First Financial Northwest, Inc. Reports Net Income for the Second Quarter of $2.4 Million or $0.16 per Diluted Share; 992,840 Shares Repurchased During the Quarter

RENTON, Wash., July 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 June 30, 2014, of $2.4 million, or $0.16 per diluted share, compared to net income of $2.6 million, or $0.17 per diluted share for the quarter ended March 31, 2014, and net income of $16.4 million, or $0.95 per diluted share for the comparable quarter in 2013. The results for the quarter ended June 30, 2013, included a $13.8 million tax benefit related to the reversal of the valuation allowance on deferred tax assets ("DTA"), reflecting the Company's return to profitability and its expectation of sustainable profitability for future periods. During the quarter ended June 30, 2014, the Company recognized a federal income tax provision of $1.3 million, compared to $1.5 million for the quarter ended March 31, 2014. The primary reason for the decline in net income for the quarter ended June 30, 2014, compared to the quarter ended March 31, 2014, related to a decline in the Company's recapture of provision for loan losses to $100,000 for the current quarter compared to $500,000 for the March 31, 2014, quarter. The larger recapture during the quarter ended March 31, 2014, was due primarily to upgrading the risk categories of $12.3 million of loans during that quarter as a result of improvement in their risk profiles that in turn reduced the allowance for loan and lease losses ("ALLL") needed for these loans. During the second quarter, the smaller recapture was primarily related to improved property valuations on impaired loans.

"In addition to the Company's financial and credit quality performance for the first half of 2014, I am pleased to report that we repurchased 992,840 shares of the Company's common stock during the quarter at an average cost of $10.90 per share," stated Joseph W. Kiley III, President and Chief Executive Officer. "These share repurchases, along with the profits generated during the quarter, helped increase the Company's book value per share to $11.60 at June 30, 2014, compared to $11.42 at March 31, 2014, and $10.88 at June 30, 2013. A total of 652,574 shares remain to be purchased under the Share Repurchase Plan approved by the Company's Board of Directors in April 2014. Despite a very competitive lending environment, we are also pleased to report that net loans receivable increased to $676.5 million at June 30, 2014, compared to $671.8 million at March 31, 2014, and $653.8 million at June 30, 2013," concluded Kiley.

Highlights for the quarter ended June 30, 2014, included:

• nonperforming assets at June 30, 2014, decreased to $12.4 million from $14.1 million at March 31, 2014, and $28.8 million at June 30, 2013; included in nonperforming assets are Other Real Estate Owned ("OREO") totaling $10.1 million at June 30, 2014, compared to $11.6 million at March 31, 2014, and $14.2 million at June 30, 2013.
• the Company's book value per share increased to $11.60 at June 30, 2014, from $11.42 at March 31, 2014, and $10.88 at June 30, 2013; and
• the Bank's Tier 1 and total risk-based capital ratios at June 30, 2014, were 18.9% and 29.3%, respectively.

Based on management's evaluation of the adequacy of the ALLL, a $100,000 recapture of prior provisions for loan losses was appropriate for the second quarter of 2014. The following items contributed to this recapture during the quarter ended June 30, 2014:

• delinquent loans (loans over 30 days past due) continued to improve to $2.6 million at June 30, 2014, compared to $3.0 million at March 31, 2014, and $8.1 million at June 30, 2013;
• nonperforming loans decreased to $2.3 million at June 30, 2014, from $2.5 million at March 31, 2014, and $14.6 million at June 30, 2013, reflecting continuing improvement in the quality of our loan portfolio;
• nonperforming loans as a percentage of total loans improved to 0.33% at June 30, 2014, compared to 0.37% at March 31, 2014, and 2.18% at June 30, 2013; and

The ALLL represented 518.9% of nonperforming loans and 1.73% of total loans receivable, net of undisbursed funds, at June 30, 2014, compared to 477.2% and 1.76%, respectively, at March 31, 2014, and 84.6% and 1.84% respectively at June 30, 2013.

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 June 30, 2014:

OREO declined to $10.1 million at June 30, 2014, from $11.6 million at March 31, 2014, as sales and write-downs of OREO exceeded transfers of loans into OREO during the quarter. We sold $1.9 million of OREO during the second quarter of 2014, generating net losses of $36,000. As a result of our quarterly inventory evaluation, we expensed $92,000 related to the decline in the market values of OREO properties during the quarter, compared to $196,000 during the first quarter of 2014. We continue to actively market our OREO properties in an effort to minimize the amount of holding costs incurred.

The following table presents details on our TDRs:

During the second quarter of 2014, TDRs decreased to $57.2 million, compared to $60.5 million at March 31, 2014, and $64.1 million at June 30, 2013. When necessary, management's philosophy is to restructure the loan so that the borrower 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 to receive full payment of the restructured amount. At June 30, 2014, $56.8 million, or 99.2% of TDRs were performing in accordance with their repayment terms.

Net interest income totaled $8.2 million for the quarter ended June 30, 2014, compared to $8.1 million for the first quarter of 2014, and $7.8 million for the second quarter of 2013.  

Interest income for the second quarter of 2014 remained steady at $9.7 million, unchanged from both the first quarter of 2014 and the quarter ended June 30, 2013. Average loans outstanding increased in the current quarter, however, the yield on the portfolio continued to decline as the interest rates on new loan originations continued to be at rates lower than the overall portfolio yield.

Interest expense decreased to $1.5 million for the quarter ended June 30, 2014, as compared to $1.6 million in the quarter ended March 31, 2014, and $1.9 million in the quarter ended June 30, 2013. The primary reason for these declines in interest expense is related to our certificates of deposit, most of which continue to mature and reprice at rates lower than the previously contracted rate while others do not renew at maturity, resulting in a decrease in the average balance of certificates of deposit during the periods.

Our net interest margin increased eight basis points to 3.86% for the quarter ended June 30, 2014, compared to 3.78% for the quarter ended March 31, 2014, and increased 15 basis points from 3.71% for the quarter ended June 30, 2013, due primarily to a reduced cost of funds in the current quarter compared to the prior periods. In addition, certain low yielding securities were sold subsequent to June 30, 2013, and March 31, 2014, increasing the yield on the securities portfolio and contributing to the improved net interest margin.

Noninterest income for the quarter ended June 30, 2014, increased slightly to $88,000 compared to $68,000 in the quarter ended March 31, 2014, and decreased from $155,000 in the quarter ended June 30, 2013. The primary reasons for the higher level of noninterest income in the quarter ended June 30, 2013, include income of $27,000 from a rental property, which has since been sold, and escrow fee income of $24,000 from discontinued operations of a subsidiary. The cost savings realized by discontinuing the escrow operations of the subsidiary is greater than the foregone escrow fee income.

Noninterest expense for the quarter ended June 30, 2014, increased to $4.7 million from $4.5 million during the quarter ended March 31, 2014, and decreased significantly when compared to $5.3 million during the quarter ended June 30, 2013. The largest reason for the increase in the second quarter of 2014 compared to the first quarter of 2014 was due to other general and administrative expenses increasing as unfunded loan commitment reserve expense increased $235,000, to an expense of $157,000 in the June 2014 quarter compared to a benefit of $78,000 in the March 2014 quarter. The decline in noninterest expense since June 30, 2013, was primarily a result of reduced salaries and employee benefits due to staffing reductions and other improved operating efficiencies implemented throughout 2013 and into 2014.

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. For additional information, please visit the Bank's 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,that 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, 2013. 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.