As filed with the Securities and Exchange Commission on August 2, 1999
Registration No. 333-81125
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EVERTRUST FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in charter)
Washington 6036 91-1613658
- ------------------------------- ------------------ -------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
2707 Colby Avenue, Suite 600
Everett, Washington 98201
(425) 258-3645
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(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire Beth A. Freedman, Esquire
BREYER & ASSOCIATES PC SILVER, FREEDMAN & TAFF, L.L.P.
Suite 700 East Suite 700 East
1100 New York Avenue, N.W. 1100 New York Avenue, N.W.
Washington, D.C. 20005 Washington, D.C. 20005
(202) 737-7900 (202) 414-6100
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(Name and address of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Calculation of Registration Fee
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Proposed Maximum Proposed Proposed Maximum
Title of Each Class of Securities Amount Being Offering Aggregate Offering Amount of
Being Registered Registered(1) Price(1) Price(1) Registration Fee
- -------------------------------------------------------------------------------------------------------
Common Stock, No Par Value 8,986,250 $10.00 $89,862,500 $24,982(1)
Participation interests 77,408 -- --(2) --(3)
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(1) Previously paid. Estimated solely for purposes of calculating the
registration fee. Includes shares to be issued to The EverTrust Foundation.
As described in the Prospectus, the actual number of shares to be issued
and sold are subject to adjustment based upon the estimated pro forma
market value of the registrant and market and financial conditions.
(2) In addition, this registration statement also covers an undeterminate
amount of interest to be offered or sold pursuant to the Everett Mutual
Bank 401(k) Savings Plan.
(3) The securities of EverTrust Financial Group, Inc. to be purchased by the
Everett Mutual Bank 401(k) Savings Plan are included in the amount shown
for Common Stock. Accordingly, pursuant to Rule 457(h) of the Securities
Act of 1933, as amended, no separate fee is required for the participation
interests. Pursuant to such rule, the amount being registered has been
calculated on the basis of the number of shares of Common Stock that may be
purchased with the current assets of such Plan.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
1. Forepart of the Registration Forepart of the Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information, Risk Summary; Risk Factors
Factors and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds How EverTrust Financial Group, Inc. Intends
to Use the Conversion Offering Proceeds;
Capitalization
5. Determination of Offering Market for EverTrust Financial Group,
Price Inc.'s Common Stock
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution Mutual Bancshares' Conversion
9. Description of Securities to Description of Capital Stock of EverTrust
be Registered Financial Group, Inc.
10. Interests of Named Experts Legal and Tax Opinions; Experts
and Counsel
11. Information with Respect to
the Registrant
(a) Description of Business Business of Mutual Bancshares
(b) Description of Property Business of the Mutual Bancshares --
Properties
(c) Legal Proceedings Business of the Mutual Bancshares -- Legal
Proceedings
(d) Market Price of and Outside Front Cover Page; Market for
Dividends on the EverTrust Financial Inc.'s Common Stock;
Registrant's Common EverTrust Financial Group, Inc.'s Dividend
Equity and Related Policy
Stockholder Matters
(e) Financial Statements Consolidated Financial Statements;
Pro Forma Data
(f) Selected Financial Data Selected Consolidated Financial Information
(g) Supplementary Financial *
Information
(h) Management's Discussion Management's Discussion and Analysis
and Analysis of Financial of Financial Condition and Results of
Condition and Results of Operations
Operations
(i) Changes in and *
Disagreements with
Accountants on Accounting
and Financial Disclosure
(j) Directors and Executive Management of EverTrust Financial Group,
Officers Inc.; Management of Everett Mutual Bank
(k) Executive Compensation Management of EverTrust Financial Group,
Inc.; Management of Everett Mutual Bank --
Benefits -- Executive Compensation
(l) Security Ownership of *
Certain Beneficial Owners
and Management
(m) Certain Relationships and Management of Everett Mutual Bank -- Loans
Related Transactions and Other Transactions with Officers and
Directors
12. Disclosure of Commission Part II - Item 17
Position on Indemnification
for Securities Act Liabilities
- ----------
* Item is omitted because answer is negative or item inapplicable.
Interests in
EVERTRUST FINANCIAL GROUP, INC.
401(k) Employee Savings and Profit Sharing Plan and Trust
and
Offering of 77,408 Shares of
EVERTRUST FINANCIAL GROUP, INC.
Common Stock
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In connection with Everett Mutual Bank and EverTrust Financial Group,
Inc.'s conversion and the simultaneous offering of EverTrust common stock,
EverTrust has amended the Everett Mutual Bank 401(k) Employee Savings Profit
Sharing Plan and Trust (hereinafter referred to as the 401(k) Plan with regard
to the 401(k) portion of the plan) to permit participants to direct the trustee
of the 401(k) Plan to invest their 401(k) Plan accounts in the common stock of
EverTrust through the EverTrust Financial Group, Inc. Common Stock Fund subject
to the terms and provisions of the 401(k) Plan, effective on and after September
1, 1999. Based upon the value of the 401(k) Plan assets at April 30, 1999, the
trustee of the 401(k) Plan could purchase up to 77,408 shares of the common
stock (assuming a purchase price of $10.00 per share). This prospectus
supplement relates to the initial election of 401(k) Plan participants to direct
the trustee of the 401(k) Plan to invest a portion of their 401(k) Plan accounts
in the Common Stock Fund at the time of the conversion. All references to common
stock refer to EverTrust common stock.
The prospectus dated [___________], 1999, of EverTrust, which we have
attached to this prospectus supplement, includes detailed information regarding
the conversion, the common stock and the financial condition, results of
operations and business of EverTrust. This prospectus supplement provides you
with information regarding the 401(k) Plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page [___] of the prospectus.
The date of this Prospectus Supplement is August [___], 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE WASHINGTON DEPARTMENT
OF FINANCIAL INSTITUTIONS, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY
OTHER STATE OR FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, HAS APPROVED
OR DISAPPROVED THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This prospectus supplement may be used only in connection with offers and
sales by EverTrust of interests or shares of common stock pursuant to the 401(k)
Plan. No one may use this prospectus supplement to reoffer or resell interests
or shares of common stock acquired through the 401(k) Plan.
EverTrust has not authorized any person to give any information or to
make any representations other than those contained in the prospectus or this
prospectus supplement, and, if given or made, no one may rely on such
information or representations as having been authorized by EverTrust or the
401(k) Plan. This prospectus supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this prospectus supplement and the prospectus nor any
sale of common stock shall under any circumstances create any implication that
there has been no change in the affairs of EverTrust or the 401(k) Plan since
the date of this prospectus supplement, or that the information contained in
this prospectus supplement or incorporated by reference is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
THE OFFERING ........................................................... 1
Securities Offered ................................................ 1
Election to Purchase EverTrust Financial Group, Inc.
Common Stock in the Conversion .............................. 1
Value of Participation Interests .................................. 2
Method of Directing Transfer ...................................... 2
Time for Directing Transfer ....................................... 2
Irrevocability of Transfer Direction .............................. 2
Direction to Purchase EverTrust Financial Group, Inc.
Common Stock After the Conversion ........................... 2
Purchase Price of EverTrust Financial Group, Inc. Common Stock .... 3
Nature of a Participant's Interest in EverTrust
Financial Group, Inc. Common Stock .......................... 3
Voting and Tender Rights of EverTrust Financial Group, Inc.
Common Stock ................................................ 3
DESCRIPTION OF THE PLAN................................................. 4
Introduction ...................................................... 4
Eligibility and Participation ..................................... 4
Contributions Under the Plan ...................................... 5
Limitations on Contributions ...................................... 5
Investment of Contributions ....................................... 7
Benefits Under the Plan ........................................... 9
Withdrawals and Distributions from the Plan ....................... 9
Administration of the Plan ........................................ 10
Reports to Plan Participants ...................................... 10
Plan Administrator ................................................ 10
Amendment and Termination ......................................... 10
Merger, Consolidation or Transfer ................................. 11
Federal Income Tax Consequences ................................... 11
ERISA and Other Qualification ..................................... 13
Restrictions on Resale ............................................ 13
Securities and Exchange Commission Reporting
and Short-Swing Profit Liability ............................. 14
Financial Information Regarding Plan Assets ....................... 15
LEGAL OPINIONS ......................................................... 15
EVERTRUST FINANCIAL GROUP, INC. 401(k) PLAN FINANCIALS ................. 16
INVESTMENT ELECTION FORM ............................................... 17
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the 401(k) Plan. Assuming a purchase price of $10.00
per share, the trustee of the 401(k) Plan may acquire up to 77,408 shares of
common stock for the Common Stock Fund known as the EverTrust Financial Group,
Inc. Common Stock Fund. EverTrust, the holding company for Everett Mutual Bank,
is the issuer of the common stock. Only eligible employees, previously eligible
employees, alternate payees and beneficiaries of the preceding parties may
participate in the Plan. The interests offered under this prospectus supplement
are conditioned on the consummation of the conversion. Your investment in the
Common Stock Fund in connection with the conversion is subject to priorities set
forth in the plan of conversion of EverTrust.
This prospectus supplement contains information regarding the 401(k)
Plan. The attached prospectus contains information regarding the conversion and
the financial condition, results of operations and business of EverTrust. You
may contact EverTrust at the following address: EverTrust Financial Group, Inc.,
2707 Colby Avenue, Suite 600, Everett, Washington 98201. The telephone number of
EverTrust is (425) 258-3645.
Election to Purchase EverTrust Financial Group, Inc. Common Stock in the
Conversion
In connection with the conversion of Everett Mutual Bank, EverTrust has
amended the 401(k) Plan to permit you to direct the trustee to transfer a
portion of the funds which represent your beneficial interest in the assets of
the 401(k) Plan to the Common Stock Fund. The trustee of the 401(k) Plan will
subscribe for common stock offered for sale in connection with the conversion in
accordance with each participant's timely direction. In the event the conversion
offering is oversubscribed and some or all of your funds cannot be used to
purchase common stock in the conversion offering, the trustee will reallocate
the amount not invested in common stock on a proportionate basis to the other
investment options you have selected. If you fail to direct the investment of
your account, your account balance will remain in the other investment options
of the 401(k) Plan.
Your ability to invest in the Common Stock Fund is based on your status
as an eligible account holder, supplemental eligible account holder or depositor
of Commercial Bank of Everett. An eligible account holder is a depositor whose
account totaled $50.00 or more on December 31, 1997. A supplemental eligible
account holder is a depositor whose account totaled $50.00 or more on June 30,
1999. A depositor of Commercial Bank of Everett is a depositor who had $50.00 or
more on deposit with Commercial Bank of Everett as of December 31, 1997. To the
extent you fall into one of the subscription offering categories, you have
subscription rights to purchase shares of common stock in the subscription
offering and you may use funds in your 401(k) Plan account to pay for the common
stock for which you subscribe.
1
Value of Participation Interests
As of April 30, 1999, the market value of the assets of the 401(k) Plan
equaled $3.3 million. The plan administrator informed each participant of the
value of his or her beneficial interest in the 401(k) Plan as of April 30, 1999.
The value of plan assets represents the past contributions to the 401(k) Plan by
the participants of EverTrust, plus or minus earnings or losses on the
contributions, less previous withdrawals plus forfeitures.
Method of Directing Transfer
The last page of this prospectus supplement contains a form for you to
direct a transfer to the Common Stock Fund, the investment election form. If you
wish to conduct a transfer (in multiples of not less than 1%) of your beneficial
interest in your available account balance of the 401(k) Plan to the Common
Stock Fund, you should complete the investment election form. If you do not wish
to make such an election at this time, you do not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Common
Stock Fund in connection with the conversion is September [__], 1999. You must
return the investment election form to Nancy Elliott in the Human Resources
Department at 3:00 p.m. on this date.
Irrevocability of Transfer Direction
Your 1999 direction to transfer amounts credited to such account in the
401(k) Plan to the Common Stock Fund cannot be changed after the deadline date.
Direction to Purchase EverTrust Financial Group, Inc. Common Stock After the
Conversion
After the conversion, you may direct the trustee of the 401(k) Plan to
transfer a certain percentage (in multiples of not less than 1%) of the net
value of your available account balance in the 410(k) Plan to the Common Stock
Fund or to the other investment funds available under the 401(k) Plan. You may
also direct the trustee of the 401(k) Plan to transfer a certain percentage of
your available account balance in the Common Stock Fund to the trust fund and
invest it in accordance with the terms of the 401(k) Plan. You may direct the
trustee to invest future contributions made to the 401(k) Plan on your behalf in
the Common Stock Fund. Following your initial election, you may change the
allocation of your investments in the Common Stock Fund on the first day of any
following calendar trimester by submitting an appropriate form to the plan
administrator. You may obtain a form from the Human Resources Department of
EverTrust. Special restrictions may apply to transfers directed by those
participants who are officers, directors and principal shareholders of EverTrust
who are subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934.
2
Purchase Price of EverTrust Financial Group, Inc. Common Stock
The trustee will use the funds transferred to the Common Stock Fund to
purchase shares of common stock in the conversion. The trustee will pay the same
price for shares of common stock as all other persons who purchase shares of the
common stock in the conversion.
The trustee will acquire common stock after the conversion in open market
transactions. The prices paid by the trustee for shares of the common stock will
not exceed "adequate consideration" as defined in the Employee Retirement Income
Security Act, most commonly referred to as "ERISA", the primary federal law
governing retirement plans. The trustee will pay transaction fees associated
with the purchase, sale or transfer of the common stock after the conversion.
Nature of a Participant's Interest in EverTrust Financial Group, Inc. Common
Stock
The trustee will hold common stock in the name of the 401(k) Plan. The
trustee will allocate shares of common stock acquired at your direction to your
account under the 401(k) Plan. Therefore, earnings with respect to your account
are not affected by the investment designations of other participants in the
401(k) Plan.
Voting And Tender Rights of EverTrust Financial Group, Inc. Common Stock
The plan administrator generally will exercise voting rights attributable
to all of the common stock held by the Common Stock Fund. With respect to
matters involving tender offers for EverTrust, the plan administrator will vote
shares allocated to participants in the 401(k) Plan, as directed by participants
with interests in the Common Stock Fund. The trustee will allocate to you voting
instruction rights reflecting your proportion interest in the Common Stock Fund.
The number of shares of common stock held in the Common Stock Fund that the
trustee votes in the affirmative and negative on each matter shall be
proportionate to the number of voting instruction rights exercised in the
affirmative and negative, respectively. For matters not involving a tender
offer, the plan administrator will direct the vote of allocated shares and
Participants will not have an opportunity to direct the voting of shares.
3
DESCRIPTION OF THE PLAN
I. Introduction
Effective January 1, 1986, Everett Mutual Bank adopted the Mutual
Bancshares 401(k) Employee Savings and Profit Sharing Plan & Trust. EverTrust
intends for the 401(k) Plan to comply, in form and in operation, with all
applicable provisions of the Internal Revenue Code and ERISA. As a plan subject
to ERISA, federal law provides you with various rights and protections as a plan
participant. However, your benefits under the plan are not guaranteed and are
not required to be guaranteed by the Pension Benefit Guaranty Corporation.
EverTrust may amend the 401(k) Plan from time to time in the future to
ensure continued compliance with all applicable laws. EverTrust may also amend
the 401(k) Plan from time to time in the future to add, modify, or eliminate
certain features of the plan, subject to applicable laws. Most recently,
EverTrust amended the 401(k) Plan to include a common stock fund as an
investment choice. The Common Stock Fund will consist of common stock of
EverTrust and cash.
APPLICABLE FEDERAL TAX LAW IMPOSES SUBSTANTIAL RESTRICTIONS ON YOUR
ABILITY TO WITHDRAW AMOUNTS HELD UNDER THE 401(k) PLAN PRIOR TO YOUR TERMINATION
OF EMPLOYMENT WITH EVERTRUST. FEDERAL LAW MAY ALSO IMPOSE AN EXCISE TAX ON
WITHDRAWALS MADE FROM THE 401(k) PLAN PRIOR TO THE TIME YOU REACH AGE 59-1/2,
REGARDLESS OF WHETHER THE WITHDRAWAL OCCURS DURING YOUR EMPLOYMENT WITH
EVERTRUST OR AFTER TERMINATION OF YOUR EMPLOYMENT WITH EVERTRUST AND
SUBSIDIARIES.
Reference to Full Text of Plan. The following portions of this prospectus
supplement summarize certain provisions of the 401(k) Plan. EverTrust qualifies
these summaries in their entirety by the full text of the 401(k) Plan, which
shall have priority. You may obtain copies of the 401(k) Plan document by
sending a request to: Plan Administrator, Everett Mutual Bank, 2707 Colby
Avenue, Suite 600, Everett, Washington, 98201. You should carefully read the
full text of the 401(k) Plan document to understand your rights and obligations
under the plan.
II. Eligibility and Participation
Any employee of EverTrust may participate in the 401(k) Plan as of the
first day of the month following completion of one "year of service" and
attainment of age 21 with the exception of non-resident aliens and union
employees, unless a collective bargaining agreement expressly provides for union
participation. For purposes of the 401(k) Plan, you generally earn one "year of
service" if you complete 1,000 hours of service with EverTrust within the
applicable 12-consecutive-month computation period.
4
As of June 30, 1999, approximately 75 out of 81 then eligible employees
had elected to participate in the 401(k) Plan.
III. Contributions Under the Plan
401(k) Plan Participant Contributions. The 401(k) Plan permits you to
annually defer receipt of up to 10% of the compensation that EverTrust and/or
its affiliates would otherwise pay to you. For purposes of calculating your
deferrals, the 401(k) Plan considers compensation to include your total pay
reportable on Internal Revenue Service Form W-2 (excluding bonuses and overtime)
for purposes of income-tax withholding. However, by law, the 401(k) Plan may not
consider more than $160,000 of compensation for purposes of determining
deferrals for 1999. You may modify the rate of your future contributions to the
plan, by filing a new deferral agreement with the plan administrator at least 15
days prior to the effective date of the modification. Modifications of your rate
of deferral take effect at the beginning of each trimester, i.e., January 1, May
1 and September 1.
EverTrust Contributions. EverTrust has discretion whether or not to make
matching contributions for you under the 401(k) Plan. For 1998, EverTrust made
matching contributions to the 401(k) Plan equal to $94,010.
IV. Limitations on Contributions
Limitation on Employee Salary Deferral. Although the 401(k) Plan allows
you to defer receipt of up to 15% of your compensation each year, federal law
limits your total deferrals under the 401(k) Plan, and any similar plans to
$10,000 for 1999. The Internal Revenue Service will periodically increase this
annual deferral limitation. Contributions in excess of this limitation ("excess
deferrals") will be included in an affected participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed by
the 401(k) Plan to the participant, unless the excess deferral (together with
any income allocable thereto) is distributed to the participant not later than
the first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the participant in the taxable year in which the
distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Internal Revenue Code, the 401(k) Plan provides that the
total amount of contributions and forfeitures (annual additions) allocated to
participants during any plan year may not exceed the lesser of 25% of the
participant's compensation for the plan year, for 1999, or $30,000. The 401(k)
Plan will also limit annual additions to the extent necessary to prevent the
limitations set forth in the Internal Revenue Code for all of the qualified
defined benefit plans and defined contribution plans maintained by EverTrust
from being exceeded.
5
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Internal Revenue Code limit the amount of
deferred compensation that may be made to the Plan in any Plan Year on behalf of
Highly Compensated Employees (defined below) in relation to the amount of
deferred compensation made by or on behalf of all other employees eligible to
participate in the Plan. Specifically, the percentage of elective deferrals made
on behalf of a Participant who is a Highly Compensated Employee shall be limited
so that the Average Actual Deferral Percentage for the group of such Highly
Compensated Employees for the Plan Year does not exceed the greater of (i) the
Average Actual Deferral Percentage for the group of eligible Employees who are
Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or (ii)
the Average Actual Deferral Percentage for the group of eligible Employees who
are Non-Highly Compensated Employees for the Plan Year, multiplied by two (2);
provided that the difference in the Average Actual Deferral Percentage for
eligible Non-Highly Compensated Employees does not exceed 2%. Use of this
alternative limitation shall be subject to the provisions of Income Tax
Regulations Section 1.401(m)-2 regarding the multiple use of the alternative
deferral test set forth in Sections 401(k) and 401(m) of the Internal Revenue
Code.
In general, a Highly Compensated Employee includes any employee who, (1)
was a 5% owner of the Employer at any time during the year or preceding year; or
(2) had compensation for the preceding year in excess of $80,000 and, if the
Employer so elects, was in the top 20% of employees by compensation for such
year. The dollar amounts in the foregoing sentence are for 1998. Such amounts
are adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Employer will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) Everett Mutual Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by EverTrust or its
subsidiaries.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of participants who are Key Employees (as defined below) exceeds
60% of the aggregate balance of the Accounts of all participants. Key Employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of EverTrust or its
subsidiaries having annual compensation in excess of $60,000 who is in an
administrative or
6
policy-making capacity, (2) one of the ten employees having annual compensation
in excess of $30,000 and owning, directly or indirectly, the largest interests
in EverTrust, (3) a 5% owner of EverTrust, (i.e., owns directly or indirectly
more than 5% of the stock of EverTrust, or stock possessing more than 5% of the
total combined voting power of all stock of EverTrust) or (4) a 1% owner of
EverTrust having annual compensation in excess of $150,000. The dollar amounts
in the foregoing sentence are for 1998.
V. Investment of Contributions
All amounts credited to participants' accounts under the 401(k) Plan are
held in trust. A trustee appointed by the board of directors of EverTrust
administers the trust.
As of June 30, 1999, the 401(k) Plan offers the following investment
choices for your accounts under the plan:
Aggressive. This fund is diversified among large U.S. stocks,
international stocks, and stocks of smaller growth companies. It uses a
multiple manager, multiple style approach to provide long-term growth.
Approximately 99% of the fund is invested in stocks, with the remaining 1%
invested in a money market fund.
Moderate. This fund is designed to provide growth over time. While it
is likely to produce good growth over the long term, it can produce
moderate fluctuations in value in the short term. It uses a multiple
manager, multiple style approach. Approximately 81% of the fund is invested
in stocks, 18% in bonds, and 1% in a money market fund.
Conservative. This fund is intended to provide growth and income over
time by investing in stocks and bonds. It uses a multiple manager, multiple
style approach to investing. Approximately 53% of the fund is invested in
stocks, 46% in bonds, and 1% in a money market fund.
Money Market. This fund is designed to provide maximum stability of
principal and generate moderate current income. 100% of this fund is
invested in a money market fund.
In addition to these investment choices, the 401(k) Plan, as amended,
will provide a Common Stock Fund as an additional investment alternative. The
Common Stock Fund will invest in the common stock of EverTrust. As with the
other investments choices, you may direct the trustee of the 401(k) Plan to
invest a portion of your 401(k) Plan account balance in the Common Stock Fund.
Such portion may not exceed the lesser of: 100% of your voluntary employee
account or more than 25% of the fair market value of your combined vested
account balance in the EverTrust 401(k) Plan.
7
You may elect (in increments of 5%), to have both past and future
contributions and additions to your 401(k) Plan accounts invested in the Common
Stock Fund. Your election becomes effective as of the last day of each calendar
trimester for which you make the election, provided you file written notice with
the plan administrator at least 15 days in advance. The trustee will invest any
amounts credited to your 401(k) Plan accounts for which you have not given
investment directions in the money market account.
A. Previous Funds.
For the 1998, 1997, and 1996 Plan years, the investments returned the
following annual percentages on investments:
1998 1997 1996
---- ---- ----
a. Aggressive 3.39% 17.18% 17.92%
b. Moderate 5.14% 16.38% 15.72%
c. Conservative 6.71% 13.82% 11.81%
d. Money Market 4.97% 5.55% 5.05%
B. The Common Stock Fund.
The Common Stock Fund will consist of investments in the common stock of
EverTrust made on and after the effective date of the conversion. After the
conversion, the trustee of the 401(k) Plan will, to the extent practicable, use
all amounts held by it in the Common Stock Fund, including cash dividends paid
on the common stock held in the fund, to purchase shares of common stock of
EverTrust. EverTrust anticipates that the trustee will make all purchases of
common stock at prevailing market prices. Pending investment in common stock,
the trustee will place cash held in the Common Stock Fund in the money market
account.
As of the date of this prospectus supplement, none of the shares of
common stock have been issued or are outstanding and there is no established
market for the common stock. Accordingly, there is no record of the historical
performance of the Common Stock Fund. Performance of the Common Stock Fund will
depend on a number of factors, including without limitation the financial
condition and profitability of EverTrust and its subsidiaries and market
conditions for the common stock generally.
Investments in the Common Stock Fund may involve certain special risks in
investments in the Common Stock of EverTrust. For a discussion of these risk
factors, see "Risk Factors" in the prospectus.
8
VI. Benefits Under the Plan
Vesting. At all times, you have a fully vested, nonforfeitable interest
in your 401(k) account under the 401(k) Plan, subject to the Plan's vesting
schedule.
VII. Withdrawals and Distributions from the Plan
Withdrawals Prior to Termination of Employment. You may receive
in-service distributions from the 401(k) Plan under limited circumstances in the
form of hardship distributions and loans. You can apply for a loan from the
401(k) Plan by contacting the Human Resources Department of Everett Mutual Bank.
All loans from the 401(k) Plan are repaid by payroll withholding. You cannot
have more than one loan outstanding at a time. You can apply for a minimum loan
of $1,000 and a maximum loan of the lesser of $50,000 or 50% of your total
vested account balance, less the highest outstanding loan balance in the
immediately preceding 12- month period. You may also be eligible for hardship
withdrawals. In order to qualify for a hardship withdrawal, you must have an
immediate and substantial need to meet certain expenses and have no other
reasonably available resources to meet the financial need. If you qualify for a
hardship distribution, the trustee will make the distribution pro rata from the
investment funds in which you have invested your account balances. You may not
receive more than one hardship withdrawal in any calendar year.
Distribution Upon Retirement or Disability. Unless you have elected an
optional form of benefit, the automatic form of benefit payable to you upon
retirement or disability shall be a life annuity (for married participants, a
qualified joint and survivor annuity). However, you may elect to receive a lump
sum payment or installments from the 401(k) Plan.
Distribution Upon Death. If you die prior to your benefits being paid
from the 401(k) Plan, your benefits will be paid to your surviving spouse or
beneficiary under one or more of the forms available under the 401(k) Plan.
Distribution Upon Termination for any Other Reason. If you terminate
employment for any reason other than retirement, disability or death and your
account balances exceeds $5,000, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
do not exceed $5,000, the trustee will generally distribute your benefits to you
as soon as administratively practicable in a lump sum following termination of
employment.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the Plan shall be void.
9
Administration of the Plan
The trustee with respect to the Plan is the named fiduciary of the 401(k)
Plan for purposes of ERISA.
Trustees. The Savings Plan Administration Committee of EverTrust appoints
the trustee to serve at its pleasure. The Savings Plan Administration Committee
has appointed U.S. Bancorp or its successor in interest as trustee of the Common
Stock Fund.
The trustee receives, holds and invests the contributions to the 401(k)
Plan in trust and distributes them to participants and beneficiaries in
accordance with the terms of the plan and the directions of the plan
administrator. The trustee is responsible for investment of the assets of the
trust.
Reports to Plan Participants
The plan administrator will furnish you a statement at least quarterly
showing (i) the balance in your account as of the end of that period, (ii) the
amount of contributions allocated to your account for that period, and (iii) the
adjustments to your account to reflect earnings, losses, or forfeitures (if
any).
Plan Administrator
Currently, the plan administrator of the 401(k) Plan is Everett Mutual
Bank Plan Administration Savings Committee, 2707 Colby Avenue, Everett,
Washington 98201, (425) 258- 3645. The plan administrator is responsible for the
administration of the 401(k) Plan, interpretation of the provisions of the plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
Internal Revenue Service, and for all disclosures required to be made to
participants, beneficiaries and others under ERISA.
Amendment and Termination
EverTrust intends to continue the 401(k) Plan indefinitely. Nevertheless,
EverTrust may terminate the 401(k) Plan at any time. If EverTrust terminates the
401(k) Plan in whole or in part, then regardless of other provisions in the
plan, all participants affected by such termination shall become fully vested in
their accounts. EverTrust reserves the right to make, from time to time, any
amendment or amendments to the 401(k) Plan which do not cause any part of the
trust to be used for, or diverted to, any purpose other than the exclusive
benefit of participants or their beneficiaries; provided, however, that
EverTrust may amend the plan as it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA or the Internal Revenue Code.
10
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the 401(k) Plan with
another plan, or the transfer of the trust assets to another plan, the plan
requires that you would (if either the plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer which
is equal to or greater than the benefit you would have been entitled to receive
immediately before the merger, consolidation or transfer (if the plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax
aspects of the 401(k) Plan. You should not rely on this survey as a complete or
definitive description of the federal income tax consequences relating to the
401(k) Plan. Statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Before making an election,
you are urged to consult your tax advisor with respect to any distribution from
the 401(k) Plan and transactions involving the plan.
As a "qualified retirement plan," the Internal Revenue Code affords the
401(k) Plan special tax treatment, including: (1) The sponsoring employer is
allowed an immediate tax deduction for the amount contributed to the plan each
year; (2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) earnings of the plan are tax-deferred thereby
permitting the tax-free accumulation of income and gains on investments.
EverTrust will administer the 401(k) Plan to comply in operation with the
requirements of the Internal Revenue Code as of the applicable effective date of
any change in the law.
Lump Sum Distribution. A distribution from the 401(k) Plan to a
participant or the beneficiary of a participant will qualify as a lump sum
distribution if it is made: (i) within one taxable year; (ii) on account of the
participant's death, disability or separation from service, or after the
participant attains age 59-1/2; and (iii) consists of the balance to the credit
of the participant under this plan and all other profit sharing plans, if any,
maintained by EverTrust. The portion of any lump sum distribution required to be
included in your taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such lump sum distribution
less the amount of after-tax contributions, if any, you have made to any other
profit sharing plans maintained by EverTrust which is included in the
distribution.
Averaging Rules. The portion of the total taxable amount of a lump sum
distribution attributable to participation after 1973 in the 401(k) Plan or in
any other profit-sharing plan maintained by EverTrust (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, if you have completed at least five years of participation in
the 401(k) Plan before the taxable year in which the distribution is made, or
receive a lump sum distribution on account of your death (regardless of the
period of your
11
participation in this plan or any other profit-sharing plan maintained by
EverTrust), you may elect to have the ordinary income portion of such lump sum
distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to one
lump sum distribution you or your beneficiary receive, provided such amount is
received on or after you attain age 59-1/2 and the recipient elects to have any
other lump sum distribution from a qualified plan received in the same taxable
year taxed under the special averaging rule (however, for taxable years
commencing after December 31, 1999, the five-year averaging rule for lump sum
distributions is repealed). Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their lump sum distribution taxed under
either the five-year averaging rule or under the prior law using the ten-year
averaging rule. These individuals also may elect to have that portion of the
lump sum distribution attributable to the participant's pre-1974 participation
in the plan taxed at a flat 20% rate as gain from the sale of a capital asset.
The Common Stock Included in Lump Sum Distribution. If a lump sum
distribution includes the common stock, the distribution generally will be taxed
in the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to the
common stock that is the excess of the value of the common stock at the time of
the distribution over its cost or other basis of the securities to the trust.
The tax basis of the common stock for purposes of computing gain or loss on its
subsequent sale equals the value of the common stock at the time of distribution
less the amount of net unrealized appreciation. Any gain on a subsequent sale or
other taxable disposition of the common stock, to the extent of the amount of
net unrealized appreciation at the time of distribution, will constitute
long-term capital gain regardless of the holding period of the common stock. Any
gain on a subsequent sale or other taxable disposition of the common stock in
excess of the amount of net unrealized appreciation at the time of distribution
will be considered long-term capital gain regardless of the holding period of
the common stock. Any gain on a subsequent sale or other taxable disposition of
the common stock in excess of the amount of net unrealized appreciation at the
time of distribution will be considered either short-term or long-term capital
gain depending upon the length of the holding period of the common stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of the distribution to the
extent allowed by the regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. You may roll over virtually all distributions from the 401(k) Plan
to another qualified plan or to a standard individual retirement account without
regard to whether the distribution is a lump sum distribution or a partial
distribution. You have the right to elect to have the trustee transfer all or
any portion of an "eligible rollover distribution" directly to another qualified
retirement plan (subject to the provisions of the recipient qualified plan) or
to an Individual Retirement Account. If you do not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
Individual Retirement Account, the distribution will be subject to a mandatory
federal withholding tax equal to 20% of the taxable distribution. An "eligible
rollover distribution" means any amount distributed from the plan except: (1) a
distribution that is (a) one of a series of substantially equal periodic
payments (not less frequently than annually) made for
12
your life (or life expectancy) or the joint lives of you and your designated
beneficiary, or (b) for a specified period of ten years or more; (2) any amount
required to be distributed under the minimum distribution rules; and (3) any
other distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of lump sum
distributions that you do not roll over or transfer. In other words, the change
does not affect forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
ERISA and Other Qualification
As noted above, the 401(k) Plan is subject to certain provisions of ERISA
and is intended to be a qualified retirement plan under the Internal Revenue
Code.
We have provided you with a brief description of certain federal income
tax aspects of the 401(k) Plan which are of general application under the
Internal Revenue Code. It is not intended to be a complete or definitive
description of the federal income tax consequences of participating in or
receiving distributions from the 401(k) Plan. Accordingly, you are urged to
consult a tax advisor concerning the federal, state and local tax consequences
of participating in and receiving distributions from the 401(k) Plan.
Restrictions on Resale
Any person receiving a distribution of shares of common stock under the
401(k) Plan who is an "affiliate" of EverTrust under Rules 144 and 405 under the
Securities Act of 1933, as amended (e.g., directors, officers and substantial
shareholders of Everett Mutual Bank) may reoffer or resell such shares only
pursuant to a registration statement filed under the Securities Act of 1933
assuming the availability of a registration statement, pursuant to Rule 144 or
some other exemption of the registration requirements of the Securities Act of
1933. Any person who may be an "affiliate" of EverTrust may wish to consult with
counsel before transferring any common stock they own. In addition, participants
are advised to consult with counsel as to the applicability of Section 16 of the
Securities Act of 1934 which may restrict the sale of common stock acquired
under the 401(k) Plan, or other sales of common stock.
Persons who are not deemed to be "affiliates" of EverTrust at the time of
resale will be free to resell any shares of common stock distributed to them
under the 401(k) Plan, either publicly or privately, without regard to the
registration and prospectus delivery requirements of the Securities Act of 1933
or compliance with the restrictions and conditions contained in the exemptive
rules under federal law. An "affiliate" of EverTrust is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with EverTrust. Normally, a director, principal officer
or major shareholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" of EverTrust at the time
of a proposed resale will be permitted to make public resales of the common
stock only pursuant to a "reoffer" prospectus or in accordance with the
restrictions and conditions contained in Rule 144 under the Securities Act of
1933 or some
13
other exemption from registration, and will not be permitted to use this
prospectus in connection with any such resale. In general, the amount of the
common stock which any such affiliate may publicly resell pursuant to Rule 144
in any three-month period may not exceed the greater of one percent of the
common stock then outstanding or the average weekly trading volume reported on
the National Association of Securities Dealers Automated Quotation System during
the four calendar weeks prior to the sale. Such sales may be made only through
brokers without solicitation and only at a time when EverTrust is current in
filing the reports required of it under the Securities Act of 1934.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Act of 1934 imposes reporting and liability
requirements on officers, directors and persons beneficially owning more than
ten percent of public companies such as EverTrust. Section 16(a) of the
Securities Act of 1934 requires the filing of reports of beneficial ownership.
Within ten days of becoming a person subject to the reporting requirements of
Section 16(a), a Form 3 reporting initial beneficial ownership must be filed
with the Securities and Exchange Commission. Certain changes in beneficial
ownership, such as purchases, sales, gifts and participation in savings and
retirement plans must be reported periodically, either on a Form 4 within ten
days after the end of the month in which a change occurs, or annually on a Form
5 within 45 days after the close of EverTrust's fiscal year. Participation in
the Common Stock Fund of the 401(k) Plan by officers, directors and persons
beneficially owning more than 10% of common stock of EverTrust must be reported
to the Securities and Exchange Commission annually on a Form 5 by such
individuals.
In addition to the reporting requirements described above, Section 16(b)
of the Securities Act of 1934 provides for the recovery by EverTrust of profits
realized by any officer, director or any person beneficially owning more than
10% of the common stock ("Section 16(b) Persons") resulting from the purchase
and sale or sale and purchase of the common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that exempt many
transactions involving the 401(k) Plan from the "short-swing" profit recovery
provisions of Section 16(b). The exemptions generally involve restrictions upon
the timing of elections to buy or sell employer securities for the accounts of
Section 16(b) Persons.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons may, under limited circumstances involving the
purchase of common stock within six months of the distribution, be required to
hold shares of the common stock distributed from the 401(k) Plan for six months
following such distribution.
14
Financial Information Regarding Plan Assets
The financial statements and schedules of the 401(k) Plan as of December
31, 1998 and 1997 and for the years then ended have been included herein.
LEGAL OPINIONS
The validity of the issuance of EverTrust common stock will be passed
upon by Breyer & Associates PC, 1100 New York Avenue, N.W., Washington, D.C.,
which firm acted as special counsel for EverTrust in connection with its
conversion.
15
EVERTRUST FINANCIAL GROUP, INC.
401(K) PLAN FINANCIALS
(AS REPORTED ON THE PLAN'S FORM 5500)
Year Ended December 31,
-----------------------
1998 1997
---- ----
ASSETS:
Cash
Receivables ......................................... $ 8,760 $ --
Investments:
U.S. Government securities ........................ -- --
Corporate debt and equity instruments ............. -- --
Real estate and mortgages (other than
to participants) ................................. -- --
Loans to participants:
Mortgages ..................................... -- --
Other ......................................... -- --
Other ............................................. 2,766,946 2,535,830
---------- ----------
Total investments ............................. $2,775,706 $2,535,830
========== ==========
Buildings and other property used in plan
operations ......................................... $ -- $ --
Other assets ........................................ -- --
Total assets ...................................... -- --
LIABILITIES:
Payables ............................................ -- 1,466
Acquisition indebtedness ............................ -- --
Other liabilities ................................... -- --
Total liabilities ................................... -- 1,466
---------- ----------
Net assets .......................................... $2,775,706 $2,534,364
========== ==========
INCOME:
Contributions received or receivable in
cash from:
Employer(s) ....................................... $ 84,560 $ 68,672
Employees ......................................... 214,547 140,743
Other ............................................. -- --
---------- ----------
Total ......................................... 299,107 209,415
Noncash contributions ............................... -- --
Earnings from investments ........................... -- --
Net realized gain (loss) on sale or
exchange of assets ................................. -- --
Other income ........................................ 123,897 356,238
---------- ----------
Total income ...................................... $ 423,004 $ 565,653
========== ==========
EXPENSES:
Distribution of benefits and payments to
provide benefits:
Directly to participants or their beneficiaries ... $ 164,803 $ 305,856
Other ............................................. -- --
Total distribution of benefits and payments to
provide benefits ........................... -- --
---------- ----------
Administrative expense .............................. 16,859 15,513
Other expenses ...................................... -- --
Total expenses .................................... 181,662 321,369
---------- ----------
Net income (loss) ............................. $ 241,342 $ 244,284
========== ==========
16
INVESTMENT ELECTION FORM
PARTICIPANT ELECTION TO INVEST IN
EVERTRUST FINANCIAL GROUP, INC. STOCK
("EMPLOYER STOCK FUND")
EVERETT MUTUAL BANK
401(k) Employee Savings and Profit Sharing Plan and Trust
as adopted by
EverTrust Financial Group, Inc.
If you would like to participate in the offering using amounts currently in your
account in Everett Mutual Bank's 401(k) plan as of April 30, 1999, please
complete this form and return it to Nancy Elliott in the Human Resources
Department by no later than 3:00 PM on [_____________________], 1999.
Participant's Name (Please Print):______________________________________________
Address:________________________________________________________________________
Street City State Zip Code
Social Security Number: _______________ Certificate Number: _________________
1. Background Information
EverTrust will be issuing shares of common stock, par value $0.01 per
share (the "Common Stock"), to certain depositors and the public (the
"Offering") in connection with its conversion.
Participants in the Everett Mutual Bank 401(k) Plan (the "Plan") are
being given an opportunity to direct the trustee of the plan (the "Trustee") to
purchase Common Stock in the Offering with amounts currently in their Plan
account. (Employees who would like to directly purchase shares of Common Stock
in the offering with funds other than amounts currently in their Plan account
may do so by completing the order form that accompanies the prospectus.) In
connection therewith, a new investment fund under the Plan -- the "Common Stock
Fund" -- comprised of EverTrust Common Stock is being established. Participants
are also being given the opportunity, after the offering, to direct future pay
deferrals under the Plan to the Common Stock Fund. Because it is actually the
Plan that purchases the common stock, participants would acquire a
"participation interest" (expressed as units of the Common Stock Fund) in the
shares and would not own the shares directly.
Prior to making a decision to direct the Trustee to purchase common
stock, we strongly urge you to carefully review the prospectus and the
prospectus supplement that accompany this investment election form. Your
decision to direct the transfer of amounts credited to your account balances to
the Common Stock Fund in order to purchase shares of common stock in connection
with the Offering is irrevocable. Notwithstanding this irrevocability,
participants may transfer out some or all of their units in the Common Stock
Fund, if any, and into one or more of the Plan's other investment funds at such
times as are provided for under the Plan's rules for such transfers.
Investing in any stock entails some risks and we encourage you to discuss
your investment decision with your investment advisor before completing this
form. Neither the Trustee, the plan administrator, nor any employee of the
employer sponsor is authorized to make any representations about this
investment. You should not rely on any information other than information
contained in the prospectus and the prospectus supplement in making your
investment decision.
Any shares purchased by the plan based on your election will be subject
to the conditions and restrictions otherwise applicable to common stock
purchased directly by you in the offering. These restrictions are described in
the prospectus and the prospectus supplement.
17
2. Investment Elections
If you would like to participate in the Offering with amounts currently
in your 401(k) Plan, please complete the box below, indicating what percentage
of each of your current funds you would like to transfer into the Common Stock
Fund. In calculating the number of shares of common stock that the Trustee will
purchase in the Offering based on your election, the Trustee will use your
401(k) Plan account balances as of April 30, 1999. Thus, for example, if your
voluntary employee account balance as of April 30, 1999 totals $ 5,000 and you
elect in the box below to transfer 20% from your aggressive fund account balance
to the Common Stock Fund, the Trustee of the plan will use $ 1,000 (20% of $
5,000) from your aggressive fund account to purchase 100 shares of common stock
at a purchase price of $10.00 per share.
In the event that the Trustee is unable to use the total amount that you
elect in the box below to have transferred into the Common Stock Fund to
purchase common stock due to an oversubscription in the offering, the amount
that is not invested in the Common Stock Fund will be reallocated on a pro-rata
basis among your other 401(k) Plan fund investments. If you elect in the box
below to have 100% of your current 401(k) Plan funds transferred into the Common
Stock Fund and the Offering is oversubscribed, the amount that is not invested
in the Common Stock Fund will be invested in the money market account.
Indicate the exact percentage to be transferred from one or more of the
following funds into the Common Stock Fund:
Percentage From Fund
---------- ---------
_______% which equal $________.00 Aggressive
_______% which equal $________.00 Moderate
_______% which equal $________.00 Conservative
_______% which equal $________.00 Money Market
Note: If you do not complete this box, you will not participate in the offering
by using your 401(k) Plan funds.
3. Purchaser Information. The ability of participants in the Plan to purchase
common stock in the conversion and to direct their current account balances into
the Common Stock Fund is based upon the participant's status as an eligible
account holder or supplemental eligible account holder. Please indicate your
status.
a. [ ] Eligible Account Holder - Check here if you were a depositor
with $50.00 or more on deposit with Everett Mutual Bank,
December 31, 1997.
b. [ ] Supplemental Eligible Account Holder - Check here if you were
a depositor with $50.00 or more on deposit with Everett
Mutual Bank as of June 30, 1999, but are not an eligible
account holder.
c. [ ] Depositor with $50 or more on deposit at Commercial Bank of
Everett as of December 31, 1997.
18
4. Participant Signature and Acknowledgment - Required
By signing this election form, I authorize and direct the plan
administrator and trustee to carry out my instructions. I acknowledge that I
have been provided with and have read a copy of the prospectus and prospectus
supplement relating to the issuance of common stock that accompany this
investment election form. I am aware of the risks involved in investing in
common stock and understand that the trustee, plan administrator nor any
employee of the employer sponsor are not responsible for my choice of
investment. I understand that my failure to sign this acknowledgment will make
this investment election form null and void.
Participant's Signature: _________________________ Date Signed: ________________
* * *
This form must be completed and returned to Nancy
Elliott in the Human Resources Department at Everett
Mutual Bank by no later than
3:00 PM on [____________________], 1999.
19
PROSPECTUS [LOGO]
EVERTRUST FINANCIAL GROUP, INC.
8,596,250 SHARES OF COMMON STOCK
EverTrust is a stock company that replaces Mutual Bancshares in the conversion
from mutual to stock form and is issuing shares of its common stock in
connection with the conversion. EverTrust has never issued any capital stock.
The conversion must be approved by a majority of the votes eligible to be cast
by the depositors and borrowers of Everett Mutual Bank.
EverTrust will be the holding company for Everett Mutual Bank, Commercial Bank
of Everett, I-Pro, Inc. and Mutual Bancshares Capital, Inc.
----------
OFFERING SUMMARY
Price Per Share: $10.00
Proposed Nasdaq National Market trading symbol: EVRT
Maximum
Without Further
Minimum Midpoint Regulatory Approval
------- -------- -------------------
Number of shares: 5,525,000 6,500,000 7,475,000
Gross offering proceeds: $55,250,000 $65,000,000 $74,750,000
Estimated underwriting commissions, other offering
expenses and contribution to The EverTrust Foundation: $2,605,000 $2,800,000 $2,800,000
Estimated net proceeds: $52,645,000 $62,200,000 $71,950,000
Estimated net proceeds per share: $9.53 $9.57 $9.63
For a discussion of material risks that you should consider, see "Risk
Factors" beginning on page 1.
With the approval of the regulatory agencies, EverTrust may increase the maximum
number of shares of common stock by up to 15% to 8,596,250 shares.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc., will use
its best efforts to assist EverTrust in selling at least the minimum number of
shares but does not guarantee that this number will be sold. Charles Webb is not
obligated to purchase any shares of common stock in the offering. Keefe,
Bruyette & Woods, Inc. intends to make a market in the common stock.
The subscription offering will end at 12:00 Noon, Pacific Time, on
______________, 1999. If the conversion is not completed by _________, 1999, and
the regulators give Mutual Bancshares more time to complete the conversion,
EverTrust will give all subscribers the opportunity to increase, decrease or
cancel their orders. No extension may go beyond __________, 2001. EverTrust will
hold all funds received from subscribers in an interest-bearing savings account
at Everett Mutual Bank until the conversion is completed or terminated.
EverTrust will return all funds promptly with interest if the conversion is
terminated.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Washington Department of
Financial Institutions, the Federal Deposit Insurance Corporation, nor any state
securities regulator has approved or disapproved these securities or determined
if this prospectus is accurate or complete. Any representation to the contrary
is a criminal offense.
For additional information about the conversion and the stock offering, please
refer to the more detailed information in this prospectus. For assistance,
please contact the stock information center toll free at (888)_____ - ______ or
(425) _____-________.
CHARLES WEBB & COMPANY a Division
of Keefe, Bruyette & Woods, Inc.
___________ ___, 1999
[Map depicting office locations of EverTrust]
SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. For assistance, please contact the stock information
center toll free at (888) ____-_______.
The Companies
EverTrust Financial Group, Inc. EverTrust is a stock company that replaces
2707 Colby Avenue, Suite 600 Mutual Bancshares as the holding company
Everett, Washington, 98201 for Everett Mutual Bank; Commercial Bank
(425) 258-3645 of Everett; I-Pro, Inc.; and Mutual
Bancshares Capital Inc. After the
conversion, EverTrust intends to acquire
or organize other operating subsidiaries,
although it currently has no specific
plans or agreements to do so. At March 31,
1999, Mutual Bancshares had assets of
$452.1 million, deposits of $375.9 million
and retained earnings of $52.1 million.
Everett Mutual Bank Everett Mutual Bank's business strategy is
2707 Colby Avenue, Suite 600 to continue operating as a
Everett, Washington, 98201 community-oriented bank dedicated to
(425) 258-3645 financing residential properties and
providing quality customer service.
Everett Mutual Bank operates out of 11
full service offices located throughout
Snohomish County, Washington. Everett
Mutual Bank considers the communities in
Snohomish County, Washington as its
primary market area for making loans and
attracting deposits. Everett Mutual Bank
also makes loans in King and Pierce
Counties and, to a much lesser extent,
other counties in Western Washington.
Everett Mutual Bank'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. At March 31, 1999,
Everett Mutual Bank had $426.5 million in
assets and $41.5 million in equity. For
the year ended March 31, 1999, Everett
Mutual Bank had net income of $4.5
million.
For a discussion of Everett Mutual Bank's
business strategy and recent results of
operations, see "Management's Discussion
and Analysis of Financial Condition and
Results of Operations." For a discussion
of Everett Mutual Bank's business
activities, see "Business of Mutual
Bancshares."
Commercial Bank of Everett Commercial Bank of Everett was recently
2707 Colby Avenue, Suite 715 formed in order to offer business loans
Everett, Washington, 98201 and deposit services to individuals and
(425) 258-0388 local businesses through its office
located in Everett, Washington. At March
31, 1999, Commercial Bank of Everett
had $19.8 million in assets and $2.8
million in equity. For the year ended
March 31, 1999, Commercial Bank of Everett
had a loss of $204,000.
(i)
I-Pro, Inc. I-Pro, Inc. provides backroom banking
6838 South 220th Street services for Everett Mutual Bank and
Kent, Washington 98032 Commercial Bank of Everett, as well as
(253) 872-7976 other financial institutions and
nonbanking businesses. At March 31, 1999,
I-Pro, Inc. had $628,000 in assets and
$47,000 in equity. For the year ended
March 31, 1999, I-Pro, Inc. had a loss of
$340,000.
Mutual Bancshares Capital, Inc. Mutual Bancshares Capital, Inc. is a
22020 17th Avenue, S.E., Suite 200 start-up venture capital company organized
Bothell, Washington 98201 to provide equity to regionally-based
(425) 424-0058 high- technology companies and companies
that make medical instruments at the
beginning or early stages of development.
At March 31, 1999, Mutual Bancshares
Capital, Inc. had $3.2 million in assets
and $3.2 million in equity. For the year
ended March 31, 1999, Mutual Bancshares
Capital, Inc. had a loss of $64,000.
Corporate Structure
The following table sets forth the organization of EverTrust before and
after the conversion.
Before Conversion
- -----------------
Mutual Bancshares
(Holding Company)
-----------------
Everett Mutual Bank Commercial Bank of Everett I-Pro, Inc. Mutual Bancshares
(Real estate & consumer lending, (Business banking (Check processing & Capital, Inc.
retail banking services) services) statement rendering) (Venture capital company)
------------------------------ --------------------------- -------------------- ------------------------
Sound Financial Inc.
(Annuity & mutual fund sales)
After Conversion
- ----------------
Shareholders
------------
EverTrust Financial Group, Inc.
(Holding Company)
-------------------------------
Everett Mutual Bank Commercial Bank of Everett I-Pro, Inc. Mutual Bancshares
(Real estate & consumer lending, (Business banking (Check processing & Capital, Inc.
retail banking services) services) statement rendering) (Venture capital company)
- -------------------------------- -------------------------- -------------------- -------------------------
Sound Financial Inc.
(Annuity & mutual fund sales)
-----------------------------
(ii)
The Conversion
What is the Conversion (page 106) EverTrust is a stock company that replaces
Mutual Bancshares
in the conversion from mutual to stock
form. In connection with the conversion
EverTrust is offering stock to the
depositors and borrowers of Everett Mutual
Bank and Commercial Bank of Everett.
Voting rights in EverTrust will belong to
its stockholders.
The regulators have approved the
conversion, with the condition that Mutual
Bancshares' members approve the
conversion. Mutual Bancshares has called a
special meeting of its members for
_________, 1999 to vote on the conversion.
Mutual Bancshares' Reasons for The conversion will be important to
Conversion (page 108) EverTrust's future growth and performance
because it will:
o provide EverTrust
flexibility to continue to
diversify its operations,
o provide a larger capital
base which will permit
Everett Mutual Bank and
Commercial Bank of Everett
to increase the number and
amount of loans they can
make to the people and
businesses in its market
area,
o provide Everett Mutual Bank
and Commercial Bank of
Everett the ability to
expand their financial
services through the
addition of new branch
offices,
o enhance their ability to
attract and retain qualified
management through
stock-based compensation
plans,
o provide Everett Mutual
Bank's and Commercial Bank
of Everett's customers and
communities the ability to
own stock in their local,
community-oriented financial
institution, and
o enhance their ability to
expand their financial
services, especially
non-banking services, for
all of their customers.
Presently, EverTrust does not have any
specific plans or arrangements for
diversification or expansion.
Benefits of the Conversion to EverTrust intends to adopt the following
Management of EverTrust and its benefit plans and executive officer
Related Entities (pages 85-92) employment agreements:
(iii)
o Employee Stock Ownership
Plan. This plan intends to
purchase 2% of the shares
issued in the conversion,
including shares issued to
The EverTrust Foundation.
This would range from
117,130 shares, assuming
5,856,500 shares are issued
in the conversion, to
157,300 shares, assuming
7,865,000 shares are issued
in the conversion. EverTrust
will allocate these shares
to employees over a period
of years in proportion to
their compensation.
o Stock Option Plan. Under
this plan, EverTrust may
award stock options to key
employees and directors. The
number of options available
under this plan will be
equal to 10% of the number
of shares sold in the
conversion, including shares
issued to The EverTrust
Foundation. This would range
from 585,650 shares,
assuming 5,856,500 shares
are issued in the
conversion, to 786,500
shares, assuming 7,865,000
shares are issued in the
conversion. This plan will
require shareholder
approval.
o Management Recognition and
Development Plan. Under this
plan, EverTrust may award
shares of restricted stock
to key employees and
directors at no cost to the
recipient. The number of
shares available under this
plan will equal 4% of the
number of shares sold in the
conversion, including shares
issued to The EverTrust
Foundation. This would range
from 234,260 shares,
assuming 5,856,500 shares
are issued in the
conversion, to 314,600
shares, assuming 7,865,000
shares are issued in the
conversion. This plan will
require shareholder
approval.
o Employment Agreements will
be entered into with three
executive officers The
employment agreements will
provide for severance
benefits if the executive
officer is terminated
following a change in
control of EverTrust or
Everett Mutual Bank. If a
change in control had
occurred at March 31, 1999,
the aggregate value of the
severance benefits available
to the executive officers
under the agreements would
have been approximately $1.1
million.
o Employee Severance
Compensation Plan. This plan
will provide severance
benefits to eligible
employees if there is a
change in control of
EverTrust or Everett Mutual
Bank. In the event the
provisions of the severance
plan are triggered, the
total amount of payments due
would be approximately
$914,130.
(iv)
The following table summarizes the total
number and dollar value of the shares of
common stock, assuming 6,500,000 shares
are sold in the conversion and 390,000
shares are issued to The EverTrust
Foundation, which the employee stock
ownership plan would acquire, and the
total number of shares and dollar amount
available for award under the stock
option plan and the management
recognition and development plan. The
table assumes the value of the shares is
$10.00 per share. The table does not
include a value for the options because
their value would be equal to the fair
market value of the common stock on the
day that the options are granted. As a
result, financial gains can be realized
on an option only if the market price of
common stock increases.
Percentage
Number Estimated of Shares
of Value of Issued in the
Shares Shares Conversion
------ ------ ----------
Employee stock
ownership plan...... 137,800 $1,378,000 2.0%
Management
recognition and
development.......... 275,600 2,756,000 4.0
plan awards
Stock options......... 689,000 -- 10.0
--------- ---------- -----
Total................. 1,102,400 $4,134,000 16.0%
========= ========== =====
For a discussion of material risks
associated with these plans and
agreements, see "Risk Factors --
Implementation of Benefit Plans Will
Increase Future Compensation Expense and
Will Lower EverTrust's Net Income" and
"-- Employment Agreements and Severance
Plan Could Make Takeover Attempts More
Difficult to Achieve."
The Offering
Subscription Offering (page 110) EverTrust has granted subscription rights
in the following order of priority to:
1. Persons with $50 or more on
deposit at Everett Mutual
Bank as of December 31,
1997.
2. The EverTrust employee stock
ownership plan.
3. Persons with $50 or more on
deposit at Everett Mutual
Bank as of June 30, 1999.
(v)
4. Everett Mutual Bank's
depositors and borrowers as
of _________ __, 1999.
5. Persons with $50 or more on
deposit at Commercial Bank
of Everett as of December
31, 1997.
To ensure that EverTrust properly
identifies your subscription rights, you
must list all of your deposit accounts
and loans as of the eligibility dates on
the stock order form. If you fail to do
so, your subscription may be reduced or
rejected.
The subscription offering will end at
12:00 Noon, Pacific Time, on ________,
1999. If the offering is oversubscribed,
EverTrust will allocate shares in order
of the priorities described above under a
formula contained in the plan of
conversion.
Subscription Rights Are Not Subscription rights are not transferable,
Transferable (page 111) and persons with subscription rights may
not subscribe for shares for the benefit
of any other person. If you violate this
prohibition, you may lose your right to
purchase shares and may face criminal
prosecution and other sanctions.
Community Offering (page 112) EverTrust may offer shares not sold in the
subscription offering to the general
public in a community offering. If shares
are available, EverTrust expects to offer
them to the general public immediately
after the end of the subscription
offering, but may begin a community
offering at any time during the
subscription offering.
EverTrust may reject orders received in
the community offering either in whole or
in part. If your order is rejected in
part, you cannot cancel the remainder of
your order.
Purchase Price of the Common Stock The purchase price is $10.00 per share,
(page 116) which was determined by the Boards of
Directors of Mutual Bancshares and Everett
Mutual Bank in consultation with Charles
Webb.
(vi)
Number of Shares to be Issued The amount of common stock that EverTrust
in the Conversion (page 116) will offer in the conversion is based on
the independent appraisal by RP Financial,
LC., dated as June 11, 1999. The
independent appraisal established the
offering range of $55,250,000 to
$74,750,000 with a midpoint of
$65,000,000, which is the estimated market
value of the shares to be sold in the
offering. This means that EverTrust will
sell between 5,525,000 and 7,475,000
shares of its common stock in this
offering. With regulatory approval,
EverTrust may increase the number of
shares to 8,596,250 without giving you
further notice. The appraisal was based on
Mutual Bancshares' and its related
entities' financial condition and
operations and the effect of the
additional capital raised in the offering.
You will not pay a commission to buy any
shares in the conversion.
Book Value and Price Earnings After completion of the conversion and the
Ratios For EverTrust Common offering, each share of EverTrust common
Stock (page 15) stock will have a book value of $15.42, at
the maximum of the offering range. This
means the price paid for each share sold
in this offering will be 64.85% of the
book value. In addition, the price to
earnings ratio at the maximum of the
offering range will be 26.32. These ratios
are important factors used by RP Financial
in determining the appraised value of
Mutual Bancshares and its related
entities.
Limitations on the Purchase of The minimum purchase is 25 shares.
Common Stock in the Conversion
(page 118)
The maximum purchase in the subscription
offering by any person or group of persons
through a single deposit account is
$250,000 of common stock, which equals
25,000 shares.
The maximum purchase by any person in the
community offering is $250,000 of common
stock, which equals 25,000 shares.
The maximum purchase in the subscription
offering and community offering combined
by any person, related persons or persons
acting together is $500,000 of common
stock, which equals 50,000 shares.
How to Purchase Common Stock If you want to subscribe for shares, you
(page 114) must complete an original stock order form
and send it together with full payment to
Everett Mutual Bank in the postage-paid
envelope provided. You must sign the
certification that is part of the stock
order form. Everett Mutual Bank must
receive your stock order form before the
end of the subscription offering.
You may pay for shares in any of the
following ways:
(vii)
o In Cash if delivered in
person at any branch of
Everett Mutual Bank or
Commercial Bank of Everett,
although we request that you
exchange cash for a check
with any teller.
o By Check or Money Order made
payable to EverTrust
o By Withdrawal from an
account at Everett Mutual
Bank or Commercial Bank of
Everett. To use funds in an
IRA at Everett Mutual Bank
or Commercial Bank of
Everett you must transfer
your account to an
unaffiliated institution or
broker. Please contact the
stock information center as
early as possible during the
subscription offering for
assistance.
Everett Mutual Bank will pay interest on
your subscription funds at the rate it
pays on savings accounts from the date it
receives your funds until the conversion
is completed or terminated. All funds
authorized for withdrawal from deposit
accounts with Everett Mutual Bank will
earn interest at the applicable account
rate until the conversion is completed.
There will be no early withdrawal penalty
for subscriptions paid for by withdrawal
from certificates of deposit.
After Everett Mutual Bank receives your
order, you cannot cancel or change it
without Everett Mutual Bank's consent. If
EverTrust sells fewer than 5,525,000
shares or more than 8,596,250 shares, all
subscribers will be notified and given the
opportunity to change or cancel their
orders.
EverTrust's and Everett Mutual EverTrust will invest 50% of the net
Bank's Use of Proceeds From the conversion proceeds in Everett Mutual
Sale of Common Stock in the Bank. Everett Mutual Bank will use the net
Conversion (page 8) proceeds received from the offering to
invest in short term and intermediate term
U.S. Government and agency obligations and
ultimately loan originations consistent
with prior lending practices.
In addition, EverTrust will use the
remainder of the proceeds as follows:
o to contribute $2.3 million
to Commercial Bank of
Everett;
o for general corporate
purposes, which may include,
for example, buying back
shares of its common stock;
o to loan an amount equal to
2% of the gross proceeds of
the offering to the employee
stock ownership plan to fund
its purchase of common
stock; and
(viii)
o to expand operations through
acquiring or establishing
additional non-banking
entities, although it has no
specific plans,
arrangements, agreements or
understandings, written or
oral, regarding these
activities.
Pending such use, the net proceeds will be
invested in investment securities with
short and intermediate terms or in a
deposit account at Everett Mutual Bank.
Purchases of Common Stock by Mutual Bancshares' directors and executive
Mutual Bancshares; and its Related officers intend to subscribe for 187,000
Entities' Officers and Directors shares regardless of the number of shares
(page 20) issued in the conversion. This number
equals 2.38% of the 7,865,000 shares that
would be issued at the maximum of the
offering range, including shares issued to
The EverTrust Foundation. If fewer shares
are issued in the conversion, then
officers and directors will own a greater
percentage of EverTrust. Directors and
executive officers will pay the same
$10.00 per share price for these shares as
everyone else who purchases shares in the
conversion.
Plans to List the Common Stock On EverTrust intends to list the common stock
the Nasdaq National Market System on the Nasdaq National Market System.
(page 10) Keefe Bruyette & Woods, Inc. intends to be
a market maker in the common stock. After
shares of the common stock begin trading,
you may contact a stock broker to buy or
sell shares.
EverTrust Does Not Currently EverTrust does not intend initially to pay
Plan to Pay Dividends a cash dividend, however, should it adopt
(page 10) a policy in the future of paying periodic
cash dividends, the Board of Directors may
declare and pay periodic special cash
dividends in addition to, or in lieu of,
regular cash dividends. Dividends, if any,
will be affected by a number of factors,
including the prevailing economic,
interest rate and stock market conditions,
as well as profitability, financial
condition, expected growth, compliance
with capital requirements, dividend payout
ratio and peer group analyses. The
establishment, timing and amount of any
dividend payments will be determined by
the Board of Directors of EverTrust, based
on the factors noted above.
Plans to Contribute a Maximum of Mutual Bancshares currently maintains a
390,000 shares of EverTrust Common charitable foundation, The Everett Mutual
Stock and a maximum of $1.3 million Foundation. During the year ended March
in cash to The EverTrust Foundation 31, 1999, Mutual Bancshares contributed
(page 101) $3.4 million to The Everett Mutual
Foundation.
(ix)
In connection with the conversion,
EverTrust intends to establish an
additional charitable foundation, The
EverTrust Foundation, in order to further
Mutual Bancshares' commitment to the local
community. EverTrust will fund the
foundation with cash and stock equal to 8%
of the shares issued in the offering at
the minimum of the estimated valuation
range with a maximum contribution equal to
8% of the shares issued in the offering at
the midpoint of the estimated valuation
range. A maximum of 390,000 shares or 75%
of the contribution will be made to the
foundation in stock and $1.3 million or
25% of the total contribution to the
foundation will be made in cash. If the
foundation is established and funded, then
the appraisal will be reduced and
EverTrust will sell fewer shares of common
stock than if the conversion were
completed without the foundation.
(x)
RISK FACTORS
Before investing in EverTrust's common stock please carefully consider
the matters discussed below. EverTrust's common stock is not a savings account
or deposit and is not insured by the Federal Deposit Insurance Corporation or
any other government agency.
Everett Mutual Bank's and Commercial Bank of Everett's Non-Residential Lending
Increases Lending Risk Because of the Higher Risk that the Loans Will Not Be
Repaid
Multi-family and Commercial Real Estate and Construction Lending.
Multi-family and commercial real estate and construction lending involve larger
loan amounts and more risk than residential lending and are subject to a greater
extent to adverse conditions in the economy. These loans offer Everett Mutual
Bank an opportunity to receive interest at rates higher than those generally
available from one- to- four family residential lending. However, multi-family
and commercial real estate loans involve a greater degree of risk than one- to-
four family residential mortgage loans because they usually have larger
principal balances; have unpredictable cash flows; are more difficult to
evaluate and monitor, which makes impaired loans difficult to identify early on,
and are concentrated in a single geographical area. Additionally, a single loss
on a multi-family or commercial real estate loan generally is considered a large
loss because of the amount of the loan and has a greater impact on the financial
institution. Because payments on loans secured by multi-family and commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. See "Business of Mutual Bancshares -- Lending
Activities -- Multi-Family Lending," "-- Commercial Real Estate Lending" and "--
Construction Lending."
Business Lending. Business loans involve larger loan amounts and are
subject to a greater extent to adverse conditions in the economy. These types of
loans are riskier than traditional real estate secured loans because the
repayment of the loan depends upon the success of the business, the operations
of which may be subject to adverse conditions in the economy. For a discussion
of Commercial Bank of Everett's commercial business lending. See "Business of
Commercial Bank of Everett -- Business Lending."
Implementation of Stock-Based Benefit Plans Will Increase Future Compensation
Expense and Will Lower EverTrust's Net Income
Additional material employee compensation and benefit expenses from the
shares purchased or granted to employees and executives under new stock-based
benefit plans will be experienced by EverTrust and may lower its net income.
These expenses have been reflected in the pro forma financial information under
"Pro Forma Data" assuming the $10.00 per share purchase price as fair market
value. Actual expenses, however, may be higher or lower. Recently proposed
accounting rules also require EverTrust to recognize compensation expense for
stock options awarded to non-employee directors. For further discussion of these
plans, see "Management of Everett Mutual Bank -- Benefits."
Issuance of Shares for Benefit Programs Will Lower Your Ownership Interest
Your ownership interest in EverTrust could be reduced by up to
approximately 3.85% if the shares for the management recognition and development
plan are issued from authorized but unissued stock. If the shares for the stock
option plan are issued from authorized but unissued stock, your ownership
interest could be reduced by up to approximately 9.09%. EverTrust intends to
issue shares to its officers and directors through these new stock based benefit
programs, if stockholders approve these plans. See "Pro Forma Data."
1
Loss of Key Personnel May Hurt EverTrust's and Everett Mutual Bank's Operations
Because it May Be Difficult to Hire Qualified Replacements
The loss of the chief executive officer and president and other senior
executive officers could have a material adverse impact on the operations of
Everett Mutual Bank since they have been instrumental in managing the business
affairs of Everett Mutual Bank for up to 20 years. Other officers do not have
the experience and expertise to readily replace these individuals. If Everett
Mutual Bank were to loose these executive officers, the Board of Directors would
have to search outside of Everett Mutual Bank for qualified, permanent
replacements. This search may be prolonged and Everett Mutual Bank cannot assure
you that it will be able to locate and hire qualified replacements. Neither
Everett Mutual Bank nor EverTrust has any plans to obtain a "key man" life
insurance policy for any individual. For a discussion of Everett Mutual Bank's
management, see "Management of Everett Mutual Bank."
Possible Voting Control by EverTrust's Management and Employees and Provisions
in EverTrust's Corporate Documents May Prevent Transactions You Would Like
EverTrust's management and employees will control a significant
percentage of EverTrust's common stock, and if these individuals were to act
together, they could have significant influence over the outcome of any
stockholder vote. This voting power may prevent takeover attempts that
management opposes and other transactions that you would like to see happen. For
information about management's intended stock purchases and the number of shares
that may be awarded under new benefit plans, see "Shares to be Purchased by
Management With Subscription Rights," "Management of Everett Mutual Bank --
Benefits" and "Restrictions on Acquisition of EverTrust Financial Group, Inc."
Employment Agreements and Severance Plan Could Make Takeover Attempts More
Difficult to Achieve Because They Will Increase the Costs of Acquiring EverTrust
The cash severance payments and/or the continuation of health, life and
disability benefits that may be triggered by a change in control under the
proposed employment agreements for certain executive officers, and the severance
plan may have the effect of increasing the costs of acquiring EverTrust. These
additional costs may have the affect of discouraging future attempts to take
over EverTrust or Everett Mutual Bank. If a change in control had occurred at
March 31, 1999, the aggregate value of the severance benefits available to the
executive officers under the agreements would have been approximately $1.1
million. In addition, if a change in control had occurred at March 31, 1999 and
all eligible employees had been terminated, the aggregate payment due under the
severance plan would have been approximately $914,130. For information about the
proposed employment agreements and severance plan, see "Management of Everett
Mutual Bank -- Executive Compensation."
There May Not Be An Active and Liquid Trading Market for the Common Stock and as
a Result You May Have Difficulty in Buying and Selling Shares
EverTrust has never issued capital stock and, consequently, there is no
existing market for the common stock. Although EverTrust has received
conditional approval to list the common stock on the National Market System of
the Nasdaq Stock Market under the symbol "EVRT," there can be no assurance that
an active and liquid trading market for the common stock will develop, or if
developed, will continue. Furthermore, there can be no assurance that purchasers
will be able to sell their shares at or above the purchase price. See "Market
for EverTrust Financial Group, Inc.'s Common Stock."
2
Your Subscription Funds Could be Held for an Extended Time Period and Will Be
Unavailable to You for Other Investments if Completion of the Conversion Is
Delayed
Your subscription funds could be held for an extended time period if the
conversion is not completed by __________, 1999 and the regulators give
EverTrust more time to complete this conversion. If this occurs, your funds
would not be available to use for other purposes. If the regulators give
EverTrust more time to complete the conversion, EverTrust will contact everyone
who subscribed for shares to see if they still want to purchase stock. This is
commonly referred to as a "resolicitation offering." A material change in the
independent appraisal of Mutual Bancshares and its related entities would be the
most likely, but not necessarily the only, reason for a delay in completing the
conversion. Federal and state regulations permit the regulators to grant one or
more time extensions, none of which may exceed 90 days. Extensions may not go
beyond __________, 2001. In the resolicitation offering, EverTrust would mail a
supplement to this prospectus to you if you subscribed for stock to let you
confirm, modify or cancel your subscription. If you fail to respond to the
resolicitation offering, it would be as if you had canceled your order and all
subscription funds, together with accrued interest, would be returned to you. If
you authorized payment by withdrawal of funds on deposit at Everett Mutual Bank
or Commercial Bank of Everett, that authorization would terminate. If you
affirmatively confirm your subscription order during the resolicitation
offering, EverTrust and Everett Mutual Bank would continue to hold your
subscription funds until the end of the resolicitation offering. Your
resolicitation order would be irrevocable without the consent of EverTrust and
Everett Mutual Bank until the conversion is completed or terminated.
Rising Interest Rates Could Hurt Everett Mutual Bank's Profits
If interest rates rise, Everett Mutual Bank anticipates that its net
interest income would decline as interest paid on deposits would increase more
quickly than the interest earned on loans and investment securities. Rising
interest rates may also cause a decrease in customer demand for loans and a
reduction in value of Everett Mutual Bank's securities available for sale. For
further discussion of how changes in interest rates could impact Everett Mutual
Bank, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset and Liability Management and Market Risk."
Return on Equity Will Be Below Average After Conversion Because of High Capital
Levels and Operating Losses of Commercial Bank of Everett, I-Pro, Inc. and
Mutual Bancshares Capital, Inc.
As a result of the significant amount of additional capital that will be
raised in this offering, EverTrust expects that its return on average equity
will decrease. In addition, compensation expense will increase as a result of
the new benefit plans. Over time, EverTrust intends to use the net proceeds from
this offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. This goal could take a number
of years to achieve and there will be a great deal of discretion by the Board of
Directors and management in the investment of this capital so EverTrust cannot
assure you that this goal can be attained. In addition, as a result of their
recent start-up, Commercial Bank of Everett, I-Pro, Inc. and Mutual Bancshares
Capital, Inc. are not currently profitable. Consequently, you should not expect
a competitive return on equity in the near future. See "Pro Forma Data" for an
illustration of the financial effects of this stock offering.
Layoff Announcement by the Boeing Company May Cause EverTrust to Experience a
Reduction in Income
The Boeing Company has announced company-wide layoffs of 48,000, with
31,000 of the layoffs expected to occur in the State of Washington. The expected
layoffs may cause EverTrust to experience a reduction in income because of
resulting decreases in customer demand for loans as well as customer ability to
make timely loan payments. As home to the largest Boeing assembly plant in the
state, Snohomish County is particularly impacted by the layoffs since twenty
percent of jobs in the County are in the aerospace industry, including parts
manufacturers and other suppliers to Boeing. The Boeing Company announced in
December 1998 that a number of
3
commercial aircraft orders had been canceled due to the economic problems in
Asia. As a result, management increased the level of reserves allocated to one-
to four-family loans to $784,000 at March 31, 1999 from $320,000 at March 31,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results of Mutual Bancshares
for the Year Ended March 31, 1998 and 1999 -- Provision for Loan Losses."
Possible Year 2000 Computer Program Problems May Disrupt EverTrust's and Its
Related Entities' Business Operations
If EverTrust's and its related entities' computer systems and the
computer systems operated by their respective third party vendors do not
properly work on January 1, 2000, then a disruption in business operations could
be experienced. As a result of this disruption, EverTrust's and its related
entities' financial condition and results of operations could be weakened. For
further discussion of EverTrust's and its related entities' year 2000 compliance
program, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Year 2000 Issues."
Plans for Diversification and Expansion of Operations Include the Acquisition of
Non-Banking Related Entities Which May Be Difficult to Integrate into
EverTrust's Operations
EverTrust's business plan involves the possible expansion of its
operations through the acquisition of non-banking related entities. Any such
acquisition would be subject to the negotiation of acceptable terms, and other
factors outside the control of EverTrust. It is not known if any opportunities
for this type of diversification will become available to EverTrust after the
conversion, and if they become available, will be pursued. Additionally,
management of EverTrust cannot predict how successfully the operations of any
non-banking entity acquired would be integrated with its operations and those of
its related entities.
Strong Competition in Everett Mutual Bank's and Commercial Bank of Everett's
Primary Market Area May Reduce Their Ability to Attract and Retain Deposits and
Originate Loans
Everett Mutual Bank's and Commercial Bank of Everett's profitability
depends upon their continued ability to successfully compete in their market
areas. Competition in the banking and financial services industry is intense in
Snohomish County, which has one of the largest concentrations of financial
institutions in the Pacific Northwest. Everett Mutual Bank and Commercial Bank
of Everett must compete for customers by offering excellent service and
competitive rates on loans and deposit products. Competition for deposits and
loans typically comes from other commercial banks, savings institutions,
mortgage banking firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms. Some of these
competitors have greater resources than Everett Mutual Bank and Commercial Bank
of Everett and may offer services that they do not provide.
The Establishment of The EverTrust Foundation Will Reduce Earnings
In connection with the conversion, EverTrust intends to establish The
EverTrust Foundation and to contribute a maximum of 390,000 of its shares issued
in the conversion and a maximum of $1.3 million in cash. This contribution will
be a significant expense to EverTrust and will decrease operating results for
the year ending March 31, 2000. In addition, the contribution to the foundation
will reduce your ownership in EverTrust.
4
Endangered Chinook Salmon Species May Make it Difficult to Obtain Construction
and Land Development Permits and May Restrict Lending Activities
In May 1999, the chinook salmon was listed as a threatened species under
the Endangered Species Act. As a result, there may be severe restrictions on
construction and other land development on properties in Everett Mutual Bank's
and Commercial Bank of Everett's primary market area. Accordingly, any endeavor
that requires a federal permit in an area listed as a salmon habitat will
require permission from the National Marine Fisheries Service biologists. This
could delay or severely limit the issuance of construction permits, and, as a
result, reduce building and new construction lending, which is a major
contributor to Mutual Bancshares' interest income.
Earthquakes in Everett Mutual Bank's Primary Market Area May Result in Material
Losses Because of Damage to Collateral Properties and Borrowers' Inability to
Repay Loans
A major earthquake could result in material loss to Everett Mutual Bank,
although Everett Mutual Bank has not experienced any losses in the past five
years due to earthquake damage to collateral securing loans. Snohomish, King and
Pierce Counties, where substantially all of the real and personal properties
securing Everett Mutual Bank's loans are located, is an earthquake-prone region.
In addition to possibly sustaining damage to its own property, a substantial
number of Everett Mutual Bank's borrowers do not have insurance for the
collateral property which provides for coverage due to losses from earthquakes.
Earthquake insurance is generally not required by other lenders in the market
area, and as a result in order to remain competitive in the marketplace,
earthquake insurance is not required by Everett Mutual Bank as a condition of
making a loan. Earthquake insurance is also not always available at a reasonable
coverage level and cost because of changing insurance underwriting practices in
Everett Mutual Bank's market area resulting from past earthquake activity and
the likelihood of future earthquake activity in the region. Additionally, if the
collateralized properties are only damaged and not destroyed to the point of
total insurable loss, borrowers may suffer sustained job interruption or job
loss, which may materially impair their ability to meet the terms of their loan
obligations. No assurances can be given that a major earthquake in Everett
Mutual Bank's primary market area will not result in material losses to Everett
Mutual Bank. See "Business of Mutual Bancshares -- Earthquakes."
Venture Fund Investments in Small, Newly Established Companies With No Operating
History May Result in Loss of Principal
Mutual Bancshares Capital, Inc. through its limited partnerships plans on
investing in start-up high-technology and medical instrumentation companies at
the beginning or early stages of their development. These investments may
involve a high level of risk that the limited partnerships may not be adequately
compensated for and may involve a loss of the principal invested. Early stage
and development stage companies often experience unexpected problems in the
areas of product development, manufacturing, marketing, financing and general
management, which cannot be adequately solved. Mutual Bancshares Capital, Inc.
and its limited partnerships try to minimize these risks by carefully evaluating
the company and its proposed activities and conducting thorough due diligence.
5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth information concerning the consolidated
financial position of Mutual Bancshares, the predecessor of EverTrust, and its
related entities at the dates indicated.
At March 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets................................ $452,089 $421,305 $399,158 $384,364 $357,403
Investment securities....................... 75,432 59,694 52,809 41,144 41,472
Loans receivable, net....................... 315,327 311,951 293,134 292,233 295,475
Deposit accounts............................ 375,896 350,971 329,770 314,648 297,647
Federal Home Loan Bank advances............. 18,949 15,503 20,057 24,111 18,814
Total equity................................ 52,263 51,096 46,143 42,694 38,794
Year Ended March 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
OPERATING DATA:
Interest income............................. $ 33,894 $ 33,462 $ 31,049 $ 30,207 $25,877
Interest expense............................ 17,837 17,899 17,010 16,781 13,646
-------- -------- -------- -------- --------
Net interest income......................... 16,057 15,563 14,039 13,426 12,231
Provision for loan losses................... 780 420 420 458 319
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses...................................... 15,277 15,143 13,619 12,968 11,912
Other operating income...................... 1,927 1,792 1,074 1,512 1,021
Other operating expenses.................... 15,532 10,287 9,796 9,026 9,475
-------- -------- -------- -------- --------
Income before income taxes.................. 1,672 6,648 4,897 5,454 3,458
Provision for income taxes.................. 261 2,114 1,387 1,561 864
-------- -------- -------- -------- --------
Net income.................................. $ 1,411 $ 4,534 $ 3,510 $ 3,893 $ 2,594
======== ======== ======== ======== ========
6
At March 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Loans outstanding ........... 3,505 3,645 3,762 3,875 3,984
Deposit accounts ............ 30,221 29,846 29,751 29,593 29,411
Full service offices ........ 12 11 11 10 10
At or For
Year Ended March 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on assets(1)........................ 0.33% 1.11% 0.91% 1.06% 0.76%
Return on equity(2)........................ 2.71 9.54 8.07 9.53 6.91
Equity-to-assets ratio(3).................. 12.18 11.66 11.26 11.13 10.96
Interest rate spread (4)................... 3.20 3.27 3.12 3.20 3.20
Net interest margin(5)..................... 3.83 3.89 3.70 3.75 3.67
Average interest-earning assets to average
interest-bearing liabilities........... 114.75 113.85 113.00 111.62 111.36
Other operating expenses as a percent of
average total assets................... 3.64 2.53 2.54 2.46 2.77
Efficiency ratio (6)(7).................... 66.74 58.64 64.07 59.81 70.52
Capital Ratios:
Leverage................................... 11.80 12.20 11.70 11.30 11.00
Tier 1 risk-based.......................... 13.70 14.90 14.90 14.40 13.60
Total risk-based........................... 14.90 16.10 16.20 15.70 14.90
Asset Quality Ratios:
Nonaccrual and 90 days or more past due
loans as a percent of total loans, net 0.12 0.27 0.35 0.43 1.53
Nonperforming assets as a percent of total
assets................................. 0.08 0.20 0.48 0.59 1.85
Allowance for losses as a percent of gross
loans receivable....................... 1.62 1.48 1.45 1.37 1.25
Allowance for loan losses as a percent of
nonperforming loans.................... 1500.53 582.28 440.33 329.59 83.30
Net charge-offs to average outstanding
loans.................................. -- 0.01 0.03 0.01 0.01
- ---------------
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Total other operating expenses divided by total net interest income (on a
tax-equivalent basis) before provision for loan losses plus total other
operating income.
(7) For the year ended March 31, 1999, other operating expenses included $3.4
million in charitable contributions. With this expense, the efficiency
ratio would have been 85.44%.
7
HOW EVERTRUST FINANCIAL GROUP, INC.
INTENDS TO USE THE PROCEEDS FROM THIS OFFERING
The net proceeds from the sale of the common stock which are being
offered in the conversion are estimated to range from $55.3 million to $74.8
million, or up to $86.0 million if the estimated valuation range is increased by
15%. See "Pro Forma Data" for the assumptions used to arrive at such amounts.
The following table presents the estimated net proceeds of the
offering, the amounts retained by EverTrust and contributed to its subsidiaries
and The EverTrust Foundation, and the amount of EverTrust's loan to the employee
stock ownership plan. See "Pro Forma Data" for the assumptions used to arrive at
these amounts. The Washington Department of Financial Institutions, Division of
Banks must approve, and the Federal Deposit Insurance Corporation must provide
its non-objection to, the sale of up to 8,596,250 shares in the conversion.
8,596,250
5,525,000 6,500,000 7,475,000 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10.00 Per Share
$10.00 Per Share $10.00 Per Share $10.00 Per Share (Maximum of
(Minimum of (Midpoint of (Maximum of Offering Range
Offering Range) Offering Range) Offering Range) As Adjusted)
--------------- --------------- --------------- ------------
(In thousands)
Gross proceeds........................... $55,250 $65,000 $74,750 $85,963
Less: estimated underwriting commissions
and other offering expenses.......... 1,500 1,500 1,500 1,500
------- ------- ------- -------
Net proceeds............................. $53,750 $63,500 $73,250 $84,463
======= ======= ======= =======
Amount to be retained by EverTrust
Financial Group, Inc................. $26,875 $31,750 $36,625 $42,231
Amount to be contributed to The EverTrust
Foundation........................... 1,105 1,300 1,300 1,300
Amount to be contributed to Everett
Mutual Bank.......................... 26,875 31,750 36,625 42,231
Amount to be contributed to Commercial
Bank of Everett ................... 2,300 2,300 2,300 2,300
Amount to be contributed to I-Pro........ -- -- -- --
Amount to be contributed to Mutual
Bancshares Capital Inc. ............ -- -- -- --
Amount of loan by EverTrust Financial
Group, Inc. to the employee stock
ownership plan........................ 1,171 1,378 1,573 1,797
EverTrust has received conditional approval from the Washington
Division of Banks and the Federal Deposit Insurance Corporation to invest 50% of
the net conversion proceeds in Everett Mutual Bank. In addition, EverTrust will
use the remainder of these funds as follows:
o to contribute $2.3 million to Commercial Bank of Everett.
o for general corporate purposes, which may include, for example,
if the Board of Directors adopts a dividend policy, paying cash
dividends to the stockholders of EverTrust and for future
repurchases of common stock to the extent permitted under
Washington law and federal regulations.
o for additional contributions to existing and/or new subsidiaries
in the form of debt or equity, to support future diversification
or acquisition activities.
o to lend the employee stock ownership plan the amount necessary to
purchase 2% of the shares
8
sold in the conversion and issued to The EverTrust Foundation.
The employee stock ownership plan purchases would range between
117,130 shares at the minimum of the offering range and 157,300
shares at the maximum of the offering range, including shares
issued to The EverTrust Foundation.
At the midpoint of the offering range, and including shares
issued to The EverTrust Foundation, the employee stock ownership
plan would purchase 137,800 shares. If 8,986,250 shares are
issued in the conversion, the employee stock ownership plan would
purchase 179,725 shares. The Board of Directors of EverTrust has
determined that the employee stock ownership plan loan will have
a five-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the
conversion. The loan will be repaid principally from Everett
Mutual Bank's contributions to the employee stock ownership plan
and from any dividends paid on shares of common stock held by the
employee stock ownership plan.
o to expand operations and services through acquiring or
establishing wealth management and wealth transfer services or
acquiring other financial institutions, although it has no
specific plans, arrangements, agreements or understandings,
written or oral, regarding these activities.
Pending these uses, the net proceeds will be invested in investment
securities with short and intermediate terms to maturity or in a deposit account
at Everett Mutual Bank.
Receipt of 50% of the net proceeds of the sale of the common stock will
increase Everett Mutual Bank's capital and will provide it with the ability to
expand its financial services. Everett Mutual Bank will use the net proceeds
received from the offering as follows:
o in the short term, to invest in short and intermediate term U.S.
Government and agency obligations and ultimately in loan
originations.
Except as described above, neither EverTrust Financial Group, Inc. nor
Everett Mutual Bank has specific plans for the investment of the proceeds of
this offering. Although Everett Mutual Bank's capital currently exceeds
regulatory requirements, it is converting to stock form to structure itself in
the form of organization used by commercial banks and most other financial
services companies. For a discussion of management's business reasons for
undertaking the conversion, see "Mutual Bancshares' Conversion -- Reasons for
the Conversion."
Following the conversion, the Board of Directors will have the
authority to adopt plans for repurchases of common stock, subject to statutory
and regulatory requirements. Since EverTrust Financial Group, Inc. has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based. The Board of Directors will
consider many facts and circumstances in determining whether to repurchase stock
in the future. These factors include:
o the ability to improve EverTrust Financial Group, Inc.'s return
on equity,
o the ability to increase the book value and/or earnings per share
of the remaining outstanding shares,
o market and economic factors like the price at which the stock is
trading in the market,
o the volume of trading, and
o the attractiveness of other investment alternatives in terms of
the rate of return and risk involved in the investment.
The avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans is another factor that will be considered. The Board of
Directors will also consider any other circumstances in which repurchases would
be in the best interests of EverTrust Financial Group, Inc. and its
stockholders. Before any stock repurchases, the Board of Directors must
determine that
9
EverTrust Financial Group, Inc., Everett Mutual Bank and Commercial Bank of
Everett will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that capital will be adequate, taking into
account, among other things, Everett Mutual Bank's and Commercial Bank of
Everett's level of nonperforming and classified assets, EverTrust Financial
Group, Inc.'s, Everett Mutual Bank's and Commercial Bank of Everett's current
and projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. For a discussion of the
regulatory limitations applicable to stock repurchases, see "Mutual Bancshares'
Conversion -- Restrictions on Repurchase of Stock."
EVERTRUST FINANCIAL GROUP, INC.'S DIVIDEND POLICY
General
EverTrust does not intend initially to pay a cash dividend, however,
should it adopt a policy in the future of paying periodic cash dividends, the
Board of Directors may declare and pay periodic special cash dividends in
addition to, or in lieu of, regular cash dividends. Declarations or payments of
dividends, if any, will be affected by a number of factors, including the
prevailing economic, interest rate and stock market conditions, as well as
profitability, financial condition, expected growth, compliance with capital
requirements, dividend payout ratio and peer group analyses. The establishment,
timing and amount of any dividend payments will be determined by the Board of
Directors of EverTrust, based on the factors noted above.
Current Restrictions
Dividends from EverTrust may depend, in part, upon receipt of dividends
from Everett Mutual Bank because EverTrust initially will have no source of
income other than dividends from Everett Mutual Bank, the net proceeds from the
offering retained by EverTrust and any earnings from the investment of the net
proceeds. As a converted institution, Everett Mutual Bank also will be subject
to the regulatory restriction that it will not be permitted to declare or pay a
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its regulatory capital to be reduced below the amount required for
the liquidation account established in connection with the conversion. Under
Washington law, EverTrust is prohibited from paying a dividend if, as a result
of its payment, EverTrust would be unable to pay its debts as they become due in
the normal course of business, or if EverTrust's total liabilities would exceed
its total assets. See "Regulation -- The Banks -- Dividends," "Mutual
Bancshares' Conversion -- Effects of Conversion to Stock Form on Depositors and
Borrowers of Everett Mutual Bank -- Liquidation Account" and Note 12 of the
Notes to Consolidated Financial Statements included in the back of this
prospectus.
MARKET FOR EVERTRUST FINANCIAL GROUP, INC.'S COMMON STOCK
Since EverTrust has never issued capital stock, there is no existing
market for the common stock. Although EverTrust has received conditional
approval to list the common stock on the National Market System of the Nasdaq
Stock Market under the symbol "EVRT," there can be no assurance that EverTrust
will meet Nasdaq National Market System listing requirements, which include a
minimum market capitalization, at least three market makers and a minimum number
of record holders. Keefe, Bruyette & Woods, Inc. has indicated its intention to
act as a market maker for EverTrust's common stock following consummation of the
conversion and will assist EverTrust in seeking to encourage at least two
additional market makers to establish and maintain a market in the common stock.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of EverTrust, Everett Mutual Bank or any market maker. There can be no assurance
that an active and liquid trading market for the common stock will develop or
that, if developed, it will continue. The number of active buyers and sellers of
the common stock at any particular time may be limited. Under such
circumstances, investors in the common stock could have difficulty disposing of
their shares on short notice and should not view the common stock as a
short-term investment. Furthermore, there can be no assurance that purchasers
will be able to sell their shares at or above the purchase price or that
quotations will be available on the National Market System of the Nasdaq Stock
Market as contemplated.
10
CAPITALIZATION
The following table presents the historical capitalization of Mutual
Bancshares at March 31, 1999, and the pro forma consolidated capitalization of
EverTrust Financial Group, Inc. after giving effect to the assumptions under
"Pro Forma Data," based on the sale of the number of shares indicated in the
table. The issuance of 8,596,250 shares would require Washington Department of
Financial Institutions and Federal Deposit Insurance Corporation approval of an
updated appraisal confirming that valuation. A change in the number of shares to
be issued in the conversion may materially affect pro forma consolidated
capitalization.
EverTrust Financial Group, Inc.
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-------------------------------------------------------------------------------------
8,596,250
5,525,000 6,500,000 7,475,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.00
Capitalization at $10.00 at $10.00 at $10.00 Per Share(2)
as of Per Share(1) Per Share(1) Per Share(1) (Maximum of
March 31, (Minimum of (Midpoint of (Maximum of Offering Range,
1999 Offering Range) Offering Range) Offering Range) as Adjusted)
---- --------------- --------------- --------------- ------------
(Dollars in thousands)
Deposits(3).......................... $375,896 $375,896 $375,896 $375,896 $375,896
Federal Home Loan Bank of
Seattle advances................... 18,949 18,949 18,949 18,949 18,949
-------- -------- -------- -------- --------
Total deposits and borrowed
funds.............................. $394,845 $394,845 $394,845 $394,845 $394,845
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
1,000,000 shares, no par
value per share, authorized;
none issued or outstanding..... $ -- $ -- $ -- $ -- $ --
Common stock:
49,000,000 shares, no par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)................ -- -- -- -- --
Additional paid-in capital........ -- 53,750 63,500 73,250 84,463
Shares issued to The EverTrust
Foundation...................... -- 3,315 3,900 3,900 3,900
Less: Stock contribution to
The EverTrust Foundation......... -- (3,315) (3,900) (3,900) (3,900)
Less: Cash contribution to
The EverTrust Foundation......... -- (1,105) (1,300) (1,300) (1,300)
Retained earnings, substantially
restricted(5)................. 52,147 52,147 52,147 52,147 52,147
Unrealized gain on securities,
net of tax................... 116 116 116 116 116
Plus: tax benefit of contribution to
The EverTrust Foundation...... -- 1,503 1,768 1,768 1,768
Less:
Common Stock to be acquired by
employee stock ownership
plan(6)....................... -- (1,171) (1,378) (1,573) (1,797)
Common Stock to be acquired by
management recognition and
development plan(7)........... -- (2,343) (2,756) (3,146) (3,595)
-------- -------- -------- -------- --------
Total stockholders' equity........... $52,263 $102,897 $112,097 $121,262 $131,802
======= ======== ======== ======== ========
Equity/assets........................ 11.56% 20.47% 21.90% 23.27% 24.79%
(footnotes on following page)
11
- ---------------
(1) Does not reflect the possible increase in the estimated valuation range to
reflect material changes in the financial condition or results of
operations of Mutual Bancshares or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the stock option plan.
(2) This column represents the pro forma capitalization of EverTrust Financial
Group, Inc. in the event the aggregate number of shares of common stock
issued in the conversion is 15% above the maximum of the estimated
valuation range. See "Pro Forma Data" and footnote 1 to the table under
"Pro Forma Data."
(3) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Withdrawals will reduce pro forma deposits by the amounts of the
withdrawals.
(4) Everett Mutual Bank's authorized capital consists solely of 1,000 shares of
common stock, par value $1.00 per share, all of which were previously
issued to Mutual Bancshares, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
conversion.
(5) Total equity is substantially restricted by applicable regulatory capital
requirements. Additionally, Everett Mutual Bank will be prohibited from
paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of Everett Mutual Bank's eligible account holders and supplemental
eligible account holders at the time of the conversion and adjusted
downward thereafter as such account holders reduce their balances or when
they are no longer depositors. See "Mutual Bancshares' Conversion --
Effects of Conversion to Stock Form on Depositors and Borrowers of Everett
Mutual Bank -- Liquidation Account" and Notes 9 and 12 of the Notes to the
Consolidated Financial Statements.
(6) Assumes that 2% of the common stock issued in the conversion, including
shares issued to The EverTrust Foundation, will be acquired by the employee
stock ownership plan in the conversion with funds borrowed from EverTrust
Financial Group, Inc. This would range between 117,130 shares, assuming
5,856,500 shares are issued in the conversion, to 179,725 shares, assuming
8,986,250 shares are issued in the conversion. The loan will be repaid
principally from Everett Mutual Bank's contributions to the employee stock
ownership plan and dividends payable on the common stock held by the
employee stock ownership plan over the anticipated five-year term of the
loan. Under generally accepted accounting principles, the amount of common
stock to be purchased by the employee stock ownership plan represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. As shares are released to employee stock ownership plan
participants' accounts, a corresponding reduction in the charge against
capital will occur. Since the funds are borrowed from EverTrust Financial
Group, Inc., the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the consolidated
financial statements of EverTrust Financial Group, Inc. See "Management of
Everett Mutual Bank -- Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at $10.00 per share of a number of
shares equal to 4% of the shares of common stock issued in the conversion
at the minimum, midpoint, maximum and 15% above the maximum of the
estimated valuation range, including shares issued to The EverTrust
Foundation. This would range between 234,260 shares, assuming 5,856,500
shares are issued in the conversion, to 359,450 shares, assuming 8,986,250
shares are issued in the conversion. The issuance of an additional 4% of
the shares of common stock for the management development and recognition
plan from authorized but unissued shares would dilute the ownership
interest of stockholders by 3.85%. The shares are reflected as a reduction
of stockholders' equity. See "Risk Factors -- Issuance of Shares for
Benefit Programs Will Lower Your Ownership Interest," "Pro Forma Data" and
"Management of Everett Mutual Bank -- Benefits -- Management Recognition
and Development Plan." The management development and recognition plan
requires stockholder approval, which is expected to be sought at a meeting
to be held no earlier than six months following the conversion.
12
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At March 31, 1999, Everett Mutual Bank and Commercial Bank of Everett
exceeded the minimum regulatory capital requirements. The following table
presents Everett Mutual Bank's and Commercial Bank of Everett's historical and
pro forma capital positions relative to their capital requirements at March 31,
1999. For purposes of the table below, the amount expected to be borrowed by the
employee stock ownership plan and the cost of the shares expected to be acquired
by the management recognition and development plan is deducted from pro forma
regulatory capital. For a discussion of the assumptions underlying the pro forma
capital calculations, see "How EverTrust Financial Group, Inc. Intends to Use
the Conversion Offering Proceeds," "Capitalization" and "Pro Forma Data." For a
discussion of the capital standards applicable to Everett Mutual Bank and
Commercial Bank of Everett, see "Regulation -- The Banks -- Capital
Requirements."
PRO FORMA AT MARCH 31, 1999
-----------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
----------------- ----------------- ----------------- ----------------
5,525,000 Shares 6,500,000 Shares 7,475,000 Shares 8,596,250 Shares
at at at at
March 31, 1999 $10.00 Per Share $10.00 Per Share $10.00 Per Share $10.00 Per Share
------------------- ------------------ ----------------- ------------------ -----------------
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ ----------- ------ ---------- ------ -----------
(Dollars in thousands)
Everett Mutual Bank:
Generally accepted
accounting principles
capital................ $41,527 9.74% $64,888 14.39% $69,143 15.18% $73,433 15.96% $78,367 16.85%
======= ======= ======= ===== ======= ===== ======= ====== ======= =====
Tier I (leverage)
capital................ $41,404 9.89% $64,765 14.61% $69,020 15.42% $73,310 16.21% $78,244 17.11%
Tier I (leverage)
capital requirement.... 16,748 4.00 17,729 4.00% 17,908 4.00% 18,087 4.00% 18,293 4.00%
------- ------- -------- ------- ------- ------- -------- ------- --------- -------
Excess.................. $24,656 5.89% $47,036 10.61% $51,112 11.42% $55,223 12.21% $59,950 13.11%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
Tier I risk adjusted
capital................ $41,404 11.53% $64,765 17.80% $69,020 18.92% $73,310 20.05% $78,244 21.34%
Tier I risk adjusted
capital requirement.... 14,359 4.00 14,555 4.00% 14,591 4.00% 14,627 4.00% 14,668 4.00%
------- ------- -------- ------- ------- ------- -------- ------- --------- -------
Excess.................. $27,045 7.53% $50,210 13.80% $54,429 14.92% $58,683 16.05% $63,576 17.34%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
Total risk adjusted
assets................. $46,004 12.82% $69,365 19.06% $73,620 20.18% $77,910 21.31% $82,844 22.59%
Total capital
requirement............ 28,717 8.00 29,110 8.00% 29,182 8.00% 29,253 8.00% 29,336 8.00%
------- ------- -------- -------- ------- ------- -------- ------- --------- -------
Excess.................. $17,286 4.82% $40,255 11.06% $44,438 12.18% $48,657 13.31% $53,508 14.59%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
Reconciliation of
Capital infused Into
Everett Mutual Bank:
Net Proceeds Infused... $26,857 $31,750 $36,625 $42,231
Less: Common Stock
Acquired by ESOP...... (1,171) (1,378) (1,573) (1,797)
Less: Common Stock
Acquired by MRDP...... (2,343) (2,756) (3,146) (3,595)
Pro Forma Increase in
GAAP and Regulatory
Equity................ $23,361 $27,616 $31,906 $36,840
- --------------
(1) Based upon total adjusted assets of $426.5 million at March 31, 1999 and
$452.6 million, $457.3 million, $461.8 million and $466.9 million at the
minimum, midpoint, maximum and maximum, as adjusted, of the estimated
valuation range, respectively, for purposes of leverage capital
requirements.
(table continued on following page)
13
PRO FORMA AT MARCH 31, 1999
-----------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
----------------- ----------------- ----------------- ----------------
5,525,000 Shares 6,500,000 Shares 7,475,000 Shares 8,596,250 Shares
at at at at
March 31, 1999 $10.00 Per Share $10.00 Per Share $10.00 Per Share $10.00 Per Share
------------------- ------------------ ----------------- ------------------ -----------------
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ ----------- ------ ---------- ------ -----------
(Dollars in thousands)
Commercial Bank
of Everett:
Generally accepted
accounting
principles capital..... $2,822 14.25% $5,122 23.17% $5,122 23.17% $5,122 23.17% $5,122 23.17%
====== ===== ====== ===== ====== ===== ====== ====== ====== =====
Tier I (leverage)
capital................ $2,832 17.88% $5,132 28.28% $5,132 28.28% $5,132 28.28% $5,132 28.28%
Tier I (leverage)
capital requirement.... 634 4.00 726 4.00 726 4.00 726 4.00 726 4.00
------ ----- ------ ----- -------- ------ --------- ------- -------- -------
Excess.................. $2,198 13.87% $4,406 24.28% $4,406 24.28% $4,406 24.28% $4,406 24.28%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tier I risk adjusted
capital................ 2,832 18.14% $5,132 31.94% $5,132 31.94% $5,132 31.94% $5,132 31.94%
Tier I risk adjusted
capital requirement.... 624 4.00 643 4.00 643 4.00 643 4.00 643 4.00
------ ----- ------ ----- -------- ------ --------- ------- -------- -------
Excess.................. $2,208 14.14% $4,489 27.94% $4,489 27.94% $4,489 27.94% $4,489 27.94%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total risk adjusted
assets................. $3,022 19.35% $5,322 33.12% $5,322 33.12% $5,322 33.12% $5,322 33.12%
Total capital
requirement............ 1,249 8.00 1,286 8.00 1,286 8.00 1,286 8.00 1,286 8.00
------ ----- ------ ----- ------- ------ -------- ------- -------- -------
Excess.................. $1,773 11.36% $4,036 25.12% $4,036 25.12% $4,036 25.12% $4,036 25.12%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ------------
(1) Based upon total adjusted assets of $19.8 million at March 31, 1999 and
$22.1 million, $22.1 million, $22.1 million and $22.1 million at the
minimum, midpoint, maximum and maximum, adjusted, of the estimated
valuation range, respectively, for purposes of the leverage capital
requirements.
14
PRO FORMA DATA
The conversion requires that the common stock must be sold at a price
equal to the estimated market value of Mutual Bancshares, as converted, based
upon an independent valuation. The estimated valuation range as of June 11, 1999
is from a minimum of $55,250,000 to a maximum of $74,750,000 with a midpoint of
$65,000,000. At a price per share of $10.00, this results in a minimum number of
shares of 5,525,000, a maximum number of shares of 7,475,000 and a midpoint
number of shares of 6,500,000.
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds indicated on
the following table are based upon the following assumptions:
1. Charles Webb will receive a fixed management fee and a success
fee totaling $715,000, as discussed under "Mutual Bancshares'
Conversion -- Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
2. All of the common stock will be sold in the subscription and
direct community offerings.
3. Conversion expenses, including the fees paid to Charles Webb, are
$1.5 million.
The pro forma data that follows was prepared by EverTrust and Everett
Mutual Bank with the assistance of RP Financial. The following table summarizes
the historical net income and retained earnings of Everett Mutual Bank and the
pro forma consolidated net income and stockholders' equity of EverTrust at and
for the year ended March 31, 1999. Pro forma consolidated net income has been
calculated as if the conversion was completed on April 1, 1998 and the estimated
net proceeds had been invested at 4.70% (3.10% after giving effect to federal
and state income tax) beginning on that date, which amounts were determined
using a 34% federal and a 0% state income tax rate. That percentage yield
represents the one-year U.S. Treasury Bill yield as of March 31, 1999. See
"Taxation -- Federal Taxation."
Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of common
stock indicated in the footnotes to the table. Per share amounts have been
computed as if the common stock had been outstanding at April 1, 1998 or at
March 31, 1999, but without any adjustment of historical or pro forma
stockholders' equity per share to reflect the earnings on the estimated net
proceeds.
EverTrust Financial Group, Inc. and Everett Mutual Bank did not figure
into this calculation the following four items:
1. the shares to be reserved for issuance under the stock option
plan, which is expected to be voted upon by stockholders at a
meeting to be held no earlier than six months following the
conversion;
2. withdrawals from deposit accounts to purchase common stock in the
conversion;
3. the issuance of shares from authorized but unissued shares to the
management development and recognition plan, which is expected to
be voted upon by stockholders at a meeting to be held no earlier
than six months following the conversion; or
4. the liquidation account that Everett Mutual Bank will establish
for the benefit of eligible account holders and supplemental
eligible account holders. See "Mutual Bancshares' Conversion --
Effects of Conversion to Stock Form on Depositors and Borrowers
of Everett Mutual Bank -- Liquidation Account."
The following pro forma data may not represent the actual financial
effects of the conversion or the operating results of EverTrust after the
conversion. The pro forma data relies exclusively on the assumptions outlined
above. The pro forma data does not represent the fair market value of
EverTrust's common stock, the current fair market value of Mutual Bancshares'
assets or liabilities, or the amount of money that would be available for
distribution to shareholders if EverTrust is liquidated.
15
At or For the Year Ended March 31, 1999
----------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ----------- ---------- ---------------
5,525,000 6,500,000 7,475,000 8,596,250(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
Gross proceeds.................................. $ 55,250 $ 65,000 $ 74,750 $ 85,963
Plus: Shares issued to The EverTrust
Foundation..................................... 3,315 3,900 3,900 3,900
--------- --------- ---------- ---------
Pro forma market capitalization................. $ 58,565 $ 68,900 $ 78,650 $ 89,863
========= ========= ========== =========
Gross proceeds.................................. $ 55,250 $65,000 $ 74,750 $ 85,963
Less: Estimated underwriting commissions
and other offering expenses.................. (1,500) (1,500) (1,500) (1,500)
Management recognition and development
plan purchases after one year............... -- -- -- --
--------- --------- ---------- ---------
Estimated net proceeds.......................... $ 53,750 $ 63,500 $ 73,250 $ 84,463
========= ========= ========== =========
Less: Cash contribution to The EverTrust
Foundation..................................... (1,105) (1,300) (1,300) (1,300)
Less: Common stock acquired by employee
stock ownership plan......................... (1,171) (1,378) (1,573) (1,797)
Less: Common stock to be acquired by management
recognition and development plan........... (2,343) (2,756) (3,146) (3,595)
--------- --------- ---------- ----------
Net investable proceeds................. $49,131 $58,066 $67,231 $77,771
======= ======= ======= =======
Consolidated net income:
Historical.................................. $ 1,411 $ 1,411 $ 1,411 $ 1,411
Pro forma income on net proceeds(2)......... 1,524 1,801 2,086 2,412
Pro forma employee stock ownership plan
adjustments(3)............................. (155) (182) (208) (237)
Pro forma management recognition and
development plan adjustments(4).......... (309) (364) (415) (474)
--------- --------- ---------- ----------
Pro forma net income...................... $ 2,471 $ 2,666 $ 2,874 $ 3,112
========= ========= ========== ==========
Consolidated net income per share(5)(6):
Historical.................................. $0.24 $0.21 $0.18 $0.16
Pro forma income on net proceeds............ 0.26 0.27 0.27 0.27
Pro forma employee stock ownership plan
adjustments(3)................................. (0.03) (0.03) (0.03) (0.03)
Pro forma management recognition and
development plan adjustments(4).......... (0.05) (0.05) (0.05) (0.05)
--------- ---------- ---------- ---------
Pro forma net income per share............ $0.42 $0.40 $0.37 $0.35
Purchase price as a multiple of pro forma
net income per share......................... 23.81x 25.00x 27.03x 28.57x
Shares used in earnings per share
calculations................................... 5,762,796 6,779,760 7,739,160 8,842,470
========= ========= ========== =========
Consolidated stockholders' equity (book value):
Historical.................................. $ 52,263 $ 52,263 $ 52,263 $ 52,263
Estimated net proceeds...................... 53,750 63,500 73,250 84,463
Plus: Stock issued to The EverTrust
Foundation................................. 3,315 3,900 3,900 3,900
Less: Stock Contribution to The EverTrust
Foundation................................. (3,315) (3,900) (3,900) (3,900)
Less: Cash Contribution to The EverTrust
Foundation................................. (1,105) (1,300) (1,300) (1,300)
Plus: Tax benefit of the contribution to
The EverTrust Foundation................. 1,503 1,768 1,768 1,768
Less: Common stock acquired by employee
stock ownership plan...................... (1,171) (1,378) (1,573) (1,797)
Less: Common stock to be acquired by
management recognition and development
plan(4).................................... (2,343) (2,756) (3,146) (3,595)
--------- --------- ---------- ----------
Pro forma stockholders' equity(7)....... $ 102,897 $ 112,097 $ 121,262 $ 131,802
========= ========= ========== ==========
Consolidated stockholders' equity per
share(6)(8):
Historical(6)............................... $8.92 $7.59 $6.65 $5.82
Estimated net proceeds...................... 9.18 9.22 9.31 9.40
Plus: Stock issued to The EverTrust
Foundation................................. 0.57 0.57 0.50 0.43
Less: Stock contribution to The EverTrust
Foundation................................. (0.57) (0.57) (0.50) (0.43)
Less: Cash contribution to The EverTrust
Foundation................................. (0.19) (0.19) (0.17) (0.14)
Plus: Tax benefit of the contribution to
The EverTrust Foundation................ 0.26 0.26 0.22 0.20
Less: Common stock acquired by employee
stock ownership plan.................... (0.20) (0.20) (0.20) (0.20)
Less: Common stock to be acquired by
management recognition and development
plan(4).................................... (0.40) (0.40) (0.40) (0.40)
--------- --------- ---------- --------
Pro forma stockholders' equity
per share(9)........................ $17.57 $16.28 $15.41 $14.68
========= ========= ========== =========
Offering price as a percentage of pro forma
stockholders' equity per share................. 56.92% 61.43% 64.89% 68.12%
Shares used in book value per share
calculations................................... 5,856,500 6,890,000 7,865,000 8,986,250
(footnotes on following page)
16
- -----------------
(1) Gives effect to the sale of an additional 1,121,250 shares in the
conversion, which may be issued to cover an increase in the pro forma
market value of EverTrust Financial Group, Inc. and Everett Mutual Bank as
converted, without the resolicitation of subscribers or any right of
cancellation. The issuance of such additional shares will be conditioned on
a determination by RP Financial that such issuance is compatible with its
determination of the estimated pro forma market value of EverTrust
Financial Group, Inc. and Everett Mutual Bank as converted. See "Mutual
Bancshares' Conversion -- Stock Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. Since funds on
deposit at Everett Mutual Bank may be withdrawn to purchase shares of
common stock (which will reduce deposits by the amount of such purchases),
the net amount of funds available to Everett Mutual Bank for investment
following receipt of the net proceeds of the conversion will be reduced by
the amount of such withdrawals.
(3) The funds used to acquire such shares will be borrowed by the employee
stock ownership plan at an interest rate equal to the prime rate as
published in The Wall Street Journal on the closing date of the conversion,
which rate is currently 7.75%, from the net proceeds from the conversion
retained by EverTrust Financial Group, Inc. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine
estimated net investable proceeds. Everett Mutual Bank intends to make
contributions to the employee stock ownership plan in amounts at least
equal to the principal and interest requirement of the debt. As the debt is
paid down, stockholders' equity will be increased. EverTrust Financial
Group, Inc.'s payment of the employee stock ownership plan debt is based
upon equal installments of principal over a five-year period, assuming a
federal income tax rate of 34.0%. Interest income earned by Everett Mutual
Bank on the employee stock ownership plan debt offsets the interest it will
pay on the employee stock ownership plan loan. No reinvestment is assumed
on proceeds contributed to fund the employee stock ownership plan.
Applicable accounting practices require that compensation expense for the
employee stock ownership plan be based upon shares committed to be released
and that unallocated shares be excluded from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year, which,
for purposes of this calculation, was assumed to be equal to the $10.00 per
share purchase price. See "Management of Everett Mutual Bank -- Benefits --
Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the management recognition and
development plan, it is assumed that the required stockholder approval has
been received, that the shares were acquired at the beginning of the period
presented in open market purchases at the $10.00 per share purchase price,
that 20% of the amount contributed was an amortized expense during the
period, and that the federal income tax rate is 34.0%. The issuance of
authorized but unissued shares of the common stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.85% and pro forma net income per share would be $0.43,
$0.39, $0.37 and $0.34 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range for the year ended March 31, 1999,
respectively, and pro forma stockholders' equity per share would be $17.30,
$16.04, $15.22 and $14.49 at the minimum, midpoint, maximum and 15% above
the maximum of the estimated valuation range at March 31, 1999,
respectively. Shares issued under the management recognition and
development plan vest 20% per year and for purposes of this table
compensation expense is recognized on a straight-line basis over each
vesting period. In the event the fair market value per share is greater
than $10.00 per share on the date shares are awarded, total management
recognition and development plan expense would increase. The total
estimated expense was multiplied by 20% (the total percent of shares for
which expense is recognized in the first year) resulting in pre-tax
management recognition and development plan expense of $468,000, $552,000,
$629,000 and $718,000 at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range for the year ended March 31, 1999,
respectively. No effect has been given to the shares reserved for issuance
under the proposed stock option plan.
(5) Per share amounts are based upon shares outstanding of 5,762,796,
6,779,760, 7,739,160 and 8,842,470 at the minimum, midpoint, maximum and
15% above the maximum of the estimated valuation range for
17
the year ended March 31, 1999, respectively, which includes the shares of
common stock sold in the conversion less the number of shares assumed to be
held by the employee stock ownership plan not committed to be released
within the first year following the conversion.
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional employee stock ownership plan expense or the
proposed management recognition and development plan expense, as described
above.
(7) "Book value" represents the difference between the stated amounts of
Everett Mutual Bank's assets and liabilities. The amounts shown do not
reflect the liquidation account which will be established for the benefit
of eligible account holders and supplemental eligible account holders in
the conversion, or the federal income tax consequences of the restoration
to income of Everett Mutual Bank's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"Mutual Bancshares' Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Everett Mutual Bank" and "Taxation." The
amounts shown for book value do not represent fair market values or amounts
distributable to stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 5,856,500,
6,890,000, 7,865,000 and 8,986,250 at the minimum, midpoint, maximum and
15% above the maximum of the estimated valuation range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the common stock.
18
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT FOUNDATION
If EverTrust does not establish the charitable foundation as part of
the conversion, RP Financial has estimated that the pro forma aggregate market
value of EverTrust would be approximately $74.0 million at the midpoint of the
estimated price range. This is approximately $9.0 million greater than the pro
forma aggregate market capitalization of EverTrust, including the foundation,
and would result in a 900,000 share increase in the amount of common stock
offered for sale in the conversion. The pro forma book value ratio would be the
same, assuming the mid-point, under both the current appraisal and the estimate
of the value of EverTrust without the foundation. The pro forma shareholders'
equity per share would also be the same with or without the foundation.
EverTrust cannot assure that, in the event the foundation was not formed, the
appraisal prepared at that time would have concluded that the pro forma market
value of EverTrust would be that same as was estimated. The following
information is not based on Mutual Bancshares' existing foundation, the Everett
Mutual Foundation, which was formed in 1990.
At the Maximum,
At the Minimum At the Midpoint At the Maximum As Adjusted
---------------------- ----------------------- ----------------------- ------------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering
amount ................... $ 55,250 $ 62,900 $ 65,000 $ 74,000 $ 74,750 $ 85,100 $ 85,963 $ 97,865
Pro forma market
capitalization ........... 58,565 62,900 68,900 74,000 78,650 85,100 89,863 97,865
Total assets .............. 503,828 509,715 513,223 520,149 522,388 530,583 532,928 542,582
Total liabilities ......... 399,826 399,826 399,826 399,826 399,826 399,826 399,826 399,826
Pro forma
shareholders' equity ..... 102,897 109,889 112,097 120,323 121,262 130,757 131,802 142,756
Pro forma
consolidated net
income ................... 2,471 2,701 2,666 2,936 2,874 3,172 3,112 3,443
Pro forma
shareholders' equity
per share ................ $ 17.57 $ 17.47 $ 16.28 $ 16.26 $ 15.41 $ 15.36 $ 14.68 $ 14.59
Pro forma
consolidated net
income per share ......... $ 0.42 $ 0.44 $ 0.40 $ 0.40 $ 0.37 $ 0.38 $ 0.35 $ 0.36
Pro Forma Pricing
Ratios:
Offering price as a
percentage of pro
forma shareholders'
equity per share .... 56.92% 57.24% 61.43% 61.50% 64.89% 65.10% 68.12% 68.54%
Offering price to pro
forma net income per
share .... 23.81x 22.73x 25.00x 25.00x 27.03x 26.32x 28.57x 27.78x
Pro forma market
capitalization
to assets ........... 11.62% 12.34% 13.42% 14.23% 15.06% 16.04% 16.86% 18.04%
Pro Forma Financial
Ratios:
Return on assets ..... 0.49% 0.53% 0.52% 0.56% 0.55% 0.60% 0.58% 0.63%
Return on
shareholders'
equity .............. 2.40% 2.46% 2.38% 2.44% 2.37% 2.43% 2.36% 2.41%
Shareholders'
equity to assets .... 20.42% 21.56% 21.84% 23.13% 23.21% 24.64% 24.73% 26.31%
19
SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table sets forth information as to the approximate
purchases of common stock by each director and executive officer of EverTrust,
Everett Mutual Bank and related entities, including their associates, as defined
by applicable regulations. No individual has entered into a binding agreement
with respect to these intended purchases, and, therefore, actual purchases could
be more or less than indicated below. Directors and officers of Everett Mutual
Bank and their associates may not purchase in excess of 27% of the shares sold
in the conversion. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Directors, officers, their associates and employees will pay the same price as
all other subscribers for the shares for which they subscribe.
Percent of Percent of
Anticipated Anticipated Shares at the Shares at the
Number of Dollar Minimum of Maximum of
Shares to be Amount to be the Estimated the Estimated
Name and Position Purchased(1) Purchased Valuation Range(2) Valuation Range(2)
- ----------------- ------------ --------- ------------------ ------------------
Michael B. Hansen 25,000 $250,000* 0.43% 0.32%
President, Chief Executive
Officer and Director
Michael R. Deller 10,000 100,000 0.17 0.13
Executive Vice President
and Director
Jeffrey R. Mitchell 10,000 100,000 0.15 0.11
Senior Vice President,
Chief Financial Officer
and Treasurer
Lorelei Christenson 10,000 100,000 0.17 0.13
Senior Vice President,
Chief Information Officer
and Corporate Secretary
Terry Cullom 5,000 50,000 0.09 0.06
Vice President and
Credit Administrator
Margaret B. Bavasi 12,000 120,000 0.20 0.15
Director
R. Michael Kight 10,000 100,000 0.17 0.13
Director
Robert A. Leach, Jr. 20,000 200,000 0.34 0.25
Director
George S. Newland 10,000 100,000 0.17 0.13
Director
William J. Rucker 20,000 200,000 0.34 0.25
Director
Thomas J. Gaffney 20,000 200,000 0.34 0.25
Director
Thomas R. Collins 20,000 200,000 0.34 0.25
Director
Dale A. Lyski 7,500 75,000 0.13 0.10
President and Chief
Operating Officer of
Commercial Bank of
Everett
John E. Thoresen 7,500 75,000 0.13 0.10
President of Mutual ------ -------- ---- ----
Bancshares Capital
Inc., a subsidiary
of EverTrust
Total 187,000 $1,870,000 3.19 2.38
======= ========== ==== ====
- ------------------
* Maximum amount available for individual purchase.
(1) Does not include any shares to be awarded pursuant to the employee stock
ownership plan and management recognition and development plan or options
to acquire shares pursuant to the stock option plan.
(2) Includes shares contributed to The EverTrust Foundation.
20
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Mutual Bancshares
and subsidiaries for the fiscal years ended March 31, 1999, 1998 and 1997 have
been derived from the audited consolidated financial statements audited by
Deloitte & Touche LLP, independent auditors. The report of independent auditors
is included herein. These statements should be read in conjunction with the
Consolidated Financial Statements and related Notes included in the back of this
prospectus.
Years Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
INTEREST INCOME:
Loans receivable ...................... $ 28,852 $ 28,625 $ 26,379
Investment securities:
Taxable interest income ............. 4,204 4,151 4,052
Tax-exempt interest income .......... 376 367 344
Dividend income ..................... 462 319 274
-------- -------- --------
Total investment security income... 5,042 4,837 4,670
-------- -------- --------
Total interest income.............. 33,894 33,462 31,049
INTEREST EXPENSE:
Deposit accounts ...................... 16,816 16,762 15,716
Federal Home Loan Bank advances ....... 1,021 1,137 1,294
-------- -------- --------
Total interest expense............. 17,837 17,899 17,010
-------- -------- --------
Net Interest Income ............ 16,057 15,563 14,039
PROVISION FOR LOAN LOSSES ............... 780 420 420
-------- -------- --------
Net interest income after
provision for loan losses ..... 15,277 15,143 13,619
======== ======== ========
OTHER INCOME:
Loan service fees ..................... 781 854 798
Gain (loss) on sale of securities...... 315 (1) --
Other, net ............................ 831 939 276
-------- -------- --------
Total other income ............. 1,927 1,792 1,074
OTHER EXPENSES:
Salaries and employee benefits ........ 5,436 4,761 4,134
Occupancy and equipment ............... 3,134 2,388 2,260
Charitable contributions .............. 3,426 106 70
Information processing costs .......... 849 653 582
Other, net ............................ 2,687 2,379 2,750
-------- -------- --------
Total other expenses ........... 15,532 10,287 9,796
-------- -------- --------
BALANCE, earnings before federal
income taxes ........................... 1,672 6,648 4,897
FEDERAL INCOME TAXES:
Current ............................... 1,944 2,551 1,598
Deferred .............................. (1,683) (437) (211)
-------- -------- --------
Total federal income tax ...... 261 2,114 1,387
-------- -------- --------
Net Income .............................. $ 1,411 $ 4,534 $ 3,510
======== ======== ========
See Notes to Consolidated Financial Statements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of Mutual Bancshares and its
subsidiaries. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes in the back of this prospectus, the Consolidated Statements of Income on
the previous page, as well as the other sections of this prospectus.
Mutual Bancshares' results of operations depend primarily on its net
interest income, which is the difference between the income earned on its
interest-earning assets, consisting of loans and investments, and the cost of
its interest-bearing liabilities, consisting of deposits and Federal Home Loan
Bank of Seattle borrowings. Mutual Bancshares' net income is also affected by,
among other things, fee income, provisions for loan losses, operating expenses
and income tax provisions. Mutual Bancshares' results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of the regulatory authorities.
Forward-Looking Statements
This prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of Mutual
Bancshares. These forward-looking statements are generally identified by use of
the word "believe," "expect," "intend," anticipate," "estimate," "project," or
similar words. Mutual Bancshares's ability to predict results of the actual
effect of future plans or strategies is uncertain. Factors which could have a
material adverse effect on our operations include, but are not limited to,
changes in interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market areas and accounting
principles and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and you should not rely too much on these
statements.
Operating Strategy
Mutual Bancshares is a bank holding company which was formed in 1993 in
connection with the mutual holding company reorganization of Everett Mutual
Bank. At March 31, 1999, Mutual Bancshares owned four subsidiaries - Everett
Mutual Bank, a Washington state chartered savings bank; Commercial Bank of
Everett, a Washington state chartered commercial bank; I-Pro, Inc., a Washington
corporation, which is an item processing company; and Mutual Bancshares Capital
Inc., a Washington corporation, which is a venture capital firm.
Everett Mutual Bank's strategy is to operate as a community-based,
retail oriented financial institution offering a wide variety of banking
products, delivered and distinguished by providing a superior level of
customized service to individuals. Everett Mutual Bank attracts retail deposits
and generates real estate secured loans through its 11 banking offices using
targeted marketing, customer cross-selling, referrals and its longstanding
reputation in its market area as a primary means of meeting this strategy.
Everett Mutual Bank strives to serve a niche base of higher balance transaction
account customers by offering tiered, interest-bearing products, versus a mass
market strategy that seeks lower balance/no interest/high fee transaction
accounts. In addition to offering one- to four family real estate loans, Everett
Mutual Bank focuses on construction and land development loans, as well as
multi-family and commercial real estate loans. Since single family lending has
become a commodity product, Everett Mutual Bank has sought to diversify its
lending activities by emphasizing real estate construction, multi-family and
commercial lending. This diversification has allowed for continued customization
of its lending
22
products in a highly competitive environment. To a lesser, but increasing
extent, Everett Mutual Bank also originates consumer loans and intends to
continue to build the consumer lending segment of its loan portfolio through a
broadened product line with an emphasis on quality service. See "Business of
Mutual Bancshares -- Lending Activities."
Commercial Bank of Everett's strategy is to operate as a
community-based financial institution primarily focused on serving the needs of
business banking customers with a high level of customer service. This strategy
is accomplished by providing banking services directly at the customer's place
of business, including lending and non-cash deposit activities, to the greatest
extent possible. Commercial Bank of Everett does not directly compete with
Everett Mutual Bank's retail customer focus. Rather, Commercial Bank of Everett
and Everett Mutual Bank serve to complement each other through an organized
referral network that provides both banks with the opportunity for increased
business. Commercial Bank of Everett was formed as a start-up bank under a
separate banking charter in order to foster and preserve a true commercial
banking culture which is diverse from the historical operating strategy of
Everett Mutual Bank. Commercial Bank of Everett's business consists primarily of
attracting non-cash deposits from business customers and, to a lesser extent,
the general public, and using those funds to originate commercial loans to a
wide variety of small businesses and professional service companies in the local
market. As an accommodation to its business customers and other contacts made
during the normal course of business, Commercial Bank of Everett originates
consumer loans, and acts as a broker to Everett Mutual Bank on one- to
four-family residential loans, multi-family and commercial real estate loans.
See "Business of Commercial Bank of Everett."
The operating strategy of Mutual Bancshares' other minor subsidiaries,
I-Pro, Inc. and Mutual Bancshares Capital, Inc. is to complement and enhance the
efficiencies of Everett Mutual Bank and Commercial Bank of Everett through
cross-marketing and referral opportunities and by producing additional sources
of noninterest income that are not generally subject to the same cyclical
influences of the banking business. I-Pro, Inc.'s operating strategy is to
provide superior quality backroom check processing and electronic imaging
services for banks, with the long-term objective of supplying this technology to
non-financial businesses for similar applications. The company employs state of
the art check and statement imaging technology and customized services to
accomplish this objective. At March 31, 1999, I-Pro, Inc.'s sole clients
included Everett Mutual Bank and Commercial Bank of Everett. The operating
strategy of Mutual Bancshares Capital, Inc. is to provide, through an
organizational structure more fully explained in "Business of Mutual Bancshares
Capital, Inc.," management services and limited partnership venture capital
investments under licensing by the Small Business Administration as a Small
Business Investment Company. These management and investment opportunities are
expected to result in an additional source of non-interest income to the
consolidated operations of Mutual Bancshares and provide for potential
cross-selling opportunities with the other subsidiaries of Mutual Bancshares as
well. See "Business of I- Pro, Inc." and "Business of Mutual Bancshares Capital,
Inc."
Mutual Bancshares does not presently engage in any activities outside
of serving as a shell parent company for its subsidiaries. The operating
strategy of Mutual Bancshares has been to invest dividends received from Everett
Mutual Bank into additional operating subsidiaries, which currently consist of
Commercial Bank of Everett, I-Pro, Inc. and Mutual Bancshares Capital, Inc., in
an effort to expand and diversify the consolidated operations of Mutual
Bancshares across a variety of companies that are engaged in complementary, but
different, businesses and/or operating strategies. As a result of the additional
capital that will be retained by EverTrust Financial Group, Inc. from the
conversion, we anticipate that this diversification strategy will continue and
accelerate, although there are no specific acquisitions or new business
formations planned at this time.
Comparison of Financial Condition of Mutual Bancshares at March 31, 1999 and
March 31, 1998
Total assets increased 7.3% from $421.3 million at March 31, 1998 to
$452.1 million at March 31, 1999, primarily as a result of an increase in loans
receivable, net, which was funded by increased deposits, Federal Home Loan Bank
advances and retained net income.
23
Cash and cash equivalents decreased 30.9% from $19.1 million at March
31, 1998 to $13.2 million at March 31, 1999, primarily as a result of a decrease
in overnight Fed Funds and Federal Home Loan Bank investments that were
reinvested in securities available for sale in generally the one to three year
maturity range at a higher yield as short-term interest rates fell during the
year. Lower short term interest rates throughout the year precipitated the move
from short-term to intermediate term securities to increase yield and net
interest income.
Securities available for sale increased 58.1% from $38.9 million at
March 31, 1998 to $61.6 million at March 31, 1999, as management employed a
strategy of shifting from shorter term investments to longer term corporate bond
investments in order to increase yield. Approximately $13.4 million of this
increase was funded by the reinvestment of maturing held to maturity securities
and overnight Fed Funds and Federal Home Loan Bank investments. The remaining
$9.3 million of the increase was funded by increased deposits and Federal Home
Loan Bank advances. Management intends to place most new investment purchases in
the available for sale category which allows for active management of the
securities portfolio to meet liquidity and asset/liability management needs. See
"Business of Mutual Bancshares -- Investment Activities."
Loans receivable, net, including loans held-for-sale, increased 5.9%
from $325.7 million at March 31, 1998 to $345.0 million at March 31, 1999,
primarily as a result of loans held for sale which increased $15.9 million from
March 31, 1998 to March 31, 1999. Total loans, before deducting undisbursed loan
proceeds, deferred loan fees, and reserves for loan losses, increased 7.2% from
$356.4 million at March 31, 1998 to $382.1 million at March 31, 1999. Although a
higher level of one- to four family saleable loans was held as of March 31,
1999, total one- to four family loans increased only $6.3 million or 6.6%, as
many existing loans in this category were paid off as a result of heavy
refinancing activity triggered by historically low mortgage interest rates.
Commercial and multi-family construction/permanent loans increased $14.7 million
or 125.1% as Everett Mutual more actively marketed this loan product. See
"Business of Mutual Bancshares -- Construction and Land Development Lending."
The combined outstanding balance of permanent commercial and multifamily loans
was unchanged from March 31, 1998 to March 31, 1999, despite gross loan
originations of $32.0 million in these two categories during the fiscal year, as
a result of an increase in payoffs and refinancings. The commercial and
multi-family portfolios also experienced strong payoffs from refinancings
triggered by historically low interest rates and increased market competition.
Business loans increased $2.7 million or 43.7% as originations by the Commercial
Bank of Everett increased. Competition for real estate secured and business
loans is considered intense and is indicative of the modest growth in the loan
portfolio from March 31, 1998 to March 31, 1999.
Loans held-for-sale on the secondary market increased from $13.7
million at March 31, 1998 to $29.6 million at March 31, 1999. This 116.3%
increase resulted primarily from holding saleable loans to absorb liquidity and
provide interest income at a higher rate than comparable investment securities.
Many of these loans were originated from refinance activity and have very low
loan to value ratios, making them high quality assets. Management may continue
to hold saleable loans for longer periods as part of Mutual Bancshares'
asset/liability strategy. Changes in interest rates impact the market value of
loans held-for-sale, which are carried on the consolidated financial statements
at the lower of cost or market value on an aggregate basis. Rising interest
rates would result in decreased market value which would be recognized as a
component of net income in the event that the aggregate market value decreased
below the cost of loans held-for-sale.
Premises and equipment, net, decreased 9.2% from $8.8 million at March
31, 1998 to $8.0 million at March 31, 1999, as a result of depreciation expense.
During the year ended March 31, 1999 Mutual Bancshares and its subsidiaries
reevaluated and shortened the estimated life of certain electronic equipment,
consisting principally of personal computers and related software and I-Pro's
item processing hardware and software, and as a result, incurred additional
depreciation expenses of approximately $450,000. For the years ended March 31,
1999 and 1998, depreciation expense was $1.5 million and $1.1 million,
respectively. See "Business of Mutual Bancshares -- Properties."
24
Deposits increased 7.1% from $351.0 million at March 31, 1998 to $375.9
million at March 31, 1999, primarily as a result of interest credited back to
accounts and a general growth in deposits brought about by the opening of the
new Stanwood branch of Everett Mutual Bank.
Federal Home Loan Bank of Seattle advances increased 22.2% from $15.5
million at March 31, 1998 to $18.9 million at March 31, 1999, primarily as a
result of asset/liability objectives to obtain longer-term, fixed rate, funding
at historically low interest rates. In the future, as one of its strategies to
leverage excess capital, EverTrust may engage in "wholesale leveraging" by
investing Federal Home Loan Bank of Seattle advances in investment securities of
the type in which Mutual Bancshares currently invests, with the goal of
recognizing income on the difference between the interest rate paid on the
advance and the interest rate earned on the securities, although EverTrust
currently has no specific plans to do so.
Total capital increased 2.3% from $51.1 million at March 31, 1998 to
$52.3 million at March 31, 1999, primarily as a result of retained net income
for the year ended March 31, 1999.
Comparison of Operating Results of Mutual Bancshares for the Year Ended March
31, 1998 and 1999
Net Income. Net income decreased 68.9% from $4.5 million for the year
ended March 31, 1998 to $1.4 million for the year ended March 31, 1999 primarily
as a result of $3.4 million, pre-tax, in charitable contributions (primarily to
the Everett Mutual Foundation), higher loan loss provisions and increased
noninterest expenses for salaries and benefits and occupancy that were not fully
offset by higher net interest income and higher noninterest income.
Net Interest Income. Net interest income increased 3.2% from $15.6
million for the year ended March 31, 1998 to $16.1 million for the same period
in 1999 as total interest income increased more than total interest expense.
Total interest income increased 1.3% from $33.5 million for the year
ended March 31, 1998 to $33.9 million for the year ended March 31, 1999
primarily as a result of an increase in the average balance of loans receivable,
net, which more than offset a decline in the average yield. The average balance
of loans receivable, net, increased from $322.8 million for the year ended March
31, 1998 to $334.9 million for the year ended March 31, 1999 as a result of
increased loan demand. The average yield earned on loans declined from 8.87% for
the year ended March 31, 1998 to 8.62% for the year ended March 31, 1999
primarily as a result of loan refinancings and new loan originations at lower
market interest rates. Interest earned on investment and mortgage-backed
securities increased from $4.8 million for the year ended March 31, 1998 to $5.0
million for the year ended March 31, 1999 as average balances increased from
$64.0 million for the year ended March 31, 1998 to $71.6 million for the year
ended March 31, 1999 as a result of investing cash from deposit increases.
Total interest expense remained virtually unchanged from $17.9 million
for the year ended March 31, 1998 to $17.8 million for the year ended March 31,
1999. The average balance of total deposits increased $15.5 million but the
weighted average cost of deposits decreased 20 basis points due to a general
decline in market interest rates. The average balance of certificates of deposit
increased from $177.9 million for the year ended March 31, 1998 to $182.0
million for the year ended March 31, 1999 as a result of interest credited to
accounts and deposit increases at the new Stanwood branch office. Interest
expense on Federal Home Loan Bank advances decreased $100,000 from $1.1 million
at March 31, 1998 to $1.0 million at March 31, 1999 primarily as a result of a
decrease in average balances.
Mutual Bancshares' interest rate spread was 3.27% for the year ended
March 31, 1998 and 3.20% for the same period in 1999. The net interest margin
declined from 3.89% for the year ended March 31, 1998 to 3.83% for the same
period in 1999 as the yield on interest earning assets decreased more than the
cost of interest bearing liabilities. It is anticipated that the net interest
margin may be subject to decline as a result of intense pricing competition for
both loans and deposits in the market area.
25
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, based on management's continuing analysis of factors underlying the
quality of the loan portfolio. These factors include changes in portfolio size
and composition, actual loan loss experience, current economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. See "Business of Mutual Bancshares
- -- Lending Activities -- Nonperforming Assets and Delinquencies" and Note 1 of
Notes to Consolidated Financial Statements.
The provision for loan losses was $780,000 for the year ended March 31,
1999 compared to $420,000 for the year ended March 31, 1998. This resulted from
management's ongoing consistent application of its formula analysis methodology
which measures changes in loan portfolio composition by collateral categories,
including loan commitments and classified loans. The formula analysis is
supplemented by management's ongoing assessment of overall credit quality of the
portfolio, including loan delinquencies and peer group analysis, adjusted for
current economic conditions. The allowance for loan losses was $5.7 million, or
1.62% of total loans at March 31, 1999, compared to $4.9 million or 1.48% of
total loans at March 31, 1998. The unallocated portion of the allowance for loan
losses was $377,000 and $329,000 at March 31, 1999 and March 31, 1998,
respectively. The increased allowance level resulted from continued loan
portfolio growth in the higher-risk lending categories of commercial and
multi-family construction/permanent loans, business loans and credit card loans
during the period, which comprised $224.5 million, or 58.8% of the portfolio at
March 31, 1999, versus $206.2 million, or 57.9% of the portfolio at March 31,
1998. The allocated portion of the allowance for loan losses for these loan
types was $3.3 million at March 31, 1999 and $2.9 million at March 31, 1998. In
addition, commercial and multi-family loans have larger individual loan amounts,
which have a greater single impact on the total portfolio quality in the event
of delinquency or default. There have been significant negative changes in the
economic environment and governmental regulations from March 31, 1998. In
particular, the Boeing Company has announced company-wide layoffs of 48,000,
with 31,000 of the layoffs expected to occur in the State of Washington. As home
to the largest Boeing assembly plant in the state, Snohomish County is
particularly impacted by the layoffs since twenty percent of jobs in the County
are in the aerospace industry, including parts manufacturers and other suppliers
to Boeing. As a result of the foregoing, the level of reserves allocated to one-
to four-family loans increased to $784,000 at March 31, 1999 from $320,000 at
March 31, 1998. In addition, the listing of chinook salmon as an endangered
species and the resulting impact that designation has on the ability of Everett
Mutual Bank's commercial construction and spec construction borrowers' abilities
to complete projects, warranted higher reserve levels. See "Risk Factors."
Noninterest Income. Total noninterest income increased 7.5% from $1.8
million for the year ended March 31, 1998 to $1.9 million for the year ended
March 31, 1999. This increase resulted primarily from the gain on sale of equity
securities and, to a lesser extent, increased earnings on automated teller
machine operations as a result of the expanded network of owned machines. The
increases were partially offset by lower earnings on the sale of other real
estate owned and residential mortgage loans.
Noninterest Expense. Total noninterest expense increased 51.0% from
$10.3 million for the year ended March 31, 1998 to $15.5 million for the year
ended March 31, 1999 primarily as a result of $3.4 million of charitable
contributions, primarily to The Everett Mutual Foundation, as compared to a
$106,000 during fiscal 1998. Also contributing to the increase in noninterest
expenses were increases in salaries and employee benefits, occupancy and fixed
assets, and Y2K preparation and testing costs. Salaries and employee benefits
increased from $4.8 million for the year ended March 31, 1998 to $5.4 million
for the year ended March 31, 1999 as a result of increased staffing levels,
general salary increases and related payroll tax cost. Occupancy and equipment
expense increased from $2.4 million for the year ended March 31, 1998 to $3.1
million for the year ended March 31, 1999 primarily as a result of expenses
associated with accelerated depreciation on electronic equipment. Noninterest
expense can be expected to increase in subsequent periods following the
consummation of the conversion as a result of increased costs associated with
operating as a public company and increased compensation expense as a result of
the adoption of the employee stock ownership plan and, if approved by
EverTrust's stockholders, the management recognition plan. After the
contribution being made as part of the conversion, Mutual Bancshares does not
intend to
26
make significant contributions to The Everett Mutual Foundation in the future.
See "Risk Factors -- Return on Equity Will Be Below Average After Conversion
Because of High Capital Levels and Operating Losses of Subsidiaries" and "--
Implementation of Benefit Plans Will Increase Future Compensation Expense and
May Lower EverTrust Financial Group, Inc.'s Net Income."
Provision for Income Taxes. The provision for income taxes decreased
from $2.1 million for the year ended March 31, 1998 to $261,000 for the year
ended March 31, 1999 as a result of lower income before income taxes. The
effective tax rate was 31.8% for the year ended March 31, 1998 and 15.6% for the
year ended March 31, 1999. The effective tax rate was lower primarily as a
result of tax-exempt interest and federal low income housing tax credits. For
the year ended March 31, 1998, tax-exempt interest and federal low income
housing tax credits lowered the effective tax rate 160 basis points and 320
basis points, respectively. For the year ended March 31, 1999, these same items
lowered the effective tax rate 770 basis points and 1,290 basis points,
respectively.
The deferred portion of the provision for income taxes was ($437,000)
for the year ended March 31, 1998 and ($1.7) million for the year ended March
31, 1999. The change in the deferred portion is primarily attributable to
expenses for bad debts, depreciation and charitable contributions, that were not
fully deductible in the current tax year, offset by income deferred into future
years which was comprised primarily of Federal Home Loan Bank stock dividends.
Comparison of Operating Results of Mutual Bancshares for the Years Ended March
31, 1997 and 1998
Net Income. Net income increased 29.2% from $3.5 million in fiscal 1997
to $4.5 million in fiscal 1998 primarily as a result of increased net interest
income and noninterest income.
Net Interest Income. Net interest income increased 10.9% from $14.0
million in fiscal 1997 to $15.6 million in fiscal 1998 as total interest income
increased more than total interest expense.
Total interest income increased 7.8% from $31.0 million in fiscal 1997
to $33.5 million in fiscal 1998 primarily as a result of an increase in the
average balance of loans receivable, net, from $303.0 million in fiscal 1997 to
$322.8 million in fiscal 1998 as a result of increased loan demand. The average
yield earned on loans receivable, net, increased from 8.70% in fiscal 1997 to
8.87% in fiscal 1998 primarily because of the increased balances in higher
yielding loan products such as speculative construction, multi-family and
commercial loans, combined with accelerated amortization of deferred loan fees
as a result of increases in both loan payoffs and sales. Interest earned on
investment and mortgage-backed securities increased from $4.7 million in fiscal
1997 to $4.8 million in fiscal 1998 as average balances increased from $53.4
million in fiscal 1997 to $64.0 million in fiscal 1998 as a result of investing
funds from deposit increases.
Total interest expense increased 5.2% from $17.0 million in fiscal 1997
to $17.9 million in fiscal 1998 primarily as a result of an increase in the
average balance of deposits from $315.3 million in fiscal 1997 to $333.8 million
in fiscal 1998, coupled with a slight increase in the average rate paid from
4.98% in fiscal 1997 to 5.02% in fiscal 1998, as a result of a change in the
deposit mix to higher yielding products.
The interest rate spread increased from 3.12% in fiscal 1997 to 3.27%
in fiscal 1998. The net interest margin increased from 3.70% for the year ended
March 31, 1997 to 3.89% for the same period in 1998. This increase is primarily
attributable to commercial banking activities and increased yields on interest
earning assets above interest bearing liabilities.
Provision for Loan Losses. The provision for loan losses was $420,000
for the year ended March 31, 1998, the same level as the year ended March 31,
1997. This resulted from management's ongoing application of its formula
analysis methodology which measures changes in loan portfolio composition by
collateral categories, including unfunded loan commitments and classified loans,
which, as discussed above, has been consistently applied year to year. The
formula analysis is supplemented by management's ongoing assessment of overall
credit
27
quality of the portfolio, including loan delinquencies and peer group analysis,
adjusted for current economic conditions. The allowance for loan losses was $4.9
million, or 1.48% of total loans at March 31, 1998, compared to $4.5 million or
1.45% of total loans at March 31, 1997. The unallocated portion of the allowance
for loan losses was $329,000 and $618,000 at March 31, 1998 and March 31, 1997,
respectively. The increased allowance level resulted from continued loan
portfolio growth in the higher-risk lending categories of commercial and
multi-family construction/permanent loans, business loans and credit card loans
during the period, which comprised $206.2 million, or 57.9% of the portfolio at
March 31, 1998, versus $185.2 million, or 57.5% of the portfolio at March 31,
1997. The allocated portion of the allowance for loan losses for these loan
types was $2.9 million at March 31, 1998 and $2.5 million at March 31, 1997. The
unallocated portion of the reserve declined due to exceptionally strong economic
conditions in the market area. For further information, see the discussion on
the allowance and related methodology contained in "Business of Mutual
Bancshares -- Allowance for Loan Losses." See "Business of Mutual Bancshares --
Lending Activities -- Nonperforming Assets and Delinquencies" and Note 1 of
Notes to Consolidated Financial Statements.
Noninterest Income. Total noninterest income increased 66.9% from $1.1
million in fiscal 1997 to $1.8 million in fiscal 1998. The increase resulted
primarily from gains on the sale of two other real estate owned properties
(commercial real estate and land development properties); the sale of
residential mortgage loans; and higher fees earned on checking accounts as a
result of the implementation of a new fee structure. Also, in fiscal 1997
noninterest income included losses on the sale and disposition of fixed assets
of $175,000.
Noninterest Expense. Total noninterest expense increased 5.0% from $9.8
million in fiscal 1997 to $10.3 million in fiscal 1998 primarily as a result of
increases in salaries and employee benefits. This change was the result of
annual salary increases combined with increased staffing levels. Profit sharing
costs also increased in fiscal 1998 because of operating results.
Provision for Income Taxes. The provision for income taxes increased
from $1.4 million in fiscal 1997 to $2.1 million in fiscal 1998 as a result of
higher income before income taxes. The effective tax rate was 28.3% in fiscal
1997 and 31.8% in fiscal 1998.
Average Balances, Interest and Average Yields/Cost
The earnings of Everett Mutual Bank and Commercial Bank of Everett
depend largely on the spread between the yield on interest-earning assets, which
consist primarily of loans and investments, and the cost of interest-bearing
liabilities, which consist primarily of deposit accounts and borrowings, as well
as the relative size of Everett Mutual Bank's and Commercial Bank of Everett's
interest-earning assets and interest-bearing liabilities.
28
The following table sets forth, on a consolidated basis for Mutual
Bancshares for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts of interest income
from average interest-earning assets and interest expense on average
interest-bearing liabilities, resultant yields, interest rate spread, net
interest margin, and ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period.
Year Ended March 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ----------------------------- ------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)..... $334,896 $28,852 8.62% $322,811 $28,625 8.87% $303,036 $26,379 8.70%
Investment securities........ 67,771 4,058 5.99 60,493 3,807 6.29 50,118 3,184 6.35
Federal Home Loan Bank stock. 3,787 291 7.68 3,488 273 7.83 3,232 250 7.74
Cash and cash equivalents.... 12,892 693 5.38 13,699 757 5.53 23,281 1,236 5.31
------ -------- ---- -------- -------- ---- -------- ------- ----
Total interest-earning
assets................... 419,346 33,894 8.08 400,491 33,462 8.36 379,667 31,049 8.18
-------- ---- -------- ---- ------- ----
Noninterest-earning assets...... 7,580 6,493 6,598
-------- -------- -------
Total average assets...... $426,926 $406,984 $386,265
======== ======== ========
Interest-bearing liabilities:
Savings accounts............. $ 11,454 $ 316 2.76% $ 10,373 $ 309 2.98% $ 10,842 $ 336 3.10%
NOW accounts................. 32,227 845 2.62 29,992 839 2.80 27,143 753 2.77
Money market deposit
accounts.................... 123,469 5,354 4.34 115,514 5,264 4.56 107,214 4,796 4.47
Certificates of deposit...... 182,016 10,301 5.66 177,877 10,350 5.82 170,097 9,831 5.78
--------- -------- ---- --------- -------- ---- -------- --------- ----
Total deposits............. 349,216 16,816 4.82 333,756 16,762 5.02 315,296 15,716 4.98
Federal Home Loan Bank
advances.................... 16,215 1,021 6.30 18,003 1,137 6.32 20,682 1,294 6.26
---------- --------- ---- ---------- --------- ---- -------- --------- ----
Total interest-bearing
liabilities............ 365,431 17,837 4.88 351,759 17,899 5.09 335,978 17,010 5.06
-------- ---- -------- ---- -------- ----
Noninterest-bearing
liabilities................. 9,449 7,713 6,779
---------- ----------- --------
Total average
liabilities........... 374,880 359,472 342,757
Average equity.................. 52,046 47,512 43,508
---------- ---------- --------
Total liabilities
and equity........... $426,926 $406,984 $386,265
======== ======== ========
Net interest income............. $16,057 $15,563 $14,039
======= ======= =======
Interest rate spread............ 3.20% 3.27% 3.12%
==== ==== ====
Net interest margin............. 3.83% 3.89% 3.70%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 114.75% 113.85% 113.00%
====== ====== ======
- ------------
(1) Average loans includes non-performing loans and loans held for sale.
Interest income does not include interest on loans 90 days or more past
due.
29
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of Mutual Bancshares. Information is provided
with respect to effects on interest income attributable to changes in volume,
which are changes in volume multiplied by prior rate; effects on interest income
attributable to changes in rate, which are changes in rate multiplied by prior
volume; and changes in rate/volume, which are changes in rate multiplied by
change in volume.
Year Ended March 31, 1999 Year Ended March 31, 1998
Compared to year Ended March 31, 1998 Compared to year Ended March 31, 1997
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ---------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans receivable, net .................... $ 1,072 $ (814) $ (30) $ 228 $ 1,721 $ 492 $ 32 $ 2,245
Investment securities .................... 458 (185) (22) 251 659 (30) (6) 623
Federal Home Loan Bank
stock ................................ 23 (5) -- 18 20 3 -- 23
Interest-bearing deposits ................ (45) (21) 1 (65) (509) 50 (21) (480)
------- ------- ------- ------- ------- ------- ------- -------
Total net change in income on
interest-earning assets ............... $ 1,508 $(1,025) $ (51) $ 432 $ 1,891 $ 515 $ 5 2,411
======= ======= ======= ------- ======= ======= ======= -------
Interest-bearing liabilities:
Savings accounts ......................... $ 32 $ (23) $ (2) 7 $ (15) $ (13) $ 1 (27)
NOW accounts ............................. 64 (54) (4) 6 79 6 1 86
Money market deposit ..................... 363 (255) (18) 90 371 90 7 468
accounts
Certificates of deposit .................. 241 (283) (7) (49) 450 66 3 519
------- ------- ------- ------- ------- ------- ------- -------
Total average deposits ............... 700 (615) (31) 54 885 149 12 1,046
Federal Home Loan Bank
advances ............................. (113) (3) -- (116) (168) 12 (2) (158)
------- ------- ------- ------- ------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities .......... $ 587 $ (618) $ (31) (62) $ 717 $ 161 $ 10 888
======= ======= ======= ------- ======= ======= ======= -------
Net change in net interest
income ................................ $ 494 $ 1,523
======= =======
30
Yields Earned and Rates Paid
The following table sets forth, on a consolidated basis, for the
periods and at the date indicated, the weighted average yields earned on Mutual
Bancshares' assets and the weighted average interest rates paid on Mutual
Bancshares' liabilities, together with the net yield on interest-earning assets.
For the Year
Ended March 31,
At March 31 ----------------------
1999 1999 1998 1997
---- ---- ---- ----
Weighted average yield on:
Loans receivable, net (1) ......... 7.99% 8.62% 8.87% 8.70%
Investment securities ............. 5.98 5.99 6.29 6.35
Federal Home Loan Bank stock ...... 7.75 7.68 7.83 7.74
Cash and cash equivalents ......... 5.00 5.38 5.53 5.31
Total interest-earning assets .. 7.63 8.08 8.36 8.18
Weighted average rate paid on:
Savings accounts .................. 2.77 2.76 2.98 3.10
NOW accounts ...................... 2.61 2.62 2.80 2.77
Money market deposit accounts ..... 4.20 4.34 4.56 4.47
Certificates of deposit ........... 5.50 5.66 5.82 5.78
Total average deposits ......... 4.60 4.82 5.02 4.98
Federal Home Loan Bank advances ... 6.19 6.30 6.32 6.26
Total interest-bearing
liabilities ................... 4.75 4.88 5.09 5.06
Interest rate spread (spread
between weighted average rate
on all interest-earning assets
and all interest-bearing
liabilities) ....................... 2.88 3.20 3.27 3.12
Net interest margin (net
interest income (expense)
as a percentage of average
interest-earning assets) ........... -- 3.83 3.89 3.70
- -------------
(1) Weighted average rate earned on loans does not include earnings from
deferred loan fees at March 31, 1999. Earnings from the amortization of
loan fees was included in the weighted average rate calculations for the
years ended March 31, 1999, 1998 and 1997.
Asset and Liability Management and Market Risk
Mutual Bancshares' Risks When Interest Rates Change. Mutual
Bancshares'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. Mutual Bancshares' 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
31
investments. Non-interest income includes service charges and fees on accounts
and gain on sale of investments. Non-interest expenses primarily include
compensation and benefits, occupancy and equipment expenses, deposit insurance
premiums and data processing expenses. Mutual Bancshares's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
The following table sets forth at March 31, 1999, the estimated
percentage change in Everett Mutual Bank's net interest income over a
four-quarter period and market value of portfolio equity based on the indicated
changes in interest rates. Management of Mutual Bancshares believes that
analysis of interest rate sensitivity set forth below for Everett Mutual Bank
would be materially different for Mutual Bancshares on a consolidated basis.
Estimated Change in
Change (In Basis Points ("bp")) Net Interest Income Market Value of
in Interest Rates (1) (next four quarters) Portfolio Equity
------------------------------- -------------------- -----------------
400 bp 1.55% (34.36)%
300 (3.82) (24.80)
200 (8.69) (15.38)
100 (6.88) (7.15)
0 -- --
(100) 5.57 6.17
(200) (0.36) 11.45
(300) (12.14) 15.91
(400) (24.22) 19.61
- --------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of
Everett Mutual Bank's operations to changes in interest rates in the preceding
table are described below. Although management believes these assumptions are
reasonable, the interest rate sensitivity of Everett Mutual Bank's assets and
liabilities and the estimated effects of changes in interest rates on Everett
Mutual Bank's (and hence Mutual Bancshares') net interest income and market
value of portfolio equity indicated in the preceding table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities lag behind changes
in market interest rates. Non-uniform changes and fluctuations in market
interest rates across various maturity horizons will also affect the results
presented. In addition, certain assets, such as adjustable rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate from those assumed
in calculating the table.
The assumptions used by management were based upon proprietary data and
are reflective of historical results or current market conditions. These
assumptions relate to interest rates, prepayments, deposit decay rates, and the
market value of certain assets under the various interest rate scenarios.
Prepayments for mortgage loans were based on management's evaluation of
its current loan portfolio. Prepayments were estimated to double from the base
at the -400bp rate shock and to decrease to 0.1% of the base at the +400bp rate
shock. Everett Mutual Bank's loans are the only assets or liabilities which
management assumed possess optionality for purpose of determining market value
changes.
32
Management assumed the non-maturity deposits could be maintained with
rate adjustments not directly proportionate to the change in market interest
rate. These assumptions are based upon management's analysis of its customer
base, competitive factors and historical review of Everett Mutual Bank's deposit
mix.
The net interest income and net market value table presented above is
predicated upon a stable balance sheet with no growth or change in asset or
liability mix. In addition, the net market value is based upon the present value
of discounted cash flows using management's estimates of current replacement
rates to discount the cash flows. The net interest income table is based upon a
cash flow simulation of Everett Mutual Bank's existing assets and liabilities.
It was also assumed that delinquency rates would not change as a result of
changes in interest rates although there can be no assurance that this will be
the case. Even if interest rates change in the designated amounts, there can be
no assurance that Everett Mutual Bank's assets and liabilities would perform as
set forth above. Also, a change in the U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause changes to the net market value and net interest income other than those
indicated above.
The following table sets forth at March 31, 1999 the estimated
percentage change in Commercial Bank of Everett's net interest income over a
four-quarter period and market value of portfolio equity based on the indicated
changes in interest rates.
Estimated Change In
Change (in Basis Points) Net Interest Income Market Value of
in Interest Rates (1) (next four quarters) Portfolio Equity
------------------------ -------------------- ----------------
400 bp 17.91% (8.13)%
300 13.56 (6.18)
200 9.26 (4.14)
100 4.80 (2.01)
0 0.00 0.00
(100) (4.99) 1.45
(200) (10.06) 2.26
(300) (15.42) 3.17
(400) (21.10) 4.20
- -------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
Certain assumptions utilized by management in assessing the interest
rate risk of Commercial Bank of Everett were employed in preparing data included
in the preceding table. These assumptions were based upon proprietary data
selected by management and are reflective of historical results or current
market conditions. These assumptions relate to interest rates, repayment rates,
deposit decay rates, and the market value of certain assets under the various
interest rate scenarios.
Prepayment assumptions for mortgage-backed securities and the loan
portfolio were based upon industry standards for prepayments. Commercial Bank of
Everett's mortgage-backed securities and loan portfolio are the only assets or
liabilities which management assumed possess optionality for purposes of
determining market value changes.
33
Management assumed that the majority of non-maturity deposits had
estimated lives ranging from 0 to 5 years, while only 6.0% of non-maturity
deposits had estimated lives ranging from 5 to 20 years. These assumptions are
based upon management's analysis of its customer base and competitive factors.
The net interest income and market value table presented above is
predicated upon a stable balance sheet with no growth or change in asset or
liability mix. In addition, the net market value is based upon the present value
of discounted cash flows using management's estimates of current replacement
rates to discount the cash flows. The net interest income table is based upon a
cash flow simulation of Commercial Bank of Everett's existing assets and
liabilities. It was also assumed that delinquency rates would not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that Commercial Bank of Everett's assets and liabilities
would perform as set forth above. Also, a change in the U.S. Treasury rates in
the designated amounts accompanied by a change in the shape of the Treasury
yield curve would cause changes to the net market value and net interest income
other than those indicated above.
How Mutual Bancshares Manages Its Risk of Interest Rate Changes. Mutual
Bancshares does not maintain a trading account for any class of financial
instrument nor does it purchase high-risk derivative instruments. Everett Mutual
Bank is authorized to engage in limited hedging activities for its saleable loan
pipeline, however, no such hedges were in place at March 31, 1999. Furthermore,
Mutual Bancshares has no commodity price risk, and only a limited amount of
foreign currency exchange rate risk as a result of holding Canadian currency in
the normal course of business. For information regarding the sensitivity to
interest rate risk of Mutual Bancshares's interest-earning assets and
interest-bearing liabilities, see the tables under "Business of Mutual
Bancshares -- Lending Activities -- Loan Maturity and Repricing," "-- Investment
Activities" and "-- Deposit Activities and Other Sources of Funds -- Deposit
Accounts -- Time Deposits by Maturities."
Mutual Bancshares has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of Mutual
Bancshares's interest-earning assets by originating for its portfolio loans with
interest rates that periodically adjust to market conditions. Mutual Bancshares
relies on retail deposits as its primary source of funds, supplemented by
Federal Home Loan Bank borrowings. Other approved funding sources include
brokered deposits and reverse repurchase agreements, although no such deposits
or reverse repurchase agreements were used as of March 31, 1999. Management
believes that retail deposits, compared to Federal Home Loan Bank borrowings,
brokered deposits and reverse repurchase agreements, reduces the effects of
interest rate fluctuations because they generally represent a more stable source
of funds.
The only hedging activity currently authorized by the Board of Everett
Mutual Bank is related to the hedging of loans originated for resale to the
secondary market. Everett Mutual Bank's hedging policy permits the forward sale
of loans and investments with a high correlation factor to the asset being
hedged. Everett Mutual Bank does not currently have any open hedges as secondary
market loan sale activity has been limited. However, Everett Mutual Bank may use
hedges in the future if loan sale activity accelerates.
Commercial Bank of Everett does not currently nor does it plan to use
instruments with hedging characteristics.
Should Mutual Bancshares deem it necessary to engage in additional
hedging activities, management would authorize the development of necessary
in-house expertise and/or engage qualified outside consultants to implement
appropriate Board-approved policies and procedures, which would comply with all
relevant regulations.
34
Liquidity and Capital Resources
Mutual Bancshares' primary sources of funds are deposits and proceeds
from principal and interest payments on loans and securities, and Federal Home
Loan Bank of Seattle advances. While maturities and scheduled amortization of
loans and securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activity of Mutual Bancshares is the origination
of one- to four-family, commercial and multi-family mortgage loans. During the
years ended March 31, 1999 and 1998, Mutual Bancshares originated $124.4 million
and $103.9 million of these loans, respectively.
A secondary, but increasing activity of Mutual Bancshares is the
origination of business loans. During the years ended March 31, 1999 and 1998,
Mutual Bancshares originated $4.5 million and $5.1 million of these loans,
respectively. Other investing activities during these periods include the
purchase of investment securities to provide liquidity and yield. These
activities were funded primarily by principal repayments on loans and deposits.
Everett Mutual Bank and Commercial Bank of Everett must maintain
adequate levels of liquidity to ensure the availability of sufficient funds to
support loan growth and deposit withdrawals, to satisfy financial commitments
and to take advantage of investment opportunities. The sources of funds include
deposits and principal and interest payments from loans and investments and
Federal Home Loan Bank of Seattle advances. During fiscal years 1999 and 1998,
Everett Mutual Bank and Commercial Bank of Everett used these sources of funds
primarily to fund loan commitments and to pay maturing savings certificates and
deposit withdrawals. At March 31, 1999, Everett Mutual Bank and Commercial Bank
of Everett had combined loan commitments, excluding loans in process, of $12.1
million.
At March 31, 1999, Mutual Bancshares had $176,000 of unrealized gains
on securities classified as available for sale, which amount represented 0.3% of
the amortized cost basis, or $61.4 million, of the related securities. Movements
in market interest rates will affect the unrealized gains and losses in these
securities. However, assuming that the securities are held to their individual
dates of maturity, even in periods of increasing market interest rates, as the
securities approach their dates of maturity, the unrealized gain or loss will
begin to decrease and eventually be eliminated.
At March 31, 1999, certificates of deposit amounted to $188.9 million,
or 50.3%, of Mutual Bancshares' total deposits, including $125.9 million which
were scheduled to mature by March 31, 2000. Historically, Mutual Bancshares has
been able to retain a significant amount of its deposits as they mature.
Management of Mutual Bancshares believes it has adequate resources to fund all
loan commitments by deposits and, if necessary, Federal Home Loan Bank of
Seattle advances and sale of mortgage loans and that it can adjust the offering
rates of savings certificates to retain deposits in changing interest rate
environments.
Year 2000 Readiness Disclosure
Mutual Bancshares and its subsidiaries are users of computers, computer
software and equipment utilizing embedded microprocessors that will be effected
by the year 2000 issue. The year 2000 issue exists because many computer systems
and applications use two-digit date fields to designate a year. As the century
date change occurs, date-sensitive systems may recognize the year 2000 as 1900,
or not at all. This inability to recognize or properly treat the year 2000 may
cause erroneous results, ranging from system malfunctions to incorrect or
incomplete processing.
Mutual Bancshares' Y2K Task Force is chaired by Senior Vice President
Lorelei Christenson, and includes a cross-section of bank managers and the
internal auditor. The Board of Directors is charged with oversight of the
35
Y2K readiness effort. Mrs. Christenson makes a monthly progress report to the
Board of Directors of the subsidiary banks. Management has been active in
promoting customer confidence and public education on Y2K issues.
The Y2K Task Force has developed and is implementing a comprehensive
plan to make all information and non-information technology assets year 2000
compliant. The plan is comprised of the following phases:
1. Awareness - Educational initiatives on year 2000 issues and
concerns. This phase is complete.
2. Assessment - Develop a plan, identify and evaluate all vital
systems of Everett Mutual Bank, Commercial Bank of Everett and
I-Pro, Inc. This phase was completed as of June 30, 1998.
3. Renovation - Upgrade or replace any critical system that is
non-year 2000 compliant. This phase was substantially completed
as of December 31, 1998.
4. Validation - Testing all critical systems and third-party vendors
for year 2000 compliance. The validation phase was substantially
complete as of March 31, 1999 and will be complete by June 30,
1999. Everett Mutual Bank, Commercial Bank of Everett and I-Pro,
Inc. have upgraded or replaced all in-house equipment, such as
teller station equipment, etc., with year 2000 compliant
equipment. A third-party service bureau processes all customer
transactions and has completed upgrades to its systems to be year
2000 compliant. Everett Mutual Bank, Commercial Bank of Everett
and I-Pro, Inc. are relying on the results of proxy testing by
its third-party service bureau for certain date sensitive
testing. The proxy testing, which involved the use of test client
data, tested the results of transactions at various test dates
before and after the year 2000 date change and covered all of the
applications used by Everett Mutual Bank and Commercial Bank of
Everett. This proxy testing will be completed by June 30, 1999.
5. Implementation - Placement of renovated systems on-line. Everett
Mutual Bank, Commercial Bank of Everett and I-Pro, Inc. have
already implemented all necessary remedial actions and have
verified the year 2000 compliance of its computer hardware and
other equipment containing embedded microprocessors. Mutual
Bancshares' plan provides for year 2000 readiness to be completed
by June 30, 1999.
Everett Mutual Bank and Commercial Bank of Everett estimate their total
cost to identify, fix and replace computer equipment, software programs or other
equipment containing embedded microprocessors that were not year 2000 compliant,
exclusive of internal labor costs to be $200,000 of which $112,900 has been
incurred as of March 31, 1999. System maintenance or modification costs are
charged to expense as incurred, while the cost of new hardware, software or
other equipment is capitalized and amortized over their estimated useful lives.
Everett Mutual Bank and Commercial Bank of Everett do not separately track the
internal costs and time that their own employees spend on year 2000 issues,
which are principally payroll costs.
Because Everett Mutual Bank and Commercial Bank of Everett depend
substantially on their computer systems and those of third parties, the failure
of these systems to be year 2000 compliant could cause substantial disruption of
Everett Mutual Bank's and Commercial Bank of Everett's business and could have a
material adverse financial impact on each of their operations. Failure to
resolve year 2000 issues presents the following risks to Everett Mutual Bank and
Commercial Bank of Everett: Everett Mutual Bank and Commercial Bank of Everett
could lose customers to other financial institutions, resulting in a loss of
revenue, if Everett Mutual Bank's and Commercial Bank of Everett's third party
service bureau is unable to properly process customer transactions; governmental
agencies, such as the Federal Home Loan Bank of Seattle, and correspondent
institutions could fail to provide funds to Everett Mutual Bank and Commercial
Bank of Everett, which could materially impair Everett Mutual Bank's and
Commercial Bank of Everett's liquidity and affect their ability to fund loans
and deposit
36
withdrawals; concern on the part of depositors that year 2000 issues could
impair access to their deposit account balances could result in Everett Mutual
Bank and Commercial Bank of Everett experiencing deposit outflows prior to
December 31, 1999; and Everett Mutual Bank and Commercial Bank of Everett could
incur increased personnel costs if additional staff is required to perform
functions that inoperative systems would have otherwise performed.
TransAlliance, L.P. is a regional third party electronic funds transfer
service company that provides services, including automated teller machine and
point-of-sale services, and transaction switching and routing services to banks
and bank holding companies. During the second calendar quarter of 1999,
TransAlliance, L.P.'s systems were determined to not be Year 2000 compliant
based on the results of the most recent review by the federal banking agencies
and the State of Washington, Department of Financial Institutions. These
agencies have entered into an agreement with TransAlliance, L.P. to protect the
interests of its financial institution customers, including Everett Mutual Bank
and Commercial Bank of Everett, and set milestone dates and other provisions to
ensure the adequate review, renovation, testing, remediation, management and
contingency planning of mission- critical systems. Everett Mutual Bank and
Commercial Bank of Everett intend to fully inform their customer base should it
appear that a disruption may occur over the year change date. Alternative
funding methods, such as check cashing at the branches or asking merchants to
run their debit card as a credit card when making a point-of-sale purchase, will
be presented to customers through a direct mailing sent during the fourth
quarter of 1999.
If deficiencies discovered during the review are not adequately
addressed, the ability of Everett Mutual Bank and Commercial Bank of Everett
customers to access their funds from automated teller machines, other than those
owned and operated by Everett Mutual Bank, and make purchases through
point-of-sale services using the debit card option could be disrupted.
Mutual Bancshares has developed a Y2K Contingency Master Plan to
minimize disruption of service and risk of loss from safety and soundness,
profitability and customer confidence concerns for all subsidiaries. The
Contingency Master Plan is further defined in two specific types of contingency
plans: the Business Resumption Plan and the Remediation Contingency Plan.
The Business Resumption Contingency Plan addresses the actions Everett
Mutual Bank and Commercial Bank of Everett would take if core business
processes, such as paying and receiving, cannot be carried out in the normal
manner through the century date change due to system or vendor failure. Everett
Mutual Bank's and Commercial Bank of Everett's Business Resumption Contingency
Plan follows an industry-recognized four phase approach:
o Organization Planning
o Business Impact Analysis
o Contingency Planning
o Validation
Based on its current assessments, and remediation plans, which are
based in part on certain representations of third-party service providers,
Mutual Bancshares does not expect that it will experience a significant
disruption of its operations as a result of the change to the new millennium.
Although the Mutual Bancshares has no reason to conclude that a failure will
occur, the most reasonably likely worst-case Year 2000 scenario would entail a
disruption or failure of its power supply or voice and data transmission
suppliers, a third-party service provider, or a facility. If such a failure were
to occur, Mutual Bancshares would implement its contingency plans, which are
expected to be substantially completed and validated by August 31, 1999,
including back-up solutions for mission-critical operations and business
continuation plans for significant vendors and other business partners. For
example, Mutual Bancshares has reserve power supplies at three of its branch
sites, and will have back-up account data and alternative manual processes for
certain business line functions. Mutual Bancshares also has developed a
liquidity management plan to address potential increased funding needs that may
arise as the millennium
37
approaches. While Mutual Bancshares has contingency plans to address a temporary
disruption in services, there can be no assurance that any disruption or failure
will be only temporary, that the contingency plans will function as anticipated,
or that Mutual Bancshares results of operations will not be adversely affected
in the event of a prolonged disruption or failure.
The first three phases are complete and the validation phases will be
complete by September 30, 1999. The Continuity Planning Workgroup of EverTrust,
which is comprised of members of the Y2K Task Force and the existing Disaster
Recovery Team of EverTrust, has identified the interdependency between all
critical systems and core business processes, and has completed a risk
assessment of possible failure scenarios. An individual business resumption plan
has been drafted for each core business process under every failure scenario
rated medium or high risk.
A Remediation Contingency Plan is in place and will be implemented in
the event that a critical system will not meet regulatory deadlines for
renovation, validation or implementation. Management of EverTrust is confident
that the Remediation Contingency Plan will not need to be implemented, as all
critical systems have been renovated, validated and implemented within required
time frames.
Mutual Bancshares' Year 2000 project contingency plans are designed to
mitigate the potential effects of system failures in the event of reasonably
likely worst case scenarios. These contingency plans, which are expected to be
substantially completed and validated by August 31, 1999, include back-up
solutions for mission-critical operations and business continuation plans for
significant vendors and other business partners. For example, Mutual Bancshares
has reserve power supplies at three of its branch sites, and will have back-up
account data and alternative manual processes for certain business line
functions. Mutual Bancshares also has developed a liquidity management plan to
address potential increased funding needs that may arise as the millennium
approaches. Notwithstanding Mutual Bancshares' efforts and such contingency
plans, however, given the unprecedented nature of the Year 2000 computer
problem, there can be no assurance that Year 2000 issues will not arise, or that
any such issues will be fully mitigated.
Everett Mutual Bank's loan portfolio consists of loans to individuals
primarily secured by real estate, rather than business loans secured by accounts
receivable, inventory, furniture, fixtures and equipment and other non-real
estate collateral. Management has conducted a Y2K readiness survey of borrowers
and borrowing entities with loans on individual properties having balances of
$500,000 or more secured by multi-family, commercial and land development
projects via a customer questionnaire. If no response was received from the
borrower, Y2K readiness was assessed based on information already on file, if
any. Based on the findings of this limited survey, management has reason to
believe, but cannot be assured, that year 2000 issues will not significantly
impair the ability of Everett Mutual Bank's borrowers to repay their debts.
Commercial Bank of Everett's loan portfolio consists of loans primarily
to commercial business borrowers secured by accounts receivable, inventory,
furniture, fixtures and equipment and other non-real estate collateral.
Management has conducted a Y2K readiness survey of borrowers and borrowing
entities with aggregate loan balances of $100,000 or more via a customer
questionnaire. If no response was received from the borrower, Y2K readiness was
assessed based on information already on file, if any. Based on the findings of
this limited survey, management believes, but cannot be assured, that year 2000
issues will not significantly impair the ability of Commercial Bank of Everett's
borrowers to repay their debt.
There can be no assurances that Mutual Bancshares' year 2000 plan will
effectively address the year 2000 issue, that Mutual Bancshares' estimates of
the timing and costs of completing the plan will ultimately be accurate or that
the impact of any failure of Mutual Bancshares or its third-party vendors and
service providers to be year 2000 compliant will not have a material adverse
effect on Mutual Bancshares' business, financial condition or results of
operations. However, management of Mutual Bancshares is confident of its ability
to complete the transition into the next century with minimal disruption of
normal service levels.
38
Impact of Accounting Pronouncements and Regulatory Policies
Accounting For Derivative Instruments And Hedging Activities. Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998, standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under Statement of Financial Accounting Standards
No. 133, entities are required to carry all derivative instruments in the
statement of financial position at fair value. The accounting for changes in the
fair value (i.e., gains and losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reasons for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposures
to changes in fair value, cash flows or foreign currencies. See Notes 1 and 3 of
the Notes to Consolidated Financial Statements included in the back of this
prospectus for further information. Statement of Financial Accounting Standards
No. 133 is effective for financial statements issued for periods beginning after
June 15, 1999, although earlier adoption is permitted. Mutual Bancshares will
adopt this statement effective April 1, 2000. The impact of the adoption of the
provisions of this statement on the results of operations or financial condition
of Mutual Bancshares has not been determined. On May 20, 1999, an exposure draft
was issued, which if finalized would amend Statement of Financial Accounting
Standards No. 133 to extend the implementation by one year.
Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," issued in October 1998, amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities," and Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for
years beginning after December 15, 1998. Statement of Financial Accounting
Standards No. 134 requires that when a mortgage banking company securitizes
mortgage loans held for sale, that the security be classified as either trading,
available for sale, or held to maturity according to the company's intent,
unless the company has already committed to sell the security before or during
the securitization process. This statement is not expected to have a material
impact on the results of operations or financial condition of Mutual Bancshares.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which generally require the measurement of financial
position and operating results in terms of historical dollars, without
considering the changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation is reflected in the increased cost of
Mutual Bancshares' operations. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
39
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
consolidated financial position and results of operations of EverTrust and its
related entities at the dates and for the periods indicated. Information at June
30, 1999 and the three months ended June 30, 1999 and 1998 are unaudited, but,
in the opinion of management, contain all adjustments (none of which were other
than normal recurring entries) necessary for a fair presentation of the results
of such periods. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes included in the back of this
prospectus.
At At
June 30, March 31,
1999 1999
------------------ --------------
(Unaudited)
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................. $ 464,035 $ 452,089
Investment securities.................................... 75,213 75,432
Loans receivable, net.................................... 331,819 315,327
Deposit accounts......................................... 388,751 375,896
Federal Home Loan Bank advances.......................... 18,936 18,949
Total equity............................................. 52,658 52,263
Three Months
Ended June 30,
1999 1998
---- ----
(Unaudited)
(In Thousands)
OPERATING DATA:
Interest income.......................................... $ 8,787 $ 8,471
Interest expense......................................... 4,614 4,445
--------- ---------
Net interest income...................................... 4,173 4,026
Provision for loan losses................................ 275 105
---------- ----------
Net interest income after provision for loan losses...... 3,898 3,921
Other operating income................................... 108 552
Other operating expenses................................. 3,157 3,036
--------- ---------
Income before income taxes............................... 849 1,437
Provision for income taxes............................... 208 415
---------- ----------
Net income............................................... $ 641 $ 1,022
========= ========
40
Three Months
Ended June 30,
1999 1998
---- ----
OTHER DATA:
Number of:
Loans outstanding..................................... 3,615 3,580
Deposit accounts...................................... 30,715 29,918
Full service offices.................................. 12 12
At or For the
Three Months
Ended June 30,
1999 1998
---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1)........................... 0.56% 0.98%
Return on average equity (2)........................... 4.94% 8.08%
Equity-to-assets ratio (3)............................. 11.39% 12.17%
Interest rate spread (4)............................... 3.17% 3.31%
Net interest margin (5)................................ 3.74% 3.95%
Average interest-earning assets to average interest-
bearing liabilities.................................. 113.67% 114.63%
Other operating expenses as a percent of average
total assets......................................... 2.77% 2.92%
Efficiency ratio(6)...................................... 72.85% 65.66%
Capital Ratios:
Leverage................................................. 11.58% 12.41%
Tier 1 risk-based ....................................... 13.25% 15.26%
Total risk-based......................................... 14.53% 16.51%
- ---------------------
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets
and weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Total other operating expenses divided by total net interest income (on
a tax-equivalent basis) before provision for loan \losses plus total
other operating income.
41
Regulatory Capital
The tables below set forth Everett Mutual Bank's and
Commercial Bank of Everett's capital position relative to the FDIC capital
requirements at June 30, 1999. The definitions of the terms used in the table
are those provided in the capital regulations issued by the Federal Deposit
Insurance Corporation. See "Regulation -- The Banks -- Capital Requirements."
At June 30, 1999
Percent of Adjusted
Amount Total Assets(1)
------ ---------------
(In Thousands)
Everett Mutual Bank:
Tier 1 (leverage) capital................................ $42,309 9.85%
Tier 1 (leverage) capital requirement.................... 17,188 4.00
-------- ------
Excess................................................... $25,121 5.85%
======= ======
Tier 1 risk adjusted capital............................. $42,309 11.29%
Tier 1 risk adjusted capital requirement................. 14,985 4.00
-------- ------
Excess................................................... $27,324 7.29%
======= ======
Total risk-based capital................................. $47,120 12.58%
Total risk-based capital requirement..................... 29,971 8.00
-------- ------
Excess................................................... $17,149 4.58%
======= ======
Commercial Bank of Everett:
Tier 1 (leverage) capital................................ $2,816 14.83%
Tier 1 (leverage) capital requirement.................... 759 4.00
-------- ------
Excess................................................... $2,057 10.83%
====== =====
Tier 1 risk adjusted capital............................. $2,816 15.69%
Tier 1 risk adjusted capital requirement................. 718 4.00
-------- ------
Excess................................................... $2,098 11.69%
====== =====
Total risk-based capital................................. $3,021 16.83%
Total risk-based capital requirement..................... 1,436 8.00
------- ------
Excess................................................... $1,585 8.83%
====== ======
- -----------------------
(1) For the Tier 1 (leverage) capital and regulatory capital calculations,
percent of total average assets of $429.7 million and $19.0 million for
Everett Mutual Bank and Commercial Bank of Everett. For the Tier 1
risk-based capital and total risk-based capital calculations, percent
of total risk-weighted assets of $374.6 million and $17.9 million for
Everett Mutual Bank and Commercial Bank of Everett, respectively.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL INFORMATION
Comparison of Financial Condition at June 30, 1999 and March 31, 1998
Total assets at June 30, 1999 were $464.0 million compared to $452.1
million at March 31, 1999, an increase of $11.9 million. The primary factor in
this increase was a $12.9 million increase in deposits which were used to fund a
$16.5 million increase in loans and a $3.0 million increase in cash and cash
equivalents. These increases were partially offset by a $8.2 million decrease in
loans held for sale. Loans held for sale decreased from $29.6 million at March
31, 1999 to $21.4 million at June 30, 1999 as a result of $9.0 million in loan
sales and a mark-to-market adjustment of $448,000.
At June 30, 1999, EverTrust had $476,000 in loans accounted for on a
non-accrual basis ($467,000 in commercial real estate loans and $9,000 in
consumer loans) compared to $378,000 at March 31, 1999. At June 30, 1999,
EverTrust had $104,000 in accruing loans which were contractually past due 90
days or more, compared to none at March 31, 1999.
Total deposits of EverTrust increased by $12.9 million from $375.9
million at March 31, 1999 to $388.8 million at June 30, 1999. The increase
included interest credited to accounts of $3.6 million.
Total equity at June 30, 1999 was $52.7 million compared to $52.3
million at March 31, 1999. This is an increase of $395,000 or 0.8%. Net earnings
of $641,000 for the three months ended June 30, 1999 were offset by a $246,000
decrease in unrealized gains in securities available for sale, net of deferred
income taxes.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
June 30, 1998
General. Net income decreased 37.2% from $1.0 million for the three
months ended June 30, 1998 to $641,000 for the three months ended June 30, 1999
primarily as a result of $448,000, pre-tax, mark-to-market expense of the loans
held for sale and an increase of $327,000 in personnel costs.
Net Interest Income. Net interest income increased 3.7% from $4.0
million for the three months ended June 30, 1998 to $4.2 million for the three
months ended June 30, 1999. In comparing the two periods, both interest income
and interest expense were higher in 1999 due to higher average balances of both
interest-earning assets and interest-bearing liabilities. The average balance of
interest-earning assets increased from $407.8 million for the three months ended
June 30, 1998 to $446.7 million for the three months ended June 30, 1999. The
average balance of interest-bearing liabilities increased from $340.3 million
for the three months end June 30, 1998 to $374.0 million for the same period in
1999. This increase was partially offset by lower average yields on both
interest-earning assets and interest-bearing liabilities due to lower interest
rate levels in general.
Provision for Loan Losses. The provision for loan losses increased from
$105,000 for the three months ended June 30, 1998 to $275,000 for the same
period in 1999. This increase resulted from continued loan portfolio growth in
the higher-risk lending categories of commercial and multifamily
construction/permanent loans, business loans and credit card loans during the
period, which when applied to EverTrust loan loss reserve model resulted in the
higher provision for loan losses.
Noninterest Income. Noninterest income declined 80.4% to $108,000 for
the three months ended June 30, 1999 compared with $552,000 for the three months
ended June 30, 1998. The decline resulted primarily from a $448,000
mark-to-market of the loans held for sale. The decline in the value of the loans
held for sale was due primarily to the sharp increase in mortgage rates during
June 1999.
Noninterest Expense. Noninterest expense increased 4.0% from $3.0
million for the three months ended June 30, 1998 compared with $3.2 million for
the same period in 1999. The increase in compensation expense (24.9%) is
partially offset by lower charitable contributions. Compensation expense
increased as the result of
43
increased staffing levels and general salary increases. Charitable contributions
decreased due to the large contribution made during the fourth quarter of the
fiscal year ended March 31, 1999.
Provision for Income Taxes. Federal income taxes decreased from
$415,000 for the three months ended June 30, 1998 to $208,000 for the three
month ended June 30, 1999 due to the reduction in taxable earnings.
BUSINESS OF MUTUAL BANCSHARES
Mutual Bancshares is a bank holding company which owned four
subsidiaries at March 31, 1999: Everett Mutual Bank, Commercial Bank of Everett,
I-Pro, Inc. and Mutual Bancshares Capital, Inc. The business of Mutual
Bancshares is conducted primarily by Everett Mutual Bank, whose operations are
enhanced by the activities and operations of Mutual Bancshares' other three
subsidiaries. Mutual Bancshares' business activities generally are limited to
passive investment activities and oversight of its investment in Everett Mutual
Bank. Accordingly, the information regarding Mutual Bancshares' business,
including consolidated financial statements and related data, relates primarily
to Everett Mutual Bank.
Reference to Mutual Bancshares in this prospectus refers to the holding
company on a historical basis. Reference to EverTrust Financial Group, Inc. in
this prospectus refers to the holding company in the future, following the
conversion.
General
Mutual Bancshares. Mutual Bancshares is a bank holding company which
was formed in 1993 in connection with the mutual holding company reorganization
of Everett Mutual Bank. Mutual Bancshares owns four subsidiaries - Everett
Mutual Bank, a Washington state chartered savings bank; Commercial Bank of
Everett, a Washington state chartered commercial bank; I-Pro, Inc., a Washington
corporation, which is an item processing company; and Mutual Bancshares Capital,
Inc., a Washington corporation, which is a venture capital firm.
Everett Mutual Bank. Everett Mutual Bank was formed in 1916 and is
regulated by the Washington Division of Banks and the Federal Deposit Insurance
Corporation. The Federal Deposit Insurance Corporation through the Bank
Insurance Fund currently insures Everett Mutual Bank's deposits, which have been
federally insured since 1934.
Commercial Bank of Everett. Commercial Bank of Everett was formed by
Mutual Bancshares in 1996 in order to offer commercial banking services to
small- and medium-sized businesses and professional practices in Snohomish
County. Commercial Bank of Everett operates through a single leased office
facility in Everett. Commercial Bank of Everett is regulated by the Washington
Division of Banks and the Federal Deposit Insurance Corporation. The Federal
Deposit Insurance Corporation through the Bank Insurance Fund currently insures
Commercial Bank of Everett's deposits, which have been federally insured since
1996.
I-Pro, Inc. I-Pro, Inc. was organized in 1997 to provide check
processing and deposit and loan account statement printing and mailing services
for Everett Mutual Bank and Commercial Bank of Everett, as well as other
financial institutions and nonbanking businesses in the future, utilizing
electronic imaging technology. Currently, Everett Mutual Bank and Commercial
Bank of Everett are I-Pro's only clients. However, I-Pro intends to expand its
third-party relationships with other regional banking and nonbanking companies
during the next year.
Mutual Bancshares Capital, Inc. Mutual Bancshares Capital, Inc. was
formed in late 1998 and through its subsidiary, Bancshares Capital Management,
LLC, is the general partner to Bancshares Capital, L.P., an early stage venture
fund, which provides early stage equity to regionally-based high-technology and
medical instrumentation companies. Mutual Bancshares Capital, Inc. expects to
make initial investments in these companies in late 1999 and is reviewing
business plans and conducting due diligence for potential investment
opportunities. The investment in any single company is expected to be in the
range of $50,000 to $600,000 and Bancshares Capital, L.P. may co-invest with
other entrepreneurs or venture funds.
44
Market Area
Mutual Bancshares, through its subsidiaries, conducts the majority of
its lending and deposit operations in Snohomish County, located in Northwest
Washington. Snohomish County is located north of King County (Seattle) and south
of Skagit County along the I-5 corridor. Snohomish County, the state's third
largest county covering 2,098 square miles, has an estimated population of
216,000 for a density of 103 persons per square mile. Everett, the largest city
in Snohomish County, is the county seat and serves as the county's economic and
cultural center. Everett, a port city, is located approximately 30 miles north
of Seattle.
The market environment in Snohomish County has been highly influenced
by prevailing trends in nearby Seattle, and the relatively greater availability
of land at affordable prices, until recently, for residential and commercial
development. These factors led to Snohomish County's status as one of
Washington's fastest growing counties. During the last decade, Snohomish County
population grew by one-third and jobs grew by 60%. Many residents and businesses
have been attracted to Snohomish County by quality of life considerations given
the proximity to the Puget Sound and the Cascade Mountains and more open space
than in the Seattle area, principally because of the relatively limited supply
and high cost of developable land for new construction in the King County
metropolitan area.
The strong growth of the Puget Sound area, including Snohomish County,
led to recent state legislation (the Growth Management Act) to address many of
the resulting taxation and infrastructure problems. It is uncertain what the
long-term impact from such legislation may have on the impact of future regional
growth.
The favorable economic conditions in Snohomish County over the past
decade have undergone considerable change and an economic slowdown is expected.
Affordable housing was an attractive feature of Snohomish County in the past;
today, however, real estate values, which increased 19% in 1997 and 10% in 1998,
have pushed Snohomish County into the top ten least affordable residential real
estate markets in the nation. Furthermore, in late 1998 and early 1999, major
employer Boeing announced layoffs, many of which will be in the Everett plants,
due to delays in orders particularly from Asia. In addition, salmon habitat
preservation issues have recently become issues in construction and land
development in Snohomish County as seven Washington State salmon species were
recently placed under the Federal Endangered Species Act. These factors may slow
population growth in Snohomish County, curtail new construction and development
and lead to higher unemployment.
Until the mid to late 1960s, the economy of Snohomish County was based
primarily on natural resources, including timber, agriculture and, more
recently, aerospace. While the forest products industry is still important,
diversification into other major industries over the last 20 years or more has
evolved. The forest products industry faces uncertainty in the wake of proposed
Federal timber harvest restrictions to protect threatened animal species. The
aerospace industry is fostered by Boeing's headquarters in Seattle and large
manufacturing plants in Snohomish County. Economic development organizations
used the "Boeing Bust" and the ensuing economic upheaval of the early 1970s as
incentives to expand the industrial mix in their respective regions to mitigate
the impact of future aerospace employment fluctuations. While such initiatives
have been successful, a number of the technology companies are tied to Boeing.
The more important areas of economic growth include biotechnology,
electronics/software industries, led by King County based Microsoft, the Edmonds
and Everett ports and the Everett Carrier Home Port. The Everett Carrier Home
Port is home to a nuclear aircraft carrier and support ships, which are now
based in Everett, however, the Navy is considering the relocation of the carrier
to Bremerton and replacing it with several smaller ships. The Everett Carrier
Home Port was once targeted for base closure, but it has since been removed from
the list.
Everett Mutual Bank has also increased its lending in King and Pierce
Counties. King County, which includes the greater Seattle region, has a
well-diversified economy based on a variety of industries and employment
sectors. This area is a national center for manufacturing, high technology
industries, services and international trade. With more than 1.5 million people,
it ranks as the twelfth most populous county in the United States.
45
Pierce County, which includes Tacoma, Washington, is led by the
electronics, aerospace and shipping/transportation sectors. Additionally, Pierce
County is home to two large military bases, McChord Air Force Base and Fort
Lewis Army Base. These military bases have increased in size contrary to the
general downsizing trend experienced within the U.S. armed forces.
Regional demographic and economic characteristics and prevailing trends
as well as competition in the local market area directly influence the operating
strategies of Mutual Bancshares.
Lending Activities
General. Because Everett Mutual Bank's lending is the most significant
business activity of Mutual Bancshares, this section will focus primarily on the
lending of Everett Mutual Bank. Historically, the principal lending activity has
consisted of the origination of loans secured by first mortgages on
owner-occupied, one- to- four family residences and loans for the construction
of one- to- four family residences. In recent years, Everett Mutual Bank has
increased its origination of loans secured by multi-family properties,
construction and land development loans and commercial real estate loans.
Everett Mutual Bank's total loans were $368.7 million at March 31, 1999,
representing approximately 96.5% of Mutual Bancshares' total loans of $382.1
million.
Everett Mutual Bank's internal loan policy limits the maximum amount of
loans to one borrower to 15% of its capital. At March 31, 1999, the maximum
amount which Everett Mutual Bank could have lent to any one borrower and the
borrower's related entities was approximately $6.2 million under its policy. At
March 31, 1999, Everett Mutual Bank had loans to two builders/developers
(including loans for construction, land development and permanent financing)
with an aggregate committed balance in excess of this amount which were
specifically approved as policy exceptions by the Board of Directors: the first
borrower had $12.3 million committed, of which $10.3 million was outstanding,
representing 29.6% and 24.8% of Everett Mutual Bank's total capital of $41.5
million, respectively; and the other borrower had $6.9 million committed, of
which $5.9 million was outstanding, representing 16.6% and 14.2% of Everett
Mutual Bank's total capital, respectively. All loans to these two borrowers were
performing according to their terms at March 31, 1999. Loans in excess of 25% of
Everett Mutual Bank's capital are participated to Mutual Bancshares on a
last-in, first-out basis. There were no participations with Mutual Bancshares
outstanding as of March 31, 1999, since no amounts outstanding to any one
borrower exceeded 25% of Everett Mutual Bank's capital.
46
Loan Portfolio Analysis. The following table sets forth the composition
of Mutual Bancshares' consolidated loan portfolio including loans of both
Everett Mutual Bank and Commercial Bank of Everett by type of loan as of the
dates indicated. At March 31, 1999, Everett Mutual Bank's and Commercial Bank of
Everett's total loans receivable were $368.7 million and $13.4 million,
respectively.
At March 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Real Estate:
One- to four-family
residential(1)................ $101,649 26.61% $ 95,305 26.73% $ 94,612 29.40% $ 93,544 29.78% $ 94,820 29.53%
One- to four-family construction
and land development.......... 34,928 9.14 36,444 10.23 27,226 8.46 39,406 12.54 42,123 13.12
Income property:
Commercial construction....... 12,491 3.27 4,620 1.30 1,624 0.50 1,895 0.60 400 0.12
Commercial real estate........ 72,573 19.00 76,121 21.36 70,042 21.76 62,596 19.93 62,341 19.42
Multi-family construction..... 14,012 3.67 7,153 2.01 2,323 0.72 1,530 0.49 4,009 1.25
Multi-family residential...... 115,972 30.35 111,975 31.42 109,003 33.87 101,831 32.42 104,205 32.45
Consumer:
Residential mortgages............ 4,867 1.27 4,318 1.21 4,299 1.34 4,824 1.54 4,718 1.47
Home equity and second
mortgages..................... 13,734 3.59 11,548 3.24 7,888 2.45 6,047 1.92 5,863 1.83
Credit cards..................... 488 0.13 124 0.03 -- -- -- -- -- --
Automobiles...................... 787 0.21 1,036 0.29 1,190 0.37 1,051 0.33 1,173 0.37
Other installment loans.......... 1,612 0.42 1,524 0.43 1,457 0.45 1,015 0.32 1,040 0.32
Business loans...................... 8,949 2.34 6,226 1.75 2,181 0.68 407 0.13 390 0.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................. 382,062 100.00% 356,394 100.00% 321,845 100.00% 314,146 100.00% 321,082 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loan proceeds........ (28,183) (22,563) (8,526) (6,784) (17,383)
Deferred loan fees and other..... (3,239) (3,278) (3,243) (3,207) (3,490)
Reserve for loan losses.......... (5,672) (4,897) (4,509) (4,178) (3,757)
-------- -------- -------- -------- --------
344,968 325,656 305,566 299,977 296,452
Loans receivable held for sale...... (29,641) (13,705) (12,432) (7,744) (980)
-------- -------- -------- -------- --------
Loans receivable, net............... $315,327 $311,951 $293,134 $292,233 $295,472
======== ======== ======== ======== ========
- ----------------
(1) Includes owner/builder construction/permanent loans of $5.5 million $8.4
million, $5.3 million. $5.4 million and $3.7 million at March 31, 1999,
1998, 1997, 1996 and 1995, respectively.
47
Residential One- to- Four Family Lending. At March 31, 1999, $101.6
million of Mutual Bancshares' loan portfolio consisted of permanent loans
secured by one- to- four family residences. This amount represents 26.6% of
total loans of Mutual Bancshares.
Everett Mutual Bank originates both fixed-rate loans and
adjustable-rate loans. Generally, 30 year fixed-rate loans are originated to
meet the requirements for sale in the secondary market to Fannie Mae, however,
from time to time, a portion of these fixed-rate loans originated by Everett
Mutual Bank may be retained in Everett Mutual Bank's loan portfolio to meet
Everett Mutual Bank's asset/liability management objectives.
At March 31, 1999, $68.2 million, or 68.6%, of Mutual Bancshares' one-
to- four family loan portfolio consisted of fixed rate one- to- four family
mortgage loans, both held for sale and held for investment. Everett Mutual Bank
also offers adjustable rate mortgage loans at rates and terms competitive with
market conditions. All of Everett Mutual Bank's adjustable rate mortgage loans
are retained in its loan portfolio and not with a view toward sale in the
secondary market.
Everett Mutual Bank offers several adjustable rate mortgage products
which adjust annually after an initial period ranging from one to seven years.
Contractual annual adjustments generally range from 2% to unlimited, subject to
a general overall limitation of 6%. These adjustable rate mortgage products have
generally utilized the weekly average yield on one year U.S. Treasury securities
adjusted to a constant maturity of one year plus a margin of 2.5% to 3.5%.
Adjustable rate mortgage loans held in Everett Mutual Bank's portfolio do not
permit negative amortization of principal and carry no prepayment restrictions.
Borrower demand for adjustable rate mortgage loans versus fixed-rate mortgage
loans is a function of the level of interest rates, the expectations of changes
in the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and adjustable rate mortgage loans that can be originated at any
time is largely determined by the demand for each in a competitive environment.
At March 31, 1999, $31.3 million, or 31.4%, of Mutual Bancshares' one- to- four
family loan portfolio consisted of adjustable rate mortgage loans.
The retention of adjustable rate mortgage loans in Everett Mutual
Bank's loan portfolio helps reduce Everett Mutual Bank's exposure to changes in
interest rates. There are, however, credit risks resulting from the potential of
increased interest to be paid by the customer due to increases in interest
rates. It is possible that, during periods of rising interest rates, the risk of
default on adjustable rate mortgage loans may increase as a result of repricing
and the increased costs to the borrower. Furthermore, because the adjustable
rate mortgage loans originated by Everett Mutual Bank may provide, as a
marketing incentive, for initial rates of interest below the rates which would
apply were the adjustment index used for pricing initially, these loans are
subject to increased risks of default or delinquency. Everett Mutual Bank
attempts to reduce the potential for delinquencies and defaults on adjustable
rate mortgage loans by qualifying the borrower based on the borrower's ability
to repay the loan assuming that the maximum interest rate that could be charged
at the first adjustment period remains constant during the loan term. Another
consideration is that although adjustable rate mortgage loans allow Everett
Mutual Bank to increase the sensitivity of its asset base due to changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, Everett Mutual Bank has no assurance that yields on adjustable
rate mortgage loans will be sufficient to offset increases in Everett Mutual
Bank's cost of funds.
While fixed-rate, single-family residential mortgage loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in Everett
Mutual Bank's loan portfolio contain due-on-sale clauses providing that Everett
Mutual Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, Everett Mutual Bank enforces these
due-on-sale clauses to the extent permitted by law and as business judgment
dictates. Thus, average loan maturity is a function of, among other factors, the
level of
48
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
Everett Mutual Bank requires fire and extended coverage casualty
insurance to be maintained on all of its real estate secured loans. Everett
Mutual Bank is not able to and generally does not require earthquake insurance
because of competitive market factors.
Everett Mutual Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
95% of the lesser of the appraised value or the purchase price. However, Everett
Mutual Bank usually obtains private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property. The maximum loan-to-value ratio on mortgage loans secured by
non-owner-occupied properties is generally 75%, or 70% for loans originated for
sale in the secondary market to Fannie Mae.
Construction and Land Development Lending. Everett Mutual Bank has an
established market niche as an originator of construction and land development
loans. Competition from other financial institutions has increased in recent
periods and Everett Mutual Bank expects that its margins on construction loans
may be reduced in the future.
Everett Mutual Bank currently originates two types of residential
construction loans: speculative construction loans, and owner/builder loans. To
a lesser, but increasing, extent, Everett Mutual Bank also originates
construction loans for the development of multi-family and commercial
properties. Annual originations of construction and land development loans have
been $32.1 million, $42.3 million and $27.5 million for the three years ended
March 31, 1999, 1998 and 1997, respectively. Subject to market conditions,
Everett Mutual Bank intends to continue to emphasize its construction lending
activities. See "Risk Factors -- Everett Mutual Bank's and Commercial Bank of
Everett's Non-Residential Lending Increases Lending Risk Because of the Higher
Risk that the Loans Will Not Be Repaid."
At March 31, 1999, the composition of Mutual Bancshares' construction
and land development loan portfolio was as follows:
Outstanding Percent of
Balance Total
----------- ----------
(In thousands)
Speculative construction............ $ 10,539 15.8%
Owner/builder construction.......... 5,464 8.2
Multi-family........................ 14,012 20.9
Land development.................... 24,389 36.4
Commercial real estate.............. 12,491 18.7
-------- -----
Total............................. $66,895 100.0%
======= =====
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either Everett Mutual Bank or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to service the
debt on the speculative construction loan and finance real estate taxes and
other carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. Everett Mutual
Bank lends to approximately 30 builders located in Everett Mutual Bank's primary
market area, each of which generally have two to 25 speculative loans from
Everett Mutual Bank during a 12 month period, with approximately five to six
loans outstanding at any one time, from Everett Mutual Bank during a 12 month
period. Rather than originating lines of credit to home builders to construct
49
several homes at once, Everett Mutual Bank generally originates and underwrites
a separate loan for each home. Speculative construction loans are originated for
a term of 12 months, with a variable interest rate tied to the Prime rate as
published in The Wall Street Journal, plus a margin ranging from 0% to 2%, and
with a loan-to-value ratio of no more than 80% of the appraised estimated value
of the completed property. During this 12 month period, the borrower is required
to make monthly payments of accrued interest on the outstanding loan balance. At
March 31, 1999 speculative construction loans totaled $10.5 million, or 15.8%,
of the total construction loan portfolio. At March 31, 1999, Everett Mutual Bank
had three borrowers each with aggregate outstanding speculative loan balances of
more than $1 million, all of which were performing according to their respective
terms and the largest of which amounted to $2.2 million.
Owner/builder construction loans are originated to the home owner
rather than the home builder as a single loan that automatically converts to a
permanent loan at the completion of construction. The construction phase of a
owner/builder construction loan generally lasts six to twelve months. The
borrower has three financing options:
o they may opt for a fixed interest rate during the construction
period, with the rate on the permanent loan set at the
completion of construction based on the required net yield for
Fannie Mae loans, plus a margin;
o the rate on the construction and permanent loans will be set
at the start of construction based on the required net yield
for Fannie Mae loans, plus a margin and an additional fixed
fee based on the loan amount; or,
o the borrower may choose an adjustable rate mortgage option
during the construction and permanent phases.
Loan-to-value ratios under all three options are up to 80%, or up to 90% with
private mortgage insurance, of the appraised estimated value of the completed
property or cost, whichever is less. During the construction period, the
borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. At March 31, 1999, owner/builder construction loans
totaled $5.5 million, or 8.2%, of the total construction loan portfolio. At
March 31, 1999, the largest outstanding owner/builder construction loan had an
outstanding balance of $950,000 and was performing according to its terms.
For over 15 years, Everett Mutual Bank has originated loans to local
real estate developers for the purpose of developing residential subdivisions,
which includes installing roads, sewers, water and other utilities for plats
generally ranging from 10 to 50 lots. At March 31, 1999, subdivision development
loans totaled $24.4 million, or 36.4% of construction and land development loans
receivable. Land development loans are secured by a lien on the property and
made for a period of one to three years with generally variable interest rates
tied to the Prime rate as published in The Wall Street Journal, plus a margin
ranging from 0% to 3% , and are made with loan-to-value ratios not exceeding
75%. Monthly interest payments are required during the term of the loan. Land
development loans are structured so that Everett Mutual Bank is repaid in full
upon the sale by the borrower of approximately 80% of the subdivision lots.
Substantially all of Everett Mutual Bank's land development loans are secured by
property located in its primary market area. In addition, in the case of a
corporate borrower, Everett Mutual Bank also generally obtains personal
guarantees from corporate principals and reviews their personal financial
statements. At March 31, 1999, Everett Mutual Bank had no nonaccruing land
development loans.
Land development loans secured by land under development involve
greater risks than one- to- four family residential mortgage loans because such
loans are advanced upon the predicted future value of the developed property. If
the estimate of such future value proves to be inaccurate, in the event of
default and foreclosure Everett Mutual Bank may be confronted with a property
the value of which is insufficient to assure full repayment. Everett Mutual Bank
attempts to minimize this risk by limiting the maximum loan-to-value ratio on
land loans to 75% of the estimated developed value of the secured property and
getting guarantees.
50
Everett Mutual Bank also provides construction and construction
permanent financing for multi-family and commercial properties. At March 31,
1999, such construction loans amounted to $26.5 million. These loans are
typically secured by apartment buildings, condominiums, warehouses, mini-storage
facilities, industrial use buildings, office and medical office buildings and
retail shopping centers located in Everett Mutual Bank's market area and
typically range in amount from $500,000 to $3.0 million. At March 31, 1999, the
largest multi-family loan was for $4.3 million secured by a 45 unit apartment
building located in Everett Mutual Bank's market area and was performing
according to its terms. At March 31, 1999, the largest commercial construction
loan was for $3.2 million, secured by a mini-storage facility located in Everett
Mutual Bank's market area and was performing according to its terms.
Periodically, Everett Mutual Bank purchases, without recourse to the seller
other than for fraud, from other lenders participation interests in multi-family
and commercial construction loans secured by properties located in Everett
Mutual Bank's market area. Everett Mutual Bank underwrites such participation
interests according to its own standards. At March 31, 1999, Everett Mutual Bank
had no participation in construction loans with other lenders.
All construction loans must be approved by Everett Mutual Bank's Loan
Committee. See "-- Loan Solicitation and Processing." Prior to preliminary
approval of any construction loan application, Everett Mutual Bank reviews the
existing or proposed improvements, identifies the market for the proposed
project and analyzes the pro forma data and assumptions on the project. In the
case of a speculative or custom construction loan, Everett Mutual Bank reviews
the experience and expertise of the builder and the borrower. After preliminary
approval has been given, the application is processed, which includes obtaining
credit reports, financial statements and tax returns on the borrowers and
guarantors, an independent appraisal of the project, and any other expert
reports necessary to evaluate the proposed project. In the event of cost
overruns, Everett Mutual Bank requires that the borrower increase the funds
available for construction by depositing its own funds into a loans in process
account.
Loan disbursements during the construction period are made to the
builder based on a line item budget, which is assessed by periodic on-site
inspections by qualified Bank employees or an independent inspection service.
Everett Mutual Bank believes that its internal monitoring system helps reduce
many of the risks inherent in its construction lending.
Everett Mutual Bank originates construction loan applications through
walk-in customers, customer referrals, contacts in the business community and
real estate brokers seeking financing for their clients.
Construction lending affords Everett Mutual Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than does
its single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, Everett Mutual Bank may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Bank may be
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan depends on the builder's ability to sell the
property prior to the time that the construction loan is due. Everett Mutual
Bank has sought to address these risks by adhering to strict underwriting
policies, disbursement procedures, and monitoring practices. In addition,
because Everett Mutual Bank's construction lending is primarily secured by
properties in its market area, changes in the local and state economies and real
estate markets could adversely affect Everett Mutual Bank's construction loan
portfolio.
Multi-Family Lending. At March 31, 1999, $129.6 million, or 38% of
Everett Mutual Bank's total loan portfolio was secured by multi-family dwelling
units, which consist of more than four units, located primarily in its market
area.
51
Multi-family adjustable rate mortgage loans are originated with
variable rates which generally adjust annually after an initial period ranging
from one to seven years. Contractual annual adjustments generally range from 2%
to unlimited, subject to a overall limitation of 6%. These adjustable rate
mortgage loans have generally utilized the weekly average yield on one year U.S.
Treasury securities adjusted to a constant maturity of one year plus a margin of
2.50% to 3.50%, with principal and interest payments fully amortizing over terms
of up to 30 years. Everett Mutual Bank has also originated fixed rate
multi-family loans due in five and ten years, with amortization terms of up to
30 years. Multi-family loans originated since 1993 generally contain prepayment
penalties during the first three years. Multi-family loans typically range in
principal amount from $500,000 to $3.0 million. At March 31, 1999, the largest
multi-family loan was on a 71 unit apartment building with an outstanding
principal balance of $3.0 million located in Everett Mutual Bank's market area.
At March 31, 1999, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally
75%. Everett Mutual Bank requires appraisals of all properties securing
multi-family real estate loans. Appraisals are performed by an independent
appraiser designated by Everett Mutual Bank, all of which are reviewed by
Everett Mutual Bank's review appraiser. Everett Mutual Bank requires its
multi-family loan borrowers to submit financial statements and rent rolls on the
subject property annually. Everett Mutual Bank also inspects the subject
property annually if the balance of the loan exceeds $500,000. Everett Mutual
Bank generally imposes a minimum debt coverage ratio of approximately 1.20 times
for loans secured by multi-family properties.
Multi-family mortgage lending affords Everett Mutual Bank an
opportunity to receive interest at rates higher than those generally available
from one- to- four family residential lending. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. Everett Mutual Bank seeks to minimize these
risks by carefully reviewing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the loan.
Everett Mutual Bank generally obtains loan guarantees from financially capable
parties based on a review of personal financial statements, or if the borrower
is a corporation, Everett Mutual Bank also generally obtains personal guarantees
from corporate principals based on a review of personal financial statements.
Commercial Real Estate Lending. Commercial real estate loans totaled
$83.6 million, or 25% of total loans receivable at March 31, 1999, and consisted
of 179 loans. Everett Mutual Bank originates commercial real estate loans
primarily secured by warehouses, mini-storage facilities, industrial use
buildings, office and medical office buildings and retail shopping centers
located in Everett Mutual Bank's market area. Commercial real estate loans
typically range in principal amount from $500,000 to $3.0 million. At March 31,
1999, the largest commercial real estate loan had an outstanding balance of $3.0
million and is secured by an office building located in Everett Mutual Bank's
market area. This loan was performing according to its terms at March 31, 1999.
Commercial adjustable rate mortgage loans are originated with variable
rates which generally adjust annually after an initial period ranging from one
to seven years. Contractual annual adjustments generally range from 2% to
unlimited, subject to a overall limitation of 6%. These adjustable rate mortgage
loans have generally utilized the weekly average yield on one year U.S. Treasury
securities adjusted to a constant maturity of one year plus a margin of 2.75% to
3.50%, with principal and interest payments fully amortizing over terms of up to
30 years. Everett Mutual Bank has also originated fixed rate commercial loans
due in five and ten years, with amortization terms of up to 30 years. Commercial
loans originated since 1993 generally contain prepayment penalties during the
first three years.
Everett Mutual Bank requires appraisals of all properties securing
commercial real estate loans. Appraisals are performed by an independent
appraiser designated by Everett Mutual Bank, all of which are reviewed by
Everett
52
Mutual Bank's review appraiser. Everett Mutual Bank requires its commercial loan
borrowers to submit financial statements and rent rolls on the subject property
annually. Everett Mutual Bank also inspects the subject property annually if the
balance of the loan exceeds $500,000. Everett Mutual Bank considers the quality
and location of the real estate, the credit of the borrower, the cash flow of
the project and the quality of management involved with the property. Everett
Mutual Bank generally imposes a minimum debt coverage ratio of approximately
1.30 times for originated loans secured by income producing commercial
properties. Everett Mutual Bank generally obtains loan guarantees from
financially capable parties based on a review of personal financial statements,
or if the borrower is a corporation, Everett Mutual Bank also generally obtains
personal guarantees from corporate principals based on a review of personal
financial statements.
Commercial real estate lending affords Everett Mutual Bank an
opportunity to receive interest at rates higher than those generally available
from one- to- four family residential lending. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. Everett Mutual Bank seeks to minimize these
risks by limiting the maximum loan-to-value ratio to 75% and carefully reviewing
the financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.
Consumer Lending. Consumer lending has traditionally been a secondary,
but recently growing part of Everett Mutual Bank's business. Consumer loans
generally have shorter terms to maturity and higher interest rates than mortgage
loans. Consumer loans include home equity lines of credit, home improvement
loans, second mortgage loans, lot acquisition loans, savings account loans,
automobile loans, boat loans, recreational vehicle loans and personal unsecured
loans. Consumer loans are made with both fixed and variable interest rates and
with varying terms. At March 31, 1999, consumer loans amounted to $18.9 million,
or 6% of the total loan portfolio.
At March 31, 1999, the largest component of the consumer loan portfolio
consisted of real estate secured loans, such as residential first mortgage
loans, second mortgages and home equity lines of credit, which totaled $17.6
million, or 5%, of the total loan portfolio. Home equity lines of credit and
second mortgage loans are made for purposes such as the improvement of
residential properties, debt consolidation and education expenses, among others.
The majority of these loans are made to existing customers and are secured by a
first or second mortgage on residential property. Everett Mutual Bank also
solicits loans from non-customers. The loan-to-value ratio is typically 80% or
less, when taking into account both the first and second mortgage loans. Second
mortgage loans typically carry fixed interest rates with a fixed payment over a
term between five and fifteen years. Home equity lines of credit allow for a ten
year draw period, plus an additional fifteen year repayment period, and the
interest rate is tied to the Prime rate as published in The Wall Street Journal,
plus a margin.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans. Everett Mutual Bank believes that these risks are not as prevalent
in the case of Everett Mutual Bank's consumer loan portfolio because a large
percentage of the portfolio consists of first and second mortgage loans and home
equity lines of credit for existing customers that are underwritten in a manner
such that they result in credit risk that is substantially similar to one- to-
four family residential mortgage loans. Nevertheless, second mortgage loans and
home equity lines of credit have greater credit
53
risk than one- to- four family residential mortgage loans because they are
secured by mortgages subordinated to the existing first mortgage on the
property, which may or may not be held by Everett Mutual Bank. At March 31,
1999, there were $7,000 of consumer loans delinquent in excess of 90 days or in
nonaccrual status.
Loan Maturity and Repricing
The following table sets forth information at March 31, 1999
regarding the dollar amount of loans maturing in Mutual Bancshares' portfolio
based on their contractual terms to maturity, but does not include scheduled
payments or potential prepayments. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Loan balances do not include undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loan losses.
Within After One Year After 3 Years After 5 Years
One Year Through 3 Years Through 5 Years Through 10 Years Beyond 10 Years Total
---------- --------------- --------------- ---------------- --------------- --------
(In thousands)
Real Estate:
One- to four-family residential.. $ 17,130 $12,605 $ 4,165 $ 7,076 $58,503 $ 99,479
One- to four-family construction
and land development.......... 21,471 560 624 818 16 23,489
Income property:
Commercial construction....... - - 4,112 3,107 155 2,983 10,356
Commercial real estate........ 37,287 18,329 8,862 6,274 1,822 72,573
Multi-family construction..... 2,387 2,307 1,827 983 -- 7,504
Multi-family residential...... 64,862 32,720 11,663 6,062 666 115,973
Consumer:
Residential mortgages............ 510 294 375 1,151 2,536 4,867
Home equity and second
mortgages..................... 2,618 54 717 2,507 4,732 10,627
Credit cards..................... 90 -- -- -- -- 90
Automobiles...................... 35 290 368 91 2 786
Other installment loans.......... 863 214 147 75 60 1,359
Business loans...................... 5,495 249 764 88 180 6,776
-------- ------- ------- ------- ------- --------
Total............................... $152,747 $71,734 $32,618 $25,280 $71,500 $353,879
======== ======= ======= ======= ======= ========
54
The following table sets forth the dollar amount of all loans due after
March 31, 1999, which have fixed interest rates and have floating or adjustable
interest rates.
Floating or
Fixed Rates Adjustable Rates
----------- ----------------
(In thousands)
Real Estate:
One- to four-family residential.. $ 68,202 $ 31,277
One- to four-family construction
and land development.......... 780 22,709
Income property:
Commercial construction....... 6,244 4,112
Commercial real estate........ 12,798 59,775
Multi-family construction..... 2,824 4,680
Multi-family residential...... 11,434 104,539
Consumer:
Residential mortgages............ 4,867 --
Home equity and second
mortgages..................... 8,051 2,576
Credit cards..................... - - 90
Automobiles...................... 786 - -
Other installment loans.......... 538 821
Business loans...................... 1,494 5,282
-------- --------
Total............................... $118,018 $235,861
======== ========
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give Everett Mutual Bank the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, loan brokers for primarily
multi-family and commercial loans, and referrals from builders and realtors.
Upon receipt of a loan application from a prospective borrower, a credit report
and other data are obtained to verify specific information relating to the loan
applicant's employment, income and credit standing. An appraisal of the real
estate offered as collateral generally is undertaken by an appraiser retained by
Everett Mutual Bank and certified by the State of Washington.
Mortgage loan applications are initiated by loan officers and are
required to be approved by Everett Mutual Bank's Management Loan Committee,
which presently consists of the Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer and the Credit Administrator. All loans up
to and including $750,000 may be approved by the Management Loan Committee
without Board approval; loans in excess of $750,000 and up to $1,500,000 must be
approved by the Board Loan Committee; and, loans exceeding $1,500,000, as well
as loans of any size granted to a single borrower whose aggregate lending
relationship exceeds 15% of total capital, must be approved by Everett Mutual
Bank's Board of Directors.
55
Loan Originations, Purchases and Sales. During the year ended March 31,
1999, Mutual Bancshares' total gross loan originations were $140.7 million.
Periodically, Everett Mutual Bank purchases participation interests in
construction and land development loans and multi-family loans, secured by
properties located in Everett Mutual Bank's primary market area, from other
lenders. Such purchases are underwritten to Everett Mutual Bank's underwriting
guidelines and are without recourse to the seller other than for fraud. See "--
Construction and Land Development Lending" and "-- Multi-Family Lending."
Consistent with its asset/liability management strategy, Everett Mutual
Bank's policy has been to retain in its portfolio all of the adjustable rate
mortgage loans and mid to shorter-term fixed rate loans. Thirty-year fixed rate
loans are originated with a view toward sale in the secondary market to Fannie
Mae; however, from time to time, a portion of fixed-rate loans may be retained
in Everett Mutual Bank's portfolio to meet its asset/liability objectives. Loans
sold in the secondary market are generally sold on a servicing retained basis.
At March 31, 1999, Everett Mutual Bank's loan servicing portfolio totaled $73.4
million.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loans originated:
Real estate:
One- to four-family residential.............. $ 39,034 $ 26,267 $ 17,469
One- to four-family construction and loan
development............................... 32,063 42,274 27,532
Income property
Commercial construction................... 9,941 4,620 1,624
Commercial real estate.................... 11,095 13,100 13,663
Multi-family construction................. 11,387 4,354 1,840
Multi-family residential.................. 20,892 13,299 15,627
Consumer:
Residential mortgages....................... 2,657 1,608 1,050
Home equity loans........................... 7,421 6,522 4,990
Credit cards................................ 427 -- --
Automobiles................................. 311 526 854
Other installment loans..................... 949 742 1,312
Business loans................................. 4,517 5,092 2,018
-------- -------- --------
Total loans originated................ 140,694 118,404 87,979
-------- -------- --------
Loans purchased................................. -- -- --
-------- -------- --------
Loans sold:
Total whole loans sold......................... 3,958 7,206 5,055
Participation loans............................ -- -- --
-------- -------- --------
Total loans sold...................... 3,958 7,206 5,055
-------- -------- --------
Principal repayments............................ 113,624 82,264 71,828
Loans securitized............................... -- -- --
Transfer to real estate owned................... 117 102 795
Increase (decrease) in other items, net......... (2,908) (8,354) (4,381)
-------- -------- --------
Net increase (decrease) in loans receivable,
net and loans held for sale................... $ 20,087 $ 20,478 $ 5,920
======== ======== ========
56
Loan Origination and Other Fees. Mutual Bancshares, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by Mutual Bancshares' subsidiary financial
institutions range up to 1.50%. Current accounting standards require fees
received, net of certain loan origination costs, for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income at the time of prepayment. Mutual Bancshares had $3.2
million of net deferred mortgage loan fees at March 31, 1999.
Nonperforming Assets and Delinquencies. Everett Mutual Bank generally
assesses late fees or penalty charges on delinquent loans of 5% of the monthly
loan payment amount. Substantially all fixed-rate and adjustable rate mortgage
loan payments are due on the first day of the month; however, the borrower is
given a 15 day grace period to make the loan payment. When a mortgage loan
borrower fails to make a required payment when due, Everett Mutual Bank
institutes collection procedures. The first notice is mailed to the borrower on
the sixteenth day requesting payment and assessing a late charge. Attempts to
contact the borrower by telephone generally begin upon the thirtieth day of
delinquency. If a satisfactory response is not obtained, continuous follow-up
contacts are attempted until the loan has been brought current. Before the 90th
day of delinquency, attempts to interview the borrower are made to establish the
cause of the delinquency, whether the cause is temporary, the attitude of the
borrower toward the debt, and a mutually satisfactory arrangement for curing the
default.
If the borrower is chronically delinquent and all reasonable means of
obtaining payment on time have been exhausted, foreclosure is initiated
according to the terms of the security instrument and applicable law. Interest
income on loans is reduced by the full amount of accrued and uncollected
interest (i.e. placed on nonaccrual status).
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, Everett Mutual Bank institutes the same
collection procedures as for its mortgage loan borrowers.
Everett Mutual Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent by more than 90
days or nonaccruing, the status on all loans currently in foreclosure, and the
status of all foreclosed and repossessed property owned by Everett Mutual Bank.
57
The following table sets forth information with respect to Mutual
Bancshares' non-performing assets and restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 for the periods indicated.
At March 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a Nonaccrual basis:
Mortgage loans:
One- to four-family residential.......... $ -- $ 517 $ 657 $ 489 $ 975
Commercial real estate................... 364 293 313 352 --
Consumer:
Home equity and second mortgages............ -- 27 47 -- 10
Automobiles................................. 7 4 6 3 10
Other installment loans..................... 7 -- -- 5 20
----- ----- ------ ------ ------
Total................................ 378 841 1,024 849 1,015
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
One- to four-family construction and
land development..................... -- -- -- 419 --
Income property:
Multifamily residential.................. -- -- -- -- 3,495
----- ----- ------ ------ ------
Total................................ -- -- -- 419 3,495
Total of nonaccrual and 90 days
past due loans....................... 378 841 1,024 1,268 4,510
Real estate owned acquired in satisfaction
of debts previously contracted....... -- -- 876 998 2,117
Total nonperforming assets........... 378 841 1,900 2,266 6,627
Restructured loans............................ -- -- -- -- 4,041
Nonaccrual and 90 days or more past due
loans as a percentage of loans
receivable, net...................... 0.12% 0.27% 0.35% 0.43% 1.53%
Nonaccrual and 90 days or more past due
loans as a percentage of total assets 0.08% 0.20% 0.26% 0.33% 1.26%
Nonperforming assets as a percentage of
total assets......................... 0.08% 0.20% 0.48% 0.59% 1.85%
58
Additional interest income, which would have been recorded for the year
ended March 31, 1999 had nonaccruing loans been current in accordance with their
original terms, amounted to approximately $10,400. The amount of interest
included in interest income on such loans for the year ended March 31, 1999 was
approximately $51,000.
Real Estate Owned. Real estate acquired by Everett Mutual Bank as a
result of foreclosure or by deed-in- lieu of foreclosure is classified as real
estate owned until it is sold. When property is acquired it is recorded at the
lower of its cost, which is the unpaid principal balance of the related loan
plus foreclosure costs, or fair market value. Subsequent to foreclosure, the
property is carried at the lower of the foreclosed amount or fair value, less
estimated selling costs. At March 31, 1999, Everett Mutual Bank did not have any
real estate owned.
Restructured Loans. Under generally accepted accounting principles,
Everett Mutual Bank is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if Everett
Mutual Bank for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrowers that Everett Mutual Bank would
not otherwise consider. Debt restructures or loan modifications for a borrower
do not necessarily always constitute troubled debt restructures, however, and
troubled debt restructures do not necessarily result in nonaccrual loans.
Everett Mutual Bank had no restructured loans as of March 31, 1999.
Asset Classification. Applicable regulations require that each insured
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, regulatory examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as loss,
it charges off the balances of the asset. Assets which do not currently expose
the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are required to be
designated as special mention. Everett Mutual Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the Federal Deposit Insurance Corporation and the
Washington Division of Banks which can order the establishment of additional
loss allowances.
Allowance for Loan Losses. Everett Mutual Bank has established a
systematic methodology for the determination of provisions for loan losses that
takes into consideration the need for an overall general valuation allowance.
In originating loans, Everett Mutual Bank recognizes that losses will
be experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Management recognizes that these losses will occur over the life of
the loan and may not necessarily result in current impairment of the loan
balance. Management also believes that certain loans may currently be impaired
that are not yet evident in the loan's performance. The general valuation
allowance for loan losses is maintained to cover these losses inherent in the
loan portfolio but not yet apparent. Management reviews the adequacy of the
allowance at least quarterly, as computed by a consistently applied
formula-based methodology, supplemented by management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan
59
portfolio. At March 31, 1999, Mutual Bancshares had a general allowance for loan
losses of $5.7 million, representing 1.62% of total loans, compared to $4.9
million, or 1.48% of total loans at March 31, 1998.
Mutual Bancshares recorded a $780,000 provision for loan losses for the
year ended March 31, 1999, compared to $420,000 for the years ended March 31,
1998 and 1997. Provisions for loan losses are charges to earnings to bring the
total allowance for loan losses to a level considered by management as adequate
to provide for known and inherent risks in the loan portfolio, including
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loan loss experience, current economic conditions, detailed analysis of
individual loans from which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans.
Mutual Bancshares' net charge-offs as a percentage of average loans
outstanding reflected in the following table has been consistent over the past
several years, largely the result of extremely favorable economic conditions in
the market area. The level of non-performing assets has fluctuated from month to
month, and the reserve level of 1500.5% of total loans at March 31, 1999 is
considered an anomaly not being indicative of potential loss inherent in the
portfolio. During the fiscal year ending March 31, 1999, the loan loss reserve
to non-performing asset ratio fluctuated from a low of 780.4% to a high of
3051.2% as the level of nonperforming assets fluctuated from $170,000 to
$632,000. The extremely low amount of nonperforming loans at March 31, 1999
cannot reasonably be relied upon to reflect the current level of risk inherent
in the loan portfolio, especially given the dollar amount of loans in
higher-risk lending categories, including construction, land development,
multi-family and commercial loans at March 31, 1999.
The following table reflects the allowance allocated to each respective
loan category using a formula-based approach. Reserve percentages are applied
against outstanding loans and certain commitments as follows: single family
loans, 0.80%; two- to four-family loans, 1.00%; permanent multi-family loans,
1.25%; permanent commercial loans, 1.50%; construction and land development
loans, 2.00%; consumer loans, 1.00% to 2.00% based on collateral type; business
loans generally, 1.00% to 2.00% based on credit grade. These reserve factors
have been developed based on management's understanding of the relative credit
risk which could indicate it is probable that current impairment has occurred in
the portfolio, and to a lesser extent, the factors that peers are applying to
similar loan categories. With the exception of changing the one- to four-family
reserve allocation factor from a 25% risk-weight of principal and a 1.00%
reserve, to a 100% risk-weight of principal and a 0.80% reserve in the fiscal
year ending March 31, 1999 in order to recognize the impact of employment
layoffs in the local market area, these reserve percentages have generally been
unchanged over the past five years. The management loan committee reviews the
reserve factors in conjunction with the quarterly loan loss allowance analysis
and may be adjusted in future periods to reflect changes in delinquency
percentages and loss experience. The unallocated portion of the reserve
represents the amount management deems necessary to account for estimation risk
in the formula method, and to incorporate other critical factors impacting
credit quality, such as loan volumes and concentrations, seasoning of the loan
portfolio, specific industry conditions within portfolio segments, governmental
regulatory actions, recent loss experience in particular segments of the
portfolio and the duration of the current business cycle, and the economic
conditions described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors."
Management believes that the amount maintained in the allowances will
be adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While Mutual Bancshares believes it has established its existing
allowance for loan losses in accordance with generally accepted accounting
principals, there can be no assurance that regulators, in reviewing Mutual
Bancshares' loan portfolio, will not request Mutual Bancshares, or one of its
subsidiaries, to increase significantly
60
its allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Mutual Bancshares' financial
condition and results of operations.
The following table sets forth an analysis of Mutual Bancshares'
allowance for loan losses at the dates and for the periods indicated.
Year Ended March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance at beginning of period............ $4,897 $4,509 $4,178 $3,757 $3,478
Provision for loan losses................... 780 420 420 458 319
Charge-offs:
Mortgage loans:
One- to four-family residential -- -- 43 -- --
One- to four-family construction and
land development................. -- -- 38 -- 1
Income property:
Commercial real estate................. -- 112 -- 33 --
Consumer:
Home equity and second mortgages......... -- -- 5 -- 22
Automobiles.............................. 2 -- 4 5 --
Other installment loans.................. 3 -- -- 16 17
------ ------ ------ ------ ------
Total charge-offs....................... 5 112 90 54 40
Recoveries:
Income property:
Commercial construction................ -- 79 -- -- --
Consumer:
Automobiles.............................. -- 1 -- 5 --
Other installment loans.................. -- -- 1 12 -
------ ------ ------ ------ ------
Total recoveries........................ -- 80 1 17 --
------ ------ ------ ------ ------
Net charge-offs......................... 5 32 89 37 40
------ ------ ------ ------ ------
Balance at end of period................ $5,672 $4,897 $4,509 $4,178 $3,757
====== ====== ====== ====== ======
Allowance for loan losses as a
percentage of total loans
outstanding at the end of the
period.................................. 1.62% 1.48% 1.45% 1.37% 1.25%
Net charge-offs as a percentage of
average loans outstanding during
the period............................. --% 0.01% 0.03% 0.01% 0.01%
Allowance for loan losses as a
percentage of nonperforming
loans at end of period.................. 1500.53% 582.28% 440.33% 329.59% 83.30%
61
The following table sets forth the breakdown of Mutual Bancshares'
allowance for loan losses by loan category for the periods indicated.
At March 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Loan in Loan in
Amount of Amount Category Amount of Amount Category Amount of Amount Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in thousands)
Real Estate:
One- to four-family residential .. $ 784 $101,649 26.61% $ 320 $ 95,305 26.73% $ 334 $ 94,612 29.40%
One- to four-family construction
and land development ........... 838 34,928 9.14 1,008 36,444 10.23 778 27,226 8.46
Income property:
Commercial construction ........ 271 12,491 3.27 71 4,620 1.3 42 1,624 0.5
Commercial real estate ......... 1,073 72,573 19.00 1,142 76,121 21.36 1,051 70,042 21.76
Multifamily construction ....... 267 14,012 3.67 138 7,153 2.01 4 2,323 0.72
Multifamily residential ........ 1,450 115,972 30.35 1,399 111,975 31.42 1,377 109,003 33.87
Consumer:
Residential mortgages ............ 134 4,867 1.27 121 4,318 1.21 102 4,299 1.34
Home equity and second
mortgages ...................... 207 13,734 3.59 186 11,548 3.24 137 7,888 2.45
Credit cards ..................... 16 488 0.13 6 124 0.03 -- -- --
Automobiles ...................... 16 787 0.21 22 1,036 0.29 22 1,190 0.37
Other installment loans .......... 43 1,612 0.42 31 1,524 0.43 33 1,457 0.45
Business loans ..................... 196 8,949 2.34 125 6,226 1.75 11 2,181 0.68
Total allocated .............. 5,295 -- -- 4,568 -- -- 3,891 -- --
Unallocated ........................ 377 -- -- 329 -- -- 618 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total ........................ $5,672 $382,062 100.00% $4,897 $356,394 100.00% $4,509 $321,845 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
At March 31,
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Percent Percent
of Loans of Loans
Loan in Loan in
Amount of Amount Category Amount of Amount Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(Dollars in thousands)
Real Estate:
One- to four-family residential .. $ 324 $ 93,544 29.78% $ 312 $ 94,820 29.53%
One- to four-family construction
and land development ........... 838 39,406 12.54 918 42,123 13.12
Income property:
Commercial construction ........ 35 1,895 0.6 8 400 0.12
Commercial real estate ......... 949 62,596 19.93 897 62,341 19.42
Multifamily construction ....... 24 1,530 0.49 81 4,009 1.25
Multifamily residential ........ 1,273 101,831 32.42 1,263 104,205 32.45
Consumer:
Residential mortgages ............ 92 4,824 1.54 86 4,718 1.47
Home equity and second
mortgages ...................... 107 6,047 1.92 117 5,863 1.83
Credit cards ..................... -- -- -- -- -- --
Automobiles ...................... 21 1,051 0.33 23 1,173 0.37
Other installment loans .......... 99 1,015 0.32 44 1,040 0.32
Business loans ..................... 8 407 0.13 8 390 0.12
Total allocated .............. 3,770 -- -- 3,757 -- --
Unallocated ........................ 408 -- -- (--) -- --
------ -------- ------ ------ -------- ------
Total ........................ $4,178 $314,146 100.00% $3,757 $321,082 100.00%
====== ======== ====== ====== ======== ======
62
Investment Activities
The investment policies of Mutual Bancshares, Everett Mutual Bank and
Commercial Bank of Everett are substantially the same with the exception of the
dollar limitations of individual investments. Under Washington law, banks are
permitted to invest in various types of marketable securities. Authorized
securities include but are not limited to U.S. Treasury obligations, securities
of various federal agencies, mortgage-backed securities, certain certificates of
deposit of insured banks and savings institutions, banker's acceptances,
repurchase agreements, federal funds, commercial paper, corporate debt and
equity securities and obligations of states and their political sub-divisions.
The investment policies of the Mutual Bancshares are designed to provide and
maintain adequate liquidity and to generate favorable rates of return without
incurring undue interest rate or credit risk. Mutual Bancshares' policies
generally limit investments to U.S. Government and agency securities, municipal
bonds, certificates of deposit, marketable corporate debt obligations and
mortgage-backed securities. Investment in mortgage-backed securities includes
those issued or guaranteed by Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association and Government National Mortgage Association.
At March 31, 1999, Mutual Bancshares' consolidated investment portfolio
totaled $79.3 million and consisted principally of U.S. Government and agency
obligations, municipal bonds, corporate debt obligations, equity securities,
mutual funds, and Federal Home Loan Bank stock. From time to time, investment
levels may be increased or decreased depending upon yields available on
investment alternatives, and management's projections as to the demand for funds
to be used in Mutual Bancshares' loan originations, deposits and other
activities.
Mortgage-Backed Securities. Mutual Bancshares mortgage-backed
securities, which at March 31, 1999, totaled $2.8 million at estimated fair
value, was comprised of Federal National Mortgage Association and Government
National Mortgage Association mortgage backed securities.
State and Municipal Bonds. Mutual Bancshares' tax exempt municipal bond
portfolio, which at March 31, 1999, totaled $12.0 million at estimated fair
value, or $11.9 million at amortized cost, was comprised of general obligation
bonds (i.e., backed by the general credit of the issuer) and revenue bonds
(i.e., backed by revenues from the specific project being financed) issued by
various housing authorities, hospitals, schools, water and sanitation districts
and other authorities located in the State of Washington. At March 31, 1999,
general obligation bonds and revenue bonds had total estimated fair values of
$3.2 million and $8.8 million, respectively. Most of the municipal bonds are not
rated by a nationally recognized credit rating agency such as Moody's or
Standard and Poor's. Non-rated municipal bonds held in portfolio are generally
comprised of housing bonds issued by various local housing authorities in Mutual
Bancshares' market area. At March 31, 1999, Mutual Bancshares' municipal bond
portfolio had a weighted average maturity of approximately 10.8 years and a
weighted average coupon rate of 5.3%. The largest security in the portfolio was
a Snohomish County Housing Authority bond issued by Snohomish County,
Washington, with an amortized cost of $1.2 million and a fair value of $1.2
million.
Corporate Bonds. Mutual Bancshares' corporate bond portfolio, which
totaled $47.9 million at fair value ($47.8 million at amortized cost) at March
31, 1999, was composed of short to intermediate-term fixed-rate securities from
issuers rated Baa by Moody's or BBB by Standard and Poor's, or better. A high
credit rating indicates only that the rating agency believes there is a low risk
of loss or default. However, all of Mutual Bancshares' investment securities,
including those that have high credit ratings, are subject to market risk and
credit risk in so far as a change in market rates of interest or other
conditions may cause a change in an investment's market value. In addition,
credit ratings are also subject to change at the discretion of the rating
agencies, which could also impact the market value of the investment. At March
31, 1999, the portfolio had a weighted average maturity of 1.9 years and a
weighted average coupon rate of 6.5%. The longest term bond has an amortized
cost of $502,000 and a term to maturity of 4.8 years.
At March 31, 1999, the holdings of the largest single issuer totaled
$3.7 million at amortized cost or 7.8% of the total portfolio. Issuers in the
financial sector comprised 51% of the total portfolio.
63
The following tables set forth the maturity and rating of the corporate
bonds held in Mutual Bancshares' investment portfolio at March 31, 1999.
Moody Rating
-----------------------------------------------------------------------------------------------------
Maturity Aaa Aa A Baa Total
- -------- ----------------- ----------------- ----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(In thousands)
1 year or less... -- -- $ 3,199 $ 3,223 $ 7,654 $ 7,661 $ 1,017 $1,021 $11,870 $11,905
Over 1-3 years... -- -- 8,520 8,583 17,030 17,028 1,262 1,263 26,812 26,874
Over 3-5 years... -- -- 2,064 2,020 7,094 7,090 -- -- 9,158 9,110
Over 5-10 years.. -- -- -- -- -- -- -- -- -- --
------- ----- ------- ------- ------- ------- ------- ------ ------------------
Totals........... -- -- $13,783 $13,826 $31,778 $31,779 $ 2,279 $2,284 $47,840 $47,889
======= ===== ======= ======= ======= ======= ======= ====== ======= =======
Standard and Poors Rating
-----------------------------------------------------------------------------------------------------
Maturity AAA AA A BBB Total
- -------- ----------------- ----------------- ----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(In thousands)
1 year or less... -- -- $ 2,470 $ 2,483 $ 8,383 $ 8,401 $ 1,017 $1,021 $11,870 $11,905
Over1-3 years.... -- -- 5,561 5,572 16,137 16,174 5,114 5,128 26,812 26,874
Over 3-5 years... -- -- 1,773 1,728 6,384 6,393 1,001 989 9,158 9,110
Over 5-10 years.. -- -- -- -- -- -- -- -- -- --
------ ----- ------- ------- ------- ------- ------- ------ ------- -------
Totals........... -- -- $ 9,804 $ 9,783 $30,904 $30,968 $ 7,132 $7,138 $47,840 $47,889
====== ===== ======= ======= ======= ======= ======= ====== ======= =======
Equity Securities. Mutual Bancshares' equity investments totaled $6.2
million at fair value, or $6.0 million at cost, at March 31, 1999. The equity
portfolio consists primarily of trust preferred stocks, common stocks of
companies included in the Dow Jones Industrial Average and has typically
included other mid to large cap companies, and mutual funds.
U.S. Government and Agency Obligations. Mutual Bancshares' portfolio of
U.S. Government and agency obligations had a fair value of $6.4 million, or $6.3
million at amortized cost, at March 31, 1999. The longest term bond has an
amortized cost of $1.0 million and a term to maturity of 5.9 years.
Off Balance Sheet Derivatives. Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate or
index. Such derivatives include "forwards," "futures," "options" or "swaps."
Mutual Bancshares generally has not invested in "off balance sheet" derivative
instruments, although investment policies authorize such investments to hedge
the saleable loan pipeline of Everett Mutual Bank. On March 31, 1999, Mutual
Bancshares had no off balance sheet derivatives and no outstanding commitments
to purchase or sell securities.
64
The following table sets forth the composition of Mutual Bancshares'
investment portfolio at the dates indicated.
At March 31,
------------------------------------------------------------------
1999 1998 1997
----------------- ------------------- ------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------- ------ -------- ----- -------- ------
(Dollars in thousands)
Available for sale:
Investment securities:
U.S. Treasury obligations...... $ -- $ -- $ 2,085 $ 2,093 $ 6,555 $ 6,554
U.S. Government Agency
obligations.................. 3,751 3,749 8,846 8,866 9,100 9,090
Corporate obligations.......... 45,875 45,841 23,650 23,787 12,721 12,650
Municipal obligations.......... 5,097 5,080 800 798 -- --
Equity securities.............. 5,978 6,203 2,498 2,880 353 342
Certificates of deposit........ 175 175 -- -- -- --
Mortgage-backed securities:
Federal National Mortgage
Association................. 514 518 520 520 304 307
------- ------- ------- -------- ------- -------
Total available for sale... $61,390 $61,566 $38,399 $38,944 $29,033 $28,943
======= ======= ======= ======= ======= =======
Held to maturity:
Investment securities:
U.S. Treasury obligations...... -- -- 4,026 4,191 4,030 4,086
U.S. Government Agency
obligations.................. 2,520 2,684 -- -- -- --
Corporate obligations.......... 1,965 2,048 4,438 4,572 5,907 6,012
Municipal obligations.......... 6,773 6,876 7,057 7,196 7,383 7,456
Certificates of deposit........ 455 455 872 950 889 867
Mortgage-backed securities:
Federal National Mortgage
Association................. 2,153 2,254 4,357 4,561 5,657 5,795
------- ------- ------- ------- ------- -------
Total held to maturity .... $13,866 $14,317 $20,750 $21,470 $23,866 $24,216
======= ======= ======= ======= ======= =======
Total...................... $75,256 $75,883 $59,149 $60,414 $52,899 $53,159
======= ======= ======= ======= ======= =======
65
The table below sets forth information regarding the carrying value,
weighted average yields and maturities or periods to repricing of Mutual
Bancshares' investment portfolio at March 31, 1999.
At March 31, 1999
Amount Due or Repricing within:
---------------------------------------------------------------------------------------------------
Over One to Over Five to
One Year or Less Five Years Ten Years Over Ten Years Totals
------------------ ------------------ ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Available for sale:
Investment securities:
U.S. Government Agency
obligations........... $ 1,141 5.95% $ 2,610 5.51% $ -- --% $ -- --% $ 3,751 5.64%
Corporate obligations....... 11,372 7.04 34,503 6.26 -- -- -- -- 45,875 6.46
Municipal obligations....... 1,835 5.05 1,796 4.51 966 4.14 500 5.55 5,097 4.74
Equity securities........... 2,328 4.15 -- -- -- -- 3,650 2.58 5,978 3.19
Certificates of deposit..... -- -- 175 5.20 -- -- -- -- 175 5.20
Mortgage-backed securities:
Federal National Mortgage
Association............... -- -- -- -- 468 6 46 9.52 514 6.31
------- ---- ------- ----- ------ ----- ------ ----- ------- ----
Total available for sale $16,676 6.34% $39,084 6.12% $1,434 4.75% $4,196 3.01% $61,390 5.94%
======= ==== ======= ===== ====== ===== ====== ===== ======= ====
Held to maturity:
Investment securities:
U.S. Government Agency
obligations............ $ -- --% $ 1,514 7.69% $1,006 7.46% $ -- --% $ 2,520 7.60%
Corporate obligations....... 498 7.23 1,467 7.07 -- -- -- -- 1,965 7.11
Municipal obligations....... 735 5.31 1,839 5.73 1,372 5.11 2,827 6.18 6,773 5.75
Certificates of deposit..... -- -- 455 5.66 -- -- -- -- 455 5.66
Mortgage-backed securities:
Federal National Mortgage
Association................. -- -- -- 6.50 6 -- 2,147 8.13 2,153 8.13
------- ----- ------- ----- ------ ----- ------ ----- ------- ----
Total held to maturity.. $ 1,233 6.08% $ 5,281 6.66% $2,378 6.11% $4,974 7.02% $13,866 6.64%
======= ===== ======= ===== ====== ===== ====== ===== ======= ====
Total.................... $17,909 6.33% $44,365 6.19% $3,812 5.60% $9,170 5.18% $75,256 6.07%
======= ===== ======= ===== ====== ===== ====== ===== ======= ====
66
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of Everett
Mutual Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the Federal Home Loan Bank
of Seattle or Fed Funds lines may be used to compensate for reductions in the
availability of funds from other sources.
Everett Mutual Bank's deposit composition reflects a deposit mixture
with certificates of deposit accounting for approximately one-half of total
deposits and negotiable order of withdrawal/checking accounts comprising a
relatively modest portion of total deposits. On the other hand, Commercial Bank
of Everett's community bank operating strategy with a focus on small business
lending and relationship banking has resulted in a deposit structure is heavily
weighted towards checking and negotiable order of withdrawal accounts while
certificates of deposit comprise approximately one-third of the total deposit
base. Many of Commercial Bank of Everett's deposits are tied to lending
relationships. Thus, as Commercial Bank of Everett continues to build the loan
portfolio and number of commercial account relationships it is anticipated that
deposit balances will also increase.
Deposit Accounts. Substantially all of Everett Mutual Bank's depositors
are residents of Washington. Deposits are attracted from within Everett Mutual
Bank's market area through the offering of a broad selection of deposit
instruments, including checking accounts, money market deposit accounts, savings
accounts and certificates of deposit. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, Everett Mutual Bank considers current market interest rates,
profitability to Everett Mutual Bank, matching deposit and loan products and its
customer preferences and concerns. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
At March 31, 1999 Mutual Bancshares had $40.4 million of jumbo
certificates of deposit, including $1.9 million in public unit funds, which
represents 0.5% of total deposits at March 31, 1999. Everett Mutual Bank is also
authorized to utilize brokered deposits as a funding source, but has not done so
to date. Management believes that its jumbo certificates of deposit and the use
of brokered deposits present similar interest rate risk to its other deposit
products.
In the unlikely event Everett Mutual Bank is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to EverTrust Financial Group, Inc., as
the sole stockholder of Everett Mutual Bank. See "Mutual Bancshares' Conversion
- -- Effects of Conversion to Stock Form on Depositors and Borrowers of Everett
Mutual Bank -- Liquidation Rights."
67
The following table sets forth information concerning Mutual
Bancshares' time deposits and other non-interest and interest-bearing deposits
at March 31, 1999.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ---- -------- ------ ---------- ----------
(In thousands)
0.0% N/A Non-interest bearing accounts $ 7,782 $ -- 2.1%
2.8 N/A Savings accounts 11,798 300 3.1
2.6 N/A Checking accounts 33,655 300 9.0
4.2 N/A Money market deposit accounts 133,748 1,000 35.6
Certificates of Deposit
4.8 1-11 months Fixed-term, fixed-rate 32,660 500 8.7
5.2 12-23 months Fixed-term, fixed-rate 62,536 500 16.6
5.5 24-35 months Fixed-term, fixed-rate 23,767 500 6.3
5.7 36-59 months Fixed-term, fixed-rate 19,461 500 5.2
6.2 60-84 months Fixed-term, fixed rate 50,489 500 13.4
-------- -----
TOTAL $375,896 100.0%
======== =====
The following table indicates the amount of Mutual Bancshares' jumbo
certificates of deposit by time remaining until maturity as of March 31, 1999.
Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
Certificates
Maturity Period of Deposits
--------------- -------------
(In thousands)
Three months or less................. $ 9,222
Over three through six months........ 8,561
Over six through twelve months....... 10,691
Over twelve months................... 11,959
--------
Total............................ $40,433
=======
68
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by Mutual Bancshares at the dates
indicated.
At March 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------------------- ------------------------------
Percent of Percent of Increase Percent of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
--------- ---------- -------- ---------- ---------- -------- ---------- ---------
(Dollars in thousands)
Savings accounts.................... $ 11,798 3.14% $ 10,510 2.99% $ 1,288 $ 10,830 3.28% $ 968
Demand deposit accounts............. 41,437 11.02 37,422 10.66 4,015 32,683 9.91 8,754
Money market deposit accounts....... 133,748 35.58 122,969 35.05 10,779 110,910 33.64 22,838
Fixed-rate certificates which
mature in the year ending:
Within 1 year..................... 125,923 33.50 112,290 31.99 13,633 108,532 32.91 17,391
After 1 year, but within
2 years..................... 28,186 7.50 33,881 9.65 (5,695) 28,900 8.76 (714)
After 2 years, but within
5 years..................... 32,241 8.58 31,769 9.05 472 37,039 11.23 (4,798)
Certificates maturing
thereafter.................. 2,563 0.68 2,130 0.61 433 876 0.27 1,687
-------- ------ -------- ------ ------- -------- ------ -------
Total.......................... $375,896 100.00% $350,971 100.00% $24,925 $329,770 100.00% $46,126
======== ====== ======== ====== ======= ======== ====== =======
69
Deposit Accounts
Deposit accounts consisted of the following at March 31, 1999.
Weighted
Average Rate 1999 1998
at March 31, --------------- ---------------
1999 Amount % Amount %
------------ -------- ----- -------- -----
Noninterest-bearing accounts.. --% $ 7,782 2.1% $ 6,064 1.7%
Savings accounts.............. 2.8 11,798 3.1 10,510 3.0
Checking accounts............. 2.6 33,655 9.0 31,358 8.9
Money market accounts......... 4.2 133,748 35.6 122,969 35.1
Time deposits:
1 to 11 months............. 4.8 32,660 8.7 26,665 7.6
12 to 23 months............ 5.2 62,536 16.6 59,723 17.0
24 to 35 months............ 5.5 23,767 6.3 23,191 6.6
36 to 59 months............ 5.7 19,461 5.2 19,986 5.7
60 to 84 months............ 6.2 50,489 13.4 50,505 14.4
---- -------- ----- -------- -----
5.5 188,913 50.2 180,070 51.3
---- -------- ----- -------- -----
4.6% $375,896 100.0% $350,971 100.0%
=== ======== ===== ======== =====
Time Deposits by Rates
The following table sets forth the time deposits of Mutual Bancshares
classified by rates as of the dates indicated.
At March 31,
--------------------------------------------------
1999 1998 1997
------------ ------------- -----------
(Dollars in thousands)
0.00 - 0.99%............... $ 273 $ -- $ 100
1.00 - 1.99%............... 1 -- --
2.00 - 2.99%............... 374 123 181
3.00 - 3.99%............... 79 111 --
4.00 - 4.99%............... 44,666 109 392
5.00 - 5.99%............... 106,603 135,244 118,698
6.00 - 6.99%............... 33,282 40,272 51,397
7.00 - 7.99%............... 3,621 4,198 4,555
8.00 - 8.99%............... 14 13 24
-------- -------- --------
Total................. $188,913 $180,070 $175,347
======== ======== ========
70
The following table sets forth the amount and maturities of time
deposits at March 31, 1999.
Amount Due
------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
--------- ------- ------- ------- ------- --------
(Dollars in thousands)
0.00 - 0.99%...... $ 223 $ 50 $ -- $ -- $ -- $ 273
1.00 - 1.99%...... 1 -- -- -- -- 1
2.00 - 2.99%...... 374 -- -- -- -- 374
3.00 - 3.99%...... 79 -- -- -- -- 79
4.00 - 4.99%...... 42,432 1,815 381 7 31 44,666
5.00 - 5.99%...... 64,398 20,418 7,868 5,796 8,123 106,603
6.00 - 6.99%...... 14,975 5,709 4,605 4,822 3,171 33,282
7.00 - 7.99%...... 3,427 194 -- -- -- 3,621
8.00 - 8.99%...... 14 -- -- -- -- 14
--------- ------- ------- ------- ------- --------
Total........ $125,923 $28,186 $12,854 $10,625 $11,325 $188,913
======== ======= ======= ======= ======= ========
Deposit Activities
The following table sets forth the savings activities of Mutual
Bancshares for the periods indicated.
Year Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Beginning balance....................... $350,971 $329,770 $314,648
Net deposits (withdrawals) before
interest credited.................. 8,170 4,720 (507)
Interest credited....................... 16,755 16,481 15,629
-------- -------- --------
Net increase (decrease) in deposits..... 24,925 21,201 15,122
-------- -------- --------
Ending balance.......................... $375,896 $350,971 $329,770
======== ======== ========
Borrowings
Savings deposits are the primary source of funds for Everett Mutual
Bank's lending and investment activities and for general business purposes.
Everett Mutual Bank has the ability to use advances from the Federal Home Loan
Bank of Seattle to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The Federal Home Loan Bank of Seattle functions as a
central reserve bank providing credit for savings and loan associations and
certain other member financial institutions. As a member of the Federal Home
Loan Bank of Seattle, Everett Mutual Bank is required to own capital stock in
the Federal Home Loan Bank of Seattle and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit. At March 31, 1999, Everett Mutual Bank maintained a committed credit
facility with the Federal Home Loan Bank of Seattle that provided for
immediately available advances up to an aggregate of 20% of total assets, or
$85.3 million, of which $18.9 million was outstanding. In addition, Everett
Mutual Bank has a $10 million unsecured Fed Funds line from a commercial bank at
March 31, 1999, of which none was outstanding.
71
Everett Mutual Bank may engage, as one of its capital management
strategies to leverage its extra capital, in wholesale leveraging to leverage
the strong post-conversion capital provided attractive arbitrage opportunities
exist and depending upon the retail banking activity and capitalization. Everett
Mutual Bank will consider and/or undertake such a leverage strategy only after a
complete review of any applicable regulatory requirements or restrictions that
may be imposed upon it as a result of the intended leveraging strategy. The
decision to implement such a leverage strategy will only be taken following this
review. Such borrowings would be expected to primarily consist of Federal Home
Loan Bank advances or reverse repurchase agreements. Everett Mutual Bank may
consider limited wholesale leveraging prior to the offering to reduce the
exposure of investing such a large amount of funds at any one point in the
interest rate cycle.
The following table sets forth information regarding Federal Home Loan
Bank advances by Everett Mutual Bank and Commercial Bank of Everett at the end
of and during the periods indicated. The table includes both short-term and
long-term borrowings unless noted otherwise.
For the Year Ended March 31,
---------------------------------
1999 1998 1997
------- -------- -------
(Dollars in thousands)
Maximum amount of borrowings outstanding at any month end..... $20,954 $20,052 $24,106
Approximate average borrowings outstanding with respect to.... $16,215 $18,003 $20,682
Approximate weighted average rate paid on..................... 6.30% 6.32% 6.26%
At March 31,
-----------------------------------
1999 1998 1997
------- -------- -------
(Dollars in thousands)
Balance outstanding at end of period.......................... $18,949 $15,503 $20,057
Weighted average rate paid on................................. 6.19% 6.37% 6.27%
Competition
Everett Mutual Bank operates in an intensely competitive market for the
attraction of savings deposits, which is its primary source of funds, and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from credit unions, mutual funds and, to a lesser extent,
community banks, large commercial banks and thrift institutions in its primary
market area. Particularly in times of extremely low or extremely high interest
rates, Everett Mutual Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. Everett Mutual Bank's competition for loans comes
principally from mortgage bankers, commercial banks, other thrift institutions
and insurance companies. Such competition for deposits and the origination of
loans may limit Everett Mutual Bank's future growth and earnings prospects.
Subsidiary Activities
Everett Mutual Bank maintains three subsidiaries including Sound
Financial, Inc., Colby Crest Partners, L.P. and Alpine Ridge Associates, L.P.
Sound Financial, Inc. has two principal activities: it owns the Arlington Branch
and leases the facility back to Everett Mutual Bank; and through a turnkey
contract with Invest Financial
72
Services, it sells annuities and mutual funds. Sound Financial, Inc. currently
operates with one full time and one part-time registered investment
representative.
Colby Crest Partners, L.P. is a partnership formed in 1992 to construct
and operate a 66 unit low income housing project in downtown Everett. The
project was financed, in part, by housing tax credits which are received by
Colby Crest Partners, L.P. over a ten year period. At March 31, 1999, Everett
Mutual Bank's book value in Colby Crest Partners, L.P. was $284,400. The
estimated remaining tax credit receivable equals $543,000, if fully realized.
Alpine Ridge Associates, L.P. was formed in 1993 by Everett Mutual Bank
and Key Bank of Washington to construct and operate a 60 unit low income
retirement apartment in Mount Vernon, Washington. The project was financed, in
part, by housing tax credits which are received by Alpine Ridge Associates, L.P.
over a ten year period. At March 31, 1999, Everett Mutual Bank's book value in
Alpine Ridge Associates, L.P. was $90,900. The estimated tax credit receivable
equals $345,000, if fully realized.
Commercial Bank of Everett and I-Pro do not have any active
subsidiaries and none are contemplated at the present time. Mutual Bancshares
Capital, Inc. will have an interest in a partnership formed for the purpose of
providing capital to start-up technology companies. See "Business of Mutual
Bancshares Capital, Inc."
Charitable Foundation
The Everett Mutual Foundation is a charitable organization established
in 1990 and funded by Everett Mutual Bank and Mutual Bancshares. At March 31,
1999, The Everett Mutual Foundation had $3.2 million in assets. The assets,
liabilities, income and expenses of the Foundation are not included in the
consolidated financial statements as they are not part of Mutual Bancshares.
Earthquakes
Snohomish, King and Pierce Counties, where substantially all of the
real and personal properties securing Everett Mutual Bank's loans are located,
is an earthquake-prone region. Although Everett Mutual Bank has not suffered any
losses in the last five years from earthquake damage to collateral security
loans, a major earthquake could result in material loss to Everett Mutual Bank
in two primary ways. First, while Everett Mutual Bank maintains adequate
insurance coverage on its own properties, if an earthquake damages real or
personal properties collateralizing outstanding loans to the point of insurable
loss, material loss would be suffered to the extent that the properties are
uninsured or inadequately insured. A substantial number of Everett Mutual Bank's
borrowers do not have insurance which provides for coverage due to losses from
earthquakes. Earthquake insurance is generally not required by other lenders in
the market area, and as a result in order to remain competitive in the
marketplace, earthquake insurance is not required by Everett Mutual Bank as a
condition of making a loan. Earthquake insurance is also not always available at
a reasonable coverage level and cost because of changing insurance underwriting
practices in Everett Mutual Bank's market area resulting from past earthquake
activity and the likelihood of future earthquake activity in the region. Second,
if the collateralized properties are only damaged and not destroyed to the point
of total insurable loss, borrowers may suffer sustained job interruption or job
loss, which may materially impair their ability to meet the terms of their loan
obligations. While risk of credit loss can be insured against by, for example,
job interruption insurance or "umbrella" insurance policies, such forms of
insurance often are beyond the financial means of many individuals. Accordingly,
for most individuals, sustained job interruption or job loss would likely result
in financial hardship that could lead to delinquency in their financial
obligations or even bankruptcy. Accordingly, no assurances can be given that a
major earthquake in Everett Mutual Bank's primary market area will not result in
material losses to Everett Mutual Bank.
73
Properties
The following table sets forth information regarding Mutual Bancshares'
and its subsidiaries' offices at March 31, 1999.
Net Book Value of
Leased Date of Total Property or Leasehold Total Deposits
or Year Lease Approximate Improvement at at March 31,
Location Owned Opened Expiration Square Footage March 31, 1999 1999
-------- ------- ------ ---------- ----------------- ------------------------ --------------
(In thousands) (In thousands)
Everett Mutual Bank
Administration Office Leased 1994 12/31/14 27,000(1) $ 748 $ 2,601
2707 Colby Avenue
Suite 600
Everett, WA 98201
Henry Cogswell College Leased 1991 7/31/11 6,351 -- --
Building Annex
Storage Facility
2801 Wetmore Ave.
Everett, WA 98201
Branch Offices:
Main Branch Leased 1994 12/31/14 6,000 Office 410 74,224
2707 Colby Avenue 4,000 Drive-thru
Suite A
Everett, WA 98201
Silver Lake Branch Owned 1972 N/A 2,916 1,200 46,760
1902 110th SE
Everett, WA 982008
Monroe Branch Owned 1973 N/A 1,917 259 37,598
214 East Main Street
Monroe, WA 98272
Stanwood Branch Owned 1998 N/A 3,000 1,460 3,956
26606 72nd Avenue NW
Stanwood, WA 98292
Madison Branch Owned 1976 N/A 2,708 613 44,430
6726 Evergreen Way
Everett, WA 98203
Marysville Branch Owned 1977 N/A 2,916 713 40,693
1300 State Avenue
Marysville, WA 98270
Snohomish Branch Leased 1990 6/30/15 2,788 410 33,230
1325 Avenue D
Snohomish, WA 98290
74
Net Book Value of
Leased Date of Total Property or Leasehold Total Deposits
or Year Lease Approximate Improvement at at March 31,
Location Owned Opened Expiration Square Footage March 31, 1999 1999
- -------- ------ ------ ---------- -------------- --------------------- --------------
Arlington Branch Leased(2) 1981 1/1/06 2,883 255 20,026
535 North Olympic
Arlington, WA 98223
Arlington Branch Leased 1991 Month-to N/A -- --
Parking stalls (seven) month
adjacent to branch
535 North Olympic
Arlington, WA 98223
Lake Stevens Branch Leased 1989 8/27/09 2,685 249 31,931
633 Highway 9
Lake Stevens, WA 98258
North Creek Branch Leased 1989 5/31/03 1,863 150 16,423
18001 Bothell/Everett
Highway
Bothell, WA 98012
Smokey Point Branch Owned 1994 N/A 2,916 922 10,119
17021 Smokey Point Blvd.
Arlington, WA 98223
Commercial Bank of Leased 1996 12/31/04 2,747(3) 92 14,858
Everett
2707 Colby Ave.
Suite 715
Everett, WA 98201
I-Pro, Inc. Leased 1997 6/30/02 4,398 405 N/A
6838 S. 220th Street
Kent, WA 98032
Mutual Bancshares Leased 1998 10/31/03 1,413 20 N/A
Capital, Inc.
22020 17th Ave., SE
Suite 200
Bothell, WA 98021
- --------------
(1) 27,000 square feet, of which 2,747 square feet is subleased by Commercial
Bank of Everett and 5,600 square feet is subleased by a third party.
(2) Leased from Sound Financial, Inc., a subsidiary of Everett Mutual Bank.
(3) Subleased from Everett Mutual Bank.
The net book value of property includes land, building and leasehold
improvements and furniture, fixtures and equipment.
75
Everett Mutual Bank also operates nine proprietary automated teller
machines that are part of a nationwide cash exchange network, all of which are
located at certain offices of Everett Mutual Bank.
Personnel
At March 31, 1999, Everett Mutual Bank had 110 employees. On that date,
Commercial Bank of Everett, Sound Financial, Inc., I-Pro and Mutual Bancshares
Capital, Inc. had five, one, six and two employees, respectively. The employees
are not represented by a collective bargaining unit and all companies believe
that the relationship with their employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving
Everett Mutual Bank, such as claims to enforce liens, condemnation proceedings
on properties in which Everett Mutual Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to Everett Mutual Bank's business. Everett Mutual Bank is not a party
to any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of Everett Mutual Bank.
BUSINESS OF COMMERCIAL BANK OF EVERETT
Commercial Bank of Everett's strategy is to operate as a
community-based financial institution primarily focused on serving the needs of
business banking customers with a high level of customer service. This strategy
is accomplished by providing banking services directly at the customer's place
of business, including lending and non-cash deposit activities, to the greatest
extent possible. Inasmuch, Commercial Bank of Everett does not directly compete
with Everett Mutual Bank's retail customer focus. Rather, Commercial Bank of
Everett and Everett Mutual Bank serve to complement each other through an
organized referral network that provides both banks with the opportunity for
increased business.
Commercial Bank of Everett's lending operations are focused on
commercial loans which are generally made to a wide variety of small businesses
and professionals in the local market. To a lesser extent, Commercial Bank of
Everett has also brokered commercial, multi-family and residential mortgage
loans to Everett Mutual Bank. Commercial Bank of Everett also purchases
participation interests in commercial, multi-family and residential mortgage
loans from Everett Mutual Bank under the same underwriting policies and
conditions as Everett Mutual Bank. To a lesser extent, Commercial Bank of
Everett originates consumer loans for real estate, automobiles, secured and
unsecured personal lines of credit and credit cards.
Business Lending
Commercial Bank of Everett originates business loans to small and
medium sized businesses in its primary market area. Business loans are generally
made to finance the purchase of seasonal inventory needs, new or used equipment,
and for short-term working capital. Such loans are generally secured by
equipment, accounts receivable and inventory, although business loans are
sometimes granted on an unsecured basis. Such loans are made for terms of seven
years or less, depending on the purpose of the loan and the collateral, with
loans to finance operating expenses made for one year or less, with interest
rates that adjust at least annually at a rate equal to the prime rate, as
published in The Wall Street Journal, plus a margin ranging from 0% to 3.50%. At
March 31, 1999, the business loans amounted to $7.9 million, or 58.9%, of
Commercial Bank of Everett's total loans and 2.1% of the total loans of Mutual
Bancshares.
At March 31, 1999, the largest outstanding business loan was a $750,000
equipment term loan to a door manufacturer. Such loan was performing according
to its terms at March 31, 1999.
76
Commercial Bank of Everett underwrites its business loans on the basis
of the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of underlying collateral value, and Commercial Bank of Everett
seeks to structure such loans to have more than one source of repayment. The
borrower is required to provide Commercial Bank of Everett with sufficient
information to allow Commercial Bank of Everett to make its lending
determination. In most instances, this information consists of at least three
years of financial statements, tax returns, a statement of projected cash flows,
current financial information on any guarantor and any additional information on
the collateral. Generally, for loans with balances exceeding $100,000,
Commercial Bank of Everett requires that borrowers and guarantors provide
updated financial information at least annually.
Commercial Bank of Everett's business loans may be structured as term
loans or as lines of credit. Business term loans are generally made to finance
the purchase of long-lived assets and have maturities of five years or less.
Business lines of credit are typically made for the purpose of providing working
capital and are usually approved with a term of between six months and one year.
Commercial Bank of Everett provides borrowers with secured standby
letters of credit based on the same underwriting requirements and conditions as
described above. The letters of credit are backed by signed notes payable to
Commercial Bank of Everett for like terms of the letter of credit. At March 31,
1999, Commercial Bank of Everett had no outstanding letters of credit.
International letters of credit are offered through a correspondent bank who
assumes credit and payment risk on the instrument. The Commercial Bank of
Everett receives a fee from the borrower and the correspondent bank for
arranging the international letters of credit.
Business loans are often larger than residential loans and may involve
greater risk than other types of lending. Because payments on such loans are
often dependent on successful operation of the business involved, repayment of
such loans may be subject to a greater extent to adverse conditions in the
economy. Commercial Bank of Everett seeks to minimize these risks through its
underwriting guidelines, which require that the loan be supported by adequate
cash flow of the borrower, profitability of the business, collateral and
personal guarantees of the individuals in the business. In addition, Commercial
Bank of Everett limits this type of lending to its market area.
Commercial and Multi-Family Mortgage Loans
Commercial Bank of Everett acts as a broker of commercial and
multi-family mortgage loans to Everett Mutual Bank for which Commercial Bank of
Everett receives a portion of the loan fee as compensation for the processing
and referral of the loan. From time to time, Commercial Bank of Everett also
purchases participation interests in commercial and multi-family loans from
Everett Mutual Bank to hold in its own portfolio for investment. Such purchases
are made under the same general underwriting policies and conditions as Everett
Mutual Bank. See "Business of Mutual Bancshares -- Lending Activities --
Multi-Family Lending" and "-- Commercial Real Estate Lending." Financing of
commercial and multi-family properties provides loan diversification for
Commercial Bank of Everett from a collateral and asset/liability perspective. As
such, the financing of these types of loans is expected, subject to market
conditions, to continue to remain a part of Commercial Bank of Everett's loan
portfolio. As of March 31, 1999, commercial and multi-family mortgage loans
totaled $1.5 million and $389,000, respectively and together equaled 13.8% of
total loans. The majority of loans are for either commercial or mixed-use
structures and many are owner occupied. Commercial and multi-family loans are
generally extended for up to a 75% loan to value ratio and require a debt
service coverage of at least 1.30 and 1.20 times, respectively.
Residential Mortgage Loans
Residential mortgage loans are primarily offered to Commercial Bank of
Everett's business and consumer customers as an accommodation, and may
frequently have a business related purpose (i.e., working capital for a sole
proprietor is one example). Commercial Bank of Everett also acts a broker of
residential mortgage loans to Everett Mutual Bank for which Commercial Bank of
Everett receives a portion of the fee as compensation for processing
77
and referral of the loan. From time to time, Commercial Bank of Everett may also
purchase participation interests in residential loans from Everett Mutual Bank
to hold in its own portfolio for investment. Such purchases are made under the
same general underwriting policies and conditions as Everett Mutual Bank. See
"Business of Mutual Bancshares -- Residential One- to Four-Family Lending."
Financing of residential mortgage loans provides loan diversification for
Commercial Bank of Everett from a collateral and asset/liability management
perspective. As such, subject to market conditions, the financing of this type
is expected to continue to remain a part of Commercial Bank of Everett's loan
portfolio The residential mortgage portfolio consists of equal amounts of home
equity lines of credit/second mortgage loans and first mortgage loans. Lines of
credit equaled $965,000 or 7.2% of total loans at March 31, 1999, while
permanent residential mortgage loans totaled $1.1 million or 8.1% of total
loans.
Consumer Loans
Consumer loans consist of installment loans for boats, autos and other
purposes and include a modest balance of credit card loans. Consumer loans
(other than credit card loans) are underwritten using the same guidelines as
Everett Mutual Bank. See "Business of Mutual Bancshares -- Consumer Lending." As
of March 31, 1999, consumer loans, excluding credit card loans, totaled $1.1
million or 8.0% of total loans. At March 31, 1999 there was one $7,300 consumer
loan 90 days or more past due and in nonaccrual status. The loan is unsecured,
but adequately protected by the paying capacity of the guarantor.
Credit card loans are underwritten using suggested Independent
Community Bankers Association guidelines, credit scoring and financial statement
analysis. Credit cards are issued primarily to Commercial Bank of Everett's
business customers. At March 31, 1999, the credit card portfolio consisted of
business credit lines of $345,000 and personal credit card lines of $186,000 for
a total of $531,000 or 3.9% of total loans. Commercial Bank of Everett also
receives credit card applications referred from Everett Mutual Bank branches.
Credit card loans entail greater risk than do other loans especially given their
unsecured status. Commercial Bank of Everett attempts to limit this risk by
adhering to sound underwriting and collection practices, although there can be
no assurances that these will prevent credit card losses. At March 31, 1999, no
credit card loans were 90 days or more past due or in nonaccrual status.
Nonperforming Assets and Delinquencies
Commercial Bank of Everett generally assesses late fees or penalty
charges on delinquent loans of 5% of the payment amount. Substantially all
business loan payments are due 30 days from disbursement and each 30 days
thereafter; however, the borrower is given a 10 day grace period to make the
loan payment. Delinquent business loans are monitored on a weekly basis until
the delinquency is resolved to management's satisfaction. When a consumer loan
borrower fails to make a required payment on a consumer loan by the payment due
date, Commercial Bank of Everett generally institutes the same collection
procedures as for its business loan borrowers.
Commercial Bank of Everett's Board of Directors is informed monthly as
to the status of all loans that are delinquent by more than 90 days or on
nonaccrual, the status on all loans currently in foreclosure or repossession,
and the status of all foreclosed and repossessed property owned by Commercial
Bank of Everett.
Deposit Accounts
Commercial Bank of Everett's deposit base is primarily comprised of
relatively even percentages of non-interest bearing business deposits, money
market deposit accounts and time deposits. As the Commercial Bank of Everett's
operating tenure lengthens, business deposits are anticipated to make up a
greater overall portion of the deposit mix, although this cannot be assured.
Commercial Bank of Everett also offers its business customers the option to
sweep excess account balances in non-interest bearing accounts into non-FDIC
insured money market funds which allows the customer to earn interest on
invested balances. The Commercial Bank of Everett receives a 12b-1 fee from the
mutual fund company for providing this service. Deposits are solicited from
within Commercial Bank of Everett's market area through existing customers and
limited outside advertising. While not intending to
78
compete directly with Everett Mutual Bank for time deposit accounts, customers
of Everett Mutual Bank may be referred to Commercial Bank of Everett in those
cases were the customer desires a greater amount of FDIC deposit insurance
coverage for their funds since both Commercial Bank of Everett and Everett
Mutual Bank are separately insured by the FDIC.
Borrowings
Deposits are the primary source of funds for Commercial Bank of
Everett's lending and investment activities and for general business purposes.
Commercial Bank of Everett has the ability to use advances from the Federal Home
Loan Bank of Seattle to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The Federal Home Loan Bank of Seattle functions
as a central reserve bank providing credit for savings and loan associations and
certain other member financial institutions. As a member of the Federal Home
Loan Bank of Seattle, Commercial Bank of Everett is required to own capital
stock in the Federal Home Loan Bank of Seattle and is authorized to apply for
advances on the security of such stock and certain of its mortgage loans and
other assets (principally securities which are obligations of, or guaranteed by,
the U.S. Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
Commercial Bank of Everett's use of borrowings has been relatively
limited and primarily for the purpose of supplementing deposit flows and loan
fundings. Commercial Bank of Everett maintains a funding line at the Federal
Home Loan Bank of Seattle equal to 5% of total assets or $990,300, none of which
was outstanding. Commercial Bank of Everett also has available an unsecured
letter of credit line of $250,000 and an unsecured federal funds lines of credit
of $500,000 from a commercial bank in addition to a $2.5 million unsecured
federal funds line of credit from Everett Mutual Bank. As of March 31, 1999, the
only borrowing outstanding consisted of federal funds totaling $2.1 million from
Everett Mutual Bank, which is eliminated in the Consolidated Financial
Statements.
BUSINESS OF I-PRO, INC.
I-Pro was formed in April 1997 by Mutual Bancshares to provide check
processing and deposit and loan account statement printing and mailing services
to banking and nonbanking companies. I-Pro's objective is to provide these
services for Everett Mutual Bank and Commercial Bank of Everett, and to other
financial institutions who are seeking to provide a high level of service to
their customers in response to requests for copies of checks, account statements
and other similar records. I-Pro's focus is to provide customized service and
personal attention thereby providing the benefits of an in-house system while:
(1) eliminating a portion of the burden of providing administrative oversight of
an in-house system; and (2) spreading the expense of such a system over a larger
base.
I-Pro utilizes electronic imaging technology, versus a traditional
paper-based processing and retrieval system, to deliver account research, check
processing, and customized account statements to its clients and their
customers.
79
BUSINESS OF MUTUAL BANCSHARES CAPITAL, INC.
Overview
Mutual Bancshares Capital, Inc. was formed in October 1998. Mutual
Bancshares Capital, Inc. is a member of Bancshares Capital Management, LLC,
which serves as General Partner to Bancshares Capital, L.P., an early stage
venture fund providing equity to regionally based high technology and medical
instrumentation companies. Bancshares Capital, L.P. is applying for licensing by
the U.S. Small Business Administration as a small business investment company
(SBIC) . Bancshares Capital, L.P. anticipates a fund size of $5.0 million to
$7.0 million, $2.3 million of which will be invested by Mutual Bancshares
Capital, Inc. Subsequent venture funds of similar or larger size are anticipated
to be formed in the future. A number of Company directors and officers of Mutual
Bancshares Capital, Inc. may also be limited partners.
Investment Strategy
Bancshares Capital, L.P. will provide equity to regionally based high
technology and medical instrumentation companies in the seed, start-up and early
stages of development. Bancshares Capital, L.P. will closely monitor and, if
possible, add value to those investments, with successful ventures returning
cash to the fund over an anticipated three to seven year time frame. It is
anticipated that liquidity of the investment will result from acquisition of
securities by a strategic partner, merger or acquisition of the subject
investment, or by sale of the subject investment in the public markets following
an initial public offering. It is anticipated that the investment in any single
company will be in the range of $100,000 to $1.0 million and Bancshares Capital,
L.P. may co-invest with other entrepreneurs or venture funds as needed or
desired.
Targeted Market
Bancshares Capital, L.P. will be seeking to deploy its venture funds
primarily in the Technology Corridor in the Seattle Metropolitan Area although
opportunities within the Pacific Northwest may be examined on a limited basis.
The corridor that encompasses I-405 and I-5 from Bellevue to Everett is home to
over 300 technology companies, has outstanding support services, is within close
proximity to university and other research institutions and has been the
location of many high technology and medical instrumentation companies
start-ups. While there will be no specific bias toward any one industry,
Bancshares Capital, L.P. expects to invest in companies whose technologies
involve software and digital media, environmental science, medical devices,
telecommunications and internet-related technologies among others.
Structure of the Partnership Investments
Mutual Bancshares Capital, Inc. has formed Bancshares Capital, L.P.,
which will act as general partner and Bancshares Capital, L.P. will sell limited
partnership interests in the venture fund. In its role as general partner,
Mutual Bancshares Capital, Inc. will receive a 2% management fee plus 20% of the
carried interest (i.e., 3% of the profits of the fund). Mutual Bancshares
Capital, Inc. will contribute 31% of the capital and have a 31% equity interest
in Bancshares Capital, L.P. while the balance of funds and ownership will be
derived from and distributed to the outside limited partners.
Anticipated Timing of Investments
Subject to market conditions and other factors, Bancshares Capital,
L.P. is targeting to make investments equal to $1.0 million in the first year,
$2.4 million in the second year and $3.0 million in the third year of operation.
As discussed above, Mutual Bancshares Capital, Inc.'s capital contribution will
be equal to 31% of the above amounts.
80
MANAGEMENT OF EVERTRUST FINANCIAL GROUP, INC.
EverTrust Financial Group, Inc.'s board of directors consists of nine
persons divided into three classes, with one-third of the directors elected at
each annual meeting of stockholders. One class, consisting of Margaret B.
Bavasi, Thomas R. Collins and Thomas J. Gaffney, has a term of office expiring
at the first annual meeting of stockholders after their initial election by
stockholders; a second class, consisting of Michael R. Deller, R. Michael Kight
and George S. Newland, has a term of Office expiring at the second annual
meeting of stockholders after their initial election by stockholders; and a
third class, consisting of Michael B. Hansen, Robert A. Leach, Jr. and William
J. Rucker, has a term of office expiring at the third annual meeting of
stockholders after their initial election by stockholders.
EverTrust Financial Group, Inc.'s executive officers are elected
annually and hold office until death, resignation or removal by the board of
directors. The executive officers are:
Executive Position
- --------- --------
Michael B. Hansen Chairman, President and Chief Executive Officer
Jeffrey R. Mitchell Senior Vice President, Chief Financial Officer
and Treasurer
Lorelei Christenson Senior Vice President and Corporate Secretary
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of EverTrust Financial
Group, Inc. is set forth under "-- Management of Everett Mutual Bank" and "--
Executive Officers Who Are Not Directors."
MANAGEMENT OF EVERETT MUTUAL BANK
The board of directors of Everett Mutual Bank presently consists of
nine directors divided into three classes, with approximately one-third of the
directors elected at each annual meeting of stockholders. Because EverTrust
Financial Group, Inc. will own all the issued and outstanding capital stock of
Everett Mutual Bank upon the conversion and stock issuance, the board of
directors of EverTrust Financial Group, Inc. will elect the directors of Everett
Mutual Bank.
Directors
Current
Director Term
Name Age(1) Position with Everett Mutual Bank Since Expires
- ---- ------ --------------------------------- -------- -------
Margaret B. Bavasi(2) 44 Chairman of the Board 1996 2000
Thomas R. Collins 56 Director 1994 2000
Michael R. Deller(2)(3) 48 Executive Vice President, Chief Operating 1999 2001
Officer and Director
Thomas J. Gaffney(4) 51 Director 1984 2000
Michael B. Hansen(2)(3)(4)(5) 57 President, Chief Executive Officer and 1981 2002
Director
R. Michael Kight(2) 60 Director 1974 2001
Robert A. Leach, Jr.(4) 49 Director 1997 2002
George S. Newland(2) 59 Director 1985 2001
William J. Rucker(2) 59 Director 1976 2002
(footnotes on following page)
81
- ------------
(1) As of March 31, 1999.
(2) Also serves as a Director of Commercial Bank of Everett.
(3) Also serves as a Director of I-Pro, Inc.
(4) Also serves as a Director of Mutual Bancshares Capital, Inc.
(5) Also serves as Chief Executive Officer and Director of Commercial Bank of
Everett.
Executive Officers Who Are Not Directors
Name Age(1) Position with Everett Mutual Bank
- ---- ----- ---------------------------------
Lorelei Christenson(2) 45 Senior Vice President, Chief Information Officer and Secretary
Terry L. Cullom(3) 56 Vice President and Credit Administrator
Jeffrey R. Mitchell(4) 40 Senior Vice President, Chief Financial Officer and Treasurer
Dale A. Lyski 61 President and Director of Commercial Bank of Everett
John E. Thoresen 48 President of Mutual Bancshares Capital, Inc.
- -------------------
(1) As of March 31, 1999.
(2) Also serves as Senior Vice President, Chief Information Officer and
Corporate Secretary of Commercial Bank of Everett; President and Director
of I-Pro, Inc.; and Senior Vice President and Corporate Secretary of Mutual
Bancshares Capital, Inc.
(3) Also serves as Vice President and Credit Administrator of Commercial Bank
of Everett
(4) Also serves as Senior Vice President and Cashier of Commercial Bank of
Everett; Senior Vice President, Chief Financial Officer, Treasurer and
Director of I-Pro, Inc.; and Senior Vice President, Chief Financial Officer
and Treasurer of Mutual Bancshares Capital, Inc.
Biographical Information
The principal occupation of each of the above individuals for the past
five years, as well as other information, is set forth below. All of the
individuals reside in Everett, Washington, unless otherwise indicated. No family
relationships exist among the individuals except as otherwise noted.
Margaret B. Bavasi is the former co-owner of the Everett AquaSox
Baseball Club, a minor league baseball club. She served as the Club's Vice
President from 1984 to 1999.
Thomas R. Collins is an attorney and a Partner in the Anderson Hunter
Law Firm, P.S., which firm he has been associated with for 30 years. Mr. Collins
is the brother-in-law of Michael R. Deller, the Executive Vice President and
Chief Operating Officer of Everett Mutual Bank. He resides in Mukilteo,
Washington.
Michael R. Deller has been Executive Vice President and Chief Operating
Officer of Everett Mutual Bank since 1997 and is responsible for branch
administration, marketing and sales. From 1994 to 1997, Mr. Deller was the
Executive Director of the Port of Everett. Prior to that, Mr. Deller was the
director of the first congressional district under U.S. Representative Maria
Cantwell. Mr. Deller is the brother-in-law of Thomas R. Collins. He resides in
Mukilteo, Washington.
Thomas J. Gaffney is the Managing Partner of the Everett office of Moss
Adams LLP, a certified public accounting firm, with which he has been associated
for 30 years.
Michael B. Hansen is President and Chief Executive Officer of Everett
Mutual Bank and Chief Executive Officer of Commercial Bank of Everett. Mr.
Hansen has been employed by Everett Mutual Bank for 20 years. He resides in
Mukilteo, Washington.
82
R. Michael Kight is an attorney and a partner in the law firm of
Newton-Kight, L.L.P., which he joined 32 years ago. The firm serves as general
counsel to Everett Mutual Bank and Commercial Bank of Everett. Mr. Kight resides
in Marysville, Washington.
Robert A. Leach, Jr. is an investment executive and senior vice
president and branch manager of Ragen Mackenzie, Inc., a financial services
company. Mr. Leach has worked in the financial services industry for 17 years.
He resides in Mukilteo, Washington.
George S. Newland is the President and owner of Newland Construction
Co., Inc., a general contracting company specializing in commercial, industrial
and institutional projects in the greater Northwest area. Mr. Newland has over
37 years of experience in the construction area.
William J. Rucker is the Chief Executive Officer and owner of H&L
Sporting Goods and Soccer West, retail and institutional sporting goods
businesses.
Lorelei Christenson is Senior Vice President, Chief Information Officer
and Corporate Secretary of Everett Mutual Bank, positions she has held since
1984. Ms. Christenson has served Everett Mutual Bank in various capacities since
1973.
Terry L. Cullom has been Vice President and Credit Administrator of
Everett Mutual Bank since 1992. Mr. Cullom has over 30 years of experience in
lending. He resides in Kirkland, Washington.
Jeffrey R. Mitchell is Senior Vice President, Treasurer and Chief
Financial Officer of Everett Mutual Bank, positions he has held since 1988. He
resides in Mukilteo, Washington.
Dale A. Lyski is President and Chief Operating Officer of Commercial
Bank of Everett, positions he has held since 1996. Prior to that, Mr. Lyski was
Executive Vice President of Everett Mutual Bank from 1989 to 1996. Mr. Lyski has
served Everett Mutual Bank in various capacities since 1986.
John E. Thoresen is President of Mutual Bancshares Capital, Inc., a
position he has held since September 1998. Prior to that time, Mr. Thoresen was
employed by the Economic Development Council of Snohomish County, Inc., a
regional nonprofit business development organization, from 1986 to September
1998. Mr. Thoresen resides in Edmonds, Washington.
Directors' Compensation
All directors receive an annual retainer of $10,000 paid quarterly in
increments of $2,500. Also, all directors, other than the Chairman of the Board,
receive a fee of $550 per board meeting attended and $220 per committee meeting
attended. The Chairman of the Board receives a fee of $660 per board meeting
attended and the chairman of each committee receives $275 per committee meeting
attended. Total fees paid to directors during the year ended March 31, 1999 were
$230,151. Following consummation of the conversion, directors' fees will
continue to be paid by EverTrust Financial Group, Inc.
Meetings and Committees of the Board of Directors
Mutual Bancshares. Mutual Bancshares' board of directors meets
quarterly and has special meetings as needed. During the year ended March 31,
1999, the Board held eight meetings. No director attended fewer than 75% of the
total meetings of the board of directors during this period. Mutual Bancshares
maintains an Executive Committee composed of directors Collins, Gaffney, Leach,
Hansen and Rucker. The Executive Committee meets in between regular quarterly
board meetings.
83
Everett Mutual Bank. Everett Mutual Bank's Board of Directors meets
monthly and has special meetings as needed. During the year ended March 31,
1999, the Board of Directors met 16 times. No director attended fewer than 75%
of the total meetings of the board and committees on which such board members
served during this period.
The Executive Committee of Everett Mutual Bank, comprised of Directors
Bavasi, Collins and Leach, sets board policies and reviews the performance and
salary of Everett Mutual Bank's Chief Executive Officer. In fiscal 1999, this
Committee met twice.
The Loan Review Committee of Everett Mutual Bank, comprised of
Directors Bavasi, Collins, Kight and Newland, meets monthly. This Committee
monitors Everett Mutual Bank's lending practices and policies. In fiscal 1999,
this Committee met 13 times.
The Audit and Budget Committee of Everett Mutual Bank, comprised of
Directors Leach, Gaffney and Rucker, meets monthly. This Committee reviews
internal auditing functions and establishes policies to assure full disclosure
of Everett Mutual Bank's financial condition. This Committee also oversees the
audit prepared by an external audit firm and the results of the examinations of
the Federal Deposit Insurance Corporation and the Washington Division of Banks.
In fiscal 1999, this Committee met 12 times.
The Investment Committee of Everett Mutual Bank, comprised of Directors
Kight, Leach, Rucker and Newland, meets quarterly. This Committee reviews the
liquidity investments of Everett Mutual Bank. In fiscal 1999, this Committee met
four times.
The Nominating Committee of Everett Mutual Bank, comprised of Directors
Bavasi, Gaffney, Hansen and Leach, meets as necessary. This Committee reviews
and investigates potential board members when there is a vacancy on the board.
In fiscal 1999, this Committee met twice.
The entire board of directors of Everett Mutual Bank determines the
salaries to be paid to officers and employees of Everett Mutual Bank, based on
recommendations of the chief executive officer. The board of directors met once
during fiscal 1999 to discuss such salary matters.
Commercial Bank of Everett. Commercial Bank of Everett held 13 meetings
of its board of directors during the year ended March 31, 1999. Commercial Bank
of Everett has audit, investment and loan committees. All committee meetings are
held with regular board meetings, with all board members in attendance.
Executive Compensation
Summary Compensation Table. The following table sets forth a summary of
certain information concerning the compensation paid by Everett Mutual Bank,
including amounts deferred to future periods by the officers, for services
rendered in all capacities during the fiscal year ended March 31, 1999 to its
President and Chief Executive Officer and the five other highest compensated
executive officers.
Annual Compensation(1)
-------------------------------------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus(2) Compensation(3)(4) Compensation(5)
- -------- ---- ------ -------- ------------------ -----------------
Michael B. Hansen 1999 $185,000 $72,000 $15,625 $7,949
President and Chief Executive Officer
of Mutual Bancshares and Everett
Mutual Bank; Chief Executive Officer
of Commercial Bank of Everett
(table continued on following page)
84
Annual Compensation(1)
--------------------------------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus(2) Compensation(3)(4) Compensation(5)
- -------- ---- ------ -------- ------------------ ---------------
Michael R. Deller 1999 $120,000 $ 51,000 $217 $ 4,723
Executive Vice President and Chief
Operating Officer of Everett
Mutual Bank
Jeffrey R. Mitchell 1999 90,000 36,000 347 3,912
Senior Vice President, Chief Financial
Officer and Treasurer of Mutual
Bancshares, Everett Mutual Bank,
Commercial Bank of Everett, I-Pro,
Inc. and Mutual Bancshares Capital,
Inc.
Dale A. Lyski 1999 100,019 19,000 3,990 4,405
President and Chief Operating Officer
of Commercial Bank of Everett
Lorelei Christenson 1999 90,000 29,000 9,276 3,893
Senior Vice President, Chief Information
Officer and Corporate Secretary of
Mutual Bancshares, Everett Mutual Bank,
Commercial Bank of Everett, and Mutual
Bancshares Capital, Inc.; President of
I-Pro, Inc.
Terry Cullom 1999 81,000 20,000 563 3,515
Vice President and Credit Administrator
of Everett Mutual Bank and Commer-
cial Bank of Everett
- ----------------
(1) Compensation information for fiscal years ended March 31, 1997 and 1998
have been omitted as Mutual Bancshares was neither a public company nor a
subsidiary thereof at such time. Salary and bonus information does not
exclude amounts deferred under a nonqualified deferred compensation plan.
(2) Paid in April 1999 for fiscal year ending March 31, 1999.
(3) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(4) Amounts reported are earnings credited to the non-qualified deferred
compensation programs in excess of 120% of the applicable federal rate. The
earnings credit rate is anticipated to be significantly reduced following
the conversion based on the pro forma return on shareholders' equity.
(5) Includes amounts paid in connection with contributions made by Mutual
Bancshares on behalf of the officer to vested and unvested defined
contribution plans and the dollar value of any insurance premiums paid by
Mutual Bancshares on behalf of the officer with respect to term life
insurance.
Employment Agreements for Executive Officers. In connection with the
conversion, Everett Mutual Bank intends to enter into three-year employment
agreements with Messrs. Hansen, Deller, and Mitchell. Under the employment
agreements, the initial salary level for Messrs. Hansen, Deller, and Mitchell
will be $200,000, $135,000 and $97,000, respectively, which amounts will be paid
by Everett Mutual Bank and may be increased at the discretion of the Board of
Directors or an authorized committee of the Board. On each anniversary of the
initial date of the employment agreements, the term of the agreements may be
extended for an additional year at the discretion of the Board. The agreements
may be terminated by Everett Mutual Bank at any time, by the executive if he or
she is assigned duties inconsistent with his or her initial position, duties,
responsibilities and status, or upon the
85
occurrence of certain events specified by federal regulations. In the event that
the executive's employment is terminated without cause or upon the executive's
voluntary termination following the occurrence of an event described in the
preceding sentence, Everett Mutual Bank would be required to honor the terms of
the agreement through the expiration of the current term, including payment of
then current cash compensation and continuation of employee benefits.
The employment agreements also provide for a severance payment and
other benefits if the executive is involuntarily terminated because of a change
in control of EverTrust Financial Group, Inc. or Everett Mutual Bank. The
agreements authorize severance payments on a similar basis if the executive
voluntarily terminates his or her employment following a change in control
because he or she is assigned duties inconsistent with his or her position,
duties, responsibilities and status immediately prior to such change in control.
The agreements define the term "change in control" as having occurred when,
among other things, a person other than EverTrust Financial Group, Inc.
purchases shares of EverTrust Financial Group Inc.'s common stock under a tender
or exchange offer for the shares; any person, as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, is or becomes the
beneficial owner, directly or indirectly, of securities of EverTrust Financial
Group, Inc. representing 25% or more of the combined voting power of EverTrust
Financial Group, Inc.'s then outstanding securities; the membership of the Board
of Directors changes as the result of a contested election; or shareholders of
EverTrust Financial Group, Inc. approve a merger, consolidation, sale or
disposition of all or substantially all of EverTrust Financial Group, Inc.'s
assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual compensation during the
five-year period prior to the effective date of the change in control. The
employment agreements provide that the value of the maximum benefit may be
distributed, at the executive's election, in the form of a lump sum cash payment
equal to 2.99 times the executive's base amount, or a combination of a cash
payment and continued coverage under EverTrust Financial Group, Inc.'s and
Everett Mutual Bank's health, life and disability programs for a 36-month period
following the change in control, the total value of which does not exceed 2.99
times the executive's base amount. Assuming that a change in control had
occurred at March 31, 1999 and that Messrs. Hansen, Deller, and Mitchell each
elected to receive a lump sum cash payment, they would be entitled to a payment
of approximately $486,265, $382,069 and $220,949, respectively. Section 280G of
the Internal Revenue Code provides that severance payments that equal or exceed
three times the individual's base amount are deemed to be "excess parachute
payments" if they are conditioned upon a change in control. Individuals
receiving parachute payments in excess of 2.99 times of their base amount are
subject to a 20% excise tax on the amount of such excess payments. If excess
parachute payments are made, EverTrust Financial Group, Inc. and Everett Mutual
Bank would not be entitled to deduct the amount of such excess payments. The
employment agreements provide that severance and other payments that are subject
to a change in control will be reduced as much as necessary to ensure that no
amounts payable to the executive will be considered excess parachute payments.
The employment agreements restrict each executive's right to compete
against Everett Mutual Bank for a period of one year from the date of
termination of the agreement if the executive voluntarily terminates employment
except in the event of a change in control.
Existing Employment Agreement for Executive Officer. John E. Thoreson
has an employment agreement with Mutual Bancshares under which he serves as
president of Mutual Bancshares Capital, Inc., a subsidiary of Mutual Bancshares.
He is also permitted to serve on the Board of Directors of Mutual Bancshares or
on the board of directors of any subsidiary without any additional compensation
or payment. He is accorded an annual salary of $150,000, and the welfare,
vacation and deferred compensation benefits accorded other senior management
employees. He is obligated to establish and capitalize a venture fund outlined
in the Bancshares Capital LP Business Plan. In the event that such
capitalization shall be insufficient to obtain a small business investment
company license from the U.S. Small Business Administration, then the agreement
will be terminated and he will receive severance pay equal to 33% of his annual
compensation. The agreement may otherwise be terminated by either party with six
months' written notice.
86
Employee Severance Compensation Plan. Everett Mutual Bank's Board of
Directors intends to, upon conversion, establish the Everett Mutual Bank
Employee Severance Compensation Plan which will provide eligible employees with
severance pay benefits in the event of a change in control of Everett Mutual
Bank or EverTrust Financial Group, Inc. following the conversion. Management
personnel with employment agreements or change in control agreements are not
eligible to participate in the severance plan. Generally, employees will be
eligible to participate in the severance plan if they have completed at least
one year of service with Everett Mutual Bank. Employees will have credit for
service prior to adoption of the plan. The severance plan vests in each
participant a contractual right to the benefits the participant is entitled to
thereunder. Under the severance plan, in the event of a change in control of
Everett Mutual Bank, or EverTrust Financial Group, Inc., eligible employees who
are terminated or terminate their employment within one year, for reasons
specified under the severance plan, will be entitled to receive a severance
payment. If the participant, whose employment has terminated, has completed at
least one year of service, the participant will be entitled to a cash severance
payment equal to 3.846% of annual compensation for each year of service up to a
maximum of 100% of annual compensation. Such payments may tend to discourage
takeover attempts by increasing costs to be incurred by Everett Mutual Bank in
the event of a takeover. In the event the provisions of the severance plan are
triggered, the total amount of payments that would be due thereunder, based
solely upon current salary levels, would be approximately $914,130. However, it
is management's belief that substantially all of Everett Mutual Bank's employees
would be retained in their current positions in the event of a change in
control, and that any amount payable under the severance plan would be
considerably less than the total amount that could be possibly be paid under the
severance plan.
Benefits
General. Mutual Bancshares and its subsidiaries currently provide
health and welfare benefits to its employees, including medical, vision, dental,
life, disability, 401(k) savings and pension, subject to certain deductibles and
employee copayments.
401(k) Savings Plan. Mutual Bancshares and its wholly-owned
subsidiaries maintain the Everett Mutual Savings Bank 401(k) Employee Savings
and Profit Sharing Plan and Trust for the benefit of the eligible employees of
Mutual Bancshares and its wholly owned subsidiaries. Mutual Bancshares and its
wholly owned subsidiaries are referred to in this section as the employer. The
plan is a combination 401(k) and profit sharing plan and is part of a
floor/offset arrangement with the defined benefit pension plan. The plan is
intended to be a tax-qualified retirement plan under Sections 401(a) and 401(k)
of the Internal Revenue Code of 1986, as amended. Employees of Mutual Bancshares
and its wholly owned subsidiaries who have completed one year of service and who
have attained age 21 are eligible to participate in the plan.
Participants may contribute the lesser of $10,000 or 8% of their annual
compensation through a pre-tax salary reduction election. The employer matches
the first 4% of a participant's pre-tax salary reduction contribution at the
rate of 50%. Pre-tax salary reduction contributions by a participant above the
first 4% of his compensation are not matched. A participant may not, however,
make contributions to the plan unless he has elected to make a 2% non-deductible
contribution to the plan. The employer matches such mandatory contributions at
the rate of 100%. Participants are at all times 100% vested in their salary
reduction contributions.
To the profit sharing portion of the plan, the employer may also
contribute a discretionary amount with respect to any plan year which is
allocated to participants in proportion that their annual compensation bears to
the total compensation of all participants during the plan year. With respect to
matching and discretionary profit sharing contributions made by the employer,
participants vest in such contributions at the rate of 20% per year, beginning
with the completion of their third year of service with full vesting occurring
after seven years of service. For the plan's fiscal year ended December 31,
1998, Mutual Bancshares and its wholly owned subsidiaries incurred
contribution-related expenses of $93,011 in connection with the 401(k) and
profit sharing portions of the plan. For the plan's fiscal year ended December
31, 1998, employees contributed $171,009 to the plan.
87
Generally, participants direct the investment of plan assets. In
connection with the conversion, the investment options available to participants
will be expanded to include the opportunity to direct the investment of their
plan account balances to purchase shares of EverTrust Financial Group, Inc.
common stock. A participant in the plan who elects to purchase EverTrust
Financial Group, Inc. common stock through the plan will receive the same
subscription priority and be subject to the same individual purchase limitations
as if the participant had elected to make such purchase using other funds. See
"Mutual Bancshares - - Limitation on Purchases of Shares."
Pension Plan. Mutual Bancshares and its wholly-owned subsidiaries
maintain the Everett Mutual Savings Bank Pension Plan. It is part of a
floor/offset arrangement with the 401(k) plan. The pension plan is intended to
be a tax-qualified retirement plan under Section 401(a) of the Internal Revenue
Code of 1986, as amended. Employees of Mutual Bancshares and its wholly owned
subsidiaries who have completed one year of service and who have attained age 21
are eligible to participate in the pension plan.
At his normal retirement age of 62, a participant is entitled to a
retirement benefit equal to 2% of his average monthly compensation based on his
highest paid five years of compensation and multiplied by his total number of
years of service, which may be up to a maximum of 30 years, and reduced by the
monthly benefit equal to the participant's Basic Salary Deferral Account and the
vested portion of his Basic Company Matching Account, as maintained in the
410(k) plan, divided by an actuarial equivalent factor that converts a life
annuity into a lump sum as of the calculation date. Years of service in excess
of 30 are not counted.
The benefit provided to a participant at the early retirement age of 55
with ten years of service who elects to defer the payment of his benefits to
normal retirement age, at early retirement age with 10 years of service who
elects to receive payment of his benefit prior to normal retirement age, or who
postpones annual benefits beyond normal retirement age, are calculated basically
the same as the benefits for normal retirement age, with final average earnings
being multiplied by 2% for each year of such individual's actual years of
service. A participant eligible for early retirement benefits who begins to
receive benefits prior to normal retirement age will have his benefits
actuarially adjusted, as further described in the pension plan.
The pension plan is subject to the same vesting schedule as that
imposed on the profit sharing and matching accounts in the 401(k) plan. Mutual
Bancshares intends to terminate the pension plan on December 31, 1999, following
the adoption of the employee stock ownership plan. No contributions were
required to be made to the pension plan for the plan's fiscal year ending
December 31, 1998.
The following table sets forth, as of December 31, 1998, the fiscal
year end for this pension plan, estimated monthly pension benefits for
individuals at age 62 payable in the form of a life annuity under the most
advantageous plan provisions for various levels of compensation and years of
service. The figures in this table are based upon the assumption that the
pension plan continues in its present form and does not reflect offsets for
Social Security or employee stock ownership plan benefits. As of December 31,
1998, the estimated years of credited service of Messrs. Hansen, and Mitchell,
Ms. Christensen and Mr. Cullom were 19, 9, 25 and 5 years, respectively.
Years of Credited Service
Remuneration 10 15 20 25 30
------------ -------- -------- -------- -------- -----
$ 80,000 1,333 2,000 2,667 3,333 4,000
100,000 1,667 2,500 3,333 4,167 5,000
120,000 2,000 3,000 4,000 5,000 6,000
140,000 2,333 3,500 4,667 5,833 7,000
160,000 2,667 4,000 5,333 6,667 8,000
180,000 2,667 4,000 5,333 6,667 8,000
200,000 2,667 4,000 5,333 6,667 8,000
220,000 2,667 4,000 5,333 6,667 8,000
240,000 2,667 4,000 5,333 6,667 8,000
260,000 2,667 4,000 5,333 6,667 8,000
280,000 2,667 4,000 5,333 6,667 8,000
300,000 2,667 4,000 5,333 6,667 8,000
88
Non-Qualified Deferred Compensation Program. Mutual Bancshares sponsors
a deferred compensation program for directors and a select group of management
and/or highly compensated employees. The plan was originally effective as of
January 1, 1996, and has been amended and restated as of July 1, 1999 as the
EverTrust Financial Group, Inc. Amended and Restated Voluntary Deferred
Compensation Plan. The board of directors of Mutual Bancshares, or the Chief
Executive Officer, or the president of Mutual Bancshares, or of a
50%-or-more-owned subsidiary selects the participants.
The plan is administered by a committee of at least five directors. An
eligible employee is permitted to defer all or a specified portion of his
compensation, including annual base salary and any compensation payable under
any bonus or incentive plan, paid to him. The committee may elect in its sole
discretion to set maximum and/or minimum deferred amounts for each calendar
year. Prior to June 30, 1999, an eligible employee could make such deferrals
only after he had deferred a minimum of 6% of his base salary into the 401(k)
plan. On and after July 1, 1999, the requirement of deferral into the 401(k)
plan has been removed. In general, an eligible employee must elect the amount of
his compensation to be deferred prior to January 1 of the year of the deferral.
Such election is irrevocable during the ensuing calendar year. Deferral amounts
are credited to a participant's Deferred Compensation Account as of the last day
of each calendar quarter and credited with earnings in the Deferred Compensation
Account in accordance with such benchmark investment measures as the committee
determines. Prior to September 30, 1999, the investment benchmark used was based
on the annualized return on equity of Everett Mutual Bank. Effective on or after
October 1, 1999, participants will be entitled to select among other investment
return measures, as determined by the committee.
A participant must elect, at the time of his initial deferral, when to
receive payment of his Deferred Compensation Account. Payments may be made
either in a lump sum; or substantially equal annual installments not to exceed
ten years, as the participant shall have elected. In the event of a severe
financial hardship, the Participant may request an early distribution from his
Deferred Compensation Account, but only to the extent reasonably needed to
satisfy such hardship. In addition, in the event a participant becomes
permanently incapacitated, the committee, in its sole discretion, and upon the
participant's written application, may direct the immediate payment of all or a
portion of the then current value of the participant's Deferred Compensation
Account to the participant.
Mutual Bancshares has established a grantor trust to hold assets that
fund its obligation and that of its 50%-or- more-owned subsidiaries to
participants in the plan.
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by EverTrust Financial Group, Inc. of an employee stock ownership
plan for eligible employees of EverTrust Financial Group, Inc. and its wholly
owned subsidiaries, to become effective as of April 1, 1999, subject to the
completion of the conversion. The purpose of the employee stock ownership plan
is to satisfy the requirements for an employee stock ownership plan under the
Internal Revenue Code of 1986, as amended, and the Employee Retirement Income
Security Act of 1974, as amended. Employees of EverTrust Financial Group, Inc.
and its wholly owned subsidiaries who have been credited with at least 1,000
hours of service during a designated 12-month period and who have attained age
21 will be eligible to participate in the employee stock ownership plan.
It is intended that the employee stock ownership plan will purchase 2%
of the shares issued in the conversion. This would range between 117,130 shares,
assuming 5,856,500 shares are issued in the conversion and including shares
contributed to The EverTrust Foundation, and 157,300 shares, assuming 7,865,000
shares are issued in the conversion and including shares contributed to The
EverTrust Foundation. It is anticipated that the employee stock ownership plan
will borrow funds from EverTrust Financial Group, Inc. to purchase the shares.
Such loan will equal 100% of the aggregate purchase price of the common stock.
The employee stock ownership plan will repay the loan principally from the cash
contributions of the wholly owned subsidiaries of EverTrust Financial Group,
Inc. and from dividends payable on the common stock held by the employee stock
ownership plan over the anticipated five-year term of the loan. The interest
rate for the employee stock ownership plan loan is expected to be the prime rate
as published in The Wall Street Journal on the closing date of the conversion.
See "Pro Forma Data." To the extent that the employee
89
stock ownership plan is unable to acquire 2% of the common stock issued in the
conversion, it is anticipated that it may acquire the shares following the
conversion through open market purchases.
In any plan year, EverTrust Financial Group, Inc. and its wholly owned
subsidiaries may make additional discretionary contributions to the employee
stock ownership plan for the benefit of participants. These contributions may be
made from shares of common stock that are acquired through the purchase of
outstanding shares in the market, from individual stockholders, or from shares
which constitute authorized but unissued shares or shares held in trust by
EverTrust Financial Group, Inc. Several factors will affect the timing, amount,
and manner of such discretionary contributions, including applicable regulatory
policies, the requirements of applicable laws and regulations, and market
conditions.
EverTrust Financial Group, Inc. will hold shares purchased by the
employee stock ownership plan with the proceeds of the loan in a suspense
account and release them on a pro rata basis as the loan is repaid.
Discretionary contributions to the employee stock ownership plan and shares
released from the suspense account will be allocated among participants on the
basis of each participant's proportional share of total compensation.
Forfeitures will be reallocated among the remaining plan participants.
Participants will vest in their accrued benefits under the employee
stock ownership plan at the rate of 20% per year, beginning upon the completion
of two years of service. A participant is fully vested at normal retirement,
which is generally the attainment of age 65 and completion of five years of
participation, in the event of death or disability or upon termination of the
employee stock ownership plan. Benefits are distributable upon a participants'
normal retirement, early retirement, death, disability or termination of
employment. Contributions to the employee stock ownership plan are not fixed, so
benefits payable under the employee stock ownership plan cannot be estimated.
It is anticipated the Board of Directors will select an institutional
trustee to serve as trustee of the employee stock ownership plan. The trustee
must vote all allocated shares held in the employee stock ownership plan in
accordance with the instructions of plan participants and unallocated shares
must be voted in the same ratio on any matter as those shares for which
instructions are given. The trustee will vote, in his discretion, allocated
shares for which no instructions are received .
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan will meet the requirements of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
of the Internal Revenue Service and the Department of Labor issued thereunder.
EverTrust Financial Group, Inc. intends to request a determination letter from
the Internal Revenue Service regarding the tax-qualified status of the employee
stock ownership plan. EverTrust Financial Group, Inc. expects, but cannot
guarantee, that a favorable determination letter will be received by the
employee stock ownership plan.
Management Recognition and Development Plan. The Board of Directors of
EverTrust Financial Group, Inc. intends to adopt the EverTrust Financial Group,
Inc.'s Management Recognition and Development Plan, a restricted stock plan, for
senior officers and non-employee directors of EverTrust Financial Group, Inc.
and Everett Mutual Bank and to submit it to the stockholders for approval at a
meeting held no earlier than six months following the conversion. The plan will
enable EverTrust Financial Group, Inc. and Everett Mutual Bank to provide
participants with a proprietary interest in EverTrust Financial Group, Inc. as
an incentive to contribute to the success of EverTrust Financial Group, Inc. and
Everett Mutual Bank. Persons who are awarded stock under the plan will not have
to pay for the stock. Furthermore, some or all of the persons who receive awards
under the management recognition and development plan will also be granted
options under the stock option plan. The plan will comply with all applicable
regulatory requirements. The Washington Department of Financial Institutions and
the Federal Deposit Insurance Corporation will not approve or endorse the plan.
90
The plan intends to acquire a number of shares of EverTrust Financial
Group, Inc.'s common stock equal to 4% of the common stock issued in the
conversion, including shares issued to The EverTrust Foundation. This would
range from 234,260 shares, assuming 5,856,500 shares are issued in the
conversion, to 314,600 shares, assuming 7,865,000 shares are issued in the
conversion. The plan will acquire the shares on the open market, if available,
with funds contributed by EverTrust Financial Group, Inc. or Everett Mutual Bank
to a trust which EverTrust Financial Group, Inc. may establish in conjunction
with the plan or from authorized but unissued shares or treasury shares of
EverTrust Financial Group, Inc.
The compensation committee of the Board of Directors of EverTrust
Financial Group, Inc. will administer the management recognition and development
plan, the members of which will also serve as trustees for the plan, if a trust
is formed. The trustees will be responsible for the investment of all funds
contributed by EverTrust Financial Group, Inc. or Everett Mutual Bank to the
trust. The Board of Directors of EverTrust Financial Group, Inc. may terminate
the plan at any time and, upon termination, all unallocated shares of common
stock will revert to EverTrust Financial Group, Inc.
Shares of common stock granted under the plan will be in the form of
restricted stock which will become unrestricted ratably over a specified vesting
period following the date of grant. During the period of restriction, EverTrust
Financial Group, Inc. or the plan will hold all shares in escrow. Under current
regulations, if the management recognition and development plan is implemented
within the first year following the conversion, the minimum vesting period will
be five years. All unvested awards will vest upon the recipient's death or
disability.
A recipient of a plan award in the form of restricted stock generally
will not recognize income upon an award of shares of common stock, and EverTrust
Financial Group, Inc. will not be entitled to a federal income tax deduction,
until the termination of the restrictions. Upon termination of the restrictions,
the recipient will recognize ordinary income in an amount equal to the fair
market value of the common stock at the time and EverTrust Financial Group, Inc.
will be entitled to a deduction in the same amount after satisfying federal
income tax reporting requirements. However, the recipient may elect to recognize
ordinary income in the year the restricted stock is granted in an amount equal
to the fair market value of the shares at that time, determined without regard
to the restrictions. In that event, EverTrust Financial Group, Inc. will be
entitled to a deduction in that year and in the same amount. Any gain or loss
recognized by the recipient upon subsequent disposition of the stock will be
either a capital gain or capital loss.
Although no specific award determinations have been made at this time,
EverTrust Financial Group, Inc. and Everett Mutual Bank anticipate that if
stockholder approval is obtained it would provide awards to its non-employee
directors and senior officers to the extent and under terms and conditions
permitted by applicable regulations. Under current regulations, if the plan is
implemented within one year after the conversion, no senior officer could
receive an award covering in excess of 25%, no non-employee director could
receive in excess of 5% and non-employee directors, as a group, could not
receive in excess of 30% of the number of shares reserved for issuance under the
plan.
1999 Stock Option Plan. The Board of Directors of EverTrust Financial
Group, Inc. intends to adopt the stock option plan and to submit the stock
option plan to the stockholders for approval at a meeting held no earlier than
six months following the conversion. The stock option plan will comply with all
applicable regulatory requirements. However, the stock option plan will not be
approved or endorsed by the Washington Department of Financial Institutions or
the Federal Deposit Insurance Corporation.
EverTrust Financial Group, Inc. will design the stock option plan to
attract and retain qualified management personnel and non-employee directors, to
provide such officers, key employees and non-employee directors with a
proprietary interest in EverTrust Financial Group, Inc. as an incentive to
contribute to the success of EverTrust Financial Group, Inc. and Everett Mutual
Bank, and to reward officers and key employees for outstanding performance. The
stock option plan will provide for the grant of incentive stock options intended
to comply with the requirements of the Internal Revenue Code and for
nonqualified stock options. Upon receipt of stockholder approval of the stock
option plan, EverTrust Financial Group, Inc. may grant stock options to key
employees of EverTrust Financial Group, Inc. and its subsidiaries, including
Everett Mutual Bank. The stock option plan will continue in effect for a period
of ten years from the date the stock option plan is approved by stockholders,
unless terminated earlier.
91
A number of authorized shares of common stock equal to 10% of the
number of shares of common stock issued in connection with the conversion,
including shares issued to The EverTrust Foundation, will be reserved for future
issuance under the stock option plan. This would range from 585,650 shares,
assuming 5,856,500 shares are issued in the conversion, to 786,500, assuming
7,865,000 shares are issued in the conversion. Shares acquired upon exercise of
options will be authorized but unissued shares or treasury shares. If a stock
split, reverse stock split, stock dividend, or similar event occurs, the number
of shares of common stock under the stock option plan, the number of shares to
which any award relates and the exercise price per share under any option may be
adjusted by the compensation committee to reflect the increase or decrease in
the total number of shares of common stock outstanding.
The compensation committee of the Board of Directors of EverTrust
Financial Group, Inc. will administer and interpret the stock option plan.
According to applicable federal regulations, the compensation committee will
determine which non-employee directors, officers and key employees will be
granted options, whether, in the case of officers and key employees, the options
will be incentive stock options or nonqualifying stock options, and the number
of shares represented by each option, and the exercisability of options. All
options granted to non-employee directors will be nonqualified stock options.
The per share exercise price of all options will equal at least 100% of the fair
market value of a share of common stock on the date the option is granted.
EverTrust Financial Group, Inc. anticipates that it will grant all
options under the stock option plan subject to a vesting schedule so that the
options become exercisable over a specified period following the date of grant.
Under federal regulations, if the stock option plan is implemented within the
first year following the conversion the minimum vesting period will be five
years. All unvested options will be immediately exercisable upon the recipient's
death or disability.
Each incentive stock option that is awarded to an officer or key
employee will remain exercisable at any time on or after the date it vests
through the earlier to occur of the tenth anniversary of the date of grant or
three months after the date on which the optionee terminates employment, or one
year if the optionee's termination results from death or disability, unless the
compensation committee extends the time period. Each nonqualified stock option
that is awarded to an officer, key employee or non-employee director will remain
exercisable through the earlier to occur of the tenth anniversary of the date of
grant or one year or two years following the grantee's death, disability or
termination of service. All incentive stock options are nontransferable except
by will or the laws of descent or distribution.
Under current provisions of the Internal Revenue Code, the federal tax
treatment of incentive stock options and non-qualified stock options is
different. With respect to incentive stock options, an optionee who satisfies
certain holding period requirements will not recognize compensation income at
the time the option is granted or at the time the option is exercised. If the
holding period requirements are satisfied, the optionee will generally recognize
capital gain or loss upon a subsequent disposition of the shares of common stock
received upon the exercise of a stock option. If the holding period requirements
are not satisfied, the difference between the fair market value of the common
stock on the date of exercise and the option exercise price, if any, will be
taxable to the optionee at ordinary income tax rates. A federal income tax
deduction generally will not be available to EverTrust Financial Group, Inc. as
a result of the grant or exercise of an incentive stock option, unless the
optionee fails to satisfy the holding period requirements. For non-qualified
stock options, the grant generally is not a taxable event for the optionee and
no tax deduction will be available to EverTrust Financial Group, Inc. However,
upon exercise, the difference between the fair market value of the common stock
on the date of exercise and the option exercise price generally will be treated
as compensation to the optionee upon exercise, and EverTrust Financial Group,
Inc. will be entitled to a compensation expense deduction in the amount of
income recognized by the optionee.
Although no specific award determinations have been made at this time,
EverTrust Financial Group, Inc. and Everett Mutual Bank anticipate that if
stockholder approval is obtained it would provide awards to its directors,
officers and key employees to the extent and under terms and conditions
permitted by applicable regulations.
92
Loans and Other Transactions with Officers and Directors
Mutual Bancshares has followed a policy of granting loans to its
officers and directors. Loans to directors and executive officers are made in
the ordinary course of business and on the same terms and conditions as those of
comparable transactions with the general public prevailing at the time, or in
the case of home mortgages, under the employee loan program, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans made to directors and executive officers are subject to
federal regulations restricting loans and other transactions with affiliated
persons of Mutual Bancshares. Loans to all directors and executive officers and
their associates totaled approximately $1.6 million at March 31, 1999, which was
1.21% of pro forma stockholders' equity, assuming 8,596,250 shares are sold in
the conversion. All loans to directors and executive officers were performing in
accordance with their terms at March 31, 1999.
R. Michael Kight is a partner in the law firm of Newton-Kight, L.L.P.,
which firm is general counsel to Everett Mutual Bank and Commercial Bank of
Everett. Services provided by Newton-Kight, L.L.P. to Everett Mutual Bank and
Commercial Bank of Everett are provided on terms comparable to those which are
available to unaffiliated parties.
George S. Newland is the President and owner of Newland Construction
Co., Inc., a general contracting company. During fiscal 1999, Mutual Bancshares
and Everett Mutual Bank paid Newland Const. Co., Inc. approximately $343,659 in
fees for construction and periodic maintenance of their offices. Services
provided by Newland Const. Co., Inc. to Everett Mutual Bank and Commercial Bank
of Everett are provided on terms comparable to those which are available to
unaffiliated parties.
REGULATION
The Banks
General. As state-chartered, federally insured financial institutions,
Everett Mutual Bank and Commercial Bank of Everett are subject to extensive
regulation. Lending activities and other investments must comply with various
statutory and regulatory requirements, including prescribed minimum capital
standards. Everett Mutual Bank and Commercial Bank of Everett are regularly
examined by the Federal Deposit Insurance Corporation and their state banking
regulators and file periodic reports concerning their activities and financial
condition with their regulators. Everett Mutual Bank and Commercial Bank of
Everett's relationship with depositors and borrowers also is regulated to a
great extent by both federal and state law, especially in such matters as the
ownership of savings accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of Everett Mutual Bank and Commercial Bank of Everett, including
reserves, loans, mortgages, capital, issuance of securities, payment of
dividends and establishment of branches. Federal and state bank regulatory
agencies also have the general authority to limit the dividends paid by insured
banks and bank holding companies if such payments should be deemed to constitute
an unsafe and unsound practice. The respective primary federal regulators of
Mutual Bancshares and Everett Mutual Bank and Commercial Bank of Everett have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision. As a state-chartered savings bank,
Everett Mutual Bank is subject to applicable provisions of Washington law and
regulations. As a state-chartered commercial bank, Commercial Bank of Everett is
also subject to applicable provisions of Washington law and regulations. State
law and regulations govern Everett Mutual Bank's and Commercial Bank of
Everett's ability to take deposits and pay interest thereon, to make loans on or
invest in residential and other real estate, to make consumer loans, to invest
in securities, to offer
93
various banking services to its customers, and to establish branch offices.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations. Everett Mutual Bank and Commercial Bank of Everett are subject to
periodic examination and reporting requirements by and of their state banking
regulators.
Deposit Insurance. The Federal Deposit Insurance Corporation is an
independent federal agency that insures the deposits, up to prescribed statutory
limits, of depository institutions. The Federal Deposit Insurance Corporation
currently maintains two separate insurance funds: the Bank Insurance Fund and
the Savings Association Insurance Fund. As insurer of Everett Mutual Bank and
Commercial Bank of Everett's deposits, the Federal Deposit Insurance Corporation
has examination, supervisory and enforcement authority over Everett Mutual Bank
and Commercial Bank of Everett.
Everett Mutual Bank's accounts are insured by the Bank Insurance Fund
and Commercial Bank of Everett's accounts are also insured by the Bank Insurance
Fund to the maximum extent permitted by law. Everett Mutual Bank and Commercial
Bank of Everett pay deposit insurance premiums based on a risk-based assessment
system established by the Federal Deposit Insurance Corporation. Under
applicable regulations, institutions are assigned to one of three capital groups
that are based solely on the level of an institution's capital--"well
capitalized," "adequately capitalized," and "undercapitalized"--which are
defined in the same manner as the regulations establishing the prompt corrective
action system, as discussed below. These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications.
Pursuant to the provisions in the Federal Deposit Insurance Act, all
Bank Insurance Fund-insured banks must pay semiannual insurance assessments.
These insurance premiums were substantially reduced by the Federal Deposit
Insurance Corporation effective January 1, 1996 as a result of the Bank
Insurance Fund having reached its designated reserve ratio in 1995. Insurance
premiums for Bank Insurance Fund insured institutions currently range from 0 to
27 basis points. As well capitalized banks, Everett Mutual Bank and Commercial
Bank of Everett qualified for the minimum statutory assessment during fiscal
1999. Everett Mutual Bank's and Commercial Bank of Everett's assessment for the
year ended December 31, 1998, equalled $41,000 and $1,000, respectively.
On September 30, 1996, the Deposit Insurance Fund Act was enacted to
assist depository institutions insured by the Savings Association Insurance Fund
in meeting its designated reserve ratio. Pursuant to the Federal Deposit
Insurance Act, the Federal Deposit Insurance Corporation imposed an assessment
on Savings Association Insurance Fund and Bank Insurance Fund insured financial
institutions beginning January 1, 1997, for the purpose of paying interest on
the obligations issued by the Financing Corporation in the 1980s to help fund
the thrift industry cleanup. Bank Insurance Fund-assessable deposits will be
charged an assessment at a rate of approximately 0.013% until the earlier of
December 31, 1999, or the date upon which the last savings association ceases to
exist, after which time the assessment will be the same for all insured
deposits.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the Federal Deposit Insurance Corporation. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of accounts
is terminated, the accounts at the institution at the time of termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the Federal Deposit Insurance Corporation.
Management is aware of no existing circumstances that could result in
termination of the deposit insurance of Everett Mutual Bank and Commercial Bank
of Everett.
94
Prompt Corrective Action. Under Federal Deposit Insurance Corporation
Improvement Act of 1991, each federal banking agency is required to implement a
system of prompt corrective action for institutions which it regulates. The
federal banking agencies have promulgated substantially similar regulations to
implement this system of prompt corrective action. Under the regulations, an
institution shall be deemed to be: "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, has a Tier I risk-based capital ratio of 4.0% or
more, has a Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;"
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, has a Tier I risk-based capital ratio that
is less than 3.0% or has a Tier I leverage capital ratio that is less than 3.0%;
and "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. The Federal Deposit Insurance Corporation may
not, however, reclassify a significantly undercapitalized institution as
critically undercapitalized.
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1999, Everett Mutual Bank and Commercial Bank of Everett
were categorized as "well capitalized" under the prompt corrective action
regulations of the Federal Deposit Insurance Corporation.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to: internal controls, information systems and internal
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; asset quality; earnings and compensation, fees and
benefits. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the Federal Deposit
Insurance Corporation determines that either Everett Mutual Bank or Commercial
Bank of Everett fails to meet any standard prescribed by the Guidelines, the
agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. Federal Deposit Insurance Corporation
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The Federal Deposit Insurance Corporation's
minimum capital standards applicable to Federal Deposit Insurance
Corporation-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100-200 basis points above
the 3% minimum. The Federal Deposit Insurance Corporation capital regulations
establish a minimum leverage ratio of not less than 4% for banks that are not
highly rated or are anticipating or experiencing significant growth.
95
Any insured bank with a Tier 1 capital to total assets ratio of less
than 2% is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the Federal Deposit
Insurance Corporation is a party, to correct its capital deficiency. Insured
banks operating with Tier 1 capital levels below 2%, and which have not entered
into a written agreement, are subject to an insurance removal action. Insured
banks operating with lower than the prescribed minimum capital levels generally
will not receive approval of applications submitted to the Federal Deposit
Insurance Corporation. Also, inadequately capitalized state nonmember banks will
be subject to such administrative action as the Federal Deposit Insurance
Corporation deems necessary.
Federal Deposit Insurance Corporation regulations also require that
banks meet a risk-based capital standard. The risk-based capital standard
requires the maintenance of total capital, which is defined as Tier 1 capital
and Tier 2 or supplementary capital, to risk weighted assets of 8% and Tier 1
capital to risk-weighted assets of 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk- weight of 0% to 100%, based on the risks the Federal
Deposit Insurance Corporation believes are inherent in the type of asset or
item. The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage requirement. The components of supplementary capital
currently include cumulative perpetual preferred stock, adjustable-rate
perpetual preferred stock, mandatory convertible securities, term subordinated
debt, intermediate-term preferred stock and allowance for possible loan and
lease losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of Tier 1 capital.
Federal Deposit Insurance Corporation capital requirements are
designated as the minimum acceptable standards for banks whose overall financial
condition is fundamentally sound, which are well-managed and have no material or
significant financial weaknesses. The Federal Deposit Insurance Corporation
capital regulations state that, where the Federal Deposit Insurance Corporation
determines that the financial history or condition, including off- balance sheet
risk, managerial resources and/or the future earnings prospects of a bank are
not adequate and/or a bank has a significant volume of assets classified
substandard, doubtful or loss or otherwise criticized, the Federal Deposit
Insurance Corporation may determine that the minimum adequate amount of capital
for that bank is greater than the minimum standards established in the
regulation.
Mutual Bancshares believes that, under the current regulations, Everett
Mutual Bank and Commercial Bank of Everett will continue to meet their minimum
capital requirements in the foreseeable future. However, events beyond the
control of Everett Mutual Bank and Commercial Bank of Everett, such as a
downturn in the economy in areas where Everett Mutual Bank and Commercial Bank
of Everett have most of their loans, could adversely affect future earnings and,
consequently, the ability of Everett Mutual Bank and Commercial Bank of Everett
to meet their capital requirements.
Activities and Investments of Insured State-Chartered Banks. Federal
law generally limits the activities and equity investments of Federal Deposit
Insurance Corporation-insured, state-chartered banks to those that are
permissible for national banks. Under regulations dealing with equity
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, acquiring or retaining a majority interest in a subsidiary,
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, acquiring
up to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions, and
acquiring or retaining the voting shares of a depository institution if certain
requirements are met.
Federal law provides that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the Federal
96
Deposit Insurance Corporation has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Federal Reserve System. The Federal Reserve Board requires under
Regulation D that all depository institutions, including savings banks, maintain
reserves on transaction accounts or non-personal time deposits. These reserves
may be in the form of cash or non-interest-bearing deposits with the regional
Federal Reserve Bank. Negotiable order of withdrawal accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank. Under
Regulation D, a bank must establish reserves equal to 0% of the first $4.9
million of net transaction accounts, 3% of the next $41.6 million, and 10% plus
$1.56 million of the remainder. The reserve requirement on non-personal time
deposits with original maturities of less than 1.5 years is 0%. As of March 31,
1999, Everett Mutual Bank's and Commercial Bank of Everett's deposit with the
Federal Reserve Bank and vault cash exceeded their respective reserve
requirements.
Affiliate Transactions. Mutual Bancshares, Everett Mutual Bank,
Commercial Bank of Everett, I-Pro, Inc. and Mutual Bancshares Capital, Inc. are
legal entities separate and distinct. Various legal limitations restrict Everett
Mutual Bank and Commercial Bank of Everett from lending or otherwise supplying
funds to Mutual Bancshares, which is an affiliate of these two financial
institution subsidiaries. These restrictions generally limit such transactions
with the affiliate to 10% of the bank's capital and surplus and limiting all
such transactions to 20% of the bank's capital and surplus. Such transactions,
including extensions of credit, sales of securities or assets and provision of
services, also must be on terms and conditions consistent with safe and sound
banking practices, including credit standards, that are substantially the same
or at least as favorable to Everett Mutual Bank and Commercial Bank of Everett
as those prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank, to
assess the bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate income neighborhoods. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.
Dividends. Dividends from Everett Mutual Bank and Commercial Bank of
Everett will constitute the major source of funds for dividends which may be
paid by Mutual Bancshares. The amount of dividends payable by Everett Mutual
Bank and Commercial Bank of Everett to Mutual Bancshares will depend upon
Everett Mutual Bank's and Commercial Bank of Everett's earnings and capital
position, and is limited by federal and state laws, regulations and policies.
Federal law further provides that no insured depository institution may
make any capital distribution, which would include a cash dividend, if, after
making the distribution, the institution would be "undercapitalized," as defined
in the prompt corrective action regulations. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
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Mutual Bancshares
General. Mutual Bancshares is a bank holding company registered with
the Federal Reserve. Bank holding companies are subject to comprehensive
regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as
amended, and the regulations of the Federal Reserve. Mutual Bancshares is
required to file with the Federal Reserve annual reports and such additional
information as the Federal Reserve may require and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries,
including its bank subsidiaries,. In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
Under the Bank Holding Company Act, a bank holding company must obtain
Federal Reserve approval before: acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares, unless it
already owns or controls the majority of such shares; acquiring all or
substantially all of the assets of another bank or bank holding company; or
merging or consolidating with another bank holding company.
The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve includes, among other things: operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers.
Interstate Banking and Branching. The Federal Reserve must approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The Federal Reserve may not approve the acquisition of a bank that has
not been in existence for the minimum time period, not exceeding five years,
specified by the statutory law of the host state. Nor may the Federal Reserve
approve an application if the applicant, and its depository institution
affiliates, controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. Federal law does
not affect the authority of states to limit the percentage of total insured
deposits in the state which may be held or controlled by a bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the federal law.
The Federal banking agencies are authorized to approve interstate
merger transactions without regard to whether such transaction is prohibited by
the law of any state, unless the home state of one of Everett Mutual Bank and
Commercial Bank of Everett adopted a law prior to June 1, 1997 which applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches will be
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers
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and branch acquisitions will also be subject to the nationwide and statewide
insured deposit concentration amounts described above.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the Federal Reserve prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The Federal
Reserve may disapprove such a purchase or redemption of it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, Federal Reserve order, or any condition imposed by, or written
agreement with, the Federal Reserve.
Capital Requirements. The Federal Reserve has established capital
adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the Federal Deposit Insurance Corporation for Everett
Mutual Bank and Commercial Bank of Everett. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets.
Mutual Bancshares' total risk based capital must equal 8% of
risk-weighted assets and one half of the 8%, or 4%, must consist of Tier 1
(core) capital. As of March 31, 1999 Mutual Bancshares' total risk based capital
was 15.0% of risk-weighted assets and its risk based capital of Tier 1 (core)
capital was 13.7% of risk-weighted assets.
Environmental Issues Associated With Real Estate Lending
The Comprehensive Environmental Response, Compensation and Liability
Act, a federal statute, generally imposes strict liability on, among other
things, all prior and present "owners and operators" of hazardous waste sites.
However, the U.S. Congress created a safe harbor provision for secured creditors
by providing that the term "owner and operator" excludes a person who, without
participating in the management of the site, holds indicia of ownership
primarily to protect its security interest in the site. Since the enactment of
the Comprehensive Environmental Response, Compensation and Liability Act, this
"secured creditor exemption" has been the subject of judicial interpretations
which have left open the possibility that lenders could be liable for cleanup
costs on contaminated property that they hold as collateral for a loan.
In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency, an agency within
the Executive Branch of the government, promulgated a regulation clarifying when
and how secured creditors could be liable for cleanup costs under the
Comprehensive Environmental Response, Compensation and Liability Act. Generally,
the regulation protected a secured creditor that acquired full title to
collateral property through foreclosure as long as the creditor did not
participate in the property's management before foreclosure and undertook
certain due diligence efforts to divest itself of the property. However, in
February 1994, the U.S. Court of Appeals for the District of Columbia Circuit
held that the Environmental Protection Agency lacked authority to promulgate
such regulation on the grounds that Congress meant for decisions on liability
under the Comprehensive Environmental Response, Compensation and Liability Act
to be made by the courts and not the Executive Branch. In January 1995, the U.S.
Supreme Court denied to review the U.S. Court of Appeal's decision. In light of
this adverse court ruling, in October 1995 the Environmental Protection Agency
issued a statement entitled "Policy on Comprehensive Environmental Response,
Compensation
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and Liability Act Enforcement Against Lenders and Government Entities that
Acquire Property Involuntarily" explaining that as an enforcement policy, the
Environmental Protection Agency intended to apply as guidance the provisions of
the Environmental Protection Agency lender liability rule promulgated in 1992.
To the extent that legal uncertainty exists in this area, all
creditors, including Everett Mutual Bank and Commercial Bank of Everett, that
have made loans secured by properties with potential hazardous waste
contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which costs often substantially exceed the value of the
collateral property.
TAXATION
Federal Taxation
General. EverTrust Financial Group, Inc. and subsidiaries will report
their income on a fiscal year basis using the accrual method of accounting and
will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly Everett Mutual Bank's
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to Everett Mutual Bank or EverTrust
Financial Group, Inc.
Bad Debt Reserve. Historically, savings institutions such as Everett
Mutual Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. Everett Mutual
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on Everett Mutual Bank's actual loss experience, or a
percentage equal to 8% of Everett Mutual Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to Everett Mutual Bank's loss experience,
Everett Mutual Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year, which is the last taxable
year beginning before January 1, 1988. Everett Mutual Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, Everett Mutual
Bank's bad debt deduction will be determined under the experience method using a
formula based on actual bad debt experience over a period of years or, if
Everett Mutual Bank is a "large" association, with assets in excess of $500
million, on the basis of net charge-offs during the taxable year. The new rules
allow an institution to suspend bad debt reserve recapture for the 1996 and 1997
tax years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvement loans are included and the institution can elect to
have the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured base year reserves will not be subject to recapture as long as
the institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
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Distributions. To the extent that Everett Mutual Bank makes
"nondividend distributions" to EverTrust Financial Group, Inc., such
distributions will be considered to result in distributions from the balance of
its bad debt reserve as of December 31, 1987, or a lesser amount if Everett
Mutual Bank's loan portfolio decreased since December 31, 1987, and then from
the supplemental reserve for losses on loans ("Excess Distributions"), and an
amount based on the Excess Distributions will be included in Everett Mutual
Bank's taxable income. Nondividend distributions include distributions in excess
of Everett Mutual Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Everett Mutual Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from Everett Mutual Bank's
bad debt reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
conversion, Everett Mutual Bank makes a "nondividend distribution," then
approximately one and one-half times the Excess Distribution would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate, exclusive of state and local taxes. See "Regulation -- The Banks --
Dividends" and "EverTrust Financial Group, Inc.'s Dividend Policy" for limits on
the payment of dividends by Everett Mutual Bank. Everett Mutual Bank does not
intend to pay dividends that would result in a recapture of any portion of its
tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
tax on alternative minimum taxable income at a rate of 20%. In addition, only
90% of alternative minimum taxable income can be offset by net operating loss
carryovers. Alternative minimum taxable income is increased by an amount equal
to 75% of the amount by which Everett Mutual Bank's adjusted current earnings
exceeds its alternative minimum taxable income, which is determined without
regard to this preference and prior to reduction for net operating losses. For
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of alternative minimum taxable income,
with certain modification, over $2.0 million is imposed on corporations,
including Everett Mutual Bank, whether or not an alternative minimum tax is
paid.
Dividends-Received Deduction. EverTrust Financial Group, Inc. may
exclude from its income 100% of dividends received from its subsidiaries as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which EverTrust Financial Group, Inc. and
its subsidiaries will not file a consolidated tax return, except that if
EverTrust Financial Group, Inc. or its subsidiaries owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
Audits. Mutual Bancshares' federal income tax returns have not been
audited during the past five years.
The EverTrust Foundation
General. To continue Everett Mutual Bank's commitment to the
communities that it serves and to complement the Everett Mutual Foundation,
management determined to establish The EverTrust Foundation as part of the
conversion to develop a unified charitable donation strategy for EverTrust and
its related entities. The establishment of the foundation in connection with the
conversion provided EverTrust with an opportunity to support charitable causes
in its community and to give the community a chance to directly benefit from its
conversion and stock offering. The contribution of EverTrust's common stock to
the foundation in connection with the conversion will enable the local
communities to share in the anticipated future success of EverTrust through cash
dividends payable on the stock and potential appreciation of the value of the
stock over time.
The purpose of the foundation will be to provide funding to support
charitable causes in the market areas served by EverTrust and its related
entities, particularly in Snohomish County, Washington. This support will
include, but will not be limited to, providing grants for youth and youth
recreation programs, education, affordable housing and partnering with other
traditional types of charitable organizations operating in the local area. It is
anticipated that the foundation will be active in each of these areas, and the
distribution from year to year may differ based on each area's need. The
foundation will consider partnerships with other charitable organizations to
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leverage the foundation's impact on the community in the event the foundation's
own programs result in additional charitable giving capacity.
The foundation will be organized as a non-stock Washington corporation
and will be funded with cash and the common stock of EverTrust. By increasing
EverTrust's visibility and reputation in the communities that it serves,
EverTrust believes that the foundation will enhance the long-term value of its
community banking franchise.
Purpose of the Foundation. Traditionally, Everett Mutual Bank has
emphasized community lending and community development activities within the
communities that it serves. The foundation is being formed as a complement to
the Everett Mutual Foundation's existing community activities. The EverTrust
Foundation will be completely dedicated to community activities and the
promotion of charitable causes, and may be able to support such activities in
ways that are not currently available to the Everett Mutual Foundation.
The board of directors believes the establishment of a charitable
foundation is consistent with Mutual Bancshares' commitment to community
service. The board further believes that the funding of the foundation with cash
and common stock of EverTrust Financial Group, Inc. is a means of enabling the
communities served by EverTrust Financial Group, Inc. to share in the growth and
success of EverTrust Financial Group, Inc. long after completion of the
conversion and stock offering. The foundation will accomplish that goal by
providing for continued ties between the foundation and EverTrust Financial
Group, Inc., forming a partnership with EverTrust Financial Group, Inc.'s
community. The establishment of the foundation also will enable EverTrust
Financial Group, Inc. to develop a unified charitable donation strategy.
EverTrust Financial Group, Inc., however, does not expect the contribution to
the foundation to take the place of its traditional community lending
activities.
Structure of the Foundation. Under The EverTrust Foundation's bylaws,
the foundation will be governed by a six member Board of Trustees, including
four members of EverTrust Financial Group, Inc.'s Board of Directors and/or
senior management, and two individuals selected for their experience, expertise
and demonstrated commitment and service to charitable and community purposes.
The current members of the Board of Trustees are anticipated to be Margaret B.
Bavasi, Thomas R. Collins, Thomas J. Gaffney, George S. Newland, Harry Stuchell
and Maurice "Ole" Olsen. There are no plans to change the size of the
foundation's board of directors during the one-year period after the completion
of the conversion.
A nominating committee of the foundation's board will nominate
individuals eligible for election to the board of trustees. The members of the
foundation, who are comprised of its board members, will elect the trustees from
those nominated by the nominating committee. Trustees will be appointed for one
year terms. It is not anticipated that the members of EverTrust Financial Group,
Inc.'s and Everett Mutual Bank's boards of directors who also serve as a
director of the foundation will receive any additional compensation for serving
as a director of the foundation. No determination has been made whether the
other foundation trustees will receive any compensation. The articles of
incorporation of the foundation provide that the corporation is organized
exclusively for charitable purposes, including community development, as set
forth in Section 501(c)(3) of the Internal Revenue Code. The foundation's
articles of incorporation also provide that no part of the net earnings of the
foundation will inure to the benefit of, or be distributable to its trustees,
officers or members. The foundation will make no award, grant or distribution to
any director, officer or employee of EverTrust Financial Group, Inc. or to any
of their affiliates. In addition, the conflict of interest rules of the Federal
Deposit Insurance Corporation and the Washington Division of Banks will apply to
those persons, if they serve as an officer, director or employee of the
foundation.
The board of trustees of the foundation will have the authority for the
affairs of the foundation. Among the responsibility of the foundation trustees
is the establishment of the policies of the foundation with respect to its
grants or donations, consistent with the purposes of the foundation. Although no
formal policy governing foundation grants exists at this time, the foundation's
board of trustees will adopt a policy upon establishment of the foundation. As
trustees of a nonprofit corporation, trustees of the foundation will at all
times be bound by their fiduciary duty to advance the foundation's charitable
goals, to protect the assets of the foundation and to act in
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a manner consistent with its charitable purpose. The trustees of the foundation
will also be responsible for directing the activities of the foundation,
including the management of the common stock of EverTrust Financial Group, Inc.
held by the
foundation. However, it is expected that as a condition to receiving the
approval of the Washington Division of Banks and the nonobjection of the Federal
Deposit Insurance Corporation to the conversion and stock offering, that the
foundation will be required to commit to the Washington Division of Banks and
the Federal Deposit Insurance Corporation that all shares of common stock held
by the foundation will be voted in the same ratio as all other shares of
EverTrust Financial Group, Inc.'s common stock, on all proposals considered by
stockholders. However, the Washington Division of Banks and the Federal Deposit
Insurance Corporation may waive this voting restriction under certain
circumstances. If a waiver is granted, the Washington Division of Banks and the
Federal Deposit Insurance Corporation may impose additional conditions regarding
the composition of the Foundation's board of trustees.
The foundation's initial place of business is expected to be located at
EverTrust Financial Group, Inc.'s administrative offices. Initially, the
foundation is expected to have no separate employees with the exception of an
executive director. The board of directors of the foundation will appoint such
other officers as may be necessary to manage the operations of the foundation.
In this regard, it is expected that EverTrust Financial Group, Inc. will be
required to provide the Federal Deposit Insurance Corporation with a commitment
that, to the extent applicable, EverTrust Financial Group, Inc. will comply with
the affiliate restrictions set forth in Sections 23A and 23B of the Federal
Reserve Act with respect to any transactions between EverTrust Financial Group,
Inc., its subsidiaries and the foundation.
EverTrust Financial Group, Inc. intends to capitalize The EverTrust
Foundation with cash of up to $1.3 million and a maximum of 390,000 shares or an
amount equal to 8.0% of the shares of common stock of EverTrust Financial Group,
Inc. sold in the stock offering based on the midpoint of the estimated valuation
range, which would have a market value of $3.3 million to $3.9 million, and $3.9
million at the maximum, as adjusted, based on the purchase price of $10.00 per
share. Messrs. Collins, Gaffney and Newland and Ms. Bavasi, who will serve as
initial trustees of the foundation, and their affiliates, intend to purchase,
subject to availability, an aggregate of 62,000 shares of common stock. The
shares of common stock to be acquired by the foundation, when combined with the
proposed purchases of shares of common stock by Messrs. Collins, Gaffney and
Newland and Ms. Bavasi and their affiliates will total 573,000 shares or 6.38%
of the total number of shares of common stock to be issued and outstanding,
assuming the sale of 8,986,250 shares of common stock.
The EverTrust Foundation will receive working capital from the cash
donation and any dividends paid on the common stock, and subject to applicable
federal and state laws, loans collateralized by the common stock or from the
proceeds of the sale of any of the common stock in the open market permitted to
provide the foundation with additional liquidity. As a private foundation under
Section 501(c)(3) of the Internal Revenue Code, the foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of common stock by EverTrust Financial Group, Inc. is that the amount
of common stock that may be sold by the foundation in any one year shall not
exceed 5% of the average market value of the assets held by the foundation,
except where the board of directors of the foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a longer-term reduction of the value of the foundation's assets and as such
would jeopardize the foundation's capacity to carry out its charitable purposes.
Failure to distribute this minimum return will require the payment of
substantial federal taxes. Upon completion of the conversion and the stock
offering and the contribution of shares of common stock to the foundation,
EverTrust Financial Group, Inc. would have 5,856,500, 6,890,000, 7,865,000 and
8,986,250 shares issued and outstanding based on the minimum, midpoint, maximum
and maximum, as adjusted, of the estimated valuation range. Because EverTrust
Financial Group, Inc. will have an increased number of shares outstanding, the
ownership interests of minority stockholders in EverTrust Financial Group,
Inc.'s common stock would be diluted to 5.66%, 5.66%, 4.96% and 4.34% at the
minimum, midpoint and maximum and maximum, as adjusted, of the estimated
valuation range. For additional discussion of the dilutive effect, see "Pro
Forma Data."
Tax Considerations. EverTrust Financial Group, Inc. has been advised by
their outside tax advisors that an organization created and operated for the
above charitable purposes would generally qualify as a Section 501(c)(3) exempt
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organization under the Internal Revenue Code, and that this type of an
organization would likely be classified as a private foundation as determined in
Section 501 of the Internal Revenue Code. The foundation will submit a timely
request to the Internal Revenue Service to be recognized as an exempt
organization. As long as the foundation files its application for recognition of
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
foundation's status as a Section 501(c)(3) organization will be the date of its
organization. EverTrust Financial Group, Inc.'s outside tax advisor, however,
has not rendered any advice on the regulatory condition to the contribution
which is expected to require that all shares of common stock of EverTrust
Financial Group, Inc. held by the foundation must be voted in the same ratio as
all other outstanding shares of common stock of EverTrust Financial Group, Inc.,
on all proposals considered by stockholders of EverTrust Financial Group, Inc.
Consistent with the expected condition, in the event that EverTrust Financial
Group, Inc. or the foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the foundation, or subject the foundation to an
excise tax under Section 4941 of the Internal Revenue Code, it is expected that
the Federal Deposit Insurance Corporation and the Washington Division of Banks
would waive such voting restriction upon submission of a legal opinion(s) by
EverTrust Financial Group, Inc. or the foundation satisfactory to them. See "--
Regulatory Conditions Imposed on the Foundation."
Under Washington law, EverTrust Financial Group, Inc. is authorized by
statute to make charitable contributions and case law has recognized the
benefits of such contributions to a Washington corporation. In this regard,
Washington case law provides that a charitable gift must be within reasonable
limits as to amount and purpose to be valid. Under the Internal Revenue Code,
EverTrust Financial Group, Inc. is generally allowed a deduction for charitable
contributions made to qualifying donees within the taxable year of up to 10% of
its taxable income of the consolidated group of corporations (with certain
modifications) for that year. Charitable contributions made by EverTrust
Financial Group, Inc. in excess of the annual deductible amount will be
deductible over each of the five succeeding taxable years, subject to certain
limitations. EverTrust Financial Group, Inc. believe that the conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
conversion. In making such a determination, EverTrust Financial Group, Inc.
considered the dilutive impact of the contribution of common stock to the
foundation on the amount of common stock available to be offered for sale in the
stock offering. Based on such consideration, EverTrust Financial Group, Inc.
believes that the contribution to the foundation in excess of the 10% annual
deduction limitation is justified given EverTrust Financial Group, Inc.'s
capital position and its earnings, the substantial additional capital being
raised in the stock offering and the potential benefits of the foundation to the
communities served by EverTrust Financial Group, Inc. In this regard, assuming
the sale of shares at the maximum of the estimated offering range, EverTrust
Financial Group, Inc. would have pro forma stockholders' equity of $121.3
million or 23.27% of pro forma consolidated assets. See "Historical and Pro
Forma Regulatory Capital Compliance," "Capitalization," "Comparison of Valuation
and Pro Forma Information with No Foundation" and "Pro Forma Data." EverTrust
Financial Group, Inc. believes that the amount of the charitable contribution is
reasonable given EverTrust Financial Group, Inc.'s pro forma capital positions.
As such, EverTrust Financial Group, Inc. believes that the contribution does not
raise safety and soundness concerns.
EverTrust Financial Group, Inc. has received an opinion of its outside
tax advisors, Deloitte & Touche LLP, that EverTrust Financial Group, Inc.'s
contribution of its own stock to the foundation should not constitute an act of
self-dealing. EverTrust Financial Group, Inc. should also, more likely than not
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the foundation
is required to pay to EverTrust Financial Group, Inc. for such stock, subject to
the annual deduction limitation described above. EverTrust Financial Group,
Inc., however, would be able to carry forward any unused portion of the
deduction for five years following the contribution, subject to certain
limitations. EverTrust Financial Group, Inc.'s outside tax advisors, however,
have not rendered advice as to fair market value for purposes of determining the
amount of the tax deduction. Assuming the close of the Offerings at the maximum
of the estimated price range, EverTrust Financial Group, Inc. estimates that all
of the contribution should be deductible over the six-year period. EverTrust
Financial Group, Inc. may make further contributions to the foundation following
the initial contribution. In addition, EverTrust Financial Group, Inc. also may
continue to make charitable contributions to other qualifying organizations. Any
of these future contributions would be based on an assessment of, among other
factors, the financial condition of EverTrust Financial Group, Inc. at that
time, the interests of stockholders and depositors of EverTrust Financial Group,
Inc., and the financial condition and operations of the foundation.
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Although EverTrust Financial Group, Inc. has received an opinion of
their outside tax advisors that EverTrust Financial Group, Inc. will more likely
than not be entitled to a deduction for the charitable contribution, there can
be no assurances that the Internal Revenue Service will recognize the foundation
as a Section 501(c)(3) exempt organization or that a deduction for the
charitable contribution will be allowed. In either case, EverTrust Financial
Group, Inc.'s contribution to the foundation would be expensed without tax
benefit, resulting in a reduction in earnings in the year in which the Internal
Revenue Service makes the determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The foundation will be required to make an
annual filing with the Internal Revenue Service within four and one-half months
after the close of the foundation's fiscal year. The foundation also will be
required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of the
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the foundation's managers and a concise statement of the purpose of each
grant. Numerous other restrictions exist in the operation of the foundation
including transactions with related entities, level of investment and
distributions for charitable purposes.
Regulatory Conditions Imposed on the Foundation. Establishment of The
EverTrust Foundation is expected to be subject to the following conditions being
agreed to in writing by the foundation as a condition to receiving the Federal
Deposit Insurance Corporation's nonobjection and the Washington Division of
Banks' approval of the conversion:
(1) the foundation will be subject to examination by the Federal
Deposit Insurance Corporation and the Washington Division of Banks;
(2) the foundation must comply with supervisory directives imposed by
the Federal Deposit Insurance Corporation and the Washington Division of Banks;
(3) the foundation will operate in accordance with written policies
adopted by its board of directors, including a conflict of interest policy;
(4) any shares of common stock held by the foundation must be voted in
the same ratio as all other shares of common stock, voting on all proposals
considered by stockholders of EverTrust Financial Group, Inc.; provided,
however, that, consistent with the condition, the Federal Deposit Insurance
Corporation and the Washington Division of Banks would waive this voting
restriction under certain circumstances and subject to certain conditions if
compliance with the voting restriction would:
o cause a violation of the law of the State of Washington;
o would cause the foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the
foundation; or
o would cause the foundation to be subject to an excise tax under
Section 4941 of the Internal Revenue Code;
(5) the foundation must submit a proposed operating plan to the Federal
Deposit Insurance Corporation prior to the conversion; and
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(6) the foundation must submit annual reports to the Federal Deposit
Insurance Corporation. In order to obtain a waiver of condition number 4 above,
EverTrust Financial Group, Inc.'s or the foundation's legal counsel would be
required to render an opinion satisfactory to the Federal Deposit Insurance
Corporation and the Washington Division of Banks. While there is no current
intention for EverTrust Financial Group, Inc. or the foundation to seek a waiver
from the Federal Deposit Insurance Corporation and the Washington Division of
Banks from these restrictions, there can be no assurances that a legal opinion
addressing these issues could be rendered, or if rendered, that the Federal
Deposit Insurance Corporation and the Washington Division of Banks would grant
an unconditional waiver of the voting restriction. If the voting restriction is
waived or becomes unenforceable, the Federal Deposit Insurance Corporation and
the Division may either impose a condition that provides a certain portion of
the members of the foundation's board of directors shall be persons who are not
directors, officers or employees of EverTrust Financial Group, Inc., Everett
Mutual Bank or any affiliate or impose other conditions relating to control of
the foundation's common stock as is determined by the Federal Deposit Insurance
Corporation or the Washington Division of Banks to be appropriate at the time.
In no event would the voting restriction survive the sale of shares of the
common stock held by the foundation.
Washington Taxation
Mutual Bancshares is subject to a business and occupation tax imposed
under Washington law at the rate of 1.50% of gross receipts. Interest received
on loans secured by mortgages or deeds of trust on residential properties and
certain investment securities are exempt from such tax.
MUTUAL BANCSHARES' CONVERSION
The Washington Division of Banks has approved the plan of conversion
with the condition that it is approved by the members of Everett Mutual
Bancshares entitled to vote and to the satisfaction of certain other conditions
imposed by the Washington Division of Banks in its approval. The Washington
Division of Banks' approval is not a recommendation or endorsement of the plan
of conversion.
General
On March 20, 1999, the Board of Directors of Everett Mutual Bank and
Mutual Bancshares, respectively, unanimously adopted, and on May 24, 1999,
subsequently amended, the plan of conversion, under which Mutual Bancshares will
become a stock bank holding company. In connection with the conversion, Mutual
Bancshares has changed its name to EverTrust Financial Group, Inc.
References to Mutual Bancshares are to the entity in its mutual form of
ownership. References to EverTrust Financial Group, Inc. are to the entity,
which is offering the common stock for sale, and which will be the resulting
stock company in the mutual to stock conversion of Mutual Bancshares.
The following discussion of the plan of conversion contains all
material terms about the conversion. Nevertheless, readers are urged to read
carefully the plan of conversion, which is attached as Exhibit A to Everett
Mutual Bancshares' Proxy Statement and is available to members of Mutual
Bancshares upon request. The plan of conversion is also filed as an exhibit to
the Registration Statement. See "Where You Can Find More Information." A special
meeting of Mutual Bancshares' members entitled to vote on the conversion has
been called for that purpose to be held on ________, 1999.
The plan of conversion provides generally that:
1. Mutual Bancshares will convert from mutual to stock form;
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2. the common stock will be offered by EverTrust Financial Group,
Inc. in the subscription offering to persons having subscription
rights and in a direct community offering to certain members of
the general public, with preference given to natural persons
residing in Snohomish County;
3. if necessary, shares of common stock not subscribed for in the
subscription and direct community offering will be offered to
certain members of the general public in a syndicated community
offering through a syndicate of registered broker-dealers under
selected dealers agreements; and
4. the conversion will be completed only upon the sale of at least
$55,250,000 of common stock to be issued pursuant to the plan of
conversion.
As part of the conversion, EverTrust Financial Group, Inc. is making a
subscription offering of its common stock to holders of subscription rights in
the following order of priority:
o Persons with $50 or more on deposit at Everett Mutual Bank as of
December 31, 1997;
o EverTrust Financial Group, Inc.'s employee stock ownership plan;
o Persons with $50 or more on deposit at Everett Mutual Bank as of
June 30, 1999;
o Everett Mutual Bank's depositors and borrowers as of _________
__, 1999;
o Persons with $50 or more on deposit at Commercial Bank of Everett
as of December 31, 1997; and
o All other people.
Shares of common stock not subscribed for in the subscription and
direct community offering may be offered for sale in the syndicated community
offering. Regulations require that the syndicated community offering be
completed within 45 days after completion of the fully extended subscription
offering unless extended by Everett Mutual Bank or EverTrust Financial Group,
Inc. with the approval of the regulatory authorities. If the syndicated
community offering is determined not to be feasible, the Boards of Directors of
Everett Mutual Bank and EverTrust Financial Group, Inc. will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of common stock. The plan of conversion provides
that the conversion must be completed within 24 months after the date of the
approval of the plan of conversion by the members of Mutual Bancshares.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of Mutual Bancshares.
The completion of the offerings, however, depends on market conditions
and other factors beyond Mutual Bancshares and Everett Mutual Bank's control. No
assurance can be given as to the length of time after approval of the plan of
conversion at the special meeting that will be required to complete the direct
community or syndicated community offerings or other sale of the common stock.
If delays are experienced, significant changes may occur in the estimated pro
forma market value of Mutual Bancshares and its subsidiaries, together with
corresponding changes in the net proceeds realized by EverTrust Financial Group,
Inc. from the sale of the common stock. In the event the conversion is
terminated, Mutual Bancshares would be required to charge all conversion
expenses against current income.
Orders for shares of common stock will not be filled until at least
5,525,000 shares of common stock have been subscribed for or sold and the
Washington Division of Banks approves the final valuation and the conversion
closes. If the conversion is not completed within 45 days after the last day of
the fully extended subscription offering and the Washington Division of Banks
consents to an extension of time to complete the conversion, subscribers will be
given the right to increase, decrease or rescind their subscriptions. Unless an
affirmative
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indication is received from subscribers that they wish to continue to subscribe
for shares, the funds will be returned promptly, together with accrued interest
at Everett Mutual Bank's savings account rate, from the date payment is received
until the funds are returned to the subscriber. If such period is not extended,
or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Everett Mutual Bank's savings account rate
from the date payment is received until the conversion is terminated.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in
the best interests of Mutual Bancshares, its members and the communities it
serves. By converting to the stock form of organization, Mutual Bancshares will
be structured in the form used by holding companies of commercial banks and by a
growing number of savings institutions. Management of Mutual Bancshares believes
that the conversion offers a number of advantages which will be important to the
future growth and performance of Mutual Bancshares and Everett Mutual Bank. The
capital raised in the conversion is intended to support Everett Mutual Bank's
current lending and investment activities by permitting the origination of
larger loan amounts and may also support possible future expansion and
diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The conversion is also expected to afford Mutual Bancshares'
management, members and others the opportunity to become stockholders of
EverTrust Financial Group, Inc. and participate more directly in, and contribute
to, any future growth of EverTrust Financial Group, Inc. and Everett Mutual
Bank. The conversion will also enable EverTrust Financial Group, Inc. and
Everett Mutual Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities.
Effects of Conversion to Stock Form on Depositors and Borrowers of Everett
Mutual Bank
Voting Rights. Savings members and borrowers who are not shareholders
will have no voting rights in EverTrust Financial Group, Inc. and therefore will
not be able to elect directors of EverTrust Financial Group, Inc. or to control
its affairs. After the conversion, voting rights will be vested exclusively in
EverTrust Financial Group, Inc. with respect to Everett Mutual Bank and the
other subsidiaries and the holders of the common stock as to matters pertaining
to EverTrust Financial Group, Inc. Each holder of common stock shall be entitled
to vote on any matter to be considered by the stockholders of EverTrust
Financial Group, Inc. A stockholder will be entitled to one vote for each share
of common stock owned.
Deposit Accounts and Loans. Everett Mutual Bank's deposit accounts,
account balances and existing Federal Deposit Insurance Corporation insurance
coverage of deposit accounts will not be affected by the conversion.
Furthermore, the conversion will not affect the loan accounts, loan balances or
obligations of borrowers under their individual contractual arrangements with
Everett Mutual Bank.
Tax Effects. EverTrust Financial Group, Inc. and Everett Mutual Bank
have received an opinion from Breyer & Associates PC, Washington, D.C., that the
conversion will constitute a nontaxable reorganization under Section
368(a)(1)(F) of the Internal Revenue Code. The opinion states that:
1. no gain or loss will be recognized to Mutual Bancshares in its
mutual or stock form by reason of the conversion;
2. no gain or loss will be recognized to its account holders upon
the issuance to them of accounts in Everett Mutual Bank
immediately after the conversion, in the same dollar amounts and
on the same terms and conditions as their accounts at Everett
Mutual Bank in its mutual form plus interest in the liquidation
account;
3. the tax basis of account holders' accounts in Everett Mutual Bank
immediately after the conversion will be the same as the tax
basis of their accounts immediately prior to conversion;
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4. the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that
interest;
5. the tax basis of the common stock purchased in the conversion
will be the amount paid and the holding period for the stock will
begin at the date of purchase; and
6. no gain or loss will be recognized to account holders upon the
receipt or exercise of subscription rights in the conversion,
except to the extent subscription rights are deemed to have value
as discussed below.
Unlike a private letter ruling issued by the Internal Revenue Service,
an opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached therein. If
there is a disagreement, no assurance can be given that the conclusions reached
in an opinion of counsel would be sustained by a court if contested by the
Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the
opinion provides that the receipt of subscription rights by certain persons
under the plan of conversion will be taxable to the extent, if any, that the
subscription rights are deemed to have a fair market value. RP Financial, a
financial consulting firm retained by Mutual Bancshares, whose findings are not
binding on the Internal Revenue Service, has issued a letter indicating that the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
common stock at a price equal to its estimated fair market value, which will be
the same price paid by purchasers in the direct community offering for
unsubscribed shares of common stock. If the subscription rights are deemed to
have a fair market value, the receipt of the rights may only be taxable to those
persons who exercise their subscription rights. Mutual Bancshares and Everett
Mutual Bank could also recognize a gain on the distribution of such subscription
rights. Holders of subscription rights are encouraged to consult with their own
tax advisors as to the tax consequences in the event the subscription rights are
deemed to have a fair market value.
EverTrust Financial Group, Inc. and Everett Mutual Bank has also
received an opinion from Deloitte & Touche LLP, Seattle, Washington, that,
assuming the conversion does not result in any federal income tax liability to
Everett Mutual Bank, its account holders, or EverTrust Financial Group, Inc.,
implementation of the plan of conversion will not result in any Washington
income tax liability to such entities or persons.
The opinions of Breyer & Associates PC and Deloitte & Touche LLP and
the letter from RP Financial are filed as exhibits to the Registration
Statement. See "Where You Can Find More Information."
Prospective Investors Are Urged to Consult With Their Own Tax Advisors
Regarding The Tax Consequences of The Conversion Particular to Them.
Liquidation Account. In the unlikely event of a complete liquidation of
Everett Mutual Bank in its present mutual form, each depositor in Everett Mutual
Bank would receive a pro rata share of any assets of Everett Mutual Bank
remaining after payment of claims of all creditors, including the claims of all
depositors up to the withdrawal value of their accounts. Each depositor's pro
rata share of such remaining assets would be in the same proportion as the value
of his deposit account to the total value of all deposit accounts in Everett
Mutual Bank at the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in Everett
Mutual Bank, including certificates of deposit, shall not be entitled to share
in any residual assets in the event of liquidation of Everett Mutual Bank.
However, under the Washington Division of Banks' regulations, Everett Mutual
Bank shall, at the time of the conversion, establish a liquidation account in an
amount equal to its total equity as of the date of the latest statement of
financial condition contained in the final prospectus relating to the
conversion.
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The liquidation account shall be maintained by Everett Mutual Bank
subsequent to the conversion for the benefit of eligible account holders and
supplemental eligible account holders who retain their savings accounts in
Everett Mutual Bank. Each eligible account holder and supplemental eligible
account holder shall, with respect to each savings account held, have a related
inchoate interest in a subaccount portion of the liquidation account balance.
The initial subaccount balance for a savings account held by an
eligible account holder or a supplemental eligible account holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the savings account and the denominator is the total amount of the
"qualifying deposits" of all eligible account holders. The initial subaccount
balance shall not be increased, and it shall be decreased as provided below.
If the deposit balance in any savings account of an eligible account
holder or supplemental eligible account holder at the close of business on any
annual closing day of Everett Mutual Bank subsequent to December 31, 1997 or
June 30, 1999 is less than the lesser of the deposit balance in a savings
account at the close of business on any other annual closing date subsequent to
December 31, 1997 or June 30, 1999, or the amount of the "qualifying deposit" in
a savings account on December 31, 1997 or June 30, 1999, then the subaccount
balance for a savings account shall be adjusted by reducing the subaccount
balance in an amount proportionate to the reduction in the deposit balance. Once
reduced, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related savings
account. If any savings account is closed, the related subaccount balance shall
be reduced to zero.
Only upon a complete liquidation of Everett Mutual Bank, each eligible
account holder and supplemental eligible account holder shall be entitled to
receive a liquidation distribution from the liquidation account in the amount of
the then current adjusted subaccount balance(s) for savings account(s) then held
by the holder before any liquidation distribution may be made to stockholders.
No merger, consolidation, bulk purchase of assets with assumptions of savings
accounts and other liabilities or similar transactions with another federally
insured institution in which Everett Mutual Bank is not the surviving
institution shall be considered to be a complete liquidation. In any of these
transactions the liquidation account shall be assumed by the surviving
institution.
In the unlikely event Everett Mutual Bank is liquidated depositors will
be entitled to full payment of their deposit accounts before any payment is made
to EverTrust Financial Group, Inc. as the sole stockholder of Everett Mutual
Bank.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories set forth in
the plan of conversion. Subscription priorities have been established for the
allocation of stock to the extent that the common stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at Everett Mutual Bank as of December 31, 1997 will receive
nontransferable subscription rights to subscribe for up to the greater of 25,000
shares of common stock, one-tenth of one percent of the total offering of common
stock or 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
eligible account holder and the denominator is the total amount of qualifying
deposits of all eligible account holders. If the exercise of subscription rights
in this category results in an oversubscription, shares of common stock will be
allocated among subscribing eligible account holders so as to permit each one,
to the extent possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated proportionately, based on the
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amount of their respective qualifying deposits as compared to total qualifying
deposits of all subscribing eligible account holders. Subscription rights
received by officers and directors in this category based on their increased
deposits in Everett Mutual Bank in the one year period preceding December 31,
1997 are subordinated to the subscription rights of other eligible account
holders.
Category 2: Employee Stock Ownership Plan. The plan of conversion
provides that the employee stock ownership plan shall receive nontransferable
subscription rights to purchase up to 10% of the shares of common stock issued
in the conversion. The plan intends to purchase 2% of the shares of common stock
issued in the conversion. If the plan's subscription is not filled in its
entirety, the plan may purchase shares in the open market or may purchase shares
directly from EverTrust Financial Group, Inc.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of June 30, 1999 will receive nontransferable
subscription rights to subscribe for up to the greater of 25,000 shares of
common stock, one-tenth of one percent of the total offering of common stock or
15 times the product, rounded down to the next whole number, obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
supplemental eligible account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing supplemental eligible
account holders so as to permit each one, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing supplemental eligible
account holders proportionately, based on the amount of their respective
qualifying deposits as compared to total qualifying deposits of all supplemental
eligible account holders.
Category 4: Other Members. Each depositor and borrower of Everett
Mutual Bank as of ________, 1999 will receive nontransferable subscription
rights to purchase up to 25,000 shares of common stock in the conversion to the
extent shares are available following subscriptions by eligible account holders,
EverTrust Financial Group, Inc.'s employee stock ownership plan and supplemental
eligible account holders. If there is an oversubscription in this category, the
available shares will be allocated proportionately based on the amount of the
respective subscriptions.
Category 5: Commercial Bank of Everett Eligible Account Holders. Each
depositor of Commercial Bank of Everett on December 31, 1997 will receive
nontransferable subscription rights to purchase up to 25,000 shares of common
stock in the conversion to the extent shares are available following
subscriptions by eligible account holders, EverTrust Financial Group, Inc.'s
employee stock ownership plan, supplemental eligible account holders and other
members. If there is an oversubscription in this category, the available shares
will be allocated proportionately based on the amount of the respective
subscriptions.
In addition to the purchase limitations described above, purchases of
shares of common stock in the conversion by any person, and associates thereof,
or a group of persons acting in concert, may not exceed $500,000, except that
the employee stock ownership plan intends to purchase 2% of the total shares of
the common stock issued in the conversion, and shares purchased by the employee
stock ownership plan and attributable to any participant thereunder shall not be
aggregated with shares purchased by such participant or any other purchaser.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the Washington Division of Banks or another agency of the U.S. Government. Each
person exercising subscription rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of the shares. Once tendered, subscription orders cannot be revoked without the
consent of Everett Mutual Bank and EverTrust Financial Group, Inc.
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EverTrust Financial Group, Inc. and Everett Mutual Bank will make
reasonable attempts to provide a prospectus and related offering materials to
holders of subscription rights. However, the subscription offering and all
subscription rights under the plan of conversion will expire at Noon, Pacific
Time, on ___________ __, 1999, whether or not EverTrust Financial Group, Inc.
and Everett Mutual Bank has been able to locate each person entitled to such
subscription rights. Orders for common stock in the subscription offering
received in hand by Everett Mutual Bank after that time will not be accepted.
The subscription offering may be extended by EverTrust Financial Group, Inc. and
Everett Mutual Bank up to ___________ ___, 1999 without the Washington Division
of Banks' approval. The Washington Division of Banks' regulations require that
EverTrust Financial Group, Inc. complete the sale of common stock within 45 days
after the close of the subscription offering. If the direct community offering
and the syndicated community offerings are not completed within that period, all
funds received will be promptly returned with interest at Everett Mutual Bank's
savings account rate and all withdrawal authorizations will be canceled. If
regulatory approval of an extension of the time period has been granted, all
subscribers will be notified of the extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by EverTrust Financial Group, Inc. from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest, or withdrawal authorizations will be
canceled. No single extension can exceed 90 days.
Direct Community Offering. Concurrently with the subscription offering,
EverTrust Financial Group, Inc. is offering shares of the common stock to
certain members of the general public in a direct community offering, with
preference given to natural persons residing in Snohomish County, Washington.
Purchasers in the direct community offering are eligible to purchase up to
$250,000 of common stock in the conversion, which equals 25,000 shares. No
person, and associates thereof, and persons acting in concert with such person,
may purchase in the aggregate, shares with an aggregate purchase price of more
than $500,000, or 50,000 shares based on the $10.00 purchase price, of the
shares of the common stock issued in the conversion. If not enough shares are
available to fill orders in the direct community offering, the available shares
will be allocated on a pro rata basis determined by the amount of the respective
orders. Orders for the common stock in the direct community offering will be
filled to the extent such shares remain available after the satisfaction of all
orders received in the subscription offering. The direct community offering may
terminate on or at any time subsequent to Noon, Pacific Time, on _____________
____, 1999, but no later than 45 days after the close of the subscription
offering, unless extended by EverTrust Financial Group, Inc. and Everett Mutual
Bank, with approval of the Washington Division of Banks. If regulatory approval
of an extension of the time period has been granted, all subscribers will be
notified of the extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response is not received by EverTrust Financial Group,
Inc. and Everett Mutual Bank from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest.
EverTrust Financial Group, Inc. and Everett Mutual Bank have the absolute right
to accept or reject in whole or in part any orders to purchase shares in the
direct community offering. If an order is rejected in part, the purchaser does
not have the right to cancel the remainder of the order. EverTrust Financial
Group, Inc. presently intends to terminate the direct community offering as soon
as it has received orders for all shares available for purchase in the
conversion.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
Syndicated Community Offering. The plan of conversion provides that all
shares of common stock not purchased in the subscription and direct community
offering, if any, may be offered for sale to certain members of the general
public in a syndicated community offering through a syndicate of registered
broker-dealers to be managed by Charles Webb acting as agent of EverTrust
Financial Group, Inc. EverTrust Financial Group, Inc. and Everett Mutual Bank
have the right to reject orders, in whole or part, in their sole discretion in
the syndicated community offering. If an order is rejected in part, the
purchaser does not have the right to cancel the remainder of the order. Neither
Charles Webb nor any registered broker-dealer shall have any obligation to take
or purchase any shares of the common stock in the syndicated community offering;
however, Charles Webb has agreed to use its best efforts in the sale of shares
in the syndicated community offering.
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Stock sold in the syndicated community offering will be sold at the
$10.00 purchase price, the same price as all other shares in the offering. See
"-- Stock Pricing and Number of Shares to be Issued." No person, together with
any associate or group of persons acting in concert, will be permitted to
subscribe in the syndicated community offering for shares of common stock with
an aggregate purchase price of more than $250,000, or 25,000 shares of common
stock. See "-- Plan of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings" for a description of the commission to be paid
to any selected dealers and to Charles Webb.
Charles Webb may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with EverTrust Financial Group,
Inc. as of a certain date for the purchase of shares. When and if Charles Webb
and EverTrust Financial Group, Inc. believe that enough indications of interest
and orders have been received in the subscription offering, the direct community
offering and the syndicated community offering to complete the conversion,
Charles Webb will request, as of that certain date, selected dealers to submit
orders to purchase shares for which they have received indications of interest
from their customers. Selected dealers will send confirmations to such customers
on the next business day after that certain date. Selected dealers may settle
the trade by debiting the accounts of their customers on a date which will be
three business days from that certain date. Customers who authorize selected
dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the settlement date. On the
settlement date, selected dealers will remit funds to the account that EverTrust
Financial Group, Inc. established for each selected dealer. Each customer's
funds so forwarded to EverTrust Financial Group, Inc., along with all other
accounts held in the same title, will be insured by the Federal Deposit
Insurance Corporation up to the applicable $100,000 legal limit. After payment
has been received by EverTrust Financial Group, Inc. from selected dealers,
funds will earn interest at Everett Mutual Bank's savings account rate until the
completion of the offering. At the consummation of the conversion, the funds
received will be used to purchase the shares of common stock ordered. The shares
of common stock issued in the conversion cannot and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency. If the
conversion is not completed, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The syndicated community offering may close as early as Noon, Pacific
Time, on ____________ ___, 1999, or any date thereafter at the discretion of
EverTrust Financial Group, Inc. The syndicated community offering will terminate
no more than 45 days following _____________ ___, 1999, unless extended by
EverTrust Financial Group, Inc., with approval from the Washington Division of
Banks, but in no case later than ___________ ___, 1999. The syndicated community
offering may run concurrent to the subscription and direct community offering,
or subsequent thereto.
If EverTrust Financial Group, Inc. is unable to find purchasers from
the general public for all unsubscribed shares, other purchase arrangements will
be made by the Board of Directors of EverTrust Financial Group, Inc. and Everett
Mutual Bank, if feasible. Any other arrangements must be approved by the
Washington Division of Banks. The Washington Division of Banks may grant one or
more extensions of the offering period, provided that no single extension
exceeds 90 days, subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and the extensions do
not go more than two years beyond the date on which the members approved the
plan of conversion. If the conversion is not completed within 45 days after the
close of the subscription offering, either all funds received will be returned
with interest, and withdrawal authorizations canceled, or, if the Washington
Division of Banks has granted an extension of time, all subscribers will be
given the right to increase, decrease or rescind their subscriptions at any time
prior to 20 days before the end of the extension period. If an extension of time
is obtained, all subscribers will be notified of the extension and of their
rights to modify their orders. If an affirmative response to any resolicitation
is not received by EverTrust Financial Group, Inc. from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest, or withdrawal authorizations will be canceled. No single
extension can exceed 90 days.
Persons in Non-Qualified States. EverTrust Financial Group, Inc. will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock under the plan of
conversion reside. Under certain circumstances, however, EverTrust Financial
Group, Inc. is not required to offer stock in the subscription offering
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to any person who resides in a foreign country or who resides in a state of the
United States, even though the person may be an eligible subscriber. Generally,
these circumstances occur in states where a small number of persons otherwise
eligible to subscribe for shares of common stock reside, or EverTrust Financial
Group, Inc. determines that compliance with the securities laws of such state is
impracticable for reasons of cost or otherwise. Many states request or require
that EverTrust Financial Group, Inc., or its officers, directors or trustees,
register as a broker, dealer, salesman or selling agent, under the securities
laws of the state. This registration may be an expensive and time consuming
effort that may not be completed by the time the offering begins. States may
also request or require EverTrust Financial Group, Inc. to register or otherwise
qualify the subscription rights or common stock for sale or submit additional
filings regarding the sale of the stock. Where a state has only a small number
of persons eligible to subscribe for shares, EverTrust Financial Group, Inc.
will base its decision as to whether or not to offer the common stock in the
state on a number of factors. Some of these factors include the size of accounts
held by account holders in the state, the cost of reviewing the registration and
qualification requirements of the state, and of actually registering or
qualifying the shares, or the need to register EverTrust Financial Group, Inc.,
its officers, directors or employees as brokers, dealers or salesmen.
Eligible account holders, or supplemental eligible account holders, who
reside in these states will receive a letter from Charles Webb that indicates
they will not be eligible to purchase shares of common stock in the offering.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
EverTrust Financial Group, Inc. and Everett Mutual Bank have retained
Charles Webb to consult with, advise and to assist EverTrust Financial Group,
Inc., on a best efforts basis, in the distribution of the shares of common stock
in the offering. The services that Charles Webb will provide include, but are
not limited to training the employees of Everett Mutual Bank who will perform
certain ministerial functions in the subscription offering and direct community
offering regarding the mechanics and regulatory requirements of the stock
offering process, managing the stock information center by assisting interested
stock subscribers and by keeping records of all stock orders, preparing
marketing materials, and assisting in the solicitation of proxies from Mutual
Bancshares' members for use at the special meeting.
For its services, Charles Webb will receive a fixed management fee and
a success fee of $715,000. If selected dealers are used to assist in the sale of
shares of common stock in the direct community offering, Charles Webb will be
paid a fee of up to 5.5% of the aggregate purchase price of the shares sold by
such dealers. EverTrust Financial Group, Inc. and Everett Mutual Bank have
agreed to reimburse Charles Webb for its out-of-pocket expenses, and its legal
fees up to a total of $70,000, and to indemnify Charles Webb against certain
claims or liabilities, including certain liabilities under the Securities Act,
and will contribute to payments Charles Webb may be required to make in
connection with any such claims or liabilities.
Sales of shares of common stock will be made primarily by registered
representatives affiliated with Charles Webb or by the broker-dealers managed by
Charles Webb. A stock information center will be established at the main office
of Everett Mutual Bank. EverTrust Financial Group, Inc. will rely on Rule 3a4-1
of the Securities Exchange Act and sales of common stock will be conducted
within the requirements of such Rule, so as to permit officers, directors and
employees to participate in the sale of the common stock in those states where
the law so permits. No officer, director or employee of EverTrust Financial
Group, Inc. or Everett Mutual Bank will be compensated directly or indirectly by
the payment of commissions or other remuneration in connection with his or her
participation in the sale of common stock.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To purchase shares in the subscription and direct community offering,
an executed stock order form along with the required full payment for each share
subscribed, or with appropriate authorization for withdrawal of full payment
from the subscriber's deposit account with Everett Mutual Bank or Commercial
Bank of Everett, must be received by Everett Mutual Bank by Noon, Pacific Time,
on ______________ ___, 1999. Stock order forms will be provided to each
accountholder, regardless of the number of accounts held. Stock order forms that
are not received by that time or are executed defectively or are received
without full payment, or without appropriate withdrawal instructions, are not
required to be accepted. EverTrust Financial Group, Inc. and Everett Mutual Bank
have the right to waive or permit the correction of incomplete or improperly
executed stock order forms, but do not represent that they will do so.
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Under the plan of conversion, the interpretation by EverTrust Financial Group,
Inc. and Everett Mutual Bank of the terms and conditions of the plan of
conversion and of the stock order form will be final. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of EverTrust Financial Group, Inc. and Everett Mutual Bank, unless the
conversion has not been completed within 45 days after the end of the
subscription offering, unless such period has been extended.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the stock order form giving all names in each account, the account number and
the approximate account balance as of the appropriate eligibility date. Failure
to list an account could result in fewer shares allocated if there is an
over-subscription than if all accounts had been disclosed.
Full payment for subscriptions may be made in cash only if delivered in
person at an office of Everett Mutual Bank, by check, bank draft, or money
order, or by authorization of withdrawal from deposit accounts maintained with
Everett Mutual Bank. Appropriate means by which such withdrawals may be
authorized are provided on the stock order form. No wire transfers will be
accepted and full payment is required. Interest will be paid on payments made by
cash, check, bank draft or money order at Everett Mutual Bank's savings account
rate from the date payment is received until the completion or termination of
the conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the conversion, unless the certificate matures after the date of
receipt of the stock order form but prior to closing, in which case funds will
earn interest at the savings account rate from the date of maturity until the
conversion is completed or terminated, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or termination
of the conversion. When the conversion is completed, the funds received in the
offering will be used to purchase the shares of common stock ordered. The shares
of common stock issued in the conversion cannot and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency. If the
conversion is not consummated for any reason, all funds submitted will be
promptly refunded with interest as described above.
If a subscriber authorizes Everett Mutual Bank or Commercial Bank of
Everett to withdraw the amount of the aggregate purchase price from his or her
deposit account, Everett Mutual Bank or Commercial Bank of Everett will do so as
of the effective date of the conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. Everett Mutual Bank and Commercial Bank of Everett will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
Everett Mutual Bank's or Commercial Bank of Everett's savings account rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for the
shares of common stock subscribed for at the $10.00 purchase price after the
conversion, provided that there is in force from the time of its subscription
until that time, a loan commitment from an unrelated financial institution or
EverTrust Financial Group, Inc. to lend to the employee stock ownership plan, at
that time, the aggregate purchase price of the shares for which it subscribed.
Certificates representing shares of common stock purchased, and any
refund due, will be mailed to purchasers at the address that is specified in a
properly completed stock order form or to the last address of the person
appearing on the records of Everett Mutual Bank as soon as practicable following
completion of the sale of all shares of common stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law.
Purchasers may not be able to sell the shares of common stock which they
purchased until certificates for the common stock are available and delivered to
them, even though trading of the common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to _______, 1999 in accordance with Rule 15c2-8 under the Securities
Exchange Act, no prospectus will be mailed any later than five days prior to
115
such date or hand delivered any later than two days prior to that date. Signing
the stock order form will confirm receipt or delivery in accordance with Rule
15c2-8. Stock order forms will only be distributed with a prospectus. Everett
Mutual Bank will accept for processing only orders submitted on original stock
order forms. Everett Mutual Bank is not obligated to accept orders submitted on
photocopied or telecopied stock order forms. Orders cannot and will not be
accepted without the execution of the certification appearing on the reverse
side of the stock order form.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of Mutual Bancshares and its subsidiaries, as converted, as
determined by an independent appraisal. Mutual Bancshares and Everett Mutual
Bank have retained RP Financial to prepare an appraisal of the pro forma market
value of Mutual Bancshares and its subsidiaries, as well as a business plan. RP
Financial will receive a fee expected to total approximately $45,000 for its
appraisal services and assistance in the preparation of a business plan, plus
reasonable out-of-pocket expenses incurred in connection with the appraisal.
Mutual Bancshares and Everett Mutual Bank have agreed to indemnify RP Financial
under certain circumstances against liabilities and expenses, including legal
fees, arising out of, related to, or based upon the conversion.
For its analysis, RP Financial undertook substantial investigations to
learn about Mutual Bancshares' and its subsidiaries' businesses and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed
Mutual Bancshares' Application for Approval of Conversion and EverTrust
Financial Group, Inc.'s Form S-1 Registration Statement. Furthermore, RP
Financial visited Everett Mutual Bank's facilities and had discussions with
Mutual Bancshares' management and its special conversion legal counsel, Breyer &
Associates PC. No detailed individual analysis of the separate components of
Mutual Bancshares' and its subsidiaries' assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of Mutual Bancshares and its
subsidiaries, as required by applicable regulatory guidelines, RP Financial's
analysis utilized three selected valuation procedures, the Price/Book method,
the Price/Earnings method, and Price/Assets method, all of which are described
in its report. RP Financial placed the greatest emphasis on the Price/Earnings
and Price/Book methods in estimating pro forma market value. In applying these
procedures, RP Financial reviewed, among other factors, the economic make-up of
Mutual Bancshares' and its subsidiaries' primary market area, their financial
performance and condition in relation to publicly-traded institutions that RP
Financial deemed comparable, the specific terms of the offering of EverTrust
Financial Group, Inc.'s common stock, the pro forma impact of the additional
capital raised in the conversion, conditions of securities markets in general,
and the market for thrift institution common stock in particular. RP Financial's
analysis provides an approximation of the pro forma market value of Mutual
Bancshares and its subsidiaries, based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of EverTrust Financial Group, Inc.
after the conversion that were utilized in determining the appraised value.
These assumptions included estimated expenses and an assumed after-tax rate of
return on the net conversion proceeds as described under "Pro Forma Data,"
purchases by the employee stock ownership plan of 8% of the common stock sold in
the conversion and purchases in the open market by the management recognition
and development plan of a number of shares equal to 4% of the common stock sold
in the conversion at the purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, RP Financial has advised Mutual
Bancshares and its subsidiaries that, in its opinion, as of June 11, 1999, the
aggregate estimated pro forma market value of Mutual Bancshares and its
subsidiaries, and, therefore, the common stock was within the valuation range of
$55,250,000 to $74,750,000 with a midpoint of $65,000,000, which is the
estimated value of the shares to be sold in the offering. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the estimated valuation range
which is equal to the valuation range of $55,250,000 to $74,750,000 with a
midpoint of $65,000,000, which is the estimated value of the shares to be sold
in the offering. Assuming that the shares are sold at $10.00 per share in the
conversion, the estimated number of shares would be between 5,525,000
116
and 7,465,000 with a midpoint of 6,500,000. The purchase price of $10.00 was
determined by discussion among the Boards of Directors of Mutual Bancshares and
Everett Mutual Bank and Charles Webb, taking into account, among other factors
the requirement under Washington Division of Banks regulations that the common
stock be offered in a manner that will achieve the widest distribution of the
stock and the desired liquidity in the common stock subsequent to the
conversion. Since the outcome of the offerings relate in large measure to market
conditions at the time of sale, it is not possible to determine the exact number
of shares that will be issued by EverTrust Financial Group, Inc. at this time.
The estimated valuation range may be amended, with the approval of the
Washington Division of Banks, if necessitated by developments following the date
of such appraisal in, among other things, market conditions, the financial
condition or operating results of Mutual Bancshares and its subsidiaries,
regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the
Registration Statement. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of Mutual Bancshares and its
subsidiaries, as of the close of the subscription offering.
No sale of the shares will take place unless RP Financial confirms to
the Washington Division of Banks that, to the best of RP Financial's knowledge
and judgment, nothing of a material nature has occurred that would cause it to
conclude that the actual total purchase price on an aggregate basis was
incompatible with its estimate of the total pro forma market value of Mutual
Bancshares and its subsidiaries, at the time of the sale. If, however, the facts
do not justify that statement, the offering or other sale may be canceled, a new
estimated valuation range and price per share set and new subscription, direct
community and syndicated community offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares
sold may be more than 8,596,250 shares or less than 5,525,000 shares. If the
total amount of shares sold is less than 5,525,000 or more than 8,596,250, 15%
above the maximum of the estimated valuation range, for aggregate gross proceeds
of less than $55,250,000 or more than $85,962,500, subscription funds will be
returned promptly with interest to each subscriber unless he indicates
otherwise. If RP Financial establishes a new valuation range, it must be
approved by the Washington Division of Banks.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of Everett Mutual Bank and EverTrust Financial
Group, Inc., if possible. Other purchase arrangements must be approved by the
Washington Division of Banks and may provide for purchases for investment
purposes by directors, officers, their associates and other persons in excess of
the limitations provided in the plan of conversion and in excess of the proposed
director purchases discussed earlier, although no such purchases are currently
intended. If such other purchase arrangements cannot be made, the plan of
conversion will terminate.
In formulating its appraisal, RP Financial relied upon the
truthfulness, accuracy and completeness of all documents Mutual Bancshares and
its subsidiaries furnished to it. RP Financial also considered financial and
other information from regulatory agencies, other financial institutions, and
other public sources, as appropriate. While RP Financial believes this
information to be reliable, RP Financial does not guarantee the accuracy or
completeness of the information and did not independently verify the financial
statements and other data provided by Mutual Bancshares and its subsidiaries or
independently value the assets or liabilities of Mutual Bancshares and its
subsidiaries. The appraisal by RP Financial is not intended to be, and must not
be interpreted as, a recommendation of any kind as to the advisability of voting
to approve the plan of conversion or of purchasing shares of common stock.
Moreover, because the appraisal is necessarily based on many factors
117
which change from time to time, there is no assurance that persons who purchase
shares in the conversion will later be able to sell shares after the conversion
at prices at or above the purchase price.
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed
upon the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The plan
of conversion provides for the following purchase limitations:
1. The maximum purchase in the subscription offering by any person
or group of persons through a single account is $250,000, which
equals 25,000 shares;
2. No person may purchase more than $250,000, which equals 25,000
shares, in the direct community offering; and
3. The maximum purchase in the conversion by any person, related
persons or persons acting in concert is $500,000, which equals
50,000 shares.
For purposes of the plan of conversion, the directors are not deemed to
be acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
Everett Mutual Bank's and EverTrust Financial Group, Inc.'s Boards of
Directors may, in their sole discretion, increase the maximum purchase
limitation up to 9.99% of the shares of common stock sold in the conversion,
provided that orders for shares which exceed 5% of the shares of common stock
sold in the conversion may not exceed, in the aggregate, 10% of the shares sold
in the conversion. Everett Mutual Bank and EverTrust Financial Group, Inc. do
not intend to increase the maximum purchase limitation unless market conditions
justify that an increase in the maximum purchase limitation is necessary to sell
a number of shares in excess of the minimum of the estimated valuation range. If
the Boards of Directors decide to increase the purchase limitation set forth
above, persons who subscribed for the maximum number of shares of common stock
will be, and other large subscribers in the discretion of EverTrust Financial
Group, Inc. and Everett Mutual Bank may be, given the opportunity to increase
their subscriptions accordingly, based on the rights and preferences of any
person who has priority subscription rights.
The term "acting in concert" is defined in the plan of conversion to
mean knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not by an express agreement; or
a combination or pooling of voting or other interests in the securities of an
issuer for a common purpose under any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. In general, a
person who acts in concert with another party shall also be deemed to be acting
in concert with any person who is also acting in concert with that other party.
EverTrust Financial Group, Inc. and Everett Mutual Bank may presume that certain
persons are acting in concert based upon, among other things, joint account
relationships and the fact that persons may have filed joint Schedules 13D with
the Securities And Exchange Commission with respect to other companies.
The term "associate" of a person is defined in the plan of conversion
to mean any corporation or organization, other than Everett Mutual Bank or a
majority-owned subsidiary of Everett Mutual Bank or Mutual Bancshares, of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; any trust or
other estate in which a person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity; and any
relative or spouse of a person, or any relative of a spouse, who either has the
same home as a person or who is a director or officer of Everett Mutual Bank or
any of its subsidiaries, or Mutual Bancshares. For example, a corporation of
which a person serves as an officer would be an associate of a person and,
therefore, all shares purchased by the corporation would be included with the
number of shares which a person could purchase individually under the above
limitations.
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The term "officer" is defined in the plan of conversion to mean an
executive officer of Everett Mutual Bank, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of Everett Mutual Bank and
EverTrust Financial Group, Inc. and by NASD members. See "-- Restrictions on
Transferability by Directors and Officers and NASD Members."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased in the offering by directors and
officers of EverTrust Financial Group, Inc. may not be sold for a period of one
year following consummation of the conversion, except in the event of the death
of the stockholder or in any exchange of the common stock in connection with a
merger or acquisition of EverTrust Financial Group, Inc. Shares of common stock
received by directors or officers through the employee stock ownership plan or
the management recognition and development plan or upon exercise of options
issued under the stock option plan or purchased after the conversion are free of
restriction. Accordingly, shares of common stock issued by EverTrust Financial
Group, Inc. to directors and officers shall bear a legend giving appropriate
notice of the restriction and, in addition, EverTrust Financial Group, Inc. will
give appropriate instructions to the transfer agent for EverTrust Financial
Group, Inc.'s common stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted common stock shall also be restricted.
Purchases of outstanding shares of common stock of EverTrust Financial
Group, Inc. by directors, executive officers, or any person who was an executive
officer or director of Everett Mutual Bank after adoption of the plan of
conversion, and their associates during the three-year period following
conversion may be made only through a broker or dealer registered with the
Securities and Exchange Commission, except with the prior written approval of
the Washington Division of Banks. This restriction does not apply, however, to
negotiated transactions involving more than 1% of EverTrust Financial Group,
Inc.'s outstanding common stock or to the purchase of stock pursuant to the
stock option plan.
EverTrust Financial Group, Inc. has filed with the Securities and
Exchange Commission a registration statement under the Securities Act for the
registration of the common stock to be issued in the conversion. The
registration under the Securities Act of shares of the common stock to be issued
in the conversion does not cover the resale of the shares. Shares of common
stock purchased by persons who are not affiliates of EverTrust Financial Group,
Inc. may be resold without registration. Shares purchased by an affiliate of
EverTrust Financial Group, Inc. will be subject to the resale restrictions under
Rule 144 of the Securities Act. If EverTrust Financial Group, Inc. meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of EverTrust Financial Group, Inc. who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of certain other persons, would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of EverTrust
Financial Group, Inc. or the average weekly volume of trading in the shares
during the preceding four calendar weeks. Provision may be made in the future by
EverTrust Financial Group, Inc. to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
face certain restrictions on the transfer of securities purchased in accordance
with subscription rights and to certain reporting requirements upon purchase of
the securities.
RESTRICTIONS ON ACQUISITION OF EVERTRUST FINANCIAL GROUP, INC.
The following discussion is a summary of certain provisions of federal
law and regulations and Washington corporate law, as well as the Articles of
Incorporation and Bylaws of EverTrust Financial Group, Inc., relating to stock
ownership and transfers, the Board of Directors and business combinations, all
of which may be deemed to have "anti-takeover" effects. The description of these
provisions is necessarily general and reference should be made to the actual law
and regulations and to the Articles of Incorporation and Bylaws of EverTrust
Financial Group, Inc. See "Where You Can Find More Information" on how to obtain
a copy of these documents.
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Change of Control Regulations
The Change in Bank Control Act, together with Washington regulations,
require that the consent of the Washington Division of Banks and the Federal
Reserve be obtained prior to any person or company acquiring "control" of a
Washington-chartered savings bank or a Washington-chartered savings bank holding
company. Upon acquiring control, such acquiror will be deemed to be a bank
holding company. Control is conclusively presumed to exist if, among other
things, an individual or company acquires the power, directly or indirectly, to
direct the management or policies of EverTrust Financial Group, Inc. or Everett
Mutual Bank or to vote 25% or more of any class of voting stock. Control is
rebuttably presumed to exist under the Change in Bank Control Act if, among
other things, a person acquires more than 10% of any class of voting stock, and
the issuer's securities are registered under Section 12 of the Exchange Act or
the person would be the single largest stockholder. Restrictions applicable to
the operations of bank holding companies and conditions imposed by the Federal
Reserve in connection with its approval of such acquisitions may deter potential
acquirors from seeking to obtain control of EverTrust Financial Group, Inc. See
"Regulation -- Mutual Bancshares."
Anti-takeover Provisions in EverTrust Financial Group, Inc.'s Articles of
Incorporation and Bylaws
The Articles of Incorporation and Bylaws of EverTrust Financial Group,
Inc. contain certain provisions that are intended to encourage a potential
acquiror to negotiate any proposed acquisition of EverTrust Financial Group,
Inc. directly with EverTrust Financial Group, Inc.'s Board of Directors. An
unsolicited non-negotiated takeover proposal can seriously disrupt the business
and management of a corporation and cause it great expense. Accordingly, the
Board of Directors believes it is in the best interests of EverTrust Financial
Group, Inc. and its stockholders to encourage potential acquirors to negotiate
directly with management. The Board of Directors believes that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or transaction at prices reflective of the true
value of EverTrust Financial Group, Inc. and that otherwise is in the best
interests of all stockholders. However, these provisions may have the effect of
discouraging offers to purchase EverTrust Financial Group, Inc. or its
securities which are not approved by the Board of Directors but which certain of
EverTrust Financial Group, Inc.'s stockholders may deem to be in their best
interests or pursuant to which stockholders would receive a substantial premium
for their shares over the current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors and management more difficult. The Boards of Directors of Everett
Mutual Bank and EverTrust Financial Group, Inc. believe these provisions are in
the best interests of the stockholders because they will assist EverTrust
Financial Group, Inc.'s Board of Directors in managing the affairs of EverTrust
Financial Group, Inc. in the manner they believe to be in the best interests of
stockholders generally and because a company's board of directors is often best
able in terms of knowledge regarding the company's business and prospects, as
well as resources, to negotiate the best transaction for its stockholders as a
whole.
The following description of certain of the provisions of the Articles
of Incorporation and Bylaws of EverTrust Financial Group, Inc. is necessarily
general and reference should be made in each instance to such Articles of
Incorporation and Bylaws. See "Where You Can Find More Information" regarding
how to obtain a copy of these documents.
Board of Directors. The Articles of Incorporation provide that the
number of directors shall not be less than five nor more than 15. The initial
number of directors is nine, but such number may be changed by resolution of the
Board of Directors. These provisions have the effect of enabling the Board of
Directors to elect directors friendly to management in the event of a
non-negotiated takeover attempt and may make it more difficult for a person
seeking to acquire control of EverTrust Financial Group, Inc. to gain majority
representation on the Board of Directors in a relatively short period of time.
EverTrust Financial Group, Inc. believes these provisions to be important to
continuity in the composition and policies of the Board of Directors.
The Articles of Incorporation provide that there will be staggered
elections of directors so that the directors will each be initially elected to
one, two or three-year terms, and thereafter all directors will be elected to
terms of three years each. This provision also has the effect of making it more
difficult for a person seeking to acquire control of EverTrust Financial Group,
Inc. to gain majority representation on the Board of Directors.
120
Cumulative Voting. The Articles of Incorporation specifically do not
permit cumulative voting for the election of directors. Cumulative voting in
election of directors entitles a stockholder to cast a total number of votes
equal to the number of directors to be elected multiplied by the number of his
or her shares and to distribute that number of votes among such number of
nominees as the stockholder chooses. The absence of cumulative voting for
directors limits the ability of a minority stockholder to elect directors.
Because the holder of less than a majority of EverTrust Financial Group, Inc.'s
shares cannot be assured representation on the Board of Directors, the absence
of cumulative voting may discourage accumulations of EverTrust Financial Group,
Inc.'s shares or proxy contests that would result in changes in EverTrust
Financial Group, Inc.'s management. The Board of Directors believes that
elimination of cumulative voting will help to assure continuity and stability of
management and policies; directors should be elected by a majority of the
stockholders to represent the interests of the stockholders as a whole rather
than be the special representatives of particular minority interests; and
efforts to elect directors representing specific minority interests are
potentially divisive and could impair the operations of EverTrust Financial
Group, Inc.
Special Meetings. The Articles of Incorporation of EverTrust Financial
Group, Inc. provide that special meetings of stockholders of EverTrust Financial
Group, Inc. may be called by the President or by the Board of Directors. If a
special meeting is not called by such person or entity, stockholder proposals
cannot be presented to the stockholders for action until the next annual
meeting. Stockholders are not permitted to call special meetings under EverTrust
Financial Group, Inc.'s Articles of Incorporation.
Authorized Capital Stock. The Articles of Incorporation of EverTrust
Financial Group, Inc. authorize the issuance of 49,000,000 shares of common
stock and 1,000,000 shares of preferred stock. The shares of common stock and
preferred stock were authorized in an amount greater than that to be issued in
the conversion to provide EverTrust Financial Group, Inc.'s Board of Directors
with flexibility to effect, among other transactions, financings, acquisitions,
stock dividends, stock splits and employee stock options. However, these
additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
EverTrust Financial Group, Inc. The Board of Directors also has sole authority
to determine the terms of any one or more series of Preferred Stock, including
voting rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the Board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
Preferred Stock to persons friendly to management in order to attempt to block a
post tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. EverTrust
Financial Group, Inc.'s Board currently has no plan for the issuance of
additional shares, other than the issuance of additional shares pursuant to
stock benefit plans.
Director Nominations. The Articles of Incorporation of EverTrust
Financial Group, Inc. require a stockholder who intends to nominate a candidate
for election to the Board of Directors at a stockholders' meeting to give
written notice to the Secretary of EverTrust Financial Group, Inc. at least 30
days (but not more than 60 days) in advance of the date of the meeting at which
such nominations will be made. The nomination notice is also required to include
specified information concerning the nominee and the proposing stockholder. The
Board of Directors of EverTrust Financial Group, Inc. believes that it is in the
best interests of EverTrust Financial Group, Inc. and its stockholders to
provide sufficient time for the Board of Directors to study all nominations and
to determine whether to recommend to the stockholders that such nominees be
considered.
Supermajority Voting Provisions. EverTrust Financial Group, Inc.'s
Articles of Incorporation require the affirmative vote of 80% of the outstanding
shares entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 80% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on EverTrust Financial Group, Inc.'s Board of
Directors. "Continuing Directors" generally includes all members of the Board of
Directors who are not affiliated with any individual, partnership, trust or
other person or entity (or the affiliates and associates of such person or
entity) which is a beneficial owner of 10% or more of the voting shares of
EverTrust Financial Group, Inc. This provision could tend to make the
acquisition of EverTrust Financial Group, Inc. more difficult to accomplish
without the cooperation or favorable recommendation of EverTrust Financial
Group, Inc.'s Board of Directors.
Amendment of Articles of Incorporation and Bylaws. EverTrust Financial
Group, Inc.'s Articles of Incorporation may be amended by the vote of the
holders of a majority of the outstanding shares of its common stock, except that
the
121
provisions of the Articles of Incorporation governing the duration of the
corporation, the purpose and powers of the corporation, authorized capital
stock, denial of preemptive rights, the number and staggered terms of directors,
removal of directors, approval of certain business combinations, the evaluation
of certain business combinations, elimination of directors' liability,
indemnification of officers and directors, calling of special meetings of
shareholders, the authority to repurchase shares and the manner of amending the
Articles of Incorporation may not be repealed, altered, amended or rescinded
except by the vote of the holders of at least 80% of the outstanding shares of
EverTrust Financial Group, Inc. This provision is intended to prevent the
holders of a lesser percentage of the outstanding stock of EverTrust Financial
Group, Inc. from circumventing any of the foregoing provisions by amending the
Articles of Incorporation to delete or modify one of such provisions.
EverTrust Financial Group, Inc.'s Bylaws may only be amended by a
majority vote of the Board of Directors of EverTrust Financial Group, Inc. or by
the holders of at least 80% of the outstanding stock by EverTrust Financial
Group, Inc.
Purpose and Takeover Defensive Effects of EverTrust Financial Group,
Inc.'s Articles of Incorporation and Bylaws. The Board of Directors believes
that the provisions described above are prudent and will reduce EverTrust
Financial Group, Inc.'s vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by its Board of
Directors. These provisions will also assist in the orderly deployment of the
conversion proceeds into productive assets during the initial period after the
conversion. The Board of Directors believes these provisions are in the best
interest of Everett Mutual Bank and EverTrust Financial Group, Inc. and its
stockholders. In the judgment of the Board of Directors, EverTrust Financial
Group, Inc.'s Board will be in the best position to determine the true value of
EverTrust Financial Group, Inc. and to negotiate more effectively for what may
be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of EverTrust Financial Group,
Inc. and its stockholders to encourage potential acquirors to negotiate directly
with the Board of Directors of EverTrust Financial Group, Inc. and that these
provisions will encourage such negotiations and discourage hostile takeover
attempts. It is also the view of the Board of Directors that these provisions
should not discourage persons from proposing a merger or other transaction at a
price reflective of the true value of EverTrust Financial Group, Inc. and that
is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of EverTrust
Financial Group, Inc. for its stockholders, with due consideration given to
matters such as the management and business of the acquiring corporation and
maximum strategic development of EverTrust Financial Group, Inc.'s assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive
EverTrust Financial Group, Inc.'s remaining stockholders of benefits of certain
protective provisions of the Exchange Act, if the number of beneficial owners
became less than 300, thereby allowing for deregistration under the Exchange
Act.
Despite the belief of Everett Mutual Bank and EverTrust Financial
Group, Inc. as to the benefits to stockholders of these provisions of EverTrust
Financial Group, Inc.'s Articles of Incorporation and Bylaws, these provisions
may also have the effect of discouraging a future takeover attempt that would
not be approved by EverTrust Financial Group, Inc.'s Board, but pursuant to
which stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have any opportunity to do so. Such provisions
will also render the removal of EverTrust Financial Group, Inc.'s Board of
Directors and of management more difficult. The Board of Directors of Everett
Mutual Bank and EverTrust Financial Group, Inc., however, have concluded that
the potential benefits outweigh the possible disadvantages.
122
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, EverTrust Financial Group, Inc. may
adopt additional anti-takeover charter provisions or other devices regarding the
acquisition of its equity securities that would be permitted for a Washington
business corporation.
The cumulative effect of the restriction on acquisition of EverTrust
Financial Group, Inc. contained in the Articles of Incorporation and Bylaws of
EverTrust Financial Group, Inc. and in Federal and Washington law may be to
discourage potential takeover attempts and perpetuate incumbent management, even
though certain stockholders of EverTrust Financial Group, Inc. may deem a
potential acquisition to be in their best interests, or deem existing management
not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF EVERTRUST FINANCIAL GROUP, INC.
General
EverTrust Financial Group, Inc. is authorized to issue 49,000,000
shares of common stock having no par value per share and 1,000,000 shares of
preferred stock having no par value per share. EverTrust Financial Group, Inc.
currently expects to issue up to 7,475,000 shares of common stock, subject to
adjustment up to 8,596,500 shares, and no shares of preferred stock in the
conversion. Each share of EverTrust Financial Group, Inc.'s common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. Upon payment of the purchase price for the
common stock, in accordance with the plan of conversion, all such stock will be
duly authorized, fully paid and nonassessable.
The common stock of EverTrust Financial Group, Inc. represents
nonwithdrawable capital. The common stock is not a savings or deposit account
and is not insured by the Federal Deposit Insurance Corporation or any other
government agency.
Common Stock Dividends. EverTrust Financial Group, Inc. can pay
dividends out of statutory surplus or from certain net profits if, as and when
declared by its Board of Directors. The payment of dividends by EverTrust
Financial Group, Inc. is subject to limitations which are imposed by law and
applicable regulation. See "EverTrust Financial Group, Inc.'s Dividend Policy"
and "Regulation." The holders of common stock of EverTrust Financial Group, Inc.
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of EverTrust Financial Group, Inc. out of
funds legally available therefor. If EverTrust Financial Group, Inc. issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock with respect to dividends.
Stock Repurchases. Federal Reserve regulations place certain
limitations on the repurchase of EverTrust Financial Group, Inc.'s capital
stock. See "How EverTrust Financial Group, Inc. Intends to Use the Conversion
Offering Proceeds."
Voting Rights. Upon conversion, the holders of common stock of
EverTrust Financial Group, Inc. will possess exclusive voting rights in
EverTrust Financial Group, Inc. They will elect EverTrust Financial Group,
Inc.'s Board of Directors and act on such other matters as are required to be
presented to them under Washington law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
EverTrust Financial Group, Inc.," each holder of common stock will be entitled
to one vote per share and will not have any right to cumulate votes in the
election of directors. If EverTrust Financial Group, Inc. issues preferred
stock, holders of EverTrust Financial Group, Inc. preferred stock may also
possess voting rights. Certain matters require a vote of 80% of the outstanding
shares entitled to vote thereon. See "Restrictions on Acquisition of EverTrust
Financial Group, Inc."
As a state mutual savings bank, corporate powers and control of Everett
Mutual Bank are vested in its Board of Directors, who elect the officers of
Everett Mutual Bank and who fill any vacancies on the Board of Directors as it
exists upon conversion. Subsequent to the conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of Everett
Mutual Bank, all of which will be owned by EverTrust Financial Group, Inc., and
voted at the direction of EverTrust Financial Group, Inc.'s Board of Directors.
Consequently, the holders of the common stock will not have direct control of
Everett Mutual Bank.
123
Liquidation. In the event of any liquidation, dissolution or winding up
of Everett Mutual Bank, EverTrust Financial Group, Inc., as holder of Everett
Mutual Bank's capital stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Everett Mutual Bank,
including all deposit accounts and accrued interest thereon, and after
distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "Mutual
Bancshares' Conversion"), all assets of Everett Mutual Bank available for
distribution. In the event of liquidation, dissolution or winding up of
EverTrust Financial Group, Inc., the holders of its common stock would be
entitled to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of EverTrust Financial Group, Inc. available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the common stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of the common stock of EverTrust Financial
Group, Inc. will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of EverTrust Financial Group, Inc.'s authorized
preferred stock will be issued in the conversion and there are no plans to issue
the preferred stock. Such stock may be issued with such designations, powers,
preferences and rights as the board of directors may from time to time
determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
Restrictions on Acquisition
Acquisitions of EverTrust Financial Group, Inc. are restricted by
provisions in its Articles of Incorporation and Bylaws and by the rules and
regulations of various regulatory agencies. See "Regulation" and "Restrictions
on Acquisition of EverTrust Financial Group, Inc."
REGISTRATION REQUIREMENTS
EverTrust Financial Group, Inc. will register the common stock with the
Securities and Exchange Commission pursuant to Section 12(g) of the Securities
Exchange Act upon the completion of the conversion and will not deregister its
common stock for a period of at least three years following the completion of
the conversion. Upon the registration of the common stock, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Securities Exchange Act will be
applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for EverTrust
Financial Group, Inc. by Breyer & Associates PC, Washington, D.C. The federal
tax consequences of the offering have been opined upon by Breyer & Associates PC
and the Washington tax consequences of the offering have been opined upon by
Deloitte & Touche LLP, Seattle, Washington. Breyer & Associates PC and Deloitte
& Touche LLP have consented to the references herein to their opinions. Certain
legal matters concerning the conversion and the shares to be issued in the
conversion will be passed upon for Charles Webb by Patton Boggs LLP, Washington,
D.C.
EXPERTS
The consolidated financial statements of Mutual Bancshares as of March
31, 1999 and 1998, and for each of the three years ended March 31, 1999, 1998
and 1997, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
124
RP Financial has consented to the publication in this prospectus of the
summary of its report to Everett Mutual Bank setting forth its opinion as to the
estimated pro forma market value of EverTrust Financial Group, Inc. and Everett
Mutual Bank, as converted, and its letter with respect to subscription rights
and to the use of its name and statements with respect to it appearing in this
prospectus.
WHERE YOU CAN FIND MORE INFORMATION
EverTrust Financial Group, Inc. has filed with the Securities and
Exchange Commission a Registration Statement on Form S-1 (File No. 333-81125)
under the Securities Act with respect to the common stock offered in the
conversion. This prospectus does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. Such
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained at prescribed rates from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Registration Statement also is available
through the Securities and Exchange Commission's World Wide Web site on the
Internet (http://www.sec.gov).
Everett Mutual Bank has filed with the Washington Division of Banks an
Application for Approval of Conversion, which includes proxy materials for
Mutual Bancshares' special meeting of members and certain other information.
This prospectus omits certain information contained in the Application for
Approval of Conversion. The Application, including the proxy materials, exhibits
and certain other information that are a part of the Application for Approval of
Conversion, may be inspected, without charge, at the office of the Washington
Division of Banks, Department of Financial Institutions, General Administration
Building, 3rd Floor, Room 300, 210 11th Avenue West, Olympia, Washington 98504.
A copy of the Application for Approval of Conversion has also been filed with
the Federal Deposit Insurance Corporation.
Copies of EverTrust Financial Group, Inc.'s Articles of Incorporation
and Bylaws may be obtained by written request to Everett Mutual Bank.
125
Index To Consolidated Financial Statements
Mutual Bancshares
Page
----
Independent Auditors' Report - Deloitte & Touche LLP...................................................... F-1
Consolidated Balance Sheets as of March 31, 1999 and 1998 ................................................ F-2
Consolidated Statements of Income for the Years Ended March 31, 1999, 1998 and 1997 ..................... 21
Consolidated Statements of Changes in Equity Capital for the Years Ended March 31, 1999 and 1998.......... F-3
Consolidated Statements of Cash Flows for the Years Ended March 31, 1999 and 1998......................... F-4
Notes to Consolidated Financial Statements................................................................ F-5
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
126
INDEPENDENT AUDITORS' REPORT
Board of Trustees
Mutual Bancshares
Everett, Washington
We have audited the accompanying consolidated statements of financial condition
of Mutual Bancshares and subsidiaries (the Company) as of March 31, 1999 and
1998, and the related consolidated statements of operations, comprehensive
income, equity, and cash flows for each of the three years in the period ended
March 31, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
May 14, 1999
F-1
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands)
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
- ------ -------- --------
Cash and cash equivalents, including interest
bearing deposits of $4,583 and $11,121 ............. $ 13,230 $ 19,136
Securities available for sale, amortized cost
of $61,390 and $38,399 ............................. 61,566 38,944
Securities held to maturity, fair value of
$14,317 and $21,470 ................................ 13,866 20,750
Federal Home Loan Bank stock, at cost ................ 3,994 3,660
Loans receivable, net ................................ 315,327 311,951
Loans held for sale .................................. 29,641 13,705
Accrued interest receivable .......................... 3,177 3,030
Premises and equipment, net .......................... 7,953 8,760
Prepaid expenses and other assets .................... 3,335 1,369
-------- --------
Total ................................................ $452,089 $421,305
======== ========
LIABILITIES AND RETAINED EARNINGS
- ---------------------------------
Liabilities:
Deposit accounts ................................... $375,896 $350,971
Federal Home Loan Bank advances .................... 18,949 15,503
Accounts payable and other liabilities ............. 4,981 3,735
-------- --------
Total liabilities ................................ 399,826 370,209
Commitments and contingencies ........................ -- --
Equity:
Retained earnings .................................. 52,147 50,736
Accumulated other comprehensive income ............. 116 360
-------- --------
Total equity ..................................... 52,263 51,096
-------- --------
Total ................................................ $452,089 $421,305
======== ========
See notes to consolidated financial statements.
F-2
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
------ ------ ------
NET INCOME ......................................... $1,411 $4,534 $3,510
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 $(54), $216, and $(31) .......... (104) 419 (61)
Less adjustment of gains included in net income,
net of income tax of $(72), $-0-, and $-0- ... (140) -- --
------ ------ ------
Other comprehensive income (loss) .......... (244) 419 (61)
------ ------ ------
COMPREHENSIVE INCOME ............................... $1,167 $4,953 $3,449
====== ====== ======
See notes to consolidated financial statements.
F-3
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
Accumulated
other
Retained comprehensive
Earnings income (loss) Total
-------- ------------- -------
BALANCE, April 1, 1996 .......................... $42,692 $ 2 $42,694
Net income .................................... 3,510 -- 3,510
Other comprehensive loss, net of income taxes . -- (61) (61)
------- ----- -------
BALANCE, March 31, 1997 ......................... 46,202 (59) 46,143
Net income .................................... 4,534 -- 4,534
Other comprehensive income, net of income taxes -- 419 419
------- ----- -------
BALANCE, March 31, 1998 ......................... 50,736 360 51,096
Net income .................................... 1,411 -- 1,411
Other comprehensive loss, net of income taxes . -- (244) (244)
------- ----- -------
BALANCE, March 31, 1999 ......................... $52,147 $ 116 $52,263
======= ===== =======
See notes to consolidated financial statements.
F-4
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
OPERATING ACTIVITIES:
Net income .............................................. $ 1,411 $ 4,534 $ 3,510
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of premises
and equipment ..................................... 1,474 1,081 1,015
Stock dividends and accretion of investment
security discounts ................................ (457) (654) (754)
Loss (gain) on sale of premises and equipment
and real estate owned ............................. (7) (100) 240
Amortization of investment security premiums ........ 244 96 100
Book loss on limited partnership .................... 125 120 122
Provision for losses on loans and real estate owned . 780 420 420
Amortization of deferred loan fees and costs ........ (1,184) (1,049) (882)
Loan fees deferred .................................. 1,145 1,197 1,032
Proceeds from sale of loans ......................... 5,297 7,206 5,055
Loans originated for sale ........................... (34,485) (12,821) (9,743)
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable ..................... (147) (225) (149)
Prepaid expenses and other assets ............... (283) 719 (723)
Accounts payable and other liabilities .......... 1,255 554 519
Deferred taxes .................................. (1,683) (235) (242)
-------- -------- --------
Net cash provided (used) by operating activities ........ (26,515) 843 (480)
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 19,952 32,628 37,316
Proceeds from maturities of securities held to maturity . 7,106 3,860 5,449
Proceeds from sale of securities available for sale ..... 3,561 1,333 --
Purchases of securities available for sale .............. (46,647) (43,109) (49,239)
Purchases of securities held to maturity ................ (157) (675) (4,880)
Purchases of FHLB stock ................................. (44) -- --
Loan principal payments ................................. 112,285 82,264 71,828
Loans originated or acquired ............................ (103,275) (97,408) (73,988)
Proceeds from sales of reacquired assets and
real estate owned ..................................... 130 1,114 1,830
Investment in real estate owned ......................... (9) (42) (548)
Net additions to premises and equipment ................. (664) (2,719) (968)
-------- -------- --------
Net cash used by investing activities ............... (7,762) (22,754) (13,200)
-------- -------- --------
BALANCE, carried forward .................................. (34,277) (21,911) (13,680)
See notes to consolidated financial statements.
F-5
MUTUAL BANCSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (continued)
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
BALANCE, brought forward .................................. $(34,277) $(21,911) $(13,680)
FINANCING ACTIVITIES:
Net increase in deposit accounts ........................ 24,925 21,201 15,122
Proceeds from Federal Home Loan Bank advances ........... 16,000 -- --
Repayments of Federal Home Loan Bank advances ........... (12,554) (4,554) (4,054)
-------- -------- --------
Net cash provided by financing activities ............... 28,371 16,647 11,068
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................. (5,906) (5,264) (2,612)
CASH AND CASH EQUIVALENTS:
Beginning of year ....................................... 19,136 24,400 27,012
-------- -------- --------
End of year ............................................. $ 13,230 $ 19,136 $ 24,400
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits .................................. $ 16,807 $ 16,381 $ 15,685
Federal income taxes .................................. 2,337 2,352 1,949
Interest on borrowings ................................ 1,000 1,160 1,315
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure .............. $ 117 $ 102 $ 795
Company financing of sales of real estate owned ....... -- 502 866
See notes to consolidated financial statements.
F-6
MUTUAL BANCSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998, AND 1997 (tables in thousands)
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of presentation: The consolidated
financial statements include Mutual Bancshares (the Company), Mutual Bancshares
Capital (MB Cap), I-Pro Inc. (I-Pro), Commercial Bank of Everett (CBE), and
Everett Mutual Bank (EMB), and EMB's wholly owned subsidiary, Sound Financial,
Inc. All significant intercompany transactions and balances have been
eliminated.
Holding company formation: In September 1993, Mutual Bancshares, a bank holding
company, was formed as the parent company for EMB and subsidiaries. The Company
is subject to regulation by the Federal Reserve Board (FRB) and the Federal
Deposit Insurance Corporation (FDIC). On September 1, 1996 (inception), CBE was
formed as a wholly owned subsidiary of the Company. On April 2, 1997, I-Pro was
formed as a wholly owned subsidiary of the Company. On October 29, 1998, MB Cap
was formed as a wholly owned subsidiary of the Company.
Nature of business: Through its subsidiaries, EMB and CBE (collectively, the
Banks), the Company is primarily engaged in attracting deposits from the general
public through its 11 branches in Snohomish County and using those funds,
together with borrowings, to originate loans secured by real estate and to
purchase investment securities. The Company sells nonproprietary mutual funds
and annuities through another subsidiary, Sound Financial, Inc. The Company also
is engaged in providing deposit services and loans to customers who are
predominately local businesses and individuals through CBE's one branch in
Everett. Through its subsidiary, I-Pro, the Company is engaged in providing item
processing and statement rendering services. The Company will provide equity to
high technology businesses in the seed, startup, and early stage of development
through its subsidiary, MB Cap.
Cash and cash equivalents: For purposes of the statements of cash flows, cash
and cash equivalents include cash on hand and in banks, overnight investments
and highly liquid debt instruments with maturities at the time of purchase of
three months or less. For those short-term investments, the carrying value is a
reasonable estimate of fair value.
Federal Reserve Board regulations require depository institutions to maintain
certain minimum reserve balances. Included in cash were balances maintained at
the Federal Reserve Bank of San Francisco of $925,000 and $919,000 at March 31,
1999 and 1998.
Investment securities:
Securities available for sale: Securities available for sale are carried at
fair value. Unrealized holding gains and losses are excluded from earnings
and reported net of tax, in other comprehensive income. Gains and losses on
the sale of investment securities are computed under the specific
identification method.
Securities held to maturity: Securities held to maturity are stated at cost
and are adjusted for amortization of premiums and accretion of discounts
using the level yield method. Securities held to maturity are designated as
such at the date of purchase based on management's positive intent and
F-7
ability to hold such investments to maturity. Unrealized losses resulting
from market valuation differences deemed other than temporary are included
in earnings.
Loans: Loans held for investment are reported at the principal amount
outstanding, net of unamortized nonrefundable loan fees and related direct loan
origination costs. Deferred net fees and costs are recognized in interest income
over the loan term using a method that generally produces a level yield on the
unpaid loan balance. Interest is accrued primarily on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to unpaid
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgement, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This policy applies only to loans that are well
secured and in management's judgement are considered to be fully collectible.
Although the accrual of interest income is suspended, any payments received may
be applied to the loan according to its contractual terms and interest income
recognized when cash is received.
Loans are considered impaired when, based on current information, management
determines it is probable that the Company will be unable to collect all amounts
due according to the terms of the loan agreement, including scheduled interest
payments. Impaired loans are carried at the lower of the recorded investment in
the loan, the estimated present value of expected future cash flows discounted
at the loan's effective rate, or at the fair value of the collateral, if the
loan is collateral dependent. Excluded from impairment analysis are large groups
of smaller balance homogeneous loans such as consumer and residential mortgage
loans.
Loans held for sale: Loans originated and held for sale are carried at the lower
of cost or market value on an aggregate basis. Nonrefundable fees and direct
loan origination costs related to loans held for sale are deferred and
recognized when the loans are sold.
Reserve for loan losses: The Company maintains an allowance for credit losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the probable estimated losses inherent in the loan
portfolio. The allowance is increased by the provision for credit losses, which
is charged against current period operating results and decreased by the amount
of chargeoffs, net of recoveries.
The Company's methodology for assessing the appropriateness of the allowance
consists of several key elements which include the formula allowance, specific
allowance and the unallocated allowance. The allowance also incorporates the
results of measuring impaired loans as provided in Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditor for Impairment of a
Loan - Income Recognition and Disclosures. These accounting standards prescribe
the measurement methods, income recognition and disclosures related to impaired
loans. A loan is considered impaired when, based on current information,
management determines it is probable that the Company will be unable to collect
all amounts due according to the terms of the loan agreement. Impairment is
measured by the difference between the recorded investment in the loan
(including accrued interest and net deferred loan fees or costs) and the
estimated present value of total expected future cash flows, discounted at the
loan's effective rate, or the
F-8
fair value of the collateral, if the loan is collateral dependent. Impairment is
recognized by adjusting an allocation of the existing allowance for loan losses.
The formula allowance is calculated by applying a loss percentage factor to the
various loan pool types based on past due ratios, historical loss experience,
the regulatory and internal credit grading and classification system and general
economic, business and regulatory conditions which could affect the
collectibility of the portfolio. These factors may be adjusted for significant
events, in management's judgement, as of the evaluation date. The Company
derives the loss percentage factors for problem graded loans using regulatory
guidelines; and, for pass graded loans by using estimated credit losses over the
upcoming twelve months based on the annual rate of chargeoffs experienced over
the previous three years on similar loans, adjusted for current conditions and
trends.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred.
The unallocated allowance is comprised of two components. The first component
recognizes the estimation risk associated with the formula and specific
allowances. The second component is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions evaluated in connection with the
unallocated allowance may include loan volumes and concentrations, seasoning of
the loan portfolio, specific industry conditions within portfolio segments,
governmental regulatory actions, recent loss experience in particular segments
of the portfolio and the duration of the current business cycle.
Mortgage servicing rights: Originated servicing rights are recorded when
mortgage loans are originated and subsequently sold or securitized (and held as
available-for-sale securities) with the servicing rights retained. The total
costs of the mortgage loans are allocated between servicing rights and the loans
(without the servicing rights) based on their relative fair values. The cost
relating to the mortgage servicing rights is capitalized and amortized in
proportion to, and over the period of, estimated future net servicing income.
Amounts capitalized are recorded at cost, net of accumulated amortization and
valuation allowance.
In order to determine the fair market value of servicing rights, the Banks use a
valuation model that evaluates the difference between the price of loans sold
with servicing released as compared to loans sold with servicing retained. The
cost is then allocated between the principal balance of the loan sold and the
related servicing rights. Assumptions used in the valuation model include the
cost of servicing the loan and anticipated prepayment speeds.
The Banks assess impairment of the capitalized mortgage servicing rights based
on recalculation of the current market price of servicing rights discounted for
changes in actual prepayment speeds of the loans. Impairment is assessed on a
pool-by-pool basis with any impairment recognized through a valuation allowance
for the combined pools. The pools are combined as they all have similar interest
rates, terms, and risk characteristics.
Real estate owned: Real estate owned (REO) includes properties acquired through
foreclosure that are transferred to REO. These properties are initially recorded
at the lower of cost or fair value. Write-downs that result from the ongoing
periodic valuation of the foreclosed properties are charged to operations in the
period in which they are identified. Gains or losses at the time the property is
sold are charged or credited to operations in the period in which they are
realized. The amounts the Company will ultimately recover from real estate owned
may differ substantially from the carrying value of the
F-9
assets because of future market factors beyond the control of the Company or
because of changes in the Company's strategy for recovering its investments.
Real estate held for investment: Real estate held for investment represents the
Company's investment in two real estate partnerships of which the principal
activity is the development of low-income housing. The Company's investment has
been recorded using the equity method of accounting. The Company earns
low-income housing tax credits on these real estate partnerships which reduces
the Company's federal income tax provision and liability.
Premises and equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The depreciation and amortization are
computed on the straight-line method. Estimated useful lives are as follows:
Buildings and improvements ......................... Up to 27.5 years
Furniture, fixtures, and automobiles ............... 3 - 15 years
The Company capitalizes expenditures for betterments and major renewals, and
charges ordinary maintenance and repairs to operations as incurred.
The Company periodically reviews buildings and improvements for impairment.
Impairment exists when the estimated undiscounted cash flows for the property is
less than its carrying` value. If identified, an impairment loss is recognized
through a charge to earnings based on the fair value of the property.
Income taxes: Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates which will be in effect when the differences between
the financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the change in the deferred tax
liability from the beginning to the end of the year. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company reports income and expenses using the accrual method of accounting
and files a consolidated tax return that includes all of its subsidiaries.
Interest rate risk management: In order to reduce the risk of significant
mortgage interest rate fluctuations, EMB is authorized to utilize financial
futures contracts, option contracts and forward commitments to hedge certain
mortgage loans held for sale and loan origination commitments. Gains and losses
on open futures contracts, option contracts and forward commitments are included
in lower of cost or market computations for mortgage loans held for sale or
matched against loan origination commitments. There were $-0- and $4,000,000 in
open forward commitments to hedge against interest rate fluctuations at March
31, 1999 and 1998, respectively. Gains and losses on closed futures contracts,
option contracts and forward commitments are recognized as part of the net gain
on sale of the related hedged mortgage loans.
Use of estimates: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements.
Changes in these estimates and assumptions are considered reasonably possible
and may have a material impact on the financial statements. The Banks use
significant estimates in determining reported reserves and allowances for loan
losses, tax liabilities, and other contingencies.
F-10
Recently issued accounting standards adopted in these financial statements:
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, was issued in June 1997 and requires businesses to
disclose comprehensive income and its components in their general-purpose
financial statements. SFAS No. 130 was adopted by the Company on April 1, 1998.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, was issued in June 1997 and redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. This statement does not affect
the results of operations or financial condition of the Company. SFAS No. 131
was adopted by the Company on April 1, 1998.
SFAS No. 132, Employers' Disclosure About Pensions and Other Postretirement
Benefits, was issued in February 1998 and standardizes the annual disclosure
requirements for pensions and other postretirement benefits. This statement does
not affect the results of operations or financial condition of the Company. SFAS
No. 132 was adopted by the Company on April 1, 1998.
Recently issued accounting standards not yet adopted: SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will implement this statement on April 1, 2000.
The impact of the adoption of the provisions of this statement on the results of
operations or financial condition of the Company has not yet been determined. On
May 20, 1999, an exposure draft was issued amending SFAS No. 133 to extend the
implementation by one year.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
was issued in October 1998. Prior to issuance of SFAS No. 134, when a mortgage
banking company securitized mortgage loans held for sale but did not sell the
security in the secondary market, the security was classified as trading. SFAS
No. 134 requires that the security be classified either trading, available for
sale, or held to maturity according to the Company's intent, unless the Company
has already committed to sell the security before or during the securitization
process. The statement is effective for all fiscal years beginning after
December 15, 1998. This statement is not expected to have a material impact on
the results of operations or financial condition of the Company.
Reclassifications: Certain reclassifications have been made in the 1998 and 1997
consolidated financial statements to conform with the classifications used in
1999.
F-11
NOTE 2: SECURITIES AVAILABLE FOR SALE
Securities available for sale classified by type and contractual maturity date
consisted of the following at March 31 (in thousands):
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
--------- ---------- ---------- ----------
1999:
Debt securities:
U.S. Government agency securities due:
Within one year .................... $ 1,141 $ 6 $ -- $ 1,147
After one but within five years .... 2,610 2 (10) 2,602
------- ---- ----- -------
3,751 8 (10) 3,749
Municipal obligations due:
Within one year .................... 80 -- -- 80
After one but within five years .... 1,796 6 (18) 1,784
After five but within ten years .... 966 2 (6) 962
After ten years .................... 2,255 -- (1) 2,254
------- ---- ----- -------
5,097 8 (25) 5,080
Obligations of corporations due:
Within one year .................... 11,372 43 (15) 11,400
After one but within five years .... 34,503 141 (203) 34,441
------- ---- ----- -------
45,875 184 (218) 45,841
Mortgage-backed securities due:
After five but within ten years ...... 468 1 -- 469
After ten years ...................... 46 3 -- 49
------- ---- ----- -------
514 4 -- 518
Certificates of deposit due:
After one but within five years ...... 175 -- -- 175
Equity securities:
Mutual funds ......................... 2,221 -- -- 2,221
Other stock .......................... 3,757 225 -- 3,982
------- ---- ----- -------
5,978 225 -- 6,203
------- ---- ----- -------
$61,390 $429 $(253) $61,566
======= ==== ===== =======
F-12
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
--------- ---------- ---------- ----------
1998:
Debt securities:
U.S. Treasury securities due:
Within one year .................... $ 1,985 $ 8 $ -- $ 1,993
After one but within five years .... 100 -- -- 100
------- ---- ----- -------
2,085 8 -- 2,093
U.S. Government agency securities due:
Within one year .................... 2,013 -- (3) 2,010
After one but within five years .... 6,833 23 -- 6,856
------- ---- ----- -------
8,846 23 (3) 8,866
Municipal obligations due:
After five but within ten years .... 800 -- (2) 798
Obligations of corporations due:
Within one year .................... 1,964 4 -- 1,968
After one but within five years .... 21,097 129 (1) 21,225
After five but within ten years .... 589 5 -- 594
------- ---- ----- -------
23,650 138 (1) 23,787
Mortgage-backed securities due:
Within one year ...................... 474 -- (3) 471
After ten years ...................... 46 3 -- 49
------- ---- ----- -------
520 3 (3) 520
Equity securities:
Other stock .......................... 2,498 398 (16) 2,880
------- ---- ----- -------
$38,399 $570 $ (25) $38,944
======= ==== ===== =======
Fair value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Gross realized gains on the sale of securities available for sale were $322,535,
$13,309, and $-0- for the years ended March 31, 1999, 1998, and 1997,
respectively. Gross realized losses on the sale of securities available for sale
were $7,282, $13,764, and $-0- for the years ended March 31, 1999, 1998, and
1997, respectively.
The expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
F-13
NOTE 3: SECURITIES HELD TO MATURITY
Securities held to maturity classified by type and contractual maturity date
consisted of the following at March 31 (in thousands):
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
--------- ---------- ---------- ----------
1999:
Debt securities:
U.S. Government agency securities due:
After one but within five years .... $ 1,514 $ 70 $ -- $ 1,584
After five but within ten years .... 1,006 94 -- 1,100
------- ---- ----- -------
2,520 164 -- 2,684
Municipal obligations due:
Within one year .................... 735 3 -- 738
After one but within five years .... 1,839 49 -- 1,888
After five but within ten years .... 1,372 36 -- 1,408
After ten years .................... 2,827 15 -- 2,842
------- ---- ----- -------
6,773 103 -- 6,876
Obligations of corporations due:
Within one year .................... 498 6 -- 504
After one but within five years .... 1,467 77 -- 1,544
------- ---- ----- -------
1,965 83 -- 2,048
Mortgage-backed securities due:
After five but within ten years ...... 6 -- -- 6
After ten years ...................... 2,147 101 -- 2,448
------- ---- ----- -------
2,153 101 -- 2,254
Certificates of deposit due:
After one but within five years ...... 455 -- -- 455
------- ---- ----- -------
$13,866 $451 $ -- $14,317
======= ==== ===== =======
F-14
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
--------- ---------- ---------- ----------
1998:
Debt securities:
U.S. Government agency securities due:
Within one year .................... 1,500 -- -- 1,500
After one but within five years .... 1,519 77 -- 1,596
After five but within ten years .... 1,007 88 -- 1,095
------- ---- ----- -------
4,026 165 -- 4,191
Municipal obligations due:
Within one year .................... 405 1 -- 406
After one but within five years .... 2,296 32 (2) 2,326
After five but within ten years .... 1,551 26 -- 1,577
After ten years .................... 2,805 82 -- 2,887
------- ---- ----- -------
7,057 141 (2) 7,196
Obligations of corporations due:
Within one year .................... 2,495 20 -- 2,515
After one but within five years .... 1,943 114 -- 2,057
------- ---- ----- -------
4,438 134 -- 4,572
Mortgage-backed securities due:
After five but within ten years ...... 10 -- -- 10
After ten years ...................... 4,347 205 (1) 4,551
------- ---- ----- -------
4,357 205 (1) 4,561
Certificates of deposit due:
Within one year ...................... 429 71 -- 500
After one but within five years ...... 443 7 -- 450
------- ---- ----- -------
872 78 -- 950
------- ---- ----- -------
$20,750 $723 $ (3) $21,470
======= ==== ===== =======
Fair value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Investment securities with a par value of $2,100,000 and a market value of
$2,130,427 were pledged to secure public deposits at March 31, 1999.
The expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
F-15
NOTE 4: LOANS RECEIVABLE
Loans receivable consisted of the following at March 31 (in thousands):
1999 1998
-------- --------
Real estate:
1-4 family residential ............................... $101,649 $ 95,305
1-4 family construction and land development ......... 34,928 36,444
Income property:
Commercial construction ............................ 12,491 4,620
Commercial real estate ............................. 72,573 76,121
Multifamily construction ........................... 14,012 7,153
Multifamily residential ............................ 115,972 111,975
Consumer:
Residental mortgages ................................. 4,867 4,318
Home equity and second mortgages ..................... 13,734 11,548
Credit cards ......................................... 488 124
Automobiles .......................................... 787 1,036
Other installment loans .............................. 1,612 1,524
Business loans ....................................... 8,949 6,226
-------- --------
382,062 356,394
Less:
Undisbursed loan proceeds ............................ (28,183) (22,563)
Deferred loan fees and other ......................... (3,239) (3,278)
Reserve for loan losses .............................. (5,672) (4,897)
-------- --------
344,968 325,656
Loans receivable held for sale ......................... (29,641) (13,705)
-------- --------
Loans receivable, net .................................. $315,327 $311,951
======== ========
A substantial portion of the Company's revenues are derived from the origination
of loans in the Puget Sound region of Washington State. The customers' ability
to honor their commitments to repay such loans is dependent upon the region's
economy.
Single-family residential, permanent, and construction loans are primarily
secured by collateral located in Western Washington. Income property loans, by
county or state in which the property resides, are as follows at March 31, 1999
(in thousands):
Snohomish King Pierce
County County County Other Total
--------- ------- ------- ------- --------
Income property:
Commercial construction ... $ 3,191 $ 3,865 $ 4,935 $ 500 $ 12,491
Commercial real estate .... 44,710 22,773 2,082 3,008 72,573
Multifamily construction .. 2,100 10,337 -- 1,575 14,012
Multifamily residential ... 44,430 50,659 10,183 10,700 115,972
------- ------- ------- ------- --------
$94,431 $87,634 $17,200 $15,783 $215,048
======= ======= ======= ======= ========
F-16
Outstanding commitments to borrowers for loans totalled $12,111,452 and
$4,082,600 at March 31, 1999 and 1998, respectively.
The Banks serviced loans for others totalling $72,637,330 and $100,496,449, as
of March 31, 1999 and 1998, respectively.
The activity in the reserve for loan losses was as follows for the years ended
March 31 (in thousands):
1999 1998 1997
------ ------ ------
Balance, beginning of year .................. $4,897 $4,509 $4,178
Provision for loan losses ................... 780 420 420
Reserves charged off, net of recoveries ..... (5) (32) (89)
------ ------ ------
Balance, end of year ........................ $5,672 $4,897 $4,509
====== ====== ======
The Banks originate both adjustable and fixed interest rate loans. At March 31,
1999, the composition of those loans was as follows (in thousands):
Fixed Adjustable
Term to maturity or rate adjustment rate rate Total
----------------------------------- ------- ---------- --------
Due within one year ................... $ 1,444 $168,978 $170,422
After one but within three years ...... 6,446 66,015 72,461
After three but within five years ..... 20,870 17,422 38,292
After five but within 15 years ........ 41,576 7,454 49,030
After 15 years ........................ 22,216 -- 22,216
------- -------- --------
$92,552 $259,869 $352,421
======= ======== ========
The adjustable rate loans have various interest rate adjustment limitations and
are generally indexed to Treasury rates or to the Office of Thrift Supervision
national monthly median cost of funds ratio to SAIF-insured institutions. Future
market factors may affect the correlation of the interest rate adjustment with
the rate the Banks pay on the short-term deposits and Federal Home Loan Bank of
Seattle (FHLB) advances that have been primarily utilized to fund these loans.
The average balance of impaired loans during 1999, 1998 and 1997 was $3,137,000,
$3,670,000 and $4,465,000, and the Company recognized $283,000 and $331,000 of
related interest income, respectively. Interest income is normally recognized on
the accrual basis; however, if the impaired loan is nonperforming, interest
income is recorded on the receipt of cash.
F-17
Impaired loans consist of the following at March 31 (in thousands):
1999 1998
------ ------
Loans with allocated reserves of $164 and $154 ......... $2,644 $2,694
Loans without allocated reserves ....................... 378 841
------ ------
Total impaired loans ................................. $3,022 $3,535
====== ======
Loans on nonaccrual status ............................. $ 378 $ 575
Loans under foreclosure ................................ -- 266
Performing loans judged to be impaired ................. 2,644 2,694
------ ------
$3,022 $3,535
====== ======
NOTE 5: ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at March 31 (in
thousands):
1999 1998
------ ------
Investment securities .................................. $1,020 $ 869
Loans .................................................. 2,157 2,161
------ ------
$3,177 $3,030
====== ======
NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at March 31 (in thousands):
1999 1998
------- -------
Land ................................................... $ 1,491 $ 1,491
Buildings (including leasehold improvements) ........... 6,771 6,438
Furniture, fixtures and automobiles .................... 5,661 5,454
------- -------
13,923 13,383
Less accumulated depreciation and amortization ......... (5,970) (4,623)
------- -------
$ 7,953 $ 8,760
======= =======
During the current fiscal year, management reviewed and changed the estimated
useful lives of computers and other office equipment. The Company's policy now
is to expense computers, with the exception of server equipment, in the period
costs are incurred. Other office equipment useful lives have been shortened from
five to three years.
F-18
The Company has noncancellable operating leases for office facilities, branches,
and equipment. Future minimum rental commitments for all noncancellable leases
are as follows (in thousands):
2000 ..................................................... $ 692
2001 ..................................................... 689
2002 ..................................................... 680
2003 ..................................................... 653
2004 ..................................................... 633
Thereafer ................................................... 6,316
------
$9,663
======
Rent expense for the years ended March 31, 1999, 1998, and 1997, totalled
$710,000, $660,000, and $637,000, respectively.
NOTE 7: DEPOSIT ACCOUNTS
Deposit accounts, with respective interest rate ranges, consisted of the
following at March 31 (in thousands):
Weighted
average rate
at March 31,
1999 1999 % 1998 %
------------ -------- ----- -------- -----
Noninterest-bearing accounts .. --% $ 7,782 2.1% $ 6,064 1.7%
Savings accounts .............. 2.8 11,798 3.1 10,510 3.0
Checking accounts ............. 2.6 33,655 9.0 31,358 8.9
Money market accounts ......... 4.2 133,748 35.6 122,969 35.1
Time deposits by original term:
1 to 11 months .............. 4.8 32,660 8.7 26,665 7.6
12 to 23 months ............. 5.2 62,536 16.6 59,723 17.0
24 to 35 months ............. 5.5 23,767 6.3 23,191 6.6
36 to 59 months ............. 5.7 19,461 5.2 19,986 5.7
60 to 84 months ............. 6.2 50,489 13.4 50,505 14.4
--- -------- ----- -------- -----
5.5 188,913 50.2 180,070 51.3
--- -------- ----- -------- -----
4.6% $375,896 100.0% $350,971 100.0%
=== ======== ===== ======== =====
Time deposits are scheduled to mature as follows (in thousands):
Year ending March 31,
---------------------
2000 ............................................. $125,923
2001 ............................................. 28,186
2002 ............................................. 12,854
2003 ............................................. 10,625
2004 ............................................. 8,762
Thereafter .......................................... 2,563
--------
$188,913
========
F-19
Included in deposits are time deposits greater than or equal to $100,000 of
$40,433,000 and $31,977,000 at March 31, 1999 and 1998, respectively. Interest
on time deposits greater than or equal to $100,000 totalled $2,157,000,
$1,915,000, and $1,934,000 for the years ended March 31, 1999, 1998, and 1997,
respectively.
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Scheduled maturities of advances from the FHLB were as follows at March 31 (in
thousands):
1999 1998
----------------------- -----------------------
Interest rate Interest rate
Amount ranges Amount ranges
------- ------------- ------- -------------
Nonamortizing:
Due within 1 year ........ $ 1,000 5.91% $ 500 6.21%
1 year - 2 years ......... 3,500 6.05 - 6.35 1,000 5.91
2 years - 3 years ........ 1,000 6.03 3,500 6.05 - 6.35
3 years - 5 years ........ 4,600 6.12 - 6.40 4,000 6.03 - 6.31
5 years - 10 years ....... 6,500 5.39 - 6.67 3,900 6.12 - 6.64
Over 10 years ............ 1,500 6.69 - 6.93 1,700 6.58 - 6.93
Amortizing:
Over 10 years ............ 849 8.19 903 8.19
------- -------
$18,949 $15,503
======= =======
Advances are collateralized by securities and mortgage pool securities of the
U.S. Government and agencies thereof.
At March 31, 1999, EMB had available unsecured lines of credit with commercial
banks totalling $10,000,000 and a revolving line of credit with the FHLB of up
to 20% of total assets. There were no advances outstanding as of March 31, 1999,
on the lines of credit with the commercial bank.
At March 31, 1999, CBE had available an unsecured letter of credit line and a
federal funds line with a commercial bank in the amount of $250,000 and
$500,000, respectively, maturing on April 1, 1999, and a revolving line of
credit with the FHLB of up to 5% of total assets. As of March 31, 1999, there
were no outstanding borrowings on the line of credit.
NOTE 9: FEDERAL TAXES ON INCOME
Under prior law, EMB has qualified under a provision of the Internal Revenue
Code to deduct from taxable income an allowance for bad debts based on a
percentage of taxable income before such deduction or based on the experience
method. The experience method provides financial institutions the ability to add
to the reserve for losses on loans the greater of two computational alternates:
(1) the base-year amount, or (2) the six-year moving average amount.
In August 1996, the President of the United States signed the Small Business Job
Protection Act of 1996 (the Act). Under the Act, the percentage taxable income
method of accounting for tax basis bad debts is no longer available effective
for the years ended after December 31, 1995. As a result, EMB is required to use
the experience method of accounting for tax basis bad debts for 1997 and later
years. In addition, EMB is also required to recapture its post-1987 additions to
its bad debt reserves made pursuant to the percentage taxable income method. As
of March 31, 1996, these additions were $3,766,000 which, pursuant to the Act,
are being included in taxable income ratably over a six-taxable-year period
beginning with the year ended
F-20
March 31, 1997. The recapture of the post-1987 additions to tax-basis bad debt
reserves does not result in a charge to earnings as these amounts are included
in the deferred tax liability at March 31, 1997.
Retained earnings at March 31, 1999, 1998, and 1997, includes approximately
$3,691,000 in tax-basis bad debt reserves for which no income tax liability has
been recorded. In the future, if this tax bad debt reserve is used for purposes
other than to absorb bad debts or if legislation is enacted requiring recapture
of all tax bad debt reserves, EMB will incur a federal tax liability at the then
prevailing corporate tax rate.
A reconciliation of the tax provision based on the statutory corporate rate on
pretax income and the provisions as shown in the accompanying consolidated
statements of operations is as follows for the years ended March 31 (in
thousands):
1999 1998 1997
----- ------ ------
Income tax expense at statutory rate ............ $ 568 $2,260 $1,665
Income tax effect of:
Tax-exempt interest ........................... (128) (107) (99)
Low-income housing tax credit ................. (216) (216) (217)
Other, net .................................... 37 177 38
----- ------ ------
$ 261 $2,114 $1,387
===== ====== ======
The net deferred tax asset (liability), which is included in the accompanying
consolidated statements of financial condition, consists of the following at
March 31 (in thousands):
1999 1998
------ ------
Deferred tax liabilities:
Loan origination fees and costs ....................... $ (83) $ (112)
Prepaid expenses ...................................... (40) (35)
FHLB dividends ........................................ (379) (279)
Other, net ............................................ (194) (171)
Unrealized gain on securities ......................... (63) (160)
------ ------
(696) (597)
Deferred tax assets:
Deferred compensation ................................. 266 161
Bad debt deduction .................................... 1,314 762
Accrued vacation ...................................... 74 54
Pension ............................................... 165 137
Depreciation .......................................... 201 7
Charitable contribution ............................... 883 --
------ ------
2,903 1,121
------ ------
$2,207 $ 524
====== ======
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company maintains two separate retirement plans for its employees: a
noncontributory defined benefit plan and a 401(k) plan. All employees of the
Company are eligible to participate in the 401(k) plan once certain length of
F-21
service and other requirements are achieved. All employees are eligible to
participate in the defined benefit plan upon attainment of age 21 and the
completion of one year of service. In addition, the employee must agree to
contribute at least 2% of salary on an after-tax basis to the defined
contribution plan in order to receive benefit service under the defined benefit
plan. Employees are fully vested in employer-matched 401(k) contributions at a
rate of 20% per year after three years of service. The Company's funding policy
is to contribute amounts to its pension plan sufficient to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974. The
actuarial cost method used to compute the pension contribution is the projected
unit cost method. Information presented below reflects a measurement date of
December 31, 1998, 1997, and 1996.
Weighted average assumptions used in accounting for the defined benefit pension
plan were as follows for the periods ended December 31:
1998 1997 1996
---- ---- ----
Assumed discount rate ............................ 6.9% 7.5% 7.5%
Rate of compensation increase .................... 6.0 6.0 6.0
Expected return on assets ........................ 8.0 8.0 8.0
Changes in the benefit obligation were as follows for the years ended December
31 (in thousands):
1998 1997
------ ------
Benefit obligation, beginning of year ................ $1,448 $1,603
Actuarial loss (gain) .............................. 258 (25)
Interest cost ...................................... 107 119
Service cost ....................................... 105 115
Benefits paid ...................................... (39) (353)
Expenses ........................................... (10) (11)
------ ------
Benefit obligation, end of year ...................... $1,869 $1,448
====== ======
Changes in defined benefit pension plan assets were as follows for the years
ended December 31 (in thousands):
1998 1997
------ ------
Fair value of assets, beginning of year .............. $1,538 $1,654
Actual return on assets ............................ 66 248
Benefits paid ...................................... (39) (353)
Expenses ........................................... (10) (11)
------ ------
Fair value of assets, end of year ................... $1,555 $1,538
====== ======
F-22
Reconciliations of funded status were as follows as of December 31 (in
thousands):
1998 1997
------ ------
Funded status ........................................ $ (314) $ 90
Unrecognized net loss ................................ (122) (476)
------ ------
Accrued benefit cost ................................. $ (436) $ (386)
====== ======
Net periodic expense for the defined benefit pension plan was as follows for the
years ended December 31 (in thousands):
1998 1997 1996
----- ----- -----
Interest cost ................................... $ 107 $ 119 $ 108
Service cost .................................... 105 115 112
Expected return on assets ....................... (121) (131) (116)
Amortization of unrecognized transition asset ... -- -- (29)
Amortization of gains or losses ................. (41) (26) (19)
----- ----- -----
Net periodic expense ............................ $ 50 $ 77 $ 56
===== ===== =====
The Company's cost for the 401(k) plan was $940,010, $78,028 and $76,615 for
1999, 1998 and 1997, respectively.
The Company also maintains a nonqualified deferred compensation plan for certain
key management personnel, for which the cost is accrued but unfunded.
Participants may elect to defer all or a specific portion of their compensation.
The Company does not provide a matching contribution on amounts deferred.
However, the Company does provide interest quarterly on amounts contributed by
participants. At March 31, 1999, 1998, and 1997, the liability for accumulated
deferred compensation was $1,277,000, $970,000, and $765,000, respectively, and
is included in the consolidated statements of financial condition. Annual
expense for the Company related to this plan totalled $148,000, $111,000, and
$71,000, in 1999, 1998, and 1997, respectively.
NOTE 11: INTEREST RATE RISK
EMB is engaged principally in providing first mortgage permanent and
construction loans for both residential and commercial property. Thirty (30)
year, fixed rate residential home mortgages are originated primarily for sale in
the secondary market and EMB is authorized to hedge against interest rate
fluctuations with financial futures contracts, option contracts and forward
commitments. There were $-0- and $4,000,000 of open forward commitments to hedge
interest rate fluctuations at March 31, 1999 and 1998. Forward commitments have
little credit risk because established exchanges are the counterparties.
EMB also originates adjustable and fixed rate home mortgages which are held for
investment. Adjustable loans have various interest rate adjustment limitations
and are generally indexed to Treasury rates or to the Office of Thrift
Supervision national monthly median cost of funds ratio to SAIF-insured
institutions. As of March 31, 1999 and 1998, adjustable rate mortgages held for
investment totalled $248,904,000 and $257,655,000, respectively. Fixed rate
mortgages held for investment totalled $90,116,000 and $72,680,000, at December
31, 1999 and 1998, respectively.
EMB originates both fixed and variable rate residential and commercial property
construction loans. Variable rate adjustments are tied to the prime interest
rate. The maturities on these loans range from six to 18 months.
EMB's adjustable and fixed rate home mortgages and residential and commercial
construction loans are funded by short-term deposits and FHLB advances.
F-23
EMB manages interest rate risk by matching assets and liabilities within
reasonable limits. This has been accomplished through short-term maturities and
variable rates, and where appropriate, hedging techniques are employed through
the use of financial futures contracts, option contracts and forward
commitments.
CBE originates commercial loans that are adjustable to the prime lending rate
index to customers who are predominately local businesses and individuals,
funded through short-term deposits and borrowings.
At March 31, 1999, the Company had interest-earning assets of $438,114,000
having a weighted average effective yield of 7.56%, and interest-bearing
liabilities of $387,050,000 having a weighted average effective interest rate of
4.75%. The Company's one-year interest rate sensitivity gap, excluding passbook
savings accounts, was a negative 14.75% at March 31, 1999. The gap position
reflects the shorter duration of the interest-sensitive liabilities.
NOTE 12: REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Banks must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company and the Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of March 31, 1999, that the Company
and the Banks meet all capital adequacy requirements to which they are subject.
As of March 31, 1999 and 1998, the most recent notifications from the Federal
Deposit Insurance Corporation (FDIC) categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
F-24
Actual capital amounts and ratios for the Company and the Banks are also
presented in the table.
To be categorized
as well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provision
--------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of March 31, 1999 (in thousands):
Total capital (to risk-weighted assets)
The Company .......................... $56,995 15.0% greater/ $30,491 greater/ 8.0% greater/ $ N.A. greater/ N.A.%
EMB .................................. 46,004 12.8 equal to 28,713 equal to 8.0 equal to 35,897 equal to 10.0
CBE .................................. 3,022 19.4 1,249 8.0 1,561 10.0
Tier I capital (to risk-weighted assets)
The Company .......................... 52,119 13.7 greater/ 15,245 greater/ 4.0 greater/ N.A. greater/ N.A.
EMB .................................. 41,404 11.5 equal to 14,359 equal to 4.0 equal to 21,538 equal to 6.0
CBE .................................. 2,832 18.1 624 4.0 937 6.0
Tier I capital (to average assets)
The Company .......................... 52,119 11.8 greater/ 17,673 greater/ 4.0 greater/ N.A. greater/ N.A.
EMB .................................. 41,404 9.9 equal to 16,748 equal to 4.0 equal to 20,935 equal to 5.0
CBE .................................. 2,832 17.9 634 4.0 793 5.0
As of March 31, 1998 (in thousands):
Total capital (to risk-weighted assets)
The Company .......................... $54,955 16.1% greater/ $27,235 greater/ 8.0% greater/ $ N.A. greater/ N.A.%
EMB .................................. 45,313 13.8 equal to 26,241 equal to 8.0 equal to 37,701 equal to 10.0
CBE .................................. 3,134 39.8 630 8.0 758 10.0
Tier I capital (to risk-weighted assets)
The Company .......................... 50,642 14.9 greater/ 13,617 greater/ 4.0 greater/ N.A. greater/ N.A.
EMB .................................. 41,204 12.6 equal to 13,120 equal to 4.0 equal to 14,681 equal to 6.0
CBE .................................. 3,036 38.5 315 4.0 473 6.0
Tier I capital (to average assets)
The Company .......................... 50,692 12.2 greater/ 16,591 greater/ 4.0 greater/ N.A. greater/ N.A.
EMB .................................. 41,204 10.5 equal to 15,946 equal to 4.0 equal to 19,933 equal to 5.0
CBE .................................. 3,036 30.3 400 4.0 560 5.0
NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-25
The fair values of financial instruments were as follows at March 31 (in
thousands):
1999 1998
-------------------- --------------------
Carrying Carrying
amount Fair value amount Fair value
-------- ---------- -------- ----------
Financial assets:
Cash and cash equivalents ........ $ 13,230 $ 13,230 $ 19,136 $ 19,136
Securities available for sale .... 61,566 61,566 38,944 38,944
Securities held to maturity ...... 13,866 14,317 20,750 21,470
Loans held for sale .............. 29,641 29,767 13,705 13,962
Loans receivable ................. 315,327 317,531 311,951 313,330
Federal Home Loan Bank stock ..... 3,994 3,994 3,660 3,660
-------- -------- -------- --------
437,624 440,405 408,146 410,502
Financial liabilities:
Deposits ......................... 375,896 378,849 350,971 353,151
Federal Home Loan Bank advances .. 18,949 19,236 15,503 15,796
-------- -------- -------- --------
394,845 398,085 366,474 368,947
-------- -------- -------- --------
Net financial instruments .......... $ 42,779 $ 42,320 $ 41,672 $ 41,555
======== ======== ======== ========
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument as of March 31, 1999 and 1998:
Cash and cash equivalents: The carrying amount represented fair value.
Securities available for sale and held to maturity: Fair values were based
on quoted market prices, if available. If a quoted market price was not
available, fair value was estimated using quoted market prices for similar
securities.
Loans held for sale: Fair values were based on quoted market prices.
Loans receivable: Loans were priced using the discounted cash flow method.
The discount rate used was the rate currently offered on similar products.
Deposits: The fair value of checking accounts, savings accounts, and money
market accounts was the amount payable on demand at the reporting date. For
time deposit accounts, the fair value was determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered
on similar products.
Federal Home Loan Bank advances: Borrowings were priced using the
discounted cash flow method. The discount rate used was the rate currently
offered on similar products.
F-26
NOTE 14: MUTUAL BANCSHARES (PARENT COMPANY ONLY)
Summary financial information as of March 31:
STATEMENTS OF FINANCIAL CONDITION (in thousands):
ASSETS 1999 1998
- ------ ------- -------
Cash ....................................................... $ 499 $ 146
Securities available for sale, amortized cost of $5 and $6 . 4,746 5,862
Accrued interest receivable ................................ 24 96
Investment in subsidiaries ................................. 47,581 44,979
Prepaid expenses and other assets .......................... 1,714 568
------- -------
Total .................................................. $54,564 $51,651
======= =======
LIABILITIES AND RETAINED EARNINGS
- ---------------------------------
Liabilities:
Accounts payable and other liabilities ................... $ 2,301 $ 555
Retained earnings .......................................... 52,147 50,736
Accumulated other comprehensive income ..................... 116 360
------- -------
Total equity ........................................... 52,263 51,096
------- -------
Total .................................................. $54,564 $51,651
======= =======
STATEMENTS OF OPERATIONS (in thousands): 1999 1998 1997
------- ------- -------
INCOME:
Income from equity investment in subsidiaries ........ $ 3,849 $ 4,726 $ 3,800
Interest from investment securities available for sale 417 250 147
Other income ......................................... 9
------- ------- -------
Total income ....................................... 4,275 4,976 3,947
OTHER EXPENSE:
Salary and employee benefits ......................... 349 291 201
Occupancy and equipment .............................. 8 1 1
Information processing costs ......................... 111 2 --
Contributions ........................................ 3,255 35 --
Other, net ........................................... 393 180 384
------- ------- -------
4,116 509 586
------- ------- -------
Income before federal income taxes ................. 159 4,467 3,361
FEDERAL INCOME TAXES ................................... (1,252) (67) (149)
------- ------- -------
NET INCOME ............................................. $ 1,411 $ 4,534 $ 3,510
======= ======= =======
F-27
STATEMENTS OF CASH FLOWS (in thousands): 1999 1998 1997
------- -------- --------
OPERATING ACTIVITIES:
Net income ........................................ $ 1,411 $ 4,534 $ 3,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of investment security discounts .... (38) (112) (95)
Amortization of investment security premiums .. 53 20 --
Equity in undistributed income of subsidiaries 408 (376) (1,300)
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable ............... 73 (79) --
Prepaid expenses and other assets ......... (1,145) (494) 20
Accounts payable and other liabilities .... 1,747 154 374
------- -------- --------
Net cash provided by operating activities ......... 2,509 3,647 2,469
INVESTING ACTIVITIES:
Proceeds from maturities of securities held
to maturity ..................................... 6,525 11,326 21,628
Proceeds from maturities of securities available
for sale ........................................ -- 51 --
Proceeds from sale of securities available for sale 4,116 -- --
Purchases of securities held to maturity .......... -- (100) --
Purchases of securities available for sale ........ (9,547) (14,382) (21,030)
Contribution to Mutual Bancshares Capital ......... (3,250) -- --
Contribution to I-Pro Inc. ........................ -- (500) --
Contribution to commercial bank ................... -- -- (3,500)
------- -------- --------
Net cash used by investing activities ............. (2,156) (3,605) (2,902)
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 353 42 (433)
CASH AND CASH EQUIVALENTS:
Beginning of year ................................. 146 104 537
------- -------- --------
End of year ....................................... $ 499 $ 146 $ 104
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for federal income taxes $ 135 $ 79 $ 120
NOTE 15: CONTINGENCIES
In the normal course of business, the Company has various legal claims and other
contingent matters outstanding. The Company believes that any liability
ultimately arising from these actions would not have a material adverse effect
on the results of operations or consolidated financial position at March 31,
1999.
F-28
NOTE 16: LINES OF BUSINESS
Mutual Bancshares is managed by legal entities. The entities are EMB, CBE, MB
Cap, and I-Pro. MB Cap, I-Pro, and the holding company have been included in all
others as their operating results are not significant when taken on an
individual basis.
The principal activities of each legal entity is described in Note 1. Each
entity is managed by an executive team responsible for sales, marketing,
operations, and certain administrative functions. Back office support is
provided to each entity for credit administration, information systems, finance,
and human resources.
The costs of these functions is allocated based on actual time spent conducting
business for each entity.
Financial highlights by lines of business are as follows:
Year ended March 31, 1999
-------------------------------------------------------
(in thousands)
EMB CBE Other Eliminations Total
-------- -------- ------- ------------ --------
Condensed income statement:
Net interest income after provision for loan loss $ 14,317 $ 530 $ 430 $ -- $ 15,277
Other income .................................... 1,916 91 4,104 (4,184) 1,927
Other expense ................................... 9,953 928 4,986 (335) 15,532
-------- -------- ------- -------- --------
Income before income taxes ...................... 6,280 (307) (452) (3,849) 1,672
Income taxes .................................... 1,823 (103) (1,459) -- 261
-------- -------- ------- -------- --------
Net income ...................................... $ 4,457 $ (204) $ 1,007 $ (3,849) $ 1,411
======== ======== ======= ======== ========
March 31, 1999
-------------------------------------------------------
Total assets ...................................... $426,538 $ 19,806 $56,900 $(51,155) $452,089
======== ======== ======= ======== ========
Year ended March 31, 1998
-------------------------------------------------------
(in thousands)
EMB CBE Other Eliminations Total
-------- -------- ------- ------------ --------
Condensed income statement:
Net interest income after provision for loan loss $ 14,486 $ 412 $ 245 $ -- $ 15,143
Other income .................................... 1,801 60 4,852 (4,921) 1,792
Other expense ................................... 8,946 733 802 (194) 10,287
-------- -------- ------- -------- --------
Income before income taxes ...................... 7,341 (261) 4,295 (4,727) 6,648
Income taxes .................................... 2,328 (88) (126) -- 2,114
-------- -------- ------- -------- --------
Net income ...................................... $ 5,013 $ (173) $ 4,421 $ (4,727) $ 4,534
======== ======== ======= ======== ========
March 31, 1998
-------------------------------------------------------
Total assets ...................................... $404,448 $ 10,285 $45,938 $(45,938) $421,305
======== ======== ======= ======== ========
F-29
Year ended March 31, 1997
-----------------------------------------------------
(in thousands)
EMB CBE Other Eliminations Total
-------- ------ ------- ------------ --------
Condensed income statement:
Net interest income after provision for loan loss $ 13,436 $ 36 $ 147 $ -- $ 13,619
Other income .................................... 1,116 8 3,800 (3,850) 1,074
Other expense ................................... 8,827 433 586 50 9,796
-------- ------ ------- -------- --------
Income before income taxes ...................... 5,725 (389) 3,361 (3,800) 4,897
Income taxes .................................... 1,634 (98) (149) -- 1,387
-------- ------ ------- -------- --------
Net income ...................................... $ 4,091 $ (291) $ 3,510 $ (3,800) $ 3,510
======== ====== ======= ======== ========
March 31, 1997
-----------------------------------------------------
Total assets ...................................... $391,323 $5,306 $46,543 $(44,014) $399,158
======== ====== ======= ======== ========
NOTE 17: SUBSEQUENT EVENTS
On March 19, 1999, and March 20, 1999, the Boards of Directors of Everett Mutual
Bank and Mutual Bancshares, respectively, unanimously adopted, and on May 24,
1999, subsequently amended, the plan of conversion, under which Mutual
Bancshares will become a stock bank holding company and Everett Mutual Bank will
be held as its wholly owned subsidiary. In connection with the conversion,
Mutual Bancshares will change its name to EverTrust Financial Group, Inc. The
conversion is expected to be completed by September 30, 1999.
Pursuant to regulations, Everett Mutual Bank will, at the time of conversion,
establish a liquidation account for the benefit of certain depositors in an
amount equal to the capital of Everett Mutual Bank of the date of its latest
statement of financial condition in the final prospectus (estimated to be as of
September 30, 1999). Each eligible depositor would be entitled, in the event of
a complete liquidation after the conversion, to an interest in the liquidation
account.
F-30
NOTE 18: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis were as follows (in thousands):
Year ended March 31, 1999
-------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income ..................... $8,471 $8,367 $8,496 $ 8,560
Interest expense .................... 4,445 4,517 4,478 4,397
------ ------ ------ -------
Net interest income ............. 4,026 3,850 4,018 4,163
Provision for loan losses ........... 105 105 120 450
------ ------ ------ -------
Net interest income after
provision for loan losses ..... 3,921 3,745 3,898 3,713
Noninterest income .................. 552 435 471 469
Noninterest expense ................. 3,036 2,648 2,785 7,063 (1)
------ ------ ------ -------
Income before provision for
income taxes .................. 1,437 1,532 1,584 (2,881)
Provision for income taxes .......... 415 442 462 (1,058)(2)
------ ------ ------ -------
Net income .......................... $1,022 $1,090 $1,122 $(1,823)
====== ====== ====== =======
(1) The fourth quarter increase in noninterest expense is due primarily to
$3,100,000 in charitable contributions provided primarily to The Everett
Mutual Foundation and $426,000 additional depreciation costs due to the
change in estimated useful lives of computers and other office equipment.
(2) Change in the provision for income taxes is due primarily to the fourth
quarter operating results.
F-31
Year ended March 31, 1998
-------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income ........................ $8,311 $8,328 $8,388 $ 8,435
Interest expense ....................... 4,420 4,518 4,541 4,420
------ ------ ------ -------
Net interest income ................ 3,891 3,810 3,847 4,015
Provision for loan losses .............. 120 120 60 120
------ ------ ------ -------
Net interest income after provision
for loan losses .................. 3,771 3,690 3,787 3,895
Noninterest income ..................... 470 413 430 479
Noninterest expense .................... 2,509 2,479 2,582 2,717
------ ------ ------ -------
Income before provision for
income taxes ..................... 1,732 1,624 1,635 1,657
Provision for income taxes ............. 557 536 471 550
------ ------ ------ -------
Net income ............................. $1,175 $1,088 $1,164 $ 1,107
====== ====== ====== =======
Year ended March 31, 1997
-------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income ........................ $7,689 $7,682 $7,788 $ 7,890
Interest expense ....................... 4,226 4,255 4,276 4,253
------ ------ ------ -------
Net interest income ................ 3,463 3,427 3,512 3,637
Provision for loan losses .............. 120 220 40 40
------ ------ ------ -------
Net interest income after provision
for loans losses ................. 3,343 3,207 3,472 3,597
Noninterest income ..................... 346 335 157 236
Noninterest expense .................... 2,200 2,203 2,446 2,947
------ ------ ------ -------
Income before provision for
income taxes ..................... 1,489 1,339 1,183 886
Provision for income taxes ............. 430 427 310 220
------ ------ ------ -------
Net income ............................. $1,059 $ 912 $ 873 $ 666
====== ====== ====== =======
F-32
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by EverTrust Financial Group, Inc. or Everett Mutual Bank Savings
Bank. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby to any person or in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of EverTrust Financial Group, Inc. or Everett Mutual Bank
since any of the dates as of which information is furnished herein or since the
date hereof.
Table of Contents Page
----------------- ----
Summary.......................................................
Risk Factors..................................................
Selected Consolidated Financial Information...................
How EverTrust Financial Group, Inc. Intends to Use
the Proceeds From This Offering.............................
EverTrust Financial Group, Inc.'s Dividend Policy.............
Market for EverTrust Financial Group, Inc.'s Common Stock.....
Capitalization................................................
Historical and Pro Forma Regulatory Capital Compliance........
Pro Forma Data................................................
Shares to be Purchased by Management with
Subscription Rights.........................................
Mutual Bancshares and Subsidiaries Consolidated
Statements of Income........................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
Recent Developments...........................................
Business of Mutual Bancshares.................................
Business of Commercial Bank of Everett........................
Business of I-Pro, Inc........................................
Business of Mutual Bancshares Capital, Inc....................
Management of EverTrust Financial Group, Inc..................
Management of Everett Mutual Bank.............................
Regulation....................................................
Taxation......................................................
Mutual Bancshares' Conversion.................................
Restrictions on Acquisition of EverTrust Financial
Group, Inc..................................................
Description of Capital Stock of EverTrust Financial
Group, Inc..................................................
Registration Requirements.....................................
Legal and Tax Opinions........................................
Experts.......................................................
Where You Can Find More Information...........................
Index to Consolidated Financial Statements....................
Until the later of _____________, 1999, or 90 days after commencement of the
syndicated community offering of common stock, if any, all dealers that buy,
sell or trade these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
[Logo for EverTrust Financial Group, Inc.]
5,856,500 to 8,986,250 Shares of
Common Stock
Prospectus
CHARLES WEBB AND COMPANY,
a division of Keefe, Bruyette & Woods, Inc.
________ __, 1999
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Legal fees and expenses ....................................... $ 225,000
Securities marketing legal fees ............................... 35,000
EDGAR, copying, printing, postage and mailing ................. 180,000
Appraisal and business plan preparation ....................... 55,000
Accounting fees ............................................... 75,000
Securities marketing fees and expenses ........................ 775,000
Data processing fees and expenses ............................. 20,000
SEC registration fee .......................................... 24,982
Blue Sky filing fees and expenses ............................. 5,000
State of Washington Department of Financial Institutions
filing fee................................................... 2,000
NASD fairness filing fee ...................................... 9,487
NASDAQ listing fee ............................................ 40,000
Other expenses ................................................ 50,475
----------
Total ..................................................... $1,500,000
==========
Item 14. Indemnification of Officers and Directors
In accordance with the Washington Business Corporation Law, RCW
ss.23B.08.570, Article XIII of the Registrant's Amended and Restated Articles of
Incorporation provides as follows:
"ARTICLE XIII. Indemnification. The corporation shall indemnify and advance
expenses to its directors, officers, agents and employees as follows:
A. Directors and Officers. In all circumstances and to the full extent
permitted by the Washington Business Corporation Act now or hereafter in
force, the corporation shall indemnify any person who is or was a director,
officer or agent of the corporation and who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (including an action by or in
the right of the corporation), by reason of the fact that he is or was an
agent of the corporation, against expenses, judgments, fines, and amounts
paid in settlement and incurred by him in connection with such action, suit
or proceeding. However, such indemnity shall not apply on account of: (a)
acts or omissions of the director and officer finally adjudged to be in
violation of law; (b) conduct of the director and officer finally adjudged
to be in violation of RCW 23B.08.310, or (c) any transaction with respect
to which it was finally adjudged that such director and officer personally
received a benefit in money, property, or services to which the director
was not legally entitled. The corporation shall advance expenses incurred
in a proceeding for such persons pursuant to the terms set forth in a
separate directors' resolution or contract.
B. Implementation. The Board of Directors may take such action as is
necessary to carry out these indemnification and expense advancement
provisions. It is expressly empowered to adopt, approve and amend from time
to time such Bylaws, resolutions, contracts or further indemnification and
expense advancement arrangements as may be permitted by law, implementing
these provisions. Such Bylaws, resolutions, contracts, or further
arrangements shall include, but not be limited to, implementing the manner
in which determinations as to any indemnity or advancement of expenses
shall be made.
C. Survival of Indemnification Rights. No amendment or repeal of this
Article shall apply to or have any effect on any right to indemnification
provided hereunder with respect to acts or omissions occurring prior to
such amendment or repeal.
II-1
D. Service for Other Entities. The indemnification and advancement of
expenses provided under this Article shall apply to directors, officers,
employees, or agents of the corporation for both (a) service in such
capacities for the corporation, and (b) service at the corporations's
request as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise. A person is considered to be
serving an employee benefit plan at the corporation's request if such
person's duties to the corporation also impose duties on, or otherwise
involve services by, the director to the plan or to participants in or
beneficiaries of the plan.
E. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise against liability
asserted against him and incurred by him in such capacity or arising out of
his status as such, whether or not the corporation would have had the power
to indemnify him against such liability under the provisions of this bylaw
and Washington law.
F. Other Rights. The indemnification provided by this section shall
not be deemed exclusive of any other right to which those indemnified may
be entitled under any other bylaw, agreement, vote of stockholders, or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such an office,
and shall continue as to a person who has ceased to be a director, trustee,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person."
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this Registration
Statement are as follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among EverTrust Financial Group, Inc.,
Everett Mutual Bank and Charles Webb & Company
1.2 -- Engagement Letter between Everett Mutual Bank and Charles Webb &
Company(a)
2 -- Plan of Conversion of Everett Mutual Bank (attached as an exhibit to the
Proxy Statement included herein as Exhibit 99.5)(a)
3.1 -- Articles of Incorporation of EverTrust Financial Group, Inc.(a)
3.2 -- Bylaws of EverTrust Financial Group, Inc.(a)
4 -- Form of Certificate for Common Stock(a)
5 -- Opinion of Breyer & Associates PC regarding legality of securities
registered(a)
8.1 -- Federal Tax Opinion of Breyer & Associates PC
8.2 -- State Tax Opinion of Deloitte & Touche LLP
8.3 -- Opinion of RP Financial, LP as to the value of subscription rights(a)
II-2
10.1 -- Proposed Form of Employment Agreement for Executive Officers
10.2 -- Proposed Form of Employee Stock Ownership Plan(a)
10.3 -- Everett Mutual Bank 401(k) Plan
10.4 -- Proposed Form of Everett Mutual Bank Employee Severance Compensation
Plan(a)
21 -- Subsidiaries of EverTrust Financial Group, Inc.
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Associates PC (contained in opinion included as
Exhibit 5)(a)
23.3 -- Consent of Breyer & Associates PC as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.4 -- Consent of Deloitte & Touche LLP as to its State Tax Opinion (contained
in opinion included in Exhibit 8.2)
23.5 -- Consent of RP Financial, LC.(a)
24 -- Power of Attorney (contained in signature page to the Registration
Statement)(a)
99.1 -- Order and Certification Form (contained in the marketing materials
included as Exhibit 99.2)(a)
99.2 -- Solicitation and Marketing Materials(a)
99.3 -- Appraisal Agreement with RP Financial, LC.(a)
99.4 -- Appraisal Report of RP Financial, LC.(b)
99.5 -- Proxy Statement for Special Meeting of Members of Mutual Bancshares(a)
- ----------
(a) Previously filed.
(b) In accordance with Rule 202 of Regulation S-T, the Appraisal Report of RP
Financial, LC, is being filed in paper pursuant to a continuing hardship
exemption.
II-3
Financial Statements and Schedules
Index To Consolidated Financial Statements
Mutual Bancshares
Page
----
Independent Auditors' Report - Deloitte & Touche LLP ................... F-1
Consolidated Balance Sheets as of March 31, 1999 and 1998 .............. F-2
Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997 ......................................... 21
Consolidated Statements of Changes in Equity Capital for the
Years Ended March 31, 1999 and 1998 .................................... F-3
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999 and 1998 ................................................ F-4
Notes to Consolidated Financial Statements ............................. F-5
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-4
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended ("Exchange Act") (and,
where applicable, each filing of any employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Everett, Washington on
the 2nd day of August, 1999.
EVERTRUST FINANCIAL GROUP, INC.
By: /s/ Michael B. Hansen
-------------------------------------
Michael B. Hansen
President and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Michael B. Hansen President and Chief Executive August 2, 1999
- -------------------------- Officer and Director
Michael B. Hansen (Principal Executive Officer)
/s/ Jeffrey R. Mitchell* Vice President, Chief Financial August 2, 1999
- -------------------------- Officer and Treasurer
Jeffrey R. Mitchell (Principal Financial and
Accounting Officer)
/s/ Margaret B. Bavasi* Chairman of the Board August 2, 1999
- --------------------------
Margaret B. Bavasi
/s/ Michael R. Deller* Director August 2, 1999
- --------------------------
Michael R. Deller
Signatures Title Date
- ---------- ----- ----
/s/ Thomas J. Gaffney* Director August 2, 1999
- --------------------------
Thomas J. Gaffney
/s/ R. Michael Kight* Director August 2, 1999
- --------------------------
R. Michael Kight
/s/ George S. Newland* Director August 2, 1999
- --------------------------
George S. Newland
/s/ William J. Rucker* Director August 2, 1999
- --------------------------
William J. Rucker
/s/ Thomas R. Collins* Director August 2, 1999
- --------------------------
Thomas R. Collins
/s/ Robert a. Leach, Jr.* Director August 2, 1999
- --------------------------
Robert A. Leach, Jr.
- -------------
* By power of attorney dated June 18, 1999.
As filed with the Securities and Exchange Commission on August 2, 1999
Registration No. 333-81125
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EVERTRUST FINANCIAL GROUP, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Washington 6036 91-1613658
- ------------------------------- ------------------ -------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
2707 Colby Avenue, Suite 600
Everett, Washington 98201
(425) 258-3645
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire Beth A. Freedman, Esquire
BREYER & ASSOCIATES PC SILVER, FREEDMAN & TAFF, L.L.P.
Suite 700 East Suite 700 East
1100 New York Avenue, N.W. 1100 New York Avenue, N.W.
Washington, D.C. 20005 Washington, D.C. 20005
(202) 737-7900 (202) 414-6100
---------------------------- -------------------------------
(Name and address of agent for service)
================================================================================
INDEX TO EXHIBITS
1.1 -- Form of proposed Agency Agreement among EverTrust Financial Group, Inc.,
Everett Mutual Bank and Charles Webb & Company
1.2 -- Engagement Letter between Everett Mutual Bank and Charles Webb &
Company(a)
2 -- Plan of Conversion of Everett Mutual Bank (attached as an exhibit to the
Proxy Statement included herein as Exhibit 99.5)(a)
3.1 -- Articles of Incorporation of EverTrust Financial Group, Inc.(a)
3.2 -- Bylaws of EverTrust Financial Group, Inc.(a)
4 -- Form of Certificate for Common Stock(a)
5 -- Opinion of Breyer & Associates PC regarding legality of securities
registered(a)
8.1 -- Federal Tax Opinion of Breyer & Associates PC
8.2 -- State Tax Opinion of Deloitte & Touche LLP
8.3 -- Opinion of RP Financial, LP as to the value of subscription rights(a)
10.1 -- Proposed Form of Employment Agreement for Executive Officers
10.2 -- Proposed Form of Employee Stock Ownership Plan(a)
10.3 -- Everett Mutual Bank 401(k) Plan
10.4 -- Proposed Form of Everett Mutual Bank Employee Severance Compensation
Plan(a)
21 -- Subsidiaries of EverTrust Financial Group, Inc.
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Associates PC (contained in opinion included as
Exhibit 5)(a)
23.3 -- Consent of Breyer & Associates PC as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.4 -- Consent of Deloitte & Touche LLP as to its State Tax Opinion (contained
in opinion included in Exhibit 8.2)
23.5 -- Consent of RP Financial, LC.(a)
24 -- Power of Attorney (contained in signature page to the Registration
Statement)(a)
99.1 -- Order and Certification Form (contained in the marketing materials
included as Exhibit 99.2)(a)
99.2 -- Solicitation and Marketing Materials(a)
99.3 -- Appraisal Agreement with RP Financial, LC.(a)
99.4 -- Appraisal Report of RP Financial, LC.(b)
99.5 -- Proxy Statement for Special Meeting of Members of Mutual Bancshares(a)
- ----------
(a) Previously filed.
(b) In accordance with Rule 202 of Regulation S-T, the Appraisal Report of RP
Financial, LC, is being filed in paper pursuant to a continuing hardship
exemption.