================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to
Section 13 of
The Securities Exchange Act of 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission File Number 005-57091
FIRST MUTUAL BANCSHARES, INC.
--------------------------------------------
(Exact name of bank as specified in charter)
WASHINGTON
------------------------
(State of incorporation)
91-2005970
---------------------------------------
(I.R.S. Employee Identification Number)
400 108th Avenue N.E., Bellevue, WA 98004
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(Address of principal office) (Zip code)
Company's telephone number, including area code: (425) 453-5301
---------------
Indicate by check mark whether the company (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 company 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
--- ---
The number of shares outstanding of the registrant's common stock as of
March 31, 2000 4,664,396
---------
================================================================================
<PAGE>
Item 1. Financial Statements
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS March 31 December 31
- ------ 2000 1999
------------- -------------
(Unaudited)
CASH AND CASH EQUIVALENTS:
Interest-earning deposits $ 5,121,853 $ 14,993
Noninterest-earning demand deposits
and cash on hand 4,330,088 3,850,002
------------- -------------
9,451,941 3,864,995
MORTGAGE-BACKED AND OTHER SECURITIES
AVAILABLE FOR SALE 16,866,836 17,374,783
LOANS RECEIVABLE, HELD FOR SALE 5,226,429 2,709,750
MORTGAGE-BACKED AND OTHER SECURITIES
HELD TO MATURITY 86,403,421 88,056,338
LOANS RECEIVABLE 473,966,690 457,980,649
RESERVE FOR LOAN LOSSES (6,420,054) (6,309,268)
------------- -------------
LOANS RECEIVABLE, NET 467,546,636 451,671,381
ACCRUED INTEREST RECEIVABLE 4,050,234 3,840,911
LAND, BUILDINGS AND EQUIPMENT, NET 5,448,246 5,527,024
FEDERAL HOME LOAN BANK (FHLB) STOCK, AT COST 7,383,100 7,020,400
MORTGAGE SERVICING RIGHTS 193,299 110,341
OTHER ASSETS 1,369,145 940,383
------------- -------------
TOTAL $ 603,939,287 $ 581,116,306
============= =============
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
LIABILITIES: March 31 December 31
- ----------- 2000 1999
------------- -------------
(Unaudited)
Deposits:
Investor custodial checking $ 3,875,827 $ 3,216,280
Money market deposit and checking accounts 92,076,703 96,623,844
Regular savings 10,291,075 11,018,069
Time Deposits 319,605,862 289,315,897
------------- -------------
Total deposits 425,849,467 400,174,090
Drafts payable 1,078,700 1,381,374
Accounts payable and other liabilities 2,864,685 4,147,946
Advance payments by borrowers for
taxes and insurance 2,730,823 1,589,312
FHLB advances 129,581,925 134,236,925
Other advances 250,000 250,000
Current Tax Liability 849,481
------------- -------------
Total liabilities 563,205,081 541,779,647
STOCKHOLDERS' EQUITY:
Common stock, $1 par value-
Authorized, 10,000,000 shares
Issued and outstanding, 4,664,396
and 4,672,636 shares, respectively 4,664,396 4,672,636
Additional paid-in capital 31,095,738 31,116,359
Employee Stock Ownership Plan debt (145,614) (310,739)
Retained earnings 5,889,558 4,527,356
Accumulated other comprehensive income(loss):
Unrealized (loss) on securities available
for sale, net of federal income tax (769,872) (668,953)
------------- -------------
Total stockholders' equity 40,734,206 39,336,659
------------- -------------
TOTAL $ 603,939,287 $ 581,116,306
============= =============
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Quarters ended March 31
2000 1999
------------- -------------
(Unaudited)
INTEREST INCOME:
Loans Receivable $ 10,251,294 $ 8,425,795
Interest on AFS Securities 291,945 322,244
Interest on HTM Securities 1,310,836 1,161,246
Interest on Other 136,753 113,136
------------- -------------
11,990,828 10,022,421
INTEREST EXPENSE:
Deposits 5,006,563 4,715,094
FHLB advances and other 1,907,423 764,696
------------- -------------
6,913,986 5,479,790
------------- -------------
Net interest income 5,076,842 4,542,631
PROVISION FOR LOAN LOSSES 130,000 150,000
------------- -------------
Net interest income, after provision
for loan losses 4,946,842 4,392,631
OTHER OPERATING INCOME (EXPENSE):
Gain on sales of loans 121,532 393,686
Servicing fees, net of amortization 229,774 115,146
Fees on deposits 80,764 68,218
Other 190,330 217,672
------------- -------------
Total other operating income 622,400 794,722
BALANCE, carried forward 5,569,242 5,187,353
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
Quarters ended March 31
2000 1999
------------- -------------
(unaudited)
BALANCE, brought forward $ 5,569,242 $ 5,187,353
OPERATING EXPENSES:
Salaries and employees benefits 1,940,888 1,950,019
Occupancy 427,528 342,937
Other 707,486 731,736
------------- -------------
Total other operating expenses 3,075,902 3,024,692
------------- -------------
Income before federal income taxes 2,493,340 2,162,661
FEDERAL INCOME TAXES 846,044 733,605
------------- -------------
NET INCOME $ 1,647,296 $ 1,429,056
============= =============
PER SHARE DATA(1):
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.31
============= =============
EARNINGS PER COMMON SHARE-ASSUMING DILUTION $ 0.35 $ 0.30
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,669,507 4,671,758
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
INCLUDING DILUTIVE STOCK OPTIONS 4,734,291 4,761,876
============= =============
(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>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE><CAPTION>
Common stock Additional
--------------------------- paid-in Retained
Shares Amount capital earnings
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1998 4,125,227 $ 4,125,227 $24,882,773 $ 2,520,178
Options exercised, including tax benefit of $545,675 122,048 122,048 965,908
Repayment of employee stock ownership plan debt
Cash dividends declared ($.60 per share) (1) (2,546,154)
Comprehensive income:
Net income 5,207,696
Other comprehensive income(loss)--Change in unrealized
losses on securities available for sale, net of
federal income tax
-----------
Total Comprehensive income 5,207,696
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 4,247,275 $ 4,247,275 $25,848,681 $ 5,181,720
Options exercised, including tax benefit of $13,038 9,378 9,378 48,701
10% stock dividend 424,483 424,483 5,252,977 (5,677,460)
Retirement of shares repurchased (8,500) (8,500) (34,000) (60,031)
Repayment of employee stock ownership plan debt
Cash dividends declared ($.20 per share) (1) (917,221)
Comprehensive income:
Net income 6,000,348
Other comprehensive income(loss)--Change in unrealized
losses on securities available for sale, net of
federal income tax
-----------
Total Comprehensive income 6,000,348
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 4,672,636 $ 4,672,636 $31,116,359 $ 4,527,356
=========== =========== =========== ===========
Options exercised, including tax benefit of $6,431 1,760 1,760 19,379
Retirement of shares repurchased (10,000) (10,000) (40,000) (51,875)
Repayment of employee stock ownership plan debt
Cash dividends declared ($.05 per share) (1) (233,219)
Comprehensive income:
Net income 1,647,296
Other comprehensive income(loss)--Change in unrealized
losses on securities available for sale, net of
federal income tax
-----------
Total Comprehensive income 1,647,296
----------- ----------- ----------- -----------
BALANCE, MARCH 31, 2000 4,664,396 $ 4,664,396 $31,095,738 $ 5,889,558
=========== =========== =========== ===========
</TABLE>
(1) Cash dividends declared divided by weighted average shares outstanding of
4,669,507 in 2000 and 4,675,654 in 1999 and 4,215,764 in 1998.
(2) Income tax benefit netted against accumulated comprehensive losses were
$396,601, $344,612, and $6,174, for the periods ended March 31, 2000,
December 31, 1999 and 1998, respectively.
<TABLE><CAPTION>
Employee stock Accumulated
ownership Comprehensive
plan debt Income(loss)(2) Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, JANUARY 31, 1998 $ (871,570) $ (4,780) 30,651,828
Options exercised, including tax benefit of $545,675 1,087,956
Repayment of employee stock ownership plan debt 267,832 267,832
Cash dividends declared ($.60 per share) (1) (2,546,154)
Comprehensive income:
Net income 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)
----------- -----------
Total Comprehensive income (7,205) 5,200,491
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ (603,738) $ (11,985) $34,661,953
Options exercised, including tax benefit of $13,038 58,079
10% stock dividend
Retirement of shares repurchased (102,531)
Repayment of employee stock ownership plan debt 292,999 292,999
Cash dividends declared ($.20 per share) (1) (917,221)
Comprehensive income:
Net income 6,000,348
Other comprehensive income(loss)--Change in unrealized
losses on securities available for sale, net of
federal income tax (656,968) (656,968)
----------- -----------
Total Comprehensive income (656,968) 5,343,380
----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ (310,739) $ (668,953) $39,336,659
=========== =========== ===========
Options exercised, including tax benefit of $6,431 21,139
Retirement of shares repurchased (101,875)
Repayment of employee stock ownership plan debt 165,125 165,125
Cash dividends declared ($.05 per share) (1) (233,219)
Comprehensive income:
Net income 1,647,296
Other comprehensive income(loss)--Change in unrealized
losses on securities available for sale, net of
federal income tax (100,919) (100,919)
----------- -----------
Total Comprehensive income (100,919) 1,546,377
----------- ----------- -----------
BALANCE, MARCH 31, 2000 $ (145,614) $ (769,872) $40,734,206
=========== =========== ===========
</TABLE>
(1) Cash dividends declared divided by weighted average shares outstanding of
4,669,507 in 2000 and 4,675,654 in 1999 and 4,215,764 in 1998.
(2) Income tax benefit netted against accumulated comprehensive losses were
$396,601, $344,612, and $6,174, for the periods ended March 31, 2000,
December 31, 1999 and 1998, respectively.
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Three months ended March 31
----------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,647,296 $ 1,429,055
Adjustments to reconcile net cash
provided (used) by operating activities:
Provision for loan losses 130,000 150,000
Depreciation and Amortization 187,380 134,582
Deferred loan origination fees, net of accretion (121,805) (55,273)
Amortization of Mortgage servicing rights 24,351 49,735
Gain on sales of loans (121,160) (428,424)
Gain on sale of repossessed real estate (22,727)
FHLB stock dividends (116,654) (93,100)
Cash provided (used) by changes in
operating assets and liabilities:
Loans receivable held for sale (2,516,679) 6,587,718
Accrued interest receivable (209,323) (152,602)
Other assets (154,126) (248,798)
Drafts payable (302,673) (1,071,491)
Accounts payable and other liabilities (1,282,423) (845,163)
Federal income taxes 574,845 505,918
Advance payments by borrowers for Taxes and insurance 1,141,510 976,785
------------ ------------
Net cash provided (used) by operating activities (1,119,461) 6,916,215
INVESTING ACTIVITIES:
Loan originations (45,534,444) (44,987,061)
Loan principal repayments 24,846,243 27,108,658
Increase in undisbursed loan proceeds 4,700,305 379,504
Principal repayments & redemptions on mortgage-backed
and other securities 2,261,160 8,158,617
Purchase of mortgage-backed and other securities held to maturity (250,000) (35,029,243)
Purchases of premises and equipment (109,052) (88,525)
Purchase of FHLB stock (246,046)
Proceeds from sale of Loans 173,963 581,431
Proceeds from sale of Real Estate Held for Sale 42,054
------------ ------------
Net cash provided (used) by
investing activities, carried forward (14,157,871) (43,834,565)
</TABLE>
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE><CAPTION>
Three months ended March 31
------------------------------
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
BALANCE, net cash provided (used) by
investing activities, brought forward $ (14,157,871) $ (43,834,565)
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 20,657,504 (14,855,971)
Interest credited to deposit accounts 5,017,873 4,870,921
Proceeds from advances 295,848,000 105,493,000
Repayment of advances (300,503,000) (58,417,000)
Dividends paid (234,057) (1,911,274)
Proceeds from exercise of stock options 14,708
Repurchase of common stock (101,875)
Repayment of Employee Stock Ownership Plan debt 165,125 139,932
------------- -------------
Net cash provided (used) by financing activities 20,864,278 35,319,608
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,586,946 (1,598,742)
CASH:
Beginning of year 3,864,995 5,529,145
------------- -------------
End of quarter $ 9,451,941 $ 3,930,403
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Loans originated for mortgage banking activities $ 11,434,050 $ 44,470,319
Loans originated for investment activities 45,534,444 44,987,061
------------- -------------
Total loans originated for mortgage banking
activities and investment activities $ 56,968,494 $ 89,457,380
============= =============
Proceeds from sales of loans held for sale $ 8,917,371 $ 51,058,037
============= =============
Cash paid during three months ended Mar. 31
Interest $ 6,973,460 $ 5,439,901
============= =============
Income taxes $ 212,780 $ 185,155
============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Loans transferred to real estate held for sale, net $ $ 80,001
============= =============
</TABLE>
<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, 2000, and December 31, 1999 are summarized as follows:
<TABLE><CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 2000
FHLMC securities $ 425,931 $ 14,077 $ 440,008
FNMA securities 15,753,710 40,663 1,078,539 14,715,834
GNMA securities 1,842,374 131,380 1,710,994
----------- ----------- ----------- -----------
$18,022,015 $ 54,740 $ 1,209,919 $16,866,836
=========== =========== =========== ===========
DECEMBER 31, 1999:
FHLMC securities $ 427,499 $ 7,216 $ 434,715
FNMA securities 16,073,769 22,354 933,028 15,163,095
GNMA securities 1,869,018 116,794 1,752,224
----------- ----------- ----------- -----------
$18,370,286 $ 29,570 $ 1,049,822 $17,350,034
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 3.
MORTGAGE-BACKED AND OTHER SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of mortgage-backed and other
securities at March 31, 2000 and December 31, 1999 are summarized as follows:
<TABLE><CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 2000
FNMA certificates $38,017,261 $ 177,949 $ 1,542,857 $36,652,353
FHLMC certificates 1,783,496 39,517 1,823,013
U.S. Government Agency securities 42,655,873 1,428,729 41,227,144
Merrill Lynch corporate bond 2,531,276 129,826 2,401,450
Municipal bonds 874,917 74,417 800,500
REMICS 540,598 3,172 59 543,711
----------- ----------- ----------- -----------
$86,403,421 $ 220,638 $ 3,175,888 $83,448,171
=========== =========== =========== ===========
DECEMBER 31, 1999:
FNMA certificates $39,827,759 $ 149,563 $ 1,389,648 $38,587,674
FHLMC certificates 1,792,237 18,780 1,811,017
U.S. Government Agency securities 42,652,659 44,178 1,250,503 41,446,334
Merrill Lynch corporate bond 2,534,010 111,285 2,422,725
Municipal bonds 625,395 84,965 540,430
REMICS 624,278 7,194 631,472
----------- ----------- ----------- -----------
$88,056,338 $ 219,715 $ 2,836,401 $85,439,652
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 4.
NONPERFORMING ASSETS
The Company had nonperforming assets as follows.
March 31, 2000 December 31, 1999
-------------- -----------------
Nonperforming loans $958,776 $342,579
Repossessed assets 9,907 9,613
-------- --------
Totals $968,683 $352,192
======== ========
At March 31, 2000 and December 31, 1999, the 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
March 31, 2000 and March 31, 1999:
<TABLE><CAPTION>
Income Shares Per share
(numerator) (denominator) amount
--------------------------------------
<S> <C> <C> <C>
Quarter ended March 31, 2000
Basic EPS:
Income available to common shareholders $1,647,296 4,669,507 $ 0.35
========
Effect of dilutive stock options 64,784
---------- ---------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $1,647,296 4,734,291 $ 0.35
======================================
Quarter ended March 31, 1999
Basic EPS:
Income available to common shareholders $1,429,056 4,671,758 $ 0.31
========
Effect of dilutive stock options 90,118
---------- ---------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercise $1,429,056 4,761,876 $ 0.30
======================================
</TABLE>
<PAGE>
NOTE 6.
RATE VOLUME ANALYSIS FIRST QUARTER 2000
(Dollars in thousands) VS
FIRST QUARTER 1999
INCREASE (DECREASE) DUE TO
TOTAL
VOLUME RATE CHANGE
- ---------------------------------------------------------------------------
INTEREST INCOME
Investments:
Available for sale securities $ (46) $ 16 $ (30)
Held to maturity securities 122 28 150
Other equity investments 45 (21) 24
------- ------- -------
Total investments 121 23 144
Loans:
Residential 77 55 132
Residential construction 59 65 124
Multifamily 697 40 737
Multifamily construction 59 54 113
Commercial and commercial real estate 449 31 480
Commercial real estate construction 43 1 44
Consumer & Other 172 23 195
------- ------- -------
Total loans 1,556 269 1,825
-----------------------------
Total interest income 1,677 292 1,969
INTEREST EXPENSE
Deposits:
Money market deposit and checking (41) 47 6
Regular savings (7) (15) (22)
Time deposits 183 125 308
------- ------- -------
Total deposits 135 157 292
FHLB advances and other 871 272 1,143
------- ------- -------
Total interest expense 1,006 429 1,435
Net interest income $ 671 $ (137) $ 534
======= ======= =======
<PAGE>
NOTE 7.
SEGMENTS
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company has three reportable segments:
consumer banking, residential lending, and commercial lending.
Consumer banking offers depositor banking services, home equity lending, direct
consumer loans, consumer dealer financing contracts and small business lending.
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 may choose to retain or sell the right to service the loans
sold (i.e., collection of principal and interest payments) depending upon market
conditions.
Commercial lending offers permanent and interim (construction) loans for
multifamily housing (over four units), commercial real estate properties, and
loans to small and medium-sized businesses for financing inventory, accounts
receivable, and 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 quarters ended
March 31, 2000, 1999 and 1998:
<TABLE><CAPTION>
CONSUMER RESIDENTIAL COMMERCIAL
BANKING LENDING LENDING TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers 2000 $ 2,479,946 $ 2,080,662 $ 7,708,375 $12,268,983
1999 2,098,936 2,251,623 6,201,471 10,552,030
1998 1,600,278 3,168,585 5,606,430 10,375,293
Revenues from other segments 2000 4,531,990 86,158 442,606 5,060,754
1999 4,543,186 80,802 384,194 5,008,182
1998 5,205,591 123,763 352,737 5,682,091
Total Revenues 2000 7,011,936 2,166,820 8,150,981 17,329,737
1999 6,642,122 2,332,425 6,585,665 15,560,212
1998 6,805,869 3,292,348 5,959,167 16,057,384
Net interest revenue 2000 1,583,035 481,689 2,935,537 5,000,261
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 2000 198,096 204,291 2,176,761 2,579,148
1999 222,561 447,861 1,561,534 2,231,956
1998 577,026 846,650 1,318,675 2,742,351
Total assets as of March 31: 2000 436,698,525 108,233,518 346,884,288 891,816,331
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>
NOTE 7.
SEGMENTS (CONTINUED)
Reconciliations of segment data to the Company consolidated financial statements
are shown in the table below. The amounts for the segments will 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>
For Quarter ended March 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
TOTAL REVENUES
Segment total revenues $ 17,329,737 $ 15,560,212 $ 16,057,384
Back out or add back:
Revenues from other segments (5,060,754) (5,008,182) (5,682,091)
Revenues of administrative departments netted against
overhead costs and reallocated as net costs 344,245 265,114 213,169
-----------------------------------------------
Consolidated total revenues $ 12,613,228 $ 10,817,144 $ 10,588,462
NET INTEREST REVENUE
Segment net interest revenue $ 5,000,261 $ 4,425,188 $ 4,157,962
Back out or add back:
Difference between actual interest expense
and intersegment funding allocation (67,949) (73,938) (105,495)
Interest revenues of administrative departments netted
against overhead costs and reallocated as net costs 144,530 191,381 154,543
-----------------------------------------------
Consolidated net interest revenue $ 5,076,842 $ 4,542,631 $ 4,207,010
INCOME BEFORE FEDERAL INCOME TAXES
Segment pre-tax income $ 2,579,148 $ 2,231,956 $ 2,742,353
Back out or add back:
Unallocated loan losses (130,000) (150,000) (100,000)
Unallocated net expenses of administrative departments (772,650)
Difference between actual total funding cost
and total intersegment funding allocation 44,192 80,705 9,607
-----------------------------------------------
Consolidated pre-tax income $ 2,493,340 $ 2,162,661 $ 1,879,310
TOTAL ASSETS AS OF MARCH 31:
SEGMENT TOTAL ASSETS $ 891,816,331 790,486,777 786,423,322
Back out or add back:
Inferred intersegment interest earning assets on branch deposits (293,355,798) (264,686,850) (320,102,852)
Unallocated reserve for loan loss (6,420,054) (5,699,677) (4,919,431)
Unallocated nonearning assets of administrative departments 11,898,808 5,417,359 7,916,828
-----------------------------------------------
Consolidated total assets $ 603,939,287 $ 525,517,609 $ 469,317,867
</TABLE>
<PAGE>
PART I
FINANACIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company begin on page 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
First Mutual Bancshares, Inc. (the "Company"), a Washington corporation, is a
holding company primarily engaged in the business of planning, directing, and
coordinating the activities of its wholly-owned subsidiary, First Mutual Bank.
First Mutual Bank (the "Bank") is a Washington-chartered savings bank subject to
regulation by the State of Washington Department of Financial Institutions and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts business
from its headquarters in Bellevue, Washington, and has nine full-service
facilities located in Bellevue (3), Redmond, Seattle (2), Issaquah, Bellingham,
and Monroe, Washington, and has two income property loan production offices
located in Salem, Oregon, and Tacoma, Washington. The Bank's business consists
mainly of attracting deposits from the general public as well as wholesale
funding sources, and investing those funds primarily in real estate loans, small
and mid-sized business loans, and consumer loans. In addition to portfolio
lending, the Bank conducts a mortgage banking operation.
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the audited
consolidated financial statements and notes thereto for the Company and
subsidiaries for the year ended December 31, 1999.
RESULTS OF OPERATIONS
- ---------------------
Net Interest Income
-------------------
Net interest income increased $534,000, or 11.8%, in the first quarter of 2000
as contrasted with the same quarter in 1999. The net interest margin for the
quarter was 3.52%, which compares to 3.61%, 3.69%, 3.65%, and 3.69%, for the
quarters ended December 31, 1999, September 30, 1999, June 30, 1999, and March
31, 1999, respectively.
Net interest income improved principally as a result of an increase in earning
assets, which contributed $671,000 in the first quarter. Offsetting the benefit
from greater earning assets, which grew from $512,134,000 at March 31, 1999, to
$588,548,000 at quarter-end March 2000, was the negative impact of $137,000 from
a change in interest rates. The unfavorable change in the net interest margin is
attributable to a greater increase in interest expense than the corresponding
figure for interest income. Interest expense, as measured by the ratio of
interest
<PAGE>
expense/average-earning assets, rose from 4.45% in the first quarter of 1999 to
4.79% in the same period in 2000. Interest income, as gauged by the ratio of
interest income/average-earning assets, also grew, rising from 8.13% in the
first quarter of 1999 to 8.30% in 2000. Thus, even though the interest income
ratio increased 0.17%, the rise of 0.34% in the interest expense ratio was
significantly greater.
One of the factors that contributed to the decrease in the net interest margin
is the Bank's mismatch (called gap) between the amount of assets repricing
within a one-year period and the corresponding one-year liabilities. As of March
31, 2000, the gap was a negative 23.5%, which means that $477 million in
liabilities is projected to reprice within the next 12 months as compared to
$335 million in assets. Comparable ratios for year-end 1999 and 1998 were a
negative 15.3% and negative 0.8%, respectively. Since year-end 1998 one-year
assets have grown from $311 million to $335 million, or 7.7%. During that same
period one-year liabilities have risen from $315 million to $477 million, an
increase of 51.4%.
To address that adverse trend the Bank is placing more emphasis on acquiring
assets with one-year repricing characteristics and extending the repricing
liabilities beyond the one-year time frame.
With a one-year negative gap of 23.5% at March 31, 2000, a further rise in
short-to-intermediate interest rates will most likely continue to reduce the net
interest margin.
The provision for loan losses decreased from $150,000 in the first quarter of
1999 to $130,000 in the like period in 2000. 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 interest to the Bank is the mix of its loan portfolio. Currently 20.6% of the
portfolio is residential loans, including loans held for sale, and the remaining
79.4% is composed of commercial, construction, and consumer loans. The
residential figure of 20.6% compares, according to the fourth quarter 1999 FDIC
Quarterly Banking Profile (latest available data), to 70.3% for FDIC-insured
savings institutions and 24.4% 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 1.34% at March 31, 2000.
The comparable ratios for FDIC-insured savings institutions and commercial
banks, as of December 31, 1999, were 0.91% and 1.68%, 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 non-performing
loans to assets warrants favorable consideration. As of quarter-end March 2000
the Bank's non-performing assets to total assets ratio was 0.16%. That number
compares to the national ratios of 0.58% for savings institutions and 0.63% for
commercial banks as of December 31, 1999.
<PAGE>
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 ratios for comparable loan
portfolios when tempered by the Bank's favorable non-performing asset status.
Other Operating Income
----------------------
Gain on sales of loans, which amounted to $122,000 in the first quarter of 2000
and is down 69.0% from $394,000 in the like quarter of 1999, is comprised of
three categories--sale of mortgage servicing rights, secondary market fees, and
capitalized mortgage servicing rights.
The net gain from the sale of servicing rights amounted to $95,000 in the
quarter ending March 31, 2000, off dramatically from $472,000 a year earlier.
The Bank sold $9 million in servicing rights in the first quarter of 2000
compared to $32 million in the first quarter of 1999. The outlook for servicing
rights sales in the year 2000 is anticipated to continue to be down
substantially from sales realized in 1999. Because of the rise in interest rates
experienced in 1999, the refinance loan origination activity has declined
significantly. The Bank does not expect a return to the residential
single-family origination volume experienced last year until such time as the
home loan rates decline materially from the current yields.
Secondary market fees are the cash gains or losses from the sale of loans into
the secondary market. Cash losses on loan sales of $8,917,000 in the first
quarter totaled $40,000. That figure compares to a loss of $207,000 on loan
sales of $51,058,000 in the same quarter of 1999.
The gains recorded for capitalized 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 first quarter of 1999 totaled $129,000, as
compared to $66,000 in the same period of 2000. The drop in mortgage servicing
rights (MSR) income is the result of an 82.5% decline in loan sales, partially
offset by a change in valuation estimates. Periodically the Bank evaluates the
estimates used in calculating the value of the MSR. Key considerations include
the fair market value, when known, and cash flow projections. Based on a recent
reevaluation, the value of MSR has been increased significantly from the
valuations used in 1999.
Servicing fees, net of amortization, jumped 100% from $115,000 in the first
quarter of 1999 to $230,000 in the like period of 2000. The first quarter 2000
results were affected by a $120,000 adjustment to the mortgage servicing rights
asset. Absent that adjustment, the fee income from the servicing portfolio would
have been $110,000, down modestly from the prior year's first-quarter figure.
The mortgage servicing rights asset is reviewed quarterly to determine the
amount that should remain on the balance sheet. Estimates as to future cash
flows heavily influence the valuation of that asset. Because of rising interest
rates in the last 12 months, the value of that asset was increased to reflect
its current fair market value. The Bank does not anticipate any further
significant adjustments, other than normal amortization, in year 2000. This
<PAGE>
balance sheet item totaled only $193,000 at March 31, 2000, and would not
normally be expected, at that level, to materially affect future income
statements.
Fee income from deposits rose $13,000, or 18.4%, in 2000 on a quarter-to-quarter
comparison. In the last year the Bank has focused more attention on improving
fee income from deposit accounts in general, and checking accounts in
particular. This emphasis on fee income has been successful, and the Bank
anticipates continued improvement in future quarters.
Other income fell $28,000, or 12.6%, from $218,000 in the three months ending
March 31, 1999, to $190,000 in the like quarter of 2000. Adversely affecting
first quarter 2000 was a decrease in brokered loan fees of $36,000, and the
absence of a gain that was realized in the first quarter of last year on real
estate acquired through foreclosure. Partially offsetting those two items was a
dividend received from the Bank's TransAlliance partnership.
Brokered loan fees are down as a result of the decline in refinanced home loans.
The $23,000 realized gain on sale of real estate held for sale in the first
quarter of 1999 is somewhat unusual. The Bank did not realize any such gains
this year, and that would be the current norm. Partially offsetting the decrease
in income from brokered loans and sale of real estate was a $22,000 dividend
received from the TransAlliance partnership. The dividends received from that
partnership are erratic, varying widely from year to year.
Operating Expenses
------------------
Salaries and employees benefits dropped 0.46%, from $1,950,000 in the first
quarter of 1999 to $1,941,000 in the same period this year. The modest decline
in compensation is largely the result of a decrease in loan officer commissions
and staff incentive bonuses, offset by a drop in SFAS No. 91 benefits.
Loan officer commissions totaled $192,000 in the first quarter of 1999, as
compared to $157,000 this year. Loan originations, which amounted to $89 million
in the first quarter of last year, dropped to $57 million in the first quarter
of 2000. Bonus compensation for the staff also fell, as compared to last year,
from $338,000 in 1999 to $107,000 in the same quarter this year.
Offsetting the favorable decline in costs from lower commission and bonus
expense was the decrease in SFAS No. 91 benefits. 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. In the first quarter of 2000
the SFAS No. 91 benefit related to compensation and employee benefits amounted
to $220,000, as compared to $350,000 last year. The decrease in SFAS No. 91
benefits is largely the result of a drop in loan originations this year. Loans
closed in 2000, as was noted earlier, totaled $57 million, as compared to $89
million the prior year.
Occupancy expense increased $85,000, or 24.7%, on a quarter-to-quarter
comparison. Although no new full-service offices were opened in the last 12
months, the Bank has expanded its
<PAGE>
facilities at the Bellevue headquarters and the Salem loan production office.
Office rent is up 21.2%, and the depreciation of leasehold improvements has
jumped 79.2%. The planned opening of the Kirkland office this summer will also
increase occupancy costs in 2000.
Other operating expenses fell 3.3%, from $732,000 in 1999, to $707,000 this
year. The decline in operating costs was chiefly due to a $64,000, or 59.6%,
drop in legal expenses. In early 1999 the Bank initiated the actions that
eventually led to the formation of a bank holding company in October of last
year.
Net Income
----------
Net income increased 15.3%, from $1,429,000 in the first quarter of 1999, to
$1,647,000 in the same period of 2000. The improvement in net income was a
reflection of higher net interest income offset by a decrease in non-interest
income.
BUSINESS SEGMENTS
- -----------------
The Bank has identified three segments of business for the purposes of
management reporting. 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 amounts for the segments are different from the actual consolidated
financial statements due to the various methods for allocating costs and the
inferring of interest-earning assets. For example, the consumer banking segment
includes inferred interest-earning assets on branch-banking deposits, which are
essentially the same assets from the lending segments, but credited with a
proportionate interest yield. Consequently, adding the assets of the three
segments results in a larger total than what is shown in the consolidated
financial statements. (See the reconciliation section in Note 7 to the financial
statements.)
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 fell from $223,000 in the
first quarter of 1999 to $198,000 in the same quarter in 2000. Adversely
impacting the consumer-banking segment was a decline in net interest income and
increased operating expenses.
Net interest income was down $29,000 for this business segment, dropping from
$1,612,000 in the first quarter of 1999 to $1,583,000 this year. The net
interest margin also declined from 1.59% in 1999 to 1.49% in 2000. Average
assets rose modestly to $424,912,000 in the first quarter of 2000, as compared
to $406,456,000 last year.
<PAGE>
Non-interest income increased from $130,000 in the three months ending March
1999 to $154,000 in the same quarter this year. Contributing to the growth in
non-interest income was a rise in deposit fee income of 18.4% this year. As was
noted earlier, the Bank has placed a greater emphasis on improving fee income
from deposit accounts.
Operating expense increased $21,000, or 1.4%, in the first quarter of 2000. The
change in operating expenses is largely the result of normal annual salary
increases for the branch and support staff.
Residential Lending
-------------------
Income before taxes dropped sharply for the residential lending segment, from
$448,000 in the first quarter of 1999 to $204,000 in 2000. This segment was
affected by a decrease in both net-interest and non-interest income, partially
offset by a decline in operating expenses.
Net interest income fell for this business segment, from $495,000 in the first
quarter of 1999 to $482,000 this year. The net interest margin also decreased on
a quarter-to-quarter comparison, from 1.92% to 1.80%. The same trends that were
discussed earlier regarding the Bank's negative gap position also apply to the
residential lending segment.
Non-interest income fell dramatically, from $543,000 last year to $243,000 in
year 2000. The sale of servicing rights dropped from $32 million in the first
quarter of 1999 to $9 million this year. In addition, loans originated for
mortgage-banking activities decreased $33 million, or 74.3%, on a
quarter-to-quarter basis. The Bank does not expect any significant change in
loan sales or residential loan originations until such time as residential loan
rates decline substantially from current levels.
Operating expenses decreased 11.8%, from $590,000 in the three months ending
March 31, 1999, to $520,000 in the same period of 2000. Contributing to that
decline in operating costs was a significant fall in loan officer commissions,
offset by a decrease in SFAS No. 91 benefits. Residential loan officer
commissions totaled $150,000 in the first quarter of 1999, as compared to
$56,000 in the like period of 2000. SFAS No. 91 benefits, which are also
affected by loan originations, dropped from $209,000 last year to $39,000 in
year 2000.
Commercial Lending
------------------
Income before taxes for this business segment rose $615,000, or 39.4%, from
$1,562,000 in the first quarter of 1999 to $2,177,000 in the like period of
2000. Net interest revenue grew $617,000, while operating expenses increased
$16,000.
Net interest revenue benefited from a 20.8% increase in average assets. Average
assets rose from $284 million in the first quarter of 1999 to $342 million this
year. Also of importance to this business segment was the improvement in the net
interest margin, which rose from 3.27% in the first quarter of 1999 to 3.43% in
the like period of 2000. The favorable change in the net
<PAGE>
interest margin was in sharp contrast to the other two business segments, where
the net interest margins declined in year 2000.
Operating expenses rose 2%, from $805,000 in the first quarter of 1999 to
$822,000 in the same period in 2000. Increased operating costs were largely due
to normal annual salary adjustments for the staff and officers.
FINANCIAL CONDITION
- -------------------
Assets increased 3.9%, from $581,116,000 at year-end 1999 to $603,939,000 as of
March 31, 2000. The change in assets is principally the result of an increase in
portfolio and loans held for sale.
Loans receivable rose from $457,981,000 at year-end 1999 to $473,967,000, an
increase of 3.5% in three months. The growth in loan balances is largely due to
an increase in commercial real estate loans, in particular, multi-family
permanent portfolio loans. Those loans grew $13 million, from $148 million at
year-end 1999, to $161 million at March 31, 2000.
Loans held for sale increased from $2,710,000 at year-end 1999 to $5,226,000 as
of March 31, 2000. The rise in loans held for sale, of $2.5 million since
year-end 1999, is not meaningful, and only reflects the normal volatility in
mortgage banking activity.
Security investments (securities available for sale and mortgage-backed and
other securities held to maturity) dropped $2,161,000, or 2.1%, from December
31, 1999, to the end of the first quarter 2000.
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, 2000, the balance of
the unrealized loss, net of federal income taxes, was $770,000, which compares
to an unrealized loss at year-end 1999 of $669,000. 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 non-performing loans totaled $969,000 at March 31,
2000, and constituted a ratio of 0.16% of assets. That figure compares to the
national thrift average of 0.58% (FDIC Quarterly Banking Profile, fourth quarter
1999).
Deposits increased $25,675,000, or 6.4%, in the first three months of 2000. The
Bank is pleased with the deposit growth in the first quarter, as deposits had
generally declined throughout most of 1999. Deposit growth this year not only
funded asset growth, it allowed the Bank to repay a portion of the Federal Home
Loan Bank (FHLB) borrowings that had been acquired to fund last year's asset
growth.
<PAGE>
The FHLB advances declined from $134,237,000 at year-end 1999 to $129,582,000 as
of the end of the first quarter. As of March 31, 2000, the Bank had the capacity
to borrow up to $241 million in FHLB advances, subject to sufficient collateral
to support those advances.
Liquidity and Capital Reserves
------------------------------
The net change in cash, as reported in the Statement of Cash Flows, increased by
$5,587,000 in the first three months of 2000. The deposit flows for the first
quarter of 2000 were strong, and the Bank added substantially to its loan
portfolio.
The net cash flows from deposits were $21 million in the first quarter of 2000.
Total deposits, including interest credits for the quarter, were up $26 million.
That cash was principally used to fund the loan portfolio, which increased $16
million since year-end 1999.
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 21.5%, which is below the Bank's credit limit of 40% 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.
On October 28, 1999, the Company announced a stock repurchase program for up to
225,000 shares, or approximately 5%, of the Company's outstanding common stock.
Shares purchased to date total 18,500, of which 10,000 were acquired in the
first quarter this year.
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, 2000, the Bank exceeded the capital levels required to meet the definition
of a well-capitalized institution:
<TABLE><CAPTION>
To be categorized as well
For capital capitalized under prompt
Actual adequacy minimum corrective action provisions
------ ---------------- ----------------------------
<S> <C> <C> <C>
Total capital (to risk-weighted assets):
First Mutual Bancshares, Inc. 11.09% 8.00% n/a
First Mutual Bank 11.12 8.00 10.00%
Tier I capital (to risk-weighted assets):
First Mutual Bancshares, Inc. 9.84 4.00 n/a
First Mutual Bank 9.87 4.00 6.00
Tier I capital (to average assets):
First Mutual Bancshares, Inc. 6.97 4.00 n/a
First Mutual Bank 6.99 4.00 5.00
</TABLE>
<PAGE>
YEAR 2000 ISSUES
- ----------------
The Bank went through the date change into 2000 without any disruptions to its
systems or services to customers. The Bank relies on third-party vendors for
almost all of its data processing and telecommunications systems. These vendors
made all the necessary changes to their systems to ensure a smooth changeover.
While the Bank has not experienced any problems related to year 2000 to date,
there are still some important dates ahead as defined by the Federal Financial
Institutions Examination Council. These dates include October 10, 2000, and the
end of the year. The Bank will continue to monitor its systems to ensure they
properly handle these dates.
While the Bank currently believes that these dates will not pose significant
operational problems, there can be no assurance that any significant failures
will not have a material impact on the operations of the Bank.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's profitability is dependent to a large extent on its net interest
income, which is the difference between the interest received from its
interest-earning assets and the interest expense incurred on its
interest-bearing liabilities. The Company's objectives in its asset/liability
management are to utilize its capital effectively, to provide adequate liquidity
and to enhance net interest income, without taking undue risks subjecting the
Company unduly to interest rate fluctuations.
Assumptions regarding interest rate risk are inherent in all financial
institutions. Interest rate risk is the risk to earnings or capital resulting
from adverse movements in interest rates. Interest rate sensitivity is the
relationship between market interest rates and net interest income due to the
repricing characteristics of assets and liabilities. The Company monitors
interest rate sensitivity by examining its one-year and longer gap positions on
a regular basis. Traditional gap analysis and a sophisticated income simulation
model are used to manage interest rate risk.
The traditional gap analysis report is prepared based on the maturity or
repricing characteristics of the assets and liabilities on the balance sheet for
specified time periods. The gap is the mismatch between the repricings or
maturities of the assets and liabilities for each time period. A positive gap
occurs when assets are repricing or maturing faster than liabilities within the
same time band. This situation will generally result in an institution's net
interest margin increasing in a rising rate environment and decreasing in a
falling rate environment. A negative gap will generally have the opposite result
on the institution's net interest margin. There are many limitations to gap
analysis such as the sensitivity of assets and liabilities to changes in
interest rates.
Certain shortcomings are inherent in gap analysis. For example, some assets and
liabilities may have similar maturities or repricing characteristics, but they
may react differently to changes in market rates. Certain assets such as ARM
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Due to the restrictions of the gap
analysis, these features are not taken into consideration. Additionally, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the one-year gap
calculation. As a result, the Company utilizes the gap report as a complement to
its income simulation model.
The Company utilizes a rather complex income simulation model that calculates
the result of a 100, 200, 300, etc. basis point shock in regards to the net
interest income as well as the effect on the net portfolio value of the Company.
The model incorporates beginning of the period rate, balance and maturity data,
using various levels of aggregation of that data, as well as certain assumptions
concerning the maturity, repricing, amortization and prepayment characteristics
of loans and other interest-earning assets and the repricing withdrawal of
deposits and other interest-bearing liabilities. The Company updates and
<PAGE>
prepares simulation modeling at least quarterly for review by ALCO (Asset
Liability Committee), senior management and the Board of Directors. The Company
believes that data and assumptions are realistic representations of its
portfolio and possible outcomes under the various interest rate scenarios.
Nonetheless, the interest rate sensitivity of the Company's net interest income
and net market value of equity could vary substantially if different assumptions
were used or if actual experience differs from the assumptions used.
The Company's income simulation model results and its gap analysis results for
the periods ending March 31, 2000 and December 31, 1999 are presented below. The
results of both models indicate that in a rising rate environment the net
interest income of the Company would decrease and in periods of falling interest
rates the net interest income would increase indicating that the Company is
liability sensitive or negatively gapped.
RATE SHOCK ESTIMATES
Net Interest Income and Market Value
31-Mar-00
March 31, 2000 December 31, 1999
Percentage Change Percentage Change
- -----------------------------------------------------------------------------
Immediate Net Net Net Net
Change in Interest Market Interest Market
Interest Rates Income Value Income Value
- -----------------------------------------------------------------------------
+400 (18)% (59)% (15)% (49)%
+300 (13) (42) (11) (38)
+200 (8) (28) (8) (26)
+100 (4) (13) (4) (14)
-100 3 9 1 5
-200 4 17 - 8
-300 4 20 (2) 6
-400 4 21 (4) 2
- -----------------------------------------------------------------------------
One-Year Interest Rate Sensitive GAP
-------------------------------------
March 31, 2000 December 31, 1999
-------------- -----------------
One-year repricing $ 334,846,403 $ 333,124,176
assets
One year repricing $ 476,518,244 $ 422,095,639
liabilities -------------- -----------------
One-year gap $(141,671,841) $ (88,971,463)
============== =================
Total assets $ 603,939,287 $ 581,116,306
============== =================
Interest rate (23.5)% (15.3)%
sensitivity gap as
a percent of assets
<PAGE>
The Rate Shock results for March 31, 2000 indicate that if rates were to
immediately rise 200 basis points, the Company's net interest income would
decrease by 8%. Adversely, if rates were to immediately fall 200 basis points
the Company's net interest income would increase 4%. In addition, with the same
rise and fall in rates the Company's net market value would decrease 28% with
a 200 basis point rise and increase 17% with a 200 basis point decrease in
market interest rates.
As a result of the current interest rate environment and the simulation model
and gap results, the Company has taken measures to address this issue and
control the negative gap position. Among these actions is a focus on attracting
longer term deposit funds. By realigning our deposit mix among the varying time
bands the Company's gap position should decrease to a more acceptable level. In
addition, the practice of taking down longer than one-year borrowings on a
consistent basis will also help to mitigate the gap position. The Company is
aware of its interest rate risk position and is actively managing its position.
The sensitivity analysis does not represent a forecast for the Company. There
are numerous assumptions inherent in the simulation model as well as the gap
report. Some of these assumptions include the nature and timing of interest rate
levels including yield curve shape, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits, and
reinvestment/replacement of asset and liability cash flows. Customer
preferences, and competitor and economic influences are impossible to predict,
therefore, the Company cannot make any assurances as to the outcome of these
analyses.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
First Mutual Bancshares, Inc. 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 Company'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
a. See exhibit 27 - Financial Data Schedule
b. During the quarter, the Company did not file any report on Form 8-K.
FORWARD LOOKING STATEMENTS DISCLAIMER
- -------------------------------------
In this Form 10-Q, First Mutual Bancshares, Inc. has included certain "forward-
looking statements" concerning its future operations. It is the Company's desire
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
forward-looking statements contained in this Form 10-Q. Sentences containing
words such as "may," "will," "expect," "anticipate," "believe," "estimate,"
"optimistic," "hopeful," "should," "projected," or similar words may constitute
forward-looking statements. Although the Company believes that the expectations
expressed in these forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of it business and operations, it
is possible that actual results may differ materially from these expectations.
Factors which could affect actual results include interest rate trends, the
general state of the economy in the Company's market area and the country as a
whole, the impact of competitive products, services and pricing, the ability of
the Company to control costs and expenses, loan delinquency rates, and
legislative, regulatory and accounting changes affecting the banking and
financial services industry. These risks and uncertainties should be considered
in evaluating the forward-looking statements and undue reliance should not be
placed on such statements. The Company and the Bank disclaim any obligations
publicly to announce future events or developments which affect the
forward-looking statements herein.
<PAGE>
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 thereunto duly authorized.
FIRST MUTUAL BANCSHARES, INC.
Date: May 12, 2000
/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)
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