First Financial Northwest, Inc. Reports Net Income of $2.6 Million or $0.28 per Diluted Share for the Fourth Quarter and $8.6 Million or $0.88 per Diluted Share for the Year Ended December 31, 2020

Rhea-AI Summary

First Financial Northwest reported a net income of $2.6 million for Q4 2020, an increase from $2.1 million in Q3 2020 and steady compared to Q4 2019. For the full year, net income was $8.6 million, down from $10.4 million in 2019. The bank's checking account balances rose by $80.7 million, boosting total deposits to $1.09 billion. The cost of funds decreased to 1.07%. However, 16 loans totaling $34.2 million were downgraded due to COVID-19 impacts, resulting in a $600,000 loan loss provision. Book value per share grew to $16.05 from $15.62.

Positive

• Net income increased to $2.6 million for Q4 2020, up from $2.1 million in Q3 2020.
• Total deposits increased by $24 million to $1.09 billion at year-end 2020.
• Cost of funds improved to 1.07%, down from 1.19% in Q3 2020.
• Book value per share rose to $16.05 from $15.62 in Q3 2020.

Negative

• Full year net income decreased to $8.6 million from $10.4 million in 2019.
• Provision for loan losses increased to $1.9 million from a recapture of $300,000 the prior year due to loan downgrades.

RENTON, Wash., Jan. 28, 2021 (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, 2020, of $2.6 million, or $0.28 per diluted share, compared to net income of $2.1 million, or $0.21 per diluted share, for the quarter ended September 30, 2020, and $2.6 million, or $0.26 per diluted share, for the quarter ended December 31, 2019. For the year ended December 31, 2020, net income was $8.6 million, or $0.88 per diluted share, compared to net income of $10.4 million, or $1.03 per diluted share, for the year ended December 31, 2019.

“While 2020 certainly presented significant challenges, it also created many opportunities,” stated Joseph W. Kiley III, President and CEO. “We were able to keep all our offices open and available to our customers throughout the year. Thanks to the efforts of our fantastic team of employees, balances in checking accounts increased by $80.7 million in 2020, allowing us to decrease our balance of higher cost certificates of deposit. Due in large part to our improved deposit mix and the impact of the current low interest rate environment, our cost of funds declined to 1.07% in the quarter ended December 31, 2020, from 1.19% in the quarter ended September 30, 2020, and 1.82% in the quarter ended December 31, 2019. If interest rates remain low, we expect this trend to continue as we have approximately $266 million in certificates of deposit maturing in the next 12 months at a weighted average rate of 1.87%,” continued Kiley.

“In the third quarter of 2015, we embarked on a branch expansion strategy, focused on leasing small, efficient office spaces that provide a presence for our teams of community bankers in each market we serve, with many of these offices staffed with just two to three employees and equipped with cash recycling machines to assist with handling traditional teller work. We have now grown from a single office thrift institution in 2015 to a multi-branch, full-service community bank. We will open our 15th office in Issaquah, Washington, in the first quarter of 2021 and then pause our expansion with a focus on growing relationships and improving efficiency throughout our branch network. As an example of how the Bank has changed, checking account balances now total $199.5 million compared to $38.6 million at June 30, 2015, just prior to the beginning of our branch expansion efforts. Our strategy remains focused on improving the Bank’s deposit composition from a reliance on certificates of deposit to a more balanced deposit mix, and expanding our network for lending opportunities,” stated Kiley.

“Our lending teams are working closely with our customers and continue to assist borrowers that may require additional support or closer monitoring due to the COVID-19 pandemic. In the fourth quarter, borrowers that had requested an additional COVID-19 related loan deferral or concession were evaluated, ultimately resulting in downgrades in loan classifications on 16 loans totaling approximately $34.2 million. While these loans remain classified as ‘pass’ credits and the Bank still expects to receive full payment on the loans, including the deferred interest, these downgrades were the primary reason for our provision for loan losses of $600,000 in the quarter ended December 31, 2020, bringing the total provision for the year to $1.9 million, an increase of $2.2 million from the prior year. Nonetheless, our pre-tax, pre-provision income⁽¹⁾ was $12.4 million for the year ended December 31, 2020, a slight change from $12.6 million in 2019, despite the challenges presented in 2020,” concluded Kiley.

⁽¹⁾ Pre-tax, pre-provision income is a non-GAAP financial measure. Refer to Non-GAAP Financial Measures at the end of this press release for a reconciliation to the nearest GAAP equivalent.

Highlights for the quarter and year ended December 31, 2020:

• Demand deposits increased $80.7 million for the year ended December 31, 2020.
• The strong growth in retail deposits allowed the Bank to reduce its brokered certificates of deposit by $94.5 million in 2020 to none at December 31, 2020.
• The Company’s book value per share was $16.05 at December 31, 2020, compared to $15.62 at September 30, 2020, and $15.25 at December 31, 2019.
• The Company repurchased 544,626 shares during the year at an average price of $10.44 per share, an amount equal to approximately 5.3% of shares outstanding at the beginning of 2020.
• The Company paid regular quarterly cash dividends to shareholders totaling $0.40 per share for the year.
• The Bank’s Tier 1 leverage and total capital ratios at December 31, 2020, were 10.3% and 15.6%, respectively, compared to 10.0% and 15.3%, at September 30, 2020, and 10.3% and 14.4% at December 31, 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 $600,000 provision for loan losses during the quarter, bringing the total provision for loan losses to $1.9 million for the year.
  

Total deposits increased $24.0 million to $1.09 billion at December 31, 2020, from $ 1.07 billion at September 30, 2020, and increased $60.1 million from $1.03 billion at December 31, 2019. Demand deposits increased $6.2 million and certificates of deposit decreased $19.1 million during the quarter, including a $10 million reduction in brokered deposits.

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

	Dec 31, 2020				Sep 30, 2020				Dec 31, 2019				Three Month Change				One Year Change
Deposits:	(Dollars in thousands)
Noninterest-bearing demand	$	91,285			$	82,376			$	52,849			$	8,909			$	38,436
Interest-bearing demand		108,182				110,856				65,897				(2,674	)			42,285
Statement savings		19,221				19,292				17,447				(71	)			1,774
Money market		465,369				428,512				377,766				36,857				87,603
Certificates of deposit, retail (1)		409,576				418,646				425,103				(9,070	)			(15,527	)
Certificates of deposit, brokered		–				10,000				94,472				(10,000	)			(94,472	)
Total deposits	$	1,093,633			$	1,069,682			$	1,033,534			$	23,951			$	60,099

⁽¹⁾ Balance of retail certificates of deposit for acquired branches are net of an aggregate fair value adjustment of $12,000 at December 31, 2020, $14,000 at September 30, 2020, and $28,000 at December 31, 2019.

The following tables present an analysis of total deposits by branch office (unaudited):

December 31, 2020
	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	$	36,932	$	47,964	$	13,696	$	243,940	$	325,803	$	–	$	668,335
Landing		5,300		3,199		22		14,024		8,108		–		30,653
Woodinville		3,054		7,040		688		14,270		9,790		–		34,842
Bothell		2,153		1,760		53		5,502		3,233		–		12,701
Crossroads		6,719		5,249		58		56,836		10,994		–		79,856
Kent (1)		5,047		8,607		–		23,052		1,077		–		37,783
Kirkland (1)		5,205		113		30		3,757		–		–		9,105
Total King County		64,410		73,932		14,547		361,381		359,005		–		873,275
Snohomish County
Mill Creek		3,176		2,765		1,411		14,823		9,289		–		31,464
Edmonds		12,074		13,735		351		30,807		19,989		–		76,956
Clearview		5,367		6,690		1,012		17,902		5,346		–		36,317
Lake Stevens		3,057		7,419		835		14,593		4,669		–		30,573
Smokey Point		2,788		3,237		1,005		21,575		11,278		–		39,883
Total Snohomish County		26,462		33,846		4,614		99,700		50,571		–		215,193
Pierce County
University Place		377		215		15		1,578		–		–		2,185
Gig Harbor		36		189		45		2,710		–		–		2,980
Total Pierce County		413		404		60		4,288		–		–		5,165
Total retail deposits		91,285		108,182		19,221		465,369		409,576		–		1,093,633
Brokered deposits		–		–		–		–		–		–		–
Total deposits	$	91,285	$	108,182	$	19,221	$	465,369	$	409,576	$	–	$	1,093,633

⁽¹⁾ Kent opened January 31, 2019; Kirkland, November 12, 2019; University Place, March 2, 2020; and Gig Harbor, October 5, 2020.

September 30, 2020
	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	$	35,066	$	47,957	$	14,677	$	235,680	$	335,675	$	–	$	669,055
Landing		3,209		3,193		37		16,398		8,251		–		31,088
Woodinville		3,086		6,608		703		12,589		8,514		–		31,500
Bothell		2,270		2,104		54		4,675		3,290		–		12,393
Crossroads		6,755		8,085		48		50,304		11,076		–		76,268
Kent (1)		5,452		8,277		–		13,802		1,070		–		28,601
Kirkland (1)		4,534		56		1		2,627		–		–		7,218
Total King County		60,372		76,280		15,520		336,075		367,876		–		856,123
Snohomish County
Mill Creek		3,713		3,236		856		14,695		10,675		–		33,175
Edmonds		5,853		13,865		485		28,229		19,300		–		67,732
Clearview		6,102		6,478		853		18,014		4,881		–		36,328
Lake Stevens		3,264		7,346		703		13,520		4,356		–		29,189
Smokey Point		2,733		3,137		875		16,173		11,558		–		34,476
Total Snohomish County		21,665		34,062		3,772		90,631		50,770		–		200,900
Pierce County
University Place (1)		339		514		–		1,806		–		–		2,659
Total Pierce County		339		514		–		1,806		–		–		2,659
Total retail deposits		82,376		110,856		19,292		428,512		418,646		–		1,059,682
Brokered deposits		–		–		–		–		–		10,000		10,000
Total deposits	$	82,376	$	110,856	$	19,292	$	428,512	$	418,646	$	10,000	$	1,069,682

⁽¹⁾ Kent opened January 31, 2019; Kirkland, November 12, 2019; and University Place, March 2, 2020.

Net loans receivable totaled $1.10 billion at December 31, 2020, compared to $1.13 billion at September 30, 2020, and $1.11 billion at December 31, 2019. New commercial loan activity remains muted as many borrowers are focused on maintaining their existing loans in lieu of seeking out new opportunities. The average balance of net loans receivable totaled $1.13 billion for the quarter ended December 31, 2020, compared to $1.14 billion for the quarter ended September 30, 2020, and $1.09 billion for the quarter ended December 31, 2019. For the year ended December 31, 2020, the average balance of net loans receivable was $1.12 billion, compared to $1.06 billion for the year ended December 31, 2019.

The Company recorded a $600,000 provision for loan losses in the quarter ended December 31, 2020, compared to a $700,000 provision for loan losses in the quarter ended September 30, 2020, and no provision for loan losses in the quarter ended December 31, 2019. The provision in the quarter ended December 31, 2020, was primarily due to risk rating downgrades on $34.2 million in commercial real estate loans, as any relationship that requested an additional loan payment deferral and demonstrated other weaknesses received additional scrutiny. Somewhat offsetting this impact, net loans receivable declined by $33.4 million during the quarter. The provision in the quarter ended September 30, 2020, was primarily attributed to loan downgrades during the quarter, including the downgrade of $26.8 million in commercial real estate loans. Strong loan portfolio quality metrics and credit upgrades for certain loan relationships resulted in no provision for loan losses in the quarter ended December 31, 2019. For the year ended December 31, 2020, the provision for loan losses totaled $1.9 million, compared to a recapture of provision for loan losses of $300,000 for the year ended December 31, 2019.

The ALLL represented 1.36% of total loans receivable at December 31, 2020, compared to 1.27% of total loans receivable at September 30, 2020, and 1.18% of total loans receivable at December 31, 2019. Excluding Paycheck Protection Program (“PPP”) loan balances, which are 100% guaranteed by the Small Business Administration (“SBA”), the ALLL represented 1.41% of total loans receivable at December 31, 2020, compared to 1.33% of total loans receivable at September 30, 2020. The ALLL as a percent of total loans excluding PPP loans is a non-GAAP financial measure. See Non-GAAP Financial Measures at the end of this press release for a reconciliation to its nearest GAAP equivalent. Nonperforming loans are comprised of a single $2.1 million multifamily loan in foreclosure at both December 31, 2020, and September 30, 2020, and were $95,000 at December 31, 2019. Based on an impairment analysis and ongoing monitoring, the Company does not expect to incur a loss on this multifamily loan. OREO also remained unchanged at $454,000 at December 31, 2020, September 30, 2020, and December 31, 2019.

The following table presents a breakdown of our nonperforming assets (unaudited):

	Dec 31,				Sep 30,				Dec 31,				Three Month				One Year
		2020				2020				2019			Change				Change
	(Dollars in thousands)
Nonperforming loans:
One-to-four family residential	$	─			$	─			$	95			$	─			$	(95	)
Multifamily		2,104				2,104				─				─				2,104
Total nonperforming loans		2,104				2,104				95				─				2,009
Other real estate owned (“OREO”)		454				454				454				─				─
Total nonperforming assets (1)	$	2,558			$	2,558			$	549			$	─			$	2,009
Nonperforming assets as a
percent of total assets		0.18	%			0.19	%			0.04	%

⁽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 the Bank’s TDRs were performing in accordance with their restructured terms at December 31, 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 December 31, 2020, TDRs totaled $3.9 million, compared to $4.1 million at September 30, 2020, and $5.2 million at December 31, 2019. All TDRs were performing according to their modified repayment terms for the periods presented. As discussed further below, The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”), signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID19 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. The recently enacted Consolidated Appropriations Act, 2021 provides additional COVID relief, including, among other things, additional PPP funding of $284.5 billion and extends TDR relief to the earlier of 60 days after the national emergency termination date or January 1, 2022.

Net interest income totaled $10.7 million for the quarter ended December 31, 2020, compared to $10.1 million for the quarter ended September 30, 2020, and $9.7 million for the quarter ended December 31, 2019. The $562,000 increase in the quarter ended December 31, 2020, was due primarily to higher loan related fees including a $187,000 increase in net deferred fee recognition relating to the forgiveness of PPP loans. For the year ended December 31, 2020, net interest income totaled $40.5 million, compared to $38.9 million for the year ended December 31, 2019, due to changes in the average balances in net loans receivable to $1.12 million in 2020 compared to $1.06 million in 2019, and reductions in the cost of interestbearing liabilities that declined to 1.41% for the year ended December 31, 2020, from 1.92% for the year ended December 31, 2019.

Total interest income was $13.8 million for the quarter ended December 31, 2020, compared to $13.7 million for the quarter ended September 30, 2020, and $15.0 million for the quarter ended December 31, 2019. For the year ended December 31, 2020, interest income totaled $56.1 million, compared to $59.6 million for the prior year. The increase in the current quarter compared to the quarter ended September 30, 2020, was primarily due to the recognition of deferred fees on PPP loans, as noted above.

Total interest expense was $3.2 million for the quarter ended December 31, 2020, compared to $3.6 million for the quarter ended September 30, 2020, and $5.3 million for the quarter ended December 31, 2019. The average cost of interest-bearing deposits declined to 1.12% for the quarter ended December 31, 2020, compared to 1.27% for the quarter ended September 30, 2020, and 1.94% for the quarter ended December 31, 2019. The decline from the quarter ended September 30, 2020, was due primarily to a reduced level of brokered deposits and retail certificates of deposits, along with lower rates paid on the Bank’s other interestbearing deposit balances. During the quarter ended December 31, 2020, the Bank redeemed its remaining $10.0 million in callable brokered certificates of deposit with an average coupon of 1.475%, resulting in the recognition of $60,000 in unamortized fees in the quarter, compared to $20,000 in unamortized fees related to a $5.0 million redemption in the quarter ended September 30, 2020. Advances from the FHLB remained unchanged at $120.0 million at December 31, 2020 and September 30, 2020, compared to $137.7 million at December 31, 2019, and were comprised of short-term FHLB advances tied to cash flow hedge agreements utilized to assist in the Bank’s interest rate risk management efforts. The average cost of borrowings was 1.40% for the quarter ended December 31, 2020, compared to 1.28% for the quarter ended September 30, 2020, and 1.66% for the quarter ended December 31, 2019. For the year ended December 31, 2020, total interest expense declined to $15.6 million, compared to $20.7 million for the year ended December 31, 2019, due to the significant reduction in short term interest rates following decreases in the federal funds target rates in 2020 in response to COVID-19.

The net interest margin was 3.29% for the quarter ended December 31, 2020, compared to 3.07% for the quarter ended September 30, 2020, and 3.09% for the quarter ended December 31, 2019. The expansion in the net interest margin is due primarily to the 12 basis point reduction in the Company’s cost of interestbearing liabilities during the quarter to 1.15%, compared to 1.27% in the quarter ended September 30, 2020. The 10basis point increase in the yield on interest earning assets to 4.26% in the quarter ended December 31, 2020, from 4.16% in the quarter ended September 30, 2020, was impacted favorably by the quarter over quarter increase in net deferred fee recognition on PPP loans, with deferred fees totaling $420,000 recognized in the quarter ended December 31, 2020, compared to $232,000 in the quarter ended September 30, 2020. At December 31, 2020, the net balance of deferred fees relating to PPP loans totaled $1.0 million, which will be recognized in future periods.

Noninterest income for the quarter ended December 31, 2020, totaled $1.7 million, compared to $1.0 million for the quarter ended September 30, 2020, and $1.5 million for the quarter ended December 31, 2019. The increase in noninterest income for the quarter ended December 31, 2020, compared to the quarter ended September 30, 2020, was primarily due to a $706,000 increase in loan related fees, including an increase of $411,000 in swap related fees and an increase of $202,000 in prepayment penalty income. For the year ended December 31, 2020, noninterest income increased to $4.4 million, from $4.1 million for the year ended December 31, 2019, due primarily to an increase in loan related fees.

Noninterest expense totaled $8.4 million for the quarter ended December 31, 2020, compared to $7.9 million for the quarter ended September 30, 2020, and $8.0 million in the quarter ended December 31, 2019. Salaries and employee benefits for the quarter ended December 31, 2020, increased $266,000 compared to the quarter ended September 30, 2020, due primarily to accruals for employee incentives, based in large part on successful deposit growth, earned in 2020. Occupancy and equipment expenses increased $160,000 in the quarter ended December 31, 2020, compared to the quarter ended September 30, 2020, due primarily to expenses relating to our branch expansion efforts. Noninterest expense totaled $32.5 million for the year ended December 31, 2020, compared to $30.4 million in 2019. The increase in noninterest expense year over year was due primarily to increases in salaries and employee benefits, occupancy and equipment, and data processing expenses relating to the Company’s growth. As a result of ongoing efforts to identify operational efficiencies and to align with near-term growth expectations, the Bank eliminated eight full-time positions in mid-January 2021, representing approximately 6% of its employee base.

COVID-19 Related Information

The Bank is committed to assisting its customers and communities in response to the COVID-19 pandemic, including providing certain short-term loan modifications. In addition, the Bank is participating in the PPP as an SBA lender. The Bank continues to take the steps necessary while working with its loan customers to effectively manage the portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the crisis.

Paycheck Protection Program
The SBA provides assistance to small businesses impacted by COVID-19 through the PPP, which was designed to provide near-term relief to help small businesses sustain operations. The deadline for PPP loan applications to the SBA under the original PPP was August 8, 2020. Under this program, as of December 31, 2020, there were 372 PPP loans outstanding totaling $41.3 million, down from 462 PPP loans totaling $52.0 million as of September 30, 2020, and $51.7 million representing 455 loans as of June 30, 2020. A total of 307, or more than 82%, of the remaining loans at December 31, 2020, are for loan amounts of $150,000 or less and represent $13.5 million of the total, of which 199 loans, representing $3.6 million, are for loan amounts of $50,000 or less. As of December 31, 2020, a total of 146 PPP loans totaling $11.2 million had been approved for forgiveness under the SBA program. Recent legislation reopened the PPP through March 31, 2021, by authorizing $284.5 billion in funding for eligible small businesses and nonprofits. In January, the Bank began accepting and processing loan applications under this second PPP program.

Modifications
The primary method of relief is to allow the borrower to defer their loan payments for three to six months, while certain borrowers are allowed to pay interest only or have payment deferrals for periods longer than six months depending upon their specific circumstances. The CARES Act and regulatory guidelines suspend the determination of certain loan modifications related to the COVID19 pandemic from being treated as TDRs. Recent legislation extended this accounting treatment through the earlier of 60 days after the national emergency termination date or January 1, 2022. The following table provides detail on the balance of loans remaining on deferral status as of December 31, 2020:

	As of December 31, 2020
	Balance of loans with modifications of 4-6 months				Balance of loans with modifications of greater than 6 months				Total balance of loans with modifications granted				Total loans				Modifications as % of total loans in each category
	(Dollars in thousands)
One-to-four family residential	$	745			$	1,027			$	1,772			$	381,960			0.5	%
Multifamily		-				2,347				2,347				136,694			1.7
Commercial real estate:
Office		-				-				-				84,311			-
Retail		-				3,972				3,972				114,117			3.5
Mobile home park		-				-				-				28,094			-
Hotel/motel		-				30,501				30,501				69,304			44.0
Nursing home		-				6,368				6,368				12,868			49.5
Warehouse		-				-				-				17,484			-
Storage		-				-				-				33,671			-
Other non-residential		-				-				-				25,416			-
Total commercial real estate		-				40,841				40,841				385,265			10.6

FAQ

What was First Financial Northwest's net income for Q4 2020?

First Financial Northwest reported a net income of $2.6 million for Q4 2020.

How did total deposits change for First Financial Northwest in 2020?

Total deposits increased by $24 million, reaching $1.09 billion at December 31, 2020.

What was the cost of funds for First Financial Northwest in Q4 2020?

The cost of funds for Q4 2020 was 1.07%, down from 1.19% in Q3 2020.

What is the book value per share for First Financial Northwest as of December 31, 2020?

The book value per share was $16.05 as of December 31, 2020.

Did First Financial Northwest experience any loan downgrades in 2020?

Yes, 16 loans totaling approximately $34.2 million were downgraded due to COVID-19 impacts.

How much was the provision for loan losses for First Financial Northwest in 2020?

The provision for loan losses increased to $1.9 million for the year ended December 31, 2020.