ITEM 1. BUSINESS - ----------------
(a) General
First Mutual Bancshares, Inc. (the "Company") is a Washington corporation, which was formed for the purpose of becoming the bank holding company for First Mutual Bank ("First Mutual" or the "Bank"). The Banks reorganization was completed on October 26, 1999, on which date the Bank became the wholly-owned subsidiary of the Company, and the stockholders of the Bank became stockholders of the Company. Prior to completion of the reorganization, the Company had no material assets or liabilities and engaged in no business activities. Subsequent to the reorganization, the Company has engaged in no significant activity other than holding the stock of the Bank and engaging in certain passive investment activities. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank.
First Mutual Bank was incorporated as a Washington state-chartered mutual savings bank in 1968 known as First Mutual Savings Bank and was the successor to Eastside Savings and Loan Association, which was organized in 1952 and commenced operations in 1953. The Bank converted from mutual to stock form through the sale and issuance of 966,000 shares of Common Stock in December 1985. In connection with the holding company reorganization, the Bank changed its name to First Mutual Bank. Effective June 2000, the Federal Reserve Bank approved the election for the Company to become a financial holding company. The Bank is subject to regulation by the State of Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The Company is subject to regulation by the Federal Reserve Board.
The business of the Bank consists of attracting deposits from the general public as well as wholesale funding sources and investing those funds primarily in commercial and residential real estate loans, business loans, loans secured by savings accounts, and consumer loans. The Bank also invests in federal government and agency obligations; structured notes; real estate mortgage investment conduits ("REMICs"); mortgage-backed securities; and corporate and municipal securities. In addition to portfolio lending, the Bank conducts mortgage banking activities, that encompasses the selling of primarily fixed-rate loans into the secondary mortgage market. The Bank generally sells the right to service the loans sold (I.E., collection of principal and interest payments) for which it receives a fee.
The principal sources of funds for the Bank's lending and investment activities are deposits, repayment of loans, loan sales and Federal Home Loan Bank ("FHLB") of Seattle advances. The Bank's primary sources of income are interest on loans, gains on sales of loans and loan servicing rights, servicing fees on loans, service-charge income on deposit accounts and interest and dividends on investment securities. Its principal expenses are interest paid on deposits and borrowings, and general and administrative costs.
The Bank's savings and lending operations are conducted through ten full service facilities located in Bellevue (3), Kirkland, Redmond, Seattle (2), Issaquah, Bellingham, and Monroe, Washington, and an income property loan production office located in Tacoma, Washington. The Bank's main office is located at 400 108th Avenue N.E., Bellevue, Washington. See "Item 2.
ITEM 2. PROPERTIES
The following table provides the location of the Bank's offices, as well as certain information relating to these offices.
(table continued on following page)
A branch site has also been acquired in Juanita, just north of Kirkland, and a new site for the existing Ballard Branch was recently purchased, with construction expected to begin in 2001. In addition, negotiations are currently taking place for two other de novo branch sites, both located on the east side of Lake Washington, which is the Bank's primary focus for enlarging the branch franchise.
The Bank reviews the utilization of its properties on a regular basis and believes that it has adequate facilities for current operations. The Bank may open new branches from time-to-time, and on a selective basis, depending on the availability of capital resources, the locations potential for growth and profitability, and if the business model for the branch is favorable.
The Bank regularly analyzes demographic and geographic data as well as information regarding the Bank's competitors and its current loan and deposit customers in order to locate potential future bank sites. Specific criteria is gathered for each potential geographic area identified. The criteria is then weighted as to importance to the Bank, its customers and its target market and a ranking is made of the various locations under analysis.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
At December 31, 2000, First Mutual was not engaged in any litigation, which in the opinion of management, after consultation with its counsel, would exceed 10% of the equity capital accounts of the Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -----------------------------------------------------------------------------
The information contained under the caption "Stock Information" in the Annual Report is incorporated herein by reference.
The following table provides the cash dividends declared by the Company (and the Bank as its predecessor) during the last three fiscal years. All amounts have been adjusted for stock dividends and the dilutive effect of stock options.
Quarter Ending Fiscal 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 - -------------- ----------- ----------- ----------- ----------- -----------
Fiscal year $ .200 $ .200 $ .600 $ .501 $ .105
March 31 .050 .050 .450 .029 .027 June 30 .050 .050 .050 .034 .026 September 30 .050 .050 .050 .034 .026 December 31 .050 .050 .050 .404 .026
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
The information contained in the section captioned "Selected Financial Data" in the Annual Report is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- The information contained under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk Sensitive Instruments" in the Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
The financial statements contained in the Annual Report, which are listed under Item 14 herein, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------
Effective September 19, 2000, the Company dismissed Deloitte & Touche LLP as the Company's independent accountants and engaged Moss Adams LLP as its new independent accountants. The decision to change the Company's accounting firm was approved by the Company's Audit Committee of the Board of Directors as empowered by the Board of Directors. Deloitte & Touche reports on the Company's financial statements for the 1998 and 1999 fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's last two fiscal years and the subsequent interim periods to the date of the change of accountants, there were no material disagreements between the Company and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche, would have caused them to make reference to the subject matter of the disagreements in connection with their report on the financial statements.
The Company requested that Deloitte & Touche furnish a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of such letter, dated September 20, 2000, was filed as an exhibit to the Company's Form 8-K.
Effective September 19, 2000, the Company engaged the accounting firm of Moss Adams LLP as its new independent accountants.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -----------------------------------------------------------
The information contained under the section captioned "Proposal 1. Election of Directors" in the Company's Proxy Statement is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information with respect to the executive officers of the Company and the Bank.
The following is a description of the principal occupation and employment of the executive officers of the Bank during at least the past five years:
JOHN R. VALAAS is the President and Chief Executive Officer for First Mutual Bank and First Mutual Bancshares, Inc. Prior to his appointment as President of the Bank, Mr. Valaas was Senior Vice President and manager of the Commercial Financial Services Division at Seafirst Bank where he was employed from 1983 to 1992. Mr. Valaas has over 28 years of experience in commercial banking.
ROGER A. MANDERY, CPA, is Executive Vice President for First Mutual Bank and First Mutual Bancshares, Inc. Prior to serving in that capacity, from March 1984 to 1989, he was Senior Vice President of Finance. Mr. Mandery serves as the Bank's Chief Financial Officer and in this capacity is responsible for the Bank's treasury, accounting, internal audit, retail branches, and asset/liability functions.
JAMES R. BOUDREAU is First Mutual's Executive Vice President and Chief Credit Officer and First Mutual Bancshares, Inc. Executive Vice President; he has been employed by the Bank since 1975. He is responsible for overseeing lending policies for all lending areas of the Bank. He chairs the Bank's Loan Committee and supervises the asset management and residential underwriting departments.
KENNETH J. WALKKY, CPA, joined First Mutual in September 1990 as Vice President and Manager of Income Property Lending. He is responsible for income property and construction lending production. Prior to joining the Bank, he served as Vice President and Northern Regional Manager of Commercial Real Estate Lending, Puget Sound National Bank, where he was employed from 1983 to 1990. He was a Vice President at Seafirst Bank from 1980 to 1983. Mr Walkky is also a Washington State certified general appraiser. (Mr. Walkky is no longer employed by the Bank as of first quarter 2001.)
KARI STENSLIE, CPA, CMA, is the Vice President and Controller for First Mutual Bank and First Mutual
Bancshares, Inc. and has been employed by the Bank since 1988. She is responsible for the Bank's accounting systems, financial reporting, tax accounting functions, and operational analysis.
ROBIN R. CAREY is First Mutual's Senior Vice President of Operations and Administration and has been employed by the Bank since 1979. She is responsible for overseeing central banking operations, facilities, loan servicing, income property operations, and human resources.
SCOTT HARLAN is the Bank's Senior Vice President of Residential and Consumer Lending and has been employed by the Bank since 1985. He is responsible for the home equity, consumer, residential lending, secondary marketing, and the information systems departments.
RONALD P. WERTH joined First Mutual in February 1996 as Vice President and Manager of Business Banking. He is responsible for all aspects of Business Banking including business development and administration. From 1988 to 1995 he served as Vice President - Finance for two privately owned companies. Prior to that, he served as Vice President for the Corporate Banking Division at Seafirst Bank where he was employed from 1973 to 1988.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
The information required by this item is incorporated by reference to the section captioned - "Proposal I - Executive Compensation" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Principal Holders of Voting Securities and Management" in the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
The information required by this item is incorporated by reference to the section captioned - "Proposal I - Board of Directors, Committees and Reports; Certain Relationships and Director and Executive Compensation" in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) (1) Consolidated Financial Statements (*) ---------------------------------
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 2000 and 1999 Consolidated Statements of Income for the three years ended December 31, 2000 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2000 Consolidated Statements of Cash Flows for the three years ended December 31, 2000 Notes to Consolidated Financial Statements
(2) All required financial statement schedules are included in the Notes to Consolidated Financial Statements.
(b) A Form 8-K was filed on September 21, 2000 in connection with the change in independent auditors.
(c) Exhibits --------
(3) a. Articles of Incorporation (a) b. Bylaws (a)
(11) Statement regarding computation of per share earnings. Reference is made to the Company's Consolidated Statements of Income attached hereto as part of Exhibit 13, which are incorporated herein by reference.
(13) 2000 Annual Report to Shareholders.
(21) Subsidiaries
(23) Accountants Consent
(*) Incorporated by reference from 2000 Annual Report to Shareholders attached hereto as Exhibit 13. (a) Incorporated by reference to the Current Report on Form 8-K filed with the SEC on September 21, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 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.