The Company does not use interest rate risk management products, such as
interest rate swaps, hedges, or derivatives.
MANAGEMENT REPORT & FINANCIAL REVIEW (CONTINUED)
CAPITAL RESOURCES
Stockholders' equity on December 31, 2001, was $14,738,000, compared with
$14,577,000 at December 31, 2000 -- an increase of $161,000, or 1.10 percent.
Current earnings were $1,240,000 and dividends paid were $166,000.
Effective June 2001, pursuant to the reorganization, an equal number of Bancorp
shares were issued in exchange for Bank shares. Two shareholders exercised their
right to dissent to the reorganization and were paid $24.50 for each share for a
total price of $997,000 for 40,700 shares (6.13 percent of the total common
shares outstanding).
On May 17, 2001, Bancorp's Board of Directors approved a three-for-two stock
split payable July 31, 2001 to shareholders of record July 1, 2001.
Unrealized gains on available-for-sale securities totaling $122,000, also
increased total December 31, 2001 stockholders' equity.
Other matters regarding stock holder equity accounts are presented in Note 9 to
the accompanying consolidated financial statements.
Management has issued no material commitments for major capital expenditures and
knows of no trends or uncertainties, favorable or unfavorable, other than
increased competition, that would materially impact capital resources. Adequate
reserves are maintained to provide for loan losses. The principal source of
capital is undivided profits.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of EvergreenBancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
EvergreenBancorp, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EvergreenBancorp,
Inc. at December 31, 2001 and 2000, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ John L. O'Brien & Company, PLLC
January 25, 2002
Seattle, Washington
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (in thousands): 2001 2000
- -------------------------- --------- ---------
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 9,319 $ 11,597
Interest-bearing deposits in financial institutions 1,547 1,118
Federal funds sold 6,300 9,700
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 17,166 22,415
--------- ---------
INVESTMENT SECURITIES:
Held to maturity 3,305
Available for sale 15,214 11,743
--------- ---------
TOTAL INVESTMENT SECURITIES 15,214 15,048
--------- ---------
Loans 122,219 113,058
Allowance for loan losses (1,498) (1,323)
--------- ---------
NET LOANS 120,721 111,735
--------- ---------
Premises and equipment 1,925 1,051
Other real estate owned 5
Accrued interest and other assets 1,339 1,498
--------- ---------
TOTAL ASSETS $ 156,365 $ 151,752
--------- ---------
LIABILITIES
DEPOSITS:
Noninterest bearing $ 38,233 $ 37,925
Interest bearing 92,111 87,500
--------- ---------
TOTAL DEPOSITS 130,344 125,425
--------- ---------
Federal funds purchased and securities sold
under agreements to repurchase 5,597 7,986
Advances from Federal Home Loan Bank 4,005 2,000
Accrued expenses and other liabilities 1,681 1,764
--------- ---------
TOTAL LIABILITIES 141,627 137,175
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock:
No par value; 100,000 shares authorized;
issued and outstanding - none
Common stock and surplus:
2001 - no par value; 15,000,000 shares authorized;
934,817 shares issued and outstanding
2000 - $10 par value; 10,000,000 shares authorized;
663,462 shares issued and outstanding 11,485 6,634
Surplus 5,838
Retained earnings 3,198 2,124
Accumulated other comprehensive income (loss) 55 (19)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 14,738 14,577
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 156,365 $ 151,752
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
YEARS ENDED DECEMBER 31 (in thousands, except per share data):
2001 2000 1999
------- -------- -------
INTEREST AND DIVIDEND INCOME
Loans, including fees $10,716 $ 9,850 $ 7.502
Federal funds sold and other 472 687 1,110
Investment securities:
Held to maturity 167 182
Available for sale 561 1,168 1,640
------- -------- -------
TOTAL INTEREST AND DIVIDEND INCOME 11,749 11,872 10,434
------- -------- -------
INTEREST EXPENSE
Deposits 3,593 3,385 2,516
Federal funds purchased and securities
sold under agreements to repurchase 235 903 1,589
Advances from Federal Home Loan Bank 207 415
------- -------- -------
TOTAL INTEREST EXPENSE 4,035 4,703 4,105
------- -------- -------
Net interest income 7,714 7,169 6,329
- -------------------
Provision for loan losses 479 455 300
------- -------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,235 6,714 6,029
------- -------- -------
NONINTEREST INCOME
Service charges on deposit accounts 727 658 523
Merchant credit card processing 1,320 714 412
Gain (loss) from sales of loans 9 45
Gain (loss) on sales of available-for-sale securities 118 (19) 2
Other noninterest income 764 814 1,087
------- -------- -------
Total noninterest income 2,938 2,212 2,024
- ------------------------ ------- -------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,882 3,856 3,703
Merchant credit card processing 1,131 625 390
Occupancy and equipment 1,055 877 805
Other noninterest expense 2,276 1,834 1,617
------- -------- -------
Total noninterest expense 8,344 7,192 6,515
- ------------------------- ------- -------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,829 1,734 1,538
Income tax expense 589 524 463
------- -------- -------
NET INCOME $ 1,240 $ 1,210 $ 1,075
------- -------- -------
Basic earnings per share of common stock(*) $ 1.29 $ 1.21 $ 1.03
Diluted earnings per share of common stock(*) $ 1.22 $ 1.20 $ 1.03
(*)Retroactively adjusted for the shares issued pursuant to the 2001
three-for-two stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, and 1999 (in thousands, except share and
per share data):
ACCUMULATED
OTHER
COMMON COMPRE-
COMMON STOCK COMMON HENSIVE TOTAL
STOCK AND STOCK RETAINED INCOME STOCKHOLDERS'
SHARES SURPLUS PAR VALUE SURPLUS EARNINGS (LOSS) EQUITY
------- -------- -------- -------- -------- ---------- ------------
BALANCE AT JANUARY 1, 1999 697,264 $ $ 6,972 $ 5,028 $ 1,404 $ 129 $ 13,533
Comprehensive income
Net income 1,075 1,075
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
securities available for sale,
net of deferred income tax
benefit of $(155) (300)
Reclassification adjustments included
in net income (2) (302)
--------
Total comprehensive income 773
Cash dividends ($.147 per share)(*) (154) (154)
Transfer of undivided profits to surplus 1,250 (1,250)
------- -------- ------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999 697,264 6,972 6,278 1,075 (173) 14,152
======= ======== ======= ======== ======= ======== ========
Comprehensive income
Net income 1,210 1,210
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income tax of $73 141
Reclassification adjustments included
in net income, net of deferred
income tax of $6 13 154
-------
Total comprehensive income 1,364
Cash dividend ($.153 per share)(*) (161) (161)
Repurchase of common stock (33,802) (338) (440) (778)
------- ------- ------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2000 663,462 6,634 5,838 2,124 (19) 14,577
======= ======== ======= ======== ======= ======== ========
Comprehensive income
Net income 1,240 1,240
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income tax of $63 122
Reclassification adjustments
included in net income, net of
deferred income tax benefit of $(40) (79) 43
-------
Total comprehensive income 1,283
Cumulative effect of reclassifying certain
securities from held to maturity
to available for sale as of June 1, 2001,
net of deferred income tax of $16 31 31
Cash dividend ($.167 per share)(*) (166) (166)
Change in par value of common stock
from $10 to$1 (5,971) 5,971
Change in par value from $1 to no par value 11,475 (623) (10,852)
Repurchase of common stock (40,700) (40) (957) (997)
Three-for-two stock split 311,355
Exercise of stock options 700 10 10
------- -------- ------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 2001 934,817 $ 11,485 $ 0 $ 0 $ 3,198 $ 55 $ 14,738
======= ======== ======= ======== ======= ======== ========
(*)Retroactively adjusted for the shares issued pursuant to the 2001
three-for-two stock split. The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 (in thousands): 2001 2000 1999
- -------------------------------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,240 $ 1,210 $ 1,075
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 369 324 310
Provision for loan losses 479 455 300
(Gain) loss from sales of investment securities (118) 19 (2)
(Gain) on sales of loans (9) (45)
Gain on sale of other assets (158)
Net amortization of premium (accretion of
discount) on investment securities 23 36 90
Federal Home Loan Bank stock dividends (80) (71) (75)
Other changes, net 46 416 166
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,792 2,344 1,864
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of
investments securities 12,269 14,711 16,409
Purchases of investment securities (12,147) (12,364)
Net increase in loans (9,594) (23,707) (13,579)
Proceeds from sales of loans 138 1,144
Proceeds from sales of other assets 158
Purchases of premises and equipment (1,247) (629) (347)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (10,423) (8,481) (9,881)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 308 (2,058) (727)
Net increase in interest-bearing deposits 4,611 18,617 3,009
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (2,389) (29,627) (10,657)
Advances from Federal Home Loan Bank 2,005 12,000
Repayment of advances from Federal Home Loan Bank (10,000)
Repurchase of common stock (997) (778)
Proceeds from exercise of stock options 10
Dividends paid (166) (161) (154)
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,382 (12,007) (8,529)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (5,249) (18,144) (16,546)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,415 40,559 57,105
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,166 $ 22,415 $ 40,559
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 3,985 $ 4,618 $ 4,133
Income taxes paid 757 564 479
Total change in unrealized gains (losses)
on available-for-sale securities 184 214 (458)
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: EvergreenBancorp, Inc. "Bancorp" was formed February 9, 2001 and
is a Washington corporation chartered as a bank holding company. Bancorp holds
all of the issued and outstanding shares of EvergreenBank (the "Bank"). The Bank
is a Washington state chartered financial institution that engages in general
commercial and consumer banking operations. Deposits in the Bank are insured by
the Federal Deposit Insurance Corporation (the "FDIC").
The Bank offers a broad spectrum of personal and business banking services,
including commercial, consumer and real estate lending. The Bank's offices are
centered in the Puget Sound region in the Seattle, Lynnwood and Bellevue
communities.
HOLDING COMPANY INFORMATION: The Bank became a wholly owned subsidiary of
Bancorp on June 20, 2001 in accordance with the Plan and Agreement of
Reorganization and Merger dated February 14, 2001 (the "Plan"), and provided
that each share of the Bank's common stock be exchanged for an equal number of
shares of the common stock of Bancorp. The Plan also provided that the
reorganization be treated similarly to a "pooling of interest" for accounting
and financial reporting purposes. Accordingly, the capital accounts of the Bank
as of June 20, 2001 were carried forward, without change, as the capital
accounts of Bancorp.
ACCOUNTING: The accounting and reporting policies of Bancorp and the Bank,
collectively referred to as the "Company" throughout these financial statements,
conform to accounting principles generally accepted in the United States of
America. The following is a description of the more significant of these
policies.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES: The accompanying consolidated
financial statements include the combined accounts of Bancorp and the Bank, for
all years reported. Significant intercompany balances and transactions have been
eliminated.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
with the general practices in the banking industry. The preparation of financial
statements in conformity with these principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, including contingent amounts, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates particularly susceptible to possible changes in the near term relate
to the determination of the allowance for losses on loans, the carrying values
of securities, and deferred tax assets. An estimate of possible changes or range
of possible changes cannot be made related to these items.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand, cash
items, clearings and exchanges, amounts due from correspondent banks,
interest-bearing deposits in other financial institutions, and federal funds
sold. Federal funds sold generally mature within one to four days from the
transaction date.
INVESTMENT SECURITIES: Securities purchased with the positive intent and ability
to hold to maturity are reported at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income using the
interest method. Securities classified as available for sale are reported at
fair value, with the net unrealized gains or losses, net of tax effect, reported
in other comprehensive income (loss), a separate component of stockholders'
equity. Realized gains or losses on securities sold are based on the net
proceeds and adjusted book values of the securities sold, using the specific
identification method. The Company does not engage in any trading activity.
LOANS: Loans are reported at the principal amount outstanding, net of unearned
income. Unearned income, which includes deferred fees net of deferred direct
incremental loan origination costs, is amortized to interest income generally
over the contractual life of the loan using an interest method or the
straight-line method if not materially different. Loans are classified according
to the purpose of the loan and the use of loan proceeds. Interest on loans is
calculated using the simple interest method on the daily balance of the
principal amount outstanding.
Interest accrual is discontinued on loans 90 days or more past due when the
collateral is inadequate to cover principal and interest. If management believes
that collection is doubtful after considering relevant conditions, accrual of
interest is discontinued immediately. Accrued interest on nonaccruing loans is
charged against interest income when a loan is transferred to the nonaccruing
classification.
Impairment of a loan occurs when, based on current information and events, it is
probable that all amounts due according to the contractual terms of the loan
agreement are not expected to be collected. Impaired loans are carried at the
present value of expected future cash flows or the fair value of the related
collateral, if the loan is considered to be collateral dependent. Impaired loans
consist of nonperforming loans and troubled debt restructuring. Nonperforming
loans are loans 90 days or more delinquent as to principal and interest payments
unless the loan is well secured. Troubled debt restructuring are loans which
have been modified based upon interest rate concessions and/or payment
concessions.
Other real estate owned, acquired through partial or total satisfaction of
loans, is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable loan losses. The allowance for loan losses is increased
by provisions charged to expense and by recoveries on loans previously charged
off. Loans are charged against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely. The determination
of the level of the allowance for loan losses rests upon various
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
judgements and assumptions, including general economic conditions, changes in
the nature and volume of the composition of the loan portfolio, overall loan
portfolio quality, value of pledged collateral, review of specific problem
loans, evaluation of credit risk related to certain individual borrowers, and
the ongoing review process.
The Company considers the allowance for loan losses adequate to cover losses
inherent in the loan portfolio, including loan commitments and standby and other
letters of credit. While currently available information is used to provide for
losses on loans, additions to the allowance for losses on loans may be necessary
based on new information and/or future economic conditions or events.
PREMISES AND EQUIPMENT: Premises and equipment include leasehold improvements
and are stated at cost, less accumulated depreciation and amortization on the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the related leases. The Company leases the premises upon
which it conducts business. Furniture and equipment are leased as needed by the
Company under a master lease. Maintenance, repairs, taxes, and insurance are
charged to noninterest expense.
INCOME TAXES: Income tax expense is based on the amounts reported in the
statements of income. Consolidated federal income tax returns are filed in which
the taxable income or loss of the Bancorp is combined with that of the Bank. The
Bank's share of income tax expense (benefit) is based on the amount which would
be payable (receivable) if separate returns were filed. Certain items of income
and expense are recognized for financial reporting purposes in different years
than they are recognized for income tax reporting purposes. Income taxes
applicable to these temporary differences are deferred and are included in other
assets. The effect on deferred income taxes for a change in tax rates is
recognized through the provision for income taxes during the period of
enactment.
COMPREHENSIVE INCOME: Comprehensive income includes both net income and other
comprehensive income elements, including the change in unrealized gains and
losses on securities available-for-sale, net of income tax.
REPURCHASE AGREEMENTS: The liability to repurchase securities sold under
agreements to repurchase represents amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by
federal deposit insurance.
POSTRETIREMENT HEALTH CARE BENEFITS: The liability for postretirement benefits
is reported by recognizing the expense for such benefits over the period
services are rendered by employees.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The following
methods and assumptions were used by the Company in estimating fair values of
financial instruments:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS. The book values of cash and due from banks,
interest-bearing deposits in financial institutions, and federal funds sold
approximate their fair values.
INVESTMENT SECURITIES. Fair values of held-to-maturity securities and
available-for-sale securities are based on quoted market prices.
LOANS. For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on book values. Fair values for
fixed-rate loans are estimated using discounted cash flow analysis based on
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where applicable.
ACCRUED INTEREST AND OTHER ASSETS. The book values of accrued interest and other
assets approximate their fair values.
DEPOSITS. The fair values of demand deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their book values). The
book values of variable rate money market accounts and certificates of deposit
approximate their fair values. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis based on interest
rates currently being offered on similar certificates.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The
book values of federal funds purchased and securities sold under agreements to
repurchase approximate their fair values.
ADVANCES FROM FEDERAL HOME LOAN BANK. Fair values of advances from Federal Home
Loan Bank are estimated using a discounted cash flow analysis based on interest
rates currently being offered on advances with similar terms and remaining
maturities.
OFF-BALANCE-SHEET ITEMS. Fair values for off-balance-sheet lending commitments
are based on fees currently charged to enter into similar agreements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has adopted Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement was adopted to reclassify
certain securities from held-to-maturity to available-for- sale, as permitted.
The Company does not currently participate in derivative or hedging activities.
SEGMENT DISCLOSURE: The Company has no operating segments at this time, and
therefore the information to be reported about operating segments is not
applicable.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based compensation plans, including employee stock purchase
plans, stock options and restricted stock. SFAS No. 123 encourages all entities
to adopt a fair value method of accounting for stock-based compensation plans,
whereby compensation cost is measured at the grant date based upon the fair
value of the award and is realized as an expense over the service or vesting
period. However, SFAS No. 123 also allows an entity to continue to measure
compensation cost for these plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Stock-based awards to employees and directors are accounted for using the
intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25. Under the intrinsic value method, compensation cost is
generally the excess, if any, of the quoted market price of the stock at the
grant or other measurement date over the exercise price. See Note 13 for a pro
forma presentation of net income and earnings per share had compensation cost
related to stock option awards been determined under the fair value method.
EARNINGS PER SHARE: Basic earnings per share are calculated by dividing net
earnings or loss for the period by the weighted-average common shares
outstanding for that period. There is no adjustment to the number of outstanding
shares for potential dilutive instruments, such as stock options. Diluted
earnings per share takes into account the potential dilutive impact of such
instruments and uses the average share price for the period in determining the
number of incremental shares to add to the weighted-average number of shares
outstanding. Earnings per share have been adjusted retroactively for all periods
presented in recognition of the 2001 three-for-two stock split.
DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends that may be paid by the
Bank to Bancorp or by Bancorp to stockholders.
RECLASSIFICATIONS: Certain items in prior years' financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications did not change previously reported stockholders' equity or net
income.
NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS
Federal Reserve Board regulations require that the Company maintain certain
minimum reserve balances with the Federal Reserve Bank. The amounts of such
balances at December 31, and 2000 were approximately $922,000 and $823,000,
respectively.
NOTE 3: INVESTMENT SECURITIES
Securities previously classified as "held to maturity" were reclassified on June
1, 2001 to the "available for sale" category as part of the balance sheet
restructuring resulting from withdrawing from
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
check clearing activities. The reclassification increased the carrying amount of
investment securities by $46,000. Accumulated other comprehensive income also
was increased by $31,000, and the deferred income tax liability was increased by
$16,000.
Subsequent to the reclassification and after June 20, 2001, certain securities
which had been reclassified were sold. A gain of $38,000 was realized on the
sales.
Amortized cost, unrealized gains and losses, and approximate market value of
investment securities were as follows (in thousands):
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- --------- ---------- -------
DECEMBER 31, 2001
U.S. Treasury and agencies $ 2,012 $ 32 $ $ 2,044
States and political subdivisions 1,768 42 1,810
AMF Adjustable Rate Mortgage Portfolio 10,127 10 10,137
Federal Home Loan Bank stock 1,223 1,223
------- ------- ------ -------
Total available-for-sale securities 15,130 84 15,214
------- ------- ------ -------
TOTAL $15,130 $ 84 $ $15,214
======= ======= ======= ========
DECEMBER 31, 2000
States and political subdivisions $ 3,305 $ 3 $ 9 $ 3,299
------- ------- ------- --------
Total held-to-maturity securities 3,305 3 9 3,299
------- ------- ------- --------
U.S. Treasury and agencies 8,002 2 36 7,968
States and political subdivisions 2,628 9 5 2,632
Federal Home Loan Bank stock 1,143 1,143
------- ------- ------- -------
Total available-for-sale securities 11,773 11 41 11,743
------- ------- ------- -------
TOTAL $15,078 $ 14 $ 50 $15,042
======= ======= ======= ========
The scheduled maturities of available-for-sale securities at December 31, 2001,
were as follows (in thousands):
Amortized Market
cost value
---------- --------
Due in one year or less $12,910 $12,946
Due after one year through five years 2,210 2,258
Due after five years through 10 years 10 10
Due after 10 years
------- -------
Total $15,130 $15,214
======= =======
Investment securities with a book value of $1,009,000 and $9,002,000 and a
market value of $1,026,000 and $8,964,000 at December 31, 2001 and December 31,
2000, respectively, were pledged to secure public deposits, securities sold
under agreements to repurchase, and for other purposes required or permitted by
law. Interest earned on tax-exempt securities in 2001, 2000, and 1999 was
$177,000, $258,000, and $223,000, respectively. The Company is required to
maintain a minimum
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investment in the stock of the Federal Home Loan Bank of Seattle ("FHLB") based
on certain percentages of outstanding mortgage loans or advances from FHLB. At
December 31, 2001, the minimum required investment was $398,000, which the
Company exceeded. The Federal Home Loan Bank stock is a restricted security,
carried at cost, and evaluated for impairment. Dividend income from the Federal
Home Loan Bank stock was $81,000, $71,000, and $76,000 for 2001, 2000, and 1999,
respectively.
NOTE 4: LOANS
The Company originates loans primarily in King, Snohomish, and Pierce counties.
Although the Company has a diversified loan portfolio, local economic conditions
may affect the borrower's ability to meet stated repayment terms. Collateral
may, depending on the loan, include accounts receivable, inventory, equipment,
and real estate. Loans are originated at both fixed and variable rates.
Loans at December 31 consisted of the following (in thousands):
2001 2000
-------- --------
Commercial and financial $ 53,791 $ 46,265
Real estate mortgage 42,291 39,605
Real estate construction 7,002 5,187
Consumer 18,911 21,726
Other including overdrafts 224 275
Total $122,219 $113,058
======== ========
The book value of impaired loans was $553,000 at December 31, 2001, and $277,000
at December 31, 2000. The specific allocation of the allowance for loan losses
made for impaired loans was $74,000 for 2001 and $123,000 for 2000. No
allocation of the allowance for loan losses was considered necessary for the
remaining impaired loans of $479,000 and $154,000 at December 31, 2001 and 2000,
respectively. The daily average balance of impaired loans was $354,000,
$770,000, and $431,000 for 2001, 2000, and 1999, respectively. The Company
applies payments to the principal balance due on impaired loans before it
recognizes any interest income. The Company did not recognize any interest
income on impaired loans in 2001 or 2000.
Past-due and nonaccrual loans at December 31 were as follows (in thousands):
2001 2000
---- ----
Loans past due 90 days
or more and still accruing $602 $278
Loans accounted for on a nonaccrual basis 553 277
If interest on these nonaccrual loans had been
recognized, such income would have been 22 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loans at December 31, 2001, by maturity or repricing date were as follows (in
thousands):
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- --------
Due in one year or less $ 11,546 $ 48,499 $ 60,045
Due after one year through five years 57,338 57,338
Due after five years 4,283 4,283
-------- -------- --------
TOTAL $ 73,167 $ 48,499 $121,666
-------- -------- --------
Loans on which the accrual of interest has been discontinued 553
--------
TOTAL $122,219
========
Unamortized deferred loan fees net of unamortized origination costs were
$351,000 and $313,000 at December 31, 2001 and 2000, respectively.
The aggregate amount of loans serviced for others, including loan participations
and the sold portion of U.S. Government guaranteed loans, was $7,251,000 at
December 31, 2001.
At December 31, 2001 and 2000, loans aggregating $21,626,000 and $21,760,000,
respectively, were reported as available as collateral for the advances from the
Federal Home Loan Bank of Seattle, as described in Note 8.
TRANSACTIONS WITH DIRECTORS, OFFICERS, AND OTHERS: The Company has had, and
expects to have in the future, banking transactions in the ordinary course of
its business with directors, executive officers, principal stockholders, and
their associates, on the same terms -- including interest rates and collateral
on loans -- as those prevailing at the time for comparable transactions with
others. In the opinion of management, such transactions did not involve more
than a normal risk for collectibility or present any other unfavorable features.
