FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended...................December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 0-26993
EVERTRUST FINANCIAL GROUP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1613658
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2707 Colby Ave. Suite 600, Everett, Washington 98201
----------------------------------------------------
(Address of principal executive offices and Zip code)
(425) 258-3645
----------------------------------------------------
(Registrant's telephone number, including area code)
NA
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of December 31, 1999
--------------- -----------------------
Common stock, no par value 8,986,250
EVERTRUST FINANCIAL GROUP, INC.
Table of Contents
Page
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements
of EverTrust Financial Group, Inc. filed as a part of the
report are as follows:
Consolidated Statements of Financial Condition
as of December 31, 1999 and March 31, 1999.................... 1
Consolidated Statements of Operations for the
three and nine months ended December 31, 1999 and 1998........ 2
Consolidated Statements of Comprehensive Income for the
nine months ended December 31, 1999 and 1998.................. 3
Consolidated Statements of Changes in Equity for the
nine months ended December 31, 1999 and 1998.................. 3
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1999 and 1998.............................. 4
Notes to Consolidated Financial Statements.................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
General....................................................... 7
Year 2000 Disclosure ......................................... 8
Comparison of Financial Condition at December 31 and
March 31, 1999................................................ 8
Comparison of Operating Results for the three months
ended December 31, 1999 and 1998.............................. 10
Liquidity and Capital Resources............................... 13
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................... 15
Item 2. Changes in Securities................................ 15
Item 3. Defaults upon Senior Securities ..................... 15
Item 4. Submission of Matters to Vote of Stockholders........ 15
Item 5. Other Information.................................... 15
Item 6. Exhibits and Reports on Form 8-K..................... 16
i
SIGNATURES ........................................................ 17
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
ii
EverTrust Financial Group, Inc.
Consolidated Statement of Financial Condition
December 31, 1999 and March 31, 1999
(Dollar amounts in thousands, except per share amounts)
December 31, March 31,
1999 1999
---- ----
(Unaudited)
ASSETS
Cash and cash equivalents, including interest
bearing deposits of $7,577 and $4,583 $ 16,671 $ 13,230
Securities available for sale, amortized cost
of $103,993 and $61,390 102,755 61,566
Securities held to maturity, fair value of
$12,437 and $14,317 12,289 13,866
Federal Home Loan Bank 4,216 3,994
Loan receivable, net 389,223 315,327
Loans held for sale -- 29,641
Accrued interest receivable 3,730 3,177
Premises and equipment 8,267 7,953
Prepaid expenses and other assets 7,011 3,335
-------- --------
Total Assets $544,162 $452,089
======== ========
LIABILITIES AND EQUITY
Liabilities:
Deposit accounts $380,717 $375,896
Federal Home Loan Bank advances 22,909 18,949
Accounts payable and other liabilities 3,509 $4,981
--------- ---------
Total Liabilities 407,135 399,826
--------- ---------
Equity:
Common stock - no par value, 49,000,000
shares authorized, 8,986,250 shares and
0 shares outstanding at December 31,
1999 and March 31, 1999, respectively 88,145 --
Equity contra: Loan to Employee Stock
Ownership Plan (ESOP) (1,584) --
Retained earnings 51,282 52,147
Accumulated other comprehensive income (816) 116
--------- ---------
Total Equity 137,027 52,263
--------- ---------
Total Liabilities and Equity $ 544,162 $ 452,089
========= =========
Book value per common share (1) $ 15.25 n/a
========= =========
Common shares outstanding at end of period(1) 8,986,250 --
========= =========
(1) The Company converted from a mutual to public company on September 30,
1999.
1
EverTrust Financial Group, Inc.
Consolidated Statement of Operations
For the Three Months Ended December 31, 1999 and 1998
and the Nine Months Ended December 31, 1999 and 1998
(Dollar amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans receivable $7,695 $7,183 $22,990 $21,530
Investment securities:
Taxable interest income 2,032 1,083 4,465 3,207
Tax-exempt interest income 101 95 305 274
Dividend income 142 135 405 323
------ ------ ------ ------
Total investment security income 2,275 1,313 5,175 3,804
------ ------ ------ ------
Total interest income 9,970 8,496 28,165 25,334
INTEREST EXPENSE:
Deposit accounts 4,331 4,235 13,295 12,711
Federal Home Loan Bank advances 292 243 890 729
Other borrowed funds -- -- 1 --
------ ------ ------ ------
Total interest expense 4,623 4,478 14,186 13,440
------ ------ ------ ------
Net interest income 5,347 4,018 13,979 11,894
PROVISION FOR LOAN LOSSES 243 120 653 330
------ ------ ------ ------
Net interest income after provision
for loan losses 5,104 3,898 13,326 11,564
OTHER INCOME:
Loan service fees 161 196 483 631
Gain (loss) on sale of securities 48 84 218 210
Other, net 263 191 119 618
------ ------ ------ ------
Total other income 472 471 820 1,459
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,507 1,347 4,761 3,862
Occupancy and equipment 721 595 2,605 1,902
Information processing costs 175 197 513 579
Other, net 951 647 7,946 2,128
------ ------ ------ ------
Total other expenses 3,354 2,786 15,825 8,471
------ ------ ------ ------
Earnings before federal
income taxes 2,222 1,583 (1,679) 4,552
FEDERAL INCOME TAXES 673 462 (814) 1,318
------ ------ ------ ------
NET INCOME $1,549 $1,121 $(865) $3,234
====== ====== ====== ======
Net income per common share -
basic(1) $0.18 n/a nm n/a
Net income per common share -
diluted(1) $0.18 n/a nm n/a
Weighted average shares outstanding-
basic(1) 8,812,749 -- 2,980,942 --
Weighted average shares outstanding-
diluted(1) 8,812,749 -- 2,980,942 --
(1) The Company converted from a mutual to public company on September 30,
1999.
2
EverTrust Financial Group, Inc.
Consolidated Statement of Comprehensive Income
For the Nine Months Ended December 31, 1999 and 1998
(in thousands, Unaudited)
1999 1998
---- ----
Net Income (Loss) $ (865) $ 3,234
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
$(406) and $65 (788) 126
Less adjustment of gains included in net income
(loss), net of income tax of $(74) and $(67) (144) (130)
-------- --------
Other comprehensive income (loss) (932) (4)
-------- --------
Comprehensive Income $(1,797) $ 3,230
======== ========
EverTrust Financial Group, Inc.
Consolidated Statement of Change in Equity
For the Nine Months Ended December 31, 1999 and 1998
(Dollar amounts in thousands, Unaudited)
Common Stock (1) Accum Other
Number of Debt Related Retained Comprehensive
Shares Amount to ESOP Earnings Income Total
------ ------ ------- -------- ------ -----
Balance at March 31, 1998 n/a $ $ $ 50,736 $ 360 $51,096
Net income 3,234 3,234
Other comprehensive income, net of
$2 unrealized losses on AFS
securities (4) (4)
--------- -------- ------- -------- ------- --------
Balance at December 31, 1998 n/a $ $ $ 53,970 $ 356 $54,326
========= ======== ======= ======== ======= ========
Balance at March 31, 1999 $ $ $ 52,147 $ 116 $52,263
Common stock issued 8,986,250 88,213 88,213
Loan to ESOP (1,980) (1,980)
Repayment of ESOP debt 396 396
ESOP Shares committed to
be released (68) (68)
Net income (865) (865)
Other comprehensive income,
net of$480 unrealized losses
on AFS securities (932) (932)
--------- -------- ------- -------- ------- --------
Balance at December 31, 1999 8,986,250 $ 88,145 $(1,584) $ 51,282 $ (816) $137,027
========= ======== ======= ======== ======= ========
(1) Stock offering completed on September 30, 1999.
3
EverTrust Financial Group, Inc.
Consolidated Statement of Cash Flows
For the Nine Months Ended December 31, 1999 and 1998
(in thousands, Unaudited)
1999 1998
---- ----
Operating Activities:
Net income $ (865) $ 3,234
Adjustment to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 696 769
Stock dividends and accretion of investment
security discounts (351) (358)
Loss(gain) on sale of premises and equipment,
securities available for sale and
real estate owned (234) (217)
Amortization of investment security premiums 219 157
Book loss on limited partnerships 101 93
Provision for losses on loans and real estate
owned and mark to market loss on saleable loans 653 330
Amortization of deferred loan fees and costs (1,157) (876)
Loan fees deferred 1,205 809
Proceeds from the sale of loans 31,559 3,958
Loans originated for sale (6,917) (20,526)
Stock contributed to charitable foundation 3,900 --
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (553) (234)
Prepaid expenses and other assets (1,962) (74)
Accounts payable and other liabilities (1,472) (292)
Deferred taxes (1,333) (246)
-------- --------
Net cash provided (used) by operating activities 23,489 (13,473)
-------- --------
Investing Activities:
Proceeds from maturities of securities available
for sale 28,490 15,386
Proceeds from maturities of securities held to
maturity 1,614 5,645
Proceeds from sale of securities available for sale 4,522 1,014
Purchase of securities available for sale (75,524) (39,441)
Purchase of securities held to maturity -- --
Purchase of Federal Home Loan Bank stock -- (31)
Loan principal repayments 69,834 87,518
Loans originated or acquired (139,432) (82,774)
Proceeds from sales of reacquired assets and
real estate owned -- 123
Investment in real estate owned -- (119)
Net additions to premises and equipment (994) (628)
-------- --------
Net cash used by investing activities (111,490) (13,307)
-------- --------
Financing Activities:
Net increase in deposit accounts 4,821 14,345
Proceeds from Federal Home Loan Bank advances 17,400 5,000
Repayment of Federal Home Loan Bank advances (13,440) (540)
Proceeds from other borrowings 1,000 --
Repayment of other borrowings (1,000) --
Proceeds from the sale of common stock 84,245 --
Loan to ESOP (1,584) --
-------- --------
Net cash provided by financing activities 91,442 18,805
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 3,441 (7,975)
Cash and Cash Equivalent:
Beginning of the year 13,230 19,136
-------- --------
End of quarter $ 16,671 $ 11,161
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest on deposits $ 13,263 $ 12,694
Federal income taxes 520 1,678
Interest on borrowings 904 734
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Real estate acquired through foreclosure $ -- $ 117
Company financing of sales of real estate owned -- --
4
EverTrust Financial Group, Inc.
Notes to Consolidated Financial Statements
Three and Nine Months Ended December 31, 1999
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The unaudited consolidated financial statements of EverTrust and its
subsidiaries reflect all adjustments which are, in the opinion of management,
necessary to present fairly the statement of financial position and results of
operations for the interim periods presented. All such adjustments are of a
normal recurring nature. The consolidated financial statements include
EverTrust's wholly owned subsidiaries, Everett Mutual Bank (EMB), Commercial
Bank of Everett (CBE), I-Pro, Inc. (I-Pro), and Mutual Bancshares Capital Inc.
(MB Cap). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The balance sheet data as of March 31, 1999 was derived from audited financial
statements, but does not include all disclosures which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) rules pertaining to the presentation of interim financial
statements. It is suggested that these consolidated financial statements and
notes be read in conjunction with the consolidated financial statements and
notes included in EverTrust's prospectus dated August 12, 1999.
Note 2 - Conversion to stock form
- ---------------------------------
EverTrust'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. The stock began trading on the Nasdaq Stock Market under
the trading symbol of EVRT on October 4, 1999. In connection with the
conversion, and as discussed in the Company's prospectus dated August 12,
1999, EverTrust established a charitable foundation, The EverTrust Foundation,
and contributed 390,000 shares of its common stock and $1.3 million in cash to
the charitable foundation on September 30, 1999.
Note 3 - Earnings per share
- ---------------------------
EverTrust's basic earnings per common share are computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. EverTrust's diluted earnings per common share are computed by
dividing net income by the diluted weighted-average number of shares
outstanding during the period. For the quarter ended December 31, 1999, the
weighted-average shares outstanding was 8,812,749 for both basic and diluted.
For the nine months ended December 31, 1999, the calculation is not
meaningful.
5
Note 4 - Lines of Business
- --------------------------
EverTrust manages the following legal entities EMB, CBE, I-Pro and MB Cap. The
operating results of EverTrust, MB Cap and I-Pro have been included in Other
as their results are not significant when taken on an individual basis.
Financial highlights by lines of business are as follows:
Nine Months Ended December 31, 1999
-----------------------------------
(in thousands)
EMB CBE Other Eliminations Totals
--- --- ----- ------------ ------
Condensed income statement:
Net interest income after
provision for loan loss $12,013 $664 $649 $ - $13,326
Other income 792 117 3,547 (3,636) 820
Other expense 7,739 740 7,631* (285) 15,825
------- ---- ------- ------- -------
Income before income taxes 5,066 41 (3,435) (3,351) (1,679)
Income taxes 1,480 15 (2,309) - (814)
------- ---- ------- ------- -------
Net income (loss) $ 3,586 $ 26 $(1,126) $(3,351) $ (865)
======= ==== ======= ======= =======
* - Includes charitable contribution expense of $5.2 million ($3.9 million in
stock and $1.3 million in cash) to form The EverTrust Foundation.
December 31, 1999
-----------------
(in thousands)
EMB CBE Other Eliminations Totals
--- --- ----- ------------ ------
Total Assets $508,320 $24,486 $142,447 $(131,091) $544,162
========= ======= ======== ========= ========
Nine Months Ended December 31, 1998
-----------------------------------
(in thousands)
EMB CBE Other Eliminations Totals
--- --- ----- ------------ ------
Condensed income statement:
Net interest income after
provision for loan loss $10,853 $397 $314 $ - $11,564
Other income 1,463 61 3,765 (3,830) 1,459
Other expense 6,735 646 1,337 (247) 8,471
------- ----- ------ ------- -------
Income before income taxes 5,581 (188) 2,742 (3,583) 4,552
Income taxes 1,666 (63) (285) - 1,318
------- ----- ------ ------- -------
Net income (loss) $ 3,915 $(125) $3,027 $(3,583) $ 3,234
======= ===== ====== ======= =======
December 31, 1998
-----------------
(in thousands)
EMB CBE Other Eliminations Totals
--- --- ----- ------------ ------
Total Assets $420,302 $14,590 $58,975 $(50,819) $443,048
======== ======= ======= ======== ========
6
Note 5 - Additional Information Regarding Investment Securities
- ---------------------------------------------------------------
The following table sets forth additional detail on EverTrust's investment
securities (in thousands):
December 31, 1999 March 31, 1999
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Available for sale:
U.S. Government Agency obligations $ 9,849 $ 9,777 $3,751 $3,749
Corporate obligations 45,008 44,284 45,875 45,841
Municipal obligations 5,696 5,609 5,097 5,080
Equity securities 5,409 5,154 5,978 6,203
Certificate of deposits 12,682 12,682 175 175
Mortgage-backed securities 25,349 25,249 514 518
-------- -------- ------- -------
Total available for sale 103,993 102,755 61,390 61,566
-------- -------- ------- -------
Held to maturity:
U.S. Government Agency obligations 2,516 2,572 2,520 2,684
Corporate obligations 1,481 1,506 1,965 2,048
Municipal obligations 6,126 6,149 6,773 6,876
Certificate of deposits 475 475 455 455
Mortgage-backed securities 1,691 1,735 2,153 2,254
-------- -------- ------- -------
Total held to maturity 12,289 12,437 13,866 14,317
-------- -------- ------- -------
Total investment securities $116,282 $115,192 $75,256 $75,883
======== ======== ======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General. EverTrust, a Washington corporation, is primarily engaged in the
business of planning, directing and coordinating the business of its wholly
owned subsidiaries, EMB, CBE, I-Pro and MB Cap. EMB conducts business through
its 11 full service offices located throughout Snohomish County, Washington
and a loan office in Bellevue (King County). EMB considers the communities in
Snohomish County, Washington as its primary market area for making loans and
attracting deposits. EMB also makes loans in King and Pierce Counties and, to
a much lesser extent, other counties in Western Washington. EMB's principal
business is attracting deposits from the general public and using those funds
to originate residential mortgage loans as well as multi-family, commercial
real estate and construction loans. CBE offers business loans and deposit
services to individuals and local businesses through its office located in
Everett, Washington. I-Pro is located in Kent, Washington and provides
backroom banking services for EMB and CBE. MB Cap is a start-up venture
capital company located in Bothell, Washington, which was organized to provide
equity to regionally-based high-technology companies and companies that make
medical instruments at the beginning or early stages of development.
7
Year 2000 Disclosure. EverTrust and its subsidiaries experienced no known
material year 2000 issues as a result of the century date change. All
computers, computer software and equipment utilizing embedded microprocessors
functioned as expected. Ongoing monitoring efforts will continue to ensure
that all systems operate properly as other year 2000 milestone dates are
reached. While there can be no assurance that all year 2000 issues have been
addressed and corrected, EverTrust's management is confident that systems will
continue to operate normally with minimal disruption of normal service levels.
Comparison of Financial Condition at December 31, 1999 and March 31, 1999
- -------------------------------------------------------------------------
Total assets increased $92.1 million, or 20.4%, from $452.1 million at March
31, 1999 to $544.2 million at December 31, 1999. The majority of the increase
was the result of the funds received in the stock offering completed on
September 30, 1999. EverTrust received $86 million in cash from the stock
offering.
The investment portfolio (including FHLB stock) increased $39.9 million, or
50.3%, from $79.4 million at March 31, 1999 to $119.3 million at December 31,
1999. The increase was primarily funded by proceeds received from the stock
offering and to a lesser extent the sale of one to four family mortgage loans.
Loans receivable increased $73.9 million, or 23.4%, from $315.3 million at
March 31, 1999 to $389.2 million at December 31, 1999. The increase was due
primarily to growth in the commercial real estate loan portfolio of $39.6
million from $72.6 million at March 31, 1999 to $112.2 million at December 31,
1999, the multifamily loan portfolio of $12.8 million from $116.0 million at
March 31, 1999 to $128.8 million at December 31, 1999 and the multifamily
construction loans portfolio of $10.4 million from $7.5 million (net of $6.5
million in undisbursed funds) at March 31, 1999 to $17.9 million (net of $18.2
million in undisbursed funds) at December 31, 1999. Loans held for sale
decreased from $29.6 million at March 31, 1999 to $0 at December 31, 1999.
The decrease is due to the sale of $31.6 million in loans during the period
($9.0 million were sold in the first quarter, $20.8 million were sold in the
second quarter and $1.8 million were sold in the third quarter). Increased
sale of loans were designed to reduce the Company's exposure to the risk of
rising interest rates. The proceeds of the loan sales were primarily used to
fund the growth of loans and securities.
8
The following table is provided to disclose additional detail on EverTrust's
loans (in thousands):
December 31, March 31,
1999 1999
---- ----
Real Estate:
1-4 family residential $68,522 $101,649
1-4 family construction and land development 43,353 34,928
Income property:
Commercial construction 15,663 12,491
Commercial real estate 112,166 72,573
Multifamily construction 36,143 14,012
Multifamily residential 128,752 115,972
Consumer:
Residential mortgages 4,473 4,867
Home equity and second mortgages 16,411 13,734
Credit cards 1,078 488
Automobiles 953 787
Other installment loans 3,718 1,612
Business loans 16,149 8,949
-------- --------
Gross loans 447,381 382,062
Less:
Undisbursed loan proceeds (48,532) (28,183)
Deferred loan fees and other (3,287) (3,239)
Reserve for loan losses (6,339) (5,672)
-------- --------
Total 389,223 344,968
Loans receivable held for sale - (29,641)
-------- --------
Loans receivable, net $389,223 $315,327
======== ========
At December 31, 1999, EverTrust had $241,000 in loans accounted for on a
non-accrual basis ($234,000 in one to four family mortgage loans and $7,000 in
consumer loans) compared to $378,000 at March 31, 1999. The following table
provides a roll-forward of EverTrust's allowance for loan loss for the nine
months ended December 31, 1999 and 1998 (in thousands):
1999 1998
---- ----
Allowance at beginning of period $5,672 $4,897
Provision for loan losses 653 330
Charge-offs 4 -
Recoveries 18 -
------ ------
Balance at end of period $6,339 $5,227
====== ======
Other assets increased $3.7 million from $3.3 million at March 31, 1999 to
$7.0 million at December 31, 1999. The increase is due primarily to an
increase in the deferred tax asset of $2.2 million ($1.8 million is related to
the $5.2 million charitable contribution) and a $867,000 deposit for new
software related to the computer system conversion planned for next year.
Total deposits of EverTrust increased by $4.8 million, or 1.3%, from $375.9
million at March 31, 1999 to $380.7 million at December 31, 1999. The stock
offering slowed overall deposit growth as funds held in deposit accounts were
used to buy stock in the Company's initial stock offering. The increase in
deposits that has occurred is due
9
primarily to interest credited to accounts.
The following table sets forth the balances of deposits in the various types
of accounts offered by EverTrust at the dates indicated (dollars in
thousands):
At December 31, 1999 At March 31, 1999
Percent of Percent of
Amount Total Amount Total
Non-interest bearing accounts $ 7,801 2.0 % $ 7,782 2.1 %
Savings accounts 10,768 2.8 11,798 3.1
Demand deposit accounts 35,390 9.3 33,655 9.0
Money market deposit accounts 133,378 35.0 133,748 35.5
Fixed rate certificates
which mature:
Within 1 year 128,751 33.9 125,923 33.5
After 1 year, but within
2 years 26,576 7.0 28,186 7.5
After 2 years, but within
5 years 35,572 9.3 32,241 8.6
Certificates maturing
thereafter 2,481 0.7 2,563 0.7
-------- ----- -------- -----
Total $380,717 100.0 % $375,896 100.0 %
======== ===== ======== =====
Total equity at December 31, 1999 was $137.0 million compared to $52.3 million
at March 31, 1999. This is an increase of $84.7 million. Net proceeds from
the sale of stock resulted in additional capital of $88.1 million which is
partially offset by a loan to the ESOP of $1.6 million. Losses incurred
during the period reduced equity by an additional $865,000.
Comparison of Operating Results for the Three Months Ended December 31, 1999
- ----------------------------------------------------------------------------
and 1998
- --------
General. Net income increased $428,000 from $1.1 million for the three months
ended December 31, 1998 to $1.5 million for the three months ended December
31, 1999. The increase is due primarily to higher net interest income of $1.3
million partially offset by increased operating expenses of $568,000.
Net Interest Income. Net interest income increased 32.5% from $4.0 million
for the three months ended December 31, 1998 to $5.3 million for the three
months ended December 31, 1999. The change is due primarily to higher average
balances partially offset by a lower overall yield.
Interest income increased $1.5 million from $8.5 million for the three months
ended December 31, 1998 to $10.0 million for the same period in 1999. During
this same time period, the average balance of interest-earning assets
increased from $423.5 million for the three months ended December 31, 1998 to
$527.0 million for the three months ended December 31, 1999 resulting in an
increase of $1.8 million in income. This increase was partially offset by a
decrease in the yield on interest-earning assets from 8.03% for the three
months ended December 31, 1998 to 7.57% for the same period in 1999 resulting
in a decrease of $300,000 in income. Increased balances were due to increased
loan volumes, security purchases and balances held in short-term funds. These
increases were funded by the proceeds received from the public offering and
loan sales. The decrease in
10
yields is the result of a change in the composition of the interest-earning
assets (investment securities and cash and cash equivalents comprised 28.7% of
total interest-earning assets for the quarter ended December 31, 1999 as
compared to 19.7% for the same period in 1998) and the overall lower yield
earned on mortgage loans as many of these loans were originated or refinanced
in the prior year at lower rates and this is now reflected in the current
quarter's earnings.
Interest expense increased $145,000 from $4.5 million for the three months
ended December 31, 1998 to $4.6 million for the same period in 1999. The
average balance of interest-bearing liabilities increased 5.8% or $21.4
million from $368.6 million at December 31, 1998 to $390.0 million for the
three months ended December 31, 1999 resulting in an increase of $272,000 in
expense. This increase was partially offset by a decrease in the yield on
interest-bearing liabilities from 4.86% for the three months ended December
31, 1998 to 4.74% for the same period in 1999 resulting in a decrease of
$125,000 in expense.
The following table provides additional comparative data on the Company's net
interest income and margin:
Quarter Ended
Average Balance December 31
--------------- -----------
(in thousands) 1999 1998
---- ----
Interest-earning assets:
Loans receivable, net $ 371,436 $ 336,238
Investment securities 115,686 74,231
Federal Home Loan Bank stock 4,141 3,834
Cash and cash equivalent 35,774 9,173
--------- --------
Total interest-earning assets 527,037 423,476
Noninterest-earning assets 16,075 9,490
--------- --------
Total average assets $ 543,112 $ 432,966
========= =========
Interest-bearing liabilities:
Savings accounts $ 10,995 $12,439
NOW accounts 35,000 32,609
Money market deposit accounts 133,740 124,842
Certificate of deposits 191,500 183,504
--------- --------
Total deposits 371,235 353,394
Federal Home Loan Bank advances 18,796 15,186
--------- --------
Total interest-bearing liabilities 390,031 368,580
Noninterest-bearing liabilities 16,610 11,106
--------- --------
Total average liabilities 406,641 379,686
Average equity 136,471 53,280
--------- --------
Total average liabilities and equity $ 543,112 $432,966
========= ========
16
Interest Rate Yields/Expense (rates are annualized)
Quarter Ended
December 31,
1999 1998
Interest Rate Yield:
Loans receivable, net 8.29 % 8.55 %
Investment securities 6.01 5.92
Federal Home Loan Bank stock 7.31 7.81
Cash and cash equivalent 5.16 6.11
----- -----
Total interest rate yield on
interest-earning assets 7.57 8.03
----- -----
Interest Rate Expense:
Savings accounts 2.90 2.61
NOW accounts 2.62 2.55
Money market deposit accounts 4.26 4.28
Certificate of deposits 5.43 5.69
----- -----
Total interest rate expense on deposits 4.67 4.79
Federal Home Loan Bank advances 6.22 6.34
----- -----
Total interest rate expense on interest-
bearing liabilities 4.74 4.86
----- -----
Interest rate spread 2.83 % 3.17 %
===== =====
Net interest margin on interest-earning assets 4.06 % 3.80 %
===== =====
Provision for Loan Losses. During the three months ended December 31, 1999,
the provision for loan losses was $243,000, compared to $120,000 for the same
period in 1998, an increase of $123,000. The increase resulted from continued
loan portfolio growth in the higher-risk lending categories of commercial and
multifamily loans, business loans and credit card loans during the period.
The allowance for loan losses increased $667,000 from $5.7 million at March
31, 1999 to $6.3 million at December 31, 1999. The allowance for loan losses
as a percentage of net loans (loans receivable excluding allowance for losses)
was 1.60% at December 31, 1999 and 1.77% at March 31, 1999.
The allowance for losses on loans is maintained at a level sufficient to cover
losses inherent in the loan portfolio but not yet apparent to management. The
risk of loss will vary with 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. EverTrust's 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. 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
judgment different from 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 EverTrust's
control.
Non-interest Income. Non-interest income remained relatively unchanged as it
increased $1,000 from $471,000 for the three months ended December 31, 1998 to
$472,000 for the
12
same period in 1999.
Non-interest Expense. Non-interest expense increased $568,000 from $2.8
million for the three months ended December 31, 1998 to $3.4 million for the
same period in 1999. Salary and employee benefits increased $160,000 from
$1.3 million for the three months ended December 31, 1998 to $1.5 million for
the three months ended December 31, 1999. Compensation expense increased as
the result of increased staffing levels and general salary increases as
compared to the prior year. 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 $126,000 from
$595,000 for the three months ended December 31, 1998 to $721,000 for the same
period in 1999. The increase in occupancy and equipment expense is due
primarily to the continued cost of the company wide computer upgrade in the
amount of $71,000 and the cost of leasing additional facilities for EMB's
Eastside loan office, MB Cap's office space and the new data center space.
Other expenses increased $304,000 from $647,000 for the three months ended
December 31, 1998 to $951,000 for the three months ended December 31, 1999.
Increased cost of $91,000 for marketing and $115,000 for professional services
are the major items resulting in the change. The marketing costs are for
current and ongoing marketing campaigns. The increase in professional
services are the result of the change from a private to public company and
consulting costs for the Company's upcoming computer conversion which is
anticipated to be completed during the third quarter of next year.
Provision for Income Taxes. Federal income taxes increased from $462,000 for
the three months ended December 31, 1998 to $673,000 for the three months
ended December 31, 1999. The change is due to increased taxable earnings.
Liquidity and Capital Resources
- -------------------------------
EverTrust's primary source of funds are deposits and proceeds from principal
and interest payments on loans and securities, and Federal Home Loan Bank of
Seattle advances. While maturities and scheduled amortization of loan and
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activity of EverTrust is the origination of one-to-four
family loans and commercial and multifamily loans. A secondary, but
increasing activity of the Company is the origination of business loans.
During the nine months ended December 31, 1999, the Company originated $139.4
million in loans. In addition, during this nine month period, funds were used
to purchase $75.5 million in investment securities. These activities were
funded by loan repayments, the sale of $31.6 million of loans during the
period and the proceeds from the public offering.
13
EverTrust must maintain adequate levels of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The source of funds include deposits and principal
and interest payments from loans and investments and Federal Home Loan Bank of
Seattle advances. The Company also raised $84.3 million in capital through
its initial public offering which was completed on September 30, 1999.
The management of EverTrust believes it has adequate resources to fund all
loan commitments by deposits and, if necessary, Federal Home Loan Bank of
Seattle advances and the sale of mortgage loans. It can also adjust the
offering rates of deposit accounts to retain deposits in changing interest
rate environments.
Capital Requirements. EverTrust, as a bank holding company, is regulated by
the Federal Reserve Board (FRB). The FRB's minimum risk-based capital ration
guidelines for Tier 1 and total capital are 4% and 8%, respectively.
The actual regulatory capital ratios calculated for EverTrust along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum for Capital
Actual adequacy purposes
------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
December 31, 1999:
Total capital to risk-weighed assets $143,146 31.15 % $36,828 8.00 %
Tier 1 capital to risk-weighted assets 137,654 29.90 18,414 4.00
Tier 1 leverage capital to average
assets 137,654 25.38 21,694 4.00
Asset and Liability Management and Market Risk
- ----------------------------------------------
EverTrust's profitability depends primarily on its net interest income, which
is the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits
and borrowings. Net income is further affected by gains and losses on loans
held for sale, which can be affected by changes in interest rates. Net
interest income is also affected by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets equal
or exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. EverTrust continues to actively manage the
impact of interest rate changes on net interest income and capital by
emphasizing the origination of adjustable rate and short-term fixed rate
loans, selling 30 year fixed rate mortgages, and purchasing investment
securities that better match the duration of its deposits. EverTrust'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. EverTrust'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.
14
EverTrust does not maintain a trading account for any class of financial
instrument nor does it purchase high-risk derivative instruments. EMB is
authorized to engage in limited hedging activities for its saleable loan
pipeline, however, no such hedges were in place at December 31, 1999.
Furthermore, EverTrust has no commodity price risk, and only a limited amount
of foreign currency exchange rate risk as a result of holding Canadian
currency in the normal course of business.
Forward-looking Statements
- --------------------------
Certain matters discussed in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may therefore
involve risks and uncertainties. The Company's actual results, performance,
or achievements may differ materially from this suggested, expressed, or
implied by forward looking statements due to a wide range of factors
including, but not limited to, non-bank financial services providers,
regulatory changes, Year 2000 issues and other risks detailed in the Company's
reports filed with the Securities and Exchange Commission.
Part II Other Information
Item 1. Legal Proceedings
From time to time the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are considered
to have a material impact on the Company's financial position or results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Shareholders
None.
Item 5. Other Information
None.
15
Item 6. Exhibits and Reports on Form 8-K
Exhibits
3.1 Articles of Incorporation of EverTrust Financial Group, Inc.*
3.2 Bylaws of EverTrust Financial Group, Inc.*
10.1 Everett Mutual Bank 401(k) Savings Plan*
27 Financial Data Schedule
--------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
S-1, as amended (File No. 333-81125).
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
16
Signatures
Pursuant to the requirement 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.
February 10, 2000 /s/Michael B. Hansen
--------------------------------------------
Michael B. Hansen
President and Chief Executive Officer
(Principal Executive Officer)
February 10, 2000 /s/Jeffrey R. Mitchell
--------------------------------------------
Jeffrey R. Mitchell
Chief Financial Officer
(Principal Financial and Accounting Officer)
17