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FFNW > SEC Filings for FFNW > Form 10-Q on 8-May-2014All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our 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 affected 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 Federal Reserve Bank of San Francisco and our bank subsidiary by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institutions, Division of Banks ("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; our ability to pay dividends on our common stock; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the 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; costs and effects of litigation, including settlements and judgments; 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, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act") and the implementing regulations; 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 filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Form 10-K"). 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 wholly-owned subsidiary of First Financial Northwest and, as such, comprises substantially all of the activity for First Financial Northwest. 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. First Savings Bank's business consists of attracting deposits from the public and utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land development, business and consumer loans. Our current business strategy emphasizes one-to-four family residential, multifamily and commercial real estate lending.

Our primary source of revenue 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 periodic charge to operations which is required to adequately provide for probable losses inherent in our loan portfolio.

Our noninterest expenses consist primarily of salaries and employee benefits, occupancy and equipment, data processing, OREO-related expenses, professional fees, regulatory assessments and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for retirement

and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of real estate taxes, depreciation expenses, maintenance and costs of utilities. OREO-related expenses consist primarily of maintenance and costs of utilities for the OREO inventory, market valuation adjustments, build-out expenses, gains and losses from OREO sales, legal fees, real estate taxes and insurance related to the properties included in the OREO inventory.

Net income for the three months ended March 31, 2014 was $2.6 million, or $0.17 per diluted share, as compared to net income of $1.6 million, or $0.09 per diluted share for the three months ended March 31, 2013. The change in operating results in the first quarter of 2014, as compared to the first quarter of 2013, was primarily the result of a $1.4 million decrease in noninterest expense, a $665,000 increase in net interest income, a $500,000 recapture of loan loss provision partially offset by a $1.4 million increase in the federal income tax provision.

During the three months ended March 31, 2014, our total loan portfolio increased $8.7 million, or 1.3% from December 31, 2013, due primarily to a $6.0 million, or 2.4% increase in commercial real estate loans, a $3.5 million, or 2.9% increase in multifamily loans and a $2.1 million, or 6.8% increase in construction/land development loans partially offset by a $1.4 million, or 0.5% decrease in one-to-four family residential loans.

The following table details our five largest lending relationships at March 31, 2014:

                                  Residential                         Commercial Real                                  Aggregate
                   Number of        (Rental                           Estate (Rental         Construction/Land      Balance of Loans
 Borrower (1)        Loans        Properties)       Multifamily         Properties)             Development               (2)
                                                                           (In thousands)
Real estate
investor                  3     $           -     $           -     $          18,321     $                   -     $       18,321
Real estate
builder                  63            15,200                 -                     -                     2,756             17,956
Real estate
builder (3)              91            14,161                 -                   212                         -             14,373
Real estate
investor                 34             8,464             3,951                 1,689                         -             14,104
Real estate
investor                  2                 -                 -                13,636                         -             13,636
Total                   193     $      37,825     $       3,951     $          33,858     $               2,756     $       78,390


(1) The composition of borrowers represented in the table may change between periods.

(2) Net of LIP.

(3) Of this amount, $13.2 million were considered impaired loans; and all of these loans were performing and consisted of one-to-four family residential loans.

These relationships, which represent 11.4% of our loans, net of undisbursed funds, decreased $1.2 million from December 31, 2013. All five borrowers were current on their loan payments at March 31, 2014. We monitor the performance of these borrowing relationships very closely due to the concentration risk they possess in relation to the entire loan portfolio.

Critical Accounting Policies

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern the allowance for loan and lease losses ("ALLL"), the valuation of OREO and foreclosed assets, and the calculation of deferred taxes, fair values and other-than-temporary impairments on the market value of investments. These policies and estimates are described in further detail in

Part II, Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 1, Summary of Significant Accounting Policies with the 2013 Form 10-K. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the Company's 2013 Form 10-K

Comparison of Financial Condition at March 31, 2014 and December 31, 2013


Assets. Total assets were $901.5 million at March 31, 2014, a decrease of $19.5
million, or 2.1% from $921.0 million at December 31, 2013. The following table
details the changes in the composition of our assets at March 31, 2014 from
December 31, 2013.
                                          Balance at        Increase/(Decrease) from             Percent
                                        March 31, 2014          December 31, 2013          Increase/(Decrease)
                                                                (Dollars in thousands)
Cash on hand and in
banks                                 $          5,440     $                (634 )                (10.4 )%
deposits                                        28,073                   (21,428 )                (43.3 )
Investments available-for-sale, at
fair value                                     139,868                    (4,496 )                 (3.1 )
Loans receivable,
net                                            671,848                     8,695                    1.3
Premises and equipment, net                     17,139                      (152 )                 (0.9 )
FHLB stock, at cost                              6,952                       (65 )                 (0.9 )
Accrued interest receivable                      3,509                      (189 )                 (5.1 )
Deferred tax assets, net                        13,124                    (1,711 )                (11.5 )
OREO                                            11,609                       144                    1.3
Prepaid expenses and other assets                3,917                       336                    9.4
Total assets                          $        901,479     $             (19,500 )                 (2.1 )%

