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 Bank's 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. The Company's only significant activity is holding the stock of the Bank and engaging in certain passive investment activities. 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 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.
Our business 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, construction loans, and consumer loans. We also invest in federal government and agency obligations, structured notes, real estate mortgage investment conduits ("REMICs"), mortgage-backed securities, and municipal securities. In addition to portfolio lending, we participate in mortgage banking activities that encompass the selling of primarily fixed-rate loans into the secondary mortgage market. We generally sell the right to service the loans sold (I.E., collection of principal and interest payments) for which we receive a fee.
The principal sources of funds for lending and investment activities are deposits, repayment of loans, loan sales and Federal Home Loan Bank ("FHLB") of Seattle advances. The primary sources of income are interest on loans, gains on sales of loans, investments, and loan servicing rights, servicing fees on loans, service-charge income on deposit accounts and interest and dividends on investment securities. Principal expenses are interest paid on deposits and borrowings, and general and administrative costs.
The savings and lending operations are conducted through ten full-service facilities located in Bellevue (3), Kirkland (2), Redmond, Seattle (2), Issaquah, and Monroe. We also have income property loan production offices located in Bellingham and Tacoma, Washington, and a consumer loan office located in Jacksonville, Florida. Our 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 offices, as well as certain information relating to these offices.
(table continued on following page)
Since year-end 2002 some changes have taken place regarding our existing office sites. In March 2003 we purchased the office located at 400 108th Avenue NE which includes the Bellevue banking center and our administrative offices. In addition, the Bellingham branch was closed in March of 2002 and the income property loan office that was also located within the Bellingham branch office has relocated, as of February 2003, to a leased office space that better fits their needs.
A site has also been acquired in Woodinville and is currently under construction for an additional banking center expected to begin operations during the third quarter of 2003. In addition, a lease has been signed for a banking center site located on the Sammamish Plateau with an expectation of opening in the first quarter of 2004. A site has also been acquired in the Canyon Park area and is currently in the site development phase, with an anticipated construction of a three-story office building, to include a banking center, in the year 2005.
We have reviewed the utilization of our properties on a regular basis and believe that we have adequate facilities for current operations. We may open new banking centers from time-to-time, and on a selective basis, depending on the availability of capital resources, the locations potential for growth and profitability.
We regularly analyze demographic and geographic data as well as information regarding our competitors and our current loan and deposit customers in order to locate potential future bank sites.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ---------------------------
At December 31, 2002, the Bank was not engaged in any litigation, which in the opinion of management, after consultation with its counsel, would be material to 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, 2002.
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 five fiscal years.
Quarter Ending Fiscal 2002 Fiscal 2001 Fiscal 2000 Fiscal 1999 Fiscal 1998 - -------------- ----------- ----------- ----------- ----------- ----------- Fiscal year $0.28 $0.22 $0.20 $0.20 $0.60
March 31 0.07 0.05 0.05 0.05 0.45 June 30 0.07 0.05 0.05 0.05 0.05 September 30 0.07 0.05 0.05 0.05 0.05 December 31 0.07 0.07 0.05 0.05 0.05
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 15 herein, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The information contained under the section captioned "Proposal Number One. 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 the Bank and the Company. Prior to his appointment as President of the Bank in 1992, 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 30 years of experience in commercial banking.
RICHARD J. COLLETTE is the Bank's Executive Vice President and Manager of its Commercial Banking Group and the Company's Executive Vice President. His responsibilities include overseeing commercial real estate lending and business banking. Prior to joining the Bank in December of 2001, he was the Northwest Region's Senior Credit Risk Management Executive for Bank of America where he was employed from 1973 to 2001. Mr. Collette has over 28 years of experience in commercial banking.
ROGER A. MANDERY, CPA, is Executive Vice President for the Bank and the Company. 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, and asset/liability functions.
JAMES R. BOUDREAU is the Bank's Executive Vice President and Chief Credit Officer and the Company's 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 committees and supervises the asset management and residential underwriting departments.
KARI STENSLIE, CPA, CMA, is the Vice President and Controller for the Bank and the Company and has been employed by the Bank since 1988. She is responsible for the Bank's accounting systems, financial reporting, tax accounting functions, and financial analysis.
ROBIN R. CAREY is the Bank's Senior Vice President of Operations and Administration and has been employed by the Bank since 1979. She is responsible for overseeing facilities and security, human resources, and customer service and support, which includes lending and deposit support functions.
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 consumer and residential lending as well as the information systems departments.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
The information required by this item is incorporated by reference to the section captioned - "Board of Directors Committees and Reports; Certain Relationships and Directors and Executive Compensation" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ---------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
The information required by this item is incorporated herein by reference to the sections captioned "Proposal Number One - Election of Directors" and "Principal Holders of Voting Securities and Management" in the Company's definitive proxy statement for the Company's 2003 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 Number One - Election of Directors" and "Board of Directors Committees and Reports; Certain Relationships and Director and Executive Compensation" in the Proxy Statement.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES - ---------------------------------
The Bank's Chief Executive Officer and Chief Financial Officer and other appropriate officers have evaluated the Bank's disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and have concluded that, although there are inherent limitations in all control systems and although we apply certain reasonable cost/benefit considerations to the design of our disclosure controls and procedures, as of December 31, 2002, those disclosure controls and procedures are effective.
There have been no changes in the Bank's internal controls or in other factors known to the Bank that could significantly affect these controls subsequent to their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
While the Bank believes that its existing disclosure controls and procedures have been effective to accomplish these objectives, the Company intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.
ITEM 16. COST OF ACCOUNTANTS - -----------------------------
The information required by this item is incorporated by reference to the section captioned -- "Board of Directors Committees and Reports, Certain Relationships and Director and Executive Compensation -- Report of the Audit Committee and Audit Fees" in the Proxy Statement.
PART IV
ITEM 15.
ITEM 15. 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, 2002 and 2001 Consolidated Statements of Income for the three years ended December 31, 2002 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2002 Consolidated Statements of Cash Flows for the three years ended December 31, 2002 Notes to Consolidated Financial Statements
(2) All required financial statement schedules are included in the Notes to Consolidated Financial Statements.
(b) Exhibits -------- (3) a. Articles of Incorporation (a) b. Bylaws (as amended and restated) We are parties to certain debt instruments under which the total amount of securities authorized does not exceed ten percent of our total consolidated assets. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, we agree to furnish a copy of those instruments to the Securities and Exchange Commission upon request. (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) 2002 Annual Report to Shareholders. (21) Subsidiaries (23.1) Consent of Moss Adams LLP, Independent Auditors (99) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(*) Incorporated by reference from 2002 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.
FIRST MUTUAL BANCSHARES, INC.
DATE: March 31, 2003 BY: /s/ John R. Valaas ---------------------------------- John R. Valaas, President and Chief Executive Officer and Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Roger A. Mandery By: /s/ Victor E. Parker ---------------------------- ---------------------------- Roger A. Mandery Victor E. Parker Principal Financial Officer Director
Date: March 31, 2003 Date: March 31, 2003
By: /s/ Kari A. Stenslie By: /s/ George W. Rowley, Jr. ---------------------------- ---------------------------- Kari A. Stenslie George W. Rowley, Jr. Principal Accounting Officer Director
Date: March 31, 2003 Date: March 31, 2003
By: /s/ F. Kemper Freeman, Jr. By: /s/ Richard S. Sprague ---------------------------- ---------------------------- F. Kemper Freeman, Jr. Richard S. Sprague Chairman of the Board Director
Date: March 31, 2003 Date: March 31, 2003
By: /s/ James J. Doud, Jr. By: /s/ John R. Valaas ---------------------------- ---------------------------- James J. Doud, Jr. John R. Valaas Director Director
Date: March 31, 2003 Date: March 31, 2003
By: /s/ Mary Case Dunnam By: /s/ Robert C. Wallace ---------------------------- ---------------------------- Mary Case Dunnam Robert C. Wallace Director Director
Date: March 31 , 2003 Date: March 31, 2003
By: /s/ Janine Florence ---------------------------- Janine Florence Director
Date: March 31, 2003
CERTIFICATION -------------
I, John R. Valaas, President and Chief Executive Officer of the Company certify that:
1. I have reviewed this annual report on Form 10-K of First Mutual Bancshares, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2002 By: /s/ John R. Valaas ----------------- ------------------------------------- John R. Valaas President and Chief Executive Officer
CERTIFICATION -------------
I, Roger A. Mandery, Executive Vice President and Principal Financial Officer of the Company certify that:
1. I have reviewed this annual report on Form 10-K of First Mutual Bancshares, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2002 By: /s/ Roger A. Mandery ----------------- ---------------------------- Roger A. Mandery Executive Vice President and Principal Financial Officer