First Mutual Posts 25th Consecutive Record Quarter;Reports Fourth Quarter Profit of $1.3 Million,...

BELLEVUE, Wash.--(BUSINESS WIRE)--Jan. 27, 1999--First Mutual Savings Bank (Nasdaq:FMSB) today reported record net income for both the full year and the fourth quarter of 1998. This marks First Mutual's 25th consecutive quarter of year-over-year earnings growth. Fourth quarter net income increased

15% to $1.3 million, or $.31 per diluted share, compared to $1.2 million, or $.27 per diluted share, in the fourth quarter a year ago. For all of 1998, net income also rose 15% to $5.2 million, or $1.20 per diluted share, compared to $4.5 million, or $1.07 per diluted share a year ago.

Other 1998 highlights include:

1. Loan originations increased 78% to $380 million. 2. Non-interest income grew 89% to $3.23 million. 3. Return on equity improved to 15.95% and return on assets increased

to 1.11%. 4. Non-performing assets were cut in half to 0.07% of total assets. 5. First Mutual continued to position itself as a community

commercial bank, with single-family residential loans now

accounting for just 17% of its total portfolio. 6. FMSB declared $.60 in cash dividends: $.05 quarterly, plus a

$.40 special cash dividend paid earlier this month.

"Fourth quarter loan originations were up 57% to $94.1 million, compared with $59.9 million in the fourth quarter a year ago. For the year, originations increased 78% to $380 million," said John R. Valaas, President. "The activity in our lending department helped boost non-interest income 79% in the fourth quarter, and 89% for the full year. Our primary focus remains on building our commercial loan portfolio, but the fee income generated by the recent wave of residential refinances has been a strong contributor to the income statement."

For all of 1998, non-interest income increased 89% to $3.2 million from $1.7 million the prior year. Non-interest income for the fourth quarter rose 79% to $731,000, compared to $408,000 in the like quarter a year ago. Non-interest expense increased to a lesser degree, up 16% for the quarter to $3.0 million, and up 24% for the year to $12.0 million.

"We experienced a strong net interest margin for both the quarter and full year, which helped us increase net interest income 8%, to $4.4 million in the fourth quarter, and 10% to $17.4 million for the year," Valaas stated. Net interest margin was 3.79% for the fourth quarter and 3.85% for the full year of 1998, compared to 3.79% in the fourth quarter and 3.78% for all of 1997.

First Mutual's return on average equity was 15.39% in the fourth quarter and 15.95% in 1998, compared to 15.24% for the fourth quarter and 15.57% for the full year of 1997. The bank's return on average assets was 1.12% for the fourth quarter compared to 1.04% in the like period a year ago, and was 1.11% for the full year compared with 1.05% in 1997.

"We have been able to increase returns in part due to our internal growth, with assets increasing 10% to $489 million, and partially from the quality of the loans we have written," Valaas explained. "Total non-performing assets were only $336,000, or 0.07% of total assets at year end, less than half of what they were a year ago." In addition, the bank added $165,000 to its loan loss provision during the fourth quarter, and $750,000 over the course of the year, increasing total loan loss reserves to $5.6 million, or 1.42% of total loans outstanding.

The bank continued to evolve its loan portfolio in 1998 to more closely resemble that of a commercial bank. "First Mutual has strong ties to the community, and we intend to be, first and foremost, a community bank," Valaas stated. "Our vision of the future has not changed. We will continue to help finance the tremendous growth this region is seeing."

Commercial real estate loans grew to 61.2% of First Mutual's loan portfolio compared with 56.5% at December 31, 1997, while single-family residential loans declined to 17.2%, from 29.8%, of the portfolio a year ago. Construction loans totaled 10.0% and consumer loans were 4.5% of the loan portfolio at December 31, compared with 8.1% and 3.3%, respectively, last year. Adjustable-rate loans account for 83% of the total portfolio.

"This has been a banner year for First Mutual, and our shareholders," Valaas continued. "We have been generating consistent earnings growth for over six years now, and we continue to pass those earnings along to our shareholders. In addition to a $.05 quarterly dividend, we recently paid a $.40 per share special cash dividend, and we remain very well capitalized."

At December 31, 1998, First Mutual's Tier I capital ratio was 7.2%, compared with 6.9% a year ago. Stockholders' equity increased 13%, to $34.7 million, from $30.7 million a year ago. Tangible book value at year-end was $8.16 per share compared to $7.43 per share at December 31, 1997.

First Mutual Savings Bank is an independent, community-based bank that operates nine full-service offices in the Puget Sound area. Established in 1953 and headquartered in Bellevue, First Mutual Savings Bank is one of the oldest institutions on the Eastside. First Mutual also operates a loan production office in Tacoma, Washington. The FDIC-insured savings bank derives a significant portion of its income from residential lending and small commercial property loan originations.

Note: Except for the historical information in this news release, the matters described herein are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include those related to the local and national economic environment, products and pricing of competition, the fiscal and monetary policies of the US government, credit risk management, changes in and other risks and uncertainties discussed from time to time in First Mutual Bank's FDIC securities filings. First Mutual Bank disclaims any obligation to publicly announce future events or developments which affect the forward-looking statements herein. -0-

STATEMENT OF OPERATIONS
(in thousands except per share data) (unaudited)

                                 Quarter Ended       Year Ended
                      Annual      December 31,       December 31,
                     % Change    1998      1997     1998     1997
                     --------  -----------------  ------------------
INTEREST INCOME
 Loans Receivable              $ 8,563  $  8,234  $ 34,518  $ 31,202
 Mortgage-Backed
  and Related
  Securities                       592       450     1,652     2,070
 Interest-Earning
  Deposits with
  Banks                             18        87        62       470
 FHLB Stock Dividends               93        89       358       331
 US Treasury and Govt.
  Agencies Securities              641       599     2,625     2,323
                                -------  -------  --------- --------
                         8%    $ 9,907  $  9,459  $ 39,215  $ 36,396
INTEREST EXPENSE
 Deposits                      $ 5,038  $  4,809  $ 19,880  $ 17,779
 FHLB Advances and Other           443       539     1,939     2,811
                               -------   -------  --------  --------
                                 5,481     5,348    21,819    20,590
                               -------   -------  --------  --------
NET INTEREST INCOME      10%     4,426     4,111    17,396    15,806

PROVISION FOR LOAN LOSSES          165       195       750       976
                               -------   -------  --------  --------
  Net Interest Income
   After Loan
   Loss Provision        12%  $  4,261  $  3,916 $  16,646  $  14,830
OTHER OPERATING
 INCOME (EXPENSE)
 Net Gain on Sale
  of Servicing Rights              378       -0-     1,982        -0-
 Gain (Loss) on
  Sales of Loans                   (37)      (40)     (229)       140
 Servicing Fees,
  Net of Amortization              123       173       474        805
 Fees on Deposits                   59        41       208        167
 Other                             208       234       795        594
                               -------   -------   -------    -------
  Total Other
   Operating Income      89%  $    731  $    408   $ 3,230   $  1,706

OPERATING EXPENSES
 Salaries and
  Employee Benefits              1,566     1,538    7,500       5,959
 Occupancy                         355       329    1,379       1,165
 Other                           1,034       688    3,108       2,565
                              --------  -------- --------    --------
  Total Other
   Operating Expense     24%  $  2,955  $  2,555 $ 11,987   $   9,689
                              --------  -------- --------   ---------
 Income Before
  Federal Income Taxes   15%  $  2,037  $  1,769 $  7,889   $   6,847
FEDERAL INCOME TAX            $    692  $    601 $  2,681   $   2,328
                              --------  --------  -------   ---------
NET INCOME               15%  $  1,345  $  1,168 $  5,208   $   4,519
                              ========  ======== ========   ==========
PER SHARE DATA(1)
Basic Earnings Per
 Common Share                 $   0.32  $  0.29  $   1.24   $    1.11
Earnings Per Common
 Share-Assuming Dilution      $   0.31  $  0.27  $   1.20   $    1.07
Weighted Average
 Shares Outstanding              4,247    4,091     4,216       4,063
Weighted Average
 Shares Outstanding
 Including Dilutive
 Effect of Stock Options         4,330    4,282     4,327       4,235


                                   Quarter Ended       Year Ended
                                    December 31,       December 31,
FINANCIAL RATIOS                    1998    1997     1998      1997
----------------                   --------------    ---------------
Return on Average Assets           1.12%    1.04%    1.11%    1.05%
Return on Average Equity          15.39%   15.24%   15.95%   15.57%
Annualized Operating
 Expense/Average Assets            2.45%    2.28%    2.56%    2.25%
Net-Interest Margin/Average
 Interest-Earning Assets           3.79%    3.79%    3.85%    3.78%

   (1)Comparative Earnings per Share data for the prior year has
been restated to conform with Statement of Financial Accounting
Standards Number 128.

BALANCE SHEET (in thousands except per share data) (unaudited)
ASSETS:               % Change   December 31, 1998   December 31, 1997
                      --------   -----------------   -----------------
Cash and Cash
 Equivalents:
     Interest-Earning
      Deposits                   $       217            $       167
     Non-Interest-Earning
      Demand Deposits
      and Cash on Hand                 5,312                  5,742
                                 -----------            -----------
                                       5,529                  5,909
Mortgage-backed and
 Other Securities
 Available for Sale                   20,337                  1,335
Loans Receivable,
 Held for Sale                        27,371                  8,422
Mortgage-backed and
 Other Securities Held
 to Maturity                          61,764                 64,157
Loans Receivable        2%           365,104                356,767
     Reserve for
      Loan Losses      15%            (5,569)                (4,858)
                                  -----------            ----------
Loans Receivable, Net   2%           359,535                351,909
Accrued Interest
 Receivable                            3,311                  3,148
Land, Buildings and
 Equipment, Net                        5,537                  5,452
Federal Home Loan Bank
 (FHLB) Stock, at Cost                 4,877                  4,519
Mortgage Servicing Rights                356                    601
Other Assets                             613                    310
                                 -----------            -----------
     TOTAL             10%       $   489,230            $   445,762
                                 ===========            ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits:
     Investor Custodial
      Checking                   $     8,146            $     6,194
     Money Market Deposit
      and Checking Deposits           90,773                 70,338
     Regular Savings                  12,248                 14,649
     Time Deposits                   300,084                281,647
                                 -----------            -----------
     Total Deposits     10%          411,251                372,828

Drafts Payable                         4,383                  1,864
Accounts Payable and
 Other Liabilities                     5,466                  4,438
Advance Payments by
 Borrowers for Taxes
 and Insurance                         1,517                  1,587
FHLB Advances                         31,765                 34,230
Federal Income
 Taxes Payable                           186                    163
                                 -----------            -----------
     Total Liabilities  10%          454,568                415,110

Stockholders' Equity:
Common Stock, $1 Par
 Value-Authorized,
 10,000 Shares; Issued
 and Outstanding,
 4,247 and 4,125 Shares,
 Respectively                         4,247                  4,125
Additional Paid-In Capital           25,849                 24,883
Employee Stock
 Ownership Plan Debt                   (604)                  (871)
Retained Earnings                     5,182                  2,520
Accumulated Other
 Comprehensive Income (Loss);
 Unrealized (Loss) on
 Securities Available
 for Sale, Net of Federal
 Income Tax                             (12)                    (5)
                                 -----------            -----------
Total Stockholders'
 Equity                 13%          34,662                 30,652
                                 -----------            -----------
     TOTAL              10%     $   489,230            $   445,762
                                 ===========            ===========