First Financial Northwest, Inc. Reports Third Quarter Net Income of $2.8 Million or $0.27 per Diluted Share

RENTON, Wash., Oct. 25, 2018 (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, 2018, of $2.8 million, or $0.27 per diluted share, compared to net income of $3.1 million, or $0.30 per diluted share, for the quarter ended June 30, 2018, and $1.9 million, or $0.18 per diluted share, for the quarter ended September 30, 2017. For the nine months ended September 30, 2018, net income was $12.7 million, or $1.22 per diluted share, compared to net income of $6.1 million, or $0.58 per diluted share, for the comparable nine‑month period in 2017.

“Deposit growth was a significant focus during the quarter. We elected to aggressively attract deposits at current rates in advance of potentially higher rates in the future, since market expectations indicate a likelihood that the Federal Open Market Committee (“FOMC”) will continue to increase short term interest rates,” stated Joseph W. Kiley III, President and Chief Executive Officer. “Deposits increased $83.5 million, or 10 percent, from the second quarter to $916.3 million at September 30, 2018, with nearly all our branches achieving an increase in local deposits,” continued Kiley. “We supplemented the increase in local deposits with $26.6 million in additional funds through national brokered certificates of deposit during the quarter. Of the brokered certificates of deposits received during the quarter, $22.6 million have call options, providing us the opportunity to return the deposits without penalty in the future, when it is in our best interest to do so,” continued Kiley. “We also have plans to open a new branch in the next several months at Kent Station, a contemporary, open air urban village located eight miles south of our main Renton office, as we continue to look for opportunities to expand our presence in the region,” concluded Kiley.

Net loans receivable totaled $995.6 million at September 30, 2018, compared to $989.3 million at June 30, 2018, and $931.9 million at September 30, 2017. The average balance of net loans receivable totaled $993.3 million for the quarter ended September 30, 2018, compared to $997.1 million for the quarter ended June 30, 2018, and $879.1 million for the quarter ended September 30, 2017.

The Company recorded a $200,000 provision for loan losses in the quarter ended September 30, 2018, compared to a $400,000 recapture of provision for loan losses in the quarter ended June 30, 2018, and a $500,000 provision for loan losses in the quarter ended September 30, 2017. The provision for loan losses in the most recent quarter was primarily due to growth in loans receivable, reduced by recoveries received on loans previously charged off. The recapture of provision in the quarter ended June 30, 2018, was due primarily to a reduction in balances in construction loans outstanding, while the provision for loan losses in the quarter ended September 30, 2017, was primarily due to growth in net loans receivable, partially offset by recoveries received on loans previously charged off.

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 aggregate fair value adjustment of $69,000.

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $80,000.

Additional noteworthy items for the quarter ended September 30, 2018:

• Net loans receivable increased to $995.6 million at September 30, 2018, from $989.3 million at June 30, 2018, and from $931.9 million at September 30, 2017.
• Despite continued strong competition for deposits in the Bank’s markets, total deposits increased $83.5 million to $916.3 million at September 30, 2018, compared to $832.8 million at June 30, 2018, and $815.7 million at September 30, 2017. Retail branch deposits were up $56.9 million to $814.2 million, from $757.3 million at June 30, 2018. To supplement the increase in local deposits, the Company generated a net increase of $26.6 million in additional funds through national brokered certificates of deposit in the current quarter. At September 30, 2018, $102.1 million of total deposits were brokered deposits, compared to $75.5 million at June 30, 2018, and September 30, 2017.
• The Company’s book value per share was $14.17 at September 30, 2018, compared to $13.97 at June 30, 2018, and $13.08 at September 30, 2017. Tangible book value per share was $13.99 at September 30, 2018, compared to $13.78 at June 30, 2018, and $12.86 at September 30, 2017.
• The Bank’s Tier 1 leverage and total capital ratios at September 30, 2018, were 10.4% and 14.8%, respectively, compared to 10.2% and 14.5% at June 30, 2018, and 10.8% and 14.2% at September 30, 2017.

