First Financial Northwest, Inc. Reports Net Income for the Fourth Quarter of $3.9 Million or $0.25 Per Share and $24.5 Million or $1.47 Per Share for the Year Ended December 31, 2013

RENTON, Wash., Jan. 30, 2014 (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 December 31, 2013 of $3.9 million, or $0.25 per diluted share, compared to a net income of $2.6 million, or $0.16 per diluted share for the quarter ended September 30, 2013 and net income of $1.5 million, or $0.09 per diluted share for the comparable quarter in 2012. For the year ended December 31, 2013, net income was $24.5 million or $1.47 per diluted share, compared to $2.7 million, or $0.15 per diluted share for the year ended December 31, 2012.

"Net income of $3.9 million for the fourth quarter is a significant improvement for our Company. Our efforts to reduce nonperforming assets are reflected in our nonperforming loan totals which declined to $4.0 million at December 31, 2013, compared to $9.4 million at September 30, 2013 and $22.8 million at December 31, 2012. Another bright spot for 2013 was the decline in other real estate owned ("OREO") to $11.5 million at year end, from $12.6 million at September 30, 2013 and $17.3 million at the end of 2012," stated Joseph W. Kiley III, President and Chief Executive Officer.

"In addition, despite significant loan prepayment activity as a result of the low interest rate environment throughout most of 2013, we increased net loans receivable to $663.2 million at December 31, 2013, a $12.7 million increase from $650.5 million one year earlier, including increasing the amount of higher yielding non-residential loans," continued Kiley. "We are also pleased with the improvement in the Company's stock price per share which closed at $10.37 on December 31, 2013 compared to $7.55 on December 31, 2012 and $5.90 on December 31, 2011. The Company's market capitalization (as measured by multiplying shares outstanding by closing share price) increased to $170 million at December 31, 2013 compared to $142 million at December 31, 2012 and $111 million at December 31, 2011. This increase occurred even with the reduction in shares outstanding primarily as a product of our share repurchase programs conducted in 2013, through which we repurchased 2.7 million shares," concluded Kiley.

As reported previously, the Company reversed most of the valuation allowance on its deferred tax asset ("DTA") during the quarter ended June 30, 2013, reflecting its return to profitability and its expectation of sustainable profitability for future periods. During the quarter ended September 30, 2013, the Company reversed an additional $135,000 of its DTA allowance and in the quarter ended December 31, 2013 it reversed the remainder of the valuation allowance, exclusive of a $431,000 valuation allowance associated with capital loss carry-forwards. At December 31, 2013, the Company's balance sheet reflects a net DTA of $14.8 million which is expected to be utilized in future periods when the Company recognizes future taxable earnings. During the quarter ended December 31, 2013, the Company recorded a tax expense of $343,000 as a result of actual earnings exceeding previously projected amounts.

Highlights for the quarter ended December 31, 2013 included:

• Nonperforming assets at December 31, 2013 decreased to $15.5 million from $22.0 million at September 30, 2013 and $40.1 million at December 31, 2012;
• Expenses and market value adjustments related to OREO and gains on sale of OREO properties decreased to $78,000 in the aggregate for the quarter, compared to $123,000 during the third quarter of 2013 and totaled a net gain of $108,000 for the year ended December 31, 2013 compared to a expense of $3.2 million for the prior year; Gains on sale of OREO improved to $1.1 million for the year ended December 31, 2013 up from $607,000 for the prior year.
• The Company's book value per share at December 31, 2013, increased to $11.25 from $11.05 at September 30, 2013 and $9.95 at December 31, 2012;
• The Bank's Tier 1 and total risk-based capital ratios at December 31, 2013 were 18.60% and 28.44%, respectively;

Based on management's evaluation of the adequacy of the allowance for loan and lease losses ("ALLL"), a $200,000 recovery from the allowance for loan losses was appropriate for the fourth quarter of 2013. The following items contributed to this recovery during the quarter ended December 31, 2013:

• The Bank received recoveries of amounts previously charged off totaling $1.3 million during the quarter, offsetting current period loan charge-offs of $333,000. For the year ended December 31, 2013, recoveries of amounts previously charged off totaled $2.1 million, offsetting loan charge-offs of $1.6 million.
• Delinquent loans (loans over 30 days past due), decreased to $4.3 million at December 31, 2013, from $5.5 million at September 30, 2013 and $20.9 million at December 31, 2012;
• Nonperforming loans decreased to $4.0 million at December 31, 2013, from $9.4 million at September 30, 2013 and $22.8 million at December 31, 2012, reflecting continuing improvement in the quality of our loan portfolio;
• Nonperforming loans as a percentage of total loans improved to 0.59% at December 31, 2013, compared to 1.41% at September 30, 2013 and 3.42% at December 31, 2012; and
• Nonperforming assets decreased to $15.5 million at December 31, 2013, compared to $22.0 million at September 30, 2013, and $40.1 million at December 31, 2012.

The ALLL represented 325.3% of nonperforming loans and 1.91% of net loans receivable at December 31, 2013 compared to 130.1% and 1.84%, respectively, at September 30, 2013 and 55.11% and 1.89% respectively at December 31, 2012.

The following table presents a breakdown of our nonperforming assets:

The following table presents a breakdown of our OREO by county and property type at December 31, 2013:

OREO decreased $1.1 million to $11.5 million at December 31, 2013, from $12.6 million at September 30, 2013, as sales and write-downs of OREO exceeded transfers of loans into OREO during the quarter. We sold $1.2 million of OREO during the fourth quarter of 2013, generating net gains of $62,000. We evaluate our OREO inventory quarterly. As a result of this evaluation, we expensed $47,000 related to the decline in the market values of OREO properties during the quarter, as compared to $135,000 during the third quarter of 2013. OREO market value adjustment for the year ended December 31, 2013, also declined significantly to $403,000 as compared to $2.0 million for the prior year. We continue to actively market our OREO properties in an effort to minimize the amount of holding costs incurred.

The following table presents a breakdown of our TDRs:

During the fourth quarter of 2013, TDRs decreased to $61.1 million, compared to $63.7 million at September 30, 2013 and $70.4 million at December 31, 2012. The Company's philosophy is to restructure the loan so that the customer can continue to make payments while minimizing the potential loss to the Bank. As part of the restructure, the portion of the loan that is determined to be uncollectable is charged-off. After the restructure, the Bank expects full payment of the restructured amount. At December 31, 2013, $60.1 million, or 98.4% of TDRs were performing in accordance with their repayment terms.

Net interest income for the fourth quarter of 2013 increased to $8.1 million, compared to $7.7 million in the third quarter of 2013, and $7.0 million in the fourth quarter of 2012. Net interest income for the year ended December 31, 2013 increased $1.8 million, or 6.1%, to $31.0 million, as compared to $29.2 million for the year ended December 31, 2012.  

Interest income for the fourth quarter of 2013 increased to $9.8 million, compared to $9.5 million in the quarter ended September 30, 2013. This increase was due largely to a $3.8 million construction/land development loan that returned to accrual status during the quarter ended December 31, 2013.  Interest income for the year ended December 31, 2013 was $38.5 million compared to $41.5 million a year earlier. This decrease was due primarily to the low interest rate environment during 2013 which resulted in a significant number of loans being refinanced during the year and a decline in the average balance of loans outstanding during the year ended December 31, 2013 as compared to last year.  

Interest expense decreased to $1.7 million for the quarter ended December 31, 2013, as compared to $1.8 million in the quarter ended September 30, 2013. Interest expense for the year ended December 31, 2013 decreased $4.7 million to $7.5 million, compared to $12.2 million for the year ended December 31, 2012. The primary reason for these declines in interest expense was related to our certificates of deposit, most of which continue to mature and reprice at rates lower than the previously contracted rate and a decrease in the average balance of certificates of deposit, as a number of certificates of deposit were not renewed at maturity. Also contributing to the year over year improvement in interest expense was the restructuring of the Bank's wholesale borrowings from the Federal Home Loan Bank of Seattle. Specifically, the Bank repaid in January 2013, upon its maturity, a $50 million advance which had a rate of 2.17%. In addition, in March 2013 the Bank replaced $33.1 million in advances with lower rate advances reducing the average rate being paid on the advances from 2.93% to 0.81%.

Our net interest margin improved to 3.82% for the quarter ended December 31, 2013, compared to 3.71% for the quarter ended September 30, 2013. For the year ended December 31, 2013, our net interest margin increased to 3.68% compared to 3.08% for the year ended December 31, 2012, due in large part to the interest expense reductions noted above.

Noninterest income for the quarter ended December 31, 2013 increased to $372,000 compared to $120,000 in the quarter ended September 30, 2013. The primary reason for this increase relates to a $325,000 gain on the sale of an investment property during the fourth quarter. For the year ending December 31, 2013, noninterest income decreased to $751,000 compared to $836,000 in the prior year.

Noninterest expense for the quarter ended December 31, 2013 decreased $1.0 million to $4.4 million from $5.4 million during the quarter ended September 30, 2013. This decrease was primarily the result of reductions in salary and employee benefits expense relating to management changes announced previously and from reductions in stock based compensation expenses as most of our outstanding stock options and restricted shares were issued under the Company's 2008 Equity Incentive Plan and have now been fully expensed following completion of their five year vesting period.

Noninterest expense for the year ended December 31, 2013 decreased $4.4 million to $20.9 million compared to $25.3 million in 2012. The decrease in noninterest expense during the year ended December 31, 2013 compared to the prior year was primarily due to improvements in expenses, market value adjustments and gains on sale related to our OREO.  Net gains on sale of OREO property improved to $1.1 million for the year ended December 31, 2013 from $607,000 in the prior year while OREO market value adjustments improved to $403,000 during 2013 from $2.0 million for 2012. Net OREO related expenses improved to $601,000 in 2013 from $1.8 million a year earlier. Regulatory assessments also contributed to the improvement in noninterest expense, declining to $693,000 in 2013 compared to $1.0 million in 2012, as a result of the Bank's improved condition and regulatory assessment. Finally, proxy contest and related litigation expenses in 2013 declined to $106,000 compared to $1.1 million in 2012. These items all contributed to the improvement in noninterest expense in 2013, as reflected in our improved efficiency ratio of 65.93% for the year ended December 31, 2013 compared to 84.15% in the prior year.

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 as well as the Russell 2000 and 3000 Indices. 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 or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be 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 Board of Governors of the Federal Reserve System ("Federal Reserve") and our bank subsidiary by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institutions, Division of Banks ("Washington DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against the Company or the Bank,which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; our ability to pay dividends on our common stock; our ability to attract and retain deposits; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; 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 or as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2012. 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 (unaudited):