First Financial Northwest, Inc. Reports Third Quarter Net Income of $2.1 Million or $0.21 per Diluted Share

RENTON, Wash., Oct. 27, 2020 (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 September 30, 2020, of $2.1 million, or $0.21 per diluted share, compared to net income of $2.1 million, or $0.22 per diluted share, for the quarter ended June 30, 2020, and $2.5 million, or $0.25 per diluted share, for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, net income was $5.9 million, or $0.60 per diluted share, compared to net income of $7.8 million, or $0.77 per diluted share, for the comparable nine-month period in 2019.

“While 2020 has presented plenty of challenges to the banking industry, I am pleased with our response and many aspects of our Bank’s business,” said Joseph W. Kiley III, President and Chief Executive Officer. “First, I welcome all the new customers we are fortunate to have banking with us after, adhering to our mission, they experienced our relationship focused community bank service via the Paycheck Protection Program. Thanks to those new and existing customers, our employees, and our expanded office network we continued broadening our deposit base, which contributed to the decline in our cost of funds to 1.19% during the quarter, compared to 1.34% in the previous quarter and 1.82% for the fourth quarter of 2019. If interest rates remain low, we expect this trend to continue as we have approximately $260 million in certificates of deposit maturing in the next 12 months at a weighted average rate of 1.88%,” continued Kiley.

“I am also very pleased with the efforts of our credit team that continues working very closely with borrowers to help them navigate through their individual challenges. By providing borrowers with loan payment deferrals where appropriate, we are able to assist customers with their cash flow needs. I am happy to report that as of September 30, 2020, total loan balances under a payment deferral program declined to $65.5 million or 5.7% of total loans outstanding, compared to $132.1 million or 11.4% of total loans outstanding at June 30, 2020. In addition, working closely with our borrowers helps us identify borrowers that may need additional support or require closer monitoring. In the third quarter, we identified approximately $26.8 million in commercial real estate loans that required a reduction in loan grade classification. These loan grade reductions were the primary reason for the increase in our provision for loan losses to $700,000 in the quarter ended September 30, 2020, compared to $300,000 in each of the two preceding quarters,” added Kiley.

“Finally, it is my pleasure to report that our 14th office opened October 5th in Gig Harbor, Washington, and a 15th office is scheduled to open in Issaquah, Washington, early next year. As noted previously, we expect to slow the pace of expansion following the opening of these two offices,” concluded Kiley.

Highlights for the quarter ended September 30, 2020:

• Net loans receivable declined slightly to $1.13 billion at September 30, 2020, compared to $1.14 billion at June 30, 2020, but were up from $1.08 billion at September 30, 2019.
• The Bank reduced its brokered certificates of deposits by $22.4 million ending the quarter with a balance of $10.0 million.
• The Company’s book value per share was $15.62 at September 30, 2020, compared to $15.32 at June 30, 2020, and $15.06 at September 30, 2019.
• The Company repurchased 155,049 shares during the quarter at an average price of $9.54 per share under a plan that went into effect on July 30, 2020, authorizing the Company to repurchase up to 5% of its outstanding shares of common stock over a period of up to six months.
• The Company paid a regular quarterly cash dividend of $0.10 per share to shareholders.
• The Bank’s Tier 1 leverage and total capital ratios at September 30, 2020, were 10.0% and 15.3%, respectively, compared to 10.0% and 15.0% at June 30, 2020, and 10.1% and 14.4% at September 30, 2019.
• Based on management’s evaluation of the adequacy of the Allowance for Loan and Lease Losses (“ALLL”) and taking into account the estimated future impact of the COVID-19 pandemic, the Bank recorded a $700,000 provision for loan losses during the quarter.
  

Total deposits decreased $56.5 million to $1.07 billion at September 30, 2020, from $1.13 billion at June 30, 2020, primarily as a result of Paycheck Protection Program (“PPP”) loan-related deposits withdrawn during the quarter, and increased $52.9 million from $1.02 billion at September 30, 2019. Demand deposits decreased $1.1 million and retail certificates of deposit decreased $31.8 million during the quarter. The Bank further reduced its brokered deposits by $22.4 million in the quarter for a total reduction of $128.6 million over the past 12 months, while growing total deposits by $52.9 million during that period, reflecting, in part, deposits from its expanded office network.

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 $14,000 at September 30, 2020, $17,000 at June 30, 2020, and $34,000 at September 30, 2019.

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 unamortized aggregate fair value adjustment of $14,000.
⁽²⁾ Kent office opened January 31, 2019; Kirkland, November 12, 2019; and University Place, March 2, 2020.

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an unamortized aggregate fair value adjustment of $17,000.
⁽²⁾ Kent office opened January 31, 2019; Kirkland, November 12, 2019; and University Place, March 2, 2020.

Net loans receivable totaled $1.13 billion at September 30, 2020, compared to $1.14 billion at June 30, 2020, and $1.08 billion at September 30, 2019. New commercial loan activity remains muted as borrowers appear to be focused on their existing loans in lieu of seeking out new opportunities. The average balance of net loans receivable totaled $1.14 billion for the quarter ended September 30, 2020, compared to $1.12 billion for the quarter ended June 30, 2020, and $1.07 billion for the quarter ended September 30, 2019.

The Company recorded a $700,000 provision for loan losses in the quarter ended September 30, 2020, compared to a $300,000 provision for loan losses in the quarter ended June 30, 2020, and a $100,000 provision for loan losses in the quarter ended September 30, 2019. The provision in the quarter ended September 30, 2020, was primarily attributed to reductions in loan grades during the quarter, including $26.8 million in Commercial Real Estate Loans that were downgraded, while the provision in the quarter ended June 30, 2020, was primarily attributed to adjustments to economic factors due to COVID-19 in our Commercial Real Estate and Construction/Land portfolios. The provision in the quarter ended September 30, 2019, was due primarily to growth in loans receivable. In the quarter ended September 30, 2020, any relationship that requested a second loan payment deferral, and demonstrated other weaknesses, received additional scrutiny which resulted in many of these loans being downgraded.

The ALLL represented 1.27% of total loans receivable at September 30, 2020, compared to 1.20% at both June 30, 2020, and September 30, 2019. Excluding the PPP loan balances, which are 100% guaranteed by the Small Business Administration (“SBA”), the ALLL represented 1.33% of total loans receivable at September 30, 2020, compared to 1.25% of total loans receivable at June 30, 2020, and 1.20% at September 30, 2019. The ALLL as a percent of total loans excluding PPP loans is a non-GAAP financial measure. See Non-GAAP Financial Measures at the end of this press release for a reconciliation to its nearest GAAP equivalent. Nonperforming loans totaled $2.1 million at September 30, 2020, compared to $2.2 million at June 30, 2020, and $137,000 at September 30, 2019. The increase from the prior year is due to a $2.1 million multifamily loan currently in foreclosure. Based on an impairment analysis and ongoing monitoring, the Company does not expect to incur a loss on this credit. Other than the $2.1 million multifamily loan in foreclosure, there was only one consumer loan of $32,000 that was 30 days or more past due and not on loan payment deferral at September 30, 2020. OREO remained unchanged at $454,000 at September 30, 2020, June 30, 2020, and September 30, 2019.

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 September 30, 2020.

The Company accounts for certain loan modifications or restructurings as TDRs. In general, the modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. At September 30, 2020, TDRs totaled $4.1 million, down from $4.3 million at June 30, 2020, and $6.6 million at September 30, 2019. As discussed further below, The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 (“CARES Act”) provides guidance around the modification of loans as a result of the COVID19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not categorized as TDRs.

Net interest income for both the quarters ended September 30, 2020, and June 30, 2020 totaled $10.1 million, compared to $9.7 million for the quarter ended September 30, 2019.

Interest income totaled $13.7 million for the quarter ended September 30, 2020, compared to $14.1 million for the quarter ended June 30, 2020, and $15.2 million for the quarter ended September 30, 2019. The decline in the current quarter compared to the quarter ended June 30, 2020, was primarily due to the continued decline in asset yields. In addition, the lower yielding PPP loans impacted the entire quarter ended September 30, 2020, compared to only a portion of the previous quarter. Further, the Bank received a payoff on a $7.7 million loan it had purchased at a premium, resulting in a reduction of $177,000 in interest income relating to the unamortized premium at the time of payoff. As a result, average loan yields declined to 4.49% at September 30, 2020, compared to 4.72% at June 30, 2020, and 5.14% at September 30, 2019. On a related note, the $7.7 million payoff also resulted in the receipt of a $233,000 prepayment penalty, which was included in noninterest income.

Total interest expense was $3.6 million for the quarter ended September 30, 2020, compared to $4.0 million for the quarter ended June 30, 2020, and $5.6 million for the quarter ended September 30, 2019. The average cost of interest-bearing deposits declined to 1.27% for the quarter ended September 30, 2020, compared to 1.49% for the quarter ended June 30, 2020, and 2.00% for the quarter ended September 30, 2019. The decline from the quarter ended September 30, 2019, was due primarily to a reduced level of brokered deposits and retail certificates of deposits, along with a declining interest rate environment. Specifically, the Bank replaced higher cost retail certificates of deposit and brokered deposits with lower cost deposits through its branch network. During the quarter ended September 30, 2020, the Bank redeemed $5.0 million in callable brokered certificates of deposit that carried a coupon of 1.35%. That redemption resulted in the recognition of $20,000 in unamortized fees during the quarter ended September 30, 2020, compared to $1,500 in such fees in the quarter ended June 30, 2020. Advances from the FHLB remained unchanged at $120.0 million at September 30, 2020, and June 30, 2020, and were down slightly from $121.0 million at September 30, 2019. The average cost of borrowings was 1.28% for the quarter ended September 30, 2020, compared to 1.08% for the quarter ended June 30, 2020, and 2.02% for the quarter ended September 30, 2019. At September 30, 2020, the entire balance of our $120.0 million in borrowings were comprised of short-term FHLB advances tied to cash flow hedge agreements, utilized to assist in the Bank’s interest rate risk management efforts.

The net interest margin was 3.07% for the quarter ended September 30, 2020, compared to 3.12% for the quarter ended June 30, 2020, and 3.07% for the quarter ended September 30, 2019. The modest reduction in the quarter ended September 30, 2020, from the quarter ended June 30, 2020, relates primarily to the reduction in the Bank’s average yield on interest earning assets outpacing the average cost of interest-bearing liabilities, due in part to the $177,000 accelerated amortization of the premium related to the $7.7 million loan payoff noted above, and the recognition of $20,000 of unamortized fees relating to the early redemption of $5.0 million in callable brokered deposits.

Noninterest income for the quarter ended September 30, 2020, totaled $1.0 million, compared to $789,000 for the quarter ended June 30, 2020, and $1.0 million for the quarter ended September 30, 2019. The increase in noninterest income for the quarter ended September 30, 2020, compared to the quarter ended June 30, 2020, was primarily due to an increase in loan related fees due to prepayment penalties.

Noninterest expense totaled $7.9 million for both the quarters ended September 30, 2020, and June 30, 2020, compared to $7.5 million in the quarter ended September 30, 2019. Salaries and employee benefits for the quarter ended September 30, 2020, were higher than the quarter ended June 30, 2020, due primarily to the reclassification of the compensation expense related to PPP loan originations to loan direct costs in the quarter ended June 30, 2020. Noninterest expense increased from the same quarter last year as the Bank continued to pursue its branch expansion strategy, which resulted in higher salaries and benefits, occupancy and equipment and data processing expense among increases in other noninterest expenses.

COVID-19 Related Information

The Bank is committed to assisting its customers and communities in response to the COVID-19 pandemic. Under the CARES Act, it is providing certain short-term loan modifications. In addition, the Bank is participating in the PPP as an SBA lender. The Bank continues to take the steps necessary while working with its loan customers to effectively manage the portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the crisis.

Paycheck Protection Program
As of September 30, 2020, the Bank had funded $52.0 million in PPP loans, which represents 462 loans, a slight increase from the 455 loans totaling $51.7 million as of June 30, 2020. Based on information provided with the borrower’s applications, these funds are estimated to have provided support for approximately 5,000 jobs in the communities we serve. A total of 381 of these loans, or more than 82%, are for loan amounts of $150,000 or less and represent $18.0 million of the total, of which 253 loans, representing $6.4 million, are for loan amounts of $50,000 or less. As of October 21, 2020, a total of 17 loan customers representing PPP loans totaling $3.8 million had submitted loan forgiveness applications.

Modifications
The primary method of relief is to allow the borrower to defer their loan payments for three to six months, while certain borrowers are allowed to pay interest only or have payment deferrals for periods longer than six months depending upon their specific circumstances. The CARES Act and regulatory guidelines suspend the determination of certain loan modifications related to the COVID19 pandemic from being treated as TDRs. The following table provides detail on the balance of loans remaining on deferral status as of September 30, 2020:

As of September 30, 2020, $36.1 million in loans had been granted modifications of greater than six months, of which $30.1 million were for loans in the hotel/motel category. Total loans with modifications granted declined from $132.1 million, or 11.4% of total loans outstanding, at June 30, 2020.

Additional Loan Portfolio Details
Total balances drawn on outstanding lines of credit were $46.4 million and the unused portion of lines of credit totaled $35.0 million as of September 30, 2020. At December 31, 2019, total balances drawn on outstanding lines of credit were $47.1 million and the unused portion of lines of credit totaled $38.1 million.

The Bank is monitoring its loan portfolio for delinquencies of loans that have not requested modification qualifying under the CARES Act or regulatory guidance. The following table presents the loan to value (“LTV”) ratios of select segments of our loan portfolio that we believe may be more likely to be impacted by COVID-19 pandemic considerations at September 30, 2020. The LTV ratio is derived by dividing the current loan balance by the lower of the original appraised value or purchase price of the real estate or other collateral:

⁽¹⁾ Represents select segments of loans that may include construction loans; classifications may differ from those used elsewhere in this release because they are based on type of collateral rather than loan category.

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 14 full-service banking offices. 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: the effect of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; increased competitive pressures; changes in the interest rate environment; 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 2020 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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
(Unaudited)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
(Unaudited)

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

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures
(Unaudited)

⁽¹⁾ Performance ratios are calculated on an annualized basis.
⁽²⁾ Tangible equity ratio and tangible book value per share are non-GAAP financial measures. Refer to page 15 for reconciliation between the GAAP and nonGAAP financial measures.
⁽³⁾ Capital ratios are for First Financial Northwest Bank only.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures (continued)
(Unaudited)

⁽¹⁾ Yields and costs are annualized.

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 which include: tangible assets; tangible book value per share; tangible equity to tangible assets ratio; and the ratio of the ALLL excluding PPP loans. The Company believes that these non-GAAP financial measures and ratios as presented are useful for both investors and management to understand the effects of certain items and provides an alternative view of the Company’s performance over time and in comparison to the Company’s competitors.

Non-GAAP financial measures have limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation and are not a substitute for other measures in this earnings release that are presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

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

Tangible equity to tangible assets and tangible book value per share:

ALLL on loans to total loans receivable, excluding PPP loans:

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