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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 005-57091
FIRST MUTUAL BANCSHARES, INC.
--------------------------------------------
(Exact name of bank as specified in charter)
WASHINGTON 91-2005970
---------- ----------
(State of (I.R.S. Employer
incorporation) Identification Number)
400 108th Avenue N.E., Bellevue, WA 98004
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 453-5301
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
November 13, 2001 4,725,966
---------
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FIRST MUTUAL BANCSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
----
PART I: FINANCIAL INFORMATION............................................... 2
Item 1. Financial Statements............................................. 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 14
General..................................................... 14
Recently Issued Accounting Standards........................ 14
Results of Operations....................................... 15
Net Income.............................................. 15
Net Interest Income..................................... 15
Non-Interest Income..................................... 16
Non-Interest Expense.................................... 20
Financial Condition......................................... 21
Asset Quality............................................... 22
Business Segments........................................... 22
Consumer Banking........................................ 23
Residential Lending..................................... 23
Commercial Lending...................................... 24
Liquidity and Capital Reserves.............................. 25
Expansion................................................... 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 26
Forward-Looking Statements Disclaimer....................... 28
PART II: OTHER INFORMATION.................................................. 29
Item 1. Legal Proceedings................................................ 29
Item 2. Changes in Securities............................................ 29
Item 3. Defaults Upon Senior Securities.................................. 29
Item 4. Submission of Matters to a Vote of Security-Holders.............. 29
Item 5. Other Information................................................ 29
Item 6. Exhibits and Reports on Form 8-K................................. 29
SIGNATURES.................................................................. 30
1
ITEM 1. FINANCIAL STATEMENTS
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2001 2000
-------------- --------------
ASSETS: (Unaudited)
CASH AND CASH EQUIVALENTS:
Interest-earning deposits $ 38,809,893 $ 513,806
Noninterest-earning demand deposits
and cash on hand 4,734,543 6,485,186
-------------- --------------
43,544,436 6,998,992
MORTGAGE-BACKED AND OTHER SECURITIES
AVAILABLE FOR SALE 23,206,561 38,648,017
LOANS RECEIVABLE, HELD FOR SALE 4,987,118 15,774,341
MORTGAGE-BACKED AND OTHER SECURITIES
HELD TO MATURITY 33,599,841 85,041,725
LOANS RECEIVABLE 546,537,954 480,505,472
RESERVE FOR LOAN LOSSES (7,013,303) (6,729,166)
-------------- --------------
LOANS RECEIVABLE, NET 539,524,651 473,776,306
ACCRUED INTEREST RECEIVABLE 3,610,259 4,665,516
REAL ESTATE HELD FOR SALE -- 1,352,611
LAND, BUILDINGS AND EQUIPMENT, NET 8,553,685 7,423,956
FEDERAL HOME LOAN BANK (FHLB) STOCK,
at cost 8,391,300 7,749,400
MORTGAGE SERVICING RIGHTS 51,213 145,097
OTHER ASSETS 1,992,100 1,655,505
-------------- --------------
TOTAL $ 667,461,164 $ 643,231,466
============== ==============
2
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
September 30, December 31,
2001 2000
-------------- --------------
(Unaudited)
LIABILITIES:
Deposits:
Investor custodial checking $ 137,661 $ 662,545
Money market deposit and checking
accounts 101,230,833 96,267,362
Regular savings 8,159,710 8,350,254
Time deposits 351,834,505 352,211,748
-------------- --------------
Total deposits 461,362,709 457,491,909
Drafts payable 1,480,758 1,300,082
Accounts payable and other liabilities 2,598,228 3,493,118
Advance payments by borrowers for
taxes and insurance 2,879,065 1,484,132
FHLB advances 147,141,225 133,034,725
Other advances 250,000 250,000
Current tax liability 744,956 260,229
-------------- --------------
Total liabilities 616,456,941 597,314,195
STOCKHOLDERS' EQUITY:
Common stock, $1 par value-
Authorized, 10,000,000 shares
Issued and outstanding, 4,715,966
and 4,671,286 shares, respectively 4,715,966 4,671,286
Additional paid-in capital 31,346,556 31,118,545
Employee stock ownership plan debt -- (97,821)
Retained earnings 14,657,241 10,140,569
Accumulated other comprehensive income:
Unrealized income on securities
available for sale, net of federal
income tax 284,460 84,692
-------------- --------------
Total stockholders' equity 51,004,223 45,917,271
-------------- --------------
TOTAL $ 667,461,164 $ 643,231,466
============== ==============
3
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Quarters ended September 30 Nine Months ended September 30
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited)
INTEREST INCOME:
Loans Receivable $ 11,787,341 $ 11,058,397 $ 35,157,638 $ 32,017,990
Interest on AFS Securities 401,184 654,560 1,463,723 1,230,992
Interest on HTM Securities 713,804 1,342,219 3,031,487 3,987,769
Interest Other 300,736 159,980 602,545 421,149
------------ ------------ ------------ ------------
13,203,065 13,215,156 40,255,393 37,657,900
INTEREST EXPENSE:
Deposits 5,740,381 6,101,883 18,037,256 16,627,084
FHLB advances and other 2,269,545 1,921,329 6,582,087 5,706,009
------------ ------------ ------------ ------------
8,009,926 8,023,212 24,619,343 22,333,093
------------ ------------ ------------ ------------
Net interest income 5,193,139 5,191,944 15,636,050 15,324,807
PROVISION FOR LOAN LOSSES 50,000 50,000 315,000 280,000
------------ ------------ ------------ ------------
Net interest income, after provision
for loan losses 5,143,139 5,141,944 15,321,050 15,044,807
OTHER OPERATING INCOME:
Gain (Loss) on sales of loans 100,105 (84,909) 1,263,786 43,480
Servicing fees, net of amortization 25,080 107,436 91,908 445,683
Gain on sales of investments 417,545 -- 1,046,208 --
Fees on deposits 76,500 57,945 243,653 211,022
Other 257,745 176,191 671,122 518,437
------------ ------------ ------------ ------------
Total other operating income 876,975 256,663 3,316,677 1,218,622
BALANCE, carried forward 6,020,114 5,398,607 18,637,727 16,263,429
4
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
Quarters ended September 30 Nine Months ended September 30
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited)
BALANCE, brought forward $ 6,020,114 $ 5,398,607 $ 18,637,727 $ 16,263,429
OPERATING EXPENSES:
Salaries and employee benefits 1,751,438 1,594,756 6,063,816 5,211,733
Occupancy 531,390 460,885 1,568,609 1,310,962
Other 1,062,903 804,513 2,876,961 2,265,592
------------ ------------ ------------ ------------
Total other operating expenses 3,345,731 2,860,154 10,509,386 8,788,287
------------ ------------ ------------ ------------
Income before Federal Income Tax and
Cumulative Effect of Adoption of New
Accounting Principle 2,674,383 2,538,453 8,128,341 7,475,142
FEDERAL INCOME TAX 904,886 858,837 2,750,393 2,532,504
------------ ------------ ------------ ------------
Income before Cumulative Effect of
Adoption of New Accounting Principle 1,769,497 1,679,616 5,377,948 4,942,638
------------ ------------ ------------ ------------
Cumulative effect of Adoption of New
Accounting Principle, net of federal
income tax -- -- (155,247) --
------------ ------------ ------------ ------------
NET INCOME $ 1,769,497 $ 1,679,616 $ 5,222,701 $ 4,942,638
============ ============ ============ ============
PER SHARE DATA:
Basic earnings per common share before
Cumulative Effect of Adoption of New
Accounting Principle $ 0.38 $ 0.36 $ 1.14 $ 1.06
Cumulative Effect of Adoption of New Accounting
Principle, Net of federal income tax -- -- (0.03) --
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.38 $ 0.36 $ 1.11 $ 1.06
============ ============ ============ ============
Earnings per common share before cumulative
effect of Adoption of New Accounting
Principle, Assuming Dilution $ 0.37 $ 0.35 $ 1.12 $ 1.04
Cumulative Effect of Adoption of New
Accounting Principle, Net of federal income tax -- -- (0.03) --
------------ ------------ ------------ ------------
Earnings Per Common Share Assuming Dilution $ 0.37 $ 0.35 $ 1.09 $ 1.04
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,711,962 4,671,286 4,700,755 4,670,569
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
INCLUDING DILUTIVE STOCK OPTIONS 4,787,340 4,734,309 4,782,274 4,734,208
============ ============ ============ ============
5
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Common stock Additional Employee stock Accumulated
------------------------ paid-in Retained ownership Comprehensive
Shares Amount capital earnings plan debt Income(loss) Total
---------- ----------- ------------ ------------ ---------- ---------- -----------
BALANCE, JANUARY 1, 1999 4,247,275 $ 4,247,275 $ 25,848,681 $ 5,181,720 $ (603,738) $ (11,985) $34,661,953
Options exercised, including tax
benefit of $13,038 9,378 9,378 48,701 58,079
10% stock dividend 424,483 424,483 5,252,977 (5,677,460) --
Retirement of shares repurchased (8,500) (8,500) (34,000) (60,031) (102,531)
Repayment of ESOP debt 292,999 292,999
Cash dividends declared ($.20 per share) (917,221) (917,221)
Comprehensive income:
Net income 6,000,348 6,000,348
Other comprehensive income(loss)
--Change in unrealized loss on
securities available-for-sale,
net of federal income tax (656,968) (656,968)
------------ ---------- -----------
Total Comprehensive income 6,000,348 (656,968) 5,343,380
---------- ----------- ------------ ------------ ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 4,672,636 $ 4,672,636 $ 31,116,359 $ 4,527,356 $ (310,739) $ (668,953) $39,336,659
========== =========== ============ ============ ========== ========== ===========
Options exercised, including tax
benefit of $6,431 8,650 8,650 42,186 50,836
Retirement of shares repurchased (10,000) (10,000) (40,000) (51,874) (101,874)
Repayment of ESOP debt 212,918 212,918
Cash dividends declared ($.20 per share) (933,913) (933,913)
Comprehensive income:
Net income 6,599,000 6,599,000
Other comprehensive income(loss)
--Change in unrealized gain on
securities available-for-sale,
net of federal income tax 753,645 753,645
------------ ---------- -----------
Total Comprehensive income 6,599,000 753,645 7,352,645
---------- ----------- ------------ ------------ ---------- ---------- -----------
BALANCE, DECEMBER 31, 2000 4,671,286 $ 4,671,286 $ 31,118,545 $ 10,140,569 $ (97,821) $ 84,692 $45,917,271
========== =========== ============ ============ ========== ========== ===========
Options exercised, including tax
benefit of $86,101 44,680 44,680 228,011 272,691
Repayment of ESOP debt 97,821 97,821
Cash dividends declared ($.05 per share) (706,029) (706,029)
Comprehensive income:
Net income 5,222,701 5,222,701
Other comprehensive income(loss)
--Change in unrealized gain on
securities available-for-sale,
net of federal income tax 199,768 199,768
------------ ---------- -----------
Total Comprehensive income 5,222,701 199,768 5,422,469
---------- ----------- ------------ ------------ ---------- ---------- -----------
BALANCE, SEPTEMBER 30, 2001 4,715,966 $ 4,715,966 $ 31,346,556 $ 14,657,241 $ -- $ 284,460 $51,004,223
========== =========== ============ ============ ========== ========== ===========
6
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
--------------------------------
2001 2000
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,222,701 $ 4,942,638
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 315,000 280,000
Depreciation and amortization 999,968 581,712
Deferred loan origination fees, net of accretion (435,448) (328,709)
Amortization of mortgage servicing rights 9,832 54,732
Gain on sales of loans (1,100,127) (51,893)
Gain on sale of repossessed real estate (9,296) --
Gain on sale of securities available-for-sale (581,996) --
Gain on sale of other investments (464,212) --
FHLB stock dividends (408,800) (358,554)
Changes in operating assets & liabilities:
Loans receivable held-for-sale 10,787,223 (16,862,217)
Accrued interest receivable 1,055,257 (707,197)
Other assets (336,595) (972,270)
Drafts payable 180,676 251,483
Accounts payable and other liabilities (897,124) (1,000,654)
Federal income taxes 484,727 (364,923)
Advance payments by borrowers for taxes and insurance 1,394,933 1,102,228
------------- -------------
Net cash provided (used) by operating activities 16,216,719 (13,433,624)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (182,341,853) (111,786,815)
Loan principal repayments 125,970,510 73,970,955
Increase in undisbursed loan proceeds (9,699,454) 8,943,006
Principal repayments & redemptions on -- --
mortgage-backed and other securities 50,422,704 7,506,755
Purchase of mortgage-backed securities available for sale (14,434,698) --
Purchase of mortgage-backed and other securities held-to-maturity (2,996,250) (4,500,000)
Purchases of premises and equipment (1,737,517) (2,460,608)
Purchase of FHLB stock (233,100) (245,946)
Proceeds from sale of loans 1,146,155 385,777
Proceeds from other investments 472,769 --
Proceeds from sale of securities 34,767,959 --
Proceeds from sale of real estate held-for-sale 1,433,584 --
------------- -------------
BALANCE, net cash provided (used) by investing activities 2,770,809 (28,186,876)
7
FIRST MUTUAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Nine months ended September 30,
--------------------------------
2001 2000
------------- -------------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (14,205,956) 35,551,405
Interest credited to deposit accounts 18,076,756 16,499,487
Proceeds from advances 173,941,000 496,574,175
Repayment of advances (159,834,500) (506,034,375)
Dividends paid (703,795) (700,841)
Proceeds from exercise of stock options 186,590 44,405
Repurchase of common stock - (101,874)
Repayment of employee stock ownership plan debt 97,821 197,050
------------- -------------
Net cash provided by financing activities 17,557,916 42,029,432
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 36,545,444 408,932
CASH & CASH EQUIVALENTS:
Beginning of year 6,998,992 3,864,995
------------- -------------
End of quarter $ 43,544,436 $ 4,273,927
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Loans originated for mortgage banking activities $ 70,987,505 $ 50,611,688
============= =============
Loans originated for investment activities $ 182,341,853 $ 111,786,815
============= =============
Proceeds from sales of loans held-for-sale $ 81,774,728 $ 33,749,471
============= =============
Cash paid during nine months ended September 30
Interest $ 25,501,389 $ 22,209,206
============= =============
Income taxes $ 2,202,500 $ 2,884,280
============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Loans securitized into securities available for sale - $ 22,550,393
Loans transferred to (from) real estate
held-for-sale, net $ (1,352,611) $ 894,574
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations.
NOTE 2.
MORTGAGE-BACKED AND OTHER SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities available-for-sale at
September 30, 2001 and December 31, 2000 are summarized as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
SEPTEMBER 30, 2001:
FHLMC securities $ 5,329,863 $ 93,710 $ -- $ 5,423,573
FNMA securities 17,445,698 337,290 -- 17,782,988
----------- ----------- ----------- -----------
$22,775,561 $ 431,000 $ -- $23,206,561
=========== =========== =========== ===========
DECEMBER 31, 2000:
FHLMC securities $ 420,698 $ 9,504 $ -- $ 430,202
FNMA securities 36,383,457 358,474 217,890 36,524,041
GNMA securities 1,713,531 -- 19,757 1,693,774
----------- ----------- ----------- -----------
$38,517,686 $ 367,978 $ 237,647 $38,648,017
=========== =========== =========== ===========
NOTE 3.
MORTGAGE-BACKED AND OTHER SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair value of mortgage-backed and other
securities are summarized as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
SEPTEMBER 30, 2001:
FNMA certificates $27,165,816 $ 866,236 $ -- $28,032,052
FHLMC certificates 1,155,049 16,716 -- 1,171,765
U.S. government agency securities 3,999,875 86,646 -- 4,086,521
Municipal bonds 1,114,863 -- 1,577 1,113,286
REMICS 164,238 1,128 -- 165,366
----------- ----------- ----------- -----------
$33,599,841 $ 970,726 $ 1,577 $34,568,990
=========== =========== =========== ===========
DECEMBER 31, 2000:
FNMA certificates $32,858,126 $ 215,635 $ 456,516 $32,617,245
FHLMC certificates 1,528,524 18,518 -- 1,547,042
U.S. government agency securities 46,665,515 131,994 227,007 46,570,502
Merrill Lynch corporate bond 2,523,071 -- 31,246 2,491,825
Municipal bonds 1,120,707 -- 60,939 1,059,768
REMICs 345,782 1,222 914 346,090
----------- ----------- ----------- -----------
$85,041,725 $ 367,369 $ 776,622 $84,632,472
=========== =========== =========== ===========
9
NOTE 4.
NONPERFORMING ASSETS
The Bank had nonperforming assets as follows.
September 30, 2001 December 31, 2000
------------------ -----------------
Nonperforming loans $ 2,168,382 $ 1,110,920
Real Estate and Repossessed assets Held-for-Sale -- 1,352,611
------------------ -----------------
Totals $ 2,168,382 $ 2,463,531
================== =================
At September 30, 2001 and December 31, 2000, the Bank had no material impaired
loans as defined under Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan."
NOTE 5.
EARNINGS PER SHARE
Basic Earnings Per Share is computed by dividing net income by the
weighted-average number of shares outstanding during the year. Diluted EPS
reflects the potential dilutive effect of stock options and is computed by
dividing net income by the weighted-average number of shares outstanding during
the year, plus the dilutive common shares that would have been outstanding had
the stock options been exercised.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for quarters and nine months
ending September 30, 2001 and September 30, 2000:
Income Shares Per share
(numerator) (denominator) amount
--------------------------------------------
Quarter ended September 30, 2001
- --------------------------------
Basic EPS:
Income available to common shareholders $ 1,769,497 4,711,962 $ 0.38
============
Effect of dilutive stock options -- 75,378
------------- ------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercised $ 1,769,497 4,787,340 $ 0.37
===========================================
Nine months ended September 30, 2001
- ------------------------------------
Basic EPS:
Income available to common shareholders $ 5,222,701 4,700,755 $ 1.11
============
Effect of dilutive stock options -- 81,519
------------- -------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercised $ 5,222,701 4,782,274 $ 1.09
===========================================
Quarter ended September 30, 2000
- --------------------------------
Basic EPS:
Income available to common shareholders $ 1,679,616 4,671,286 $ 0.36
============
Effect of dilutive stock options -- 63,023
------------- -------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercised $ 1,679,616 4,734,309 $ 0.35
===========================================
Nine months ended September 30, 2000
- ------------------------------------
Basic EPS:
Income available to common shareholders $ 4,942,638 4,670,569 $ 1.06
============
Effect of dilutive stock options -- 63,639
------------- -------------
Diluted EPS:
Income available to common shareholders
plus assumed stock options exercised $ 4,942,638 4,734,208 $ 1.04
===========================================
10
NOTE 6.
RATE VOLUME ANALYSIS THIRD QUARTER 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001
(Dollars in thousands) VS VS
THIRD QUARTER 2000 NINE MONTHS ENDED SEPTEMBER 30, 2000
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
TOTAL TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
- --------------------------------------------------------------------------------- ---------------------------------
INTEREST INCOME
Investments:
Available-for-sale securities $ (212) $ (42) $ (254) $ 364 $ (132) $ 232
Held-to-maturity securities (457) (171) (628) (467) (488) (955)
Other equity investments 243 (102) 141 274 (92) 182
------- ------- ------- ------- ------- -------
Total investments (426) (315) (741) 171 (712) (541)
Loans:
Residential (57) 229 172 (462) 361 (101)
Residential construction 182 (195) (13) 598 (349) 249
Multifamily 98 (166) (68) 133 72 205
Multifamily construction (18) (168) (186) 331 (127) 204
Commercial real estate and Business 1,056 (358) 698 2,367 (415) 1,952
Commercial real estate construction 86 (101) (15) 282 (228) 54
Consumer & Other 228 (87) 141 667 (91) 576
------- ------- ------- ------- ------- -------
Total loans 1,575 (846) 729 3,916 (777) 3,139
------- ------- ------- ------- ------- -------
Total interest income 1,149 (1,161) (12) 4,087 (1,489) 2,598
INTEREST EXPENSE
Deposits:
Money market deposit and checking 23 (300) (277) 72 (442) (370)
Regular savings (3) (8) (11) (25) (16) (41)
Time deposits 133 (207) (74) 974 846 1,820
------- ------- ------- ------- ------- -------
Total deposits 153 (515) (362) 1,021 388 1,409
FHLB advances and other 512 (163) 349 916 (39) 877
------- ------- ------- ------- ------- -------
Total interest expense 665 (678) (13) 1,937 349 2,286
Net interest income $ 484 $ (483) $ 1 $ 2,150 $(1,838) $ 312
======= ======= ======= ======= ======= =======
11
NOTE 7.
SEGMENTS
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company has three reportable segments:
consumer banking, residential lending, and commercial lending.
Consumer banking offers depositor banking services, home equity lending, direct
consumer loans, consumer dealer financing contracts and small business lending.
Residential lending offers conventional or government-insured loans to borrowers
to purchase, refinance, or build homes, secured by one-to-four unit family
dwellings. Embedded within the residential lending segment is a mortgage banking
operation, which sells loans in the secondary mortgage market. The mortgage
banking operation may choose to retain or sell the right to service the loans
sold (i.e., collection of principal and interest payments) depending upon market
conditions.
Commercial lending offers permanent and interim (construction) loans for
multifamily housing (over 4 units), commercial real estate properties, and loans
to small and medium-sized businesses for financing inventory, accounts
receivables, and equipment, among other things. The underlying real estate
collateral or business asset being financed typically secures these loans.
These segments are managed separately because each business requires different
processes and different marketing strategies to reach the customer base that
purchases those products and services. All three segments derive a majority of
their revenue from interest, and management relies primarily on net interest
revenue in managing these segments. No single customer provides more than 10% of
the Company's revenues.
The Company measures the performance of segments as self-standing business
entities. As self-standing entities, the segments have full income-allocated and
cost-burdened profit and loss statements. Except for the allocations and the
funds transfer-pricing mechanism described below, the accounting policies for
the segments are the same as those described in the Summary of Significant
Accounting Policies.
Allocations and funds transfer-pricing mechanism:
Operating income and expenses are allocated to segments whenever they can be
directly attributed to their activities. Indirect income and overhead costs are
credited or charged to the segments whenever they are specifically identified as
providers or users of the ancillary internal service, or are allocated based on
some common denominator. For certain services, inter-segment user fees are
assessed at agreed-upon prices.
A funds transfer-pricing method has been utilized to allocate interest income
for the deposits held in the branch banks. The deposit-gathering activities
contribute to the profitability by reducing borrowing costs. The deposits are
therefore presumed to generate revenues for consumer banking through
reinvestments in low-risk securities (inferred interest-earning assets). The
interest earnings are calculated using an internal, proxy-market interest rate.
The loan-producing units in the residential, commercial, and consumer segments
are also presumed to borrow money to fund their loans using an internal,
proxy-market interest rate.
Equity capital commensurate with the risk weight of segment assets has been
allocated to simulate the operating capital level required by the Bank's
regulators. The allocated capital provides the segments with interest-free
funding.
Financial information for the Company's segments is shown below for Sept 30,
2001, 2000 and 1999:
CONSUMER RESIDENTIAL COMMERCIAL
QUARTER ENDED SEPTEMBER 30: BANKING LENDING LENDING TOTALS
- -------------------------- ---------- ---------- ---------- ----------
Revenues from external customers 2001 $2,532,653 $1,745,104 $8,719,866 12,997,623
2000 3,012,598 1,527,334 8,498,624 13,038,556
1999 2,310,595 2,244,001 6,834,970 11,389,566
Revenues from other segments 2001 5,524,761 96,004 531,529 6,152,294
2000 5,004,410 76,437 481,968 5,562,815
1999 4,256,010 72,441 413,991 4,742,442
Total Revenues 2001 8,057,414 1,841,108 9,251,395 19,149,917
2000 8,017,008 1,603,771 8,980,592 18,601,371
1999 6,566,605 2,316,442 7,248,961 16,132,008
Net interest revenue 2001 1,566,383 525,592 3,038,506 5,130,481
2000 1,425,058 459,412 3,347,019 5,231,489
1999 1,585,371 399,706 2,630,793 4,615,870
Income (loss) before federal income taxes 2001 (236,387) 375,210 2,362,796 2,501,619
2000 61,689 100,179 2,665,380 2,827,248
1999 108,638 507,459 1,839,396 2,455,493
CONSUMER RESIDENTIAL COMMERCIAL
YEAR-TO-DATE ENDED SEPTEMBER 30: BANKING LENDING LENDING TOTALS
- -------------------------------- ---------- ---------- ---------- ----------
Revenues from external customers 2001 $ 8,379,320 $ 5,138,194 $ 26,137,035 $ 39,654,549
2000 8,142,072 5,569,153 24,164,030 37,875,255
1999 6,686,067 6,546,361 19,568,719 32,801,147
Revenues from other segments of the Bank 2001 16,023,799 294,082 1,563,033 17,880,914
2000 14,347,232 252,257 1,378,779 15,978,268
1999 13,011,876 222,429 1,193,479 14,427,784
Total Revenues 2001 24,403,119 5,432,276 27,700,068 57,535,463
2000 22,489,304 5,821,410 25,542,809 53,853,523
1999 19,697,943 6,768,790 20,762,198 47,228,931
Net interest revenue 2001 4,268,555 1,387,318 9,393,133 15,049,006
2000 4,465,677 1,409,244 9,382,879 15,257,800
1999 4,803,119 1,332,725 7,423,836 13,559,680
Income (loss) before federal income taxes 2001 (1,228,804) 805,530 6,938,314 6,515,040
2000 422,251 473,508 7,186,611 8,082,370
1999 606,479 1,349,729 5,104,700 7,060,908
Total assets as of September 30 2001 486,680,969 100,961,588 416,664,519 1,004,307,076
2000 461,962,775 90,233,841 374,542,435 926,739,051
1999 411,571,160 98,177,125 315,886,644 825,634,929
12
NOTE 7.
SEGMENTS (CONTINUED)
Revenues from external customers are comprised of interest income and other
operating income. Revenues from other segments include the interest-free benefit
of allocated equity capital, the interest revenue from the inferred earning
assets on branch deposits, and inter-segment user fees and charges.
Reconciliations of segment data to the Company consolidated financial statements
are shown in the table below. The amounts for the segments will differ from the
actual consolidated financial statements due to a funds transfer pricing
mechanism that uses internal, proxy market interest rates, and also, various
methods for allocating costs. The provision for loan losses and the reserve for
loan losses have not been allocated to the segments. Total segment assets
include inferred interest - earning assets on branch deposits, which are
essentially the same assets from the lending segments, but credited with a
proportionate interest yield.
