First Financial Northwest, Inc. Reports Net Income of $1.3 Million or $0.07 Per Share and an $18.4 Million Reduction in Nonperforming Assets for the Second Quarter of 2011

RENTON, Wash., July 25, 2011 (GLOBE NEWSWIRE) -- First Financial Northwest, Inc. (the "Company") (Nasdaq:FFNW), the holding company for First Savings Bank Northwest (the "Bank"), today reported net income for the quarter ended June 30, 2011 of $1.3 million, or $0.07 per diluted share, as compared to a net loss of $24.9 million, or $1.43 per diluted share, for the quarter ended June 30, 2010. For the six months ended June 30, 2011 net income was $2.7 million or $0.15 per diluted share as compared to a net loss of $42.6 million or $2.45 per diluted share for the comparable period in 2010.

"I am pleased to report that net income of $1.3 million for the second quarter of 2011 represents our third consecutive quarter of profitability following our challenges as a result of the economic recession. We have been successful in reducing our nonperforming assets over the past several quarters. We have been proactive in identifying loan customers in the early stages of delinquency to develop strategies to mitigate potential losses in the future as reflected in the improvement in our loans that are less than 90 days delinquent.

The success of the banking industry is closely linked to the health of the economy and we are encouraged by signs of improvement in our local economy. We have worked diligently to return the Bank to profitability thanks to our loyal customers and shareholders who have maintained their confidence in us," stated Victor Karpiak, Chairman, President and Chief Executive Officer of First Financial Northwest, Inc.

Highlights for the quarter ended June 30, 2011 include:

• On a sequential quarter basis, nonperforming assets decreased $18.4 million or 22.4% from March 31, 2011 and $73.2 million or 53.4% from June 30, 2010 to $63.9 million at June 30, 2011;
• On a sequential quarter basis, nonperforming loans decreased $13.2 million or 25.8% from March 31, 2011 and $82.7 million or 68.6% from June 30, 2010 to $37.9 million at June 30, 2011;
• Delinquent loans less than 90 days past due decreased $3.1 million to $4.9 million from $8.0 million at March 31, 2011 as a result of our continued emphasis to aggressively manage our delinquent loan portfolio;
• Construction/land development loans declined $8.9 million to $34.2 million, a 20.6% decrease from March 31, 2011. This segment of our loan portfolio now represents 4.4% of total loans compared to 5.2% at March 31, 2011 and 9.2% at June 30, 2010;
• Sales of other real estate owned ("OREO") totaled $10.7 million during the quarter with a net gain on sales of $508,000;
• Gain on sales of investments during the quarter totaled $751,000;
• Net interest margin remained relatively unchanged at 3.07% for the quarter as compared to the quarter ended March 31, 2011 and
• The Company's ratio of tangible equity to tangible assets at June 30, 2011 was 15.6% ⁽¹⁾.

On a quarterly basis, management evaluates the adequacy of the allowance for loan losses. Based on this evaluation, a provision of $1.6 million was required for the second quarter of 2011, an increase of $400,000 from the first quarter of 2011. This increase was primarily the result of the impact of our recent actual historical loan loss experience on our provision calculation. The amount of the provision is determined by management's analysis of various quantitative and qualitative factors affecting loans to provide reserves adequate to support known and inherent losses within the portfolio. One component of our provision calculation utilizes a weighted-average, look-back period, which is common practice within the industry. Actual loan loss history incurred by the Bank was significant during 2009 and 2010, although loan losses were minimal in years prior. As a result, as quarters with minimal losses roll off and are replaced with quarters that contain higher loan losses, the provision may continue to increase even though the credit quality of our loan portfolio may continue to significantly improve and the amount of our delinquencies and the size of our total loan portfolio may continue to decrease.

The effect of the $1.6 million provision for loan losses combined with net charge-offs of $4.9 million resulted in a decrease in the allowance for loan losses to $17.0 million at June 30, 2011 from $20.3 million at March 31, 2011. The allowance for loan losses represented 44.8% of nonperforming loans at June 30, 2011, compared to 39.6% at March 31, 2011, primarily due to the $13.2 million decrease in nonperforming loans during the second quarter.

(1)     The tangible equity to tangible assets ratio is the same as the equity to assets ratio under Generally Accepted Accounting Principles ("GAAP") as the Company has an immaterial amount of intangible assets at June 30, 2011.

The following table presents a breakdown of our troubled debt restructured loans ("TDRs"):

During the second quarter of 2011, our TDRs decreased $5.1 million to $72.1 million, of which 79.1% are one-to-four family residential loans. At June 30, 2011, $66.0 million or 91.5% of our TDRs were classified as performing. Included in this $66.0 million of TDRs are $34.0 million which represent "A" notes related to "A/B" note workout strategies, where the "A" note amount was the current loan balance charged down to result in an acceptable loan to value ratio and positive debt service coverage at the time of the restructure. TDRs represent loan relationships where the Bank modified the loan terms because the borrower was experiencing financial challenges. Our priority is to negotiate a solution that is acceptable to the Bank while providing the borrower time to resolve their financial issues.

The following table presents a breakdown of our nonperforming assets:

Nonperforming assets decreased for the fifth consecutive quarter. At their peak, nonperforming assets reached $166.4 million at March 31, 2010 decreasing to $63.9 million at June 30, 2011, representing a $102.5 million or 61.6% decrease. Nonperforming assets as a percent of total assets was 5.6%, 7.0% and 10.5% at June 30, 2011, March 31, 2011 and June 30, 2010, respectively.

The following table presents a breakdown of our OREO by county and type of property at June 30, 2011:

OREO decreased $5.3 million or 16.9% to $26.0 million at June 30, 2011 from $31.3 million at March 31, 2011 as sales exceeded transfers of loans into OREO during the quarter. We sold $10.7 million of OREO during the second quarter of 2011 which generated a net gain of $508,000. We evaluate our OREO inventory quarterly. As a result of the evaluation, we expensed $289,000 related to the decline in the market value of those properties during the quarter ended June 30, 2011. Additional expenses related to OREO were $986,000 for the second quarter of 2011. During the remainder of 2011, we will continue to actively market our OREO properties in an effort to minimize the amount of holding costs incurred.

Net interest income for the quarter ended June 30, 2011 was $8.4 million compared to $8.6 million for the quarter ended March 31, 2011 primarily due to the decrease in the balance of our loan portfolio partially offset by the decrease in our cost of funds. Net interest income for the second quarter of 2011 increased $377,000 to $8.4 million from $8.1 million for the same period in 2010. The reason for this change was a decrease of $2.6 million in interest expense partially offset by a decrease of $2.2 million in interest income. The decline in our total interest expense was principally the result of a 70 basis point decrease in our cost of funds during the second quarter of 2011 to 1.97% as compared to 2.67% during the second quarter of 2010, due to new and renewing certificates of deposit pricing at lower interest rates. In addition, public funds decreased $10.7 million during the second quarter of 2011 as part of our strategy to reduce our exposure to these types of higher cost deposits. Interest income declined as a result of the reduction in the size of our loan portfolio and corresponding increase in lower yielding investments and interest-bearing deposits. The decline in our loan portfolio was the result of paydowns due to normal borrower activity, charge-offs and transfers of nonperforming loans to OREO. Our interest rate spread increased 58 basis points to 2.84% from 2.26% while the net interest margin increased to 3.07% from 2.58% from the second quarter of 2010.

Noninterest expense for the second quarter of 2011 decreased $170,000 to $6.4 million compared to $6.6 million from the first quarter of 2011. Noninterest expense for the quarter ended June 30, 2011 decreased $598,000 from the same quarter in 2010. The decline for both periods was primarily the result of a decrease in net expenses related to OREO.

Progress on Regulatory Order

On September 24, 2010, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order ("Order") with the FDIC and the Washington State Department of Financial Institutions ("DFI"). We are pleased to report that we believe we have complied with each item set forth in the Order in advance of all required due dates and the appropriate documentation has been submitted to our regulators for their review. We will continue to work towards reducing substandard assets and improving earnings in the upcoming quarters in our ongoing efforts to improve our operations.

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. 

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 Federal Reserve Board 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 additional enforcement actions against the Company or the Bank, to take additional 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 compliance with regulatory enforcement actions; the requirements and restrictions that have been imposed upon the Company under the memoranda of understanding with the Office of Thrift Supervision and the consent order the Bank entered into with the FDIC and the Washington DFI and the possibility that the Company and the Bank will be unable to fully comply with these enforcement actions which could result in the imposition of additional requirements or restrictions; our ability to attract and retain deposits; further increases in premiums for deposit insurance; 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, 2010. 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.

The following table presents a breakdown of our loan portfolio: