markdown Part I [Business](index=9&type=section&id=Item%201.%20Business) First Financial Northwest, Inc. is a bank holding company with $1.51 billion in assets, pending acquisition Financial Highlights as of December 31, 2023 | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $1.51 | | Net Loans | $1.18 | | Deposits | $1.19 | | Stockholders' Equity | $0.162 | - On January 10, 2024, the company entered into a Purchase and Assumption (P&A) Agreement with Global Federal Credit Union, which will acquire most assets and liabilities for **$231.2 million** in cash, followed by liquidation[26](index=26&type=chunk)[27](index=27&type=chunk) [General](index=9&type=section&id=Item%201.%20Business%20-%20General) First Financial Northwest, Inc. is a Washington-based bank holding company funding diverse loans through public deposits [Market Area](index=10&type=section&id=Item%201.%20Business%20-%20Market%20Area) The company serves Washington's Puget Sound Region, which saw slight home price increases and low unemployment in 2023 Puget Sound Region Economic Indicators (December 2023) | County | Unemployment Rate | Median Home Sales Price | Y/Y Price Change | | :--- | :--- | :--- | :--- | | King | 3.5% | $775,000 | +5.4% | | Pierce | 5.5% | $526,000 | +5.2% | | Snohomish | 3.6% | $675,000 | -0.6% | | Kitsap | 4.7% | $540,000 | +9.0% | [Lending Activities](index=11&type=section&id=Item%201.%20Business%20-%20Lending%20Activities) The company's $1.18 billion net loan portfolio is concentrated in residential and commercial real estate, 87.2% in Washington Loan Portfolio Composition as of December 31, 2023 | Loan Category | Amount ($ millions) | % of Total Loans | | :--- | :--- | :--- | | One-to-four family residential | $513.2 | 43.1% | | Commercial real estate | $377.9 | 31.6% | | Multifamily | $138.1 | 11.6% | | Construction/land | $60.9 | 5.1% | | Consumer | $72.0 | 6.1% | | Business | $29.1 | 2.5% | | **Total Loans** | **$1,191.2** | **100.0%** | - The company's single largest lending relationship totaled **$25.2 million**, well within the regulatory limit of **$34.8 million**[37](index=37&type=chunk) - The consumer loan portfolio is significantly composed of purchased indirect loans for classic and collectible cars, totaling **$58.6 million**, which is **81.4%** of the total consumer loan portfolio[68](index=68&type=chunk) Loan Originations and Purchases (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Total Loans Originated | $181,156 | $271,403 | | Total Loan Purchases & Participations | $22,019 | $49,961 | | **Total Originations & Purchases** | **$203,175** | **$321,364** | [Asset Quality](index=20&type=section&id=Item%201.%20Business%20-%20Asset%20Quality) The company maintains strong asset quality with minimal nonperforming assets and a $15.3 million Allowance for Credit Losses - Nonaccrual loans were minimal at **$220,000** (**0.02%** of total loans) at year-end 2023, compared to **$193,000** at year-end 2022[85](index=85&type=chunk)[102](index=102&type=chunk) - The company had no Other Real Estate Owned (OREO) properties at the end of both 2023 and 2022[86](index=86&type=chunk) Classified Loans (Substandard) | Loan Type | Dec 31, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | One-to-four family residential | $293 | $0 | | Multifamily | $1,590 | $1,630 | | Commercial real estate | $44,020 | $45,411 | | Consumer | $220 | $201 | | **Total** | **$46,123** | **$47,242** | Allowance for Credit Losses (ACL) Summary | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | ACL Balance | $15.3 million | $15.2 million | | ACL as % of Total Loans | 1.28% | 1.29% | | (Recapture) of Provision for Credit Losses | ($208,000) | ($434,000) | [Investment Activities](index=24&type=section&id=Item%201.%20Business%20-%20Investment%20Activities) The company's $207.9 million investment portfolio primarily holds mortgage-backed securities and government obligations for liquidity Available-for-Sale Investment Portfolio by Type (Dec 31, 2023) | Security Type | Carrying Value ($ thousands) | Weighted-Avg Yield | | :--- | :--- | :--- | | Mortgage-backed securities | $76,830 | 4.00% | | U.S. government agencies | $69,957 | 3.94% | | Municipal bonds | $31,849 | 2.10% | | Corporate bonds | $29,279 | 4.77% | | **Total** | **$207,915** | **3.80%** | - At year-end 2023, **123 securities** were in an unrealized loss position, with declines primarily attributed to changes in market interest rates rather than credit losses[118](index=118&type=chunk) [Deposit Activities and Other Sources of Funds](index=27&type=section&id=Item%201.%20Business%20-%20Deposit%20Activities%20and%20Other%20Sources%20of%20Funds) Deposits total $1.19 billion, primarily money market and CDs, supplemented by brokered deposits and FHLB advances Deposit Composition as of December 31, 2023 | Deposit Type | Amount ($ thousands) | % of Total | | :--- | :--- | :--- | | Money market | $529,411 | 44.3% | | Certificates of deposit, retail | $357,153 | 29.9% | | Brokered deposits | $130,790 | 11.0% | | Noninterest bearing demand | $100,899 | 8.4% | | Interest-bearing demand | $56,968 | 4.8% | | Savings | $18,886 | 1.6% | | **Total Deposits** | **$1,194,107** | **100.0%** | - At year-end 2023, deposit accounts with balances greater than the **$250,000** FDIC insurance limit totaled **$513.3 million**, representing **43.0%** of total deposits[125](index=125&type=chunk) - The company utilizes interest rate swaps to manage risk, with **eight agreements** outstanding with an aggregate notional amount of **$115.0 million** at year-end 2023[136](index=136&type=chunk) [Human Capital](index=31&type=section&id=Item%201.