QUARTER YEAR-TO-DATE QUARTER YEAR-TO-DATE
ENDED ENDED ENDED ENDED
2001 2001 2000 2000
------------ --------------- ------------ --------------
TOTAL REVENUES
- --------------
Segment total revenues $ 19,149,917 $ 57,535,463 $ 18,601,371 $ 53,853,523
Back out or add back:
Revenues from other segments of the Bank (6,152,294) (17,880,914) (5,562,815) (15,978,268)
Revenues of administrative departments netted against
overhead costs and reallocated as net costs 1,082,417 3,917,521 433,262 1,001,266
------------ --------------- ------------ --------------
Consolidated Bank total revenues $ 14,080,040 $ 43,572,070 $ 13,471,818 $ 38,876,521
============ =============== ============ ==============
NET INTEREST REVENUE
- --------------------
Segment net interest revenue $ 5,130,481 $ 15,049,006 $ 5,231,489 $ 15,257,800
Back out or add back:
Difference between actual Bank interest expense
and intersegment funding allocation (468,825) (892,162) (367,798) (538,856)
Interest revenues of administrative departments netted
against overhead costs and reallocated as net costs 531,483 1,479,206 328,252 605,862
------------ --------------- ------------ --------------
Consolidated Bank net interest revenue $ 5,193,139 $ 15,636,050 $ 5,191,943 $ 15,324,806
============ =============== ============ ==============
INCOME BEFORE FEDERAL INCOME TAXES
- ----------------------------------
Segment pre-tax income $ 2,501,619 $ 6,515,040 $ 2,827,248 $ 8,082,370
Back out or add back:
Unallocated loan losses (50,000) (315,000) (50,000) (280,000)
Unallocated net expenses of administrative departments - - - -
Difference between actual total Bank funding cost
and total intersegment funding allocation 222,764 1,928,301 (238,795) (327,228)
------------ --------------- ------------ --------------
Consolidated Bank pre-tax income $ 2,674,383 $ 8,128,341 $ 2,538,453 $ 7,475,142
============ =============== ============ ==============
TOTAL ASSETS AS OF SEPTEMBER 30
- -------------------------------
SEGMENT TOTAL ASSETS $ 1,004,307,076 $ 926,739,051
Back out or add back:
Inferred intersegment interest earning assets on
branch deposits (340,304,267) (296,817,214)
Unallocated reserve for loan loss (7,013,303) (6,470,422)
Unallocated nonearning assets of administrative
departments 10,471,658 4,983,412
--------------- --------------
Consolidated Bank total assets $ 667,461,164 $ 628,434,827
=============== ==============
QUARTER YEAR-TO-DATE
ENDED ENDED
1999 1999
------------ --------------
TOTAL REVENUES
- --------------
Segment total revenues $ 16,132,008 $ 47,228,931
Back out or add back:
Revenues from other segments of the Bank (4,742,442) (14,427,784)
Revenues of administrative departments netted against
overhead costs and reallocated as net costs 223,225 662,927
------------ --------------
Consolidated Bank total revenues $ 11,612,791 $ 33,464,074
============ ==============
NET INTEREST REVENUE
- --------------------
Segment net interest revenue $ 4,615,870 $ 13,559,680
Back out or add back:
Difference between actual Bank interest expense
and intersegment funding allocation 40,687 (9,834)
Interest revenues of administrative departments netted
against overhead costs and reallocated as net costs 175,087 505,131
------------ --------------
Consolidated Bank net interest revenue $ 4,831,644 $ 14,054,977
============ ==============
INCOME BEFORE FEDERAL INCOME TAXES
- ----------------------------------
Segment pre-tax income $ 2,455,493 $ 7,060,908
Back out or add back:
Unallocated loan losses (250,000) (685,000)
Unallocated net expenses of administrative departments - -
Difference between actual total Bank funding cost
and total intersegment funding allocation 136,552 353,740
------------ --------------
Consolidated Bank pre-tax income $ 2,342,045 $ 6,729,648
============ ==============
TOTAL ASSETS AS OF SEPTEMBER 30
- -------------------------------
SEGMENT TOTAL ASSETS $ 825,634,929
Back out or add back:
Inferred intersegment interest earning assets on
branch deposits (277,588,741)
Unallocated reserve for loan loss (6,220,843)
Unallocated nonearning assets of administrative
departments 5,998,936
--------------
Consolidated Bank total assets $ 547,824,281
==============
13
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying consolidated statements of
financial condition and related interim consolidated statements of income,
comprehensive income, stockholders' equity and cash flows reflect all
adjustments (which include reclassifications and normal recurring adjustments)
that are necessary for a fair presentation in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the financial statements.
Certain reclassifications have been made to the 2000 financial statements to
conform to the 2001 presentation. All significant inter-company transactions and
balances have been eliminated.
The information included in this Form 10-Q should be read in conjunction with
First Mutual Bancshares, Inc. Year 2000 Annual Report on Form 10-K to the
Securities and Exchange Commission. Interim results are not necessarily
indicative of results for a full year.
Consolidated Financial Statements of the Company begin on page 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
First Mutual Bancshares, Inc. (the "Company"), a Washington corporation, is a
financial holding company owning all of the equity of its wholly owned
subsidiary, First Mutual Bank. The Company is subject to regulation by the
Federal Reserve Bank of San Francisco. This discussion refers to the
consolidated statements of the Company and the Bank and therefore the references
to "Bank" in this discussion refers to both entities.
First Mutual Bank (the "Bank") is a Washington-chartered savings bank subject to
regulation by the State of Washington Department of Financial Institutions and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank conducts business
from its headquarters in Bellevue, Washington, and has eleven full-service
facilities located in Bellevue (3), Kirkland (2), Redmond, Seattle (2),
Issaquah, Bellingham, and Monroe. The Bank also has an income property loan
production office located in Tacoma, Washington and a consumer loan office
located in Jacksonville, Florida. The Bank's business consists mainly of
attracting deposits from the general public as well as wholesale funding
sources, and investing those funds primarily in real estate loans, small and
mid-sized business loans, and consumer loans. In addition to portfolio lending,
the Bank conducts a mortgage banking operation.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142 Goodwill
14
and Other Intangible Assets. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
SFAS No. 142 eliminates the amortization of goodwill relating to past and future
acquisitions and instead subjects goodwill to an impairment assessment. The
provisions of SFAS No. 142 will apply to existing goodwill and other intangible
assets effective January 1, 2002. The adoption of the provisions of these
statements is not anticipated to have a significant impact on the Bank.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
----------
Net income for the quarter and the nine months ended September 30, 2001 was $1.8
million and $5.2 million, compared with $1.7 million and $4.9 million for the
same periods in 2000. Diluted earnings per share totaled $0.37 and $1.09 for the
quarter and nine months ended September 30, 2001. The comparable figures for the
quarter and nine months ended September 30, 2000, were $0.35 and $1.04.
NET INTEREST INCOME
-------------------
Net interest income after provision increased $1,000 or 0.02%, in the third
quarter of 2001 as contrasted with the same quarter in 2000. The net interest
margin for the quarter was 3.23%. Net interest income benefited from an increase
in earning assets, which was offset by a negative impact from interest rates.
Earning assets contributed $484,000 in the third quarter. Offsetting the benefit
from greater-earning assets, which grew from $610 million at September 30, 2000,
to $649 million at quarter-end September 2001, was the negative effect of
$483,000 from a change in interest rates.
The net interest margin over the last eight quarters is generally characterized
by a steady decline, followed by a "bottoming out" pattern over the last three
quarters.
-------------------------- ---------------------
QUARTER ENDED NET INTEREST MARGIN
------------- -------------------
-------------------------- ---------------------
December 31, 1999 3.61%
-------------------------- ---------------------
March 31, 2000 3.52%
-------------------------- ---------------------
June 30, 2000 3.41%
-------------------------- ---------------------
September 30, 2000 3.44%
-------------------------- ---------------------
December 31, 2000 3.37%
-------------------------- ---------------------
March 31, 2001 3.28%
-------------------------- ---------------------
June 30, 2001 3.31%
-------------------------- ---------------------
September 30, 2001 3.23%
-------------------------- ---------------------
Since the quarter ended December 31, 2000, the Bank has experienced a decline in
both interest income and interest expense. This drop is a direct result of the
ten rate cuts that the Federal Open Market Committee (FOMC) has approved since
the beginning of the year. As interest rates in general have declined the Bank's
rates on its loan portfolio and funding sources have declined as well. The
impact on the Bank's net interest income is largely dependent upon the repricing
or maturing characteristics of both of these factors in this declining interest
rate environment. Early in the year the Bank experienced a large portion of its
loans reprice whereas, during the fourth quarter of this year a large portion of
the Banks deposits will be repricing. This mismatch has caused a squeeze on the
Bank's net interest margin because the interest earning assets have been
repricing downward faster than the interest bearing liabilities. At this time it
15
is unknown where the net interest margin will end up in this volatile rate
environment. Based on the Bank's interest rate risk (IRR) model results using
quarter end data as of September 30, 2001, the following changes are
anticipated. (Please see the section titled "Quantitative and Qualitative
Disclosures About Market Risk" for more information regarding the Banks IRR
model.)
In the coming fourth quarter, $54.6 million of loans and $159.2 million of
deposits are expected to reprice. In addition, $47.3 million of Federal Home
Loan Bank (FHLB) borrowings will reprice.
At rates as of October 9, 2001, it is anticipated that loans will reprice
downward in the fourth quarter by $190,000. Funding expenses are expected to
decline by $1,043,000 with deposits dropping $820,000 and FHLB borrowings
decreasing by $223,000. The expected net difference is $853,000 for the quarter.
Net interest income year-to-date 2001, after provision for loan losses, remained
nearly the same as compared to the same period in 2000. The slight improvement
in net interest income was the result of a growth in earning assets. Greater
earning assets contributed $2.2 million, which was partially offset by an
unfavorable variance of $1.8 million in interest rates. See Note 6. for further
information regarding volume and rate relationships affecting net interest
income.
NON-INTEREST INCOME
-------------------
Non-interest income consisted of the following:
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
GAIN ON SALE OF INVESTMENTS: $ 418,000 $ -- $ 1,046,000 $ --
----------- ----------- ----------- -----------
Secondary Market Income $ 48,000 $ (224,000) $ (33,000) $ (332,000)
Sale of Servicing Rights (2,000) 86,000 858,000 189,000
SFAS 133 Gain 35,000 -- 307,000 --
Mortgage Servicing Rights 19,000 53,000 132,000 186,000
----------- ----------- ----------- -----------
GAIN ON SALE OF LOANS: $ 100,000 $ (85,000) $ 1,264,000 $ 43,000
=========== =========== =========== ===========
Servicing Fees 25,000 107,000 92,000 446,000
Prepayment & Extension Fees 144,000 29,000 320,000 95,000
TransAlliance Limited Partnership -- 39,000 -- 83,000
Other Income 113,000 109,000 351,000 341,000
Deposits Fees 77,000 58,000 244,000 211,000
----------- ----------- ----------- -----------
OTHER INCOME: $ 359,000 $ 342,000 $ 1,007,000 $ 1,176,000
=========== =========== =========== ===========
TOTAL NON-INTEREST INCOME $ 877,000 $ 257,000 $ 3,317,000 $ 1,219,000
=========== =========== =========== ===========
16
Total non-interest income increased to $877,000 in the third quarter of 2001 as
compared to $257,000 in the same quarter in 2000. Non-interest income jumped
from $1.2 million for the first nine months of 2000 to $3.3 million for the like
period in 2001. The increase for both periods was mainly attributable to the
rise in gain on sale of investments and the gain on sale of loans.
GAIN ON SALE OF INVESTMENTS was $418,000 for the third quarter of 2001 and $1.0
million year-to-date as compared to no activity in the third quarter or nine
months ending September 30, 2000. Security sales during the third quarter of
2001 totaled $30.8 million of which all but $7.5 million were 30-year fixed-rate
investments. During that same period through the end of October 2001 the Bank
acquired, or committed to purchase, $29.5 million of seven-year securities. The
sale of 30-year securities and subsequent repurchase of seven-year investments
should improve the Bank's asset/liability position. The year-to-date gains
include $464,000 from the sale of a limited partnership interest, of which the
final $42,000 was recognized during the third quarter, and $582,000 from the
sale of investment securities. There were no similar transactions during 2000.
GAIN ON SALE OF LOANS is composed of four elements: secondary market gains or
losses, the sale of servicing rights, the mark-to-market of all interest rate
locks on loans pending sale and forward commitments into the secondary market
(pursuant to SFAS No. 133), and the capitalization of mortgage servicing rights.
The gain on sale of loans jumped from a loss of $85,000 in the third quarter of
2000 to a gain of $100,000 this year. Year-to-date the gain on sale of loans
increased from $43,000 for the first nine months of 2000 to $1.3 million. The
increase for the quarter is mainly due to secondary marketing gains, whereas the
majority of the gain year-to-date is attributable to the sale of servicing
rights.
Secondary market gains are the cash gains or losses from the sale of loans into
the secondary market and the resulting gain or loss from forward commitments
(pair-offs). The gain/loss from the sale of loans into the secondary market
includes both loans sold servicing released and loans sold servicing retained.
"Loans sold servicing released" simply means that the Bank has given up its
right and entitlement to future income associated with the collection of future
loan payments. Therefore, "loans sold servicing retained" are those loans that
the Bank has chosen to sell but retain the right and the fee income associated
with the activity of collecting future loan payments. The distinction is made
here due to the fact that depending upon various factors, the Bank may decide to
sell loans "servicing released" or "servicing retained" or a combination
thereof. The income from these activities is all captured under the heading
"secondary market income". What is not included in this line item are any gains
or losses as a result of the sale of the servicing rights that are sold separate
from that of the sale of the actual loan. These gains/losses are included in the
line item titled "sale of servicing rights". As a result, significant changes
may occur from period to period in regards to these two accounts depending upon
the manner in which the Bank is selling loans and/or servicing rights.
Secondary market income totaled $48,000 in the third quarter of 2001 as compared
to a loss of $224,000 in the same quarter last year. The increase for the
quarter is largely the result of income from the sale of consumer loans and
servicing released income from the sale of residential loans. Gains from the
sale of consumer loans totaled $67,000 in the third quarter of 2001. There were
no sales of this type in the same quarter of last year. The Bank anticipates
that income from this source will continue to be realized in future periods.
Servicing-released income from the
17
sale of residential loans totaled $31,000 in the third quarter last year and
$157,000 in the like quarter of 2001. The favorable change this year is mainly
attributable to increased servicing-released sales. Last year in the third
quarter servicing released loan sales totaled $3.9 million as compared to $25.8
million this year. Loan sales, in general, are very dependent upon loan
refinancing activity, and thus no meaningful forecast can be made for future
periods.
The resulting gains from loan sales and the volume of sales are shown below for
the first nine months of 2000 and 2001:
NINE MONTHS ENDING:
2001 2000
-------------- --------------
Gains from:
Consumer Loan Sales $ 187,000 $ --
Servicing-Released Loan Sales 347,000 87,000
-------------- --------------
Total $ 534,000 $ 87,000
============== ==============
Loans Sold:
Servicing Release $ 62.7 million $ 12.8 million
Servicing Retained 19.0 million 20.9 million
-------------- --------------
Total $ 81.7 million $ 33.7 million
============== ==============
Year-to-date the loss for the first nine months of 2001 totaled $33,000
decreasing from a loss of $332,000 for the like period in 2000. The positive
change year-to-date was mainly due to an increase in the sale of consumer loans
and servicing-released income from the sale of residential loans. These gains
were somewhat offset by the dramatic increase in pair-off losses for 2001.
Pair-off losses increased $266,000 compared to the same period last year.
Pair-off losses totaled $234,000 for the first nine months of 2000 as compared
to $500,000 this year. Pair-off gains/losses are a routine secondary market
activity; however, whether the pair-off results in a gain or loss is largely
dependent on the movement of mortgage rates. When rates decline, losses occur in
pair-offs, and vice versa in a rising interest rate environment.
The sale of servicing rights amounted to a gain of $86,000 in the third quarter
of last year, as compared to a loss of $2,000 in 2001. The principal reason for
that decline was a change in the manner in which the Bank sells loans. As noted
above, loans are sold servicing retained or servicing released. During the third
quarter of 2001 the Bank chose to sell the loans servicing released. The amount
of loan sales with servicing rights totaled $28.7 million in the third quarter
of 2000, and zero in the like quarter of 2001. Year-to-date, the gain from the
sale of servicing rights is $858,000, as contrasts with $189,000 last year. The
sale of loans with servicing rights totaled $42 million through September 30,
2000 as compared to $84 million year-to-date 2001. The increase year-to-date as
compared to the same period last year is largely the result of the Bank's
decision to liquidate its residential servicing portfolio during the first
quarter of this year. This bulk sale included $78 million of loans with
servicing rights.
The third piece of the Gain on Sale of Loans is the gain or loss resulting from
financial derivatives. Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, took effect on January 1, 2001.
This standard requires that all interest rate locks on loans pending sale and
forward sale commitments, which are considered to be derivatives, be
marked-to-market. The net gain realized from these two activities totaled
$35,000 for the third quarter of 2001 and $307,000 year-to-date. Beginning in
the third quarter of 2001 the Bank also
18
applied hedge accounting as prescribed by SFAS 133 to a portion of its loan
inventory. A hedging relationship must meet the criteria for fair value hedges
set forth in SFAS 133. This treatment contributed $85,000 to the gain for the
quarter.
The fourth and final piece of the calculation of Gain on Sales of Loans is the
capitalization of mortgage servicing rights. The gains recorded for mortgage
servicing rights (MSR) are pursuant to Statement of Financial Accounting
Standard (SFAS) No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which requires the capitalization of
internally generated servicing rights. The amount of MSR's capitalized and
recognized in income totaled $19,000 for the third quarter of 2001 as compared
to $53,000 for the like quarter in 2000. The amount of loan sales, related to
the capitalization of the MSR's in the third quarter of 2001 amounted to $4.8
million as compared to $8.6 million in the third quarter of 2000. The amount of
servicing rights that are capitalized is directly related to the amount of loan
sale activity in which the Bank retains the right to service loans. Year-to-date
the amount of MSR's capitalized totaled $132,000 as compared to $186,000 for the
first nine months of 2000. The related loan sale activity for the same time
periods totaled $19.0 million and $21.0 million, respectively.
OTHER INCOME increased slightly from $342,000 in the third quarter of 2000 to
$359,000 for the same period this year. Year-to-date other income decreased from
$1.2 million to $1.0 million this year. On a quarterly and year-to-date basis
prepayment and extension fees contributed to the increase. For the first nine
months of 2001 the dramatic decline in servicing fees accounted for the majority
of the drop in other income.
Servicing fees continued to decline in the third quarter and first nine months
of 2001. The servicing fee income dropped $82,000 from $107,000 in the third
quarter of 2000, to $25,000 in the like quarter of 2001. Year-to-date service
fee income has declined $354,000 from $446,000 at September 30, 2000 to $92,000
for the same period this year. The servicing portfolio totaled $40 million at
September 30, 2001 as compared to $179 million a year ago. The sale of servicing
rights in the last few years has eroded the balance of that portfolio, thus
decreasing the income generated from that asset. The lower levels of service fee
income that the Bank has experienced this year are anticipated to continue into
next year as the Bank is currently selling its servicing rights on its fixed
rate residential products on a flow basis.
Prepayment and extension fees have increased $115,000 from $29,000 in third
quarter of 2000 to $144,000 for the like quarter this year. The year-to-date
results are similar to the third quarter. For the nine months ended September
30, 2000 prepayment and extension fees totaled $95,000 as compared to $320,000,
an increase of $225,000. Thirty-three percent of these fees are related to two
borrowers. The Bank does not anticipate a continuation of fee income at this
level.
TransAlliance dividends totaled $39,000 for the first quarter of 2000 and
$83,000 for the first nine months of 2000 as compared to zero for this year. The
sale of the TransAlliance Limited Partnership earlier this year eliminated any
future dividends.
Other income remained fairly steady on a quarterly and year-to-date basis. On a
quarter-to-quarter comparison other income increased $4,000 and on a
year-to-date basis the result was a rise of $10,000.
Deposit fees have risen in 2001, $19,000 on a quarter-to-quarter comparison, and
$33,000 on a year-to-date basis, mainly due to income generated from checking
account non-sufficient funds fee
19
income. This increase is a result of the heightened emphasis the Bank has placed
on this service over the past year.
NON-INTEREST EXPENSE
--------------------
Non-interest expense consisted of the following:
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
SALARIES AND BENEFITS: $ 1,752,000 $ 1,595,000 $ 6,064,000 $ 5,212,000
=========== =========== =========== ===========
OCCUPANCY: $ 531,000 $ 461,000 $ 1,568,000 $ 1,311,000
=========== =========== =========== ===========
OTHER EXPENSES:
Outside Services $ 113,000 26,000 $ 204,000 $ 67,000
Legal Fees 125,000 61,000 283,000 151,000
B&O Taxes 89,000 63,000 279,000 124,000
Other 736,000 654,000 2,111,000 1,923,000
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES: $ 1,063,000 $ 804,000 $ 2,877,000 $ 2,265,000
=========== =========== =========== ===========
TOTAL NON-INTEREST EXPENSE $ 3,346,000 $ 2,860,000 $10,509,000 $ 8,788,000
=========== =========== =========== ===========
SALARIES AND EMPLOYEE BENEFITS increased $157,000, or 9.8%, from $1,595,000 in
third quarter of 2000 to $1,752,000 in the like quarter of 2001. In addition to
annual salary increases, the Bank has expanded the Business Banking and Consumer
departments. Also contributing to increased compensation expense was the opening
of the Juanita Branch, and a $91,000, or 91% jump in loan officer commissions.
Partially offsetting the rise in compensation expense was the reversal of a
$250,000 staff bonus accrual. A $92,000 accrual reversal was also recorded in
the same quarter last year.
OCCUPANCY EXPENSE is up $70,000, or 15.2%, on a quarter-to-quarter comparison.
Increased costs include the expansion of the Business Banking and Consumer Loan
Departments at the Bellevue headquarters and the opening of the Juanita Branch.
Outside service's expense rose $87,000, or 334.6% for the third quarter of 2001
compared to the previous year. Year-to-date the trend is similar, outside
services expense totaled $204,000 for the first nine months of the year compared
to $67,000 in 2000. The increase in business development expenses associated
with the Business Banking and Community Business Banking departments, a formal
asset/liability review and a compensation study all contributed to both the
quarterly and year-to-date increase in outside services expense.
Legal expenses have risen for the quarter and year-to-date as compared to the
prior year due to the increased legal expenses associated with the expansion of
the Bank's consumer lending
20
activity. For the third quarter of 2001, legal fees are up $64,000, or 105.0%
and the increase for the first three-quarters of the year totaled $132,000 or
87.4%.
Business and occupation (B&O) taxes for the third quarter of 2001 were $89,000
versus $63,000 in the like quarter last year. The increase was mainly due to
gains realized on the sales of securities. In addition, in the third quarter of
2000 a $10,000 refund from the State of Washington Department of Revenue was
recorded. Year-to-date B&O taxes totaled $279,000 as compared to $124,000 in
2000. Year-to-date figures are higher compared to 2000 due to the sales of
investments throughout 2001 and the $95,000 refund of B&O taxes from the State
of Washington Department of Revenue recorded in the second and third quarters of
2000.
FINANCIAL CONDITION
- -------------------
ASSETS At September 30, 2001, the Bank's assets totaled $667.5 million, an
increase of 3.8% from $643.2 at December 31, 2000. The change in assets is
principally the result of growth in the loan portfolio partially offset by a
decrease in both loans held for sale and cash and securities.
LOANS Net loans receivable rose from $473.8 million at year-end 2000 to $539.5
million, an increase of $65.7 million, or 13.9% in the first nine months of this
year. Factors contributing to loan growth were residential loan originations
which were positively affected by the continued drop in interest rates, and the
consumer lending and business banking loan originations which increased 53.7%
for the first nine months of 2001 as compared to the like period a year ago.
Loans held for sale decreased from $15.8 million at year-end 2000 to $5.0
million as of September 30, 2001. The decline in loans held for sale is
attributable to the routine volatility in the mortgage-banking activity and the
renewed focus by the Bank to originate portfolio loans as opposed to fixed rate
mortgage loans which constitute the bulk of the loans held for sale.
SECURITIES The Bank classifies investment securities in one of the following
categories: 1) trading, 2) available for sale, or 3) held to maturity.
Securities classified as available for sale are reviewed regularly and any
unrealized gains or losses are recorded in the shareholders' equity account. The
balance of the unrealized gain, net of federal income taxes, was $284,000 at
September 30, 2001, and $85,000 at year-end 2000. Generally, rising interest
rates will decrease the amount recorded as unrealized gain, and falling rates
will increase any unrealized gains, as the market value of securities inversely
adjusts to the change in interest rates.
Security investments declined $66.9 million, or 54.1%, from year-end 2000. The
drop in securities is a result of sales of securities, callable securities being
called by the issuer, maturing securities and normal loan prepayment activity
which occurs with mortgage-backed securities. During the last nine months, with
interest rates on the decline, $32.7 million in securities were called by the
issuer, $39.0 million were sold, and $8.0 million matured. To partially
compensate for the decline in the securities portfolio, the Bank has purchased
$17.5 million in securities. During the second and third quarters of 2001 the
securities portfolio has been a major source of funding for the Bank. Management
anticipates that securities that mature or prepay in the future will be
replaced.
LIABILITIES Funds from deposits increased slightly from $457.5 million at
year-end 2000, to $461.4 million at the end of the third quarter of 2001. The
increase of $3.9 million represents a rise of 0.85%. With interest rates near
record lows and approximately 35% of the Bank's
21
deposits repricing in fourth quarter, the Bank anticipates that deposits could
decline below year-end 2000 levels.
The Federal Home Loan Bank (FHLB) advances increased from $133.0 million at
year-end 2000 to $147.1 million as of the end of the third quarter 2001. This
increase of 11% compares to a decrease of 7.0% for the first nine months of
2000. With deposit growth flat year-to-date the Bank has used FHLB borrowings
and the proceeds from securities to fund its asset growth. As of September 30,
2001, the Bank had the capacity to borrow up to $267.0 million in FHLB advances,
subject to sufficient collateral to support those advances.
ASSET QUALITY
- -------------
The Bank analyzes a number of factors in determining the provision for loan
losses, such as current and historical economic conditions, non-accrual asset
trends, and historical loan loss experience. Factors that influenced the level
of provision in the third quarter were an improvement in classified "watch"
loans and slower growth of the loan portfolio which in turn were offset by a
deteriorating and uncertain economy.
Non-performing assets were 0.32% of total assets in the third quarter, up from
0.28% in the like quarter of 2000.
The composition of those non-performing assets is as follows:
Amount
------
Custom construction loan in Western Washington
with an estimated market value of $2.0 million $ 1,237,000
Lot loans in Western Oregon with no loss anticipated,
although a lengthy recovery period is expected 465,000
Income property loan in Western Oregon with no loss
anticipated 341,000
Single-family residence in Western Washington with no loss
anticipated 81,000
Six consumer loans with no loss anticipated 45,000
----------
Total $2,169,000
==========
BUSINESS SEGMENTS
- -----------------
The Bank has identified three segments of business for the purposes of
management reporting. The amounts for the segments are different from the actual
consolidated financial statements due to the various methods for allocating
costs and the inferring of interest-earning assets. The management accounting
process measures the performance of the business segments based on the
management structure of the Bank and is not necessarily comparable with similar
information for any other financial institution.
22
CONSUMER BANKING
----------------
Income before taxes for the consumer-banking segment fell from $62,000 in the
third quarter of 2000 to a loss of $236,000 in the same quarter in 2001. The
decline in income before taxes was largely the result of an increase in
operating expenses.
Net interest income increased $141,000, rising from $1,425,000 in the third
quarter of 2000 to $1,566,000 this year. The net interest margin also increased
from 1.25% in 2000 to 1.30% in 2001. The increase is mainly due to the rise in
the consumer loan portfolio. At September 30, 2000, consumer loans totaled $30.9
million as compared to $40.2 million one year later, an increase of 30%.
Non-interest income increased from $182,000 in the quarter ending September 30,
2000 to $208,000 in the same quarter this year. The increase for the quarter is
largely the result of fee income generated from the sale of consumer loans,
which was partially offset by the elimination of the limited partnership
dividend. Gains from the sale of consumer loans totaled $67,000 in the third
quarter of 2001. There were no sales of this type in the same quarter of last
year. The Bank anticipates that income from this source will continue to be
realized in future periods. Offsetting part of the gain from sales of consumer
loans was the drop in dividend income. During the third quarter of last year
dividends of $39,000 were recognized from the TransAlliance limited partnership.
Earlier this year the Bank sold its interest in the partnership and as a result
no dividend income was recognized for the quarter.
Operating expenses increased $500,000, from $1.5 million in the third quarter of
2000 to $2.0 million for the like quarter this year. The rise in operating
expenses is principally the result of the yearly salary increases, the addition
of the Juanita branch and the expansion of the consumer loan department. The
Juanita branch opened in August of this year, thus adding to the operating
expenses of the Bank. In addition, the consumer-lending department has continued
to increase its loan production and as a result, operating expenses have
increased also.
Year-to-date net income decreased $1.7 million or 391% due to the significant
increase in non-interest expense over the past year. Net interest income
decreased $197,000, which was offset by the increase in non-interest income of
$132,000. Non-interest expense rose $1.6 million for the first nine months of
2001 as compared to the same period last year. Operating expenses for this
segment have increased 35.9% as a result of the expansion of the consumer loan
department and the branch network. During the past year the Bank has acquired
additional leased space at the Bellevue headquarters for the consumer lending
staff, opened an office in Jacksonville, FL and opened a new branch in Juanita.
In addition to occupancy expenses, compensation and employee benefits expense as
well as legal expense have increased to support this area's expansion.
RESIDENTIAL LENDING
-------------------
Income before taxes increased significantly for the residential lending segment,
from $100,000 in the third quarter of 2000 to $375,000 in the like quarter of
2001. The increase was mainly due to the rise in interest income coupled with a
reduction of operating expenses.
Interest income increased $183,000, or 11.3% due to the increase in the
residential portfolio loans on a quarter-to-quarter comparison. At September 30,
2000, the residential loan portfolio
23
totaled $89.5 million as compared to $100.2 million at September 30, 2001, an
increase of 11.7%. Net interest income for the quarter rose 14.4%, or $66,000 on
a quarter-to-quarter comparison.
Non-interest income also increased, from a negative $18,000 last year to a
positive $37,000 for the third quarter of 2001. Most of that increase is due to
the fee income generated from the sale of residential loans. Last year in the
third quarter residential loan sales totaled $10.4 million as compared to $25.8
million this year. Loan sales are very dependent upon loan refinancing activity,
and thus no meaningful forecast can be made for future periods. For more
information please see the sub-heading "Gain on Sales of Loans" under "Other
Operating Income".
Operating expenses decreased 45.1%, from $342,000 in the three months ending
September 30, 2000, to $187,000 in the same period of 2001. Contributing to the
decline in operating costs was an increase in net fee income from the
construction loan department. Net fees from that department are a direct offset
to this segment's operating expense. Those net fees totaled $145,000 for the
third quarter of 2001 as compared to $81,000 for the like period last year.
Year-to-date, income before tax is up 70.1%, from $474,000 in the first nine
months of 2000 to $806,000 in 2001. Fee income is down, which has been partially
compensated by a decrease in operating expenses.
Non-interest income fell from $311,000 in the first nine months of 2000 to
$20,000 in the same period this year due to a combination of reduced allocated
service fee income and gain on sale of servicing rights. During the first nine
months of 2000 gain on sale of servicing rights and service fee income allocated
to this segment totaled $189,000 and $251,000 respectively. The comparable
results through September 30, 2001 amounted to a $32,000 gain on the sale of
servicing rights and allocated servicing income totaled $9,000. The dramatic
decrease in these two items is a direct result of the sale of virtually all of
the Bank's servicing portfolio. Over the past year the Bank has sold almost all
of its servicing portfolio in anticipation of falling rates. This has resulted
in a significant reduction in the amount of fee income generated from servicing
loans for other investors this year.
Operating expenses declined from $1,247,000 in the first three-quarters of 2000
to $602,000 this year. Contributing to that decline in operating costs was an
increase in net fee income from the construction loan department. Net fees from
that department are a direct offset to this segment's operating expense. Those
net fees totaled $481,000 year-to-date 2001 as compared to $158,000 for the like
period last year.
COMMERCIAL LENDING
------------------
Income before taxes for this business segment fell $300,000, or 11.1%, from $2.7
million in the third quarter of 2000 to $2.4 million in the like period of 2001.
Net interest income declined $309,000, while non-interest income and operating
expenses rose $46,000 and $41,000, respectively.
Net interest income suffered from an increase in interest expense of 9.5% while
interest income only increased 2.5%. For the third quarter of 2000, the
commercial segment's net interest margin was 3.66%, as compared to 2.94% for the
like quarter this year. The continued drop in interest rates has negatively
affected this area due to the fact that the segments funding costs have not
adjusted as rapidly as its asset revenues. Partially offsetting the negative
impact that
24
interest rates have had on this segment was the increase in average assets. At
September 30, 2000, average assets for the quarter equaled $365.5 million as
contrasted with $413.4 million at September 30, 2001.
Non-interest income rose $46,000 or 133.3% for the quarter. This increase is
principally due to prepayment and extension fees that have been collected during
the third quarter. The Bank does not anticipate a similar occurrence for the
fourth quarter due to the fact that 38% percent of the fees were associated with
one borrower.
Operating expenses increased 5.7% in the third quarter of 2001 as compared to
the like quarter a year ago. Non-interest expense increased primarily due to the
yearly salary increases and the expansion of the Business Banking department.
The Bank has increased the staff in the Business Banking department to emphasize
the growth of the loan portfolio in this area.
Year-to-date income before federal income taxes has declined $248,000, or 3.5%,
as compared to the like period in 2000. Net interest income was flat, increasing
only $10,000, while non-interest income and operating expenses have risen.
Non-interest income increased $99,000 or 74.5% for the first nine months of 2001
as compared to the same period last year. The Bank has experienced an increase
in the collection of prepayment and extension fees this year. This trend is not
anticipated to continue into next year due to the fact that a significant amount
of these fees were collected from a limited number of borrowers.
Operating expenses year-to-date are up $357,000, from $2.3 million in the first
three-quarters of 2000 to $2.7 million this year. Yearly salary increases and
the expansion of the Business Banking department throughout the year contributed
to this increase.
LIQUIDITY AND CAPITAL RESERVES
- ------------------------------
The net change in cash, as reported in the Statement of Cash Flows, increased by
$36.5 million in the first nine months of 2001. The net deposit flows for the
first nine months of 2001 were flat, although a number of the Bank's securities
within the security portfolio either matured, were called by the issuer or were
sold, providing an influx of cash which the Bank used to fund its asset growth.
(Please refer to the section titled "Financial Condition" under the sub-heading
"Securities" for more information.)
