<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 September 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 September 30, 1998.
Included were 253,800 unearned ESOP shares.
<PAGE>
FIRST MUTUAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................... 1
Consolidated Statements of Financial Condition as of
September 30, 1998, and December 31, 1997............................. 2
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1998 and 1997........................................... 3
Consolidated Statements of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1998.................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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...................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 18
PART II. OTHER INFORMATION...................................................................... 21
</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, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,410 $ 4,612
Interest-bearing deposits with financial institutions 12,694 13,993
Securities held to maturity
(Estimated fair value: September 30, 1998 $24,448)
(Estimated fair value: December 31, 1997 $34,167) 24,124 33,976
Securities available for sale 6,148 17
Loans held for sale 2,025 2,057
Loans receivable, net 293,525 307,237
Federal Home Loan Bank stock 2,374 2,349
Accrued interest receivable 2,272 2,194
Foreclosed real estate, net of allowance for losses 92 29
Premises and equipment 6,505 6,896
Cash surrender value of life insurance 3,404 3,496
Goodwill and core deposit intangibles 12,111 12,643
Other assets 1,673 1,940
---------- ----------
TOTAL ASSETS $ 371,357 $ 391,439
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 309,410 $ 320,031
Advances from borrowers for taxes and insurance 553 1,344
Advances from Federal Home Loan Bank 2,000 12,500
Accrued expenses and other liabilities 3,321 3,375
---------- ----------
TOTAL LIABILITIES 315,284 337,250
STOCKHOLDERS' EQUITY
Common Stock $.10 par value;
8,000,000 shares authorized;
issued 4,700,000 shares 470 470
Additional paid in capital 45,758 45,420
Unearned ESOP shares (2,538) (2,820)
Unearned stock awards (688) (1,027)
Retained earnings, substantially restricted 30,163 29,523
Treasury Stock at cost - 1,192,930 shares (Dec. 31, 1997)
-- 1,169,430 shares (September 30, 1998) (17,101) (17,377)
Unrealized appreciation (depreciation) on
securities available for sale, net of tax 9 --
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 56,073 54,189
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 371,357 $ 391,439
---------- ----------
---------- ----------
Number of Shares Outstanding, including Unearned
ESOP Shares 3,530,570 3,507,070
Book Value Per Share $ 15.88 $ 15.45
</TABLE>
Page 2
<PAGE>
FIRST MUTUAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Interest Income
Loans receivable
First mortgage loans $ 14,193 $ 14,325 $ 4,617 $ 4,852
Consumer and other loans 3,165 3,037 1,043 1,091
Commercial loans 913 649 333 227
Investment securities 1,485 2,367 480 785
Other interest-earning assets 805 1,258 273 208
---------- ---------- ---------- ----------
Total Interest Income 20,561 21,636 6,746 7,163
Interest Expense
Deposits 11,306 11,989 3,746 3,989
Federal Home Loan Bank advances
and other interest charges 404 1,056 80 305
---------- ---------- ---------- ----------
Total Interest Expense 11,710 13,045 3,826 4,294
---------- ---------- ---------- ----------
Net Interest Income 8,851 8,591 2,920 2,869
Provision for loan losses 431 396 111 143
---------- ---------- ---------- ----------
Net Interest Income after provision
for loan losses 8,420 8,195 2,809 2,726
Noninterest income
Gain (loss) on sales of loans 426 160 116 76
Deposit service fee income 679 565 235 225
Loan servicing fees 79 88 30 29
Investment sales commissions 203 123 53 31
Gain on recovery from
worthless securities 312 -- 312 --
Other 408 289 161 98
---------- ---------- ---------- ----------
Total noninterest income 2,107 1,225 907 459
Noninterest expense
Compensation and benefits 4,334 4,286 1,473 1,463
Occupancy and equipment 1,040 995 352 339
FDIC deposit insurance premium 97 101 32 35
Advertising and promotion 190 409 71 141
Data processing 615 599 190 181
Printing, postage, stationery,
and supplies 260 352 89 116
Net expense on foreclosed
real estate operations 7 7 2 4
Net gain (loss) on sale of real estate
owned including provisions
for losses 5 5 -- (11)
Amortization of goodwill
and core deposit intangibles 532 539 177 179
Other 1,161 1,047 483 340
---------- ---------- ---------- ----------
Total noninterest expense 8,241 8,340 2,869 2,787
---------- ---------- ---------- ----------
Income before income taxes 2,286 1,080 847 398
Income taxes 866 292 327 127
---------- ---------- ---------- ----------
Net income $ 1,420 $ 788 $ 520 $ 271
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average Number of Shares Outstanding
for calculating:
Basic Earnings per share 3,175,071 3,221,149 3,200,241 3,100,774
Diluted Earnings per share 3,317,886 3,321,602 3,318,850 3,209,524
Earnings Per Common Share
Basic $ .44 $ .25 $ .16 $ .09
Diluted $ .43 $ .24 $ .15 $ .08
</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)
Additional Unearned Unearned Earnings - on 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 ($.30 per share) -- -- -- -- -- -- (1,197)
------ ------ ------ ------ ------- ------ ------ -------
Balance at December 31, 1996 470 45,104 (3,196) (1,504) 29,578 (8,231) (4) 62,217
Net Income -- -- -- -- 986 -- -- 986
Purchase of Treasury Shares -- -- -- -- -- (9,151) -- (9,151)
ESOP Shares earned -- 247 376 -- -- -- -- 623
Stock Awards earned -- -- -- 477 -- -- -- 477
Tax Benefit of Stock Awards -- 69 -- -- -- -- -- 69
Exercise of Stock Options -- -- -- -- -- 5 -- 5
Change in unrealized appreciation
(depreciation) on securities
available for sale, net of tax -- -- -- -- -- -- 4 4
Cash dividends ($.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 -- -- -- -- 1,420 -- -- 1,420
ESOP Shares earned -- 243 282 -- -- -- -- 525
Stock Awards earned -- -- -- 339 -- -- -- 339
Tax Benefit of Stock Awards -- 20 -- -- -- -- -- 20
Exercise of Stock Options -- -- -- -- -- 276 -- 276
Tax Benefit
of Stock Options exercised -- 75 -- -- -- -- -- 75
Change in unrealized appreciation
(depreciation) on securities
available for sale, net of tax -- -- -- -- -- -- 9 9
Cash dividends ($.24 per share) -- -- -- -- (780) -- -- (780)
------ ------ ------ ------ ------- ------ ------ -------
Balance at September 30, 1998 $ 470 $ 45,758 ($ 2,538) ($ 688) $ 30,163 ($17,101) $ 9 $ 56,073
------ ------ ------ ------ ------- ------ ------ -------
------ ------ ------ ------ ------- ------ ------ -------
</TABLE>
Page 4
<PAGE>
FIRST MUTUAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net Income $ 1,420 $ 788
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 534 471
Amortization of premiums and
discounts on mortgaged-backed
and investment securities, net 121 157
Amortization of Goodwill
and Core Deposit Intangibles 532 540
ESOP Compensation Expense 525 434
Stock Awards Expense 339 378
Origination of loans held for sale (33,781) (12,010)
Proceeds from sale of loans 34,240 11,363
Change in net deferred loan
origination costs (3) 24
Change in deferred income taxes 101 75
Provision for loan losses 431 396
Provision for losses on foreclosed real estate -- 3
Net gain (loss) on sales of available-for-sale
securities -- 8
Net gain (loss) on sales of loans (426) (160)
Net gain (loss) on sale of foreclosed real estate 5 1
Change in
Accrued interest receivable (78) (547)
Cash surrender value of life insurance 91 (42)
Other assets 118 (138)
Accrued expenses and other liabilities 39 1,094
------ ------
Net cash provided by (used in) operating activities 4,208 2,835
Cash flows from investing activities
Net (increase) decrease in loans receivable 13,003 (14,550)
Proceeds from maturity of investment securities
Held to Maturity 11,750 7,750
Proceeds from maturity and sale of investments
- Available for Sale -- 21,006
Proceeds from redemption of
Federal Home Loan Bank stock, -- 851
Purchase of investment securities
- Held to Maturity (2,007) (25,365)
Purchase of investments securities
- Available for Sale (6,128) (27,042)
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 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 (101) (3,051)
Foreclosed real estate (179) (29)
Goodwill and core deposit intangibles -- (13,335)
Cash surrender value of insurance -- (200)
Net change in interest-bearing
deposits with financial institutions 1,300 (7,423)
Proceeds from sales of foreclosed real estate 393 236
------- -------
Net cash provided by (used in) investing activities 18,005 (71,081)
Cash flows from financing activities
Net increase (decrease) in deposits (10,621) 119,939
Net change in advances from
Federal Home Loan Bank (10,500) (48,300)
Proceeds from exercise of stock options 276 --
Proceeds from securities sold under
agreements to repurchase -- 7,000
Net increase (decrease) in advances from
borrowers for taxes and insurance (792) (755)
Purchase of Treasury Stock -- (9,151)
Dividends paid (778) (827)
------- -------
Net cash provided by (used in) financing activities (22,415) 67,906
------- -------
Net increase (decrease) in cash and cash equivalents (202) (340)
Cash and cash equivalents at beginning of period 4,612 4,350
------- -------
Cash and cash equivalents at end of period $ 4,410 $ 4,010
------- -------
------- -------
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 12,051 $ 12,137
Income taxes (refunds) 609 (55)
Transfers from loans to real estate acquired
through foreclosure 388 166
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 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 periods ended September 30, 1998 are not
necessarily indicative of the results expected for the year ending December
31, 1998.
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
Page 7
<PAGE>
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the Securities and Exchange Commission.
(2) Conversion
On June 30, 1995, 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) Acquisition by Union Planters Corporation
On July 2, 1998, the Company 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 UPC through the merger of
the Company 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 Company stockholders and the receipt of required
regulatory approvals.
(4) Earnings Per Share of Common Stock
Basic and diluted earnings per share for the quarter were computed by
dividing net income by 3,200,241 and 3,318,850 respectively, the weighted
average number of net shares of common stock outstanding during the three
months ended September 30, 1998. There were 383,700 outstanding stock options
at September 30, 1998 at an exercise price of $11.75 per share.
Page 8
<PAGE>
A reconciliation of the numerators and denominators for earnings per common
share computations for the periods ended September 30, 1998, and September
30, 1997 is presented below.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income $1,420 $ 788 $ 520 $ 271
------ ------ ------ ------
------ ------ ------ ------
Weighted average common
shares outstanding 3,175 3,221 3,200 3,101
------ ------ ------ ------
------ ------ ------ ------
Basic Earnings Per Share $ .44 $ .25 $ .16 $ .09
------ ------ ------ ------
------ ------ ------ ------
Earnings Per Share Assuming Dilution
Net income $1,420 $ 788 $ 520 $ 271
------ ------ ------ ------
------ ------ ------ ------
Weighted average common
shares outstanding 3,175 3,221 3,200 3,101
Add: dilutive effect of
assumed exercises:
Stock options 125 84 106 92
Unearned stock awards 18 17 13 17
------ ------ ------ ------
Weighted average common and
dilutive common shares
outstanding 3,318 3,322 3,319 3,210
------ ------ ------ ------
------ ------ ------ ------
Diluted Earnings Per Share $ .43 $ .24 $ .15 $ .08
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Page 9
<PAGE>
(4) Accounting Changes
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reason for holding it.
If certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain
or loss on the derivative instrument is recognized in earnings in the period
of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive income
(outside earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or loss
is recognized in earnings in the period of change. This Statement will have
no effect on the Company.
Page 10
<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 $20.0 million, or 5.1%, to $371.4 million at September
30, 1998, from $391.4 million at December 31, 1997.
Loans receivable (including loans held for sale) decreased $13.7 million, or
4.4%, to $295.6 million at September 30, 1998, from $309.3 million at
December 31, 1997, primarily due to the excess of loan repayments versus loan
originations during the nine-month period. 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 period 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.
Securities, including both those held to maturity and available for sale
decreased $3.7 million, or 10.9%, to $30.3 million at September 30, 1998,
from $34.0 million at December 31, 1997.
Total deposits decreased $10.6 million, or 3.3%, to $309.4 million at
September 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 $10.5 million, to $2.0
million at September 30, 1998, from $12.5 million at December 31, 1997,
as a result of maturing FHLB term advances.
Page 11
<PAGE>
Non-performing assets were $1.3 million as of September 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>
September 30, 1998 December 31, 1997
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Non-performing Loans (1):
One to four family $ 727 $1,235
Consumer 299 231
Commercial Real Estate 159 60
------ ------
Total $1,185 $1,526
Total Repossessed Assets 31 37
Total Real Estate Owned 92 29
------ ------
Total Non-performing Assets $1,308 $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 .35% .41%
</TABLE>
(1) Includes non-accrual loans, restructured loans, and loans past due 90
days or more and accruing interest.
Page 12
<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
$45.7 million at September 30, 1998.
As of September 30, 1998, the Company had total equity capital of $56.1
million and the Bank had total equity capital of $53.5 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 September 30, 1998, was
$520,000 compared to $271,000 for the same period in 1997. The increase was
primarily due to the increase in non-interest income of $448,000, or 97.6%;
the increase in net interest income of $51,000, or 1.8%; and the decrease in
the provision for loan losses of $32,000, or 22.4%. These were partially
offset by the increase in income taxes of $200,000 or 157.5%, and the
increase in non-interest expense of $82,000, or 2.9%. The increase in
non-interest income was due primarily to the $312,000 gain on the recovery
from investment securities previously written off as uncollectible in a prior
year.
Net income for the nine months ended September 30, 1998 was $1,420,000
compared to $788,000 for the same period in 1997. The increase was primarily
due to the increase in non-interest income of $.9 million, or 75.0%, to $2.1
million in 1998 versus $1.2 million in the earlier period. The increase was
also due to the increase in net interest income of $.3 million, or 3.5% to
$8.9 million in 1998 versus $8.6 million in the earlier period, and to the
decrease in non-interest expense of $.1 million, or 1.2%, to $8.2 million in
1998 versus $8.3 million in the earlier period. These were partially offset
by the increase in income taxes of $.6 million, or 200%, to $.9 million in
1998 versus $.3 million in 1997.
Page 13
<PAGE>
Interest Income. Interest income for the three months ended September 30,
1998 decreased $.5 million, or 6.9%, to $6.7 million from $7.2 million in the
earlier period. The decrease was primarily the result of the decrease in
average earning assets to $345.2 million from $371.5 million in the earlier
period. This was partially offset by the increase in the average yield on
earning assets to 7.82% from 7.71% in the earlier period.
Interest income for the nine months ended September 30, 1998, decreased $1.0
million, or 4.6%, to $20.6 million from $21.6 million in the earlier period.
The decrease was primarily due to the decrease in average earning assets to
$353.1 million from $385.0 million in the earlier period. This was partially
offset by the increase in the average yield on earning assets to 7.76% from
7.49% in the earlier period.
Interest Expense. Interest expense for the three month period ended
September 30, 1998 decreased $.5 million, or 11.6%, to $3.8 million from
$4.3 million in the earlier period resulting primarily from the decrease
in average interest bearing liabilities to $317.1 million from $345.5 million
in the earlier period. The cost of average interest bearing liabilities also
decreased to 4.83% from 4.97% in the earlier period.
Interest expense for the nine months decreased $1.3 million, or 10.0%, to
$11.7 million for the nine months ended September 30, 1998 from $13.0 million
in the earlier period resulting primarily from the decrease in average interest
bearing liabilities to $324.4 million from $356.5 million in the earlier
period. The cost of the average interest bearing liabilities also decreased to
4.81% from 4.88% in the earlier period.
Net Interest Income. Net interest income increased $51,000, or 1.8%, to
$2,920,000 for the three months ended September 30, 1998 from $2,869,000 in the
earlier three-month period. The increase was primarily due to the increase in
the net interest rate spread, which increased to 2.99% from 2.74% in the
earlier three-month period.
Net interest income increased $.3 million, or 3.5%, to $8.9 million for the
nine months ended September 30, 1998 from $8.6 million in the earlier
nine-month period. The increase was primarily due to the increase in the net
interest rate spread, which increased to 2.95% from 2.61% 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
Page 14
<PAGE>
experience, adverse situations that may affect borrowers' ability to repay
loans, estimated value of underlying loan collateral, and current, and to a
lesser extent, expected future economic conditions. During the three months
ended September 30, 1998, a $111,000 provision for loan losses was recorded,
primarily as a result of changes in the loan portfolio mix, especially the
increase in commercial loans, and of the net charge-offs incurred during the
period. Bank management made a $143,000 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, including loans 90 days or more past due and
still accruing interest, was 124.30% at September 30, 1998, compared to
93.77% at December 31, 1997, primarily due to the decrease in non-performing
loans to $1.2 million at September 30, 1998, compared to $1.5 million at
December 31, 1997.
During the nine months ended September 30, 1998, a $431,000 provision for
loan losses was recorded, primarily as a result of changes in the loan
portfolio mix, especially the increase in commercial loans, and of the net
charge-offs incurred during the period. Bank management made a $396,000
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, loan servicing fees, and gain on
recovery from worthless securities, increased $448,000, or 97.6%, for the
three- month period ended September 30, 1998, as compared to the earlier
three-month period. The increase was primarily due to the $312,000 gain on
the recovery from investment securities previously written off as
uncollectible in a prior year.
Non-interest income increased $.9 million, or 75.0%, for the nine-month
period ended September 30, 1998, as compared to the earlier nine-month
period. The increase was primarily due to the gain on the recovery from
investment securities previously written off as uncollectible in a prior year
of $312,000 and to the increase in the gain on sale of loans of $266,000, or
166.3%.
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 $82,000, or 2.9%, for the three-month period ended September 30,
1998, as compared to the earlier three-month period in 1997. The increase was
primarily due to the increase in other expenses of $143,000, or 42.1%. Other
expenses increased primarily as a result of legal and other expenses incurred
as a result of the signing on July 2, 1998, of a definitive agreement for the
acquisition of the Company by Union Planters Corporation.
Page 15
<PAGE>
Non-interest expense decreased $99,000, or 1.2% for the nine-month period
ended September 30, 1998, as compared to the earlier nine-month period in
1997. The decrease was primarily due to the decreases in advertising and
promotion of $219,000, or 53.5%, and printing, postage, stationery, and
supplies of $92,000, or 26.1%. This was partially offset by the increase in
other expenses of $114,000, or 10.9%, and compensation and benefits of
$48,000, or 1.1%.
Income Tax Expenses. Income tax expenses increased $200,000, or 157.5%, for
the three-month period ended September 30, 1998 compared to the earlier
period in 1997. The increase was primarily due to the increase in earnings
before taxes to $847,000 from $398,000 in the earlier period.
Income tax expenses increased $574,000, or 196.6%, for the nine-month period
in 1998 compared to the same period in 1997. The increase was primarily due
to the increase in earnings before taxes to $2,286,000 from $1,080,000 in the
earlier period.
Year 2000. The federal banking regulators recently issued guidelines
establishing minimum safety and soundness standards for achieving Year 2000
compliance. The guidelines, which took effect October 15, 1998 and apply to
all FDIC-insured depository institutions, establish standards for developing
and managing Year 2000 project plans, testing remediation efforts and
planning for contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal Financial
Institutions Examination Council (the "FFIEC"), but are not intended to
replace or supplant the FFIEC guidance which will continue to apply to all
federally insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit Insurance
Act, as amended (the "FDIA"), which requires the federal banking regulators
to establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution
fails to meet any of the standards established in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any respect to implement a compliance
plan that has been accepted by its primary federal regulator, the regulator
is required to issue an order directing the institution to cure the
deficiency. Such an order is enforceable in court in the same manner as a
cease and desist order. Until the deficiency cited in the regulator's order
is cured, the regulator may restrict the institution's rate of growth,
require the institution to increase its capital, restrict the rates the
institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. In addition to the
Page 16
<PAGE>
enforcement procedures established in section 39 of the FDIA, noncompliance
with the standards established by the guidelines may also be grounds for
other enforcement action by the federal banking regulators, including cease
and desist orders and civil money penalty assessments.
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. Financial institutions are particularly
vulnerable due to the industry's dependence on electronic data processing
systems.
The directors and management of the Company have assigned a high priority to
the Year 2000 issue. A Year 2000 Compliance Committee was established in
October, 1997, and is comprised of five senior officers and eight other
officers and employees of the Company. A review of the Company's computer
systems and related equipment that could be affected by the Year 2000 problem
was performed. Potential problems were identified and a systematic approach
was developed to resolve each item. A matrix was designed listing each item,
assigning individual responsibility, establishing completion and testing
dates, and the date compliance is achieved. Most of the items pertained to
the computer systems of the Company's outside data processing service bureau,
which is a data processing service bureau for a large number of banks and
thrifts. The service bureau has been making changes and addressing the Year
2000 problem for some time in order for its computer systems to process
properly in a Year 2000 environment. Service bureau personnel have tested the
modified systems and are also making available to its users a test system
to test the systems at the user's site, using several future dates in 1999,
2000 and 2001. Company personnel began this testing on-site on
November 3, 1998, and are scheduled to complete testing in the first quarter
of 1999.
Company personal computers, file servers, and related equipment have also
been tested by Company personnel for Year 2000 compliance. Equipment not Year
2000 compliant has been replaced with the exception of approximately six
personal computers to be replaced in 1999 as part of the regular replacement
program. Other third party software used by the Company has been tested and
replaced as necessary to be Year 2000 compliant.
The Company has also tested such things as vault doors, alarm systems,
networks, etc. and is not aware of any significant problems with such systems.
A budget amount of $166,500 was initially established in December, 1997, for
computer hardware and software costs plus other related costs in connection
with the Year 2000 problem. The Company does not expect to exceed this amount
at this time. Approximately $53,000 has been incurred through September 30,
1998.
Page 17
<PAGE>
The Company believes it has made substantial progress in achieving Year 2000
compliance and expects to complete testing of the service bureau's computer
systems used by the Company in the first quarter of 1999.
An analysis has been done of the Company's borrowing customers and the
Company has initiated a program to visit with those identified to communicate
with key Company customers to ensure they are properly prepared for the Year
2000 and will not suffer serious adverse consequences. This same analysis has
been performed for large depositors and funds providers.
Management is in the process of modifying its existing business continuity
plans and is also developing contingency plans to address potential risks in
the event of Year 2000 failures, including non-compliance by third parties.
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 June 30,
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 June 30,
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 value of such
instruments. Company borrowings were tabulated by contractual maturity dates.
The Company believes the June 30, 1998 table presented also represents a
reasonable estimate of this information as of September 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 14% 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:
Page 18
<PAGE>
<TABLE>
<CAPTION>
Prepayment
Assumption Over
Interest Rate: 10 to 20 years 20 years
- ------------- -------------- --------
<S> <C> <C>
8% or less 14% 12%
8.01% to 10% 21% 21%
10.01 to 12% 21% 21%
12.01 to 14% 21% 21%
14.01% and over 21% 21%
</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 19
<PAGE>
Principal Amount Maturing in:
<TABLE>
<CAPTION>
7/1/98 7/1/99- 7/1/01- Fair value
(Dollars in Thousands) - 6/30/99 6/30/01 6/30/03 Thereafter Total 6/30/98
--------- ------- ------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed-interest-rate loans
Residential 1-4 family real estate $ 24,808 $ 26,163 $ 17,905 $ 26,687 $ 95,563 $ 96,860
Average interest rate 7.81% 7.52% 7.48% 7.40% 7.55%
Multifamily and commercial real estate 4,708 2,752 1,075 840 9,375 9,411
Average interest rate 8.33% 8.10% 8.09% 8.33% 8.23%
Commercial business loans 4,003 1,971 740 198 6,912 6,927
Average interest rate 8.62% 8.93% 8.78% 9.60% 8.75%
Consumer loans 19,374 19,147 5,161 661 44,343 44,503
Average interest rate 9.08% 9.04% 9.03% 10.29% 9.07%
Variable-interest-rate loans
Residential 1-4 family real estate $ 14,011 $ 22,300 $ 16,849 $ 39,474 $ 92,634 92,532
Average interest rate 7.72% 7.72% 7.72% 7.72% 7.72%
Multifamily and commercial real estate 5,675 9,450 8,516 22,026 45,667 45,472
Average interest rate 8.33% 8.32% 8.26% 8.36% 8.33%
Commercial business loans 5,809 776 46 13 6,644 6,644
Average interest rate 8.78% 9.02% 8.70% 7.69% 8.81%
Consumer loans 861 1,384 744 -- 2,989 2,990
Average interest rate 9.64% 9.47% 9.41% -- 9.50%
Fixed-interest-rate securities
(including interest bearing deposits) $ 29,496 $ 12,118 -- -- $ 41,614 $ 41,787
Average interest rate 5.73% 6.22% -- -- 5.87%
Rate-sensitive liabilities:
Non-interest bearing checking $ 3,264 $ 2,434 $ 949 $ 606 $ 7,253 $ 7,253
Average interest rate -- -- -- -- -- --
NOW and super NOW accounts 26,232 4,835 3,194 6,220 40,481 40,481
Average interest rate 2.71% 2.71% 2.71% 2.71% 2.71%
Passbook saving accounts 14,153 1,286 929 2,420 18,788 18,788
Average interest rate 2.36% 2.36% 2.36% 2.36% 2.36%
Money Market accounts 26,122 5,762 2,246 1,435 35,565 35,565
Average interest rate 4.19% 4.19% 4.19% 4.19% 4.19%
Certificate of deposit accounts 134,966 63,019 13,994 30 212,009 213,073
Average interest rate 5.45% 5.88% 6.03% 5.25% 5.61%
FHLB advances 3,000 2,000 -- -- 5,000 4,998
Average interest rate 6.52% 6.71% -- -- 6.60%
</TABLE>
Page 20
<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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibts
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
Form 8K (Report dated July 2, 1998 - Item 5). 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 UPC 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 21
<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,
--------------------------------
President
and Chief Executive Officer
Date: By: /s/ G. Lynn Brinkman,
--------------------------------
Vice President
Secretary, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,410
<INT-BEARING-DEPOSITS> 12,694
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,148
<INVESTMENTS-CARRYING> 24,124
<INVESTMENTS-MARKET> 24,448
<LOANS> 295,550
<ALLOWANCE> 1,473
<TOTAL-ASSETS> 371,357
<DEPOSITS> 309,410
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 3,874
<LONG-TERM> 0
470
0
<COMMON> 0
<OTHER-SE> 55,603
<TOTAL-LIABILITIES-AND-EQUITY> 371,357
<INTEREST-LOAN> 5,993
<INTEREST-INVEST> 480
<INTEREST-OTHER> 273
<INTEREST-TOTAL> 6,746
<INTEREST-DEPOSIT> 3,746
<INTEREST-EXPENSE> 3,826
<INTEREST-INCOME-NET> 2,920
<LOAN-LOSSES> 111
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,869
<INCOME-PRETAX> 847
<INCOME-PRE-EXTRAORDINARY> 520
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 520
<EPS-PRIMARY> $.16
<EPS-DILUTED> $.15
<YIELD-ACTUAL> 3.38
<LOANS-NON> 360
<LOANS-PAST> 825
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 122
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 1,473
<ALLOWANCE-DOMESTIC> 1,473
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
