Business Overview and History First Financial Northwest, Inc. (FFNW) is a bank holding company that operates primarily through its wholly-owned subsidiary, First Financial Northwest Bank. Headquartered in Renton, Washington, the company serves the Pacific Northwest region, with a focus on King, Pierce, Snohomish, and Kitsap counties.
First Financial Northwest, Inc. was formed on June 1, 2007, with the purpose of becoming the holding company for First Financial Northwest Bank. The company completed its conversion from a mutual holding company structure to a stock holding company structure on October 9, 2007. As a holding company, First Financial Northwest's business activities are generally limited to passive investment activities and oversight of its investment in the Bank.
The Bank, which serves as the primary operating subsidiary, has undergone significant changes throughout its history. Until February 4, 2016, it operated as a community-based savings bank. On that date, it converted to a Washington chartered commercial bank, reflecting the expanded range of commercial banking services it now provides to its customers. This transition marked a significant milestone in the Bank's evolution and its ability to meet the diverse needs of its client base.
First Financial Northwest Bank primarily serves King, Pierce, Snohomish, and Kitsap counties in Washington through its network of 15 locations. The Bank's core business model involves attracting deposits from the general public, combined with borrowing from the Federal Home Loan Bank (FHLB) and raising funds in the wholesale market. These funds are then utilized to originate various types of loans, forming the foundation of the Bank's revenue generation.
Throughout its history, First Financial Northwest and its subsidiary Bank have faced and overcome numerous challenges. The COVID-19 pandemic in 2020 presented significant economic hurdles, leading to an increase in the Bank's provision for credit losses. Additionally, the Bank has consistently dealt with competitive pressures from other financial institutions in its markets, which have impacted its net interest margin. The company has also had to adapt to evolving regulations and technological advancements in the banking industry, demonstrating its ability to remain agile in a changing landscape.
Despite these obstacles, First Financial Northwest has maintained a steadfast focus on serving its local communities and providing high-quality banking services to its customers. The company has strategically worked to diversify its loan portfolio and revenue streams, aiming to mitigate risk and drive sustainable growth. The successful acquisition and integration of several smaller banks over the years have further contributed to the company's expansion and market presence.
Financial Performance and Ratios For the fiscal year ended December 31, 2023, First Financial Northwest reported net income of $6.3 million, or $0.69 per diluted share, with annual revenue of $43.32 million. The company's total assets stood at $1.45 billion as of September 30, 2024, a decrease of 3.6% from the $1.51 billion reported at the end of 2023.
For the third quarter of 2024, the company reported revenue of $9.13 million and a net loss of $608,000, compared to net income of $1.5 million in Q3 2023. This decrease of $2.1 million was primarily due to a $1.2 million decrease in net interest income and a $1.9 million increase in provision for credit losses, partially offset by a $282,000 decrease in noninterest expense and a $733,000 decrease in the federal income tax provision.
The company's key financial ratios paint a mixed picture. The net interest margin (NIM) decreased to 2.56% for the nine months ended September 30, 2024, from 2.91% in the prior-year period, primarily due to the increase in interest expense outpacing the increase in interest income. The efficiency ratio, a measure of the bank's cost-effectiveness, stood at 66.2% for the nine months ended September 30, 2024, compared to 55.7% in the same period of 2023.
The bank's asset quality metrics have shown some deterioration, with nonperforming loans to total loans at 0.07% as of September 30, 2024, compared to 0.02% at the end of 2023. The allowance for credit losses (ACL) as a percentage of total loans was 1.42% at the end of the third quarter of 2024, up from 1.29% at the end of 2023, reflecting management's proactive approach to maintaining adequate reserves.
Liquidity First Financial Northwest maintains a strong liquidity position to meet its operational needs and regulatory requirements. The company's liquidity is primarily derived from deposits, borrowings from the FHLB, and cash flows from its loan and investment portfolios. As of December 31, 2023, the company had $30.53 million in cash, providing a solid buffer for immediate liquidity needs.
The bank's debt-to-equity ratio was 0.64 as of December 31, 2023, indicating a conservative capital structure. The current ratio and quick ratio both stood at 1.75, demonstrating the company's ability to meet its short-term obligations.
As of September 30, 2024, the bank maintained credit facilities with the FHLB totaling $506.5 million, subject to qualifying collateral limits that reduced its pledged collateral borrowing capacity to $418.6 million, with an outstanding balance of $100.0 million. The bank also had the ability to borrow $54.9 million from the Federal Reserve Bank (FRB) and $75.0 million from unused lines of credit with other financial institutions, with no balance outstanding from these sources at September 30, 2024.
Strategic Initiatives and Challenges On January 10, 2024, First Financial Northwest announced a definitive agreement for Global Federal Credit Union to acquire substantially all of the assets and assume substantially all of the liabilities of First Financial Northwest Bank. This transaction, which is subject to regulatory approvals and other customary closing conditions, is expected to provide liquidity and strategic opportunities for the company.
One of the key challenges facing First Financial Northwest has been the ongoing interest rate environment. The company's net interest income has been impacted by the increase in interest expense outpacing the increase in interest income, leading to a decline in the net interest margin. To manage this risk, the bank has utilized interest rate swap agreements to effectively fix the rate on certain FHLB advances, helping to mitigate the impact of rising rates on its funding costs.
Another area of focus for the company has been geographic diversification. First Financial Northwest has strategically expanded its loan portfolio by purchasing loans and participating in loan originations outside of its primary market area, with the goal of enhancing asset quality and reducing concentration risk. As of September 30, 2024, loans secured by properties outside the company's core markets accounted for 9.3% of the total loan portfolio, with 7.2% in Washington (outside the primary market area), 2.6% in California, and 9.3% across other regions.
Loan Portfolio and Asset Quality FFNW's loan portfolio is diversified across several major categories, including one-to-four family residential, multifamily, commercial real estate, construction and land development, business, and consumer loans. As of September 30, 2024, the Bank's total loans receivable, net were $1.13 billion, representing a 4.2% decrease from the $1.18 billion reported at December 31, 2023. This decline was primarily attributable to decreases across all loan categories, including commercial real estate ($14.8 million decrease), business ($14.7 million decrease), one-to-four family residential ($12.4 million decrease), multifamily ($5.3 million decrease), consumer ($975,000 decrease), and construction and land development ($703,000 decrease).
The Bank has strategically focused on diversifying its loan portfolio both geographically and by product type. Additionally, the Bank has expanded its commercial business lending offerings, including products such as business lines of credit, business term loans, and equipment financing, in an effort to enhance portfolio diversity, attract business deposits, and bolster revenue generation.
Asset quality metrics showed some deterioration during the first nine months of 2024. Nonaccrual loans increased to $853,000, or 0.07% of total loans, at September 30, 2024, compared to $220,000, or 0.01% of total loans, at December 31, 2023. This increase was primarily attributable to management placing a $279,000 one-to-four family residential loan and a $352,000 consumer loan on nonaccrual status.
The allowance for credit losses (ACL) increased to $16.27 million at September 30, 2024, representing 1.42% of total loans, up from $15.31 million, or 1.29% of total loans, at December 31, 2023. The increase in the ACL was primarily driven by a significant decrease in appraised values on two participation commercial loans, shifts in the loan portfolio composition, credit rating changes, changes in unemployment rate forecasts, and an increase in balances of multifamily, construction, and commercial construction development loans.
Deposit Base and Funding FFNW's deposit base is composed of noninterest-bearing demand deposits, interest-bearing demand deposits, savings, money market accounts, and retail and brokered certificates of deposit. Total deposits decreased 2.2% to $1.17 billion as of September 30, 2024, down from $1.19 billion at December 31, 2023. This decline was primarily driven by a $116.7 million decrease in the aggregate of brokered deposits, money market accounts, savings accounts, and interest-bearing demand accounts, partially offset by a $90.3 million increase in retail certificates of deposit.
The Bank focused on reducing its reliance on wholesale funding sources, such as brokered deposits, during the first nine months of 2024 in response to the decrease in loan demand and portfolio balances. At September 30, 2024, brokered deposits totaled $50.9 million, down from $130.8 million at December 31, 2023.
Pandemic Impact and Response The COVID-19 pandemic presented significant challenges for First Financial Northwest, as it did for the broader banking industry. The company proactively worked with borrowers to provide relief and modifications, while closely monitoring the impact on its loan portfolio and adjusting its credit loss reserves accordingly.
In the third quarter of 2024, the company recorded a $1.6 million provision for credit losses, primarily related to two participation loans secured by short-term rehabilitation and assisted living facilities. The impacts of the pandemic, including changes in demand for certain services, contributed to the need for this increased provision.
Looking Ahead As First Financial Northwest navigates the current market environment and the pending transaction with Global Federal Credit Union, the company remains focused on enhancing its operational efficiency, maintaining asset quality, and pursuing strategic growth opportunities. The successful completion of the transaction with Global, if approved by regulators, is expected to provide the company with greater financial flexibility and resources to support its long-term objectives.
Overall, First Financial Northwest's history of navigating challenges, its diversified loan portfolio, and its strategic initiatives position the company to weather the current market conditions and pursue future growth, subject to the successful completion of the proposed transaction with Global Federal Credit Union. The company's focus on geographic diversification, expansion of commercial business lending offerings, and management of its deposit base and funding sources will be crucial in addressing the challenges posed by the current interest rate environment and evolving market dynamics.