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Section 1: 8-K (FORM 8-K)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):  July 25, 2019

           First Financial Northwest, Inc.           
(Exact name of registrant as specified in its charter)

Washington
 
001-33652
 
26-0610707
State or other jurisdiction of
incorporation
 
Commission
File Number
 
(I.R.S. Employer
Identification No.)
         
201 Wells Avenue South, Renton, Washington
 
98057
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number (including area code) (425) 255-4400

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.

[  ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))

[  ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4 (c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on
which registered
Common Stock, par value $0.01 per share
 
FFNW
 
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]


Item 2.02 Results of Operations and Financial Condition

On July 25, 2019, First Financial Northwest, Inc. (the “Company”) issued its earnings release for the quarter ended June 30, 2019. A copy of the earnings release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.


Item 8.01 Other Events
 
First Financial Northwest, Inc. announced on July 25, 2019 that the Company's Board of Directors declared a quarterly cash dividend of $0.09 per share on the Company's outstanding shares of common stock.  The dividend will be paid on September 20, 2019 to shareholders of record as of the close of business on September 6, 2019.  The Company also announced that the Board of Directors authorized the repurchase of up to 520,000 shares of the Company's common stock, or approximately 5.0% of its outstanding shares.  The repurchase will be conducted in the open market or in privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934.  The press release announcing the dividend and the stock repurchase is attached as Exhibit 99.2 and incorporated by reference herein.


Item 9.01. Financial Statements and Exhibits

(d)              Exhibits

The following exhibit is being furnished or filed, as appropriate, herewith and this list shall constitute the exhibit index:

99.1 Earnings Release dated July 25, 2019
99.2 Press Release dated July 25, 2019







2

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 
FIRST FINANCIAL NORTHWEST, INC.
 
 
 
 
DATE: July 25, 2019
By:  /s/ Richard P. Jacobson                        
 
        Richard P. Jacobson
        Executive Vice President and
        Chief Financial Officer

 

       





3


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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit 99.1





 
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.
Reports Second Quarter Net Income of $3.3 Million or $0.33 per Diluted Share

Renton, Washington – July 25, 2019 - 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, 2019, of $3.3 million, or $0.33 per diluted share, compared to net income of $1.9 million, or $0.19 per diluted share, for the quarter ended March 31, 2019, and $3.1 million, or $0.30 per diluted share, for the quarter ended June 30, 2018. For the six months ended June 30, 2019, net income was $5.2 million, or $0.52 per diluted share, compared to net income of $9.9 million, or $0.96 per diluted share, for the comparable six-month period in 2018.

“I am very pleased with the improvement to net income in the quarter, despite the challenges that a flat yield curve presents,” stated Joseph W. Kiley III, President and Chief Executive Officer. “In recent quarters, interest expense increased more rapidly than interest income as competition for deposits in the Puget Sound Region remains intense,” continued Kiley. “However, it was great to see deposit growth during the quarter, including an increase of $3.2 million in noninterest‑bearing checking accounts. Two of our offices in particular produced strong results during the quarter. Our Edmonds office, increased deposits by $10.8 million, and our Crossroads office in Bellevue, increased their deposit base by $6.4 million,” concluded Kiley.

Net loans receivable remained stable at $1.05 billion at both June 30, 2019, and March 31, 2019, but were up from $989.3 million at June 30, 2018. The average balance of net loans receivable totaled $1.05 billion for the quarter ended June 30, 2019, compared to $1.03 billion for the quarter ended March 31, 2019, and $997.1 million for the quarter ended June 30, 2018.

The Company recorded an $800,000 recapture of provision for loan losses in the quarter ended June 30, 2019, compared to a $400,000 provision for loan losses in the quarter ended March 31, 2019, and a recapture of provision for loan losses of $400,000 in the quarter ended June 30, 2018. The recapture of provision for loan losses in the quarter ended June 30, 2019, was due primarily to the recapture of provision associated with a single construction loan with a balance of $11.6 million. The loan was technically in default and classified as impaired. Impaired loans are reviewed individually to determine any loan loss allowance requirement. All payments on the loan were current as of June 30, 2019, and the loan is well collateralized. The impairment analysis concluded that the Bank does not anticipate incurring losses on this loan and funds previously allocated to this loan in the allowance for loan and lease losses calculation were recaptured during the quarter. The provision in the quarter ended March 31, 2019, was due primarily to growth in net loans receivable. The recapture of provision for loan losses in the quarter ended June 30, 2018, was due primarily to a reduction in total construction loan balances outstanding.


