FIRST MUTUAL BANCSHARES INC, 10-Q, 2000-11-14

FIRST MUTUAL BANCSHARES INC
10-Q, 2000-11-14
STATE COMMERCIAL BANKS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/	Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2000

/ /	Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from to

Commission File Number 005-57091

FIRST MUTUAL BANCSHARES, INC.

(Exact name of bank as specified in charter)

WASHINGTON (State of incorporation)		91-2005970 (I.R.S. Employer Identification Number)
400 108th Avenue N.E., Bellevue, WA (Address of principal office)		98004 (Zip code)

Registrant's telephone number, including area code: (425) 453-5301

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),

Yes /x/ No / /

and (2) has been subject to such filing requirements for the past 90 days.

Yes /x/ No / /

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 13, 2000: 4,671,286

FIRST MUTUAL BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS

				Page
PART I: FINANCIAL INFORMATION				2
	Item 1. Financial Statements			2
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			16
		General		16
		Results of Operations		16
			Net Interest Income	16
			Other Operating Income	17
			Operating Expenses	20
			Net Income	21
		Business Segments		21
			Consumer Banking	22
			Residential Lending	22
			Commercial Lending	23
		Financial Condition		23
			Asset Quality	25
			Liquidity and Capital Reserves	26
		Year 2000 Issues		26
		Expansion		27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
PART II: OTHER INFORMATION				29
	Item 1. Legal Proceedings			29
	Item 2. Changes in Securities and Use of Proceeds			29
	Item 3. Defaults Upon Senior Securities			29
	Item 4. Submission of Matters to a Vote of Security Holders			29
	Item 5. Other Information			29
	Item 6. Exhibits and Reports on Form 8-K			29
		Forward-Looking Statements Disclaimer		29

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of income, and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements.

Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. All significant intercompany transactions and balances have been eliminated.

The information included in this Form 10-Q should be read in conjunction with First Mutual Bancshares, Inc. Annual Report on Form 10-K to the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.

Consolidated Financial Statements of the Company begin on page 3.

FIRST MUTUAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

		September 30 2000			December 31 1999
		(Unaudited)
ASSETS:
CASH AND CASH EQUIVALENTS:
	Interest-earning deposits	$	265,349		$	14,993
	Noninterest-earning demand deposits and cash on hand		4,008,578			3,850,002

			4,273,927			3,864,995
MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE FOR SALE			38,177,019			17,374,784
LOANS RECEIVABLE, HELD FOR SALE			19,571,967			2,709,750
MORTGAGE-BACKED AND OTHER SECURITIES HELD TO MATURITY			86,296,278			88,056,338
LOANS RECEIVABLE			464,597,212			457,980,649
RESERVE FOR LOAN LOSSES			(6,529,845	)		(6,309,268	)

LOANS RECEIVABLE, net			458,067,367			451,671,381
ACCRUED INTEREST RECEIVABLE			4,548,108			3,840,911
REAL ESTATE HELD FOR SALE			894,574			—
LAND, BUILDINGS AND EQUIPMENT, net			7,423,821			5,527,024
FEDERAL HOME LOAN BANK (FHLB) STOCK, at cost			7,624,900			7,020,400
MORTGAGE SERVICING RIGHTS			173,864			110,341
OTHER ASSETS			1,383,002			940,383

TOTAL		$	628,434,827		$	581,116,306

				September 30 2000			December 31 1999
				(Unaudited)
LIABILITIES:
	Deposits:
		Investor custodial checking		$	3,502,782		$	3,216,280
		Money market deposit and checking accounts			98,687,018			96,623,844
		Regular savings			8,959,310			11,018,069
		Time deposits			341,075,872			289,315,897

			Total deposits		452,224,982			400,174,090
		Drafts payable			1,632,857			1,381,374
		Accounts payable and other liabilities			3,146,800			4,147,946
		Advance payments by borrowers for taxes and insurance			2,691,540			1,589,312
		FHLB advances			124,776,725			134,236,925
		Other advances			250,000			250,000

			Total liabilities		584,722,904			541,779,647
STOCKHOLDERS' EQUITY:
	Common stock, $1 par value—Authorized, 10,000,000 shares
		Issued and outstanding, 4,671,286 and 4,672,636 shares, respectively			4,671,286			4,672,636
	Additional paid-in capital				31,118,545			31,116,359
	Employee Stock Ownership Plan Debt				(113,689	)		(310,739	)
	Retained earnings				8,717,771			4,527,356
	Accumulated other comprehensive income (loss):
		Unrealized (loss) on securities available for sale, net of federal income tax			(681,990	)		(668,953	)

			Total stockholders' equity		43,711,923			39,336,659

TOTAL				$	628,434,827		$	581,116,306

FIRST MUTUAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

			Quarters ended September 30					Nine Months ended September 30
			2000			1999		2000		1999
			(Unaudited)					(Unaudited)
INTEREST INCOME:
	Loans Receivable		$	11,058,397		$	8,936,776	$	32,017,990	$	25,873,836
	Interest on AFS Securities			654,560			300,216		1,230,992		933,857
	Interest on HTM Securities			1,342,219			1,349,848		3,987,769		3,858,566
	Interest Other			159,980			102,004		421,148		305,653

				13,215,156			10,688,844		37,657,899		30,971,912
INTEREST EXPENSE:
	Deposits			6,101,883			4,618,023		16,627,084		13,883,218
	FHLB advances and other			1,921,329			1,239,176		5,706,009		3,033,717

				8,023,212			5,857,199		22,333,093		16,916,935

	Net interest income before provision for loan losses			5,191,944			4,831,645		15,324,806		14,054,977
PROVISION FOR LOAN LOSSES				50,000			250,000		280,000		685,000

	Net interest income, after provision for loan losses			5,141,944			4,581,645		15,044,806		13,369,977
OTHER OPERATING INCOME (EXPENSE):
	Gain (Loss) on sales of loans			(84,909	)		557,780		43,480		1,334,169
	Servicing fees, net of amortization			107,436			124,373		445,683		353,737
	Fees on deposits			57,945			84,519		211,022		245,716
	Other			176,191			157,276		518,437		558,540

		Total other operating income		256,663			923,948		1,218,622		2,492,162
BALANCE, carried forward				5,398,607			5,505,593		16,263,428		15,862,139

			Quarters ended September 30				Nine Months ended September 30
			2000		1999		2000		1999
			(Unaudited)				(Unaudited)
BALANCE, brought forward			$	5,398,607	$	5,505,593	$	16,263,428	$	15,862,139
OPERATING EXPENSES:
	Salaries and employee benefits			1,594,756		2,074,784		5,211,734		5,704,940
	Occupancy			460,885		382,593		1,310,961		1,071,793
	Other			804,513		706,171		2,265,591		2,355,759

		Total other operating expenses		2,860,154		3,163,548		8,788,286		9,132,492

		Income before federal income taxes		2,538,453		2,342,045		7,475,142		6,729,647
FEDERAL INCOME TAXES				858,837		794,600		2,532,504		2,282,987

NET INCOME			$	1,679,616	$	1,547,445	$	4,942,638	$	4,446,660

PER SHARE DATA:
BASIC EARNINGS PER COMMON SHARE			$	0.36	$	0.33	$	1.06	$	0.95

EARNINGS PER COMMON SHARE—ASSUMING DILUTION			$	0.35	$	0.32	$	1.04	$	0.93

WEIGHTED AVERAGE SHARES OUTSTANDING				4,671,286		4,679,239		4,670,569		4,674,441

WEIGHTED AVERAGE SHARES OUTSTANDING INCLUDING DILUTIVE STOCK OPTIONS				4,734,309		4,759,307		4,734,208		4,760,429

FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

			Common stock											Employee stock ownership plan debt
			Common stock					Additional paid-in capital			Retained earnings						Accumulated Comprehensive Income(loss)(2)
			Shares		Amount			Additional paid-in capital			Retained earnings						Accumulated Comprehensive Income(loss)(2)			Total
BALANCE, January 31, 1998			4,125,227		$	4,125,227		$	24,882,773		$	2,520,178		$	(871,570	)	$	(4,780	)	$	30,651,828
	Options exercised, including tax benefit of $545,675		122,048			122,048			965,908												1,087,956
	Repayment of employee stock ownership plan debt														267,832						267,832
	Cash dividends declared ($.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	)

	Total Comprehensive income (loss)											5,207,696						(7,205	)		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, including tax benefit of $13,038		9,378			9,378			48,701												58,079
	10% stock dividend		424,483			424,483			5,252,977			(5,677,460	)								—
	Retirement of shares repurchased		(8,500	)		(8,500	)		(34,000	)		(60,031	)								(102,531	)
	Repayment of employee stock ownership plan debt														292,999						292,999
	Cash dividends declared ($.20 per share)(1)											(917,221	)								(917,221	)
	Comprehensive income:
		Net income										6,000,348									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 (loss)											6,000,348						(656,968	)		5,343,380

BALANCE, December 31, 1999			4,672,636		$	4,672,636		$	31,116,359		$	4,527,356		$	(310,739	)	$	(668,953	)	$	39,336,659

	Options exercised, including tax benefit of $6,431		8,650			8,650			42,186												50,836
	Retirement of shares repurchased		(10,000	)		(10,000	)		(40,000	)		(51,874	)								(101,874	)
	Repayment of employee stock ownership plan debt														197,050						197,050
	Cash dividends declared ($.15 per share)(1)											(700,349	)								(700,349	)
	Comprehensive income:
		Net income										4,942,638									4,942,638
		Other comprehensive income(loss)—Change in unrealized losses on securities available for sale, net of federal income tax																(13,037	)		(13,037	)

	Total Comprehensive income (loss)											4,942,638						(13,037	)		4,929,601

BALANCE, September 30, 2000			4,671,286		$	4,671,286		$	31,118,545		$	8,717,771		$	(113,689	)	$	(681,990	)	$	43,711,923

(1): Cash dividends declared divided by weighted average shares outstanding of 4,670,207 in 2000 and 4,675,654 in 1999 and 4,215,764 in 1998.
(2): Income tax benefit netted against accumulated comprehensive losses were $351,328, $344,612, and $6,174 for the periods ended September 30, 2000, December 31, 1999 and 1998, respectively.

FIRST MUTUAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Nine months ended September 30
				2000			1999
				(Unaudited)
OPERATING ACTIVITIES:
	Net income			$	4,942,638		$	4,446,660
	Adjustments to reconcile net cash provided (used) by operating activities:
		Provision for loan losses			280,000			685,000
		Depreciation and amortization			581,712			431,514
		Deferred loan origination fees, net of accretion			(328,709	)		(43,018	)
		Amortization of mortgage servicing rights			54,732			128,378
		Gain on sales of loans			(51,893	)		(1,395,183	)
		Gain on sale of repossessed real estate			—			(17,029	)
		FHLB stock dividends			(358,554	)		(275,300	)
		Cash provided (used) by changes in operating assets and liabilities:
			Loans receivable held for sale		(16,862,217	)		11,885,996
			Accrued interest receivable		(707,197	)		(286,649	)
			Other assets		(972,270	)		(621,744	)
			Drafts payable		251,483			(3,468,794	)
			Accounts payable and other liabilities		(1,000,654	)		(127,002	)
			Federal income taxes		(364,923	)		—
			Advance payments by borrowers for taxes and insurance		1,102,228			1,010,338

	Net cash provided (used) by operating activities				(13,433,624	)		12,353,167
INVESTING ACTIVITIES:
	Loan originations				(111,786,815	)		(147,263,447	)
	Loan principal repayments				73,970,955			98,035,330
	Increase in undisbursed loan proceeds				8,943,006			2,235,460
	Principal repayments & redemptions on mortgage-backed and other securities				7,506,755			14,617,287
	Purchase of mortgage-backed and other securities held to maturity				(4,500,000	)		(39,717,343	)
	Purchases of premises and equipment				(2,460,608	)		(440,986	)
	Purchase of FHLB stock				(245,946	)		—
	Proceeds from sale of Loans				385,777			1,843,672
	Proceeds from sale of Real Estate Held for Sale				—			119,738

		Net cash (used) by investing activities, carried forward			(28,186,876	)		(70,570,289	)

			Nine months ended September 30
			2000			1999
			(Unaudited)
BALANCE, net cash provided (used) by investing activities, brought forward			$	(28,186,876	)	$	(70,570,289	)
FINANCING ACTIVITIES:
	Net increase (decrease) in deposit accounts			35,551,405			(22,483,234	)
	Interest credited to deposit accounts			16,499,487			14,040,711
	Proceeds from advances			496,574,175			318,751,375
	Repayment of advances			(506,034,375	)		(251,207,000	)
	Dividends paid			(700,841	)		(2,360,484	)
	Proceeds from exercise of stock options			44,405			45,041
	Repurchase of common stock			(101,874	)		—
	Repayment of Employee Stock Ownership Plan Debt			197,050			277,807

	Net cash provided by financing activities			42,029,432			57,064,216

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS				408,932			(1,152,906	)
CASH:
		Beginning of year		3,864,995			5,529,145

		End of quarter	$	4,273,927		$	4,376,239

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Loans originated for mortgage banking activities		$	50,611,688		$	89,410,934
	Loans originated for investment activities			111,786,815			147,263,447

	Total loans originated for mortgage banking activities and investment activities		$	162,398,503		$	236,674,381

	Proceeds from sales of loans held for sale		$	33,749,471		$	101,296,930

	Cash paid during nine months ended September 30
		Interest	$	22,209,206		$	16,807,092

		Income taxes	$	2,884,280		$	2,660,155

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
	Loans securitized into securities available for sale		$	22,550,393		$	—
	Loans transferred to real estate held for sale, net		$	894,574		$	—

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.

In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 137 entitled, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS Statement No. 133. The statement amends SFAS No. 133 to defer its effective date to all fiscal quarters for all fiscal years beginning after June 15, 2000. The Bank will implement this statement on January 1, 2001. The impact of the adoption of the provisions of this statement on the results of operations or financial condition has not yet been determined.

Note 2.

Mortgage-Backed and Other Securities Available for Sale

The amortized cost and estimated fair value of securities available for sale at September 30, 2000 and December 31, 1999 is summarized as follows:

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
September 30, 2000:
FHLMC securities	$	422,004	$	10,374	$	—	$	432,378
FNMA securities		37,026,278		103,994		1,065,674		36,064,598
GNMA securities		1,757,018		—		76,975		1,680,043

	$	39,205,300	$	114,368	$	1,142,649	$	38,177,019

December 31, 1999:
FHLMC securities	$	427,499	$	7,216	$	—	$	434,715
FNMA securities		16,077,307		43,566		933,028		15,187,845
GNMA securities		1,869,018		—		116,794		1,752,224

	$	18,373,824	$	50,782	$	1,049,822	$	17,374,784

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:

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
September 30, 2000:
FNMA certificates	$	33,936,088	$	182,320	$	1,022,908	$	33,095,500
FHLMC certificates		1,649,173		22,151		—		1,671,324
U.S. Government Agency securities		46,662,301		27,375		875,817		45,813,859
Merrill Lynch corporate bond		2,525,806		—		72,356		2,453,450
Municipal bonds		1,122,593		—		71,787		1,050,806
REMICS		400,317		1,474		835		400,956

	$	86,296,278	$	233,320	$	2,043,703	$	84,485,895

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

Note 4.

Nonperforming Assets

The Company had nonperforming assets as follows.

	September 30, 2000		December 31, 1999
Nonperforming loans	$	831,025	$	342,579
Real Estate and Repossessed Assets Held for Sale		904,187		9,613

Totals	$	1,735,212	$	352,192

At September 30, 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 September 30, 2000 and September 30, 1999:

			Income (numerator)		Shares (denominator)	Per share amount
Quarter ended September 30, 2000
	Basic EPS:
		Income available to common shareholders	$	1,679,616	4,671,286	$	0.36

	Effect of dilutive stock options			—	63,023

	Diluted EPS:
		Income available to common shareholders plus assumed stock options exercised	$	1,679,616	4,734,309	$	0.35

Year ended September 30, 2000
	Basic EPS:
		Income available to common shareholders	$	4,942,638	4,670,569	$	1.06

	Effect of dilutive stock options			—	63,639

	Diluted EPS:
		Income available to common shareholders plus assumed stock options exercised	$	4,942,638	4,734,208	$	1.04

Quarter ended September 30, 1999
	Basic EPS:
		Income available to common shareholders	$	1,547,445	4,679,239	$	0.33

	Effect of dilutive stock options			—	80,068

	Diluted EPS:
		Income available to common shareholders plus assumed stock options exercised	$	1,547,445	4,759,307	$	0.32

Year ended September 30, 1999
	Basic EPS:
		Income available to common shareholders	$	4,446,660	4,674,441	$	0.95

	Effect of dilutive stock options			—	85,988

	Diluted EPS:
		Income available to common shareholders plus assumed stock options exercised	$	4,446,660	4,760,429	$	0.93

Note 6.

					Third Quarter 2000 vs Third Quarter 1999 Increase (Decrease) Due To									Nine Months Ended September 30, 2000 vs Nine Months Ended September 30, 1999 Increase (Decrease) Due To
Rate Volume Analysis (Dollars in thousands)					Volume			Rate			Total Change			Volume			Rate			Total Change
INTEREST INCOME
	Investments:
		Available for sale securities			$	330		$	25		$	355		$	247		$	51		$	298
		Held to maturity securities				(64	)		56			(8	)		172			(43	)		129
		Other equity investments				94			(36	)		58			184			(68	)		116

			Total investments			360			45			405			603			(60	)		543
	Loans:
		Residential				63			(54	)		9			384			106			490
		Residential construction				144			25			169			301			192			493
		Multifamily				497			268			765			1,833			489			2,322
		Multifamily construction				132			159			291			281			245			526
		Commercial real estate and Business				398			193			591			1,166			342			1,508
		Commercial real estate construction				35			(39	)		(4	)		112			(65	)		47
		Consumer & Other				243			58			301			629			129			758

			Total loans			1,512			610			2,122			4,706			1,438			6,144

				Total interest income		1,872			655			2,527			5,309			1,378			6,687
INTEREST EXPENSE
	Deposits:
		Money market deposit and checking				(80	)		(6	)		(86	)		(193	)		60			(133	)
		Regular savings				(17	)		(16	)		(33	)		(34	)		(49	)		(83	)
		Time deposits				786			817			1,603			1,537			1,424			2,961

			Total deposits			689			795			1,484			1,310			1,435			2,745
	FHLB advances and other					319			363			682			1,705			967			2,672

		Total interest expense				1,008			1,158			2,166			3,015			2,402			5,417
		Net interest income			$	864		$	(503	)	$	361		$	2,294		$	(1,024	)	$	1,270

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 4 units), commercial real estate properties, and loans to small and medium-sized businesses for financing inventory, accounts receivables, and equipment, among other things. The underlying real estate collateral or business asset being financed typically secures these loans.

Financial information for the Company's segments is shown below for 2000, 1999 and 1998:

		Consumer Banking		Residential Lending		Commercial Lending		Totals
Quarter ended September 30:
Revenues from external customers	2000	$	3,012,598	$	1,527,334	$	8,498,624	$	13,038,556
	1999		2,310,595		2,244,001		6,834,970		11,389,566
	1998		1,636,586		2,565,414		6,264,749		10,466,749
Revenues from other segments	2000		5,004,410		76,437		481,968		5,562,815
	1999		4,256,010		72,441		413,991		4,742,442
	1998		5,344,132		99,671		375,080		5,818,883
Total Revenues	2000		8,017,008		1,603,771		8,980,592		18,601,371
	1999		6,566,605		2,316,442		7,248,961		16,132,008
	1998		6,980,718		2,665,085		6,639,829		16,285,632
Net interest revenue	2000		1,425,058		459,412		3,347,019		5,231,489
	1999		1,585,371		399,706		2,630,793		4,615,870
	1998		1,588,940		544,683		2,388,215		4,521,838
Income before federal income taxes	2000		61,689		100,179		2,665,380		2,827,248
	1999		108,638		507,459		1,839,396		2,455,493
	1998		435,837		497,470		1,700,493		2,633,800

		Consumer Banking	Residential Lending	Commercial Lending	Totals
Year-to-Date ended September 30:
Revenues from external customers	2000	8,142,072	5,569,153	24,164,030	37,875,255
	1999	6,686,067	6,546,361	19,568,719	32,801,147
	1998	4,702,957	8,480,841	17,908,002	31,091,800
Revenues from other segments	2000	14,347,232	252,257	1,378,779	15,978,268
	1999	13,011,876	222,429	1,193,479	14,427,784
	1998	15,989,035	337,969	1,104,631	17,431,635
Total Revenues	2000	22,489,304	5,821,410	25,542,809	53,853,523
	1999	19,697,943	6,768,790	20,762,198	47,228,931
	1998	20,691,992	8,818,810	19,012,633	48,523,435
Net interest revenue	2000	4,465,677	1,409,244	9,382,879	15,257,800
	1999	4,803,119	1,332,725	7,423,836	13,559,680
	1998	4,912,191	1,547,724	6,463,125	12,923,040
Income before federal income taxes	2000	422,251	473,508	7,186,611	8,082,370
	1999	606,479	1,349,729	5,104,700	7,060,908
	1998	1,316,623	1,669,869	4,433,542	7,420,034
Total assets as of September 30:	2000	461,962,775	90,233,841	374,542,435	926,739,051
	1999	411,571,160	98,177,125	315,886,644	825,634,929
	1998	402,153,081	109,895,075	267,723,456	779,771,612

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.

		Quarter Ended 2000			Year-to-Date Ended 2000			Quarter Ended 1999			Year-to-Date Ended 1999			Quarter Ended 1998			Year-to-Date Ended 1998
Total revenues for September 30:
Segment total revenues		$	18,601,371		$	53,853,523		$	16,132,008		$	47,228,931		$	16,284,936		$	48,523,435
Back out or add back:
	Revenues from other segments		(5,562,815	)		(15,978,268	)		(4,742,442	)		(14,427,784	)		(5,818,883	)		(17,431,635	)
	Revenues from administrative departments netted against overhead costs and reallocated as net costs		433,262			1,001,266			223,225			662,927			276,037			714,837

Consolidated total revenues		$	13,471,818		$	38,876,521		$	11,612,791		$	33,464,074		$	10,742,090		$	31,806,637
Net interest revenue for September 30:
Segment net interest revenue		$	5,231,489		$	15,257,800		$	4,615,870		$	13,559,680		$	4,521,142		$	12,923,040
Back out or add back:
	Difference between actual interest expense and intersegment funding allocation		(367,798	)		(538,856	)		40,687			(9,834	)		(280,276	)		(495,175	)
	Interest revenues of administrative departments netted against overhead costs and reallocated as net costs		328,252			605,862			175,087			505,131			219,696			542,165

Consolidated net interest revenue		$	5,191,943		$	15,324,806		$	4,831,644		$	14,054,977		$	4,460,562		$	12,970,030
Income before federal income taxes for September 30:
Segment pre-tax income		$	2,827,248		$	8,082,370		$	2,455,493		$	7,060,908		$	2,633,104		$	7,420,034
Back out or add back:
	Unallocated loan losses		(50,000	)		(280,000	)		(250,000	)		(685,000	)		(385,433	)		(585,433	)
	Unallocated net expenses of administrative departments		—			—			—			—			—			(789,582	)
	Difference between actual total funding cost and total intersegment funding allocation		(238,795	)		(327,228	)		136,552			353,740			(210,320	)		(193,060	)

Consolidated pre-tax income		$	2,538,453		$	7,475,142		$	2,342,045		$	6,729,648		$	2,037,351		$	5,851,959
Total assets as of September 30:
Segment total assets					$	926,739,051						825,634,929						779,771,612
Back out or add back:
	Inferred intersegment interest earning assets on branch deposits					(296,817,214	)					(277,588,741	)					(306,241,438	)
	Unallocated reserve for loan loss					(6,470,422	)					(6,220,843	)					(5,404,431	)
	Unallocated nonearning assets of administrative departments					4,983,412						5,998,936						5,965,922

Consolidated total assets					$	628,434,827					$	547,824,281					$	474,091,665

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 financial 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 ten full-service facilities located in Bellevue (3), Kirkland, 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.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income increased $360,000, or 7.5%, in the third quarter of 2000 as contrasted with the same quarter in 1999. The net interest margin for the quarter was 3.44%, which compares to 3.41%, 3.52%, 3.61%, and 3.69% for the quarters ended June 30, 2000, March 31, 2000, December 31, 1999, and September 30, 1999, respectively.

Net interest income improved principally as a result of an increase in earning assets, which contributed $864,000 in the third quarter. Offsetting the benefit from greater-earning assets, which grew from $533,542,000 at September 30, 1999, to $610,003,000 at quarter-end September 2000, was the negative impact of $503,000 from a change in interest rates.

The unfavorable change in interest rates is primarily due to the fact that our liabilities repriced more quickly than our assets. The cost ratio of our interest-bearing liabilities (interest expense/average earning assets) rose 85 basis points to 5.32% for the third quarter of 2000 from 4.47% for the same period a year ago. By comparison our ratio for return on assets (interest income/average earning assets) only increased 60 basis points from 8.16% in 1999 to 8.76% this year.

In general, interest rates have risen rapidly over the past year. For example, the one-year Treasury rate has increased from 5.45% at September 30, 1999, to 6.28% in September of this year, or 83 basis points. The Bank's net interest margin was affected by this rise in interest rates because of its negative mismatch of assets and liabilities. First Mutual's "gap," or mismatch between one-year assets and liabilities, was a negative 15.3% at year-end 1999, meaning that more liabilities would reprice in the next 12 months than assets. By March 31, 2000, that gap had widened further to a negative 23.5%, and then rebounded back to a negative 11.6% last quarter. The current gap position is a positive 2.7%, which indicates that slightly more assets will reprice in the next year than liabilities. Please see "—ITEM 3. Quantitative and Qualitative Disclosures about Market Risk" on page 27 for a more complete discussion regarding the impact interest rates may have on the Bank's net interest income.

Over the past year, the Bank has increased its attention to gap management. Included in the Bank's plan was an emphasis on acquiring assets with one-year repricing characteristics and extending the repricing of liabilities beyond the one-year time frame. This strategy proved successful over the last few months as can be seen by the change in the Bank's gap position. In addition, a new forecast report related to the Bank's gap is now compiled and reviewed monthly. The forecast is a projection of the

Bank's one-year gap position for the upcoming two calendar quarters. It incorporates assumptions from the overall Bank forecast as well as strategies adopted in the Bank's monthly Asset and Liability Committee meetings. The gap forecast provides management and the Board of Directors the ability to assess and weigh the impact and effectiveness of current asset and liability strategies as they relate to the Bank's balance sheet. Presently, the forecasted one-year gap position is well within the Bank's policy limits of -20% to +10%.

Net interest income year-to-date 2000, after provision for loan losses, rose $1,675,000, or 12.5%, over the comparable period in 1999. Like the third quarter, the improvement in net interest income was the result of a growth in earning assets. Greater earning assets contributed $2,294,000, which was partially offset by an unfavorable variance of $1,024,000 in interest rates. See Note 6 for further information regarding volume and rate relationships affecting net interest income.

Other Operating Income

Other operating income consisted of the following:

	Three Months Ended September 30					Nine Months Ended September 30
	2000			1999		2000			1999
Sale of Servicing Rights	$	86,000		$	419,000	$	189,000		$	1,441,000
Secondary Market Fees		(224,000	)		115,000		(332,000	)		(359,000	)
Mortgage Servicing Rights		53,000			24,000		186,000			252,000

Gain on Sale of Loans		(85,000	)		558,000		43,000			1,334,000

Servicing Fees		107,000			124,000		446,000			354,000
Broker Fees—Loans		14,000			57,000		90,000			188,000
Late Charges—Loans		30,000			16,000		68,000			53,000
Prepayment & Extension Fees		29,000			33,000		95,000			147,000
TransAlliance Limited Partner		39,000			0		83,000			0
Other Income		65,000			51,000		183,000			170,000
NSF Fee Income		36,000			40,000		118,000			104,000
Other Deposits Fees		22,000			45,000		93,000			142,000

Total	$	257,000		$	924,000	$	1,219,000		$	2,492,000

Non-interest income declined from $924,000 in the third quarter of 1999 to $257,000 this year. Most of that decline is due to a drop in the gain on sale of loans, which plunged from $558,000 in 1999 to a loss of $85,000 in the same quarter of 2000. The fall in income is largely a combination of a $333,000 drop in the sale of servicing rights and a $339,000 adverse swing in secondary market fees both of which were partially offset by a $29,000 increase in mortgage servicing rights.

Year-to-date, non-interest income has declined $1.3 million, as compared to the first nine months of 1999. Like the third quarter, the decrease is mainly attributable to the decline in gain on sale of loans, which dropped from $1,334,000 in the first nine months in 1999 to $43,000 this year.

The sale of servicing rights amounted to $419,000 in the third quarter of last year as compared to $86,000 in 2000. The principal reason for that decline was a fall in the sale of loans with servicing rights which amounted to $27 million in the third quarter of 1999, and only $6 million in the like quarter of 2000. Year-to-date, the sale of servicing rights is $189,000 this year, as contrasts with $1,441,000 last year. The sale of loans with servicing rights totaled $99 million in the first nine months in 1999, as compared to $19 million year-to-date 2000.

Secondary market fees are the cash gains or losses from the sale of loans into the secondary market. Cash losses on loan sales of $12,540,000 in the third quarter totaled $224,000. That figure

compares to a gain of $115,000 on loan sales of $10,386,000 in the same quarter of 1999. The swing in secondary market fees is principally the result of an adverse impact from "pair off" fees. When the Bank has a forward commitment to the secondary market to deliver loans and is unable to satisfy that commitment because of loan origination activity, the position is closed (paired off) with either a gain or loss to the Bank. Pair offs are a routine secondary market activity; however, whether the pair off results in a gain or loss is largely dependent on the movement of mortgage rates. When rates decline, losses occur in pair offs, and vice-versa in a rising market. On approximately the same amount of loan sales ($13 million in third quarter 2000 versus $10 million in 1999), pair offs represented a gain of $157,000 in the third quarter of 1999 as compared to a loss of $192,000 in year 2000. Mortgage rates were rising last summer/fall as opposed to a flat-to-declining environment this year.

The year-to-date trend in secondary market fees is the result of both a dramatic change in loan sales and the pair off gains and losses experienced in the third quarter of each year. In addition to the pair off fees noted earlier, the year-to-date losses were affected by fewer sales this year, $33,749,000, compared to $101,297,000 in 1999. The combination of pair-off gains/losses, influenced by interest rate trends and a 66.7% drop in loan sales this year, resulted in secondary market losses, year-to-date, totaling $332,000 in year 2000, and $359,000 last year.

The gains recorded for mortgage servicing rights (MSR) 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 totaled $53,000 in the third quarter of 2000, as compared to $24,000 in the same period in 1999. The increase in MSR income for the third quarter of 2000 is due to a gain of $53,000 recorded on $8.6 million of loan sales as compared to a gain of $24,000 based on $6.2 million of loan sales for the same period in 1999. The gain in the third quarter increased 120.8% from 1999 to 2000 as compared to the loan sales which increased only 38.7%. The reason for the difference regarding the increase in MSR income versus loan sales is due to the reevaluation of the estimates used in calculating the internally generated MSR assets. During the first quarter of 2000 the Bank reevaluated the estimates it uses in calculating the value of the MSR asset. Key considerations included the fair market value, when known, and cash flow projections. Based on the evaluation performed at the beginning of the year, the value of MSR has been increased significantly from the valuations used in 1999.

Year-to-date the MSR income is down $66,000 or 26.2% compared to 1999. The drop in MSR gains year-to-date in 2000 is the result of lower loan originations compared to 1999, partially offset by the change, this year, in the valuation of the capitalized mortgage servicing rights.

Servicing fees continued to decline in the third quarter of 2000. The servicing fee income dropped $17,000 from $124,000 in the third quarter of 1999, to $107,000 in the like quarter of 2000. The servicing portfolio totaled $179 million at September 30, 2000, as compared to $204 million a year ago. The sale of servicing rights in the last few years has eroded the balance of that portfolio. Although the year-to-date numbers appear to be improving from $354,000 for the nine months ended September 30, 1999, to $446,000 for the same period in 2000, the major improvement was due to a $120,000 adjustment that was made to the mortgage servicing rights valuation account in the first quarter of 2000. Absent that adjustment, the year-to-date servicing fee income would have been $326,000, reflecting the downward trend that is apparent in the third quarter results.

In the fourth quarter of 2000 and the first quarter of 2001, it is the Bank's intent to sell the majority of its mortgage servicing rights. The loans attached to these servicing rights have been sold in previous periods to investors. The Bank had retained the rights to service these mortgages and currently collects a monthly income on the services that it provides. It is anticipated that the sale will take place in two transactions, depending upon the buyer. The first transaction would commence in the fourth quarter of 2000, and the second transaction would take place in the first quarter of 2001. The

two sales would entail approximately 95% of the remaining servicing portfolio. Presently, the estimated market value of the portfolio ranges from $1.3 million to $1.9 million. These sales figures are preliminary estimates, and the Bank cannot guarantee that these transactions will even occur. Currently the Bank sells its new production of servicing rights on a monthly "flow" basis. It is anticipated that the Bank will continue this business practice in the future.

The Bank's decision to sell its servicing portfolio in the coming two quarters is prompted by a concern that future loan prepayments could degrade the economic value of the portfolio. The Bank has gone to auction with the sale of the servicing rights, and will not know until later this year if the auction results in an actual sales transaction. If these two sales take place, the impact on servicing fee income will be dramatic. The exact impact is not known at this time but the expected result would be a significant decrease in the service fee income that the Bank would realize in future periods.

	Loans Originated for Mortgage Banking Activities
	Year 2000		Year 1999
First Quarter	$	11,434,000	$	44,470,000
Second Quarter		22,035,000		33,174,000
Third Quarter		17,143,000		11,767,000

Total Year-to-Date	$	50,612,000	$	89,411,000

Broker fees are down as a result of lower mortgage-banking loan originations. Mortgage-banking loan closings are off 103.2% year-to-date 2000 as compared to the first three quarters of 1999.

Late charge fees have increased 87.5% compared to third quarter last year. Late charges on loans amounted to $30,000 for the third quarter 2000, as compared to $16,000 for the like quarter last year. This increase is mainly attributable to the decline in non-performing assets that the Bank has experienced over the past quarter. During the third quarter a commercial real estate loan in Oregon paid its past due payments to include late charges, thus adding substantially to the Bank's late charge income. (Please see the section titled "Asset Quality" on page 25 for a complete discussion of the Bank's non-performing loans.) In addition, the Bank has been proactive in assessing and collecting late fees on its commercial, multi-family and speculative construction loans. Year-to-date the Bank's late charge income has increased from $53,000 to $68,000, a 28.3% increase. The year-to-date increase of $15,000 is a result of the third quarter 2000 rise. Also, adding to the increase in the year-to-date income is the increase in late fees collected from the Bank's installment loan customers. These late fees have increased 101% compared to the first three quarters of 1999. This increase equates to a mere $2,200, but as the Bank continues to grow this segment of the business, it is expected that this area will increase its contribution to the Bank's late fee income.

Prepayment and extension fees, which are usually related to construction lending, have declined despite an increase in construction lending. Construction loan originations totaled $25.9 million in the third quarter of 2000 and $68.4 million year-to-date. In comparison, construction loans closed in the same periods of 1999 were $16.3 million in the third quarter, and $47.4 million for the first nine months. Over the past year the Bank has been progressing through a transition period in regards to a policy change regarding custom construction loans. The decision was made mid-1999 to eliminate extension fees in relation to custom construction projects that have not been completed within the allotted construction period. The new policy is to move the loan into a permanent loan status and require the borrower to commence paying principal and interest payments at the maturity of the construction phase on the entire loan balance. This change has contributed to the decline in the prepayment and extension fees that the Bank has collected over the past year. This decline has been partially offset by the interest earned on the undisbursed portion of the loan, thus increasing the yield. Currently, there are only a few loans outstanding that are still under the "old" program. This change

has basically shifted the collection of extension fee income from "Other Operating Income" on the income statement to "Interest Income." The impact of this change is a decline in extension fee income of $16,000 year-to-date 2000, as compared to the first three quarters of 1999.

The TransAlliance Limited Partnership dividend was again a pleasant surprise for the quarter and year-to-date. The majority of the dividend was due to earnings that had previously been retained during the period July 1998 through July 1999 for the purpose of ensuring that TransAlliance had adequate reserves to cover any contingencies regarding Y2K matters. The Bank has also received a fourth quarter dividend from TransAlliance in the amount of $29,000 which will be reflected in fourth quarter 2000 earnings. At this time the outlook regarding dividends to be received in future periods from the TransAlliance Limited Partnership is uncertain.

Other deposit fees have declined in 2000, $23,000 on a quarter-to-quarter basis, and $49,000 on a year-to-date basis, due to a change in strategic direction regarding non-Bank insured investments. The Bank found that fee income derived from those investment sales is not sufficient to justify the expense and effort dedicated to that activity.

Operating Expenses

Operating expenses consisted of the following:

	Three Months Ended September 30					Nine Months Ended September 30
	2000			1999		2000		1999
Salaries and Benefits	$	1,595,000		$	2,075,000	$	5,212,000	$	5,705,000
Occupancy		461,000			383,000		1,311,000		1,072,000
Legal Fees		55,000			26,000		145,000		242,000
Marketing/Public Relations		141,000			124,000		402,000		340,000
B&O Taxes		63,000			79,000		124,000		225,000
REHFS Expense		(24,000	)		0		7,000		0
Data Processing		113,000			98,000		334,000		319,000
Office Supplies/Postage		96,000			89,000		246,000		269,000
Audit & Examination		39,000			33,000		116,000		99,000
Other		321,000			257,000		891,000		861,000

Total	$	2,860,000		$	3,164,000	$	8,788,000	$	9,132,000

Salaries and employee benefits were down slightly, as compared to last year in both the third quarter and first nine months of 2000. Loan officer commissions, because of decreased loan originations, have declined 49.5% in the third quarter of 2000, and 31.8% year-to-date. Also reducing salary and benefit expense, on a quarter-to-quarter comparison, is the decreased provision for the staff performance bonus. The provision in the third quarter of 1999 was $326,000 as compared to a $92,000 reversal this year of a first quarter 2000 accrual. Year-to-date the expense for year 2000 is zero as compared to $643,000 in the same period of 1999. The staff bonus is accrued throughout the year in accordance with management's assessment as to the amount that will be due the staff at year-end.

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 third quarter of 2000 the SFAS No. 91 benefit related to compensation and employee benefits amounted to $173,000, as compared to $296,000 last year. Year-to-date the SFAS No. 91 benefit totaled $570,000. The comparable figure for 1999 is $922,000. The decrease in SFAS No. 91 benefits is largely the result of a drop in loan originations this year. Loans closed year-to-date 2000 totaled $162 million versus $237 million the prior year.

Occupancy expense increased $78,000, or 20.5%, on a quarter-to-quarter comparison. Year-to-date 2000 occupancy expense is up $239,000, or 22.3%. During the third quarter First Mutual Bank opened its tenth full-service branch in Kirkland. In addition during the year, the Bank has expanded its facilities at the Bellevue headquarters and added the Salem loan production office. The rise in occupancy costs is largely the result of increased rent expense, which has jumped 50.9% on a quarter-to-quarter basis and 39.5% on a year-over-year comparison. The Bank also purchased an existing site in Juanita that is expected to commence operations in the fall of 2001. Additionally, in the third quarter of 2000, the Bank purchased a permanent site to replace the existing Ballard Branch. This site has an existing structure on it, which will need to be demolished before construction of the new branch may commence. Due to the unknown amount of time that it will take to process a building permit, as well as the time it will take to construct the new branch, a proposed timeframe for opening the new branch has not been set. As with all new branches, the addition of these new offices will contribute to the increase in occupancy expense in the future. Please see the subheading "Expansion" on page 27 for more discussion on the intent of the Bank to expand its branch network.

For the third quarter of 2000, legal fees are up approximately 111.5% due to the increased legal expenses associated with the rise in the Bank's real estate held for sale. Year-to-date legal fees reflect a different trend. For the first three quarters of 2000, legal expenses are down 40.1% compared to the same time period a year ago. The reason for the change is due to the substantial legal fees that were incurred in 1999 associated with the formation of First Mutual Bancshares, Inc., the Bank's holding company.

Business and occupation (B&O) taxes for the third quarter of 2000 are $63,000 versus $79,000 in the like quarter last year. The final $10,000 refund from the State of Washington Department of Revenue was recorded in the third quarter. Year-to-date B&O taxes are $124,000, as compared to $225,000 in 1999. Year-to-date figures are down compared to 1999 due to the $95,000 refund of B&O taxes from the State of Washington Department of Revenue recorded in the second and third quarters of 2000.

Real estate held for sale (REHFS) expense was a negative $24,000 for the third quarter and $7,000 year-to-date 2000. There were no similar costs in the first three quarters of 1999. In the third quarter of 2000, the Bank reversed $29,000 of expense that was recorded in June 2000 that was later determined to be a capitalizable item. These costs were related to the residential real estate held for sale (REHFS) of $564,000 under the Asset Quality subheading. For a further discussion of this asset, see "Asset Quality" on page 25.

Net Income

Net income increased 8.6%, from $1,547,000 in the third quarter of 1999 to $1,680,000 in the same period of 2000. For the first nine months of 2000 net income is up $496,000, or 11.2%, over the comparable period in 1999. The improvement in net income is a reflection of higher net interest income and reduced operating expenses, offset by a decrease in non-interest income.

BUSINESS SEGMENTS

The Bank has identified three segments of business for the purposes of management reporting. 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. 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.

Consumer Banking

Income before taxes for the consumer-banking segment fell from $109,000 in the third quarter of 1999 to $62,000 in the same quarter in 2000. The decline in income before taxes was largely the result of a drop in net interest income.

Net interest income was down $160,000, falling from $1,585,000 in the third quarter of 1999 to $1,425,000 this year. The net interest margin also declined from 1.57% in 1999 to 1.25% in 2000. Although average assets this year increased $50.4 million, or 12.4%, on a quarter-to-quarter comparison, the favorable impact from that growth was insufficient to offset the compression in the net interest margin.

Non-interest income increased from $134,000 in the three months ending September 1999 to $182,000 in the same quarter this year. Contributing to the growth in non-interest income was the $39,000 dividend received from the TransAlliance Limited Partnership. TransAlliance is a network of automated teller machines (ATMs), and dividends are paid to the limited partners as deemed appropriate by the Partnership's directors. No dividends were paid in 1999.

Operating expenses were down slightly, $79,000, from $1,613,000 in the third quarter of 1999 to $1,534,000 this year. The decline in operating expenses is principally the result of the reversal of the accrual for the staff performance bonus as compared to last year, wherein a bonus was paid.

The year-to-date trend is similar to that of the third quarter. Net interest income is down significantly; fee income is up $108,000, or 26.5%; and operating expenses are down a modest 2.0%. Net interest income fell from $4,803,000 in the first nine months of 1999 to $4,466,000 this year. The net interest margin has compressed from 1.55% in 1999 to 1.36% in the nine months ended September 30, 2000. The consumer line of business, like the Bank as a whole, has experienced an environment in which deposit costs have risen more rapidly than asset revenues.

Non-interest income year-to-date is largely the reflection of TransAlliance Limited Partnership payments received in 2000.

Residential Lending

Income before taxes dropped sharply for the residential lending segment, from $507,000 in the third quarter of 1999 to $100,000 in 2000. Non-interest income fell dramatically, from $701,000 last year to a negative $18,000 for the third quarter of 2000. Most of that decline is due to a drop in the gain on sale of loans, which plunged from $558,000 in 1999 to a loss of $85,000 in the same quarter of 2000. The fall in income is a combination of a $333,000 drop in the sale of servicing and a $339,000 adverse swing in secondary market fees. Sale of servicing amounted to $419,000 in third quarter of last year as compared to $86,000 in 2000. Servicing sales totaled $27 million last year and only $6 million in the like quarter of 2000.

Operating expenses decreased 42.4%, from $593,000 in the three months ending September 30, 1999, to $342,000 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 $139,000 in the third quarter of 1999 as compared to $50,000 in the like period of 2000. SFAS No. 91 benefits, which are also affected by loan originations, dropped from $98,000 last year to $62,000 in the third quarter 2000. The reversal of the employee performance bonus also contributed to the decrease in operating expenses in third quarter 2000.

The year-to-date results for residential lending are much the same as the third quarter. Pre-tax income is down 64.9%, from $1,350,000 in 1999 to $474,000 in 2000. Fee income is down considerably, which is partially offset by a decline in operating expenses.

Non-interest income fell from $1,753,000 in the first nine months of 1999 to $311,000 in the same period this year. Both the sale of servicing rights and loan originations are down significantly. Servicing sales have fallen 87.0% and loan originations for this business segment have decreased 43.4%.

Operating expenses declined from $1,736,000 in the first three-quarters of 1999 to $1,247,000 this year. On a year-to-year comparison, loan officer commissions are down 47%, and there was no staff bonus accrued. Partially offsetting the impact of those two items on operating costs was the loss of $240,000 in SFAS No. 91 benefits.

Commercial Lending

Income before taxes for this business segment rose $826,000, or 44.9%, from $1,839,000 in the third quarter of 1999 to $2,665,000 in the like period of 2000. Net interest revenue grew $716,000, while operating expenses fell $116,000.

Net interest revenue benefited from a 17.4% increase in average assets. Average assets rose from $311 million in the third quarter of 1999 to $365 million this year. Also of importance to this business segment was the improvement in the net interest margin, which rose from 3.38% in the third quarter of 1999 to 3.66% in the like period of 2000. The favorable change in the net interest margin for this business line is related to the asset mix of its loan portfolio. Unlike the other two business segments, the assets for commercial lending repriced more rapidly than the funding sources.

Operating expenses declined 13.9% in the third quarter of 2000, as compared to the like quarter in 1999. Non-interest expenses dropped primarily because of the reversal of the staff performance bonus costs.

The year-to-date trend parallels the third quarter. Income before federal income taxes has risen $2,082,000, or 40.8% from $5,105,000 in 1999 to $7,187,000 in year 2000. Net interest income is up 26.4% and operating costs are down 6.7%.

Net interest income jumped $1,959,000 from $7,424,000 in the first three quarters of 1999 to $9,383,000 in the same period in 2000. Average assets have grown 20.7% from $295,061,000 in 1999 to $356,244,000 this year.

Operating expenses year-to-date are down $166,000 from $2,495,000 in the first three quarters of 1999 to $2,329,000 this year. The absence of the staff performance bonus and a refund in B&O taxes in second quarter contributed materially to the decrease in operating costs.

FINANCIAL CONDITION

Assets. At September 30, 2000, the Bank's assets were $628,435,000, an increase of 8.1% from $581,116,000 at December 31, 1999. The change in assets is principally the result of growth in the loan portfolio and loans held for sale categories.

Loans. Loans receivable rose from $457,981,000 at year-end 1999 to $464,597,000, an increase of 14.4% in the first nine months. Portfolio loan growth for nine months of 14.4%, or 19.3% annualized compares to 5.6% annualized, for the first half of 2000. The Bank targets portfolio loan growth of 15.0% annually. The unexpected increase in the third quarter was mainly due to a decline in the prepayment rates that the Bank has been experiencing. Throughout the year the Bank has seen annualized prepayment rates as high as 25% per month, and the year-to-date annualized loan payoff rate is 13.7%. Third quarter average annualized loan payoffs dipped down to 9.17% largely due to the fact that in September the Bank did not experience any payoffs on its larger commercial loans.

Loans originated were $56 million for the quarter, down from $66 million in the like quarter of 1999. Year-to-date loan originations are off $74 million, or 31.4% from last year. Residential loans, which represent about 16% of the Bank's portfolio, have declined because of the earlier rise in

mortgage interest rates. Until long-term mortgage interest rates drop substantially from their present levels, it is not likely that there will be a significant increase in lending from that area.

Commercial real estate loan originations, which have fallen 20.7% on a year-to-date basis, have been affected by a general concern among developers that projects begun at this stage of the economic cycle could be at risk if the Puget Sound area economy were to significantly decline. The Bank anticipates that loan volumes for both residential and commercial loans in the fourth quarter will be at or near levels experienced in the third quarter.

Loans held for sale increased from $2,710,000 at year-end 1999 to $19,572,000 as of September 30, 2000. The rise in loans held for sale is attributable to several factors. First of all, routine volatility in mortgage-banking activity affects the total balance of loans held for sale. Secondly, construction lending for custom-built homes has picked up this year. Loan originations for custom homes totaled $13.7 million in the first nine months of last year, as compared to $21.1 million in 2000. Because custom homes often take 6-12 months to build they remain on the Bank's balance sheet much longer than a typical mortgage-banking loan, which is usually shipped within 45 days of origination. A consequence of closing more custom loans this year has been a partial inflation of the loans-held-for-sale asset.

Mortgage Servicing Rights. As was discussed under the sub-heading "Other Operating Income", it is the intent of the Bank to sell the majority of the mortgage servicing rights that are currently carried on the Bank's balance sheet at $174,000. These servicing rights are related to mortgage loan balances of approximately $133.5 million. The sales that are expected to take place in the fourth quarter of 2000 and the first quarter of 2001 would virtually eliminate the mortgage servicing rights asset from the Bank's balance sheet. As well, the fee income that the servicing rights generate would decrease substantially in future periods. Please see the discussion regarding this issue on page 17 under the sub-heading "Other Operating Income."

Securities. 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. The balance of the unrealized loss, net of federal income taxes, was $682,000 at September 30, 2000, and $669,000 at year-end 1999. Generally, rising interest rates will increase the amount recorded as unrealized loss, and falling rates will decrease any unrealized losses, as the market value of securities inversely adjusts to the change in interest rates.

Security investments increased $19.0 million, or 18.1%, from year-end 1999. The increase in securities is the result of converting $22.6 million of residential loans to securities in July and the normal loan prepayment activity, which occurs with mortgage-backed securities. As a result of this transaction, the Bank is relieved of any future credit risk associated with those loans; it also gains a capital advantage in the calculation of the risk-adjusted capital ratio. In the determination of the risk-adjusted ratio, securities are risk-weighted at 20%, while residential loans are risk-weighted at 50%. This transaction increased the Bank's Total Capital Ratio by .16%. Those securities were classified as available for sale, which means that the Bank could choose to sell those securities should interest rates move in a favorable direction.

Liabilities. Funds from deposits increased $52,051,000, or 13.0%, in the first nine months of 2000, as compared to a decrease of 2.1% in the first nine months of 1999. The Bank is pleased with the current deposit growth, 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.

The FHLB advances declined from $134,237,000 at year-end 1999 to $124,777,000 as of the end of the third quarter. This decline of 7.0% compares to an increase of 212.6% for the first nine months of

1999. As of September 30, 2000, the Bank had the capacity to borrow up to $251 million in FHLB advances, subject to sufficient collateral to support those advances.

Asset Quality

Provision and Reserve for Loan Losses. The provision for loan losses reflects the amount deemed appropriate to produce an adequate reserve for estimated losses that exist based on the inherent risk characteristics of the Bank's loan portfolio. In determining the appropriate reserve balance, the Bank takes into consideration the profile of the loan portfolio, the local and national economic outlook, and the current and historical performance of the loan portfolio.

The determination of the level of reserves, and thus any additional provision, is arrived at through a process that begins with the Asset Management Department. That department analyzes the loan portfolio from a historical credit perspective and a composition and geographic concentration viewpoint. The Asset Management Department then prepares an economic analysis of the Puget Sound region to include employment forecasts, housing sales, vacancy rates, commercial real estate analysis, and comments on the area's major employers. That information is then reviewed by the Bank's Senior Loan Committee, which further evaluates national and international trends and establishes the appropriate level of reserve.

As a result of the analysis, a $50,000 provision for loan losses was recorded in the third quarter of 2000. In arriving at this decision, the Loan Committee took into consideration the fact that the loan portfolio has actually dropped $2 million in the last three months and is up only $1.6 million in the past six months and that the loans classified as "watch" or worse increased $2.4 million. In addition to these statistics, the Loan Committee addressed two factors that affected their view of the inherent risks. In reviewing the classified loans it was noted that the Bank has made significant progress in improving the Bank's position with three of the larger loans. And secondly, the economy has remained stronger than expected and employment continues to grow. Interest rates have declined slightly, and expectations of further rate increases by the Federal Reserve have largely disappeared.

Non-performing assets were .28% of total assets in the third quarter, up from .09% in the like quarter of 1999. On a quarterly sequential basis, non-accrued assets have declined from .48% in the second quarter of this year.

Non-performing assets are composed of RHFS and repossessed assets of $904,000, and non-performing loans of $831,000, for a total of $1,735,000. The composition of those assets is as follows:

	Amount
Residential Real Estate (RHFS), Portland	$	564,000
Four Residential Loans (RHFS), Puget Sound Area		331,000
Personal Watercraft		10,000
Residential Loan, Oregon Coast		221,000
Residential Loan, Puget Sound		312,000
Two Residential Loans, Spokane		247,000
Five Consumer Loans		34,000
Home Equity Loan		16,000

Total	$	1,735,000

Real Estate Held for Sale (RHFS). The loan held for sale in Portland is a partially finished home which has a balance of $564,000. The Bank has executed a purchase and sale agreement regarding this property which should close prior to year-end.

The four loans in Puget Sound are builder loans with a current balance of $331,000. The Bank expects to spend another $240,000 to finish those homes, and anticipates that it will about break even after netting closing and sales costs.

The repossessed personal watercraft, with a balance of $10,000, is worth an estimated $6,000. Obviously, the Bank anticipates a small loss on this loan.

Another builder loan for $221,000 is a residence on the Oregon coast. The value of this property is only $170,000; however, the Bank has a claim pending with a title company to reimburse First Mutual up to $75,000 for any losses.

A home in the Puget Sound area carries a balance owing of $312,000. The borrower is on a repayment plan, and the property is worth an estimated $525,000. The Bank does not anticipate any losses from this loan.

Another delinquent home loan, with a balance of $113,000, is located in Spokane. The Bank has mortgage insurance on the loan, which it expects will cover any potential losses. An additional home loan in Spokane, with an unpaid balance of $134,000, will also most likely not result in a loss to the Bank. The home has an estimated market value of $200,000.

The five consumer loans, totaling $34,000, involve four motorcycles and several loans on home improvements for windows. The Bank anticipates collecting its full loan balances on the window loans, and taking a modest loss on some of the motorcycle loans.

The final loan, for $16,000, is a home equity loan, which has since been reinstated.

In summary, although there are a number of loans that are troublesome, none of them appear to present a significant potential for loss.

Liquidity and Capital Reserves

The net change in cash, as reported in the Statement of Cash Flows, increased by $409,000 in the first nine months of 2000. The deposit flows for the first nine months of 2000 were strong, and the Bank was able to both fund its assets and pay down its FHLB borrowings.

The net cash flows from deposits were $52.0 million in the first nine months of 2000. That cash was principally used to fund the loan portfolio, which increased $26.8 million since year-end 1999, and to reduce FHLB advances, which dropped $9.5 million.

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 19.9%, 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 $50,000,000.

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 of this year. No purchases were made in the second or third quarters.

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 September 30, 2000, the Bank exceeded the capital levels required to meet the definition of a well-capitalized institution:

		Actual		"Well-capitalized" Minimum Ratio
Total capital (to risk-weighted assets):
	First Mutual Bancshares, Inc.	11.22	%	10.00	%
	First Mutual Bank	11.25		10.00
Tier I capital (to risk-weighted assets):
	First Mutual Bancshares, Inc.	9.97		6.00	%
	First Mutual Bank	10.00		6.00
Tier I capital (to average assets):
	First Mutual Bancshares, Inc.	7.16		5.00	%
	First Mutual Bank	7.18		5.00

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, the Federal Financial Institutions Examination Council defines year-end 2000 as a possible concern.

The Bank currently believes that this date will not pose significant operational problems, although, there can be no assurance that any significant failure will not have a material impact on the operations of the Bank.

EXPANSION

The Bank opened its Kirkland Branch in September. This is the Bank's tenth branch. A branch site has also been acquired in Juanita, just north of Kirkland, and a new site for the existing Ballard Branch was recently purchased, with construction expected to begin in 2001. In addition, negotiations are currently taking place for two other de novo branch sites, both located on the east side of Lake Washington, which is the Bank's primary focus for enlarging the branch franchise. The Bank also made the decision to close its Salem, Oregon, Loan Production Office in November 2000, and has restructured some of its residential lending operations to reflect diminished residential loan activity.

The Bank continues to seek opportunities to expand its branch franchise in its primary market area east of Lake Washington, and north from Renton to the Bothell/Kenmore area. This particular market area has the highest household income and household net worth of any area in the state, including Seattle. This expansion will continue to have an impact on expenses as branches are opened. The operating cost of a new office can range from $25,000 to $30,000 a month. Income from branch operations often requires a number of years before it equals operating expenses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank'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 Bank'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 unreasonable risks subjecting the Bank 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 Bank monitors interest rate sensitivity by examining its one-year and longer gap positions on a regular basis. Gap analysis and an 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 Bank utilizes the gap report as a complement to its simulation model.

The Bank utilizes an 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 Bank. 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 Bank updates and prepares simulation modeling monthly for review by ALCO (Asset Liability Committee), senior management, and the Board of Directors. The Bank believes that its 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 Bank'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 Bank's income simulation model results and its gap analysis results for the periods ending September 30, 2000, and December 31, 1999, are presented below. The simulation results indicate that in a rising or declining rate environment the effect to net interest income would be a decrease. This is indicative of the Bank's sensitivity to its liabilities.

RATE SHOCK ESTIMATES
Net Interest Income and Market Value
September 30, 2000

	September 30, 2000 Percentage Change				December 31, 1999 Percentage Change
Immediate Change in Interest Rates	September 30, 2000 Percentage Change				December 31, 1999 Percentage Change
Immediate Change in Interest Rates	Net Interest Income		Net Market Value		Net Interest Income		Net Market Value
+400	(5)	%	(27)	%	(15)	%	(49)	%
+300	(3	)	(19	)	(11	)	(38	)
+200	(1	)	(12	)	(8	)	(26	)
+100	—		(5	)	(4	)	(14	)
-100	(1	)	2		1		5
-200	(4	)	2		—		8
-300	(7	)	(3	)	(2	)	6
-400	(11	)	(8	)	(4	)	2

The simulation results for September 30, 2000 indicate that if interest rates were to immediately rise or fall 200 basis points, the effect on the Bank's net interest income would change by -1% and -4%, respectively. Additionally, applying the same changes in interest rates, the Bank's net market value would change by -12% and +2%, respectively.

			One-Year Interest Rate Sensitive Gap
			September 30, 2000		December 31, 1999
One-year repricing assets			$	384,905,503	$	333,124,176
One-year repricing liabilities				368,278,349		422,095,639
	One-year Gap			16,627,154		(88,971,463	)

		Total assets	$	628,434,827	$	581,116,306

Interest sensitive Gap as a percent of assets				2.7%		(15.3	)%

The mismatch between one-year assets and liabilities, called "gap," was negative 15.3% at year-end 1999, meaning that there were more liabilities repricing in the next 12 months than assets. By March 31, 2000, that negative gap had further increased to 23.5%, and then rebounded back to a negative 11.6% last quarter. The current gap position is a positive 2.7%, which indicates that we have slightly more assets repricing in the coming 12 months than liabilities. Although the gap analysis is not as complex as the simulation model, the present gap position would suggest that near-term changes in interest rates might not significantly impact the net interest margin.

Although the one-year Gap indicates that if rates were to rise, interest income would increase as opposed to the results of the simulation model, the simulation model indicates that in a rising rate environment, net interest income would decline. The discrepancy between these two models is due to the numerous assumptions and projections embedded in these models. These models are used as indicators with a much greater reliance on the simulation model.

The sensitivity analysis does not represent a forecast for the Bank. 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 Bank cannot make any assurances as to the outcome of these analyses.

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 AND USE OF PROCEEDS

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.: A report on Form 8-K was filed on July 7, 2000, under Item 5 to update the description of the registrant's capital stock.
c.: A report on Form 8-K was filed on September 21, 2000, under Item 4 regarding the termination of Deloitte & Touche LLP as the Company's independent accountants and the engagegement of Moss Adams LLP as the Company's new independent accountants.

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," "intend," "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 its 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.

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.

Date: November 14, 2000		FIRST MUTUAL BANCSHARES, INC.
		/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)