The net cash flows from the securities portfolio totaled $67.7 million in the
first nine months of the year, which combined with $14.1 million in FHLB
advances provided the funding source for the Bank's portfolio loan growth. The
loan portfolio has increased $65.7 million since year-end 2000.
The Bank's deposits grew $3.9 million from December 31, 2000 balances. Deposits
amounted to $461.4 million at September 30, 2001 as compared to $457.5 million
as of year-end 2000. The Bank's long-term liquidity objective is to fund growth
through consumer deposits. Whenever that source is inadequate to meet the Bank's
asset growth requirements, FHLB advances are normally accessed. The current
ratio of FHLB advances to assets is 22.0%, which is below the Bank's credit
limit of 40% of assets. Other sources of liquidity include the sale of
25
loans into the secondary market, net income after the payment of dividends,
brokered deposits, and reverse repurchase agreement credit lines of $50,000,000.
The FDIC's statutory framework for capital requirements establishes five
categories of capital strength, ranging from a high of well capitalized to a low
of critically under-capitalized. An institution's category depends upon its
capital level in relation to relevant capital measures, including a risk-based
capital measure, a leverage capital measure, and certain other factors. At
September 30, 2001, the Bank exceeded the capital levels required to meet the
definition of a well-capitalized institution:
To be categorized as well
For capital capitalized under prompt
Actual adequacy minimum corrective action provisions
------ ---------------- ----------------------------
Total capital (to risk-weighted
assets):
First Mutual Bancshares, Inc. 11.54% 8.00% N/A
First Mutual Bank 11.51 8.00 10.00%
Tier I capital (to risk-weighted
assets):
First Mutual Bancshares, Inc. 10.29 4.00 N/A
First Mutual Bank 10.26 4.00 6.00
Tier I capital (to average assets):
First Mutual Bancshares, Inc. 7.58 4.00 N/A
First Mutual Bank 7.55 4.00 5.00
EXPANSION
- ---------
The Bank opened its Juanita Branch in August 2001. This is the Bank's eleventh
branch. A branch site has also been acquired for the relocation of the existing
Ballard Branch and a new branch to be located in Woodinville. Construction is
expected to begin within the next year on these two locations.
The Bank continues to seek opportunities to expand its branch franchise in its
primary market area east of Lake Washington, and north from Renton to the
Bothell/Kenmore area. This particular market area has the highest household
income and household net worth of any area in the state. This expansion will
continue to have an impact on expenses as branches are opened. Income from
branch operations often requires a number of years before it equals operating
expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the sensitivity of income and capital from changes in
interest rates, foreign currency exchange rates, commodity prices and other
relevant market rates or prices. The primary market risk to which we are exposed
to is interest rate risk. The Bank's profitability is dependent to a large
extent on its net interest income, which is the difference between the
26
interest received from its interest-earning assets and the interest expense
incurred on its interest-bearing liabilities. The Bank's objectives in its
asset/liability management are to utilize its capital effectively, to provide
adequate liquidity, and to enhance net interest income, without taking
unreasonable risks subjecting the Bank unduly to interest rate fluctuations.
Assumptions regarding interest rate risk are inherent in all financial
institutions. Interest rate risk is the risk to earnings or capital resulting
from adverse movements in interest rates. Interest rate sensitivity is the
relationship between market interest rates and net interest income due to the
repricing characteristics of assets and liabilities. The Bank monitors interest
rate sensitivity by examining its one-year and longer gap positions on a regular
basis. Gap analysis and an income simulation model are used to manage interest
rate risk.
The interest rate sensitive gap is defined as the difference between
interest-earning assets and interest bearing liabilities anticipated to mature
or reprice during the same period. The gap analysis quantifies the mismatch
between these assets and liabilities in like time periods. Certain shortcomings
are inherent in gap analysis. For example, some assets and liabilities may have
similar maturities or repricing characteristics but they may react differently
to changes in interest rates. Assets such as adjustable rate mortgage loans may
have features that limit the effect that changes in interest rates have on the
asset in the short-term and/or over the life of the loan. Due to the limitations
of the gap analysis, these features are not taken into consideration.
Additionally, in the event of a change in interest rates, prepayment and early
withdrawal penalties would likely deviate significantly from those assumed in
the gap calculation. As a result, the Bank utilizes the gap report as a
complement to its income simulation model.
The Bank's income simulation model calculates the change to net interest income
and the economic value of equity based upon increases and decreases of 100, 200,
and 300 basis point movements in interest rates. The model is based on a number
of assumptions such as the maturity, repricing, amortization, and prepayment
characteristics of loans and other interest-earning assets and the repricing of
deposits and other interest-bearing liabilities. The Bank runs the income
simulation model monthly for review by the ALCO (Asset Liability Committee),
senior management, and the Board of Directors. The Bank believes that data and
assumptions are realistic representations of its portfolio and possible outcomes
under the various interest rate scenarios. Nonetheless, the interest rate
sensitivity of the Bank's net interest income and net market value of equity
could vary substantially if different assumptions were used or if actual
experience differs from the assumptions used.
The Bank's income simulation model and its gap analysis results for the periods
ending September 30, 2001, and December 31, 2000, are presented below.
FIRST MUTUAL BANCSHARES, INC.
RATE SHOCK ESTIMATES
Net Interest Income and Market Value
September 30, 2001
September 30, 2001 December 31, 2000
Percentage Change Percentage Change
- ------------------------- -------------------- ---------- -------------------
Immediate Net Net Net Net
Change in Interest Market Interest Market
Interest Rates Income Value Income Value
- -------------- ---------- -------------------- ---------- -------------------
+300 1 % (18) % 0 % (20) %
+200 0 (12) 1 (12)
+100 1 (4) 1 (5)
-100 (1) 2 (3) 2
-200 (9) (4) (5) 1
-300 (24) (11) (10) (4)
- -------------- ---------- -------------------- ---------- -------------------
27
FIRST MUTUAL BANCSHARES, INC.
ONE-YEAR INTEREST RATE SENSITIVE GAP
(in thousands)
September 30, 2001 December 31, 2000
------------------ -----------------
One-year repricing assets $ 520,692 $ 423,956
One-year repricing liabilities 484,962 448,242
--------- ---------
One-year gap 35,730 (24,286)
--------- ---------
Total assets $ 667,461 $ 643,231
========= =========
One Year Interest Rate Sensitive
GAP as a Percent of Assets 5.4% (3.8)%
Model simulation and gap results for the period are indicative of an asset
sensitive position, in that the Bank's net interest income is projected to
increase as market rates rise and the gap results indicate that more assets will
be maturing/repricing than liabilities within the next year. Projections to net
interest income in a declining rate environment are less favorable. A
contributing factor to the results in a declining rate environment is the Banks
adjustable rate commercial real estate portfolio. Sixty-six percent of these
loans have an average minimum interest rate or "floor" of 7.50%. The model has
assumed an elevated level of prepayment speeds on these loans given the fact
that these "floors" exceed the current offering rates for similar loans by more
than 1.0%. Again the model assumes that these loans will refinance to current
rates thus decreasing the amount of interest income that the Bank will realize
in the next 12 months.
The sensitivity analysis does not represent a forecast for the Bank. There are
numerous assumptions inherent in the simulation model as well as in the gap
report. Some of these assumptions include the nature and timing of interest rate
levels, including yield curve shape, prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits, and
reinvestment/replacement of asset and liability cash flows. Customer
preferences, and competitor and economic influences are impossible to predict;
therefore, the Bank cannot make any assurances as to the outcome of these
analyses.
FORWARD-LOOKING STATEMENTS DISCLAIMER
- -------------------------------------
In this Form 10-Q, First Mutual Bancshares, Inc. has included certain
"forward-looking statements" concerning its future operations. It is the
Company's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Company of the protections of such safe harbor
with respect to all forward-looking statements contained in this Form 10-Q.
Sentences containing words such as "objectives," "model," "expect,"
"anticipate," "believe," "assumptions," or similar words may constitute
forward-looking statements. Although the Company believes that the expectations
expressed in these forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
it is possible that actual results may differ materially from these
expectations. Factors which could affect actual results include interest rate
trends, the general state of the economy in the Company's market area and the
country as a whole, the impact of competitive products, services and pricing,
the ability of the Company to control costs and expenses, loan delinquency
rates, and legislative, regulatory and accounting changes affecting the banking
and financial services industry. These risks and uncertainties should be
considered in evaluating the forward-looking statements and undue reliance
should not be placed on such statements. The Company and the Bank disclaim any
obligations publicly to announce future events or developments, which affect the
forward-looking statements herein.
28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
First Mutual Bancshares, Inc. has certain litigations and negotiations
in progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a material
adverse effect on the Bank's financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2001 FIRST MUTUAL BANCSHARES, INC.
/s/ John R. Valaas
---------------------------------
John R. Valaas
President and Chief Executive Officer
/s/ Roger A. Mandery
---------------------------------
Roger A. Mandery
Executive Vice President
(Principal Financial Officer)
30