First Financial Northwest, Inc. Reports Second Quarter Net Income of $2.1 Million or $0.22 per Diluted Share

RENTON, Wash., July 28, 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 June 30, 2020, of $2.1 million, or $0.22 per diluted share, compared to net income of $1.7 million, or $0.17 per diluted share, for the quarter ended March 31, 2020, and $3.3 million, or $0.33 per diluted share, for the quarter ended June 30, 2019. For the six months ended June 30, 2020, net income was $3.8 million, or $0.39 per diluted share, compared to net income of $5.2 million, or $0.52 per diluted share, for the comparable six‑month period in 2019.

“As we all know, the first six months of 2020 have been quite different than we initially anticipated,” said Joseph W. Kiley III, President and Chief Executive Officer. “I am extremely proud that through it all the First Financial Northwest team has maintained its strength, integrity and passion. While we took necessary precautions to support our team with flexible work accommodations and to manage COVID‑19 health risks, we also demonstrated our high touch philosophy to meet the needs and expectations of our customers, communities, and shareholders. We delivered quality solutions by working with existing customers in a variety of ways and invited new customers to experience our superior service via the Paycheck Protection Program. In the three months ending on June 30, 2020, we had facilitated 455 PPP loans totaling $51.7 million, with the potential to support upwards of 5,000 jobs,” continued Kiley.

“I am also very pleased with the progress being made to reduce our cost of funds and improve our deposit mix. During the quarter, our cost of funds declined to 1.34% compared to 1.69% in the previous quarter, with demand deposits increasing $72.0 million,” continued Kiley. “We also saw our net interest margin increase slightly even though we added over $50 million of lower-yielding PPP loans in the quarter.”

Kiley stated, “As a result of economic concerns because of the COVID-19 pandemic, we again increased our allowance for loan loss risk factors for certain loan categories, which resulted in a provision for loan losses of $300,000 for the second quarter. Without the adjustment for COVID‑19 related economic factors, we would not have recorded a provision for loan losses in the quarter.”

“While I am very positive about our geographical expansion strategy and our success to date, as well as the market opportunities offered with the two new offices planned for Gig Harbor in Pierce County and Issaquah in King County, we expect to slow the pace of expansion in the current environment,” concluded Kiley.

Highlights for the quarter ended June 30, 2020:

• Paycheck Protection Program (“PPP”) loans totaled $51.7 million.
• Net loans receivable increased $46.1 million to $1.14 billion at June 30, 2020, from $1.09 billion at March 31, 2020, and $85.6 million from $1.05 billion at June 30, 2019.
• Total deposits increased 12.6% to $1.13 billion as of June 30, 2020, from $1.00 billion at March 31, 2020, and 9.8% from $1.03 billion at June 30, 2019.
• The Bank received regulatory approval to open offices in Gig Harbor, Pierce County, Washington, and Issaquah, King County, Washington.
• The Company’s book value per share was $15.32 at June 30, 2020, compared to $15.03 at March 31, 2020, and $14.83 at June 30, 2019.
• The Company repurchased 135,450 shares during the quarter at an average price of $9.42 per share under a stock repurchase plan that expired on July 27, 2020.
• The Company’s Board of Directors authorized a new stock repurchase plan to repurchase up to 5% of its outstanding shares of common stock effective July 30, 2020, for 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 June 30, 2020, were 10.0% and 15.0%, respectively, compared to 10.3% and 14.7%, respectively, at both March 31, 2020, and June 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 $300,000 provision for loan losses during the quarter ended June 30, 2020.

Total deposits at June 30, 2020, increased $126.2 million to $1.13 billion, from $1.00 billion at March 31, 2020, and was up $100.5 million from $1.03 billion at June 30, 2019. Demand deposits increased $72.0 million during the quarter, due in large part to deposits related to PPP loans funded during the quarter. The continued success of our deposit gathering efforts through our expanded branch network has allowed the Company to reduce its dependence on brokered deposits and FHLB advances as sources of funds.

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 $17,000 at June 30, 2020, $22,000 at March 31, 2020, and $41,000 at June 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 $17,000.
⁽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 $22,000.
⁽²⁾ Kent office opened January 31, 2019; Kirkland, November 12, 2019; and University Place, March 2, 2020.

Net loans receivable increased to $1.14 billion at June 30, 2020, from $1.09 billion at March 31, 2020, and $1.05 billion at June 30, 2019. PPP loan originations of $51.7 million contributed to this quarterly increase. The average balance of net loans receivable totaled $1.12 billion for the quarter ended June 30, 2020, compared to $1.10 billion for the quarter ended March 31, 2020, and $1.05 billion for the quarter ended June 30, 2019.

The Company recorded a $300,000 provision for loan losses in both the quarters ended June 30, 2020, and March 31, 2020, and a recapture of provision for loan losses of $800,000 in the quarter ended June 30, 2019. The provision in the quarter ended June 30, 2020, was primarily attributed to adjustments to economic factors due to COVID-19 primarily in our Commercial Real Estate and Construction/Land portfolios. The provision in the quarter ended March 31, 2020, was due primarily to forecasted credit deterioration for all loans categories in response to disruption caused by the COVID-19 pandemic. The $800,000 recapture of provision for loan losses in the quarter ended June 30, 2019, was primarily due to the recapture of provision associated with a single construction loan with a balance of $11.6 million after an impairment analysis concluded that the Bank did not anticipate incurring losses on the loan.

The ALLL represented 1.20% of total loans receivable at June 30, 2020, compared to 1.22% at both March 31, 2020, and June 30, 2019. Excluding the PPP loan balances, which are 100% guaranteed by the Small Business Administration, the ALLL represented 1.25% of total loans receivable at June 30, 2020. Nonperforming loans totaled $2.2 million at both June 30, 2020, and March 31, 2020, compared to $146,000 at June 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 conducted in the first quarter of 2020, the Company does not expect to incur a loss on this credit. As of June 30, 2020, there were no loans 30 days or more past due that had not requested a deferral other than the $2.1 million multifamily loan in foreclosure and one consumer loan of less than $10,000. OREO remained unchanged at $454,000 at June 30, 2020, March 31, 2020, and June 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 June 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 June 30, 2020, TDRs totaled $4.3 million, compared to $5.0 million at March 31, 2020, and $6.7 million at June 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 COVID‑19 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 TDRs.

Net interest income for the quarter ended June 30, 2020, totaled $10.1 million, compared to $9.7 million for each of the quarters ended March 31, 2020, and June 30, 2019.

Interest income totaled $14.1 million for the quarter ended June 30, 2020, compared to $14.5 million for the quarter ended March 31, 2020, and $14.9 million for the quarter ended June 30, 2019. The decline in the current quarter compared to the quarter ended March 31, 2020, was primarily due to the recent decline in interest rates as the Federal Reserve’s Open Market Committee dramatically reduced its short-term interest rate targets by 150 basis points in March 2020 in response to the COVID-19 pandemic. This partially impacted the results for the quarter ended March 31, 2020, however it had a larger impact with the low rates in place for the entire quarter ended June 30, 2020. In addition, the yields on the PPP loans originated during the quarter ended June 30, 2020 were well below the yields in the remainder of our loan portfolio. As a result, average loan yields declined to 4.72% at June 30, 2020, compared to 4.94% at March 31, 2020, and 5.19% at June 30, 2019.

Total interest expense was $4.0 million for the quarter ended June 30, 2020, compared to $4.8 million for the quarter ended March 31, 2020, and $5.2 million for the quarter ended June 30, 2019. In addition to improving our deposit mix by increasing lower cost demand deposits, we were able to successfully reduce the rates paid on our interest-bearing deposits during the quarter ended June 30, 2020.  As a result, the average cost of  deposits declined to 1.49% for the quarter ended June 30, 2020, compared to 1.81% for the quarter ended March 31, 2020, and 1.89% for the quarter ended June 30, 2019. The decline from the quarter ended June 30, 2019, was due primarily to a reduced level of brokered deposits and a declining interest rate environment. Specifically, we replaced higher cost brokered deposits with retail deposits through our branch network and FHLB advances obtained in conjunction with interest rate swaps to secure lower long-term interest rates. Advances from the FHLB totaled $120.0 million at June 30, 2020, compared to $160.0 million at March 31, 2020, and $105.0 million at June 30, 2019. The average cost of borrowings was 1.08% for the quarter ended June 30, 2020, compared to 1.48% for the quarter ended March 31, 2020, and 2.28% for the quarter ended June 30, 2019. At June 30, 2020, the entire balance of our $120.0 million in borrowings were short-term FHLB advances tied to long-term interest rate swaps. During the quarter ended March 31, 2020, we entered into interest rate swap transactions totaling $45.0 million. In addition, we entered into $25.0 million in forward starting interest rate swaps beginning October 25, 2021, to partially replace a $50.0 million swap maturing on that date.

Total stockholders’ equity increased slightly to $154.0 million at June 30, 2020, from $153.1 million at March 31, 2020, primarily due to net income partially offset by share repurchases. The Company’s book value per common share increased to $15.32 at June 30, 2020, from $15.03 at March 31, 2020, due in part to the Company’s success in repurchasing shares well below book value per share during the quarter.

The net interest margin was 3.12% for the quarter ended June 30, 2020, compared to 3.11% for the quarter ended March 31, 2020, and 3.23% for the quarter ended June 30, 2019. The modest improvement in the quarter ended June 30, 2020, from the quarter ended March 31, 2020, relates primarily to the reduction in our cost of interest-bearing liabilities outpacing the reduction in yield on interest-earning assets. The decline in net interest margin for the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019, was due primarily to a significant decline in interest-earning asset yields, partially offset by a decline in cost of interest-bearing liabilities.

Noninterest income for the quarter ended June 30, 2020, totaled $789,000, compared to $990,000 for the quarter ended March 31, 2020, and $879,000 for the quarter ended June 30, 2019. The decrease in noninterest income for the quarter ended June 30, 2020, compared to the quarter ended March 31, 2020, was primarily due to a reduction in loan prepayment penalties. The decrease from the year-ago quarter was primarily due to lower loan prepayment penalties in the quarter ended June 30, 2020, and fees received on new loan interest rate swap agreements in the quarter ended June 30, 2019.

Noninterest expense totaled $7.9 million for the quarter ended June 30, 2020, compared to $8.3 million for the quarter ended March 31, 2020, and $7.3 million in the quarter ended June 30, 2019. Salaries and employee benefits for the quarter ended June 30, 2020, decreased from the quarter ended March 31, 2020, primarily due to a reduction in stock-based compensation elements reflecting the recent decline in the Company’s stock price, along with the reclassification of the compensation expense related to PPP loan originations to loan direct costs. Other general and administrative expenses increased in the current quarter due to an increase in the Company’s unfunded commitment reserve. Unfunded commitments totaled $114.0 million as of June 30, 2020, compared to $102.9 million as of March 31, 2020. The change in unfunded commitments resulted in a $29,000 expense for the quarter ended June 30, 2020, compared to a recapture of expense of $72,000 for the quarter ended March 31, 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 due to the growth in our operations.

COVID-19 Related Information

As noted above, in response to the current global situation surrounding the COVID-19 pandemic, we are providing assistance to our customers in a variety of ways and participating in the PPP offered under the CARES Act as a Small Business Administration (“SBA”) lender, and taking the steps necessary while working with our loan customers to effectively manage our portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the crisis. The following is presented to outline certain activities in this regard:

Paycheck Protection Program
As of June 30, 2020, we had originated 455 requests for PPP loans totaling approximately $51.7 million. A total of 375 of these loans, or more than 82%, are for loan amounts of $150,000 or less and represent $17.8 million of the total. According to data received from customers in this process, these funds will assist small businesses who provided approximately 5,000 jobs in the community to retain employees. We are very proud of the countless hours our employees spent processing these applications and helping so many small businesses.

Modifications
The primary method of relief is to allow the borrower to defer their loan payments for three to nine months, while others have been provided the opportunity to pay interest only depending upon their specific circumstances. The CARES Act and regulatory guidelines suspend the determination of certain loan modifications related to the COVID‑19 pandemic from being treated as TDRs. The following table provides detail on the modifications approved and processed through June 30, 2020:

As of July 16, 2020, $16.6 million in loans included in the table above for which the deferral period had expired had resumed their scheduled payments. Extension requests were approved on eight loans with a total balance of $17.6 million which were previously modified.

Additional Loan Portfolio Details
Total balances drawn on outstanding lines of credit as of December 31, 2019, were $47.1 million and the unused portion of lines of credit totaled $38.1 million. As of March 31, 2020, total balances drawn increased slightly to $48.4 million with $30.3 million in available lines of credit remaining. At June 30, 2020, total balances drawn declined to $46.6 million and the unused portion of lines of credit totaled $35.1 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 June 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 13 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 COVID‑19 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.

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

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 non‑GAAP 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 of the tangible equity ratio and tangible book value per share. The Company's intangible assets consist of goodwill and core deposit intangible. Tangible equity is calculated by subtracting intangible assets from total stockholders’ equity. Tangible assets are 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 its capital and facilitate peer comparison that is desired by investors.

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: