First Washington Financial (FWFC) 10QSB 2004 Q3 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

______________________

FORM 10-QSB

(Mark One)
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

 or

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

For the transition period from _______________________ to _____________________

Commission file number 0-32949

FIRST WASHINGTON FINANCIALCORP
(Exact name of Registrant as Specified in Its Charter)

NEW JERSEY
(State or other jurisdiction of incorporation or organization)

52-2150671
(I.R.S. Employer Identification Number)

US ROUTE 130 & MAIN STREET
WINDSOR, NEW JERSEY 08561
(Address of Principal Executive Offices)

(609) 426-1000
(Issuer’s Telephone Number, including area code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 and 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___

Indicate by check mark whether the registrant (1) is an accelerated filer (as defined in rule 12(b)-2 of the Securities and Exchange Act of 1934). Yes __  No   X  

As of November 10, 2004 there were 4,254,533 shares of common stock, no par value, outstanding.

FORM 10-QSB

INDEX

Part I.	Financial Information	Page(s)
Item 1.	Financial Statements
	Consolidated Balance Sheet– at September 30,2004 (unaudited) and December 31, 2003	1
	Consolidated Income Statement (unaudited) – Three and nine months ended September 30, 2004 and 2003	2
	Changes in Shareholders’ Equity (unaudited) – Three and nine months ended September 30, 2004	3
	Consolidated Statement of Cash Flows (unaudited) – Three and nine months ended September 30, 2004 and 2003	4-5
	Notes to Consolidated Financial Statements (unaudited)	6-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-19
Item 3.	Controls and Procedures	20
Part II.	Other Information
	Item 1. Legal Proceedings	23
	Item 2. Changes in Securities and Small Business Issuer Purchaser of Equity Securities	23
	Item 3. Defaults Upon Senior Securities	23
	Item 4. Submission of Matters to a Vote of Security Holders	23
	Item 5. Other Information	23
	Item 6. Exhibits	23
	Signature Page	24
	Exhibit 31.1 – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	25-26
	Exhibit 31.2 – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	27-28
	Exhibit 32.0 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	29-30

FIRST WASHINGTON FINANCIALCORP
Consolidated Balance Sheets

		September 30, 2004		December 31, 2003
		(unaudited)
ASSETS
Cash and due from banks	$	14,248,743	$	12,951,567
Federal funds sold		18,370,000		9,700,000
Total cash and cash equivalents		32,618,743		22,651,567
Investment securities available-for-sale		125,420,807		123,798,831
Mortgage-backed securities available-for-sale		89,941,723		83,239,611
Loans, net		224,849,784		204,364,510
Premises and equipment, net		9,206,392		7,077,023
Accrued interest receivable		2,232,633		2,295,853
Other assets		2,046,910		2,688,684
Total assets	$	486,316,992	$	446,116,079
LIABILITIES
Deposits
Non-interest bearing – demand	$	73,876,907	$	66,846,532
Interest bearing – demand		58,187,337		45,819,537
Savings and money market		63,449,381		61,756,988
Certificates of deposit, under $100,000		210,512,116		197,759,240
Certificates of deposit, $100,000 and over		12,743,989		12,849,404
Total deposits		418,769,730		385,031,701
Securities sold under agreements to repurchase		18,162,498		15,860,269
FHLB advances		11,000,000		10,000,000
Accrued interest payable		302,004		277,879
Other liabilities		1,079,336		1,032,480
Total other liabilities		30,543,838		27,170,628
Total liabilities		449,313,568		412,202,329
SHAREHOLDERS' EQUITY
Common stock – authorized, 10,000,000 shares of no par value; 4,253,741 and 4,235,888
issued and outstanding at September 30, 2004 and December 31, 2003, respectively		29,722,471		29,499,347
Retained earnings		6,726,913		3,020,428
Accumulated other comprehensive income		554,040		1,393,975
Total shareholders’ equity		37,003,424		33,913,750
Total liabilities and shareholders’ equity	$	486,316,992	$	446,116,079

The accompanying notes are an integral part of these statements.

1

FIRST WASHINGTON FINANCIALCORP
Consolidated Statements of Income
(unaudited)

		For the three months ended September 30,				For the nine months ended September 30,
		2004		2003		2004		2003
INTEREST INCOME
Loans, including fees	$	3,764,781	$	3,525,459	$	10,912,191	$	10,498,637
Investment and mortgage-backed securities
Taxable securities		1,130,981		897,569		3,349,562		2,928,016
Tax exempt securities		653,662		606,591		1,974,035		1,656,715
Federal funds sold		47,484		42,510		95,903		151,754
Total interest income		5,596,908		5,072,129		16,331,691		15,235,122
INTEREST EXPENSE
Deposits		1,385,305		1,349,762		4,113,338		4,217,949
Borrowed funds		101,454		85,882		298,206		278,598
Total interest expense		1,486,759		1,435,644		4,411,544		4,496,547
Net interest income		4,110,149		3,636,485		11,920,147		10,738,575
PROVISION FOR LOAN LOSSES		150,000		60,000		150,000		240,000
Net interest income after provision for loan losses		3,960,149		3,576,485		11,770,147		10,498,575
NON-INTEREST INCOME
Service fees on deposit accounts		384,094		336,022		967,733		1,042,583
Other service charges and fees		40,281		28,230		109,078		111,106
Net gains on sale of investment and mortgage-backed
securities		500,071		—		811,947		301,378
Fee income on sales of mortgages		84,440		311,029		232,110		774,324
Other		53,486		89,725		144,703		176,935
Total non-interest income		1,062,372		765,006		2,265,571		2,406,326
NON-INTEREST EXPENSE
Salaries		1,333,181		1,312,711		3,988,498		3,714,311
Employee benefits		279,340		263,072		809,343		792,354
Occupancy expense		329,539		264,812		1,001,331		836,421
Other		1,125,371		916,059		2,872,221		2,678,469
Total non-interest expense		3,067,431		2,756,654		8,671,393		8,021,555
Income before income tax expense		1,955,090		1,584,837		5,364,325		4,883,346
INCOME TAX EXPENSE		456,000		351,680		1,190,000		1,143,480
NET INCOME	$	1,499,090	$	1,233,157	$	4,174,325	$	3,739,866

The accompanying notes are an integral part of these statements.

2

FIRST WASHINGTON FINANCIALCORP
Consolidated Statement of Changes in Shareholders’ Equity
For Nine Months Ended September 30, 2004
(unaudited)

		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2003	$	29,499,347	$	3,020,428		$	1,393,975					$	33,913,750
Net Income		—		1,385,363			—			1,385,363			1,385,363
Stock options exercised (3,000 shares)		33,873		—			—			—			33,873
Other comprehensive income, net
of taxes		—		—			1,055,176			1,055,176			1,055,176
Total comprehensive income (unaudited)		—		—			—		$	2,440,539			—
Balance at March 31, 2004	$	29,533,220	$	4,405,791		$	2,449,151					$	36,388,162
Net Income		—		1,289,872			—			1,289,872			1,289,872
Stock options exercised (6,636 shares)		100,503		—			—			—			100,503
Other comprehensive loss, net
of taxes		—		—			(3,961,758	)		(3,961,758	)		(3,961,758	)
Total comprehensive loss (unaudited)		—		—			—		$	(2,671,886	)		—
Balance at June 30, 2004	$	29,633,723	$	5,695,663		$	(1,512,607	)				$	33,816,779
Net Income		—		1,499,090			—			1,499,090			1,499,090
Stock options exercised (8,217 shares)		88,748		—			—			—			88,748
Cash Stock dividend ($0.11 per share)				(467,840	)								(467,840	)
Other comprehensive loss, net
of taxes		—		—			2,066,647			2,066,647			2,066,647
Total comprehensive income (unaudited)		—		—			—		$	3,565,737			—
Balance at September 30, 2004	$	29,722,471	$	6,726,913		$	554,040					$	37,003,424

The accompanying notes are an integral part of these statements.

3

FIRST WASHINGTON FINANCIALCORP
Consolidated Statements of Cash Flows
(unaudited)

		For the nine months ended September 30,
		2004			2003
OPERATING ACTIVITIES
Net income	$	4,174,325		$	3,739,866
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		270,245			366,272
Provisions for loan losses		150,000			240,000
Gains on sales of investment securities		(713,633	)		(301,378	)
Gains on sales of mortgage-backed securities		(98,314	)		—
Amortization of premium on investment securities		257,217			238,691
Amortization of premium on mortgage-backed securities		270,842			414,941
Accretion of discount on investment securities		(68,242	)		(30,262	)
Accretion of discount on mortgage-backed securities		(26,002	)		(57,351	)
Decrease (increase) in accrued interest receivable		63,220			(120,123	)
Decrease (increase) in other assets		793,778			(1,524,151	)
Increase (decrease) in accrued interest payable		24,125			(22,252	)
Decrease (increase) in other liabilities		46,855			(105,152	)
Net cash provided by operating activities		5,144,416			2,839,101
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale		(58,040,744	)		(57,885,588	)
Purchases of mortgage-backed securities available-for-sale		(29,847,634	)		(41,832,027	)
Proceeds from sales of investment securities available-for-sale		14,742,314			5,463,905
Proceeds from sales of mortgage-backed securities available-for-sale		3,502,130			—
Proceeds from maturities of investment securities available-for-sale		40,672,686			30,205,795
Repayment of principal on investment securities available-for-sale		257,295			492,295
Repayment of principal on mortgage-backed securities available-for-sale		19,476,059			32,343,484
Net increase in loans		(20,335,274	)		(9,428,019	)
Purchase of premises and equipment		(2,399,614	)		(216,239	)
Net cash used in investing activities		(31,972,782	)		(40,856,394	)
FINANCING ACTIVITIES
Issuance of common stock under stock option plan		(244,716	)		98,694
Net increase in demand deposits and savings accounts		21,090,568			8,407,311
Net increase in certificate of deposits		12,647,461			27,903,952
Proceeds from FHLB advances		1,000,000			2,000,000
Net increase in securities sold under repurchase agreements		2,302,229			(1,132,222	)
Net cash provided by financing activities		36,795,542			37,277,735
Net increase (decrease) in cash and cash equivalents		9,967,176			(739,558	)
Cash and cash equivalents, beginning of year		22,651,567			23,343,859
Cash and cash equivalents, end of period	$	32,618,743		$	22,604,301

The accompanying notes are an integral part of these statements.

4

FIRST WASHINGTON FINANCIALCORP
Consolidated Statements of Cash Flows
(unaudited)

		For the three months ended September 30,
		2004			2003
OPERATING ACTIVITIES
Net income	$	1,499,090		$	1,233,157
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		57,942			115,318
Provisions for loan losses		150,000			60,000
Gains on sales of investment securities		(401,757	)		—
Gains on sales of mortgage-backed securities		(98,314	)		—
Amortization of premium on investment securities		80,470			83,869
Amortization of premium on mortgage-backed securities		89,541			198,846
Accretion of discount on investment securities		(22,094	)		(13,555	)
Accretion of discount on mortgage-backed securities		(8,222	)		(20,237	)
Increase in accrued interest receivable		37,136			(41,902	)
Increase in other assets		392,175			(673,682	)
Decrease in accrued interest payable		23,030			(17,801	)
Decrease in other liabilities		269,074			137,470
Net cash provided by operating activities		2,068,071			1,061,483
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale		(13,773,679	)		(19,564,981	)
Purchases of mortgage-backed securities available-for-sale		(14,456,170	)		(15,266,502	)
Proceeds from sales of investment securities available-for-sale		6,827,710			—
Proceeds from sales of mortgage-backed securities available-for-sale		3,502,130			—
Proceeds from maturities of investment securities available-for-sale		9,839,062			7,752,925
Repayment of principal on investment securities available-for-sale		62,191			110,503
Repayment of principal on mortgage-backed securities available-for-sale		6,320,082			13,654,056
Net increase in loans		(2,276,135	)		(5,106,971	)
Purchase of premises and equipment		(208,579	)		(101,492	)
Net cash used in investing activities		(4,163,388	)		(18,522,462	)
FINANCING ACTIVITIES
Issuance of common stock under stock option plan		(379,092	)		98,694
Net increase in demand deposits and savings accounts		2,066,151			3,761,221
Net (decrease) increase in certificate of deposits		7,409,625			7,713,147
Repayments of FHLB advances		(1,000,000	)		—
Net (decrease) increase in securities sold under repurchase agreements		(45,673	)		(2,953,976	)
Net cash (used in) provided by financing activities		8,051,011			8,619,086
Net (decrease) increase in cash and cash equivalents		5,955,694			(8,841,893	)
Cash and cash equivalents, beginning of year		26,663,049			31,446,194
Cash and cash equivalents, end of period	$	32,618,743		$	22,604,301

The accompanying notes are an integral part of these statements.

5

FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Statements Nine and Three months ended September 30, 2004 and 2003 (unaudited)

 NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

First Washington FinancialCorp (the Company) was formed to operate as a bank holding company. Concurrently with its formation in 1998, the Company issued one share of its common stock in exchange for one share of common stock of First Washington State Bank (the Bank). The formation of the holding company called for a conversion of par value from $5.00 to no par value.

The Bank is a New Jersey-chartered commercial bank. The Bank provides banking services to individual and corporate customers through its sixteen branches in Mercer, Monmouth, and Ocean Counties in New Jersey.

1. Basis of Financial Statement Presentation

The financial statements as of September 30, 2004, and for the nine and three months ended September 30, 2004 and 2003 are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position and results of operations have been included. The results of operations for the nine and three months ended September 30, 2004 and 2003 are not necessarily indicative of the results that may be attained for an entire fiscal year.

2. Recent Accounting Pronouncements

In October 2003, the AICPA issued Statement of Position (SOP) No. 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP No. 03-3 applies to a loan with the evidence of deterioration of credit quality since origination, acquired by completion of a transfer, for which it is probable at acquisition, that the Company will be unable to collect all contractually required payments receivable. SOP No. 03-3 requires that the Company recognize the excess of all cash flows expected at acquisition over the investor’s initial investment in the loan as interest income on a level-yield basis over the life of the loan as the accretable yield. The loan’s contractually required payments receivable in excess of the amount of its cash flows accepted at acquisition (nonaccretable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP No. 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. Management is currently evaluating the provisions of SOP No. 03-3.

In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in the Company’s 2003 Form 10-K. In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed Staff Position, EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments delays the effective date of certain provisions of EITF Issue 03-1, including steps two and three of the Issue’s three-step approach for determining whether an investment is other-than-temporarily impaired.  However, step one of that approach must still be initially applied for impairment evaluations in reporting periods beginning after June 15, 2004. The delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, ‘'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Company is in the process of determining the impact that this EITF will have on its financial statements.

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123 and APB No. 95, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under the FASB’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. On October 13, 2004, FASB voted to delay the adoption of this proposed standard by public companies until their first fiscal quarter beginning after June 15, 2005. The Company is currently evaluating this proposed statement and its effects on its results of operations.

6

The SEC recently released Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 is not expected to have a material effect on the consolidated financial statements.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). In general, a variable interest entity (VIE) is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain VIEs to be consolidated by the primary beneficiary if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. For public companies, the consolidation requirements of FIN 46 applied immediately to interest entities created after September 15, 2003. In December 2003, the FASB issued FIN 46R with respect to VIEs, which among other things revised the implementation date for small business issuers to the first fiscal year or interim period ending after December 15, 2004, with the exception of Special Purpose Entities (SPEs). The Company currently has no SPEs. The adoption of this statement did not have a material impact on the financial condition or results of operations of the Company.

3. Shareholders’ Equity

     In the first nine months of 2004, options to purchase 17,853 shares of common stock were exercised. On March 1, 2004, a 5 for 4 stock split was issued and on September 30, 2004 a $0.11 per share cash dividend was paid. Earnings per share for periods ending September 30, 2004 have been adjusted to reflect the stock split and cash dividend, and earnings per share for periods ending September 30, 2003 have been retroactively adjusted to reflect the stock split.

4. Comprehensive Income

The Company follows FASB No. 130, “Reporting Comprehensive Income.” This standard established new standards for reporting comprehensive income, which includes net income as well as certain other items, which result in a change to equity during the period.

The income tax effects allocated to comprehensive income (loss) is as follows for the following periods ended:

		September 30, 2004									September 30, 2003
		Before tax amount			Tax Effect			Net of tax amount			Before tax amount			Tax Benefit		Net of tax amount
		(unaudited)									(unaudited)
Unrealized gain on securities
Unrealized holding gains (losses) arising during period	$	(2,104,154	)	$	736,454		$	(1,367,700	)	$	(1,748,713	)	$	612,050	$	(1,136,663	)
Less reclassification adjustment for gains
realized in net income		811,947			(284,181	)		527,766			(301,378	)		105,482		(195,896	)
Other comprehensive income (loss), net	$	(1,292,207	)	$	452,273		$	(839,934	)	$	(2,050,091	)	$	717,532	$	(1,332,559	)

7

5. Stock Based Compensation

The Company follows the disclosure provisions of FASB No. 123, “Accounting for Stock-Based Compensation” to account for its stock options. This standard contains a fair value-based method for valuing stock-based compensation that entities may use, and measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service life and similar equity instruments under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

			Three months ended September 30,					Nine months ended September 30,
			2004		2003			2004			2003
Net income, as reported		$	1,499,090	$	1,233,157		$	4,174,325		$	3,739,866
Less: Stock-based compensation costs determined
under fair value based method for all awards			—		(1,000	)		(227,000	)		(619,000	)
Pro forma net income		$	1,499,090	$	1,232,157		$	3,947,325		$	3,120,866
Earnings per share – Basic	As Reported	$	0.35	$	0.29		$	0.98		$	0.88
	Proforma	$	0.35	$	0.29		$	0.93		$	0.74
Earnings per share – Diluted	As Reported	$	0.32	$	0.28		$	0.90		$	0.85
	Proforma	$	0.32	$	0.29		$	0.86		$	0.71

At September 30, 2004, the Company had three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

The fair value of these options is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 4.03% and 3.88% in 2004 and 2003, respectively, expected weighted volatility of 85.07%, and an expected life of 10 years for all periods.

The proforma net income for the nine months ended September 30, 2004 was significantly impacted by the issuance of options to the Board of Directors and Officers that vested immediately on the date of the grant, January 14, 2004. Because there is no vesting period for these options, the full potential financial impact is shown in this period.

8

NOTE B – EARNINGS PER SHARE

The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted EPS computations:

		For the nine months ended September 30, 2004
		Income (numerator)	Weighted Average Shares Outstanding (denominator)		Per Share Amount
Basic EPS
Income available to common stockholders	$	4,174,325	4,242,442	$	0.98
Effect of dilutive securities
Options		—	373,312		(0.08	)
Diluted EPS
Income available to common stockholders
plus assumed conversions	$	4,174,325	4,615,754	$	0.90

		For the nine months ended September 30, 2003
		Income (numerator)	Weighted Average Shares Outstanding (denominator)		Per Share Amount
Basic EPS
Income available to common stockholders	$	3,739,866	4,228,811	$	0.88
Effect of dilutive securities
Options		—	211,613		(0.04	)
Diluted EPS
Income available to common stockholders
plus assumed conversions	$	3,739,866	4,440,424	$	0.84

9

NOTE B – EARNINGS PER SHARE (CONTINUED)

		For the three months ended September 30, 2004
		Income (numerator)	Shares (denominator)		Per Share Amount
Basic EPS
Income available to common stockholders	$	1,499,090	4,249,895	$	0.35
Effect of dilutive securities
Options		—	371,131		(0.03	)
Diluted EPS
Income available to common stockholders
plus assumed conversions	$	1,499,090	4,621,026	$	0.32

		For the three months ended September 30, 2003
		Income (numerator)	Shares (denominator)		Per Share Amount
Basic EPS
Income available to common stockholders	$	1,233,157	4,228,811	$	0.29
Effect of dilutive securities
Options		—	219,774		(0.01	)
Diluted EPS
Income available to common stockholders
plus assumed conversions	$	1,233,157	4,448,585	$	0.28

NOTE C – PENDING MERGER WITH FULTON FINANCIAL CORPORATION

In June, the Company signed a definitive agreement to merge with Fulton Financial Corporation. Fulton is a $10.6 billion Lancaster, Pennsylvania-based financial holding company which operates 207 banking offices. Under the terms of the agreement, each outstanding share of the Company’s common stock will be exchanged for 1.35 shares of Fulton common stock. In addition, the Company is permitted to pay $0.11 per share cash dividends in the third and fourth quarters of 2004, provided that the transaction does not close on or before the record date for Fulton’s declared cash dividend. The third quarter $0.11 per share dividend was paid on September 30, 2004 to shareholders of record on August 30, 2004. Shareholder approval was received on November 5, 2004. Consummation of the merger is still subject all required regulatory approvals. The parties believe the merger will be completed by December 31, 2004.

10

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES

The accounting and reporting policies of the First Washington FinancialCorp (the Company) conform to accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry. The accompanying consolidated financial statements include the accounts of the Company, and all its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The following discussion summarizes the most critical accounting policies, judgments and estimates utilized by the Company in compiling its financial statements:

Allowance for Loan Losses
     The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio. Management's judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance.

     Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond our control, it is possible that management's estimates of the allowance for loan losses and actual results could differ in the near term. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination.

     Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, would adversely affect our future results of operations.

Deferred Taxes
     The Company recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carryforwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. In the event management determines that the Company is unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.

11

RESULTS OF OPERATIONS

 Nine and Three months ended September 30, 2004 and September 30, 2003

OVERVIEW

In June, the Company signed a definitive agreement to merge with Fulton Financial Corporation. Fulton is a $10.6 billion Lancaster, Pennsylvania-based financial holding company which operates 207 banking offices. Under the terms of the agreement, each outstanding share of the Company’s common stock will be exchanged for 1.35 shares of Fulton common stock. In addition, the Company is permitted to pay $0.11 per share cash dividends in the third and fourth quarters of 2004, provided that the transaction does not close on or before the record date for Fulton’s declared cash dividend. The Company paid the third quarter cash dividend of $0.11 per share on September 30, 2004. Consummation of the merger is subject to a number of conditions, including receipt of shareholder approval and all required regulatory approvals. The parties believe the merger will be completed by December 31, 2004.

For the nine months ended September 30, 2004, the Company realized an 11.62% increase in net income to $4.17 million or $0.98 per basic share, from $3.74 million or $0.88 per basic share for the same period the prior year. For the three months ended September 30, 2004, the Company realized a 21.57% increase in net income to $1.50 million or $0.35 per basic share, from $1.23 million or $0.29 per basic share for the same period the prior year. Total assets grew to $486.32 million at September 30, 2004 from $446.12 million at year-end, a $40.20 million increase. The Company’s net loans grew 10.02% from a year-end total of $204.36 million to $224.85 million at September 30, 2004. Deposits also increased from $385.03 million at December 31, 2003 to $418.77 million at September 30, 2004. As evidenced by our balance sheet growth, we have continued to penetrate our target markets with the addition of four new branches over the past year.

RESULTS OF OPERATIONS

Interest Income. Total interest income rose to $16.33 million for the nine months ended September 30, 2004 as compared to $15.24 million for the nine months ended September 30, 2003. For the three months ended September 30, 2004, interest income rose to $5.60 million as compared to $5.07 million for the same period in 2003. The change in interest income is a reflection of increases in average interest earning assets of $56.97 million and $50.79 million for the same nine and three month periods, respectively, partially offset by a decline in the average yield on interest earning assets of 34 basis points and 12 basis points for the nine and three months ended September 30, 2004, respectively, compared to the same period the prior year. This rate of decline in yield has started to diminish as market interest rates have started to rise slightly over the past few months. The greatest yield decline for the nine month period was seen in the loan portfolio (50 basis points), followed by a decrease in yield of 32 basis points on the taxable securities portfolio. For the three month period, the greatest decline in yield was also on the loan portfolio (37 basis points), which is a reflection of the refinancing activity in the past year. These yield declines were partially offset by yield an increase of 40 basis points on the Federal Funds Sold portfolio and an 11 basis point increase on the taxable securities portfolio. The largest average balance increase for the nine months ended September 30, 2004 compared to September 30, 2003 was $26.60 million in taxable securities, followed by $22.73 million in the loan portfolio. For the three month period ended September 30, 2004 as compared to September 30, 2003, the largest increase in average balance was in the loan portfolio of $25.30 million followed closely by an increase of $23.95 million in the taxable securities portfolio.

12

Interest Expense. The Company's interest expense for the first nine months of 2004 decreased by $85 thousand to $4.41 million from $4.50 million for the first nine months of 2003. For the three months ended September 30, 2004 interest expense decreased $51 thousand as compared to the same period the prior year. While the average cost of interest bearing liabilities for the nine month period declined 28 basis points over the prior year period, the volume of average interest bearing liabilities increased $46.40 million. Half of the decline in the average cost of interest-bearing liabilities over the full nine month period, 14 basis points, occurred during the three month period ended September 30, 2004, with the volume of average interest bearing liabilities increasing $40.54 million for the same period. Time deposits had by far the greatest impact with volume increases for both the nine and three month periods of $33.34 million and $27.40 million, respectively. The rate paid on these liabilities also declined, 41 basis points and 24 basis points, respectively, for the nine and three months ended September 30, 2004, compared to the same period the prior year. The decline in the cost of interest bearing liabilities reflects the continued low rate environment. While the decline in the rate paid on time deposits had the greatest effect on the overall cost of funds, FHLB advances experienced an even greater rate decline of 59 basis points and 33 basis points, respectively, over the same periods. These rate declines reflect longer-term time deposits and FHLB advances maturing and being replaced with funds at current market rates of interest.

Net-Interest Income. Net interest income, on a tax equivalent basis, for the nine months ended September 30, 2004 was $12.98 million, an increase of $1.35 million over net interest income of $11.63 million for the same period the prior year. Net interest income, on a tax equivalent basis, for the three months ended September 30, 2004 was $4.46 million, an increase of $499 thousand over net interest income of $3.96 million for the same period the prior year. The net interest margin saw a marginal decline, on a fully tax-equivalent basis, of 6 basis points to 3.65% for the nine months ended September 30, 2004 from 3.71% for the nine months ended September 30, 2003. For the three months ended September 30, 2004 the net interest margin, on a fully tax-equivalent basis was 3.69%, a decline of 2 basis points from 3.69% for the three months ended September 30, 2003. The net yield on interest–earning assets decreased by 34 basis points and 12 basis points for the nine and three month periods ended September 30, 2004 as compared to the same periods in 2003, respectively. The net yield on interest-earning assets for the nine months ended September 30, 2004 was 3.95% as compared to 4.07% for the same period in 2003. The net yield on interest-earning assets was 3.99% for both the three month periods ended September 30, 2004 and September 30, 2003. The yield changes reflect a shift in general market interest rates, which have stabilized or increased over the past year.

13

The following table presents, on a tax equivalent basis, a summary of the Company’s interest-earning assets and their average yields, and interest-bearing liabilities and their average costs and shareholders’ equity for the three months ended September 30, 2004 and 2003. The average balance of loans includes non-accrual loans, and associated yields include loan fees, which are considered an adjustment to yields.

FIRST WASHINGTON FINANCIALCORP
Comparative Average Balance Sheet
For the Nine Months Ended
(unaudited)

		September 30,							September 30,
		2004							2003
		Average Balance			Interest Income / Expense	Average Rates Earned / Paid			Average Balance			Interest Income / Expense	Average Rates Earned / Paid
Assets:
Interest earning assets:
Loans		216,305,963			10,912,191	6.73	%		193,575,065			10,498,637	7.23	%
Taxable Securities		131,980,851			3,349,562	3.38	%		105,377,893			2,928,016	3.70	%
Tax Exempt Securities		78,822,395			3,036,977	5.14	%		64,590,266			2,548,792	5.26	%
Fed Funds Sold		10,894,300			95,903	1.17	%		17,491,996			151,754	1.16	%
Total Interest Earning Assets		438,003,509			17,394,633	5.30	%		381,035,220			16,127,199	5.64	%
Non-Interest Earning Assets		28,712,233							27,780,595
Allowance for possible loan losses		(2,939,601	)						(2,837,459	)
Total Assets	$	463,776,141						$	405,978,356
Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
NOW accounts	$	49,584,839		$	165,641	0.45	%	$	43,300,818		$	212,001	0.65	%
Savings		48,012,763			139,486	0.39	%		42,638,303			192,664	0.60	%
Money Market deposits		16,124,189			51,272	0.42	%		15,408,417			74,525	0.64	%
Time deposits		217,592,435			3,756,939	2.30	%		184,251,003			3,738,759	2.71	%
FHLB advances		11,868,613			280,954	3.16	%		8,437,729			237,425	3.75	%
Securities sold under repurchase agreements		14,298,695			17,252	0.16	%		17,043,440			41,173	0.32	%
Total Interest Bearing Liabilities		357,481,534			4,411,544	1.65	%		311,079,710			4,496,547	1.93	%
Non-Interest Bearing Liabilities:
Demand deposits		69,889,133							60,857,841
Other liabilities		1,329,345							2,276,463
Total Non-Interest Bearing Liabilities		71,218,478							63,134,304
Stockholders’ equity		35,076,129							31,764,342
Total Liabilities and Stockholders’ Equity	$	463,776,141						$	405,978,356
Net Interest Differential						3.65	%						3.71	%
Net Yield on Interest-Earning Assets						3.95	%						4.07	%
Net interest income				$	12,983,089						$	11,630,652

16

FIRST WASHINGTON FINANCIALCORP
Comparative Average Balance Sheet
For the Three Months Ended
(unaudited)

	September 30,							September 30,
	2004										2003
	Average Balance			Interest Income / Expense	Average Rates Earned / Paid			Average Balance			Interest Income / Expense	Average Rates Earned / Paid
Assets:
Interest earning assets:
Loans	223,247,706			3,764,781	6.75	%		197,949,346			3,525,459	7.12	%
Taxable Securities	133,897,974			1,130,981	3.38	%		109,949,589			897,569	3.27	%
Tax Exempt Securities	77,210,402			1,005,634	5.21	%		72,295,485			933,216	5.16	%
Fed Funds Sold	13,332,500			47,484	1.42	%		16,707,587			42,511	1.02	%
Total Interest Earning Assets	447,688,582			5,948,880	5.32	%		396,902,007			5,398,755	5.44	%
Non-Interest Earning Assets	30,574,766							31,224,692
Allowance for possible loan losses	(2,953,831	)						(2,849,569	)
Total Assets	475,309,517						$	425,277,130
Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
NOW accounts	54,289,510		$	62,412	0.46	%	$	45,540,744		$	60,249	0.53	%
Savings	47,868,730			46,809	0.39	%		45,445,591			53,670	0.47	%
Money Market deposits	16,674,988			18,763	0.45	%		15,627,667			20,727	0.53	%
Time deposits	219,714,807			1,257,321	2.29	%		192,315,109			1,215,117	2.53	%
FHLB advances	11,956,522			92,888	3.11	%		8,532,609			73,345	3.44	%
Securities sold under repurchase agreements	14,809,080			8,566	0.23	%		17,314,446			12,536	0.29	%
Total Interest Bearing Liabilities	365,313,637			1,486,759	1.63	%		324,776,165			1,435,644	1.77	%
Non-Interest Bearing Liabilities:
Demand deposits	73,568,887							65,589,892
Other liabilities	1,135,164							2,363,995
Total Non-Interest Bearing Liabilities	74,704,051							67,953,887
Stockholders’ equity	35,291,829							32,547,078
Total Liabilities and Stockholders’ Equity	475,309,517						$	425,277,130
Net Interest Differential					3.69	%						3.67	%
Net Yield on Interest-Earning Assets					3.99	%						3.99	%
Net interest income			$	4,462,121						$	3,963,111

17

Provision for Loan Losses. The provision for possible loan loses for the nine and three months ended September 30, 2004 was $150 thousand in the aggregate as compared to $240 thousand and $60 thousand, respectively, for the same periods last year. The change in the provision for loan losses reflects management’s judgment concerning the risks inherent in the Company’s existing loan portfolio and the size of the allowance necessary to absorb the risks. The methodology used to calculate the provision is consistent with the guidance provided in SAB No. 102. Management reviews the adequacy of its allowance on an ongoing basis and will provide, as management may deem necessary, for additional provisions in future periods.

Non-Interest Income. Total non-interest income showed a decrease of $141 thousand, or 5.85%, to $2.27 million for the first nine months of 2004 from $2.41 million for the first nine months of 2003. For the three month period ended September 30, 2004, total non-interest income showed an increase of $297 thousand to $1.06 million from $765 thousand. The decrease for the nine month period ending September 30, 2004 as compared to the same period of 2003 consists primarily of a decline of $542 thousand in fee income on the sale of mortgages, offset by an increase of $511 thousand in net gains on the sale of investment and mortgage-backed securities. In addition to the decline in fee income on the sale of mortgages, service fees on deposit accounts declined $75 thousand. For the three month period ending September 30, 2004 as compared to the same period of 2003, the Company also experienced a decline in the income on sold mortgages of $227 thousand, again offset by an increase in net gains on the sale of investment securities of $500 thousand. The decline in fee income on sales of mortgages continues to reflect a decreased level of mortgage originations in 2004 due to the low rate environment and historically high refinancing activity prevalent during 2003 and the rise in home financing rates in 2004.

Non-Interest Expense. Total non-interest expense for the nine months ended September 30, 2004 increased $650 thousand to $8.67 million from $8.02 million for the same period in 2003. The majority of the increase was in salary and employee benefits of $291 thousand, followed by an increase in other non-interest expenses of $194 thousand, consisting primarily of costs associated with the anticipated merger with Fulton Financial Corporation of $285 thousand, offset by a decline of $82 thousand in loan origination and servicing expense. The increase in salaries is a reflection of the addition of our Marlboro, Hamilton Marketplace, Ewing and Lawrenceville offices. For the three months ended September 30, 2004 as compared to September 30, 2003, non-interest expense increased $311 thousand, with the majority of the increase in merger related costs of $137 thousand, followed by an increase of $65 thousand in occupancy expense.

Income Taxes. Our effective income tax rate for the third quarter of 2004 was 22.2% as compared to 21.7% at December 31, 2003. The effective income tax rate for the three months ended September 30, 2004 was 23.3%.

18

FINANCIAL CONDITION

September 30, 2004 as compared to December 31, 2003

Total assets increased to $486.32 million at September 30, 2004, a $4.20 million increase from total assets of $446.12 million at December 31, 2003. The most significant increase at September 30, 2004 compared to year-end 2003 was in net loans ($20.49 million) followed by a $9.97 million increase in cash and due from banks. Mortgage-backed securities increased $6.70 million, followed by an increase of $2.13 million in premises and equipment and $1.62 in investment securities. These increases in assets were funded primarily by increases in interest bearing demand deposits of $12.37 million, non-interest bearing deposits of $7.03 million, and time deposits of $12.65 million.

Net loans at September 30, 2004 increased $20.49 million to $224.85 million from year-end 2003. The major portfolio change was in commercial real estate, which increased $20.00 million.

The following schedule presents the components of loans for each date presented:

	September 30, 2004					December 31, 2003
	Amount			Pct		Amount			Pct
Commercial and industrial	$	48,957,216		21.5	%	$	47,752,700		23.1	%
Commercial RE properties		128,922,237		56.6	%		108,920,706		52.5	%
Residential RE properties		14,674,158		6.4	%		15,034,830		7.3	%
Consumer		3,401,329		1.5	%		3,646,322		1.8	%
Installment		13,012,257		5.7	%		14,958,176		7.2	%
Home equity		18,845,299		8.3	%		16,816,717		8.1	%
Gross loans		227,812,496		100.0	%		207,129,451		100.0	%
Plus: Net deferred fees		147,924					164,804
Total loans		227,960,420					207,294,255
Less: Allowance for possible loan losses		(3,110,636	)				(2,929,745	)
Net loans	$	224,849,784				$	204,364,510

Federal funds sold increased to $18.37 million at September 30, 2004 from $9.7 million at December 31, 2003 as we had additional liquidity.

The following schedule presents the components of average deposits, for each period presented.

		September 30, 2004				December 31, 2003
		Average	Average			Average	Average
		Amount	Yield			Amount	Yield
Non-interest bearing demand	$	69,889,133	—		$	61,575,680	—
Interest bearing demand		49,584,839	0.45	%		43,991,198	0.60	%
Savings and money market deposits		64,136,952	0.40	%		59,135,988	0.56	%
Time deposits		217,592,435	2.30	%		188,580,380	2.63	%
Total	$	401,203,359	1.37	%	$	353,283,246	1.57	%

Total year to date average deposits increased $47.92 million or 13.56% to $401.20 million through the third quarter of 2004 from the twelve-month average of $353.28 million at December 31, 2003. The majority of the increase is in time deposits of $29.01 million, which is a reflection of marketing for consumer time deposits. Management continues to monitor the shift in deposits through its Asset/Liability Committee.

19

ASSET QUALITY

At September 30, 2004, non-performing assets decreased to $23 thousand from $673 thousand at December 31, 2003. This decline reflects the sale of two OREO (Other Real Estate Owned) properties during the first quarter paying off the outstanding loan balances plus costs associated with the sale.

The following table provides information regarding risk elements in the loan portfolio (in thousands except percentages):

		September 30,			December 31,
		2004			2003
Non-accrual loans (1)	$	23		$	114
Other Real Estate Owned		—			559
Non-accrual loans to total loans		0.01	%		0.06	%
Non-performing assets to total assets		0.00	%		0.32	%
Allowance for possible loan losses as
a percentage of non-performing assets		13561	%		435	%
Allowance for possible loan losses to total loans		1.36	%		1.41	%

(1)      Excludes loans past due 90 days or more and still accruing interest with principal balances of approximately $122 thousand at September 30, 2004. There were no loans past due 90 days or more and still accruing interest at December 31, 2003.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. At September 30, 2004, the allowance for loan losses increased by $239 thousand to $3.11 million from $2.87 million at September 30, 2003 and the allowance for possible loan losses as a percentage of total loans was 1.36% compared to 1.46% for the same periods. Management receives financial statements from borrowers on a periodic basis, and reviews them to determine whether the borrowers are experiencing any signs of financial weakness or deterioration, even while their loans may be performing. Based on these reviews, our estimate of these economic weaknesses, caused by environmental factors but impacting particularized borrowers, and the existing level of our allowance, management then makes adjustments, as deemed appropriate.

The allowance is increased by provisions charged to expense and reduced by charge-offs, net of recoveries. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ credit worthiness, and the impact of examinations by regulatory agencies all could cause changes to the Company’s allowance for possible loan losses.

The following is a summary of the reconciliation of the allowance for loan losses for the nine months ended September 30, 2004 and September 30, 2003.

		Nine months ended
		September 30, 2004			September 30, 2003
Balance at beginning of year	$	2,929,745		$	2,757,874
Provision for loan losses		150,000			240,000
Charge-offs		(10,728	)		(139,358	)
Recoveries		41,619			13,462
Ending Balance	$	3,110,635		$	2,871,978
Ratio of net (recoveries) charge-offs to average loans outstanding		-0.01	%		0.06	%
Balance of allowances as a % of total loans at period end		1.36	%		1.46	%

20

LIQUIDITY MANAGEMENT

Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost effective manner. Our principal sources of funds are deposits, scheduled amortization and repayments of loan principal, sales, maturities and repayment of principal of investment securities and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

Through our investment portfolio we generally have sought to obtain a safe yet slightly higher yield than would have been available to us as a net seller of overnight Federal Funds, while still maintaining liquidity. Through our investment portfolio we also attempt to manage our maturity gap by seeking maturities of investments, which coincide as closely as possible with maturities of deposits.

Net cash provided by operating activities increased by $2.31 million to $5.14 million for the nine months ended September 30, 2004 compared to $2.84 million for the nine months ended September 30, 2003. Major changes were in other assets of $2.32 million, followed by net income of $434 thousand and accrued interest receivable of $183 thousand, offset by a decline in the gains on sales of investment securities of $412 thousand. For the three months ended September 30, 2004 net cash provided by operating activities increased by $1.01 million to $2.07 million, from $1.06 million at September 30, 2003. The change in other assets also accounted for the majority of the change in the three month period with an increase of $1.07 million. The change in other assets for both periods is due primarily to a change in prepaid expenses which is a reflection of the assets for the three new branches added in the fourth quarter 2003.

Net cash used in investing activities was $31.97 million and $4.16 million for the nine and three months ended September 30, 2004 compared to $40.86 million and $18.52 million for the nine and three months ended September 30, 2003. The purchase of mortgage-backed securities comprised the majority of the change with a decrease of $11.98 million, for the nine month period, offset by an increase of $10.47 million in the proceeds from maturities of investment securities for the same period. The change in the three month period was due primarily to the proceeds from sales of investment and mortgage-backed securities of $10.33 million.

Net cash provided by financing activities was $36.80 million for the nine months ended September 30, 2004 compared to $37.28 million for the same period in 2003. The decrease is comprised of a decrease in certificates of deposits of $15.26 million offset by an increase in demand deposits and savings accounts of $12.68 million. For the three months ended September 30, 2004, net cash provided by financing activities declined $568 thousand due to decreases of $1.70 million in demand deposits and savings accounts and $1.00 million in repayments of FHLB advances offset by an increase of $2.91 million in securities sold under repurchase agreements.

CAPITAL RESOURCES

Total shareholders’ equity increased $3.09 million to $37.00 million at September 30, 2004 from $33.91 million at year-end 2003. The increase was due to an increase of $3.71 million in net income, offset by a decrease of $840 thousand in accumulated other comprehensive income (loss).

At September 30, 2004, each of the Company and Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at September 30, 2004 for the Company and Bank as well as the minimum regulatory requirements.

		Actual				For capital adequacy purposes				To be well capitalized
		Amount	Ratio			Amount	Ratio			Amount	Ratio
Total Capital (to risk weighted assets)	$	39,558,824	13.75	%	$	23,017,032	8.00	%	$	28,771,290	10.00	%
Tier 1 capital (to risk weighted assets)		36,448,188	12.67	%		11,508,516	4.00	%		17,262,774	6.00	%
Tier 1 capital (to average assets)	$	36,448,188	7.67	%	$	19,012,381	4.00	%	$	23,765,476	5.00	%

The regulatory capital of the Company is not materially different from that of the Bank.

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ITEM 3 – CONTROLS AND PROCEDURES

First Washington FinancialCorp’s (the Company) Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures) that the Company’s disclosure controls and procedures are, as of the end of the period covered by this report, effective to ensure that information required to be disclosed by the Company in its SEC reports is accumulated and communicated to the Company’s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.

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Part II Other Information

Item 1.	Legal Proceedings
	The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit.
Item 2.	Changes in Securities and Small Business Issuer Purchases of Equity Securities
	Not applicable. The Company did not repurchase any equity securities during the quarter.
Item 3.	Defaults Upon Served Securities
	Not applicable
Item 4.	Submission of Matters to a Vote of Security Holders
	Not applicable
Item 5.	Other Information
	Not applicable.
Item 6.	Exhibits
		Exhibit 31.1 – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		Exhibit 31.2 – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		Exhibit 32.0 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FIRST WASHINGTON FINANCIALCORP
Date:	November 11, 2004	By:/s/ C. Herbert Schneider
		C. HERBERT SCHNEIDER
		President & CEO
		By:/s/ Lewis H. Foulke, Jr.
		LEWIS H. FOULKE, JR.
		Senior Vice President & CFO
		(Principal Financial and Accounting Officer)

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