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| FFNW > SEC Filings for FFNW > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Forward-looking statements:
Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding ours mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Office of Thrift Supervision and our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2008. Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.
First Savings Bank is a community-based savings bank primarily serving King and, to a lesser extent, Pierce, Snohomish and Kitsap counties, Washington through our full-service banking office located in Renton, Washington. Our business strategy has included an emphasis on one-to-four family residential mortgage and commercial real estate lending. In the past, we had also included construction/land development lending in our business strategy. We have deemphasized this type of lending over the past 12 to 18 months as a result of market conditions. First Savings Bank's business consists of attracting deposits from the public and utilizing these funds to originate one-to-four family, multifamily, construction/land development, commercial real estate, business and consumer loans.
Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.
An offset to net interest income is the provision for loan losses which represents the quarterly charge to operations which is required to adequately provide for probable losses inherent in the loan portfolio.
Our operating expenses consist primarily of salaries and employee benefits, occupancy and equipment, data processing, marketing, postage and supplies, professional services and deposit insurance premiums. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement benefits, the equity incentive plan and other employee benefits. Occupancy and equipment expenses, consist primarily of real estate taxes, depreciation charges, maintenance and costs of utilities.
We incurred a net loss for the second quarter ended June 30, 2009 of $28.0 million, or $1.49 per diluted share, as compared to net income of $2.2 million, or $0.10 per diluted share for the quarter ended June 30, 2008.
During the quarter ended June 30, 2009, the following items contributed to our net loss:
· We increased the provision for loan losses to $18.3 million;
· Goodwill impairment totaling $14.2 million was written-off;
· The remaining book value of $983,000 related to the building that housed our lending division was expensed, as a new facility is being built;
· A special assessment was levied on all financial institutions for deposit insurance by the FDIC, our portion totaled $559,000; and
· We incurred an other-than-temporary impairment ("OTTI") loss on the AMF Ultra Short Mortgage Fund totaling $152,000.
These items also contributed to a net loss for the first half of 2009 of $26.8 million, or $1.41 per diluted share, as compared to net income of $6.7 million, or $0.32 per diluted share for the first six months of 2008.
During the quarter ended June 30, 2009, our total gross loan portfolio increased $1.5 million or 0.1% from March 31, 2009. For the quarter ended June 30, 2009, our one-to-four family residential loans decreased $1.7 million or 0.3%, multifamily loans increased $5.8 million or 5.6% and commercial real estate loans increased $13.7 million or 5.3%. In addition, consumer loans increased $3.5 million or 26.7% and construction/land development loans decreased $20.0 million or 8.3%. We also originated our first business line of credit for $251,000.
For the six months ended June 30, 2009, our total gross loan portfolio decreased $13.7 million or 1.2% from December 31, 2008. For the first half of 2009, our one-to-four family residential loans decreased $9.5 million or 1.9%, multifamily loans increased $8.7 million or 8.7% and commercial real estate loans increased $12.9 million or 4.9%. In addition, consumer loans increased $3.6 million or 28.1% and construction/land development loans decreased $29.6 million or 11.9% while business loans increased $251,000.
June 30, 2009 December 31, 2008
Aggregate Amount Number Aggregate Amount Number
of
Borrower of Loans (1) Loans of Loans (1) of Loans
Real estate builder $ 48.5 million 138 $ 47.3 million 131
Real estate builder 38.4 million 131 37.2 million 132
Real estate builder 28.7 million 113 29.0 million 103
million
Real estate builder 20.5 (2) 83 25.2 million (4) 88
million
Real estate builder 19.1 (3) 98 19.1 million (5) 100
Total $ 155.2 million $ 157.8 million
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(1) Net of undisbursed funds.
(2) Of this amount, $16.1 million is considered impaired and
nonperforming.
(3) Of this amount, $7.3 million is considered impaired and
nonperforming.
(4) Of this amount, $20.8 million is considered impaired and
nonperforming.
(5) Of this amount, $7.7 million is considered impaired and
nonperforming.
All of the loans to these five builders have personal guarantees in place as an additional source of repayment, including those made to partnerships and corporations and we are in the first lien position. All of the properties securing these loans are in our geographic market area.
The following table details the breakdown of the types of loans to our top five builder relationships at June 30, 2009 and December 31, 2008:
Top Five Builder Relationships
June 30, 2009
Permanent Permanent Permanent
One-to-Four Family Multifamily Commercial
Residential Loans Loans Loans Construction/ Aggregate Amount
Borrower (Rental Properties) (Rental Properties) (Rental Properties) Land Development (1) of Loans (1)
Real estate
builder $ 17.8 million $ - $ 0.3 million $ 30.4 million $ 48.5 million
Real estate
builder 23.8 million - 0.8 million 13.8 million 38.4 million
Real estate
builder 18.1 million 1.1 million 0.1 million 9.4 million 28.7 million
Real estate
builder 12.6 million - - 7.9 million 20.5 million
Real estate
builder 11.8 million - - 7.3 million 19.1 million
Total $ 84.1 million $ 1.1 million $ 1.2 million $ 68.8 million $ 155.2 million
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(1) Net of undisbursed funds.
Top Five Builder Relationships
December 31, 2008
Permanent Permanent Permanent
One-to-Four Family Multifamily Commercial
Residential Loans Loans Loans Construction/ Aggregate Amount
Borrower (Rental Properties) (Rental Properties) (Rental Properties) Land Development (1) of Loans (1)
Real estate
builder $ 15.6 million $ - $ 0.3 million $ 31.4 million $ 47.3 million
Real estate
builder 20.2 million - 0.9 million 16.1 million 37.2 million
Real estate
builder 17.4 million 1.1 million 0.1 million 10.4 million 29.0 million
Real estate
builder 13.5 million - - 11.7 million 25.2 million
Real estate
builder 6.8 million - - 12.3 million 19.1 million
Total $ 73.5 million $ 1.1 million $ 1.3 million $ 81.9 million $ 157.8 million
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(1) Net of undisbursed funds.
The builders listed in the above tables, as part of their business strategy, retain a certain percentage of their finished homes in their own inventory of permanent investment properties, (i.e. one-to-four family rental properties). These properties are used to enhance the builders' liquidity through rental income and improve their equity through the appreciation in market value of the property. As part of our underwriting process we review the borrowers' business strategy to determine the feasibility of the project. Although this strategy has been included in these builders' business plans prior to the current economic crisis, these builders have taken more rental properties into their portfolio in the last 18 months than originally planned as a result of the sluggish housing market. While we do not allow all of our builder loan customers to expand their rental pools, we have offered this program to a limited number of builders based upon such factors as financial strength, collateral value and their proven historical ability to work through difficult financial times. In the aggregate, these five builders' one-to-four family residential rental property portfolios have increased $10.6 million as compared to December 31, 2008.
The following table includes construction/land development loans, net of undisbursed funds, by the five counties that contain our largest loan concentrations at June 30, 2009.
County Loan Balance (1) Percent of Loan Balance (1)
(Dollars in thousands)
King $ 73,935 42.8 %
Pierce 39,431 22.8
Kitsap 18,039 10.5
Snohomish 12,926 7.5
Whatcom 11,648 6.8
All other counties 16,613 9.6
Total $ 172,592 100.0 %
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(1) Net of undisbursed funds.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. The following are our critical accounting policies.
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our methodology for analyzing the allowance for loan losses consists of two components: formula and specific allowances. The formula allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, the prevailing economy, borrower's ability to repay, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, management's experience level, our loan review and grading system, the value of underlying collateral, the level of problem loans, business conditions and credit concentrations in assessing the allowance for loan losses. The specific allowance
Our Board of Directors approves the provision for loan losses on a quarterly basis. The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the amount of actual loan charge-offs, net of recoveries.
We believe that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period-to-period requiring management to make assumptions about probable losses inherent in the loan portfolio; and the impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. For additional information see the section titled "We may be required to make further increases in our provision for loan losses and to charge-off additional loans in the future, which could adversely affect our results of operations," within the section titled "Item 1A. Risk Factors" in this Form 10-Q.
Goodwill. Goodwill represents the cost in excess of net assets acquired arising from the purchase of Executive House, Inc. in December 2005. Goodwill is not amortized, but is reviewed for impairment and written down and charged to expense during the periods in which the recorded value is more than its fair value. Annually or more often if appropriate, we engage an independent valuation consulting firm to assist us in determining whether and to what extent our goodwill asset is impaired. Generally Accepted Accounting Principles, with respect to goodwill, requires that we compare the implied fair value of goodwill to the carrying amount of goodwill on our balance sheet. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. The estimated fair value of the Company is allocated to all of the Company's individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. As a result of the Company's market capitalization being less than our total stockholders' equity at June 30, 2009 and the significant increase in the second quarter ended June 30, 2009 of our provision for loan losses, we engaged the independent valuation consulting firm to assist us in determining whether and to what extent our goodwill asset was impaired. Based on that valuation analysis, we recorded a $14.2 million impairment charge which eliminated all of the goodwill previously carried in our Consolidated Balance Sheet. An impairment charge has no effect on our cash balances or liquidity. In addition, goodwill is not included in regulatory capital for the purpose of calculating the Bank's regulatory capital ratios.
Deferred Taxes. Deferred tax assets arise from a variety of sources, the most significant being: a) expenses, such as our charitable contribution to the First Financial Northwest Foundation, that can be carried forward to be utilized against profits in future years; b) expenses recognized in our books but disallowed in our tax return until the associated cash flow occurs; and c) write-downs in the value of assets for book purposes that are not deductible for tax purposes until the asset is sold or deemed worthless.
We record a valuation allowance to reduce our deferred tax assets to the amount which can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management's assessment of our historic and future profitability profile. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where income is less than projected or recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future tax capacity.
Comparison of Financial Condition at June 30, 2009 and December 31, 2008
General. Our total assets increased $53.7 million, or 4.3%, to $1.3 billion at June 30, 2009 from December 31, 2008. The asset growth resulted primarily from an increase of $49.4 million in, interest-bearing deposits and a $23.3 million increase in investment securities, partially offset by a $9.9 million decline in loans receivable, net and a $14.2 million non-cash impairment charge for goodwill. Total liabilities increased $90.0 million to $1.0 billion at June 30, 2009 from $954.3 million at December 31, 2008 primarily as a result of increases in deposits of $92.7 million. Stockholders' equity decreased $36.3 million, primarily due to the net loss for the six months ended June 30, 2009 of $26.8 million, the cost for the repurchase of our stock of $7.7 million and cash dividends paid during the first half of 2009 of $3.3 million.
Assets. Total assets increased $53.7 million or 4.3% at June 30, 2009, as compared to December 31, 2008. The following table details the changes in the composition of our assets.
Increase/(Decrease)
Balance at from Percentage
June 30, 2009 December 31, 2008 Increase/(Decrease)
(Dollars in thousands)
Cash on hand and in banks $ 3,105 $ (261) (7.75) %
Interest-bearing deposits 49,975 49,375 8,229.17
Federal funds sold 2,295 505 28.21
Investments available for sale 172,586 23,263 15.58
Loans receivable, net 1,025,324 (9,857) (0.95)
Premises and equipment, net 13,713 687 5.27
Federal Home Loan Bank
stock, at cost 7,413 - -
Accrued interest receivable 5,387 (145) (2.62)
Deferred tax assets, net 15,039 5,773 62.30
Goodwill - (14,206) (100.00)
Prepaid expenses and other assets 3,279 (1,458) (30.78)
Total assets $ 1,298,116 $ 53,676 4.31 %
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