<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
October 26, 1999
----------------
Date of Report
(Date of earliest event reported)
FIRST MUTUAL BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Washington 91-2005970
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
400 108th Avenue N.E., Bellevue, WA 98004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (425) 455-7300
--------------
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On October 26, 1999, First Mutual Savings Bank reorganized into the
holding company form of ownership through the following steps: (1) the
formation by First Mutual Savings Bank of First Mutual Bancshares, Inc. as a
wholly-owned, first-tier subsidiary, incorporated under Title 23B of the Revised
Code of Washington; (2) the formation of First Interim Bank, which was
wholly-owned by First Mutual Bancshares, Inc. immediately prior to the
reorganization; and (3) the merger of First Interim Bank with and into First
Mutual Savings Bank under the Amended Charter and Articles of Incorporation of
First Mutual Savings Bank. The name of the banking corporation resulting from
the merger of First Interim Bank and First Mutual Savings Bank is "First
Mutual Bank."
Pursuant to the reorganization of First Mutual Savings Bank into the
holding company form of ownership, among other things, all of the issued and
outstanding shares of common stock, $1.00 par value per share, of First
Mutual Savings Bank were automatically converted by operation of law on a
one-for-one basis into an equal number of issued and outstanding shares of
First Mutual Bancshares, Inc. In addition, First Mutual Bancshares, Inc.
became the sole shareholder of First Mutual Bank. The shares of First Mutual
Bancshares, Inc. will trade on the Nasdaq Stock Market under the symbol
"FMSB." This Current Report on Form 8-K is being filed for the purpose of
filing as exhibits the First Mutual Bancshares, Inc. news release dated
October 26, 1999, the articles and bylaws of First Mutual Savings Bank and
First Mutual Bancshares, Inc., and the most recent proxy statement, annual
report and quarterly reports filed by First Mutual Savings Bank with the
Federal Deposit Insurance Corporation ("FDIC") prior to the reorganization.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits. The exhibits accompanying this report are listed in the
accompanying Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 10, 1999 FIRST MUTUAL BANCSHARES, INC.
By: /s/ John R. Valaas
--------------------------------
John R. Valaas
President and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
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<S> <C>
3.1 Articles of Incorporation (First Mutual Savings Bank)
3.2 Articles of Incorporation (First Mutual Bancshares, Inc.)
3.3 Bylaws (First Mutual Savings Bank)
3.4 Bylaws (First Mutual Bancshares, Inc.)
13.1 First Mutual Savings Bank's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed with
the FDIC on March 31, 1999.
13.2 First Mutual Savings Bank's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, filed with
the FDIC on May 14, 1999.
13.3 First Mutual Savings Bank's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, filed with
the FDIC on August 12, 1999.
13.4 First Mutual Savings Bank's Proxy Statement dated
March 19, 1999.
99.1 Press Release dated October 26, 1999.
</TABLE>
<PAGE>
ARTICLES OF AMENDMENT OF
AMENDED CHARTER AND ARTICLES OF INCORPORATION OF
FIRST MUTUAL SAVINGS BANK
ARTICLES OF AMENDMENT of the Amended Charter and Articles of
Incorporation of First Mutual Savings Bank (the "Bank") are herein executed
by said Bank, pursuant to the provisions of RCW 23B.10.060, as follows:
FIRST: The name of this corporation is First Mutual Savings Bank.
SECOND: The text of the amendments is that there is added to the Amended
Charter and Articles of Incorporation of First Mutual Savings Bank new Articles
XIV and XV as follows:
ARTICLE XIV
A director of the Bank shall not be personally liable to the Bank or
its shareholders for monetary damages for conduct as a director, except
for:
(a) Acts or omissions involving intentional misconduct by the
director or a knowing violation of law by the director;
(b) Conduct violating RCW 23B.08.310; or
(c) Any transaction from which the director will personally receive
a benefit in money, property, or services to which the director is not
legally entitled.
If either the Washington Business Corporation Act (RCW 23B) or the
Washington statutes applicable to savings banks (RCW 32) is hereafter
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Bank shall be eliminated or limited to the fullest extent permitted by
either such title, as so amended. Any repeal or modification of the
foregoing paragraph by the Bank or its shareholders shall not adversely
affect any right or protection of a director of the Bank with respect to
any acts or omissions of such director occurring prior to such repeal or
modification. This Article XIV does not limit the liability of a director
for any act or
<PAGE>
omission occurring prior to the date when this Article XIV initially
becomes effective.
ARTICLE XV
The Bank shall indemnify its directors and officers to the fullest
extent permitted by the Washington Business Corporation Act (RCW 23B) or
the Washington statutes pertaining to savings banks (RCW 32) now or
hereafter in force. However, such indemnity shall not apply on account of:
(a) Acts or omissions of the director or officer finally adjudged
to be intentional misconduct or a knowing violation of law;
(b) Conduct of the director or 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 or officer personally received a benefit in money,
property or services to which the director was not legally entitled. The
Bank shall advance expenses for such persons pursuant to the terms set
forth in the Bylaws, or any separate directors resolution or contract.
This Article is not a limitation upon the indemnity provisions in
the Bank's Bylaws.
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.
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.
THIRD: These amendments do not provide for an exchange,
reclassification or cancellation of issued shares.
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<PAGE>
FOURTH: These amendments were adopted April 28, 1994.
FIFTH: These amendments were duly approved by the shareholders in
accordance with RCW 23B.10.030 and 23B.10.040, and the Washington statutes
pertaining to savings banks.
DATED this 20th day of May, 1994.
FIRST MUTUAL SAVINGS BANK
By: /s/ John R. Valaas
---------------------
John R. Valaas, President
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<PAGE>
AMENDED CHARTER
AND
ARTICLES OF INCORPORATION
OF
FIRST MUTUAL SAVINGS BANK
---------------------------
Pursuant to the provisions of Section 32.32.485 of the Revised Code of
Washington, the following shall constitute the amended charter and articles
of incorporation of First Mutual Savings Bank.
ARTICLE I. The name of the corporation shall be First Mutual Savings
Bank.
ARTICLE II. The principal office of the corporation shall be located
in the City of Bellevue, County of King, State of Washington.
ARTICLE III. The nature of the business and the objects and purposes to
be transacted, promoted or carried on by the corporation are to engage in any
lawful act of business for which savings banks may be organized under the
laws of the State of Washington as now in existence or as such laws may
hereafter be amended.
ARTICLE IV. The total number of shares of all classes of capital stock
which the corporation has authority to issue is 20,000,000, of which
10,000,000 shall be common stock, par value $1.00 per share, and 10,000,000
shall be serial preferred stock, par value $1.00 per share. The
consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the stated value per share. Upon
payment of such consideration such shares shall be deemed to be fully paid
and nonassessable. Upon authorization by the board of directors, the
corporation may issue its own shares in exchange for or in conversion of its
outstanding shares or distribute its own shares, pro rata to its shareholders
or the shareholders of one or more classes or series, to effectuate stock
dividends or splits, and any such transaction shall not require
consideration. Nothing contained herein shall entitle the holders of any
class or series of capital stock to vote as a separate class or series. A
description of the different classes and series of the corporation's capital
stock is as follows:
COMMON STOCK. Except as provided herein, the holders of the common
stock shall exclusively possess all voting power. Each holder of shares of
common stock shall be entitled to one vote for each share held by such
holder, and there shall be no right to cumulate votes for the election of
directors or for any other purpose.
<PAGE>
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock
having preference over the common stock as to the payment of dividends, the
full amount of dividends and of sinking fund or retirement fund or other
retirement payments, if any, to which such holders are respectively entitled
in preference to the common stock, then dividends may be paid on the common
stock and on any class or series of stock entitled to participate therewith
as to dividends, out of any assets legally available for the payment of
dividends; but only when and as declared by the board of directors.
Subject to Article VII of these Articles, in the event of any
liquidation, dissolution or winding up of the corporation, after there shall
have been paid to or set aside for the holders of any class having
preferences over the common stock in the event of liquidation, dissolution or
winding up, of the full preferential amounts of which they are respectively
entitled, the holders of the common stock, and of any class or series of
stock entitled to participate therewith, in whole or in part, as to
distribution of assets, shall be entitled after payment or provision for
payment of all debts and liabilities of the corporation to receive the
remaining assets of the corporation available for distribution, in cash or in
kind.
Each share of common stock shall have the same relative rights as
and be identical in all respects with all the other shares of common stock.
SERIAL PREFERRED STOCK. The board of directors of the corporation
is authorized by resolution or resolutions from time to time adopted, to
provide for the issuance of serial preferred stock in series and to fix and
state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof,
including, but not limited to, determination of any of the following:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative and, if
so, from which date or dates, the payment date or dates for dividends,
and the participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation, dissolution or
winding up of the corporation;
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<PAGE>
(f) Whether the shares or such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other series of
the same or any other class or classes of stock of the corporation, and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange.
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all other shares of the
same series.
ARTICLE VI. Holders of the capital stock of the corporation shall not be
entitled to preemptive rights with respect to any shares of the corporation
which may be issued.
ARTICLE VII. Pursuant to the laws of the State of Washington, the
corporation shall establish and maintain a liquidation account for the benefit
of its savings account holders as of March 31, 1985 ("eligible savers"). In the
event of a complete liquidation of the corporation it shall comply with such
laws with respect to the amount and the priorities on liquidation of each
eligible saver's inchoate interests in the liquidation account to the extent it
is still in existence; provided, however, that an eligible saver's inchoate
interest in the liquidation account shall not entitle such eligible saver to any
voting rights at meetings of the corporation's stockholders.
ARTICLE VIII. One third of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy shall constitute a quorum at
a meeting of stockholders. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
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<PAGE>
ARTICLE IX. The persons who shall serve as the initial board of
directors of the corporation until the first annual meeting of stockholders, at
which time they may stand for reelection, are as follows:
NAME ADDRESS
---- -------
Bruce F. Baker 14301 N.E. 2nd Place
Bellevue, Washington 98007
P.O. Box 1647
Bellevue, Washington 98009
Janine Fortin Barker 14445 S.E. 55th
Bellevue, Washington 98006
P.O. Box 1863
Bellevue, Washington 98009
Elwell C. Case 1029 37th East
Seattle, Washington 98112
F. Kemper Freeman, Jr. P.O. Box 1012
Bellevue, Washington 98009
P.O. Box 908
Bellevue, Washington 98009
Victor E. Parker 8911 Lake Washington Boulevard N.E.
Bellevue, Washington 98004
1700 First Interstate Center
999 3rd Avenue
Seattle, Washington 98104
Richard S. Sprague 6211 N.E. 138th Place
Kirkland, Washington 98033
Skyline Tower, 15th Floor,
10900 N.E. 4th
Bellevue, Washington 98004
William E. Tremper 9235 N.E. 37th Place
Bellevue, Washington 98004
300 Elliott Avenue, West
#430
Seattle, Washington 98119
H. Scott Wallace 11602 W. Sno-Valley Road N.E.
Carnation, Washington 98014
Robert C. Wallace 4526-153rd Avenue S.E.
Bellevue, Washington 98006
P.O. Box 4184
Bellevue, Washington 98009
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<PAGE>
Harold J. Woosley 2025 8th Place, N.E.
Bellevue, Washington 98004
P.O. Box 3325
Bellevue, Washington 98009
ARTICLE X. The registered office of the corporation shall be located
at 10430 N.E. 8th, Bellevue, Washington. The initial registered agent of the
corporation at such address shall be Bruce F. Baker.
ARTICLE XI. For a period of three years from the date of filing of
these articles of incorporation with the Secretary of State, no person,
either directly or through an affiliate thereof, shall be permitted to
acquire more than 10% of the outstanding voting stock of the corporation. The
terms "person" and "affiliate" shall have the meaning defined in RCW
32.32.435 and RCW 32.32.025, respectively, as now or hereafter in effect.
ARTICLE XII. No amendment to these articles of incorporation shall be
made unless such is first proposed by the board of directors and approved by
the stockholders by at least two-thirds of the total votes eligible to be
cast at a lawful meeting. All amendments to these articles of incorporation
shall be subject to the approval of the Supervisor of Banking, State of
Washington.
ARTICLE XIII. The name and mailing address of the incorporator is as
follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Bruce F. Baker 14301 N.E. Second Place
Bellevue, Washington 98007
</TABLE>
-5-
<PAGE>
Executed this 21st day of November, 1985.
/s/ Bruce F. Baker /s/ Richard S. Sprague
- ---------------------------------- ----------------------------------
Bruce F. Baker Richard S. Sprague
/s/ Janine Fortin Barker /s/ William E. Tremper
- ---------------------------------- ----------------------------------
Janine Fortin Barker William E. Tremper
/s/ Elwell C. Case /s/ H. Scott Wallace
- ---------------------------------- ----------------------------------
Elwell C. Case H. Scott Wallace
/s/ F. Kemper Freeman, Jr. /s/ Robert C. Wallace
- ---------------------------------- ----------------------------------
F. Kemper Freeman, Jr. Robert C. Wallace
/s/ Victor E. Parker /s/ Harold J. Woosley
- ---------------------------------- ----------------------------------
Victor E. Parker Harold J. Woosley
-6-
<PAGE>
STATE OF WASHINGTON
COUNTY OF KING
On this 21st day of November, 1985 before me personally appeared Bruce
F. Baker, Janine Fortin Barker, Elwell C. Case, F. Kemper Freeman, Jr.,
Victor E. Parker, Richard S. Sprague, William E. Tremper, H. Scott Wallace,
Robert C. Wallace, Harold J. Woosley, to be known to be the Trustees of First
Mutual Savings Bank described in and who executed the within and foregoing
instrument, and acknowledged that they signed the same as their free and
voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 21st day of November, 1985.
/s/ Pamela Susan Drexler
-----------------------------------
Notary Public in and for the State
of Washington, residing at Redmond
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<PAGE>
CERTIFICATE
This Certificate, subscribed and acknowledged by the undersigned this 23rd
day of December, 1985, each of whom presently serves as trustee of First Mutual
Savings Bank (the "Bank") and each of whom shall be directors of the Bank upon
its conversion to a stock savings bank pursuant to RCW 32.32, sets forth the
following:
(a) A total of 384,007 shares of the Bank's common stock offered pursuant
to its plan of conversion ("Plan") has been subscribed for by eligible account
holders and other participants under the Bank's Plan and the Bank has sold the
remaining shares in an underwritten public offering, and upon recordation and
filing of the articles of incorporation attached hereto, all of the shares of
the Bank shall be issued.
(b) The attached articles of incorporation have been executed by all of
the persons who are to be directors of the Bank upon conversion.
(c) The principal office of the Bank shall continue to be located at
400 108th Avenue, N.E., King County, Bellevue, Washington, and the Bank shall
continue to conduct its business in the same manner and in the same locations
as it has theretofore conducted its business.
(d) The name, occupation, residence, and post office address of each of
the persons signing this certificate are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS OCCUPATION
---- ------- ----------
<S> <C> <C>
Bruce F. Baker 14301 N.E. 2nd Place President/CEO
Bellevue, Washington 98007 First Mutual Bank
P.O. Box 1647
Bellevue, Washington 98009
Janine Fortin Barker 14445 S.E. 55th Vice President
Bellevue, Washington 98006 Quality Food
P.O. Box 1863 Centers, Inc.
Bellevue, Washington 98009
Elwell C. Case 1029 37th East Retired
Seattle, Washington 98112
F. Kemper Freeman, Jr. P.O. Box 1012 President
Bellevue, Washington 98009 Bellevue Square
P.O. Box 908 Managers, Inc.
Bellevue, Washington 98009
(Continued)
<PAGE>
Victor E. Parker 8911 Lake Washington Blvd. N.E. President
Bellevue, Washington 98004 Parker Smith & Feek,
1700 First Interstate Center Inc.
999 3rd Avenue
Seattle, Washington 98104
Richard S. Sprague 6211 N.E. 138th Place Senior Partner
Kirkland, Washington 98033 (Attorney) Bogle &
Skyline Tower, 15th Floor, Gates
10900 N.E. 4th
Bellevue, Washington 98004
William E. Tremper 9235 N.E. 37th Place Partner (CPA)
Bellevue, Washington 98004 Tremper, Wolfe & Co.
300 Elliott Avenue, West
#430
Seattle, Washington 98119
H. Scott Wallace 11602 W. Sno-Valley Road N.E. Dairyman Owner
Carnation, Washington 98014
Robert C. Wallace 4526-153rd Avenue S.E. Managing Partner
Bellevue, Washington 98006 Wallace Properties
P.O. Box 4184 Group
Bellevue, Washington 98009
Harold J. Woosley 2025 8th Place, N.E. Owner
Bellevue, Washington 98004 Hal Woosley Realty
P.O. Box 3325
Bellevue, Washington 98009
</TABLE>
(e) The assets, liabilities, guaranty fund, and nondivided profits of
the Bank as of December 1, 1985, were as follows:
<TABLE>
<S> <C>
Assets.......................... $114,451,700
Liabilities..................... $109,130,300
Guaranty Fund................... $ 1,559,031
Unallocated Reserves............ $ 2,083,474
Nondivided Profits.............. $ 1,678,928
</TABLE>
(f) Each of the undersigned will accept the responsibilities and
faithfully discharge the duties of a director of the Bank, as converted, and is
free from all the disqualifications specified in the laws applicable to
converted mutual savings banks.
<PAGE>
WHEREAS, this Certificate is hereby subscribed and acknowledged by each
of the undersigned on the day and year first hereinabove set forth.
/s/ Bruce F. Baker /s/ Richard S. Sprague
- ------------------------ ---------------------------
Bruce F. Baker Richard S. Sprague
/s/ Janine Fortin Barker /s/ William E. Tremper
- ------------------------ ---------------------------
Janine Fortin Barker William E. Tremper
/s/ Elwell C. Case /s/ H. Scott Wallace
- ------------------------ ---------------------------
Elwell C. Case H. Scott Wallace
/s/ F. Kemper Freeman, Jr. /s/ Robert C. Wallace
- ------------------------ ---------------------------
F. Kemper Freeman, Jr. Robert C. Wallace
/s/ Victor E. Parker /s/ Harold J. Woosley
- ------------------------ ---------------------------
Victor E. Parker Harold J. Woosley
<PAGE>
STATE OF WASHINGTON
COUNTY OF KING
On this 23rd day of December, 1985, before me personally appeared Bruce
F. Baker, Janine Fortin Barker, Elwell C. Case, F. Kemper Freeman, Jr.,
Victor E. Parker, Richard S. Sprague, William E. Tremper, H. Scott Wallace,
Robert C. Wallace, Harold J. Woosley, to me known to be the Trustees of
First Mutual Savings Bank described in and who executed the within and
foregoing instrument, and acknowledged that they signed the same as their
free and voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 23rd day of December, 1985.
/s/ Pamela Susan Drede
--------------------------------------
Notary Public in and for the State
of Washington, residing at Redmond
<PAGE>
ARTICLES OF INCORPORATION
OF
FIRST MUTUAL BANCSHARES, INC.
ARTICLE I. The name of the corporation shall be First Mutual Bancshares,
Inc. (the "Corporation").
ARTICLE II. The principal office of the Corporation shall be located in
the City of Bellevue, County of King, State of Washington.
ARTICLE III. The nature of the business and the objects and purposes to be
transacted, promoted or carried on by the Corporation are to engage in any
lawful business for which a corporation may be incorporated under Title 23B, RCW
as now in existence or as such laws may hereafter be amended.
ARTICLE IV. The total number of shares of all classes of capital stock
which the Corporation has authority to issue is 20,000,000, of which 10,000,000
shall be common stock, par value $1.00 per share, and 10,000,000 shall be serial
preferred stock, par value $1.00 per share. The consideration for the issuance
of the shares shall be paid in full before their issuance and shall not be less
than the stated value per share. Upon payment of such consideration such shares
shall be deemed to be fully paid and nonassessable. Upon authorization by the
board of directors, the Corporation may issue its own shares in exchange for or
in conversion of its outstanding shares or distribute its own shares, pro rata
to its shareholders or the shareholders of one or more classes or series, to
effectuate stock dividends or splits, and any such transaction shall not require
consideration. Nothing contained herein shall entitle the holders of any class
or series of capital stock to vote as a separate class or series. A description
of the different classes and series of the Corporation's capital stock is as
follows:
COMMON STOCK. Except as provided herein, the holders of the common
stock shall exclusively possess all voting power. Each holder of shares of
common stock shall be entitled to one vote for each share held by such holder,
and there shall be no right to cumulate votes for the election of directors or
for any other purpose.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund or retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in preference
to the common stock, then dividends may be paid on the common stock and on any
class or series of stock entitled to participate therewith as to dividends, out
of any assets legally available for the payment of dividends; but only when and
as declared by the board of directors.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
any class having preferences over the
<PAGE>
common stock in the event of liquidation, dissolution or winding up, of the
full preferential amounts of which they are respectively entitled, the
holders of the common stock, and of any class or series of stock entitled to
participate therewith, in whole or in part, as to distribution of assets,
shall be entitled after payment or provision for payment of all debts and
liabilities of the Corporation to receive the remaining assets of the
Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative rights as and
be identical in all respects with all the other shares of common stock.
SERIAL PREFERRED STOCK. The board of directors of the Corporation is
authorized by resolution or resolutions from time to time adopted, to provide
for the issuance of serial preferred stock in series and to fix and state the
voting powers, designations, preferences and relative, participating, optional
or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof, including, but not limited
to, determination of any of the following:
(a) the distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative and,
if so, from which date or dates, the payment or dates for dividends,
and the participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of
such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
(f) Whether the shares or such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase
or redemption of such shares, and if so entitled, the amount of such
fund and the manner of its application, including the price or prices
at which such shares may be redeemed or purchased through the
application of such fund;
(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock of the
Corporation, and, if so convertible or exchangeable, the conversion
price or prices, or the rate or rates of
<PAGE>
exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such
conversion or exchange.
(h) The price or other consideration for which the shares of
such series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
serial preferred stock and whether such shares may be reissued as
shares of the same or any other serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all other shares of the
same series.
ARTICLE V. Holders of the capital stock of the Corporation shall not be
entitled to preemptive rights with respect to any shares of the Corporation
which may be issued.
ARTICLE VI. One third of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy shall constitute a quorum at
a meeting of stockholders. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
ARTICLE VII. The persons who shall serve as the initial board of directors
of the Corporation until the first annual meeting of stockholders, at which time
they may have stand for reelection, are as follows: James J. Doud, Jr., Mary
Case Dunnam, Janine Florence, F. Kemper Freeman, Jr., Victor E. Parker, Richard
S. Sprague, George W. Rowley, Jr., William E. Tremper, John R. Valaas, H. Scott
Wallace, Robert C. Wallace.
ARTICLE VIII. The registered office of the Corporation shall be located at
400 - 108th Avenue N.E., Bellevue, Washington 98004. The initial registered
agent of the Corporation at such address shall be Phyllis A. Easterlin.
ARTICLE IX. No amendment to these articles of incorporation shall be made
unless such is first proposed by the board of directors and approved by the
stockholders by at least two-thirds of the total votes eligible to be cast at a
lawful meeting.
ARTICLE X. The name and mailing address of the incorporator is as
follows:
Name Mailing Address
---- ---------------
First Mutual Savings Bank 400 - 108th Avenue N.E., Bellevue, WA 98004
ARTICLE XI. A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages for conduct as a
director, except for:
<PAGE>
(a) Acts or omissions involving intentional misconduct by the director or
a knowing violation of law by the director;
(b) Conduct violating RCW 23B.08.310; or
(c) Any transaction from which the director will personally receive a
benefit in money, property, or services to which the director is not legally
entitled.
If the Washington Business Corporation Act (RCW 23B) is hereafter amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by either such
title, as so amended. Any repeal or modification of the foregoing paragraph by
the Corporation or its shareholders shall not adversely affect any right or
protection of a director of the Corporation with respect to any acts or
omissions of such director occurring prior to such repeal or modification.
ARTICLE XII. The Corporation shall indemnify its directors and officers to
the fullest extent permitted by the Washington Business Corporation Act (RCW
23B) now or hereafter in force. However, such indemnity shall not apply on
account of:
(a) Acts or omissions of the director or officer finally adjudged to be
intentional misconduct or a knowing violation of law;
(b) Conduct of the director or 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 or officer personally received a benefit in money, property or
services to which the director was not legally entitled. The Corporation shall
advance expenses for such persons pursuant to the terms set forth in the Bylaws,
or any separate directors resolution or contract.
This Article is not a limitation upon the indemnity provisions in the
Corporation's Bylaws.
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.
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
<PAGE>
amendment or repeal.
The undersigned incorporator has executed these Articles of Incorporation
as duplicate signed originals on _____________, 1999.
INCORPORATOR:
FIRST MUTUAL SAVINGS BANK
By ______________________________
John R. Valaas
President
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF )
I certify that I know or have satisfactory evidence that John R. Valaas is
the person who appeared before me, and said person acknowledged that he signed
this instrument and acknowledged it to be his free and voluntary act for the
uses and purposes mentioned in the instrument.
DATED:
Notary Public
[Seal or Stamp]
[Printed Name]
My appointment expires:
<PAGE>
CONSENT TO SERVE AS REGISTERED AGENT
I, Phyllis A. Easterlin, hereby consent to serve as Registered Agent in the
State of Washington for First Mutual Bancshares, Inc. (the "Corporation"). I
understand that as agent for the Corporation, it will be my responsibility to
receive service of process in the name of the Corporation; to forward all mail
to the Corporation; and to immediately notify the Secretary of State in the
event of my resignation, or of any changes in the registered office of the
Corporation for which I am agent.
Dated this ____ day of ____________________, 1999.
By ________________________________
Phyllis A. Easterlin
<PAGE>
BYLAWS OF
FIRST MUTUAL SAVINGS BANK
ARTICLE I
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the principal office of the Bank or at such other
place within or without the State of Washington as the Board of Directors may
determine and as designated in the notice of such meeting.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the Bank for
the election of Directors and for the transaction of any other business of the
Bank shall be held annually on the fourth Thursday in each April, unless that
date is a legal holiday, in which case the meeting shall be held on the first
business day thereafter, or at such other date and time prior to May 15 as the
Board of Directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the President, or a majority of
the Board of Directors and shall be called by the President or the Secretary
upon the written request of the holders of not less than one-fourth of all the
outstanding capital stock of the Bank entitled to vote at the meeting. Such
written request shall state the place and purpose or purposes of the meeting and
shall be delivered at the principal office of the Bank addressed to the
President or the Secretary. Except as otherwise determined by the Board of
Directors, such written request must be received by the President or Secretary
more than sixty days in advance of the date of the special meeting. Without
limitation, the Board of Directors, through the rules adopted, and the Chairman
of the meeting in the conduct thereof, may restrict or limit attendance, the
debate of issues and the question period to allow the efficient conduct of the
meeting and the accomplishment of the essential business to come before the
meeting.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with such rules as may be established by the Board of
Directors or these Bylaws. The Board of Directors shall designate, when
present, the President to preside at such meetings.
SECTION 5. NOTICE OF MEETING. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be delivered by the Secretary or the officer performing his duties, not
less than ten days nor more than sixty days before the meeting to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the U.S. mail, addressed to
the
<PAGE>
shareholder at his address as it appears on the stock transfer books or
records of the Bank as of the record date prescribed in Section 6 of this
Article I, with postage thereon prepaid. If a shareholder be present at a
meeting, or in writing waive notice thereof before or after the meeting,
notice of the meeting to such shareholder shall be unnecessary. When any
shareholders' meeting, either annual or special, is adjourned for thirty days
or more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than thirty days or of the
business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors shall fix in advance a date as the record
date for any such determination of shareholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of shareholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this Section, such determination shall apply to any adjournment
thereof.
SECTION 7. QUORUM. One-third of the outstanding shares of the Bank
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a quorum is represented at a
meeting, a majority of the shares so represented may adjourn the meeting from
time to time without further notice. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. The
shareholders present at a lawful meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid
after eleven months from the date of its execution.
In order to be valid, any proxy form not supplied by the Bank must contain
all the identifying information found on the Bank's form of proxy and must be
presented to the Secretary before the beginning of the meeting. A presented
proxy or other written direction which revokes a proxy previously delivered to
the Bank must so state. Votes may only be cast by proxy delivered prior to the
meeting, or by full completion of a written ballot supplied by the Bank during
the meeting. A vote properly cast at the meeting will revoke any previous proxy
cast on the issue in question.
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<PAGE>
SECTION 9. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Bank to the contrary, at any meeting of the
shareholders of the Bank, any one or more of such shareholders may cast, in
person or by proxy, all votes to which such ownership is entitled. In the event
an attempt is made to cast conflicting votes, in person or by proxy, by the
several persons in whose name shares of stock stand, the vote or votes to which
these persons are entitled shall be cast as directed by a majority of those
holding such stock and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another bank may be voted by any officer, agent or proxy as the Bylaws
of such bank may prescribe, or, in the absence of such provision, as the Board
of Directors of such bank may determine. Shares held by an administrator,
executor, guardian or conservator may be voted by him, either in person or by
proxy, without a transfer of such shares into his name. Shares standing in the
name of a Director may be voted by him, either in person or by proxy, but no
Director shall be entitled to vote shares held by him without a transfer of such
shares into his name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into his name, if authority
to do so is contained in an appropriate order of the court or other public
authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Bank, nor shares held
by another bank, if a majority of the shares entitled to vote for the election
of directors of such other bank is held by the Bank, shall be voted at any
meeting or counted in determining the total number of outstanding shares at any
given time for purposes of any meeting.
SECTION 11. VOTING. Every shareholder entitled to vote at any meeting
shall be entitled to one vote for each share of stock held by him. Unless
otherwise provided in the Articles of Incorporation, by Statute, or by these
Bylaws, a majority of those votes cast by shareholders at a lawful meeting shall
be sufficient to pass on a transaction or matter.
SECTION 12. SHAREHOLDER PROPOSALS. All shareholders shall be entitled to
consider all matters upon which they are entitled to vote. Accordingly,
proposals from shareholders shall not be considered at an annual meeting unless
they are submitted to the Secretary of the Bank in writing not later than the
first day of December preceding the annual meeting at which the matter is
proposed for consideration, or such earlier date as the Board determines is the
date 120 calendar days in advance of the date one year later than the date of
mailing the previous year's proxy statement. No proposals from the floor of an
annual meeting shall be entertained. The Bank shall give notice of any
shareholder proposal timely received in its notice of the annual
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<PAGE>
meeting. No proposal shall be considered at a special meeting unless it is
included in the notice thereof.
SECTION 13. NOMINATING COMMITTEE. The Board of Directors, or such
committee of the members of the Board of Directors as it may appoint for the
purpose, shall act as the nominating committee of the Bank. The Secretary shall
serve as secretary for the nominating committee. The nominating committee shall
be solely responsible for reviewing, determining the eligibility of, and the
qualification of candidates to serve on the Board of Directors, including
consideration of all of the requirements of law. If the entire Board of
Directors serves as the nominating committee, it shall determine the slate of
candidates. If the nominating committee is composed of fewer than all
Directors, it shall recommend to the full Board of Directors the candidates to
fill vacancies on the Board of Directors and the slate of nominees for election
as directors at the annual meeting.
The work of the nominating committee shall be conducted at one or more
meetings within the fourth calendar quarter of each year, and at such other
meetings as it finds advisable. The committee shall consider for nomination as
Directors individuals recommended by shareholders if such nominations are
received by the committee in writing on or prior to October 15 of the year
preceding the annual meeting at which consideration of said nominee is desired.
No nominations from the floor of any annual meetings shall be entertained, and
any vote for a nominee not reviewed and recommended by the nominating committee
shall be void and not counted.
SECTION 14. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Bank at
least twenty days before the date of the annual meeting, or in the case of a
shareholder proposal within the time stated at bylaw 12 of this Article I, and
all business so stated, proposed and filed shall be considered at the annual
meeting, but no other proposal shall be acted upon at the annual meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Bank shall be
managed under the direction of, its Board of Directors.
SECTION 2. NUMBER, TERM AND ELECTION. The Board of Directors shall
consist of not less than nine members nor more than thirty members, as shall
from time to time be determined by resolution of the Board of Directors. The
Board of Directors shall be divided into three
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<PAGE>
classes as nearly equal in term as possible. The members of each class shall
be elected by the shareholders for a term of three years and until their
successors are elected and have qualified. One class shall be elected by
ballot annually.
SECTION 3. PLACE OF MEETINGS; PARTICIPATION. All meetings of the Board
shall be held at the principal office of the Bank in Bellevue, Washington, or
such other place within or without the State of Washington as may be approved by
a majority of the Board of Directors. Whenever permitted by the chairman of the
meeting, members of the Board of Directors may participate in board meetings or
committee meetings by means of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each other.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at 3:00 p.m. on the fourth Thursday of each month unless that date
is a legal holiday, in which case the meeting shall be held on the first
business day thereafter at the same hour. The President, with the approval of
the majority of the Board, and upon notice as provided in Section 6 of this
Article, may change the date of any regular meeting to any other day, or hour of
the day, within the month provided for such meeting, and may change the place
thereof if such approval is given as provided in Section 3 of this Article.
SECTION 5. SPECIAL MEETINGS. A special meeting of the Board of Directors
may be called at any time by the President when in his or her opinion it is
necessary or expedient, or by the Secretary on the written request of three (3)
members of the Board.
SECTION 6. NOTICE OF MEETING. Notice of a special, or change of regular,
meeting of the Board shall be given by the Secretary by mail, telegraph or
telephone of the time, place and purpose of the meeting, to each Director at his
or her last known Post Office address in time to enable the Director, after
receipt thereof, to conveniently reach the place of meeting at the appointed
time; provided that notice of any meeting at other than the Bank's principal
office shall not be less than 48 hours prior to the meeting. Attendance by a
Director at a meeting shall constitute a waiver of notice thereof, except where
a Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 7. QUORUM. A quorum at any regular or special meeting of the
Board shall consist of a majority of the whole Board of Directors then serving,
but not less than five (5) members thereof; but less than a quorum shall have
power to adjourn any meeting of the Board, from time to time, until the next
regular meeting hereof.
SECTION 8. ORGANIZATION. Unless the Board of Directors shall by
resolution otherwise provide, the Chairman shall act as chairman at all meetings
of the Board of Directors and such other officer or Director as maybe designated
by the Board shall act as secretary at all such meetings.
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<PAGE>
SECTION 9. MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by these Bylaws or the
Articles of Incorporation.
SECTION 10. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the Directors. Such consent shall have the same effect as a unanimous
vote.
SECTION 11. VACANCIES. Any vacancy occurring in the Board of Directors,
whether resulting from the resignation or inability to serve of an existing
Director or from an increase in the number of Directors, may be filled by the
affirmative vote of a majority of the remaining Directors although less than a
quorum of the Board of Directors. A Director elected to fill a vacancy
resulting from the resignation or inability to serve (including by reason of
death) of an existing Director shall serve for the remainder of the term of the
resigning, deceased or incapacitated Director. A Director elected to fill a
vacancy resulting from an increase in the number of Directors shall serve until
the next election of Directors by the shareholders. The existence of a vacancy
on the Board of Directors shall not impair the authority of the remaining
Directors to act in any manner authorized by law.
SECTION 12. REMOVAL OF DIRECTORS. A Director may be removed from office
for the causes and in the manner provided by law.
SECTION 13. QUALIFICATIONS. A person shall not be a Director of this Bank
if that individual: (1) is not a resident of the State of Washington; (2) has
been adjudicated a bankrupt or has taken the benefit of any insolvency law or
has made a general assignment for the benefit of creditors; (3) has suffered a
judgment for a sum of money which has remained unsatisfied of record or
unsecured on appeal for a period of more than three months; (4) is a director,
officer, clerk or other employee of any other savings bank; or (5) is a director
of a bank, trust company, or national banking association, a majority of the
Board of Directors of which are Directors of this Bank. Except as provided in
Section 14 of these Bylaws, no person shall be eligible for election as a
Director of this Bank who is seventy-five (75) years of age or more, and no
person shall be a Director of this Bank solely by reason of holding public
office.
SECTION 14. AGE LIMITATIONS. A Director shall retire from the Board of
Directors upon attaining age seventy-five. Upon retiring from the Board of
Directors, a Director with ten years or more service may be elected to the
honorary position of Director Emeritus. A Director Emeritus may attend meetings
of the Board and take part in discussions, and serve on such committees of the
Board as may be determined from time to time, but shall not vote on any matters
or otherwise be considered a Director of this Bank for any other purpose.
SECTION 15. COMPENSATION OF DIRECTORS. The Board of Directors shall fix
the compensation for Directors by affirmative vote of a majority of all the
Directors. A Director
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<PAGE>
receiving compensation from the Bank for service as an officer shall not
receive any additional compensation from the Bank for service as a Director.
SECTION 16. CHAIRMAN OF THE BOARD. The Board of Directors may elect a
Chairman and Vice-Chairman of the Board. The Chairman of the Board of Directors
shall preside at meetings of the Board of Directors.
SECTION 17. EMERGENCY IN THE EVENT OF DISASTER. In the event there shall
occur and be declared by appropriate governmental authority a state of disaster
which shall be of such severity as to prevent the conduct and management of the
affairs and business of the Bank by its Board and officers as otherwise provided
in these Bylaws, any three (3) available Directors shall constitute a Special
Committee for the full conduct and management of the affairs and business of the
Bank and any two (2) shall constitute a quorum of such committee. If, in any
emergency, any authorized place of business of this Bank shall be unable to
function because of this emergency, the business ordinarily conducted at such
location may be relocated elsewhere, in addition to or in lieu of the locations
theretofore authorized.
ARTICLE III
COMMITTEES
SECTION 1. STANDING AND OTHER COMMITTEES. Standing or temporary
committees, subcommittees and advisory boards may be elected from its own number
by the Board of Directors from time to time by resolution of the Board of
Directors. The Board of Directors may from time to time vest such committees
with such powers as it may see fit, subject to such conditions as may be
prescribed by the Board. All committees so elected shall keep regular minutes
of the transactions of their meetings and shall cause them to be recorded in
books kept for that purpose. The designation of any such committee and the
delegation of authority thereto shall not relieve the Board of Directors or any
member thereof of any responsibility imposed by law.
SECTION 2. AUDIT COMMITTEE. At the annual meeting of the Board each year,
an Audit Committee of not less than three Directors, none of whom shall be
officers or salaried employees of the Bank, shall be elected. It shall be the
duty of the Audit Committee to guide and review the work of the Bank's
accounting department and to examine the results of the periodic audit of the
records and affairs of the Bank for the purpose of determining the Bank's true
financial condition. The Audit Committee may employ such assistance as it deems
necessary, including the services of an independent certified public accounting
firm, to perform such examinations on behalf of the Committee. A report of the
result of each such examination shall be presented to the Board of Directors at
its regular meeting which shall be held within thirty (30) days after completion
of such examinations. The Audit Committee shall make such other examinations as
the Board of Directors may require.
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<PAGE>
SECTION 3. INVESTMENT COMMITTEE. At each annual meeting, the Board of
Directors shall elect an Investment Committee consisting of not less than two
persons, who shall be Directors of the Bank. The duties of the Investment
Committee shall be fixed by resolution of the Board of Directors. The number of
persons to be elected to the Investment Committee shall be such as shall be
provided from time to time by resolution of the Board of Directors, but in no
event fewer than two.
SECTION 4. QUORUM. A quorum for the Investment Committee is as stated in
the Loan Policy. For other committees, a majority of the members of a committee
then serving shall be necessary at all meetings to constitute a quorum for the
transaction of business.
SECTION 5. VACANCIES. In case of death, resignation or incapacity of any
member of a committee, that member's place shall be filled for the remainder of
the term as soon as practicable in the manner prescribed for original selection.
ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 1. OFFICER DESIGNATIONS. The Board of Directors shall elect from
their number a Chairman of the Board and a Vice-Chairman of the Board. In
addition, the Directors shall elect from their number, or otherwise, a
President, and other officers having the title Executive Vice-President, Senior
Vice-President, Vice-President or Assistant Vice-President.
SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside
at all meetings of the Board of Directors and shall have all powers and perform
the duties incidental to the office or those assigned to the Chairman from time
to time by the Board of Directors. Unless otherwise provided by the Board at
any time, or from time to time, the Chairman of the Board shall also be the
Chief Executive Officer of the Bank and shall exercise overall general
supervision over its officers, business and affairs.
SECTION 3. PRESIDENT. The President shall be the Chief Executive Officer
of the Bank if the Chairman of the Board is not and shall, subject to the
direction of the Board, have such authority and such duties as shall be
determined from time to time by the Board of Directors. The President shall
also preside over meetings of the Board in the absence of the Chairman of the
Board and the Vice Chairman of the Board.
SECTION 4. VICE PRESIDENTS. The Executive Vice-President, Senior
Vice-President, other Vice Presidents and Assistant Vice-Presidents as may be
designated at any time or from time to time shall perform such duties and
exercise such authority as may be designated by the Board of Directors, the
Chairman of the Board or the officer of the Bank assigned to supervise the
activities of such officer.
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<PAGE>
In the absence or disability of the Chairman of the Board, the Vice
Chairman of the Board, and the President, the Executive Vice President, Senior
Vice President and other Vice Presidents shall perform the duties of those
officers in the order of their priority of status.
SECTION 5. SECRETARY. The Secretary shall attend meetings of the Board
and the meetings of such committees of the Board as may be requested and keep
the minutes of such meetings. The Secretary shall give such notices to the
Directors as may be required by law or by these Bylaws and shall have the
custody of the corporate seal and the contracts, papers and documents belonging
to the Bank. The Secretary shall have such powers as usually appertain to the
office of Secretary and perform such other duties as may from time to time be
assigned by the Board of Directors, the Chairman of the Board or the President.
The Assistant Secretary or Assistant Secretaries, in the order designated by the
Board, shall perform all of the duties of Secretary during the absence or
disability of the Secretary and at other times may perform such other duties as
are directed by the Board of Directors, the Chairman of the Board, the President
or the Secretary.
SECTION 6. TREASURER. The Treasurer shall have control of the money,
securities and other property of the Bank and shall keep regular books of
account. The Treasurer shall disburse the funds of the Bank in payment of the
just demands against the Bank or as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render to the Board of
Directors from time to time as may be required in an account of all the
Treasurer's transactions and of the financial condition of the Bank. The
Treasurer shall perform all other duties incidental to the office or that are
properly required of the Treasurer by the Board of Directors. The Assistant
Treasurer or Assistant Treasurers, in the order designated by the Board of
Directors, shall perform all of the duties of the Treasurer in the absence or
disability of the Treasurer and at other times may perform such other duties as
are directed by the Board of Directors, the Chairman of the Board, the President
or the Treasurer.
SECTION 7. OTHER OFFICERS. Additional officers elected by the Board of
Directors shall exercise such powers and perform such duties as shall be
required by law or determined from time to time by the Board of Directors, the
Chairman of the Board or the President.
SECTION 8. DELEGATION. In the absence or inability to act of any officer
of the Bank and of any person herein authorized to act in that officer's place,
the Board of Directors may from time to time delegate the powers or duties of
such officer to any other officer or any Director or other person whom it may
select.
SECTION 9. CONTRACTS AND SATISFACTIONS. Annually, or at other times as
the Board of Directors shall determine, the Board shall by resolution fix and
establish the authority of Bank officers in relation to the execution of
commitment letters, releases and assignments of mortgages and other documents,
and as to deeds, contracts and other instruments in writing to be made or
executed by the Bank.
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<PAGE>
SECTION 10. REPORT TO DIRECTORS. The Board of Directors shall, by
resolution duly recorded in the minutes, designate an officer or officers whose
duty it shall be to prepare and submit to the Directors at each regular meeting
of the Board a written statement of purchases and sales of securities and of
loans made since the last regular meeting of the Board. The statement shall be
in such form and contain such information as the Board shall determine from time
to time.
SECTION 11. TERM-REMOVAL. The officers of the Bank shall hold office
until their successors are chosen and qualify. Any officer elected by the Board
of Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of the whole Board of Directors, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed, unless such removal is effected following written notice of objection
to such officer by the Supervisor of Banks.
SECTION 12. VACANCIES. Vacancies in any office arising from any cause may
be filled by the Board of Directors at any regular or special meeting of the
Board.
SECTION 13. COMPENSATION. The Board of Directors from time to time:
(1) Shall fix and determine the salary and other compensation and
benefits of officers, employees, agents and representatives of the Bank;
(2) May delegate to the Chief Executive Officer, any other officer or
such committees or boards as it may specify the authority and duty to determine
the salary and other compensation and benefits of officers, employees, agents
and representatives of the Bank, except as otherwise expressly provided in these
Bylaws;
(3) May authorize or provide for employment contracts with officers,
employees, agents and representatives of the Bank and may provide for
retirement, pension, insurance, disability and other benefits as the Board of
Directors may deem appropriate to the extent not prohibited by law.
SECTION 14. UNAUTHORIZED COMPENSATION. If an officer or employee of this
Bank receives any commission on any loan made by this Bank which that individual
is not authorized by the Board to retain, the officer or employee shall
immediately pay the same over to the Bank.
SECTION 15. RESTRICTIONS ON OFFICERS. An officer of this Bank shall not:
(1) Personally or as agent or partner of another, directly or
indirectly, use any of the funds or deposits held by this Bank, except to make
such current and necessary payments as are authorized by the Board;
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(2) Receive, directly or indirectly, and retain any commission on or
benefit from any loan made by this Bank or pay or emolument for services
rendered to any borrower by the Bank in connection with such loan, except as
authorized by the Board;
(3) Become an endorser, surety or guarantor or in any manner an
obligor for any loan made by the Bank; or
(4) Personally or as agent or partner of another, directly or
indirectly, borrow any of the funds or deposits held by the Bank or become the
owner of real property upon which the Bank holds a mortgage. For purposes of
this provision, a loan to or a purchase by an organization in which such officer
is the owner of a fifteen percent equity interest or in which that officer and
other officers of the Bank hold a twenty-five percent equity interest shall be
deemed a loan to or a purchase by such officer within the meaning of this
provision, unless the loan to or purchase by such organization occurred without
such officer's knowledge or against such officer's protest. A deposit in a bank
shall not be deemed a loan within the meaning of this provision.
SECTION 16. FIDELITY BONDS. The Board of Directors by resolution may
require any and all of the officers and employees of the Bank to give bonds to
the Bank, with sufficient surety or sureties, conditioned for the faithful
performance of the duties of their respective offices and to comply with such
other conditions as may from time to time be required by the Board of Directors.
Such security may be accepted from any company authorized to furnish fidelity
bonds and doing business under the laws of the State of Washington, and premiums
therefor may be paid as a necessary expense of the Bank.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. DEFINITIONS. As used in this article:
A. "Action" means any actual or threatened claim, suit or proceeding,
whether civil, criminal, administrative or investigative.
B. "Another Enterprise" means a corporation (other than the Bank),
partnership, joint venture, trust, association, committee, employee benefit plan
or other group or entity.
C. "Bank" means First Mutual Savings Bank and any predecessor to it and
any constituent corporation (including any constituent of a constituent)
absorbed by the Bank in a consolidation or merger.
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D. "Director or Officer" means each person who is serving or who has
served as a director or officer of the Bank or, at the request of the Bank, as a
director, officer, partner, trustee, employee or agent of Another Enterprise.
E. "Indemnitee" means each person who was, is or is threatened to be made
a party to or is involved (including without limitation, as a witness) in an
Action because the person is or was a Director or Officer of the Bank.
F. "Loss" means loss, liability, expenses (including attorneys' fees),
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement, actually and reasonably incurred or suffered by Indemnitee in
connection with an Action.
SECTION 2. RIGHT TO INDEMNIFICATION. The Bank shall indemnify and hold
each Indemnitee harmless against all Loss except for Losses arising out of: (a)
the Indemnitee's acts or omissions finally adjudged to be intentional misconduct
or a knowing violation of law, (b) the Indemnitee's approval of certain
distributions or loans by such Indemnitee which are finally adjudged to be in
violation of RCW 23A.08.450, or (c) any transaction in which it is finally
adjudged that the Indemnitee personally received a benefit in money, property or
services to which the Indemnitee was not legally entitled. Except as provided
in Section 4 of this Article, the Bank shall not indemnify an Indemnitee in
connection with an Action (or part thereof) initiated by the Indemnitee unless
such Action (or part thereof) was authorized by the Board of Directors of the
Bank. If, after the effective date of this Article, the Washington Business
Corporation Act is amended to authorize further indemnification of directors or
officers, then Directors and Officers of this Bank shall be indemnified to the
fullest extent permitted by the Washington Business Corporation Act, as so
amended.
SECTION 3. BURDEN OF PROOF AND PROCEDURE FOR PAYMENT.
A. The Indemnitee shall be presumed to be entitled to indemnification
under this Article upon submission of a written claim (including a claim for
expenses incurred in defending any Action in advance of its final disposition,
where the undertaking in B. below has been tendered to the Bank), and thereafter
the Bank shall have the burden of proof to overcome the presumption that the
Indemnitee is so entitled.
B. The right to indemnification conferred in this Article shall include
the right to be paid by the Bank all expenses (including attorneys' fees)
incurred in defending any Action in advance of its final disposition; provided,
however, that the payment of such expenses in advance of the final disposition
of an Action shall be made upon delivery to the Bank of an undertaking, by or on
behalf of such Director or Officer, to repay all amounts so advanced if it shall
ultimately be determined that such Director or Officer is not entitled to be
indemnified under this Article or otherwise.
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SECTION 4. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this
Article is not paid in full by the Bank within 60 days after a written claim
has been received by the Bank, except in the case of a claim for expenses
incurred in defending a proceeding in advance of its final disposition, in
which case the applicable period shall be 20 days, the claimant may at any
time thereafter bring suit against the Bank to recover the unpaid amount of
the claim and, to the extent successful in whole or in part, the Indemnitee
shall be entitled to be paid also the expense of prosecuting such claim.
Neither the failure of the Bank (including its Board of Directors, its
shareholders or independent legal counsel) to have made a determination prior
to the commencement of such Action that indemnification of or reimbursement
or advancement of expenses to the claimant is proper in the circumstances,
nor an actual determination by the Bank (including its Board of Directors,
its shareholders or independent legal counsel) that the Indemnitee is not
entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
Indemnitee is not so entitled.
SECTION 5. NONEXCLUSIVITY OF RIGHTS. The right to indemnification and
the payment of expenses incurred in defending an Action in advance of its
final disposition conferred in this Article shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise.
SECTION 6. INSURANCE, CONTRACTS AND FUNDING. The Bank may maintain
insurance, at its expense, to protect itself and any Director, Officer,
employee or agent of the Bank or Another Enterprise against any expense,
liability or loss, whether or not the Bank would have the power to indemnify
such person against such expense, liability or loss under the Washington
Business Corporation Act. The Bank may, without further corporate action,
enter into contracts with any Director or Officer of the Bank in furtherance
of the provisions of this Article and may create a trust fund, grant a
security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article.
SECTION 7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE BANK. The
Bank may, by action of its Board of Directors from time to time, provide
indemnification and pay expenses in advance of the final disposition of an
Action to employees and agents of the Bank with the same scope and effect as
the provisions of this Article with respect to the indemnification and
advancement of expenses of Directors and Officers of the Bank or pursuant to
rights granted pursuant to, or provided by, the Washington Business
Corporation Act or otherwise.
SECTION 8. CONTRACT RIGHT. Rights of indemnification under this
Article shall continue as to an Indemnitee who has ceased to be a Director or
Officer and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred in this Article shall
be a contract right upon which each Director or Officer shall be presumed to
have relied in determining to serve or to continue to serve as such. Any
amendment to or repeal
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of this Article shall not adversely affect any right or protection of a
Director or Officer of the Bank for or with respect to any acts or omissions
of such Director or Officer occurring prior to such amendment or repeal.
SECTION 9. SEVERABILITY. If any provision of this Article or any
application thereof shall be invalid, unenforceable or contrary to applicable
law, the remainder of this Article, or the application of such provisions to
persons or circumstances other than those as to which it is held invalid,
unenforceable or contrary to applicable law, shall not be affected thereby
and shall continue in full force and effect.
SECTION 10. FURTHER INDEMNIFICATION. Reference is made to the adoption
of indemnity statutes at RCW 23B.08.500-600. To the extent these statutes,
or any successor statute within the Washington Business Corporation Act or
the Washington statutes pertaining to savings banks (RCW Title 32), as in
effect from time to time, create rights of indemnification for officers and
directors broader than contained in the balance of the bylaws within this
Article V, such additional or further indemnification is approved and made a
part of this bylaw.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares
of capital stock of the Bank shall be in such form as shall be determined by
the Board of Directors. Such certificates shall be signed by the President
or Vice President, attested by the Secretary or an Assistant Secretary, and
sealed with the corporate seal or a facsimile thereof. The signatures of
such officers upon a certificate may be facsimiles if the certificate is
manually signed on behalf of a transfer agent or registered by a registrar,
other than the company itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Bank. All certificates surrendered to the Bank
for transfer shall be canceled and no new certificate shall be issued until
the former certificate for the like number of shares shall have been
surrendered and canceled, except that in case of a lost or destroyed
certificate, a new certificate may be issued therefor upon such terms and
indemnity to the Bank as the Board of Directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of
the Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by
his attorney thereunto authorized by power of attorney duly executed and
filed with the Bank. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name of
shares of capital stock stand on the books of the Bank shall be deemed by the
Bank to be the owner thereof for all purposes.
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ARTICLE VII
SAVINGS ACCOUNTS AND DEPOSITS
SECTION 1. ASSENT TO BYLAWS. Each depositor shall be deemed and
considered as assenting to and bound by the rules and regulations of the Bank
set forth in this Article VII and Article VIII of these Bylaws. Copies of
these rules and regulations of the Bank shall be posted in a conspicuous
place in each location where business of the Bank is transacted with
depositors and furnished to depositors upon request.
SECTION 2. DEPOSITS. Deposits in current funds, within the limits
hereinafter prescribed, may be received at any time with the consent of the
attending officers.
SECTION 3. MINIMUM BALANCES AND SERVICE CHARGES. The Bank may receive
on deposit for the use and benefit of depositors all sums of money offered
for that purpose, subject to such limitations on amounts as the Bank may
establish. Different types and classes of deposits and special regulations
may be established by vote of the Board of Directors. The Bank may charge or
deduct service charges and fees in such amounts as are posted in each
location where business of the Bank is transacted with depositors.
SECTION 4. TYPES AND FORMS OF DEPOSITS. This Bank may establish all
types and forms of deposits, whether of an individual depositor, two or more
depositors, groups of depositors, partnerships, corporations, associations,
public bodies or others, which include but are not limited to the following:
1. Deposits in the names of the depositor and another or others in
joint form with right of survivorship.
2. Deposits in the name of the depositor as trustee for another under
a voluntary and revocable trust.
3. Deposits in the name of the depositor and another in joint form
with right of survivorship as trustee for another under a voluntary and
revocable trust.
4. Deposits in the name of, or on behalf of, a partnership or other
form of multiple ownership enterprise.
5. Deposits in the name of a corporation, society, or unincorporated
association.
6. Deposits maintained by a person, society or corporation as
administrator, executor, guardian or trustee under a will or trust agreement.
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7. Deposits designated as community property of a marital community,
whether in the name of either or both of the members of the community.
8. Deposits designated as separate property of the depositor.
The type of account shall be determined by the terms of the contract of
deposit between the depositor and the Bank. The contract of deposit shall be
in writing and be signed by all persons who have a current right to payment
of funds from an account. The Bank may restrict the form of ownership of any
account in accordance with applicable law, regulation, or policy of the Bank.
All deposits made by individuals shall be further governed by the provisions
of chapter 30.22 RCW.
This Bank may limit the aggregate amount which an individual or any
corporation or society may have to its credit to such sums this Bank may deem
expedient to receive and may in its discretion refuse to receive a deposit or
may at any time return all or any part of any deposits or require the
withdrawal of any interest. Any account in excess of One Hundred Thousand
Dollars ($100,000.00) may only be accepted or held in accordance with such
regulations as the Director of Financial Institution for the State of
Washington may establish.
SECTION 5. RECORDING OF DEPOSITS. Every deposit shall be regularly
entered in the books of the Bank and also in the passbook furnished to the
depositor upon opening an account. The issuance of a passbook by the Bank
may be omitted for any account if a ledger record on which deposits,
withdrawals and interest credited to the account are entered in lieu of
maintaining a passbook, provided that a passbook shall be issued upon the
request of any depositor. The bank may in its discretion, accept deposits
for passbook accounts at authorized ATM terminals, through funds transfers,
by mail or at unmanned deposit drops, without entering the deposit in the
passbook furnished; PROVIDED that the deposit shall be entered at the next
available opportunity upon production of the deposit receipt and passbook by
any depositor.
The Bank shall take or receive any instrument for the payment of money
from a depositor (usually in the form of a check but herein referred to as an
"item"), only as a collecting agent of the depositor, whether or not the item
is negotiable, as an accommodation for the convenience of the depositor.
Funds for any item taken for collection of deposit shall be made available in
accordance with the Bank's Funds Availability policy, however, the Bank may
decline to pay any item until the Bank shall have received final settlement
for the item in cash or solvent credits, except as otherwise limited by
applicable law. If the Bank makes funds available for any item whether in
the form of payment, credit or otherwise, such settlement shall be
provisional until the Bank receives cash or solvent credits in final
settlement of the item. The Bank may revoke a provisional settlement for any
item and charge depositor's account for any funds disbursed, until the Bank
receives final settlement for the item as provided in RCW 62A.4-214. The
Bank at anytime may return an item to the depositor and recover from the
depositor or the depositor's account any payments given to the depositor by
reason of the item unless and until the Bank shall have received final
settlement for the item. After the final payment of an item, if the Bank
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receives a claim that the item was not properly paid, the Bank may withhold
the amount of the item from the depositor's account until the claim has been
settled.
SECTION 6. LOSS OF PASSBOOK AND OTHER PAYMENTS. Except as hereinafter
provided, if a passbook has been issued, the Bank shall not pay any interest
or deposit or portion thereof or any check drawn upon it by a depositor
unless the passbook of the depositor is produced and proper entry is made
therein at the time of payment.
If a passbook or other evidence of account is lost, the depositor must
give immediate notice thereof to the Bank. In such cases and in other
exceptional cases where the passbook or other evidence of account cannot be
produced without loss or serious inconvenience to the depositor, payments may
be made after the lapse of such time, the delivery of such proof, and the
giving of such security as the Bank may require.
The Bank may make payments of interest payable on any deposit to
depositors without requiring the production of a passbook of the depositor if
the depositor has filed a written request in a form satisfactory to the Bank
requesting the payment of such interest without requiring the production of
the passbook, and any payment made in accordance with any such request and
the receipt or acquittance of the one to whom such payment is made shall be
valid and sufficient release and discharge of the Bank for all payments made
on account of such request prior to receipt by the Bank of notice in writing
not to pay such sums in accordance with such request.
SECTION 7. WITHDRAWALS.
1. Withdrawals of funds on deposit shall only be made upon (1) written
order signed by the depositor or his legal representative, (2) by an
electronic withdrawal card and any related identification code numbers issued
to the depositor, (3) by any Bank authorized method of telephone access,
including the Bank's automated response service, or (4) by any Bank
authorized method of electronic access, such as computerized home banking,
unless another method is specifically provided by law or these Bylaws.
Ordinarily withdrawals may be made in any amount at any time, except that
where a depositor has agreed that no withdrawal will be made from an account
until after a specified period of time (Time Deposits), no withdrawal can be
made until the expiration of such period without the consent of the Bank and
payment of such penalties as may be required by applicable law, regulation or
these Bylaws. Nevertheless, as authorized by law, the Bank reserves the
right at any time by resolution of its Board of Directors to require
depositors to give notice of intention to withdraw deposits of not more than
six months and not less than 30 days in which event no deposit shall be due
or payable until expiration of the notice period. If the Bank requires such
notice or withdrawal, the Bank will not be liable for any loss, damage or
delay resulting from said notice. The Bank may, solely at its option, pay
any deposit or deposits before the expiration of such notice period. If the
Bank requires such notice of withdrawal, the Bank will not be liable for any
loss, damage or delay resulting from said notice.
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2. If all or a portion of a time deposit is withdrawn before its
maturity, the Bank shall assess an interest penalty on the amount withdrawn.
The method for computing this penalty shall be determined from time to time
by the Board of Directors, but in no case shall it be less than the penalty
required by law or regulation. This provision shall not apply:
a. On the death or judicial declaration of mental incompetence of
an owner of a time deposit; or
b. For qualifying IRA distributions when the person for whom the
account is maintained is 59-1/2 years of age or older.
3. Depositor shall not make any transfers or withdrawals, or write
checks for amounts that may exceed the available funds in any account with
the Bank. No account shall be subject to automatic overdraft protection
unless all depositors listed on the account have signed a separate written
agreement for an automatic overdraft protection plan. Such a plan shall be
subject to the terms and conditions of that written agreement. The Bank may
choose to honor transfers, withdrawals or items that exceed available funds
in its sole discretion, but the Bank shall have no obligation to do so.
SECTION 8. JOINT ACCOUNTS. If any deposit shall be made by any person
in the names of such depositor and one or more other persons and in form to
be paid to any of them or the survivor of them, such deposit and any
additions thereto made by any of such persons shall, after the making
thereof, become the property of such persons as joint tenants, and the same,
together with all interest thereon, shall be held for the exclusive use of
such persons and may be paid to any of them during their lifetimes or to the
survivor or survivors, and such payment and the receipt or acquittance of the
one to whom such payment is made shall be a valid sufficient release and
discharge to the Bank for all payments made on account of such deposit prior
to the receipt by the Bank of notice in writing not to pay such deposit in
accordance with the terms thereof. The making of a deposit in such form
shall be evidence of the intention of the depositor to vest title to such
deposit and the additions thereto in the survivor or survivors.
SECTION 9. MINORS ACCOUNTS. Any adult person may open an account as
trustee for a minor, and such account shall be subject to the exclusive
control of the trustee. Any adult person or a bank with trust powers may
open an account as custodian for a minor under the provisions of the
Washington Uniform Transfers to Minors Act. A minor may open an account in
his or her own name with or without an adult joint depositor. Except for
custodial accounts and accounts naming an adult trustee, when any deposit
shall be made by or in the name of any minor, the same shall be held for the
exclusive right and benefit of such minor and free from the control or lien
of all other persons, except creditors, all as provided in the Individual
Account Deposit Act, chapter 30.22 RCW.
SECTION 10. CERTAIN TRUST ACCOUNTS. When any deposit shall be made by
any person in trust for another and no other or further notice of the
existence and terms of a legal and
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valid trust shall have been given in writing to the Bank, in the event of the
death of the trustee, the deposit or any part thereof, together with the
interest thereon, may be paid to the person for whom the deposit was made.
SECTION 11. ACCOUNTS OF DECEASED PERSONS. The Bank may make payment of
funds in the account of a deceased depositor to that person's heirs,
creditors, personal representatives, or to surviving joint depositors, as
provided in the Individual Account Deposit Act, chapter 30.22 RCW. If a
person dies leaving in the Bank an account on which the balance due does not
exceed Two Thousand Five Hundred Dollars ($2,500.00) and no executor or
administrator of that person's estate shall have been appointed, the Bank in
its discretion, upon advice of counsel and the direction of any officer, may
pay the balance of the account to the surviving spouse, next of kin, funeral
director or other creditor who may appear to be entitled thereto. As a
condition of such payment, the officer giving the direction shall require
satisfactory proof of death and an affidavit to the effect that no personal
representative has been appointed for the deceased's estate. The Bank may
also require in its sole discretion, additional affidavits or proofs of the
claimant or claimants and may such other waivers, indemnities, bonds,
sureties, and receipt and acquittance for such payment, as it deems necessary
and proper.
SECTION 12. NOTICES. Printed or written notice mailed to a depositor
at the post office address as it appears at the time upon the books of the
Bank, postage prepaid, shall constitute notice to the depositor for any
purpose contemplated by law or by these Bylaws. The affidavit of the
Secretary or an Assistant Secretary shall be deemed satisfactory proof of
such mailing.
SECTION 13. CHANGE OF ADDRESS. Notice of a change of residence or post
office address shall be given by a depositor in writing to the Secretary of
the Bank.
SECTION 14. DORMANT ACCOUNTS. An annual service charge as established
by the Bank may be charged against an account. An account will be presumed
abandoned unless the depositor has within the past five years:
1. Increased or decreased the amount of the deposit or presented the
passbook or other similar evidence of the deposit to the Bank for crediting
of interest;
2. Corresponded in writing with the Bank concerning the deposit; or
3. Otherwise indicated an interest in the deposit as evidenced by a
memorandum on file with the Bank.
SECTION 15. TIME DEPOSITS. A specific deposit contract may be given by
the Bank for Time Deposits. Any document evidencing such contract shall be
non-negotiable and the accounts shall not be transferable except on the books
of the Bank. Time Deposit accounts may be opened on such terms and
conditions as may be adopted by the Bank from time to time. The contract
shall contain additional terms and conditions that apply to that particular
deposit
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account. The terms and conditions shall provide (without limitation) for the
date or terms under which the account will mature or be payable,
circumstances under which the account shall be automatically renewed, and the
rate of interest or index upon which interest will be calculated together
with the frequency of compounding. Payment of interest on Time Deposits may
be prepaid, deferred to maturity or paid or credited at frequencies or
periods as stipulated in the contract of deposit and as authorized by the
Bank. Time Deposits may be payable at a fixed future time not less than the
minimum time permitted by law nor more than the maximum time permitted by law.
The Bank shall pay the principal and interest due at the maturity date
for any Time Deposit, only upon the demand of any depositor and only if the
account has not been automatically renewed in accordance with the terms and
conditions for its contract of deposit. No interest shall be paid on any
Time Deposit account beyond the maturity date, except as provided in its
terms and conditions for automatic renewals. The Bank may pay any depositor,
transfer funds to another account, or renew the Time Deposit subject to terms
and conditions for a new contract of deposit upon the instruction of any
depositor on the account, in any manner permitted by the Bank and without
production or surrender of the contract of deposit or any document.
Depositor shall, however, surrender the contract or any document evidencing
the same upon request of the Bank.
This bylaw shall govern new time deposits and the renewal of any fixed
term deposits, by any name, which are outstanding at the time of the adoption
of this bylaw.
SECTION 16. STATEMENT ACCOUNTS. A ledger record of savings accounts
for which no passbook is issued shall be maintained, either manually or
electronically on appropriate equipment, and periodic statements of deposits,
withdrawals, interest, credits and payments, charges and balances shall be
furnished to the depositor. A statement shall be conclusive of the matters
described unless the depositor notifies the Bank of any inaccuracy within
sixty (60) days after mailing of the statement to the depositor. No
statements of account shall be issued for Time Deposits. Withdrawals from
settlement accounts may be made upon any instructions of the depositor,
including written, oral, telephonic, electronic or otherwise as the Bank may
permit, except that the Bank shall have the right to require production of
the account card or other suitable identification before allowing a
withdrawal. Depositors shall give notice of loss, theft or determination of
an account card to the Bank promptly.
SECTION 17. DRAFT ACCOUNTS. Draft accounts, also known as Negotiable
Order of Withdrawal accounts (NOW), and other accounts on which drafts may be
drawn are subject to the provisions of the Bank's Charter and these Bylaws,
except as modified below:
1. The Bank may, at the request of a depositor, open a specially
classified savings account designated a draft account for the purpose of
making withdrawals upon presentation to the Bank of orders of withdrawals in
a form prescribed by the Bank and signed by the depositor
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for payment to the depositor or to other parties, subject to the terms and
conditions set forth below:
a. Draft accounts shall be eligible to receive interest at a rate
established under policies approved by the Bank's Board of Directors;
provided, however, that the payment of interest on funds deposited in draft
accounts by business organizations operated for profit shall be subject to
any limitations or restrictions on the payment of interest on such deposits
imposed under state or federal regulation.
b. The Bank reserves the right to refuse to honor any orders of
withdrawal which are not on the Bank's form or which are incompletely or
defectively drawn.
c. The Bank shall provide periodic statements of activity on each
depositor's draft account. Any objection to any item appearing on any such
statement will be barred unless made known to the Bank in writing within
sixty (60) days from the date such statement is made available to the
depositor at the depositor's address as it appears upon the books of the Bank.
d. The Bank may charge or deduct service charges and fees in such
amounts as may be approved from time to time by the rules adopted by the
Board of Directors and are posted in each location where business of the Bank
is transacted with depositors.
e. At the request of the person authorized to draw orders on a
draft account, the Bank may accept requests to stop payment on an order
solely at the risk of such depositor, if the Bank is provided with the
account number of such depositor's draft account, the name of the payee on
the order, the date and amount of the order and the order number. Oral
requests to stop payment will be honored by the Bank for fourteen (14)
calendar days and requests to stop payment in writing shall be honored for
six (6) months unless renewed in writing. All such requests must be received
by the Bank within a reasonable period prior to the date on which such order
is presented to the Bank for payment.
f. The Bank's authority to pay any order of withdrawal if
otherwise effective is not revoked by the death or incompetence of a
depositor prior to presentation of the order of withdrawal to the Bank for
payment, unless the Bank knows of the death or of the adjudication of
incompetence of such depositor and has reasonable opportunity to act upon
such knowledge of such death, continue to pay or certify orders of withdrawal
executed on or prior to the date of death for ten (10) business days
following such death unless ordered to stop payment thereon by a person
claiming an interest in the decedent's account.
g. The Bank reserves the right to terminate or restrict draft
accounts at any time, and upon termination thereof such accounts shall be
deemed to be statement accounts as outlined in Section 16 of the Article VII
of these Bylaws.
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h. Every draft, check or other item deposited in a draft account
will be credited only conditionally until the Bank receives final payment of
the draft, check, or other item. At its discretion the Bank may refuse to
honor orders of withdrawal drawn against conditionally credited funds. The
Bank also reserves the right to assess a service fee and refuse to honor
orders of withdrawal if there are insufficient funds in the draft account to
cover the order. The Bank shall not be liable for refusing to pay orders of
withdrawal when insufficient funds result from the assessment and deduction
of service fees.
i. Each draft account may be identified by an account number
which may be magnetically encoded on all of the depositor's deposit and
withdrawal slips in order to facilitate computerized recordkeeping of
deposits in and withdrawals from, such depositor's account. The Bank shall
not assume any responsibility for any loss, damage or delay occasioned by a
depositor's use of deposit or withdrawal slips bearing a magnetically encoded
account number which differs from the account number assigned by the Bank to
such depositor's draft account.
2. Pursuant to prior written instructions from the depositor, the Bank
may automatically withdraw funds from another savings account and deposit
such funds in a draft account as established in this Section 17 of Article
VII, subject to the terms and conditions set forth below:
a. Accounts that are designated for automatic transfer shall be
eligible to receive interest at a rate established under rules approved by
the Bank's Board of Directors.
b. Withdrawals from accounts that are designated for automatic
transfer shall be made as necessary to pay (i) any orders of withdrawal
presented to the Bank for payment from such depositor's draft account and
(ii) any charges assessed by the Bank against such depositor's draft account.
c. Each account designated for automatic transfer may be
identified by an account number which may be magnetically encoded on all of
the depositor's deposit and withdrawal slips in order to facilitate
computerized recordkeeping of deposits in and withdrawals from such
depositor's account. The Bank shall not assume any responsibility for any
loss, damage or delay occasioned by a depositor's use of deposit or
withdrawal slips bearing a magnetically encoded account number which differs
from the account number assigned by the Bank to such depositor's savings
account designated for automatic transfer.
SECTION 18. MONEY MARKET ACCOUNTS. The Bank may open, at the request
of the depositor, specially classified savings accounts known as Money Market
accounts. Such accounts are subject to the provisions of these Bylaws,
except as modified below:
1. Interest on Money Market accounts shall be calculated at a variable
rate of interest according to the terms established by the Bank.
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2. Negotiable orders of withdrawal may be drawn by the depositor for
payment from Money Market accounts. These accounts are subject to all
provisions of Sections 16 and 17 of this Article except those related to the
payment of interest. The number of such negotiable orders of withdrawals or
other withdrawals may be restricted to accordance with applicable State and
Federal laws or regulations of the Bank.
SECTION 19. RIGHT OF OFFSET. Without prior notice to the depositor,
the Bank shall have the right to offset any indebtedness of a depositor to
the Bank against any account of that depositor with the Bank.
SECTION 20. DEPOSIT AGREEMENT. From time to time the Board of
Directors may establish written deposit agreements for one or more of the
Bank's accounts. To the extent of any inconsistency between the written
deposit agreement and the provisions of this bylaw, the provisions of the
written deposit agreement shall control the account relationship.
ARTICLE VIII
PAYMENT OF INTEREST
SECTION 1. INTEREST. The Board of Directors shall declare the amount
of interest payable on deposits and the date of payment of the same in
conformity with applicable law and as follows:
1. Interest shall be credited on deposits from the date of deposit to
date of withdrawal under rules set by the Board of Directors (unless
otherwise specifically stated), provided, however, that no interest shall be
payable on any account, except accounts of executors, administrators,
guardians and trustees acting under wills or written trust agreements unless
the account has been maintained at the Bank for a period of at least thirty
(30) days or the terms of the certificate of deposit call for a shorter
period, and provided further that interest credits for deposits of drafts,
checks, and other negotiable instruments may be deferred until the Bank
receives provisional credit for such items.
2. Interest on funds deposited in any account where the rate of
interest is subject to change shall be paid in accordance with the terms
established by the Bank.
3. Interest on funds deposited under an agreement which sets the rate
of interest to be paid on such funds shall be paid in accordance with the
terms of such agreement.
4. Dormant accounts, as defined in Section 14 hereof, may cease to be
credited with interest unless upon a reasonable showing of the reasons for
the lack of activity in the account, an officer of the Bank directs that
interest omitted because of the application of this Section be credited to
the account.
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ARTICLE IX
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Bank shall end on the last day of December of
each year. The Bank shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by the Board of
Directors.
ARTICLE X
DIVIDENDS
Dividends upon the stock of the Bank, subject to the provisions of the
Articles of Incorporation, if any, may be declared by the Board of Directors
at any regular or special meeting, pursuant to law. Dividends may be paid in
cash, in property or in stock.
ARTICLE XI
CORPORATE SEAL
The corporate seal of the Bank shall be in such form as the Board of
Directors shall prescribe.
ARTICLE XII
CONFORMITY
Any article, section or provision of these Bylaws which shall be in
conflict with any laws or regulations relating to or governing this Bank or
the activities thereof shall be deemed amended to conform therewith. Whether
or not specifically provided in these Bylaws, this Bank, its Board of
Directors and its officers shall have all authority, control, management and
power granted to or provided for savings banks by the laws of the State of
Washington and any other laws now or hereafter in effect. If any provision
of these Bylaws should be held invalid or in violation of any law or
regulation, it shall not affect the validity of the remainder of these Bylaws
or of the article, section or other subdivision thereof in which such
provision appears.
ARTICLE XIII
AMENDMENTS
These Bylaws may be amended at any time by a majority vote of the Board
of Directors.
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BYLAWS
OF
FIRST MUTUAL BANCSHARES, INC.
ARTICLE I
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the principal office of the First Mutual
Bancshares, Inc. (the "Corporation") or at such other place within or without
the State of Washington as the Board of Directors may determine and as
designated in the notice of such meeting.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the
Corporation for the election of Directors and for the transaction of any
other business of the Corporation shall be held annually on the fourth
Thursday in each April, unless that date is a legal holiday, in which case
the meeting shall be held on the first business day thereafter, or at such
other date and time prior to May 15 as the Board of Directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes may be called at any time by the President, or a
majority of the Board of Directors and shall be called by the President or
the Secretary upon the written request of the holders of not less than
one-fourth of all the outstanding capital stock of the Corporation entitled
to vote at the meeting. Such written request shall state the place and
purpose or purposes of the meeting and shall be delivered at the principal
office of the Corporation addressed to the President or the Secretary.
Except as otherwise determined by the Board of Directors, such written
request must be received by the President or Secretary more than sixty days
in advance of the date of the special meeting. Without limitation, the Board
of Directors, through the rules adopted, and the Chairman of the meeting in
the conduct thereof, may restrict or limit attendance, the debate of issues
and the question period to allow the efficient conduct of the meeting and the
accomplishment of the essential business to come before the meeting.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with such rules as may be established by the Board of
Directors or these Bylaws. The Board of Directors shall designate, when
present, the President to preside at such meetings.
SECTION 5. NOTICE OF MEETING. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be delivered by the Secretary or the officer performing his
duties, not less than ten days nor more than sixty days before the meeting to
each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the U.S. mail,
addressed to the shareholder at his address as it appears on the stock
transfer books or records of the Corporation as of the record date prescribed
in Section 6 of this Article I, with postage thereon prepaid. If a
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shareholder be present at a meeting, or in writing waive notice thereof
before or after the meeting, notice of the meeting to such shareholder shall
be unnecessary. When any shareholders' meeting, either annual or special, is
adjourned for thirty days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting. It shall not be necessary to
give any notice of the time and place of any meeting adjourned for less than
thirty days or of the business to be transacted thereat, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders,
or any adjournment thereof, or shareholders entitled to receive payment of
any dividend, or in order to make a determination of shareholders for any
other proper purpose, the Board of Directors shall fix in advance a date as
the record date for any such determination of shareholders. Such date in any
case shall be not more than sixty days, and in case of a meeting of
shareholders, not less than ten days prior to the date on which the
particular action, requiring such determination of shareholders, is to be
taken. When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this Section, such determination
shall apply to any adjournment thereof.
SECTION 7. QUORUM. One-third of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a quorum is
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may
be transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a lawful meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the shareholder or, in the absence of such
direction, as determined by a majority of the Board of Directors. No proxy
shall be valid after eleven months from the date of its execution.
In order to be valid, any proxy form not supplied by the Corporation
must contain all the identifying information found on the Corporation's form
of proxy and must be presented to the Secretary before the beginning of the
meeting. A presented proxy or other written direction which revokes a proxy
previously delivered to the Corporation must so state. Votes may only be
cast by proxy delivered prior to the meeting, or by full completion of a
written ballot supplied by the Corporation during the meeting. A vote
properly cast at the meeting will revoke any previous proxy cast on the issue
in question.
SECTION 9. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership of stock stands in the name of two or more persons, in the absence
of written directions to the Corporation to the contrary, at any meeting of
the shareholders of the Corporation, any one or more of such shareholders may
cast, in person or by proxy, all votes to which such ownership is entitled.
In the event an attempt is made to cast conflicting votes, in
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person or by proxy, by the several persons in whose name shares of stock
stand, the vote or votes to which these persons are entitled shall be cast as
directed by a majority of those holding such stock and present in person or
by proxy at such meeting, but no votes shall be cast for such stock if a
majority cannot agree.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in
the name of another Corporation may be voted by any officer, agent or proxy
as the Bylaws of such Corporation may prescribe, or, in the absence of such
provision, as the Board of Directors of such Corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a Director may be voted by
him, either in person or by proxy, but no Director shall be entitled to vote
shares held by him without a transfer of such shares into his name. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name, if authority to do so is
contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee
and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another Corporation, if a majority of the shares entitled to
vote for the election of directors of such other Corporation is held by the
Corporation, shall be voted at any meeting or counted in determining the
total number of outstanding shares at any given time for purposes of any
meeting.
SECTION 11. VOTING. Every shareholder entitled to vote at any meeting
shall be entitled to one vote for each share of stock held by him. Unless
otherwise provided in the Articles of Incorporation, by Statute, or by these
Bylaws, a majority of those votes cast by shareholders at a lawful meeting
shall be sufficient to pass on a transaction or matter.
SECTION 12. SHAREHOLDER PROPOSALS. All shareholders shall be entitled
to consider all matters upon which they are entitled to vote. Accordingly,
proposals from shareholders shall not be considered at an annual meeting
unless they are submitted to the Secretary of the Corporation in writing not
later than the first day of December preceding the annual meeting at which
the matter is proposed for consideration, or such earlier date as the Board
determines is the date 120 calendar days in advance of the date one year
later than the date of mailing the previous year's proxy statement. No
proposals from the floor of an annual meeting shall be entertained. The
Corporation shall give notice of any shareholder proposal timely received in
its notice of the annual meeting. No proposal shall be considered at a
special meeting unless it is included in the notice thereof.
SECTION 13. NOMINATING COMMITTEE. The Board of Directors, or such
committee of the members of the Board of Directors as it may appoint for the
purpose, shall act as the nominating committee of the Corporation. The
Secretary shall serve as secretary for the
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nominating committee. The nominating committee shall be solely responsible
for reviewing, determining the eligibility of, and the qualification of
candidates to serve on the Board of Directors, including consideration of all
of the requirements of law. If the entire Board of Directors serves as the
nominating committee, it shall determine the slate of candidates. If the
nominating committee is composed of fewer than all Directors, it shall
recommend to the full Board of Directors the candidates to fill vacancies on
the Board of Directors and the slate of nominees for election as directors at
the annual meeting.
The work of the nominating committee shall be conducted at one or more
meetings within the fourth calendar quarter of each year, and at such other
meetings as it finds advisable. The committee shall consider for nomination
as Directors individuals recommended by shareholders if such nominations are
received by the committee in writing on or prior to October 15 of the year
preceding the annual meeting at which consideration of said nominee is
desired. No nominations from the floor of any annual meetings shall be
entertained, and any vote for a nominee not reviewed and recommended by the
nominating committee shall be void and not counted.
SECTION 14. NEW BUSINESS. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the Secretary of the
Corporation at least twenty days before the date of the annual meeting, or in
the case of a shareholder proposal within the time stated at bylaw 12 of this
Article I, and all business so stated, proposed and filed shall be considered
at the annual meeting, but no other proposal shall be acted upon at the
annual meeting. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers,
directors and committees, but in connection with such reports no new business
shall be acted upon at such annual meeting unless stated and filed as herein
provided.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, its Board of Directors.
SECTION 2. NUMBER, TERM AND ELECTION. The Board of Directors shall
consist of not less than nine members nor more than thirty members, as shall
from time to time be determined by resolution of the Board of Directors. The
Board of Directors shall be divided into three classes as nearly equal in
term as possible. The members of each class shall be elected by the
shareholders for a term of three years and until their successors are elected
and have qualified. One class shall be elected by ballot annually.
SECTION 3. PLACE OF MEETINGS; PARTICIPATION. All meetings of the Board
shall be held at the principal office of the Corporation in Bellevue,
Washington, or such other place within or without the State of Washington as
may be approved by a majority of the Board of Directors. Whenever permitted
by the chairman of the meeting, members of the Board of
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Directors may participate in board meetings or committee meetings by means of
conference telephone or similar communications equipment by which all persons
participating in the meeting can hear each other.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at 3:00 p.m. on the fourth Thursday of each month
unless that date is a legal holiday, in which case the meeting shall be held
on the first business day thereafter at the same hour. The President, with
the approval of the majority of the Board, and upon notice as provided in
Section 6 of this Article, may change the date of any regular meeting to any
other day, or hour of the day, within the month provided for such meeting,
and may change the place thereof if such approval is given as provided in
Section 3 of this Article.
SECTION 5. SPECIAL MEETINGS. A special meeting of the Board of
Directors may be called at any time by the President when in his or her
opinion it is necessary or expedient, or by the Secretary on the written
request of three (3) members of the Board.
SECTION 6. NOTICE OF MEETING. Notice of a special, or change of
regular, meeting of the Board shall be given by the Secretary by mail,
telegraph or telephone of the time, place and purpose of the meeting, to each
Director at his or her last known Post Office address in time to enable the
Director, after receipt thereof, to conveniently reach the place of meeting
at the appointed time; provided that notice of any meeting at other than the
Corporation's principal office shall not be less than 48 hours prior to the
meeting. Attendance by a Director at a meeting shall constitute a waiver of
notice thereof, except where a Director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting
is not lawfully called or convened.
SECTION 7. QUORUM. A quorum at any regular or special meeting of the
Board shall consist of a majority of the whole Board of Directors then
serving, but not less than five (5) members thereof; but less than a quorum
shall have power to adjourn any meeting of the Board, from time to time,
until the next regular meeting hereof.
SECTION 8. ORGANIZATION. Unless the Board of Directors shall by
resolution otherwise provide, the Chairman shall act as chairman at all
meetings of the Board of Directors and such other officer or Director as
maybe designated by the Board shall act as secretary at all such meetings.
SECTION 9. MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the
Board of Directors, unless a greater number is prescribed by these Bylaws or
the Articles of Incorporation.
SECTION 10. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the Directors. Such consent shall have the same effect as a
unanimous vote.
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SECTION 11. VACANCIES. Any vacancy occurring in the Board of
Directors, whether resulting from the resignation or inability to serve of an
existing Director or from an increase in the number of Directors, may be
filled by the affirmative vote of a majority of the remaining Directors
although less than a quorum of the Board of Directors. A Director elected to
fill a vacancy resulting from the resignation or inability to serve
(including by reason of death) of an existing Director shall serve for the
remainder of the term of the resigning, deceased or incapacitated Director.
A Director elected to fill a vacancy resulting from an increase in the number
of Directors shall serve until the next election of Directors by the
shareholders. The existence of a vacancy on the Board of Directors shall not
impair the authority of the remaining Directors to act in any manner
authorized by law.
SECTION 12. REMOVAL OF DIRECTORS. A Director may be removed from
office for the causes and in the manner provided by law.
SECTION 13. QUALIFICATIONS. A person shall not be a Director of this
Corporation if that individual: (1) is not a resident of the State of
Washington; (2) has been adjudicated a bankrupt or has taken the benefit of
any insolvency law or has made a general assignment for the benefit of
creditors; (3) has suffered a judgment for a sum of money which has remained
unsatisfied of record or unsecured on appeal for a period of more than three
months; (4) is a director, officer, clerk or other employee of any
unaffiliated bank or insured depository institution. Except as provided in
Section 14 of these Bylaws, no person shall be eligible for election as a
Director of this Corporation who is seventy-five (75) years of age or more,
and no person shall be a Director of this Corporation solely by reason of
holding public office.
SECTION 14. AGE LIMITATIONS. A Director shall retire from the Board of
Directors upon attaining age seventy-five. Upon retiring from the Board of
Directors, a Director with ten years or more service may be elected to the
honorary position of Director Emeritus. A Director Emeritus may attend
meetings of the Board and take part in discussions, and serve on such
committees of the Board as may be determined from time to time, but shall not
vote on any matters or otherwise be considered a Director of this Corporation
for any other purpose.
SECTION 15. COMPENSATION OF DIRECTORS. The Board of Directors shall
fix the compensation for Directors by affirmative vote of a majority of all
the Directors. A Director receiving compensation from the Corporation for
service as an officer shall not receive any additional compensation from the
Corporation for service as a Director.
SECTION 16. CHAIRMAN OF THE BOARD. The Board of Directors may elect a
Chairman and Vice-Chairman of the Board. The Chairman of the Board of
Directors shall preside at meetings of the Board of Directors.
SECTION 17. EMERGENCY IN THE EVENT OF DISASTER. In the event there
shall occur and be declared by appropriate governmental authority a state of
disaster which shall be of such severity as to prevent the conduct and
management of the affairs and business of the Corporation by its Board and
officers as otherwise provided in these Bylaws, any three (3) available
Directors shall constitute a Special Committee for the full conduct and
management of the affairs and business of the Corporation and any two (2)
shall constitute a quorum of such committee. If, in
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any emergency, any authorized place of business of this Corporation shall be
unable to function because of this emergency, the business ordinarily
conducted at such location may be relocated elsewhere, in addition to or in
lieu of the locations theretofore authorized.
ARTICLE III
COMMITTEES
SECTION 1. STANDING AND OTHER COMMITTEES. Standing or temporary
committees, subcommittees and advisory boards may be elected from its own
number by the Board of Directors from time to time by resolution of the Board
of Directors. The Board of Directors may from time to time vest such
committees with such powers as it may see fit, subject to such conditions as
may be prescribed by the Board. All committees so elected shall keep regular
minutes of the transactions of their meetings and shall cause them to be
recorded in books kept for that purpose. The designation of any such
committee and the delegation of authority thereto shall not relieve the Board
of Directors or any member thereof of any responsibility imposed by law.
SECTION 2. AUDIT COMMITTEE. At the annual meeting of the Board each
year, an Audit Committee of not less than three Directors, none of whom shall
be officers or salaried employees of the Corporation, shall be elected. It
shall be the duty of the Audit Committee to guide and review the work of the
Corporation's accounting department and to examine the results of the
periodic audit of the records and affairs of the Corporation for the purpose
of determining the Corporation's true financial condition. The Audit
Committee may employ such assistance as it deems necessary, including the
services of an independent certified public accounting firm, to perform such
examinations on behalf of the Committee. A report of the result of each such
examination shall be presented to the Board of Directors at its regular
meeting which shall be held within thirty (30) days after completion of such
examinations. The Audit Committee shall make such other examinations as the
Board of Directors may require.
SECTION 3. INVESTMENT COMMITTEE. At each annual meeting, the Board of
Directors shall elect an Investment Committee consisting of not less than two
persons, who shall be Directors of the Corporation. The duties of the
Investment Committee shall be fixed by resolution of the Board of Directors.
The number of persons to be elected to the Investment Committee shall be
such as shall be provided from time to time by resolution of the Board of
Directors, but in no event fewer than two.
SECTION 4. QUORUM. A quorum for the Investment Committee is as stated
in the Loan Policy. For other committees, a majority of the members of a
committee then serving shall be necessary at all meetings to constitute a
quorum for the transaction of business.
SECTION 5. VACANCIES. In case of death, resignation or incapacity of
any member of a committee, that member's place shall be filled for the
remainder of the term as soon as practicable in the manner prescribed for
original selection.
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ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 1. OFFICER DESIGNATIONS. The Board of Directors shall elect
from their number a Chairman of the Board and a Vice-Chairman of the Board.
In addition, the Directors shall elect from their number, or otherwise, a
President, and other officers having the title Executive Vice-President,
Senior Vice-President, Vice-President or Assistant Vice-President.
SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board of Directors and shall have all powers
and perform the duties incidental to the office or those assigned to the
Chairman from time to time by the Board of Directors. Unless otherwise
provided by the Board at any time, or from time to time, the Chairman of the
Board shall also be the Chief Executive Officer of the Corporation and shall
exercise overall general supervision over its officers, business and affairs.
SECTION 3. PRESIDENT. The President shall be the Chief Executive
Officer of the Corporation if the Chairman of the Board is not and shall,
subject to the direction of the Board, have such authority and such duties as
shall be determined from time to time by the Board of Directors. The
President shall also preside over meetings of the Board in the absence of the
Chairman of the Board and the Vice Chairman of the Board.
SECTION 4. VICE PRESIDENTS. The Executive Vice-President, Senior
Vice-President, other Vice Presidents and Assistant Vice-Presidents as may be
designated at any time or from time to time shall perform such duties and
exercise such authority as may be designated by the Board of Directors, the
Chairman of the Board or the officer of the Corporation assigned to supervise
the activities of such officer.
In the absence or disability of the Chairman of the Board, the Vice
Chairman of the Board, and the President, the Executive Vice President,
Senior Vice President and other Vice Presidents shall perform the duties of
those officers in the order of their priority of status.
SECTION 5. SECRETARY. The Secretary shall attend meetings of the Board
and the meetings of such committees of the Board as may be requested and keep
the minutes of such meetings. The Secretary shall give such notices to the
Directors as may be required by law or by these Bylaws and shall have the
custody of the corporate seal and the contracts, papers and documents
belonging to the Corporation. The Secretary shall have such powers as
usually appertain to the office of Secretary and perform such other duties as
may from time to time be assigned by the Board of Directors, the Chairman of
the Board or the President. The Assistant Secretary or Assistant
Secretaries, in the order designated by the Board, shall perform all of the
duties of Secretary during the absence or disability of the Secretary and at
other times may perform such other duties as are directed by the Board of
Directors, the Chairman of the Board, the President or the Secretary.
SECTION 6. TREASURER. The Treasurer shall have control of the money,
securities and other property of the Corporation and shall keep regular books
of account. The Treasurer shall
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disburse the funds of the Corporation in payment of the just demands against
the Corporation or as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Board of Directors
from time to time as may be required in an account of all the Treasurer's
transactions and of the financial condition of the Corporation. The Treasurer
shall perform all other duties incidental to the office or that are properly
required of the Treasurer by the Board of Directors. The Assistant Treasurer
or Assistant Treasurers, in the order designated by the Board of Directors,
shall perform all of the duties of the Treasurer in the absence or disability
of the Treasurer and at other times may perform such other duties as are
directed by the Board of Directors, the Chairman of the Board, the President
or the Treasurer.
SECTION 7. OTHER OFFICERS. Additional officers elected by the Board of
Directors shall exercise such powers and perform such duties as shall be
required by law or determined from time to time by the Board of Directors,
the Chairman of the Board or the President.
SECTION 8. DELEGATION. In the absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in that
officer's place, the Board of Directors may from time to time delegate the
powers or duties of such officer to any other officer or any Director or
other person whom it may select.
SECTION 9. CONTRACTS AND SATISFACTIONS. Annually, or at other times as
the Board of Directors shall determine, the Board shall by resolution fix and
establish the authority of Corporation officers in relation to the execution
of commitment letters, releases and assignments of mortgages and other
documents, and as to deeds, contracts and other instruments in writing to be
made or executed by the Corporation.
SECTION 10. REPORT TO DIRECTORS. The Board of Directors shall, by
resolution duly recorded in the minutes, designate an officer or officers
whose duty it shall be to prepare and submit to the Directors at each regular
meeting of the Board a written statement of purchases and sales of securities
and of loans made since the last regular meeting of the Board. The statement
shall be in such form and contain such information as the Board shall
determine from time to time.
SECTION 11. TERM AND REMOVAL. The officers of the Corporation shall
hold office until their successors are chosen and qualify. Any officer
elected by the Board of Directors may be removed at any time, with or without
cause, by the affirmative vote of a majority of the whole Board of Directors,
but such removal shall be without prejudice to the contract rights, if any,
of the person so removed, unless such removal is effected following written
notice of objection to such officer by the Supervisor of Corporations.
SECTION 12. VACANCIES. Vacancies in any office arising from any cause
may be filled by the Board of Directors at any regular or special meeting of
the Board.
-9-
<PAGE>
SECTION 13. COMPENSATION. The Board of Directors from time to time:
(1) Shall fix and determine the salary and other compensation and
benefits of officers, employees, agents and representatives of the
Corporation;
(2) May delegate to the Chief Executive Officer, any other officer
or such committees or boards as it may specify the authority and duty to
determine the salary and other compensation and benefits of officers,
employees, agents and representatives of the Corporation, except as otherwise
expressly provided in these Bylaws;
(3) May authorize or provide for employment contracts with
officers, employees, agents and representatives of the Corporation and may
provide for retirement, pension, insurance, disability and other benefits as
the Board of Directors may deem appropriate to the extent not prohibited by
law.
SECTION 14. UNAUTHORIZED COMPENSATION. If an officer or employee of
this Corporation receives any commission on any loan made by this Corporation
which that individual is not authorized by the Board to retain, the officer
or employee shall immediately pay the same over to the Corporation.
SECTION 15. RESTRICTIONS ON OFFICERS. An officer of this Corporation
shall not:
(1) Personally or as agent or partner of another, directly or
indirectly, use any of the funds or deposits held by this Corporation, except
to make such current and necessary payments as are authorized by the Board;
(2) Receive, directly or indirectly, and retain any commission on
or benefit from any loan made by this Corporation or pay or emolument for
services rendered to any borrower by the Corporation in connection with such
loan, except as authorized by the Board;
(3) Become an endorser, surety or guarantor or in any manner an
obligor for any loan made by the Corporation; or
(4) Personally or as agent or partner of another, directly or
indirectly, borrow any of the funds or deposits held by the Corporation or
become the owner of real property upon which the Corporation holds a
mortgage. For purposes of this provision, a loan to or a purchase by an
organization in which such officer is the owner of a fifteen percent equity
interest or in which that officer and other officers of the Corporation hold
a twenty-five percent equity interest shall be deemed a loan to or a purchase
by such officer within the meaning of this provision, unless the loan to or
purchase by such organization occurred without such officer's knowledge or
against such officer's protest. A deposit in a Corporation shall not be
deemed a loan within the meaning of this provision.
-10-
<PAGE>
SECTION 16. FIDELITY BONDS. The Board of Directors by resolution may
require any and all of the officers and employees of the Corporation to give
bonds to the Corporation, with sufficient surety or sureties, conditioned for
the faithful performance of the duties of their respective offices and to
comply with such other conditions as may from time to time be required by the
Board of Directors. Such security may be accepted from any company
authorized to furnish fidelity bonds and doing business under the laws of the
State of Washington, and premiums therefor may be paid as a necessary expense
of the Corporation.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. DEFINITIONS. As used in this article:
A. "Action" means any actual or threatened claim, suit or proceeding,
whether civil, criminal, administrative or investigative.
B. "Another Enterprise" means a corporation (other than the
Corporation), partnership, joint venture, trust, association, committee,
employee benefit plan or other group or entity.
C. "Corporation" means First Mutual Bancshares, Inc. and any
predecessor to it and any constituent corporation (including any constituent
of a constituent) absorbed by the Corporation in a consolidation or merger.
D. "Director or Officer" means each person who is serving or who has
served as a director or officer of the Corporation or, at the request of the
Corporation, as a director, officer, partner, trustee, employee or agent of
Another Enterprise.
E. "Indemnitee" means each person who was, is or is threatened to be
made a party to or is involved (including without limitation, as a witness)
in an Action because the person is or was a Director or Officer of the
Corporation.
F. "Loss" means loss, liability, expenses (including attorneys' fees),
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement, actually and reasonably incurred or suffered by Indemnitee in
connection with an Action.
SECTION 2. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify
and hold each Indemnitee harmless against all Loss except for Losses arising
out of: (a) the Indemnitee's acts or omissions finally adjudged to be
intentional misconduct or a knowing violation of law, (b) the Indemnitee's
approval of certain distributions or loans by such Indemnitee which are
finally adjudged to be in violation of RCW 23A.08.450, or (c) any transaction
in which it is finally adjudged that the Indemnitee personally received a
benefit in money, property or services to which the Indemnitee was not
legally entitled. Except as provided in Section 4 of this Article, the
Corporation shall not indemnify an Indemnitee in connection with an Action
(or part thereof) initiated by the Indemnitee unless such Action (or part
thereof) was authorized by the Board of
-11-
<PAGE>
Directors of the Corporation. If, after the effective date of this Article,
the Washington Business Corporation Act is amended to authorize further
indemnification of directors or officers, then Directors and Officers of this
Corporation shall be indemnified to the fullest extent permitted by the
Washington Business Corporation Act, as so amended.
SECTION 3. BURDEN OF PROOF AND PROCEDURE FOR PAYMENT.
A. The Indemnitee shall be presumed to be entitled to indemnification
under this Article upon submission of a written claim (including a claim for
expenses incurred in defending any Action in advance of its final
disposition, where the undertaking in B. below has been tendered to the
Corporation), and thereafter the Corporation shall have the burden of proof
to overcome the presumption that the Indemnitee is so entitled.
B. The right to indemnification conferred in this Article shall
include the right to be paid by the Corporation all expenses (including
attorneys' fees) incurred in defending any Action in advance of its final
disposition; provided, however, that the payment of such expenses in advance
of the final disposition of an Action shall be made upon delivery to the
Corporation of an undertaking, by or on behalf of such Director or Officer,
to repay all amounts so advanced if it shall ultimately be determined that
such Director or Officer is not entitled to be indemnified under this Article
or otherwise.
SECTION 4. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this
Article is not paid in full by the Corporation within 60 days after a written
claim has been received by the Corporation, except in the case of a claim for
expenses incurred in defending a proceeding in advance of its final
disposition, in which case the applicable period shall be 20 days, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, to the extent successful in whole
or in part, the Indemnitee shall be entitled to be paid also the expense of
prosecuting such claim. Neither the failure of the Corporation (including its
Board of Directors, its shareholders or independent legal counsel) to have
made a determination prior to the commencement of such Action that
indemnification of or reimbursement or advancement of expenses to the
claimant is proper in the circumstances, nor an actual determination by the
Corporation (including its Board of Directors, its shareholders or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of expenses, shall be
a defense to the action or create a presumption that the Indemnitee is not so
entitled.
SECTION 5. NONEXCLUSIVITY OF RIGHTS. The right to indemnification and
the payment of expenses incurred in defending an Action in advance of its
final disposition conferred in this Article shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise.
SECTION 6. INSURANCE, CONTRACTS AND FUNDING. The Corporation may
maintain insurance, at its expense, to protect itself and any Director,
Officer, employee or agent of the Corporation or Another Enterprise against
any expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or
-12-
<PAGE>
loss under the Washington Business Corporation Act. The Corporation may,
without further corporate action, enter into contracts with any Director or
Officer of the Corporation in furtherance of the provisions of this Article
and may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in
this Article.
SECTION 7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay expenses in advance of the final disposition
of an Action to employees and agents of the Corporation with the same scope
and effect as the provisions of this Article with respect to the
indemnification and advancement of expenses of Directors and Officers of the
Corporation or pursuant to rights granted pursuant to, or provided by, the
Washington Business Corporation Act or otherwise.
SECTION 8. CONTRACT RIGHT. Rights of indemnification under this
Article shall continue as to an Indemnitee who has ceased to be a Director or
Officer and shall inure to the benefit of his or her heirs, executors and
administrators. The right to indemnification conferred in this Article shall
be a contract right upon which each Director or Officer shall be presumed to
have relied in determining to serve or to continue to serve as such. Any
amendment to or repeal of this Article shall not adversely affect any right
or protection of a Director or Officer of the Corporation for or with respect
to any acts or omissions of such Director or Officer occurring prior to such
amendment or repeal.
SECTION 9. SEVERABILITY. If any provision of this Article or any
application thereof shall be invalid, unenforceable or contrary to applicable
law, the remainder of this Article, or the application of such provisions to
persons or circumstances other than those as to which it is held invalid,
unenforceable or contrary to applicable law, shall not be affected thereby
and shall continue in full force and effect.
SECTION 10. FURTHER INDEMNIFICATION. Reference is made to the adoption
of indemnity statutes at RCW 23B.08.500-600. To the extent these statutes,
or any successor statute within the Washington Business Corporation Act or
the Federal Bank Holding Company Act, as in effect from time to time, create
rights of indemnification for officers and directors broader than contained
in the balance of the bylaws within this Article V, such additional or
further indemnification is approved and made a part of this bylaw.
-13-
<PAGE>
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. Certificates representing shares
of capital stock of the Corporation shall be in such form as shall be
determined by the Board of Directors. Such certificates shall be signed by
the President or Vice President, attested by the Secretary or an Assistant
Secretary, and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or registered by
a registrar, other than the company itself or one of its employees. Each
certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
are issued, with the number of shares and date of issue, shall be entered on
the stock transfer books of the Corporation. All certificates surrendered to
the Corporation for transfer shall be canceled and no new certificate shall
be issued until the former certificate for the like number of shares shall
have been surrendered and canceled, except that in case of a lost or
destroyed certificate, a new certificate may be issued therefor upon such
terms and indemnity to the Corporation as the Board of Directors may
prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record thereof or by
his legal representative, who shall furnish proper evidence of such
authority, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Corporation. Such transfer shall be made only on
surrender for cancellation of the certificate for such shares. The person in
whose name of shares of capital stock stand on the books of the Corporation
shall be deemed by the Corporation to be the owner thereof for all purposes.
ARTICLE VII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the last day of December
of each year. The Corporation shall be subject to an annual audit as of the
end of its fiscal year by independent public accountants appointed by the
Board of Directors.
ARTICLE VIII
DIVIDENDS
Dividends upon the stock of the Corporation, subject to the provisions
of the Articles of Incorporation, if any, may be declared by the Board of
Directors at any regular or special meeting, pursuant to law. Dividends may
be paid in cash, in property or in stock.
-14-
<PAGE>
ARTICLE IX
CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the Board
of Directors shall prescribe.
ARTICLE X
CONFORMITY
Any article, section or provision of these Bylaws which shall be in
conflict with any laws or regulations relating to or governing this
Corporation or the activities thereof shall be deemed amended to conform
therewith. Whether or not specifically provided in these Bylaws, this
Corporation, its Board of Directors and its officers shall have all
authority, control, management and power granted to or provided for
corporations by the laws of the State of Washington and any other laws now or
hereafter in effect. If any provision of these Bylaws should be held invalid
or in violation of any law or regulation, it shall not affect the validity of
the remainder of these Bylaws or of the article, section or other subdivision
thereof in which such provision appears.
ARTICLE XI
AMENDMENTS
These Bylaws may be amended at any time by a majority vote of the Board
of Directors.
-15-
<PAGE>
CERTIFICATE OF ADOPTION
The undersigned Secretary of First Mutual Bancshares, Inc. (the
"Corporation") does hereby certify that the above and foregoing Bylaws of
First Mutual Bancshares, Inc. were adopted by the directors as the Bylaws of
the Corporation and that the same do now constitute the Bylaws of this
Corporation.
Dated this day of , 1999.
----- ------------------
----------------------------------------
Phyllis A. Easterlin, Secretary
-16-
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FDIC Certificate Number: 19835-8
FIRST MUTUAL SAVINGS BANK
-------------------------
(Exact name of registrant as specified in its charter)
State of Washington 91-0594387
- -------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 108th Avenue N.E., Bellevue, Washington 98004
- -------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (206) 455-7300
---------------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO
--- ---
As of March 8, 1999, there were issued and outstanding 4,247,275 shares
of the registrant's common stock. The aggregate market value of the voting stock
held by nonaffiliates (1,756,692 shares) of the registrant was $23,056,583 based
on the closing sales price of the registrant's common stock as quoted on the
NASDAQ National Market System which on March 8, 1999 was $13.125.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
1. Annual Report to Shareholders for the fiscal year ended December 31,
1998.
2. Proxy Statement dated March 19, 1999 for the 1999 Annual Meeting
of Shareholders.
PART I
ITEM 1. BUSINESS
(a) GENERAL
First Mutual Savings Bank ("First Mutual" or the "Bank") was
incorporated as a Washington state-chartered mutual savings bank in 1968 as the
successor to Eastside Savings and Loan Association, which was organized in 1952
and commenced operations in 1953. In December 1985, the Bank converted from
mutual to stock form through the sale and issuance of 966,000 shares of Common
Stock. The Bank is subject to regulation by the State of Washington Department
of Financial Institutions and the Federal Deposit Insurance Corporation
("FDIC").
The business of the Bank consists of attracting deposits from the
general public as well as wholesale funding sources and investing those funds
primarily in real estate loans, mid-sized business loans, loans secured by
savings accounts, and consumer loans. The Bank also invests in federal
government and agency obligations; structured notes; real estate mortgage
investment conduits ("REMICs"); mortgage-backed securities; and corporate and
municipal securities. The Bank is a major residential mortgage lender in the
Puget Sound area. In addition to portfolio lending, the Bank conducts a
significant mortgage banking operation, which encompasses the selling of
primarily fixed-rate loans into the secondary mortgage market. The Bank
generally retains the right to service the loans sold (i.e., collection of
principal and interest payments) for which it receives a monthly fee based on
the unpaid balances of the sold loans. The loan servicing rights may be resold
at opportune market conditions.
The principal sources of funds for the Bank's lending and investment
activities are savings deposits, repayment of loans, loan sales, reverse
repurchase agreements and Federal Home Loan Bank ("FHLB") of Seattle advances.
The Bank's primary sources of income are interest on loans, gains on sales of
loans and loan servicing rights, servicing fees on loans, service-charge income
on deposit accounts and interest and dividends on investment securities. Its
principal expenses are interest paid on deposits and borrowings, and general and
administrative costs.
The Bank's savings and lending operations are conducted through nine
full service facilities located in Bellevue(3), Redmond, Seattle(2), Issaquah,
Bellingham, and Monroe, Washington, and three income property loan production
offices located in Salem, Oregon, and Tacoma and Bellingham, Washington. The
Bank's main office is currently located at 400 108th Avenue N.E., Bellevue,
Washington. See "Item 2. - Properties" herein for additional information on the
Bank's facilities.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Bank with the
FDIC, in the Bank's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Bank wishes
to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date
<PAGE>
made, and to advise readers that various factors, including regional and
national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors,
could affect the Bank's financial performance and could cause the Bank's
actual results for future periods to differ materially from those anticipated
or projected.
The Bank does not undertake, and specifically disclaims any obligation,
to revise any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
SELECTED FINANCIAL DATA
The information under the section captioned "Selected Financial Data"
in the 1998 Annual Report to Shareholders ("Annual Report") is incorporated
herein by reference.
YIELDS EARNED AND RATES PAID
The Bank's pretax earnings depend significantly on its net interest
income, which is the difference between the income it receives on its loan
portfolio and other investments and its cost of money, consisting primarily of
interest paid on savings deposits and FHLB advances. Net interest income is
affected by: (i) the difference between rates of interest earned on its
interest-earning assets and rates paid on its interest-bearing liabilities
("interest rate spread") and (ii) the relative amounts of its interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
The average yields received on long-term, fixed-rate real estate loans
change slowly and generally do not keep pace with changes in interest rates on
deposit funds and borrowings. At December 31, 1998, the Bank's portfolio of
loans consisted of 83% adjustable-rate and 17% fixed-rate loans. The Bank has
employed various measures designed to make yields on its loan portfolio and
investments interest-rate sensitive. They have included: (i) adoption of a
policy under which the Bank generally originates and sells long-term, fixed-rate
mortgage loans which have been written to specifications promulgated by the
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") and qualify for sale in the secondary market, (ii) emphasis
on origination of adjustable-rate mortgage loans on residential and commercial
properties, and (iii) origination of construction loans secured by residential
and commercial properties, at interest rates subject to periodic adjustment
based upon the prevailing market rates. See "Lending Activities" and "Interest
Rate Risk Management."
<PAGE>
AVERAGE BALANCE SHEET
The following table presents 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, resulting interest rate spread,
and ratio of interest-earning assets to interest-bearing liabilities. Averages
are calculated using monthly averages. The Bank follows the practice of stopping
interest accruals on loans past due 90 days and over unless it is reasonably
assured that all principal and interest due on the loan will be fully recovered.
The interest income on loans for all years presented below excludes the interest
beyond the 90 day period. These amounts were immaterial for all periods
presented. Interest income on tax-free municipal bonds are not shown on a
tax-equivalent basis.
<TABLE>
<CAPTION>
At December 31, Years Ended December 31,
------------------- --------------------------------------
1998 1998
------------------- --------------------------------------
Average Average
Yield/ Average Yield/
Balance Cost Balance Interest Cost
------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans recrreivable $386,906 8.30% $386,422 $34,519 8.93%
Mortgage-backed securities 39,284 6.70 24,560 1,652 6.73
Corporate and municipal bonds 3,172 5.89 746 37 4.96
Short-term investments 217 4.32 939 62 6.60
U.S. securities 39,644 6.11 40,084 2,588 6.46
Other equity investments 4,877 7.75 4,680 357 7.63
-------- ------- ------
Total interest-earning assets 474,100 7.96 457,431 39,215 8.57
Non-interest earning assets 15,130 - - 10,065 - - - -
-------- -------
Total assets $489,230 - - $467,496 - - - -
-------- -------
-------- -------
Interest-bearing liabilities:
Deposits $403,105 4.80 $387,720 19,880 5.13
FHLB advances and other borrowed money 31,765 5.24 34,402 1,939 5.64
-------- ------- ------
Total interest-bearing liabilities 434,870 4.83 422,122 21,819 5.17
Non-interest-bearing liabilities - deposits
and other 19,698 - - 12,717 - - - -
-------- -------
Total liabilities 454,568 - - 434,839 - - - -
Shareholders' equity 34,662 - - 32,657 - - - -
-------- -------
Total liabilities and shareholders' equity $489,230 - - $467,496 - - - -
-------- -------
-------- -------
Net interest income - - - - - - $17,396 - -
---- ------- ----
---- ------- ----
Ratio of average interest-earning
assets to average interest-bearing
liabilities - - - - 1.08x - - - -
Interest rate spread - - - - - - - - 3.40%
Net yield (net interest income as a
percentage of average interest-earning
assets) - - - - - - 3.80% - -
Amortized loan fees included in loan
receivable interest income $1,000
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $344,293 $31,202 9.06% $317,355 $27,841 8.77%
Mortgage-backed securities 28,714 2,070 7.21 35,913 2,491 6.94
Corporate and municipal bonds 37 4.96
Short-term investments 7,525 470 6.25 928 41 4.42
U.S. securities 36,776 2,323 6.32 19,543 1,166 5.97
Other equity investments 4,333 331 7.64 4,014 313 7.80
------- ------ ------- ------
Total interest-earning assets 421,641 36,396 8.63 377,753 31,852 8.43
Non-interest earning assets 9,656 - - - - 11,426 - - - -
------- -------
Total assets $431,297 - - - - $389,179 - - - -
------- -------
-------
Interest-bearing liabilities:
Deposits $344,500 17,779 5.16 $289,609 14,874 5.14
FHLB advances and other borrowed money 46,935 2,811 5.99 59,196 3,427 5.79
------- ------ ------- ------
Total interest-bearing liabilities 391,435 20,590 5.26 348,805 18,301 5.25
Non-interest-bearing liabilities - deposits
and other 10,838 - - - - 14,839 - - - -
------- -------
Total liabilities 402,273 - - - - 363,644 - - - -
Shareholders' equity 29,024 - - - - 25,535 - - - -
------- -------
Total liabilities and shareholders' equity $431,297 - - - - $389,179 - - - -
------- ------ ---- ------- ------ ----
-------
Net interest income - - $15,806 - - - - $13,551 - -
------- ---- ------- ----
------- ---- ------- ----
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.08x - - -- 1.08x - - - -
Interest rate spread - - - - 3.37% - - - - 3.18%
Net yield (net interest income as a
percentage of average interest-earning
assets) - - 3.75% -- -- 3.59% - -
Amortized loan fees included in loan
receivable interest income $ 809 $804
</TABLE>
<PAGE>
RATE VOLUME ANALYSIS
The "Rate Volume Analysis" table is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report, which is incorporated herein by reference.
KEY OPERATING RATIOS
The following table provides certain performance ratios of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets (net
income divided by average
total assets) 1.11% 1.05% 1.01% 1.03% 1.09%
Return on average equity (net income
divided by average equity) 15.95 15.57 15.33 15.40 16.13
Average equity to average assets
ratio (average equity divided by
average total assets) 6.99 6.73 6.56 6.67 6.75
Dividend payout ratio 49.00% 45.80% 12.50% 26.22% 11.11%
</TABLE>
LENDING ACTIVITIES
GENERAL. The Bank's loan portfolio and loans held for sale totaled
$386.9 million at December 31, 1998 (loans held for sale totaled $27.4 million
of this amount). On that date before deductions, $95.8 million, or 24%, of total
outstanding loans, including loans held for sale, consisted of loans secured by
one-to-four-unit residential properties; $118.0 million, or 30%, consisted of
loans secured by mortgages on over-four-unit residential properties;
construction loans constituted $60.6 million, or 16%; and $121.2 million, or
31%, consisted of commercial real estate loans. The balance of the Bank's
outstanding loans was comprised of consumer and business loans.
The Bank's principal lending activities have focused on the origination
of conventional permanent loans on residential and commercial real estate. Total
loans originated were $188.9 million and $213.2 million for the years ended
December 31, 1996 and 1997, respectively, and $380.2 million for the year ended
December 31, 1998.
In order to maintain the interest rate sensitivity of its loan
portfolio and investments, the Bank observes a number of measures, which
include: (i) adoption of a policy under which the Bank generally originates
long-term, fixed-rate mortgage loans only when such loans qualify for and are
sold in the secondary market, (ii) an emphasis on origination of adjustable-rate
mortgage loans on residential and commercial properties, and (iii) origination
of construction loans secured by residential and commercial properties at
interest rates subject to periodic adjustment based upon the prevailing prime
rate. At December 31, 1998, $321.1 million, or 83% of net loans receivable,
including loans held for sale, were comprised of loans that were other than
long-term, fixed-rate mortgage loans. This amount consists of $47.5 million in
residential mortgage loans with rates adjustable at periods ranging from one to
five years, $234.2 million in business loans and loans secured by
income-producing and multifamily residential properties, $30.0 million in net
construction loans, and $9.4 million in consumer loans.
<PAGE>
The following tables provide selected data relating to the composition
of the Bank's loan portfolio by type of loan and type of security on the dates
indicated..
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
-------------------------- ----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Conventional Real
Estate Loans:
Interim construction loans $ 60,641 15.67% $ 44,494 12.35% $ 35,706 10.74% $27,953 9.23% $23,265 9.33%
Loans on existing property 260,068 67.22 239,846 66.56 236,676 71.19 224,105 74.04 195,615 78.39
Loans refinanced 74,691 19.31 83,165 23.08 69,244 20.83 58,874 19.45 39,518 15.84
Insured or guaranteed real
estate loans 320 0.08 604 0.17 1,278 0.39 1,494 0.49 1,387 0.56
Consumer loans 17,465 4.52 11,831 3.28 7,121 2.14 1,875 0.62 1,049 0.42
Business loans 2,629 0.68 1,583 0.44 169 0.05 -- -- -- --
Less -
Loans in process (21,765) (5.63) (14,934) (4.14) (12,283) (3.69) (7,818) (2.58) (7,528) (3.02)
Reserve for loan losses (5,569) (1.44) (4,858) (1.35) (3,882) (1.17) (2,223) (0.73) (1,973) (0.79)
Deferred loan fees and (0.73)
other discounts (1,574) (0.41) (1,400) (0.39) (1,583) (0.48) (1,569) (0.52) (1,809) (0.73)
-------- ------ -------- ------ -------- ------ -------- ------- -------- -------
TOTAL $386,906 100.00% $360,331 100.00% $332,446 100.00% $302,691 100.00% $249,524 100.00%
======== ====== ======== ====== ======== ====== ======== ======= ======== =======
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF SECURITY:
Residential:
One-to-four-family $95,807 24.77% $117,285 32.55% $131,894 39.68% $144,819 47.84% $132,846 53.24%
Multifamily 118,015 30.50 101,317 28.12 85,042 25.58 71,008 23.46 50,299 20.16
Construction 60,641 15.67 44,494 12.35 35,706 10.74 27,953 9.23 23,265 9.33
Commercial real estate 121,257 31.34 105,013 29.14 90,262 27.15 68,646 22.68 53,375 21.39
Consumer loans 17,465 4.52 11,831 3.28 7,121 2.14 1,875 0.62 1,049 0.42
Business loans 2,629 0.68 1,583 0.44 169 0.05 -- -- -- --
Less -
Loans in process (21,765) (5.63) (14,934) (4.14) (12,283) (3.69) (7,818) (2.58) (7,528) (3.02)
Reserve for loan losses (5,569) (1.44) (4,858) (1.35) (3,882) (1.17) (2,223) (0.73) (1,973) (0.79)
Deferred loan fees and
other discounts (1,574) (0.41) (1,400) (0.39) (1,583) (0.48) (1,569) (0.52) (1,809) (0.73)
-------- ------ -------- ------ -------- ------ -------- ------- -------- -------
TOTAL $386,906 100.00% $360,331 100.00% $332,446 100.00% $302,691 100.00% $249,524 100.00%
======== ====== ======== ====== ======== ====== ======== ======= ======== =======
</TABLE>
<PAGE>
LOAN MATURITY. The following table sets forth certain information at
December 31, 1998, regarding the dollar amount of loans maturing based on their
contractual terms to maturity or repricing. 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 unearned discounts,
deferred loan origination fees and allowance for loan losses.
<TABLE>
<CAPTION>
Due 2 Years 3 Years
Within Through Through
One Year 3 Years 5 Years After 5
From After After Years
December December December Through Beyond
31, 1998 31, 1998 31, 1998 10 Years 10 Years Total
-------- -------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Conventional Real Estate Loans:
Interim construction loans $ 38,876 $ -- $ -- $ -- $ -- $ 38,876
Loans on existing property 178,050 19,001 19,729 7,893 35,395 260,068
Loans refinanced 51,136 5,457 5,666 2,267 10,165 74,691
Insured or guaranteed
real estate loans 190 20 34 -- 76 320
Consumer loans 10,508 687 586 5,622 62 17,465
Business Loans 2,472 45 112 -- -- 2,629
-------- -------- -------- -------- -------- --------
Total Loans $281,232 $ 25,210 $ 26,127 $ 15,782 $ 45,698 $394,049
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans,
categorized by fixed interest rates and floating or adjustable interest rates.
Loan balances do not include unearned discounts, deferred loan origination fees,
and allowance for loan losses.
<TABLE>
<CAPTION>
Due Within
One Year From December 31, 1998 Due After December 31, 1999
------------------------------- ---------------------------
Fixed Adjustable Fixed Adjustable
Rates Rates Total Rates Rates Total
----- ---------- ----- ----- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $7,125 $261,127 $268,252 $51,242 $54,461 $105,703
Consumer loans 1,241 9,267 10,508 6,957 -- 6,957
Business Loans 88 2,384 2,472 157 -- 157
------ -------- -------- ------- ------- --------
Total $8,454 $272,778 $281,232 $58,356 $54,461 $112,817
====== ======== ======== ======= ======= ========
</TABLE>
RESIDENTIAL LOANS. A key lending activity is the granting of
conventional or government-insured loans to enable borrowers to purchase,
refinance or build homes. At December 31, 1998, approximately 24% of the Bank's
total loan portfolio, including loans held for sale, consisted of loans secured
by one-to-four unit family dwellings located within the States of Washington,
Oregon and Idaho.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on residential mortgage loans to 97% of the appraised value as determined
by an independent appraiser, with the condition that private mortgage insurance
be required on home loans with loan-to-value ratios in excess of 80%.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible in accordance with sound lending practices, market
conditions, and underwriting standards established by the Bank. Mortgage loans
made by the
<PAGE>
Bank are generally long-term loans, amortized on a monthly basis, with
principal and interest due each month. The initial contractual loan payment
period for residential loans typically ranges from five to 30 years. The
Bank's experience indicates that real estate loans remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option, subject to prepayment penalty
provisions when included in the note.
The Bank offers six-month, one-year, three-year and five-year loans
with limitations on adjustments of two percent in any one year with a maximum
lifetime interest rate adjustment of between four and six percent. The Bank also
offers fixed-rate loans, which it originates for sale in the secondary market.
Since 1982, the Bank has generally followed a policy of not originating
fixed-rate mortgages for its own portfolio.
All improved real estate which serves as security for a loan to the
Bank must be insured by such companies as may be approved by the Bank against
fire, extended coverage, vandalism, malicious mischief and other hazards. Such
insurance must be maintained throughout the term of the loan and in an amount
not less than that amount necessary to meet the replacement cost of the property
structures, subject to insurance carrier limits.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LOANS. First Mutual's real
estate loan portfolio also includes loans on multifamily housing (over four
units), construction loans (residential, commercial and multifamily) and
commercial loans.
Multifamily loans are generally made in amounts between $500,000 and
$2.0 million and at December 31, 1998, the largest multifamily loan was for $2.5
million. As of December 31, 1998, multifamily loans were $118.0 million, or 30%,
of the loan portfolio as compared to $101.3 million, or 28%, in 1997.
The Bank provides interim (construction) financing for residential and
commercial property development. At December 31, 1998, the Bank had $60.6
million in construction loans of which $38.9 million was disbursed. These loans
constituted 10% of the loan portfolio.
Single-family construction loans are further designated by the Bank
into two categories -- speculative and custom. Speculative (spec) construction
loans are approved for builder-developers who generally first build the
residence and then sell the property to the end buyer. Those loans typically are
made for a twelve-month period, which may be extended subject to negotiation and
the payment of an extension fee. Interest rates on spec loans are tied to the
prime rate and are adjusted when the prime rate changes. At the present time,
rates quoted range from 1.0% to 2.0% above the prevailing prime rate and are
dependent upon the type of loan and its terms.
Custom construction loans are originated directly to the borrower. The
borrower's builder must be approved by the Bank, and the Bank oversees the
disbursement of construction funds to the borrower and builder. Those loans are
generally made for periods ranging from six to 12 months. Interest rates charged
for custom construction loans are typically the same as those offered for
fixed-rate and adjustable-rate one-to-four family loans. The loan fee structure
for custom construction loans is 1% or more higher than that assessed other
single-family loans with similar terms and conditions. The additional loan fee
compensates the Bank for the extra costs associated with this type of lending.
At December 31, 1998, commercial real estate loans (excluding
multifamily and construction loans) constituted $121.2 million, or approximately
31% of First Mutual's loan portfolio, including loans held for sale. These loans
are typically secured by office buildings, warehouse, commercial and retail
centers located in First Mutual's primary lending area in the Greater Puget
Sound area and Western Oregon. Permanent commercial real estate loans are
normally made up to 75% of the appraised value of the property and generally
<PAGE>
have interest rates which are adjusted annually based on the constant maturity
index of the one-year United States Treasury Bills plus a spread ranging from
3.00% to 4.00%.
Income property loans, consisting of multifamily, construction and
commercial real estate loans, totaled $261.3 million at December 31, 1998. That
figure compares to $216.9 million at year-end 1997 and $189.2 million at
year-end 1996. The increase in income property loans of $72.1 million, or 38%,
over a two-year period is a result of both an increase in the asset size of the
Bank and an emphasis on income property lending.
It is the intent of the Bank to focus on income property, consumer, and
business lending in the future. Over time, the Bank anticipates that these types
of loans as a percent of the total loan portfolio will slowly rise and the
corresponding percent of residential loans will decline.
The assets of the Bank totaled $446 million at year-end 1997, which
compares to $489 million at December 31, 1998. An increase in asset size will
typically result in an increase in all types of portfolio loans.
The Bank has also focused on income property loans because, as a group,
these loans tend to return a higher yield than residential adjustable-rate
loans. At year-end 1998, adjustable-rate residential loans totaled $64.3 million
and had an average yield of 8.1%. In contrast, the adjustable-rate income
property loans totaled $247.3 million and returned an average yield of 8.6%.
Income property real estate financing is generally considered to
involve a somewhat higher degree of credit risk than financing of residential
properties. The risk of loss on an income property construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. If the estimate of the construction cost
of the property upon completion of the project proves to be inaccurate, the Bank
may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral which is insufficient to assure full repayment. On permanent
income property real estate loans, the risk to the Bank is primarily
attributable to the cash flow from the property being financed. If the cash flow
from the property is reduced (e.g., if leases are not obtained or renewed), the
borrower's ability to repay the Bank's loan may be impaired.
The Bank's underwriting criteria are designed to evaluate and minimize
the risk of income property real estate lending. Among other things, the Bank
considers the credit history and reputation of the borrower, the borrower's net
worth and liquidity, the amount of the borrower's equity in the project,
independent appraisal and review of cost estimates, preconstruction sale and
leasing information, and cash flow projections of the borrower. To manage and
control the risk inherent in this type of lending, the Bank has adopted a
concentration of credit policy which, among other things, generally limits the
amount the Bank can lend to any one borrower to $3.5 million unless this
requirement is waived by the Investment Committee of the Board of Directors.
BUSINESS BANKING. The Business Banking Department makes loans for
"owner-occupied" commercial real estate properties and construction loans, in
addition to non-real-estate-based business loans. At year-end 1998, total
business banking loans grew to $16.2 million compared to $3.7 million the
previous year. Non real-estate business loans included in those totals were $2.6
million and $1.6 million at December 31, 1998 and 1997, respectively.
Business banking commercial real estate loans is typically made on
"owner-occupied" properties. The Business Banking Department analyzes the
owner's business that occupies the property, and looks at the
<PAGE>
business' cash flow as the primary source of repayment. The real estate
collateral provides secondary security to the loan. Non-real-estate business
loans are typically extended to medium-sized businesses for the purpose of
financing inventory, accounts receivable, equipment, facilities, etc.
Interest rates on business loans are generally tied to the prime rate,
plus a spread ranging from .75 to 2.50% or to the constant maturity index of the
one-year U.S. Treasury Bills, plus a spread ranging from 3.00% to 4.00%. The
rates are adjusted when the index rate changes. Prime based loans reprice
immediately while the rest reprice based on set schedules, generally annually
and after a fixed period of time. Annual fees are also usually assessed to line
of credit business loans.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multifamily real estate lending.
Real
<PAGE>
estate lending is generally considered to be collateral-based lending with
loan amounts based on predetermined loan to collateral values, and liquidation
of the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete
or of limited use, among other things. Accordingly, the repayment of a
commercial business loan depends primarily on the creditworthiness and cash
flow of the borrower (and any guarantors), while liquidation of collateral is a
secondary source of repayment.
CONSUMER LOANS. The Bank originates consumer loans through three
departments: sales finance lending, home equity lending, and direct consumer
lending. Consumer loans totalled $17.5 million at December 31, 1998 compared to
$11.8 million the previous year. The increase is primarily in sales finance
lending. At December 31, 1998, sales finance loans totaled $6.0 million compared
to $1.0 million last year.
The Sales Finance Department began operations during the third quarter
of 1997. This department purchases non-recourse consumer financing contracts
from approved dealers in Washington and Oregon. Typical collateral for these
contracts include retrofitted windows, siding, roofs, spas, and motorcycles.
Dealers must be approved with the Bank prior to the purchase of contracts.
Before a contract is purchased, Bank personnel make independent credit decisions
of the borrowers by checking the credit worthiness of the borrower, calculating
debt-to-income ratios, and evaluating the value of the collateral purchased. The
financing contracts are secured and the Bank's lien is perfected by the use of a
Financing Statement on home improvement loans over $5,000 and by the vehicle
titles on vehicles. The terms of the contracts are fixed rate and vary in term
from two to 10 years. As an incentive for a selection of dealers, the Bank
maintains a quality assurance account where funds are held on behalf of the
dealer and are rebated back to them on an annual basis. The rebate is based on
the performance of the loans delivered by the dealer to the Bank throughout the
year. At December 31, 1998, the dealer quality assurance account had a total
balance of $9,000.
The Bank originates home equity lines of credit and loans for its
portfolio and for sale to others in the secondary market. These loans are
secured by a second mortgage deed-of-trust on residential real estate occupied
by the borrower or owned by the borrower as an investment. Home equity loans
totaled $9.2 million at December 31, 1998 compared to $10.1 million last year.
The high level of loan prepayments experienced by the Bank in 1998 was the
primary cause of the decline in loan totals between the two years.
The Bank's strategy regarding home equity loans is to sell fixed-rate
installment second mortgages and higher loan-to-value revolving lines-of-credit.
Revolving lines-of-credit retained in the Bank's portfolio generally have a
combined loan-to-value of less than 80%. All revolving lines-of-credit are tied
to the prime rate plus a margin. The margin is determined based on loan-to-value
ratio, the credit worthiness of the borrower, and the borrower's debt-to-income
ratio. The interest rates charged to the borrower are adjustable and change
based on the prime rate. The underwriting and insurance requirements for the
Bank's home equity products falls under the same underwriting guidelines and
standards as the Bank's residential loans. See "Residential Loans."
The Direct Consumer Lending Department began operations in the second
quarter of 1998. The Department processes and closes consumer loan requests
generated within the Bank's deposit branches and from lending officers. The
lending products offered fall into two categories: collateral based loans
(automobiles, boats, recreational vehicles, home improvement, etc.), and
unsecured lines-of-credit. The underwriting criteria for collateral-based loans
are similar to that of the sales finance loans noted above. Primary
consideration is given to the borrower's capacity to repay the obligation. A
secondary consideration on secured consumer loans is the value of the loan
collateral as a source of repayment. The underwriting criteria on the unsecured
lines-of-credit call for a higher level of borrower creditworthiness because of
the
<PAGE>
unsecured nature of these loans. The terms on the collateral based loans are
fixed rates with terms of up to 10 years. The unsecured lines-of-credit are
variable and tied to the prime rate plus a margin. Direct consumer loans totaled
$636,000 at December 31, 1998.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which 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 thus 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 which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loans such as the Bank,
and a borrower may be able to assert against such assignee claims and defenses
that it has against the seller of the underlying collateral. At December 31,
1998, consumer loans past due 90 days or more totaled $20,000.
LOAN SOLICITATION AND PROCESSING. The Bank relies upon its employees to
solicit and/or originate income property and residential loans. The Bank also
utilizes the services of mortgage brokers. Residential mortgage brokers take
applications from borrowers, process the credit information, obtain property
appraisals, and then submit the loan to First Mutual for approval. If approved,
the loan is funded by and closed in the name of First Mutual. Income property
brokers are generally limited to taking the initial application from borrowers.
Mortgage brokers provide the Bank with a cost effective method of originating
loans in a broader geographic area than the Bank's customer base. Approximately
59% of all residential loans closed during the year ended December 31, 1998,
were obtained through mortgage brokers.
The Bank's lending policy is reviewed annually and approved by the
Board of Directors. Residential loans up to specified limits may be approved by
a member of the Loan Committee or designated underwriters. Income property loans
up to $750,000, and business loans up to $400,000 are approved by the Loan
Committee, which consists of officers Valaas, Mandery, Boudreau, Young, Walkky,
Werth and Chermak. All residential loans with cumulative extensions of credit
over $750,000, income property loans over $750,000, and business loans over
$400,000 are further reviewed and subject to approval by the Investment
Committee, which is comprised of Directors Valaas, Freeman, Parker, Tremper,
Wallace (Robert), Florence, Doud and Rowley.
LOAN ORIGINATIONS AND SALES. Loan originations increased in 1998 to
$380 million from $213 million in 1997 and from $189 million in 1996. The
increase in originations came from residential and other loan closings, which
increased from $121 million in 1997 to $245 million in 1998. Income property and
business loan originations also increased from $92 million in 1997 to $134
million in 1998.
Selling loans in the secondary mortgage market reduces the Bank's risk
that interest rates will escalate while holding long-term, fixed-rate loans
in its portfolio. The sale of loans into the secondary market also allows the
Bank to continue to make loans during periods when savings flows decline or
funds are not otherwise available for lending purposes. In connection with
such sales, the Bank generally retains the right to service (i.e., collection
of principal and interest payments), for which it receives an average monthly
fee of .23% per annum of the unpaid balance of each loan. The loan servicing
rights may be resold at opportune market conditions.
The Bank currently sells loan servicing rights for which it typically
receives a fee of 1.25% to 1.75%
<PAGE>
of the loan principal balance. Anticipating a potential risk to the servicing
portfolio from accelerated prepayments, the Bank sold one-third of its
servicing rights in the first quarter of 1998. These actions helped to reduce
the economic loss from the early repayment of loans serviced for others. The
"refinance boom" did in fact materialize and remained high through the rest
of 1998. In addition to the $93 million sold in the first quarter, sales
totaling $85 million were executed in the subsequent three quarters. The net
gain on the sale of servicing rights totaled $1,982,000 in 1998. There were
no sales of servicing rights in 1997. (See further discussions on this
subject in the Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Annual Report, under the caption Gain of
Sales of Loans).
As of December 31, 1998, the Bank was servicing loans for others
aggregating approximately $268 million as compared to $379 million in 1997. Loan
servicing fees, net, totaled $474,000 for the year ended December 31, 1998 and
$805,000 for the year ended December 31, 1997.
Currently, long-term mortgage loans are being originated for sale in
the secondary mortgage market to FNMA, which is a publicly owned
quasi-governmental agency that purchases residential mortgage loans from
federally insured financial institutions and certain other lenders. During the
year ended December 31, 1998, the Bank securitized and sold $198 million in
loans as compared to $97.6 million during 1997.
Set forth below is a table showing the Bank's loan origination and
sales activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Total loans at beginning
of period (net of undisbursed loan proceeds) $ 366,589 $ 337,911 $ 306,483
Loans originated:
Real estate loans:
Construction loans 52,917 39,952 39,014
Loans on existing property 187,802 90,805 68,974
Loans refinanced 124,639 72,779 75,432
Insured and guaranteed loans -- 769 317
Consumer and other loans 14,826 8,902 5,198
--------- --------- ---------
Total loans originated 380,184 213,207 188,935
Principal reductions (135,764) (86,952) (59,495)
Loans sold:
Whole loans (197,404) (90,412) (91,431)
Participation loans (10,555) (7,165) (6,581)
--------- --------- ---------
Total loans sold (207,959) (97,577) (98,012)
--------- --------- ---------
Total gross loans at end of period (net of
undisbursed loan proceeds) $ 403,050 $ 366,589 $ 337,911
========= ========= =========
</TABLE>
LOAN COMMITMENTS. First Mutual's commitments to make conventional
mortgage loans on existing residential dwellings are generally made for periods
of 30 to 60 days. The borrower may reserve ("lock-in") an interest rate and loan
fee for a period of 30 to 60 days from the date of application. This reservation
is conditioned upon loan approval and closing within this time frame. Interest
rates and loan fees committed at the time of the lock-in are based upon the
prevailing market rate at the time of approval. Outstanding commitments to
borrowers for loans, including commitments for income property loans, totalled
$65.1 million at December 31, 1998.
<PAGE>
LOAN ORIGINATION FEES AND OTHER FEES. In addition to interest earned on
loans and servicing fees on loans sold and securitized, the Bank receives loan
origination fees for originating mortgage loans. See Note 1 of Notes to
Consolidated Financial Statements in the Annual Report for information as to the
recognition of loan fee income.
Loan origination fees have varied with the volume and type of loans
made and with competitive conditions in mortgage markets. Loan demand and
availability of money affect these market conditions. Recent trends have kept
loan origination fees in the 1% to 2% range for permanent real estate loans.
Construction loan fees at the present time range from 2% to 3% of the loan
amount.
The Bank also receives other fees and charges relating to existing
loans, which include late charges and fees collected in connection with a change
in borrower or other loan modifications, including construction loan extensions.
In connection with its loan origination activities, the Bank also realizes
closing fees. These fees are paid by borrowers to the Bank.
REAL ESTATE HELD FOR SALE AND NONPERFORMING LOANS. Loans are defined as
nonperforming when any payment of principal and/or interest is 90 days past due,
unless the loan is well-secured and is in process of collection. While generally
the Bank is able to work out a satisfactory repayment schedule with a delinquent
borrower, the Bank will undertake foreclosure proceedings if the delinquency is
not otherwise resolved. Property acquired by the Bank as a result of foreclosure
or by deed in lieu of foreclosure is classified as "real estate held for sale"
until such time as it is sold or otherwise disposed. At December 31, 1998, the
total of nonperforming loans, repossessed assets, and real estate acquired
through foreclosure was $336,000.
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(Dollars in Thousands)
Loans greater than 90 days delinquent and
still accruing $ -- $ -- $ --
Restructured troubled loans -- -- --
Nonaccrual loans 298 674 224
Other assets and real estate acquired
through foreclosure 38 -- 58
---- ---- ----
Total $336 $674 $282
==== ==== ====
As a percentage of net loans .1% .2% .1%
As a percentage of total assets .1% .2% .1%
Gross interest income that would have
been recorded in the period if loans
had been current with original terms $ 21 $ 58 $ 20
Interest income on loans included
in net income for the period $ 16 $ 44 $ 20
</TABLE>
The Bank follows the practice of stopping interest accruals on loans 90
days or more past due unless the Bank is reasonably assured that it can fully
recover all interest and principal due on the loan. Nonperforming assets for
fiscal 1998 were primarily composed of loans collateralized by single-family
<PAGE>
residences.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level sufficient to
provide for estimated losses based for known and inherent risks in the loan
portfolio. This reserve is based upon management's continuing analysis of the
factors underlying the quality of the loan portfolio. These factors include
changes in the size and composition of the loan portfolio; actual loan loss
experience; current and anticipated economic conditions; detailed analysis of
individual loans for which full collectibility may not be assured and for which
impairment may be present; and determination of the existence and fair value of
the collateral and guarantees securing the loans. The reserve is based upon
factors and trends identified by management at the time the financial statements
are prepared. The ultimate recovery of loans is susceptible to future market
factors beyond the Bank's control, which may result in losses or recoveries
differing significantly from those provided in the financial statements. At
December 31, 1998, the reserve for loan losses totaled $5.6 million compared to
$4.9 million at December 31, 1997.
A $976,000 provision for loan losses was charged to operations in 1998.
Several factors prompted the Bank's substantial provision of $976,000 in 1998 to
the reserve for loan losses. First, the mixture of residential loans to income
property loans has changed materially over the last few years. In 1996
residential loans amounted to $130.1 million, or 39.1%, of the total loan
portfolio of $332 million. At the end of 1998, residential loans equaled $94.1
million, or 24.3%, of the total loan portfolio of $387 million. The national
norm for savings institutions is 72.2% residential loans and 27.8% commercial
and consumer loans (derived from the third quarter 1998 FDIC Quarterly Banking
Profile). For the average commercial bank, the comparable ratio is 23.9%
residential loans and 76.1% commercial and consumer loans, which is almost
identical to First Mutual's ratio at December 31, 1998. The Bank considered the
higher risk level in a portfolio that was shifting to a greater emphasis on
commercial and income property lending.
At year-end 1998 the ratio of First Mutual's reserves to total loans
was 1.42%. That ratio compares to the national average for commercial banks of
1.82%, and for savings institutions of .98%. First Mutual believes that its
reserve for loan loss is consistent with its peers.
Second, the Puget Sound area, in which most of the Bank's loans are
concentrated, has experienced an exceedingly long period of economic prosperity
and, although the Bank is sanguine about the immediate future for the local
economy, it is becoming concerned that a significant amount of portfolio loans
are being originated at a time when the local economy may be at or near the peak
in the cycle. The inherent risk in that position was also considered within the
provision for loan losses.
In addition, the Boeing Company, the State's largest employer, has
announced significant reductions in staffing levels and aircraft production over
the next two years. A major employee layoff from Boeing will very likely have an
adverse effect on the region's economy. A detailed discussion of the Bank's
reserve for loan losses is included in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section of the Annual Report.
While the Bank believes it has established its existing reserve for
loan losses in accordance with generally accepted accounting principles as of
December 31, 1998, there can be no assurance that regulators, when reviewing the
Bank's loan portfolio in the future, will not request the Bank to increase its
reserve for loan losses, thereby adversely affecting the Bank's financial
condition and earnings. See the Consolidated Financial Statements contained in
the Annual Report.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods
<PAGE>
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands)
Balance at beginning of period $4,858 $3,882 $2,223 $1,973 $1,399
Charge-offs (39) -- (41) -- --
Residential real estate and other loans (39) -- (41) -- --
Commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Recoveries -- -- -- -- --
Residential real estate -- -- -- -- --
Commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Provision 750 976 1,700 250 574
------- ------- ------ -------- --------
Balance at end of period $5,569 $4,858 $3,882 $2,223 $1,973
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0% 0% 0% 0% 0%
</TABLE>
INTEREST RATE RISK MANAGEMENT
The Bank manages its balance sheet to maximize net interest income while
minimizing the impact on income of changes in the level of market interest
rates. As a framework for evaluating the effects of changes in interest rates,
the balance sheet is allocated according to repricing and maturity
characteristics of products. A static gap analysis compares the sensitivities of
existing assets and liabilities by grouping balances over various time horizons.
A traditional time horizon is a one year period. The Bank had a negative (more
liabilities repricing than assets) .84% one-year interest rate sensitivity ratio
at December 31, 1998, as compared to a negative .96% at December 31, 1997.
INVESTMENT ACTIVITIES
At December 31, 1998, the book value of the Bank's investment security
portfolio totalled $82.1 million while the estimated fair value amounted to
$82.8 million. Securities with stated maturities greater than ten years
comprised 43% of the investment portfolio. Mortgage-backed securities guaranteed
by the FNMA, FHLMC and GNMA totalled $38.1 million including those available for
sale. Another broad category of investment securities, the REMICs, totalled $1.2
million at year end 1998 and comprised 1% of the investment security portfolio.
The REMICs, which are considered mortgage derivative securities, are evaluated
annually for their sensitivity to early prepayment and interest rate changes.
Each security is tested for: 1) "average life test," to determine if the
mortgage derivative product has an expected weighted average life greater than
ten years; 2) "average life sensitivity test," to determine if the average life
extends by more than four years if there is an immediate and sustained parallel
shift in the yield curve of plus 300 basis points or if the average life
shortens by more than six years because of a downward shift in the yield curve
by 300 basis points; and 3) a "price sensitivity test," that estimates if the
price will change by more than 17% due to an immediate and sustained parallel
shift in the yield curve of plus or minus 300 basis points. If a mortgage
derivative security fails any one of these three tests, it is tested quarterly.
At December, 31 1998, all of the Bank's REMICs met all three of the tests.
At December 31, 1998, corporate and municipal bonds include $2.6 million
of Merrill Lynch corporate bonds and four Washington State municipal bonds
totaling $600,000. The Bank follows the criteria of purchasing only corporate
and municipal bonds that are rated AA or better.
<PAGE>
Under Washington law, savings banks are permitted to own government and
government agency obligations, commercial paper, corporate bonds, mutual fund
shares, debt and equity obligations issued by creditworthy entities, whether
traded on public securities exchanges or placed privately for investment
purposes. The Bank holds a portfolio of mortgage-backed securities, REMICs,
corporate and municipal bonds and common stock. Subject to certain exceptions,
the Bank is prohibited by FDIC regulations from making equity investments of a
type, or in an amount, that is not permissible for national banks. The Bank's
investment activities are guided by the Investment Committee of the Board of
Directors. For further information concerning the Bank's investment securities
portfolio, reference is made to Notes 3 and 4 of the Notes to Consolidated
Financial Statements in the Annual Report to Shareholders.
The following table presents the carrying value of the Bank's investment
securities portfolio. The market value of the Bank's investments in the table at
December 31, 1998, was approximately $82.8 million.
<TABLE>
<CAPTION>
At December 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(In Thousands)
Investment securities:
Common stock - Guarantee Life $ -- $ -- $ 5
U.S. Government and
agency obligations 39,643 42,129 25,548
Corporate and municipals 3,172 -- --
Mortgage-backed certificates 39,286 23,308 33,670
------- ------- -------
Total $82,101 $65,437 $59,223
======= ======= =======
</TABLE>
<PAGE>
The following table provides the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 1998.
<TABLE>
<CAPTION>
One One Five
One One to Five to Five to Ten
Year Year Years Years Years
Book Yield Book Yield Book
---- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. Agencies and Treasuries $1,000 5.000% $20,970 6.515% $17,674
Corporate & Municipals* -- -- 2,546 6.000 --
FHLMC Certificates 623 5.000 -- -- --
FNMA Certificates 404 6.835 927 5.500 2,283
GNMA Certificates -- -- -- -- --
REMICs-FNMA -- -- 589 6.000 --
REMICs-FHLMC -- -- -- -- --
------ ----- ------- ----- -------
Total $2,027 5.366% $25,032 6.413% $19,957
------ ----- ------- ----- -------
------ ----- ------- ----- -------
<CAPTION>
Five More More
to Ten than Ten than Ten
Years Years Years Total Total
Yield Book Yield Book Market Yield
------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. Agencies and Treasuries 5.692% $ -- --% $39,644 $40,149 6.110%
Corporate & Municipals* -- 627 5.461 3,173 3,102 5.894
FHLMC Certificates -- 3,582 7.509 4,205 4,233 7.137
FNMA Certificates 5.637 28,309 6.787 31,923 32,141 6.666
GNMA Certificates -- 1,996 6.500 1,996 1,996 6.500
REMICs-FNMA -- 231 6.500 820 849 6.141
REMICs-FHLMC -- 331 7.000 331 334 7.000
----- ------- ----- ------- ------- -----
Total 5.686% $35,076 6.820% $82,092 $82,804 6.384%
----- ------- ----- ------- ------- -----
----- ------- ----- ------- ------- -----
</TABLE>
* Municipal bond yields are not shown on a tax equivalent basis.
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Savings accounts and other deposits have traditionally been an
important source of the Bank's funds for use in lending and for other general
business purposes. In addition to deposit accounts, the Bank derives funds from
loan repayments, interest payments, loan sales, FHLB advances and other
borrowings and operations. The availability of funds from loan sales is
influenced by general interest rates and other market conditions. Loan
repayments and interest payments are a relatively stable source of funds, while
deposit inflows and outflows vary widely and are influenced by prevailing
interest rates and money market conditions. Borrowings are used on a short-term
basis to compensate for reductions in deposits or deposit inflows at less than
projected levels and are used on a longer-term basis to support expanded lending
activities.
DEPOSITS. First Mutual offers a number of deposit accounts, including
passbook savings accounts, NOW checking, business checking accounts, money
market accounts and time deposit accounts, ranging in maturity from thirty days
to ten years. Deposit account terms vary with the principal differences being
the minimum balance required, the time period the funds must remain on deposit
and the interest rate. See Note 9 of Notes to Consolidated Financial Statements
in the Annual Report for the Bank's total deposits that were represented by
various types of programs as of December 31, 1998.
JUMBO TIME DEPOSITS. The Bank offers jumbo, mini-jumbo and public funds
mini-jumbo time deposits. These accounts are offered for minimum terms of 30
days and in minimum amounts of $100,000, $50,000, and $20,000, respectively.
The following table indicates the amount of the Bank's jumbo time
deposits by time remaining until maturity as of December 31, 1998. Jumbo time
deposits require minimum deposits of $100,000, and rates paid on such accounts
are negotiable.
<TABLE>
<CAPTION>
Jumbo
Maturity Period Time Deposits
--------------- -------------
<S> <C>
(In Thousands)
Three months or less $33,944
Four through six months 13,907
Over six through twelve months 24,096
Over twelve months 26,709
--------
Total $98,656
--------
--------
</TABLE>
IRA ACCOUNTS. The Bank offers tax-deferred individual retirement
accounts (IRA). IRA accounts are offered on the same terms as the time deposits
noted below. In addition, the Bank offers MMDA accounts to IRA customers.
The MMDA IRA requires a minimum balance of $100.
<PAGE>
DEPOSIT FLOWS. The following table sets forth the balance of savings
deposits in the various types of savings accounts offered by the Bank at the
dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at
December 31, % of Increase December 31,
1998 Deposits (Decrease) 1997
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
NOW and Business
Checking Accounts $ 29,530 7.2% $ 5,311 $ 24,219
Jumbo Time Deposits 98,656 24.0 11,216 87,440
Mini-Jumbo Time Deposits 94 -- (86) 180
Super Now Checking
Accounts 1,132 0.3 679 453
Passbook and Regular
Savings Accounts 12,247 3.0 (2,402) 14,649
Money Market Deposit
Accounts 68,258 16.6 16,397 51,861
3 Months or less Time
Deposits 1,943 0.5 408 1,535
4-6 Month Time Deposits 17,367 4.2 (2,806) 20,173
7 Month-One Year
Time Deposits 102,164 24.8 (7,925) 110,089
13 Month-to Five Year
Time Deposits 78,610 19.1 17,532 61,078
6-10 Year Time Deposits 1,250 0.3 98 1,152
--------- ------ ------- --------
Total Deposits $ 411,251 100.00% $38,422 $372,829
--------- ------ ------- --------
--------- ------ ------- --------
IRA/Keogh Accounts $ 22,371 5.4% $ 2,275 $ 20,096
--------- ------ ------- --------
--------- ------ ------- --------
<CAPTION>
Balance at
% of Increase December 31, % of
Deposits (Decrease) 1996 Deposits
-------- ---------- ------------ --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
NOW and Business
Checking Accounts 6.5% $ 1,211 $ 23,008 7.0%
Jumbo Time Deposits 23.5 15,631 71,809 21.9
Mini-Jumbo Time Deposits 0.1 60 120 --
Super Now Checking
Accounts 0.1 210 243 .1
Passbook and Regular
Savings Accounts 3.9 (3,097) 17,746 5.4
Money Market Deposit
Accounts 13.9 13,833 38,028 11.6
3 Months or less Time
Deposits 0.4 466 1,069 .3
4-6 Month Time Deposits 5.4 (13,560) 33,733 10.3
7 Month-One Year
Time Deposits 29.5 79,735 30,354 9.2
13 Month-to Five Year
Time Deposits 16.4 (49,761) 110,839 33.8
6-10 Year Time Deposits 0.3 (294) 1,446 .4
----- -------- -------- ------
Total Deposits 100.0% $ 44,434 $328,395 100.00%
----- -------- -------- ------
----- -------- -------- ------
IRA/Keogh Accounts 5.4% $ 2,336 $ 17,760 5.4%
----- -------- -------- ------
----- -------- -------- ------
</TABLE>
<PAGE>
The following table represents an analysis of the Bank's deposit
accounts by interest rate and maturity ranges at December 31, 1998.
<TABLE>
<CAPTION>
1 Year to 2 Years to
Less Than Less Less 5 Years
One Year Than 2 Years Than 5 Years or more Total
--------- ------------ ------------ ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Less than 4.01% $ 48,201 $ -- $ -- $ -- $ 48,201
4.01 - 5.00% 94,228 10,385 88 21 104,722
5.01 - 6.00% 195,673 37,006 10,495 571 243,745
6.01 - 8.00% 897 2,816 9,291 1,441 14,445
8.01 - 10.00% 138 -- -- -- 138
-------- ------- ------- ------ --------
Total $339,137 $50,207 $19,874 $2,033 $411,251
-------- ------- ------- ------ --------
-------- ------- ------- ------ --------
</TABLE>
The following table provides the savings activity for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits $650,908 $575,028 $505,198
Withdrawals 632,287 548,392 466,287
-------- -------- --------
Net Deposits (Withdrawals)
Before Interest Credited 18,621 26,636 38,911
Interest Credited 19,802 17,797 14,977
-------- -------- --------
Net Increase in Savings Deposits $ 38,423 $ 44,433 $ 53,888
-------- -------- --------
-------- -------- --------
</TABLE>
For further information concerning the Bank's savings deposits,
reference is made to Note 9 of the Notes to Consolidated Financial Statements
in the Annual Report.
BORROWINGS. Savings deposits are the primary source of funds for
First Mutual's lending and investment activities and for its general business
purposes. The Bank does rely, however, upon advances from the FHLB to
supplement its supply of lendable funds and to meet deposit and withdrawal
requirements. The FHLB has served as the Bank's primary borrowing source.
Advances from the FHLB are typically secured by a portion of the Bank's first
mortgage loans. At December 31, 1998, First Mutual had advances totaling
$32 million from the FHLB, which mature in 1999 through 2006 at interest
rates ranging from 4.56% to 6.25%. For further information on the Bank's
borrowings, see Note 10 of the Notes to Consolidated Financial Statements in
the Annual Report to Shareholders.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
FHLB advances $31,765 $34,230 $54,180
------- ------- -------
------- ------- -------
FHLB advances:
Maximum outstanding at any month end $39,755 $54,180 $70,488
Average outstanding 33,441 47,184 59,197
Weighted average interest rates:
Annual 5.798% 5.960% 5.790%
End of Year 5.236 6.050 5.870
</TABLE>
The FHLB functions as a central reserve bank providing credit for
commercial banks, savings banks, savings and loan associations and certain
other member financial institutions. As a member, First Mutual is required to
own capital stock in the FHLB and is authorized to apply for advances on the
security of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different 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 either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. Under its current credit policies, the FHLB has limited
advances to First Mutual to 35% of its assets. At December 31, 1998, the
percentage of assets represented by FHLB borrowings was 6%. See "Regulation
and Supervision - Federal Home Loan Bank System," below.
REGULATION AND SUPERVISION
GENERAL. As a state-chartered, federally-insured stock savings
bank, First Mutual is subject to extensive federal and state regulation.
Lending activities and other investments must comply with various statutory
and regulatory requirements, including prescribed minimum capital standards.
First Mutual is regularly examined by the FDIC (Federal Deposit Insurance
Corporation) and the Department of Financial Institutions of the State of
Washington and files periodic reports concerning the Bank's activities and
financial condition with its federal and state regulators. The Bank'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.
The law and regulations of the State of Washington pertaining to stock
savings banks apply to the Bank. Among other things, those laws and
regulations govern the Bank's investments and borrowings, loans, payment of
interest and dividends, and establishment and relocation of branch offices.
DEPOSIT INSURANCE. Deposit accounts at the Bank are insured up to
applicable limits by the FDIC under the Bank Insurance Fund ("BIF"). As an
insurer, the FDIC issues regulations, conducts examinations, requires the
filing of reports and generally supervises and regulates the operations of
state-chartered banks that are not members of the Federal Reserve System.
FDIC approval is required prior to any merger or consolidation involving
state, nonmember banks or the establishment or relocation of an office
facility thereof. FDIC supervision and regulation are intended primarily for
the protection of depositors and the FDIC insurance funds.
Pursuant to provisions in the Federal Deposit Insurance Act ("FDI
Act"), all BIF-insured banks must pay semiannual insurance assessments. These
insurance premiums were substantially reduced by the FDIC effective January
1, 1996 as a result of the BIF having reached its designated reserve ratio in
1995. Insurance premiums for BIF insured institutions currently range from 0
to 27 basis points. As a well capitalized bank, First Mutual qualified for
the minimum statutory assessment during fiscal 1998. The Bank's assessments
for
<PAGE>
the year ended December 31, 1998, equalled $47,000.
On September 30, 1996, the Deposit Insurance Fund Act was enacted to
assist depository institutions insured by the Savings Association Insurance
Fund ("SAIF") in meeting its designated reserve ratio. Pursuant to the Act,
the FDIC imposed an assessment on SAIF and BIF insured financial institutions
beginning January 1, 1997, for the purpose of paying interest on the
obligations issued by the Financing Corporation in the 1980's to help fund
the thrift industry cleanup. BIF-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.
Any insured bank which does not operate in accordance with or
conform to FDIC regulations, policies and directives may be sanctioned for
non-compliance. For example, proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank who engages
in unsafe and unsound practices, including the violation of applicable laws
and regulations. The FDIC has the authority to terminate deposit insurance
pursuant to procedures established for that purpose.
CAPITAL REQUIREMENTS. FDIC regulations recognize two types or tiers
of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital.
Tier 1 capital generally includes common stockholders' equity and
noncumulative perpetual preferred stock, less most intangible assets. Tier 2
capital, which is limited to 100 percent of Tier 1 capital, includes such
items as qualifying general loan loss reserves, cumulative perpetual
preferred stock, mandatory convertible debt, term subordinated debt and
limited life preferred stock; however, the amount of term subordinated debt
and intermediate term preferred stock (original maturity of at least five
years but less than 20 years) that may be included in Tier 2 capital is
limited to 50 percent of Tier 1 capital.
The FDIC currently measures an institution's capital using a
leverage limit together with certain risk-based ratios. The FDIC's minimum
leverage capital requirement specifies a minimum ratio of Tier 1 capital to
average total assets. Most banks are required to maintain a minimum leverage
ratio of at least 4% to 5% of total assets. The FDIC retains the right to
require a particular institution to maintain a higher capital level based on
an institution's particular risk profile. Although the Bank is only required
to maintain the minimum capital level, it has set a higher target range of
6.00% to 6.50% for asset and liability management purposes. First Mutual Bank
calculated its leverage ratio to be 7.2% as of December 31, 1998.
FDIC regulations also establish a measure of capital adequacy based
on ratios of qualifying capital to risk- weighted assets. Assets are placed
in one of four categories and given a percentage weight -- 0%, 20%, 50% or
100% --based on the relative risk of that category. In addition, certain
off-balance-sheet items are converted to balance-sheet credit equivalent
amounts, and each amount is then assigned to one of the four categories.
Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2
capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1
capital to risk-weighted assets must be at least 4%. First Mutual Bank has
calculated its total risk-based ratio to be 11.5% as of December 31, 1998,
and its Tier 1 risk-based capital ratio to be 10.3%. In evaluating the
adequacy of a bank's capital, the FDIC may also consider other factors that
may affect a bank's financial condition. Such factors may include interest
rate risk exposure, liquidity, funding and market risks, the quality and
level of earnings, concentration of credit risk, risks arising from
nontraditional activities, loan and investment quality, the effectiveness of
loan and investment policies, and management's ability to monitor and control
financial operating risks.
Federal statutes establish a supervisory framework based on five
capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measure, which include a
risk-based capital measure, a leverage ratio capital measure, and certain
other factors. The federal banking agencies have adopted regulations that
implement this statutory framework. Under these regulations, an institution
is treated as well capitalized if its ratio of total capital to risk-weighted
assets is 10% or more, its ratio of core capital to risk-weighted assets is
6% or more, its ratio of core capital to adjusted total assets is 5%
<PAGE>
or more, and it is not subject to any federal supervisory order or directive
to meet a specific capital level. In order to be adequately capitalized, an
institution must have a total risk- based capital ratio of not less than 8%,
a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio
of not less than 4%. Any institution which is neither well capitalized nor
adequately capitalized will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt
corrective action requirements, regulatory controls and restrictions which
become more extensive as an institution becomes more severely
undercapitalized. Failure by the Bank to comply with applicable capital
requirements would, if unremedied, result in restrictions on its activities
and lead to enforcement actions including, but not limited to, the issuance
of a capital directive to ensure the maintenance of required capital levels.
Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements.
Additionally, approval of any regulatory application filed for their review
may be dependent on compliance with capital requirements.
First Mutual's management believes that, under the current
regulations, the Bank will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Bank,
such as a downturn in the economy in areas where the Bank has most of its
loans, could adversely affect future earnings and, consequently, the ability
of the Bank to meet its capital requirements.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB of Seattle serves as a
reserve or central bank for the member institutions within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLBs. It makes loans (i.e., advances) to
members in accordance with policies and procedures established by the Federal
Housing Finance Board and the Board of Directors of the FHLB of Seattle. As a
member, the Bank is required to purchase and hold stock in the FHLB of
Seattle in an amount equal to the greater of 1% of their aggregate unpaid
home loan balances at the beginning of the year or an amount equal to 5% of
FHLB advances outstanding. As of December 31, 1998, First Mutual held stock
in the FHLB of Seattle in the amount of $4.9 million. See "Business --
Deposit Activities and Other Sources of Funds -- Borrowings."
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires (under
"Regulation D") that all depository institutions, including savings banks,
maintain reserves on transaction accounts or non-personal time deposits.
These reserves may be in the form of cash or non-interest bearing deposits
with the regional Federal Reserve Bank. NOW 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 December 31, 1998, the Bank's deposit with the Federal Reserve Bank
and vault cash exceeded the Bank's reserve requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
BAD DEBT RESERVES. Historically, savings institutions such as the
Bank, which met certain definitional tests primarily related to their assets
and the nature of their businesses, were permitted to establish a reserve for
bad debts and to make annual additions to the reserve. These additions may,
within specified formula limits, have been deducted in arriving at the Bank's
taxable income. For purposes of computing the deductible addition to its bad
debt reserve, the Bank's loans are separated into "qualifying real property
loans" (i.e., generally those loans secured by interests in residential real
property) and all other loans ("non-qualifying loans"). The following
formulas were used to compute the bad debt deduction with respect to
qualifying real property loans: (i) actual loss experience or (ii) a
percentage equal to 8% of taxable income. The deduction with respect to
non-qualifying loans was computed under the experience method. Reasonable
additions to the
<PAGE>
reserve for losses on non-qualifying loans were based upon actual loss
experience and would reduce the current year's addition to the reserve for
losses on qualifying real property loans, unless that addition was also
determined under the experience method. The sum of the additions to each
reserve for each year was the Bank's annual bad debt deduction.
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 financial institutions 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
(last taxable year beginning before January 1, 1988). The 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, the 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 the Bank is a
"large" association (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
institution's 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. First Mutual met the residential loan
requirement for the taxable year ending December 31, 1996, but did not meet
this requirement in fiscal 1997 and 1998.
DISTRIBUTIONS. If a stock institution distributes amounts to
stockholders and the distribution is treated as being from its accumulated
bad debt reserves, the distribution will cause the institution to have
additional taxable income. A distribution to stockholder is deemed to have
been made from accumulated bad debt reserves to the extent that (i) the
reserves exceed the amount that would have been accumulated on the basis of
actual loss experience, and (ii) the distribution is a "non-dividend
distribution." A distribution in respect of stock is a non-dividend
distribution to the extent that, for federal income tax purposes, (i) it is
redemption of shares, (ii) it is pursuant to a liquidation or partial
liquidation of the institution, or (iii) in the case of current distribution,
together with all other such distributions during the taxable year, it
exceeds the institution's current and post-1951 accumulated earnings and
profits. The amount of additional taxable income created by a non-dividend
distribution is an amount that, when reduced by tax attributable to it, is
equal to the amount of the distribution.
MINIMUM TAX. In addition to regular corporate income tax,
corporations are subject to an alternative minimum tax which generally is
equal to 20% of alternative minimum taxable income (taxable income, increased
by tax preference items and adjusted for certain regular tax items). The
preference items which are generally applicable include an amount equal to
75% of the amount by which a financial institution's adjusted current
earnings (generally alternative minimum taxable income computed without
regard to this preference and prior to reduction for net operating losses)
exceeds its alternative minimum taxable income without regard to this
preference and the excess of the institution's bad debt deduction over the
amount deductible under the experience method, as discussed below.
Alternative minimum tax paid can be credited against regular tax due in later
years.
First Mutual's federal income tax returns have been audited through
1991, and no additional taxes have been assessed.
STATE TAXATION
<PAGE>
The Bank is subject to a business and occupation tax which is
imposed under Washington law at the rate of 1.5% of gross receipts. However,
interest received on loans secured by first lien mortgages or deeds of trust
on residential properties is not subject to such tax.
Reference is made to Note 11 of the Notes to Consolidated Financial
Statements in the Annual Report to Shareholders for additional information
regarding income taxes payable by the Bank.
COMPETITION
The Bank's competition for savings deposits comes from securities
brokerage firms and other financial institutions, many of which have greater
resources than the Bank. In addition, during times of low interest rates the
Bank experiences significant competition for investors' funds from stock and
bond mutual funds that yield total returns higher than those paid by the Bank
on savings deposits.
The Bank competes for deposits principally by offering depositors a
wide variety of savings programs, convenient branch locations, preauthorized
payment and withdrawal systems, tax deferred retirement programs, and
miscellaneous services such as money orders and travelers checks.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, savings banks, savings and loan associations,
commercial banks, insurance companies and other institutional lenders. The
Bank competes for loan originations primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. The competition for loans
encountered by the Bank, as well as the types of institutions with which the
Bank competes, varies from time to time depending upon certain factors.
Conditions which affect competition include, among others, the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the mortgage markets
and other factors which are not readily predictable.
EMPLOYEES
At December 31, 1998, First Mutual employed 121 full-time and
22 part-time employees. First Mutual employees are not represented by any
collective bargaining agreement. Management considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The following table provides the location of the Bank's offices, as
well as certain information relating to these offices.
<TABLE>
<CAPTION>
Lease
Book Value -------------------------------
Total As of Date of
Cost of December Square Owned/ Initial Termi- Renewal
Year Opened Assets 31, 1998 Feet Leased Lease nation Terms
----------- ------- ---------- ------ ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Branch Locations:
- -----------------
Bellevue Office & October 1985 $1,423 $ 521 13,833 Leased June 15, June 14, One
Administrative Offices 1985 2000 five-
400 108th Avenue NE year
Bellevue, WA 98004 option
(Originally opened 1952)
Issaquah Office December 1977 680 320 2,860 Owned -- -- --
855 Rainier Blvd. N.
Issaquah, WA 98027
(Originally opened
November 1965)
<PAGE>
Monroe Office April 1993 1,525 1,166 5,415 Owned -- -- --
19265 State Route 2
Monroe, WA 98272
(Originally opened
April 1968)
Crossroads Office September 1969 $ 400 $ 159 2,972 Owned -- -- --
15635 N.E. 8th Street
Bellevue, WA 98008
Redmond Office December 1977 1,124 536 6,474 Owned -- -- --
16900 Redmond Way
Redmond, WA 98052
Ballard Office June 1994 175 39 1,700 Leased March 25, June 1, One
2038 N.W. Market St. 1994 2001 three-
Seattle, WA 98107 year
option
<CAPTION>
(TABLE CONTINUED ON FOLLOWING PAGE)
Lease
Book Value -------------------------------
Total As of Date of
Cost of December Square Owned/ Initial Termi- Renewal
Year Opened Assets 31, 1998 Feet Leased Lease nation Terms
----------- ------- ---------- ------ ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Branch Locations (cont.):
- -------------------------
West Seattle Office July 1996 294 151 2,200 Leased March 1, February Two
4520 California Ave., S.W. 1996 28, 2001 five-
Seattle, WA 98116 year
options
Bellevue West Office July 1997 2,605 2,494 9,190 Owned -- -- --
10001 NE 8th Street
Bellevue, WA 98004
Bellingham Office March 1998 161 132 1,700 Leased February February Three
1100 Harris Street 14, 1998 14, 2003 five-
Bellingham, WA 98225 year
options
Loan Production Offices:
- ------------------------
Tacoma Loan Office January 1999 11 7 300 Leased January 1, December 31, Month
2323 N 31st St., 1999 2001 to
Suite 200 month
Tacoma, WA 98403 after
(Originally opened initial
October 1996) term
Oregon Office August 1997 21 12 1,482 Leased August 1, August 31, One
Westgate-Sylvan Building 1997 2000 three-
5319 SW Westgate Drive, year
Suite #260 option
Portland, OR 97221
(Originally opened May
1996 and was closed in
December 1998)
Bellingham Office March 1998 161 132 1,700 Leased February February Three
1100 Harris Street 14, 1998 14, 2003 five-
Bellingham, WA 98225 year
(Originally opened in options
October 1996)
</TABLE>
The Bank reviews the utilization of its properties on a regular basis
and believes that it has adequate facilities for current operations. The
Oregon office in the Westgate-Sylvan Building was closed in December 1998 and
has been subleased to third parties at terms sufficient to cover the Bank's
rent payments. The Oregon loan production is now located in Salem, Oregon,
and is currently a home-based operation. The Bank anticipates that it will
eventually relocate to permanent office facilities as loan production grows.
The Bank also regularly analyzes demographic and geographic data as
well as information regarding the Bank's competitors and its current loan and
deposit customers in order to locate potential future bank sites. Specific
criteria is gathered for each potential geographic area identified. The
criteria is then weighted as to
<PAGE>
importance to the Bank, its customers and its target market and a ranking is
made of the various locations under analysis.
The Bank may open new branches from time-to-time, and on a selective
basis, depending on the availability of capital resources, the locations
potential for growth and profitability, and if the business model for the branch
is favorable.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998, First Mutual was not engaged in any litigation
which in the opinion of management, after consultation with its counsel, would
exceed 10% of the equity capital accounts of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Stock Information" in the
Annual Report is incorporated herein by reference.
The following table provides the cash dividends declared by the Bank
during the last three fiscal years. All amounts have been adjusted for stock
dividends and the dilutive effect of stock options.
<TABLE>
<CAPTION>
Quarter Ending Fiscal 1998 Fiscal 1997 Fiscal 1996
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
Fiscal year $.600 $.501 $ .117
March 31 .450 .029 .030
June 30 .050 .034 .029
September 30 .050 .034 .029
December 31 .050 .404 .029
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section captioned "Selected Financial
Data" in the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Market Risk Sensitive Instruments" in the Annual Report is
<PAGE>
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the Annual Report, which are
listed under Item 14 herein, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
The information contained under the section captioned "Proposal 1.
Election of Directors" in the Bank's Proxy Statement is incorporated herein by
reference. Reference is made to the cover page of this report for information
regarding compliance with Section 16(a) of the Exchange Act.
The executive officers of the Bank are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------- ----- --------
<S> <C> <C>
John R. Valaas 54 President and Chief Executive Officer
Roger A. Mandery 56 Executive Vice President - Finance, Treasurer and
Assistant Secretary
James R. Boudreau 51 Senior Vice President - Chief Credit Officer
Nancy D. Chermak 49 Vice President - Loan Administration
Kenneth J. Walkky 50 Vice President - Income Property Lending
Robert J. Everett 61 Vice President - Income Property Lending
Tony S. Icasiano 41 Vice President and Controller
Robin R. Carey 41 Vice President - Operations and Administration
Scott Harlan 37 Vice President - Residential Lending Operations
James D. Young 48 Vice President and Asset Manager
Ronald P. Werth 51 Vice President and Manager of Business Banking
Robert J. Wicks 47 Vice President and Branch Administrator
Pamela S. Drexler 42 Vice President and Loan Servicing Manager
<PAGE>
Carolyn F. Ellingson 49 Vice President - Central Banking Operation
</TABLE>
The following is a description of the principal occupation and
employment of the executive officers of the Bank during at least the past five
years:
JOHN R. VALAAS is First Mutual's President and Chief Executive Officer.
Prior to his appointment as President of the Bank, Mr. Valaas was Senior Vice
President and manager of the Commercial Financial Services Division at Seafirst
Bank where he was employed from 1983 to 1992. Mr. Valaas has over 28 years of
experience in commercial banking.
ROGER A. MANDERY, CPA, is First Mutual's Executive Vice President.
Prior to serving in that capacity, from March 1984 to 1989, he was Senior Vice
President of Finance. Mr. Mandery serves as the Bank's Chief Financial Officer
and in this capacity is responsible for the Bank's Treasury, accounting,
internal audit, asset/liability, and consumer and residential lending functions.
JAMES R. BOUDREAU is First Mutual's Senior Vice President and Chief
Credit Officer; he has been employed by the Bank since 1975. He is responsible
for overseeing lending policies for all lending areas of the Bank. He chairs the
Bank's Loan Committee and supervises the asset management and residential
underwriting departments.
NANCY D. CHERMAK joined First Mutual in May 1989 and is Vice President
of Loan Administration responsible for overseeing the areas of residential
underwriting, processing, funding, closing and shipping as well as income
property loan administration and appraisal review. Prior to serving in that
capacity, she was Vice President of Residential Lending responsible for all
aspects of residential loan production and administration.
KENNETH J. WALKKY, CPA, joined First Mutual in September 1990 as Vice
President and Manager of Income Property Lending. He is responsible for income
property and construction lending production. Prior to joining the Bank, he
served as Vice President and Northern Regional Manager of Commercial Real Estate
Lending, Puget Sound National Bank, where he was employed from 1983 to 1990. He
was a Vice President at Seafirst Bank from 1980 to 1983. Mr Walkky is also a
Washington State certified general appraiser.
ROBERT J. EVERETT is a Vice President in the Income Property department
and has been employed by the Bank since May 1993. He is primarily responsible
for producing loans secured by income producing real estate. Prior to joining
the Bank, Mr. Everett was a Vice President in the real estate line of the Walter
E. Heller & Co. for many years. He also acted as a consultant to several
businesses with large real estate portfolios.
TONY S. ICASIANO, CPA, is the Bank's Vice President and Controller and
has been employed by the Bank since 1995. He is responsible for the Bank's
accounting systems, financial reporting, and tax accounting functions. Prior to
joining First Mutual, Mr. Icasiano served as Vice President and Controller for
Security Pacific Bank of Washington where he was employed from 1979 to 1994.
ROBIN R. CAREY is First Mutual's Vice President of Operations and
Administration and has been employed by the Bank since 1979. She is responsible
for overseeing central banking operations, facilities, loan servicing, income
property operations, and human resources.
SCOTT HARLAN is the Bank's Vice President of Residential and Consumer
Lending and has been employed by the Bank since 1985. He is responsible for the
home equity, consumer, wholesale residential
<PAGE>
lending, secondary marketing, and the information systems departments. His
other duties with the Bank included responsibilities in the accounting
department and financial analysis.
JAMES D. YOUNG is First Mutual's Vice President and Asset Manager and
has been employed by the Bank since 1989. He is responsible for overseeing the
day to day servicing of the Bank's income property loan portfolio including
default management for the Bank's residential and consumer loan portfolio. Mr.
Young deals directly with any of the Bank's problem income property and
construction loans, foreclosures and real estate acquired through foreclosure.
RONALD P. WERTH joined First Mutual in February 1996 as Vice President
and Manager of Business Banking. He is responsible for all aspects of Business
Banking including business development and administration. From 1988 to 1995 he
served as Vice President - Finance for two privately owned companies. Prior to
that, he served as Vice President for the Corporate Banking Division at Seafirst
Bank where he was employed from 1973 to 1988.
ROBERT J. WICKS is First Mutual's Vice President and Branch
Administrator. He is responsible for marketing, sales and customer service in
the Bank's deposit branches. He also oversees the Bank's non-deposit investment
program in conjunction with PRIMEVEST Financial Services, Inc. and is a
registered broker/dealer. Mr. Wicks joined First Mutual in April 1990. He has
over 20 years of branch banking and administration experience. He holds a Series
6 license from NASD for sales of mutual funds and Life and Disability Insurance
licenses for the sale of insurance products.
PAMELA S. DREXLER is First Mutual's Vice President in charge of Loan
Servicing. She has been with First Mutual since 1984. She is responsible for the
daily functions involved in servicing residential, income property and consumer
loans. She is also responsible for investor reporting functions on the Bank's
sold loans, the quality control of all newly originated residential loans, as
well as overseeing loan servicing sales.
CAROLYN F. ELLINGSON is First Mutual's Vice President of Central
Banking Operations and has been employed by the Bank since August 1983. She is
responsible for all aspects of branch operations, including IRA's ATM/Visa
Check card programs, check processing, and the data processing liaison. She is
also the Bank Security Officer and the officer in charge of ensuring compliance
with the Bank Secrecy Act.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section captioned - "Proposal I Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal 1. Election of Directors" and
"Principal Shareholders" in the Bank's definitive proxy statement for the Bank's
1999 Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the section captioned - "Proposal I Meetings, Compensation, Relationships and
Certain Committees of the Board of Directors" in the Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements (*)
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1998
and 1997 Consolidated Statements of Income for the three years ended
December 31, 1998 Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1998 Consolidated Statements
of Cash Flows for the three years ended December 31, 1998 Notes to
Consolidated Financial Statements
(2) All required financial statement schedules are included in the Notes to
Consolidated Financial Statements.
(b) No Forms 8-K were filed during the quarter ended December 31, 1998.
(c) Exhibits
(3) a. Articles of Incorporation (a)
b. Bylaws (a)
(10) (a) 1995 Stock Option and Incentive Plan (b) (b) Amendment
to 1995 Stock Option and Incentive Plan (c)
(11) Statement regarding computation of per share earnings.
Reference is made to the Bank's Consolidated Statements of
Income attached hereto as part of Exhibit 13, which are
incorporated herein by reference.
(13) 1998 Annual Report to Shareholders.
(21) Subsidiaries
a) First Mutual Services (FMS). First Mutual Services is
a wholly owned subsidiary of the Bank that engages in
the sale of mutual funds and annuities. PRIMEVEST
Financial Services functions as the broker dealer and
is responsible for the sale and delivery of
securities. FMS employs four individuals who are
series six and above, and sixty-three licensed and
who are dual employees of PRIMEVEST and First Mutual.
For the sale of annuities, FMS acts as agent for
PRIMEVEST and Pacific Fidelity Life Insurance
Company. The Bank's investment in First Mutual
Services at December 31, 1998, was $86,616.
- ------------------
(*) Incorporated by reference from 1998 Annual Report to Stockholders attached
hereto as Exhibit 13.
(a) Incorporated by reference to the Form F-1 filed with the FDIC.
(b) Incorporated by reference to the Annual Report on Form F-2 for the year
ended December 31, 1995.
(c) Incorporated by reference to the Bank's Definitive Proxy Statement for the
1996 Annual Meeting of Shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MUTUAL SAVINGS BANK
DATE: March 25, 1999 BY: /s/John R. Valaas
---------------------------------------------
John R. Valaas, President and Chief Executive
Officer and Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Roger A. Mandery By: /s/George W. Rowley, Jr.
----------------------------- ------------------------------
Roger A. Mandery George W. Rowley, Jr.
Principal Financial Officer Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/Tony S. Icasiano By:
----------------------------- ------------------------------
Tony S. Icasiano Richard S. Sprague
Principal Accounting Officer Director
Date: March 25, 1999 Date: March __, 1999
By: /s/F. Kemper Freeman, Jr. By: /s/William E. Tremper
----------------------------- ------------------------------
F. Kemper Freeman, Jr. William E. Tremper
Chairman of the Board Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/James J. Doud, Jr. By: /s/John R. Valaas
----------------------------- ------------------------------
James J. Doud, Jr. John R. Valaas
Director Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/Mary Case Dunnam By: /s/H. Scott Wallace
----------------------------- ------------------------------
Mary Case Dunnam H. Scott Wallace
Director Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/Janine Florence By: /s/Robert C. Wallace
----------------------------- ------------------------------
Janine Florence Robert C. Wallace
Director Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/Victor E. Parker
-----------------------------
Victor E. Parker
Director
Date: March 25, 1999
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO
Section 13 of
The Securities Exchange Act of 1934
FOR QUARTER ENDED MARCH 31, 1999
FDIC Certificate No. 17007-1
FIRST MUTUAL SAVINGS BANK
-------------------------
(Exact name of bank as specified in charter)
WASHINGTON
----------
(State of incorporation)
91-0594387
----------
(I.R.S. Employee Identification Number)
400 108th Avenue N.E., Bellevue, WA 98004
---------------------------------------------------
(Address of principal office) (Zip code)
Bank's telephone number, including area code: (425) 455-7300
--------------
Indicate by check mark whether the bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the bank was required to
file such reports),
Yes X No
------- -------
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Number of Shares of Capital Stock Outstanding
at March 31, 1999 4,672,003
---------
<PAGE>
Item 1. Financial Statements
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS March 31 Dec. 31
1999 1998
---- ----
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Interest-earning deposits $ 710,953 $ 216,953
Noninterest-earning demand deposits
and cash on hand 3,219,450 5,312,192
---------- ---------
3,930,403 5,529,145
MORTGAGE-BACKED AND OTHER SECURITIES
AVAILABLE FOR SALE 19,562,714 20,336,611
LOANS RECEIVABLE, HELD FOR SALE 20,783,097 27,370,815
MORTGAGE-BACKED AND OTHER SECURITIES
HELD TO MATURITY 89,282,235 61,764,431
LOANS RECEIVABLE 382,525,266 365,104,247
RESERVE FOR LOAN LOSSES (5,699,677) (5,569,431)
----------- -----------
LOANS RECEIVABLE, NET 376,825,589 359,534,814
ACCRUED INTEREST RECEIVABLE 3,463,724 3,311,122
LAND, BUILDINGS AND EQUIPMENT, NET 5,477,118 5,536,748
FEDERAL HOME LOAN BANK (FHLB) STOCK, 4,969,600 4,876,500
at cost
MORTGAGE SERVICING RIGHTS 360,963 356,585
OTHER ASSETS 862,166 613,368
-------- -------
TOTAL $525,517,609 $489,230,139
============ ============
</TABLE>
Page 2 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(CONTINUED)
<TABLE>
<CAPTION>
March 31 Dec. 31
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Deposits:
Investor custodial checking $ 7,477,570 $ 8,146,226
Money market deposit and
checking accounts 102,851,567 90,773,090
Regular savings 11,920,692 12,247,457
Time Deposits 279,016,269 300,084,375
------------ -----------
Total deposits 401,266,098 411,251,148
Drafts payable 3,311,120 4,382,611
Accounts payable and other liabilities 2,961,516 5,465,700
Advance payments by borrowers for
taxes and insurance 2,494,038 1,517,253
FHLB advances 78,841,000 31,765,000
Federal income taxes payable 692,392 186,474
-------- -------
Total liabilities 489,566,164 454,568,186
STOCKHOLDERS' EQUITY:
Common stock, $1 par value-
Authorized, 10,000,000 shares
Issued and outstanding, 4,672,003
and 4,247,275 shares, respectively 4,672,003 4,247,275
Additional paid-in capital 31,109,937 25,848,681
Employee Stock Ownership Plan debt (463,806) (603,738)
Retained earnings 717,674 5,181,720
Accumulated other comprehensive income(loss):
Unrealized (loss) on securities available for sale,
net of federal income tax (84,363) (11,985)
-------- --------
Total stockholders' equity 35,951,445 34,661,953
----------- ----------
TOTAL $525,517,609 $489,230,139
============ ============
</TABLE>
Page 3 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarters ended March 31
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Loans Receivable $ 8,425,795 $8,350,247
Mortgage-backed and related securities 833,686 391,553
Interest-earning deposits with banks 11,388 5,176
FHLB stock dividends 93,188 86,360
U.S. Treasury, government agency
and other securities 658,256 717,906
-------- -------
10,022,313 9,551,242
INTEREST EXPENSE:
Deposits 4,715,094 4,783,195
FHLB advances and other 764,696 561,037
-------- -------
5,479,790 5,344,232
---------- ---------
Net interest income 4,542,523 4,207,010
PROVISION FOR LOAN LOSSES 150,000 100,000
-------- -------
Net interest income, after provision
for loan losses 4,392,523 4,107,010
OTHER OPERATING INCOME (EXPENSE):
Gain(Loss) on sales of loans 393,686 675,340
Servicing fees, net of amortization 115,147 125,406
Fees on deposits 68,218 49,198
Other 217,780 187,276
-------- -------
Total other operating income 794,831 1,037,220
BALANCE, carried forward 5,187,354 5,144,230
</TABLE>
Page 4 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
<TABLE>
<CAPTION>
Quarters ended March 31
1999 1998
----- ----
(Unaudited)
<S> <C> <C>
BALANCE, brought forward $ 5,187,354 $ 5,144,230
OPERATING EXPENSES:
Salaries and employees benefits 1,950,020 2,247,964
Occupancy 342,937 343,623
Other 731,737 673,333
-------- -------
Total other operating expenses 3,024,694 3,264,920
Income before federal income taxes 2,162,660 1,879,310
FEDERAL INCOME TAXES 733,605 638,966
-------- -------
NET INCOME $1,429,055 $1,240,344
========== ==========
PER SHARE DATA(1):
BASIC EARNINGS PER COMMON SHARE $0.31 $0.28
===== =====
EARNINGS PER COMMON SHARE-ASSUMING DILUTION $0.30 $0.26
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 4,672,003 4,499,759
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
INCLUDING DILUTIVE STOCK OPTIONS 4,761,618 4,710,501
========= =========
</TABLE>
(1) Comparative Earnings Per Share data for the prior year has been restated to
conform with Statement of Financial Accounting Standards No. 128. See
Note 5.
Page 5 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock Additional Employee stock Accumulated
------------ paid-in Retained ownership Comprehensive
Shares Amount capital earnings plan debt Income(loss) Total
------ ------ ---------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 3,680,141 3,680,141 19,941,490 4,805,295 (1,024,111) (6,752) 27,396,063
Options exercised 76,890 76,890 552,607 629,497
10% stock dividend 368,196 368,196 4,388,676 (4,756,872) -
Repayment of employee stock
ownership plan debt 152,541 152,541
Cash dividends declared ($.50 per share) (2,046,925) (2,046,925)
Comprehensive income:
Net income 4,518,680 4,518,680
Other comprehensive income
(loss)--Change in unrealized
losses on securities available
for sale, net of federal income tax 1,972 1,972
----------
Comprehensive income 4,520,652
--------- --------- ---------- --------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997 4,125,227 4,125,227 24,882,773 2,520,178 (871,570) (4,780) 30,651,828
Options exercised 122,048 122,048 965,908 1,087,956
Repayment of employee stock
ownership plan debt 267,832 267,832
Cash dividends declared ($.60 per share) (2,546,154) (2,546,154)
Comprehensive income:
Net income 5,207,696 5,207,696
Other comprehensive income
(loss)--Change in unrealized
losses on securities available
for sale, net of federal income tax (7,205) (7,205)
---------
Comprehensive income 5,200,491
--------- --------- ---------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1998 4,247,275 $4,247,275 $25,848,681 $5,181,720 $(603,738) $(11,985) $34,661,953
========== ========== =========== ========== ========== ========= ===========
Tax benefit on Options exercised 5,247 5,247
10% stock dividend 424,728 424,728 5,256,009 (5,680,737) -
Repayment of employee stock
ownership plan debt 139,932 139,932
Cash dividends declared ($.05 per share) (212,364) (212,364)
Comprehensive income:
Net income 1,429,055 1,429,055
Other comprehensive income
(loss)--Change in unrealized
losses on securities available
for sale, net of federal income tax (72,378) (72,378)
----------
Comprehensive income 1,356,677
BALANCE, MARCH 31, 1999 4,672,003 $4,672,003 $31,109,937 $ 717,674 $(463,806) $ (84,363) $35,951,445
========= ========= ========== ========= ========== ========== ===========
</TABLE>
Page 6 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,429,055 $ 1,240,345
Adjustments to reconcile net cash
provided (used) by operating actiities:
Provision for loan losses 150,000 100,000
Depreciation 134,582 123,867
Deferred loan origination fees, net of accretion (55,273) (65,464)
Amortization of Mortgage servicing rights 49,735 160,095
(Gain) Loss on sales of loans (428,424) (755,905)
(Gain) Loss on sale of repossessed real estate (22,727)
FHLB stock dividends (93,100) (86,300)
Cash provided (used) by changes in
operating assets and liabilities:
Loans receivable held for sale 6,587,718 (19,046,079)
Accrued interest receivable (152,602) 6,053
Other assets (248,798) (561,836)
Drafts payable (1,071,491) 834,526
Accounts payable and other liabilities (845,163) 745,939
Advance payments by borrowers for
taxes and insurance 976,785 1,092,436
Federal income taxes payable 505,918 448,573
---------- ------------
Net cash provided (used) by operating activities 6,916,215 (15,763,750)
INVESTING ACTIVITIES:
Loan originations (44,987,061) (41,527,663)
Loan principal repayments 27,108,658 26,059,769
Increase (decrease) in undisbursed loan proceeds 379,504 (1,450,343)
Principal repayments & redemptions on mortgage-backed
and other securities 8,158,617 19,100,996
Purchase of mortgage-backed and other securities (35,029,243) (6,000,000)
Purchase of mortgage-backed securities available for sale -
Purchases of premises and equipment (88,525) (220,738)
Proceeds from sale of Loans 581,431 1,011,555
Proceeds from sale of Real Estate Held for Sale 42,054 0
----------- ----------
Net cash provided (used) by
investing activities, carried forward (43,834,565) (3,026,424)
</TABLE>
Page 7 of 24
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
BALANCE, net cash provided (used) by
investing activities, brought forward $ (43,834,565) $ (3,026,424)
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (14,855,971) 15,151,626
Interest credited to deposit accounts 4,870,921 4,820,859
Proceeds from FHLB advances 105,493,000 54,145,000
Repayment of FHLB advances (58,417,000) (53,670,000)
Dividends paid (1,911,274) (1,652,295)
Proceeds from exercise of stock options 0 200,595
Repayment of Employee Stock Ownership debt 139,932 230,201
----------- ------------
Net cash provided (used) by financing activities 35,319,608 19,225,986
---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS (1,598,742) 435,812
CASH:
Beginning of year 5,529,145 5,909,165
---------- ---------
End of quarter $ 3,930,403 $ 6,344,977
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Loans originated for mortgage banking activities $44,470,319 $55,198,791
Loans originated for investment activities 44,987,061 41,527,663
------------ -----------
Total loans originated for mortgage banking
activities and investment activities $89,457,380 $96,726,454
=========== ===========
Cash paid during three months ended March 31
Interest $ 5,439,901 $ 5,340,464
=========== ===========
Income taxes $ 185,155 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Loans transferred to (from) real estate
held for sale, net $ 80,001 $ 186,492
=========== ===========
</TABLE>
Page 8 of 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations.
NOTE 2.
MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale at
March 31, 1999 and December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MARCH 31, 1999:
FHLMC securities $ 588,392 $ 20,777 $ 609,169
FNMA securities 17,132,840 29,689 157,810 17,004,719
GNMA securities 1,967,775 - 18,949 1,948,826
---------- ------- ------- ----------
$19,689,007 $ 50,466 $176,759 $19,562,714
=========== ======== ======== ===========
DECEMBER 31, 1998:
FHLMC securities $ 648,646 $ 17,941 $ 666,587
FNMA securities 17,679,888 35,825 41,675 17,674,038
GNMA securities 1,996,385 - 399 1,995,986
---------- ------- ------ ----------
$20,324,919 $ 53,766 $42,074 $20,336,611
=========== ======== ======= ===========
</TABLE>
NOTE 3.
MORTGAGE-BACKED AND OTHER SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of mortgage-backed and other
securities is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MARCH 31, 1999:
FNMA certificates $39,725,742 $230,210 $320,515 $39,635,437
FHLMC certificates 2,731,097 27,053 2,758,150
U.S. Government Agency securities 42,643,018 500,646 331,401 42,812,263
Merrill Lynch corporate bond 2,542,215 49,815 2,492,400
Municipal bonds 626,783 49,059 577,724
REMICS 1,013,380 29,419 - 1,042,799
---------- ------- ------- ----------
$89,282,235 $787,328 $750,790 $89,318,773
=========== ======== ======== ===========
DECEMBER 31, 1998:
FNMA certificates $14,241,885 $238,948 $ 14,235 $14,466,598
FHLMC certificates 3,555,875 14,470 4,180 3,566,165
U.S. Government Agency securities 38,643,616 656,784 151,235 39,149,165
Merrill Lynch corporate bond 2,544,950 33,450 2,511,500
Municipal bonds 627,083 36,313 590,770
REMICS 1,151,194 31,631 1,182,825
U.S. Treasury securities 999,828 172 - 1,000,000
---------- ------- ------- -----------
$61,764,431 $942,005 $239,413 $62,467,023
=========== ======== ======== ===========
</TABLE>
Page 9 of 24
<PAGE>
NOTE 4.
NONPERFORMING ASSETS
The Bank had nonperforming assets as follows.
<TABLE>
<CAPTION>
March 31, 1999: December 31, 1998
--------------- -----------------
<S> <C> <C>
Nonperforming loans $475,839 $298,503
Real Estate Held for Sale 86,934 37,628
-------- --------
Totals $562,773 $336,131
======== ========
</TABLE>
At March 31, 1999 and December 31, 1998, First Mutual Bank had no impaired
loans as defined under Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan."
NOTE 5.
EARNINGS PER SHARE
Basic Earnings Per Share is computed by dividing net income by the
weighted-average number of shares outstanding during the year. Diluted EPS
reflects the potential dilutive effect of stock options and is computed by
dividing net income by the weighted-average number of shares outstanding during
the year, plus the dilutive common shares that would have been outstanding had
the stock options been exercised.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for quarters ending March 31,
1999 and March 31, 1998:
<TABLE>
<CAPTION>
Income Shares Per share
(numerator) (denominator) amount
--------------------------------------------------------
<S> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999
Basic EPS: Income available to common shareholders $1,429,055 4,672,003 $ 0.31
======
Effect of dilutive stock options - 89,615
---------- ---------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $1,429,055 4,761,618 $ 0.30
========================================================
QUARTER ENDED MARCH 31, 1998
Basic EPS: Income available to common shareholders $1,240,344 4,499,759 $ 0.28
======
Effect of dilutive stock options - 210,742
---------- ---------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $1,240,344 4,710,501 $ 0.26
========================================================
</TABLE>
Page 10 of 24
<PAGE>
NOTE 6.
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS FIRST QUARTER 1999
(Dollars in thousands) VS
FIRST QUARTER 1998
INCREASE (DECREASE) DUE TO
TOTAL
VOLUME RATE CHANGE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Investments:
Mortgage-backed and related securities $ 542 $ (100) $ 442
Interest-earning deposits with banks 11 (5) 6
Other equity investments 7 - 7
U.S. Treasury and Govt. Agencies 17 (77) (60)
--- ---- ----
Total investments 577 (182) 395
Loans:
Residential (634) (58) (692)
Residential construction 111 (57) 54
Multifamily 393 (136) 257
Multifamily construction 47 (34) 13
Commercial real estate and Business 455 (158) 297
Commercial real estate construction 33 12 45
Consumer & Other 97 5 102
--- --- ---
Total loans 502 (426) 76
--- --- ---
Total interest income 1,079 (608) 471
INTEREST EXPENSE
Deposits:
Money market deposit and checking 182 (41) 141
Regular savings (19) (12) (31)
Time deposits 57 (236) (179)
--- ----- -----
Total deposits 220 (289) (69)
FHLB advances and other 338 (134) 204
---- ----- ---
Total interest expense 558 (423) 135
Net interest income $ 521 $ (185) $ 336
====== ======= =====
</TABLE>
Page 11 of 24
<PAGE>
NOTE 7.
SEGMENTS
The Bank is organized based on the products and services that it offers. Under
this organizational structure, the Bank has 3 reportable segments: consumer
banking, residential lending, and commercial lending.
Consumer banking offers depositor banking services, home equity lending, direct
consumer loans, and consumer dealer financing contracts.
Residential lending offers conventional or government-insured loans to borrowers
to purchase, refinance, or build homes, secured by one-to-four unit family
dwellings. Embedded within the residential lending segment is a mortgage banking
operation, which sells loans in the secondary mortgage market. The mortgage
banking operation generally retains the right to service the loans sold (i.e.,
collection of principal and interest payments) for which it receives a fee based
on the unpaid principal balance. The servicing rights may be resold at opportune
market conditions.
Commercial lending offers permanent and interim (construction) loans for
multifamily housing (over 4 units), commercial real estate properties, and loans
to small and medium-sized businesses for financing inventory, accounts
receivables, equipment, among other things. The underlying real estate
collateral or business asset being financed typically secures
these loans.
Financial information for the Bank's segments is shown below for the first
quarter 1999 and 1998:
<TABLE>
<CAPTION>
CONSUMER RESIDENTIAL COMMERCIAL
Quarter ended March 31: BANKING LENDING LENDING TOTALS
-------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C>
Revenues from external customers 1999 $2,098,936 $2,251,623 $6,201,471 $ 10,552,030
1998 1,600,278 3,168,585 5,605,734 10,374,597
Revenues from other segments of the Bank 1999 4,543,186 80,802 384,194 5,008,182
1998 5,205,591 123,763 352,737 5,682,091
Total Revenues 1999 6,642,122 2,332,425 6,585,665 15,560,212
1998 6,805,869 3,292,348 5,958,471 16,056,688
Net interest revenue 1999 1,611,854 494,557 2,318,777 4,425,188
1998 1,729,524 480,968 1,947,470 4,157,962
Income before federal income taxes 1999 242,314 447,861 1,561,534 2,251,709
1998 577,029 846,650 1,318,674 2,742,353
Total assets as of March 31: 1999 398,102,920 99,504,408 292,879,449 790,486,777
1998 393,278,429 145,054,332 248,090,561 786,423,322
</TABLE>
Page 12 of 24
<PAGE>
NOTE 7.
SEGMENTS (CONTINUED)
Reconciliations of segment data to the Bank consolidated financial statements
are shown in the table below. The amounts for the segments would differ from the
actual consolidated financial statements due to a funds transfer pricing
mechanism that uses internal, proxy market interest rates, and also, various
methods for allocating costs.
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
Total revenues for the quarter ended March 31:
Segment total revenues $ 15,560,212 $ 16,056,688
Back out or add back:
Revenues from other segments of the Bank (5,008,182) (5,682,091)
Revenues of administrative departments netted against
overhead costs and reallocated as net costs 265,114 213,865
------------ ------------
Consolidated Bank total revenues $ 10,817,144 $ 10,588,462
Net interest revenue for the quarter ended March 31:
Segment net interest revenue $ 4,425,188 $ 4,157,962
Back out or add back:
Difference between actual Bank interest expense
and intersegment funding allocation (73,937) (105,495)
Interest revenues of administrative departments netted
against overhead costs and reallocated as net costs 191,272 154,543
------------ ------------
Consolidated Bank net interest revenue $ 4,542,523 $ 4,207,010
Income before federal income taxes for the quarter ended March 31:
Segment pre-tax income $ 2,251,709 $ 2,742,353
Back out or add back:
Unallocated loan loss provision (150,000) (100,000)
Unallocated net expenses of administrative departments - (772,650)
Difference between actual total Bank funding cost
and total intersegment funding allocation 60,951 9,607
------------ ------------
Consolidated Bank pre-tax income $ 2,162,660 $ 1,879,310
Total assets as of March 31:
Segment total assets $ 790,486,777 786,423,322
Back out or add back:
Inferred intersegment interest earning assets on branch deposits (264,686,850) (320,102,852)
Unallocated reserve for loan loss (5,699,677) (4,919,431)
Unallocated nonearning assets of administrative
departments 5,417,359 7,916,828
------------ ------------
Consolidated Bank total assets $ 525,517,609 $ 469,317,867
</TABLE>
Page 13 of 24
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Financial Statements of First Mutual Savings Bank began in
page 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
attached consolidated financial statements and notes thereto, and with the
audited financial statements and notes thereto for the year ended December 31,
1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $336,000, or 8%, in the first quarter of 1999 as
contrasted with the same quarter in 1998. The net interest margin for the
quarter was 3.69%, which compares to 3.79%, 3.89%, 3.78%, and 3.81%, for the
quarters ended December 31, 1998, September 30, 1998, June 30, 1998, and March
31, 1998, respectively.
Net interest income improved principally as a result of an increase in earning
assets, which contributed $521,000 in the first quarter. Offsetting the benefit
from greater earning assets, which grew from $453,475,000 at March 31, 1998 to
$512,134,000 at quarter-end March 1999, was the negative impact of $185,000 from
a change in interest rates. The unfavorable change in the net interest margin is
attributable to a greater decrease in interest income than the corresponding
figure for interest expense. Interest income, as measured by the ratio of
interest income/average earning assets, dropped from 8.64% in the first quarter
of 1998 to 8.13% in the same period in 1999. Interest expense, as gauged by the
ratio of interest expense/average earning assets, also decreased, falling from
4.84% in the first quarter of 1998 to 4.45% in 1999. Thus, even though the
interest expense ratio fell .39%, the decline of .51% in the interest income
ratio was significantly greater.
One of the factors that contributed to the decrease in the net interest margin
was the Bank's 107.7% increase in investment securities. At March 31, 1999,
investment securities totaled $108,845,000, up $56,432,000 from the prior year's
balance of $52,413,000. The yield from investment securities is dramatically
less than that received from the loan portfolio; for example, investment
securities at quarter-end March 1999 had an average return of 6.10%, as compared
to 8.20% for the loan portfolio.
The reason for the Bank's sudden increase in investment securities is somewhat
arcane. Under certain conditions the relationship between Tier I and
risk-adjusted capital is such that low-rate investment securities, because of
their advantaged risk-adjusted capital status, can be acquired at rates of
return on equity that are equal to or greater than portfolio loans.
Unfortunately, the disadvantage to acquiring those securities is that the net
interest margin is degraded.
Although investment securities will continue to be purchased in the normal
course of business, the Bank has no present intent to acquire securities on the
scale that occurred in the first quarter.
Page 14 of 24
<PAGE>
Although the Bank's loan portfolio is composed of adjustable-rate loans,
totaling 85% of the portfolio, a sharp and rapid rise in interest rates would
most likely further degrade the net interest margin. Rising interest rates
generally increase the Bank's cost of funds faster than the yield on earning
assets.
The provision for loan losses increased from $100,000 in the first quarter of
1998 to $150,000 in the like period in 1999. The provision for loan losses
reflects the amount deemed appropriate to produce an adequate reserve for
possible loan losses inherent in the risk characteristics of the Bank's loan
portfolio. In determining the appropriate reserve balance, the Bank takes into
consideration the local and national economic outlook and the historical
performance of the loan portfolio.
Of keen interest to the Bank is the mix of its loan portfolio. Currently 22.6%
of the portfolio is residential loans, and the remaining 77.4% is composed of
commercial, construction, and consumer loans. The residential figure of 22.6%
compares, according to the fourth quarter 1998 FDIC QUARTERLY BANKING PROFILE
(latest available data), to 71.9% for FDIC-insured thrift institutions and 23.6%
for FDIC-insured commercial banks. Management's assessment of this information
is that its loan portfolio is closely related to that of a commercial bank.
The Bank's loan loss reserves to total loans ratio was 1.41% at March 31, 1999.
The comparable ratios for FDIC-insured savings institutions and commercial
banks, as of December 1998, were .96% and 1.77%, respectively. Although the
Bank's loan mix is similar to that of a commercial bank, and therefore arguably
its ratio of loan loss reserves to total loans should correspond to the national
average, management believes that the Bank's current ratio of nonperforming
loans to assets warrants favorable consideration. As of quarter-end March 1999,
the Bank's nonperforming assets to total assets ratio was .11%. That number
compares to the state thrift average of .41% as of December 31, 1998, and the
national ratios of .72% for savings institutions and .65% for commercial banks.
In summary, the Bank's provision for loan loss reserves is based on historical
credit analysis and an assessment of local and national economic conditions, and
it appears to be reasonable in light of the national ratio for comparable loan
portfolios, when tempered by the Bank's favorable nonperforming asset status.
OTHER OPERATING INCOME
Gain on sale of loans, which amounted to $394,000 in the first quarter of 1999,
is down 41.7% from $675,000 in the like quarter of 1998, and is comprised of
three distinct categories--sale of mortgage servicing rights, secondary market
fees, and mortgage servicing rights.
The gain from the sale of servicing rights totaled $844,000 in the quarter
ending March 31, 1998, as compared to $472,000 this year. In the first quarter
of last year the Bank sold $93 million, approximately one-third of its servicing
portfolio, to mitigate the risk of an early prepayment of the servicing
portfolio. A sale of $32 million was executed in the first quarter of this year,
and another $40 million is pending sale in the second quarter. Both transactions
in 1999 represent the sale of loans originated within the last eight months.
The Bank has signed a best-efforts contract to sell servicing rights on a
quarterly basis. The amount and profit of sales executed in the third and fourth
quarters will depend on residential loans originated, both in terms of amount
and mix of loans. The total number of loans closed and type of loans originated
is heavily influenced by the nature of the interest rate yield curve and whether
or not long-term rates are generally rising or falling. Rising rates usually
have an adverse effect upon the amount of residential loans originated.
Page 15 of 24
<PAGE>
Since the beginning of the year interest rates have trended upward, and the Bank
has experienced a decline in residential loan applications, and a recent drop in
loan originations. If that trend continues, it will most likely have an adverse
impact on the gain realized from the sale of servicing in the second half of
1999.
Secondary market fees are the cash gains or losses from the sale of loans into
the securities market. Cash losses on loan sales of $36,153,000 in the first
quarter of 1998 totaled $194,000. That figure compares to a loss of $207,000 on
loan sales of $51,058,000 in the same quarter of 1999. The modestly higher loss
occurring in 1999 is attributable to the $14,905,000, or 41.2%, increase in loan
sales this year.
The gains recorded for mortgage servicing rights are pursuant to SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES, which requires the capitalization of internally generated
servicing rights. The amount recognized as income in the first quarter of 1998
totaled $25,000 as compared to $129,000 in the same period of 1999. The increase
in mortgage servicing rights (MSR) income is largely the result of greater loan
sales in 1999 as compared to the previous year.
Servicing fee income, net of amortization, fell 8.2% from $125,000 in the three
months ending March 31, 1998, to $115,000 in the first quarter of 1999.
Servicing fee income is impacted by both the size of the servicing portfolio and
the amount of amortization and loan prepayment interest expense netted against
the fee income. The servicing portfolio totaled $295 million at March 31, 1998,
and has since declined to $258 million. The sale of servicing throughout 1998
and into the first quarter of this year has slowly eroded the balance of the
portfolio. As it is the intent of management to continue the sale of servicing
in 1999, the servicing portfolio will probably continue to decline.
A constructive influence is the decrease in amortization and loan prepayment
interest expense. Those two elements of expense totaled $127,000 in the first
quarter of 1998, dropping 26% to $94,000 in the comparable quarter of this year.
As was noted earlier, although management currently anticipates the sale of
newly originated loan servicing assets, any number of events could occur to
alter that policy, to include a change in the yield curve, the amount of
residential loans originated, and the Bank's assessment as to the relative
benefits of selling or retaining servicing assets.
Other operating income rose $31,000, or 16.3%, in 1999 on a quarter-to-quarter
comparison. The increase in other revenue is principally attributable to a rise
in broker loan fee income in which the Bank functions as an agent to other
financial institutions. Fee income from brokered loans amounted to $82,000 in
the first quarter of 1999, as compared to $36,000 for 1998. Increased
residential lending activity accounted for the growth in broker fee income. The
Bank does not consider broker fees to be a sustainable source of income and
would expect the revenues from this activity to fluctuate widely with loan
origination volumes.
OPERATING EXPENSES
Salaries and employee benefits declined 13.3% from $2,248,000 in the first
quarter of 1998 to $1,950,000 in the same period this year. The drop in
compensation costs is the result of offsetting variables--discretionary bonuses
to directors and senior management, accrual of a performance bonus for the
staff, and commissions paid to loan officers.
Discretionary bonuses paid to directors and senior management totaled $808,000
in the first quarter of 1998. No further discretionary bonuses were paid in
1998, nor were any paid in the first quarter of this
Page 16 of 24
<PAGE>
year. Partially offsetting the benefit of no discretionary bonuses in 1999
was the additional expense of an accrual for the staff performance bonus.
This bonus is paid twice a year based on the Bank's financial results. The
accrual for that bonus is recorded in accordance with management's assessment
of the likelihood of meeting the targeted financial results. The performance
bonus accrued in the first quarter of 1998 was $40,000, which compares to
$249,000 for the same period in 1999.
Also affecting employee compensation expense were commissions paid to loan
officers. Retail residential loan officers are compensated primarily by
commission, and income property loan officers are partially compensated
through commission payments. Loan officer commissions rose from $111,000 in
the first quarter of 1998 to $192,000 this year. As was discussed earlier,
the Bank has experienced a general decline since the first of the year in
residential loan applications and most recently a fall in residential loan
originations. If that trend continues, it will have a beneficial effect on
the amount of loan officer commissions expense.
Other operating expenses increased 8.7%, from $673,000 in the first quarter of
1998 to $732,000 in the like period in 1999. The principal difference between
the two quarters is the rise in legal expenses. Legal costs jumped from $25,000
in the three months ending March 31, 1998, to $108,000 this year. The Bank is
considering the formation of a holding company and has engaged its corporate
counsel to assist in that activity. Management anticipates that the legal
expense for the second quarter of 1999 will be comparable to that experienced in
the first quarter.
NET INCOME
Net income increased 15.2% from $1,240,000 in the first quarter of 1998 to
$1,429,000 in the first three months of 1999. The improvement in net income was
largely a reflection of higher net interest income and reduced operating
expenses, offset by a decline in fee income.
BUSINESS SEGMENTS
The Bank has identified three distinct segments of business for the purposes of
management reporting. (See Note 7 to the Financial Statements.) Segment results
are determined based on the Bank's management accounting process, which assigns
balance sheet and income statement items to each responsible business unit. This
process is dynamic and somewhat subjective. Unlike financial accounting, there
is no body of guidance for management accounting equivalent to generally
accepted accounting principles.
The management accounting process measures the performance of the business
segments based on the management structure of the Bank and is not necessarily
comparable with similar information for any other financial institution. Changes
in management structure and/or the allocation process may result in changes in
allocations, transfers and assignments.
CONSUMER BANKING
Income before taxes for the consumer-banking segment dropped sharply from
$577,000 in the first quarter of 1998 to $242,000 in the same quarter in 1999.
Adversely impacting the consumer-banking segment was a decline in the net
interest margin and increased operating expenses, both of which were partially
compensated for by an increase in assets.
The net interest margin fell from 1.80% in the three months ending March 1998 to
1.59% in 1999. Although interest expense declined .21% from 5.16% in 1998 to
4.82% in 1999, the drop in the interest income rate was more severe, decreasing
.55%.
Page 17 of 24
<PAGE>
In addition to a decline in the net interest margin, operating expenses for this
business segment increased $218,000, or 16.8%, from $1,299,000 in the first
quarter of 1998 to $1,516,000 in 1999. Operating expenses rose largely as a
result of a full quarter's operating costs in 1999 for the Bellingham Office
versus one month's costs in 1998, and the impact of an increased bankwide
accrual in the staff's performance bonus.
Partially offsetting the negative effects of a lower net interest margin and
higher operating costs was the growth in assets. Assets increased $4,825,000, or
1.2%, on a quarter-to-quarter basis. Average earning assets was more
encouraging, up $22,973,000, or 6%.
RESIDENTIAL LENDING
Income before taxes also fell substantially, 47.1% for the residential lending
segment, from $847,000 in the first quarter of 1998 to $448,000 in 1999.
Residential lending was unfavorably impacted by both a drop in fee income and
higher operating expenses.
As was noted earlier, the gain from the sale of servicing rights totaled
$844,000 in the first quarter of 1998 as compared to $472,000 this year. In 1998
the Bank sold $93 million of seasoned servicing rights to reduce the risk of an
early prepayment of the servicing portfolio. The servicing sale this year
amounted to $32 million and represented the servicing derived from recently
originated loans.
Operating expenses jumped $188,000, or 47.8%, on a quarter-to-quarter
comparison. The increase in operating expenses is the result of a rise in loan
officer commission expense and the accrual for the bankwide staff performance
bonus.
Loan applications in the first quarter of 1999 have trended downward because of
generally rising mortgage interest rates. The Bank is concerned that if this
trend continues the gain realized on the sale of servicing in the second half of
1999 could be materially less than that received in the first two quarters of
this year.
Management anticipates that if residential loan originations were to
significantly decline from the pace set in the first quarter of 1999 loan
officer commission expense would drop at a commensurate rate.
COMMERCIAL LENDING
Income before taxes for this business segment rose $243,000, or 18.4%, from
$1,319,000 in the first quarter of 1998 to $1,562,000 in the like period of
1999. Net interest revenue grew $371,000, while operating expenses increased
$95,000.
Net interest revenue benefited from both a modest .05% increase in the net
interest margin, and a $44,789,000, or 18.1%, growth in assets. The Bank is
particularly encouraged with growth in its commercial lending segment as asset
improvement in this area affects core growth. In other business segments, such
as residential lending, asset growth is often temporary as most of the loan
originations are sold into the secondary market.
Operating expenses rose $95,000, or 13.5%, from $703,000 in the first quarter of
1998 to $798,000 in the like quarter of 1999. Operating costs were increased by
higher commission costs to income property loan officers and the accrual for the
bankwide staff performance bonus.
Page 18 of 24
<PAGE>
FINANCIAL CONDITION
Assets increased 7.4%, from $489,230,000 at year-end 1998 to $525,518,000 as of
March 31, 1999. The change in assets is principally the result of an increase in
portfolio loans and the investment securities portfolio, offset by a decline in
loans held for sale.
Loans receivable rose from $365,104,000 at year-end 1998 to $382,525,000, an
increase of 4.8% in three months. The growth in loan balances is largely due to
an increase in the commercial real estate loan portfolio. Loan originations for
commercial real estate totaled $36 million in the first quarter of 1999 as
compared to $28 million in the same quarter the previous year.
Loans held for sale declined 24.1% from $27,371,000 at year-end 1998 to
$20,783,000 as of March 31, 1999. Due to generally rising interest rates, loans
originated for mortgage banking activities have dropped on a quarter-to-quarter
comparison by $10,728,000, or 19.4%. Interest rates have continued to rise since
March 31, 1999, which would at the present time most likely indicate a further
decrease in loan originations and loans held for sale.
Security investments (securities available for sale and mortgage-backed and
other securities held to maturity) increased $26,744,000, or 32.6%, from
December 31, 1998, to the end of the first quarter 1999. As was noted earlier,
the Bank acquired investment securities to take advantage of a favorable
relationship between its Tier 1 and risk-adjusted capital ratios.
The Bank classifies investment securities in one of the following categories: 1)
trading, 2) available for sale, or 3) held to maturity. Securities classified as
AVAILABLE FOR SALE are reviewed regularly and any unrealized gains or losses are
recorded in the shareholders' equity account. At March 31, 1999, the balance of
the unrealized loss, net of federal income taxes, was $84,000, which compares to
an unrealized loss at year-end 1998 of $12,000. Generally, falling interest
rates will increase the amount recorded as unrealized gain and rising rates will
decrease any unrealized gains, as the market value of securities inversely
adjusts to the change in interest rates.
Real estate held for sale and nonperforming loans totaled $563,000 at March 31,
1999, and constituted a ratio of .11% of assets. That figure compares to the
national thrift average of .72% (FDIC Quarterly Banking Profile, fourth quarter
1998).
Deposits declined $9,985,000, or 2.4%, in the first three months of 1999. The
Bank is concerned about this trend and is taking actions to correct the problem.
Continued erosion of the deposit base could eventually seriously degrade the
Bank's ability to fund the growth of earning assets.
The Federal Home Loan Bank (FHLB) advances grew from $31,765,000 at year-end
1998 to $78,841,000 as of the end of the first quarter. The $47,076,000, or
148.2%, increase in FHLB advances largely reflects the $27 million increase in
security investments, and the $10 million drop in deposits. As of March 31,
1999, the Bank had the capacity to borrow up to $184 million in FHLB advances,
subject to sufficient collateral to support those advances. At the present time,
the Bank is capable of funding its banking activity through its credit line with
the FHLB. However, management believes that continued reliance on the FHLB and
other wholesale sources of funds is less desirable than the utilization of
retail deposits.
LIQUIDITY AND CAPITAL RESERVES
Cash, as reported in the Statement of Cash Flows, fell by $1,599,000 in the
first three months of 1999. The deposit flows for the quarter were negative, and
the Bank added substantially to its investment securities portfolio.
Page 19 of 24
<PAGE>
The Bank's long-term liquidity objective is to fund growth through consumer
deposits. Whenever that source is inadequate to meet the Bank's asset growth
requirements, FHLB advances are normally accessed. The current ratio of FHLB
advances to assets is 15%, which is below the Bank's credit limit of 35% of
assets. Other sources of liquidity include the sale of loans into the secondary
market, net income after the payment of dividends, and reverse repurchase
agreement credit lines of $82,000,000.
The FDIC's statutory framework for capital requirements establishes five
categories of capital strength, ranging from a high of well-capitalized to a low
of critically under-capitalized. An institution's category depends upon its
capital level in relation to relevant capital measures, including a risk-based
capital measure, a leverage capital measure, and certain other factors. At March
31, 1999, the Bank exceeded the capital levels required to meet the definition
of a well-capitalized institution:
<TABLE>
<CAPTION>
FIRST MUTUAL FDIC REQUIREMENT
SAVINGS BANK FOR WELL-CAPITALIZED
MARCH 31, 1999 INSTITUTIONS
-------------- ------------
<S> <C> <C>
Leverage Ratio 7.03% 5.00%
Tier I Risk-Based Capital Ratio 10.14% 6.00%
Total Risk-Based Capital Ratio 11.39% 10.00%
</TABLE>
YEAR 2000 ISSUES
The Bank relies on third-party vendors for almost all of its data processing and
telecommunications systems. Consequently, its efforts to ensure that the Bank is
ready for Year 2000 and that there are no meaningful interruptions to its
operations are necessarily dependent on the performance of those vendors and
adequate testing by the vendors and the Bank.
To date, the Bank has conducted a comprehensive review of its computer systems
to identify applications that could be affected by Year 2000. It has surveyed
its vendors to find out their status in addressing Year-2000 issues and is
monitoring their progress.
The Bank's primary data processor supports its deposit, loan, general ledger,
customer information file, accounts payable, and fixed-assets accounting
systems. This processor completed its programming efforts during the second
quarter 1998 and indicated that the Bank was now running, on what the processor
believed, was Year-2000-ready software and hardware. During the third quarter
the Bank conducted an extensive test of the software on a separate test computer
provided by the processor to its clients. The computer was set ahead to the end
of 1999 and rolled through January 3, 2000; in addition, it was also run through
the end of February 2000 to test for leap year. Only a few minor errors were
identified, and not all of them were date related. The processor has reported
that all errors discovered by its clients during testing have been corrected.
All of the other dates recommended for testing by the Federal Financial
Institutions Examination Council were separately tested by the processor; a
single Year-2000-related error was discovered, and it has been corrected. This
processor will not be charging the Bank, nor its other clients, for expenses
related to remediating its software to address Year-2000 issues.
Most of the Bank's other third-party vendors have indicated that their systems
would be Year-2000 ready by the end of 1998. The Bank is in the process of
testing those systems judged to be critical to its operations. Many of these
services (such as check processing, automated teller machine transactions,
automated clearinghouse transactions, and investor reporting) interface with the
Bank's primary data processor and will have to be tested in conjunction with
that processor. Most of that testing is expected
Page 20 of 24
<PAGE>
to take place during the first half of 1999. The Bank's primary data
processor is coordinating the effort and has provided the Bank a report on
its progress, which is updated monthly. In its most current report the data
processor indicated that 61% of testing with these vendors had been
completed; individual reports on the results of the proxy testing is being
provided to those clients using the particular vendors.
While the Bank does not operate any mainframe computers, it does run several
local area networks to support personal-computer workstations running
standardized word processing, spreadsheet, and database software to support its
operations. All models of the personal-computer workstations, and most of the
individual workstations, have been tested for Year-2000 functionality. All of
the workstations are Year-2000 ready. A total of six personal computers have
been replaced through normal attrition; one of the servers for a local area
network likewise needed replacement. The Bank anticipates no other material
expense related to their replacement. Likewise, much of the standardized
software has been tested and found to be Year-2000 ready. Testing will continue
on the remaining software; any versions found to be non-compliant will be
replaced. The Bank does not expect that any additional material investment will
be required to replace any of the personal-computer hardware or software at this
point in time. If it becomes advisable to replace one or more of these systems,
the investment would likely be a material amount.
In addition to computer software, it is possible that computer hardware and
other equipment used in the Bank's operations or buildings may have
microprocessors with Year-2000 issues. Most of the hardware involved in Bank's
networks and workstations has been replaced over the past several years for
reasons unrelated to Year 2000. In addition, surveys have been completed of
items such as heating and cooling systems, vault doors, automated teller
machines, and security systems. No material investments are expected related to
Year-2000 readiness for these ancillary systems.
Most of the Bank's costs in this effort has involved the time of its existing
staff; no one has been hired whose job is primarily related to Year-2000 issues.
The Bank does not expect the cost of this project to have a material effect on
its financial position or results of operations. The costs of changing to
alternate vendors, or replacement of one or more in-house systems, would be
material and, while not expected, could be incurred if the testing provides
results which are unacceptable to the Bank.
The Bank's efforts so far have been concentrated on identifying its significant
vendors, determining where they are in the process of ensuring their services
will be Year-2000 ready, and monitoring their progress. A contingency plan to
deal with vendors who may not be ready before Year 2000 or to deal with systems
that may unexpectedly fail once Year 2000 arrives has not yet been finished.
Such a plan should be completed by the end of second quarter 1999.
The Bank's operations are very dependent on the availability of utility services
such as electrical power and telephone services. The Bank has received only
limited information from those service providers about their Year-2000
preparedness so far.
The Bank operates within the lending and banking community including the check
clearing houses. In common with other financial institutions, it has the
inherent risk that a failure of any significant system of interchange among the
financial institutions, or the failure of a system within one or more large
banks in the Bank's geographic area, could have a material adverse effect on the
Bank.
While the Bank currently believes that Year 2000 will not pose significant
operational problems, there can be no assurance that its systems and the systems
of other companies on which the Bank relies will be timely converted or that any
conversion failures would not have a material impact on the operations of the
Bank.
Page 21 of 24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Bank's Market risk position
from the end of the preceding fiscal year, December 31, 1998.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
First Mutual has certain litigations and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a material adverse effect on
the Bank's financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the quarter, the Bank did not file any Current Report on Form
8-K.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Except for historical information, matters described herein are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. They are subject to risks and uncertainties that could cause actual
results to differ materially. Among these are governmental fiscal policy,
general interest rate changes, and other economic, competitive and operational
factors.
Page 22 of 24
<PAGE>
These are some examples. Management's expectations concerning Year 2000 costs
are based on test results to date. These expectations may not be achieved if
additional testing, or the Bank's operating experience, show that greater
changes are necessary. The Bank's goal to increase its non-residential lending
depends upon healthy economic growth in the Bank's local area, as well as
competitive factors. If generally adverse economic conditions were to prevail,
the goal would be less likely to be realized and the goal itself might be
revised. The sale of servicing rights is a decision based in part on interest
rate expectations, as to which there is no certain predictability. The market
for servicing rights is similarly affected by the interest rate expectations of
potential purchasers. It is possible that the Bank may, at times, be unable to
market servicing rights at a price acceptable to the Bank.
First Mutual Savings Bank disclaims any obligation to announce publicly future
events or developments which affect the forward-looking statements herein.
Page 23 of 24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MUTUAL SAVINGS BANK
/s/ John R. Valaas
---------------------------------
John R. Valaas
President and Chief Executive Officer
/s/ Roger A. Mandery
---------------------------------
Roger A. Mandery
Executive Vice President
(Principal Financial Officer)
Page 24 of 24
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO
Section 13 of
The Securities Exchange Act of 1934
FOR QUARTER ENDED JUNE 30, 1999
FDIC Certificate No. 17007-1
FIRST MUTUAL SAVINGS BANK
-------------------------
(Exact name of bank as specified in charter)
WASHINGTON
----------
(State of incorporation)
91-0594387
----------
(I.R.S. Employee Identification Number)
400 108th Avenue N.E., Bellevue, WA 98004
----------------------------------------------
(Address of principal office) (Zip code)
Bank's telephone number, including area code: (425) 455-7300
--------------
Indicate by check mark whether the bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the bank was required to file such
reports),
Yes X No _____
-------
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No _____
-------
Number of Shares of Capital Stock Outstanding
at June 30, 1999 4,679,058
---------
<PAGE>
Item 1. Financial Statements
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30 Dec. 31
ASSETS 1999 1998
- ------ ------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Interest-earning deposits $ 158,745 $ 216,953
Noninterest-earning demand deposits
and cash on hand 5,157,057 5,312,192
---------- ----------
5,315,802 5,529,145
MORTGAGE-BACKED AND OTHER SECURITIES
AVAILABLE FOR SALE 18,350,508 20,336,611
LOANS RECEIVABLE, HELD FOR SALE 14,104,231 27,370,815
MORTGAGE-BACKED AND OTHER SECURITIES
HELD TO MATURITY 91,148,362 61,764,431
LOANS RECEIVABLE 391,974,986 365,104,245
RESERVE FOR LOAN LOSSES (5,984,891) (5,569,431)
---------- -----------
LOANS RECEIVABLE, NET 385,990,095 359,534,814
ACCRUED INTEREST RECEIVABLE 3,447,637 3,311,122
LAND, BUILDINGS AND EQUIPMENT, NET 5,478,103 5,536,748
FEDERAL HOME LOAN BANK (FHLB) STOCK, 5,059,400 4,876,500
at cost
MORTGAGE SERVICING RIGHTS 274,708 356,585
OTHER ASSETS 1,193,434 613,368
---------- --------
TOTAL $ 530,362,280 $ 489,230,139
============= =============
</TABLE>
Page 2 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(CONTINUED)
<TABLE>
<CAPTION>
June 30 Dec. 31
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Deposits:
Investor custodial checking $ 4,503,153 $ 8,146,226
Money market deposit and
checking accounts 98,910,339 90,773,090
Regular savings 11,062,342 12,247,457
Time Deposits 280,809,939 300,084,375
------------ ------------
Total deposits 395,285,773 411,251,148
Drafts payable 1,592,464 4,382,611
Accounts payable and other liabilities 3,513,482 5,652,174
Advance payments by borrowers for
taxes and insurance 1,529,356 1,517,253
FHLB advances 91,543,000 31,765,000
Total liabilities 493,464,075 454,568,186
STOCKHOLDERS' EQUITY:
Common stock, $1 par value-
Authorized, 10,000,000 shares
Issued and outstanding, 4,679,058
and 4,247,275 shares, respectively 4,679,058 4,247,275
Additional paid-in capital 31,136,128 25,848,681
Employee Stock Ownership Plan debt (341,171) (603,738)
Retained earnings 1,954,264 5,181,720
Accumulated other comprehensive income(loss):
Unrealized (loss) on securities available for sale,
net of federal income tax (530,074) (11,985)
--------- --------
Total stockholders' equity 36,898,205 34,661,953
----------- -----------
TOTAL $ 530,362,280 $ 489,230,139
============== ==============
</TABLE>
Page 3 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarters ended June 30 Six Months ended June 30
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans Receivable $8,511,265 $8,801,348 $16,937,060 $ 17,151,596
Mortgage-backed and related securities 957,172 306,116 1,790,858 697,669
Interest-earning deposits with banks 9,246 13,957 20,634 19,133
FHLB stock dividends 89,827 88,987 183,015 175,347
U.S. Treasury, government agency
and other securities 693,030 597,280 1,351,286 1,315,186
-------- -------- ---------- ----------
10,260,540 9,807,688 20,282,853 19,358,931
INTEREST EXPENSE:
Deposits 4,550,101 4,998,402 9,265,195 9,781,598
FHLB advances and other 1,029,845 506,828 1,794,541 1,067,865
---------- -------- ---------- ----------
5,579,946 5,505,230 11,059,736 10,849,463
---------- ---------- ----------- -----------
Net interest income 4,680,594 4,302,458 9,223,117 8,509,468
PROVISION FOR LOAN LOSSES 285,000 100,000 435,000 200,000
-------- -------- -------- --------
Net interest income, after provision
for loan losses 4,395,594 4,202,458 8,788,117 8,309,468
OTHER OPERATING INCOME (EXPENSE):
Gain(Loss) on sales of loans 382,702 306,518 776,388 981,858
Servicing fees, net of amortization 114,217 129,216 229,363 254,622
Fees on deposits 92,980 50,083 161,198 99,281
Other 183,701 182,578 401,481 369,855
-------- -------- -------- --------
Total other operating income 773,600 668,395 1,568,430 1,705,616
BALANCE, carried forward 5,169,194 4,870,853 10,356,547 10,015,084
</TABLE>
Page 4 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
<TABLE>
<CAPTION>
Quarters ended June 30 Six Months ended June 30
1999 1998 1999 1998
----- ----- ----- ----
(Unaudited)
<S> <C> <C> <C> <C>
BALANCE, brought forward $ 5,169,194 $ 4,870,853 $ 10,356,547 $ 10,015,084
OPERATING EXPENSES:
Salaries and employees benefits 1,680,137 1,899,008 3,630,156 4,146,972
Occupancy 346,264 344,142 689,201 687,765
Other 917,851 692,406 1,649,587 1,365,739
-------- -------- ---------- ----------
Total other operating expenses 2,944,252 2,935,556 5,968,944 6,200,476
---------- ---------- ---------- ----------
Income before federal income taxes 2,224,942 1,935,297 4,387,603 3,814,608
FEDERAL INCOME TAXES 754,783 658,001 1,488,388 1,296,967
-------- -------- ---------- ----------
NET INCOME $1,470,159 $1,277,296 $2,899,215 $2,517,641
=========== =========== =========== ===========
PER SHARE DATA(1):
BASIC EARNINGS PER COMMON SHARE $0.31 $0.27 $0.62 $0.55
====== ====== ====== ======
EARNINGS PER COMMON SHARE-ASSUMING DILUTION $0.31 $0.27 $0.61 $0.53
====== ====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 4,672,243 4,655,635 4,672,123 4,603,671
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
INCLUDING DILUTIVE STOCK OPTIONS 4,760,023 4,775,679 4,760,821 4,752,097
========== ========== ========== ==========
</TABLE>
(1) Comparative Earnings Per Share data for the prior year has been restated to
conform with Statement of Financial Accounting Standards No. 128. See Note
5.
Page 5 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock Additional Employee Stock Accumulated
------------ paid-in Retained Ownership Comprehensive
Shares Amount capital earnings plan debt Income(loss) Total
------ ------ ------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 3,680,141 3,680,141 19,941,490 4,805,295 (1,024,111) (6,752) 27,396,063
Options exercised 76,890 76,890 552,607 629,497
10% stock dividend 368,196 368,196 4,388,676 (4,756,872)
Repayment of employee stock
ownership plan debt 152,541 152,541
Cash dividends declared
($.50 per share) (1) (2,046,925) (2,046,925)
Comprehensive income:
Net income 4,518,680 4,518,680
Other comprehensive
income(loss)--Change in
unrealized losses on
securities available for
sale, net of federal
income tax 1,972 1,972
-----
Comprehensive income 4,520,652
--------- --------- ---------- ----------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1997 4,125,227 4,125,227 24,882,773 2,520,178 (871,570) (4,780) 30,651,828
Options exercised 122,048 122,048 965,908 1,087,956
Repayment of employee stock
ownership plan debt 267,832 267,832
Cash dividends declared
($.60 per share) (1) (2,546,154) (2,546,154)
Comprehensive income:
Net income 5,207,696 5,207,696
Other comprehensive
income(loss)--Change in
unrealized losses on
securities available for
sale, net of federal
income tax (7,205) (7,205)
------------
Comprehensive income 5,200,491
--------- ---------- ----------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1998 4,247,275 $4,247,275 $25,848,681 $ 5,181,720 $ (603,738) $ (11,985) $34,661,953
Options exercised 7,300 7,300 34,470 41,770
10% stock dividend 424,483 424,483 5,252,977 (5,677,460)
Repayment of employee stock
ownership plan debt 262,567 262,567
Cash dividends declared
($.10 per share) (1) (449,211) (449,211)
Comprehensive income:
Net income 2,899,215 2,899,215
Other comprehensive
income(loss)--Change in
unrealized losses on
securities available for
sale, net of federal
income tax (518,089) (518,089)
------------
Comprehensive Income 2,381,126
--------- ---------- ----------- ----------- ----------- ----------- ------------
BALANCE, JUNE 30, 1999 4,679,058 $4,679,058 $31,136,128 $ 1,954,264 $ (341,171) $ (530,074) $ 36,898,205
========= ========== =========== =========== =========== =========== ============
</TABLE>
(1) Cash dividends declared divided by weighted average shares outstanding of
4,062,824 in 1997, 4,215,764 in 1998 and 4,672,123 in 1999.
Page 6 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30
------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,899,215 $ 2,517,641
Adjustments to reconcile net cash
provided (used) by operating activities:
Provision for loan losses 435,000 200,000
Depreciation 275,577 262,740
Deferred loan origination fees, net of accretion (30,907) 138,877
Amortization of Mortgage servicing rights 96,842 233,901
(Gain) Loss on sales of loans (842,493) (1,266,352)
(Gain) Loss on sale of repossessed real estate (17,029)
FHLB stock dividends (182,900) (175,200)
Cash provided (used) by changes in
operating assets and liabilities:
Loans receivable held for sale 13,266,584 (8,820,716)
Accrued interest receivable (136,515) (74,560)
Other assets (580,066) (580,667)
Drafts payable (2,790,147) (170,207)
Accounts payable, federal income
taxes and other liabilities (520,074) 1,300,854
Advance payments by borrowers for
taxes and insurance 12,103 38,622
------------- -------------
Net cash provided (used) by operating activities 11,885,190 (6,395,067)
INVESTING ACTIVITIES:
Loan originations (93,369,554) (98,440,636)
Loan principal repayments 63,456,650 65,981,227
Increase (decrease) in undisbursed loan proceeds 2,829,328 7,258,029
Principal repayments & redemptions on mortgage-backed
and other securities 11,545,366 29,015,311
Purchase of mortgage-backed and other securities (39,717,343) (18,000,000)
Purchase of mortgage-backed securities available for sale -
Purchases of premises and equipment (245,408) (365,290)
Proceeds from sale of Loans 1,301,940 1,407,607
Proceeds from sale of Real Estate Held for Sale 119,738 210,270
------------- -------------
Net cash provided (used) by
investing activities, carried forward (54,079,283) (12,933,482)
</TABLE>
Page 7 of 26
<PAGE>
FIRST MUTUAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Six months ended June 30
------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
BALANCE, net cash provided (used) by
investing activities, brought forward $ (54,079,283) $ (12,933,482)
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (25,394,016) 16,719,398
Interest credited to deposit accounts 9,428,641 9,730,349
Proceeds from FHLB advances 208,570,000 107,744,000
Repayment of FHLB advances (148,792,000) (112,294,000)
Dividends paid (2,126,816) (1,859,349)
Proceeds from exercise of stock options 32,374 529,105
Repayment of Employee Stock Ownership debt 262,567 242,856
-------------- --------------
Net cash provided (used) by financing activities 41,980,750 20,812,359
-------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS (213,343) 1,483,810
CASH:
Beginning of year 5,529,145 5,909,165
-------------- --------------
End of quarter $ 5,315,802 $ 7,392,975
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Loans originated for mortgage banking activities $ 77,644,400 $ 108,760,208
Loans originated for investment activities 93,369,554 98,440,636
-------------- --------------
Total loans originated for mortgage banking
activities and investment activities $ 171,013,954 $207,200,844
=============== ==============
Cash paid during six months ended June 30
Interest $ 11,000,749 $ 10,785,597
=============== ==============
Income taxes $ 1,760,155 $ 795,000
=============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Loans transferred to (from) real estate
held for sale, net $ -- $ 230,299
=============== ===============
</TABLE>
Page 8 of 26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations.
NOTE 2.
MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale at
June 30, 1999 and December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
JUNE 30, 1999:
FHLMC securities $ 483,938 $ 22,835 5,496 $ 501,277
FNMA securities 16,732,135 24,705 745,989 16,010,851
GNMA securities 1,937,319 - 98,939 1,838,380
------------ -------- --------- ------------
$ 19,153,392 $ 47,540 $ 850,424 $ 18,350,508
============ ======== ========= ============
DECEMBER 31, 1998:
FHLMC securities $ 648,646 $ 17,941 $ 666,587
FNMA securities 17,679,888 35,825 41,675 17,674,038
GNMA securities 1,996,385 - 399 1,995,986
------------ -------- --------- ------------
$ 20,324,919 $ 53,766 $ 42,074 $ 20,336,611
============ ======== ========= ============
</TABLE>
NOTE 3.
MORTGAGE-BACKED AND OTHER SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of mortgage-backed and other
securities is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
JUNE 30, 1999:
FNMA certificates $ 42,230,958 $ 162,985 $ 1,199,752 $ 41,194,191
FHLMC certificates 2,229,602 24,184 2,253,786
U.S. Government Agency securities 42,646,231 229,895 967,221 41,908,905
Merrill Lynch corporate bond 2,539,480 97,255 2,442,225
Municipal bonds 626,328 16,339 609,989
REMICS 875,763 21,155 - 896,918
------------ ---------- ----------- -------
$ 91,148,362 $ 438,219 $ 2,280,567 $ 89,306,014
============ ========== =========== ============
DECEMBER 31, 1998:
FNMA certificates $ 14,241,885 $ 238,948 $ 14,235 $ 14,466,598
FHLMC certificates 3,555,875 14,470 4,180 3,566,165
U.S. Government Agency securities 38,643,616 656,784 151,235 39,149,165
Merrill Lynch corporate bond 2,544,950 33,450 2,511,500
Municipal bonds 627,083 36,313 590,770
REMICS 1,151,194 31,631 1,182,825
U.S. Treasury securities 999,828 172 - 1,000,000
------------ --------- --------- -----------
$ 61,764,431 $ 942,005 $ 239,413 $62,467,023
============ ========= ========= ===========
</TABLE>
Page 9 of 26
<PAGE>
NOTE 4.
NONPERFORMING ASSETS
The Bank had nonperforming assets as follows.
<TABLE>
<CAPTION>
June 30, 1999: December 31, 1998
-------------- -----------------
<S> <C> <C>
Nonperforming loans $286,661 $298,503
Real Estate Held for Sale 9,613 37,628
--------- --------
Totals $296,274 $336,131
========= ========
</TABLE>
At June 30, 1999 and December 31, 1998, First Mutual Bank had no impaired
loans as defined under Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan."
NOTE 5.
EARNINGS PER SHARE
Basic Earnings Per Share is computed by dividing net income by the
weighted-average number of shares outstanding during the year. Diluted EPS
reflects the potential dilutive effect of stock options and is computed by
dividing net income by the weighted-average number of shares outstanding during
the year, plus the dilutive common shares that would have been outstanding had
the stock options been exercised.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for quarters and years ending
June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Income Shares Per share
(numerator) (denominator) amount
--------------------------------------------------------------
<S> <C> <C> <C>
Quarter ended June 30, 1999
- ---------------------------
Basic EPS:
Income available to common shareholders $ 1,470,159 4,672,243 $ 0.31
==========
Effect of dilutive stock options - 87,780
-------------- ---------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $ 1,470,159 4,760,023 $ 0.31
=============================================================
Year ended June 30, 1999
- ------------------------
Basic EPS:
Income available to common shareholders $ 2,899,215 4,672,123 $ 0.62
==========
Effect of dilutive stock options - 88,698
-------------- ---------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $ 2,899,215 4,760,821 $ 0.61
=============================================================
Quarter ended June 30, 1998
- ---------------------------
Basic EPS:
Income available to common shareholders $ 1,277,296 4,655,635 $ 0.27
==========
Effect of dilutive stock options - 120,044
-------------- ---------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $ 1,277,296 4,775,679 $ 0.27
=============================================================
Year ended June 30, 1998
- ------------------------
Basic EPS:
Income available to common shareholders $ 2,517,641 4,603,671 $ 0.55
==========
Effect of dilutive stock options - 148,426
-------------- ---------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $ 2,517,641 4,752,097 $ 0.53
=============================================================
</TABLE>
Page 10 of 26
<PAGE>
NOTE 6.
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS SECOND QUARTER 1999 SIX MONTHS ENDED JUNE 30, 1999
(Dollars in thousands) VS VS
SECOND QUARTER 1998 SIX MONTHS ENDED JUNE 30, 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
TOTAL TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
- ------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investments:
Mortgage-backed and related securities $ 702 $ (51) $ 651 $ 1,244 $ (151) $ 1,093
Interest-earning deposits with banks (4) (1) (5) 7 (6) 1
Other equity investments 7 (6) 1 14 (6) 8
U.S. Treasury and Govt. Agencies 147 (51) 96 164 (128) 36
------ ------ ------ ------ ------ ------
Total investments 852 (109) 743 1,429 (291) 1,138
Loans:
Residential (786) (21) (807) (1,420) (79) (1,499)
Residential construction 72 (126) (54) 183 (183) -
Multifamily 407 (263) 144 800 (399) 401
Multifamily construction 71 (34) 37 118 (68) 50
Commercial real estate and Business 486 (163) 323 941 (321) 620
Commercial real estate construction 34 (38) (4) 67 (26) 41
Consumer & Other 70 1 71 167 6 173
------ ------ ------ ------ ------ ------
Total loans 354 (644) (290) 856 (1,070) (214)
----------------------- -----------------------------
Total interest income 1,206 (753) 453 2,285 (1,361) 924
INTEREST EXPENSE
Deposits:
Money market deposit and checking 173 (28) 145 355 (69) 286
Regular savings (14) (11) (25) (33) (23) (56)
Time deposits (252) (316) (568) (195) (552) (747)
------ ------ ------ ------ ------ ------
Total deposits (93) (355) (448) 127 (644) (517)
FHLB advances and other 700 (177) 523 1,038 (311) 727
------ ------ ------ ------ ------ ------
Total interest expense 607 (532) 75 1,165 (955) 210
Net interest income $ 599 $(221) $ 378 $ 1,120 $ (406) $ 714
====== ====== ===== ======= ======= =======
</TABLE>
Page 11 of 26
<PAGE>
NOTE 7.
SEGMENTS
The Bank is organized based on the products and services that it offers.
Under this organizational structure, the Bank has 3 reportable segments:
consumer banking, residential lending, and commercial lending.
Consumer banking offers depositor banking services, home equity lending,
direct consumer loans, and consumer dealer financing contracts.
Residential lending offers conventional or government-insured loans to
borrowers to purchase, refinance, or build homes, secured by one-to-four unit
family dwellings. Embedded within the residential lending segment is a
mortgage banking operation, which sells loans in the secondary mortgage
market. The mortgage banking operation generally retains the right to service
the loans sold (i.e., collection of principal and interest payments) for
which it receives a fee based on the unpaid principal balance. The servicing
rights may be resold at opportune market conditions.
Commercial lending offers permanent and interim (construction) loans for
multifamily housing (over 4 units), commercial real estate properties, and
loans to small and medium-sized businesses for financing inventory, accounts
receivables, equipment, among other things. The underlying real estate
collateral or business asset being financed typically secures these loans.
Financial information for the Bank's segments is shown below for the first
quarter 1999 and 1998:
<TABLE>
<CAPTION>
CONSUMER RESIDENTIAL COMMERCIAL
BANKING LENDING LENDING TOTALS
------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED JUNE 30:
Revenues from external customers 1999 $2,276,536 $2,050,737 $6,532,278 $ 10,859,551
1998 1,466,093 2,746,842 6,037,519 10,250,454
Revenues from other segments of the Bank 1999 4,212,680 69,186 395,294 4,677,160
1998 5,439,312 114,535 376,814 5,930,661
Total Revenues 1999 6,489,216 2,119,923 6,927,572 15,536,711
1998 6,905,405 2,861,377 6,414,333 16,181,115
Net interest revenue 1999 1,605,894 438,462 2,474,266 4,518,622
1998 1,593,727 522,073 2,127,440 4,243,240
Income before federal income taxes 1999 255,527 394,409 1,703,770 2,353,706
1998 303,757 325,749 1,414,374 2,043,880
Total assets as of June 30: 1999 398,671,249 87,985,365 306,383,660 793,040,274
1998 400,578,600 128,463,684 258,062,692 787,104,976
CONSUMER RESIDENTIAL COMMERCIAL
BANKING LENDING LENDING TOTALS
------- ------- ------- ------
YEAR-TO-DATE ENDED JUNE 30:
Revenues from external customers 1999 $ 4,375,472 $ 4,302,360 $ 12,733,749 $ 21,411,581
1998 3,066,371 5,915,427 11,643,253 20,625,051
Revenues from other segments of the Bank 1999 8,755,866 149,988 779,488 9,685,342
1998 10,644,903 238,298 729,551 11,612,752
Total Revenues 1999 13,131,338 4,452,348 13,513,237 31,096,923
1998 13,711,274 6,153,725 12,372,804 32,237,803
Net interest revenue 1999 3,217,748 933,019 4,793,043 8,943,810
1998 3,323,251 1,003,041 4,074,910 8,401,202
Income before federal income taxes 1999 497,841 842,270 3,265,304 4,605,415
1998 880,786 1,172,399 2,733,048 4,786,233
</TABLE>
Page 12 of 26
<PAGE>
Note 7.
Segments (continued)
Reconciliations of segment data to the Bank consolidated financial statements
are shown in the table below. The amounts for the segments would differ from
the actual consolidated financial statements due to a funds transfer pricing
mechanism that uses internal, proxy market interest rates, and also, various
methods for allocating costs.
<TABLE>
<CAPTION>
YEAR-TO-DATE YEAR-TO-DATE
QUARTER ENDED ENDED QUARTER ENDED ENDED
1999 1999 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
TOTAL REVENUES FOR JUNE 30:
Segment total revenues $ 15,536,711 $ 31,096,923 $ 16,181,115 $ 32,237,803
Back out or add back:
Revenues from other segments
of the Bank (4,677,160) (9,685,342) (5,930,661) (11,612,752)
Revenues of administrative
departments netted against
overhead costs and reallocated
as net costs 174,589 439,702 225,629 439,496
------------ ------------ ------------ ------------
Consolidated Bank total revenues $ 11,034,140 $ 21,851,283 $ 10,476,083 $ 21,064,547
NET INTEREST REVENUE FOR JUNE 30:
Segment net interest revenue $ 4,518,622 $ 8,943,810 $ 4,243,240 $ 8,401,202
Back out or add back:
Difference between actual Bank
interest expense and intersegment
funding allocation 23,416 (50,521) (109,404) (214,899)
Interest revenues of administrative
departments netted against
overhead costs and reallocated
as net costs 138,556 329,828 168,622 323,165
------------ ------------ ------------ ------------
Consolidated Bank net interest revenue $ 4,680,594 $ 9,223,117 $ 4,302,458 $ 8,509,468
INCOME BEFORE FEDERAL INCOME TAXES
FOR JUNE 30:
Segment pre-tax income $ 2,353,706 $ 4,605,415 $ 2,043,880 $ 4,786,233
Back out or add back:
Unallocated loan loss provision (285,000) (435,000) (100,000) (200,000)
Unallocated net expenses of
administrative departments - - (16,932) (789,582)
Difference between actual total Bank
funding cost and total
intersegment funding allocation 156,236 217,188 8,349 17,957
------------ ------------ ------------ ------------
Consolidated Bank pre-tax income $ 2,224,942 $ 4,387,603 $ 1,935,297 $ 3,814,608
TOTAL ASSETS AS OF JUNE 30:
Segment total assets $793,040,274 787,104,976
Back out or add back:
Inferred intersegment interest earning
assets on branch deposits (264,292,073) (321,528,028)
Unallocated reserve for loan loss (5,984,891) (5,019,431)
Unallocated nonearning assets of
administrative departments 7,598,970 10,308,568
------------ ------------
Consolidated Bank total assets $530,362,280 $470,866,085
</TABLE>
Page 13 of 26
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Financial Statements of First Mutual Savings Bank begin
on page 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
attached consolidated financial statements and notes thereto, and with the
audited financial statements and notes thereto for the year ended December
31, 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $378,000, or 8.8%, in the second quarter of
1999 as contrasted with the same quarter in 1998. The net interest margin for
the quarter was 3.65%, which compares to 3.69%, 3.79%, 3.89%, and 3.78%, for
the quarters ended March 31, 1999, December 31, 1998, September 30, 1998, and
June 30, 1998, respectively.
Net interest income improved principally as a result of an increase in
earning assets, which contributed $599,000 in the second quarter. Offsetting
the benefit from greater earning assets, which grew from $456,685,000 at June
30, 1998, to $514,811,000 at quarter-end June 1999, was the negative impact
of $221,000 from a change in interest rates. The unfavorable change in the
net interest margin is attributable to a greater decrease in interest income
than the corresponding figure for interest expense. Interest income, as
measured by the ratio of interest income/average-earning assets, dropped from
8.62% in the second quarter of 1998 to 7.99% in the same period in 1999.
Interest expense, as gauged by the ratio of interest expense/average-earning
assets, also decreased, falling from 4.84% in the second quarter of 1998 to
4.35% in 1999. Thus, even though the interest expense ratio fell .49%, the
decline of .63% in the interest income ratio was significantly greater.
One of the factors that contributed to the decrease in the net interest
margin was the Bank's 100.8% increase in investment securities. At June 30,
1999, investment securities totaled $109,499,000, up $54,979,000 from the
prior year's balance of $54,520,000. The yield from investment securities is
dramatically less than that received from the loan portfolio; for example,
investment securities at quarter-end June 1999 had an average return of
6.08%, as compared to 8.19% for the loan portfolio.
The reason for the Bank's sudden increase in investment securities is
somewhat arcane. Under certain conditions the relationship between Tier I and
risk-adjusted capital is such that low-rate investment securities, because of
their advantaged risk-adjusted capital status, can be acquired at rates of
return on equity that are equal to or greater than portfolio loans.
Unfortunately, the disadvantage to acquiring those securities is that the net
interest margin is degraded.
Although investment securities will continue to be purchased in the normal
course of business, the Bank has no present intent to acquire securities on
the scale that occurred in the first half of 1999.
Net interest income year-to-date 1999 rose $714,000, or 8.4%, over the
comparable period in 1998. Like the second quarter, the improvement in net
interest income was the result of a growth in earning
Page 14 of 26
<PAGE>
assets. Greater earning assets contributed $1,120,000, which was partially
offset by an unfavorable variance of $406,000 in interest rates. See Note 6
for further information regarding volume and rate relationships affecting net
interest income.
Although the Bank's loan portfolio is composed of adjustable-rate loans,
totaling 86% of the portfolio, a sharp and rapid rise in interest rates would
most likely further degrade the net interest margin. Rising interest rates
generally increase the Bank's cost of funds faster than the yield on earning
assets.
The provision for loan losses increased from $100,000 in the second quarter
of 1998 to $285,000 in the like period in 1999. The provision for loan losses
reflects the amount deemed appropriate to produce an adequate reserve for
possible loan losses inherent in the risk characteristics of the Bank's loan
portfolio. In determining the appropriate reserve balance, the Bank takes
into consideration the local and national economic outlook and the historical
performance of the loan portfolio.
Of keen interest to the Bank is the mix of its loan portfolio. Currently
19.6% of the portfolio is residential loans, and the remaining 80.4% is
composed of commercial, construction, and consumer loans. The residential
figure of 19.6% compares, according to the first-quarter 1999 FDIC QUARTERLY
BANKING PROFILE (latest available data), to 72.1% for FDIC-insured thrift
institutions and 23.5% for FDIC-insured commercial banks. Management's
assessment of this information is that its loan portfolio is closely related
to that of a commercial bank.
The Bank's loan loss reserves to total loans ratio was 1.47% at June 30,
1999. The comparable ratios for FDIC-insured savings institutions and
commercial banks, as of March 31, 1999, were .96% and 1.78%, respectively.
Although the Bank's loan mix is similar to that of a commercial bank, and
therefore arguably its ratio of loan loss reserves to total loans should
correspond to the national average, management believes that the Bank's
current ratio of nonperforming loans to assets warrants favorable
consideration. As of quarter-end June 1999 the Bank's nonperforming assets to
total assets ratio was .06%. That number compares to the state thrift average
of .41% as of December 31, 1998, and the national ratios of .68% for savings
institutions and .67% for commercial banks as of March 31, 1999.
In summary, the Bank's provision for loan loss reserves is based on
historical credit analysis and an assessment of local and national economic
conditions, and it appears to be reasonable in light of the national ratio
for comparable loan portfolios, when tempered by the Bank's favorable
nonperforming asset status.
OTHER OPERATING INCOME
Gain on sale of loans, which amounted to $383,000 in the second quarter of
1999, is up 24.9% from $307,000 in the like quarter of 1998, and is comprised
of three distinct categories--sale of mortgage servicing rights, secondary
market fees, and mortgage servicing rights.
The gain from the sale of servicing rights totaled $348,000 in the quarter
ending June 30, 1998, as compared to $550,000 this year. In the second
quarter of last year the Bank sold $25 million, which compares to a sale of
$40 million in the like period this year.
Year-to-date the gain from the sale of servicing amounted to $1,192,000 in
1998 and $1,022,000 this year. Total sales in 1998 were $118 million, and
substantially greater than the $72 million in servicing sales in 1999. In the
first quarter of last year the Bank sold approximately one-third of its
servicing portfolio, $93 million, to mitigate the risk of an early prepayment
of the servicing portfolio.
The Bank is committed this year to a best-efforts contract to sell servicing
rights on a quarterly basis. In the third quarter the sale of the servicing
portfolio is expected to be approximately $28 million, which is
Page 15 of 26
<PAGE>
30% less than the $40 million sale executed in the second quarter. Because of
the rise in interest rates experienced in the first half of 1999 the Bank
expects that the sale of servicing in the fourth quarter of 1999 will be
substantially less than that anticipated in the forthcoming third quarter.
Secondary market fees are the cash gains or losses from the sale of loans
into the securities market. Cash losses on loan sales of $39,853,000 in the
second quarter of 1999 totaled $267,000. That figure compares to a loss of
$96,000 on loan sales of $63,787,000 in the same quarter of 1998. The
unfavorable comparison between 1998 and 1999 is attributable to both less
favorable market conditions in 1999, and a decision this year to sell all of
the servicing rights to third parties. In prior years a portion of the
servicing rights had been sold to Fannie Mae to mitigate the loss from
secondary market sales.
The year-to-date trend from the gain on sale of loans is similar to the
second quarter results. In the first six months of 1999 income declined
$185,000, from a loss of $289,000 in 1998 to a loss of $474,000.
The gains recorded for mortgage servicing rights are pursuant to Statement of
Financial Accounting Standard (SFAS) No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, which
requires the capitalization of internally generated servicing rights. The
amount recognized as income in the second quarter of 1998 totaled $54,000, as
compared to $100,000 in the same period of 1999. The increase in mortgage
servicing rights (MSR) income is largely the result of the change in practice
discussed earlier of discontinuing the sale of a portion of the servicing
rights to Fannie Mae.
The year-to-date results for MSR gains are comparable to the second quarter.
MSR gains on loan sales of $90,911,000 in 1999 amounted to $229,000, as
compared to $79,000 on loan sales of $99,939,000 a year earlier. Again, the
change with Fannie Mae as to the amount of servicing retained by the Bank
favorably affected the MSR gains realized in 1999.
Servicing fee income fell 11.6%, from $129,000 in the three months ending
June 30, 1998, to $114,000 in the like quarter of 1999. Year-to-date
servicing fee income is down $25,000, or 9.9%. In both the second quarter and
year-to-date figures, servicing fee income was impacted by the size of the
servicing portfolio, and the amount of amortization and loan prepayment
interest netted against fee income. The servicing portfolio totaled $298
million at June 30, 1998, and has since declined to $237 million. The sale of
servicing throughout 1998 and into the first half of this year has slowly
eroded the balance of the portfolio. As it is the intent of management to
continue the sale of servicing in 1999, the servicing portfolio will probably
continue to decline.
A constructive influence in 1999 has been the decrease in the amortization of
deferred loan origination costs and the loan prepayment interest expense.
Those two elements of expense totaled $100,000 in the second quarter of 1998,
dropping 24% to $76,000 in the comparable quarter of this year. Year-to-date
the costs netted against service fee income have declined 24.7%, from
$227,000 in 1998 to $171,000 this year.
As was noted earlier, although management currently anticipates the sale of
newly-originated loan servicing assets, any number of events could occur to
alter that policy, to include the amount of residential loans originated, and
the Bank's assessment as to the relative benefits of selling or retaining
servicing assets.
Fee income from deposits rose $43,000, or 85.7%, in 1999 on a
quarter-to-quarter comparison. Contributing to the gain in deposit fees was
the growth in money market and checking accounts. At June 30, 1998, money
market and checking accounts totaled $85,328,000, and represented 21.4% of
total deposits. At the end of second quarter 1999 the balance of those
accounts was $103,413,000, and
Page 16 of 26
<PAGE>
represented 26.2% of total deposits. In addition to the growth of
fee-producing accounts the Bank has focused its attention on collecting the
fees that it is due.
The year-to-date results for fees on deposits are comparable to the second
quarter in that income has risen $62,000, or 62.4%. The same trends
offsetting the second quarter favorably influenced the year-to-date figures.
OPERATING EXPENSES
Salaries and employees benefits declined 11.5%, from $1,899,000 in the second
quarter of 1998 to $1,680,000 in the same period this year. The drop in
compensation costs is the result of a number of offsetting variables--bonus
compensation for the staff, commissions paid to loan officers, and SFAS No.
91 benefits.
Bonus compensation for the staff declined from $358,000 in the second quarter
of 1998 to $85,000 in the same period this year. Year-to-date bonus
compensation amounted to $392,000 in 1998, a figure only modestly greater
than the $384,000 expense in the first half of 1999. Bonus compensation is
largely composed of the staff performance bonus, which is accrued throughout
the year based on the Bank's estimate of its obligation at year-end. It is
not uncommon for quarter-to-quarter comparisons to vary depending on the
outlook for net income at any point in time.
Commissions paid to loan officers dropped dramatically in the second quarter
of 1999, from $273,000 in 1998 to $133,000 this year. For the first six
months of 1999 loan officer commissions amounted to $325,000, down 15.1% from
$383,000 in the like period of 1998. Residential loans, which constitute the
predominant source of commission expense, fell from $58 million in the second
quarter of 1998 to $28 million in the same quarter this year. Because of the
increase in mortgage rates since the first of the year, the Bank anticipates
that the third and fourth quarters of 1999 will continue to experience a
sharp drop in residential loan originations as compared to the last half of
1998. Accordingly, loan officer commission expense should continue to be
significantly less than that incurred in the prior year.
Also affecting compensation expense is the capitalization of direct loan
origination costs, as required by SFAS No. 91. In accordance with SFAS No.
91, standard loan costs are determined annually for common loan types. The
predetermined standard loan costs are deducted from operating expenses with
the net figures reported in the financial statements. Both the volume of
loans originated in a period and the type of loans will affect the amount
capitalized. In the second quarter of 1998, direct incremental costs totaling
$399,000 were netted against salaries and employees benefits expense. The
comparable figure for the same period in 1999 is $277,000. Year-to-date the
SFAS No. 91 benefit amounted to $773,000 in 1998, as compared to $627,000
this year.
The direction for salaries and employees benefits for the first six months of
1999 parallels that of the second quarter. Salaries and benefits dropped
$517,000, or 12.5%. In addition to the items previously discussed, costs were
further impacted in the first half of 1998 from discretionary bonuses,
totaling $808,000, paid to directors and senior management.
Other operating expenses increased 32.6%, from $692,000 in the second quarter
of 1998 to $918,000 in the like period in 1999. The comparable figures for
the first six months of 1998 and 1999 were $1,366,000 and $1,650,000,
respectively. The key variants in expense were legal and outside services.
Legal costs jumped from $19,000 in the three months ending June 30, 1998, to
$109,000 this year. The year-to-date totals were $45,000 in 1998 and $216,000
in 1999. The increase in expense in both periods is largely due to the
formation of a bank holding company. The Bank is hopeful that the holding
company will be approved in the third quarter. Outside service costs also
increased in the second quarter and year-to-date 1999. Second quarter
expenses rose from $16,000 in 1998 to $107,000 this year. In
Page 17 of 26
<PAGE>
the first half of 1999 expenses totaled $138,000, as compared to
$33,000 a year earlier. In July of last year the Bank engaged outside
consultants to review the operating procedures of the Bank and to implement
improvements as needed. That project was completed in the second quarter of
1999, and consulting costs associated with that project have ceased.
NET INCOME
Net income increased 15.1%, from $1,277,000 in the second quarter of 1998 to
$1,470,000 in the second quarter of 1999. The improvement in net income was a
reflection of higher net interest income, improved fee income, and reduced
operating expenses.
BUSINESS SEGMENTS
The Bank has identified three distinct segments of business for the purposes of
management reporting. (See Note 7 to the Financial Statements.) Segment results
are determined based on the Bank's management accounting process, which assigns
balance sheet and income statement items to each responsible business unit. This
process is dynamic and somewhat subjective. Unlike financial accounting, there
is no body of guidance for management accounting equivalent to generally
accepted accounting principles.
The management accounting process measures the performance of the business
segments based on the management structure of the Bank and is not necessarily
comparable with similar information for any other financial institution. Changes
in management structure and/or the allocation process may result in changes in
allocations, transfers, and assignments.
CONSUMER BANKING
Income before taxes for the consumer-banking segment dropped sharply from
$304,000 in the second quarter of 1998 to $256,000 in the same quarter in 1999.
Adversely impacting the consumer-banking segment was a decline in non-interest
income and increased operating expenses, both of which were partially
compensated for by an increase in net interest income.
Non-interest income fell from $156,000 in the three months ending June 1998, to
$142,000 in the same quarter this year. The decline in non-interest revenues for
the consumer-banking segment is principally due to the decrease in fee income in
the Home Equity Loan Department. Fee income in the second quarter of 1999
amounted to $4,000, a drop of $30,000 from the same period in 1998. Loan sales
in that department are down substantially in 1999, as compared to the second
quarter of 1998.
Operating expense rose $46,000, or 3.2%, on a quarter-to-quarter comparison.
Operating expenses would have further increased if not for the decline in staff
bonus compensation, which dropped $273,000, or 76.3% bankwide.
Net interest income was up slightly, $12,000, for this business segment, rising
from $1,594,000 in the second quarter of 1998 to $1,606,000 this year. The net
interest margin remained the same for both periods at 1.61%. Contributing to the
modest .75% increase in net interest income was the de minimus growth in average
assets, to $398,387,000 in the second quarter of 1999, as compared to
$396,929,000 last year.
The trend year-to-date is similar to the second quarter, although the decline in
income before tax is far more dramatic, dropping 43.5% from $881,000 in the
first half of 1998 to $498,000 this year. Non-interest income was down,
operating expense rose, and net interest income declined.
Page 18 of 26
<PAGE>
Non-interest income for the first six months of 1998 totaled $287,000, as
compared to $272,000 this year. Again, the Home Equity Department accounted for
most of that decline, wherein fee income decreased from $52,000 in the first
half of 1998 to $18,000 in 1999.
Operating expenses were up $262,000, or 9.6% on a six-month-to-six-month
comparison. Impacting the first half of 1999, as compared to 1998, was a full
six-month's operating expenses for the Bellingham Office, as compared to only a
few months in 1998.
Net interest income fell $106,000, or 3.17%, from $3,323,000 in the first half
of 1998 to $3,218,000 in 1999. Although average assets, year-to-date 1999, are
$406,740,000, as compared to $387,133,000 in 1998, the decline in net interest
margin more than offsets the growth in assets. The net interest margin for the
six months ending June 30, 1998, was 1.72%, which compares to 1.58% year-to-date
1999.
RESIDENTIAL LENDING
Income before taxes increased $69,000, or 21.1%, for the residential lending
segment, from $326,000 in the second quarter of 1998 to $394,000 in 1999. This
segment benefited more from timing than a change in core earnings. The Bank
executed a sizable sale of servicing at the same time that residential loan
originations dropped, resulting in a decrease in loan officer commissions.
The Bank executed a sale of the mortgage-servicing portfolio of $40 million in
the second quarter of 1999. That figure compares to a sale of $25 million in the
same quarter of 1998, and $32 million in the first quarter of this year. The
sale of servicing is expected to drop to $28 million in the third quarter of
1999, with a substantial further decline in the fourth quarter.
Because of the materially larger sale of servicing in the second quarter of
1999, as compared to the previous year, non-interest income rose $111,000, or
27.9%, from $398,000 in 1998 to $509,000 this year.
Operating expenses dropped $42,000, or 7%, from $594,000 in the three months
ending June 30, 1998, to $553,000 in the like period of 1999. Contributing to
that decrease in operating expenses was a decline in commissions paid to loan
officers, from $220,000 in the second quarter of 1998 to $62,000 this year.
Residential loan originations totaled $58 million in the second quarter of 1998,
and have dropped to $28 million this year. The Bank anticipates that the third
and fourth quarters of 1999 will continue to experience a decrease in
residential loan originations.
Net interest income also declined for this business segment, from $522,000 in
the second quarter of 1998 to $438,000 this year. Average assets fell for this
segment, from $136,759,000 at June 30, 1998, to $93,745,000 a year later. On a
positive note, the net interest margin improved significantly, from 1.53% in the
second quarter of 1998 to 1.87% in 1999. For a number of years the Bank has
favored commercial real estate, consumer, and business banking loans over
residential home products, as the average yields on those loans are
significantly higher than residential loans.
The year-to-date trend for residential lending is a sharp contrast to that of
the second quarter. Net income before taxes is down $330,000, or 28.2%, from
$1,172,000 in the first half of 1998 to $842,000 this year. Both non-interest
and net interest income are down and operating expenses have increased.
Non-interest income fell from $1,165,000 in the first six months of 1998 to
$1,052,000 this year. The drop in non-interest income is principally related to
the unusually large sale of servicing, $93 million, in the first quarter of
1998. In the first quarter of last year the Bank sold approximately one-third of
its servicing portfolio to mitigate the risk of an early prepayment of the
servicing portfolio.
Page 19 of 26
<PAGE>
Net interest income also declined, from $1,003,000 in the first half of 1998 to
$933,000 in the like period of 1999. Although the net interest margin increased
for this segment, from 1.59% in 1998 to 1.91% this year, the fall in average
assets, from $126,435,000 in 1998 to $97,503,000 this year, more than offset the
improvement in the net interest margin.
Operating expenses increased $146,000, or 14.7%, from $996,000 in the first two
quarters of 1998 to $1,142,000 this year. Even though loan officer commission
expense declined on a year-to-date basis, from $322,000 in 1998 to $212,000 this
year, the decrease in SFAS No. 91 benefits exceeded the drop in commission
expense. Because of the decline in residential loan volume, from $121,770,000
year-to-date 1998 to $76,769,0000 this year, the SFAS No. 91 benefit fell from
$298,000 in the first half of 1998 to $178,000 in 1999.
COMMERCIAL LENDING
Income before taxes for this business segment rose $289,000, or 20.5%, from
$1,414,000 in the second quarter of 1998 to $1,704,000 in the like period of
1999. Net interest revenue grew $347,000, while operating expenses increased
$79,000.
Net interest revenue benefited from a $46,555,000, or 18.4%, increase in average
assets. Average assets rose from $253,077,000 in the second quarter of 1998 to
$299,632,000 this year. Partially offsetting the benefit from the growth in
assets was a modest decline, from 3.36% in 1998 to 3.30% this year, in the net
interest margin.
Operating expenses rose $79,000, or 10.1%, from $779,000 in the second quarter
of 1998 to $858,000 in the like quarter of 1999. Increased operating costs were
largely due to a rise in loan officer commissions in the Income Property
Department, and greater operating costs in the business banking area.
In contrast to the residential lending segment, where commission expense
declined in the second quarter of 1999, commission expense in the commercial
lending segment rose 40%, from $50,000 in the second quarter of 1998 to $70,000
in the like period of 1999. Also contributing to the increase in operating costs
for this business segment was the expansion of the business banking function.
Costs associated with that activity have increased 34.9%, from $66,000 in the
second quarter of 1998 to $89,000 this year.
The year-to-date trend parallels the second quarter. Income before federal
income taxes has risen $532,000, or 19.5%, from $2,733,000 in 1998 to $3,265,000
in 1999. Net interest revenue is up 17.6%, and operating costs have increased
11.8%.
Net interest income jumped $718,000, from $4,075,000 in the first two quarters
of 1998 to $4,793,000 in the same period in 1999. Average assets have grown
17.7%, from $246,691,000 in 1998 to $290,309,000 this year. The net interest
margin remained the same for both periods at 3.30%.
Operating expenses year-to-date are up $176,000, from $1,487,000 in the first
half of 1998 to $1,663,000 this year. Like the second quarter, commission
expense and increased operating costs for the Business Banking Department
contributed significantly to the year-to-date difference. Commission expense for
the first six months of 1999 was $111,000, as compared to $59,000 a year ago.
Commercial real estate loans originated amounted to $71 million in 1999, which
compares to $58 million in the prior year. Costs related to the business banking
function were $190,000 year-to-date 1999, as contrasted with $126,000 in 1998.
Page 20 of 26
<PAGE>
FINANCIAL CONDITION
Assets increased 8.4%, from $489,230,000 at year-end 1998, to $530,362,000 as of
June 30, 1999. The change in assets is principally the result of an increase in
portfolio loans and investment securities, offset by a decline in loans held for
sale.
Loans receivable rose from $365,104,000 at year-end 1998, to $391,975,000, an
increase of 7.4% in six months. The growth in loan balances is largely due to an
increase in the commercial real estate loan portfolio. Loan originations for
commercial real estate totaled $71 million in the first half of 1999 as compared
to $58 million in the same period the previous year.
Loans held for sale declined 48.5%, from $27,371,000 at year-end 1998, to
$14,104,000 as of June 30, 1999. Due to generally rising interest rates, loans
originated for mortgage banking activities have dropped on a year-to-year
comparison by $31,116,000, or 28.6%. Interest rates have continued to increase
since June 30, 1999, which would at the present time most likely indicate a
further decrease in loan originations and loans held for sale.
Security investments (securities available for sale and mortgage-backed and
other securities held to maturity) increased $27,398,000, or 33.4%, from
December 31, 1998, to the end of the second quarter 1999. As was noted earlier,
the Bank acquired investment securities to take advantage of a favorable
relationship between its Tier 1 and risk-adjusted capital ratios.
The Bank classifies investment securities in one of the following categories: 1)
trading, 2) available for sale, or 3) held to maturity. Securities classified as
AVAILABLE FOR SALE are reviewed regularly and any unrealized gains or losses are
recorded in the shareholders' equity account. At June 30, 1999, the balance of
the unrealized loss, net of federal income taxes, was $530,000, which compares
to an unrealized loss at year-end 1998 of $12,000. Generally, falling interest
rates will increase the amount recorded as unrealized gain, and rising rates
will decrease any unrealized gains, as the market value of securities inversely
adjusts to the change in interest rates.
Real estate held for sale and nonperforming loans totaled $296,000 at June 30,
1999, and constituted a ratio of .06% of assets. That figure compares to the
national thrift average of .68% (FDIC Quarterly Banking Profile, first quarter
1999).
Deposits declined $15,965,000, or 3.9%, in the first six months of 1999. The
Bank is concerned about this trend as continued erosion of the deposit base
could eventually seriously degrade the Bank's ability to fund the growth of
earning assets. Actions taken to date to correct this problem include new
leadership at the division level, new incentive programs for the branch managers
and assistant managers, and new performance evaluation models. The recent
results from those changes have been encouraging. Deposits reached a low point
of $390 million in May and as of July 31, 1999 have returned to $399 million, a
2.3% improvement in two months.
The Federal Home Loan Bank (FHLB) advances grew from $31,765,000 at year-end
1998 to $91,543,000 as of the end of the second quarter. The $59,778,000, or
188.2%, increase in FHLB advances largely reflects the $27 million rise in
security investments, the $14 million growth in loans, and the $16 million drop
in deposits. As of June 30, 1999, the Bank had the capacity to borrow up to $186
million in FHLB advances, subject to sufficient collateral to support those
advances. At the present time the Bank is capable of funding its banking
activity through its credit line with the FHLB. However, management believes
that continued reliance on the FHLB and other wholesale sources of funds is less
desirable than the utilization of retail deposits.
Page 21 of 26
<PAGE>
LIQUIDITY AND CAPITAL RESERVES
Cash, as reported in the Statement of Cash Flows, fell by $213,000 in the first
six months of 1999. The deposit flows for the first half of 1999 were negative,
and the Bank added substantially to its investment securities and loan
portfolios.
The Bank's long-term liquidity objective is to fund growth through consumer
deposits. Whenever that source is inadequate to meet the Bank's asset growth
requirements, FHLB advances are normally accessed. The current ratio of FHLB
advances to assets is 17.3%, which is below the Bank's credit limit of 35% of
assets. Other sources of liquidity include the sale of loans into the secondary
market, net income after the payment of dividends, and reverse repurchase
agreement credit lines of $82,000,000.
The FDIC's statutory framework for capital requirements establishes five
categories of capital strength, ranging from a high of well capitalized to a low
of critically under-capitalized. An institution's category depends upon its
capital level in relation to relevant capital measures, including a risk-based
capital measure, a leverage capital measure, and certain other factors. At June
30, 1999, the Bank exceeded the capital levels required to meet the definition
of a well-capitalized institution:
<TABLE>
<CAPTION>
First Mutual FDIC requirement
Savings Bank for well-capitalized
June 30, 1999 institutions
------------- --------------------
<S> <C> <C>
Leverage Ratio 7.17% 5.00%
Tier I Risk-Based Capital Ratio 10.34% 6.00%
Total Risk-Based Capital Ratio 11.59% 10.00%
</TABLE>
YEAR 2000 ISSUES
The paragraphs in this section constitute a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act. The Bank
relies on third-party vendors for almost all of its data processing and
telecommunications systems. Consequently, its efforts to ensure that the Bank is
ready for Year 2000 and that there are no meaningful interruptions to its
operations are necessarily dependent on the performance of those vendors and
adequate testing by the vendors and the Bank.
To date the Bank has conducted a comprehensive review of its computer systems to
identify applications that could be affected by Year 2000. It has surveyed its
vendors to find out their status in addressing Year-2000 issues and has
monitored their progress.
The Bank's primary data processor supports its deposit, loan, general ledger,
customer information file, accounts payable, and fixed-assets accounting
systems. This processor completed its programming efforts during the second
quarter 1998 and indicated that the Bank was now running, on what the processor
believed, was Year-2000-ready software and hardware. During the third quarter
the Bank conducted an extensive test of the software on a separate test computer
provided by the processor to its clients. The computer was set ahead to the end
of 1999 and rolled through January 3, 2000; in addition, it was also run through
the end of February 2000 to test for leap year. Only a few minor errors were
identified, and not all of them were date related. The processor has reported
that all errors discovered by its clients during testing have been corrected.
All of the other dates recommended for testing by the Federal Financial
Institutions Examination Council were separately tested by the processor; a
single Year-2000-related error was discovered, and it has been corrected. This
processor will not be charging the Bank, nor its other clients, for expenses
related to remediating its software to address Year-2000 issues.
Page 22 of 26
<PAGE>
In the Bank's initial assessment, most of the Bank's other third-party vendors
indicated that their systems would be Year-2000 ready by the end of 1998. The
Bank has tested those systems judged to be critical to its operations. Many of
these services (such as check processing, automated teller machine transactions,
automated clearinghouse transactions, and investor reporting) interface with the
Bank's primary data processor, and were tested in conjunction with that
processor. The testing was completed by June 30, 1999, and no material problems
were discovered.
While the Bank does not operate any mainframe computers, it does run several
local area networks to support personal-computer workstations running
standardized word processing, spreadsheet, and database software to support its
operations. All models of the personal-computer workstations, and most of the
individual workstations, have been tested for Year-2000 functionality. All of
the workstations are Year-2000 ready. A total of six personal computers have
been replaced through normal attrition; one of the servers for a local area
network likewise needed replacement. The Bank anticipates no other material
expense related to their replacement. Likewise, the standardized software has
been tested for all critical systems and found to be Year-2000 ready. The Bank
does not expect that any additional material investment will be required to
replace any of the personal-computer hardware or software at this point in time.
If it becomes advisable to replace one or more of these systems, the investment
would likely be a material amount.
In addition to computer software, it is possible that computer hardware and
other equipment used in the Bank's operations or buildings may have
microprocessors with Year-2000 issues. Most of the hardware involved in the
Bank's networks and work stations has been replaced over the past several years
for reasons unrelated to Year 2000. In addition, surveys have been completed of
items such as heating and cooling systems, vault doors, automated teller
machines, and security systems. No material investments are expected related to
Year-2000 readiness for these ancillary systems.
Most of the Bank's costs in this effort has involved the time of its existing
staff; no one has been hired whose job is primarily related to Year-2000 issues.
The Bank does not expect the cost of this project to have a material effect on
its financial position or results of operations. The costs of changing to
alternate vendors, or replacement of one or more in-house systems, would be
material and, while not expected, could be incurred if, despite satisfactory
testing, a system or service provides performance results which are unacceptable
to the Bank.
After the Bank identified its significant vendors, it concentrated its efforts
on determining where they are in the process of ensuring their services will be
Year-2000 ready, monitoring their progress, and testing their systems. A
contingency plan to deal with systems that may unexpectedly fail once Year 2000
arrives has been completed. Training on alternate procedures should a system
fail and testing the use of those procedures will occur during the third and
fourth quarters of this year.
The Bank's operations are very dependent on the availability of utility services
such as electrical power and telephone services. The Bank is monitoring their
progress on Year-2000 preparedness through information posted by them on the
Internet.
The Bank operates within the lending and banking community including the check
clearing houses. In common with other financial institutions, it has the
inherent risk that a failure of any significant system of interchange among the
financial institutions, or the failure of a system within one or more large
banks in the Bank's geographic area, could have a material adverse effect on the
Bank.
While the Bank currently believes that Year 2000 will not pose significant
operational problems, there can be no assurance that its systems and the systems
of other companies on which the Bank relies will perform in all respects as
expected from testing, or that any significant failures would not have a
material impact on the operations of the Bank.
Page 23 of 26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Bank's Market risk position
from the end of the preceding fiscal year, December 31, 1998.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
First Mutual has certain litigations and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a material adverse effect on
the Bank's financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Shareholders of First Mutual Savings Bank was
held on April 22, 1999. The results of votes on the matters presented at the
Meeting are as follows:
1. The following individuals were selected as directors, each for a
three-year term:
<TABLE>
<CAPTION>
Votes for Votes withheld
--------- --------------
<S> <C> <C>
Mary Case Dunnam 3,959,663 36,563
George W. Rowley, Jr. 3,962,601 33,625
John R. Valaas 3,961,814 34,412
H. Scott Wallace 3,960,974 35,252
</TABLE>
The terms of Directors F. Kemper Freeman, Jr., James J. Doud, Jr., Janine
Florence, Victor E. Parker, Richard S. Sprague, William E. Tremper, and Robert
C. Wallace continue.
ITEM 5. OTHER INFORMATION
The Bank filed notices and applications with the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Bank (FRB), and the Washington
State Department of Financial Institutions to effect a corporate reorganization
culminating in the formation of a bank holding company to be named First Mutual
Bancshares, Inc. Upon consummation of the transaction, First Mutual Savings Bank
will become a subsidiary of the holding company and will be named First Mutual
Bank. The FDIC, FRB, and the Washington State Department of Financial
Institutions have conditionally approved the transaction. There is no change in
control associated with this reorganization.
Page 24 of 26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the quarter, the Bank did not file any Current Report on Form
8-K.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Except for historical information, matters described herein are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. They are subject to risks and uncertainties that could cause actual
results to differ materially. Among these are governmental fiscal policy,
general interest rate changes, and other economic, competitive and operational
factors.
These are some examples. Management's expectations concerning Year 2000 costs
are based on test results to date. These expectations may not be achieved if
additional testing, or the Bank's operating experience, show that greater
changes are necessary. The Bank's goal to increase its non-residential lending
depends upon healthy economic growth in the Bank's local area, as well as
competitive factors. If generally adverse economic conditions were to prevail,
the goal would be less likely to be realized and the goal itself might be
revised. The sale of servicing rights is a decision based in part on interest
rate expectations, as to which there is no certain predictability. The market
for servicing rights is similarly affected by the interest rate expectations of
potential purchasers. It is possible that the Bank may, at times, be unable to
market servicing rights at a price acceptable to the Bank.
First Mutual Savings Bank disclaims any obligation to announce publicly future
events or developments which affect the forward-looking statements herein.
Page 25 of 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MUTUAL SAVINGS BANK
/s/ John R. Valaas
------------------------------
John R. Valaas
President and Chief Executive Officer
/s/ Roger A. Mandery
------------------------------
Roger A. Mandery
Executive Vice President
(Principal Financial Officer)
Page 26 of 26
<PAGE>
March 19, 1999
Dear Shareholder:
It is our pleasure to invite you to attend the Annual Meeting of
Shareholders of First Mutual Savings Bank to be held at the Hyatt Regency
Bellevue, Bellevue, Washington, on April 22, 1999 at 3:00 p.m. local time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting we will also
report on the operations of the Bank. Directors and officers of the Bank, as
well as a representative of Deloitte & Touche, will be present to respond to any
questions our shareholders may have.
Please sign, date and return the enclosed proxy card. If you attend the
meeting, you may vote in person even if you have previously mailed a proxy card.
Your continued interest in and support of First Mutual Savings Bank are
sincerely appreciated.
Sincerely,
John R. Valaas
President and Chief Executive Officer
- ------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR BANK THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
- ------------------------------------------------------------------------------
<PAGE>
FIRST MUTUAL SAVINGS BANK
400 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 22, 1999
Notice is hereby given that the 1999 Annual Meeting of Shareholders
(the "Meeting") of First Mutual Savings Bank (the "Bank") will be held at the
Hyatt Regency Bellevue, 900 Bellevue Way N.E., Bellevue, Washington, on April
22, 1999 at 3:00 p.m. local time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of four directors of the Bank; and
2. Such other matters as may properly come before the Meeting or
any adjournments thereof.
NOTE: The Board of Directors is not aware of any other
business to come before the Meeting.
Pursuant to action by the Bank's Board of Directors and the Bank's
Bylaws, shareholders of record at the close of business on March 8, 1999 are the
shareholders entitled to vote at the Meeting and any adjournments thereof.
You are requested to fill in and sign the enclosed form of proxy, which
is solicited by the Board of Directors, and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Meeting in
person.
BY ORDER OF THE BOARD OF DIRECTORS
Phyllis A. Easterlin
Secretary
Bellevue, Washington
March 19, 1999
<PAGE>
FIRST MUTUAL SAVINGS BANK
400 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
(425) 455-7300
PROXY STATEMENT
- -------------------------------------------------------------------------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 22, 1999
- -------------------------------------------------------------------------------
This Proxy Statement is being furnished on or about March 19, 1999 in
connection with the solicitation by First Mutual Savings Bank ("First Mutual" or
the "Bank") of proxies in the form enclosed for use at the 1999 Annual Meeting
of Shareholders (the "Meeting"), to be held at the Hyatt Regency Bellevue, 900
Bellevue Way N.E., Bellevue, Washington, on April 22, 1999 at 3:00 p.m. local
time.
- -------------------------------------------------------------------------------
OUTSTANDING SHARES, VOTING AND REVOCATION OF PROXIES
- -------------------------------------------------------------------------------
Shareholders of record as of the close of business on March 8, 1999
(the "Record Date") are entitled to one vote for each share then held, which may
be voted in person or by proxy. As of the Record Date, the Bank had 4,247,275
shares of Common Stock issued and outstanding. The Bank did not have any other
class of equity security outstanding on the Record Date. Shareholders do not
have the right to cumulate votes for the election of directors. Shareholders who
execute proxies retain the right to revoke them at any time. Unless so revoked,
the shares represented by such proxies will be voted at the Meeting and all
adjournments thereof. Proxies may be revoked by written notice to the Secretary
of the Bank or the filing of a later proxy prior to a vote being taken on a
particular proposal at the Meeting. A proxy will not be voted if a shareholder
attends the Meeting and votes in person. Proxies solicited by the Board of
Directors (the "Board") of the Bank will be voted in accordance with the
shareholders' instructions. If no instructions are specified, the shares will be
voted FOR the election of management's nominees for directors and in accordance
with the best judgment of the persons appointed as proxies with respect to the
transaction of such other business as may properly come before the Meeting.
Shares that are subject to abstentions and broker non-votes are counted as
present for purposes of determining the presence of a quorum. Neither
abstentions nor broker non-votes are included in tabulations for voting for
directors. Abstentions will be included in tabulations of the votes cast for
purposes of determining whether a proposal other than election of directors has
been approved. Broker non-votes will not be counted for purposes of determining
the number of votes cast for a proposal other than election of directors.
<PAGE>
- -------------------------------------------------------------------------------
ELECTION OF DIRECTORS
- -------------------------------------------------------------------------------
Four directors will be elected at this meeting to serve for a
three-year term. The Board of Directors is presently set at eleven directors,
divided into three classes, each of whom serve for three years (and until their
respective successors have been elected and qualified), with one class elected
each year. The Bank's Bylaws provide that the Board of Directors will consist of
not less than nine but not more than 30 members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors has approved the
following nominees for directors, all of whom are currently directors:
GROUP II (TERMS TO EXPIRE IN 2002)
----------------------------------
Mary Case Dunnam
George W. Rowley, Jr.
John R. Valaas
H. Scott Wallace
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.
Election to the Board of Directors requires the approval of a majority
of the shares voting, assuming a quorum of the outstanding shares is present or
represented at the meeting. It is intended that the proxies solicited by the
Board of Directors will be voted for the election of the above named nominees.
If any nominee is unable to serve, the shares represented by all valid proxies
will be voted for the election of such substitute as the Board of Directors may
recommend, or the Board may reduce the number of directors to eliminate the
vacancy. At this time, the Board of Directors knows of no reason why any nominee
might be unable or unwilling to serve upon election.
The following table lists the groups, names and ages of the nominees
and other directors, the nature and amount of their beneficial ownership of
Common Stock, and the amount and nature of the ownership of the Bank's Common
Stock by each director, each named executive officer, and all directors and
executive officers as a group as of February 28, 1999.
-2-
<PAGE>
SECURITIES OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Positions Held (Director Shares Percent
Name Age Since) Beneficially Owned of Class
- ------------------------------- ------- ----------------------------- ------------------------ ----------------
NOMINEES:
<S> <C> <C> <C> <C>
GROUP II (terms to expire in 2002)
Mary Case Dunnam 50 Director (1993) 12,000 *
George W. Rowley, Jr. 57 Director (1992) 89,523(1) 2.11%
John R. Valaas 54 President, Chief Executive 183,412(2) 4.30%
Officer and Director (1992)
H. Scott Wallace 72 Vice Chairman of the Board 0 *
and Director (1976)
OTHER DIRECTORS:
- ---------------------------------------------------------------------------------------------------------------
GROUP I (terms to expire in 2001)
Janine Florence 50 Director (1985) 195,369(3) 4.60%
F. Kemper Freeman, Jr. 57 Chairman of the Board and 504,499(4) 11.88%
Director (1968)
Victor E. Parker 58 Director (1983) 73,387 1.73%
William E. Tremper 74 Director (1982) 35,240(5) *
GROUP III (terms to expire in 2000)
James J. Doud, Jr. 61 Director (1993) 6,262(6) *
Richard S. Sprague 67 Director (1973) 61,186 1.44%
Robert C. Wallace 53 Director (1985) 62,469(7) 1.47%
OTHER NAMED EXECUTIVE
OFFICERS:
- ------------------------------- ------- ----------------------------- ------------------------ ----------------
Roger A. Mandery 56 Executive Vice President 63,681(8) 1.49%
James R. Boudreau 51 Senior Vice President 70,978(9) 1.66%
Kenneth J. Walkky 50 Vice President 31,695(10) *
Robert J. Everett 61 Vice President 17,248(11) *
All directors and executive 1,530,562(12) 35.03%
officers as a group (25
persons)
</TABLE>
- ------------------------
*Less than one percent (1%) of outstanding shares
-3-
<PAGE>
(1) Includes 1,501 shares owned by one of Mr. Rowley's daughters who shares
his residence.
(2) Includes 22,477 shares held by Mr. Valaas' spouse, 7,425 shares held in
trust by Mr. Valaas and his spouse for their children, and 22,736 shares
that may be acquired pursuant to stock options exercisable within sixty
(60) days.
(3) Includes 24,774 shares held in trust for the benefit of Ms. Florence's
daughter, and 61,677 shares held in trust for the benefit of Ms.
Florence's sister.
(4) Includes 54,106 shares held by Mr. Freeman's spouse and 44,047 shares
held in trust for the benefit of Mr. Freeman's daughter. Also includes
205,606 shares owned by Bellevue Square Managers I Limited Partnership.
Mr. Freeman, together with members of his immediate family, beneficially
owns a 55.7% interest in the partnership.
(5) Includes 150 shares held by Mr. Tremper's spouse.
(6) Does not include 842,361 shares owned by Matthew G. Norton Co., of which
Mr. Doud is a business consultant, but not a beneficial owner of such
shares.
(7) Includes 28,105 shares owned by Wallace Properties Group, of which Mr.
Wallace is the managing partner, and 15,205 shares owned by Mr.
Wallace's spouse.
(8) Includes 21,180 shares that may be acquired pursuant to stock options
exercisable within sixty (60) days.
(9) Includes 2,478 shares held by Mr. Boudreau's spouse, 814 shares held in
trust by Mr. Boudreau and his spouse for their daughter and son under
the UGMA, and 21,180 shares that may be acquired pursuant to stock
options exercisable within sixty (60) days.
(10) Includes 1,536 shares held by Mr. Walkky's spouse and 8,393 shares that
may be acquired pursuant to stock options exercisable within sixty (60)
days.
(11) Includes 2,760 shares held by Mr. Everett's spouse and 1,683 shares that
may be acquired pursuant to stock options exercisable within sixty (60)
days.
(12) Includes an aggregate of 122,455 shares of common stock subject to stock
options exercisable within sixty (60) days of the record date and an
aggregate of 113,166 shares of common stock held by the Bank's Employee
Stock Ownership Plan ("ESOP").
-----------------------------
-4-
<PAGE>
As a matter of policy, the Bank does not make loans to directors and
officers, and the Bank does not make loans to employees for the purpose of
financing multifamily or income-producing properties. Any loans which benefit
(or appear to benefit) officers, directors or employees are fully disclosed to
the Loan Committee and may under some conditions be required to be approved by
the Investment Committee or Board of Directors.
The following biographies describe the business experience of each nominee
or continuing director and information concerning the director's community
activities in the Bank's market area.
NOMINEES FOR ELECTION AS DIRECTORS
MARY CASE DUNNAM is active as a volunteer in various community groups, including
Trustee to the Board of the Seattle Academy of Arts & Sciences, member of the
Development Council for the Burke Museum, and past member of the Boards of
Directors of the Seattle Children's Home and St. Joseph's School. She is a
homemaker and mother and a life-long Seattle resident. Ms. Dunnam's father, Mr.
Elwell Case, was one of the original founders of First Mutual Savings Bank.
GEORGE W. (SKIP) ROWLEY, JR. is the Chairman and Chief Executive Officer of
Rowley Enterprises, Inc., a diversified real estate management company based in
Issaquah, Washington, with investments in mining, resort operations,
warehousing, manufacturing, and investments in multiple residential, office and
mini-storage buildings. Mr. Rowley has been a leader in the community, raising
funds for the newly constructed Issaquah Youth and Community Center and the new
Issaquah Library. He served as President of the Greater Issaquah Chamber of
Commerce from 1993-1995 and was President and founding member of the Eastside
Chamber Legislative Coalition from 1994-1995. He sits on numerous boards
including: The Empty Space Theatre, Mobility 21 and United for Washington, both
political action committees, and the Eastside Transportation Committee. In 1996
Rowley Enterprises was awarded the prestigious "Best in the Northwest"
Washington Family Business of the Year Award.
JOHN R. VALAAS has served as the Bank's President and Chief Executive Officer
since February 1992. Previously Mr. Valaas had, since January 1990, served as
Senior Vice President and Manager of the Commercial Financial Services Division
for Seafirst Bank and in other positions of increasing responsibility at
Seafirst Bank and Bank of America. In addition to his responsibilities to First
Mutual Savings Bank, Mr. Valaas is a member of the Board of Overseers of Whitman
College and past Chairman of the Overlake Hospital Foundation, past President of
the Bellevue Art Museum, member of the Board of Directors for the Washington
Savings League, Board member of the Bellevue Chamber of Commerce, and Board
member and past Chairman of the Bellevue Downtown Association.
-5-
<PAGE>
H. SCOTT WALLACE, a lifelong resident of the Eastside and a 45-year dairy
operator in the lower Snoqualmie Valley, now resides in Bellevue. He is a
20-year past Director of Darigold Farms and Darigold Inc., a dairy manufacturing
and processing company. His family has been a King-Pierce County "Dairy Family
of the Year." Representing the north and east portions of King County, Mr.
Wallace was elected and served eight years as one of three King County
commissioners. His two terms in public office included a period as Chairperson
of the Board of King County Commissioners. He is a past Chairman and 12-year
Director of the Lower Snoqualmie Valley (now Riverview) School District. He is
not related to Robert C. Wallace, who is also a Director of the Bank.
OTHER DIRECTORS
JAMES J. DOUD, JR. is a business consultant and former Executive Vice President
and Chief Operating Officer of Matthew G. Norton Co., Seattle, Washington. He is
Secretary/Treasurer and Director for Brooks Range Supply and Vice President,
Treasurer and Chairman of the Finance and Audit Committee of the Western
Washington University Foundation. He is a past Director for Bellingham National
Bank, Washington Physicians Service, Whatcom Medical Bureau, National
Association of Boat Manufacturers, United Way of Bellingham, and Whatcom County
Chamber of Commerce.
JANINE FLORENCE is the owner of Cambridge Management and President of Property
Development Corporation, both of Bellevue, Washington, which companies are
involved in the leasing and development of commercial properties. Ms. Florence's
family founded and was part owner of Quality Food Centers, Inc. ("QFC")
supermarkets, for which Ms. Florence served as Vice President at the time the
chain was sold in 1986. She also served as Vice President of E. L. Leasing Co.
until 1988. Ms. Florence is a Board member and past Chair of the Bellevue
Downtown Association, a member of the Executive Board of the Chief Seattle
Council of the Boy Scouts of America, and a Board member of the Bellevue Schools
Foundation.
F. KEMPER FREEMAN, JR. is the third generation involved in the ownership and
development of Bellevue Square, a 1.2 million square foot regional shopping
center in Bellevue, Washington. Mr. Freeman's development company, Kemper
Development Company, has also developed the first phase of a mixed use project
called Bellevue Place. Bellevue Place currently includes the 382 room Hyatt
Regency Hotel and 475,000 square feet of office and retail space. Mr. Freeman is
a Past Chairman, the current Government Affairs Chairman and has served as a
Trustee of the International Council of Shopping Centers since 1987. He serves
as Chairman of the Board of First Mutual Savings Bank, and an Urban Land
Institute Council Member. Mr. Freeman also has a long history of involvement in
political and civic activities.
VICTOR E. PARKER is the President of Parker, Smith & Feek, Inc., Seattle,
Washington, insurance brokers. Mr. Parker serves on the Board of Trustees for
the Greater Seattle Chamber of Commerce and on the Board of Directors for
Western Washington University Foundation. He is a past Trustee of the National
Association of Insurance Brokers, past Trustee and past President of the Board
of Pacific Northwest Arts and Crafts Association-Bellevue Art Museum, past
Trustee and past President of the Association of Insurance Brokers-Pacific
Northwest, and a past
-6-
<PAGE>
Director of Assurex International. Mr. Parker was also a Trustee of Big Brothers
of Seattle-King County and of Lakeside School.
RICHARD S. SPRAGUE is General Counsel and Secretary of Bellevue Square Managers,
Inc. and a former partner in the law firm of Bogle & Gates. Mr. Sprague was
President of University Preparatory Academy and former President of Ronald
McDonald House, a charity providing lodging for families of children being
treated for serious illnesses at Children's Hospital & Medical Center. Mr.
Sprague previously served as Chairman of the Puget Sound Chapter of the March of
Dimes, President of the Center for Community Development, General Counsel to the
Seattle Chamber of Commerce, President of Greater Seattle, Inc. (Seafair),
President of the Washington Athletic Club, President of the Seattle Mental
Health Institute, and President of the University of Washington Alumni
Association. He is currently a member of the Board of Governors of Virginia
Mason Medical Center and a Director of the Virginia Mason Foundation.
WILLIAM E. TREMPER is a retired partner of Tremper & Co., Seattle, Washington,
certified public accountants. Mr. Tremper is past council member of the American
Institute of Certified Public Accountants, past President of Washington Society
of Certified Public Accountants, and past President of Overlake Golf & Country
Club.
ROBERT C. WALLACE is the founder and managing partner of Wallace Properties
Group and Chairman of Wallace Properties, Inc., investors in, and investment
managers and developers of, real estate. Mr. Wallace is past Chairman of the
Seattle Chamber of Commerce, the Bellevue Chamber of Commerce and the Bellevue
Downtown Association. He is Vice Chairman of the Washington State Major League
Baseball Stadium Public Facilities District and is currently Chairman of the
Bellevue Convention Center Authority. He has served as President of the Bellevue
Rotary Club, Director of the King County East Convention and Visitors Bureau,
and Founding Director of the Seattle-King County Economic Development Council.
He is not related to H. Scott Wallace, who is also a Director of the Bank.
-7-
<PAGE>
MEETINGS, COMPENSATION, RELATIONSHIPS AND
CERTAIN COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the
Board and through its committees. During 1998, the Bank held twelve regular
meetings and one special meeting of the Board of Directors, as well as numerous
committee meetings. No director in office in 1998 attended fewer than 75% of the
aggregate meetings of the Board of Directors and committees of the Board of
Directors on which he or she served, except Mr. Freeman and Mr. Parker. (Mr.
Freeman did not miss any Board meetings.)
In 1998, Mr. Freeman, as Chairman of the Board, was paid a monthly
director's fee of $2,200. Other directors received $600 per Board meeting
attended and $200 for each committee meeting attended. Each director who is not
a full-time paid employee of the Bank receives, if sufficient shares are
reserved under the Plan, for every four years of service after April 1994, an
option to acquire 6,264 shares of the Bank's Common Stock, par value $1.00 per
share (the "Common Stock") at a price equal to the fair value of the shares at
the time of the grant of the option. A stock option for 6,264 shares was granted
to all current directors on April 28, 1998. Each such option is exercisable for
six years and becomes exercisable 50% upon completion of one full year of
service after the grant of the option and the balance at the end of the second
year of service.
During 1998, the Bank purchased property, liability, casualty, medical
and other insurance for aggregate premiums of $109,337 through the insurance
brokerage firm of Parker, Smith & Feek, Inc., of which Mr. Parker is a
principal.
The Bank recently has engaged Robert C. Wallace and the real estate
brokerage firm of which he is a principal, Wallace Properties, Inc., to provide
real estate services to the Bank. The extent of activities under the engagement
and aggregate compensation have not been determined.
The Board of Directors acts as a Nominating Committee for selecting the
management nominees for election as directors. The Bank's Bylaws provide that
any recommendation to the Board of Directors (except one proposed by the
existing Board of Directors of the Bank) must be made in writing and received by
the Secretary of the Bank for the Nominating Committee on or prior to October 15
of the year preceding the meeting of shareholders called for the election of
directors. Accordingly, shareholder recommendations of individuals to be
considered for nomination to be elected as directors at next year's Annual
Meeting of Shareholders must be received by the Secretary of the Bank on or
prior to October 15, 1999.
The Investment Committee meets at least once per month and oversees the
investment practices, including hedging and lending activities, of the Bank.
During 1998, the Investment Committee was composed of Directors Doud, Florence,
Freeman, Parker, Rowley, Tremper, Valaas and Robert Wallace, and it met 50
times.
The Compensation Committee reviews compensation and bonus plans for the
Bank's employees, including compensation of executive officers. During 1998, the
Compensation
-8-
<PAGE>
Committee was composed of Directors Dunnam, Florence, Valaas, H. Scott Wallace
and Robert Wallace, and it met three times.
During 1998, the Stock Option Committee, which manages the Bank's Stock
Option and Incentive Plan, was composed of Directors Dunnam, Florence, H. Scott
Wallace and Robert Wallace, and it met one time.
The Audit Committee monitors the Bank's compliance with regulatory and
audit requirements and makes recommendations with respect to the Bank's
independent auditors and changes in accounting policies and procedures. During
1998, the Audit Committee was composed of Directors Doud, Florence, Sprague and
Tremper, and it met seven times.
The Loan Committee meets weekly to review, primarily, income property
loans, construction loans and business banking loans under consideration by the
lending departments. During 1998, the Committee was composed of the following
officers of the Bank: James Boudreau, Nancy Chermak, Roger Mandery, John Valaas,
Kenneth Walkky, Ronald Werth and James Young.
COMPLIANCE WITH INSIDER REPORTING REQUIREMENTS.
Officers and directors of the Bank and greater than ten percent (10%)
shareholders are required to report to the Federal Deposit Insurance Corporation
("FDIC") on a timely basis certain changes in their legal or beneficial
ownership of the Bank's stock. FDIC regulations require the Bank to disclose to
its shareholders any reporting violations occurring after May 1, 1991, which
came to the Bank's attention during the fiscal year based on a review of the
applicable filings required by the FDIC to report such changes in legal or
beneficial ownership. The Bank believes that during the fiscal year ended
December 31, 1998 its officers, directors and shareholders filed all required
forms.
- --------------------------------------------------------------------------------
1998 ANNUAL MEETING OF SHAREHOLDERS ELECTION VOTING RESULTS
- --------------------------------------------------------------------------------
At the Bank's 1998 Annual Meeting of Shareholders, four directors were
elected for a three-year term. Of the Bank's 4,134,811 issued and outstanding
shares eligible to vote at the 1998 Annual Meeting, 4,040,829 participated in
the election of directors (97.73%).
<TABLE>
<CAPTION>
Percentage of Shares Voted
Nominees For Withheld
- --------------------------------------------------------------------------------
<S> <C> <C>
Janine Florence 99.91% 0.09%
F. Kemper Freeman, Jr. 94.18% 5.82%
Victor E. Parker 99.91% 0.09%
William E. Tremper 99.90% 0.10%
</TABLE>
-9-
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
- --------------------------------------------------------------------------------
Persons and groups owning in excess of five percent (5%) of the Bank's
Common Stock are required to file certain reports regarding such ownership with
the Bank and the FDIC. The following table sets forth, as of February 28, 1999,
based on FDIC filings and other information available to the Bank, the shares
and percentage of Common Stock beneficially owned and held of record by each
person believed by the Bank to own more than 5% of the outstanding shares of the
Bank's Common Stock. None of the individuals or entities identified owns
beneficially, directly or indirectly, shares of any class of securities of the
Bank's subsidiaries.
<TABLE>
<CAPTION>
Amount and Nature Percent of Class
Name and Business Address of Beneficial Ownership of Common Stock
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Matthew G. Norton Co.
1300 Norton Building
801 Second Avenue 842,361 19.83%
Seattle, WA 98104
F. Kemper Freeman, Jr.
P.O. Box 4186
Bellevue, WA 98009-4186 504,499(1) 11.88%
First Mutual Saving Bank
Employee Stock Ownership Plan
400 108th Ave. N.E. 353,281(2) 8.32%
Bellevue, WA 98004
</TABLE>
- -----------------------------------------
(1) Includes 54,106 shares held by Mr. Freeman's spouse and 44,407 shares held
in trust for the benefit of Mr. Freeman's daughter. Also includes 205,606
shares owned by Bellevue Square Managers I Limited Partnership. Mr.
Freeman, together with members of his immediate family, beneficially owns a
55.7% interest in the partnership.
(2) Represents shares held by the ESOP, including 276,338 shares allocated to
participants' accounts, who are entitled to vote such shares, and 76,943
unallocated shares that are voted by the trustee in the same proportions as
allocated shares.
-10-
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The following tables set forth compensation paid by the Bank for
services rendered in the Bank's last three completed fiscal years ending
December 31, 1998 to the Bank's chief executive officer and the four highest
paid executives whose total compensation exceeded $100,000 (the "named executive
officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
--------------------------------------------------------
Securities
Other Underlying
Name and Principal Salary Bonus Annual Options/ All Other
Position Year ($) ($)(2) Compensation(3) SARs(#) Compensation(4)
- ------------------------- ---- -------- -------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John R. Valaas 1998 $228,055 $339,162 $13,221 6,500 $12,300
Director, President and 1997 210,465 474,724 19,557 0 11,925
Chief Executive Officer 1996 196,239 24,470 12,849 0 10,795
Roger A. Mandery 1998 $174,383 $116,974 $13,221 6,500 $12,104
Executive Vice 1997 155,886 20,154 19,557 7,500 11,596
President and Chief 1996 135,732 16,897 12,747 8,250 10,453
Financial Officer
James R. Boudreau 1998 $149,375 $113,792 $13,225 6,500 $12,297
Senior Vice President 1997 131,009 16,921 17,816 7,500 10,761
and Chief Credit Officer 1996 110,736 13,775 10,378 8,250 8,970
Kenneth J. Walkky 1998 $112,245 $14,021 $10,390 1,800 $7,530
Vice President-Income 1997 106,723 13,547 14,379 2,100 6,397
Property Lending 1996 83,334 10,806 7,887 2,310 6,397
Robert J. Everett 1998 $120,520 $8,923 $11,621 1,500 $9,524
Vice President-Income 1997 101,304 7,668 13,343 2,100 8,178
Property Lending 1996 66,437 7,511 6,214 3,300 5,442
</TABLE>
- -----------------------------------------
(1) None of the named executives received compensation reportable under the
Restricted Stock Awards or Long-Term Incentive Plan Payouts columns.
(2) The amounts disclosed in this column reflect all discretionary bonuses as
well as basic bonus compensation that is distributed pursuant to the Bank's
bonus plan only in years in which net income, after-tax and after-bonus
distribution, exceeds the previous year's net income by at least five
percent (5%).
(3) The amounts disclosed in this column are the value at year end of shares of
the Bank's common stock allocated to the accounts of the executive officers
under the Bank's ESOP, all of which are vested and not subject to any
restrictions.
(4) The amounts disclosed in this column consist only of Bank contributions
under the Bank's 401(k) plan.
-11-
<PAGE>
The following table provides information related to options granted to
the named executive officers during 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Rates
of Stock Price
Appreciation for Option
Individual Grants Term(1)
- -------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted(2) Fiscal Year ($/sh.)(3) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John R. Valaas 6,500 15.6% $17.44 06/26/08 $71,281 $180,641
Roger A. Mandery 6,500 15.6% $17.44 06/26/08 $71,281 $180,641
James R. Boudreau 6,500 15.6% $17.44 06/26/08 $71,281 $180,641
Kenneth J. Walkky 1,800 4.3% $17.44 06/26/08 $19,739 $50,024
Robert J. Everett 1,500 3.6% $17.44 06/26/08 $16,450 $41,686
</TABLE>
- -----------------------------------------
(1) The potential realizable value portion of the table illustrates value that
might be realized upon exercise of the options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation on the Bank's Common Stock over the term of the options, but
is not intended to forecast future price appreciation of the Bank's Common
Stock. It is important to note that options have value to the listed
executives only if the stock price increases above the exercise price shown
in the table during the effective option period. These numbers do not take
into account certain provisions of the options providing for cancellation
of the option following termination of employment.
(2) Options to acquire shares of Common Stock, each of which vests 1/3 annually
beginning two years after grant of the option.
(3) The option exercise price may be paid in shares of Common Stock owned by
the executive officer, in cash, or in any other form of valid consideration
or a combination of any of the foregoing, as determined by the Compensation
Committee in its discretion.
-12-
<PAGE>
The following table provides information related to options exercised
by the named executive officers during the 1998 fiscal year and the number and
value of options held at fiscal year end. The Bank does not have any outstanding
stock appreciation rights ("SARs").
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs at
Shares at FY-End 1998 (#) FY-End 1998 ($)(1)
Acquired on Value ------------------------------- ----------------------------
Name Exercise ($) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John R. 42,937 $602,393 22,736 6,500 $216,667 ($27,219)
Valaas
Roger A. 14,240 $184,109 10,290 30,390 $78,325 $102,865
Mandery
James R. 14,240 $184,109 10,290 30,390 $78,325 $102,865
Boudreau
Kenneth J. 0 0 5,852 7,981 $46,681 $24,457
Walkky
Robert J. 2,783 $30,713 1,320 7,483 $8,823 $19,848
Everett
</TABLE>
- -----------------------------------------
(1) The closing price for the Bank's Common Stock as reported by NASDAQ on
December 31, 1998 was $13.25. The values indicated reflect the reduction
for the payment of the exercise price of applicable options.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Bank and John R. Valaas are parties to an Employment Agreement
dated November 1996, whereby Mr. Valaas agreed to continue to serve as President
and Chief Executive Officer of the Bank. The agreement has a five-year term,
which may be extended by the parties to 2006, and provides that Mr. Valaas is
entitled to a base salary of no less than $210,000 per year, plus fringe
benefits generally provided officers of the Bank, and is eligible to participate
in the Bank's bonus plan. Mr. Valaas is also eligible for discretionary grants
of stock options under the Bank's stock option plan.
The Bank also agreed that in the event of a termination of his
employment (whether voluntary or otherwise) following any future Change in
Control of the Bank, Mr. Valaas will be entitled to payment of his base salary
for a period of 35 months following termination, with all stock options
immediately vesting. A Change in Control occurs when one person or entity (other
than a group including two or more of the Bank's present directors) becomes the
owner of 25% or more of the Bank's outstanding Common Stock, replacement of a
majority of the incumbent
-13-
<PAGE>
directors by directors whose elections have not been supported by the present
Board of Directors, or dissolution or sale of 70% or more in value of the assets
of the Bank ("Change of Control").
In November 1996, the Bank entered into an Employment Agreement with
officer Roger A. Mandery, whereby Mr. Mandery agreed to continue to serve as
Executive Vice President of the Bank. The agreement has a five-year term which
is extendible by the parties to 2006, and provides that Mr. Mandery is entitled
to an annual base salary of no less than $155,000, plus fringe benefits
generally provided officers of the Bank, and is eligible to participate in the
Bank's bonus plan. Mr. Mandery is also eligible for discretionary grants of
stock options under the Bank's stock option plan.
The agreement also provides that in the event of a termination of his
employment (whether voluntary or otherwise) following any future Change of
Control of the Bank, Mr. Mandery will be entitled to payment of his base salary
for a period of 35 months following termination, with all stock options
immediately vesting.
The Bank and James R. Boudreau are parties to an Employment Agreement
dated November 1996, whereby Mr. Boudreau agreed to continue to serve as Senior
Vice President of the Bank. The agreement has a five-year term, which may be
extended by the parties to 2006, and provides that Mr. Boudreau is entitled to a
base salary of no less than $130,000 per year, plus fringe benefits generally
provided officers of the Bank, and is eligible to participate in the Bank's
bonus plan. Mr. Boudreau is also eligible for discretionary grants of stock
options under the Bank's stock option plan.
The Bank also agreed that in the event of a termination of his
employment (whether voluntary or otherwise) following any future Change of
Control of the Bank, Mr. Boudreau will be entitled to payment of his base salary
for a period of 35 months following termination, with all stock options
immediately vesting.
-14-
<PAGE>
COMPENSATION COMMITTEE REPORT
The purpose of the compensation program is to align executive
compensation with the Bank's business objectives and performance, the long-term
objectives of shareholders and the individual executive's performance. This
enables the Bank to attract, retain and reward executive officers who
contribute, and are expected to continue to contribute, to the Bank's long-term
success.
The Bank's executive compensation program is administered by the Stock
Option Committee and the Compensation Committee. Each of these committees has
four nonemployee directors. The membership of the Compensation Committee also
includes John Valaas, who recuses himself from discussions or determinations
related to his compensation. The Stock Option Committee and the Compensation
Committee work with management to develop compensation plans for the Bank and
are responsible for determining the compensation of each named executive
officer.
The Compensation Committee considers many factors in setting
compensation for the President and Chief Executive Officer, and the other named
executive officers, and in establishing guidelines for the compensation of other
executive officers of the Bank. Among the most important of these factors is
establishing compensation that is commensurate with the Bank's performance, as
measured by operating, financial and strategic goals (Bank performance is
measured against previous performance, budgeted goals, and the operating results
of peer institutions, which are composed of FDIC-insured savings institutions of
a similar asset size and complexity and market and industry conditions including
the economy as a whole). Individual performance in terms of both qualitative and
quantitative goals (with the exception of assessing the performance of the Bank,
the Compensation Committee does not have specific measures and its decisions are
subjective) is an important part of this process. Industry surveys of
compensation for comparable positions in the Bank's Peer Group (which is
composed of Washington state financial institutions of a similar asset size) are
considered. It is the Compensation Committee's belief that officers who are
among the owners of their Bank not only have longer tenure, but are also more
focused on and aligned with the long-term performance expectations of
shareholders. It therefore works to retain superior executives by providing some
equity-based compensation, currently in the form of stock options
No formal policy has been adopted by the Bank with respect to
qualifying compensation paid to its executive officers for deductibility under
Section 162(m) of the Internal Revenue Code. With certain exceptions, this
section excludes from deductibility compensation to an executive officer in
excess of the dollar limit stated in the section.
-15-
<PAGE>
COMPONENTS OF COMPENSATION
At present, the executive compensation program is comprised of base
salary, annual cash incentive compensation and long-term incentive compensation
in the form of stock options. Executives also participate, along with other Bank
employees, in the Bank's ESOP and other benefit plans.
BASE SALARY. Base salaries of the President and Chief Executive Officer
and the other named executive officers are based on surveys and data relating to
the Bank's Peer Group, as defined in the Compensation Committee Report section
of this report. These surveys are used to determine whether compensation is
competitive with that offered by other companies in the banking and financial
services industries. In addition, base salaries are based on an assessment of
individual performance. In assessing performance, the Committee takes into
consideration individual experience and contributions, level of responsibility,
department performance, and Bank performance, which is measured primarily by net
income, but without setting specific goals. With the exception of Bank
performance, the Committee does not have any specific measures, and its
decisions are subjective. (For 1998, salaries of the named executive officers,
based in part on individual contributions, were increased an average of 11.56%.)
The Compensation policy allows for total compensation of individuals to exceed
the median through incentive compensation plans based on achievement of the
Bank's operating, financial and strategic objectives.
BONUS PLAN. The Bank's named executive officers participate in the
Bank's bonus plan. This plan establishes a sliding scale overall bonus of
between 4% and 10% of the Bank's after-tax, before-bonus income if net income
improves by at least 5%, up to 15%, when compared to the prior year. The named
executive officers participate in the bonus amount proportionately, based on
their qualifying compensation, along with other employees employed longer than
six months.
STOCK OPTION PLAN. Awards of stock options under the Bank's incentive
stock option plan are designed to more closely tie together the long-term
interest of the Bank's employees and its shareholders, and to assist in the
retention of officers and key employees. The Stock Option Committee selects the
employees, including executive officers, if any, to receive stock options and
determines the number of shares subject to each grant. The Stock Option
Committee's determination of the size of option grants is generally intended to
reflect an employee's position with the Bank and his or her contributions, as
described above relative to guidelines for compensation. Options are granted
either as incentive stock options or as nonqualified stock options. The option
plan has a ten-year term, and options become exercisable on a gradual basis as
stated in each grant. The Stock Option Committee reviews the outstanding options
of the officers and key employees from time to time and may grant additional
options to encourage their retention.
ESOP; OTHER BENEFITS. Each named executive officer participates with
other employees in the Bank's ESOP, health insurance and other benefits which
are generally applicable.
-16-
<PAGE>
PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION. The compensation
for the Bank's President and Chief Executive Officer is adjusted and determined
by the Compensation Committee based on the same policies and criteria as the
compensation for the other named executive officers. On November 20, 1998, the
Compensation Committee resolved that the President and Chief Executive Officer's
base salary of $225,000 would remain at $225,000 in 1999.
In conclusion, the Committee believes the Bank has been managed well in
a challenging business environment for financial institutions and has achieved
above-average results when compared to other thrift institutions in the Bank's
Peer Group.
Submitted by Nonemployee Members of the Stock Option Committee and
Compensation Committee:
H. Scott Wallace, Chairman
Mary Case Dunnam
Janine Florence
Robert C. Wallace
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Bank does not have loans outstanding to any members of the Stock
Option Committee or the Compensation Committee. John Valaas, Bank President, is
a Bank employee as well as a director. He serves on the Compensation Committee
but does not participate in the determination of his own compensation.
-17-
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The graph below compares the Bank's five-year cumulative total return,
including reinvestment of dividends, on its common stock to the similar returns
for (a) all U.S. stocks under the Nasdaq Index and (b) SNL Western Thrift Index
of all publicly-traded thrift stocks (including the Bank) of ten western states.
-18-
<PAGE>
- --------------------------------------------------------------------------------
AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors has renewed the Bank's engagement with Deloitte
& Touche, Seattle, Washington, independent public accountants, as its auditors
for the 1999 fiscal year. A representative of Deloitte & Touche will be present
at the Meeting to respond to questions from shareholders and will have the
opportunity to make a statement if he or she so desires.
- --------------------------------------------------------------------------------
SOLICITATION OF PROXIES
- --------------------------------------------------------------------------------
The proxy accompanying this Proxy Statement is solicited by the Board
of Directors of the Bank. Proxies may be solicited by officers, directors, and
regular supervisory and executive employees of the Bank, none of whom will
receive any additional compensation for their services. Allen Nelson & Co. may
also solicit proxies at an approximate cost of $3,000, plus expenses. Such
solicitations may be made personally, or by mail, telephone, facsimile, e-mail,
telegraph or messenger. The Bank will pay persons not owning shares of Common
Stock beneficially, but holding shares on behalf of others in their names or in
the names of nominees, such as brokerage houses, banks, and other fiduciaries,
for the expense of forwarding soliciting materials to their principals. All of
the costs of solicitation of proxies will be paid by the Bank.
- -------------------------------------------------------------------------------
OTHER MATTERS
- -------------------------------------------------------------------------------
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described in this Proxy Statement. However, if
any other matters should properly come before the Meeting, it is intended that
proxies in the accompanying form will be voted in accordance with the best
judgment of the person or persons voting the proxies.
-19-
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Bank's 1998 Annual Report to Shareholders, including financial
statements prepared in conformity with generally accepted accounting principles,
are being mailed to shareholders with these proxy materials. Any shareholder who
has not received a copy of such Annual Report may obtain a copy by writing the
Bank. Such Annual Report is not to be treated as part of the proxy solicitation
material nor as having been incorporated by reference.
A COPY OF FORM 10-K (WHICH ALSO SERVES AS THE BANK'S ANNUAL DISCLOSURE
STATEMENT UNDER APPLICABLE RULES) FOR THE BANK'S MOST RECENT FISCAL YEAR AS
FILED WITH THE FEDERAL DEPOSIT INSURANCE CORPORATION WILL BE FURNISHED WITHOUT
CHARGE TO SHAREHOLDERS OF RECORD OR BENEFICIAL OWNERS AS OF THE RECORD DATE UPON
REQUEST TO PHYLLIS A. EASTERLIN, SECRETARY, FIRST MUTUAL SAVINGS BANK, 400 108TH
AVENUE N.E., BELLEVUE, WASHINGTON 98004, (425) 455-7300.
- --------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
- --------------------------------------------------------------------------------
In order to be (a) eligible for inclusion in the proxy materials of the
Bank for next year's Annual Meeting of Shareholders, or (b) presented at next
year's Annual Meeting of Shareholders without inclusion in the Bank's proxy
materials, shareholder proposals must be received no later than November 20,
1999. Such proposals must be mailed to the Bank's main office at 400 108th
Avenue N.E., Bellevue, Washington 98004. Any such proposal shall be subject to
the requirements of the proxy rules promulgated by the FDIC pursuant to the
Securities Exchange Act of 1934, as amended.
BY ORDER OF THE BOARD OF DIRECTORS
Phyllis A. Easterlin
Secretary
Bellevue, Washington
March 19, 1999
-20-
<PAGE>
COMPANY PRESS RELEASE
SOURCE: FIRST MUTUAL BANK
FIRST MUTUAL FORMS HOLDING COMPANY; CHANGES NAME TO REFLECT BROADER BUSINESS
BASE AND ADDITIONAL GROWTH PROSPECTS
BELLEVUE, Wash., Oct. 26 /PRNewswire/ --First Mutual Savings Bank (Nasdaq:
FMSB - NEWS) today announced the formation of a holding company, First Mutual
Bancshares, Inc. Concurrently, the Bank announced that the holding company's
wholly owned subsidiary, First Mutual Savings Bank, has changed its name to
First Mutual Bank effective immediately. Shareholders of record on October
26, 1999 will receive one share of stock in the new holding company, First
Mutual Bancshares, Inc., for each share of First Mutual Savings Bank stock
they own. The new shares will be payable immediately. The stock will continue
to be traded on the Nasdaq National Market system under the ticker symbol
FMSB, and current shareholders do not need to take any action to facilitate
the transaction.
"The formation of First Mutual Bancshares, Inc. gives our company a broader
platform for further growth," stated John Valaas, President and CEO. "First
Mutual has grown considerably and consistently for years, solely through
internal expansion. We believe the formation of a holding company will ease
access to acquisitions and increase growth potential.
"The name change is simply a way for First Mutual to more accurately reflect
its business," Valaas continued. "The ongoing transformation of our lending
portfolio includes a strong focus on commercial lending and a decreased
dependence on single family residential properties, which at the end of the
third quarter accounted for just 17% of the total portfolio."
First Mutual also reported its 28th consecutive record quarter. For the first
nine months of 1999, net income totaled $4.4 million, or $.93 per diluted
share. Total assets were $548 million at September 30, 1999, up 16% from a
year ago and net loans receivable were up 12% to $406 million.
First Mutual Bancshares, Inc., is the holding company for its wholly owned
subsidiary, First Mutual Bank. First Mutual is an independent,
community-based bank that operates nine full-service offices in the Puget
Sound area, as well as loan production offices in Tacoma, Washington and
Salem, Oregon. The FDIC-insured savings bank derives a significant portion of
its income from mortgage banking activities and small commercial-property
portfolio loan originations.
Note: Except for the historical information in this news release, the matters
described herein are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties that could cause actual results to differ materially. Such
risks and uncertainties include those related to the economic and competitive
environment, especially where First Mutual operates, regulatory approval,
general interest rate changes and the fiscal and monetary policies of the
government, credit risk management, and
<PAGE>
other risks and uncertainties discussed in First Mutual Bank's FDIC
securities filings. First Mutual Bank disclaims any obligation to publicly
announce future events or developments which affect the forward-looking
statements herein.
SOURCE: FIRST MUTUAL BANK
- ----------------------------
