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The thing about being a successful contrarian is that you always look wrong. The market tells you you're wrong -- until one day you're right. The best value investors require the courage of their process. So it's with that preamble that my Special Situations portfolio is back to buy more shares of First Financial Northwest (NASDAQ: FFNW  ) .

I bought shares just last month, and there's nothing new that I haven't said before, but that doesn't mean I shouldn't buy more if the price still looks good. So once again here's why I like the stock.

A cheap profitable bank below tangible book
There's so much to like about First Financial that I don't know where to begin. But let's start with profitability. The bank has been solidly profitable for the last three years. And while last year's numbers were inflated by a tax issue, the bank still improved its revenue even while decreasing noninterest expense.

Credit metrics continue to improve. Nonperforming assets as a percent of total assets dropped to 1.7% from 4.3% in 2012. And that's down from 11.8% in 2009. The latest figure is still too high but going in the right direction as the economy normalizes. The bank is based in Seattle, one of the strongest local economies.

The bank remains flush with cash. Average equity as a percent of average assets is 19.9%. Tier 1 capital is 27.2%.

Activist Joe Stilwell is seeking to get the bank sold to the highest bidder, and the new CEO recently updated his contract so that he would be paid three times his salary in the event of a buyout. So that's one more issue that should not be standing in the way of Stilwell achieving his end.

Stilwell has also gotten the bank to buy back a substantial number of shares over the past year. First Financial spent $28 million on buybacks over the past year, reducing share count by 13%.

And, yes, this bank trades at less than 90% of tangible book value.

Foolish bottom line
So that's why my Special Situations portfolio is continuing to add to an overweight position -- already nearly 8% of my holdings -- in First Financial, and later this week I'll be buying $500 of stock.

Interested in First Financial Northwest or have another stock to share? Check out my discussion board or follow me on Twitter, @TMFRoyal.

Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 15, 2014, at 8:19 PM, srockaz wrote:

    Hi Jim,

    Regarding the sale of FFNW. I didn't see any information in your articles (4/15 and 3/24) about the profitability expectations of the sale. Presumably there is no public information about it or you'd have included it. So, how do you value this opportunity?

    Thanks, srockaz

  • Report this Comment On April 15, 2014, at 10:29 PM, TMFRoyal wrote:

    Hi, srockaz,

    From what I've seen, demutualized banks are bought at an average 1.6x TBV. So maybe they don't get that here. Imagine 1.35x. Then you're still looking at 50% upside while they continue to grow book value per share. Ok, maybe they don't even that, but say 1.2x TBV. Still upside. At today's prices, I just don't see a lot of downside.


  • Report this Comment On April 25, 2014, at 1:58 PM, srockaz wrote:

    Hello again Jim,

    Great news! You sure nailed this one!! Now we'll see if the market responds as anticipated.

    Shares of First Financial Northwest (FFNW) finished higher 4.58% to $10.51 on Thursday after the company announced its board of directors has approved a quarterly cash dividend and stock repurchase program.

    I suppose the timing isn't always quite this precise :-)

    Thanks, srockaz

  • Report this Comment On April 26, 2014, at 11:28 PM, TMFRoyal wrote:

    Thanks, srockaz. I don't always re-check these comment boards, but you can always find me on my discussion board and post any questions or comments there.


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Jim Royal

Jim is a special-situations investor focusing on transactional events (such as spinoffs, recapitalizations, or reorganizations, among others) that create advantageous stock mispricings.

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