<PAGE>
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number: 0-26184
FIRST MUTUAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 37-1339075
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 East Main Street, Decatur, Illinois 62523
---------------------------------------------
(Address of principle executive offices)
Registrant's telephone number, including area code: (217) 429-2306
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: There were 3,530,570
shares of the Registrant's common stock outstanding as of June 30, 1998.
Included were 263,200 unearned ESOP shares.
<PAGE>
FIRST MUTUAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................... 1
Consolidated Statements of Financial Condition as of
June 30, 1998, and December 31, 1997.................................. 2
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1998 and 1997................................................ 3
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 1998........................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 ............................................... 5
Notes to Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 15
Recent Developments............................................................ 18
PART II. OTHER INFORMATION...................................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page 1
<PAGE>
FIRST MUTUAL BANCORP, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,977 $ 4,612
Interest-bearing deposits with financial institutions 9,698 13,993
Securities held to maturity
(Estimated fair value: June 30, 1998 $27,072)
(Estimated fair value: December 31, 1997 $34,167) 26,899 33,976
Securities available for sale 5,034 17
Loans held for sale 2,785 2,057
Loans receivable, net 299,964 307,237
Federal Home Loan Bank stock 2,374 2,349
Accrued interest receivable 2,226 2,194
Foreclosed real estate, net of allowance for losses 62 29
Premises and equipment 6,627 6,896
Cash surrender value of life insurance 3,578 3,496
Goodwill and core deposit intangibles 12,289 12,643
Other assets 2,021 1,940
-------- --------
TOTAL ASSETS $379,534 $391,439
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $314,097 $320,031
Advances from borrowers for taxes and insurance 1,345 1,344
Advances from Federal Home Loan Bank 5,000 12,500
Accrued expenses and other liabilities 3,602 3,375
-------- --------
TOTAL LIABILITIES 324,044 337,250
STOCKHOLDERS' EQUITY
Common Stock $.10 par value;
8,000,000 shares authorized;
issued 4,700,000 shares 470 470
Additional paid in capital 45,678 45,420
Unearned ESOP shares (2,632) (2,820)
Unearned stock awards (828) (1,027)
Retained earnings, substantially restricted 29,903 29,523
Treasury Stock at cost - 1,192,930 shares (Dec. 31, 1997)
-- 1,169,430 shares (June 30, 1998) (17,101) (17,377)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 55,490 54,189
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $379,534 $391,439
-------- --------
-------- --------
Number of Shares Outstanding, including Unearned
ESOP Shares 3,530,570 3,507,070
Book Value Per Share $15.72 $15.45
</TABLE>
Page 2
<PAGE>
FIRST MUTUAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
--------------------------------- ------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income
Loans receivable
First mortgage loans $9,576 $9,473 $4,755 $4,784
Consumer and other loans 2,122 1,946 1,056 1,018
Commercial loans 580 422 295 224
Investment securities 1,005 1,582 498 767
Other interest-earning assets 532 1,050 291 445
--------------- -------------- ------------- -------------
Total Interest Income 13,815 14,473 6,895 7,238
Interest Expense
Deposits 7,560 8,000 3,796 4,001
Federal Home Loan Bank advances
and other interest charges 324 751 126 358
--------------- -------------- ------------- -------------
Total Interest Expense 7,884 8,751 3,922 4,359
--------------- -------------- ------------- -------------
Net Interest Income 5,931 5,722 2,973 2,879
Provision for loan losses 320 253 140 93
--------------- -------------- ------------- -------------
Net Interest Income after provision
for loan losses 5,611 5,469 2,833 2,786
Noninterest income
Gain (loss) on sales of loans 310 84 147 47
Deposit service fee income 444 340 227 185
Loan servicing fees 49 59 31 30
Investment sales commissions 150 92 95 54
Other 247 191 131 97
--------------- -------------- ------------- -------------
Total noninterest income 1,200 766 631 413
Noninterest expense
Compensation and benefits 2,861 2,823 1,433 1,310
Occupancy and equipment 688 656 343 324
FDIC Deposit insurance premium 65 66 32 33
Advertising and promotion 119 268 65 131
Data processing 425 418 218 201
Printing, postage, stationery,
and supplies 171 236 58 110
Net expense on foreclosed
real estate operations 5 3 1 1
Net gain (loss) on sale of real estate
owned including provisions
for losses 5 16 (19) 4
Amortization of Goodwill
and Core Deposit Intangibles 355 360 175 118
Other 678 707 339 325
--------------- -------------- ------------- -------------
Total noninterest expense 5,372 5,553 2,645 2,557
--------------- -------------- ------------- -------------
Income before income taxes 1,439 682 819 642
Income taxes 539 165 303 206
--------------- -------------- ------------- -------------
Net income $900 $517 $516 $436
--------------- -------------- ------------- -------------
--------------- -------------- ------------- -------------
Average Number of Shares Outstanding
for calculating:
Basic Earnings per share 3,162,277 3,282,333 3,179,206 3,137,064
Diluted Earnings per share 3,317,396 3,378,570 3,318,327 3,226,511
Earnings Per Common Share
Basic $.28 $.16 $.16 $.14
Diluted $.28 $.16 $.16 $.14
</TABLE>
Page 3
<PAGE>
FIRST MUTUAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Retained (Depreciation) on
Additional Unearned Unearned Earnings - Securities
Common Paid ESOP Stock Substantially Treasury Available
Stock in Capital Shares Awards Restricted Stock For Sale Total
------- ----------- --------- --------- -------------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $470 $44,980 ($3,572) $ -- $ 29,604 $ -- $ 46 $ 71,528
Net Income -- -- -- -- 1,171 -- -- 1,171
Purchase of Treasury Shares -- -- -- -- -- (10,330) -- (10,330)
Unearned Stock Awards -- -- -- (2,099) -- 2,099 -- --
ESOP Shares earned -- 116 376 -- -- -- -- 492
Stock Awards earned -- -- -- 595 -- -- -- 595
Tax benefit of stock awards -- 8 -- -- -- -- -- 8
Change in unrealized
appreciation
(depreciation) on
securities available
for sale, net of tax -- -- -- -- -- -- (50) (50)
Cash dividends ($.30 per
share) -- -- -- -- (1,197) -- -- (1,197)
------- ----------- --------- --------- -------------- ---------- ------------- --------
Balance at
December 31, 1996 470 45,104 (3,196) (1,504) 29,578 (8,231) (4) 62,217
Net Income -- -- -- -- 986 -- -- 986
Purchase of Treasury Shares -- -- -- -- -- (9,151) -- (9,151)
ESOP Shares earned -- 247 376 -- -- -- -- 623
Stock Awards earned -- -- -- 477 -- -- -- 477
Tax Benefit of Stock Awards -- 69 -- -- -- -- -- 69
Exercise of Stock Options -- -- -- -- -- 5 -- 5
Change in unrealized
appreciation
(depreciation) on
securities available
for sale, net of tax -- -- -- -- -- -- 4 4
Cash dividends ($.32
per share) -- -- -- -- (1,041) -- -- (1,041)
------- ----------- --------- --------- -------------- ---------- ------------- --------
Balance at December 31, 1997 470 45,420 (2,820) (1,027) 29,523 (17,377) -- 54,189
Net Income -- -- -- -- 900 -- -- 900
ESOP Shares earned -- 177 188 -- -- -- -- 365
Stock Awards earned -- -- -- 199 -- -- -- 199
Tax Benefit of Stock Awards -- 6 -- -- -- -- -- 6
Exercise of Stock Options -- -- -- -- -- 276 -- 276
Tax Benefit
of Stock Options exercised -- 75 -- -- -- -- -- 75
Cash dividends ($.16 per
share) -- -- -- -- (520) -- -- (520)
------- ----------- --------- --------- -------------- ---------- ------------- --------
Balance at June 30, 1998 $470 $45,678 ($2,632) ($ 828) $29,903 ($17,101) -- $55,490
------- ----------- --------- --------- -------------- ---------- ------------- --------
------- ----------- --------- --------- -------------- ---------- ------------- --------
</TABLE>
Page 4
<PAGE>
FIRST MUTUAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net Income $ 900 $ 517
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 360 311
Amortization of premiums and
discounts on mortgaged-backed
and investment securities, net 84 105
Amortization of Goodwill
and Core Deposit Intangibles 355 360
ESOP Compensation Expense 365 285
Stock Awards Expense 199 278
Origination of loans held for sale (26,886) (6,217)
Proceeds from sale of loans 26,468 5,842
Change in net deferred loan
origination costs (1) 23
Change in deferred income taxes 63 31
Provision for loan losses 320 253
Provision for losses on foreclosed real estate -- 2
Net gain (loss) on sales of available-for-sale
securities -- 8
Net gain (loss) on sales of loans (311) (84)
Net gain (loss) on sale of foreclosed real estate 5 13
Change in
Accrued interest receivable (32) (621)
Cash surrender value of life insurance (82) (72)
Other assets (173) 23
Accrued expenses and other liabilities 306 1,243
------ ------
Net cash provided by (used in) operating activities 1,940 2,300
Cash flows from investing activities
Net (increase) decrease in loans receivable 6,708 (12,767)
Proceeds from maturity of investment securities
Held to Maturity 8,000 5,000
Proceeds from maturity and sale of investments
- Available for Sale -- 14,006
Proceeds from redemption of
Federal Home Loan Bank stock, -- 851
Purchase of investment securities
- Held to Maturity (1,001) (25,366)
Purchase of investments securities
- Available for Sale (5,023) (24,047)
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from investing activities (continued)
<S> <C> <C>
Investments in
Loans purchased $ -- ($ 9,929)
Federal Home Loan Bank stock (26) --
Premises and equipment (63) (2,830)
Foreclosed real estate (164) (19)
Goodwill and core deposit intangibles -- (13,335)
Net change in interest-bearing
deposits with financial institutions 4,295 (18,880)
Proceeds from sales of foreclosed real estate 373 87
--------- ---------
Net cash provided by (used in) investing activities 13,099 (87,229)
---------
Cash flows from financing activities
Net increase (decrease) in deposits (5,934) 126,628
Net change in advances from
Federal Home Loan Bank (7,500) (41,300)
Proceeds from exercise of stock options 276 --
Proceeds from securities sold under
agreements to repurchase -- 8,000
Net increase (decrease) in advances from
borrowers for taxes and insurance 2 (16)
Purchase of Treasury Stock -- (9,151)
Dividends paid (518) (572)
--------- ---------
Net cash provided by (used in) financing activities (13,674) 83,589
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,365 (1,340)
Cash and cash equivalents at beginning of period 4,612 4,350
--------- ---------
Cash and cash equivalents at end of period $ 5,977 $ 3,010
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 7,946 $ 7,706
Income taxes (refunds) 429 (149)
Transfers from loans to real estate acquired
through foreclosure 353 148
Real Estate owned sales financed
through loan origination 107 --
</TABLE>
Page 6
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The financial information of First Mutual Bancorp, Inc. (the "Company")
included herein is unaudited; however, such information reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods. The accompanying consolidated financial statements include
the accounts of First Mutual Bancorp, Inc. (the "Company"), its wholly-owned
subsidiary, First Mutual Bank, S.B. (the "Bank"), and the Bank's wholly-owned
subsidiary, First Mutual Corporation, which provides investment and insurance
services. All significant intercompany transactions and balances are
eliminated in consolidation.
The financial information has been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The results of the interim period ended June 30, 1998 are not necessarily
indicative of the results expected for the year ending December 31, 1998.
(2) Conversion
On June 30, 1995, First Mutual Bank, S.B. (the "Bank") converted from a
state-chartered mutual savings bank to a state-chartered stock savings bank. The
Bank issued all of its common stock to the Company and at the same time the
Company issued 4,700,000 shares of common stock at $10.00 per share to the ESOP,
certain depositors of the Bank, and certain members of the general public, all
pursuant to a plan of conversion (the "Conversion").
The ESOP purchased 376,000 shares of common stock representing 8% of the total
issued shares at a price of $10.00 per share. The ESOP borrowed $3,760,000 from
the Company to purchase the stock using the stock as collateral for the loan.
The loan is to be repaid principally from the Bank's contributions to the ESOP
over a period of up to 10 years.
(3) Earnings Per Share of Common Stock
Basic and diluted earnings per share for the quarter were computed by dividing
net income by 3,179,206 and 3,318,327 respectively, the weighted average number
of net shares of common stock outstanding during the three months ended June 30,
1998. There were 383,700 outstanding stock options June 30, 1998 at an exercise
price of $11.75 per share.
Page 7
<PAGE>
A reconciliation of the numerators and denominators for earnings per common
share computations for the periods ended June 30, 1998, and June 30, 1997 is
presented below.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------------- -----------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------------- --------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income $900 $517 $ 516 $ 436
--------- -------- -------- -------
--------- -------- -------- -------
Weighted average common
shares outstanding 3,162 3,282 3,179 3,137
--------- -------- -------- -------
--------- -------- -------- -------
Basic Earnings Per Share $.28 $.16 $ .16 $ .14
--------- -------- -------- -------
--------- -------- -------- -------
Earnings Per Share Assuming Dilution
Net income $900 $517 $ 516 $ 436
--------- -------- -------- -------
--------- -------- -------- -------
Weighted average common
shares outstanding 3,162 3,282 3,179 3,137
Add: dilutive effect of
assumed exercises:
Stock options 135 80 121 74
Unearned stock awards 20 17 18 15
--------- -------- -------- -------
Weighted average common and
dilutive common shares
outstanding 3,317 3,379 3,318 3,226
--------- -------- -------- -------
--------- -------- -------- -------
Diluted Earnings Per Share $.28 $.16 $ .16 $ .14
--------- -------- -------- -------
--------- -------- -------- -------
</TABLE>
Page 8
<PAGE>
(4) Accounting Changes
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, Earnings Per Share, which is effective for financial statements
beginning with year end 1997. Statement 128 simplifies the calculation of
earnings per share (EPS) by replacing primary EPS with basic EPS. It also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common shareholders by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in earnings, such as stock options, warrants or
other common stock equivalents. Statement 128 had little impact on the Company's
earnings per share calculations for 1997 other than changing terminology from
primary EPS to basic EPS. All prior period EPS data was restated to conform with
the new presentation.
Under a new accounting standard, Statement of Financial Accounting Standards No.
130, comprehensive income is now reported for all periods. Comprehensive income
includes both net income and other comprehensive income. Other comprehensive
income includes the change in unrealized gains and losses on securities
available for sale. Other comprehensive income is not material to the Company's
financial condition, and therefore is not included as a disclosure in the
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued in 1997 by the Financial
Accounting Standards Board. This Statement established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for periods beginning after December 15, 1997. Management does not
believe that the provisions of this Statement are applicable to the Company,
since substantially all of the Company's operations are banking activities.
Page 9
<PAGE>
(5) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
Total assets decreased $11.9 million, or 3.0%, to $379.5 million at June 30,
1998, from $391.4 million at December 31, 1997.
Loans receivable (including loans held for sale) decreased $6.6 million, or
2.1%, to $302.7 million at June 30, 1998, from $309.3 million at December 31,
1997, primarily due to the excess of loan repayments versus loan originations
during the quarter. Increased repayments resulted from the increased prepayment
of mortgage loans due to the lower interest rate environment for mortgage loans
during the period. Loan sales also increased during the current quarter as a
result of the lower interest rate environment. The increase in loan sales was
due to the increase in the origination of fixed rate mortgage loans available
for sale, which borrowers typically prefer in a low interest rate environment.
Interest-bearing deposits with financial institutions and securities
held-to-maturity and available for sale decreased $6.4 million, or 13.3%, to
$41.6 million at June 30, 1998, from $48.0 million at December 31, 1997. The
decrease was primarily due to the decrease in deposits and advances from the
Federal Home Loan Bank during the period.
Total Deposits decreased $5.9 million, or 1.8%, to $314.1 million at June 30,
1998, from $320.0 million at December 31, 1997. The decrease in deposits was
primarily due to the migration of deposits by customers to other investment
products as a result of the lower interest rate environment.
Advances from the Federal Home Loan Bank decreased $7.5 million, or 60%, to
$5,000,000 at June 30, 1998, from $12.5 million at December 31, 1997. The
decrease was due to the maturity of $7.0 million in term advances during the
period.
Page 10
<PAGE>
Non-performing assets were $1.3 million as of June 30, 1998, compared to $1.6
million as of December 31, 1997. The following table sets forth the amounts and
categories of non-performing assets.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -------------------
(Dollars in Thousands)
<S> <C> <C>
Non-performing Loans:
One to four family $ 855 $1,235
Consumer 208 231
Commercial Real Estate 141 60
------ ------
Total 1,204 $1,526
Total Repossessed Assets 4 37
Total Real Estate Owned 62 29
------ ------
Total Non-performing Assets $1,270 $1,592
------ ------
------ ------
Total Non-performing Loans
as a percentage of net loans
receivable .40% .49%
Total Non-performing Assets
as a percentage of total assets .33% .41%
</TABLE>
Page 11
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, funds received from the
sale, amortization, and prepayment of loans, advances from the Federal Home Loan
Bank, and funds provided from operations. While scheduled loan repayments are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Company also borrows funds from the Federal Home Loan Bank
based on need, comparative costs, and availability at the time. Assets of the
Company qualifying for regulatory liquidity totalled $41.3 million at June 30,
1998.
As of June 30, 1998, the Company had total equity capital of $55.5 million and
the Bank had total equity capital of $52.7 million. All the minimum levels of
regulatory capital required by the Federal Reserve Board for the Company and the
Federal Deposit Insurance Corporation for the Bank were met.
Results of Operations
General. Net income for the three months ended June 30, 1998, was $516,000
compared to $436,000 for the same period in 1997. The increase was primarily due
to the increase in non-interest income of $218,000, or 52.8%, and the increase
in net interest income of $94,000, or 3.3%. These were partially offset by the
increase in income taxes of $97,000 or 47.1%, the increase in non-interest
expense of $88,000, or 3.4%, and the increase in the provision for loan losses
of $47,000, or 50.5%. The increase in non-interest income was due primarily to
the increase in the gains on sale of loans resulting from the lower interest
rate environment. The increase in net interest income was due primarily to the
increase in the yield on earning assets versus the earlier period.
Net income for the six months ended June 30, 1998 was $900,000 compared to
$517,000 for the same period in 1997. The increase was primarily due to the
increase in non-interest income of $434,000, or 56.7% to $1.2 million in 1997
versus $766,000 in the earlier period. The increase was also due to the decrease
in non-interest expense of $181,000, or 3.3%, and the increase in net interest
income of 209,000, or 3.7%. These were partially offset by the increase in
income taxes of $374,000, or 227.7% and the increase in the provision for loan
losses of $67,000, or 26.5%. The increase in non-interest income was due
primarily to the increase in the gains on sales of loans resulting from the
lower interest rate environment. The increase in net interest income was due
primarily to the increase in the yield on earning assets versus the earlier
period.
Interest Income. Interest income for the three months ended June
30, 1998 decreased $.3 million, or 4.2%, to $6.9 million from
Page 12
<PAGE>
$7.2 million in the earlier period. The decrease was primarily the result of the
decrease in average earning assets to $354.9 million from $385.3 million in the
earlier period. Average earning assets decreased primarily as a result of the
decrease in average paying liabilities during the period. This was partially
offset by the increase in the average yield on earning assets to 7.77% from
7.51% in the earlier period.
Interest income for the six months ended June 30, 1998, decreased $.7 million,
or 4.8%, to $13.8 million from $14.5 million in the earlier period. The decrease
was primarily due to the decrease in average earning assets to $357.1 million
from $391.7 million in the earlier period. Average earning assets decreased
primarily as a result of the decrease in average paying liabilities during the
period. This was partially offset by the increase in the average yield on
earning assets to 7.74% from 7.39% in the earlier period.
Interest Expense. Interest expense for the three months decreased $.5 million,
or 11.4%, to $3.9 million from $4.4 million in the earlier period resulting
primarily from the decrease in average paying liabilities to $325.0 million from
$358.4 million in the earlier period. The cost of the average interest paying
liabilities also decreased to 4.83% from 4.87% in the earlier period.
Interest expense for the six months decreased $.9 million, or 10.2%, to $7.9
million from $8.8 million in the earlier period resulting primarily from the
decrease in average paying liabilities to $328.0 million from $362.0 million in
the earlier period. The cost of the average paying liabilities also decreased to
4.81% form 4.84% in the earlier period.
Net Interest Income. Net interest income increased $94,000, or 3.3%, during the
current three-month period versus the earlier three-month period. The increase
was primarily due to the increase in the net interest rate spread, which
increased to 2.94% from 2.64% in the earlier period.
Net interest income increased $209,000, or 3.7%, during the current six-month
period versus the earlier six-month period. The increase was primarily due to
the increase in the interest rate spread which increased to 2.93% from 2.55% in
the earlier period.
Provision for Loan Losses. The Bank maintains an allowance for loan losses based
upon management's periodic evaluation of known and inherent risks in the loan
portfolio including commercial real estate and commercial business loans, the
Bank's past loss experience, adverse situations that may affect borrowers'
ability to repay loans, estimated value of underlying loan collateral, current
and to a lesser extent, expected future economic
Page 13
<PAGE>
conditions. During the three months ended June 30, 1998, a $140,000 provision
for loan losses was recorded primarily as a result of changes in the loan
portfolio mix, especially the increase in commercial and consumer loans, and to
the net charge-offs incurred during the period. Bank management made a $93,000
provision to the allowance for loan losses for the same period in 1997. The
Bank's ratio of allowance for loan losses to non-performing loans was 121.84% at
June 30, 1998, compared to 93.77% at December 31, 1997, primarily due to the
decrease in non-performing loans to $1.2 million at June 30, 1998, compared to
$1.5 million at December 31, 1997.
During the six months ended June 30, 1998 a $320,000 provision for loan losses
was recorded primarily as a result of changes in the loan portfolio mix,
especially the increase in commercial and consumer loans, and to the net
charge-offs incurred during the period. Bank management made a $253,000
provision to the allowance for loan losses for the same period in 1997.
Non-Interest Income. Non-interest income, consisting primarily of service
charges and fees on loans and deposit accounts, net gain on sale of mortgage
loans, investment sales commissions, and loan servicing fees increased $218,000,
or 52.8%, for the three-month period ended June 30, 1998, as compared to the
earlier three-month period. The increase was primarily due to the increases in
the gain on sale of loans of $100,000, or 212.8%, deposit service fee income of
$42,000, or 22.7%, and investment sales commissions of $41,000, or 75.9%.
Non-interest income increased $434,000, or 56.7%, for the six-month period ended
June 30, 1998, as compared to the earlier six-month period. The increase was
primarily due to the increases in the gain on sale of loans of $226,000, or
269.0% and deposit service fee income of $104,000, or 30.6%
Non-Interest Expense. Non-interest expense, consisting primarily of employee
compensation and benefits, premises and equipment expenses, federal deposit
insurance premiums, data processing, advertising and promotion, amortization of
goodwill and core deposit intangibles, and other miscellaneous items increased
$88,000, or 3.4%, for the three-month period ended June 30, 1998, as compared to
the earlier three-month period in 1997. The increase was primarily due to the
increases in compensation and benefits of $123,000, or 9.4%, and amortization of
goodwill and core deposit intangibles of $57,000, or 48.3%.
Non-interest expense decreased $181,000, or 3.3% for the six-month period ended
June 30, 1998, as compared to the earlier six-month period in 1997. The decrease
was primarily due to the decreases in advertising and promotion of $149,000, or
55.6%, and printing, postage, stationery, and supplies of $65,000, or 27.5%.
Page 14
<PAGE>
Income Tax Expenses. Income tax expenses increased $97,000, or 47.1%, for the
three-month period ended June 30, 1998 as compared to the earlier period in
1997. The increase was primarily due to the increase in earnings before taxes to
$819,000 from $642,000 in the earlier period.
Income tax expenses increased $374,000, or 226.7%, for the six-month period in
1998 compared to the earlier six-month period in 1997. The increase was
primarily due to the increase in earnings before taxes to $1,439,000 from
$682,000 in the earlier period.
Year 2000. The Company has conducted a review of its computer systems to review
the systems that could be affected by the "Year 2000" issue and has developed an
implementation plan to resolve the issue. A budget amount of $166,500 has been
initially established for computer hardware and software costs plus other
related expenses in connection with the implementation plan. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. For example, programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and by converting to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of March 31, 1998
based on the information and assumptions set forth in the notes. The Company
believes that the assumptions utilized are reasonable. The Company had no
derivative financial instruments, or trading portfolio, as of March 31, 1998.
The expected maturity date values for loans receivable and investment securities
were calculated by adjusting the instrument's contractual maturity date for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as set
forth in the notes. With respect to the Company's adjustable rate instruments,
expected maturity date values were measured by adjusting the instrument's
contractual maturity date for expectations of prepayments, as set forth in the
notes. From a risk management perspective, however, the Company believes that
repricing dates, as opposed to expected maturity dates, may be a more relevant
metric in analyzing the
Page 15
<PAGE>
value of such instruments. Company borrowings were tabulated by contractual
maturity dates.
