I’m Back to Buy More First Financial Northwest

It's been just over a month since my Special Situations portfolio last acquired shares of First Financial Northwest (NASDAQ: FFNW  ) , but I'm back to buy more as the stock has fallen in recent weeks. It now trades at about 90% of my expectation of third-quarter tangible book value, and has catalysts aplenty to take the stock higher.

The company has significant opportunities to unlock value here. In April, First Financial announced a 10% stock repurchase authorization. By the second-quarter report, the company had completed about 60% of that authorization, and I expect the remainder to be finished by the time the third-quarter report is issued. Add potential earnings, subtract dividends paid, and factor in the effects of the buyback, and the stock is valued today at just 90% of its tangible book value of $11.75, per my calculations.

Is that the end of the buybacks? It certainly doesn't look like it!

The company has been aggressively buying its stock over the last couple years at the insistence of activist investor Joe Stilwell. And it retains so much cash that it could run buybacks for the next several years, if required. As a rough approximation of how much excess cash the company carries, the average equity to average assets runs at a ridonkulously high 20.5%. With assets of roughly $900 million, that implies excess capital could comfortably be $90 million. So without disturbing its core business, the bank could repurchase over half its stock at today's price. Another 10% buyback could well be in the offing as soon as this one is completed.

Credit metrics are trending in the right way, and profitability is solid. And the bank operates in the Seattle area -- one of the strongest U.S. markets.

The exit plan here is a sale of the bank. Stilwell's track record in this subsector at getting deals done is phenomenal. As I said in my most recent buy recommendation: "Bank activist extraordinaire Joe Stilwell came in to help clean up the mess, and he ran a proxy contest for a seat on the board. His platform was to clean up the bank and then sell it as soon as possible for as much as possible. Stilwell's record in the small-financials space is unparalleled. I expect him to succeed." For more on the stock, follow me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

Even CEO Joe Kiley has incentive to sell the bank. In December, he received a sweetened change-of-control agreement that pays him three times his annual salary (instead of the one times he was authorized to receive before).

Foolish takeaway
First Financial Northwest already comprises 7% of my Special Situations portfolio, but I'm adding another $1,000 to the position, taking it to over 8%, on the next market day. This remains a low-risk stock with a reasonable chance of significant near-term upside.

Speaking of upside potential...
Did you know that Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible? But the secret is out, and some early viewers are claiming its destined to change everything from banking to health care. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

Read/Post Comments (2) | Recommend This Article (5)

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 September 04, 2014, at 3:31 PM, 75formula wrote:

    You might want to check with the SEC before you continue to tougt Mr. Stilwell's abilities to force banks to sell. When Mr. Stilwell tried to force a FSBNW sale he seemed to have bitten off more than he could chew! On a personal note, the Denver Broncos SUCK!

  • Report this Comment On September 05, 2014, at 12:21 PM, TMFRoyal wrote:


    Foolish best,


Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3090616, ~/Articles/ArticleHandler.aspx, 9/3/2015 9:02:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,351.38 293.03 0.00%
S&P 500 1,948.86 35.01 0.00%
NASD 4,749.98 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 3:59 PM
FFNW $12.07 Down +0.00 +0.00%
First Financial No… CAPS Rating: *****