%20Business%20-%20Human%20Capital) The company employed 142 full-time, non-unionized employees as of December 31, 2023, with diverse representation and benefits Workforce Demographics by EEOC Job Classification (Dec 31, 2023) | Job Classification | % Female | % Minority | | :--- | :--- | :--- | | Executive / Senior level officers | 46.2% | 46.2% | | Mid-level officers and managers | 54.2% | 31.3% | | Professionals | 45.5% | 36.4% | | Administrative support | 86.8% | 47.4% | | **Total** | **58.5%** | **38.7%** | [How We Are Regulated](index=31&type=section&id=Item%201.%20Business%20-%20How%20We%20Are%20Regulated) The company and its bank subsidiary are regulated by the Federal Reserve, Washington DFI, and FDIC, maintaining 'well capitalized' status - The Bank is required to meet minimum capital ratios and exceeded all requirements to be considered **'well capitalized'** under FDIC guidelines as of December 31, 2023[161](index=161&type=chunk)[163](index=163&type=chunk) - The Bank's commercial real estate lending concentration was **316.8%** of regulatory capital at year-end 2023, exceeding the **300%** supervisory criterion, which may subject it to further supervisory analysis[173](index=173&type=chunk) - The Bank received an **'outstanding' rating** during its most recent Community Reinvestment Act (CRA) examination[181](index=181&type=chunk) [Risk Factors](index=41&type=page&id=Item%201A.%20Risk%20Factors) The company faces macroeconomic, lending concentration, interest rate, cybersecurity, and regulatory risks - A **significant** portion of the loan portfolio (**87.2%**) is concentrated in Washington state, making the business susceptible to downturns in the local and regional economy[215](index=215&type=chunk) - The commercial real estate loan portfolio represents **316.8%** of total capital, exceeding the **300%** regulatory guidance threshold, which may subject the company to additional regulatory scrutiny[230](index=230&type=chunk) - The company is exposed to interest rate risk, as changes in rates can adversely affect net interest margin, with the balance sheet being **liability-sensitive**[242](index=242&type=chunk)[244](index=244&type=chunk) - Cybersecurity risks are **significant**, as a breach could jeopardize confidential information, cause operational disruptions, and result in financial losses and reputational damage[262](index=262&type=chunk)[263](index=263&type=chunk) [Cybersecurity](index=53&type=section&id=Item%201C.%20Cybersecurity) The company integrates cybersecurity into its risk management using a 'three lines of defense' model and industry frameworks - The cybersecurity program is structured around a **'three lines of defense' model**: business unit operations, independent risk management oversight, and internal audit validation[282](index=282&type=chunk) - The company's Information Security Program is designed with reference to established frameworks from the **FFIEC** and the **NIST**[284](index=284&type=chunk) - Oversight is provided by the Board's **ACR Committee**, which receives regular reports on the status of the Information Security Program from the Chief Risk Officer and the Information Security Officer[287](index=287&type=chunk)[290](index=290&type=chunk) [Properties](index=54&type=section&id=Item%202.%20Properties) The company owns its corporate office and one branch, leasing 13 additional retail branches in Washington - The company owns its corporate headquarters at 201 Wells Avenue South, Renton, Washington, and one other branch property, leasing **13 additional branch locations**[291](index=291&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=55&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ, with 43 consecutive quarterly dividends and a recent stock repurchase authorization - The company's common stock is traded on **NASDAQ** under the symbol **'FFNW'**[295](index=295&type=chunk) - A stock repurchase plan authorizing the buyback of up to **457,000 shares** was approved in August 2023, with no shares repurchased during the fourth quarter of 2023[298](index=298&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=56&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased to $6.3 million in 2023 due to a $7.8 million decline in net interest income from margin compression Key Performance Indicators | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $6.3 million | $13.2 million | | Diluted EPS | $0.69 | $1.45 | | Net Interest Income | $40.5 million | $48.4 million | | Net Interest Margin | 2.82% | 3.53% | [Comparison of Financial Condition at December 31, 2023 and December 31, 2022](index=59&type=section&id=Item%207.%20MD%26A%20-%20Comparison%20of%20Financial%20Condition) Total assets remained stable at $1.51 billion, with net loan growth funded by increased deposits Balance Sheet Changes (2022 vs 2023) | Account | Change ($ millions) | % Change | | :--- | :--- | :--- | | Net Loans Receivable | +$8.8 | +0.8% | | Investments AFS | -$9.9 | -4.5% | | Total Deposits | +$24.1 | +2.1% | | FHLB Advances | -$20.0 | -13.8% | | Total Stockholders' Equity | +$1.3 | +0.8% | - The increase in deposits was primarily driven by a **$94.6 million** rise in retail certificates of deposit, reflecting promotions during the year[338](index=338&type=chunk)[339](index=339&type=chunk) [Comparison of Operating Results for the Years Ended December 31, 2023 and 2022](index=63&type=section&id=Item%207.%20MD%26A%20-%20Comparison%20of%20Operating%20Results) Net income fell by 52.4% to $6.3 million in 2023, driven by a 16.2% decrease in net interest income from higher interest expense - Net interest income decreased by **$7.8 million** (**16.2%**) due to a **$26.7 million** increase in interest expense that significantly outpaced the **$18.9 million** increase in interest income[347](index=347&type=chunk) - The average cost of interest-bearing liabilities rose sharply to **3.05%** in 2023 from **0.95%** in 2022, while the average yield on interest-earning assets increased more slowly to **5.44%** from **4.33%**[347](index=347&type=chunk)[351](index=351&type=chunk) - A recapture of the provision for credit losses of **$208,000** was recorded in 2023, compared to a **$434,000** recapture in 2022[354](index=354&type=chunk)[355](index=355&type=chunk) - Noninterest expense was nearly flat, increasing just **0.1%**, as a **$767,000** decrease in salaries and benefits was offset by a **$360,000** increase in regulatory assessments and a **$304,000** increase in other general and administrative expenses[361](index=361&type=chunk)[363](index=363&type=chunk) [Asset and Liability Management and Market Risk](index=69&type=section&id=Item%207.%20MD%26A%20-%20Asset%20and%20Liability%20Management%20and%20Market%20Risk) The company is liability-sensitive, with a 100 basis point rate increase projected to decrease net interest income by 2.71% Interest Rate Simulation Impact on Net Interest Income (Next 12 Months) | Rate Change (Basis Points) | % Change in Net Interest Income | | :--- | :--- | | +400 | (11.26)% | | +200 | (5.75)% | | +100 | (2.71)% | | Base | 0.00% | | -100 | +2.13% | | -200 | +7.70% | - At December 31, 2023, **63.5%** of net loans were adjustable-rate, with **$410.8 million** (**54.3%**) of these at their contractual interest rate floor[376](index=376&type=chunk) [Liquidity and Capital Resources](index=71&type=section&id=Item%207.%20MD%26A%20-%20Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity from deposits and FHLB advances, exceeding all 'well capitalized' regulatory requirements - Primary liquidity sources are customer deposits, loan and investment repayments, and FHLB advances[384](index=384&type=chunk) - As of December 31, 2023, the Bank was categorized as **'well capitalized'** under regulatory standards, with a total capital ratio of **16.15%** (**10.00%** required) and a Tier 1 leverage ratio of **10.18%** (**5.00%** required)[393](index=393&type=chunk)[394](index=394&type=chunk) [Financial Statements and Supplementary Data](index=73&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements for 2023 and 2022, with an unqualified auditor's opinion - The independent auditor's report from Moss Adams LLP provides an **unqualified opinion**, stating the financial statements are presented fairly in all material respects in conformity with GAAP[401](index=401&type=chunk) - A change in accounting principle was noted due to the adoption of ASC Topic 326 (CECL) for credit losses, effective January 1, 2023, resulting in a one-time, net-of-tax charge of **$395,000** to retained earnings[402](index=402&type=chunk)[494](index=494&type=chunk) [Controls and Procedures](index=126&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of December 31, 2023[664](index=664&type=chunk) - Management's assessment concluded that the company's internal control over financial reporting was **effective** as of December 31, 2023, based on the COSO framework[667](index=667&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=127&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information for this section is incorporated by reference from the company's 2024 Proxy Statement[674](index=674&type=chunk) [Executive Compensation](index=128&type=section&id=Item%2011.%20Executive%20Compensation) Details on executive and director compensation are incorporated by reference from the company's 2024 Proxy Statement - Information for this section is incorporated by reference from the company's 2024 Proxy Statement[679](index=679&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=128&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Information for this section is incorporated by reference from the company's 2024 Proxy Statement[680](index=680&type=chunk) [Certain Relationships and Related Transactions and Director Independence](index=128&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information for this section is incorporated by reference from the company's 2024 Proxy Statement[684](index=684&type=chunk) [Principal Accountant Fees and Services](index=129&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - Information for this section is incorporated by reference from the company's 2024 Proxy Statement[685](index=685&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=130&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists exhibits filed with the Form 10-K, including the P&A Agreement and various corporate documents
First Financial Northwest(FFNW) - 2023 Q4 - Annual Report