First Financial Northwest, Inc. Reports Second Quarter 2010 Financial Results

RENTON, Wash., July 23, 2010 (GLOBE NEWSWIRE) -- First Financial Northwest, Inc. (the "Company") (Nasdaq:FFNW), the holding company for First Savings Bank Northwest (the "Bank"), today reported a net loss for the second quarter ended June 30, 2010 of $24.9 million, or $1.43 per diluted share, as compared to a net loss of $28.0 million, or $1.49 per diluted share for the quarter ended June 30, 2009. For the six months ended June 30, 2010, the Company reported a net loss of $42.6 million, or $2.45 per diluted share as compared to a net loss of $26.8 million, or $1.41 per diluted share for the comparable period in 2009.

"The Company's pretax, pre-provision core earnings continue to improve as we work through this difficult credit cycle. During the second quarter we continued to focus on reducing our level of nonperforming assets. In that regard, we strengthened our lending division with the addition of Rob Robinson as our Chief Lending Officer. Rob has a great deal of lending experience and loan workout expertise which complements our existing management team. Our special assets group continues to market and sell our other real estate owned which declined by $4.0 million during the second quarter of 2010," stated Victor Karpiak, Chairman, President and Chief Executive Officer of First Financial Northwest, Inc.

During the quarter ended June 30, 2010, the following items contributed to our financial results:

• Provision for loan losses of $26.0 million;
• Loan charge-offs of $32.7 million;
• Nonperforming assets decreased $29.3 million to $137.1 million from the previous quarter;
• Deposits increased $9.5 million from the previous quarter while our cost of funds decreased 16 basis points;
• We reduced the overall risk level of our loan portfolio by decreasing the amount of speculative construction/land development loans to $94.5 million, or 9.24% of total loans from $164.0 million, or 14.7% at December 31, 2009;
• The interest rate spread increased 72 basis points to 2.26% during the second quarter of 2010 as compared to the second quarter of 2009 as our cost of funds declined 83 basis points between periods;
• Pretax, pre-provision core operating earnings, exclusive of net expenses related to other real estate owned ("OREO"), were $2.7 million for the second quarter of 2010 compared to the goodwill adjusted, pretax, pre-provision core earnings of $389,000 for the comparable quarter in 2009¹;
• The Company's consolidated ratio of tangible common equity to tangible assets ended the quarter at 15.95%¹.

"Although the economic recession continues to impact our financial results, loan delinquencies have decreased on a sequential quarter comparison. Our 30-89 day delinquent loans decreased 29% to $8.8 million at June 30, 2010 from $12.4 million at March 31, 2010. Our capital levels remain strong and continue to remain above the well-capitalized regulatory benchmarks," stated Victor Karpiak.

During the quarter ended June 30, 2010, management continued to evaluate the adequacy of the allowance for loan losses and concluded that a provision of $26.0 million was required for the quarter. The amount of the provision was based on management's analysis of various quantitative and qualitative factors affecting loans to provide reserves adequate to support known and inherent losses within the loan portfolio.

Approximately half of the $32.7 million in charge-offs, during the second quarter of 2010, were related to the decline in the market value of the collateral supporting the lending relationships of two of the Bank's largest merchant builders coupled with short falls in cash flow related to their rental portfolios. These borrowers were current on their loan payments during the second quarter but have been experiencing cash flow challenges due to the extended economic recession. The effect of the $26.0 million loan loss provision combined with charge-offs of $32.7 million decreased the allowance for loan losses balance to $29.9 million at June 30, 2010. Allowance for loan losses as a percent of total loans was 2.97% at June 30, 2010 compared to 3.07% at December 31, 2009.

Nonperforming loans decreased $25.3 million to $120.6 million at June 30, 2010, from $145.9 million at March 31, 2010. This decrease was achieved by charging-off that portion of the loans that were deemed uncollectible, short sales and loan payoffs. Nonperforming loans include loans to borrowers who are experiencing deteriorating financial conditions and there is doubt as to the ultimate recoverability of the full principal and interest due the Bank in accordance with the terms of the loan agreement.

The following table presents a breakdown of our nonperforming assets:

During the second quarter, we obtained appraisals on the majority of the properties securing our nonperforming loans. Consequently, we have charged-off $32.7 million, of which $17.4 million was related to raw land. Loans on raw land comprised just 3.77% of our total loan portfolio at June 30, 2010, down from 6.25% at December 31, 2009. We continue to work with these borrowers to reduce the Bank's loss exposure.

"We have taken the approach that we will, on a selective basis within defined price points, continue to finish the vertical construction on projects that have been started even if the loan is classified as nonperforming. This approach may increase our nonperforming assets during the build-out period. We believe it is much easier to sell a completed home than one partially completed. Regarding outstanding commitments for completion of land development projects, we have eliminated all unfunded construction commitments and intend for the developer to liquidate the underlying real estate collateral," stated Mr. Karpiak.

During the second quarter of 2010, loans transferred from the nonperforming loan category to OREO totaled $3.3 million. The following table presents a breakdown of our OREO at June 30, 2010:

OREO decreased $4.0 million or 19.6% to $16.5 million at June 30, 2010 from $20.5 million at March 31, 2010. OREO at December 31, 2009 was $11.8 million. We sold $6.7 million of OREO during the second quarter of 2010 which was comprised of 22 properties and generated a net gain of $14,000. We evaluate the market value of our OREO inventory quarterly.    During the second quarter of 2010, we obtained updated real estate appraisals on the majority of our nonperforming assets. As a result of this evaluation, we expensed $897,000 related to the decline in the market value of our OREO as of June 30, 2010. Additional expenses related to OREO were $708,000 for the second quarter of 2010. 

Total assets remained relatively unchanged at $1.3 billion at both June 30, 2010 and December 31, 2009.  Investments available for sale increased $45.0 million or 46.2% as we used excess liquidity to purchase securities to enhance the yield on our assets.  Net loans receivable declined $67.6 million as a result of $32.7 million of charge-offs, $3.3 million of transfers to OREO, a decline in new loan originations, principal payments and payoffs on existing loans. Liabilities increased $33.0 million or 3.0% primarily due to an increase in deposits at June 30, 2010 from December 31, 2009. Deposits increased $32.7 million, or 3.5% to $972.1 million from December 31, 2009. The growth was predominately in the certificates of deposit accounts of $25.7 million and to a lesser extent money market accounts.

Stockholders' equity decreased $41.7 million or 18.3% to $186.8 million at June 30, 2010 from December 31, 2009. The decrease was a result of our net loss for the first six months of 2010 of $42.6 million.

Net interest income for the quarter ended June 30, 2010 increased $1.1 million to $8.1 million from $7.0 million for the same period in 2009. The reason for this increase was a decrease of $1.4 million in interest expense offset by a decrease of $303,000 in interest income. The decline in our total interest expense was primarily the result of $177.2 million of certificates of deposit maturing during the second quarter of 2010, with renewing and new certificates repricing at a lower interest rate. Our cost of funds declined 83 basis points to 2.67% for the quarter ended June 30, 2010 from 3.50% for the same quarter in 2009. Our interest rate spread increased 72 basis points to 2.26% from 1.54% while the net interest margin increased to 2.58% from 2.24% for the same period in 2009.

Noninterest expense for the second quarter of 2010 was $7.0 million compared to $20.7 million for the same quarter in 2009, a decrease of $13.7 million. The decrease was primarily the result of a $14.2 million goodwill impairment charge in the second quarter of 2009 with no comparable charge in 2010.

We have utilized all the tax benefits available to us, as a result, no tax benefit was recorded for the second quarter of 2010.

First Financial Northwest, Inc. is the parent company of First Savings Bank Northwest, a Washington chartered stock savings bank headquartered in Renton, Washington, serving the Puget Sound Region through its full-service banking office. We are a part of the ABA NASDAQ Community Bank Index. For additional information about us, please visit our website at www.fsbnw.com and click on the "Investor Relations" section. 

NON-GAAP FINANCIAL INFORMATION

This press release contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include pretax, pre-provision core earnings. Our management uses these non-GAAP measures in its analysis of our performance. Management believes that pretax, pre-provision core earnings are a useful measure in assessing our core operating performance, particularly during times of economic stress. Management also believes that by excluding net gains and losses on OREO sales, net OREO valuation expense, OREO related expenses and goodwill impairment charges it will better reflect our core operating performance. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Pretax, Pre-Provision Core Earnings, Exclusive of Net Expenses Related to OREO and Goodwill

Forward-looking statements:

Certain matters discussed in this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding 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 impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Office of Thrift Supervision and our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal enforcement action against the Company or the Bank, such as a cease and desist order to take corrective action and refrain from unsafe and unsound practices, which may also require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2009. Any of the forward-looking statements that we make in this Press Release and in the other public 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.

¹Pretax, pre-provision core operating earnings exclusive of net expenses related to OREO, goodwill and tangible equity represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because we believe that they provide useful and comparative information to assess trends in the Company's core operations reflected in the current quarter's results. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. The tangible common equity to tangible assets ratio would be the same under GAAP accounting standards as the Company has an immaterial amount of intangible assets at June 30, 2010.

The following table presents a breakdown of our loan portfolio: