First Financial Northwest, Inc. Reports Fourth Quarter Net Income of $2.2 Million or $0.21 per Diluted Share and $14.9 Million or $1.43 per Diluted Share for the Year Ended December 31, 2018

RENTON, Wash., Jan. 24, 2019 (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 December 31, 2018, of $2.2 million, or $0.21 per diluted share, compared to net income of $2.8 million, or $0.27 per diluted share, for the quarter ended September 30, 2018, and $2.4 million, or $0.23 per diluted share, for the quarter ended December 31, 2017. For the year ended December 31, 2018, net income was $14.9 million, or $1.43 per diluted share, compared to $8.5 million, or $0.81 per diluted share, for the year ended December 31, 2017.

"I am very pleased with how we finished the year with significant lending momentum, particularly the strong growth in one-to-four family residential lending, and continued growth in our deposits across our network," stated Joseph W. Kiley III, President and Chief Executive Officer. "Our one-to-four residential team led our loan portfolio growth as net loans receivable increased $34.2 million during the year to exceed $1.0 billion at year end." Kiley continued, "We grew deposits across our network, increasing deposits by $22.8 million in the fourth quarter and $99.5 million during the year, as we ended the year with $939.0 million in total deposits, compared to $839.5 million at December 31, 2017." Kiley concluded, "I am also pleased to welcome Randy Riffle, Executive Vice President and Chief Credit Officer to lead our efforts to further modernize our credit culture by enhancing our overall customer experience thereby creating a competitive advantage for our sales teams, organically expand our business loan portfolio, including establishing an SBA lending platform in further support of our growth and loan and deposit portfolio diversification goals. Our focus on expanding our customer base and building deposits continues and our eleventh branch location is set to open at Kent Station in the first quarter of 2019."

Net loans receivable increased $34.2 million to $1.02 billion for the year ended December 31, 2018, from $988.7 million at December 31, 2017, and $27.3 million from $995.6 million at September 30, 2018. One-to-four family residential lending increased $63.3 million during the year to $342.0 million at December 31, 2018, more than offsetting the $57.8 million combined reduction in our multifamily real estate and construction/land development loan portfolios. The average balance of net loans receivable totaled $1.01 billion for the quarter ended December 31, 2018, compared to $993.3 million for the quarter ended September 30, 2018, and $963.1 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, the average balance of net loans receivable was $995.8 million, compared to $878.4 million for the year ended December 31, 2017.

The Company recorded a $200,000 provision for loan losses for both the quarters ended December 31, 2018, and September 30, 2018, compared to a $1.2 million recapture of provision in the quarter ended December 31, 2017. The provision during the quarter ended December 31, 2018, was due to growth in net loans receivable and a change in loan mix, while the provision in the third quarter of 2018, was due primarily to growth in net loans receivable. The recapture of provision in the quarter ended December 31, 2017, was due primarily to $2.0 million in recoveries during the quarter, reduced by the provision for loan losses required to increase the Allowance for Loan and Lease Losses ("ALLL"), as a result of the growth in net loans receivable. For the year ended December 31, 2018, the recapture of provision for loan losses totaled $4.0 million, which included $4.5 million in recoveries, compared to a recapture of provision for loan losses of $400,000 recorded for the year ended December 31, 2017, which included $2.3 million in recoveries.

As previously reported, the Bank expanded its geographic footprint during the year with the opening of a new branch at The Junction in Bothell, King County, in the second quarter of 2018. The Bank plans to open its eleventh branch location at Kent Station, located about eight miles south of its Renton headquarters, in the first quarter of 2019.

The following tables present an analysis of our 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 $58,000.

 ⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $69,000.

Highlights for the quarter and the year ended December 31, 2018:

• Net loans receivable increased to $1.02 billion at December 31, 2018, from $995.6 million at September 30, 2018, and $988.7 million at December 31, 2017. The Company's one-to-four residential loan portfolio increased to $342.0 million at December 31, 2018, compared to $327.9 million at September 30, 2018, and $278.7 million at December 31, 2017, representing a year over year growth of $63.3 million in one-to-four residential loans.
• Total deposits increased to $939.0 million at December 31, 2018, from $916.3 million at September 30, 2018, and $839.5 million at December 31, 2017.
• The Company increased the regular quarterly cash dividend to shareholders to $0.08 per share in the quarter ended June 30, 2018, from $0.07 per share previously.
• During the year ended December 31, 2018, the Company repurchased 203,900 shares of its common stock at an average price of $15.43 per share under a stock repurchase plan authorized by the Board of Directors on October 24, 2018. The plan, which commenced on November 5, 2018, and will expire no later than May 3, 2019, authorizes the repurchase of up to 550,000 shares of the Company's common stock, or approximately 5.0% of its outstanding shares.
• The Company's book value per share was $14.35 at December 31, 2018, compared to $14.17 at September 30, 2018, and $13.27 at December 31, 2017.
• The Bank's Tier 1 leverage and total capital ratios at December 31, 2018, were 10.4% and 14.7%, respectively, compared to 10.4% and 14.8% at September 30, 2018, and 10.2% and 13.8% at December 31, 2017.
• Based on management's evaluation of the adequacy of the ALLL, there was a $200,000 provision for loan losses during the quarter ended December 31, 2018.

The ALLL represented 1.29% of total loans receivable, net of undisbursed funds, at December 31, 2018, compared to 1.30% at September 30, 2018, and 1.28% at December 31, 2017. Nonperforming assets totaled $1.2 million at December 31, 2018, compared to $967,000 at September 30, 2018, and $662,000 at December 31, 2017. The increase in the Company's nonperforming assets since December 31, 2017, was primarily due to one $325,000 nonperforming commercial real estate loan in the quarter ended September 30, 2018, and one $272,000 nonperforming one-to-four family residential loan in the quarter ended December 31, 2018. The $325,000 nonperforming commercial real estate loan was paid in full in the first quarter of 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 December 31, 2018.

OREO totaled $483,000 at December 31, 2018, September 30, 2018, and December 31, 2017. The Company continues to actively market its two remaining OREO properties in an effort to minimize holding costs.

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 (unaudited):

Net interest income for the quarter ended December 31, 2018, totaled $10.0 million, compared to $10.1 million for the quarter ended September 30, 2018, and $10.4 million for the quarter ended December 31, 2017. The decline in net interest income was due primarily to increases in the cost of interest bearing liabilities that outpaced the increases in income from interest earning assets. For the year ended December 31, 2018, net interest income totaled $41.2 million, compared to $37.6 million for the year ended December 31, 2017. The primary contributor to the increase in the year ended December 31, 2018, was higher average loan balances. In addition, the Company received $1.0 million in additional interest income in the quarter ended March 31, 2018, relating to interest payments on loans previously charged off.

Total interest income increased to $14.3 million during the quarter ended December 31, 2018, compared to $13.9 million in the quarter ended September 30, 2018, and $13.3 million in the quarter ended December 31, 2017. For the year ended December 31, 2018, total interest income increased to $55.9 million compared to $47.6 million in 2017. These increases were due primarily to the growth in the average balances of net loans receivable to $1.01 billion for the quarter ended December 31, 2018, compared to $993.3 million for the quarter ended September 30, 2018, and $963.1 million for the quarter ended December 31, 2017. For the year ended December 31, 2018, the average balance of net loans receivable was $995.8 million compared to $878.4 million for the prior year.

Total interest expense increased to $4.3 million for the quarter ended December 31, 2018, compared to $3.8 million for the quarter ended September 30, 2018, and $2.9 million for the quarter ended December 31, 2017. The higher level of interest expense in the quarter ended December 31, 2018, was due primarily to growth in total deposits along with increases in interest rates on deposits in a competitive, rising short term interest rate environment. Total deposits increased to $939.0 million at December 31, 2018, from $839.5 million at December 31, 2017. For the year ended December 31, 2018, interest expense totaled $14.7 million, compared to $10.0 million for the year ended December 31, 2017. This increase was primarily due to growth in deposit balances along with increasing short term interest rates. The Federal Reserve's Open Market Committee continued increasing their Fed Funds target rates throughout the year, impacting the rates paid on the Company's interest bearing liabilities. Total cost of deposits increased to 1.53% for the quarter ended December 31, 2018, from 1.31% for the quarter ended September 30, 2018, and 1.02% for the quarter ended December 31, 2017. For the year ended December 31, 2018, the total cost of deposits was 1.28% compared to 0.99% for the year ended December 31, 2017.  Advances from the FHLB totaled $146.5 million at December 31, 2018, compared to $149.0 million at September 30, 2018, and $216.0 million at December 31, 2017, as the Company's deposit gathering success allowed for a reduction in FHLB advances. The average cost of FHLB advances was 2.12% for the quarter ended December 31, 2018, compared to 2.05% for the quarter ended September 30, 2018, and 1.46% for the quarter ended December 31, 2017. For the year ended December 31, 2018, the average cost of FHLB advances was 1.92%, compared to 1.30% for the prior year. The balance of brokered certificates of deposits was $97.8 million at December 31, 2018, compared to $102.1 million at September 30, 2018, and $75.5 million at December 31, 2017.

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 $58,000 at December 31, 2018, $69,000 at September 30, 2018, and $107,000 at December 31, 2017.

The Company's net interest margin was 3.41% for the quarter ended December 31, 2018, compared to 3.46% for the quarter ended September 30, 2018, and 3.65% for the quarter ended December 31, 2017. The compression in net interest margin during these periods was due to interest rates paid on interest bearing liabilities increasing more rapidly than yields earned on interest earning assets. Net interest margin for the year ended December 31, 2018, was 3.56%, compared to 3.60% for the year ended December 31, 2017.

Noninterest income for the quarter ended December 31, 2018, totaled $728,000, compared to $841,000 in the quarter ended September 30, 2018, and $211,000 in the quarter ended December 31, 2017. The decline from the prior quarter was due primarily to a reduction in the amount of Bank Owned Life Insurance ("BOLI") income recorded. For the year ended December 31, 2018, noninterest income increased to $2.9 million, from $2.2 million in 2017, due primarily to a net loss of $567,000 on the sale of investments recorded in 2017. After the U.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law in December 2017, the Company elected to restructure a portion of its investment portfolio and sold approximately $37 million in fixed rate securities and reinvested the proceeds, primarily into adjustable rate securities.

Noninterest expense for the quarter ended December 31, 2018, increased to $7.7 million from $7.2 million in the quarter ended September 30, 2018, and $7.1 million in the quarter ended December 31, 2017. Salaries and employee benefits increased $245,000 from the prior quarter due primarily to an increase in the number of work days in the fourth quarter. Other general and administrative expenses increased $206,000, as the Company incurred a $225,000 wire related fraud loss in the fourth quarter. The Company has filed an insurance claim for the loss and expects to receive payment on the claim in the first quarter of 2019, subject to a $100,000 deductible. Noninterest expense increased to $29.5 million for the year ended December 31, 2018, compared to $26.8 million in 2017. This increase in noninterest expense was due primarily to our branch expansion over the past year. Salaries and employee benefits expense increased due to increased staffing in support of the new branches and development of new products, as well as standard salary increases. Higher occupancy and equipment expenses reflect our recently opened branch locations, while the increase in other general and administrative expenses also reflects the growth in the Company's operations.

The Company's federal income tax provision was $622,000 for the quarter ended December 31, 2018, compared to $707,000 for the quarter ended September 30, 2018, and $2.3 million for the quarter ended December 31, 2017. The primary reason for the change in the 2018 periods compared to the quarter ended December 31, 2017, was the reduction in the federal corporate income tax rate from 35% to 21% in 2018 due to the Tax Act. In addition, during the quarter ended December 31, 2017, the Company recorded a charge of $807,000 through its federal income tax provision relating to changes to the Company's net deferred tax asset valuation as a result of the Tax Act's reduction in the federal corporate income tax rate.

 For the year ended December 31, 2018, the Company's federal income tax provision totaled $3.7 million on income before federal income tax provision of $18.6 million, compared to $4.9 million on pretax income of $13.4 million for the year ended December 31, 2017. The Company's federal income tax provision in 2018 benefited from the reduction in the federal corporate income tax rate, as well as from stock option exercises that occurred at prices higher than originally estimated, resulting in higher allowable expense recognition for tax purposes.

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. The Bank expects to open its eleventh branch location at Kent Station in the first quarter of 2019. We are a part of the ABA NASDAQ Community Bank Index and the Russell 3000 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.

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

⁽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 (continued)
(Dollars in thousands)
(Unaudited)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Key Financial Measures (continued)
(Dollars in thousands, except per share data)
(Unaudited)

⁽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 (continued)
(Dollars in thousands)
(Unaudited)

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 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. All financial measures reported for periods prior to December 31, 2017, are considered GAAP financial measures: