Business Overview
First Financial Northwest, Inc. (NASDAQ:FFNW) is a bank holding company that operates through its wholly-owned subsidiary, First Financial Northwest Bank. The bank primarily serves the King, Pierce, Snohomish, and Kitsap counties in Washington, providing a range of banking services to its customers.First Financial Northwest Bank was originally a community-based savings bank until it converted to a Washington-chartered commercial bank in 2016, reflecting the expanded commercial banking services it now offers. The bank's business consists predominantly of attracting deposits from the general public, combined with borrowing from the Federal Home Loan Bank (FHLB) and raising funds in the wholesale market, then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans.
The bank has strategically broadened its commercial business lending offerings, encompassing products like business lines of credit, business term loans, and equipment financing. This expansion aims to enhance loan portfolio diversity, draw in business deposits, and bolster revenue generation. Moreover, it seeks to contribute to local economic development and cultivate enduring client relationships.
Financials
For the fiscal year ended December 31, 2023, First Financial Northwest reported annual net income of $6,305,000, annual revenue of $80,931,000, annual operating cash flow of $4,171,000, and annual free cash flow of $3,378,000. These figures demonstrate the company's ability to generate consistent profitability and maintain a healthy financial position.In the latest quarter ended March 31, 2024, the company reported a net loss of $1,076,000, or ($0.12) per diluted share, compared to net income of $2,122,000, or $0.23 per diluted share, in the same quarter of the prior year. The decrease in net income was primarily due to a $2.4 million decrease in net interest income and a $2.4 million increase in noninterest expense, which included $1.2 million related to the termination of the company's defined benefit plan and $767,000 of acquisition-related expense.
Net interest income for the first quarter of 2024 decreased by $2.4 million to $8.9 million, compared to $11.3 million in the same quarter of the prior year. This decrease was primarily due to higher interest expense on deposits and borrowings, reflecting the higher market interest rates and continued intense competition for deposits, partially offset by higher income on loans receivable and interest-earning deposits with banks.
The company's net interest margin decreased by 67 basis points to 2.55% in the first quarter of 2024, compared to 3.22% in the same quarter of the prior year. The decrease was primarily due to the cost of interest-bearing liabilities outpacing the yields on interest-earning assets, with a 114 basis point increase in the average cost of interest-bearing liabilities to 3.58% from 2.44%, partially offset by a 33 basis point increase in the average yield on interest-earning assets to 5.62% from 5.29% between periods.
Loan Portfolio and Asset Quality
As of March 31, 2024, the company's net loans receivable decreased by $33.0 million, or 2.8%, to $1.14 billion, compared to $1.18 billion at December 31, 2023. The decrease was primarily due to declines in commercial real estate, business, one-to-four family residential, construction/land, and multifamily loans.The company's loan portfolio is geographically diversified, with a significant portion of loans secured by properties located outside the bank's primary market area. As of March 31, 2024, loans secured by properties outside the primary market area accounted for 7.1% of total loans in Washington, 2.8% in California, and 9.5% across regions outside of both California and Washington.
The company's allowance for credit losses (ACL) decreased by $300,000 to $15.0 million at March 31, 2024, representing 1.30% of total loans receivable, compared to $15.3 million, or 1.28% of total loans receivable, at December 31, 2023. The decrease was primarily the result of changes in loan balances, shifts in the compositions of the loan portfolio, credit rating changes, and improvements in forecasted unemployment rates.
Nonaccrual loans totaled $201,000 and $220,000 at March 31, 2024, and December 31, 2023, respectively, representing 0.02% of total loans on both dates. The company had no other real estate owned properties or foreclosed assets as of both March 31, 2024, and December 31, 2023.
Liquidity
The company's primary sources of funds are customer deposits, scheduled loan and investment repayments, maturing loans and investment securities, advances from the FHLB, brokered deposits, and deposits obtained in the national CD and internet markets. As of March 31, 2024, the company had $86.1 million in brokered deposits, down from $130.8 million at December 31, 2023.At March 31, 2024, the company maintained credit facilities with the FHLB totaling $526.6 million, subject to qualifying collateral limits that reduced the pledged collateral borrowing capacity to $455.5 million, with an outstanding balance of $115.0 million. The company also had the ability to borrow $59.3 million from the Federal Reserve Bank and $75.0 million from unused lines of credit with other financial institutions, with no balance outstanding from these sources at March 31, 2024.
The company's liquidity position and forecasted operating results are sufficient to fund all of its existing commitments. As of March 31, 2024, the undisbursed portion of construction loans-in-process and unused portion of lines of credit totaled $56.7 million and $45.5 million, respectively.
Interest Rate Risk Management
The company uses interest rate swaps, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At March 31, 2024, the company held eight interest rate swap agreements with a total notional amount of $115.0 million, a weighted-average fixed interest rate of 1.87%, and a weighted-average remaining maturity of 33 months.The company's income simulation model examines changes in net interest income in which interest rates were assumed to remain at their base level, with instantaneous increases and decreases of 100, 200, 300, and 400 basis points. This analysis indicates that the company's net interest income would decrease by 1.50% in the event of a 100 basis point increase in interest rates and increase by 5.07% in the event of a 200 basis point decrease in interest rates.
Capital and Regulatory Compliance
As of March 31, 2024, the company's subsidiary, First Financial Northwest Bank, exceeded all regulatory capital requirements. The bank's Total capital to risk-weighted assets ratio was 16.24%, Tier 1 capital and Common equity tier 1 capital to risk-weighted assets ratio was 14.98%, and Tier 1 capital to total assets ratio was 10.41%. The bank also met the financial ratios to be considered well-capitalized under the regulatory guidelines.Risks and Challenges
The company faces several risks and challenges, including interest rate risk, credit risk, and regulatory compliance. The company's liability-sensitive position means that its interest-bearing liabilities re-price at a faster rate than its interest-earning assets, which could adversely impact its net interest margin and net interest income in a rising interest rate environment.Additionally, the company's loan portfolio, particularly its commercial real estate, construction/land, and multifamily loans, could be susceptible to economic downturns or changes in the real estate market. The company's ability to maintain asset quality and manage its credit risk is crucial to its financial performance.
Regulatory changes and compliance requirements also pose ongoing challenges for the company, as it must adapt to evolving industry standards and guidelines to maintain its well-capitalized status and avoid potential enforcement actions or penalties.