Interest-earning deposits decreased $21.4 million to $28.1 million at March 31, 2014, from $49.5 million at December 31, 2013 to fund the decline in customer deposits. Investments available-for-sale decreased $4.5 million, or 3.1% to $139.9 million at March 31, 2014, from $144.4 million at December 31, 2013, primarily due to the principal repayment of $5.0 million of mortgage-backed securities. Net loans receivable increased $8.7 million to $671.8 million at March 31, 2014 from December 31, 2013. Loan originations for the quarter were $38.9 million, of which $10.3 million and $13.2 million were in one-to-four family residential and commercial real estate loans, respectively. Principal repayments for the loan portfolio during the quarter were $30.5 million and loans transferred to OREO were $1.2 million. OREO increased $144,000 or 1.3% to $11.6 million at March 31, 2014, from $11.5 million at December 31, 2013 as more loans became OREO than OREO properties that were sold.

Deposits. During the first three months of 2014, deposits decreased $25.0 million to $587.0 million at March 31, 2014, compared to $612.1 million at December 31, 2013. Deposit accounts consisted of the following:

                                     Balance at March       Increase/ (Decrease)             Percent
                                         31, 2014          from December 31, 2013      Increase/(Decrease)
                                                             (Dollars in thousands)
Noninterest-bearing                 $           8,810     $           (1,809 )                (17.0 )%
NOW                                            21,238                 (4,233 )                (16.6 )
Statement savings                              22,178                  1,782                    8.7
Money market                                  136,857                 (8,315 )                 (5.7 )
Certificates of deposit                       397,964                (12,443 )                 (3.0 )
                                    $         587,047     $          (25,018 )                 (4.1 )%

Statement savings increased by $1.8 million during the first quarter of 2014 offset by decreases of $1.8 million, $4.2 million, $8.3 million and $12.4 million in noninterest-bearing, NOW, money market accounts and certificates of deposit, respectively. The decrease in certificates of deposit and money market accounts was primarily the result of our strategy to utilize our excess liquidity, mainly cash, to reduce higher-cost deposits by competing less aggressively on deposit interest rates. We believe customers who were more interest rate sensitive elected to withdraw their funds to invest in higher yielding investment products, which contributed to the decline in our deposit balances. Included in the certificates of deposit balance at March 31, 2014 was $10.8 million in public funds. We did not have any brokered deposits at March 31, 2014 or December 31, 2013.

Advances. We use advances from the FHLB as an alternative funding source to manage funding costs, reduce interest rate risk and to leverage our balance sheet. Total FHLB advances at March 31, 2014 were $119.0 million, unchanged from December 31, 2013.

Stockholders' Equity. Total stockholders' equity increased $3.5 million, or 1.9% to $187.8 million at March 31, 2014 from $184.4 million at December 31, 2013. The increase was primarily the result of net income of $2.6 million generated during the first quarter ended March 31, 2014 and an improvement of $1.2 million in other comprehensive income from unrealized holding gains on available-for-sale securities.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

Net Interest Income. Net interest income for the quarter ended March 31, 2014 increased $665,000 before provision to $8.1 million, as compared to $7.4 million for the same quarter in 2013. The increase was attributable to an increase of $114,000 in interest income and a decrease of $551,000 in interest expense. Average interest-earning assets increased $9.7 million to $852.8 million for the three months ended March 31, 2014, from the same quarter in 2013 primarily due to an increase in our net loans receivable. Average interest-bearing liabilities increased $16.6 million to $705.2 million for the first quarter of 2014 compared to the first quarter of 2013, primarily due to an increase in our FHLB borrowings. During the same period, our yield on interest-earning assets did not change while our cost of funds decreased 34 basis points. Our interest rate spread for the quarter ended March 31, 2014 increased 34 basis points to 3.62% compared to 3.28% for the first quarter of 2013. Our net interest margin for the first quarter of 2014 increased 27 basis points to 3.78% from 3.51% for the same quarter last year.

The following table sets forth the effects of changes in rates and volumes on our net interest income:

                                              Three Months Ended March 31, 2014 Compared to March 31, 2013 Increase/(Decrease) Due to
                                                      Rate                          Volume                             Total
                                                                               (Dollars in thousands)
Interest-earning assets:
  Loan receivable, net                       $           (324 )           $                 306             $                 (18 )
  Investments available-for-sale                          157                               (26 )                             131
  Interest-earning deposits                                (1 )                               -                                (1 )
  FHLB stock                                                2                                 -                                 2
Total net change in income on
interest-earning assets                                  (166 )                             280                               114

Interest-bearing liabilities:
  NOW                                                      (1 )                               3                                 2
  Statement savings                                        (2 )                               1                                (1 )
  Money market                                            (14 )                             (11 )                             (25 )
  Certificates of deposit                                (306 )                            (216 )                            (522 )
  Advances from the FHLB                                 (450 )                             445                                (5 )
Total net change in expense on
interest-bearing liabilities                             (773 )                             222                              (551 )
Net change in net interest income            $            607             $                  58             $                 665

Interest Income. Total interest income for the first quarter of 2014 increased $114,000, or 1.2% to $9.7 million from $9.5 million, as compared to the first quarter of 2013.

The following table compares detailed average interest-earning asset balances, associated yields and resulting changes in interest and dividend income for the three months ended March 31, 2014 and 2013:

                                                             Three Months Ended March 31,

                                             2014                          2013               Increase/(Decrease) in
                                     Average                       Average                    Interest and Dividend
                                     Balance         Yield         Balance         Yield              Income
                                                                (Dollars in thousands)
Loans receivable,
net                               $   670,311          5.39 %   $   650,955          5.56 %   $             (18 )
Investments available-for-sale        142,473          1.70         151,013          1.25                   131
deposits                               33,063          0.24          33,880          0.25                    (1 )
FHLB stock                              7,001          0.10           7,271             -                     2
Total interest-earning
assets                            $   852,848          4.53 %   $   843,119          4.53 %   $             114

Interest income from net loans receivable declined $18,000 and remained at $9.0 million during the first three months of 2014, as compared to the same period in 2013. The slight decline was due to a 17 basis point decrease in the average loan yield from the comparable quarter in 2013 offsetting a $19.4 million increase in the average loan balance to $670.3 million at March 31, 2014.

Interest income from investments available-for-sale increased $131,000 to $604,000 for the three months ended March 31, 2014, as compared to $473,000 for the comparable period in 2013. The primary reason for this increase was a 45 basis points increase in the average investment yield, resulting in a $157,000 increase in interest income, reflecting adjustable rate mortgage backed securities trending upwards over the last year. This change was partially offset by a $26,000 decrease in interest income due to a $8.5 million decrease in the average balance of investments.

Interest Expense. Total interest expense for the three months ended March 31, 2014 was $1.6 million, a decrease of $551,000 compared to $2.1 million for the first quarter of 2013.

The following table details average balances, cost of funds and the resulting decrease in interest expense for the three months ended March 31, 2014 and 2013:

                                                           Three Months Ended March 31,
                                                 2014                       2013              (Decrease) in
                                         Average                    Average                     Interest
                                         Balance        Cost        Balance        Cost          Expense
                                                              (Dollars in thousands)
NOW                                    $  22,009         0.14 %   $  16,455         0.15 %   $           2
savings                                   22,349         0.13        18,304         0.20                (1 )
Money market                             138,161         0.18       158,468         0.22               (25 )
Certificates of
deposit                                  403,652         1.26       458,348         1.56              (522 )
Advances from the
FHLB                                     119,000         0.84        37,007         2.77                (5 )
Total interest-bearing
liabilities                            $ 705,171         0.91 %   $ 688,582         1.25 %   $        (551 )

Interest expense on our certificates of deposit accounts decreased $522,000, due to the $54.7 million decline in the average balance of certificates of deposit and a 30 basis point reduction in our cost of certificates for the first quarter of 2014, as compared to the first quarter of 2013. Interest expense on our money market accounts decreased $25,000, primarily as a result of a decrease in the average cost of these funds of four basis points, or $14,000 to 0.18% from 0.22%. Interest expense related to our FHLB advances decreased $5,000, primarily as a result of the 193 basis points decrease in our average cost of funds for FHLB advances to 0.84% at March 31, 2014 from 2.77% at March 31, 2013 being mostly offset by an increase of $82.0 million in the average balance of our advances to $119.0 million for the first quarter of 2014, as compared to $37.0 million during the quarter ended March 31, 2013.

Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL 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 ALLL consists of two components: general and specific allowances. The general 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 . . .

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