================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the Fiscal Year Ended December 31, 2000

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                        Commission File Number: 005-57091

                          FIRST MUTUAL BANCSHARES, INC.
                          -----------------------------
             (Exact name of registrant as specified in its charter)

     State of Washington                                         91-2005970
     -------------------                                         ----------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

400 108th Avenue N.E., Bellevue, Washington                         98004
-------------------------------------------                         -----
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code             (425) 455-7300
                                                               --------------

Securities registered pursuant to Section 12(b) of the Act: None
                                                            ----

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $1.00 per share
                     ---------------------------------------
                                (Title of Class)

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         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 (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]

         As of March 8, 2001, there were issued and outstanding 4,697,209 shares
of the registrant's common stock. The aggregate market value of the voting stock
held by non-affiliates (2,132,494 shares) of the registrant was $29,854,916
based on the closing sales price of the registrant's common stock as quoted on
the Nasdaq National Market System which on March 8, 2001 was $14.00.

                       DOCUMENTS INCORPORATED BY REFERENCE

         1. Annual Report to Shareholders for the fiscal year ended December 31,
2000.

         2. Proxy Statement dated March 20, 2001 for the 2001 Annual Meeting of
Shareholders.
================================================================================
<PAGE>

                                     PART I

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. -
Properties" herein for additional information on the Bank's facilities.

FORWARD-LOOKING STATEMENTS
--------------------------

         This Form 10-K Report contains statements concerning future operations,
trends, expectations, plans, capabilities, and prospects of First Mutual
Bancshares, Inc. and First Mutual Bank (together, the "Company") that are
forward-looking statements for purposes of the safe harbor provisions under the
Private Securities Litigation Reform Act of 1995. Statements containing words
such as "appear," "anticipate," "believe," "expect," "may," "projected,"
"should," 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

                                       2
<PAGE>

operations, actual events, results, or developments may differ materially from
those expressed or implied in forward-looking statements due to a number of
risks and uncertainties. Factors which could affect actual results include
economic conditions in the Company's market area and the nation as a whole,
interest rate fluctuations, the impact of competitive products, services and
pricing, the ability of the Company to control its costs and expenses, loan
delinquency rates, and the legislative and regulatory changes affecting the
banking industry. There are other risks and uncertainties which could affect the
Company which are discussed from time to time in the filings made by the Company
with the Securities and Exchange Commission. 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 shall not be
responsible to update any such forward-looking statements.

SELECTED FINANCIAL DATA
-----------------------

         The information under the section captioned "Selected Financial Data"
in the 2000 Annual Report to Shareholders ("Annual Report") is incorporated
herein by reference.

YIELDS EARNED AND RATES PAID
----------------------------

         The Bank's pretax earnings depend significantly on its net interest
income, which is the difference between the income it receives on its loan
portfolio and other investments and its cost of money, consisting primarily of
interest paid on savings deposits and FHLB advances. Net interest income is
affected by: (i) the difference between rates of interest earned on its
interest-earning assets and rates paid on its interest-bearing liabilities
("interest rate spread") and (ii) the relative amounts of its interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.

         At December 31, 2000, the Bank's portfolio of loans consisted of 88%
adjustable-rate and 12% fixed-rate loans. The Bank has employed various measures
designed to make yields on its loan portfolio and investments interest-rate
sensitive. They have included: (i) adoption of a policy under which the Bank
generally originates and sells long-term, fixed-rate mortgage loans which have
been written to specifications promulgated by the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") and
qualify for sale in the secondary market, (ii) emphasis on origination of
adjustable-rate mortgage loans on residential and commercial properties, (iii)
origination of construction loans secured by residential and commercial
properties, at interest rates subject to periodic adjustment based upon the
prevailing market rates, (iv) origination of business loans at interest rates
subject to periodic adjustment based on prevailing market rates, and (v)
origination of direct and indirect consumer loans at interest rates subject to
periodic adjustment based upon the prevailing rates. See "Lending Activities"
and "Interest Rate Risk Management."













                                       3
<PAGE>

                              AVERAGE BALANCE SHEET
                              ---------------------

         The following table presents for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting interest rate spread,
and ratio of interest-earning assets to interest-bearing liabilities. Averages
are calculated using monthly averages. The Bank follows the practice of stopping
interest accruals on loans past due 90 days and over unless it is reasonably
assured that all principal and interest due on the loan will be fully recovered.
The interest income on loans for all years presented below excludes the interest
beyond the 90 day period. These amounts were immaterial for all periods
presented. Interest income on tax-free municipal bonds are not shown on a
tax-equivalent basis.

<TABLE><CAPTION>
                                                 At December 31,          Years Ended December 31,
                                             ----------------------  --------------------------------------
                                                        2000                       2000
                                             ----------------------  ------------------------------------
                                                             Average                               Average
                                                             Yield/   Average                      Yield/
                                              Balance         Cost    Balance     Interest          Cost
                                              -------         ----    -------     --------          ----
                                                                 (Dollars in Thousands)
<S>                                          <C>              <C>    <C>         <C>                <C>
Interest-earning assets:
 Loans receivable..........................  $ 489,551        9.17%  $ 474,144   $  43,682          9.21%
 Mortgage-backed securities................     73,345        6.40      65,503       4,232          6.46
 Corporate and municipal bonds.............      3,644        6.71       3,485         193          5.54
 Short-term investments....................        514        5.78       1,931          71          3.68
 U.S. securities...........................     46,666        6.18      47,660       2,768          5.81
 Other equity investments..................      7,749        6.50       7,484         483          6.45
                                             ---------               ---------   ---------
  Total interest-earning assets............    621,469        8.57     600,207      51,429          8.57

Non-interest earning assets................     21,762        -         11,967           -          -
                                             ---------               ---------
Total assets...............................  $ 643,231        -      $ 612,174           -          -
                                             =========               =========

Interest-bearing liabilities:
 Deposits..................................  $ 455,256        5.60     433,601      22,987          5.30
 FHLB advances and other borrowed money....    133,285        6.39     127,239       7,932          6.23
                                             ---------               ---------    --------
Total interest-bearing liabilities.........    588,541        5.78     560,840      30,919          5.51

Non-interest-bearing liabilities - deposits
   and other...............................      8,773                   8,707           -          -
                                             ---------               ---------
 Total liabilities.........................    597,314                 569,547           -          -
Shareholders' equity.......................     45,917                  42,627           -          -
                                             ---------               ---------
Total liabilities and shareholders' equity.  $ 643,231               $ 612,174           -          -
                                             =========               =========

Net interest income........................                                      $  20,510
                                                                                 =========
Ratio of average interest-earning
 assets to average interest-bearing
 liabilities...............................                                1.07x
Interest rate spread.......................                                                         3.06%
Net yield (net interest income as a percentage
  of average interest-earning assets)......                                              3.42%

Amortized loan fees included in loan
 receivable interest income................                                      $   1,165
</TABLE>
                        AVERAGE BALANCE SHEET(continued)
                        --------------------------------
<TABLE><CAPTION>
                                                                            Years Ended December 31,
                                                  -------------------------------------------------------------------------------
                                                                 1999                                     1998
                                                  ----------------------------------        -------------------------------------
                                                                              Average                                      Average
                                                   Average                    Yield/         Average                       Yield/
                                                   Balance     Interest        Cost          Balance     Interest           Cost
                                                   -------     --------        ----          -------     --------           ----
                                                                              (Dollars in Thousands)
<S>                                               <C>          <C>             <C>          <C>          <C>                <C>
Interest-earning assets:
 Loans receivable..........................       $ 411,406    $  35,481       8.62%        $ 386,422    $  34,519          8.93%
 Mortgage-backed securities................          60,609        3,678       6.07            24,560        1,652          6.73
 Corporate and municipal bonds.............           3,165          173       5.47               746           37          4.96
 Short-term investments....................             860           37       4.30               939           62          6.60
 U.S. securities...........................          42,231        2,564       6.10            40,084        2,588          6.46
 Other equity investments..................           5,339          385       7.21             4,680          357          7.63
                                                  ---------    ---------                    ---------    ---------
  Total interest-earning assets............         523,610       42,318       8.08           457,431       39,215          8.57

Non-interest earning assets................          11,563            -       -               10,065          --            --
                                                  ---------                                 ---------
Total assets...............................       $ 535,173            -       -            $ 467,496          --            --
                                                  =========                                 =========

Interest-bearing liabilities:
 Deposits..................................       $ 393,372       18,601       4.73         $ 387,720       19,880          5.13
 FHLB advances and other borrowed money....          94,202        4,692       4.98            34,402        1,939          5.64
                                                  ---------    ---------                    ---------    ---------
Total interest-bearing liabilities.........         487,574       23,293       4.78           422,122       21,819          5.17

Non-interest-bearing liabilities - deposits
   and other...............................          10,599            -       -               12,717          --            --
                                                  ---------                                 ---------
 Total liabilities.........................         498,173            -       -              434,839          --            --
Shareholders' equity.......................          37,000            -       -               32,657          --            --
                                                  ---------                                 ---------
Total liabilities and shareholders' equity.       $ 535,173            -       -            $ 467,496          --            --
                                                  =========                                 =========

Net interest income........................                    $  19,025                           --    $  17,396           --
                                                               =========                                 =========
Ratio of average interest-earning
 assets to average interest-bearing
 liabilities...............................             1.08x                                     1.08x        --            --
Interest rate spread.......................                                    3.30%               --          --          3.40%
Net yield (net interest income as a percentagE
  of average interest-earning assets)......                          3.63%                         --            3.80%       --

Amortized loan fees included in loan
 receivable interest income................                    $   1,083                                 $   1,000
</TABLE>
                                       4
<PAGE>

RATE VOLUME ANALYSIS
--------------------

         The "Rate Volume Analysis" table is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report, which is incorporated herein by reference.

KEY OPERATING RATIOS
--------------------

         The following table provides certain performance ratios of the Bank for
the periods indicated.

<TABLE><CAPTION>
                                                                         Years Ended December 31,
                                                         --------------------------------------------------------
                                                         2000         1999         1998         1997         1996
                                                         ----         ----         ----         ----         ----
<S>                                                       <C>          <C>          <C>          <C>          <C>
Return on average assets (net income divided
  by average total assets) ....................           1.08%        1.12%        1.11%        1.05%        1.01%

Return on average equity (net income divided
  by average equity) ..........................          15.48        16.22        15.95        15.57        15.33

Average equity to average assets ratio (average
  equity divided by average total assets) .....           6.96         6.91         6.99         6.73         6.56

Dividend payout ratio .........................          14.18%       15.30%       49.00%       45.80%       12.50%
</TABLE>

LENDING ACTIVITIES
------------------

         GENERAL. The Bank's loan portfolio and loans held for sale totaled
$489.6 million at December 31, 2000 (loans held for sale totaled $15.8 million
of this amount). On that date before deductions, $74.4 million, or 15%, of total
outstanding loans, including loans held for sale, consisted of loans secured by
one-to-four-unit residential properties; $160.3 million, or 33%, consisted of
loans secured by mortgages on over-four-unit residential properties;
construction loans constituted $103.7 million, or 21%; and $159.9 million, or
33%, consisted of commercial real estate loans. The balance of the Bank's
outstanding loans was comprised of consumer and business loans. (See table on
next page).

         The Bank's principal lending activities have focused on the origination
of conventional permanent loans on residential and commercial real estate. Total
loans originated were $380.2 million and $310.4 million for the years ended
December 31, 1998 and 1999, respectively, and $211.1 million for the year ended
December 31, 2000.

         In order to maintain the interest rate sensitivity of its loan
portfolio and investments, the Bank places an emphasis on the origination of
adjustable-rate mortgage loans on residential and commercial properties, and
construction, business, and consumer loans at interest rates subject to periodic
adjustment based upon the prevailing Prime rate. At December 31, 2000, $431.3
million, or 88% of net loans receivable, including loans held for sale, were
comprised of loans that were other than long-term, fixed-rate mortgage loans.
This amount consists of $47.3 million in residential mortgage loans with rates
adjustable at periods ranging from one to five years, $315.9 million in business
loans and loans secured by income-producing and multifamily residential
properties, $54.6 million in net construction loans, and $13.5 million in
consumer loans.

                                       5
<PAGE>

          The following tables provide selected data relating to the composition
of the Bank's loan portfolio by type of loan and type of security on the dates
indicated.

<TABLE><CAPTION>
                                                            At December 31,
------------------------------------------------------------------------------------------------------
                                          2000                   1999                    1998
                                          ----                   ----                    ----
                                   Amount       Percent    Amount     Percent     Amount       Percent
                                   ------       -------    ------     -------     ------       -------
                                                         (Dollars in Thousands)
<S>                              <C>            <C>      <C>            <C>      <C>            <C>
TYPE OF LOAN:
Conventional Real
  Estate Loans:
    Interim construction loans   $ 103,727      21.19%   $  72,906      16.05%   $  60,641      15.67%
    Loans on existing property     198,240      40.49      186,632      41.07      160,068      41.37
    Loans refinanced .........     196,089      40.05      204,630      45.03      174,691      45.15
Insured or guaranteed real
    estate loans .............         257       0.05          275       0.06          320       0.08
Consumer loans ...............      34,219       6.99       24,435       5.38       17,465       4.52
Business loans ...............       5,033       1.03        3,347       0.74        2,629       0.68
Less -
    Loans in process .........     (40,087)     (8.19)     (29,959)     (6.59)     (21,765)     (5.63)
    Reserve for loan losses ..      (6,729)     (1.37)      (6,309)     (1.39)      (5,569)     (1.44)
    Deferred loan fees and
     other discounts .........      (1,198)     (0.24)      (1,576)     (0.35)      (1,574)     (0.40)
                                 ---------     ------    ---------     ------    ---------     ------

TOTAL ........................   $ 489,551     100.00%   $ 454,381     100.00%   $ 386,906     100.00%
                                 =========     ======    =========     ======    =========     ======
TYPE OF SECURITY:
Residential:
    One-to-four-family........   $  74,359      15.19%   $  96,418      21.22%   $  95,807      24.76%
    Multifamily...............     160,297      32.74      148,354      32.65      118,015      30.50
Construction..................     103,727      21.19       72,906      16.04       60,641      15.67
Commercial real estate........     159,930      32.66      146,765      32.30      121,257      31.34
Consumer loans................      34,219       6.99       24,435       5.38       17,465       4.52
Business loans................       5,033       1.03        3,347       0.74        2,629       0.68
Less -
    Loans in process..........     (40,087)     (8.19)     (29,959)     (6.59)     (21,765)     (5.63)
    Reserve for loan losses...      (6,729)     (1.37)      (6,309)     (1.39)      (5,569)     (1.44)
    Deferred loan fees and
      other discounts.........      (1,198)     (0.24)      (1,576)     (0.35)      (1,574)     (0.40)
                                 ---------     ------    ---------     ------    ---------     ------
TOTAL. . .....................    $489,551     100.00%   $ 454,381     100.00%   $ 386,906     100.00%
                                 =========     ======    =========     ======    =========     ======
</TABLE>
(table continued)
<TABLE> <CAPTION>
                                                At December 31,
-------------------------------------------------------------------------------
                                           1997                   1996
                                           ----                   ----
                                   Amount     Percent      Amount     Percent
                                   ------     -------      ------     -------
                                             (Dollars in Thousands)
TYPE OF LOAN:
Conventional Real
  Estate Loans:
<S>                              <C>            <C>      <C>            <C>
    Interim construction loans   $  44,494      12.35%   $  35,706      10.74%
    Loans on existing property     139,846      38.81      136,676      41.11
    Loans refinanced .........     183,165      50.83      169,244      50.91
Insured or guaranteed real
    estate loans .............         604       0.17        1,278       0.39
Consumer loans ...............      11,831       3.28        7,121       2.14
Business loans ...............       1,583       0.44          169       0.05
Less -
    Loans in process .........     (14,934)     (4.14)     (12,283)     (3.69)
    Reserve for loan losses ..      (4,858)     (1.35)      (3,882)     (1.17)
    Deferred loan fees and
     other discounts .........      (1,400)     (0.39)      (1,583)     (0.48)
                                 ---------     ------    ---------     ------

TOTAL ........................   $ 360,331     100.00%   $ 332,446     100.00%
                                 =========     ======    =========     ======
TYPE OF SECURITY:
Residential:
    One-to-four-family........   $ 117,285     32.55%    $ 131,894      39.68%
    Multifamily...............     101,317      28.12       85,042      25.58
Construction..................      44,494      12.35       35,706      10.74
Commercial real estate........     105,013      29.14       90,262      27.15
Consumer loans................      11,831       3.28        7,121       2.14
Business loans................       1,583       0.44          169       0.05
Less -
    Loans in process..........     (14,934)     (4.14)     (12,283)     (3.69)
    Reserve for loan losses...      (4,858)     (1.35)      (3,882)     (1.17)
    Deferred loan fees and
      other discounts.........      (1,400)     (0.39)      (1,583)     (0.48)
                                 ---------     ------    ---------     ------
TOTAL. . .....................   $ 360,331     100.00%   $ 332,446     100.00%
                                 =========     ======    =========     ======
</TABLE>
                                       6
<PAGE>

         LOAN MATURITY. The following table sets forth certain information at
December 31, 2000, regarding the dollar amount of loans maturing based on their
contractual terms to maturity or repricing. Demand loans, loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. Loan balances exclude unearned discounts, deferred loan origination fees,
and allowance for loan losses.

<TABLE><CAPTION>
                                      Due        2 Years       3 Years
                                     Within      Through       Through
                                    One Year     3 Years       5 Years      After 5
                                      From        After         After        Years
                                    December     December      December     Through      Beyond
                                    31, 2000     31, 2000      31, 2000    10 Years     10 Years      Total
                                    --------     --------     --------     --------     --------     --------
                                                              (In Thousands)
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>
Conventional Real Estate Loans:
 Interim construction loans ...     $ 63,639     $   --       $   --       $   --       $   --       $ 63,639
 Loans on existing property ...      131,167       34,776       18,565        3,332       10,400      198,240
 Loans refinanced .............      129,743       34,400       18,363        3,296       10,287      196,089
Insured or guaranteed
    real estate loans .........          180            5         --           --             72          257
Consumer loans ................       14,647        1,414        3,899       13,197        1,062       34,219
Business loans ................        4,640          293           71           29         --          5,033
                                    --------     --------     --------     --------     --------     --------
Total Loans ...................     $344,016     $ 70,888     $ 40,898     $ 19,854     $ 21,821     $497,477
                                    ========     ========     ========     ========     ========     ========
</TABLE>

         The following table sets forth the dollar amount of all loans,
categorized by fixed interest rates and floating or adjustable interest rates.
Loan balances exclude unearned discounts, deferred loan origination fees, and
allowance for loan losses.

<TABLE> <CAPTION>
                                               Due Within
                                     One Year From December 31, 2000                  Due After December 31, 2001
                                ----------------------------------------        ----------------------------------------
                                 Fixed         Adjustable                        Fixed        Adjustable
                                 Rates           Rates           Total           Rates           Rates           Total
                                --------        --------        --------        --------        --------        --------
                                                                    (In Thousands)

<S>                             <C>             <C>             <C>             <C>             <C>             <C>
Mortgage loans...............   $ 11,273        $313,456        $324,729        $ 27,240        $106,256        $133,496
Consumer loans ...............       552          14,095          14,647          19,572            --            19,572
Business loans ...............        10           4,630           4,640             132             261             393
                                --------        --------        --------        --------        --------        --------
     Total...................   $ 11,835        $332,181        $344,016        $ 46,944        $106,517        $153,461
                                ========        ========        ========        ========        ========        ========
</TABLE>

         RESIDENTIAL LOANS. At December 31, 2000, approximately 15% of the
Bank's total loan portfolio, including loans held for sale, consisted of loans
secured by one-to-four unit family dwellings located within the States of
Washington, Oregon and Idaho.

         The Bank's lending policies generally limit the maximum loan-to-value
ratio on residential mortgage loans to 97% of the appraised value as determined
by an independent appraiser, with the condition that private mortgage insurance
is required on home loans with loan-to-value ratios in excess of 80%.

         The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible in accordance with sound lending practices, market
conditions, and underwriting standards established by the Bank. Mortgage loans
made by the Bank are generally long-term loans, amortized on a monthly basis,
with principal and interest due each month. The initial contractual loan payment
period for residential loans typically ranges from five to 30 years. The Bank's
experience indicates that real estate loans remain outstanding for significantly
shorter periods than their contractual terms. Borrowers may refinance or prepay
loans at their

                                       7
<PAGE>

option, subject to prepayment penalty provisions when included in the note.

         The Bank offers six-month, one-year, three-year, five-year, seven-year
and ten-year loans with limitations on adjustments of two percent in any one
year with a maximum lifetime interest rate adjustment of between four and six
percent The Bank also offers fixed-rate loans, which it originates for sale in
the secondary market. Since 1982, the Bank has generally followed a policy of
not originating fixed-rate mortgages for its own portfolio.

         All improved real estate which serves as security for a loan to the
Bank must be insured by such companies as may be approved by the Bank against
fire, extended coverage, vandalism, malicious mischief and other hazards. Such
insurance must be maintained throughout the term of the loan and in an amount
not less than that amount necessary to meet the replacement cost of the property
structures, subject to insurance carrier limits.

         CONSTRUCTION AND COMMERCIAL REAL ESTATE LOANS. First Mutual's real
estate loan portfolio also includes loans on multifamily housing (over four
units), construction loans (residential, commercial and multifamily) and
commercial loans.

         Multifamily loans are generally made in amounts between $500,000 and
$2.0 million and at December 31, 2000, the largest multifamily loan was for $4.1
million. As of December 31, 2000, multifamily loans were $160.3 million, or 33%,
of the loan portfolio as compared to $148.4 million, or 33%, in 1999.

         The Bank provides interim (construction) financing for residential and
commercial property development. At December 31, 2000, the Bank had $103.7
million in construction loans of which $63.6 million was disbursed. These loans
constituted 13% of the loan portfolio.

         Single-family construction loans are further designated by the Bank
into two categories -- speculative and custom. Speculative (spec) construction
loans are approved for builder-developers who generally first build the
residence and then sell the property to the end buyer. Those loans typically are
made for a 12-month period, which may be extended subject to negotiation and the
payment of an extension fee. Interest rates on spec loans are tied to the Prime
rate and are adjusted when the Prime rate changes. At the present time, rates
quoted range from 1.0% to 2.0% above the prevailing Prime rate and are dependent
upon the type of loan and its terms.

         Custom construction loans are originated directly to the borrower. The
builder, the borrower has contracted with to build the residence, must be
approved by the Bank, and the Bank oversees the disbursement of construction
funds to the borrower and builder. These loans generally have thirty- or
fifteen-year terms with the construction period ranging from six- to twelve
months, with interest collected monthly based upon the disbursed balance of the
loan. At the end of the construction period the terms of payment are modified to
fully amortize the loan balance over the subsequent thirty- or fifteen-year
term.

         The loan programs and interest rates offered for custom construction
loans are typically the same as those offered for other one-to-four family
residential loans. The fee structure for custom construction loans is 1% - 2%
higher than that assessed other single-family loans with similar terms and
conditions. The additional loan fee compensates the Bank for the extra cost and
interest rate risk associated with this type of lending.

         At December 31, 2000, commercial real estate loans (excluding
multifamily and construction loans) constituted $159.9 million, or approximately
33% of First Mutual's loan portfolio, including loans held for sale. These loans
are typically secured by office buildings, warehouse, commercial and retail
centers located in First Mutual's primary lending area in the Greater Puget
Sound area and Western Oregon. Permanent commercial real estate loans are
normally made up to 75% of the appraised value of the property and generally
have interest rates which are adjusted annually based on the constant maturity
index of the one-year United States Treasury Bill plus a spread ranging from
3.00% to 4.00%.

         Income property loans, consisting of multifamily, construction and
commercial real estate loans, totaled $369.0 million at December 31, 2000. That
figure compares to $326.8 million at year-end 1999 and $261.3 million at
year-end

                                       8
<PAGE>

1998. The increase in income property loans of $107.7 million, or 41%, over a
two-year period is a result of both an increase in the asset size of the Bank
and an emphasis on income property lending.

         The assets of the Bank totaled $581 million at year-end 1999, which
compares to $643 million at December 31, 2000. An increase in asset size will
typically result in an increase in all types of portfolio loans.

         Income property real estate financing is generally considered to
involve a somewhat higher degree of credit risk than financing of residential
properties. The risk of loss on an income property construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. If the estimate of the construction cost
of the property upon completion of the project proves to be inaccurate, the Bank
may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral which is insufficient to assure full repayment. On permanent
income property real estate loans, the risk to the Bank is primarily
attributable to the cash flow from the property being financed. If the cash flow
from the property is reduced (E.G., if leases are not obtained or renewed), the
borrower's ability to repay the Bank's loan may be impaired.

         The Bank's underwriting criteria are designed to evaluate and minimize
the risk of income property real estate lending. Among other things, the Bank
considers the credit history and reputation of the borrower, the borrower's net
worth and liquidity, the amount of the borrower's equity in the project,
independent appraisal and review of cost estimates, pre-construction sale and
leasing information, and cash flow projections of the borrower. To manage and
control the risk inherent in this type of lending, the Bank has adopted a
concentration of credit policy which, among other things, generally limits the
amount the Bank can lend to any one borrower to $5.0 million unless this
requirement is waived by the Investment Committee of the Board of Directors.

         BUSINESS BANKING. The Business Banking Department makes loans for
"owner-occupied" commercial real estate properties, construction loans and
non-real-estate-based business loans. At year-end 2000, total business banking
loans grew to $37.1 million compared to $28.2 million the previous year. Non
real-estate business loans included in those totals were $4.6 million and $3.3
million at December 31, 2000 and 1999, respectively.

         Business banking commercial real estate loans are typically made on
"owner-occupied" properties. The Business Banking Department analyzes the
owner's business that occupies the property, and looks at the business's cash
flow as the primary source of repayment. The real estate collateral provides
secondary security to the loan. Non real-estate business loans are typically
extended to medium-sized businesses for the purpose of financing inventory,
accounts receivable, equipment, facilities, etc.

         Interest rates on business loans are generally tied to the Prime rate,
plus a spread ranging from 0% to 3% or to the constant maturity index of the
one-year U.S. Treasury Bills, plus a spread ranging from 3% to 4%. Prime based
loans reprice immediately while the rest reprice based on set schedules,
generally annually and after a fixed period of time. Annual fees are also
usually assessed to line-of-credit business loans.

         Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multifamily real estate lending.
Real estate lending is generally considered to be collateral-based lending with
loan amounts based on predetermined loan to collateral values, and liquidation
of the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness and cash flow of the
borrower (and any guarantors), while liquidation of collateral is a secondary
source of repayment.

                                       9
<PAGE>

         CONSUMER LOANS. The Bank originates consumer loans through four
departments: sales finance lending, home equity lending, direct consumer
lending, and community business lending. Consumer loans totaled $35.6 million at
December 31, 2000 compared to $24.4 million the previous year. The increase is
primarily in sales finance lending. At December 31, 2000, sales finance loans
totaled $18.3 million compared to $11.0 million in 1999.

         The Sales Finance Department began operations during the third quarter
of fiscal 1997. This department purchases primarily non-recourse consumer
financing contracts from approved dealers in Washington, Oregon, Idaho, and
California. Typical collateral for these contracts include retrofitted windows,
siding, roofs, spas, and motorcycles. Dealers must be approved with the Bank
prior to the purchase of contracts. Before a contract is purchased, Bank
personnel make independent credit decisions of the borrowers by checking the
creditworthiness of the borrower, calculating debt-to-income ratios, and
evaluating the value of the collateral purchased. The financing contracts are
secured and the Bank's lien is perfected by the use of a Financing Statement on
home improvement loans over $5,000 and by the vehicle titles on vehicles. The
terms of the contracts are fixed rate and vary in term from two to 10 years.

         The Bank originates home equity loans and lines of credit for its
portfolio and for sale to others in the secondary market. These loans are
secured by a second mortgage deed-of-trust on residential real estate occupied
by the borrower or owned by the borrower as an investment. Home equity loans
totaled $13.3 million at December 31, 2000 compared to $11.1 million in 1999.

         The Bank's current strategy regarding home equity loans is to sell
fixed-rate installment second mortgages and higher loan-to-value revolving
lines-of-credit. Revolving lines-of-credit retained in the Bank's portfolio
generally have a combined loan-to-value of less than 80%. All revolving
lines-of-credit are tied to the Prime rate plus a margin. The margin is
determined based on the loan-to-value ratio, the creditworthiness of the
borrower, and the borrower's debt-to-income ratio. The interest rates charged to
the borrower are adjustable and change based on the Prime rate. The underwriting
and insurance requirements for the Bank's home equity products fall under the
same underwriting guidelines and standards as the Bank's residential loans. See
"Residential Loans."

         The Direct Consumer Lending Department began operations in the second
quarter of fiscal 1998. The Department processes and closes consumer loan
requests generated within the Bank's deposit branches and from lending officers.
The lending products offered fall into two categories: collateral based loans
(automobiles, boats, recreational vehicles, home improvement, etc.), and
unsecured lines-of-credit. The underwriting criteria for collateral-based loans
are similar to that of the sales finance loans noted above. Primary
consideration is given to the borrower's capacity to repay the obligation. A
secondary consideration on secured consumer loans is the value of the loan
collateral as a source of repayment. The underwriting criteria on the unsecured
lines-of-credit call for a higher level of borrower creditworthiness because of
the unsecured nature of these loans. The terms on the collateral based loans are
fixed rates with terms of up to 10 years. The unsecured lines-of-credit are
variable and tied to the Prime rate plus a margin. Direct consumer loans totaled
$1.9 million at December 31, 2000 as compared to $953,000 at year-end 1999.

         Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans, which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loans such as

                                       10
<PAGE>

the Bank, and a borrower may be able to assert against such assignee claims and
defenses that it has against the seller of the underlying collateral. At
December 31, 2000, consumer loans past due 90 days or more totaled $33,000 as
compared to $27,000 at year-end 1999.

         The Community Business Banking Department began operations in the
fourth quarter of fiscal 1999. The Department processes and closes small
business loan requests originating in the branch system, through referrals from
other lines of business or from lending officers. The credit products available
are small, unsecured lines-of-credit, larger secured lines-of-credit and term
loans. The primary factors for approval are the borrower's ability to repay and
guarantor creditworthiness. Collateral is taken as an abundance of caution for
small business loans and lines, and is not a factor when evaluating credit
applications. The unsecured lines-of-credit are open-ended and have a variable
rate tied to the Prime rate. Secured lines-of-credit carry a twelve-month term
and also have a variable rate tied to Prime. Term loans have a maturity of seven
years or less and have a variable interest rate tied to Prime. Community
business loans totaled $481,000 at December 31, 2000 as compared to $50,000 at
year-end 1999.

         LOAN SOLICITATION AND PROCESSING. The Bank relies upon its employees to
solicit and/or originate business, consumer, income property and residential
loans. The Bank also utilizes the services of mortgage brokers. Residential
mortgage brokers take applications from borrowers, process the credit
information, obtain property appraisals, and then submit the loan to First
Mutual for approval. If approved, the loan is funded by and closed in the name
of First Mutual. Income property brokers are generally limited to taking the
initial application from borrowers. Mortgage brokers provide the Bank with a
cost-effective method of originating loans in a broader geographic area than the
Bank's customer base. Approximately 72% of all residential loans closed during
the year ended December 31, 2000, were obtained through mortgage brokers as
compared to 59% at December 31, 1999.

         The Bank's lending policy is reviewed annually and approved by the
Board of Directors. Residential loans up to specified limits may be approved by
a member of the Loan Committee or designated underwriters. Income property loans
up to $1,000,000, and business loans up to $400,000 are approved by the Loan
Committee, which consists of officers Valaas, Mandery, Boudreau, Harlan, Young,
Walkky, Werth and Chermak. Mr. Walkky is no longer employed by the Bank as of
first quarter 2001. All residential, income property and business loans with
cumulative extensions of credit over $1,000,000 are further reviewed and subject
to approval by the Investment Committee, which is comprised of Directors Valaas,
Parker, Wallace (Robert), Florence, Doud and Rowley.

         LOAN ORIGINATIONS AND SALES. Loan originations decreased in 2000 to
$211 million from $310 million in 1999 and the comparable figure for 1998 was
$380 million. The decrease in originations came from residential loan closings,
which decreased from $122 million in 1999 to $67 million in 2000. In addition,
income property and business loan originations decreased from $170 million in
1999 to $118 million in 2000.

         Selling loans in the secondary mortgage market reduces the Bank's risk
that interest rates will escalate while holding long-term, fixed-rate loans in
its portfolio. The sale of loans into the secondary market also allows the Bank
to continue to make loans during periods when savings flows decline or funds are
not otherwise available for lending purposes. In connection with such sales, the
Bank generally sells the servicing rights (i.e., collection of principal and
interest payments).

         The Bank began selling loan servicing rights for which it typically
receives a fee of 1.50% to 2.25% of the loan principal balance. The Bank sold
$93 million of its servicing rights in the first quarter of 1998, $51 million in
2000, and the final bulk sale in January 2001 of $78 million. The net gain on
the sales of servicing rights totaled $849,000, 589,000, and $810,000 for 1998,
2000 and 2001, respectively. The Bank's intent is to continue to sell servicing
rights as they are originated through our Residential Lending Department. (See
further discussions on this subject in the Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Annual Report, under the
caption Gain on Sales of Loans.)

         As of December 31, 2000, the Bank was servicing loans for others
aggregating approximately $174 million as compared to $194 million in 1999. Loan
servicing fees, net, totaled $552,000 for the year ended December 31, 2000 and

                                       11
<PAGE>

$469,000 for the year ended December 31, 1999.

         Currently, long-term mortgage loans are being originated for sale in
the secondary mortgage market to FNMA, which is a publicly owned
quasi-governmental agency that purchases residential mortgage loans from
federally insured financial institutions and certain other lenders. During the
year ended December 31, 2000, the Bank securitized and sold $42.7 million in
loans as compared to $110 million during 1999.

         Set forth below is a table showing the Bank's loan origination and
sales activity for the periods indicated.

<TABLE><CAPTION>
                                                                 Years Ended December 31,
                                                      ---------------------------------------------
                                                        2000               1999              1998
                                                      ---------         ---------         ---------
                                                                     (In Thousands)
<S>                                                   <C>               <C>               <C>
Total loans at beginning
  of period (net of undisbursed loan proceeds)        $ 462,266         $ 394,050         $ 366,589
Loans originated:
  Real estate loans:
    Construction loans .......................           78,207            61,045            52,917
    Loans on existing property ...............           77,843           165,220           187,802
    Loans refinanced .........................           28,745            67,885           124,639
    Insured and guaranteed loans .............            2,022              --                --
  Consumer and other loans ...................           24,248            16,249            14,826
                                                      ---------         ---------         ---------
           Total loans originated ............          211,065           310,399           380,184

Principal reductions .........................         (133,082)         (132,194)         (144,764)
Loans sold:
  Whole loans ................................          (36,972)         (104,463)         (197,404)
  Participation loans ........................           (5,799)           (5,526)          (10,555)
                                                      ---------         ---------         ---------
           Total loans sold ..................          (42,771)         (109,989)         (207,959)
                                                      ---------         ---------         ---------
Total gross loans at end of period (net of
  undisbursed loan proceeds) .................        $ 497,478         $ 462,266         $ 394,050
                                                      =========         =========         =========
</TABLE>

         LOAN COMMITMENTS. First Mutual's commitments to make conventional
mortgage loans on existing residential dwellings are generally made for periods
of 30 to 60 days. The borrower may reserve ("lock-in") an interest rate and loan
fee for a period of 10 to 60 days from the date of application. This reservation
is conditioned upon loan approval and closing within this time frame. Interest
rates and loan fees committed at the time of the lock-in are based upon the
prevailing market rate at the time of approval. Outstanding commitments to
borrowers for loans, including commitments for income property loans totaled
$120.3 million at December 31, 2000 and $74.3 million at year-end 1999.

         LOAN ORIGINATION FEES AND OTHER FEES. In addition to interest earned on
loans and servicing fees on loans sold and securitized, the Bank receives loan
origination fees for originating mortgage loans. See Note 1 of Notes to
Consolidated Financial Statements in the Annual Report for information as to the
recognition of loan fee income.

         Loan origination fees vary with the volume and type of loans made and
with competitive conditions in mortgage markets. Loan demand and availability of
money affect these market conditions. Recent trends have kept loan origination
fees in the 1% to 2% range for permanent real estate loans. Construction loan
fees at the present time range from 2% to 3% of the loan amount.

         The Bank also receives other fees and charges relating to existing
loans, which include late charges and fees collected in connection with a change
in borrower or other loan modifications, including construction loan extensions.
In connection with its loan origination activities, the Bank also realizes
closing fees. These fees are paid by borrowers to the Bank.

                                       12
<PAGE>

         REAL ESTATE HELD FOR SALE AND NON-PERFORMING LOANS. Loans are defined
as non-performing when any payment of principal and/or interest is 90 days past
due unless the loan is well secured and is in process of collection. While
generally the Bank is able to work out a satisfactory repayment schedule with a
delinquent borrower, the Bank will undertake foreclosure proceedings if the
delinquency is not otherwise resolved. Property acquired by the Bank as a result
of foreclosure or by deed in lieu of foreclosure is classified as "held for
sale" until such time as it is sold or otherwise disposed. At December 31, 2000,
the total of non-performing loans, repossessed assets, and real estate acquired
through foreclosure was $2.5 million compared to $352,000 at year-end 1999.

         The following table sets forth information regarding non-performing
assets at the dates indicated.

<TABLE><CAPTION>
                                                            At December 31,
                                                 ------------------------------------
                                                  2000           1999           1998
                                                 ------         ------         ------
                                                        (Dollars in Thousands)
<S>                                              <C>            <C>            <C>
Loans greater than 90 days delinquent and
    still accruing ......................        $ --           $ --           $ --
Restructured troubled loans .............          --             --             --
Nonaccrual loans ........................         1,111            343            298
Other assets and real estate acquired
     through foreclosure ................         1,353              9             38
                                                 ------         ------         ------
  Total .................................        $2,464         $  352         $  336
                                                 ======         ======         ======

As a percentage of net loans ............           0.5%           0.1%           0.1%
As a percentage of total assets .........           0.4%           0.1%           0.1%

Gross interest income that would have
   been recorded in the period if loans
   had been current with original terms .        $  100         $   60         $   21

Interest income on loans included
   in net income for the period .........        $   53         $   33         $   16
</TABLE>

         Non-performing assets for 2000 were composed of loans collateralized by
single-family residences, consumer loans, lot loans, and construction loans.

RESERVE FOR LOAN LOSSES
-----------------------

         The reserve for loan losses is maintained at a level sufficient to
provide for estimated losses based on known and inherent risks in the loan
portfolio. This reserve is based upon management's continuing analysis of the
factors underlying the quality of the loan portfolio. These factors include
changes in the size and composition of the loan portfolio; actual loan loss
experience; current and anticipated economic conditions; detailed analysis of
individual loans for which full collectibility may not be assured and for which
impairment may be present; and determination of the existence and fair value of
the collateral and guarantees securing the loans. The reserve is based upon
factors and trends identified by management at the time the financial statements
are prepared. The ultimate recovery of loans is susceptible to future market
factors beyond the Bank's control, which may result in losses or recoveries
differing significantly from those provided in the financial statements. At
December 31, 2000, the reserve for loan losses totaled $6.7 million compared to
$6.3 million at December 31, 1999.

         A $530,000 provision for loan losses was charged to operations in
fiscal 2000, which was prompted by several factors. First, the mixture of
residential loans to income property loans has changed materially over the last
few years. In

                                       13
<PAGE>

1996 residential loans amounted to $130.1 million, or 39.1% of the total loan
portfolio of $332 million. At the end of fiscal 2000, residential loans equaled
$72.9 million, or 14.9% of the total loan portfolio of $474 million. The
national norm for savings institutions is 69.6% residential loans and 30.4%
commercial and consumer loans (derived from the third quarter 2000 FDIC
Quarterly Banking Profile). For the average commercial bank, the comparable
ratio is 24.4% of residential loans and 75.6% of commercial and consumer loans,
which is almost identical to First Mutual's ratio at December 31, 2000. The Bank
considered the higher risk level in a portfolio that was shifting to a greater
emphasis on commercial and income property lending.

         At year-end 2000 the ratio of First Mutual's reserves to total loans
was 1.36% as compared to 1.37% the previous year. That ratio compares to the
national average for commercial banks of 1.66%, and for savings institutions of
 .88%. First Mutual believes that its reserve for loan loss is consistent with
its peers. A further discussion of the Bank's reserve for loan losses is
included in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Annual Report.

         While the Bank believes it has established its existing reserve for
loan losses in accordance with generally accepted accounting principles as of
December 31, 2000, there can be no assurance that regulators, when reviewing the
Bank's loan portfolio in the future, will not request the Bank to increase its
reserve for loan losses, thereby adversely affecting the Bank's financial
condition and earnings. See the Consolidated Financial Statements contained in
the Annual Report.

         The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.

<TABLE><CAPTION>
                                                                        Years Ended December 31,
                                                          ---------------------------------------------------
                                                          2000         1999       1998        1997       1996
                                                          ----         ----       ----        ----       ----
                                                                            (In Thousands)
<S>                                                     <C>         <C>         <C>         <C>        <C>
Balance at beginning of period........................  $ 6,309     $ 5,569     $ 4,858     $ 3,882    $ 2,223

     Charge-offs......................................     (112)        (68)        (39)         --        (41)
        Residential real estate and other loans.......     (112)        (45)        (39)         --        (41)
        Commercial real estate........................        -         (23)         --          --         --
        Construction..................................        -          --          --          --         --
     Recoveries.......................................        2           3          --          --         --
        Residential real estate and other loans.......        2           3          --          --         --
        Commercial real estate........................        -          --          --          --         --
        Construction..................................        -          --          --          --         --
     Provision........................................      530         805         750         976      1,700
                                                        -------    --------     -------     -------     ------
Balance at end of period..............................  $ 6,729     $ 6,309     $ 5,569     $ 4,858    $ 3,882
                                                        =======     =======     =======     =======    =======

Ratio of net charge-offs during the period to
  average loans outstanding during the period.........        0%          0%          0%          0%         0%
</TABLE>

INTEREST RATE RISK MANAGEMENT
-----------------------------

        Interest rate risk expense is the result of both repricing and basis
risk. Repricing risk occurs when interest-rate-sensitive asset and liability
positions reprice at different times as interest rates change. The analytical
methods that are used by the Bank to evaluate repricing risk include the gap
report, earnings simulation and market value analysis.

Gap Report
----------

        The gap report shows the amount of asset repricing and maturing in
various time periods versus the amount of liabilities. Although the gap report
is much simpler than the other techniques for measuring rate risk it fails to
capture

                                       14
<PAGE>

certain important information. Maturities are not necessarily the same in
different interest rate environments, prepayment options will affect the timing
of principal, loan caps are not captured, etc. Even with its short-comings the
gap report is a useful tool in assessing interest rate risk when combined with
other more dynamic devices. The Bank had a negative (more liabilities repricing
than assets) 3.7% one-year interest rate sensitivity ratio at December 31, 2000,
as compared to a negative 15.3% at December 31, 1999.

Earnings Simulation
-------------------

        Earnings simulations forecast the effect on earnings over selected
periods for different interest rate environments. Prepayment behavior in diverse
interest rate scenarios as well as loan caps may be simulated. Loans whose rates
are linked to the Prime and CMT (Constant Maturity Treasury) indices are
distinguishable. In addition, the effects of forecasted loan and deposit growth
may be included and excluded. Various forecast assumptions may be used. The
Bank's interest rate shock results are shown below for December 31, 1999 and
December 31, 2000.

<TABLE><CAPTION>
--------------------------------------------------------------------------------------
                        2000 Percentage Change              1999 Percentage Change
Immediate Change    ------------------------------     -------------------------------
in Interest Rates   Net Interest     Net Portfolio     Net Interest      Net Portfolio
(in basis points)     Income           Value              Income             Value
--------------------------------------------------------------------------------------
<S>                    <C>             <C>                 <C>               <C>
     +400              (1)%            (28)%               (15)%             (49)%
     +300               0              (20)                (11)              (38)
     +200               1              (12)                 (8)              (26)
     +100               1               (5)                 (4)              (14)
     (100)             (3)               2                   1                 5
     (200)             (5)               1                   0                 8
     (300)            (10)              (4)                 (2)                6
     (400)            (14)              (7)                 (4)                2
--------------------------------------------------------------------------------------
</TABLE>

Market Value Analysis
---------------------

         Market value analysis goes beyond simulating earnings for a specified
time period to generating principal and interest cash flows for the entire life
of all assets and liabilities. These cash flows are then discounted back to the
present. Prepayment behavior in different interest rate scenarios can then be
modeled. Loan caps can be simulated. Loans tied to Prime versus the CMT can be
distinguished. The effect of forecasted loan and deposit growth can both be
included and excluded. Different forecast assumptions can also be used.

         Basis risk arises from a shift in the relationship of the rates on
different financial instruments. Over the last five years there has been an
adverse shift in the basis relationship between the funding sources, and the
Bank's principal asset, the loan portfolio.

         The Bank's funding sources, largely deposits and Federal Home Loan Bank
advances, tend to follow the London Interbank Offering Rate (LIBOR) market. The
adjustable rate loan portfolio, which constitutes 88% of the portfolio, is
predominately indexed to the CMT index. To the extent that LIBOR and treasury
markets move in synchronization basis risk is minimized. However, over the last
five years these two markets, as measured by the one-year LIBOR and CMT have
gradually diverged. In 1996 the trailing 12-month average for the one-year LIBOR
exceeded the one-year CMT by a range of .19%-.25%. That range increased to
 .27%-.45% in 1997, with a further increase in the range to .46%-.49% in 1998,
 .51%-.72% in 1999, and .73%-.85% in year 2000. Each rise in the range compressed
the Bank's net interest margin, as the CMT failed to move to the same degree as
the shift in the LIBOR.

         The Treasury Department has announced the discontinuance of the
one-year Treasury security, although it will continue to calculate and publish a
one-year CMT index. How this change will effect the basis relationship with the
one-year LIBOR is speculative at this time.

         The Bank is currently exploring and may change the index on which it
bases its adjustable rate loan portfolio. That action would be prospective and
would not affect the existing loans.

INVESTMENT ACTIVITIES
---------------------

        Under Washington law, savings banks are permitted to own government and
government agency obligations, commercial paper, corporate bonds, mutual fund
shares, debt and equity obligations issued by creditworthy entities, whether
traded on public securities exchanges or placed privately for investment
purposes. The Bank holds a portfolio of mortgage-backed securities, real estate
mortgage investment conduits (REMICS), corporate and municipal bonds and common
stock. Subject to certain exceptions, the Bank is prohibited by FDIC regulations
from making equity investments of a type, or in an amount, that is not
permissible for national banks.

                                       15
<PAGE>

        The Chief Financial Officer of the Bank determines appropriate
investments in accordance with the Investment Committee of the Board of
Directors' and the approved investment policy. The policy generally limits
investments to US Government and agency securities and mortgage-backed
securities issued and guaranteed by FHLMC, FNMA and GNMA. Investments are made
based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Bank's liquidity position
and anticipated cash needs and sources. In addition, the effect on the Bank's
credit and interest rate risk, and risk-based capital is also included in the
evaluation.

        At December 31, 2000, the book value of the Bank's investment securities
portfolio totaled $123.6 million, while the estimated fair market value amounted
to $123.3 million as compared to $106.4 million and $102.8 million,
respectively, for 1999. Securities with stated maturities greater than ten years
comprised 38.3% of the investment portfolio in 2000. Mortgage-backed securities
guaranteed by the FNMA, FHLMC, and the GNMA totaled $73 million including those
available for sale. From time to time, investment levels may be increased or
decreased depending upon a number of factors. These factors include the yields
on investment alternatives and upon management's judgement as to the
attractiveness of the yields then available in relation to other opportunities
and its expectations of the level of yield that will be available in the future.
In addition, management's projections as to the short-term demand for funds to
be used in the Bank's loan origination and other activities is also a
consideration. As a result of these factors, during the past year the Bank's
investment portfolio has increased 16%.

        US GOVERNMENT AND AGENCY OBLIGATIONS. At December 31, 2000 the Bank's
portfolio of US Government and agency obligations had a book value and fair
market value of $47 million. The portfolio includes FHLB bonds and structured
notes and FHLMC and FNMA agency securities. At December 31, 2000 the interest
rates on these obligations ranged from 5.53% to 7.25%.

        MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed
securities to: (i) generate positive interest rate spreads on large principal
balances with minimal administrative expense, (ii) lower the credit risk of the
Bank as a result of the guarantees provided by the FHLMC, FNMA, and GNMA, (iii)
enable the Bank to use mortgage-backed securities as collateral for financing,
and (iv) invest excess funds during periods of reduced loan demand. Included in
the Bank's mortgage-backed securities portfolio are FNMA, FHLMC, and GNMA
mortgage-backed obligations with a book value and market value totaling $73
million. In comparison, the related figures for 1999 totaled $61 million and $58
million, respectively. Also included in the Bank's mortgage-backed security
portfolio are REMICS with a book value of $346,000 ranging in maturity from 2002
to 2022.

        Mortgage-backed securities typically represent a participation interest
in a pool of single-family or multifamily mortgages. The principal and interest
payments on these mortgages are passed from the mortgage originators, through
intermediaries (generally US Government agencies and government-sponsored
enterprises) that pool and resell the participation interests in the form of
securities, to investors such as the Bank. Such US Government agencies and
government sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the FHLMC, FNMA, and the GNMA.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that fall within a specified range and have varying maturity's.
Mortgage-backed securities generally yield less than loans that underlie such
securities because of the cost of payment guarantees and credit enhancements. In
addition, mortgage-backed securities are usually more liquid than individual
mortgage loans and may be used to collateralize certain liabilities and
obligations of the Bank. These types of securities also permit the Bank to
optimize its regulatory capital because they have a low risk weighting.

        REMICs are generally classified as derivative financial instruments
because they are created by redirecting the cash flows from the pool of
mortgages or mortgage-backed securities underlying these securities to create
two or more classes (tranches) with different maturity or risk characteristics
designed to meet a variety of investors needs.

        The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and may result
in a

                                       16
<PAGE>

loss of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and general
levels of market interest rates, the difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Bank may be subject to reinvestment risk because, to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. In contrast to mortgage-backed securities in which cash flow is
received and prepayment risk is shared pro rata by all security holders, the
cash flow from the mortgages underlying REMICs are segmented and paid in
accordance with a predetermined priority to investors holding various tranches
of such securities. A particular tranche of REMICs may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches.

        At December 31, 2000, corporate and municipal bonds included $2.5
million of Merrill Lynch corporate bonds and six Washington State municipal
bonds that are rated AA or better.

        For further information concerning the Bank's investment portfolio,
reference is made to Note 3 and 4 of the Notes to Consolidated Financial
Statements in the Annual Report.



















                                       17
<PAGE>

        The following table sets forth information regarding the Bank's
mortgage-backed securities (including REMICs) activity for the periods
indicated.

<TABLE><CAPTION>
                                                       Years Ended December 31,
                                              -----------------------------------------
                                                2000            1999             1998
                                              --------        --------         --------
                                                           (In Thousands)
<S>                                           <C>             <C>              <C>
Beginning balance ....................        $ 59,595        $ 39,286         $ 23,363

Mortgage-backed securities purchased .          22,038          32,768           29,419

Amortization of premiums and discounts             654            (989)             (20)
Principal repayments .................          (8,942)        (11,470)         (13,476)
                                              --------        --------         --------
     Ending balance ..................        $ 73,345        $ 59,595         $ 39,286
                                              ========        ========         ========
</TABLE>

         The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio at the dates indicated.

<TABLE><CAPTION>
                                                               Years Ended December 31,
                                   --------------------------------------------------------------------------------
                                            2000                         1999                         1998
                                   ---------------------         ---------------------         --------------------

                                                 Percent                       Percent                       Percent
                                    Amount       of Total         Amount       of Total        Amount        of Total
                                   -------        ------         -------        ------         -------        ------
                                                                       (Dollars in Thousands)
<S>                                <C>              <C>          <C>              <C>          <C>             <C>
Mortgage-backed securities:
 FHLMC ....................        $ 1,958          2.67%        $ 2,227          3.74%        $ 4,223         10.75%
 FNMA .....................         69,347         94.55          54,992         92.27          31,916         81.24
 GNMA .....................          1,694          2.31           1,752          2.94           1,996          5.08
 REMICs ...................            346          0.47             624          1.05           1,151          2.93
                                   -------        ------         -------        ------         -------        ------
   Total ..................        $73,345        100.00%        $59,595        100.00%        $39,286        100.00%
                                   =======        ======         =======        ======         =======        ======
</TABLE>

         The following table presents the carrying value of the Bank's
investment securities portfolio. The market value of the Bank's investments in
the table at December 31, 2000, was approximately $123.3 million.

<TABLE><CAPTION>
                                                             At December 31,
                                                ----------------------------------------
                                                  2000            1999            1998
                                                --------        --------        --------
                                                             (In Thousands)
<S>                                             <C>             <C>             <C>
Investment securities:
  U.S. Government and agency obligations        $ 46,666        $ 42,653        $ 39,643
  Corporate and municipals .............           3,644           3,159           3,172
  Mortgage-backed certificates .........          73,345          59,595          39,286
  FNMA Stock ...........................              35              24              30
                                                --------        --------        --------
Total ..................................        $123,690        $105,431        $ 82,131
                                                ========        ========        ========
</TABLE>

                                       18
<PAGE>

           The following table provides the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 2000.

<TABLE><CAPTION>
                                                         One to          One to    Five to        Five to     More            More
                                 One           One        Five            Five       Ten            Ten     than Ten        than Ten
                                 Year         Year       Years           Years      Years          Years      Years           Years
                                 Book         Yield       Book           Yield       Book          Yield       Book           Yield
                               --------        ----     --------          ----     --------         ----     --------          ----
                                                                       (Dollars in Thousands)
<S>                            <C>             <C>      <C>               <C>       <C>             <C>      <C>               <C>
U.S. Agencies and Treasuries.  $   7,996       6.62%    $ 33,672          6.08%     $4,997          6.15%    $      -           -  %
Corporate & Municipals*......         -           -        2,523          6.00           -             -        1,121          5.92
FHLMC Certificates...........         -           -            -             -           -             -        1,949          8.44
FNMA Certificates............         -           -        5,822          5.53      21,016          5.68       42,403          6.78
GNMA Certificates............         -           -            -             -           -             -        1,714          6.50
REMICs-FNMA..................         -           -          235          6.00           -             -          111          6.50
                               --------        ----     --------          ----     --------         ----     --------          ----
Total........................  $  7,996        6.62%    $ 42,252          6.00%    $ 26,013         5.77%    $ 47,298          6.81%
                               ========        ====     ========          ====     ========         ====     ========          ====
</TABLE>

(table continued)

<TABLE><CAPTION>
                                    Total       Total
                                     Book       Market          Yield
                                   --------    --------          ----
                                         (Dollars in Thousands)
<S>                                <C>         <C>               <C>
U.S. Agencies and Treasuries.      $ 46,665    $ 46,570          6.18%
Corporate & Municipals*......         3,644       3,552          5.98
FHLMC Certificates...........         1,949       1,977          8.44
FNMA Certificates............        69,241      69,141          6.34
GNMA Certificates............         1,714       1,694          6.50
REMICs-FNMA..................           346         346          6.16
                                   --------    --------          ----
Total........................      $123,559    $123,280          6.30%
                                   ========    ========          ====
</TABLE>

* Municipal bond yields are not shown on a tax equivalent basis.


                                       19
<PAGE>

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
---------------------------------------------

         GENERAL. Savings accounts and other deposits have traditionally been an
important source of the Bank's funds for use in lending and for other general
business purposes. Over the course of the past year deposits have increased as
compared to 1999 when the Bank experienced a decrease in deposits over the
course of the year. As a result of the current year increase the Bank was able
to pay down its FHLB advances slightly and use deposits to fund loan growth. In
addition to deposit accounts, the Bank derives funds from loan repayments,
interest payments, loan sales, FHLB advances and other borrowings and
operations. The availability of funds from loan sales is influenced by general
interest rates and other market conditions. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows vary widely and are influenced by prevailing interest rates and money
market conditions. Borrowings are used on a short-term basis to compensate for
reductions in deposits or deposit inflows at less than projected levels and are
used on a longer-term basis to support expanded lending activities.

         DEPOSITS. First Mutual offers a number of deposit accounts, including
savings accounts, NOW checking, business checking accounts, money market
accounts and time deposit accounts, ranging in maturity from 30 days to ten
years. Deposit account terms vary with the principal differences being the
minimum balance required, the time period the funds must remain on deposit and
the interest rate.

         JUMBO TIME DEPOSITS. The Bank offers jumbo, mini-jumbo and public funds
mini-jumbo time deposits. These accounts are offered for minimum terms of 30
days and in minimum amounts of $100,000, $50,000, and $20,000, respectively.

         The following table indicates the amount of the Bank's jumbo time
deposits by time remaining until maturity as of December 31, 2000. Jumbo time
deposits require minimum deposits of $100,000, and rates paid on such accounts
are negotiable.

                                                                      Jumbo
     Maturity Period                                              Time Deposits
     ---------------                                              -------------
                                                                  (In Thousands)

      Three months or less...................................       $   28,261
      Four through six months  ..............................           22,561
      Over six through twelve months.........................           52,722
      Over twelve months.....................................           16,423
                                                                   -----------
       Total.................................................        $ 119,967
                                                                     =========

         IRA ACCOUNTS. The Bank offers tax-deferred individual retirement
accounts (IRA). IRA accounts are offered on the same terms as the time deposits
noted below. In addition, the Bank offers a money market account to IRA
customers. The money market IRA requires a minimum balance of $100.






                                       20
<PAGE>

         DEPOSIT FLOWS. The following table sets forth the balance of savings
deposits in the various types of savings accounts offered by the Bank at the
dates indicated.

<TABLE><CAPTION>
                                     Balance at                           Balance at                           Balance at
                                      December     % of      Increase      December     % of      Increase      December     % of
                                      31, 2000    Deposits  (Decrease)     31, 1999   Deposits   (Decrease)     31, 1998   Deposits
                                      --------     -----     --------      --------     -----     --------      --------     -----
                                                                            (Dollars in Thousands)
NOW and Business
<S>                                   <C>            <C>     <C>           <C>            <C>     <C>           <C>            <C>
 Checking Accounts ................   $ 29,083       6.4%    $  4,610      $ 24,473       6.1%    $ (5,057)     $ 29,530       7.2%
Jumbo Time Deposits ...............    119,967      26.2       23,035        96,932      24.2       (1,724)       98,656      24.0
Mini-Jumbo Time Deposits ..........         --        --           --            --        --          (94)           94        --
Super NOW Checking Accounts .......      2,199       0.5          613         1,586       0.4          454         1,132       0.3
Savings Accounts ..................      8,350       1.8       (2,668)       11,018       2.8       (1,229)       12,247       3.0
Money Market Deposit Accounts .....     65,648      14.4       (8,134)       73,782      18.4        5,524        68,258      16.6
3 Months or less Time Deposits ....        928       0.2         (320)        1,248       0.3         (695)        1,943       0.5
4-6 Month Time Deposits ...........     11,095       2.4        4,664         6,431       1.6      (10,936)       17,367       4.2
7 Month-One Year Time Deposits ....    107,106      23.4       32,127        74,979      18.7      (27,185)      102,164      24.8
13 Month-Five Year Time Deposits ..    112,227      24.5        3,631       108,596      27.2       29,986        78,610      19.1
6-10 Year Time Deposits ...........        889       0.2         (240)        1,129       0.3         (121)        1,250       0.3
                                      --------     -----     --------      --------     -----     --------      --------     -----
     Total Deposits ...............   $457,492     100.0%    $ 57,318      $400,174     100.0%    $(11,077)     $411,251     100.0%
                                      ========     =====     ========      ========     =====     ========      ========     =====

IRA/Keogh Accounts ................   $ 24,556       5.4%    $  2,889      $ 21,667       5.4%    $   (704)     $ 22,371       5.4%
                                      ========     =====     ========      ========     =====     ========      ========     =====
</TABLE>

                                       21
<PAGE>

         The following table represents an analysis of the Bank's deposit
accounts by interest rate and maturity ranges at December 31, 2000.

<TABLE><CAPTION>
                                            1 Year to    2 Years to
                               Less Than      Less          Less        5 Years
                                One Year   Than 2 Years Than 5 Years    or more      Total
                                --------     --------     --------     --------     --------
                                                           (In Thousands)
<S>                             <C>          <C>          <C>          <C>          <C>
Less than 4.01% ...........     $ 42,808     $  1,249     $    289     $   --       $ 44,346
4.01 - 5.00% ..............       69,042          142          257            3       69,444
5.01 - 6.00% ..............       60,927        7,532        4,998          137       73,594
6.01 - 8.00% ..............      232,632       34,970        2,208          218      270,028
8.01 - 10.00% .............           80         --           --           --             80
                                --------     --------     --------     --------     --------
Total.....................      $405,489     $ 43,893     $  7,752     $    358     $457,492
                                ========     ========     ========     ========     ========
</TABLE>

       The following table provides the savings activity for the periods
indicated.

                                      Years Ended December 31,
                               --------------------------------------
                                 2000           1999           1998
                               ---------     ---------      ---------
                                           (In Thousands)

Deposits .................     $ 919,230     $ 809,150      $ 650,908
Withdrawals ..............       884,666       838,997        632,287
                               ---------     ---------      ---------

Net Deposits (Withdrawals)
  Before Interest Credited        34,564       (29,847)        18,621
Interest Credited ........        22,754        18,770         19,802
                               ---------     ---------      ---------

Net Increase (Decrease) in

   Deposits ..............     $  57,318     $ (11,077)     $  38,423
                               =========     =========      =========

         For further information concerning the Bank's deposits, reference is
made to Note 9 of the Notes to Consolidated Financial Statements in the Annual
Report.

         BORROWINGS. Deposits are the primary source of funds for First Mutual's
lending and investment activities and for its general business purposes. The
Bank does rely, however, upon advances from the FHLB to supplement its supply of
lendable funds and to meet deposit and withdrawal requirements. The FHLB serves
as the Bank's primary borrowing source. Advances from the FHLB are typically
secured by a portion of the Bank's first mortgage loans and multifamily
permanent loans. At December 31, 2000, First Mutual had advances totaling
$133,035,000 from the FHLB, which mature in 2001 through 2010 at interest rates
ranging from 4.93% to 7.58%.

         The Company relies on borrowings from other banks. Other advances
totaled $250,000 at the end of 2000. For further information on the Company's
borrowings, see Note 10 of the Notes to Consolidated Financial Statements in the
Annual Report.



                                       22
<PAGE>

                                                   Years Ended December 31,
                                          ------------------------------------
                                            2000          1999          1998
                                          --------      --------      --------
                                                     (In Thousands)

FHLB advances .........................   $133,035      $134,237      $ 31,765
                                          ========      ========      ========


FHLB advances:
   Maximum outstanding at any month end   $135,979      $134,237      $ 39,755
   Average outstanding ................    125,639        88,471        33,441
   Weighted average interest rates:
        Annual ........................      6.297%        5.288%        5.798%
        End of Year ...................      6.387%        5.513%        5.236%

Other advances ........................   $    250      $    250          --

         The FHLB functions as a central reserve bank providing credit for
commercial banks, savings banks, savings and loan associations and certain other
member financial institutions. As a member, First Mutual is required to own
capital stock in the FHLB and is authorized to apply for advances on the
security of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States Government) provided
certain standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own interest
rate and range of maturities. Limitations on the amount of advances are based on
the FHLB's assessment of the institution's creditworthiness. Under its current
credit policies, the FHLB has limited advances to First Mutual to 40% of its
assets. At December 31, 2000, the percentage of assets represented by FHLB
borrowings was 21%. See "Regulation and Supervision - Federal Home Loan Bank
System" below.

                           REGULATION AND SUPERVISION

THE BANK

         GENERAL. As a state-chartered, federally-insured financial institution,
the Bank is subject to extensive federal and state regulation. Lending
activities and other investments must comply with various statutory and
regulatory requirements, including prescribed minimum capital standards. First
Mutual is regularly examined by the FDIC (Federal Deposit Insurance Corporation)
and the Department of Financial Institutions of the State of Washington and
files periodic reports concerning the Bank's activities and financial condition
with its federal and state regulators. The Bank's relationship with depositors
and borrowers also is regulated to a great extent by both federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents.

         Federal and state banking laws and regulations govern all areas of the
operation of banks, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.

         DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of depository
institutions. The FDIC administers two separate deposit insurance funds: the
Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The
BIF is a deposit insurance fund for commercial banks and some state-chartered
savings banks, such as First Mutual. The SAIF is a deposit insurance fund for
most savings associations. As an insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.

                                       23
<PAGE>

         The FDIC has established a risk-based system for setting deposit
insurance assessments. Under the risk-based assessment system, an institution's
insurance assessment varies according to the level of capital the institution
holds and the degree to which it is the subject of supervisory concern. In
addition, regardless of the potential risk to the insurance fund, federal law
requires the ratio of reserves to insured deposits at $1.25 per $100. Both funds
currently meet this reserve ratio. During 2000, the assessment rate for both
SAIF and BIF deposits ranged from zero to 0.27% of covered deposits. As a
well-capitalized bank, First Mutual qualified for the lowest rate on its
deposits for 2000.

         In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation (FICO) to service FICO debt incurred in the 1980's to help fund the
thrift industry cleanup. The FICO assessment rate is adjusted quarterly.

         Prior to 2000, the FICO assessment rate for BIF-insured deposits was
one-fifth the rate applicable to deposits insured by the SAIF. Beginning in
2000, SAIF- and BIF-insured deposits were assessed at the same rate by FICO. As
a result, BIF FICO assessments are higher than in previous periods while SAIF
FICO assessments are lower. During 2000, BIF FICO assessment rates ranged from
2.12 cents to 2.02 cents per $100 of insured deposits. For the first quarter of
2001, the annualized rate will be 1.96 cents per $100 of insured deposits.

         Any insured bank, which does not operate in accordance with or conform
to FDIC regulations, policies and directives may be sanctioned for
non-compliance. For example, proceedings may be instituted against any insured
bank or any director, officer, or employee of such bank who engages in unsafe
and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate deposit insurance pursuant
to procedures established for that purpose. Management is not aware of any
existing circumstances that could result in termination of the deposit insurance
for the Bank.

         CAPITAL REQUIREMENTS. FDIC regulations recognize two types or tiers of
capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and non-cumulative
perpetual preferred stock, less most intangible assets. Tier 2 capital, which is
limited to 100 percent of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that may
be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.

         The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total
assets. Most banks are required to maintain a minimum leverage ratio of at least
4% to 5% of total assets. The FDIC retains the right to require a particular
institution to maintain a higher capital level based on an institution's
particular risk profile. Although the Bank is only required to maintain the
minimum capital level, it has set a higher target range of 5.5% to 7.0% for
asset and liability management purposes. First Mutual Bank calculated its
leverage ratio to be 7.2% as of December 31, 2000.

         FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight -- 0%, 20%, 50% or 100% --
based on the relative risk of that category. In addition, certain
off-balance-sheet items are converted to balance sheet credit equivalent
amounts, and each amount is then assigned to one of the four categories. Under
the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital)
to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to
risk-weighted assets must be at least 4%. First Mutual Bank has calculated its
total risk-based ratio to be 11.5% as of December 31, 2000, and its Tier 1
risk-based capital ratio to be 10.3%. In evaluating the adequacy of a bank's
capital, the FDIC may also consider other factors that may affect a bank's
financial condition. Such factors may include interest rate risk exposure,
liquidity, funding and market risks, the quality and level of earnings,
concentration of credit risk, risks arising from nontraditional activities, loan
and investment quality, the effectiveness of loan and investment policies, and
management's ability to monitor and control financial operating risks.

                                       24
<PAGE>

         Federal statutes establish a supervisory framework based on five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An institution's
category depends upon where its capital levels are in relation to relevant
capital measures, which include a risk-based capital measure, a leverage ratio
capital measure, and certain other factors. The federal banking agencies have
adopted regulations that implement this statutory framework. Under these
regulations, an institution is treated as well capitalized if its ratio of total
capital to risk-weighted assets is 10% or more, its ratio of core capital to
risk-weighted assets is 6% or more, its ratio of core capital to adjusted total
assets is 5% or more, and it is not subject to any federal supervisory order or
directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a
leverage ratio of not less than 4%. Any institution which is neither well
capitalized nor adequately capitalized will be considered undercapitalized.

         Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure by
the Bank to comply with applicable capital requirements would, if unremedied,
result in restrictions on its activities and lead to enforcement actions
including, but not limited to, the issuance of a capital directive to ensure the
maintenance of required capital levels. Banking regulators will take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, approval of any regulatory
application filed for their review may be dependent on compliance with capital
requirements.

         First Mutual's management believes that, under the current regulations,
the Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Bank, such as a
downturn in the economy in areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its capital requirements.

         FEDERAL DEPOSIT INSURANCE IMPROVEMENT ACT (FDICIA). First Mutual has
surpassed the $500 million asset threshold, and as such, is required to be
compliant with the FDICIA originally enacted in 1991 and with enhanced
provisions adopted in 1993. In general, FDICIA requires the Bank to conduct an
annual independent audit of its financial statements, appoint an independent
audit committee of outside directors, report on and assess management's
responsibilities for preparing financial statements, and establish an internal
control structure.

         An independent accountant must attest to and report on the assertions
in management's report concerning these internal controls with the desired
outcome of efficient and effective operations; the safeguarding of assets;
reliable financial reporting and compliance with applicable laws and
regulations.

         The FDIC as the primary regulator of the Bank has outlined, in general,
the requirements for compliance with FDICIA, but does not provide specific
guidance on the internal control structure, documentation, or procedures to test
the Bank's effectiveness. It is up to each bank to establish, document and
design procedures to evaluate and test the internal control structure over
financial reporting and compliance with designated laws and regulations that
minimally include loans to insiders and dividend restrictions.

         During 2000, to ensure compliance, a management team was established
that identified and documented existing controls with consideration given to the
Bank's control environment, risk assessment, control activities, information and
communication systems, and monitoring activities. These systems and controls
will be reviewed on a yearly basis in order to comply with the FDICIA
requirements.

         Under FDICIA, the Audit Committee has several responsibilities that
include but are not limited to overseeing the internal audit function;
conducting periodic meetings with management, the independent public accountant,
and the internal auditors; review of significant accounting policies, and audit
conclusions regarding significant accounting estimates; review

                                       25
<PAGE>

of the assessments prepared by management and independent auditor on the
adequacy of internal controls and the resolution of identified material
weaknesses and reportable conditions in internal controls; and the review of
compliance with laws and regulations.

         FEDERAL HOME LOAN BANK SYSTEM. The FHLB of Seattle serves as a reserve
or central bank for the member institutions within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLBs. It makes loans (i.e., advances) to members in accordance with
policies and procedures established by the Federal Housing Finance Board and the
Board of Directors of the FHLB of Seattle. As a member, the Bank is required to
purchase and hold stock in the FHLB of Seattle in an amount equal to the greater
of 1% of their aggregate unpaid home loan balances at the beginning of the year
or an amount equal to 5% of FHLB advances outstanding. As of December 31, 2000,
First Mutual held stock in the FHLB of Seattle in the amount of $7.7 million.
See "Business -- Deposit Activities and Other Sources of Funds -- Borrowings."

         FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires (under
"Regulation D") that all depository institutions, including savings banks,
maintain reserves on transaction accounts or non-personal time deposits. These
reserves may be in the form of cash or non-interest bearing deposits with the
regional Federal Reserve Bank. NOW accounts and other types of accounts that
permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any non-personal time deposits at a savings bank. Under Regulation D, First
Mutual must maintain reserves against net transaction accounts in the amount of
3% on amounts of $44.3 million or less, plus 10% on amounts in excess of $44.3
million. The Bank may designate and exempt $5.0 million of certain reservable
liabilities from these reserve requirements. These amounts and percentages are
subject to adjustment by the Federal Reserve Board. The reserve requirement on
non-personal time deposits with original maturity's of less than 1.5 years is
0%. As of December 31, 2000, the Bank's deposit with the Federal Reserve Bank
and vault cash exceeded the Bank's reserve requirements.

THE COMPANY

         GENERAL. The Company, as the sole shareholder of the Bank is a
financial holding company and is registered as such with the Federal Reserve.
Financial holding companies are subject to comprehensive regulation by the
Federal Reserve under the Bank Holding Company Act of 1956, as amended ("BHCA"),
and the regulations of the Federal Reserve. As a financial holding company, the
Company is required to file with the Federal Reserve annual reports and such
additional information as the Federal Reserve may require and will be subject to
regular examinations by the Federal Reserve. The Federal Reserve also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.

         NEW LEGISLATION. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999, was enacted for the purpose of modernizing the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act:

         1.  repeals the historical restrictions and eliminates many federal and
             state law barriers to affiliations among banks, securities firms,
             insurance companies and other financial service providers;

         2.  provides a uniform framework for the functional regulation of the
             activities of banks, savings institutions and their holding
             companies;

         3.  broadens the activities that may be conducted by national banks,
             banking subsidiaries of bank holding companies and their financial
             subsidiaries;

         4.  provides an enhanced framework for protecting the privacy of
             consumer information;

                                       26
<PAGE>

         5.  adopts a number of provisions related to the capitalization,
             membership, corporate governance and other measures designed to
             modernize the FHLB system;

         6.  modifies the laws governing the implementation of the Community
             Reinvestment Act; and

         7.  addresses a variety of other legal and regulatory issues affecting
             day-to-day operations and long-term activities of financial
             institutions.

         ACQUISITIONS. Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (1) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (2)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (3) merging or consolidating with another bank holding company.

         The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to the
business of banking or managing or controlling banks as to be a proper incident
thereto. The list of activities determined by regulation to be closely related
to banking within the meaning of the BHCA includes, among other things:
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers checks
and U.S. Savings Bonds; real estate and personal property appraising; providing
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.

         INTERSTATE BANKING. The Federal Reserve may approve an application by
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The Federal
Reserve may not approve the acquisition of a bank that has not been in existence
for the minimum time period, not exceeding five years, specified by the
statutory law of the host state. Nor may the Federal Reserve approve an
application if the applicant, and its depository institution affiliates,
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Federal law does not affect
the authority of states to limit the percentage of total insured deposits in the
state which may be held or controlled by a bank holding company to the extent
such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the federal law.

         The Federal banking agencies are authorized to approve interstate
merger transactions without regard to whether such transaction is prohibited by
the law of any state, unless the home state of one of the banks adopted a law
after September 29, 1994 and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. A branch acquired in another state through merger or otherwise may
be subject to conditions imposed by the host state in some circumstances.
Interstate mergers and branch acquisitions will also be subject to the
nationwide and statewide insured deposit concentration amounts described above.

         DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal

                                       27
<PAGE>

Reserve also indicated that it would be inappropriate for a company experiencing
serious financial problems to borrow funds to pay dividends. Furthermore, under
the prompt corrective action regulations adopted by the Federal Reserve, the
Federal Reserve may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized" under
the prompt corrective action regulations.

         STOCK REPURCHASES. Bank holding companies, except for certain
"well-capitalized" and highly rated bank holding companies, are required to give
the Federal Reserve prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of their
consolidated net worth. The Federal Reserve may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve order, or
any condition imposed by, or written agreement with, the Federal Reserve.

         In October 1999, the Company announced a stock repurchase program for
up to 225,000 shares, or approximately 5%, of the Company's outstanding common
stock. Shares may be purchased from time to time depending upon market
conditions, price and other management considerations. In 2000, the Company had
repurchased 10,000 shares. As of March 23, 2001, the Company has not repurchased
any additional shares in 2001.

         CAPITAL REQUIREMENTS. The Federal Reserve has established capital
adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the FDIC for the Bank. In general, total risk-based
capital and primary capital, similar to Tier 1 (core) capital are defined
similarly for state chartered banks with adjustments permitted for certain
intangible assets and perpetual debt instruments. The Federal Reserve
regulations provide that capital standards will be applied on a consolidated
basis in the case of a bank holding company with $150 million or more in total
consolidated assets.

