First Financial Northwest, Inc. Reports First Quarter 2010 Financial Results

RENTON, Wash., April 27, 2010 (GLOBE NEWSWIRE) -- First Financial Northwest, Inc. (the "Company") (Nasdaq:FFNW), the holding company for First Savings Bank Northwest (the "Bank"), today reported a net loss for the first quarter ended March 31, 2010 of $17.8 million, or $1.02 per diluted share, as compared to net income of $1.2 million, or $0.06 per diluted share for the quarter ended March 31, 2009.

The primary reasons for the net loss for the first quarter of 2010 include a $13.0 million provision for loan losses, $3.4 million in noninterest expense related to our other real estate owned ("OREO") and an additional $7.9 million valuation allowance related to our deferred tax asset. The increase in our provision for loan losses was primarily due to continued decreases in updated appraised values of real estate collateral securing our nonperforming loans. Similarly, our OREO related expenses included a $2.3 million valuation allowance reflecting declines in the value of the properties held as OREO. We have recorded an additional valuation allowance on our deferred tax asset as we have concluded that based on our recent loss experience we may not be able to realize the full benefit of that asset. In light of the continuing challenging operating environment, the Board of Directors has determined that it is appropriate to suspend our cash dividend at this time.

"Appraisal values have continued to reflect lower prices over the past three to six months in our primary market area," said Victor Karpiak, Chairman, President and the Chief Executive Officer of First Financial Northwest, Inc. Mr. Karpiak added, "Our focus remains to reduce our troubled loans and nonperforming assets. During the first quarter of 2010 our special assets group has converted approximately $12.7 million of nonperforming assets to performing assets. As a result of our recent performance, we do not believe that we will be able to fully utilize our deferred tax asset, however, we have the potential to take advantage of the benefits, from a tax perspective, when the economy turns around and we return to profitability." 

Tier I leverage, Tier I risk-based and Total risk-based capital ratios for the Bank only at March 31, 2010 were 11.33%, 16.43% and 17.73%, respectively, which compare to the regulatory ratios for well capitalized banks of 5%, 6% and 10%, respectively. In addition, the parent company of the Bank at March 31, 2010 had approximately an additional $49.1 million of capital.

Total assets and liabilities both remained relatively stable at $1.3 billion and $1.1 billion, respectively at March 31, 2010 and December 31, 2009.  Net loans receivable declined $22.4 million between December 31, 2009 and March 31, 2010 as a result of a decline in new loan originations and continuing payoffs on existing loans, $14.4 million of transfers to OREO and $9.7 million of charge-offs. Deposits increased $23.2 million, or 2.5% to $962.6 million from December 31, 2009. The growth was predominately in the certificates of deposit accounts of $19.4 million and to a lesser extent money market accounts of $2.9 million.

Net interest income for the quarter ended March 31, 2010 declined slightly to $8.1 million from $8.2 million for the same period in 2009. The reason for this decline was a $1.1 million reduction in total interest income resulting primarily from a decrease of $529,000 in interest income on loans as a result of $797,000 in foregone interest income for the first quarter of 2010 and a $618,000 reduction in interest earned on our investments available for sale due to the sale of investments during the fourth quarter of 2009. The decline in total interest income was offset by a $981,000 decline in our total interest expense reflecting an 84 basis point reduction in our cost of funds to 2.81% for the quarter ended March 31, 2010 from 3.65% for the same quarter in 2009. Our interest rate spread increased 27 basis points to 2.23% from 1.96% while the net interest margin decreased to 2.59% from 2.74% for the same period in 2009.

During the quarter ended March 31, 2010, management continued to evaluate the adequacy of the allowance for loan losses and concluded that a provision of $13.0 million was required for the quarter. This provision increased the allowance for loan losses to $36.5 million at March 31, 2010 from $33.0 million at December 31, 2009. Charge-offs for the first quarter of 2010 were $9.7 million as compared to $21.8 million for the fourth quarter of 2009. We are continuing to see an increase in the level of nonperforming assets and continued decreases in updated appraised values of real estate collateral securing our nonperforming loans. Our total nonperforming loans, net of undisbursed funds, increased $25.2 million at March 31, 2010 to $145.9 million from $120.7 million at December 31, 2009. Nonperforming loans include loans to borrowers who are experiencing deteriorating financial positions.  These borrowers may be current on their loan payments but there is doubt as to the ultimate recoverability of the full principal and interest due to the Bank in accordance with the terms of the loan agreement. As a result, many of our nonperforming loans may be current on their loan payments but because of the uncertainty of the borrowers' future ability to repay the entire principal and interest due to the Bank, we have classified them as nonperforming.

The following table presents a breakdown of our nonperforming assets:

 

The largest addition to nonperforming loans during the first quarter of 2010 was $43.1 million of loans related to our two largest merchant builders who are current on their loan payments. As a result of the prolonged recession, these builders are beginning to experience cash flow difficulties. We are currently establishing workout arrangements with these borrowers to reduce the Bank's exposure. As a result, we classified these loans as nonperforming at March 31, 2010. These loans are included in the one-to-four family residential and construction/land development portfolios.

During the first quarter of 2010, loans transferred from the nonperforming loan category to OREO totaled $14.4 million. Charge-offs at March 31, 2010 related to the valuation of the OREO inventory to market were $2.3 million. OREO increased $8.7 million or 73.2% to $20.5 million at March 31, 2010 from $11.8 million at December 31, 2009. The majority of this increase was in the construction/land development category. Our recently organized special assets department sold $3.5 million of OREO properties during the first quarter of 2010.  We evaluate the market value of our OREO inventory quarterly. This evaluation includes, among other things, obtaining independent appraisals on these properties every six months or sooner if management believes significant changes have affected the market values of these properties. As a result of this evaluation, we expensed $2.3 million (which is included in other noninterest expense on the consolidated statement of operations) related to the decline in the market value of our OREO as of March 31, 2010. The following table presents a breakdown of our OREO at March 31, 2010:

 

Noninterest expense for the first quarter of 2010 was $8.9 million compared to $5.1 million for the same quarter in 2009, an increase of $3.8 million. OREO related expenses accounted for $3.4 million of the increase. These expenses included decreases in OREO market values, losses from sales and maintenance expenses.

As of March 31, 2010 and December 31, 2009, our net deferred income tax assets were $5.4 million and $12.1 million, respectively. Our primary deferred tax assets relate to our allowance for loan losses, our contribution to the First Financial Northwest Foundation and our impairment charges relating to our investment in the AMF Ultra Short Mortgage Fund. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent upon projections of future earnings which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to our deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. We have concluded that we will not be able to realize all of our deferred tax assets. As a result, during the first quarter of 2010, we established an additional $7.9 million valuation allowance against our deferred tax asset. In the future, depending upon our profitability, our conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of a portion or all of the deferred tax asset valuation allowance.

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 3000 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 Office of Thrift Supervision 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 a formal enforcement action against the Company or the Bank, such as a cease and desist order to take 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 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, 2009. 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.