The Company believes the March 31, 1998 table presented also represents a
reasonable estimate of this information as of June 30, 1998.
In preparing the table, it has been assumed that: (i) adjustable rate mortgage
loans on one- to four-family residences will repay at a rate of 15% per year;
(ii) fixed rate mortgage loans on one- to four-family residences with terms to
maturity of 10 years or less will repay at a rate of 13% per year; (iii) fixed
rate first mortgage loans on one-to four-family residential properties with
remaining terms to maturity of over 10 years will prepay annually as follows:
<TABLE>
<CAPTION>
Prepayment
Assumption Over
Interest Rate: 10 to 20 years 20 years
- ------------- -------------- --------
<S> <C> <C>
8% or less 13% 11%
8.01% to 10% 20% 19%
10.01 to 12% 19% 19%
12.01 to 14% 19% 19%
14.01% and over 19% 19%
</TABLE>
(iv) fixed and adjustable rate first mortgage loans on residential properties of
five or more units and non-residential properties will prepay at a rate of 12%
per year; (v) consumer loans will prepay at a rate of 18% per year; (vi)
commercial loans will not prepay; (vii) fixed maturity deposits will not be
withdrawn prior to maturity; (viii) passbook savings accounts assume an annual
decay rate of 75.33% in the first year and 15% for the remaining years; (ix) NOW
and super accounts assume an annual decay rate of 64.80% in the first year and
18.72% for the remaining years; (x) non-interest bearing checking accounts
assume an annual decay rate of 45% in the first year and 37.56% for the
remaining years; and (xi) money market accounts assume an annual decay rate of
73.45% in the first year and 37.56% for the remaining years.
All loans are presented net of undisbursed loan proceeds and do not include net
deferred loan fees/costs or the allowance for loan losses.
The above assumptions are annual percentages based on remaining balances and
should not be regarded as indicative of the actual prepayments and withdrawals
which may be experienced by the Company.
Page 16
<PAGE>
Principal Amount Maturing in:
<TABLE>
<CAPTION>
4/1/98 4/1/99- 4/1/01- Fair value
(Dollars in Thousands) - 3/31/99 3/31/01 3/31/03 Thereafter Total 3/31/98
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed-interest-rate loans
Residential 1-4 family real estate $ 21,749 $ 25,401 $ 17,884 $ 29,212 $ 94,246 $ 95,432
Average interest rate 7.94% 7.57% 7.53% 7.45% 7.61%
Multifamily and commercial real estate 2,823 2,454 787 209 6,273 6,524
Average interest rate 8.32% 8.39% 8.39% 8.61% 8.37%
Commercial business loans 3,409 1,364 531 229 5,533 5,526
Average interest rate 8.54% 9.02% 9.04% 9.61% 8.75%
Consumer loans 18,789 19,865 5,782 696 45,132 45,480
Average interest rate 9.11% 9.06% 9.01% 10.34% 9.09%
Variable-interest-rate loans
Residential 1-4 family real estate $ 15,206 $ 24,258 $ 18,156 $ 43,007 $100,627 $100,825
Average interest rate 7.71% 7.72% 7.72% 7.72% 7.72%
Multifamily and commercial real estate 6,857 8,986 7,292 21,834 44,969 44,732
Average interest rate 8.47% 8.44% 8.46% 8.43% 8.44%
Commercial business loans 6,893 614 19 -- 7,526 7,526
Average interest rate 9.15% 8.96% 10.53% -- 9.14%
Consumer loans 950 1,313 696 -- 2,959 2,959
Average interest rate 9.68% 8.83% 8.76% -- 9.09%
Fixed-interest-rate securities
(including interest bearing deposits) $ 35,894 $ 15,161 -- -- $ 51,055 $ 51,236
Average interest rate 5.66% 6.17% -- -- 5.81%
Rate-sensitive liabilities:
Non-interest bearing checking $ 3,852 $ 2,873 $ 1,120 $ 716 $ 8,561 $ 8,561
Average interest rate -- -- -- -- -- --
NOW and super NOW accounts 26,120 4,815 3,181 6,192 40,308 40,308
Average interest rate 2.76% 2.76% 2.76% 2.76% 2.76%
Passbook saving accounts 14,373 1,306 944 2,457 19,080 19,080
Average interest rate 2.46% 2.46% 2.46% 2.46% 2.46%
Money Market accounts 25,974 5,729 2,233 1,427 35,363 35,363
Average interest rate 4.25% 4.25% 4.25% 4.25% 4.25%
Certificate of deposit accounts 133,709 69,238 13,503 59 216,509 217,679
Average interest rate 5.43% 5.95% 6.06% 5.42% 5.63%
FHLB advances 7,500 2,000 -- -- 9,500 9,505
Average interest rate 6.58% 6.71% -- -- 6.60%
</TABLE>
Page 17
<PAGE>
Recent Developments
On July 2, 1998, First Mutual Bancorp, Inc. and Union Planters Corporation, a
Tennessee Corporation ("UPC") entered into an agreement and Plan of
Reorganization, pursuant to which First Mutual will be acquired by Union
Planters Corporation through the merger of First Mutual with and into Union
Planters Holding Corporation, a Tennessee Corporation and wholly owned
subsidiary of UPC ("Holding Company"). Holding Company will be the surviving
entity following the merger.
The parties currently anticipate that the merger will close prior to December
31, 1998. Nevertheless, the consummation of the merger is subject to certain
preconditions and the non-occurrence of certain events, including, among
others, the approval of First Mutual stockholders and the receipt of required
regulatory approvals.
Page 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party other than
ordinary routine litigation incidental to their respective
businesses.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held at the Decatur
Club, 158 West Prairie, Decatur, Illinois on
April 23, 1998.
C. Robert Chastain, Richard L. Jacobs, and Glen J. Whitney
were elected directors for terms of three years. There were
2,961,787 votes for and 38,696 votes withheld for C. Robert
Chastain; 2,961,487 votes for and 38,996 votes withheld for
Richard L. Jacobs; and 2,961,487 votes for and 38,996 votes
withheld for Glen J. Whitney. Directors Roy M. Ousley, Robert
D. Nichols, Paul K. Reynolds, and Jon D. Robinson continue in
office. Subsequent to the annual meeting, Director Glen J.
Whitney died on July 18, 1998.
The appointment of Crowe, Chizek and Company LLP as auditors
for the Company for the year ending December 31, 1998, was
ratified.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8K (Report dated July 2, 1998). On July 2, 1998, First
Mutual Bancorp, Inc. and Union Planters Corporation, a
Tennessee Corporation ("UPC"), entered into an Agreement and
Plan of Reorganization, pursuant to which First Mutual will be
acquired by Union Planters Corporation through the merger of
First Mutual with and into Union Planters Holding Corporation,
a Tennessee Corporation and wholly owned subsidiary of UPC
("Holding Company"). Holding Company will be the surviving
entity following the merger.
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
(Registrant)
Date: By: /s/ Paul K. Reynolds
---------------------------------
Paul K. Reynolds, President
and Chief Executive Officer
Date: By: /s/ G. Lynn Brinkman
---------------------------------
G. Lynn Brinkman, Vice President
Secretary, Treasurer and
Chief Financial Officer
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,977
<INT-BEARING-DEPOSITS> 9,698
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,034
<INVESTMENTS-CARRYING> 26,899
<INVESTMENTS-MARKET> 27,072
<LOANS> 302,749
<ALLOWANCE> 1,467
<TOTAL-ASSETS> 379,534
<DEPOSITS> 314,097
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 4,947
<LONG-TERM> 2,000
470
0
<COMMON> 0
<OTHER-SE> 55,020
<TOTAL-LIABILITIES-AND-EQUITY> 379,534
<INTEREST-LOAN> 6,106
<INTEREST-INVEST> 498
<INTEREST-OTHER> 291
<INTEREST-TOTAL> 6,895
<INTEREST-DEPOSIT> 3,796
<INTEREST-EXPENSE> 3,922
<INTEREST-INCOME-NET> 2,973
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,645
<INCOME-PRETAX> 819
<INCOME-PRE-EXTRAORDINARY> 516
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 3.35
<LOANS-NON> 521
<LOANS-PAST> 683
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,451
<CHARGE-OFFS> 124
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,467
<ALLOWANCE-DOMESTIC> 1,467
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