Additional highlights for the quarter ended June 30, 2019:
Total deposits increased to $1.03 billion at June 30, 2019, compared to $955.3 million at March 31, 2019, and $832.8 million at June 30, 2018. Brokered deposits increased $57.4 million to $180.8 million and noninterest-bearing deposits increased $3.2 million to $49.2 million at June 30, 2019.
The Company’s book value per share was $14.83 at June 30, 2019, compared to $14.50 at March 31, 2019, and $13.97 at June 30, 2018.
The Company repurchased 82,300 shares during the quarter at an average price of $16.28 per share pursuant to its stock repurchase plan. The entire 550,000 shares authorized under the plan were repurchased at an average price of $15.72 per share over the term of the plan, which commenced on November 5, 2018, and expired on May 3, 2019.
The Bank’s Tier 1 leverage and total capital ratios at June 30, 2019, were 10.3% and 14.7%, respectively, compared to 10.3% and 14.4% at March 31, 2019, and 10.2% and 14.5% at June 30, 2018.
Based on management’s evaluation of the adequacy of the Allowance for Loan and Lease Losses (“ALLL”), there was an $800,000 recapture of provision for loan losses during the quarter ended June 30, 2019.
The ALLL represented 1.22% of total loans receivable, net of undisbursed funds, at June 30, 2019, compared to 1.30% at March 31, 2019, and 1.27% at June 30, 2018. Nonperforming assets totaled $600,000 at June 30, 2019, compared to $605,000 at March 31, 2019, and $647,000 at June 30, 2018.
The following table presents a breakdown of nonperforming assets (unaudited):
   
Jun 30,
   
Mar 31,
   
Jun 30,
   
Three
Month
   
One
Year
 
   
2019
   
2019
   
2018
   
Change
   
Change
 
   
(Dollars in thousands)
 
Nonperforming loans:
                             
One-to-four family residential
 
$
103
   
$
107
   
$
116
   
$
(4
)
 
$
(13
)
Consumer
   
43
     
44
     
48
     
(1
)
   
(5
)
Total nonperforming loans
   
146
     
151
     
164
     
(5
)
   
(18
)
                                         
Other real estate owned (“OREO”)
   
454
     
454
     
483
   
     
(29
)
                                         
Total nonperforming assets (1)(2)
 
$
600
   
$
605
   
$
647
   
$
(5
)
 
$
(47
)
                                         
Nonperforming assets as a
                                       
percent of total assets
   
0.05
%
   
0.05
%
   
0.05
%
               
(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, 2019.
(2) The $11.6 million impaired loan referenced in this document is not included in this table as all payments on the loan were current at June 30, 2019.

OREO remained unchanged at $454,000 at both June 30, 2019, and March 31, 2019, but declined from $483,000 at June 30, 2018, as a result of a write down in value of the two remaining OREO properties during the quarter ended March 31, 2019.

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. At June 30, 2019, TDRs totaled $6.7 million, compared to $7.8 million at March 31, 2019, and $13.8 million at June 30, 2018.
2

Net interest income for the quarter ended June 30, 2019, totaled $9.7 million, compared to $9.9 million for the quarter ended March 31, 2019, and $10.1 million for the quarter ended June 30, 2018. Net interest income decreased from all prior periods due to rising market rates and competitive pressures increasing the cost of liabilities.

Total interest income increased to $14.9 million during the quarter ended June 30, 2019, compared to $14.6 million in the quarter ended March 31, 2019, and $13.6 million in the quarter ended June 30, 2018. The increase in total interest income from the prior periods was due primarily to the higher average net loan balances in the quarter ended June 30, 2019.

Total interest expense increased to $5.2 million for the quarter ended June 30, 2019, compared to $4.7 million for the quarter ended March 31, 2019, and $3.5 million for the quarter ended June 30, 2018. The higher level of interest expense in the quarter ended June 30, 2019, was due primarily to the higher level of short-term market interest rates for liabilities and a competitive market for attracting deposits, in addition to an increase of $57.4 million in brokered certificates of deposit accounts. The balance of brokered certificates of deposits increased to $180.8 million at June 30, 2019, compared to $123.4 million at March 31, 2019, and $75.5 million at June 30, 2018, as the Bank continued to opportunistically acquire brokered deposits late in the quarter ended June 30, 2019. The Bank borrows from the FHLB or raises money in the national brokered deposit market to supplement its deposit gathering efforts when needed to support the Company’s growth. During the quarter ended June 30, 2019, interest rates in the brokered deposit market were lower than short term FHLB advances, therefore FHLB advances were replaced with lower cost brokered deposits. Advances from the Federal Home Loan Bank (“FHLB”) totaled $105.0 million at June 30, 2019, compared to $163.5 million at March 31, 2019, and $224.0 million at June 30, 2018. The average cost of FHLB advances was 2.28% for the quarter ended June 30, 2019, compared to 2.26% for the quarter ended March 31, 2019, and 1.92% for the quarter ended June 30, 2018.

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

   
Jun 30,
2019
   
Mar 31,
2019
   
Jun 30,
2018
   
Three
Month
Change
   
One Year
Change
 
Deposits:
 
(Dollars in thousands)
       
Noninterest-bearing
 
$
49,219
   
$
46,026
   
$
51,454
   
$
3,193
   
$
(2,235
)
Interest-bearing demand
   
50,414
     
51,096
     
39,231
     
(682
)
   
11,183
 
Statement savings
   
22,593
     
23,770
     
26,597
     
(1,177
)
   
(4,004
)
Money market
   
310,587
     
312,057
     
304,542
     
(1,470
)
   
6,045
 
Certificates of deposit, retail (1)
   
412,134
     
398,956
     
335,440
     
13,178
     
76,694
 
Certificates of deposit, brokered
   
180,763
     
123,367
     
75,488
     
57,396
     
105,275
 
Total deposits
 
$
1,025,710
   
$
955,272
   
$
832,752
   
$
70,438
   
$
192,958
 
(1) Balance of retail certificates of deposit for acquired branches are net of an unamortized aggregate fair value adjustment of $41,000 at June 30, 2019, $49,000 at March 31, 2019, and $80,000 at June 30, 2018.


3


The following tables present an analysis of total deposits by branch office (unaudited):
   
June 30, 2019
 
   
Noninterest-
bearing
demand
   
Interest-
bearing
demand
   
Statement
savings
   
Money
market
   
Certificates
of deposit,
retail
   
Certificates
of deposit,
brokered
   
Total
 
   
(Dollars in thousands)
 
King County
                                         
Renton
 
$
24,692
   
$
22,315
   
$
18,848
   
$
196,902
   
$
331,260
     
-
   
$
594,017
 
Landing
   
3,837
     
2,357
     
25
     
14,068
     
10,655
     
-
     
30,942
 
Woodinville (1)
   
1,737
     
2,107
     
610
     
13,466
     
7,019
     
-
     
24,939
 
Bothell
   
505
     
79
     
5
     
2,285
     
3,928
     
-
     
6,802
 
Crossroads
   
2,773
     
6,842
     
53
     
26,733
     
12,840
     
-
     
49,241
 
Kent (2)
   
51
     
1,773
     
47
     
3,859
     
793
     
-
     
6,523
 
Total King County
   
33,595
     
35,473
     
19,588
     
257,313
     
366,495
     
-
     
712,464
 
                                                         
Snohomish County
                                                       
Mill Creek
   
1,681
     
2,088
     
700
     
14,521
     
10,545
     
-
     
29,535
 
Edmonds
   
7,260
     
4,409
     
255
     
16,635
     
17,170
     
-
     
45,729
 
Clearview (1)
   
3,491
     
3,942
     
998
     
6,281
     
3,540
     
-
     
18,252
 
Lake Stevens (1)
   
1,955
     
1,938
     
439
     
5,625
     
4,012
     
-
     
13,969
 
Smokey Point (1)
   
1,237
     
2,564
     
613
     
10,212
     
10,372
     
-
     
24,998
 
Total Snohomish County
   
15,624
     
14,941
     
3,005
     
53,274
     
45,639
     
-
     
132,483
 
                                                         
Total retail deposits
   
49,219
     
50,414
     
22,593
     
310,587
     
412,134
     
-
     
844,947
 
Brokered deposits
   
-
     
-
     
-
     
-
     
-
     
180,763
     
180,763
 
Total deposits
 
$
49,219
   
$
50,414
   
$
22,593
   
$
310,587
   
$
412,134
   
$
180,763
   
$
1,025,710
 
(1) Balance of retail certificates of deposit for acquired branches are net of an unamortized aggregate fair value adjustment of $41,000.
(2) Kent branch opened January 31, 2019.

   
March 31, 2019
 
   
Noninterest-
bearing
demand
   
Interest-
bearing
demand
   
Statement
savings
   
Money
market
   
Certificates
of deposit,
retail
   
Certificates
of deposit,
brokered
   
Total
 
   
(Dollars in thousands)
 
King County
                                         
Renton
 
$
27,344
   
$
25,277
   
$
19,920
   
$
202,635
   
$
324,345
   
$
-
   
$
599,521
 
Landing
   
2,473
     
1,332
     
25
     
16,228
     
10,519
     
-
     
30,577
 
Woodinville (1)
   
1,522
     
3,324
     
628
     
14,719
     
6,814
     
-
     
27,007
 
Bothell
   
217
     
47
     
128
     
2,941
     
3,596
     
-
     
6,929
 
Crossroads
   
3,241
     
2,600
     
83
     
24,591
     
12,323
     
-
     
42,838
 
Kent (2)
   
7
     
1,565
     
1
     
4,946
     
638
             
7,157
 
Total King County
   
34,804
     
34,145
     
20,785
     
266,060
     
358,235
     
-
     
714,029
 
                                                         
Snohomish County
                                                       
Mill Creek
   
1,816
     
5,711
     
629
     
12,865
     
10,555
     
-
     
31,576
 
Edmonds
   
3,443
     
2,867
     
195
     
14,520
     
13,945
     
-
     
34,970
 
Clearview (1)
   
3,037
     
4,163
     
1,080
     
5,923
     
2,672
     
-
     
16,875
 
Lake Stevens (1)
   
1,627
     
1,935
     
490
     
4,046
     
3,942
     
-
     
12,040
 
Smokey Point (1)
   
1,299
     
2,275
     
591
     
8,643
     
9,607
     
-
     
22,415
 
Total Snohomish County
   
11,222
     
16,951
     
2,985
     
45,997
     
40,721
     
-
     
117,876
 
                                                         
Total retail deposits
   
46,026
     
51,096
     
23,770
     
312,057
     
398,956
     
-
     
831,905
 
Brokered deposits
   
-
     
-
     
-
     
-
     
-
     
123,367
     
123,367
 
Total deposits
 
$
46,026
   
$
51,096
   
$
23,770
   
$
312,057
   
$
398,956
   
$
123,367
   
$
955,272
 
(1) Balance of retail certificates of deposit for acquired branches are net of an unamortized aggregate fair value adjustment of $49,000.
(2) Kent branch opened January 31, 2019.

4

The net interest margin was 3.23% for the quarter ended June 30, 2019, compared to 3.37% for the quarter ended March 31, 2019, and 3.50% for the quarter ended June 30, 2018. This decline was primarily due to the increasing cost of liabilities between the periods. This continues to be a very challenging environment to acquire low-cost deposits. In addition, for the quarter ended June 30, 2019, loan yields declined, primarily related to the declining balance of higher yielding construction loans during the quarter.

Noninterest income for the quarter ended June 30, 2019, totaled $879,000, compared to $700,000 in the quarter ended March 31, 2019, and $663,000 in the quarter ended June 30, 2018. The increase in noninterest income for the quarter ended June 30, 2019, was due primarily to increases in wealth management revenue and higher deposit and loan related fees, partially offset by lower BOLI income recognition, compared to the quarters ended March 31, 2019, and June 30, 2018. BOLI income benefited from annual dividends received on certain BOLI policies during the quarter ended March 31, 2019. Loan related fees for the quarter ended June 30, 2019, benefited from higher prepayment penalty fees, as well as fees received on new loan interest rate swap agreements.

Noninterest expense decreased to $7.3 million for the quarter ended June 30, 2019, compared to $7.7 million in March 31, 2019, and $7.5 million in the quarter ended June 30, 2018. Noninterest expense for the quarter ended June 30, 2019, was lower in nearly all categories, including salaries and employee benefits, professional fees and data processing, but was partially offset by increases in other general and administrative and occupancy and equipment expenses consistent with the Bank’s branch expansion. Noninterest expense for the quarter ended March 31, 2019, benefited from the receipt of a $125,000 insurance claim that offset the $225,000 fraud loss reported in the prior quarter. Noninterest expense declined from the prior year period due primarily to lower salaries and employee benefits expense, professional fees and bond premium expense.

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 11 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 2019 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.


5


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

Assets
 
Jun 30,
2019
   
Mar 31,
2019
   
Jun 30,
2018
   
Three
Month
Change
   
One
Year
Change
 
                               
Cash on hand and in banks
 
$
8,119
   
$
9,366
   
$
9,017
     
(13.3
)%
   
(10.0
)%
Interest-earning deposits
   
22,579
     
14,596
     
14,056
     
54.7
     
60.6
 
Investments available-for-sale, at fair value
   
141,581
     
138,658
     
138,055
     
2.1
     
2.6
 
Loans receivable, net of allowance of $13,057,
   $13,808, and $12,754, respectively
   
1,052,676
     
1,051,711
     
989,256
     
0.1
     
6.4
 
Federal Home Loan Bank ("FHLB") stock, at cost
   
5,701
     
8,041
     
10,410
     
(29.1
)
   
(45.2
)
Accrued interest receivable
   
4,650
     
4,861
     
4,084
     
(4.3
)
   
13.9
 
Deferred tax assets, net
   
1,379
     
1,728
     
1,296
     
(20.2
)
   
6.4
 
Other real estate owned ("OREO")
   
454
     
454
     
483
     
0.0
     
(6.0
)
Premises and equipment, net
   
21,944
     
21,370
     
21,436
     
2.7
     
2.4
 
Bank owned life insurance ("BOLI")
   
31,446
     
30,162
     
29,501
     
4.3
     
6.6
 
Prepaid expenses and other assets
   
5,101
     
4,947
     
4,391
     
3.1
     
16.2
 
Goodwill
   
889
     
889
     
889
     
0.0
     
0.0
 
Core deposit intangible
   
1,042
     
1,079
     
1,191
     
(3.4
)
   
(12.5
)
Total assets
 
$
1,297,561
   
$
1,287,862
   
$
1,224,065
     
0.8
%
   
6.0
%
                                         
          Liabilities and Stockholders' Equity
                                       
                                         
Deposits
                                       
Noninterest-bearing deposits
 
$
49,219
   
$
46,026
   
$
51,454
     
6.9
%
   
(4.3
)%
Interest-bearing deposits
   
976,491
     
909,246
     
781,298
     
7.4
     
25.0
 
Total deposits
   
1,025,710
     
955,272
     
832,752
     
7.4
     
23.2
 
Advances from the FHLB
   
105,000
     
163,500
     
224,000
     
(35.8
)
   
(53.1
)
Advance payments from borrowers for taxes and insurance
   
2,844
     
5,374
     
2,545
     
(47.1
)
   
11.7
 
Accrued interest payable
   
461
     
478
     
570
     
(3.6
)
   
(19.1
)
Other liabilities
   
9,718
     
11,554
     
11,644
     
(15.9
)
   
(16.5
)
Total liabilities
   
1,143,733
     
1,136,178
     
1,071,511
     
0.7
     
6.7
 
                                         
          Commitments and contingencies
                                       
                                         
Stockholders' Equity
                                       
Preferred stock, $0.01 par value; authorized
    10,000,000 shares; no shares issued or
                                       
outstanding
 
$
-
   
$
-
   
$
-
     
n/a
     
n/a
 
Common stock, $0.01 par value; authorized
    90,000,000 shares; issued and outstanding
                                       
10,375,325 shares at June 30, 2019,
10,457,625 shares at March 31, 2019, and
10,916,556 shares at June 30, 2018
   
104
     
104
     
109
     
0.0
%
   
(4.6
)%
Additional paid-in capital
   
88,725
     
89,800
     
96,344
     
(1.2
)
   
(7.9
)
Retained earnings
   
69,976
     
67,568
     
63,042
     
3.6
     
11.0
 
Accumulated other comprehensive loss, net of tax
   
(1,309
)
   
(1,838
)
   
(2,145
)
   
(28.8
)
   
(39.0
)
Unearned Employee Stock Ownership Plan
   ("ESOP") shares
   
(3,668
)
   
(3,950
)
   
(4,796
)
   
(7.1
)
   
(23.5
)
Total stockholders' equity
   
153,828
     
151,684
     
152,554
     
1.4
     
0.8
 
Total liabilities and stockholders' equity
 
$
1,297,561
   
$
1,287,862
   
$
1,224,065
     
0.8
%
   
6.0
%


6


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

   
Quarter Ended
             
   
Jun 30,
2019
   
Mar 31,
2019
   
Jun 30,
2018
   
Three
Month
Change
   
One
Year
Change
 
Interest income
                             
Loans, including fees
 
$
13,606
   
$
13,281
   
$
12,429
     
2.4
%
   
9.5
%
Investments available-for-sale
   
1,109
     
1,159
     
1,010
     
(4.3
)
   
9.8
 
Interest-earning deposits
   
48
     
40
     
44
     
20.0
     
9.1
 
Dividends on FHLB Stock
   
102
     
91
     
105
     
12.1
     
(2.9
)
Total interest income
   
14,865
     
14,571
     
13,588
     
2.0
     
9.4
 
Interest expense
                                       
Deposits
   
4,330
     
3,822
     
2,435
     
13.3
     
77.8
 
FHLB advances and other borrowings
   
829
     
897
     
1,024
     
(7.6
)
   
(19.0
)
Total interest expense
   
5,159
     
4,719
     
3,459
     
9.3
     
49.1
 
Net interest income
   
9,706
     
9,852
     
10,129
     
(1.5
)
   
(4.2
)
(Recapture of provision) provision for loan losses
   
(800
)
   
400
     
(400
)
   
(300.0
)
   
100.0
 
Net interest income after (recapture of provision)
  provision for loan losses
   
10,506
     
9,452
     
10,529
     
11.2
     
(0.2
)
                                         
Noninterest income
                                       
Net loss on sale of investments
   
-
     
(8
)
   
(21
)
   
(100.0
)
   
(100.0
)
BOLI income
   
189
     
269
     
224
     
(29.7
)
   
(15.6
)
Wealth management revenue
   
261
     
196
     
156
     
33.2
     
67.3
 
Deposit related fees
   
205
     
171
     
175
     
19.9
     
17.1
 
Loan related fees
   
209
     
63
     
126
     
231.7
     
65.9
 
Other
   
15
     
9
     
3
     
66.7
     
400.0
 
Total noninterest income
   
879
     
700
     
663
     
25.6
     
32.6
 
                                         
Noninterest expense
                                       
Salaries and employee benefits
   
4,734
     
5,000
     
4,931
     
(5.3
)
   
(4.0
)
Occupancy and equipment
   
898
     
866
     
829
     
3.7
     
8.3
 
Professional fees
   
326
     
496
     
442
     
(34.3
)
   
(26.2
)
Data processing
   
397
     
518
     
351
     
(23.4
)
   
13.1
 
OREO related expenses, net
   
1
     
31
     
2
     
(96.8
)
   
(50.0
)
Regulatory assessments
   
136
     
137
     
110
     
(0.7
)
   
23.6
 
Insurance and bond premiums
   
88
     
105
     
154
     
(16.2
)
   
(42.9
)
Marketing
   
76
     
86
     
77
     
(11.6
)
   
(1.3
)
Other general and administrative
   
627
     
470
     
591
     
33.4
     
6.1
 
Total noninterest expense
   
7,283
     
7,709
     
7,487
     
(5.5
)
   
(2.7
)
Income before federal income tax  provision
   
4,102
     
2,443
     
3,705
     
67.9
     
10.7
 
Federal income tax provision
   
798
     
498
     
603
     
60.2
     
32.3
 
Net income
 
$
3,304
   
$
1,945
   
$
3,102
     
69.9
%
   
6.5
%
                                         
Basic earnings per share
 
$
0.33
   
$
0.19
   
$
0.30
                 
Diluted earnings per share
 
$
0.33
   
$
0.19
   
$
0.30
                 
Weighted average number of common shares
   outstanding
   
9,952,419
     
10,118,286
     
10,271,432
                 
Weighted average number of diluted shares
   outstanding
   
10,046,355
     
10,220,900
     
10,405,949
                 

7


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

   
Six Months Ended
June 30,
       
   
2019
   
2018
   
One Year
Change
 
Interest income
                 
Loans, including fees
 
$
26,887
   
$
25,472
     
5.6
%
Investments available-for-sale
   
2,268
     
1,939
     
17.0
 
Interest-earning deposits
   
88
     
82
     
7.3
 
Dividends on FHLB Stock
   
193
     
208
     
(7.2
)
Total interest income
   
29,436
     
27,701
     
6.3
 
Interest expense
                       
Deposits
   
8,152
     
4,711
     
73.0
 
FHLB advances and other borrowings
   
1,726
     
1,877
     
(8.0
)
Total interest expense
   
9,878
     
6,588
     
49.9
 
Net interest income
   
19,558
     
21,113
     
(7.4
)
Recapture of provision for loan losses
   
(400
)
   
(4,400
)
   
(90.9
)
Net interest income after recapture of provision for loan losses
   
19,958
     
25,513
     
(21.8
)
                         
Noninterest income
                       
Net loss on sale of investments
   
(8
)
   
(21
)
   
(61.9
)
BOLI
   
458
     
473
     
(3.2
)
Wealth management revenue
   
457
     
255
     
79.2
 
Deposit related fees
   
376
     
336
     
11.9
 
Loan related fees
   
272
     
260
     
4.6
 
Other
   
24
     
6
     
300.0
 
Total noninterest income
   
1,579
     
1,309
     
20.6
 
                         
Noninterest expense
                       
Salaries and employee benefits
   
9,734
     
9,593
     
1.5
 
Occupancy and equipment
   
1,764
     
1,598
     
10.4
 
Professional fees
   
822
     
770
     
6.8
 
Data processing
   
915
     
675
     
35.6
 
OREO related expenses, net
   
32
     
3
     
966.7
 
Regulatory assessments
   
273
     
265
     
3.0
 
Insurance and bond premiums
   
193
     
260
     
(25.8
)
Marketing
   
162
     
184
     
(12.0
)
Other general and administrative
   
1,097
     
1,166
     
(5.9
)
Total noninterest expense
   
14,992
     
14,514
     
3.3
 
Income before federal income tax  provision
   
6,545
     
12,308
     
(46.8
)
Federal income tax provision
   
1,296
     
2,364
     
(45.2
)
Net income
 
$
5,249
   
$
9,944
     
(47.2
)%
                         
Basic earnings per share
 
$
0.52
   
$
0.97
         
Diluted earnings per share
 
$
0.52
   
$
0.96
         
Weighted average number of common shares outstanding
   
10,034,895
     
10,241,297
         
Weighted average number of diluted shares outstanding
   
10,132,107
     
10,372,474
         

8

The following table presents a breakdown of our loan portfolio, net of undisbursed funds (unaudited):

 
June 30, 2019
   
March 31, 2019
   
June 30, 2018
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Commercial real estate:
                                   
Multifamily residential:
                                   
Micro-unit apartments
 
$
13,943
     
1.3
%
 
$
14,008
     
1.3
%
 
$
14,204
     
1.4
%
Other multifamily
   
147,517
     
13.8
     
153,835
     
14.4
     
180,649
     
18.0
 
Total multifamily residential
   
161,460
     
15.1
     
167,843
     
15.7
     
194,853
     
19.4
 
                                                 
Non-residential:
                                               
Office
   
100,620
     
9.5
     
99,639
     
9.3
     
99,739
     
9.9
 
Retail
   
144,050
     
13.5
     
146,864
     
13.8
     
141,451
     
14.3
 
Mobile home park
   
21,533
     
2.0
     
15,697
     
1.5
     
15,655
     
1.6
 
Motel
   
27,725
     
2.6
     
27,882
     
2.6
     
14,478
     
1.4
 
Nursing Home
   
16,172
     
1.5
     
16,243
     
1.5
     
16,454
     
1.6
 
Warehouse
   
18,303
     
1.7
     
18,274
     
1.7
     
28,185
     
2.8
 
Storage
   
36,096
     
3.4
     
36,283
     
3.4
     
30,383
     
3.0
 
Other non-residential
   
19,703
     
1.8
     
23,804
     
2.2
     
25,345
     
2.5
 
Total non-residential
   
384,202
     
36.0
     
384,686
     
36.0
     
371,690
     
37.1
 
                                                 
Construction/land:
                                               
One-to-four family residential
   
45,953
     
4.3
     
47,661
     
4.5
     
46,379
     
4.6
 
Multifamily
   
37,032
     
3.5
     
47,006
     
4.4
     
34,483
     
3.4
 
Commercial
   
13,793
     
1.3
     
12,878
     
1.2
     
4,574
     
0.5
 
Land
   
8,356
     
0.8
     
6,965
     
0.7
     
12,788
     
1.3
 
Total construction/land
   
105,134
     
9.9
     
114,510
     
10.8
     
98,224
     
9.8
 
                                                 
One-to-four family residential:
                                               
Permanent owner occupied
   
201,989
     
18.9
     
194,648
     
18.3
     
169,275
     
16.9
 
Permanent non-owner occupied
   
159,267
     
14.9
     
156,684
     
14.7
     
134,297
     
13.4
 
Total one-to-four family residential
   
361,256
     
33.8
     
351,332
     
33.0
     
303,572
     
30.3
 
                                                 
Business
                                               
Aircraft
   
14,459
     
1.4
     
11,860
     
1.1
     
9,978
     
1.0
 
Other business
   
21,899
     
2.1
     
21,653
     
2.0
     
12,143
     
1.2
 
Total business
   
36,358
     
3.5
     
33,513
     
3.1
     
22,121
     
2.2
 
                                                 
Consumer
   
17,891
     
1.7
     
14,336
     
1.4
     
12,329
     
1.2
 
Total loans
   
1,066,301
     
100.0
%
   
1,066,220
     
100.0
%
   
1,002,789
     
100.0
%
Less:
                                               
Deferred loan fees, net
   
568
             
701
             
779
         
ALLL
   
13,057
             
13,808
             
12,754
         
Loans receivable, net
 
$
1,052,676
           
$
1,051,711
           
$
989,256
         
                                                 
Concentrations of credit: (1)
                                               
Construction loans as % of total capital
   
80.1
%
           
87.5
%
           
73.5
%
       
                                                 
Total non-owner occupied commercial
real estate as % of total capital
   
441.0
%
           
460.9
%
           
475.2
%
       
(1) Concentrations of credit percentages are for First Financial Northwest Bank only using classifications in accordance with FDIC regulatory guidelines.
9

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures

   
At or For the Quarter Ended
 
   
Jun 30
   
Mar 31,
   
Dec 31,
   
Sep 30
   
Jun 30,
 
   
2019
   
2019
   
2018
   
2018
   
2018
 
   
(Dollars in thousands, except per share data)
 
Performance Ratios:
                             
Return on assets
   
1.04
%
   
0.63
%
   
0.69
%
   
0.90
%
   
1.01
%
Return on equity
   
8.70
     
5.16
     
5.54
     
7.17
     
8.28
 
Dividend payout ratio
   
27.27
     
42.11
     
38.10
     
29.63
     
26.67
 
Equity-to-assets ratio
   
11.86
     
11.78
     
12.28
     
12.53
     
12.46
 
Tangible equity ratio (1)
   
11.72
     
11.64
     
12.13
     
12.38
     
12.31
 
Net interest margin
   
3.23
     
3.37
     
3.41
     
3.46
     
3.50
 
Average interest-earning assets to average
   interest-bearing liabilities
   
113.23
     
113.87
     
114.27
     
115.20
     
114.21
 
Efficiency ratio
   
68.80
     
73.06
     
72.18
     
66.06
     
69.38
 
Noninterest expense as a percent of average
   total assets
   
2.28
     
2.48
     
2.49
     
2.33
     
2.44
 
Book value per share
 
$
14.83
   
$
14.50
   
$
14.35
   
$
14.17
   
$
13.97
 
Tangible book value per share (1)
   
14.64
     
14.32
     
14.17
     
13.99
     
13.78
 
                                         
Capital Ratios: (2)
                                       
Tier 1 leverage ratio
   
10.34
%
   
10.28
%
   
10.37
%
   
10.37
%
   
10.22
%
Common equity tier 1 capital ratio
   
13.46
     
13.13
     
13.43
     
13.58
     
13.21
 
Tier 1 capital ratio
   
13.46
     
13.13
     
13.43
     
13.58
     
13.21
 
Total capital ratio
   
14.71
     
14.38
     
14.68
     
14.83
     
14.47
 
                                         
Asset Quality Ratios:
                                       
Nonperforming loans as a percent of total loans
   
0.01
%
   
0.01
%
   
0.07
%
   
0.05
%
   
0.02
%
Nonperforming assets as a percent of total
   assets
   
0.05
     
0.05
     
0.10
     
0.08
     
0.05
 
ALLL as a percent of total loans
   
1.22
     
1.30
     
1.29
     
1.30
     
1.27
 
Net (recoveries) charge-offs to average loans
   receivable, net
   
(0.00
)
   
(0.01
)
   
(0.00
)
   
(0.02
)
   
(0.00
)
                                         
Allowance for Loan Losses:
                                       
ALLL, beginning of the quarter
 
$
13,808
   
$
13,347
   
$
13,116
   
$
12,754
   
$
13,136
 
Provision (Recapture of provision)
   
(800
)
   
400
     
200
     
200
     
(400
)
Charge-offs
   
-
     
-
     
-
     
-
     
-
 
Recoveries
   
49
     
61
     
31
     
162
     
18
 
ALLL, end of the quarter
 
$
13,057
   
$
13,808
   
$
13,347
   
$
13,116
   
$
12,754
 
(1) Tangible equity ratio and tangible book value are non-GAAP financial measures. Refer to page 12 for reconciliation between the GAAP and non‑GAAP financial measures.
(2) Capital ratios are for First Financial Northwest Bank only.

10


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

   
At or For the Quarter Ended
 
   
Jun 30,
   
Mar 31,
   
Dec 31,
   
Sep 30,
   
Jun 30,
 
   
2019
   
2019
   
2018
   
2018
   
2018
 
   
(Dollars in thousands, except per share data)
 
Yields and Costs:
                             
Yield on loans
   
5.19
%
   
5.22
%
   
5.13
%
   
5.05
%
   
5.00
%
Yield on investments available-for-sale
   
3.21
     
3.35
     
3.17
     
3.00
     
2.87
 
Yield on interest-earning deposits
   
2.33
     
2.50
     
2.27
     
1.92
     
1.48
 
Yield on FHLB stock
   
5.58
     
4.68
     
6.63
     
6.27
     
4.21
 
Yield on interest-earning assets
   
4.94
%
   
4.98
%
   
4.88
%
   
4.77
%
   
4.70
%
                                         
Cost of interest-bearing deposits
   
1.89
%
   
1.76
%
   
1.61
%
   
1.40
%
   
1.22
%
Cost of FHLB advances
   
2.28
     
2.26
     
2.12
     
2.05
     
1.92
 
Cost of interest-bearing liabilities
   
1.94
%
   
1.84
%
   
1.68
%
   
1.52
%
   
1.37
%
                                         
Cost of total deposits
   
1.80
%
   
1.67
%
   
1.53
%
   
1.31
%
   
1.15
%
Cost of funds
   
1.86
     
1.76
     
1.61
     
1.44
     
1.30
 
                                         
Average Balances:
                                       
Loans
 
$
1,051,894
   
$
1,031,994
   
$
1,006,905
   
$
993,272
   
$
997,059
 
Investments available-for-sale
   
138,634
     
140,433
     
140,568
     
140,584
     
141,035
 
Interest-earning deposits
   
8,275
     
6,484
     
10,653
     
12,223
     
11,927
 
FHLB stock
   
7,337
     
7,888
     
6,886
     
8,540
     
10,004
 
Total interest-earning assets
 
$
1,206,140
   
$
1,186,799
   
$
1,165,012
   
$
1,154,619
   
$
1,160,025
 
                                         
Interest-bearing deposits
 
$
919,306
   
$
881,260
   
$
883,672
   
$
825,055
   
$
801,852
 
Borrowings
   
145,895
     
160,950
     
135,886
     
177,250
     
213,857
 
Total interest-bearing liabilities
 
$
1,065,201
   
$
1,042,210
   
$
1,019,558
   
$
1,002,305
   
$
1,015,709
 
Noninterest-bearing deposits
   
48,137
     
47,002
     
47,580
     
53,982
     
50,145
 
Total deposits and borrowings
 
$
1,113,338
   
$
1,089,212
   
$
1,067,138
   
$
1,056,287
   
$
1,065,854
 
                                         
Average assets
 
$
1,279,880
   
$
1,258,902
   
$
1,236,460
   
$
1,225,189
   
$
1,229,341
 
Average stockholders' equity
   
152,267
     
152,850
     
154,958
     
154,444
     
150,243
 

11


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 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:

 
 
Jun 30,
2019
   
Mar 31,
2019
   
Dec 31,
2018
   
Sep 30,
2018
   
Jun 30,
2018
 
 
 
(Dollars in thousands, except per share data)
 
Total stockholders' equity (GAAP)
 
$
153,828
   
$
151,684
   
$
153,738
   
$
154,713
   
$
152,554
 
Less:
                                       
Goodwill
   
889
     
889
     
889
     
889
     
889
 
Core deposit intangible
   
1,042
     
1,079
     
1,116
     
1,153
     
1,191
 
Tangible equity (Non-GAAP)
 
$
151,897
   
$
149,716
   
$
151,733
   
$
152,671
   
$
150,474
 
 
                                       
Total assets (GAAP)
   
1,297,561
     
1,287,862
     
1,252,424
     
1,234,859
     
1,224,065
 
Less:
                                       
Goodwill
   
889
     
889
     
889
     
889
     
889
 
Core deposit intangible
   
1,042
     
1,079
     
1,116
     
1,153
     
1,191
 
Tangible assets (Non-GAAP)
 
$
1,295,630
   
$
1,285,894
   
$
1,250,419
   
$
1,232,817
   
$
1,221,985
 
 
                                       
Common shares outstanding at
period end
   
10,375,325
     
10,457,625
     
10,710,656
     
10,914,556
     
10,916,556
 
 
                                       
Equity to assets ratio
   
11.86
%
   
11.78
%
   
12.28
%
   
12.53
%
   
12.46
%
Tangible equity ratio
   
11.72
     
11.64
     
12.13
     
12.38
     
12.31