It's been just over a month since my Special Situations portfolio last acquired shares of First Financial Northwest (FFNW 0.29%), 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.