Based on management’s evaluation of the adequacy of the Allowance for Loan and Lease Losses (“ALLL”), there was a $200,000 provision for loan losses for the quarter ended September 30, 2018. The following items contributed to this provision during the quarter:

• The Company’s total loans outstanding, net of LIP, increased during the quarter to $1.01 billion at September 30, 2018, from $1.00 billion at June 30, 2018.
• Construction/land development loans outstanding, net of LIP, increased to $103.0 million at September 30, 2018, from $98.2 million at June 30, 2018, and business loans grew by $7.5 million to $29.7 million. The higher levels of construction and business loans increased the amounts necessary in the ALLL, as the Company maintains a higher ALLL allocation for these types of loans.
• The Company received $162,000 in recoveries on loans previously charged off, reducing the amount that would otherwise need to be added to the ALLL through the provision for loan losses.
• Nonperforming loans increased to $484,000 at September 30, 2018, compared to $164,000 at June 30, 2018, and $185,000 at September 30, 2017.
• Nonperforming loans as a percentage of total loans increased slightly to 0.05% at September 30, 2018, compared to 0.02% at both June 30, 2018, and September 30, 2017.

The ALLL represented 1.30% of total loans receivable, net of undisbursed funds, at September 30, 2018, compared to 1.27% at June 30, 2018, and 1.28% at September 30, 2017. Nonperforming assets rose to $967,000 at September 30, 2108, compared to $647,000 at June 30, 2018, but decreased compared to $2.0 million at September 30, 2017. During the quarter, one commercial real estate loan totaling $325,000 moved into nonaccrual status.

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 for all periods presented.

The decrease in OREO over the past year, as shown in the table above, is primarily due to the Bank’s continued efforts to actively market its OREO properties in an effort to minimize holding costs. There were $821,000 in delinquent loans (loans over 30 days past due) at September 30, 2018, compared to $532,000 in delinquent loans at June 30, 2018, and $84,000 at September 30, 2017.

In circumstances where a customer is experiencing significant financial difficulties, the Company may elect to restructure the loan so the customer can continue to make payments while minimizing the potential loss to the Company. Such restructures must be classified as TDRs.

The following table presents a breakdown of our TDRs, all of which were performing in accordance with their restructured terms at the dates indicated (unaudited):

Net interest income for the quarter ended September 30, 2018, remained relatively stable at $10.1 million, down $70,000 from the quarter ended June 30, 2018, but up from $9.4 million in the quarter ended September 30, 2017. Total interest income was $13.9 million for the quarter ended September 30, 2018, compared to $13.6 million for the quarter ended June 30, 2018, and $12.0 million for the quarter ended September 30, 2017. The increase from the quarter ended June 30, 2018, was due to an increase in average yields on both loans and investment securities, while the increase in total interest income from the third quarter of 2017 was due primarily to an increase in average balances in interest earning assets, along with increased average asset yields.

Total interest expense was $3.8 million for the quarter ended September 30, 2018, compared to $3.5 million for the quarter ended June 30, 2018, and $2.6 million for the quarter ended September 30, 2017. The higher level of interest expense in the most recent two quarters compared to the quarter ended September 30, 2017, was the result of higher short term market interest rates as a result of the FOMC increasing the Federal Funds targeted rate that adversely impacted the Company’s average cost of deposits and borrowings. Average balances of advances outstanding from the Federal Home Loan Bank (“FHLB”) were $177.3 million during the quarter ended September 30, 2018, compared to $213.9 million in the quarter ended June 30, 2018, and $197.1 million for the quarter ended September 30, 2017, as the Bank reduced its balance of FHLB advances by $75.0 million this quarter from the increased deposits. The Bank borrows from the FHLB primarily to supplement its deposit gathering efforts when needed to support asset growth. The average cost of FHLB advances and other borrowings was 2.05% for the quarter ended September 30, 2018, compared to 1.92% for the quarter ended June 30, 2018, and 1.40% for the quarter ended September 30, 2017. The average cost of deposits was 1.40% for the quarter ended September 30, 2018, compared to 1.22% for the quarter ended June 30, 2018, and 1.05% for the quarter ended September 30, 2017.

The following table presents a breakdown of our total deposits, including brokered deposits (unaudited):

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $69,000 at September 30, 2018, $80,000 at June 30, 2018, and $122,000 at September 30, 2017.

Our net interest margin was 3.46% for the quarter ended September 30, 2018, compared to 3.50% for the quarter ended June 30, 2018, and 3.53% for the quarter ended September 30, 2017. The continued narrowing of the net interest margin between periods was primarily due to the cost of our interest-bearing liabilities outpacing the yield on interest-earning assets.

Noninterest income for the quarter ended September 30, 2018, totaled $841,000 compared to $663,000 for the quarter ended June 30, 2018, and $731,000 for the quarter ended September 30, 2017. The increase from the second quarter of 2018 was due primarily to an increase in income from loan-related fees and bank owned life insurance (“BOLI”), partially offset by a decline in wealth management revenue and deposit related fees. The quarter ended June 30, 2018, was also impacted by a $21,000 net loss on sale of investments as the Company elected to sell certain securities and replace them with investments that are expected to perform better in a rising interest rate environment. The increase from the year-ago period was due primarily to higher income from loan related fees, BOLI, and deposit related fees, partially offset by lower wealth management revenue and the absence of the benefit of a net gain on sale of investments, which amounted to $47,000 during the quarter ended September 30, 2017.

Noninterest expense for the quarter ended September 30, 2018, decreased to $7.2 million from $7.5 million in the quarter ended June 30, 2018, and increased from $6.8 million in the quarter ended September 30, 2017. The decrease in noninterest expense in the current quarter compared to the prior quarter was due primarily to lower salaries and employee benefits expense, professional fees, insurance and bond premiums, and occupancy and equipment expenses, partially offset by higher regulatory assessments, marketing expense, and other general and administrative expenses. Salaries and employee benefits were lower in the quarter ended September 30, 2018, compared to the quarter ended June 30, 2018, because a higher proportion of the annual compensation paid to the Company’s directors is incurred in the second quarter than the other quarters during the year, and due to payroll taxes that typically decline during the second half of the year. The increase from the prior year period was due primarily to the increase in expenses associated with the growth in the Bank’s number of employees and locations during the past year.

The Company’s federal income tax provision was $707,000 for the quarter ended September 30, 2018, compared to $603,000 for the quarter ended June 30, 2018, and $909,000 for the quarter ended September 30, 2017. The federal income tax provision for June 30, 2018, benefited from stock option exercises that occurred at prices higher than originally estimated, resulting in higher allowable expense recognition for tax purposes. The Company’s federal income tax provision during 2018 continued to benefit from the impact of the Tax Cuts and Jobs Act of 2017 that lowered the corporate income tax rate from 35% to 21%.

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 10 full-service banking offices. We are a part of the ABA NASDAQ Community Bank Index and the Russell 2000 Index. 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: increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; 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 2018 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.

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

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

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures
	At or For the Quarter Ended
	Sep 30,				Jun 30,				Mar 31,				Dec 31,				Sep 30,
	2018				2018				2018				2017				2017
	(Dollars in thousands, except per share data)
Performance Ratios:
Return on assets		0.90	%			1.01	%			2.28	%			0.80	%			0.66	%
Return on equity		7.17				8.28				19.16				6.70				5.13
Dividend payout ratio		29.63				26.67				10.47				29.17				38.89
Equity-to-assets ratio		12.53				12.46				12.13				11.79				12.10
Tangible equity ratio		12.38				12.31				11.98				11.63				11.92
Net interest margin		3.46				3.50				3.88				3.65				3.53
Average interest-earning assets to average interest-bearing liabilities		115.20				114.21				113.46				113.32				114.08
Efficiency ratio		66.06				69.38				60.42				66.69				67.64
Noninterest expense as a percent of average total assets		2.33				2.44				2.34				2.34				2.42
Book value per common share	$	14.17			$	13.97			$	13.80			$	13.27			$	13.08
Tangible book value per share		13.99				13.78				13.60				13.07				12.86
Capital Ratios: (1)
Tier 1 leverage ratio		10.37	%			10.22	%			10.44	%			10.20	%			10.80	%
Common equity tier 1 capital ratio		13.58				13.21				13.13				12.52				12.95
Tier 1 capital ratio		13.58				13.21				13.13				12.52				12.95
Total capital ratio		14.83				14.47				14.38				13.77				14.20
Asset Quality Ratios: (2)
Nonperforming loans as a percent of total loans		0.05	%			0.02	%			0.02	%			0.02	%			0.02	%
Nonperforming assets as a percent of total assets		0.08				0.05				0.05				0.05				0.17
ALLL as a percent of total loans		1.30				1.27				1.31				1.28				1.28
Net (recoveries) charge-offs to average loans receivable, net		(0.02	)			(0.00	)			(0.43	)			(0.20	)			(0.04	)
Allowance for Loan Losses:
ALLL, beginning of the quarter	$	12,754			$	13,136			$	12,882			$	12,110			$	11,285
Provision (Recapture of provision)		200				(400	)			(4,000	)			(1,200	)			500
Charge-offs		-				-				-				-				-
Recoveries		162				18				4,254				1,972				325
ALLL, end of the quarter	$	13,116			$	12,754			$	13,136			$	12,882			$	12,110

⁽¹⁾ Capital ratios are for First Financial Northwest Bank only.
⁽²⁾ Loans are reported net of undisbursed funds.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures
	At or For the Quarter Ended
	Sep 30,				Jun 30,				Mar 31,				Dec 31,				Sep 30,
	2018				2018				2018				2017				2017
	(Dollars in thousands)
Yields and Costs:
Yield on loans		5.05	%			5.00	%			5.37	%			5.05	%			4.95	%
Yield on investments available-for-sale		3.00				2.87				2.65				2.52				2.59
Yield on interest-earning deposits		1.92				1.48				1.32				1.23				1.27
Yield on FHLB stock		6.27				4.21				4.40				3.42				2.91
Yield on interest-earning assets		4.77	%			4.70	%			4.98	%			4.67	%			4.51	%
Cost of interest-bearing deposits		1.40	%			1.22	%			1.15	%			1.08	%			1.05	%
Cost of borrowings		2.05				1.92				1.66				1.46				1.40
Cost of interest-bearing liabilities		1.52	%			1.37	%			1.25	%			1.16	%			1.13	%
Average Balances:
Loans	$	993,272			$	997,059			$	985,799			$	963,097			$	879,075
Investments available-for-sale		140,584				141,035				142,236				141,962				132,959
Interest-earning deposits		12,223				11,927				11,717				13,843				33,854
FHLB stock		8,540				10,004				9,593				9,859				9,126
Total interest-earning assets	$	1,154,619			$	1,160,025			$	1,149,345			$	1,128,761			$	1,055,014
Interest-bearing deposits	$	825,055			$	801,852			$	804,451			$	780,671			$	727,702
Borrowings		177,250				213,857				208,544				215,418				197,098
Total interest-bearing liabilities	$	1,002,305			$	1,015,709			$	1,012,995			$	996,089			$	924,800
Average assets	$	1,225,189			$	1,229,341			$	1,218,418			$	1,199,774			$	1,120,176
Average stockholders' equity		154,444				150,243				144,786				142,390				143,975

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 of the tangible equity ratio and tangible book value. The Company's intangible assets consist of goodwill and core deposit intangible. Tangible equity is calculated by subtracting intangible assets from total stockholder's equity. Tangible assets is calculated by subtracting intangible assets from total assets. The tangible equity ratio is tangible equity divided by tangible assets. Tangible book value per share is calculated by dividing tangible equity by the number of common shares outstanding. The Company believes that these non-GAAP measures provide a more consistent presentation of our capital and facilitate peer comparison that is desired by investors.

Non-GAAP financial measures have limitations, are not audited and should only be used in conjunction with the other measures in this earnings release that are presented in accordance with GAAP.

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