First Financial Northwest, Inc. Reports Second Quarter Net Income of $3.1 Million or $0.30 per Diluted Share

RENTON, Wash., July 26, 2018 (GLOBE NEWSWIRE) -- First Financial Northwest, Inc. (the “Company”) (NASDAQ GS:FFNW), the holding company for First Financial Northwest Bank (the “Bank”), today reported net income for the quarter ended June 30, 2018, of $3.1 million, or $0.30 per diluted share, compared to net income of $6.8 million, or $0.66 per diluted share, for the quarter ended March 31, 2018, and $1.9 million, or $0.18 per diluted share, for the quarter ended June 30, 2017. For the six months ended June 30, 2018, net income was $9.9 million, or $0.96 per diluted share, compared to net income of $4.2 million, or $0.40 per diluted share, for the comparable six‑month period in 2017. The quarter ended March 31, 2018, benefited from the impact of $4.3 million in recoveries during the quarter, primarily relating to payment in full of loan balances previously charged off from two customers, including an additional $1.0 million in loan interest income, and the recognition of a $4.0 million recapture of provision for loan loss.

Net loans receivable totaled $989.3 million at June 30, 2018, compared to $991.1 million at March 31, 2018, and $861.7 million at June 30, 2017. The average balance of net loans receivable totaled $997.1 million for the quarter ended June 30, 2018, compared to $985.8 million for the quarter ended March 31, 2018, and $844.9 million for the quarter ended June 30, 2017.

The Company recorded a $400,000 recapture of provision for loan losses in the quarter ended June 30, 2018, compared to a $4.0 million recapture of provision for loan losses in the quarter ended March 31, 2018, and a $100,000 provision for loan losses in the quarter ended June 30, 2017. The recapture of provision for loan losses in the most recent quarter was primarily due to a reduction in balances in construction loans outstanding. The recapture of provision in the quarter ended March 31, 2018, was due primarily to $4.3 million in recoveries received during that quarter of loans previously charged off, while the provision in the same quarter last year was primarily due to growth in net loans receivable, offset by payoffs and credit improvements to certain adversely graded loans.

“Loan paydowns slightly outpaced our loan origination activity during the quarter, slowing down our pace of growth for the year,” stated Joseph W. Kiley III, President and Chief Executive Officer. “Average balances of loans outstanding were higher, however, helping to support our interest income in the quarter. Competition for loans and deposits remains strong and I am pleased with the efforts of our employees to expand relationships throughout the markets we serve,” continued Kiley. “We opened our tenth branch office in April 2018 at The Junction in Bothell, which exceeded $500,000 in deposits at June 30, 2018. Also worth highlighting is the success of our Crossroads office in Bellevue that opened in June 2017. Our employees in this office have exceeded our expectations, growing deposit balances to $37 million in just twelve months of operations,” concluded Kiley.

The following tables present an analysis of total deposits by branch office (unaudited):

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $80,000.

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $93,000.

Additional noteworthy items for the quarter ended June 30, 2018:

• Net loans receivable decreased slightly to $989.3 million at June 30, 2018, from $991.1 million at March 31, 2018, but up from $861.7 million at June 30, 2017.
• Deposits were $832.8 million at June 30, 2018, compared to $863.2 million at March 31, 2018, and $735.6 million at June 30, 2017. With reduced loan growth due primarily to higher than usual payoffs, certain higher cost deposits were allowed to run off in the most recent quarter. Checking deposits, however, increased to $90.7 million at June 30, 2018, compared to $88.9 million at March 31, 2018, and $56.2 million at June 30, 2017. Competition for deposits in our markets remained strong.
• The Company’s book value per share was $13.97 at June 30, 2018, compared to $13.80 at March 31, 2018, and $13.00 at June 30, 2017. Tangible book value per share was $13.78 at June 30, 2018, compared to $13.60 at March 31, 2018, and $13.00 at June 30, 2017.
• The Bank’s Tier 1 leverage and total capital ratios at June 30, 2018, were 10.2% and 14.5%, respectively, compared to 10.4% and 14.4% at March 31, 2018, and 11.5% and 15.2% at June 30, 2017.

Based on management’s evaluation of the adequacy of the Allowance for Loan and Lease Losses (“ALLL”), there was a $400,000 recapture of provision for loan losses for the quarter ended June 30, 2018. The following items contributed to this recapture of provision during the quarter:

• The Company’s net loans receivable decreased slightly during the quarter to $989.3 million at June 30, 2018, from $991.1 million at March 31, 2018.
• Construction/land development loans outstanding, net of LIP, declined to $98.2 million at June 30, 2018, compared to $117.6 million at March 31, 2018, reducing the amounts necessary in the ALLL, as there is a higher ALLL allocation to this segment of loans.
• Nonperforming loans declined to $164,000 at June 30, 2018, compared to $175,000 at March 31, 2018, and $583,000 at June 30, 2017.
• Nonperforming loans as a percentage of total loans remained low at 0.02% at both June 30, 2018, and March 31, 2018, compared to 0.07% at June 30, 2017.

The ALLL represented 1.27% of total loans receivable, net of undisbursed funds, at June 30, 2018, compared to 1.31% at March 31, 2018, and 1.29% at June 30, 2017.

The following table presents a breakdown of our nonperforming assets (unaudited):

⁽¹⁾ The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all Troubled Debt Restructured Loans ("TDRs") as nonperforming loans, although 100% of our TDRs were performing in accordance with their restructured terms at June 30, 2018.

The decrease in OREO over the past year, as shown in the table above, is primarily due to the Bank’s continued efforts to actively market its OREO properties in an effort to minimize holding costs. There were $532,000 in delinquent loans (loans over 30 days past due) at June 30, 2018, compared to $225,000 in delinquent loans at March 31, 2018, and $85,000 at June 30, 2017.

In circumstances where a customer is experiencing significant financial difficulties, the Company may elect to restructure the loan so the customer can continue to make payments while minimizing the potential loss to the Company. Such restructures must be classified as TDRs.

The following table presents a breakdown of our TDRs (unaudited):

Net interest income for the quarter ended June 30, 2018, was $10.1 million, compared to $11.0 million for the quarter ended March 31, 2018, and $9.0 million in the quarter ended June 30, 2017. The decline in net interest income from the first quarter of 2018, was due primarily to the decline in total interest income, as discussed below, while the increase compared to the quarter ended June 30, 2017, was due primarily to the Company’s growth in loans receivable, partially offset by higher balances of interest-bearing liabilities and a higher cost of funds.

Total interest income was $13.6 million for the quarter ended June 30, 2018, compared to $14.1 million for the quarter ended March 31, 2018, and $11.3 million for the quarter ended June 30, 2017. The decrease from the previous quarter was due to the recognition of $1.0 million in interest income related to payments received on interest owed on the balances of previously charged off loans during the first quarter of 2018, partially offset by an increase during the current quarter in average loan receivables to $997.1 million from $985.8 million for the quarter ended March 31, 2018. The increase in total interest income from the second quarter of 2017 was due primarily to the growth in average loan balances from $844.9 million last year.

Total interest expense was $3.5 million for the quarter ended June 30, 2018, compared to $3.1 million for the quarter ended March 31, 2018, and $2.3 million for the quarter ended June 30, 2017. The higher level of interest expense in the most recent two quarters compared to the quarter ended June 30, 2017, was the result of higher short term market interest rates as a result of actions taken by the Federal Open Market Committee (“FOMC”) that adversely impacted our cost of deposits and cost of borrowings. Advances from the Federal Home Loan Bank (“FHLB”) totaled $224.0 million at June 30, 2018, compared to $200.0 million at March 31, 2018, and $191.5 million at June 30, 2017. The Bank borrows from the FHLB primarily to supplement its deposit gathering efforts when needed to support asset growth. The average cost of FHLB advances and other borrowings was 1.92% for the quarter ended June 30, 2018, compared to 1.66% for the quarter ended March 31, 2018, and 1.24% for the quarter ended June 30, 2017. Brokered certificates of deposit totaled $75.5 million at June 30, 2018, March 31, 2018, and June 30, 2017.

The following table presents a breakdown of our total deposits (unaudited):

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $80,000 at June 30, 2018, and $93,000 at March 31, 2018.