         The Federal Reserve Bank's minimum standard guidelines require the
Company's total risk-based capital to equal 8% of risk-weighted assets. One half
of the 8%, or 4%, must consist of Tier 1 (core) capital. As of December 31,
2000, the Company's total risk-based capital was 11.5% of risk-weighted assets
and its risk-based capital of Tier 1 (core) capital was 10.2% of risk-weighted
assets.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         GENERAL. The Company and its subsidiaries report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company or the Bank.

         BAD DEBT RESERVES. Historically, savings institutions such as the Bank,
which met certain definitional tests primarily related to their assets and the
nature of their businesses, were permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions may, within
specified formula limits, have been deducted in arriving at the Bank's taxable
income. For purposes of computing the deductible addition to its bad debt
reserve, the Bank's loans are separated into "qualifying real property loans"
(i.e., generally those loans secured by interests in residential real property)
and all other loans ("non-qualifying loans"). The following formulas were used
to compute the bad debt deduction with respect to qualifying real property
loans: (i) actual loss experience or (ii) a percentage equal to 8% of taxable
income. The deduction with respect to non-qualifying loans was computed under
the experience method. Reasonable additions to the reserve for losses on
non-qualifying loans were based upon actual loss experience and would reduce the
current year's addition to the reserve for losses on qualifying real property
loans, unless that addition was also determined under the experience method. The
sum of the additions to each reserve for each year was the Bank's annual bad
debt deduction.

         The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad

                                       28
<PAGE>

debt reserves for all financial institutions for tax years beginning after
December 31, 1995. These rules also require that all institutions recapture all
or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the rules
will have no effect on the net income or federal income tax expense. For taxable
years beginning after December 31, 1995, the Bank's bad debt deduction will be
determined on the basis of net charge-offs during the taxable year.

         DISTRIBUTIONS. If a stock institution distributes amounts to
stockholders and the distribution is treated as being from its accumulated bad
debt reserves, the distribution will cause the institution to have additional
taxable income. A distribution to stockholders is deemed to have been made from
accumulated bad debt reserves to the extent that (i) the reserves exceed the
amount that would have been accumulated on the basis of actual loss experience,
and (ii) the distribution is a "non-dividend distribution." A distribution in
respect of stock is a non-dividend distribution to the extent that, for federal
income tax purposes, (i) it is a redemption of shares, (ii) it is pursuant to a
liquidation or partial liquidation of the institution, or (iii) in the case of
current distribution, together with all other such distributions during the
taxable year, it exceeds the institution's current and post-1951 accumulated
earnings and profits. The amount of additional taxable income created by a
non-dividend distribution is an amount that, when reduced by tax attributable to
it, is equal to the amount of the distribution.

         MINIMUM TAX. In addition to regular corporate income tax, corporations
are subject to an alternative minimum tax which generally is equal to 20% of
alternative minimum taxable income (taxable income, increased by tax preference
items and adjusted for certain regular tax items). The preference items which
are generally applicable include an amount equal to 75% of the amount by which a
financial institution's adjusted current earnings (generally alternative minimum
taxable income computed without regard to this preference and prior to reduction
for net operating losses) exceed its alternative minimum taxable income without
regard to this preference and the excess of the institution's bad debt deduction
over the amount deductible under the experience method, as discussed below.
Alternative minimum tax paid can be credited against regular tax due in later
years.

         First Mutual's federal income tax returns have been audited through
1991, and no additional taxes have been assessed.

STATE TAXATION

         The Bank is subject to a business and occupation tax, which is imposed
under Washington law at the rate of 1.5% of gross receipts. However, interest
received on loans secured by first lien mortgages or deeds of trust on
residential properties is not subject to such tax.

         Reference is made to Note 11 of the Notes to Consolidated Financial
Statements in the Annual Report for additional information regarding income
taxes payable by the Bank.

                                       29
<PAGE>

COMPETITION

         The Bank's competition for savings deposits comes from securities
brokerage firms and other financial institutions, many of which have greater
resources than the Bank. In addition, during times of low interest rates the
Bank experiences significant competition for investors' funds from stock and
bond mutual funds that yield total returns higher than those paid by the Bank on
savings deposits.

         The Bank competes for deposits principally by offering depositors a
wide variety of savings programs, convenient branch locations, pre-authorized
payment and withdrawal systems, on-line banking services, tax deferred
retirement programs, and other miscellaneous services.

         The Bank's competition for real estate and other loans comes
principally from mortgage banking companies, savings banks, savings and loan
associations, commercial banks, insurance companies and other institutional
lenders. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. The competition for loans
encountered by the Bank, as well as the types of institutions with which the
Bank competes, varies from time to time depending upon certain factors.
Conditions which affect competition include, among others, the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the mortgage markets and
other factors which are not readily predictable.

EMPLOYEES

         At December 31, 2000, First Mutual employed 124 full-time and 11
part-time employees. First Mutual employees are not represented by any
collective bargaining agreement. Management considers its relations with its
employees to be good.


















                                       30
<PAGE>

ITEM 2. PROPERTIES

         The following table provides the location of the Bank's offices, as
well as certain information relating to these offices.

<TABLE><CAPTION>
                                                                                                           Lease
                                                                Book Value                      --------------------------
                                                    Total         As of                                   Date of
                                                   Cost of       December     Square   Owned/   Initial    Termi-   Renewal
                                  Year Opened       Assets       31, 2000      Feet    Leased    Lease     nation    Terms
                                  -----------       ------       --------      ----    ------   -------    ------    -----
                                                     (Dollars in Thousands)
Branch Locations:
----------------

<S>                               <C>               <C>            <C>        <C>      <C>      <C>        <C>       <C>
Bellevue Office &                 October 1985      $ 1,734        $ 482      19,464   Leased   June 15,   May 31,   One five-
  Administrative Offices                                                                        1985       2007      year option
  400 108th Avenue NE
  Bellevue, WA 98004
  (Originally opened 1952)

Issaquah Office                   December 1977         724          302      2,860    Owned       --         --        --
  855 Rainier Blvd. N.
  Issaquah, WA  98027
  (Originally opened
   November 1965)

Monroe Office                     April 1993          1,541        1,098       5,415   Owned       --         --        --
  19265 State Route 2
  Monroe, WA 98272
  (Originally opened April 1968)

Crossroads Office                 September 1969        431          148       2,972   Owned       --         --        --
  15635 N.E. 8th Street
  Bellevue, WA  98008

Redmond Office                    December 1977       1,239          530       6,474   Owned       --         --        --
  16900 Redmond Way
  Redmond, WA  98052

Ballard Office                    June 1994             184           18       1,700   Leased   March      June      One three-
  2038 N.W. Market St.                                                                          25, 1994   1, 2001   year option
  Seattle, WA  98107

West Seattle Office               July 1996             311           45       2,200   Leased   March      February  Two five-
  4520 California Ave., S.W.                                                                    1, 1996    28, 2001  year options
  Seattle, WA 98116

Bellevue West Office              July 1997           2,700        2,400       9,190   Owned       --         --        --
  10001 NE 8th Street
  Bellevue, WA 98004

Bellingham Branch and Loan Office March 1998            162         68         1,700   Leased   February   February  Three five-
  1100 Harris Street                                                                            14, 1998   14, 2003  year options
  Bellingham, WA 98225

Kirkland Office                   September 2000        571          537       3,800   Leased   September  September Two five-
  278 Central Way                                                                               16, 1999   16, 2009  year options
  Kirkland, WA 98033
</TABLE>

(table continued on following page)

                                       31
<PAGE>
<TABLE><CAPTION>
                                                                                                           Lease
                                                                Book Value                      --------------------------
                                                    Total         As of                                   Date of
                                                   Cost of       December     Square   Owned/   Initial    Termi-   Renewal
                                  Year Opened       Assets       31, 2000      Feet    Leased    Lease     nation    Terms
                                  -----------       ------       --------      ----    ------   -------    ------    -----
                                                     (Dollars in Thousands)

Loan Production Office:
-----------------------
<S>                               <C>               <C>            <C>        <C>      <C>      <C>        <C>       <C>
Tacoma Loan Office                January 1999           11            2         300   Leased   January    December  Month to month
  2323 N 31st St., Suite 200                                                                    1, 1999    31, 2001  after initial
  Tacoma, WA 98403                                                                                                   term
  (Originally opened October 1996)

</TABLE>

         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. 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. 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. 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.



                                       32
<PAGE>

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.  SELECTED FINANCIAL DATA
-------  -----------------------

         The information contained in the section captioned "Selected Financial
Data" in the Annual Report is incorporated herein by reference.

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.  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. 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. 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. 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.



                                       33
<PAGE>

<TABLE><CAPTION>
                        Age at                                  Position
                        December     -------------------------------------------------------------------------------
Name                    31, 2000         Company                                 Bank
----                    --------         -------                                 ----

<S>                       <C>        <C>                                 <C>
John R. Valaas            56         President and Chief Executive       President and Chief Executive
                                     Officer                             Officer

Roger A. Mandery          58         Executive Vice President and        Executive Vice President - Chief Financial
                                     Treasurer                           Officer, Treasurer and Assistant Secretary

James R. Boudreau         53         Executive Vice President            Executive Vice President - Chief Credit
                                                                         Officer

Kenneth J. Walkky         52                                             Vice President - Income Property
                                                                         Production Manager

Kari Stenslie             36         Vice President - Controller         Vice President - Controller

Robin R. Carey            43                                             Senior Vice President - Operations and
                                                                         Administration

Scott Harlan              39                                             Senior  Vice  President -  Residential  and
                                                                         Consumer Lending Operations

Ronald P. Werth           53                                             Vice President - Business Banking Manager
</TABLE>

         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

                                       34
<PAGE>

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.  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.  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.  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.  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.

                                       35
<PAGE>

(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.


                                       36
<PAGE>

                                   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.

<TABLE><CAPTION>
<S>                                                           <C>
                                                              FIRST MUTUAL BANCSHARES, INC.

DATE:  March 23, 2001                                         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 20, 2001                                         Date:  March 20, 2001

By: /s/ Kari A. Stenslie                                      By: /s/ George W. Rowley, Jr.
    -----------------------------------------------               --------------------------------------------
     Kari A. Stenslie                                              George W. Rowley, Jr.
     Principal Accounting Officer                                  Director

Date:  March 20, 2001                                         Date:  March 20, 2001

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 20, 2001                                         Date:  March 20, 2001

By:  /s/ James J. Doud, Jr.                                   By: /s/ John R. Valaas
     ----------------------------------------------               -----------------------------------------------
     James J. Doud, Jr.                                            John R. Valaas
     Director                                                      Director

Date:  March 20, 2001                                         Date:  March 20, 2001

By:  /s/ Mary Case Dunnam                                     By: /s/ H. Scott Wallace
     ----------------------------------------------               -----------------------------------------------

     Mary Case Dunnam                                              H. Scott Wallace
     Director                                                      Director

Date:  March 20 , 2001                                        Date:  March 20, 2001

By:  /w Janine Florence                                       By: /s/ Robert C. Wallace
     ----------------------------------------------               -----------------------------------------------
     Janine Florence                                               Robert C. Wallace
     Director                                                      Director

Date:  March 20, 2001                                         Date:  March 20, 2001
</TABLE>



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