The aggregate dollar amount of these loans (exclusive of loans to any such
persons that in the aggregate do not exceed $60,000) was $1,423,000 and
$1,542,000 at December 31, 2001 and 2000, respectively. During 2001, there were
additions of $518,000, and repayments on such loans were $637,000. At no time
during 2001 or 2000 did the aggregate extensions of credit to such persons as a
group exceed 20 percent of the Bank's total stockholders' equity. At no time
during 2001 or 2000 did the aggregate extensions of credit to such persons
together with his or her associates exceed 10 percent of the Bank's total
stockholders' equity.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows (in thousands):
2001 2000 1999
------- ------- -------
Balance at January 1 $ 1,323 $ 1,055 $ 907
Recoveries credited to the allowance 57 75 14
Provision for loan losses 479 455 300
Loans charged off (361) (262) (166)
------- ------- -------
Balance at December 31 $ 1,498 $ 1,323 $ 1,055
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amounts of $305,000, $208,000, and $166,000, deducted for federal income tax
purposes in 2001, 2000, and 1999, respectively, are the maximum amounts that
could have been deducted for federal income tax purposes, and $278,000,
$277,000, and $255,000, respectively, are the balances of the allowance at the
end of the periods as reported for federal income tax purposes.
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following (in thousands):
2001 2000 1999
------- ------- -------
Equipment and furniture $ 2,726 $ 2,157 $ 1,625
Leasehold improvements 1,245 595 498
Accumulated depreciation and amortization (2,046) (1,701) (1,377)
------- ------- -------
TOTAL $ 1,925 $ 1,051 $ 746
======= ======= =======
Depreciation and amortization expense amounted to $369,000, $324,000, and
$310,000 for 2001, 2000, and 1999, respectively.
Note 7: Deposits
The average rate paid on deposits was 3.90 percent for 2001 and 4.34 percent for
2000. Time certificates of deposit in denominations of $100,000 or more
aggregated $21,993,000 and $19,735,000 at December 31, 2001 and 2000,
respectively. Interest expense on time deposits of $100,000 or more in 2001,
2000, and 1999 was $1,132,000, $785,000, and $350,000, respectively.
The scheduled maturities of certificates of deposits at December 31, 2001, were
as follows (in thousands):
2002 $43,044
2003 1,139
2004 1,059
2005 -0-
Thereafter -0-
-------
Total $45,242
=======
NOTE 8: FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE,
AND ADVANCES FROM FHLB
The daily average amount outstanding for federal funds purchased and securities
sold under agreements to repurchase was $6,527,000 for 2001 and $15,865,000 for
2000. The weighted average interest rate was 3.60 percent during 2001 and 5.69
percent during 2000. The weighted average interest rate at December 31 was 1.20
percent for 2001 and 5.97 percent for 2000. The maximum amount outstanding at
the end of any month was $13,022,000 during 2001 and $25,399,000 during 2000.
The securities underlying the agreements were held by a safekeeping agent for
the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advances from Federal Home Loan Bank at December 31, 2001, aggregated $4,005,000
with maturity dates from August 2005 to April 2006, at a weighted average
interest rate of 5.91 percent. These advances were collateralized in aggregate,
as provided for in the Advance Security and Deposit Agreement with the FHLB, by
FHLB stock owned, deposits with the FHLB, qualifying first mortgage loans, and
certain U.S. Government agency securities.
NOTE 9: STOCKHOLDERS' EQUITY
Effective June 20, 2001 the Bank became a wholly owned subsidiary of Bancorp.
The reorganization resulted in a share-for-share exchange of stock whereby
stockholders of the Bank became stockholders of Bancorp. The capital accounts
of the Bank were carried forward, without change, as the capital accounts of
Bancorp.
On February 20, 2001, prior to the reorganization, the Bank amended and restated
its articles of incorporation to change the par value of its common and
preferred stock from $10 to $1 per share. This amendment was recognized in the
financial statements by transferring $5,971,000 from common stock par value to
surplus.
The articles of incorporation of Bancorp were amended and restated effective
July 31, 2001 to increase the amount of authorized common stock to 15,000,000
shares, and to change both common and preferred stock to no par value. These
amendments were recognized in the financial statements by combining the amounts
of common stock and surplus and reclassifying the total in a single category,
common stock and surplus.
Two shareholders, owning 40,700 shares of Bank common stock, exercised their
right to dissent to reorganization. These dissenting shareholders received
$24.50 for each share of Bank stock held. The Bank recognized the settlement
prior to June 20, 2001 by recording a liability to the dissenting shareholders
and payment was made following completion of the reorganization.
On May 17, 2001, Bancorp's Board of Directors approved a three-for-two stock
split payable July 31, 2001 to shareholders of record as of July 1, 2001. The
three-for-two stock split also affected stock options previously granted and
shares available for grant under the 2000 Stock Option Plan.
During February 2000, the Bank repurchased 33,802 shares (4.85 percent of the
total common shares outstanding) at $23.00 per share for a total price of
$778,000.
The Bank's Articles of Incorporation were amended in April 1999 to increase the
total authorized common stock to 10,000,000 shares.
Undivided profits of $1,250,000 were transferred to surplus on December 17,
1999.
NOTE 10: OTHER NONINTEREST INCOME
During 2001, the Bank received cash consideration of $158,000 for its
partnership interest in a company that processes debit card transactions. Income
from the partnership interest was $37,000 in 2000 and $6,000 in 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2000 the Bank withdrew from check clearing services. Gross income from this
source in 2000 and 1999 was $242,000 and $587,000, respectively. Check
processing income in 2000 includes check clearing fees of $42,000 and $200,000
related to the transfer of operations to a new check-processing provider.
NOTE 11: OTHER NONINTEREST EXPENSE
Data processing expense for services provided by PEMCO Corporation, PEMCO Mutual
Insurance Company, and PEMCO Technology Services, Inc. for 2001, 2000, and 1999
was $327,000, $315,000, and $312,000, respectively.
NOTE 12: INCOME TAXES
Income tax expense for the years ended December 31 consisted of the following
(in thousands):
2001 2000 1999
----- ----- -----
Currently payable $ 620 $ 661 $ 563
Deferred (31) (137) (100)
----- ----- -----
TOTAL $ 589 $ 524 $ 463
===== ===== =====
The components of the deferred income tax expense were as follows (in
thousands):
2001 2000 1999
----- ----- -----
Provision for loan losses in excess of
the federal income tax deduction $ (59) $ (84) $ (45)
Postretirement health care benefits (37) (23) (29)
Depreciation and other 65 (30) (26)
----- ----- -----
TOTAL $ (31) $(137) $(100)
===== ===== =====
A reconciliation between the statutory federal income tax rates (maximum of 34
percent) and the effective income tax rate was as follows (in thousands):
2001 2000 1999
----- ----- -----
Federal income tax at statutory rates $ 622 $ 590 $ 523
Decrease in taxes resulting from
tax-exempt interest income (53) (86) (76)
Nondeductible expenses and other 20 20 16
----- ----- -----
TOTAL $ 589 $ 524 $ 463
===== ===== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the deferred income tax asset included in other assets were as
follows (in thousands):
2001 2000 1999
----- ----- -----
DEFERRED TAX ASSET:
Provision for loan losses $ 415 $ 356 $ 272
Postretirement health care benefits 257 220 197
Unamortized loan fees, net of loan costs 119 106 37
Unrealized loss on available-for-sale securities 10 89
Accrued vacation pay 73 73 82
Deferred compensation 7 0 0
----- ----- -----
871 765 677
----- ----- -----
DEFERRED TAX LIABILITY:
Federal Home Loan Bank stock dividends (191) (164) (140)
Depreciation (119) (66) (60)
Unrealized gain on available-for-sale securities (28)
----- ----- -----
(338) (230) (200)
----- ----- -----
Net deferred income tax asset $ 533 $ 535 $ 477
===== ===== =====
NOTE 13: STOCK OPTION PLAN
In April of 2000, the stockholders of the Bank approved the 2000 Stock Option
Plan, that was subsequently adopted by Bancorp as a result of the holding
company formation. Options available under the Plan were adjusted for the
three-for-two stock split, and prior period amounts also have been retroactively
adjusted.
The Plan provides for the granting of non-qualified and incentive stock options
for up to 99,000 common shares to certain employees and directors. Non-qualified
stock options granted to employees vest over a 5-year period and expire 10 years
from the date of the grant. Non-qualified stock options granted to directors
vest over a 3-year period and expire 3 years from the date of the grant. At
December 31, 2001, options for 41,475 shares were available for future grants
under the Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for the
Plan. No compensation cost has been recognized for the stock options awarded
during 2001 and 2000. Had compensation cost for the awards granted during 2001
and 2000 been determined based on the fair value method at the grant date,
consistent with the alternative method described in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (in thousands) and earnings per share would have been
reduced to the pro forma amounts indicated below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2001 2000
------ ------
NET INCOME:
As reported $1,240 $1,210
Pro forma 1,132 1,206
BASIC EARNINGS PER SHARE OF COMMON STOCK:
As reported 1.29 1.21
Pro forma 1.18 1.21
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
As reported 1.22 1.20
Pro forma 1.12 1.20
====== ======
The weighted average fair value of the options granted during 2001 and 2000 was
$4.36 and $4.53, respectively. The 2001 fair value was estimated as of the date
of grant, based on the Black-Scholes valuation model with the following
weighted-average assumptions: risk-free interest rate of 5.21 percent; expected
life of 7.38 years; annual dividend yield of 1.7 percent; and expected
volatility of .22.
Stock option transactions were as follows:
2001 2000
------------------------- -------------------------
WEIGHTED-AVERAGE Weighted-average
SHARES EXERCISE PRICE Shares exercise price
------ --------------- ------- ---------------
Outstanding at the beginning of the year 32,775 $14.417
Granted 29,250 14.810 32,775 $14.417
Exercised (700) 14.417
Forfeited (4,500) 14.642
Outstanding at the end of the year 56,825 14.601 32,775 14.417
====== ====== ====== =======
Additional information concerning outstanding stock options was as follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF
WEIGHTED-AVERAGE NUMBER OF REMAINING EXERCISE PRICE OF THE EXERCISABLE
YEARS EXERCISE PRICE OPTION SHARES CONTRACTUAL LIFE OPTION SHARES OPTION SHARES
- ---- --------------- ------------- ----------------- --------------------- -------------
2001 $14.810 27,000 9.12 $14.806
2000 14.417 29,825 7.43 14.417 6,205
======= ====== ==== ======= =====
NOTE 14: EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share of common stock is computed on the basis of the
weighted average number of common stock shares outstanding adjusted for the
three-for-two stock split. Diluted earnings per share of common stock is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of the assumed conversion of outstanding stock
options adjusted for the 2001 three-for-two stock split.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted earnings per share of common stock is as follows (in
thousands, except share and per share data):
2001 2000 1999
---------- ---------- ----------
INCOME (NUMERATOR):
Net Income $ 1,240 $ 1,210 $ 1,075
---------- ---------- ----------
SHARES (DENOMINATOR):
Weighted average number of common stock
shares outstanding - basic 962,622 1,000,458 1,045,896
Dilutive effect of outstanding employee and
director stock options 51,383 6,267
---------- ---------- ----------
Weighted average number of common
stock shares outstanding and assumed
conversions - diluted 1,014,005 1,006,725 1,045,896
---------- ---------- ----------
Basic earnings per share of common stock $ 1.29 $ 1.21 $ 1.03
Diluted earnings per share of common stock 1.22 1.20 1.03
========== ========== ==========
NOTE 15: RETIREMENT PLAN
The Company participates in a multi-employer defined contribution retirement
plan. The 401(k) plan permits all salaried employees to contribute up to a
maximum of 10 percent of gross salary per month. For the first 6 percent, the
Company contributes two dollars for each dollar the employee contributes.
Partial vesting of Company contributions to the Plan begins at 30 percent after
three years of employment and such contributions are 100 percent vested with
five years of employment. The Company's contributions to the Plan for 2001,
2000, and 1999 were $270,000, $281,000, and $275,000, respectively.
NOTE 16: POSTRETIREMENT HEALTH CARE BENEFITS
The Company participates in multi-employer defined benefit postretirement health
care plans that provide medical and dental coverage to directors and surviving
spouses and to employees who retire after age 62 and 15 years of full-time
service and their dependents. The medical and dental plans are noncontributory
and nonfunded.
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires that employers recognize the cost of
providing postretirement benefits over an employee's active service period. Net
periodic postretirement benefit cost under SFAS No. 106 was $125,000 in 2001,
$76,000 in 2000, and $93,000 in 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic postretirement benefit cost for 2001, 2000, and 1999 included the
following components (in thousands):
2001 2000 1999
----- ----- -----
Service cost $ 40 $ 27 $ 37
Interest cost 58 40 40
Amortization of transition obligation 41 41 41
Recognized actuarial (gain) loss (14) (32) (25)
----- ----- -----
Net periodic benefit cost $ 125 $ 76 $ 93
===== ===== =====
A reconciliation of the benefit obligation at the beginning and ending of the
year and the effects attributable to each cost component for 2001, 2000, and
1999 are as follows (in thousands):
2001 2000 1999
----- ----- -----
Benefit obligation at beginning of year $ 606 $ 543 $ 520
Service cost 40 27 37
Interest cost 58 40 40
Actuarial (gain) loss 224 6 (47)
Benefits paid (14) (10) (7)
----- ----- -----
Benefit obligation at end of year $ 914 $ 606 $ 543
===== ===== =====
The fair value of plan assets at the beginning and ending of the year and the
changes during 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999
---- ---- ----
Fair value of plan assets at beginning of year $ 0 $ 0 $ 0
Employer contribution 14 10 6
Benefits paid (14) (10) (6)
---- ---- ----
Fair value of plan assets at end of year $ 0 $ 0 $ 0
==== ==== ====
The funded status (the excess of the benefit obligation over the fair value of
plan assets at the end of the year) of the plan is reconciled to the accrued
benefit cost at December 31, 2001, 2000, and 1999, as follows (in thousands):
2001 2000 1999
----- ----- -----
Funded status $(914) $(606) $(543)
Unrecognized transition obligation 448 489 530
Unrecognized actuarial gain (290) (530) (567)
----- ----- -----
Accrued benefit cost $(756) $(647) $(580)
===== ===== =====
The weighted-average discount rate used in the accounting for the plan was 7.0
percent for 2001, 7.25 percent for 2000, and 7.5 percent for 1999.
The assumed rate of increase for 2001 in per capita cost of covered benefits is
9.5 percent for medical benefits and 8.5 percent for dental benefits. The rate
for medical benefits was assumed to decrease gradually to 5.0 percent in 2011
and remain at that level thereafter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assumed health-care-cost trend rates have a significant effect on the amounts
reported for the health care plans. A one- percentage-point change in assumed
health-care-cost trend rates would have the following effects (in thousands):
1-percentage- 1-percentage-
point increase point decrease
-------------- --------------
Effect on total of service and interest cost components $ 22 $ (17)
Effect on benefit obligation 170 (135)
============== ==============
NOTE 17: LEASES
The Company leases premises and parking facilities for the Seattle and Lynnwood
offices from PEMCO Mutual Insurance Company under leases expiring on March 31,
2002. The Company leases the Bellevue office premises from another party. The
lease expires May 31, 2011.
Furniture and equipment is leased from PEMCO Corporation. Total rental expense,
including amounts paid under month-to-month cancelable leases, amounted to
$587,000, $401,000, and $410,000 for 2001, 2000, and 1999, respectively.
The future minimum rental commitments as of December 31, 2001, for all
noncancelable leases are as follows:
FURNITURE AND PARKING
YEARS PREMISES(*) EQUIPMENT FACILITIES TOTAL
- ----- ---------- ------------- ---------- --------
2002 $198,000 $ 18,000 $ 30,000 $246,000
2003 98,000 2,000 100,000
2004 101,000 101,000
2005 104,000 104,000
2006 107,000 107,000
Thereafter 514,000 514,000
========= ======== ======== ========
(*)Based on 2001 expense.
NOTE 18: AGREEMENTS WITH RELATED PARTIES
The Company shares common services and support activities with other companies
located at PEMCO Financial Center. Those companies include PEMCO Insurance
Company, PEMCO Mutual Insurance Company, PEMCO Life Insurance Company, PEMCO
Foundation Inc., PEMCO Corporation, PEMCO Technology Services, Inc., Public
Employees Insurance Agency Inc., and Washington School Employees Credit Union.
Such shared functions include data processing, human
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
resources, employee benefits, marketing, and purchasing. The Company has sold
U.S. government securities to these companies under agreements to repurchase.
Approximately 7.8 percent of the depository business of the Company is conducted
with those companies.
Two of the members of the boards of directors of Bancorp and the Bank are also
minority directors of one or more of the other companies located at PEMCO
Financial Center, except for the Washington School Employees Credit Union.
NOTE 19: COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments and contingent
liabilities (such as guarantees, commitments to extend credit, letters of
credit, and lines of credit) that are not presented in the financial statements.
Such off-balance-sheet items are recognized in the financial statements when
they are funded or related fees are received. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. The off-balance-sheet items do not represent
unusual elements of credit risk in excess of the amounts recognized in the
balance sheets.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding as set forth in Note 4. Commercial and standby letters of
credit and similar arrangements are granted primarily to commercial borrowers.
The Company is not aware of any claims or lawsuits that would have a materially
adverse effect on the financial position of the Company.
The Company's significant commitments and contingent liabilities at December 31
were as follows (in thousands):
2001 2000
------- -------
Commitments to extend credit $34,052 $33,316
Standby letters of credit and similar arrangements 278 69
Other letters of credit -0- -0-
======= =======
NOTE 20: CONCENTRATION OF CREDIT RISK
All of the Company's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Company's market area. Most of
those customers also are depositors of the Company. The concentrations of credit
by type of loan are set forth in Note 4.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001, amounts on deposit with other financial institutions
include $1,505,000 in excess of the deposit insurance limit of $100,000 per
institution. At December 31, 2001, deposits included $10,209,000 from other
companies located at PEMCO Financial Center.
NOTE 21: FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows (in thousands):
2001 2000
--------------------- ---------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and cash equivalents $ 17,166 $ 17,166 $ 22,415 $ 22,415
Investment securities:
Held to maturity 3,305 3,299
Available for sale 15,214 15,214 11,743 11,743
Net loans 120,721 122,092 111,735 111,701
Accrued interest and other assets 1,339 1,339 1,498 1,498
-------- -------- -------- --------
TOTAL $154,440 $155,811 $150,696 $150,656
-------- -------- -------- --------
FINANCIAL LIABILITIES
Deposits $130,344 $132,134 $125,425 $124,837
Federal funds purchased and securities
sold under agreements to repurchase 5,597 5,597 7,986 7,986
Advances from Federal Home Loan Bank 4,005 4,168 2,000 2,046
-------- -------- -------- --------
TOTAL $139,946 $141,899 $135,411 $134,869
-------- -------- -------- --------
OFF-BALANCE-SHEET ITEMS
Commitments to extend credit $ 34,052 $ 33,316
Standby letters of credit and similar arrangements 278 69
-------- -------- -------- --------
TOTAL $ 34,330 $ 33,385
======== ======== ======== ========
The fair value estimates presented herein are based on information available to
management as of December 31, 2001 and 2000. The amounts for December 31, 2000
have not been comprehensively revalued for purposes of these financial
statements. Therefore, current estimates of 2000 fair value may differ from the
amounts presented above.
NOTE 22: RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on the payment
of dividends by the Bank to Bancorp. The total amount of dividends which may be
paid at any date is generally limited to the accumulated profits of the Bank. In
addition, dividends paid to Bancorp by the Bank would be prohibited if the
effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements. There also are certain restrictions on the loans
or advances the Bank is permitted to make to the Bancorp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: REGULATORY CAPITAL REQUIREMENTS
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet the minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under the capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital adequacy guidelines that involve
quantitative measures of each entity's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. Capital
amounts and classifications also are subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain the minimum amounts and
ratios of total capital to risk-weighted assets, Tier 1 capital to risk-weighted
assets, and Tier 1 capital to average assets as set forth in the table below.
Under the regulatory framework for prompt corrective action, the Company must
maintain other minimum risk-based ratios as set forth in the table.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company
must maintain the minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios set forth in the table. There are no conditions or events since
that notification that management believes have changed the Company's category.
The actual capital amounts (in thousands) and ratios of the Bank are presented
in the table below.
MINIMUM TO BE WELL
CAPITALIZED UNDER THE
MINIMUM FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ---- ------- -----
DECEMBER 31, 2001
Total capital (to risk-weighted assets) $16,099 12.71% $10,131 8.00% $12,663 10.00%
Tier 1 capital (to risk-weighted assets) 14,601 11.53 5,065 4.00 7,598 6.00
Tier 1 capital (to average assets)(1) 14,601 9.68 6,032 4.00 7,540 5.00
DECEMBER 31, 2000
Total capital (to risk-weighted assets) $15,919 13.70% $ 9,293 8.00% $11,616 10.00%
Tier 1 capital (to risk-weighted assets) 14,596 12.57 4,646 4.00 6,970 6.00
Tier 1 capital (to average assets)(1) 14,596 9.63 6,061 4.00 7,576 5.00
======= ===== ======= ==== ======= =====
(1) Also referred to as the leverage ratio
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The following are a condensed balance sheet at December 31, 2001, and the
related condensed statements of income and cash flows for the period June 21,
2001 to December 31, 2001 for EvergreenBancorp, Inc., without including the
accounts of its subsidiary, EvergreenBank:
CONDENSED BALANCE SHEET (in thousands):
ASSETS:
Due from EvergreenBank $ 83
Investment in EvergreenBank 14,655
--------
TOTAL ASSETS $ 14,738
--------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Stockholders' equity:
Preferred stock $
Common stock and surplus 11,485
Retained earnings 3,198
Accumulated other comprehensive income 55
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,738
========
CONDENSED STATEMENT OF INCOME (in thousands):
INCOME:
Dividend from EvergreenBank $ 75
EXPENSE:
Registered transfer agent fee 3
--------
Income before income tax benefit and equity in
undistributed income of subsidiary 72
Income tax benefit 1
Equity in undistributed income of subsidiary 551
NET INCOME $ 624
========
CONDENSED STATEMENT OF CASH FLOWS (in thousands):
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 624
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiary (551)
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10
--------
NET INCREASE IN CASH 83
CASH ON DEPOSIT WITH EVERGREENBANK AT DATE OF INCORPORATION 0
--------
CASH ON DEPOSIT WITH EVERGREENBANK AT END OF YEAR $ 83
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: SELECTED QUARTERLY DATA (UNAUDITED)
(In thousands, except per share data):
QUARTER ENDED
---------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
1999
Interest and dividend income $ 2,595 $ 2,530 $ 2,616 $ 2,693 $10,434
Interest expense 1,098 1,000 997 1,010 4,105
Net interest income 1,497 1,530 1,619 1,683 6,329
Provision for loan losses 75 75 75 75 300
Net interest income after provision
for loan losses 1,422 1,455 1,544 1,608 6,029
Noninterest income 439 508 527 550 2,024
Noninterest expense 1,536 1,586 1,647 1,746 6,515
Income before income tax expense 325 377 424 412 1,538
Income tax expense 104 120 136 103 463
Net income 221 257 288 309 1,075
Basic and diluted earnings per share(*) 0.21 0.25 0.28 0.29 1. 03
2000
Interest and dividend income $ 2,730 $ 2,939 $ 3,079 $ 3,124 $11,872
Interest expense 1,022 1,161 1,267 1,253 4,703
Net interest income 1,708 1,778 1,812 1,871 7,169
Provision for loan losses 84 99 120 152 455
Net interest income after provision
for loan losses 1,624 1,679 1,692 1,719 6,714
Noninterest income 481 502 568 661 2,212
Noninterest expense 1,689 1,827 1,804 1,872 7,192
Income before income tax expense 416 354 456 508 1,734
Income tax expense 137 92 139 156 524
Net income 279 262 317 352 1,210
Basic earnings per share(*) 0.28 0.26 0.32 0.35 1.21
Diluted earnings per share(*) 0.28 0.26 0.32 0.34 1.20
2001
Interest and dividend income $ 2,987 $ 3,035 $ 2,944 $ 2,783 $11,749
Interest expense 1,126 1,134 993 782 4,035
Net interest income 1,861 1,901 1,951 2,001 7,714
Provision for loan losses 150 158 124 47 479
Net interest income after provision
for loan losses 1,711 1,743 1,827 1,954 7,235
Noninterest income 793 699 753 693 2,938
Noninterest expense 1,997 1,988 2,173 2,186 8,344
Income before income tax expense 507 454 407 461 1,829
Income tax expense 169 132 128 160 589
Net income 338 322 279 301 1,240
Basic earnings per share(*) 0.34 0.33 0.30 0.32 1.29
Diluted earnings per share(*) 0.33 0.31 0.28 0.30 1.22
(*)Retroactively adjusted for the shares issued pursuant to the 2001
three-for-two stock split.