Our net interest margin was 3.50% for the quarter ended June 30, 2018, compared to 3.88% for the quarter ended March 31, 2018, and 3.60% for the quarter ended June 30, 2017. The change between quarters was primarily attributed to the additional $1.0 million in interest income from previously charged-off loans recognized in the quarter ended March 31, 2018, as discussed above. The decrease from the year ago period relates to a narrowing of our net interest margin between periods, primarily due to a 15.8% growth in average interest-bearing liabilities and an increase in the average cost of interest-bearing liabilities to 1.37% from 1.07%.

Noninterest income for the quarter ended June 30, 2018, totaled $663,000 compared to $646,000 for the quarter ended March 31, 2018, and $731,000 for the quarter ended June 30, 2017. The increase from the first quarter of 2018 was due primarily to an increase in wealth management revenue and deposit related fees, partially offset by a decline in income from bank owned life insurance (“BOLI”) and loan related fees. Noninterest income for the quarter ended June 30, 2018, was also impacted by a $21,000 net loss on sale of investments as we elected to sell certain securities and replace them with investments that are expected to perform better in a rising rate environment.

Noninterest expense for the quarter ended June 30, 2018, increased to $7.5 million from $7.0 million in the quarter ended March 31, 2018, and $6.8 million in the quarter ended June 30, 2017. The increase in noninterest expense in the current quarter compared to the prior quarter was due primarily to higher salaries and employee benefits expense (including accruals for incentive compensation), professional fees, and occupancy and equipment, partially offset by lower regulatory assessments and marketing expense. The increase from the prior year period was due primarily to growth in the Bank’s number of locations in the past year.

The Company’s federal income tax provision was $603,000 for the quarter ended June 30, 2018, compared to $1.8 million for the quarter ended March 31, 2018, and $924,000 for the quarter ended June 30, 2017. Both the June 30, 2018, and June 30, 2017, periods benefited from stock option exercises that resulted in significantly lower federal income tax provisions than the quarter ended March 31, 2018, when no such stock option exercise activity occurred. The stock option exercises occurred at prices higher than originally estimated, resulting in higher allowable expense recognition for tax purposes in both the current and year ago quarterly periods. The Company’s federal income tax provision during 2018 also benefitted from the impact of the Tax Cuts and Jobs Act enacted December 31, 2017, which lowered the corporate income tax rate from 35% to 21%.

First Financial Northwest, Inc. is the parent company of First Financial Northwest Bank; an FDIC insured Washington State chartered commercial bank headquartered in Renton, Washington, serving the Puget Sound Region through 10 full-service banking offices. We are a part of the ABA NASDAQ Community Bank Index and the Russell 2000 Index. For additional information about us, please visit our website at ffnwb.com and click on the “Investor Relations” link at the bottom of the page.

Forward-looking statements:

When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially from those currently expected or projected in these forward-looking statements. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include, but are not limited to, the following: increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in the Company’s latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission – that are available on our website at www.ffnwb.com and on the SEC's website at www.sec.gov.

Any of the forward-looking statements that we make in this Press Release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and 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. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2018 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us and could negatively affect our operating and stock performance.

The following table presents a breakdown of our loan portfolio (unaudited):

⁽¹⁾ Concentrations of credit percentages are for First Financial Northwest Bank only using classifications in accordance with FDIC guidelines.

⁽¹⁾ Capital ratios are for First Financial Northwest Bank only.
⁽²⁾ Loans are reported net of undisbursed funds.

Non-GAAP Financial Measures

In addition to financial results presented in accordance with generally accepted accounting principles utilized in the United States ("GAAP"), this earnings release contains non-GAAP financial measures of the tangible equity ratio and tangible book value. The Company's intangible assets consist of goodwill and core deposit intangible. Tangible equity is calculated by subtracting intangible assets from total stockholder's equity. Tangible assets is calculated by subtracting intangible assets from total assets. The tangible equity ratio is tangible equity divided by tangible assets. Tangible book value per share is calculated by dividing tangible equity by the number of common shares outstanding. The Company believes that these non-GAAP measures provide a more consistent presentation of our capital and facilitate peer comparison that is desired by investors.

Non-GAAP financial measures have limitations, are not audited and should only be used in conjunction with the other measures in this earnings release that are presented in accordance with GAAP.

The following table provides a reconciliation between the GAAP and non-GAAP measures:

For more information, contact:
Joseph W. Kiley III, President and Chief Executive Officer
Rich Jacobson, Executive Vice President and Chief Financial Officer
(425) 255-4400